香港生命集團控股有限公司 (Incorporated in the Cayman Islands with Limited Liability) (Stock Code: 8212)
THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker, a licensed dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.
If you have sold or transferred all your shares in Hong Kong Life Group Holdings Limited (the “Company”), you should at once hand this circular with the enclosed form of proxy to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or transferee.
Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.
HONG KONG LIFE GROUP HOLDINGS LIMITED 香港生命集團控股有限公司 (Incorporated in the Cayman Islands with limited liability) (Stock Code: 8212)
MAJOR TRANSACTION IN RELATION TO THE ACQUISITION OF THE 49% OF THE TOTAL ISSUED SHARE CAPITAL OF BARON’S SCHOOL OF MUSIC LIMITED
AND
NOTICE OF EXTRAORDINARY GENERAL MEETING
A notice convening an extraordinary general meeting of the Company to be held at 9:30 a.m. on 29 August, 2012 at The Boardroom, Basement 2, The Wharney Guangdong Hotel Hong Kong, 57-73 Lockhart Road, Wanchai, Hong Kong is set out on pages 135 to 137 of this circular. A form of proxy is enclosed. Whether or not you are able to attend the extraordinary general meeting, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Company’s share registrar in Hong Kong, Tricor Tengis Limited at 26/F., Tesbury Centre, 28 Queen’s Road East, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the extraordinary general meeting. Completion and return of the form of proxy will not preclude you from attending and voting at the extraordinary general meeting or any adjournment thereof should you so wish.
This circular will remain on the GEM website at www.hkgem.com on the “Latest Company Announcements” page for at least 7 days from the date of its posting and on the website of the Company at www.hk-lifegroup.com. 9 August 2012 CHARACTERISTICS OF THE GROWTH ENTERPRISE MARKET (“GEM”) OF THE STOCK EXCHANGE OF HONG KONG LIMITED (THE “EXCHANGE”)
GEM has been positioned as a market designed to accommodate companies to which a high investment risk may be attached than other companies Listed on the Stock Exchange. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors.
Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main Board and no assurance is given that there will be a liquid market in the securities traded on GEM.
i TABLE OF CONTENTS
Page
DEFINITIONS ...... 1
LETTER FROM THE BOARD ...... 4
Introduction ...... 4 The Agreement ...... 5 Principal business activities of the Company ...... 10 Information of the Target Company ...... 11 Business Plan of the Target Company ...... 21 Valuation of the Target Company ...... 30 Risk Factor of the Target Company ...... 33 Reason for the Acquisition ...... 37 Financial effects of the Acquisition ...... 41 GEM Listing Rules implication ...... 41 The EGM ...... 41 Recommendation ...... 41 Additional Information ...... 42
APPENDIX I – FINANCIAL INFORMATION OF THE GROUP ...... 43
APPENDIX II – FINANCIAL INFORMATION OF THE TARGET COMPANY . . . . . 48
APPENDIX III – UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP ...... 88
APPENDIX IV – VALUATION REPORT OF THE TARGET COMPANY ...... 96
APPENDIX V – LETTERS ON PROFIT FORECAST ...... 124
APPENDIX VI – GENERAL INFORMATION ...... 128
NOTICE OF EGM ...... 135
ii DEFINITIONS
In this circular, unless the context otherwise requires, the following expressions shall have the following meanings:
“Acquisition” the proposed acquisition of the Sale Shares pursuant to the Agreement
“Agreement” the agreement dated 28 February 2012 made between the Vendor and the Purchaser in relation to the Acquisition
“associates” has the same meaning ascribed to it under the GEM Listing Rules
“Board” the board of Directors
“Business Day” a day (other than a Saturday, Sunday or a public holiday) on which licensed banks are generally open for business in Hong Kong throughout their normal business hours
“BVI” British Virgin Islands
“Closing” completion of the sale and purchase of the Sale Shares in accordance with the Agreement
“Closing Date” the date Closing shall take place falling within 5 Business Days after all the conditions precedent of the Agreement have been fulfilled or waived (as the case may be) or such other date as the Vendor and the Purchaser may agree in writing)
“Company” Hong Kong Life Group Holdings Limited, a company incorporated in the Cayman Islands with limited liability and the shares of which are listed on the GEM
“connected person(s)” has the meaning ascribed to it under the GEM Listing Rules
“Consideration” consideration payable for the Acquisition
“Deposit” a sum of HK$2.04 million payable by the Company to the Vendor or its nominee on signing of the Agreement
“Director(s)” directors of the Company
“EGM” the extraordinary general meeting of the Company to be convened to consider and, if thought fit, approve the Agreement and the transactions contemplated thereunder
“Enlarged Group” the Group immediately after completion of the Acquisition
“GEM” The Growth Enterprise Market of the Stock Exchange 1 DEFINITIONS
“GEM Listing Rules” The Rules Governing the Listing of Securities on GEM
“Group” the Company and its subsidiaries
“HK$” Hong Kong dollars, the lawful currency of Hong Kong
“HKFRSs” Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certifies Public Accountants
“Hong Kong” The Hong Kong Special Administrative Region of the PRC
“Independent Third Party(ies)” an independent third party, to the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, who is not connected with the Company and its connected persons (as defined under the GEM Listing Rules)
“Latest Practicable Date” 6 August 2012, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein
“Long Stop Date” 31 August 2012 or such other date as may be agreed by the Purchaser and the Vendor
“PRC” The People’s Republic of China and, for the purpose of this circular, excluding Hong Kong, Macau Special Administrative Region of the People’s Republic of China and Taiwan
“Purchaser” Superb Luck Limited, a company incorporated in the British Virgin Islands and a wholly owned subsidiary of the Company
“Promissory Note” a promissory note in the principal amount of HK$45 million with interest at 6% per annum due on the day following the expiry of 2 years after the Closing Date to be issued by the Company to the Vendor at Closing for the purpose of settlement of part of the Consideration
“Relevant Parties” the Target Company, the Vendor, United Value, the Purchaser and Ronald Ng
“Relevant Period” the period commencing from 1 January 2009 and ending 31 May 2012
“Rights Issue” the proposed rights issue on the basis of five (5) rights shares for every one (1) existing share in issue at HK$0.138 per rights share
2 DEFINITIONS
“Ronald Ng” Ng Lok Shing Ronald the sole director and shareholder of United Value
“Sale Shares” 490 ordinary shares of HK$1.00 in the issued share capital of the Target Company, representing 49% of the entire issued share capital of the Target Company
“Second Supplemental Agreement” the second supplemental agreement dated 24 May 2012 made between the Vendor and the Purchaser to extend the Long Stop Date to 20 July 2012
“Share(s)” ordinary share(s) of HK$0.0001 each in the share capital of the Company
“Shareholder(s)” holder(s) of the Shares
“Shareholders’ Agreement” a conditional shareholders’ agreement to be entered by the Relevant Parties in relation to the affairs, business and management of the Target Company to be taken effect simultaneously at Closing
“Star Dragon” 廣州市星龍文化藝術有限公司 (Guangzhou Star Dragon Culture & Art Company Limited), a company incorporated in PRC
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“Supplemental Agreement” the supplemental agreement dated 19 April 2012 made between the Vendor and the Purchaser to extend the Long Stop Date to 31 May 2012
“Target Company” Baron’s School of Music Limited, a company incorporated in Hong Kong
“Third Supplemental Agreement” the third supplemental agreement dated 17 July 2012 made between the Vendor and the Purchaser to extend the Long Stop Date to 31 August 2012
“United Value” United Value Holdings Limited, a company incorporated in the British Virgin Islands
“Valuer” Ample Appraisal Limited
“Vendor” Beyond Asia International Limited, a company incorporated in the British Virgin Islands
“%” per cent.
3 LETTER FROM THE BOARD
HONG KONG LIFE GROUP HOLDINGS LIMITED 香港生命集團控股有限公司 (Incorporated in the Cayman Islands with limited liability) (Stock Code: 8212)
Executive Directors: Registered office: Mr. Lam Wai Pong Cricket Square Mr. Lau Chi Kwong Hutchins Drive, P.O. Box 2681 Ms. Leung Wai Kuen, Cerene Grand Cayman KY1-1111 Mr. Zhang Yan Cayman Islands
Independent non-executive Directors: Head office and principal place Ms. Chan Wan Yee of business: Mr. Siu Kwok Chung Unit B, 16/F, Mr. Sit Bun One Capital Place, 18 Luard Road, Wanchai, Hong Kong
9 August 2012
To the Shareholders of the Company
Dear Sir or Madam,
MAJOR TRANSACTION IN RELATION TO THE ACQUISITION OF THE 49% OF THE TOTAL ISSUED SHARE CAPITAL OF BARON’S SCHOOL OF MUSIC LIMITED
AND
NOTICE OF EXTRAORDINARY GENERAL MEETING
INTRODUCTION
The Board announced on 28 February 2012 that the Company, entered into the Agreement with the Vendor pursuant to which the Purchaser has conditionally agreed to acquire from the Vendor 49% of the total issued share capital of the Target Company at the Consideration of HK$47.04 million.
4 LETTER FROM THE BOARD
The Board further announced on 19 April 2012 that the Company entered into the Supplemental Agreement with the Vendor pursuant to which the parties agreed to extend the Long Stop Date from 27 April 2012 to 31 May 2012 or such later date to be agreed between the Company and the Vendor in writing.
The Board further announced on 24 May 2012 that the Company entered in the Second Supplemental Agreement with the Vendor pursuant to which the parties agreed to further extend the Long Stop Date from 31 May 2012 to 20 July 2012 or such later date to be agreed between the Company and the Vendor in writing.
The Board further announced on 17 July 2012 that the Company entered into the Third Supplemental Agreement with the Vendor pursuant to which the parties agreed to further extend the Long Stop Date from 20 July 2012 to 31 August 2012 or such later date to be agreed between the Company and the Vendor in writing.
The purpose of this circular is to provide you with, among other things, information of the Acquisition and to give you a notice of the EGM at which a resolution will be proposed to consider and, if thought fit, approve the Acquisition.
THE AGREEMENT
Date: 28 February 2012 (after trading hours)
Vendor: the Vendor
Purchaser: the Purchaser
To the best of the Directors’ knowledge, information and belief after making all reasonable enquiries, the Vendor and its ultimate beneficial owner is Independent Third Parties. The Vendor is indirectly wholly owned by Ms. Poon Yuen Yee via two intermediate BVI companies, Goldbeam Investments Limited and Fortune Ride Investments Limited.
To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, the Vendor is a third party independent from any of the vendors of the previous transactions of the Company.
The principal business activity of the Vendor is investment holding.
Further particulars of the Target Company are set out in the paragraph headed “Information of the Target Company” below.
Assets to be acquired
The assets to be acquired is the Sale Shares, representing 49% of the total issued share capital of the Target Company.
5 LETTER FROM THE BOARD
Consideration
The Consideration for the Acquisition is HK$47.04 million, which is to be satisfied by the Purchaser in the following manner:
(a) as to HK$2.04 million in cash being refundable deposit which have been paid upon signing of the Agreement; and
(b) as to HK$45 million to be satisfied by the issue of the Promissory Note by the Company to the Vendor at Closing.
The cash portion of the Consideration will be funded by internal resources of the Company. The Consideration for the Acquisition was arrived at based on normal commercial terms after arm’s length negotiations between the Company and the Vendor and with reference to the valuation report set out in Appendix IV of this circular. The Board has made reference to the preliminary valuation on the Target Company prepared by an independent professional valuer, the Valuer, by adopting income-based approach using discounted cash flow method, according to which the market value of the Target Company was HK$96 million as at 31 May 2012.
According to the valuation report prepared by the Valuer, an independent professional valuer, the market value of 49% of the Target Company was HK$47.04 million as at 31 May 2012.
In view of the Consideration for the Acquisition being equivalent to the said valuation, the Directors (including independent non-executive Directors) consider the terms (including the consideration for the Acquisition) for the Acquisition is fair and reasonable and is in the interests of the Company and the Shareholders as a whole.
Conditions Precedent
The Agreement is conditional upon and subject to the following conditions:
(a) the Shareholders Agreement being duly executed by all Relevant Parties;
(b) the warranties and representations made by the Vendor in the Agreement shall be true and correct in all material respects;
(c) due diligence (including legal, finance and business) on the Target Company and its subsidiaries (if any), including without limitation, its state of affairs, assets and liabilities, financial position and business operation having been completed to the full satisfaction of the Purchaser; and
6 LETTER FROM THE BOARD
(d) all necessary waiver, consent and approvals required to be obtained on the part of the Vendor, the Purchaser and Company in respect of the Agreement and the transactions contemplated thereby having been obtained;
(e) the passing of a resolution by the Shareholders at the EGM to approve the Agreement and the transactions contemplated thereunder as required by GEM Listing Rules.
The Company may at its absolute discretion at any time waive in writing any of the conditions (a), (b), (c) and (d).
In the event the conditions precedent are not fulfilled before 5 p.m. on the Long Stop Date and the Purchaser has not waived any of the non-fulfilled conditions precedent in writing or the Vendor and the Purchaser have not reached any agreement in writing to extend the Long Stop Date, then the Vendor shall within 5 Business Date after the Long Stop Date return the Deposit to the Purchaser without any interest and upon the Vendor fully refunded the Deposit to the Purchaser the Agreement shall be terminated and the Vendor and the Purchaser shall have no further obligations under the Agreement save as to any rights on any antecedent breach of the Agreement.
The reason for empowering the Company to waive conditions precedent (a), (b), (c) and (d) is to allow more flexibility to the Company to manage the transaction if circumstances required or warranted. As at the date of this circular, the Company has no intention to waive any of the conditions precedent and the Company will not waive any of the conditions precedent if the waiver of such conditions is not fair and reasonable and not in the interest of the Company and its shareholders as a whole.
The scope of the due diligence to be performed on the Target Company will cover its statutory, business and financial records. The Company has so far reviewed the Target Company’s statutory records, its business plan and its audited financial statements for the years ended 31 December 2009, 2010 and 2011 and between the period from 1 January 2012 to 31 May 2012, so far the Company has not discovered any abnormality, the due diligence exercise on the Target Company is still on going and some actions like conducting litigation searches will only be performed at a time near to completion of the transaction.
As at the date of this circular, none of the conditions precedents has been fulfilled.
Closing
Closing will take place on the Closing Date within 5 Business Days after all the conditions precedent of the Agreement have been fulfilled or waived (as the case may be) or such other date as the Vendor and the Purchaser may agree in writing.
Principal term of the Promissory Note
The Company shall issue at Closing the Promissory Note in part payment of the Consideration which will be subject to the following principal terms:
7 LETTER FROM THE BOARD
Principal amount
HK$45,000,000
Maturity
On the date falling on the expiry of 2 calendar years from the date of issue of the Promissory Note
Interest
The Promissory Note shall bear interest at the rate of 6% per annum on the outstanding principal payable quarterly in arrears.
Redemption
The Company may redeem the Promissory Note in whole or any part of it (in amounts of not less than HK$1,000,000 or such other amount as agreed between the Company and holders of the Promissory Note) at any time after the date of issue of the Promissory Note up to the date immediately prior to the date of maturity.
Events of default
If any of the events (“Events of Default”) specified below occurs, the holder of Promissory Note may send a written notice to the Company request the Company to pay to the holder of Promissory Note within 14 business days the principal sum and any interest accrued thereon in full in cash. The relevant events of default are:
(a) Any resolution relating to the winding-up or liquidation of the Company or the Company’s disposal of all (or nearly all) of its assets is passed or any order relating to the same is issued by a competent court, unless the foregoing winding-up, liquidation or disposal and allocation is due to or related to any merger, takeover, consolidation or reorganization carried out soon thereafter;
(b) The chargee of any encumbrance obtains the right of possession of, or the liquidation administrator takes over, all or any significant part of the Company’s assets or business;
(c) Any significant part of the Company’s property is detained, forfeited or imposed with a closure order, executed and the same is not renounced within 30 Business Days; The listing of the Company’s shares on the Stock Exchange have been suspended for more than 30 consecutive trading days, unless such suspension occurs for the clearance of announcement or circular by the Company with the Stock Exchange, or the listing status of the Company’s shares on the Stock Exchange is withdrawn or revoked;
(d) Except for any shares that may be issued pursuant to any convertible securities of the Company that are presently outstanding, any issue of new shares by the Company without obtaining the prior written consent of the holder of Holder of Promissory Note (if any) holding an outstanding amount of not less than HK$130,000,000. 8 LETTER FROM THE BOARD
Transferability
The Promissory Note is freely transferable and assignable by its holders by way of deed to any party other than a connected person (as defined in the GEM Listing Rules) subject to prior notification to the Company.
The terms of the Promissory Note are determined after arm’s length commercial negotiation between the Company and the Vendor with reference to the prevailing market condition and the financial position of the Company. In view of the above, the Directors consider the terms of the Promissory Note including the interest rate of the Promissory Note are fair and reasonable and in the interest of the Company and its Shareholders as a whole.
Paragraph (d) of the events of default clause of the Promissory Note was requested by the Vendor during the course of negotiation on the terms of the Promissory Note between the parties on 28 February 2012. The figure of HK$130,000,000 was negotiated by the Company with the intent of providing flexibility to the Company to issue further promissory notes with amount up to HK$85,000,000 and with similar event of default clause as a means of payment in potential acquisitions of the Company in the future. As at the date of this circular, the Company does not have any intention to acquire further interest of the Target Company or made any other potential acquisition.
It is the intention of the Company to repay the amount due to the Vendor under the Promissory Note from the proceeds to be generated from the Rights Issue (as defined in the announcement of the Company dated 4 May 2012).
Principal terms of the Shareholders’ Agreement
It is a condition precedent of the Agreement that the Relevant Parties shall enter into the Shareholders’ Agreement to govern the shareholdings and management of the Target Company and its relationship with each of the shareholders of the Target Company. The major terms of the Shareholders’ Agreement are as follows:–
Commencement
The Shareholders’ Agreement shall take effect simultaneously at Closing.
Composition of the board of the Target Company
The board of the Target Company shall comprise of four directors, of whom two shall be appointed by the Purchaser, one shall be appointed by the Vendor and one shall be appointed by United Value.
Chairman
Ronald Ng as director appointed by United Value shall during the term of the Shareholders’ Agreement act as chairman of the board of the Target Company and be responsible for the overall business strategy and management of the Target Company to the benefit of all shareholders of the Target Company as a whole.
9 LETTER FROM THE BOARD
Quorum for meetings
The quorum for a meeting of the Board shall be four directors present in person or by their alternates for the time being, two of which shall be the directors nominated by the Purchaser, one of which shall be the director nominated by the Vendor and one of which shall be the director nominated by United Value.
All questions or any other matters arising in any meeting of the board of the Target Company shall be decided by majority votes of the directors present save for the following matters which will require unanimous consent from the shareholders of the Target Company:–
(a) the alteration of the memorandum or articles of association of the Target Company and the passing of any resolutions inconsistent with the provision of the Shareholders’ Agreement;
(b) the borrowing of any moneys from banks, financial institutions or any other persons (save pursuant to the provisions contained in this Agreement) or the creation of any contract or obligation to pay money or money’s worth; and
(c) the issue or the allotment of shares of the Target Company to any person including the shareholders or their associates of the Target Company; and
(d) changing the businesses carried out by the Target Company.
Restriction on disposal and charging of shares of the Target Company
None of the shareholders of the Target Company shall create or permit to subsist any encumbrance over all or any of its shares in the Target Company.
Neither the Vendor nor United Value shall dispose of or permit or suffer a transfer of the whole or any part of its shares in the Target Company without the prior written permission from the Purchaser and provided always the transferee of any permitted transfer shall enter into a deed of adherence to become bound by the Shareholders’ Agreement.
Termination of the Shareholders’ Agreement
The Shareholders’ Agreement shall continue in full force and effect until the Target Company shall be wound up or cease to exist.
The Shareholders’ Agreement shall be terminated by the written agreement of all the shareholders of the Target Company.
PRINCIPAL BUSINESS ACTIVITIES OF THE COMPANY
The Group is principally engaged in trading of edible oil and mineral materials, provision of shrine for memorial ancestor and paper-offering businesses.
10 LETTER FROM THE BOARD
INFORMATION OF THE TARGET COMPANY
The Target Company is a company incorporated in Hong Kong with limited liability principally engaged in providing high quality programmes and courses in both classical and contemporary music and is currently 75.5% owned by the Vendor and 24.5% owned by United Value.
History and development of the Target Company
The Target Company was founded by Mr. Ronald Ng (“Ronald Ng”) in August 2005. Ronald Ng is a famous music producer in Hong Kong and he had written and produced over 300 songs. Most of the songs produced by Ronald Ng were performed by famous singers in Hong Kong including Andy Lau, Hacken Lee, Joey Yung, Kelly Chen, Twins, Miriam Yeung and Eason Chan etc. Many of songs produced or involved by Ronald Ng received “Best Album Award from Hong Kong Four Radio and TV Stations” and he was also the winner of “Highest No. of New Works Performed Composer Award” in the CASH Most Performed Work Awards for 3 consecutive years. Furthermore, Ronald Ng has been awarded Ten Outstanding Young Person Selection for 2011.
The aim of the Target Company is the provision of professional musical training, through the extensive musical experience of Ronald Ng and his musical teams, to new generation musicians in Hong Kong to enhance sustainable music development in Hong Kong and neighboring areas. Together with the reputation of Ronald Ng in the musical industry in Hong Kong, the Target Company aims to become a leader for provision of musical training programs in Hong Kong.
Since incorporation in May 2005, the Target Company provides on-campus musical training courses mainly include music productions, vocal technique, instrumental group programs, junior playgroup programs and instrumental private programs.
Since 2006, in addition to the existing musical training courses, the Target Company set up eight musical divisions, namely Classical Music Performance Division (headed by Nancy Loo), Pop Music Performance Division (headed by Dennie Wong), Vocal Division (headed by Ip Fu Sheng Steven), Lyric- writing Division (headed by Mr. Lin Xi), Recording and Mixing Division (headed by Mr. Raymond Chu) Music Production and Technology Division (headed by Chan Ka Kin, Gary), DJ (Scratching/Mixing) Division (headed by DJ Tommy), Beatbox and Rap Division (headed by INK@Union). All the above head of musician divisions are not senior management of the Target Company. The profile of head of division as follows:
Classical Music Performance Division-Nancy Loo
Mrs. Nancy Loo is one of the most versatile artists, pianist, radio programme host actress and writer in Hong Kong. She attended the Juilliard School on Scholarship, where she studied with Adele Marcus. In 1978, she was a recipient of the Ten Outstanding Young Persons Awards. On her teaching, she is currently teaching piano at The Hong Kong Academy for Performing Arts and The Chinese University of Hong Kong. On her performance, she has given solo recitals and performed with orchestras in England, Europe, North America and Asia. In Hong Kong, she has appeared in the Hong Kong Arts Festival and performed with the Hong Kong Philharmonic Orchestra, the Hong Kong Chinese Orchestra and the Hong Kong Sinfonietta.
11 LETTER FROM THE BOARD
Pop Music Performance Division-Dennie Wong
Ms. Dennie Wong graduated from Yamaha Music Institute in Japan in 1990, and completed Shobi Conservertoire in Tokyo in 1992. As her performance, she was the back-up vocal for Leslie Cheung’s concert in 1994 and she was the Music Director for Joey Yung’s concert and musician for famous singer, such as Jacky Cheung, Andy Lau, Twins and Miriam Yeung.
On the other hand, she has written songs for a host of Canto-pop singers such as Audy Hui, Joey Yung, Sammi Cheng and Twins. Her outstanding reward piece sung by Leo Ku, who awards including” Top Ten Solid Gold” and “Composer of The Year”, “Radio Hong Kong Ten Solid Gold”, “FM Select Top Ten Solid Gold” and “The Highest Performance (Canton-pop) Awards in Radio and Television” in 1997 and “The best Movie Theme Song” in the 17th Hong Kong Movie Awards in 1998.
Vocal Division-Ip Fu Sheng Steven
Mr. Steven Ip is majored in vocal and graduated from Dick Grove School of Music, USA and he studied vocal proficiency under the guidance of Mr Ate Rojas of Vocal Dynamics. He is teaching full time vocal lecture, and his students became popular artists such as Chan Chung-ling, Cheung Chi-lam, Kelly Chan, Edmond Leung and Nikki Chow. In addition, he had been the vocal tutor with a number of Christian music organization such as Frontline and Believers and has been guest tutor in various church choirs.
Lyric-Writing Division-Lin Xi
Mr. Lin Xi started to be a professional lyricist in the mid 80s. He graduated in The University of Hong Kong (Major in Translation). He was once the tutor in universities, programmer officer in ATV and manager in music factory and advertising creative director in Commercial Radio Hong Kong. Currently, he is the consultant in Commercial Radio Hong Kong, training new potential lyricist and responsible for writing columns in various magazines and newspaper.
During the ten years, he has closely cooperated with numerous singer such as Anthony Wong, Faye Wong, Miriam Yeung, Leo Ku.
Recording and Mixing Division-Raymond Chu
Mr. Raymond Chu was graduated in the University of Oregon, and majored in Electronic Media and Films and completed Diploma in CD Production in College for Recording Arts in San Franciso, USA. He is active in Hong Kong Pop Music Production since 1984, he has 20 years professional music production experience. He has involved in wide range of music production work such as CD recording, mixing and mastering, and he worked with artists and singers, such as Ricky Tong, Anthony Lun, Anita Mui, Leslie Cheung, and Andy Lau. Apart from recording and mixing, he has participated in different kinds of music production such as CD producer, advertisement music, live music and original soundtracks etc.
12 LETTER FROM THE BOARD
Music Production and Technology Division- Gary Chan Ka Kin
Mr. Gary Chan is A&R Manager and Music Producer of Star Entertainment (Universe) Limited and responsible for the production and arrangement of songs and the management of CD. He has got more than 20 years of experience in music production, among which he has 10 years of experience in studio recording and live performance. He has composed, arranged, produced and recorded songs for famous singers, such as Andy Hui, Ronald Cheng and Miriam Yeung. He produced some of song of Ronald Cheng and awarded with “ Top Ten Solid Gold Award 2005” by TVB.
DJ (Scratching and Mixing) Division-DJ Tommy
DJ Tommy is undoubtedly Hong Kong’s premier scratchmaster. By 1991, he was crowned the Hong Kong DMC DJ Champion. In 1992, he went on to compete in the Technics World DJ Championship at the Ministry of Sound in London, where he came No.8 in the world. Currently, he became the No.2 in the world.
Beatbox and Rap Division- INK@Union
INK began beatboxing in 2005 with his crew Dropin’(renamed B-lang in 2006). He was discovered by MC Gold Mountain when he joined Hong Kong cypher at Victoria Park held by Gold Mountain. He then joined Hierophat performance crew and performed in Club Sugar, Club Paparazzi, Danso AP of different universities and Joint School Show of number of secondary schools. He performed in “The Magic Moments Leo Ku Concert 2007” and was on tour with “The Magic Moments Leo Ku Concert 2007” to different countries in 2008. Beside solo beatboxing performing, INK also took part in music production, such as the theme song of the DESIGN GALLERY OPENING and theme song of the TeenMusik (Program of Teen Power).
The Target Company has entered into services/employment contracts with all of the head of musician divisions, except for Lyric-writing division (headed by Mr. Lin Xi) and Classical Music Performance Division (headed by Ms. Nancy Loo). The services/employment contracts include a non- competition clause on restricting the instructor to conduct teaching at any private sectors either direct or in-direct competition to the Target Company. There was no contract in placed with Lyric-writing division (headed by Mr. Lin Xi) and Classical Music Performance Division (headed by Ms. Nancy Loo) because they are fully occupied by their personal businesses engagement, no extra schedule is allowing them to conduct teaching elsewhere with direct competition to the Target Company.
During the year of 2007, the Target Company has successfully obtained certain music training courses from the Student Financial Assistance Agency (“SFAA”) of the HKSAR. Those music training courses include Diploma in Music Composition and Production, Certificate in Lyric writing, Advanced Certificate in Modern Audio Production and Advanced Certificate in Vocal Technique & Performing Vocalist.
During the year of 2008, the Target Company was appointed as a consultancy and service provider for number of subjects related to module of “Pop Music” and “Music Industry” at the Bachelor of Music in Education (Honours) at the Hong Kong Institute of Education.
13 LETTER FROM THE BOARD
During the year of 2009, the Target Company provided tutorial services for the joint programs of Professional Diploma/Professional Certificate in Music Marketing and Management with the Open University of Hong Kong (LiPACE).
As at the Latest Practicable Date, the Target Company is still continuing provide all CEF courses with SFAA, consultancy and service provider with Hong Kong Institute of Education, and joint programs of Professional Diploma/Professional Certificate in Music Marketing and Management with Open University of Hong Kong (LiPACE).
In addition, according to education innovation implemented by HKSAR, local secondary schools would be funded by HKSAR to provide Other Learning Experience (OLE) to local secondary students in Hong Kong. As such, the Target Company has provided seminars, talks and workshop services to local secondary school. As at the year of 2011, 12 secondary schools have continuously appointed the Target Company as a services provider for OLE.
During the year of 2011, the Target Company has contracted with Star Dragon to develop vocal and music production programs in Guangzhou. Star Dragon is a company providing professional training for entertainment industry, such as various aspects of music production, film production and artists training. Star Dragon is under an entertainment group-J’STAR GROUP International (“J’ STAR”), which was founded in 1993. J’ STAR has provided the advertising of famous brand names, such as POSRCHE, OMEGA and MONTBLANC, and movie, music and entertainment productions, such as
From 2012 onwards, numbers of vocal programs with Star Dragon have been launching and recruiting students at Guangzhou, such as elementary vocal training, advance vocal training, and 3 days intensive vocal training in Hong Kong. The promotion on programs recruitment has been commenced since March 2012. The programs are scheduled to be commenced at July 2012.
Number and varieties of courses and training programs offered during the Relevant Period:
Number of courses 31 May 31 December 2012 2011 2010 2009
General courses – Continuing Education Fund (“CEF”) 11 11 11 11 – Non-CEF 4 4 4 4 Short courses 28 28 28 28
43 43 43 43
14 LETTER FROM THE BOARD
The following set forth the course details of programme offered by the Target Company during the Relevant Period:
The general course funded by CEF and duration of the general course funded by CEF as follows:
Name of certificate Course name Duration (weeks) Hours
Advanced Certificate in Vocal Vocal Techniques I 14 14 Techniques & Performing Vocalist Vocal Techniques II 16 16 Performing Vocalist I 20 26 Performing Vocalist II 15 17
Advanced Certificate in Modern Intensive Training in Modern 16 32 Audio Production Audio Production Hands-on Studio Workshop 15 34
Certificate in Lyric-writing Foundation in Lyric-writing I 6 6 Foundation in Lyric-writing II 8 8 LinXi Lyric-writing I 6 9 LinXi Lyric-writing II 6 9
Diploma in Music Composition MIDI & Digital Audio and 14 34.30 and Production Composition I
The non-CEF general course and duration of the non-CEF general course as follows:
Name of certificate Course name Duration (weeks) Hours
Diploma in Music Composition Advanced Studies for Music 15 33.15 and Production Technology and Composition II Song Arrangement 15 24.20 Professional Producer 15 15.45 Master Skills 15 22
15 LETTER FROM THE BOARD
The short course and duration of the short course as follows:
Type of courses Courses name Duration (weeks) Hours
Vocal Division Practical Singing Class 10 15 Intensive Training for 25 39 Professional Singer Intensive Training for Singing 6 9.5 Contests and Performances Junior Vocal Techniques I and II 30 75 Score Reading 6 12 Pop Singing Techniques 12 18 Small Vocal Class 6 6 Voice Control in Practice 8 12
Music Production Division Introduction to Logic Express 9 5 15 and Logic Pro 9 Foundation Music Production 8 How to start Composing 4 4 Easy Music Production 4 6
Lyric-writing Division LinXi Lyric-Writing III 6 9
Recording and Mixing Division Pro Tool 101-Introduction 8 24 to Pro Tools
DJ(Scratching/Mixing) Division DJ Mixing Techniques I and II 20 30 DJ Scratching Techniques I and II 20 30
Beatbox & Rap Division Human Beatbox Workshop I and II 20 20 Introduction to Freestyle Rap 20 20 and Art of Rhyme
Classical Music Performance Division Diploma in Piano Teaching 50 150 and Performance Comprehensive Study of Classical Guitar Performance 20 30 Saxophone Group Class for Beginners 12 18
16 LETTER FROM THE BOARD
Type of courses Courses name Duration (weeks) Hours
Pop Music Performance division Comprehensive Study of Modern Piano Performance 30 30.5 Essential Skills for Drum Players 12 18 Contemporary Techniques for Drummer 25 25 Comprehensive Study of 20 30 Steel-string Guitar Performance Comprehensive Study of Electric Guitar Performance 20 30 Pop Piano I and II 26 39
All individual programs are normally commenced with opened end duration students could initially commerce from 4 weeks or 14 weeks to continuously learning after the initial period.
In addition to the above musical courses offered by the Target Company, during the Relevant Period, the Target Company also offered individual class to students who are willing to further advance the knowledge in musical areas.
The customers of the Target Company include (i) educational institutions which the Target Company provides consultancy services and tutorial services; and (ii) the student enrolled in the musical courses offered by the Target Company. The category of students were mainly from age six above including teenagers for personal interests, working class for leisure and interest in musical industry. Furthermore, the students of the individual course include some young musical performer in Hong Kong.
Business model of the Target Company
The students of the Target Company were mainly solicited through promotion and advertisement in various media channels such as internet and press media for attracting student for enrollment of their musical courses. The Target Company normally receive course fee in advance from students for their general course and short course offered. For the individual courses and joint programs with educational institutions, the Target Company generally offered 0 – 30 days credit period.
Most of the musical training courses offered by the Target Company were designed and developed by its management team according to the market trend and expected demand for types of musical training within the musical industry. For CEF course offered by the Target Company, the content for each of the musical training course must be submitted and approved by CEF in accordance with their guideline and requirements. For other musical courses such as non-CEF courses and short courses, the contents were designed and developed by the management team of the Target Company in accordance with the their professional knowledge and teaching experience. For individual classes, the contents were developed according to the request from students.
The Target Company general outsourced its tutorial function to external tutors for its general courses, short courses and individual courses to students. During the Relevant Period, the Target Company does not have its own tutor for their musical courses and programme offered. The Directors of the Target Company is of the opinion that outsourced of tutors will be benefited from (i) reduce significant cost 17 LETTER FROM THE BOARD for the employment of famous musicians as tutors for the musical course offered; (ii) more flexible to locate suitable tutors for different types of musical courses; and (iii) appointment of famous musicians as tutors will be more attractive for students’ enrollment. The Target Company normally offers hourly rate to external tutors for its general courses and short courses ranging from HK$700 to HK$2,000 per hour depends on their experience and reputation. For individual courses, the Target Company normally offers certain percentage on the course fee to external tutors ranging from 50% to 70%.
As the Target Company has been operated in the market for over 6 years, certain brand building of the school has established into the market. To enhance the students’ enrollment, the Target Company believes the existing employment scheme with famous musician needs to be remained but with a certain allocation adjustment. The major adjustment will have the famous musician to teach less at the elementary level with the support of junior full time instructor. Then the famous musician will also more concentrate on the higher and advance level of teaching. The employment of full time instructor will be based on their level of experience, such as recent graduate from the Target Company and/or oversea music institutions, referral and/or protégé of famous musician (such as Mr. Ronald Ng or Lin Xi or others), and junior musician with few years of production experience. Other operation cost saving under execution is offering guarantee hours of teaching with lower hourly rate to the famous musician.
The analysis of turnover during the Relevant Period are set out below:
31 May 31 December 2012 2011 2010 2009 HK$’000 HK$’000 HK$’000 HK$’000
CEF general courses 1,876 3,105 4,330 4,103 Non-CEF general courses 734 1,006 1,303 1,224 Short courses 632 1,031 1,209 1,414 Individual class 2,139 3,852 3,580 2,639
5,381 8,994 10,422 9,380
The analysis of gross profit during the Relevant Period are set out below:
31 May 31 December 2012 2011 2010 2009 HK$’000 HK$’000 HK$’000 HK$’000
CEF general courses 1,195 1,579 2,327 2,457 Non-CEF general courses 529 605 838 827 Short courses 341 370 583 597 Individual class 772 1,007 1,118 646
2,837 3,561 4,866 4,527
18 LETTER FROM THE BOARD
The analysis of number of students under each pool during the Relevant Period are set below:
31 May 31 December 2012 2011 2010 2009
Below 6 years old 36 65 41 18 7-17 years old 291 329 229 171 Students and above 18 years old 169 238 208 128 Employed 213 665 916 975 Self employed 62 52 42 45 Professional 486 227 326 213 Jobless/retired 12 17 23 8
1,269 1,593 1,785 1,558
The analysis of turnover by each pool of students during the Relevant Period are set out below:
31 May 31 December 2012 2011 2010 2009 HK$’000 HK$’000 HK$’000 HK$’000
Below 6 years old 62 384 586 341 7-17 years old 1,425 2,413 1,990 1,341 Students and above 18 years old 718 1,354 1,205 1,358 Employed 1,046 3,194 4,407 4,898 Self employed 226 255 169 180 Professional 1,826 1,339 1,968 1,218 Jobless/retired 78 55 97 44
5,381 8,994 10,422 9,380
The analysis of gross profit by each pool of students during the Relevant Period are set out below:
31 May 31 December 2012 2011 2010 2009 HK$’000 HK$’000 HK$’000
Below 6 years old 33 152 273 165 7-17 years old 751 956 929 647 Students and above 18 years old 379 536 563 656 Employed 551 1,264 2,058 2,363 Self employed 119 101 79 87 Professional 963 530 919 588 Jobless/retired 41 22 45 21
2,837 3,561 4,866 4,527
19 LETTER FROM THE BOARD
The Target Company maintains quality control over its tutorial function. The Target Company maintains a register for professional musicians who are qualified for provision of the tutorial services to students. In order to become a qualified tutor, the management team of the Target Company will hold meeting with those professional musicians for assessing their teaching experience, academic qualification, background, reputation and experience within the musical industry. Furthermore, the management team of the Target Company will also discuss with students for their feedback on tutor so as to maintain high quality of musical training services.
The number of tutor joining and leaving the Target Company for the Relevant Period as follow:
31 May 31 December 2012 2011 2010 2009
Existing tutors 96 83 70 67 New tutors 5 18 15 9 Resigned tutors (1) (5) (2) (6)
100 96 83 70
The number of tutor as at 31 May 2012 and 31 December 2011, 2010 and 2009, were 100, 96, 83 and 70 respectively.
The Target Company currently has two training centre, both located in Wanchai, Hong Kong and were leased from independent third parties. The tenancy for both training centre will be expired in October 2013. The two training centre of the Target Company comprise of 5 small classrooms, 2 big classrooms and 3 classrooms, the capacities of small classroom and big classroom is 10-15 students and 25-45 students respectively. The director of the Target Company is in the opinion that the operation of the Target Company will not be disrupted if such leases are terminated or expired because (i) there is no specific requirement or license required to be obtained for operating as training centre in the commercial or industrial building so that there is no requirement preventing the Target Company to re-locate its training centre; and (ii) there is no significant capital requirement for training centre so that the Target Company would not incurred significant cost to re-locate its training centre if the current lease expired. For the year ended 31 December 2011, the renovation and relocation cost is HK$430,000. Nevertheless, the director of the Target Company is in the opinion that there is no particular matter preventing the Target Company to renew the existing leases.
The analysis on rental expenses to the Target Company’s revenue for the Relevant Period as follows:
31 May 31 December 2012 2011 2010 2009 HK$’000 HK$’000 HK$’000 HK$’000
Revenue 5,381 8,994 10,422 9,380
Rental expenses 442 1,895 840 1,676
Rental expenses to revenues 8.2% 21.1% 8.1% 17.9%
20 LETTER FROM THE BOARD
For the year ended 31 December 2010, rental expenses were shared by the productions project of Mr. Ronald Ng which required the usage of the facilities of the Target Company for the entire year of 2010. Therefore, the rental expenses for the year ended 31 December 2010 were significantly lower than the rental expenses for the years ended 31 December 2009 and 2011.
Market Competition of the Target Company
The Target Company faces competitions from musical training providers in Hong Kong. To the best knowledge and believe by the director of the Target Company, there are two competitors in the Hong Kong engaged in the provision of music training courses. However, the director of the Target Company believe that it is difficult to establish a reputation in the way that the Target Company has, without the experience, knowledge and contacts that are available to the Target Company. In addition, those competitors only provide partially music training programs especially in vocal training, however, the Target Company provide comprehensive music training programs, such as Lyric written, Music production, Vocal and Mixing and recording. As a result, the director of the Target Company believe that they have competitive advantage over the competitors in Hong Kong. On the other hand, a part of music training courses of the Target Company has obtained Continuing Education Fund (“CEF”) from the Student Financial Assistance Agency (“SFAA”) of the HKSAR, students completed the music training courses, and SFAA will refund 80% of fee of music training courses. The market competitors do not provide CEF music training courses and the director of the Target Company believe that this is another competitive advantage over their competitors in the market.
The maximum amount of the refund from SFAA for the music training courses to eligible student is $10,000 or maximum 80% of the tuition fees (whichever is the less). Eligible student must have the valid Hong Kong identification card and of age 18 to 65. The course also must be listed within SFAA. For the refund application process, student must pay the tuition fee upfront to the course provider at the time of enrollment and before the course commences with submission of application form to CEF office for the course enrolled. Then the student must attend above 70% of the scheduled lessons, and pass all the assessment. Once the student completes and fulfill all the above conditions, he/she could submit the request form along with the proof of academic result, official receipt and letter of certificate from the course provider to SAFF office for the refund process. The refund should be directly paid from SFAA to the student and take up to 60 day to process.
There is an entry barrier for provision of musical training courses for CEF program. From May 2008 onwards, no new CEF program from course provider after the launch of Quality Framework (QF). All course providers like the Target Company must have obtained the Quality Framework for any new application of CEF program. However, course provider is allowed to offer all the original and existing CEF listed programs to the public, even no Quality Framework on hand or application.
BUSINESS PLAN OF THE TARGET COMPANY
It is the Target Company’s business plan to develop its musical education and consultant services in both Hong Kong and the PRC through co-operations with various third parties to expand its business scopes and markets.
21 LETTER FROM THE BOARD
The Target Company will cooperate with the Open University of Hong Kong (“OUHK”) and contract is entered with OUHK in May 2012 for the first full-time pop music diploma certificate program in Hong Kong for the Professional Diploma in Vocal Techniques and Performing Vocalist. The program is schedule to be commenced in September 2012 with the recruitment promotion from June 2012.
The basis of corporation income generated from full time diploma with OUHK is the term and conditions, proposed training schedule and fee on signed contract with OUHK which is sharing 55% of gross course fee income, two course for each year and the enrolment will be on every March and September. On the other hand, the Target Company is responsible for 147 hours over 5 different subjects, such as Pop Music Concepts, Ear Training for Professional Singers, Advanced Vocal Techniques, Entertainment Industry and Advanced Choral Training for Professional Singers.
The analysis of corporation income for the first full-time pop music diploma certificate in OUHK as follows:
1 June to 31 December Year ending 31 December* 2012 2013 2014 2015 2016 Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Corporation income from OUHK diploma program 320 1,000 1,250 1,500 1,750 5,820
For corporation income generated from full time diploma with OUHK, we have reviewed the term and condition, proposal program schedule and fee income on signed contract with OUHK and re- calculated the fee income to ensure the consistence with forecasted income and reviewed the historical corporation income from OUHK. The corporation income generated from full time diploma with OUHK is reasonable and fair on future cash flow projection and consistence the business plan.
The Target Company will also cooperate with Star Dragon and contract is entered with Star Dragon in June 2011 which is an open end contract with no expiration date, under the contract 50% of the gross courses income from the enrolled student will be shared to the Target Company. The Target Company will provide the programs’ syllabuses and control, and instructors for the programs offered. Star Dragon will provide the promotion, administration and venue for the programs, based on their 50% share. Either the Target Company or Star Dragon may terminate the collaboration by given not less than 90 days written notice before the start date of the next intake of the program. Even when proceedings to terminate the collaboration are initiated, both the Target Company and Star Dragon will continue to ensure that all students enrolled will complete their intended program without disruption. The programs in Guangzhou are currently under the recruitment stages. Programs are scheduled to be commenced in July 2012, during the commencement of summer holiday.
The basis of corporation income generated from seminars and training courses in PRC with Star Dragon is the term and condition on signed contract with Star Dragon, and schedule of courses to be held, as agreed with Star Dragon, which is share 50% of gross course fee income, and the training programme is continuous with two months duration per level for each year.
22 LETTER FROM THE BOARD
The analysis of corporation income generated from seminars and training courses in PRC with Star Dragon as follow:
1 June to 31 December Year ending 31 December 2012 2013 2014 2015 2016 Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Corporation income generated from seminar and training course in PRC with Star Dragon 2,234 5,625 6,605 4,673 7,168 26,305
For corporation income generated from seminars and training courses in PRC with Star Dragon, we have reviewed the term and condition on signed contract with Star Dragon and schedule of courses to be held, as agreed with Star Dragon and its estimated fee income according to the signed contract and re-calculated the fee income to ensure the consistency with forecasted income. The corporation income generated from seminars and training courses in PRC with Star Dragon is reasonable and fair on future cash flow projection and consistence with the business plan.
The Target Company will also cooperate with OUHK and Middlesex University of the United Kingdom relating to Middlesex University’s joint program with OUHK for the provision of Bachelor of Pop Music programs in Hong Kong and contract is entered with OUHK in July 2012. Program promotion for recruitment of students has commenced since April 2012 and the program is expected to commence in late September of early October 2012.
The basis of corporation income from musical degree in Hong Kong with Middlesex University and OUHK is term and condition and proposed schedule and fee on final draft, which is agreed by OUHK and Middlesex University and promotion materials to the public, which is sharing 27.5% of gross course fee income and the Target Company is responsible for 540 hours over 6 subjects, such as Genres in Popular Music, Song Writing & Performance I, Applied Music Technologies, Song Writing & Performance II, Independent Project and Event & Artist Management. The analysis of corporation income from musical degree in Hong Kong with Middlesex University and OUHK as follows:
1 June to 31 December Year ending 31 December 2012 2013 2014 2015 2016 Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Corporation income from musical degree in Hong Kong with Middlesex University and OUHK 151 666 1,361 1,906 1,906 5,990
For corporation income from musical degree in Hong Kong with Middlesex University and OUHK, we have reviewed the term and condition and proposed program schedule and fee income on final draft, which is agreed by OUHK and Middlesex University signed in July 2012 and reviewed the promotion
23 LETTER FROM THE BOARD material on public. The corporation income from musical degree in Hong Kong with Middlesex University and OUHK is reasonable and fair on future cash flow projection and consistence the business plan.
The Target Company is also in discussion and negotiation with Disneyland Hong Kong and China for the development of training programs of their musical performance in the Disneyland Fun Park located in Shanghai, the PRC which will be opened in 2015, as at the Latest Practicable Date, no contract has been entered between the Target Company and Disneyland, it is expected that conclusion of the contract with Disneyland Hong Kong and China will be delayed to the last quarter of 2012. Such delay was mainly due to Disney is an international cooperation, the collaboration approval process with the Target Company from various departments of headquarter at United States, Hong Kong and Shanghai China is taking longer than the original expectation.
The basis of consultancy income for development of training programs in Disneyland Fun Park located in Shanghai is framework of cooperation provided by Disneyland.
The analysis of consultancy income for development of training programs in Disneyland Fun Park located in Shanghai as follow:
1 June to 31 December Year ending 31 December 2012 2013 2014 2015 2016 Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Consultancy income for development of training programs in Disneyland Fun Park located in Shanghai – 2,300 3,500 4,950 6,000 16,750
For consultancy income for development of training programs in Disneyland Fun Park located in Shanghai, we have reviewed the framework of cooperation provided by Disneyland, official proposal issued by the Target Company to Disneyland, quotation and proposed training schedule requested by Disneyland and detail of official meeting and correspondence in respect of estimated fee and schedule of programs between the Target Company and Disneyland. The consultancy income is reasonable and fair on future cash flow projection and consistence the business plan.
Locally, the Target Company is aiming to further develop and expand business in the Hong Kong market by applying and completing Quality Framework (QF) accreditation introduced by HKSAR so as to provide full-time daily programs. At present, there is no mandatory regulation and official government constraint over the pop music education in forced, application for Quality Framework (QF) by course provider is voluntarily.
The Quality Framework is formed and official governed by Hong Kong Council for Accreditation of Academic and Vocational Qualifications – HKCAACQ and was officially launched on 5th May 2008 (http://www.hkqf.gov.hk) on public and private education service providers for different aspects, such as make-up, photography, music, cooking, etc. All course providers are open to apply for such qualification
24 LETTER FROM THE BOARD on the programs that they are offering to the public but not mandatory. The general purpose of the QF is to provide a guideline and scaling system for the programs being offered is equivalent to the programs by tertiary institution and/or university.
For all QF application, an approval committee along with the designated subject specialty members of that particular industry will be formed for the application review.
The quality framework is comprised of five quality components as per the levels of qualifications offered by universities and/or tertiary educations (such as degree, diploma and certificate, etc…). Each component addresses several quality elements. The quality components and elements provide a systems perspective for understanding organizational performance and identifying areas for improvement. It is the intent of CQI Advisory Group and OCCHA CQI Committee to develop processes/mechanisms to facilitate health units’ implementation of this quality framework in support of continuous quality improvement.
In general, the QF contains 7 different levels for the applicant to select, each level is equivalent to the course being offered. The Target Company is aimed to apply the QF 3 and 4 on the CEF programs that are offering now, such qualification could equivalent to Form 7 and/or higher diploma in Hong Kong.
The Target Company’s competitors can apply for QF and provide new CEF program. As a matter of fact, if the Target Company is the first party successfully being granted the QF, the entire application process, quality and standard of the Target Company shall be referred as the basic consideration and requirement for any other applicants. In addition, Mr. Ronald Ng has been nominated as the subject specialty since 2007 and assessment committee since 2009. He will be notified by HKCAACQ on any applicant submission and act as assessment committee.
To assist the business growth of the Target Company, the application and obtain of QF is one of its objectives under the projection forecast in the near future. The Target Company is expected to official submit the application in late 2012 or early 2013. The overall duration of the entire process is normally a period of 4 to 12 months. The application involves two stages of evaluations and assessments,, they are:
1. Institution Evaluation (IE): to evaluate the physical environment of the institution over the facility offered and the process of administration is adequate enough.
2. Program Evaluation (PE): to evaluate the syllabus and standard of instructors on the offered programs (CEF Programs) are equivalent to the stand of QF.
An applicant could apply for both stages at the same time to stream down the overall application period.
Once the Target Company is accredited with the QF on 3 and 4, more compact and intensive daytime programs will be offered. For example, CEF programs such as Diploma in Music Composition and Production could be from one to two lessons per week into daily full time lessons for daytime students to enroll. The overall program duration will be reduced but increased by the number of new cohort as well as the students number should then be enhanced. Existing part-time programs in the evening for working class and others will remain offered. Same principle will be applied on other existing CEF programs. The intention to further develop new CEF program on different subjects will also be part of the business objective of the Target Company in the future. 25 LETTER FROM THE BOARD
The overall duration of the entire process is normally between 4 to 12 months period from the date of submission. Two stages of application and assessment (Institution Evaluation – IE and Program Evaluation – PE) are in place, but could be applied at the same time to stream down the overall application period. For the normal practice, a thoroughly details of information has to be submitted to HKCAAVQ prior to actual assessment take place. Once the submitted document is approved and the applicant has paid the application fee, HKCAAVQ will form an assessment committee (in this case, Mr. Ronald Ng will not be part of the committee due to conflict of interests). The committee will conduct venues inspections, programs evaluations, staffs and students interviews during the process. They will also advise the changes that might require. After the assessment is approved, certain terms and conditions may be imposed to the applicant to comply within a reasonable time. The adequate funding reserve should serve one of the key conditions to any applicant.
The analysis of CEF course income affected on granted the QF as follow:
1 June to 31 December Year ending 31 December 2012 2013 2014 2015 2016 Total HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Increase in revenue upon successful application of QF – 1,611 1,949 2,359 3,272 9,191
For CEF course income effected on granted the QF, we have reviewed the history of the Target Company about grant the CEF, the percentage of increase of income effected on grant the CEF, and the percentage of increase of income is reasonable and fair.
No committed income is on the contract between the Target Company, Star Dragon and the Open University of Hong Kong.
Back to economic crises at 2009, rather than suffering the economic downturn as per other businesses, the Target Company was experiencing a stable growth throughout the year to 2010. Student enrollment and receipt of tuition fees were higher than the previous years. The growth on CEF programs and mature students were also significant increased. Because of such, the Target Company assumes that more people will seek for further academic development and/or professional training on either self- improvement or career change. On the other hand, the growth of leisure and personal hobbies on music training are more common during the positive and growth of economic environment. The rapid growths of under age students are expected to be seen under such period.
Revenue forecast of the Target Company
Set out below is the revenue projection of the Target Company for the period commencing 1 June 2012 and ending 31 December 2016 (the “Revenue Forecast”) which mainly comprises revenue deriving from the following:
(i) group courses (including the CEF courses, non-CEF course and short courses) and individual classes (“Course Income Forecast”);
26 LETTER FROM THE BOARD
(ii) joint courses organized with cooperative parties, including Open University of Hong Kong, Middlesex University and Star Dragon (“Joint Course Income Forecast”); and
(iii) consultancy income deriving from Disneyland Hong Kong and China and Hong Kong Institute of Education (“Consultancy Income Forecast”).
1 June to 31 December Year ending 31 December 2012 2013 2014 2015 2016 Notes HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Course Income Forecast: Existing CEF Programs, and courses 9,488 20,456 24,752 29,949 35,821 Increase in revenue upon successful application of QF 1 0 1,611 1,949 2,359 3,272 Joint Course Income Forecast: OUHK courses 2 320 1,000 1,250 1,500 1,750 Middlesex courses 151 666 1,361 1,906 1,906 Star Dragon courses 2 2,234 5,625 6,605 4,673 7,168 Consultancy Income Forecast: HKIE courses and consultancy charges 58 138 104 92 104 Disneyland training program consultancy 3 – 2,300 3,500 4,950 6,000 Total revenue 12,251 31,796 39,521 45,428 56,020
Notes:
1. QF application in progress
2. Contracts signed has no committed income
3. Contract not yet signed and is in negotiation
Assessment of Revenue Forecast
The Revenue Forecast comprises (i) Course Income Forecast; (ii) Joint Course Income Forecast; and (iii) Consultancy Income Forecast.
Details of assumptions used in arriving at the Revenue Forecast are set out in the sub-heading “Revenue” under the paragraph headed “8.4.1. Discounted Cash Flow” in the valuation report of the Target Company as set out in Appendix IV of this circular.
The Target Company recorded a total revenue of approximately HK$5.4 million for the five months ended 31 May 2012.
27 LETTER FROM THE BOARD
Course Income Forecast
In preparing the Course Income Forecast, references are made to (i) average annual growth rates of course fee of 14% for 2013 and 10% for 2014 to 2016 and (ii) annual growth rate of 10% on headcount.
The recorded revenue for the five months ended 31 May 2012 and forecasted revenue for the seven months ending 31 December 2012 of existing CEF programs and course amounted approximately HK$5.4 million and HK$9.5 million respectively, therefore forecasted revenue of existing CEF programs and courses for the whole year of 2012 amounted to approximately HK$14.9 million as compared with the historical revenue for 2011 of approximately HK$9.0 million. The surge in revenue from 2011 to 2012 is mainly driven by combined effect of the increase in course fees and student headcount in 2012. In the last quarter of 2011, there has been course restructuring of some of the CEF programs and courses of the Target Company which result in upward adjustment in course fees. In 2012, course fees of some of the CEF courses and non-CEF courses are revised upwards which demonstrates an average course fee growth of approximately 32% and approximately 18% respectively. The effect of increase in course fees has been and is expected to continue to be reflected in the revenue of 2012. For the five months ended 31 May 2012, as a result of the combined effect of the increase in course fee and increase in student enrollment, revenue of the Target Company amounted to approximately HK$5.4 million, demonstrating a growth of approximately 53.4% from corresponding period in 2011. Moreover, as advised by the management of the Target Company, the Board is given to understand that the student base of the Target Company has been expanding since the start of business of the Target Company in 2006 with an average of over 400 new students enrolled year over year in terms of new application forms. Although not all students within the student base are active, with new students joining every year, the potential student base of the Target Company has been expanding. Those students within the student base whether active or not have the potential to enroll in courses offered by the Target Company. In addition, as advised by the management of the Target Company, with reference to its historical record and analysis, approximately 80% of the students enrolled in two or more courses offered by the Target Company. In other words, most students who completed junior level courses will continue to enroll in more advanced level courses and retained in the student base of the Business Enterprise. In the view of the foregoing, management of the Target Company expected an increase in revenue from 2011 to 2012.
The Board has discussed with the management of the Target Company and has reviewed and considered (i) the course restructures of some of the CEF programs and the changes of syllabuses and increase of lessons hours thereof which would result in corresponding adjustments in course fees in 2013; (ii) some of the CEF courses have relative low tuition fee especially after the CEF refund process and the possibility of increasing the course fees in 2013; and (iii) the Board has also considered the reputation of the Target Company has been intensively built up during the last few years and the current QF application process and its effect on generating increasing headcount in the event of obtaining QF. Based on the foregoing, after considering (i) the market researches on similar music related trainings and programs, historical change in course fee and proposed course fee adjustment stemming from proposed course restructuring; (ii) the Target Company’s capability to introduce new full and daytime CEF programs and other new CEF programs upon successful application of QF by the Target Company. Following which will allow the Target Company to offer compact and intensive daytime CEF courses alongside with existing evening courses, therefore increasing the program frequency and driving up the number of headcount and revenue; (iii) expected surge in demand for professional musical training in various aspects in view of the expansion in musical industry in Hong Kong; (iv) competitive strength of the Target Company in offering comprehensive musical training courses and CEF courses over its competitors; and (v) reputation 28 LETTER FROM THE BOARD of the Target Company with its brand name being established through previous cooperation with various educational institutions, the Directors consider that the assumptions for the Course Income Forecast to be justifiable.
Joint Course Income Forecast
In estimating the Joint Course Income Forecast, it relates to projected income from joint courses organized with cooperative parties, namely (i) OUHK; (ii) Middlesex University; and (iii) Star Dragon.
The Board has discussed with the management of the Target Company of the bases and assumptions in arriving at the Joint Course Income Forecast. Furthermore, the Board has enquired on the latest development status of the Target Company’s proposed joint course development with various cooperative partners and has reviewed the terms and conditions of the relevant signed contracts. The Joint Course Income is supported by historical cooperation income, new contracts signed or to be signed and is determined in accordance with the course schedules with various cooperative parties. In particular, (i) historical cooperation income from OUHK; (ii) new contract signed with OUHK in May 2012 in relation to Professional Diploma in Vocal Techniques and Performing Vocalist. Program promotion for student recruitment will commence in June 2012 and program will commence in September 2012; (iii) new contract signed with OUHK in July 2012 relating to the joint program between Middlesex University of the United Kingdom and OUHK for provision of Bachelor of Pop Music programs in Hong Kong. Program promotion for student recruitment has already commenced in April 2012 and the program will commence in late September 2012 or early October 2012; and (iv) contract signed with Star Dragon in June 2011 for provision of music programs on vocal training, lyrics writing, pop music composition and production. The programs are now under recruitment stages and will commence in July 2012. In view of the above, the Board has not identified any major factors which cause it to doubt the fairness and reasonableness of the principal bases and assumptions of the Joint Course Income Forecast.
Consultancy Income Forecast
In relation to Consultancy Income Forecast, reference is made to (i) the historical experience and consultancy income in providing consultancy services by the Target Company to Hong Kong Institute of Education; and (ii) the contract to be signed with Disneyland Hong Kong and China in the last quarter of 2012, where the Target Company has been actively in negotiating the details of the collaboration and business arrangement and the approval is in progress.
Taking into account the Target Company being a reputable company with over six years of history in music training industry, the management of the Target Company considers that the Target Company will be competent to provide consultancy services to Disneyland on its training program development and no major obstacles are expected in the Target Company’s cooperation with Disneyland. Based on the Board’s review of the correspondence, quotation and proposed schedule in relation to Target Company’s cooperation with Disneyland, there was no indication that the contract for the Target Company’s proposed cooperation with Disney will not be entered into.
Based on the foregoing, with the Revenue Forecast being estimated with reference to (i) outlook of the musical training industry; (ii) business strategy of the Target Company in obtaining QF for its business growth; (iii) proposed business development of the Target Company is providing joint course
29 LETTER FROM THE BOARD with cooperative parties where Joint Course Income Forecast is supported by contracts entered into or to be entered into by the Target Company; (iv) the development status of the joint programs; (v) historical business performance of the Target Company; and (vi) proposed cooperation with Disneyland where on- going negotiation is in place and with proposed cooperation initiated by Disneyland given the expertise and reputation of the Target Company, the Directors consider that the Revenue Forecast to be achievable.
VALUATION OF THE TARGET COMPANY
Valuation of market value of 100% of the Target Company (the “Valuation”) is approximately HK$96 million. The valuation report adopted the income-based approach using discounted cash flow method for arriving at the Valuation which involved projections of profits, earnings and cash flows and are regarded as profit forecasts under Rule 19.61 of the GEM Listing Rules. Details of the bases and assumptions of the Valuation are set out in the valuation report of the Target Company (the “Valuation Report”) which is set out in Appendix IV of this circular.
Valuation methodology
The Directors have reviewed the Valuation Report and have discussed with the Valuer regarding the basis of choosing the methodology adopted for the Valuation. Upon discussion with the Valuer, the Directors understand that the Valuer has considered the three commonly adopted valuation methodologies, namely market-based approach, the income-based approach and the asset-based approach in valuing the market value of the Target Company and had adopted the income-based approach. Under the income-based approach, it focuses on the economic benefits due to the income producing capability of the business entity. The underlying theory of this approach is that the value of the business entity can be measured by the present worth of the economic benefits to be received over the useful life of the business entity. Based on this valuation principle, the income based approach estimates the future economic benefits and discounts them to their present values using a discount rate appropriate for the risks associated with realizing those benefits.
Having considered that (i) the market-based approach is not appropriate as most of the important assumptions of the comparable transactions were hidden; and (ii) the cost-based approach is not appropriate as it could not reflect the market value of the Target Company, the Directors concur with the Valuer in the selection of the income-based approach as the valuation methodology for the Valuation.
Key valuation assumptions
In arriving at the Valuation under the discounted cash flow method, the following two key assumptions will be (i) the future cash flows projection; and (ii) the estimation of a discount rate.
Cash flows projection
In arriving at the Valuation, a cash flows projection for the period commencing 1 June 2012 and ending 31 December 2016 is prepared. In estimating the cash flows projections, the Revenue Forecast is a major component of cashflows projections of the Target Company with reference to the existing business model of the Target Company and its proposed business development strategies.
30 LETTER FROM THE BOARD
As set out in the section headed “Information of the Target Company”, the Target Company principally derives revenue from (i) provision of CEF courses, non-CEF general courses, short courses and individual classes; (ii) provision of consultancy services to educational institutions; and (iii) provision of tutorial services for joint programs with educational institutions.
It is the business plan of the Target Company to pursue the development of its existing musical education and consultancy services further in both Hong Kong and the PRC through the cooperative arrangement with different parties, including Open University of Hong Kong, Middlesex University, Star Dragon and Disneyland Hong Kong and China, details of which are set out in paragraph headed “Business plan of the Target Company”.
As set out in the paragraph headed “Assessment of Revenue Forecast”, the Board considers the Revenue Forecast to be achievable.
Furthermore, the Valuer considers that the assumptions used in the financial projections of the Target Company as set out in the paragraph headed “8.4.1. Discounted Cash Flow” in the Valuation Report to be fair and reasonable after (i) reviewing the financial information and other pertinent data concerning the Target Company, including financial statements, business plan, information of key personnel, contracts signed with cooperative parties; (ii) conducting site visit to the business venue of the Target Company; and (iii) latest status and updates on schedules of collaboration with various cooperative parties.
In assessing the Valuation, the Board has also discussed with and enquired the Valuer about different aspects including the bases and assumptions based upon which the Valuation has been prepared, and reviewed the Valuation Report prepared by the Valuer including the assumptions used in arriving at the cashflow projections as set out in paragraph “8.4.1. Discounted Cash Flow” in the Valuation Report and the fact that the Revenue Forecast and the forecasted expenses are not projected on signed contract with committed income but based on future events which may or may not take place. Based on (i) the Board’s understanding and assessment to the business plans of the Target Company; (ii) the Board’s discussion and enquiries with the Valuer concerning the assumptions of the Valuation; and (iii) the Valuer’s assessment and work performed regarding the reasonableness of the cashflow projections of the Target Company, the Board considers the assumptions adopted by the Valuer in relation to the cash flow projections to be acceptable.
Furthermore, the Board has also considered the comfort letter of Elite Partners CPA Limited and discussed with the reporting accountant regarding whether the profit forecast of the Target Company for the period commencing 1 June 2012 and ending 31 December 2016 has been properly complied in accordance with the bases and assumptions made by the management of the Target Company. Following discussion with the reporting accountant on its assessment on the future cash flows of the Target Company by examining the key assumptions, the Board considers that the assumptions were found to be reasonable.
Discount rate
In considering the discount rate of the Target Company adopted by the Valuer, the Board has made reference to the weighted average cost of capital (“WACC”) of companies in music related industry operating in Asia as extracted from Bloomberg as at the date of valuation, i.e. 31 May 2012. The median of the WACC of those companies was below 9%. Due to the fact that the Target Company is not a listed company, the Board considered that the higher discount rate applied to cash flow projections 31 LETTER FROM THE BOARD for the Target Company of 15.51% adopted by the Valuer, was fair and reasonable. The Board has also discussed with the Valuer on the basis of selecting the comparable companies where references were made in arriving at the discount rate adopted by the Valuer. It is noted that reference is made to the comparable companies selected which are not directly comparable to the Target Company, although the comparable companies are in pop music industry, most of their revenue is not derived from provision of music classes. With the comparable companies identified by the Valuer being engaged in similar business activities of the Target Company and the Valuer has taken into account the establishment history, nature of business operation and availability of public information of the comparable companies, the Board consider it to be reasonable to make reference to the comparable companies for the purpose of valuation. In addition, the Boards has reviewed recent merger and acquisition transactions of some of the listed companies in Hong Kong and made reference to the discount rates adopted by different valuers in discounted cash flow. The median of the discount rates was approximately 15%, which was in range with the 15.51%, adopted by the Valuer.
It should be noted that the Valuation is highly dependent on the future development of the Target Company and the cashflow projections of the Target Company may or may not be realized if the assumptions or anticipated events do not occur as scheduled.
If the Target Company does not have any future business growth or cost improvements and with its performance remain status quo, value of the Target Company will be approximately HK$13 million which is considered by the Directors to be an unlikely scenario after taking into account the progress of the business developments of the Target Company as envisaged under its business plans with collaboration contracts being signed or under active negotiation and the latest development status of the joint programs.
The financial forecast of the Target Company depends in part on successful possession of QF by the Target Company. Upon successful possession of QF, it will allow the Target Company to offer more compact and intensive daytime CEF courses alongside with existing evening courses. The Target Company is expected to official submit the application at late 2012 or early 2013. The overall duration of the entire process is normally from four to twelve months period.
Failure to obtain approval of QF, for any reasons, could have a negative effect on the Target Company’s operations and financial condition. The Board has assessed the impact on the market value of the Target Company in a scenario given that the approval of QF could not be obtained, the market value of the Target Company would be approximately HK$89 million and the Board considered that the impact, a 7% decrease in market value from that of HK$ 96 million, was not vastly significant.
After reviewing the two-stage application and assessment process of QF (institution evaluation and program evaluation) and considering the fact that the two stages of application and assessment could be applied both at the same time to stream down the overall application period, the Board is not aware of any material obstacles encountered by the Target Company in the application and possession of QF.
Summing up the above and taking into consideration that (i) the valuation was determined using generally accepted valuation approaches in accordance with the professional standard governing valuation; (ii) the personnel carrying out the valuation possess relevant qualification and expertise; (iii) the business model and strategies of the Target Company as set out in the section headed “Information of the Target Company”; (iv) future prospect and its income producing capability of the Target Company according 32 LETTER FROM THE BOARD to its management after taking into account the proposed business plan; (v) revenue projections of the Target Company as supported by the contracts signed or to be signed with cooperative parties; (vi) latest development status of the joint programs; (vii) historical business performance of the Target Company; (viii) review of the business plan, financial information and financial projections of the Target Company; (ix) due and careful enquiry made by the Directors regarding the valuation bases and assumptions used in the Valuation with the Valuer; and (x) both the Valuer’s and the Directors’ assessment that the financial projections of the Target Company to be fair and reasonable upon review of information and pertinent data of the Target Company and discussion with the management of the Target Company of its affairs and prospects, the Board is of the views that the valuation methodology and assumptions adopted by the Valuer in the Valuation Report are fair and reasonable and the current Valuation of the HK$96 million of the Target Company is not overstated.
RISK FACTOR OF THE TARGET COMPANY
Reliance on key personnel
The Target Company’s operation is dependent upon the reputation of Ronald Ng as the operations and development of the Target Company rely on his musical industry experiences and expertise in the business operations. If Ronald Ng is unable or unwilling to continue in his present positions, or if he leaves the Target Company, the Target Company may not be able to find replacements with reputation comparable with Ronald Ng in the market, which would cause severe disruption to the business of the Target Company. If the Target Company is unable to retain or replace the key personnel, the Target Company may not be able to implement its business strategies and its financial condition and results may be materially and adversely affected.
Mr. Ronald Ng has entered into a director agreement with the Target Company for an initial term of 3 years commencing from 2nd January 2012 and thereafter automatically extended for two terms of 2 years each unless either parties shall serve at least 3 months’ notice prior to expiration of the current term of its intention not to extend the term further. Under the said director agreement Mr. Ronald Ng has also provided the Target Company with non-competition arrangements within 6 months after he resigned from the Target Company.
Reliance on recruitment of outsourced tutor
The tutor of the musical course and programmes offered by the Target Company were outsourced to famous musicians or personnel with extensive experience in the musical industry. However, there was no assurance that the external tutors can be able to provide their teaching services due to various situations such as available of time because tutors might be engaged by their own business and development. Should the external tutors cannot provide their teaching services for musical course and program offered by the Target Company, the Target Company’s operation may adversely affected as the Target Company may not be able to find suitable tutor for provision of musical course and programme offered by the Target Company.
Nevertheless, this is the Target Company’s business plan to employ full time tutors to mitigate the risk of outsourced external tutors in the future. Those full time tutors to be employed are mainly the student from those outsourced external tutors or student from famous artist who are willing to further develop their career in the musical industry in full time basis. Therefore, the quality of the teaching skill and technique can be assured. 33 LETTER FROM THE BOARD
Reliance on course enrolment
The Target Company’s operation is reliance on enrolment of courses from third parties and existing students and the course fee generate from them form part of the major source of income of the Target Company. Since the musical courses offered by the Target Company are merely on leisure interesting classes or personal hobby, there is no commitment for student to enroll the musical course offered by the Target Company. The Target Company’s performance may be adversely affected if there is lack of student for enrollment in the musical courses offered by the Target Company.
Nevertheless, in the opinion of the director of Target Company, the enrolment of the musical courses offered by the Target Company was stable. The Target Company would be able to attract student for its quality of musical courses, technical tutors and developed brand name in the musical industry in Hong Kong. Furthermore, the Target Company aims to further develop the Hong Kong market by applying and complete the Quality Framework (QF) program introduced by HKSAR so as to provide more CEF courses and full-time daily programs. On the other hand, the Target Company will continue to cooperate with Star Dragon for provision of seminars and training courses in the PRC for diversify the Target Company’s income steam to mitigate the risk for reliance on course enrolment for student in Hong Kong.
Reliance on senior management and technical staff
The musical courses and programmes offered by the Target Company was developed by senior management and technical staffs based on their knowledged and musical experience. If senior management and technical staff are unable or unwilling to continue in their present position, or if they leaves the Target Company, the Target Company may not be able to find replacements with their experience, which would cause severe disruption to business of the Target Company and may not be able to implement its business strategies and its financial conditions and result may be materially and adversely affected.
Nevertheless, the director of the Target Company believe that the Target Company already has well established program structures for all of its musical courses. Furthermore, most of the senior management and technical staff joined the Target Company since its incorporation and they have good relationship with Mr. Ronald Ng. Therefore, the director of the Target Company considers that the risk for losing those senior management and technical staff is minimal and based on the reputation of Mr. Ronald Ng within the musical industry in Hong Kong, he would be able to find suitable replacement of the existing senior management and technical staff.
The Target Company’s ability to attract students
The Target Company’s attraction of students is dependent upon the reputation of Ronald Ng and famous tutors, such as Mr. Lin Xi and Ip Fu Sheng Steven, as attraction of student to enrol as the Target Company. If Ronald Ng and famous tutors is unable or unwilling to continue in their present position, or if they leaves the Target Company, the Target Company may not be able to find replacements with their experience and reputation, which would cause severe disruption to business of the Target Company. If the Target Company is unable to retain or replace him and famous tutors, the Target Company may not be able to implement it business strategies and its financial conditions and result may be materially and adversely affected.
34 LETTER FROM THE BOARD
Nevertheless, in opinion of the director of the Target Company, the Target Company already build up its brand name in past few years through wining award from singing competition and music performance to public. In addition, the Target Company further build up its brand name by the cooperation with various educational institution such as Open University and Middlesex University. Therefore, the director of the Target Company believe that the Target Company has its own ability through its brand name in the musical industry to attract students to reduce the over-reliance on the reputation of Ronald Ng and other famous tutors.
Risks associated with profit and cash flow projection and business plan of the Target Company
The valuation of the Target Company is based on the profit and cash flow projections together with the implementation of business plan of the Target Company. However, profit and cash flow projection and business plan of the Target Company involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Target Company, or the industry results, to be materially different from any future results, performance or achievements expressed or implied by such profit and cash flow projection and business plan of the Target Company.
If the Target Company is unable to achieve the forecast assumption, the value of the Target Company will be approximately HK$13,000,000 according to its historical performance. The Company will provide impairment of goodwill on the asset, and recorded in profit or loss.
Nevertheless, the Group has reviewed the profit and cash flow projection of Target Company and considered is fair and reasonable. In addition, the Group appointed various professional parties including professional valuer, reporting accountants and financial adviser to examine the profit and cash flow projections so as to mitigate the risks associated with the profit and cash flow projection. The valuation report issued by the professional has been set out in Appendix IV to this Circular and the comfort letter on profit forecast of the Target Company issued by the reporting accountant and financial advisor has been set out in Appendix V to this Circular.
Material fluctuation in profit for the years ended 31 December 2010 and 2011
According to the audited accounts of the Target Company prepared under Hong Kong Financial Reporting Standards, the audited financial information for the Target Company for the two years ended 31 December 2010 and 31 December 2011 are as follows:
Year ended Year ended 31 December 2011 31 December 2010 HK$’000 HK$’000
Turnover 8,995 10,422 Profit before taxation 403 5,376 Taxation – – Profit after taxation 403 5,376
The Target Company’s profit before and after tax dropped from HK$5.4 million in 2010 to HK$403,000 in 2011, the reasons for the decline in the Target Company’s net profit for 2011 was mainly due to:
35 LETTER FROM THE BOARD
(a) Decrease in gross profit margin from 46.7% for the year ended 31 December 2010 to 39.6% for the year ended 31 December 2011. Such decrease was mainly due to the increase in the cost of tutor providing the musical teaching services.
(b) During the two years ended 31 December 2010 and 2011, the Target Company recorded a gain on waiver of amounts due to a director and related company in the aggregate amount of approximately HK$5.4 million and HK$2.3 million respectively. The Company’s amounts due to a director and related company will be further waived in 2012 and later.
The aggregate amounts of waiver had been recognized as other income in the statement of comprehensive income. Since the aggregate amount of waiver for the year ended 31 December 2011 was significantly lower than the year ended 31 December 2010, the profit of the Target Company for the year ended 31 December 2011 was significantly decreased as compared to last corresponding year.
(c) During the year ended 31 December 2011, the Target Company recorded an increase in administrative expenses of approximately HK$0.7 million as compared to last corresponding year.
(d) During the year ended 31 December 2011, the Target Company recorded an impairment of property, plant and equipment of approximately HK$0.3 million while it was no impairment recognized during the year ended 31 December 2010.
Material fluctuation in profit for five months period ended 31 May 2012 and 2011
According to audited information of the Target Company prepared under Hong Kong Financial Reporting Standards, the audited financial information for the Target Company for the five months ended 31 May 2012 and the unaudited financial information for the Target Company for five months ended 31 May 2011 are as follow:
Five months ended Five months ended 31 May 2012 31 May 2011 HK$’000 HK$’000
Turnover 5,381 3,508 Profit/(Loss) before taxation 899 (749) Taxation – – Profit/(Loss) after taxation 899 (749)
The profit before and after tax of the Target Company is HK$899,000 for the five months ended 31 May 2012, therefore, the loss before and after tax HK$749,000 for the five months ended 31 May 2011, the reason for the increasing in the Target Company’s net profit for the five months ended 31 May 2012 was mainly due to:
(a) Increase in gross profit margin from 36.5% for the five months ended 31 May 2011 to 52.7% for the five months ended 31 May 2012. Such mainly due to decrease in cost of tutor providing the musical teaching services.
36 LETTER FROM THE BOARD
(b) During the five months ended 31 May 2012, the Target Company recorded an decrease in administrative expenses of approximately HK$207,000 as compared to last corresponding period.
According to the audited accounts of the Target Company, the net liabilities of the Target Company as at 31 May 2012 was HK$5.7 million.
Reasons of the Target Company’s net liability position as at 31 May 2012 was mainly due to:
(a) The Target Company incurred accumulated losses of approximately HK$5.8 million arising from the losses incurred from previous years.
(b) As at 31 May 2012, the major components of liabilities lead to the net liabilities position were (i) receipt in advance of approximately HK$6.1 million representing the receipt from students which not yet recognized as revenue according to the accounting policies of the Target Company; and (ii) the bank loan of HK$1.3 million.
REASON FOR THE ACQUISITION
It is the corporate strategy of the Group to strengthen its existing businesses and at the same time identify and capitalizing new opportunities to achieve financial growth for the Group and to maximize Shareholders’ value. To this end, the Directors consider the Acquisition as an opportunity for the Group to further expand its business in the sector of professional music education.
After Closing, the Company’s interest in the Target Company will be accounted for as an associate of the Company by using the equity method of accounting. The results of the Target Company will not be consolidated into the consolidated financial statements of the Company, but the Company will share the results of the Target Company.
Prior to entering into the Agreement, the Company has (i) reviewed the basic corporate documents to understand the Target Company’s history and shareholding structure; (ii) reviewed the business model of the Target Company including the revenue source, target customers, costs element, strengths and weaknesses; (iii) reviewed historical financial information and other pertinent data of the Target Company; (iv) reviewed the business plan of the Target Company and discussed with senior management of the Target Company of the related implementation strategies and the latest status of development; (v) reviewed the financial projections for the Target Company’s business and discussed the same with the Company’s auditor and financial adviser; and (vi) met and discussed with the key personnel responsible of the Target Company’s management and operation and understanding their views on the affairs and prospects of the Target Company.
As set out under the paragraph headed “Business plan of the Target Company”, in view of the proposed business development of the Target Company in the PRC market as well as the Hong Kong market which will result in the expansion of its income sources through various cooperative arrangements and introduction of new CEF courses upon successful application of QF by the Target Company in addition to the existing revenue streams of the Target Company, the Directors are optimistic on the prospect of the Target Company.
37 LETTER FROM THE BOARD
In relation to the PRC business development, the Target Company will adopt the strategy of exploring the PRC market through (i) provision of consultancy services by the Target Company to Disneyland Hong Kong and China on the development of training programs to support the musical performance in Disneyland Fun Park which will be opened in 2015 in Shanghai; and (ii) the Target Company’s partnership with Star Dragon for providing seminar and training courses in Guangzhou. Under the co-operation agreement with Star Dragon, which was entered into in June 2011 the Target Company will be responsible for provision of instructors and program contents’ and Star Dragon be responsible for provision of training venue, administration and marketing activities.
The Target Company, being a reputable company with over six years of history in music training industry, has established its brand recognition for its ability to provide professional training programs of high quality as evidenced from its historical experience in providing consultancy services and tutorial services to academic institutions. In addition, the Target Company has access to reputable musicians. As such, in August 2011, Disneyland Hong Kong and China approached the Target Company and requested for provision of consultancy services by the Target Company. Although the collaboration and contract with Disneyland Hong Kong and China will be delay to the last quarter of 2012, such delay was mainly due to longer time for the approval process of Disneyland at United State, Hong Kong and Shanghai China than originally expected. The Target Company has been actively in negotiating the details of the collaboration and business arrangement and the approval is in progress and the management of the Target Company is not aware of any material obstacles in its collaboration with Disneyland. In view of the well-perceived expertise of the Target Company, the Directors concur with the management of the Target Company that the Target Company will be competent to provide consultancy services to Disneyland and the Directors are optimistic about the collaboration between the Target Company and Disneyland for pursuing the Target Company’s business development in the PRC.
Star Dragon, under an entertainment group – J’ STAR GROUP International, is a company which provides professional training for entertainment industry, such as various aspects of music production, file production and artists training. In 2012, a number of joint vocal programs with Star Dragon, such as elementary vocal training, advance vocal training, and 3 days intensive vocal training in Hong Kong, have been launched and students are being recruited in Guangzhou. The promotion on programs commenced since March 2012 and the programs are scheduled to be commenced in July 2012. The above development status of the joint programs between the Target Company and Star Dragon is in line with that envisaged by the Target Company in its business plan.
Having considered the company background of Star Dragon and status of development of joint programs between Target Company and Star Dragon as scheduled, the Directors consider that the Target Company’s partnership with Star Dragon will allow the Target Company to fully utilize its existing human resources and expertise for generating income in pursuing PRC business development with minimal investment by capitalizing on the facilities and resources provided by Star Dragon.
In respect of the Hong Kong market, with the proposed issue of new television broadcast licenses in Hong Kong in 2012, the demand for both front-end and back-end support personnel in program production is anticipated to increase. This will in turn drive the demand for professional training in music industry, covering various aspects, such as, music production, music marketing and management, lyric writing and sound engineering, etc. In the opinion of the director of the Target Company, the demand of well-trained sound engineer will be increased upon issuance of new television licenses by the HKSAR. Since the Target Company provides training course which include industry-specific training areas of sound engineer, such
38 LETTER FROM THE BOARD as Logic Pro, Pro tools, and CEF general course of Advanced Certificate in Modern Audio Production, the issuance of new television will have positive effect on demand of the Target Company’s music training course for elementary to advanced levels. As such, business of the Target Company will be presented with the opportunity to develop further in view of the proposed issuance of new television licenses. In the Revenue Forecast, it has not included the business forecast of the Target Company stemming from proposed issuance of new television licenses, therefore, any delay in the grant of new television licenses will not affect have an impact to the Revenues Forecast. The proposed issuance of new television licenses represents a possible factor which may lead to further business development of the Target Company. In view of the above, the Directors consider that the Target Company’s proposed development strategy in providing joint Bachelor program, Professional Diploma program and Professional Certificate program of different aspects in Hong Kong, including vocal technique and music productions and management through cooperation with local and overseas institutions will allow the Target Company to capture the market demand for the professional music training. As set out in the paragraph headed “Business plan of the Target Company”, the Target Company’s business strategy in providing new joint programs with its cooperative parties in Hong Kong for its business development is supported with contracts signed with Open University in May 2012 and in July 2012. Currently, program promotion and recruitment for the new joint program with Open University will commence in June 2012 and recruitment for new joint program with Middlesex University has began in April 2012 in preparation for program commencement in around September 2012.
In addition, to further assist its business growth in Hong Kong, it is the objective of the Target Company to apply for QF. QF is an entry barrier for provision of music training CEF courses. CEF courses will be more attractive to students than non-CEF courses as students can apply partial refund of course fees of CEF courses from SFAA. Upon obtaining QF, the Target Company will not only differentiate itself from its competitors in terms of program quality, it will also enable the Target Company to introduce new CEF courses which is currently prohibited without the possession of QF qualification. With the Target Company’s strategy to provide new full and daytime CEF courses and other new CEF courses alongside with existing part-time evening CEF courses upon obtaining QF, it will allow the Target Company to enhance its business efficiency by shortening the program duration, increasing program frequency and increasing number of programs offered which will result in surge in number of students for driving up the revenue.
Apart from pursuing business development in Hong Kong and the PRC as stated above with the view of broadening the income source, the Target Company also endeavors to streamline its cost structure by (i) employing full-time instructors at fixed rate regardless of the number of lessons taught for reaching a economy of scale to maximize the potential profit earning and reduce the cost of goods sold to revenue ratio by 2% every year; (ii) adjusting the employment scheme with famous musicians where famous musicians will concentrate on higher and advanced level of teaching and elementary level will be taught by junior full time instructors for lowering the cost of goods sold to revenue ratio; (iii) restructuring the sales commission scheme by adjusting sales quota upward; and (iv) increasing the programs enrollment frequency to optimize the business efficiency following the Target Company’s relocation to a larger venue in 2012.
Having considered (i) future prospect of professional music training; (ii) proposed partnership arrangement with academic institutions and Star Dragon for strengthening its business development in both Hong Kong and PRC which will provide income stream with minimal investment by capitalizing on the resources provided by its programs partners, where such cooperation arrangements are supported
39 LETTER FROM THE BOARD with contracts entered into or to be entered into in the near future; (iii) proposed business arrangement with Disneyland where contract is expected to be entered into in the last quarter of 2012; (iv) the latest development status of the joint cooperation arrangements; (v) various cost efficiency enhancement measures; (vi) the Target Company’s historical experience in offering joint programs with academic institution and offering of CEF courses indicate its ability to provide professional training programs with high quality; (vii) the industry and government recognition of the Target Company’s training programs; (viii) the Target Company’s established network with famous musicians which enhances the competitiveness of its training programs; (ix) employment referral opportunities for students resulting from the Target Company’s network with industry participants; (x) the Target Company’s strategy of obtaining QF which will facilitate its capability to introduce new CEF courses in addition to the existing CEF courses for driving up the revenue; (xi) the risk factors, the probability of impairment in the event the business plan cannot be materialised and (xii) the valuation methodology and assumptions adopted by the Valuer, the Directors consider that the Target Company’s profit forecast and business plan would be achievable in the absence of unforeseen circumstances. Based on the foregoing, the Directors are optimistic about future prospects of the Target Company’s income producing capability in its business development process. The Directors also consider that the Target Company’s business will be sustainable.
As at 31 May 2012, the Target Company had a net liability of HK$5,752,919. The financial information of the Target Company for the 3 financial years ending 31 December 2009, 2010 and 2011 and for five months ended 31 May 2012 are set out in Appendix II of this circular.
The Company considers the Target Company can operate on a going concern basis as Mr. Ronald Ng, director of the Target Company has agreed to provide the Target Company with sufficient financial support upon completion of the Acquisition to two years after the Acquisition to enable the Target Company to meet its obligations to third parties as and when they fall due and to continue as a going concern and has signed financial supporting confirmation to the Target Company.
Upon completion of the Acquisition, the Target Company will become as the Company’s associate, the Company will share the profit or loss of the Target Company. According to profit forecast and business plan of the Target Company, the Target Company will generate profit and the Company will share the profit of the Target Company.
The Directors also consider the Acquisition to be a strategically important opportunity for the Company to participate in and entitle it to share results from the business operation of the Target Company with the view of broadening the Company’s income base and bringing in positive future earnings contribution to the Enlarged Group. Apart from sharing the results of the Target Company, the Group will be entitled to receive return from its investment in the Target Company arising from any dividends being declared by the Target Company. There is however no agreement on the Target Company’s dividend policy in place. Summing up, the Directors consider that the Acquisition and the consideration is fair and reasonable and in the interest of the Company and its Shareholders as a whole.
40 LETTER FROM THE BOARD
FINANCIAL EFFECTS OF THE ACQUISITION
As referred to the annual report of the Company for the year ended 30 June 2011 (the “Annual Report”), the audited consolidated total assets and total liabilities of the Group as at 30 June 2011 amounted to approximately HK$1,110.7 million and HK$148.2 million respectively. According to the unaudited pro forma financial information of the Enlarged Group as set out in Appendix III of the circular, assuming that the Acquisition had been completed on 30 June 2011, the unaudited pro forma total assets and total liabilities of the Enlarged Group will be approximately HK$1,144.6 million and HK$182.1 million respectively.
According to the Annual Report, the Group recorded a consolidated net loss attributable to owners of the Company of approximately HK$95.3 million for the year ended 30 June 2011. According to the accountants’ report of the Target Company as set out in Appendix II of the circular, the Target Company recorded a net profit attributable to equity holders of the company of approximately HK$403,000 for the year ended 31 December 2011 and approximately HK$899,000 for the five months ended 31 May 2012. The Directors consider that the Acquisition will bring positive contribution to the earnings of the Enlarged Group but the quantification of such contribution will depend on the future performance of the Target Company.
GEM LISTING RULES IMPLICATION
As the applicable percentage ratios in respect of the Acquisition exceeds 25% but is less than 100%, the Acquisition constitutes a major transaction for the Company under Rule 19.06 of the GEM Listing Rules, which is subject to the reporting, announcement and shareholders’ approval requirements under the GEM Listing Rules.
To the best of the Directors’ knowledge, information and belief, and having made all reasonable enquiries, no Shareholder has an interest in the Agreement which is material different from other Shareholders. Therefore no Shareholder is required to abstain from voting on the resolution to be proposed in the EGM.
THE EGM
A notice convening the EGM is set out on pages 135 to 137 of this circular. A form of proxy for the EGM is enclosed with this circular. Whether or not you intend to be represent at the EGM, you are advised to complete the form of proxy and return it to the Company’s branch share registrar in Hong Kong, Tricor Tengis Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Hong Kong in accordance with the instructions printed thereon not less than 48 hours before the time fixed for the EGM. The completion and delivery of a form of proxy will not preclude you from attending and voting at the meeting in person.
RECOMMENDATION
The Directors consider that the terms of the Agreement are on normal commercial terms and are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend that all Shareholders should vote in favour of the relevant resolution to be proposed at the EGM to approve the Acquisition.
41 LETTER FROM THE BOARD
ADDITIONAL INFORMATION
You attention is also drawn to the additional information set out in the appendices to this circular.
Yours faithfully, On behalf of the Board, Lam Wai Pong Chairman & Executive Director
The English text of this circular shall prevail over the Chinese text for the purpose of interpretation.
42 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
1. THREE-YEAR FINANCIAL INFORMATION
Financial information of the Group for each of the three years ended 30 June 2009, 30 June 2010 and 30 June 2011 are disclosed in the annual reports of the Company for the years 2009 (pages 27 to 90), 2010 (pages 41 to 164) and 2011 (pages 42 to 156) dated 30 September 2009, 17 September 2010 and 29th September 2011 respectively which are published on both the GEM website (www.hkgem.com) and the website of the Company (www.hk-lifegroup.com).
In the preparation of the Group’s consolidated financial statements for the year ended 30 June 2011, the Group has several prior year adjustments in its consolidated financial statements for the year ended 30 June 2010. Please refer to pages 54 to 59 of the annual report of the Company for year ended 30 June 2011 for further details.
The Company’s auditor has modified the auditor’s report on the Group’s consolidated financial statements for the year ended 30 June 2011, an extract of which is as follows:
“Opinion
In our opinion, the consolidated financial statements give a true and fair view of the state of affairs of the Group as at 30 June 2011, and of the Group’s results and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.
Emphasis of matter – material uncertainty regarding the going concern assumption
Without qualifying our opinion, we draw attention to note 2 to the financial statements which mentions that the Group incurred a loss of HK$95,438,000 for the year ended 30 June 2011, and as at 30 June 2011, the Group had an outstanding case of judicial review taken out by the Group against the notice issued by the Planning Department of the Government of the Hong Kong Special Administrative Region under Section 23(1) of the Town Planning Ordinance to the subsidiaries of the Group alleging unauthorised development by way of columbarium use and/or storage use on certain leasehold land owned by the Group. These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern.”
The unaudited consolidated financial statements of the Group for the six months ended 31 December 2011 has been set out on pages 1 to 15 of the interim report for 2011/12 of the Company which was published on both the GEM website (www.hkgem.com) and the website of the Company (www.hk-lifegroup.com).
43 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
2. INDEBTEDNESS STATEMENT
Borrowings
As at 30 June 2012, being the latest practicable date for ascertaining the indebtedness statement of the Group prior to the printing of this Circular, the Group had the outstanding liability component of convertible bonds of approximately HK$120,127,000, which were unsecured, transferable and interest free.
Securities and guarantees
As at the close of business on 30 June 2012, the Group did not obtain any banking facilities and did not provide any corporate guarantees to banks.
Commitments
As at 30 June 2012, the Group had an outstanding commitment of approximately HK$467,000 in respect of the sole distribution right of the paper-offering business
Contingent liabilities
As at 30 June 2012, the Group did not have any significant contingent liabilities.
Disclaimer
Save as aforesaid and apart from intra-group liabilities, at the close of business on 30 June 2012, being the latest practicable date for the purpose of this statement of indebtedness prior to the printing of this Circular, the Group had no other outstanding mortgages, charges, debentures or other loan capital or bank overdrafts or loans or other similar indebtedness, finance lease or hire purchase commitments, liabilities under acceptance or acceptance credits, debt securities, guarantees or other material contingent liabilities. Save as aforesaid, the Directors confirm that there has been no material change to the indebtedness and contingent liabilities of the Group since 30 June 2012 and up to the Latest Practicable Date.
3. WORKING CAPITAL
The Directors, after due and careful enquiry, are of the opinion that, in the absence of unforeseeable circumstances and after taking into account the net proceeds from the Rights Issue and the financial resources available to the Group (including internally generated fund and the available banking facilities), the Group will have sufficient working capital for its present requirements for a period of 12 months from the date of this circular.
4. MATERIAL ADVERSE CHANGE
The Directors are not aware of any material adverse change in the financial position or trading position of the Group since 30 June 2011, being the date to which the latest published audited accounts of the Group were made up. 44 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
5. FINANCIAL AND TRADING PROSPECT OF THE ENLARGED GROUP
At present, the Group has been principally engaged in trading of edible oil and mineral materials, provision of shrine for memorial ancestor and paper-offering businesses.
After Closing, the Company’s interest in the Target Company will be accounted for as an associate of the Company by using the equity method of accounting. The results of the Target Company will not be consolidated into the consolidated financial statements of the Company, but the Company will share the results of the Target Company.
Based on the unaudited pro forma financial information of the Enlarged Group as set out in Appendix III of the circular, assuming that the Acquisition had been completed on 30 June 2011, the enlarged Group’s pro forma net assets is approximately HK$962.6 million, which is the same as the Group’s audited net assets as at 30 June 2011.
Prospect and market trends of the Target Company
The Target Company is principally engaged in provision of high quality programmes and courses in both classical and contemporary music. From the past few years onwards, teenager students were encouraged for studying additional skill to obtain professional certification for strengthening their academic records for the propose of promoting to better school which lead to the demand of specialize training course. This was evidenced by the past experience of the Target Company which showing the growth from students in the age group of below 6 years old and 7 to 17 years old. Furthermore, the director of the Target Company also expected a growth from working classes students because of self- interests and equip for career changes through singing and other musical competitions. To the best knowledge and believe of the director of the Target Company, the market trend of the musical industry in Hong Kong will continue to expand because of (i) more people entering into the musical industry in Hong Kong such as new singer who require specific musical training courses; (ii) more musical competitions events held by various public media channels such as “The Voice”, “Asian Millionstar” and “EEG Singing Contest” which attract people to entering into the musical industry in Hong Kong and lead to an increase in the demand of specific musical training courses; and (iii) the HKSAR will have more support on creating industry which the music composition is served within the creative aspect. The director of the Target Company expects that the courses offered by the Target Company will benefit from such market trends as the Target Company provides specialize musical courses and training which are taught by famous musicians.
Up to the present moment, Target Company is the only entity offering thorough comprehensive music programs from classical to pop music education. The range of programs is covering various aspect of music training, in which student could enroll the programs for his/her best interests. To enhance the market share, new programs are being developed to accompany the trends and needs of the market from time to time.
As Hong Kong government has no official regulation (except the non-mandatory QF policy) to direct monitor the pop music education. Plus most of the local institutions and universities are only offering music programs heavily relied upon classical and performing arts. Student who wants to obtain the professional training normally needs to study abroad under the traditional approached. Because of such the Target Company believes the importance to obtain of QF. The QF will strengthen the academic recognition and professionalism.
45 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
As a result, student could enroll into the programs locally and obtain the equivalent qualification rather than travelling abroad or even use it as a credit point for further study. Once QF is being obtained, overall demand and growth of professional training will significantly higher by both academic and professional recognition. Not to mention, further programs and academic developments are to be followed with success of QF application.
Financial and Trading Prospect of the Group
It is the corporate strategy of the Group to strengthen its existing businesses and at the same time identify and capitalizing new opportunities to achieve financial growth for the Group and to maximize Shareholders’ value. The Group’s core business, the shrine business, was materially adversely affected by the government’s columbarium policy and the judicial review proceedings of the Group (the “Judicial Review”) against the notices dated 22 October 2010 issued by the Planning Department under section 23(1) of the Town Planning Ordinance in relation to Lot 2073 in Demarcation District No. 104 (the “Lots”). As disclosed in the Company’s announcement dated 21 June 2012, the appeal hearing on the Judicial Review was heard before the Court of Appeal of the High Court on 21 June 2012 and the Court ordered that such appeal be dismissed. Therefore the Group is unable to operate the shrine business at the Latest Practicable Date.
By the reasons of the judgment of the Court of Appeal of the High Court dated 17 July 2012 (the “Judgment”), the Court of Appeal came to the view that the relevant Outline Zoning Plan (“OZP”) does not include the type of use of development of the Lots which the columbarium known as “The Shrine” represents. Such use or the development of the Lots is not an always permitted use or development within the meaning of the notes to the OZP. For the above reason, the Court of Appeal dismissed the appeal for the Judicial Review.
The Company disagrees with the view of the Court of Appeal and the Judgment. Accordingly, the Company’s subsidiaries have submitted a Notice of Motion applying for leave of appeal to the Court of Final Appeal appealing against the Judgment on 17 July 2012 and the Court has fixed the date for hearing of the application on 10 October 2012.
If the results of the further appeal against the Judgment to the Court of Final Appeal are not favourable, the Company will seek profitable investment opportunities after considering the Company’s then financial positions and/or explore other business opportunities with the land that is currently designated for the shrine business. However, the Company has no present plan to change the use of land which is currently designated for shrine business since the result of the further appeal against the Judgment to the Court of Final Appeal has not been determined yet.
Further announcements will be issued by the Company to inform the market and its Shareholders regarding the further appeal against the Judgment to the Court of Final Appeal as and when appropriate.
46 APPENDIX I FINANCIAL INFORMATION OF THE GROUP
The Directors consider that it is beneficial for the Group to seek suitable investment opportunities from time to time to diversify its existing business portfolio and to broaden its source of income. To this end, the Directors consider the Acquisition as an opportunity for the Group to further expand its business in the sector of professional music education, which is in line with the Group’s business development strategy in diversifying its businesses. In addition, as set out under the paragraph headed “Business plan of the Target Company”, in view of the proposed business development of the Target Company in the PRC market as well as the Hong Kong market which will result in the expansion of its income sources, the Directors are optimistic on the prospect of the Target Company. Therefore, the Directors also consider the Acquisition to be a strategically important opportunity for the Company to participate in and entitle it to share results from the business operation of the Target Company with the view of strengthening the operation base and broadening the future income base of the Enlarged Group which will have a positive impact on the Group’s earnings.
47 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
The following is the text of a report, prepared for the sole purpose of inclusion in this circular from the independent reporting accountants of the Company, Elite Partners CPA Limited, Certified Public Accountants, Hong Kong.
9 August 2012
The Board of Directors Hong Kong Life Group Holdings Limited Unit B, 16/F One Capital Place, 18 Luard Road, Wan Chai, Hong Kong
Dear Sirs,
We report on the financial information (the “Financial Information”) of Baron’s School of Music Limited (the “Target Company”), which comprises the statement of financial position of the Target Company as at 31 December 2009, 2010, 2011 and 31 May 2012 and the statement of comprehensive income, the statements of changes in equity and the statements of cash flow of the Target Company for each of the years ended 31 December 2009, 2010, 2011 and five months ended 31 May 2012 (the “Relevant Period”) and a summary of significant accounting policies and other explanatory information. This Financial Information has been prepared by the director of the Target Company for inclusion in Appendix II to the circular of the Company dated 9 August 2012 (the “Circular”) in connection with the proposed acquisition of 49% equity interests in the Target Company by the Company.
The Target Company was incorporated in Hong Kong on 31 August 2005 with limited liability under the Hong Kong Companies Ordinance. The principal activity of the Target Company is provision of professional musical education.
The statutory financial statements of the Target Company for the three years ended 31 December 2009, 2010 and 2011 were prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Certified Public Accountants (“HKICPA”). The statutory financial statements of the Target Company for the years ended 31 December 2009 and 2010 were audited by Mable Chan & Co., Certified Public Accountants and Pan-China (H.K.) CPA Limited, Certified Public Accountants, respectively and the statutory financial statements of the Target Company for the year ended 31 December 2011 were audited by us.
For the purpose of this report, the director of the Target Company have prepared the financial statements of the Target Company for the Relevant Period, together with the notes thereto (the “Underlying Financial Statements”) in accordance with HKFRSs issued by the HKICPA. The Financial Information for the Relevant Period are prepared based on the Underlying Financial Statements, with no adjustments made thereon and in accordance with the applicable disclosure provisions of the Hong Kong
48 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
Companies Ordinance and the Rules Governing the Listing of Securities on the Growth Enterprise Market on The Stock Exchange of Hong Kong Limited (the “GEM Listing Rules”).
Respective Responsibilities of Director and Reporting Accountants
The director of the Target Company is responsible for the preparation of the Financial Information that gives a true and fair view in accordance with HKFRSs issued by the HKICPA, the requirements of the Hong Kong Companies Ordinance and the applicable disclosure provisions of the GEM Listing Rules, and for such internal control as the director of the Target Company determine is necessary to enable the preparation of the Financial Information that is free from material misstatement, whether due to fraud or error. The director of the Target Company is also responsible for the contents of the Circular in which this report is included.
It is our responsibility to form an independent opinion on the Financial Information for the Relevant Period based on our audit. We conducted our audit in accordance with Hong Kong Standards on Auditing and the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.
Opinion
In our opinion, for the purpose of this report, the Financial Information gives a true and fair view of the state of affairs of the Target Company as at 31 May 2012, 31 December 2009, 2010 and 2011 and of the results and cash flows for the Relevant Period then ended in accordance with Hong Kong Financial Reporting Standards.
Without qualifying our opinion, we draw attention to Note 2 to the Financial Information which indicate that the Target Company has net current liabilities of HK$13,367,534, HK$7,774,431 HK$7,699,888 and HK$7,276,618 and net liabilities of HK$12,490,000, HK$7,114,208, HK$6,710,751 and HK$5,811,523 as at 31 December 2009, 2010, 2011 and 31 May 2012 respectively. These conditions, along with other matters as set forth in Note 2, indicate the existence of a material uncertainty which may cast significant doubt about the Target Company’s ability to continue as a going concern.
Comparative Financial Information
For the purpose of this report, we have reviewed the unaudited financial information of the Target Company including the income statement, statement of comprehensive income, statement of changes in equity and statement of cash flow for the five months ended 31 May 2011, together with the notes thereto (the ‘‘31 May 2011 Corresponding Information’’), for which the directors are responsible, in accordance with Hong Kong Standards on Review Engagements 2410 ‘‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’’ issued by the HKICPA. A review consists principally of making enquiries of the Target Company’s management and applying analytical procedures to the 31 May 2011 Corresponding Information and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as test of controls and verification of assets, liabilities and transactions. It is substantially
49 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the 31 May 2011 Corresponding Information.
On the basis of our review which does not constitute an audit, for the purpose of this report, nothing has come to our attention that causes us to believe that the 31 May 2011 Corresponding Information is not prepared, in all material respects, in accordance with the HKICPA.
50 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
A. FINANCIAL INFORMATION
Statement of Comprehensive Income
Five months ended 31 May Year ended 31 December 2012 2011 2011 2010 2009 Notes HK$ HK$ HK$ HK$ HK$ (Unaudited)
Turnover 4(a) 5,380,575 3,507,516 8,994,577 10,421,845 9,379,748
Cost of service (2,543,774) (2,215,147) (5,433,467) (5,555,445) (4,853,042)
Gross profit 2,836,801 1,293,369 3,561,110 4,866,400 4,526,706
Other income 4(b) 673,460 798,258 1,551,240 1,077,099 289,021
Gain on waiver of amounts due to a director and a related company – – 2,256,556 5,400,000 –
Written off of property, plant and equipment – – (288,602) – –
Administrative expenses (2,567,896) (2,775,695) (6,536,638) (5,847,211) (7,542,079)
Profit/(Loss) from operations 6 942,365 (685,068) 543,666 5,496,288 (2,726,352)
Finance costs 8 (43,137) (63,802) (140,209) (120,496) (59,604)
Profit/(Loss) before tax 899,228 (748,870) 403,457 5,375,792 (2,785,956)
Taxation 9 – – – – –
Profit/(Loss) and total comprehensive income for the year 899,228 (748,870) 403,457 5,375,792 (2,785,956)
Attributable to the equity holder of the Company 899,228 (748,870) 403,457 5,375,792 (2,785,956)
The accompanying notes form an integral part of the Financial Information
51 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
Statement of Financial Position
As at 31 May As at 31 December 2012 2011 2010 2009 Notes HK$ HK$ HK$ HK$
ASSETS Non-current assets Property, plant and equipment 10 1,523,699 1,087,861 660,223 877,534
Current assets Account receivables 11 478,018 773,539 1,091,378 753,733 Deposits and prepayments 12 1,011,174 1,519,079 1,070,090 549,666 Amount due from a related company 13 186,630 110,749 – – Amount due from a director 14 110,109 – – – Cash and bank balances 98,707 40,207 84,780 314,442
1,884,638 2,443,574 2,246,248 1,617,841
Total assets 3,408,337 3,531,435 2,906,471 2,495,375
EQUITY Share capital 15 2 2 2 2 Accumulated losses (5,811,525) (6,710,753) (7,114,210) (12,490,002)
Total equity (5,811,523) (6,710,751) (7,114,208) (12,490,000)
LIABILITIES Non-current liabilities Obligation under finance lease 16 58,604 98,724 – –
Current liabilities Account payables 17 314,560 28,450 28,450 – Receipt in advance 6,054,160 6,409,892 4,676,568 4,738,020 Accruals and other payables 18 808,652 1,220,676 1,932,073 1,947,928 Current portion of obligation under finance lease 16 140,060 140,060 – – Bank borrowings 19 1,290,687 1,559,255 2,359,320 530,154 Amount due to a director 20 – 579,863 755,303 4,036,864 Amounts due to related companies 20 553,137 205,266 268,965 3,732,409
9,161,256 10,143,462 10,020,679 14,985,375
Total liabilities 9,219,860 10,242,186 10,020,679 14,985,375
52 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
Statement of Financial Position (Continued)
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Total equity and liabilities 3,408,337 3,531,435 2,906,471 2,495,375
Net current liabilities (7,276,618) (7,699,888) (7,774,431) (13,367,534)
Total assets less current liabilities (5,752,919) (6,612,027) (7,114,208) (12,490,000)
Net liabilities (5,811,523) (6,710,751) (7,114,208) (12,490,000)
The accompanying notes form an integral part of the Financial Information.
Statement of Changes in Equity
Share Accumulated capital losses Total HK$ HK$ HK$
At 1 January 2009 2 (9,704,046) (9,704,044) Loss and total comprehensive loss for the year – (2,785,956) (2,785,956)
At 31 December 2009 and at 1 January 2010 2 (12,490,002) (12,490,000) Profit and total comprehensive income for the year – 5,375,792 5,375,792
At 31 December 2010 and 1 January 2011 2 (7,114,210) (7,114,208) Profit and total comprehensive income for the year – 403,457 403,457
At 31 December 2011 and 1 January 2012 2 (6,710,753) (6,710,751) Profit and total comprehensive income for the period – 899,228 899,228
At 31 May 2012 2 (5,811,525) (5,811,523)
At 1 January 2011 2 (7,114,210) (7,114,208) Loss and total comprehensive income for the period – (748,870) (748,870)
At 31 May 2011 2 (7,863,080) (7,863,078)
53 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
Statement of Cash Flows
Period ended 31 May Year ended 31 December 2012 2011 2011 2010 2009 HK$ HK$ HK$ HK$ HK$ (Unaudited)
Profit/(Loss) from operations 942,365 (685,068) 543,666 5,496,288 (2,726,352) Adjustment for: Gain on waiver of amounts due to a director and related company – – (2,256,556) (5,400,000) – Written off of property, plant and equipment – – 288,602 – – Depreciation of property, plant and equipment 260,848 169,180 467,786 387,559 561,589 Interest income (3) (1) (3) (13) (24)
Operating (loss)/profit before working capital changes 1,203,210 (515,889) (956,505) 483,834 (2,164,787) Decrease/(Increase) in account receivables 295,521 369,086 317,839 (337,645) (464,616) Increase in deposits and prepayments 507,905 (452,183) (448,989) (520,424) (23,056) Decrease/(Increase) in amount due from a related company (30,103) (13,508) (110,749) – 60,000 Increase in amount due from a director (110,109) – – – – Increase in account payables 194,443 – – 28,450 – Increase/(Decrease) in receipt in advance (355,732) 464,838 1,733,324 (61,452) 2,205,162 (Decrease)/Increase in accruals and other payables (412,024) 157,229 (711,397) (15,855) 528,668 Increase/(Decrease) in amount due to a director (579,863) (99,041) 1,431,116 (1,381,561) (113,940) Increase/(Decrease) in amounts due to related companies 347,870 476,883 586,301 36,556 (456,555)
Net cash inflow/(outflow) from operating activities 1,061,118 387,415 1,840,940 (1,768,097) (429,124) Bank interest received 3 1 3 13 24 Bank interest paid (37,337) (62,867) (124,259) (120,496) (59,604) Finance charge paid (5,800) (935) (15,950) – –
Net cash generated from/(used in) operating activities 1,017,984 323,614 1,700,734 (1,888,580) (488,704)
Financing activities Proceeds received from secured bank loans – – – 1,800,000 700,000 Proceeds received from obligation under finance lease – 322,483 322,483 – – Settlement on secured bank loans (140,788) (235,541) (579,033) (384,747) (169,846) Settlement on obligation under finance lease (40,120) (72,481) (83,699) – –
Net cash (used in)/generated from financing activities (180,908) 14,461 (340,249) 1,415,253 530,154
54 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
Statement of Cash Flows (Continued)
Period ended 31 May Year ended 31 December 2012 2011 2011 2010 2009 HK$ HK$ HK$ HK$ HK$ (Unaudited)
Investing activities Purchase of property, plant and equipment (696,686) (423,320) (1,184,026) (170,248) (145,511)
Net cash used in investing activities (696,686) (423,320) (1,184,026) (170,248) (145,511)
Net increase/(decrease) in cash and cash equivalents 140,390 (85,245) 176,459 (643,575) (104,061) Cash and cash equivalents at beginning of period/year (152,674) (329,133) (329,133) 314,442 418,503
Cash and cash equivalents at end of period/year (12,284) (414,378) (152,674) (329,133) 314,442
Analysis of balances of cash and cash equivalents Cash and bank balances 98,707 48,929 40,207 84,780 314,442 Bank overdraft (110,991) (463,307) (192,881) (413,913) –
Cash and cash equivalents at end of period/year (12,284) (414,378) (152,674) (329,133) 314,442
55 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
B. NOTES TO THE FINANCIAL INFORMATION
1. CORPORATE INFORMATION
Baron’s School of Music Limited (the “Target Company”) was incorporated on 31 August 2005 with limited liability under Hong Kong Companies Ordinance. The principal activities of the Target Company is provision of professional musical education. the Target Company’s principal place of business is located at Room 1101, 11/F., Hong Kong Arts Centre, 2 Harbour Road, Wanchai, Hong Kong.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Financial Information has been prepared in accordance with all applicable Hong Kong Financial Reporting Standards issued by the HKICPA which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations (“HKFRSs”), the disclosure requirements of the Hong Kong Companies Ordinance and the applicable disclosure requirements of the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited.
As at 31 December 2009, 2010, 2011 and 31 May 2012, the Target Company had net current liabilities of HK$13,367,534, HK$7,774,431, HK$7,699,888 and HK$7,276,618 and net liabilities of HK$12,490,000, HK$7,114,208, HK$6,710,751 and HK$5,811,523 respectively. These conditions indicate the existence of a material uncertainty which may cash doubt on the Target Company’s ability to continue as a going concern.
This Financial Information has been prepared on a going concern basis, the validity of which depends upon the financial support from the shareholder of the Target Company at a level sufficient to finance the working capital requirements of the Target Company and to meet all third party obligations for a least the ensuring twelve months period. The shareholder of the target Company has confirmed to provide continuing financial support to the Target Company. The director of the Target Company is therefore of the opinion that it is appropriate to prepare the Financial Information on a going concern basis.
The significant accounting policies applied in the preparation of this Financial Information are set out below:
Standards and Interpretations is issued but not yet adopted
The Target Company has not early applied the following new and revised standards, amendments or interpretations that have been issued and are relevant to these Financial Information but not yet effective for annual periods beginning on 1 January 2011:
Amendments to HKFRS 7 Disclosures – Transfers of Financial Assets1 HKFRS 9 Financial Instruments2 HKFRS 13 Fair Value Measurement2 Amendments to HKAS 1 Presentation of Items of Other Comprehensive Income3 Amendments to HKAS 12 Deferred Tax – Recovery of Underlying Assets4 HKAS 19 (as revised in 2011) Employee Benefits2
56 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
1. Effective for annual periods beginning on or after 1 July 2011 2. Effective for annual periods beginning on or after 1 January 2013 3. Effective for annual periods beginning on or after 1 July 2012 4. Effective for annual periods beginning on or after 1 January 2012
The director of the Target Company anticipate that the application of the other new and revised standards, amendments or interpretations will have no material impact on the results and the financial position of the Target Company in the reporting period of initial application.
The accounting policies set out below have been applied consistently to the Relevant Period presented in the Financial Information.
Basis of preparation
The Financial Information have been prepared in accordance with HKFRSs which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations issued by HKICPA and under the historical cost convention.
The preparation of the Financial Information in accordance with HKFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the accounting policies of the Target Company. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the Financial Information are disclosed in Note 3 to the Financial Information.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and 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 property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the profit or loss in the Relevant 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 property, plant and equipment, the expenditure is capitalised as an additional cost of that asset.
57 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
Depreciation is provided to write off the cost of property, plant and equipment, using the straight line method, over their estimated useful lives. The principal annual rates are as follows:
Leasehold improvement over the lease term Musical instrument 15-30% per annum Furniture and fixtures 20% per annum Office equipment 25% per annum Computer equipment 30% per annum
The gain or loss arising from disposal of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in the profit or loss.
Account and other receivables
Account and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of account and other receivables is established when there is objective evidence that the Target Company will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the different between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the profit or loss.
Financial instruments
i. Financial assets
The Target Company classifies its financial assets as loans and receivables which are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arisen principally through the provision of goods and services to customers (trade debtors), but also incorporate other types of contractual monetary asset. At the end of each Relevant Period subsequent to initial recognition, they are carried at amortised cost using the effective interest method, less any identified impairment losses.
58 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
ii. Impairment loss on financial assets
Objective evidence that the assets are impaired includes observable data that comes to the attention of the Target Company includes the following loss events:
– significant financial difficulty of the debtors;
– a breach of contract, such as a default or delinquency in interest or principal payment;
– granting concession to a debtor because of debtors’ financial difficulty; or
– it becoming probable that the debtor will enter bankruptcy or other financial reorganisation.
An impairment loss is recognised in the profit or loss when there is objective evidence that the assets is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.
Impairment losses are reversed in subsequent periods when an increase in asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the assets at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.
iii. Financial liabilities
The Target Company classifies its financial liabilities into other financial liabilities, which are recognised at amortised cost.
iv. Derecognition
The Target Company derecognises financial assets where the contractual rights to the future cash flows in relation to the investment expire or where the financial asset has been transferred and the transfer meets the criteria for derecognition in accordance with HKAS 39.
Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires.
Current assets and current liabilities
Current assets are expected to be realised within twelve months of the end of the financial period or in the normal course of the Target Company’s operating cycle. Current liabilities are expected to be settled within twelve months of the end of the Relevant Period or in the normal course of the Target Company’s operating cycle.
59 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with banks, other short- term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the statement of financial position.
Impairment of assets
Assets that have an indefinite useful life are not subject to amortisation, which are at least tested annually for impairment and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment assets are grouped at the lower levels for which there are separately identifiable cash flow (cash-generating units).
Revenue recognition
Revenue is recognised when it is probable that the economic benefits will flow to the Target Company and when the revenue can be measured reliably, on the following bases:
(i) Revenue from tuition and training fee income are recognised when tutorial classes and training courses provided to students.
(ii) Studio rental income, rental income from musical instruments and sub-letting fee are recognised when the Target Company’s right to receive payment of studio rental has been established.
(iii) Interest income from bank deposits is accrued on a time-proportion basis by reference to the principal outstanding and the applicable interest rate.
Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit is the profit for the year, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences
60 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available which deductible temporary difference can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each of the end of the Relevant Period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the year when the liability is settled or the asset realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
Provision
A provision is recognised when the Target Company has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the effect of the time value of money is material, the amount of a provision is the present value at the end of the Relevant Period of the expenditures expected to be required to settle the obligation.
Contingent liabilities and contingent assets
A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Target Company. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably. A contingent liability is not recognised but is disclosed in the notes to the financial statements. When a change in the probability of an outflow occurs so that outflow is probable, they will then be recognised as a provision.
A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within control of the Target Company. A contingent asset is not recognised but is disclosed in the notes to the financial statements when an inflow of economic benefits is probable. When inflow is virtually certain, an asset is recognised.
61 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
Related parties
For the purposes of the Financial Information, parties are considered to be related to the Target Company if the Target Company has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Target Company and the party are subject to common control or common significant influence.
Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Target Company where those parties are individuals, and post-employment benefit plans which are for the benefit of employees of the Target Company or of any entity that is a related party of the Target Company.
3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The Target Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
(a) Useful lives of property, plant and equipment
In accordance with HKAS 16, the Target Company estimates the useful lives of property, plant and equipment in order to determine the amount of depreciation expenses to be recorded. The useful lives are estimated at the time the asset is acquired based on historical experience, the expected usage, wear and tear of the assets, as well as technical obsolescence arising from changes in the market demands or service output of the assets. The Target Company also performs annual reviews on whether the assumptions made on useful lives continue to be valid.
(b) Income taxes and deferred taxation
The Target Company is subject to income taxes in Hong Kong. Significant judgment is required in determining the provision for income tax. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Deferred tax assets relating to certain temporary differences and tax losses are recognised when management considers to be probable that future taxable profit will be available against which the temporary differences or tax losses can be utilised. The outcome of their actual utilisation may be different.
62 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
4. TURNOVER
Five months ended 31 May Year ended 31 December 2012 2011 2011 2010 2009 HK$ HK$ HK$ HK$ HK$ (Unaudited)
(a) Turnover: Tuition fee income 5,380,575 3,507,516 8,994,577 10,402,215 9,334,198 Training fee income – – – 19,630 45,550
5,380,575 3,507,516 8,994,577 10,421,845 9,379,748
(b) Other income: Interest income 3 1 3 13 24 Instructor income (Note (i)) 322,776 307,906 657,937 762,639 – Sub-letting income 20,000 20,000 88,667 27,000 135,000 Royalty income – – – – 10,000 Sundry income (Note (ii)) 330,681 470,351 804,633 287,447 143,997
673,460 798,258 1,551,240 1,077,099 289,021
6,054,035 4,305,774 10,545,817 11,498,944 9,668,769
Notes:
(i) Instructor income represents joint programmes income, consultant income from university, seminar and workshop income from secondary school.
(ii) Sundry income represents rental income from studio and musical instruments, performance income and admission fee income.
5. SEGMENT INFORMATION
The Target Company has one single reportable segment which was managed as a single strategic business unit that engaged in high quality programmes and courses in both classical and contemporary music in Hong Kong. Information reported to the Target Company’s chief operating decision maker, for the purpose of resources allocation and assessment performance is focused on the operating results of the Target Company as a whole as the Target Company’s resources are integrated and no discrete financial information is available. Accordingly, no segment analysis is presented.
The Target Company’s operations and its non-current assets are principally located in Hong Kong. Accordingly, no geographical segment information is presented.
63 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
6. PROFIT/(LOSS) FROM OPERATIONS
Five months ended 31 May Year ended 31 December 2012 2011 2011 2010 2009 HK$ HK$ HK$ HK$ HK$
Auditor’s remuneration – – 18,000 18,000 18,000 Staff costs (excluding director’s remuneration) – salaries and allowances 1,012,776 1,135,999 2,306,225 2,932,758 3,132,467 – Mandatory Provident Funds contribution 49,778 56,491 123,185 136,737 128,059 Depreciation of property, plant and equipment 260,848 169,180 467,786 387,559 561,589 Written off property, plant and equipment – _ 288,602 – – Operating lease charge in respect of office premises 441,554 705,800 1,894,924 840,000 1,676,500
7. DIRECTOR’S REMUNERATION AND FIVE HIGHEST PAID INDIVIDUALS
(a) Director’s remuneration
The emoluments paid and payable to the director of the Target Company during the Relevant Period are analysed as follows:
For the year ended 31 December 2009
Retirement Salaries benefits and other scheme Fees benefits contribution Total HK$ HK$ HK$ HK$
Mr. Ng Lok Shing Ronald – – – –
For the year ended 31 December 2010
Retirement Salaries benefits and other scheme Fees benefits contribution Total HK$ HK$ HK$ HK$
Mr. Ng Lok Shing Ronald – – – –
64 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
For the year ended 31 December 2011
Retirement Salaries benefits and other scheme Fees benefits contribution Total HK$ HK$ HK$ HK$
Mr. Ng Lok Shing Ronald – – – –
For the five months ended 31 May 2011 (Unaudited)
Retirement Salaries benefits and other scheme Fee benefits contribution Total HK$ HK$ HK$ HK$
Mr. Ng Lok Shing Ronald – – – –
For the five months ended 31 May 2012
Retirement Salaries benefits and other scheme Fee benefits contribution Total HK$ HK$ HK$ HK$
Mr. Ng Lok Shing Ronald – – – –
During the Relevant Period, no remuneration was paid or payable by the Target Company to the director as director’s remuneration or an inducement to join or upon joining the Target or as compensation for loss of office. The director of the Target Company did not waive any remuneration during the Relevant Period.
65 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
(b) Five highest paid individuals
Of the five individuals with the highest emoluments in the Target Company for the years ended 31 December 2009, 2010, 2011 and five months ended 31 May 2012 included no director, details of whose emoluments are presented above. The emoluments of the remaining five individuals for the years ended 31 December 2009, 2010, 2011 and five months ended 31 May 2012 respectively are as follows:
Five months ended 31 May Year ended 31 December 2012 2011 2011 2010 2009 HK$ HK$ HK$ HK$ HK$ (Unaudited)
Salaries and other benefits 461,920 398,899 957,357 1,038,850 1,146,733 MPF contribution 21,431 25,000 60,000 60,000 60,000
483,351 423,899 1,017,357 1,098,850 1,206,733
All of the five individuals with the highest emoluments in the Target Company for the years ended 31 December 2009, 2010, 2011 and five months ended 31 May 2012 were fall within the band of nil to HK$1,000,000.
No emoluments have been paid or payable by the Target Company to any of the five highest paid individuals as an inducement to join or upon joining the Target Company or as compensation for loss of office in any of the Relevant Period.
8. FINANCE COSTS
Five months ended 31 May Year ended 31 December 2012 2011 2011 2010 2009 HK$ HK$ HK$ HK$ HK$ (Unaudited)
Interest on secured bank loans 37,337 62,867 124,259 120,496 59,604 Interest on obligation under finance lease 5,800 935 15,950 – –
43,137 63,802 140,209 120,496 59,604
9. TAXATION
No provision for Hong Kong Profits Tax has been made for the years ended 31 December 2009, 2010 and 2011 since the Target Company incurred taxation loss. No provision for Hong Kong Profit Tax has been made for the five months ended 31 May 2012 since the Target Company has available tax loss brought forward to offset the audited profit.
No provision for deferred tax liabilities has been made as the Target Company had no material temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements.
66 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
10. PROPERTY, PLANT AND EQUIPMENT
Leasehold Musical Furniture Office Computer improvement instrument and fixtures equipment equipment Total HK$ HK$ HK$ HK$ HK$ HK$ At cost: At 1 January 2009 1,041,209 603,623 367,753 182,158 188,218 2,382,961 Additions 21,800 29,237 4,998 638 88,838 145,511
At 31 December 2009 and at 1 January 2010 1,063,009 632,860 372,751 182,796 277,056 2,528,472 Additions 113,400 42,680 2,828 2,552 8,788 170,248
At 31 December 2010 and at 1 January 2011 1,176,409 675,540 375,579 185,348 285,844 2,698,720 Additions 747,591 348,323 5,391 – 82,721 1,184,026 Written off (1,494,000) – – – – (1,494,000)
At 31 December 2011 and at 1 January 2012 430,000 1,023,863 380,970 185,348 368,565 2,388,746 Additions 689,188 – 1,070 1,498 4,930 696,686
At 31 May 2012 1,119,188 1,023,863 382,040 186,846 373,495 3,085,432
Accumulated depreciation: At 1 January 2009 687,436 143,360 113,176 72,104 73,273 1,089,349 Charge for the year 295,184 94,528 74,150 45,646 52,081 561,589
At 31 December 2009 and at 1 January 2010 982,620 237,888 187,326 117,750 125,354 1,650,938 Charge for the year 91,139 98,770 74,984 46,151 76,515 387,559
At 31 December 2010 and at 1 January 2011 1,073,759 336,658 262,310 163,901 201,869 2,038,497 Charge for the year 167,472 140,570 76,014 19,772 63,958 467,786 Written off (1,205,398) – – – – (1,205,398)
At 31 December 2011 and at 1 January 2012 35,833 477,228 338,324 183,673 265,827 1,300,885 Charge for the period 138,775 63,991 31,765 426 25,891 260,848
At 31 May 2012 174,608 541,219 370,089 184,099 291,718 1,561,733
Net book value: At 31 May 2012 944,580 482,644 11,951 2,747 81,777 1,523,699
At 31 December 2011 394,167 546,635 42,646 1,675 102,738 1,087,861
At 31 December 2010 102,650 338,882 113,269 21,447 83,975 660,223
At 31 December 2009 80,389 394,972 185,425 65,046 151,702 877,534
Musical instrument with net carrying amount of HK$280,012 as at 31 May 2011 (31 December 2010: HK$301,225) were held under finance lease as disclosed on Note 16 to financial information. 67 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
11. ACCOUNT RECEIVABLES
An aging analysis of the account receivables at the end of each Relevant Period, based on invoice date, is as follows.
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
0-30 days 478,018 773,539 1,091,378 753,733
The director of the Target Company considers that the fair value of the account receivables are not materially different from their carrying value because these amounts have short maturity period on their inception.
For the Target Company operation, general courses fee is normally receipt in advance from customers and no credit term were granted. Individual courses fee income and income from education institution will allow a credit terms and more than 30 days.
There was no impairment loss has been recognised during the Relevant Period as all the balances of account receivables were received subsequent to the respectively year/period end date. In addition, there were no account receivables that were past due at the end of each Relevant Period. The Target Company seeks to maintain strict control over its outstanding receivables overdue balances are regularly reviewed by senior management.
12. DEPOSITS AND PREPAYMENTS
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Prepayments 883,928 899,405 575,030 54,606 Deposits 127,246 619,674 495,060 495,060
1,011,174 1,519,079 1,070,090 549,666
13. AMOUNT DUE FROM A RELATED COMPANY
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Baron Junior Music Academy Limited 186,030 110,749 – –
Amount due from a related company is unsecured, interest-free and recoverable on demand.
The maximum debt balance of amount due from a related company during the year ended 31 December 2011 and the five months ended 31 May 2012 was HK$110,749 and HK$186,030 respectively.
68 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
14. AMOUNT DUE FROM A DIRECTOR
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Ng Lok Shing 110,109 – – –
Amount due from a director is unsecured, interest-free and recoverable on demand.
The maximum debt balance of amount due from a director during the five months ended 31 May 2012 was HK$110,109.
15. SHARE CAPITAL
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Authorised: 10,000 ordinary shares of HK$1 each 10,000 10,000 10,000 10,000
Issued and fully paid: 2 ordinary shares of HK$1 each 2 2 2 2
16. OBLIGATION UNDER FINANCE LEASE
It is the Target Company’s policy to lease certain of musical instrument under finance leases. The average lease term is 3 years. Interest rates underlying all obligations under finance lease are fixed at respective contract dates ranging from 6%. These leases have no terms of renewal or purchases options and escalation clauses. No arrangements have been entered into for contingent rental payment.
Minimum lease payments
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Amount payables under financial lease: Within one year 207,538 253,458 – – Less: Future financial charges (8,874) (14,674) – –
Present value of lease obligations 198,664 238,784 – – Less: Amount due for settlement within 12 months shown under current liabilities (140,060) (140,060) – –
Amount due for settlement after 12 months 58,604 98,724 – –
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17. ACCOUNT PAYABLES
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
0-30 days 286,110 – – – 31-60 days – – 28,450 – 61-180 days – – – – Over 180 days 28,450 28,450 – –
314,560 28,450 28,450 –
The director of the Target Company consider that the carrying amounts of account payables approximate to their fair values at the end of Relevant Period.
18. ACCRUALS AND OTHER PAYABLES
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Accruals 804,076 1,216,099 882,073 1,197,928 Other payables 4,576 4,577 1,050,000 750,000
808,652 1,220,676 1,932,073 1,947,928
At the end of the Relevant Period, accruals mainly comprise of salaries and instructor fee payables, which are expected to be settled within one year or are repayables on demand.
As at 31 December 2009 and 2010, other payables represent advanced from independent third party, which are unsecured, interest free and repayable on demand and non-trade in nature.
70 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
19. BANK BORROWINGS
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Bank overdraft 110,991 192,881 413,913 – Secured bank loans (Note) 1,179,696 1,366,374 1,945,407 530,154
1,290,687 1,559,255 2,359,320 530,154
Note:
The bank loans are secured by the personal guarantee provided by the director of the Target Company and the guarantee provided by the Government of Hong Kong Special Administrative Region.
20. AMOUNTS DUE TO A DIRECTOR/RELATED COMPANIES
Amounts due to a director/related companies are unsecured, interest-free and repayable on demand.
21. OPERATING LEASE ARRANGEMENT
At the end of the Relevant Period, the Target Company had contracted with landlord for the following future minimum lease payment:
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Within one year 601,380 601,380 1,451,120 1,632,000 Later than one year 59,596 501,150 – 1,451,120
660,976 1,102,530 1,451,120 3,083,120
71 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
22. RELATED PARTIES TRANSACTIONS
(a) At the end of the Relevant Period, the Target Company had the following balances with related parties:
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Amount due from a director 110,109 – – –
Amount due to a director – 579,863 755,303 4,036,864
Amount due from a related company 186,630 110,749 – –
Amounts due to related companies 553,137 205,266 268,965 3,732,409
(b) During the Relevant Period, the Target Company entered into the following transaction with related party:
Five months ended 31 May Year ended 31 December 2012 2011 2011 2010 2009 HK$ HK$ HK$ HK$ HK$ (Unaudited)
Baron Production and Artiste Management Company Limited Sub-letting fee – received 20,000 20,000 88,667 27,000 135,000
Mr. Ng Lok Shing is common director of the above related company.
(c) During the Relevant Period, the remuneration of director of the Target Company and other members of key management of the Target Company are as follows:
Five months ended 31 May For year ended 31 December 2012 2011 2011 2010 2009 HK$ HK$ HK$ HK$ HK$ (Unaudited)
Salaries and allowance 133,300 220,527 529,264 567,568 364,835 MPF contribution 500 5,000 12,000 12,000 –
138,300 225,527 541,264 579,568 364,835
72 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
23. FINANCIAL INSTRUMENTS
The carrying amounts of the Target Company’s financial assets and liabilities by category of financial instruments included in the statement of financial position are as follows:
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Financial assets by category – Loan and receivables (including cash and bank balances) 1,884,638 2,443,574 2,246,248 1,617,841
Financial liabilities by category – At amortised cost 9,219,860 10,242,186 10,020,679 14,985,375
24. FINANCIAL RISK MANAGEMENT OBJECTIVE AND POLICIES
The Target Company has no written risk management policies and guidelines. The director of the Target Company is responsible to analyse and formulate strategies to manage and monitor the Target Company’s exposure to variety of risks associated with financial instruments which arise from the Target Company’s operating activities. Generally, the Target Company employs conservative strategies regarding its risk management to ensure appropriate measures are implemented on a timely and effective manner. The risks associated with these financial instruments and the policies on how to these risks are mitigated are described as follow:
(a) Market risk
Interest rate risk
The Target Company’s interest rate risk relates primarily to the secured bank loans which are carried at fixed interest rate. The Target Company currently does not have an interest rate hedging policy. However, the director of the Target Company monitor interest rate exposure and considered the interest rate will not rise significantly in the coming years and therefore the interest rate risk is considered as minimal to the Target Company. No sensitivity analysis on interest rate risk has been present accordingly.
Foreign exchange risk
The business transactions of the Target Company conducted during the year were mainly denominated and settled in Hong Kong dollars. Therefore, no exposure in exchange rate risks and therefore no sensitivity analysis has been presented. The Target Company currently does not have hedging policy in respect of the foreign currency risk.
73 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
(b) Credit risk
At the end of each Relevant Period, the Target Company’s maximum exposure to credit risk which will cause a financial loss to the Target Company due to failure to perform an obligation by the counterparties, is the carrying amount of the respective recognised financial assets as stated in the statement of financial position.
Credit risk on cash and bank balances are mitigated as counterparties are banks or financial institutions with high credit rating. Credit risk on account receivables, deposits and prepayments is minimal as the Target Company performs ongoing credit evaluation on the financial condition of its debtors and tightly monitors the aging of the receivables balances, follow up action is taken in case of overdue balances. In addition, management reviews the recoverable amount of the receivables individually or collectively at the end of each Relevant Period to ensure that adequate impairment losses are made for irrecoverable amounts.
(c) Liquidity risk
The Target Company’s policy is to regularly monitor its liquidity requirements to ensure that it maintains sufficient reserves of cash to meet its liquidity requirements in the short and longer term.
The following table details the remaining contractual maturities at each of the Relevant Period of the Target Company’s non-derivative financial liabilities, which are based on contractual undiscounted cash flow (including interest payment computed using contractual rates or, if floating, based on current rates at the reporting date) and the earliest date the Target Company may be required to pay:
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Within one year on demand 9,161,256 10,143,462 10,020,679 14,985,475 More than one year 58,604 98,724 – –
9,219,860 10,242,186 10,020,679 14,985,475
25. CAPITAL MANAGEMENT POLICIES AND PROCEDURES
The Target Company’s objectives when managing capital are:
• To safeguard the Target Company’s ability to continue as a going concern, so that it continues to provide returns for shareholder and benefits for other stakeholders;
• To support the Target Company’s stability and growth; and
74 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
• To provide capital for the purpose of strengthening the Target Company’s risk management capability.
The Target Company actively and regularly reviews and manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the relevant reporting period.
The Target Company monitors capital using a gearing ratio, which is total debt divided by total assets. The Target Company’s total assets comprised of all assets and total debt includes bank borrowings, finance lease payable and amounts due to a director/related companies.
As at 31 May As at 31 December 2012 2011 2010 2009 HK$ HK$ HK$ HK$
Total debts 2,042,488 2,583,168 3,383,588 8,299,427
Total assets 3,408,337 3,531,435 2,906,471 2,495,375
Gearing ratio 0.60 0.73 1.16 3.33
26. CAPITAL COMMITMENT AND CONTINGENT LIABILITIES
The Target Company did not have any significant capital commitment and contingent liabilities at end of the Relevant Period.
C. SUBSEQUENT EVENTS
The Target Company did not have any significant event occurred subsequent to the Relevant Period.
D. SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements of the Target Company have been prepared in respect of any period subsequent to 31 May 2012.
75 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET COMPANY
The management discussion and analysis of the Target Company as at 31 December 2009, 2010, 2011 and 31 May 2012 are set out below.
Business Overview
The Target Company is a limited liability company incorporated under the Hong Kong Companies Ordinance on 31 August 2005 and is principally engaged in providing high quality programmes and courses in both classical and contemporary music and is currently 75.5% owned by the Vendor and 24.5% owned by United Value.
The Target Company provides both classical and contemporary music programs in Hong Kong since 2006. It was founded by Ronald Ng who is a composer in Hong Kong. There is more than 70 professional musicians involved in teaching, program design and development and quality assurance in the Target Company.
There is no information on business segment as the Target Company was only engaged in provision of professional musical education since its incorporation and as of the Latest Practicable Date.
Financial Review
Turnover
The Target Company organizes general music programs, which include music composition, lyric- writing, audio production and vocal technique. Short term courses and individual music lessons are also provided. The Target Company has been appointed as a consultancy and service provider for a number of subjects related to Pop Music and Music Industry of the bachelor program at Hong Kong Institute of Education. The Target Company also engaged in several joint programs in professional bachelor, diploma and certificate with the certain tertiary education institution.
For each of the years ended 31 December 2009, 2010, 2011 and the five months period ended 31 May 2012, turnover of the Target Company was approximately HK$9,380,000, HK$10,422,000, HK$8,995,000 and HK$5,381,000 respectively.
For the year ended 31 December 2010, the Target Company recorded an increase in turnover from approximately HK$9,380,000 to approximately HK$10,422,000, represent an increase of approximately 11.1%. Such increase was mainly due to the combined effect of increase in course fee and increase in students enrolled in both general and short course. However, the Target Company recorded a decrease in turnover from approximately HK$10,422,000 for the year ended 31 December 2010 to approximately HK$8,995,000 for the year ended 31 December 2011, representing a decrease of approximately 13.7%. Such decrease was mainly due to the economic downturn in Hong Kong leading to the decrease in student enrolled, particularly in the short courses which are substantially the interesting class.
76 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
For the period from 1 January 2012 to 31 May 2012, the Target Company recorded turnover of approximately HK$5,381,000, and for the same period for 2011, the Target Company recorded turnover of approximately HK$3,508,000, which is unaudited figure, represent an increase of approximately 53.4%. Such increase was mainly due to the combined effect of increase in course fee and increase in students enrolled in both general and short course.
Gross profit margin
For each of the years ended 31 December 2009, 2010, 2011 and period ended 31 May 2012, gross profit margin of the Target Company was 48.26%, 46.69%, 39.59% and 52.72% respectively.
The gross profit margin for the years ended 31 December 2009 and 2011 were fairly stable at approximately 48.26% and 46.69% respectively. For the year ended 31 December 2011, the Target Company recorded a decrease in gross profit margin from approximately 46.69% for the year ended 31 December 2010 to approximately 39.59% for the year ended 31 December 2011. Such decrease was mainly due to (i) the Target Company offered a special discount to student for early bird enrollment to mitigate the economic downturn in Hong Kong during the 2011 and retain existing student for enrollment to another musical courses offered by the Target Company; and (ii) the increase in the cost of tutor providing the musical teaching services.
For the period from 1 January 2012 to 31 May 2012, the Target Company recorded a increase in gross profit margin from approximately 36.85% for the period from 1 January 2011 to 31 May 2011 to approximately 52.72%. Such increase was mainly due to increase in course fee.
Expenses and costs
For each of the years ended 31 December 2009, 2010, 2011 and period ended 31 May 2012, administrative expenses were approximately HK$7,542,000, HK$5,847,000, HK$6,537,000 and 2,567,896 respectively; finance cost were approximately HK$60,000, HK$120,000 and HK$140,000 respectively.
For the year ended 31 December 2009 and 2010, the Target Company recorded a decrease in administrative expenses from approximately HK$7,542,000 for the year ended 31 December 2009 to approximately HK$5,847,000 for the year ended 31 December 2010, represents a decrease of approximately 22.5%. Such the decrease was mainly due to the decrease rental expenses, salaries and allowance and depreciation of property, plant and equipment.
For the year 31 December 2011, the Target Company recorded an increase in administrative expenses from approximately HK$5,847,000 for the year ended 31 December 2010 to approximately HK$6,537,000 for the year ended 31 December 2011, represent an increase of 11.8%. Such increase was mainly due the rental expenses for additional training centre.
For the period from 1 January 2012 to 31 May 2012, the Target Company recorded a decrease in administrative expenses from approximately HK$2,776,000 for period from 1 January 2011 to 31 May 2011 to approximately HK$2,568,000, represents a decrease of approximately 7.49%, such the decrease was mainly due to decreases in salaries, rent and rates.
77 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
During the year ended 31 December 2011, the Target Company recorded a written off of property, plant and equipment of approximately HK$300,000, which was solely attribute to the reallocation of training centre while it was no impairment recognized during the years ended 31 December 2010 and 2011.
Gain on waiver of amounts due to a director and a related company
During the two years ended 31 December 2010 and 2011, the Target Company recorded a gain on waiver of amounts due to a director and related company in the aggregate amount of approximately HK$5.4 million and HK$2.3 million respectively.
The aggregate amounts of waiver had been recognised as other income in the statement of comprehensive income. Since the aggregate amount of waiver for the year ended 31 December 2011 was significantly lower than the year ended 31 December 2010, therefore the profit of the Target Company for the year ended 31 December 2011 was significantly decreased as compared to last corresponding year.
Staff costs
Staff costs mainly comprised of salaries paid to the marketing staff and administrative staff.
Staff costs decreased by approximately 6.4% from approximately HK$3,132,000 for the year ended 31 December 2009 to approximately HK$2,933,000 for the year ended 31 December 2010. Such decrease was mainly due to the decrease in the marketing staff. The Target Company further recorded a decrease of staff costs to approximately HK$2,306,000 for the year ended 31 December 2011, represent a decrease of 21.4%, such decrease was a cost control implemented by the Target Company in view of the unfavourable economic condition in 2011.
For the period from 1 January 2012 to 31 May 2012, the staff cost decrease by approximately 10.85% from approximately HK$1,136,000 for the period from 1 January 2011 to 31 May 2011 to approximately HK$1,013,000 for the period 1 January 2012 to 31 May 2012, such decrease was a cost control implemented by the Target Company.
During the Relevant Period, the Target Company operates a Mandatory Provident Fund Scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance (Chapter 485 of the Laws of Hong Kong) for employees employed under the jurisdiction of the Hong Kong Employment Ordinance. The MPF Scheme is a defined contribution retirement scheme administered by independent trustees. Under the MPF Scheme, the employer and its employees are each required to make contributions to the scheme at 5% of the employees’ relevant income, subject to a cap of monthly relevant income of HK$20,000.
During the Relevant Period, the Target Company does not have any share option schemes and training schemes.
Non-Current assets
As at 31 December 2009, 2010, 2011 and 31 May 2012, the balance of non-current assets solely represented of property, plant and equipments. 78 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
As at 31 December 2009, 2010, 2011 and 31 May 2012, property, plant and equipments were approximately HK$ 878,000, HK$660,000, HK$1,088,000 and HK$1,524,000 respectively. The significant increase in non-current assets during the year ended December 2011 were are mainly due to fact that the Target Company acquired additional equipment for relocated their training centre and additional training centre for business expansion.
Current assets
As at 31 December 2009, 2010, 2011 and 31 May 2012, current assets mainly comprised of account receivables; deposits and prepayment and cash and bank balance the detailed analysis are set out as follows:
1. Account receivables
As at 31 December 2009, 2010, 2011 and 31 May 2012, account receivables were approximately HK$754,000, HK$1,091,000, HK$774,000 and HK$478,000 respectively. The said balance mainly represented the tuition fee not yet settled by student and amounts due from credit card centre. The tuition fee not yet settled by students was mainly due to time processing for direct debit from students’ saving account. It is the usual practice that the tuition fee should be made in advance and settled in full before attending the classes, however, in some circumstances, students made the payment by using direct debit from their personal accounts just before attending the classes. As a result, account receivables were recognised for such direct debit payment method and will be settled from banks in short period of time. The account receivables as at 31 December 2009, 2010, 2011 and 31 May 2012 was fully settled subsequent to the respective financial year end.
2. Deposits and prepayments
As at 31 December 2009, 2010, 2011 and 31 May 2012, prepayments and deposits were approximately HK$550,000, HK$1,070,000, HK$1,519,000 and HK$1,011,000. The said balance mainly comprise of rental and utilities deposits for operating lease
Current liabilities
As at 31 December 2009, 2010, 2011 and 31 May 2012, current assets mainly comprise of account payables; receipt in advance; bank borrowings; amounts due to director and a related company. The detailed analysis are set out as follows:
1. Account payables
As at 31 December 2009, 2010, 2011 and 31 May 2012, account payables were approximately HK$nil, HK$28,000, HK$28,000 and HK$315,000 respectively. The said balance mainly represented the unpaid invoice for production house.
79 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
2. Receipt in advance
As at 31 December 2009, 2010, 2011 and 31 May 2012, receipt in advance were approximately HK$4,738,000, HK$4,677,000, HK$6,410,000 and HK$6,054,000 respectively. The said balance represented the receipt from students which not yet recognized as revenue according to the accounting policies of the Target Company.
The receipt in advance as at 31 December 2010 was substantial increased by approximately 37% compared to last corresponding year, it was mainly due to the situation that (i) some courses scheduled in 2012 has accepted the enrollment in 2011 and (ii) some courses ordinary scheduled in 2011 were delay to 2012 due to insufficient student enrolled.
As at 31 December 2009, 2010, 2011 and 31 May 2012, receipt in advance contributed approximately 31.62%, 46.67%, 63.19% and 66.08% of current liabilities respectively.
3. Bank borrowings
As at 31 December 2009, 2010, 2011 and 31 May 2012, bank borrowings were approximately HK$530,000, HK$2,359,000, HK$1,559,000 and HK$1,291,000 respectively. The said balance represented the bank overdraft and secured bank loan.
During the year ended 31 December 2009, the Target Company obtained a 3-years installment loan from bank with principle amount of HK$700,000 with interest-bearing at 6% per annum. During the year 31 December 2010, the Target Company further obtained two 5-years installment loan from bank with principle amount of HK$1,000,000 and HK$800,000 with interest-bearing at 6.75% and 7.25% per annum respectively. The aforesaid bank loans are secured by the personal guarantee provided by the director of the Target Company and the guarantee provided by the Government of Hong Kong Special Administrative Region.
As at 31 December 2009, 2010, 2011 and 31 May 2012, bank borrowings contributed approximately 3.54%, 23.54%, 15.37% and 14.09% of current liabilities respectively.
In accordance with paragraph 12 of Hong Kong Interpretation 5” Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause”, the amounts repayable under a loan agreement that includes a clause that gives the lender the unconditional right to call the loan at any time shall be classified in the earliest time bracket, therefore, the balance of bank borrowing were classified as current liabilities in the statement of financial position.
4. Amounts due to a director and a related companies
As at 31 December 2009, 2010, 2011 and 31 May 2012, amounts due to a director and related companies were approximately HK$7,769,000 (director: HK$4,037,000; related companies: HK$3,732,000), HK$1,024,000 (director: HK$755,000; related companies: HK$269,000), HK$785,000 (director: HK$580,000; related companies: HK$205,000) and HK$553,000 (director: HK$ Nil; related companies: HK$553,000) respectively. The said balance represented advance from director and related companies for daily operation.
80 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
During the two years ended 31 December 2010 and 2011, the Target Company recognised a gain on waiver of amounts due to a director and related company in the aggregate amount of approximately HK$5,400,000 and HK$2,300,000 respectively.
5. Number of employees
The number of employees of the Target Company for the three years ended 31 December 2011, 2010 and 2009 and five months period ended 31 May 2012 as follows:
2012 2011 2010 2009
Full time employees 16 14 20 20 Part time employees 1 3 1 4
17 17 21 24
LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE
Overview
The Target Company generally financed its operations through a combination of internally generated funds and other borrowings. The following table presents selected cash flow data from the Target Company’s audited statements of cash flow for the years ended 31 December 2009, 2010, 2011 and for five months period 31 May 2012.
The Target Company has established its cash resources mainly from operating activities. The Target Company has adopted a policy to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient cash reserves to meet its liquidity requirements in both the short and long terms. The Directors are of the view that the financing support from Ronald Ng, director of the Target Company and the Vendor and the financial resources of the Company (including internally generated fund and the similable bank facilities), the Target Company will have sufficient working capital for its present requirement for a period of 12 months from the date of this Circular.
Period ended 31 May Year ended 31 December 2012 2011 2011 2010 2009 HK$ HK$ HK$ HK$ HK$ (Unaudited) Net cash flow generated from/(used in) operating activities 1,017,984 323,614 1,700,734 (1,888,580) (488,704) Net cash (used in)/generated from financing activities (180,908) 14,461 (340,249) 1,415,253 530,154 Net cash used in investing activities (696,686) (423,320) (1,184,026) (170,248) (145,511)
Net increase/(decrease) in cash and cash equivalents 140,390 (85,245) 176,459 (643,575) (104,061) Cash and cash equivalents at 1 January (152,674) (329,133) (329,133) 314,442 418,503
Cash and cash equivalents at 31 December (12,284) (414,378) (152,674) (329,133) 314,442
81 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
Net cash from operating activities
Our net cash from operations is mainly generated from our revenue received, advanced from director receipt in advance from student. Our cash used in operations mainly represents tutor contractor fees paid and operating lease payments..
Year ended 31 December 2010 compared to year ended 31 December 2009
For the year ended 31 December 2009, the Target Company recorded net cash outflow from operating activities of approximately HK$489,000, which comprised operating loss before taxation of approximately HK$2,762,000 and adjusted for net working capital inflow of approximately HK$2,274,000. The net working capital inflow was a result of (i) adjustment of depreciation of property, plant and equipment of approximately HK$562,000 (ii) inflow from increase in receipt in advance of approximately HK$2,205,000, increase in accruals and other payables of approximately HK$529,000; and (iii) outflow from increase in accounts receivables and decrease in amount due to a related company of approximately HK$467,000 and HK$529,000 respectively.
For the year ended 31 December 2010, the Target Company recorded net cash outflow from operating activities of approximately HK$1,889,000, which comprised operating profit before taxation of approximately HK$5,496,000 and adjusted for net working capital inflow of approximately HK$7,385,000. The net working capital outflow was a result of (i) Gain on waiver of amounts due to a director and related company of approximately HK$5,400,000 and (ii) outflow from decrease in amount due to director and increase in deposit and prepayment of approximately HK$1,382,000 and HK$520,000 respectively.
Overall, the Target Company’s operating cash flows used in operating activities increase from approximately HK$489,000 for the year ended 31 December 2009 to approximately HK$1,889,000 for the year ended 31 December 2010. Such increase was a result of (i) decrease in amount due to director of approximately HK$ 1,382,000; and (ii) gain on waiver of amounts due to a director and related company of approximately HK$ 5,400,000 which had been adjusted back to the profit before taxation.
Year ended 31 December 2011 compared to year ended 31 December 2010
For the year ended 31 December 2011, the Target Company recorded net cash inflow from operating activities of approximately HK1,701,000, which comprised operating profit before taxation of approximately HK$544,000 and adjusted for net working capital inflow of approximately HK$1,841,000. The net working capital inflow was a result of (i) gain on waiver of amounts due to a director and related company of approximately HK$2,257,000; (ii) inflow from increase in receipt in advance; increase in amount due to director and decrease in accounts receivable of approximately HK$1,733,000; HK$ 1,431,000 and HK$318,000 respectively, and (iii) outflow from decrease in accruals and other payables of HK$711,000.
Period ended 31 May 2012 compared to period ended 31 May 2011
For the period from 1 January 2012 to 31 May 2012, the Target Company recorded net cash generated from operating activities of approximately HK$1,018,000 which comprised operating profit before taxation of approximately HK$889,000 and adjusted for working capital inflow of approximately 82 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
HK$1,061,000. The net working capital inflow was a result of (i) inflow from decrease in account receivables, deposits and prepayment and increase in account payables of approximately HK$296,000, HK$508,000 and HK$194,000 respectively, and (ii) outflow from decrease in amount due to director, receipt in advance and accruals and other payables of approximately HK$580,000, HK$356,000 and HK$412,000 respectively.
Overall, the Target Company’s operating cash flows in operating activities increase from used in approximately HK$1,889,000 for the year ended 31 December 2010 to generated from approximately HK$1,701,000 for the year ended 31 December 2011. Such increase was a result of (i) increase in amount due to director of approximately HK$ 1,431,000; and (ii) increase in receipt in advance of approximately HK$ 1,733,000.
Cash flow from financing activities
Year ended 31 December 2010 compared to year ended 31 December 2009
For the year ended 31 December 2009, the Target Company recorded a net cash inflow from financing activities of approximately HK$530,000 which was solely due to net proceed received from secured bank loan.
For the year ended 31 December 2010, the Target Company recorded a net cash inflow from financing activities of approximately HK$1,415,000 which was solely due to net proceed received from secured bank loan.
Year ended 31 December 2011 compared to year ended 31 December 2010
For the year ended 31 December 2011, the Target Company recorded a net cash outflow from financing activities of approximately HK$340,000 which was mainly due to (i) net proceed received from obligations under finance lease of approximately HK$238,000; and (ii) cash outflows from repayment of secured bank loan of approximately HK$579,000.
Period ended 31 May 2012 compared to period ended 31 May 2011
For the period from 1 January 2012 to 31 May 2012, the Target Company recorded net cash used in financing activities of approximately HK$181,000 which was mainly due to cash outflows from repayment of secured bank loans and obligation under finance lease of approximately HK$141,000 and HK$40,000 respectively.
Cash flow from investing activity
For the year ended 31 December 2009, 2010 and 2011 and the period from 1 January 2012 to 31 May 2012, the Target Company did not have any significant transactions for investment purpose. The Target Company’s net cash used in investing activities only comprised purchase of property, plant and equipment which accounted for approximately HK$146,000, HK$170,000, HK$1,184,000 and HK$697,000 respectively.
83 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
MARKET RISK
Credit risk
The maximum exposure to credit risk in the event of the counterparties failure to perform their obligations at the end of the reporting period in relation to each class of recognised financial assets is the carrying amount of those assets in the statements of financial position. Other than financial assets described as below, the management considers the credit risk on remaining financial assets are minimal.
Credit risk on cash and bank balances are mitigated as counterparties are banks or financial institutions with high credit rating. Credit risk on account receivables, deposits and prepayments is minimal as the Target Company performs ongoing credit evaluation on the financial condition of its debtors and tightly monitors the aging of the receivables balances, follow up action is taken in case of overdue balances. In addition, management reviews the recoverable amount of the receivables individually or collectively at each date of the reporting year to ensure that adequate impairment losses are made for irrecoverable amounts.
Interest rate risk
The Target Company’s interest rate risk relates primarily to the secured bank loans which are carried at both fixed and floating interest rate. Baron currently does not have an interest rate hedging policy. However, the management will consider hedging significant interest rate risk should the need arise. The management considered that the Target Company’s exposure to cash flow interest rate risk is not material, and does not anticipate any significant impact resulting from the changes in interest rates.
Foreign currency risk
The business transactions of the Target Company conducted during 2009 to 2011 were mainly denominated and settled in Hong Kong dollars. Therefore, no exposure in exchange rate risks and therefore the Target Company currently does not have hedging policy in respect of the foreign currency risk.
Liquidity risk
In the management of the liquidity risk, the Target Company monitors and maintains a level of cash and cash equivalents which is deemed adequate by the management to finance the Target Company’s operations and mitigate the effects of fluctuations in cash flows.
84 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
The following table details the Target Company’s remaining contractual maturity for its nonderivative financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Target Company can be required to pay and includes both interest and principal cash flows for non-derivative financial liabilities.
More than Weighted 1 year average but not Total interest Within more than undiscounted Carrying rate 1 year 5 years cash flows amounts HK$ HK$ HK$ HK$
As at 31 December 2009 Receipt in advance N/A 4,738,020 – 4,738,020 4,738,020 Accruals and other payables N/A 1,947,928 – 1,947,928 1,947,928 Bank borrowings 6% 530,154 – 530,154 530,154 Amount due to a director N/A 4,036,864 – 4,036,864 4,036,864 Amount due to a related company N/A 3,732,409 – 3,732,409 3,732,409
14,985,375 – 14,985,375 14,985,375
As at 31 December 2010 Account payables N/A 28,450 – 28,450 28,450 Receipt in advance N/A 4,676,568 – 4,676,568 4,676,568 Accruals and other payables N/A 1,932,073 – 1,932,073 1,932,073 Bank borrowings 6.67% 2,359,320 – 2,359,320 2,359,320 Amount due to a director N/A 755,303 – 755,303 755,303 Amount due to a related company N/A 268,965 – 268,965 268,965
10,020,679 – 10,020,679 10,020,679
As at 31 December 2011 Account payables N/A 28,450 – 28,450 28,450 Receipt in advance N/A 6,409,892 – 6,409,892 6,409,892 Accruals and other payables N/A 1,220,676 – 1,220,676 1,220,676 Obligation under finance lease 6% 140,060 98,724 238,784 238,784 Bank borrowings 6.67% 1,559,255 – 1,559,255 1,559,255 Amount due to a director N/A 579,863 – 579,863 579,863 Amount due to a related company N/A 205,266 – 205,266 205,266
10,143,462 98,724 10,242,186 10,242,186
85 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
More than 1 year Weighted but not Total average Within more than undiscounted Carrying interest rate 1 year 5 years cash flows amount HK$ HK$ HK$ HK$
As at 31 May 2012 Account payables N/A 314,560 – 314,560 314,560 Receipt in advance N/A 6,054,160 – 6,054,160 6,054,160 Accruals and other payables N/A 808,652 – 808,652 808,652 Bank borrowings 6.67% 1,290,687 – 1,290,687 1,290,687 Obligation under finance lease 6% 140,060 58,604 198,664 198,664 Amount due to related companies N/A 553,137 – 553,137 553,137
9,161,256 58,604 9,219,860 9,219,860
Key Financial Ratio of the Target Company
As at 31 December 2009, 2010, 2011 and 31 May 2012, the audited total liabilities of the Target Company amounted to approximately HK$14,985,000, HK$10,021,000, HK$10,242,000 and HK$9,220,000 respectively. Cash and bank balance amounted to approximately HK$314,000, HK$85,000, HK$40,000 and HK$99,000 respectively. The Target Company financed its operation through bank borrowings, receipt in advance, advance from director and related companies generally.
As at 31 December 2009, 2010, 2011 and 31 May 2012, the gearing ratio of the Target Company is total debt divided by total assets. The Target Company’s total assets comprised of all assets and total debt includes bank borrowings, obligations under finance lease and amounts due to a director/related company were approximately 3.33, 1.16, 0.73 and 0.60 respectively.
Substantial acquisitions and disposals
The Target Company does not have any material investments, substantial acquisitions and disposals since 1 January 2009 and up to the Latest Practicable Date.
Litigation
The Target Company was not engaged in any litigation of material importance and there was no litigation or claim of material importance known to the Directors to be pending or threatened by or against the Target Company as at the Latest Practicable Date.
Charge on assets
As at 31 December 2009, 2010, 2011 and 31 May 2012, the Target Company did not have any charges on assets.
86 APPENDIX II FINANCIAL INFORMATION OF THE TARGET COMPANY
Commitments
As at 31 December 2009, 2010, 2011 and 31 May 2012, the Target Company did not have capital commitments.
Contingent liabilities
As at 31 December 2009, 2010, 2011 and 31 May 2012, the Target Company did not have contingent liabilities.
Your faithfully, Elite Partners CPA Limited Certified Public Accountants Hong Kong Yip Kai Yin Practising Certificate Number: P05131
87 APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
The following is the text of a report, prepared for the sole purpose of inclusion in this circular from the independent reporting accountants of the Company, Elite Partners CPA Limited, Certified Public Accountants, Hong Kong.
9 August 2012
The Board of Directors Hong Kong Life Group Holdings Limited Unit B, 16/F, One Capital Place, 18 Luard Road, Wan Chai, Hong Kong
We report on the unaudited pro forma financial statement (“Unaudited Pro Forma Financial Information”) of Hong Kong Life Group Holdings Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”), which has been prepared by the directors of the Company for illustrative purposes only, to provide information about how the proposed acquisition (“Acquisition”) in relation to 49% equity interests of Baron’s School of Music Limited hereinafter together with the Group upon completion of the Acquisition referred to as the “Enlarged Group”) might have affected the financial information of the Group presented, as set out in Appendix III of the circular dated 9 August 2012 (the “Circular”).
The unaudited pro forma financial information has been prepared by the directors of the Company for illustrative purposes only, to provide information about how the Acquisitions might have affected the financial information presented. The basis of preparation of the unaudited pro forma financial information is set out in Section A and B of Appendix III of the Circular.
Respective Responsibilities of the directors of the Company and Reporting Accountants
It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information of the Enlarged Group in accordance with paragraph 31 of Chapter 7 of the Rules Governing the Listing of Securities on the Growth Enterprise Market of on The Stock Exchange of Hong Kong Limited (the “GEM Listing Rules”) and with reference to Accounting Guideline 7 ‘Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars’ issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).
It is our responsibility to form an opinion, as required by paragraph 31(7) of Chapter 7 of the GEM Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.
88 APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
Basis of Opinion
We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagement 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circular” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the unaudited pro forma financial information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.
We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 31(1) of Chapter 7 of the GEM Listing Rules.
The unaudited pro forma financial information is for illustrative purposes only, based on the judgments and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Enlarged Group as at 30 June 2011 or any future date.
Opinion
In our opinion:
(a) the Pro Forma Financial Information has been properly complied by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 31(1) of Chapter 7 of the GEM Listing Rules.
Your faithfully, Elite Partners CPA Limited Certified Public Accountants Hong Kong Yip Kai Yin Practising Certificate Number: P05131
89 APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
II. UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
A. Introduction
The accompanying is an illustrative unaudited pro forma consolidated financial information which has been prepared in accordance with paragraph 7.31 of the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “Listing Rules”) for the purpose of illustrating the effects of the transactions contemplated under the Agreement (the “Acquisition”) as if they had taken place on 30 June 2011. The Target Company together with the Group, hereinafter collectively referred to as the “Enlarged Group”.
The Unaudited Pro Forma Financial Information is prepared by the directors based on a number of assumption, estimates, uncertainties and currently available information, and is provide for illustrative purpose of the effect on the assets and liabilities of the Enlarged Group as if the Acquisition had been completed on 30 June 2011, after making pro forma adjustments relating to the Acquisition that are directly attributable to the transaction and factually supportable.
The Unaudited Pro Forma Financial Information has been prepared for illustrative purpose only and because of its hypothetical nature, it may not give a true picture of the actual financial position, results of operations or cash flow of the Enlarged Group had the Transaction been completed as at the respective dates to which it is made up to or at any future dates.
B. Unaudited Pro Forma Consolidated Financial Information of the Enlarged Group
The following is the Unaudited Pro Forma Financial Information of the Enlarged Group, assuming that as if the Acquisition had been completed on 30 June 2011.
The Unaudited Pro Forma Financial Information of the Enlarged Group as at 30 June 2011 is prepared based on:
(i) the audited consolidated statement of financial position of the Group as at 30 June 2011 as set out in Appendix I to this Circular;
(ii) the audited statement of financial position of the Target Company as at 31 May 2012 as set out in Appendix II to this Circular.
As the unaudited pro forma consolidated financial information of the Enlarged Group has been prepared for illustrative purpose only and because of its nature, it may not give a true picture of the financial position of the Enlarged Group as at the date to which it is made up to or at any future date.
90 APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
Unaudited Pro Forma Statements of Assets and Liabilities of the Enlarged Group
Pro forma The Group Enlarged as at Pro forma Group as at 30 June 2011 adjustments 30 June 2011 HK$’000 HK$’000 Notes HK$’000
Non-current assets Property, plant and equipment 977 977 Prepaid lease payments 26,765 26,765 Investment in an associate – 35,919 2 (a) 35,919 Investment in a jointly controlled entity 64,982 64,982 Goodwill 939,415 939,415
1,032,139 1,068,058
Current assets Inventories 61 61 Properties held for sale 21,585 21,585 Properties under development 7,030 7,030 Trade and other receivables and prepayments 21,232 21,232 Financial assets at fair value through profit or loss 7,719 7,719 Bank and cash balances 20,976 (2,040) 2 (b) 18,936
78,603 76,563
Current liabilities Trade and other payables and accrued liabilities 37,085 37,085
Net current assets 41,518 39,478
Total assets less current liabilities 1,073,657 1,107,536
Non-current liabilities Deferred tax liabilities 263 263 Convertible bonds 110,824 110,824 Promissory Note – 33,879 2 (c) 33,879
111,087 144,966
Net assets 962,570 962,570
91 APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
Note:
1. On 28 February 2012, Superb Luck Limited (“Purchaser”), a wholly owned subsidiary of the Company, entered into an acquisition agreement with Beyond Asia Limited (“ Vendor”) for the acquisition of 49% of equity interest in Baron.
Total consideration for the acquisition of the Target Company amounted to HK$47,040,000, which shall be satisfied by the followings:
– As to HK$2,040,000 for refundable deposits paid to the Vendor; and – As to HK$45,000,000 by way of issuance of promissory note.
2(a). The goodwill arising on the acquisition of 49% equity interest in the Target Company is calculated as follow,
HK$’000
49% of net liabilities of the Target Company as at 31 May 2012 (Note i) – Goodwill 35,919
Consideration for acquisition of 49% equity interest in the Target Company (Note ii) 35,919
This adjustment will have a continuing effect on the Enlarged Group.
Notes:
(i) The net assets value of the Target Company, based on the carrying amounts of its assets and liabilities as at 31 May 2012 as if the Acquisition had been completed on 30 June 2011 and assumed the fair value of the assets and liabilities approximate to the carrying amounts, will be adjusted upon completion of the Acquisition with reference to the fair value of its assets, liabilities and contingent liabilities at the that date.
Since the fair value of assets and liabilities of the Target Company at the Completion date of the Acquisition substantially different from the fair values used in the preparation of this Unaudited Pro Forma Financial Information of the Enlarged Group, the final amounts of the identified net assets (including other intangible assets) and goodwill to be recognised in connection with the Acquisition could be different from the amounts stated herein.
Since at the completion date of the Acquisition, the Target Company was in net asset deficiency position, Hence, the amount of net asset are deemed to be zero.
The directors have not taken the transaction cost of the Acquisition into account as they consider those amount is insignificant.
(ii) An analysis of the total cost of the Acquisition of 49% equity interest of the Target Company is set out as follows:
HK$’000
Fair value of the consideration for the Acquisition:
Cash consideration 2,040 Issurance of promissory note 33,879
Total cost of Acquisition 35,919
92 APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
(iii) The recoverable amounts of Cash-generating units (“CGU”) of the Target Company has been determined based on value-in-use calculations using cash flow projections based on financial budgets covering a five years period and approved by senior management of the Target Company. The key assumptions are:
(i) Corporation income generated from vocal course in Guangzhou with Star Dragon;
(ii) Corporation income generated from full time diploma program with the Open University of Hong Kong;
(iii) Consultancy income for development of training programs of musical performance in Disneyland Fun Park located in Shanghai with Disneyland;
(iv) Corporation income generated from full time pop music bachelor program with Middlesex University and the Open University of Hong Kong; and
(v) Course fee income generated from CEF general courses.
The other key assumptions include stable profit margins, which have been determined based on past experience in this market. The discount rate applied to cash flow projections for the Target Company was 15.25%.
(iv) In order to assess whether there is any impairment on goodwill as at 30 June 2011, the directors of the Company and the reporting accountants have reviewed, in accordance with Hong Kong Accounting Standard 36 “Impairment of Assets” (“HKAS 36”), the cash flow forecasts prepared for the purpose of impairment assessment which required the assessment of value in use which must be measured based on the cash flow projections on reasonable and supportable assumptions. The directors of the Company have concluded, and the reporting accountants concurred that the assumptions used in the cash flow projection and calculating the recoverable amount of goodwill are fair and reasonable that no impairment is required for goodwill as stated in the unaudited pro forma statements of assets and liabilities of the Enlarged Group as at 30 June 2011. The directors of the Company confirmed that they will apply consistent accounting policies and principal assumptions for impairment assessment of goodwill in subsequent reporting periods in accordance with the requirement of HKAS 36.
Discount rate
The reporting accountants assessed the discount rate used for the cash flow projections by assessing the key assumptions of (a) market risk premium; (b) beta coefficient; and (c) after-tax cost of debt:
(a) The market risk premium used for determining the discount rate was examined and re-calculated. In addition, independent search on market expected return and risk free rate, being the main component of market risk premium were also performed.
(b) The estimated beta coefficient used for determining the discount rate was examined and re- calculated. The estimated beta was taking the average of the beta coefficient of several listed companies which their operations are similar to the Target Company. The beta coefficient found to be reasonable as the natures and backgrounds of those comparable companies were examined that they are the main participant in the musical industry.
(c) The after-tax cost of debt used for determining the discount rate was examined and re-calculated which is based on the average borrowing rate of the Target Company less the Hong Kong Profit Tax rate.
93 APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
Future cash flow
The reporting accountants assessed the future cash flows included in the cash flow projections by examining the following key assumptions:
Corporation income generated – the assumptions are supportable by the term and condition from vocal course in Guangzhou of the signed contract between the Target Company and Star with Star Dragon Dragon.
– future cash flow is consistent with the schedule of vocal courses to be held, as agreed with Star Dragon and its estimated fee income according to the contract.
Corporation income generated – the assumptions are supportable by the term and condition from full time diploma program of signed contract between the Target Company and Open with the Open University of University of Hong Kong. Hong Kong – future cash flow is consistent with the schedule of programs to be held, as agreed with Open University of Hong Kong and its estimated fee income according to the contract.
Corporation income generated – the assumptions are supportable by the term and condition from full time pop music final draft contract, as agreed by the Target Company and bachelor program with Open University of Hong Kong, which schedule to be signed Middlesex University and the within June 2012, and the promotion materials already Open University of Hong Kong published and released by the Open University of Hong Kong in connection to the program provided by the Target Company.
– future cash flow is consistent with the schedule of programs to be held, as agreed with Open University of Hong Kong and its estimated fee income according to the final draft contract which schedule to be signed within July 2012.
Consultancy income for the – the assumptions are supportable by the framework of development of training cooperation provided by Disneyland, official proposal programs of musical issued by the Target Company to Disneyland, quotation performance in Disneyland Fun and proposed training schedule requested by Disneyland, Park located in Shanghai details of official meeting and correspondence in respect of estimated fee and schedule of programs between the Target Company and Disneyland.
– future cash flow is consistent with the quotation and proposed training schedule according to the framework of cooperation provided by Disneyland.
Course fee income generated – the assumptions are supportable by (i) expected increase of from CEF general course CEF general course fee, of which the future cash flow is consistent with the Target Company’s historical performance; (ii) expected increase in number of student enrol the CEF general courses, of which the future cash flow is consistent with the Target Company’s historical performance; and (iii) expected increase in number of student enrol the CEF general course resulting in the effect of the Target Company obtain the QF qualification for its CEF general course.
94 APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP
Value in use
The value in use is based on the calculation of discount rates and cash flow projection of the Target Company. The reporting accountants have re-performed the calculation in determining the value in use.
(v) As if the Target Company unable to achieve the future plan and above the assumption, the value of the Target Company will then be approximately HK13,000,000 according to its historical performance.
Accordingly, the Company will provide potential impairment of goodwill, which difference between carrying amount and recoverable amount.
2(b). This represents cash payment for deposits amounted to HK$2,040,000 paid to Vendor for the Acquisition of 49% equity interest in the Target Company. Such payment has been satisfied from internal resources of the Group.
This adjustment will not have a continuing effect on the Enlarged Group.
2(c). This represents the promissory note amounted to HK$45,000,000 which will be issued for the Acquisition of 49% equity interest in the Target Company. The fair value of the promissory notes of HK$33,879,000 is estimated by using the discounted cash flow approach at prevailing market rate of approximately 15.25% per annum. On Completion, the fair value of the promissory note will have to be reassessed as at the date of Completion.
This adjustment will have a continuing effect on the Enlarged Group.
95 APPENDIX IV VALUATION REPORT OF THE TARGET COMPANY
The following is the text of the letter and valuation report prepared for the purpose of incorporation in this circular received from Ample Appraisal Limited, being an independent valuer, in connection with its valuation as at 31 May 2012 of the market value of the Target Company.
Room 604, Far East Consortium Building 121 Des Voeux Road Central Hong Kong
9 August 2012
Hong Kong Life Group Holdings Limited Unit B, 16/F, One Capital Place, 18 Luard Road, Wan Chai, Hong Kong
Dear Sir/Madam,
Re: Business Valuation of the 100% Equity Interest in Baron’s School of Music Limited
In accordance with the instructions from Hong Kong Life Group Holdings Limited (hereinafter referred to as the “Company”) to us to conduct a business valuation on the 100% equity interest in Baron’s School of Music Limited (hereinafter referred to as the “Business Enterprise”), we are pleased to report that we have made relevant enquiries and obtained other information which we consider are relevant for the purpose of providing our valuation as at 31 May 2012 (hereinafter referred to as the “Date of Valuation”).
This report states the purpose and basis of valuation, scope of work, economic and industry overviews, an overview of the Business Enterprise, major assumptions, valuation methodology, limiting conditions, and presents our opinion of value.
1. PURPOSE OF VALUATION
This report is prepared solely for the use of the directors and management of the Company. The Company is a public company listed on the Growth Enterprise Market of Hong Kong Stock Exchange. In addition, Ample Appraisal Limited (hereinafter referred to as “Ample Appraisal”) acknowledges that this report may be made available to the Company for public documentation purpose and for inclusion in the circular of the Company in connection with its proposed acquisition of 49% equity interest in the Business Enterprise only.
Ample Appraisal assumes no responsibility whatsoever to any person other than the Company in respect of, or arising out of, the contents of this report. If others choose to rely in any way on the contents of this report they do so entirely on their own risk. 96 APPENDIX IV VALUATION REPORT OF THE TARGET COMPANY
2. SCOPE OF WORK
This report is prepared in accordance with the International Valuation Standards. Ample Appraisal is in a position to provide an objective and unbiased valuation and is competent to undertake the valuation.
Our valuation conclusion is based on the assumptions stated herein and on information provided by the management of the Company, the management of the Business Enterprise and/or its representative(s) (together referred to as the “Management”).
In preparing this report, we have had discussions with the Management in relation to the development, operations and other relevant information of the Business Enterprise. As part of our analysis, we have reviewed such financial information and other pertinent data concerning the Business Enterprise provided to us by the Management and have considered such information and data as attainable and reasonable.
We have no reason to believe that any material facts have been withheld from us, however, we do not warrant that our investigations have revealed all of the matters which an audit or more extensive examination might disclose.
We do not express an opinion as to whether the actual results of the business operation of the Business Enterprise will approximate those projected because assumptions regarding future events by their nature are not capable of independent substantiation.
In applying these projections to the valuation of the Business Enterprise, we are making no representation that the business expansion will be successful, or that market growth and penetration will be realized.
3. ECONOMIC OVERVIEW
3.1 Overview of the Economy in Hong Kong
Hong Kong has long been a free market economy highly dependent on international trade and finance. For this reason, it was heavily exposed to the global economic turmoil that began in 2008 which resulted in a sharp drop of the nominal Gross Domestic Product (“GDP”) of Hong Kong in the first quarter of 2009. Since then, the economy of Hong Kong has been recovering. The GDP of Hong Kong in the fourth quarter in 2011 was approximately HK$ 506,678 million, a 3.2% increase over the last quarter and 6.8% higher than the same quarter in 2010. The preliminary nominal GDP of Hong Kong in the first quarter of 2012 was about HK$ 466,073 million. Figure 1 and figure 2 illustrate the trend of Hong Kong’s nominal GDP over the past few quarters.
97 APPENDIX IV VALUATION REPORT OF THE TARGET COMPANY
Figure 1 – Hong Kong’s Quarterly Nominal GDP from the First Quarter of 2009 to the Fourth Quarter of 2011
HK$ million 550,000
500,000
450,000
400,000
350,000
300,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2010 2011
Source: Hong Kong Census and Statistics Department
Figure 2 – Percentage Change of Hong Kong’s Nominal GDP from the First Quarter of 2009 to the Fourth Quarter of 2011
15%
10%
5%
0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2010 2011 -5%
-10%
-15%
Source: Hong Kong Census and Statistics Department
98 APPENDIX IV VALUATION REPORT OF THE TARGET COMPANY
3.2. Inflation in Hong Kong
The inflation rate in Hong Kong was volatile in the past ten years. According to the International Monetary Fund, the inflation rate in Hong Kong was negative in 2002 and 2003. Since then the inflation rate was on an uptrend and reached 3.8% in 2007. Due to the global financial crisis, the inflation rate dropped in both 2008 and 2009. The inflation rate rebounded strongly in 2010, mainly caused by a sharp rise in the commodity prices in China. The ten-year average inflation rate from 2002 to 2011 is 1.5%, which was considered as the long-term inflation rate in Hong Kong. Figure 3 shows the historical trend of Hong Kong’s inflation rate from 2002 to 2011.
Figure 3 – Hong Kong’s Inflation Rate from 2002 to 2011
5%
4%
3%
2%
1%
0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -1%
-2%
-3%
Source: International Monetary Fund
4. INDUSTRY OVERVIEW
4.1. Overview of Music Industry in Hong Kong
The music industry is comprised of a diversity of popular genres, with Cantonese popular music (“Cantopop”) being the dominant form of music in Hong Kong. Imported music forms such as Mandarin, English, Japanese and Korean are also popular in Hong Kong. In recent years, Cantopop has been facing challenges from Japanese and Korean music as they become more popular among youngsters in Hong Kong.
Cantopop has long been criticized for being too commercial and heavily tilted to love songs. The melodies and lyrics are mostly aimed at youngsters and lack variety. The music industry is a major victim of copyright infringement. From pirates to illegal downloading of music, these activities seriously threaten the development of Cantopop. Record sales are greatly damaged, causing many singers and producers to quit the shrinking music industry. Low profitability and the lack of public recognition also lead to fewer people entering the industry.
99 APPENDIX IV VALUATION REPORT OF THE TARGET COMPANY
Institutions such as the International Federation of the Phonographic Industry (Hong Kong Group) Limited (“IFPI”) and the Composers and Authors Society of Hong Kong Limited (“CASH”) were set up to protect the music copyrights of the record companies and the composers, as well as to help promote and encourage music activities. Competitions, sponsorships and assistance services are set up to raise the local standard of music.
There are also other music institutions paying concerted effort in the development of the music industry in Hong Kong, for example, music schools, universities and various music associations and societies. They provide qualified education and numerous performing opportunities to music learners. Concerts and music festivals are regularly held by the institutions to arouse public interest in music activities.
The Hong Kong government has been putting effort into developing creative industries. The music industry is one of the key areas that are treated as important long-term economic drivers for Hong Kong. The Create Hong Kong was established to promote the development of the creative industries and provide one-stop services and better support to the industries.
4.2. Overview of Music Education in Hong Kong
Traditionally, music education in Hong Kong was limited to classical music training, such as piano and vocal training, with numerous small to medium scale music education centres providing the training. Home-based one-on-one training was also popular among musical instrument learners. Except those large institutions, such as the Hong Kong Academy for Performing Arts, most training centres do not have a systematic teaching syllabus.
There were very few pop music training centres prior to the establishment of institutions like Emperor Entertainment Academy for Performing Arts, East Asia Entertainment and the Business Enterprise. Pop music education covers areas such as music production, lyric-writing, pop vocal technique and recording and mixing training. Currently, there is little government supervision over pop music education. The Education and Manpower Bureau of Hong Kong only oversees the music theory parts within the field of classical music.
The Music Office of the Leisure and Cultural Services Department is responsible for promoting knowledge and appreciation of music, especially among young people, by providing instrumental and ensemble training and organizing musical activities. According to the Hong Kong Yearbook 2010, the Music Office provided music training to 8,438 trainees under its training programs and 169,955 people participated in its music promotional activities in 2010. Figure 4 shows the number of trainees in the training programs organized by the Music Office from 2006 to 2010.
100 APPENDIX IV VALUATION REPORT OF THE TARGET COMPANY
Figure 4 – Number of Trainees in the Training Programs Organized by the Music Office from 2006 to 2010
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2006 2007 2008 2009 2010
Source: Hong Kong Yearbook
5. THE BUSINESS ENTERPRISE
The Business Enterprise is a school providing both classical and contemporary music programs in Hong Kong since 2006. It was founded by Mr. Ng Lok Shing Ronald who is a composer in Hong Kong. The Business Enterprise is mainly divided into two schools, namely School of Music Performance and School of Music Production. There are more than 70 professional musicians involved in teaching, program design and development and quality assurance in the Business Enterprise.
The Business Enterprise organizes general music programs, which include music composition, lyric-writing, audio production and vocal technique. Short term courses and individual music lessons are also provided. Since 2008, the Business Enterprise has been appointed as a consultancy and service provider for a number of subjects related to pop music and music industry of the bachelor program at Hong Kong Institute of Education.
In 2009, the Business Enterprise developed joint programs in professional diploma and certificate with the Open University of Hong Kong (the “Open University”). Further to this collaboration, the Business Enterprise has been invited to jointly develop the first full-time pop music degree in Hong Kong with the Open University. The program is expected to commence in 2012. The Business Enterprise has also been developing music programs on vocal and music production with Star Dragon. The first program commencement is expected to be in 2012.
There is no specific requirement or license which required to be obtained for operating as training centre in the commercial or industrial building and there is no license and/or direct government control over the current pop music education within the Hong Kong market. The Business Enterprise obtained its business registration certificate required to carry out its business, which is valid from 11 August 2011 and will be expired in 10 August 2012, and is renewable upon expiry.
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6. BASIS OF VALUATION
Our valuation is based on going concern premise and conducted on a market value basis. According to the International Valuation Standards, market value is defined as “the estimated amount for which an asset should be exchanged on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”.
7. INVESTIGATION AD ANALYSIS
Our investigation included discussions with members of the Management in relation to the development, operations and other relevant information of the Business Enterprise. In addition, we have made relevant inquiries and obtained further information and statistical figures regarding the economy of Hong Kong as we considered necessary for the purpose of the valuation.
As part of our analysis and assessment on the reasonableness of the financial forecast prepared by the Management, we have reviewed such financial information and other pertinent data concerning the Business Enterprise provided to us by the Management, including financial statements, business plan, information of students and instructors, major contracts signed with cooperative parties in organizing programs and courses. Also, we have conducted a site visit to the business venue of the Business Enterprise and had face-to-face meetings with the Management to understand the operations and practices prevailing in the music industry.
We believe that such information is reasonable and reliable. We had assumed the accuracy of information provided and relied to a considerable extent on such information in arriving at our valuation.
The valuation of the Business Enterprise requires consideration of all pertinent factors, which may or may not affect the operation of the business and its ability to generate future investment returns. The factors considered in our valuation include, but are not necessarily limited to, the following:
• The nature and prospect of the Business Enterprise;
• The financial condition of the Business Enterprise;
• The economic outlook in general and the specific economic environment and market elements affecting the business, industry and market;
• Relevant licenses and agreements;
• The business risk of the Business Enterprise such as the ability in maintaining competent technical and professional personnel; and
• Investment returns and market transactions of entities engaged in similar lines of business.
102 APPENDIX IV VALUATION REPORT OF THE TARGET COMPANY
8. VALUATION METHODOLOGY
There are generally three accepted approaches to obtain the market value of the Business Enterprise, namely the Market-Based Approach, Income-Based Approach and Asset-Based Approach. Each of these approaches is appropriate in one or more circumstances, and sometimes, two or more approaches may be used together. Whether to adopt a particular approach will be determined by the most commonly adopted practice in valuing business entities that are similar in nature.
8.1. Market-Based Approach
The Market-Based Approach values a business entity by comparing prices at which other business entities in a similar nature changed hands in arm’s length transactions. The underlying theory of this approach is that one would not pay more than one would have to for an equally desirable alternative. By adopting this approach, the valuer will first look for valuation indication of prices of other similar business entities that have been sold recently.
The right transactions employed in analyzing indications of values need to be sold at an arm’s length basis, assuming that the buyers and sellers are well informed and have no special motivations or compulsions to buy or to sell.
8.2. Income-Based Approach
The Income-Based Approach focuses on the economic benefits due to the income producing capability of the business entity. The underlying theory of this approach is that the value of the business entity can be measured by the present worth of the economic benefits to be received over the useful life of the business entity. Based on this valuation principle, the Income-Based Approach estimates the future economic benefits and discounts them to their present values using a discount rate appropriate for the risks associated with realizing those benefits.
Alternatively, this present value can be calculated by capitalizing the economic benefits to be received in the next period at an appropriate capitalization rate. This is subject to the assumption that the business entity will continue to maintain stable economic benefits and growth rate.
8.3. Asset-Based Approach
The Asset-Based Approach is based on the general concept that the earning power of a business entity is derived primarily from its existing assets. The assumption of this approach is that when each of the elements of working capital, tangible and intangible assets is individually valued, their sum represents the value of a business entity and equals to the value of its invested capital (“equity and long term debt”). In other words, the value of the business entity is represented by the money that has been made available to purchase the business assets needed.
This money comes from investors who buy stocks of the business entity (“equity”) and investors who lend money to the business entity (“debt”). After collecting the total amounts of money from equity and debt, and converted into various types of assets of the business entity for its operation, their sum equals the value of the business entity.
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8.4. Business Valuation
In the process of valuing the Business Enterprise, we have taken into account of the uniqueness of its operation and the nature of the music industry it is participating. Also, we have considered the accessibility to available data and relevant market transactions in choosing among the valuation approaches.
The Market-Based Approach was not adopted in this case because most of the important assumptions of the comparable transactions were hidden. The Asset-Based Approach was also not adopted because it could not reflect the market value of the Business Enterprise. We have therefore considered the adoption of the Income-Based Approach in arriving at the market value of the Business Enterprise.
8.4.1. Discounted Cash Flow
Under the Income-Based Approach, we have adopted the discounted cash flow (“DCF”) method, which is based on a simple reversal calculation to restate all future cash flows in present terms. The present value of the expected free cash flows was calculated as follows:
1 2 n n PVCF = CF1/(1+r) + CF2/(1+r) + … + CFn/(1+r) + CFn (1+g)/(r-g)/(1+r)
In which PVCF = Present value of the expected free cash flows; CF = Expected cash flow; r = Discount rate; n = Number of years; and g = Terminal growth rate.
The number of years covered in the forecast was five years, followed by a terminal value.
Major items for the estimation of free cash flows of the Business Enterprise
1 Jun to Year Ended December 31 Dec 2012 2013 2014 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Revenue 12,251 31,796 39,521 45,428 56,020 COGS (5,186) (11,508) (13,215) (14,156) (16,616) Gross Profit 7,065 20,288 26,306 31,272 39,405
Other Income 143 245 245 245 245 Operating Expenses (4,448) (8,489) (9,391) (10,427) (11,417) EBITDA 2,759 12,043 17,160 21,090 28,233
Depreciation and Amortization (504) (859) (632) (126) (98) Interest Expenses (45) (56) (30) (4) 0 Profit Before Tax 2,211 11,128 16,499 20,959 28,135
Income Tax (365) (1,836) (2,722) (3,458) (4,642) Net Profit 1,846 9,292 13,776 17,501 23,493
104 APPENDIX IV VALUATION REPORT OF THE TARGET COMPANY
1 Jun to Year Ended December 31 Dec 2012 2013 2014 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Net Profit 1,846 9,292 13,776 17,501 23,493 Depreciation and Amortization 504 859 632 126 98 After-tax Interest Expenses 37 47 25 4 0 Change in Working Capital (113) (1,503) (596) (457) (817) Capital Expenditure (20) (350) (170) (20) (20) Expected Free Cash Flow 2,254 8,345 13,667 17,154 22,753
Terminal Value 167,005
Revenue
Compared to the historical revenue for 2011 of HK$8.99 million, the forecasted revenue for 2012 amounted to HK$17.96 million, due to the expansion of business of the Business Enterprise, mainly driven by increase in course fees, student headcount and the contract signed with 廣州市星龍文化藝術有限公司 (Guangzhou Star Dragon Culture & Art Company Limited) (“Star Dragon”); as well as based on the successful application of Qualifications Framework (“QF”), in which allow the Business Enterprise to offer full and daytime programs in more compact and condense timeframe, from one to two lessons per week to daily lessons for full-time students along with current part-time programs for working class and others.
According to the business plan of the Business Enterprise, its revenue mainly comprises tuition fee income from group courses and individual classes, tuition fee income from programs and courses organized with cooperative parties and consultancy fee income. Regarding the group courses and individual classes income, the Business Enterprise has organized general music programs approved by the Continuing Education Fund (“CEF”) of the Hong Kong government; various short term courses, such as vocal training, audio software, lyrics writing, music production; and private/individual music lesson. As estimated by the Management, the average annual growth rate of course fee in 2013 was 14% and that in 2014 to 2016 was 10%. The determination of the course fee and growth rare were made with reference to historical change in course fee and the market researches on similar music related trainings and programs.
Regarding the historical change in course fee, according to the Management, the CEF programs in general increased by 10% from 2010 to 2011. Prior to the submission of tuition fee amendment on any CEF programs to The Hong Kong Council for Accreditation of Academic and Vocational Qualifications (“HKCAAVQ”), the final pricing must be discussed with the sales consultants to seek for the final opinion before confirmation, because of the sales consultants have the most sensitive and accurate feedback on how the potential students’ responses on the tuition fee and syllabus. Same rule applies on other non-CEF programs. As above-mentioned, tuition fee on all the existing non-CEF and individual programs was frozen for the past few years. During the period from 2008 to 2009, there was global financial crisis which affects the whole economy of Hong Kong, and therefore 105 APPENDIX IV VALUATION REPORT OF THE TARGET COMPANY
the Management decided to freeze the course fee in 2008 and 2009. Also, the Management considered that charging stable course fee in these two years would help the Business Enterprise building its student base and strengthening its brand and reputation. As the economy recovered, there would be extra room for future fee increase on those programs.
As estimated by the Management, the average annual growth rate of course fee in 2013 would be 14%. Since there have been course restructures of some of the CEF programs and courses, such as change of syllabuses and increase of lessons hours, it is expected that there would be corresponding adjustments in course fee in 2013. In addition, some of the CEF courses have relative low tuition fee especially after the CEF refund process. Hence, increase in course fee by 14% in 2013 was considered reasonable.
Regarding the market researches on similar music related trainings and programs conducted, market researches on the competitors for the adjustment of tuition fee include brochure and course information of Emperor Entertainment Academy for Performing Arts in Hong Kong (“EEAPA”), the Open University of Hong Kong, and School of Continuing and Professional Studies – The Chinese University of Hong Kong. Moreover, there is regular market research by the marketing department of the Business Enterprise, regular survey on existing students and incoming day to day enquires (such as phone, walk-in and email) on various program interests and attractiveness are conducted by sales consultants.
As advised by the Management, the headcount would increase by 10% per year. The determination of growth in headcount was made with reference to the Business Enterprise’s plan on QF application and the reputation of the Business Enterprise.
QF is an entry barrier for the provision of musical training courses as CEF program. No new CEF program from course provider has been approved after the launch of QF in May 2008. All course providers like the Business Enterprise must have first obtained the QF for any new application of CEF program. However, course provider is allowed to offer all the original and existing CEF listed programs to the public, without application for or recognition under QF. Once the Business Enterprise obtains the QF, more compact and intensive daytime programs will be offered. For example, CEF programs such as Diploma in Music Composition and Production could be transformed from one to two lessons per week into daily full time lessons for daytime students to enroll. The overall program duration will be reduced but the number of new cohorts as well as the number of students should then be increased. The Business Enterprise will continue to offer existing part-time programs during the evening for working class and others. Same principle will be applied to other existing CEF programs. The intention to further develop new CEF program on different subjects will also be one of the objectives of the Business Enterprise. All of these would increase the headcount of students each year.
Regarding the reputation of the Business Enterprise, the Business Enterprise has been operated in the market for over six years and certain brand building of the school has established in the market. The Business Enterprise already build up its brand name in past few years through wining award from singing competition and music performance to public. In addition, the Business Enterprise further build up its brand name by the cooperation
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with various educational institutions such as Open University of Hong Kong and Middlesex University. As advised by the Management, the enrolment of the musical courses offered by the Business Enterprise was stable. To further enhance enrolment, the Business Enterprise believes the existing employment scheme with famous musicians, such as Lin Xi, needs to be maintained but with a certain allocation adjustment. With the brand name of the Business Enterprise and reputation of famous musicians in the musical industry in Hong Kong, the Business Enterprise would be able to attract increasing number of students for its quality musical courses and further consolidate its position in the industry.
On the other hand, the Business Enterprise collaborates with different cooperative parties to organize music program in Hong Kong and China. In particular, the Business Enterprise will offer the first fulltime pop music program in Hong Kong, Professional Diploma in Vocal Techniques and Performing Vocalist, in cooperation with the Open University of Hong Kong. Contract between the Business Enterprise and Open University of Hong Kong has been entered in May 2012.
Also, the Business Enterprise will corporate with Open University of Hong Kong and Middlesex University on the provision of Middlesex University’s music degree in Hong Kong. The Business Enterprise has entered into contract with Open University of Hong Kong in July 2012. The cooperation with Open University and Middlesex University to provide a Bachelor degree program for graduates from their joint program. As a matter of fact, the program promotion for student recruitment commenced since April 2012. The program is expected to commence in late September or early October 2012.
Moreover, a cooperative agreement was signed with Star Dragon on 9 June 2011 on the provision of music programs on vocal training, lyrics writing, pop music composition and production. Since 2008, the Business Enterprise has been appointed as a service provider for a number of subjects related to Pop Music and Music Industry in the Bachelor of Music in Education (Honours) program at the Hong Kong Institute of Education. The programs in Guangzhou are currently under the recruitment stages. Programs are scheduled to commence from July 2012, in line with the commencement of summer holiday.
Regarding the consultancy fee income, the Business Enterprise has also provided consultancy services to the Hong Kong Institute of Education since 2008. The forecasted consultancy income was estimated with reference to the historical consultancy fee income for the provision of consultancy service for Bachelor of Music in Education (Honours) (Contemporary Music and Performance Pedagogy) Programme. In addition, in August 2011, the Business Enterprise has been approached by Disneyland Hong Kong and China for the development of training programs and school in China from mid-2012, as a support of Disneyland Fun Park in Shanghai at 2015 and Beijing at 2016. In relation to the collaboration and contract with Disneyland Shanghai China, there is expected to delay toward the last quarter of 2012. Such delay was mainly due to Disneyland is an international cooperation, the collaboration approval process with the Business Enterprise from various departments of headquarter at United States, Hong Kong and Shanghai China is taking longer than the original expectation. Although there is no contract entered between the Business Enterprise and Disneyland, the Management is actively negotiating the details of the collaboration and business arrangement and the approval is in progress. In the view that the Business 107 APPENDIX IV VALUATION REPORT OF THE TARGET COMPANY
Enterprise is a reputable company with over six years of history in the music training industry, the Management expected that the Business Enterprise would be competent in serving as a consultant on the programs and syllabus development and administration; venue inspection; appoint of instructors; students audition and recruitment; songs selection and re- arrangement; and music direction and production; and the Management expected that there would be no major obstacles in the cooperation with Disneyland.
As advised by the Management, the forecasted revenue of cooperation courses with Open University of Hong Kong and Star Dragon are supported by contracts. All CEF courses with SFAA, group and individual courses, course consultancy and service for Hong Kong Institute of Education, and joint programs of Professional Diploma/Professional Certificate in Music Marketing and Management with Open University of Hong Kong (LiPACE) are continuous revenue streams of the Business Enterprise and the Management expected that these revenues would be maintained in the future.
The breakdown of the yearly forecasted revenue is stated as below:
1 Jun to Year Ended December 31 Dec 2012 2013 2014 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Existing CEF Programs and Courses 9,488 20,456 24,752 29,949 35,821 New CEF Programs upon successful application of QF 0 1,611 1,949 2,359 3,272 Open University Courses 320 1,000 1,250 1,500 1,750 HKIE Course and Consultancy Charge 58 138 104 92 104 Middlesex Courses 151 666 1,361 1,906 1,906 Star Dragon Courses 2,234 5,625 6,605 4,673 7,168 Disneyland Training Program Consultancy 0 2,300 3,500 4,950 6,000
Total Revenue 12,251 31,796 39,521 45,428 56,020
The recorded revenue for the five months ended 31 May 2012 and forecasted revenue for the seven months ending 31 December 2012 of existing CEF programs and course amounted approximately HK$5.4 million and HK$9.5 million respectively, therefore forecasted revenue of existing CEF programs and courses for the whole year of 2012 amounted to approximately HK$14.9 million as compared with the historical revenue for 2011 of approximately HK$9.0 million. The significant increase in revenue from 2011 to 2012 is mainly driven by the increase in course fees and student headcount in 2012. Due to the fact that there has been course restructures of some of the CEF programs and courses in the last quarter of 2011, the Management adjusted the course fee upward accordingly. Such effect of course fee increase is expected to be reflected in the revenue of 2012. Moreover, as advised by the Management with reference to the historical records and analyses,
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approximately 80% of the students enrolled in two or more courses offered by the Business Enterprise. In other words, most students who completed junior level courses would continue to enroll in more advance level courses and retained in the student base of the Business Enterprise. In addition, since the start of business of the Business Enterprise in 2006, there was an average of over 400 new students enrolled as new member year over year in terms of number of new application forms. Although there were inactive students within the student base, the potential student base continues to expand as new students are joining every year. On the other hand, according to the audited financial statements of the Business Enterprise as at 31 May 2012, the Business Enterprise recorded course revenue of approximately HK$5.38 million for the five months ended 31 May 2012. Compared with the total course revenue of the Business Enterprise from 1 January 2011 to 31 May 2011, there was a historical year- on-year growth of 53.4%. In the view of the above reasons and prospects of the Business Enterprise, the Management expected that the increasing potential student base would continue to drive course enrollment and there would be a significant increase in revenue from 2011 to 2012.
Cost of Goods Sold
According to the business plan of the Business Enterprise, its cost of goods sold mainly comprises monthly fee to full-time instructors for group courses and tuition fee shared by tutors on individual classes. As advised by the Management, new instructors would be strategically employed on full-time basis upon reaching a scale of economies to maximize the potential profit earning and reduce the cost of goods sold to revenue ratio by 2% every year.
Before the launch of the full-time employment strategy, all instructors are paid at fixed hourly rate for group courses and tuition fee shared by tutors on individual classes. In other words, the cost of goods sold increases proportionately with the increase in sales. In contrast, a full-time instructor will be paid on a fixed scale of monthly fee regardless of the number of group courses and individual classes taught. In order words, the cost of goods sold per tuition hour reduces while the revenue increases.
Based on the information provided by the Management, one of the existing instructors has already renewed the contract to fixed salary basis in February 2012, this would lead to at least 20% cost saving of the lessons taught by this instructor. Due to this full-time instructor employment and contract renewal strategy, the Business Enterprise would improve the gross profit margin. And in the ensuing periods, the Business Enterprise expects to add at least two full-time instructors per year and expected to have around 2% yearly decrease on the cost of goods sold to revenue ratio from 2012 to 2016. This cost saving effect would be executed through offering guarantee hours of teaching to the full time instructors with a lower implied hourly rate.
Moreover, according to the business plan of the Business Enterprise, the elementary level would be taught by junior full time instructor; while the famous musician will concentrate more on higher and advance level of teaching. This arrangement would help reducing the cost of goods sold to revenue ratio of the Business Enterprise.
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The employment of full time instructor will be based on their level of experience, such as recent graduate from the Business Enterprise and/or oversea music institutions, referral and/or protégé of famous musician (such as Mr. Ronald Ng or LinXi or others), and junior musician with few years of production experience. With the reputation and business relationships of Mr. Ronald Ng and other key personnel such as LinXi, the Management expected that there would not be substantial difficulties in recruiting full time instructors for elementary level courses and famous musician.
Other Income
The other income comprises the piano room rental income and subletting fee.
The piano room rental income was estimated to be the average piano room rental income for the year ended 31 December 2009 and 2010. The sub-letting fee income is generated from subletting to other music or entertainment production companies for revenue driven purpose. Due to the normal production time for the outside companies are normally held at late evening, in which all of the studios of the Business Enterprise are normally available for subletting.
Operating Expenses
The other income comprises the sales commission for group courses and individual classes, sales commission for the Open University of Hong Kong, Hong Kong Institute of Education and Guangzhou courses, discount allowed and overhead expenses.
As advised by the Management, the sales commission for group courses and individual classes was estimated to be 7% and that for the Open University of Hong Kong, Hong Kong Institute of Education and Guangzhou courses was estimated to be 5%. The overhead expenses includes advertising expenses, bank charges, cleaning expense, finance charge, insurance, management fee, Mandatory Provident Fund (“MPF”), office expense, office payroll expenses, postage courier, printing & stationery, promotion, rent & rates, repair & maintenance, staff welfare, sundry expenses, telecommunication & internet charges, travelling expenses and utility charges.
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)
The EBITDA was computed using the formula below:
EBITDA = Revenue – Cost of Goods Sold + Other Income – Operating Expenses
Interest Expenses
The interest expenses were the bank loan interest. The Management has prepared the repayment schedules for calculation of loan interest expenses, which based on the updated information from bank.
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Income Tax Expense
The income tax expense was estimated according to the corporate tax rate of Hong Kong at 16.5% as at the Date of Valuation.
Net Profit
When compared with the historical net profit of the Business Enterprise, the net profit would increase due to the annual increase in course fees and the full-time employment strategy launched by the Business Enterprise. In 2013, there would be new venues established to accommodate the increase in headcount and students. Also, the increase in net profit would be supported by the contracts and agreements signed between the Business Enterprise and other cooperative parties. On the other hand, the Business Enterprise is expected to have around 2% yearly decrease on the cost of goods sold from 2012 to 2016, due to the full-time instructor employment and contract renewal strategy deployed. Taking account into the key factors above, the net profit would increase from 2012 to 2016.
There would be an increase in the net profit in 2013 compared with 2012, due to the fact that the forecasted revenue in 2012 on musical programs with Middlesex University, Open University and Star Dragon; and consultancy fee income from Disneyland cover only part of 2012 instead of a full year, depending on the scheduled commencement dates for the programs or services provided. However, once these musical programs and consultancy services commenced, these revenues are expected to be earned throughout 2013. Hence, there is an apparently higher increase in revenue and net profit from 2012 to 2013.
Change in Working Capital
The working capital of the Business Enterprise was estimated on the basis of its forecasted accounts receivables, accounts payable and inventory, while the accounts receivables, accounts payable and inventory were estimated with reference to the historical working capital ratios of the Business Enterprise, including accounts receivables turnover days, accounts payable turnover days and inventory turnover days. The change in working capital was calculated by the ending balance of working capital minus the beginning balance of working capital for that period.
Capital Expenditure
As advised by the Management, there would be capital expenditure of approximately HK$ 20,000 for new musical equipment in 2012. In 2013, there would be approximately HK$ 20,000 for new musical equipment, HK$ 180,000 for the new venues and HK$ 150,000 for the furniture & fixtures. In 2014, there would be approximately HK $20,000 for new musical and HK $150,000 computer equipment. In each of 2015 and 2016, there would be approximately HK$ 20,000 for new musical equipment.
According to the Management, the Business Enterprise only requires minimal capital expenditure from 2012 to 2016 as there was extraordinary capital injection for leasehold
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improvement and musical instrument in 2011 to support existing needs as well as the foreseeable business development in the future. Hence, the yearly HK$ 20,000 for new musical equipment would be adequate based on the past history since all major equipment has already in place. Also, the Management expected that the venues with the furniture & fixtures of HK$ 150,000 would be sufficient for classroom partition, lighting and extra air- condition and installation of music equipment such as speakers and projectors.
As part of our analysis and assessment on the reasonableness of the financial forecast prepared by the Management, we have reviewed the financial information and other pertinent data concerning the Business Enterprise as provided by the Management, including financial statements, business plan, information of the Management and key personnel, and contracts signed with cooperative parties. Also, we have conducted a site visit to the business venue of the Business Enterprise and had face-to-face meetings with the Management to understand the industry operations and practices. In particular, we have interviewed the Management on the risk factors and respective mitigation measures regarding the Business Enterprise, the execution and feedback of the business plan, the latest status and updates on schedules of the collaboration of various cooperative parties. We are of the opinion that the assumptions stated above are fair and reasonable.
In the view that the valuation of the Business Enterprise is highly dependent on the future development and financial forecast as provided by the Management, we have considered the value of the Business Enterprise to be approximately HK$13 million, according to its historical performance under an unlikely scenario that the Business Enterprise does not have future business development and cost improvements achieved, noted its business size and revenue was growing from 2008 to 2010. This revealed that salient business factors, such as growth and development, have a crucial impact on the fair value of a business.
In estimating the value of the Business Enterprise without future business development and cost improvements, we have adopted the average net profit of the Business Enterprise for 2010 and 2011 as the status quo net profit for the forecast. Key valuation figures and key assumptions of the valuation are stated as below:
Average Net Profit for the Year Ended December 2010 & 2011 2,889,625 Perpetuity Factor 6,447
Present Value before Marketability Discount 18,629,409 Add: Cash 98,707 Less: Debt (1,253,347)
17,474,770 Less: Marketability Discount (4,141,520)
100% Equity Interest (Rounded) 13,000,000
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Key Assumptions:
• There would not be any growth in revenue; • There would not be any cost improvements; • The status quo net profit would stay constant during the forecasted period; • There would not be any change in working capital or any capital expenditure; • The discount rate adopted was 15.51%, which was the same as disclosed in section 8.4.4; and • The marketability discount adopted was 23.70%, which was the same as disclosed in section 8.4.5.
The terminal growth rate, which is the expected constant level of growth assumed to be achieved by the Business Enterprise in perpetuity, adopted was 1.66%.
To adopt this method, we obtained the weighted average cost of capital (“WACC”) for the company as a basic discount rate. WACC of the Business Enterprise is the minimum required return that the Business Enterprise must earn to satisfy its various capital providers including shareholders and debt holders. WACC calculation takes into account the relative weights of debt and equity. It is computed using the formula below:
WACC = We x Re + Wd x Rd x (1 – Tc)
In which
Re = Cost of equity;
Rd = Cost of debt;
We = Weight of equity value to enterprise value;
Wd = Weight of debt value to enterprise value; and
Tc = Corporate tax rate.
8.4.2. Cost of Debt
The cost of debt was determined by the expected lending rate of the Business Enterprise. Since the interest expenses paid on debts are tax-deductible for the Business Enterprise, the cost of the Business Enterprise to get debt funds is less than the required rate of return of the suppliers of the debt capital. The after-tax cost of debt was calculated by multiplying one minus the corporate tax rate by the cost of debt.
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8.4.3. Cost of Equity
The cost of equity was determined using the Capital Asset Pricing Model (“CAPM”), which describes the relationship between the risk of the Business Enterprise and expected return to investors. It is calculated by the following formula:
Re = Rf + ß x Market Risk Premium + Other Risk Premium
In which
Re = Cost of equity;
Rf = Risk-free rate; and ß = Beta coefficient.
8.4.4. Discount Rate
The risk-free rate, market expected return and the betas of the comparable companies were obtained from Bloomberg as at the Date of Valuation.
The risk-free rate of 1.12% adopted was the yield rate of Hong Kong 15-Year Exchange Fund Note. The market expected return of Hong Kong was 14.02% and the market risk premium is calculated by market expected return minus the risk-free rate, arriving at 12.91%.
The beta coefficient measures the risk of the Business Enterprise relative to the market. We estimated the beta coefficient of 0.74 by taking the average of the beta coefficients of listed companies which their operations are similar to the Business Enterprise. The comparable companies include JYP Entertainment Corp. (Stock Code: 035900.KS), S.M. Entertainment Co. (Stock Code: 041510.KS), Nippon Columbia Co., Ltd. (Stock Code: 6791.JP) and AVEX Group Holdings Inc. (Stock Code: 7860.JP). Detailed list of the four comparable companies with beta coefficients and debt-to-equity ratios are shown below:
Debt-to- Company Listing Company Beta Equity Name Stock Code Location Description Coefficient Ratio
JYP 035900 KS South Korea JYP Entertainment 0.33 0.00% Entertainment Equity Corp. is a South Corp. Korea leading entertainment company. For over ten years, the company has been active in music production as well as the recruitment, training and management of new artists.
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Debt-to- Company Listing Company Beta Equity Name Stock Code Location Description Coefficient Ratio
S.M. 041510 KS South Korea S.M. Entertainment 0.53 2.48% Entertainment Equity Co. is Korea’s best Co. known entertainment & media group, operating businesses in the fields of planning, production, distribution, and circulation of records, licensing, publishing, singer/ actor management, agency activities, start-up marketing, Internet/mobile content, and education. S.M. Academy, as an affiliation of S.M. Entertainment Co. established in January 2003, is a professional entertainment training institution for fostering competitive entertainer on the world-wide basis. The programs includes music & midi technology (course for song writer), voice training (course for vocalist), acting training (course for actor), and entertainment management course.
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Debt-to- Company Listing Company Beta Equity Name Stock Code Location Description Coefficient Ratio
Nippon 6791 JP Japan Nippon Columbia 1.31 27.16% Columbia Co., Equity Co., Ltd. engages Ltd. in production, advertising, sales of audio, video and game software, etc. and management of artists. In 2005, the company established Columbia Artist Management Inc, which provides music and training management services to musicians.
AVEX Group 7860 JP Japan AVEX Group 0.69 64.49% Holdings Inc. Equity Holdings Inc. manages AVEX group which is a comprehensive entertainment company with a broad range of operations focusing on music, video and management/ concerts business. Avex Management Inc., a subsidiary of the company, provides training and management services to artists, talents and music creators.
Source: Bloomberg and company websites of the comparable companies
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Based on our understanding, the Business Enterprise has been engaging in the music industry since 2006 and providing music programs and courses in Hong Kong and China. After thorough searches on publicly listed companies in Hong Kong and China, we noted that there were no perfect comparable companies in which their businesses are directly comparable with that of the Business Enterprise. Given the lack of perfect comparable companies listed in Hong Kong and China, which solely offer music training and education, we have expanded the geographic scope of searches to listed companies operating in Asia which engage in pop music industry, preferably offer music related trainings and operate in Asia.
The above-mentioned comparable companies were selected mainly on the basis of the following criteria:
• The companies are principally engaged in pop music-related businesses, preferably providing music related and vocal training services;
• The companies have been engaged in pop music industry for at least three years such that they are mature and stable in operations;
• The companies have been listed in exchange for at least two years such that the beta coefficient can be computed; and
• The financial information of the companies is available to the public.
Due to the fact that there were limited available comparable companies which solely offer music training and education in Hong Kong and China, the comparable companies were selected on a best effort basis after thorough searches, as regard to the similarity in their principal business activities in pop music industry and offer music-related services with the Business Enterprise, based on the criteria listed above.
In particular, almost all of the revenue of JYP Entertainment Corp. in 2011 came from its entertainment business unit and it has been active in the pop music industry for more than ten years. Also, it offers recruitment, training and management of new artists. However, there was no public information available specifically indicated the percentage of profit contributed by that business segment.
S.M. Entertainment Co. established S.M. Academy since 2003, which is a professional entertainment training institution for fostering competitive entertainer on a world-wide basis. The programs includes music & midi technology (course for song writer), voice training (course for vocalist), acting training (course for actor), and entertainment management course. Over 65% of the revenue of S.M. Entertainment Co. came from artist management in 2011 and there was no public information available indicated the percentage of profit contributed by S.M. Academy.
Nippon Columbia Co., Ltd. established Columbia Artist Management Inc, which provides music and training management services to musicians since 2005. All of its revenue in 2011 was concentrated on music business, but there was no public disclosure available indicating the percentage of profit contributed by Columbia Artist Management Inc.
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AVEX Group Holdings Inc. established a subsidiary Avex Management Inc. provides training and management services to artists, talents and music creators More than 60% of its revenue in 2011 was concentrated on music business and artist training, but there was no public information specifically indicating the percentage of profit contributed by Avex Management Inc.
Given that the comparable companies are engaged in the pop music industry for at least three years as the Business Enterprise, both the Business Enterprise and the comparable companies face similar industry-specific risks and market risks in the pop music industry in general. Thus, the adopted beta coefficient derived from the average of that of the selected comparable companies reasonably reflects the market and industry risk of the pop music industry. Therefore, the discount rate would be representative to reflect the industry-specific risks and the valuation derived would be meaningful for the purpose of valuation.
In addition, size premium of 4.07% and company-specific risk of 3.00% were added, hence we arrived at 17.79% of cost of equity.
The cost of debt of 7.00% was taken based on the average borrowing rate of the Business Enterprise. The debt-to-equity ratio of 23.53% was estimated by taking the average of the debt-to- equity ratios of the comparable companies. With the corporate tax rate of Hong Kong of 16.50%, the after-tax cost of debt was calculated as 5.85%.
Accounting for the above items, we concluded the discount rate of 15.51% as at the Date of Valuation.
8.4.5. Marketability Discount
Compared to similar interest in public companies, ownership interest is not readily marketable for closely held companies. Therefore, the value of a share of stock in a privately held company is usually less than an otherwise comparable share in a publicly held company. We adopted a marketability discount of 23.70%, estimated with reference to “Quantitative Support for Discounts for Lack of Marketability” by Bruce A. Johnson, an experienced specialist in the valuations of limited partnership, professional practice and privately held company interests, on the market value of the Business Enterprise.
In the study, Bruce A. Johnson carried out a statistical survey over 72 private placement transactions. The results of the study showed that the average marketability discount in the transactions was 23.7% for the targeted companies with profit margin between 0% to 5%. Based on our understanding, there is no specific indication that any non-recurring items, such as one-off gains or losses, were excluded from the financial information when Bruce A. Johnson conducted the statistical survey. Therefore, in adopting the Johnson’s study to determine the marketability discount, we did not adjust the net profit margin for the one-off gain on waiver of debts due to director and related company of the Business Enterprise. Since the historical profit margin of the Business Enterprise was about 4.49% for the year ended 31 December 2011, we adopted a marketability discount of 23.70% in the valuation of the market value of the Business Enterprise and the determination of this marketability discount was only based on the relevant study conducted by Bruce A. Johnson.
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In the view that the Business Enterprise would make negative profit in 2011 without the one- off gain on waiver of debts due to director and related company, we have conducted a sensitivity analysis on the marketability discount. If the Business Enterprise made a negative profit for the year ended 31 December 2011, the appropriate marketability discount based on Johnson’s study would be 22.5%. The results of the Johnson’s study showed that the average marketability discount in the transactions was 22.5% for the targeted companies with negative profit margin. With the marketability discount of 22.5%, the market value of 100% equity interest in the Business Enterprise as at the Date of Valuation would be HK$97 million.
8.4.6 Sensitivity Analyses
To determine how the different values of an independent variable would impact a particular dependent variable under a given set of assumptions, we carried out a sensitivity analyses on the market value of the Business Enterprise in respect of 1% and 2% deviation in the discount rate, course fee, headcount and costs of goods sold from the status quo. The results of the sensitivity analyses were as follows:
Market Value Percentage Change in Applied of the Business Discount Rate Discount Rate Enterprise (%) (HK$)
+2% 17.51 81,000,000 +1% 16.51 88,000,000 0% 15.51 96,000,000 –1% 14.51 104,000,000 –2% 13.51 115,000,000
Market Value Percentage Change in of the Business Course Fee Enterprise (HK$)
+2% 99,000,000 +1% 97,000,000 0% 96,000,000 –1% 94,000,000 –2% 92,000,000
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Market Value Percentage Change in of the Business Headcount Enterprise (HK$)
+2% 99,000,000 +1% 97,000,000 0% 96,000,000 –1% 94,000,000 –2% 92,000,000
Market Value Percentage Change in of the Business Costs of Goods Sold Enterprise (HK$)
+2% 94,000,000 +1% 95,000,000 0% 96,000,000 –1% 96,000,000 –2% 97,000,000
9. MAJOR ASSUMPTIONS
We have adopted certain specific assumptions in our valuation and the major ones are as follows:
• All relevant legal approvals and business certificates or licenses to operate the business in the localities in which the Business Enterprise operates or intends to operate would be officially obtained and renewable upon expiry;
• The projections outlined in the financial information provided are reasonable, reflecting market conditions and economic fundamentals, and will be materialized;
• There will be sufficient supply of technical staff in the industry in which the Business Enterprise operates, and the Business Enterprise will retain competent management, key personnel and technical staff to support its ongoing operations and developments;
• As disclosed in the “Letter from the Board”, the Business Enterprise’s operation is dependent upon the reputation of Mr. Ronald Ng as the operations and development of the Business Enterprise rely on his musical industry experiences and expertise in the business operations. If Mr. Ronald Ng is unable or unwilling to continue in his present positions, or if he leaves the Business Enterprise, the Business Enterprise may not be able to find replacements with reputation comparable with Mr. Ronald Ng in the market, which would cause severe disruption to the business of the Target Company. If the Business Enterprise is unable to retain or replace the key personnel, the Business Enterprise may not be able to implement its business strategies and its financial condition and results may be materially and adversely affected;
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• A three-year employment contract has been signed between the Business Enterprise and Mr. Ronald Ng since June 2011. The contract clearly explained that Mr. Ronald Ng shall serve as “School President” until end of the contract, which is 31 May 2014, plus an extension period of two years as option, plus another two years as second option. Mr. Ronald Ng, as the school president, shall act as chairman of the board of the Business Enterprise and be responsible for the overall business strategy and management of the Business Enterprise to the benefit of all shareholders of the Business Enterprise as a whole. Since he is the founder and key personnel of the Business Enterprise, we assumed that he would be able and willing to continue in his role and position in the Business Enterprise, and there will be no major change in the quality of the Management that may have direct impact on the viability of the business;
• There will be no major change in the current taxation laws in the localities in which the Business Enterprise operates or intends to operate and that the rates of tax payable shall remain unchanged and that all applicable laws and regulations will be complied with;
• There will be no major change in the political, legal, economic or financial conditions in the localities in which the Business Enterprise operates or intends to operate, which would adversely affect the revenues attributable to and profitability of the Business Enterprise; and
• Interest rates and exchange rates in the localities for the operation of the Business Enterprise will not differ materially from those presently prevailing.
10. INFORMATION REVIEWED
Our opinion requires consideration of relevant factors affecting the market value of the Business Enterprise. The factors considered included, but were not necessarily limited to, the following:
• Financial statements of the Business Enterprise;
• Historical information of the Business Enterprise;
• Market trends of the music industry and other dependent industries;
• General descriptions in relation to the Business Enterprise; and
• Economic outlook in Hong Kong.
We have discussed with the Management and also conducted research from various sources to verify the reasonableness and fairness of information provided and we believe that such information is reasonable and reliable. We have assumed the accuracy of information provided and relied to a considerable extent on such information in arriving at our opinion.
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11. LIMITING CONDITIONS
The valuation reflects facts and conditions existing at the Date of Valuation. Subsequent events or circumstances have not been considered and we are not required to update our report for such events and conditions.
We would particularly point out that our valuation was based on the information such as the company background, business nature and market share of the Business Enterprise provided to us.
To the best of our knowledge, all data set forth in this report are reasonable and accurately determined. The data, opinions, or estimates identified as being furnished by others that have been used in formulating this analysis are gathered from reliable sources; yet, no guarantee is made nor liability assumed for their accuracy.
We have relied to a considerable extent on the historical and/or prospective information provided by the Management and other third parties in arriving at our opinion of value. The information has not been audited or compiled by us. We are not in the position to verify the accuracy of all information provided to us. However, we have had no reason to doubt the truth and accuracy of the information provided to us and to doubt that any material facts have been omitted from the information provided. No responsibilities for the operation and financial information that have not been provided to us are accepted.
We assumed that the Management is competent and perform duties under the company regulation. Also, ownership of the Business Enterprise was in responsible hands, unless otherwise stated in this report. The quality of the Management may have direct impact on the viability of the business as well as the market value of the Business Enterprise.
We have not investigated the title to or any legal liabilities of the Business Enterprise and have assumed no responsibility for the title to the Business Enterprise appraised.
Our conclusion of the market value was derived from generally accepted valuation procedures and practices that rely substantially on the use of various assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained. The conclusion and various estimates may not be separated into parts, and/or used out of the context presented herein, and/or used together with any other valuation or study.
We assume no responsibility whatsoever to any person other than the directors and management of the Company in respect of, or arising out of, the content of this report. If others choose to rely in any way on the contents of this report, they do so entirely on their own risk.
No change to any item in any part of this report shall be made by anyone except Ample Appraisal. We have no responsibility for any such unauthorized change. Neither all nor any part of this report shall be disseminated to the public through any means of communication or referenced in any publications, including but not limited to advertising, public relations, news or sales media.
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This report may not be reproduced, in whole or in part, and utilized by any third parties for any purpose, without the written consent and approval of Ample Appraisal.
The working papers and models for this valuation are being kept in our files and would be available for further references. We would be available to support our valuation if required.
12. REMARKS
Unless otherwise stated, all monetary amounts stated in this valuation report are in Hong Kong Dollars (HK$).
We hereby confirm that we have neither present nor prospective interests in the Company, the Business Enterprise and the associated companies, or the values reported herein.
13. OPINION OF VALUE
Based on the investigation and analysis stated above and on the valuation method employed, the market value of 100% equity interest in the Business Enterprise as at the Date of Valuation, in our opinion, was reasonably stated as HK$96,000,000 (HONG KONG DOLLARS NINETY SIX MILLION ONLY).
Yours faithfully, For and on behalf of Ample Appraisal Limited K. Y. Mak Johnny Law CFA, CPA (HK), AICPA CPA, CPA (Aust.) Chief Technical Adviser Senior Vice President
Notes:
Mr. Johnny Law, CPA, CPA (Aust.), possesses in excess of 10 years experience in the finance and business valuation industry in Hong Kong. Among the business valuation experiences, Mr. Law had involved in a business valuation on a tutorial centre specialized in English tuition in Hong Kong previously. This experience is relevant to the valuation of the Business Enterprise due to similar business nature and similar geographical location of valuation targets. Mr. Law holds a master’s degree in banking and finance and he is a Certified Public Accountant in Hong Kong and Certified Practising Accountant in Australia.
Mr. K. Y. Mak, AICPA, CFA, possesses over 10 years of experience in the business valuation industry in Hong Kong and gained his experience in business valuation from his previous managerial position at an international valuer. He is a member of the American Institute of Certified Public Accountants and a Chartered Financial Analyst. Together with Mr. Law, Mr. Mak had involved in the business valuation of the tutorial centre specialized in English tuition previously.
According to the International Valuation Standards, the valuation has to be prepared by an individual or firm having the appropriate technical skills, experience and knowledge of the subject of the valuation, the market in which it trades and the purpose of the valuation. Since Mr. Law is a Certified Public Accountant in Hong Kong and Certified Practising Accountant in Australia, while Mr. Mak, is a member of the American Institute of Certified Public Accountants and a charter holder of CFA, both of them demonstrate appropriate technical skills and knowledge for the valuation. As aforementioned, both of them had involved in the business valuation of the tutorial centre specialized in English tuition for 2011, which is an experience relevant to the valuation of the Business Enterprise. Moreover, both of them possess over 10 years of experience in the business valuation industry in Hong Kong, which is the same market as the Business Enterprise. Hence, Mr. Law and Mr. Mak are professionally qualified to prepare and sign off the valuation in accordance with the International Valuation Standards.
123 APPENDIX V LETTERS ON PROFIT FORECAST
A. LETTER FROM THE FINANCIAL ADVISER
The Board of Directors Hong Kong Life Group Holdings Limited Unit B, 16/F, One Capital Place 18 Luard Road Wanchai, Hong Kong
9 August 2012
Dear Sirs,
We refer to the circular of Hong Kong Life Group Holdings Limited (the “Company”) dated 9 August 2012 in relation to the Acquisition which constitutes a major transaction under the GEM Listing Rules (the “Circular”). Unless otherwise defined or if the context otherwise requires, all terms defined in the Circular shall have the same meaning when used in this letter.
Fortune Financial Capital Limited (“FFC”) hereby confirms that it has reviewed and discussed with the Company, the bases and assumptions adopted in the profit forecast prepared by Ample Appraisal Limited, the independent valuer of the Company (the “Independent Valuer”) in the course of their work, and has satisfied itself that the bases and assumptions have been made with due care and objectivity, and on a reasonable basis and that the profit forecast has been made by the Directors after due and careful enquiry.
We have not independently verified the computations leading to the Independent Valuer’s determination of the fair value and market value of the Target Company. We have had no role or involvement and have not provided and will not provide any assessment of the fair value and market value of the Target Company. Accordingly, save as expressly stated in this letter, we take no responsibility for and express no views, whether expressly or implicitly, on the fair value and market value of the Target Company as determined by the Independent Valuer and set out in the valuation report issued by the Independent Valuer or otherwise.
124 APPENDIX V LETTERS ON PROFIT FORECAST
FFC further confirms that the assessment, review and discussion carried out by it as described above are primarily based on financial, economic, market and other conditions in effect, and the information made available to us as of the date of this letter and that it has, in arriving at its views, relied on information and materials supplied to it by the Independent Valuer, the Group and the Target Company and opinions expressed by, and representations of, the employees and/or management of the Independent Valuer, the Group and Target Company. We have assumed that all information, materials and representations so supplied, including all information, materials and representations referred to or contained in the Circular, for which the Directors are wholly responsible, were true, accurate, complete and not misleading at the time they were supplied or made, and remained so up to the date of the Circular and that no material fact or information has been omitted from the information and materials supplied. No representation or warranty, expressed or implied, is made by FFC on the accuracy, truth or completeness of such information, materials, opinions and/or representations. Circumstances could have developed or could develop in the future that, if known to FFC at the time of this letter, would have altered our respective assessment and review. Further, while the qualifications, bases and assumptions adopted by the Independent Valuer are considered by us to be reasonable, they are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Company and the Independent Valuer.
FFC is acting as financial adviser to the Company in reviewing the forecast on the valuation of the Target Company and preparing this letter for inclusion in the circular and will receive fees for such advice. FFC and its directors and affiliates will, neither jointly or severally, be responsible to anyone other than the Company for providing advice in connection with the review on the forecast on the valuation of the Target Company, nor will FFC, its directors or affiliates, whether jointly or severally, owe any responsibility to anyone other than the Company.
Nothing in this letter should be construed as an opinion or view as to the fair value, market value or any other value of the Target Company or as an opinion or recommendation to any person as to whether they should acquire Shares of the Company or as to how to vote on the Acquisition, the Agreement, or other incidental or ancillary documents. Shareholders are recommended to read the Circular with care.
A copy of this letter in its entirety may be reproduced in the Circular on the basis that none of the Company, the Independent Valuer or any other person may reproduce, disseminate or quote this letter (or any part thereof) for any other purpose at any time and in any manner without our prior written consent. In the event of inconsistency, the English text of this letter shall prevail over the Chinese translation of this letter.
Yours faithfully, Fortune Financial Capital Limited
125 APPENDIX V LETTERS ON PROFIT FORECAST
B. LETTER FROM THE REPORTING ACCOUNTANTS
CAREA
The Board of Directors Hong Kong Life Group Holdings Limited Unit B, 16/F One Capital Place, 18 Luard Road, Wan Chai, Hong Kong
9 August 2012
Dear Sirs,
Hong Kong Life Group Holdings Limited (the “Company”) and its subsidiaries (collectively referred to herein as the “Group”) Comfort letter on profit forecast of Baron’s School of Music Limited
We are writing to report on the extent to which we have review the profit forecast for the period commencing 1 June 2012 and ending 31 December 2016 (the “Forecast”) of Baron’s School of Music Limited (the “Target Company”) for the Circular dated 9 August 2012 (the “Circular”) issued by the Company in connection with the acquisition of 49% of equity interest of the Target Company (the “Acquisition”). Terms defined in the Circular shall the same meanings when used herein.
We conducted our work in accordance with the Auditing Guideline 3.341 “Accountants’ report on profit forecasts” issued by the Hong Kong Institute of Certified Public Accountants.
Our opinion was made by the director of the Target Company based on the Forecast of the Target Company, for which the director of the Target Company is solely responsible. The Forecast has been prepared by the director of the Target Company based on the audited financial statements of the Target Company for the year ended 31 December 2011 and were complied on the basis of certain principal assumptions.
We have reviewed the history, background and business model of the Target Company. We have reviewed the accounting policies of the Forecast, which have been prepared and presented on acceptable bases consistent with the accounting principles and practices adopted by the Target Company in their statutory financial statements. We have determined that the Forecast is consistent with and has been properly compiled on the basis of the assumptions made by the director of the Target Company. We have also examined the arithmetical accuracy of the Forecast.
126 APPENDIX V LETTERS ON PROFIT FORECAST
In our opinion, the calculation and accounting policies of the Forecast are concerned, has been properly complied in accordance with the bases and assumptions adopted by the director of the Target Company and is presented on a basis consistent in all material respects with the accounting policies currently adopted by the Target Company as set out in Note 2 of the Accountants’ Report dated 9 August 2012, the text of which is set forth in Appendix II to the Circular.
This letter is prepared for inclusion in the circular.
Your faithfully, Elite Partners CPA Limited Certified Public Accountants Hong Kong Yip Kai Yin Practising Certificate Number: P05131
127 APPENDIX VI GENERAL INFORMATION
1. RESPONSIBILITY STATEMENT
This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the GEM Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there no other matters the omission of which would make any statement herein or this circular misleading.
2. SHARE CAPITAL OF THE COMPANY
As at the Latest Practicable Date, the authorized and issued share capital of the Company were as follows:
Authorised: HK$
10,000,000,000,000 Shares 0.0001
Issued and fully paid: HK$
127,850,100 Shares 0.0001
All Shares currently in issue rank pari passu in all respects with each others, including, in particular, as to dividends, voting rights and return of capital.
3. DISCLOSURE OF INTERESTS
Interests of directors
As at the Latest Practicable Date, the following Directors or chief executives of the Company had the following interests in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) (“SFO”)) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO), or which were recorded in the register required to be kept by the Company under Section 352 of the SFO, or otherwise notified to the Company and the Stock Exchange pursuant to the required standards of dealings by directors as referred to in Rule 5.46 of the GEM Listing Rules.
128 APPENDIX VI GENERAL INFORMATION
Approximate of aggregate percentage of Number of Number of the Company’s Capacity/nature ordinary underlying issue share Name of Directors of interests share(s) held share(s) held capital
Mr. Lam Wai Pong Personal – 297,000 (note 1) 0.28%
Mr. Lau Chi Kwong Personal – 297,000 (note 2) 0.28%
Notes:
1. The personal interest of Mr. Lam Wai Pong represents an interest in 297,000 underlying shares in respect of options granted by the Company as detailed below.
2. The personal interest of Mr. Lau Chi Kwong represents an interest in 297,000 underlying shares in respect of options granted by the Company as detailed below.
All the interests disclosed above represent long position in the shares.
Save as disclosed above, as at the Latest Practicable Date, none of the Directors or chief executives of the Company had any interests or short positions in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO, or which were recorded in the register required to be kept by the Company under Section 352 of the SFO, or otherwise notified to the Company and the Stock Exchange pursuant to the Rule 5.46 of the GEM Listing Rules.
4. LITIGATION
The Company has applied to the Court of First Instance of the High Court for judicial review (the “Judicial Review”) against the notices dated 22 October 2010 issued by the Planning Deportment under section 23(a) of the Town Planning Ordinance in relation to Lot No.2073 in Demarcation District No. 104 (the “Lots”) which alleged that there is or was an unauthorized development on the Land, such unauthorized development mean the carrying out of development of columbarium use and/or storage use which constitute a material change in the use of the Land. On 21 June 2012, Company’s appeal hearing in the Judicial Review was heard before the Court of Appeal of the High Court and the Court ordered that such appeal on the Judicial Review be dismissed.
As disclosed in the Company’s announcement dated 17 July 2012 and 27 July 2012, the Board has decided to further appeal against the judgment of the Court of Appeal to the Court of Final Appeal and has applied for leave of appeal to the Court of Final Appeal and the application is fixed for hearing on 10 October 2012.
Save as disclosed above, as at the Latest Practicable Date, the Enlarged Group was not engaged in any litigation, arbitration or claim of material importance is known to the Directors to be pending or threatened against any member of the Enlarged Group.
129 APPENDIX VI GENERAL INFORMATION
5. SERVICE CONTRACTS
As at the Latest Practicable Date, none of the Directors had entered or proposed to enter into any service contracts with any member of the Group, excluding contracts expiration or determinable by the group with in one year without payment of compensation (other than statutory compensation).
6. COMPETING INTERESTS
As at the Latest Practicable Date, as far as the Directors are aware of, none of the Directors or the management shareholders of the Company or their respective associates had any business or interest which competes or may compete with the business of the Group, or have or may have any other conflicts of interest with the Group.
7. OTHER INTERESTS OF THE DIRECTORS
As at the Latest Practicable Date:
(a) none of the Directors had any interest, either direct or indirect, in any assets which have, since 30 June 2011 (being the date to which the latest published audited accounts of the Group were made up), been acquired or disposed of by or leased to any member of the Enlarged Group, or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group; and
(b) none of the Directors was materially interested in any contract or arrangement entered into any member of the Enlarged Group which is subsisting as at the date of this circular and is significant in relation to the business of the Enlarged Group.
8. MATERIAL CONTRACTS
The following contracts (being contracts not entered into in the ordinary course business of the Enlarged Group) have been entered into by the members of the Enlarged Group after the date of two years immediately preceding the date of this circular, and up to the Latest Practicable Date, and are or may be material:
(a) the Third Supplemental Agreement;
(b) the Second Supplemental Agreement;
(c) the Supplemental Agreement;
(d) the supplemental agreement entered into between the Company and Emperor Securities Limited dated 4 May 2012 to amend the underwriting agreement dated 7 March 2012 in respect of the amendment to 639,250,500 rights shares at the subscription price of HK$0.138 per right share;
(e) the underwriting agreement entered into between the company and Emperor Securities Limited dated 7 March 2012 in relation to the underwriting of 1,278,501,000 rights shares at the subscription price of HK$0.132 per rights share;
130 APPENDIX VI GENERAL INFORMATION
(f) the Agreement;
(g) the conditional placing agreement entered into between the Company and Pico Zeman Securities (HK) Limited dated 4 January 2012 in relation to the placing of a maximum of 21,000,000 new shares at the placing price of HK$0.29 per placing share;
(h) the supplemental memorandum of understanding entered into between the Company and Mr. Liu Daoren dated 11 August 2011 in relation to proposed acquisition of the entire issued share capital of On Yan Investments Limited;
(i) the memorandum of understanding entered into between the Company and Mr. Liu Daoren dated 3 June 2011 in relation to proposed acquisition of the entire issued share capital of On Yan Investments Limited, the consideration of which is subject to further negotiations between the Company and Mr. Liu Daoren;
(j) the conditional placing agreement entered into between the Company and Chung Nam Securities Limited dated 6 May 2011 in relation to the placing of a maximum of 356,160,000 new shares at the placing price of HK$0.10 per placing share;
(k) the sale and purchase agreement entered into between Casdon Management Limited, a wholly owned subsidiary of the company as purchaser, Advant Gain Holdings Limited as vendor and Mr. Chan Lin So Alan as guarantor dated 14 January 2011 in relation to the acquisition of 50% of the issued share capital of Max Strong Limited at a consideration of HK$65,000,000;
(l) the underwriting agreement entered into between the Company and Quest Stockbrokers (HK) Limited dated 27 October 2010 in relation to the underwriting of 967,392,426 rights shares at the subscription price of HK$0.20 per rights share; and
(m) the subscription agreement entered into between the Company and Mr. Lam Shu Chung dated 6 August 2010 in relation to the subscription of 74,100,000 new shares at the subscription price of HK$0,17 per subscription share.
9. EXPERT AND CONSENT
The following are the qualification of the experts (collectively, the “Experts”) who have given opinions or advice which are contained in this circular:
Name Qualifications
Fortune Financial Capital Limited A licensed corporation to carry on type 6 (advising on corporate finance) regulated activity under the SFO
Elite Partners CPA Limited Certified Public Accountants
Ample Appraisal Limited Independent valuer
131 APPENDIX VI GENERAL INFORMATION
Each of the Experts has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter and report and references to its name in the form and context in which it appears.
As at the Latest Practicable Date, none of the Experts had any interest, either direct or indirect, in any assets which have been, since 30 June 2011, being the date to which the latest published audited consolidated financial statements of the Group were made up, acquired or disposed of by or leased to or were proposed to be acquired or disposed of by or leased to any member of the Enlarged Group nor had any shareholding in any member of the Enlarged Group nor any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Enlarged Group.
10. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection during normal business hours (i.e. from 9:30 a.m. to 6:00 p.m. on Monday to Friday) at the principal place of business of the Company in Hong Kong at Unit B, 16/F, One Capital Place, 18 Luard Road, Wanchai, Hong Kong from 9 August 2012, the date of this circular up to and including 29 August 2012:
(a) the memorandum of association and the Articles of the Company;
(b) the annual reports of the Company for the three years ended 30 June 2009, 2010 and 2011;
(c) the interim report of the Company for the six months ended 31 December 2011;
(d) the accountants’ report on the Target Company, the text of which is set out in Appendix II to this circular;
(e) the letter on the unaudited pro forma financial information of the Enlarged Group issued by Elite Partners CPA Limited set out in Appendix III to this circular;
(f) the valuation report on the Target Company, the text of which is set out in Appendix IV to this circular;
(g) the letter from Fortune Financial Capital Limited in relation to the profit forecast, the text of which is set out in Appendix V to this circular;
(h) the profit forecast report from Elite Partners CPA Limited, the text of which is set out in Appendix V to this circular;
(i) the consent letter referred to in the paragraph under the heading “Expert and Consent” in this Appendix to this circular;
(j) the material contracts disclosed in the paragraph under the heading “Material Contracts” in this Appendix to this circular; and
(k) this circular.
132 APPENDIX VI GENERAL INFORMATION
11. GENERAL
(a) The registered office and principal place of business of the Company is located at Unit B, 16/ F., One Capital Place, 18 Luard Road, Wanchai, Hong Kong.
(b) The compliance office of the Company is Mr. Lau Chi Kwong, who is an associate member of the Australian Institute of Arbitrators, a senior associate member of the Australian and New Zealand Institute of Insurance and Finance and a full number of the Institute of Management Specialists.
(c) The secretary of the Company is Mr. Leung King Fai, who is a member of the CPA Australia and an associate member of Hong Kong Institute of Certified Public Accountants.
(d) The share registrar and transfer office of the Company is Tricor Tengis Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Hong Kong.
(e) The Company’s audit committee (“Audit Committee”) comprises of three independent non- executive Directors, namely, Ms. Chan Wan Yee, Mr. Siu Kwok Chung and Mr. Sit Bun. The primary duties of the audit committee are to review the Company’s annual report and accounts, interim report and quarterly reports and to provide advices and comments thereon to the Board. The background of the members of the Audited Committee are set out below:–
(i) Ms. Chan Wan Yee (“Ms. Chan”), aged 27, holds a Bachelor degree in Business Administration (Accounting and Finance) with honours from the University of Hong Kong. Ms. Chan is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants and gained valuable experience from an international audit firm. Ms. Chan did not hold any directorship in any other companies, the securities of which are listed on any securities market in Hong Kong or overseas in the last three years.
(ii) Mr. Siu Kwok Chung (“Mr. Siu”), aged 53, is an expert in Consumer Electronics Industry and Agricultural Industry. In 1988, he founded his Siu’s Electronics Production and Trading Company. The products were mainly electronics remotes and household electronics appliances. Owing to fast expansion of business, he had to raise the production scale and moved the Hong Kong production plants to Mainland China in 1991. At that moment, he was responsible for his factory’s overall management, strategic planning, business sales and marketing and new products R&D. The business scope was specially focused in Hong Kong and overseas markets such as India, ASEAN and Middle East. In 2005, Mr. Siu joined Chaoda Modern Agriculture (Holding) Limited. Currently, Mr. Siu is the Managing Director of its subsidiary, Chaoda Vegetable & Fruits (Wholesale and Logistics) Limited. He is responsible for the Sale and Marketing Management. Overall, Mr. Siu has more than 23 years’ experiences in the related fields. Mr. Siu did not hold any directorships in any other companies, the securities of which are listed on any securities market in Hong Kong or overseas in the last three years.
133 APPENDIX VI GENERAL INFORMATION
(iii) Mr. Sit Bun (“Mr. Sit”), aged 72, is the chairman of Chinacom. International Limited. Mr. Sit was one of the pioneers in introducing the wireless paging technology into the PRC. He also assisted in modernizing the IDD call services from Guangdong Province to Hong Kong and Macau. Mr. Sit has over 25 years’ experience in telecommunications. He was a member of the Eighth, Ninth and Tenth CPPCC in Beijing. Mr. Sit did not hold any directorships in any other companies, the securities of which are listed on any securities market in Hong Kong or overseas in the last three years.
134 NOTICE OF EGM
HONG KONG LIFE GROUP HOLDINGS LIMITED 香港生命集團控股有限公司 (Incorporated in the Cayman Islands with limited liability) (Stock Code: 8212)
NOTICE OF EXTRAORDINARY GENERAL MEETING
NOTICE IS HEREBY GIVEN THAT a Extraordinary General Meeting of Hong Kong Life Group Holdings Limited (the “Company”) will be held at 9:30 a.m. on 29 August, 2012 at The Boardroom, Basement 2, The Wharney Guangdong Hotel Hong Kong, 57-73 Lockhart Road, Wanchai, Hong Kong as special business, to consider and, if thought fit, to pass with or without amendments, the following resolution:
ORDINARY RESOLUTION
“THAT
(a) the conditional sale and purchase agreement (the “Agreement”) as defined in the circular dated 9 August 2012 dispatched to the shareholders of the Company (the “Circular”), a copy of which has been produced to this meeting marked “A” and signed by the chairman hereof for the purpose of identification, and all the transactions contemplated thereby be and are hereby approved, confirmed and ratified; and
(b) any one director of the Company be and is hereby authorized to do all such acts and things as he in his sole and absolute discretion deems necessary, desirable or expedient to implement, give effect to and/or complete the Agreement and the transactions contemplated thereunder, and, where required, any amendment of the terms of the Agreement as required by, or for the purposes of obtaining the approval of, relevant authorities or to comply with all applicable laws, rules and regulations.”
By order of the Board Hong Kong Life Group Holdings Limited 香港生命集團控股有限公司 Lam Wai Pong Chairman& Executive Director
9 August 2012
135 NOTICE OF EGM
Registered Office: Head office and principal place of Cricket Square business in Hong Kong: Hutchins Drive Suite B, 16/F., One Capital Place, P.O. Box 2681 18 Luard Road, Wanchai, Hong Kong. Grand Cayman, KY1-1111 Cayman Islands
Notes:
1. a form of proxy for use at the extraordinary general meeting of the Company (the “EGM”) has been dispatched to the shareholders of the Company together with a copy of this notice.
2. The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney authorized in writing, or if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person duly authorized to sign the same.
3. Any member of the Company entitled to attend and vote at the EGM shall be entitled to appoint another person (who must be an individual) as his proxy to attend and vote instead of him and a proxy so appointed shall have the same right as the member to speak at the EGM. A proxy need not be a member of the Company. A member who is holder of more than one share may appoint more than one proxy to attend in his stead at the EGM.
4. In order to be valid, the form of proxy, together with the power of attorney (if any) under which it is signed, or a certified copy of such power or authority, must be delivered at the branch share registrar and transfer office of the Company in Hong Kong, Tricor Tengis Ltd. at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding the EGM or any adjourned meeting.
5. Delivery of an instrument appointing a proxy shall not preclude a member from attending and voting in person at the EGM or any adjournment thereof and in such event, the instrument appointing a proxy shall be deemed to be revoked.
6. Where there are joint registered holders of any share, any one of such persons may vote at the EGM, either personally or by proxy, in respect of such share as if he were solely entitled thereto; but if more than one of such joint holders be present at the EGM personally or by proxy, that one of the said persons so present being the most or, as the case may be, the more senior shall alone be entitled to vote in respect of the relevant joint holding and, for this purpose, seniority shall be determined by reference to the order in which the names of the joint holders stand on the register in respect of the relevant joint holding. Several executors or administrators of a deceased member in whose name any share stands shall for the purposes of the articles of association of the Company be deemed joint holders thereof.
As at the date of this announcement, the executive directors of the company are Mr. Lam Wai Pong, Mr. Lau Chi Kwong, Ms. Leung Wai Kuen, Cerene and Mr. Zhang Yan and the independent non-executive directors of the Company are Ms. Chan Wan Yee, Mr. Siu Kwok Chung and Mr. Sit Bun.
136