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 or other registered dealer in securities, bank manager, solicitor, professional accountant, or other professional adviser. If you have sold or transferred all your shares in Teem Foundation Group Ltd. (the “Company”), you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, licensed dealer or other agent through whom the sale or the transfer was effected for transmission to the purchaser or the transferee. The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities.
TEEM FOUNDATION GROUP LTD. 浩基集團有限公司* (Incorporated in Bermuda with limited liability) (Stock Code: 628)
TERMINATION OF TARGET ACQUISITION AGREEMENT AND VERY SUBSTANTIAL ACQUISITION
Independent financial adviser to the Company
SOMERLEY LIMITED
A notice convening a special general meeting of the Company to be held at Boardroom 3-4, M/F, Renaissance Harbour View Hotel Hong Kong, 1 Harbour Road, Wanchai, Hong Kong at 10:00 a.m. on Friday, 29 December 2006 is set out on pages 230 to 231 of this circular. Whether or not you are able to attend the special general meeting, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and deposit the same at the offices of the Company’s Hong Kong share registrar and transfer office in Hong Kong, Union Registers Ltd. at Room 1803, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the special general meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the special general meeting or any adjournment thereof should you so wish.
* For identification purposes only 11 December 2006 CONTENTS
Page
Definitions ...... 1
Letter from the Board ...... 11
Appendix I – Letter from Somerley Limited ...... 75
Appendix II – Management discussion and analysis ...... 118
Appendix III – Accountants’ report on the Target Company ...... 136
Appendix IV – Accountants’ report on Worth Perfect ...... 149
Appendix V – Assurance report on the Rolling Turnover generated by Sat Ieng ...... 160
Appendix VI – Assurance report on the Rolling Turnover generated by Dore ...... 164
Appendix VII – Financial information on the Group ...... 168
Appendix VIII – Unaudited pro forma financial information on the Enlarged Group ...... 206
Appendix IX – Property valuation report ...... 218
Appendix X – General information ...... 222
Notice of SGM ...... 230 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 on the terms contained in the New Target Acquisition Agreement
“Announcement” an announcement of the Company dated 18 September 2006 in respect of the New Target Acquisition Agreement and the transactions contemplated thereunder
“April Announcement” an announcement of the Company dated 6 April 2006 in respect of the Target Acquisition Agreement and the transactions contemplated thereunder
“Assignment” the assignment dated 30 September 2005 and entered into between Triumph Bright International Limited, a wholly-owned subsidiary of the Company and an Independent Third Party in relation to the assignment of the property comprises all those pieces or parcels of ground registered in the Tuen Mun New Territories Land Registry as (i) section A of Lot No. 391 in Demarcation District No. 131 and (ii) portion of remaining portion of Lot No. 391 in Demarcation District No. 131
“associates” has the same meaning ascribed to such term under the Listing Rules
“Board” board of the Directors
“Business Day” a day (other than Saturday and Sunday) on which licensed banks are generally open for business in Hong Kong throughout their normal business hours
“Company” Teem Foundation Group Ltd., a company incorporated in Bermuda with limited liability and the issued Shares of which are listed on the Stock Exchange
“Completion” completion of the sale and purchase of the Sale Shares in accordance with the terms and conditions of the New Target Acquisition Agreement
“Connected Person(s)” has the meaning ascribed to it under the Listing Rules
“Convertible Bond” a convertible bond in the principal amount of HK$134.4 million, to be issued by the Company in favour of Rich Game
– 1 – DEFINITIONS
“Conversion Period” the period commencing from the date when Mr. Tang and Mr. Scolari make payment in full of:
(1) the Profits guaranteed under the First Profit Guarantee and, if there is any shortfall between the Profits guaranteed under the First Profit Guarantee and the Profits actually received and/ or receivable by Worth Perfect during the First Relevant Period, the said shortfall; and
(2) the Profits guaranteed under the Second Profit Guarantee and, if there is any shortfall between the Profits guaranteed under the Second Profit Guarantee and the Profits actually received and/ or receivable by Worth Perfect during the Second Relevant Period, the said shortfall,
up to 4:00 p.m. (Hong Kong time) on the day immediately prior to and exclusive of the maturity date of the Convertible Bond
“Conversion Price” the initial conversion price of HK$1.00 per Conversion Share, subject to adjustments, pursuant to the terms of the Convertible Bond
“Conversion Shares” the Shares to be issued upon the exercise of the conversion rights in respect of the Convertible Bond
“Deed of Cancellation” a deed of cancellation dated 28 August 2006 and entered into among Team Jade, Rich Game and Sat Ieng, pursuant to which the Target Acquisition Agreement was terminated
“Deed of Guarantee” a deed of guarantee dated 28 August 2006 and executed by Mr. Tang and Mr. Scolari in favour of Worth Perfect in respect of the Profit Guarantees
“Deed of Termination” a deed of termination dated 28 August 2006 and entered into among Worth Perfect, Sat Ieng and Mr. Phua, pursuant to which the Original Profit Agreement was terminated
“DICJ” Gaming Inspection and Coordination Bureau of the Macau Government
“Director(s)” director(s) of the Company
– 2 – DEFINITIONS
“Dore” Dore Entretenimento Sociedade Unipessoal Limitada, a company incorporated in Macau, which is wholly- owned by Mr. Scolari and is principally engaged in junket business, an Independent Third Party
“Dore Profit Agreement” the agreement dated 28 August 2006 entered into among Smart as a purchaser, Dore as a vendor and Mr. Scolari as a guarantor relating to the sale and purchase of a 100% interest in the Wynn Profit
“Enlarged Group” the Group as enlarged by the Acquisition
“First Profit Guarantee” the guarantee provided by Mr. Tang and Mr. Scolari under the Deed of Guarantee that the Profits for the First Relevant Period will not be less than HK$150 million
“First Promissory Notes” the promissory notes to be executed by the Company in favour of Rich Game for the purpose of settling partially the consideration for the Sale Shares under the New Target Acquisition Agreement, including First Promissory Note I and First Promissory Note II
“First Promissory Note I” the promissory note in a principal sum of HK$61.6 million
“First Promissory Note II” the promissory note in a principal sum of HK$183 million
“First Relevant Period” the period of one year commencing from 16 March 2006 in respect of the First Profit Guarantee under the Deed of Guarantee
“Front Money Out Slip” a withdrawal slip, signed by the representative of Sat Ieng and the representatives of Sands Macao, regarding the amounts withdrawn by Sat Ieng from Sands Macao
“Global” Global Rainbow Ltd., a company incorporated in the British Virgin Islands and wholly-owned by Mr. Tang
“Group” the Company and its subsidiaries
“HLB” HLB Hodgson Impey Cheng, the auditors of the Company
“Hong Kong” Hong Kong Special Administrative Region of the PRC
“Independent Shareholders” Shareholders other than Smart Town and Pan-Star Nominees Limited, their respective ultimate beneficial owners and their respective associates – 3 – DEFINITIONS
“Independent Third Party(ies)” any person(s) or company(ies) and their respective ultimate beneficial owner(s), to the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, are third parties independent of and not connected with any director, chief executive or substantial Shareholders and its subsidiaries or any of their respective associate
“Instrument” an instrument constituting the Convertible Bond
“junket business” an industry terminology for gaming promotion business in Macau
“junket operator” or industry terminologies for gaming promoter in Macau “junket representative”
“Junket Promoter an official invoice issued by Wynn Macau to Dore Settlement Form” and containing the following information: (a) total Rolling Turnover of each month; (b) commission income calculation of each month; (c) withholding tax calculation regarding the commission income of each month; and (d) net commission payable to Dore for each month
“Junket Representative collectively the Sands Junket Representative Agreement Agreements” and Wynn Junket Representative Agreement
“Junket Representative an official invoice issued by Sands Macao to Sat Ieng Settlement Forms” and containing the following information: (1) total Rolling Turnover of each month; (2) commission income calculation of each month; (3) withholding tax calculation regarding the commission income of each month; and (4) net commission payable to Sat Ieng for each month
“Latest Practicable Date” 8 December 2006, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained in this circular
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Macau” Macau Special Administrative Region of the PRC
– 4 – DEFINITIONS
“MOP” Patacas, the lawful currency of Macau
“New Target Acquisition the conditional sale and purchase agreement dated 28 Agreement” August 2006 entered into among Team Jade as a purchaser, Rich Game as a vendor and warrantor and Global, Smart, Mr. Tang and Mr. Scolari as warrantors relating to the sale and purchase of the Sale Shares
“Non-negotiable Chips” also known as rolling chips or dead chips. These chips cannot be converted into negotiable chips or cash chips nor can they be redeemed for other goods and services. These chips can only be bet in designated area of the casino. If the customer loses, these chips go to the casino. If the customer wins, he or she is paid the winnings and the amount bet in negotiable chips. The design of these chips are different from the negotiable chips and hence, the dealers, players and the cashiers of the casino can readily recognize them from negotiable chips
“Original Profit” 0.4% of the Rolling Turnover generated by Sat Ieng and/or its customers at Sands Macao’s Paiza Club gaming rooms pursuant to the Sands Junket Representative Agreement and such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative, pursuant to the Original Profit Agreement
“Original Profit Agreement” the agreement dated 13 March 2006 entered into among Worth Perfect as a purchaser, Sat Ieng as a vendor and Mr. Phua as a guarantor relating to the sale and purchase of a 100% interest in the Original Profit
“Mr. Phua” Mr. Phua Wei Seng, an Independent Third Party
“Placee” any individual, institutional or other professional investor procured by the Placing Agent to purchase any of the Placing Shares pursuant to the Placing Agent’s obligations under the Placing Agreement
“Placing Agent” Pacific Foundation Securities Limited, a company incorporated in Hong Kong and permitted to engage in types 1 and 9 (dealing in securities and asset management) of the regulated activities as defined in the Securities and Futures Ordinance, Cap. 571 of the Laws of Hong Kong and an Independent Third Party, a placing agent under the Placing Agreement
– 5 – DEFINITIONS
“Placing Agreement” a placing agreement dated 16 March 2006 entered into between Smart Town and the Placing Agent, pursuant to which Smart Town had agreed to appoint the latter as its placing agent for the purpose of procuring the Placees to purchase the Placing Shares at the Placing Price on a fully underwritten basis, as supplemented by a deed of variation dated 31 March 2006 and entered into between Smart Town and the Placing Agent
“Placing Price” the price of HK$1.00 per Placing Share
“Placing Shares” 162.72 million Shares
“PRC” the People’s Republic of China, which for the purpose of this circular, shall exclude Hong Kong, Macau and Taiwan
“Profits” the Original Profit, the Sands Profit and the Wynn Profit
“Profit Agreements” collectively the Sands Profit Agreement and the Wynn Profit Agreement
“Profit Guarantees” the profit guarantees provided by Mr. Tang and Mr. Scolari under the Deed of Guarantee that Profits for the First Relevant Period and the Second Relevant Period will not be less than HK$150 million and HK$250 million respectively
“Provisional Agreement” the provisional agreement dated 22 July 2005 and entered into between Triumph Bright International Limited, a wholly-owned subsidiary of the Company and an Independent Third Party in relation to the acquisition of the property comprises all those pieces or parcels of ground registered in the Tuen Mun New Territories Land Registry as (i) section A of Lot No. 391 in Demarcation District No. 131 and (ii) portion of remaining portion of Lot No. 391 in Demarcation District No. 131 at a cash consideration of HK$10,000,000
“Richsense” Richsense Limited, a company incorporated in the British Virgin Islands which is an investment holding company and is a wholly-owned subsidiary of Rich Game, an Independent Third Party
– 6 – DEFINITIONS
“Rich Game” Rich Game Capital Inc., an investment holding company incorporated in the British Virgin Islands and which was a wholly-owned subsidiary of Sat Ieng, an Independent Third Party and is now beneficially owned as to 51% and 49% by Global and Smart respectively, both of whom are Independent Third Parties
“Rolling Turnover” the value of Non-negotiable Chips purchased by Sat Ieng and/or Dore on behalf of its customers less the value of Non-negotiable Chips redeemed by Sat Ieng and/or Dore on behalf of its customers
“Sale Shares” 100 ordinary shares, being the entire issued share capital of the Target Company
“Sands Junket Representative the junket representative agreement dated 27 January Agreement” 2006 entered into between Venetian Macau Limited, an Independent Third Party and Sat Ieng
“Sands Macao” Sands Macao, a one million-square-foot casino and entertainment complex located in Largo de Monte Carlo, No. 203, Macau and operated by Venetian Macau Limited, a developer of multiple casino hotel resort properties in Macau and is a subsidiary of Las Vegas Sands Corp., the securities of which are listed on the New York Stock Exchange and is a hotel and gaming company
“Sands Macao’s Paiza Club the gaming rooms, including the one operated by Sat gaming rooms” Ieng in which there are currently eight gaming tables, inside the Paiza Club of Sands Macao, a club which offers to the VIP customers services and amenities including luxurious VIP suites, spa facilities and private VIP gaming room facilities
”Sands Profit” 0.4% of the Rolling Turnover generated by Sat Ieng and/or its customers at Sands Macao’s Paiza Club gaming rooms pursuant to the Sands Junket Representative Agreement and such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative or such other VIP gaming rooms whereby Sat Ieng can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives, pursuant to the Sands Profit Agreement
– 7 – DEFINITIONS
“Sands Profit Agreement” the conditional agreement dated 28 August 2006 entered into among Worth Perfect as a purchaser, Global as a vendor and Mr. Tang as a guarantor relating to the sale and purchase of a 100% interest in the Sands Profit
“Sat Ieng” Sat Ieng Sociedade Unipessoal Limitada, a company incorporated in Macau, which is wholly-owned by Mr. Phua, who has entered into an conditional agreement with Mr. Tang for the sale of the entire issued share capital/quota of Sat Ieng to Mr. Tang and is principally engaged in junket business, an Independent Third Party
“Sat Ieng Profit Agreement” the agreement to be entered into among Global as a purchaser, Sat Ieng as a vendor and Mr. Tang as a guarantor relating to the sale and purchase of a 100% interest in the Sands Profit
“Mr. Scolari” Mr. Jean, Christophe Scolari, an Independent Third Party
“Second Profit Guarantee” the guarantee provided by Mr. Tang and Mr. Scolari under the Deed of Guarantee that the Profits for the Second Relevant Period will not be less than HK$250 million
“Second Promissory Note” the promissory note in a principal sum of HK$160 million to be executed by the Company in the favour of Smart Town
“Second Relevant Period” the period of one year commencing from the first date after the First Relevant Period in respect of the Second Profit Guarantee under the Deed of Guarantee
“SFC” the Securities and Futures Commission of Hong Kong
“SFO” Securities and Futures Ordinance, Cap. 571 of the Laws of Hong Kong
“SGM” the special general meeting of the Company to be convened to consider and, if thought fit, approve the Acquisition and the transactions contemplated thereunder
“Share(s)” ordinary share(s) of HK$0.10 each in the share capital of the Company
“Shareholder(s)” holder(s) of the Share(s)
– 8 – DEFINITIONS
“Smart” Smart Gallant Limited, a company incorporated in the British Virgin Islands and is wholly-owned by Mr. Scolari
“Smart Town” Smart Town Holdings Limited, an investment holding company incorporated in the British Virgin Islands and a controlling Shareholder interested in approximately 30.79% of the issued share capital of the Company as at the Latest Practicable Date
“STDM” Sociedade de Turismo e Diversoes de Macao
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“Mr. Tang” Mr. Tang Chien Chang, an Independent Third Party
“Target Acquisition Agreement” the conditional sale and purchase agreement dated 30 March 2006 entered into among Team Jade as a purchaser, Rich Game as a vendor and warrantor and Sat Ieng as a warrantor relating to the sale and purchase of the Sale Shares
“Target Company” Youngrich Limited, a company incorporated in the British Virgin Islands
“Target Group” the Target Company, its subsidiaries and associates from time to time (including Worth Perfect)
“Team Jade” Team Jade Enterprises Limited, a company incorporated in the British Virgin Islands and a wholly- owned subsidiary of the Company, the purchaser under the New Target Acquisition Agreement
“VIP” an acrynom of very important person
“Worth Perfect” Worth Perfect International Limited, a company incorporated in the British Virgin Islands and the shares of which are owned as to 49% and 51% by the Target Company and Richsense respectively as at the Latest Practicable Date
– 9 – DEFINITIONS
“Wynn Macau” Wynn Macau, a luxury hotel and destination casino resort located at Rua Cidade de Sintra, NAPE, Macau and operated by Wynn Resorts (Macau) S.A.. Wynn Macau features 600 luxurious guest rooms and suites; approximately 100,000 square foot of gaming area with 200 tables and 380 slots in first phase; six gourmet restaurants; and a spa and entertainment venues. Wynn Resorts (Macau) S.A. is a subsidiary of Wynn Resorts, Limited, the securities of which is traded on the Nasdaq stock exchange and is a hotel and gaming company
“Wynn Junket Representative the junket representative agreement entered into Agreement” between Wynn Resorts (Macau) S.A. dated 28 August 2006, an Independent Third Party and Dore
“Wynn Profit” 0.4% of the Rolling Turnover generated by Dore and/ or its customers at Wynn Macau VIP gaming rooms pursuant to Wynn Junket Representative Agreement and such other VIP gaming rooms whereby Dore is a duly appointed junket representative or such other VIP gaming rooms whereby Dore can procure the sale/ assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives, pursuant to the Wynn Profit Agreement
“Wynn Profit Agreement” the agreement dated 28 August 2006 entered into among Worth Perfect as a purchaser, Smart as a vendor and Mr. Scolari as a guarantor relating to the sale and purchase of a 100% interest in the Wynn Profit
“HK$” Hong Kong dollar(s), the lawful currency of Hong Kong
“USA/US” United States of America
“US$” United States of America dollar(s), the lawful currency of the US
“%” per cent.
– 10 – LETTER FROM THE BOARD
TEEM FOUNDATION GROUP LTD. 浩基集團有限公司* (Incorporated in Bermuda with limited liability) (Stock Code: 628)
Executive Directors: Registered Office: Mr. Lum Chor Wah, Richard (Chairman) Clarendon House Mr. Pun Yuen Sang 2 Church Street Mr. Tang Hin Keung, Alfred Hamilton HM11 Bermuda Independent non-executive Directors: Mr. Leung Chi Hung Principal place of business in Mr. Tsui Robert Che Kwong Hong Kong: Mr. Cheung Johnny Yim Kong Room 2108 Two International Finance Centre No.8 Finance Street Central Hong Kong
11 December 2006
To the Shareholders
Dear Sir or Madam,
VERY SUBSTANTIAL ACQUISITION
INTRODUCTION
On 18 September 2006, the Board announced that Team Jade has entered into a Deed of Cancellation to terminate the Target Acquisition Agreement and has entered into the New Target Acquisition Agreement to acquire from Rich Game, a company beneficially owned as to 51% and 49% by Global and Smart respectively, the Sale Shares for a total consideration of HK$539 million.
The consideration for the Sale Shares shall be satisfied by Team Jade (1) paying the refundable deposit in a sum of HK$160 million in the following manners: (i) as to HK$20 million, upon signing of the New Target Acquisition Agreement; and (ii) as to HK$140 million, within 30 days from the date of the New Target Acquisition Agreement; (2) procuring the Company to issue the Convertible Bond in a principal amount of HK$134.4
* For identification purposes only
– 11 – LETTER FROM THE BOARD million to Rich Game; and (3) procuring the Company to issue the First Promissory Notes in an aggregate principal amount of HK$244.6 million to Rich Game.
The purpose of this circular is to provide you with further information relating to the Acquisition and to seek approval from the Independent Shareholders for the Acquisition and any transactions contemplated thereby, including the issue of the Convertible Bond.
TARGET ACQUISITION AGREEMENT, DEED OF CANCELLATION AND REASONS FOR THE TERMINATION OF TARGET ACQUISITION AGREEMENT
Target Acquisition Agreement
On 30 March 2006, the Target Acquisition Agreement was entered into among Team Jade, as a purchaser, Rich Game, the then wholly-owned subsidiary of Sat Ieng, as a vendor and warrantor and Sat Ieng as a warrantor in relation to the sale and purchase of the Sale Shares for a total consideration of HK$539 million. The Target Acquisition Agreement has not been completed. Please refer to the April Announcement for further details.
Deed of Cancellation
Due to the change of circumstances as mentioned below, the parties to the Target Acquisition Agreement had entered into the Deed of Cancellation on 28 August 2006 to terminate the Target Acquisition Agreement. Each of the parties thereto with immediate effect from the date of thereof releases and discharges the others from all past, present and future duties, obligations, claims and liabilities under the Target Acquisition Agreement.
Rich Game returned the deposit of HK$160 million paid under the Target Acquisition Agreement, without interest, to Team Jade within 30 days from the date of the Deed of Cancellation. The convertible bond and the promissory notes payable under the Target Acquisition Agreement have not been issued to Rich Game.
Change of circumstances
There are two areas of changes which have led to the change of the deal structure.
(1) Change of ownership of Sat Ieng from Mr. Phua to Mr. Tang
The Company understands that on 28 August 2006, Mr. Phua as a vendor and Mr. Tang as a purchaser entered into a conditional agreement for the sale and purchase of the entire issued share capital/quota of Sat Ieng. As a result, a Deed of Termination was entered into among Worth Perfect, Sat Ieng and Mr. Phua, pursuant to which the Original Profit Agreement was terminated.
– 12 – LETTER FROM THE BOARD
On 28 August 2006, Worth Perfect as a purchaser entered into the Sands Profit Agreement with Global as a vendor and Mr. Tang as a guarantor, pursuant to which Global has agreed to sell and/or assign and Mr. Tang has agreed to procure Global to sell and/or assign and Worth Perfect has agreed to purchase or accept the assignment of the Sands Profit, being 0.4% of the Rolling Turnover generated by Sat Ieng and/or its customers at Sands Macao Paiza Club gaming rooms pursuant to Sands Junket Representative Agreement and such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative or such other VIP gaming rooms whereby Sat Ieng can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives, at a consideration of HK$1.00. The Sands Profit Agreement is conditional upon Global having legally acquired the Sands Profit pursuant to the Sat Ieng Profit Agreement to be entered into among Sat Ieng, Global and Mr. Tang and the New Target Acquisition Agreement is conditional upon completion of the Sands Profit Agreement. The Sat Ieng Profit Agreement will be entered into among Sat Ieng, Global and Mr. Tang once the approval from the Macau Government in respect of the transfer of the entire issued share capital/quota in Sat Ieng by Mr. Phua to Mr. Tang has been obtained. As advised by Mr. Tang’s Macau lawyers, the application for the change in shareholder of Sat Ieng has been lodged with the Macau Government and is being processed by the relevant authorities.
According to the legal advisers of the Company as to Macau law, if the transfer of the entire issued share capital/quota of Sat Ieng from Mr. Phua to Mr. Tang is rejected by the Macau Government, there will be no impact on the renewal of the gaming promoter licence, as the licence is granted to Sat Ieng and not to its shareholder.
Completion of Sands Profit Agreement is conditional upon, among other things, the obtaining of the approval for the transfer of the entire issued share capital/ quota in Sat Ieng by Mr. Phua to Mr. Tang and completion of the New Target Acquisition Agreement is conditional upon, among other things, completion of Sands Profit Agreement in accordance with its terms. If the transfer of the entire issued share capital/quota of Sat Ieng from Mr. Phua to Mr. Tang is rejected by the Macau Government, a condition precedent cannot be fulfilled, Completion will not take place unless Team Jade waives such condition, in which case the Company will issue an announcement and seek Independent Shareholders’ approval as disclosed under the section headed “Conditions precedent” in this circular.
The Company understands that Mr. Phua decided to sell the entire issued share capital/quota of Sat Ieng to Mr. Tang as he intends to concentrate on his soccer gaming business in Vietnam.
(2) Injection of Wynn Profit Agreement to Worth Perfect
Due to the procurement of Mr. Tang, on 28 August 2006, Worth Perfect has entered into the Wynn Profit Agreement, pursuant to which Smart has agreed to sell and/or assign and Mr. Scolari has agreed to procure Smart to sell and/or assign and Worth Perfect has agreed to purchase or accept the assignment of the Wynn Profit, being 0.4% of the Rolling Turnover generated by Dore and/or its customers at Wynn Macau VIP gaming rooms pursuant to the Wynn Junket Representative Agreement and such other VIP gaming rooms whereby Dore is a duly appointed junket representative or such other VIP gaming rooms whereby Dore can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives, at a consideration of HK$1.00. The Wynn Profit was acquired by Smart on the same date from Dore pursuant to the Dore Profit Agreement.
– 13 – LETTER FROM THE BOARD
As a result, the Target Acquisition Agreement was terminated. The New Target Acquisition Agreement was entered into among Team Jade, Rich Game, Global, Smart, Mr. Tang and Mr. Scolari.
Change of shareholdings structure of relevant entities
(1) Previous shareholdings structure of relevant entities
The diagram below shows the shareholdings structure of the relevant entities immediately before completion of the Target Acquisition Agreement:
Mr. Phua
100%
Sat Ieng
100%
Rich Game
100% 100%
Target Company Richsense
49% 51%
Worth Perfect
Original Profit
– 14 – LETTER FROM THE BOARD
The diagram below shows the shareholdings structure of the relevant entities immediately after completion of the Target Acquisition Agreement:
Mr. Phua
100%
The Company Sat Ieng
100% 100%
Team Jade Rich Game
100% 100%
Target Company Richsense
49% 51%
Worth Perfect
Original Profit
– 15 – LETTER FROM THE BOARD
(2) New shareholdings structure of relevant entities
The diagram below shows the shareholdings structure of the relevant entities immediately before completion of the New Target Acquisition Agreement but after completion of the transfer of entire issued share capital/quota of Sat Ieng from Mr. Phua to Mr. Tang:
Mr. Tang Mr. Scolari
100% 100%
Global Smart
51% 49% 100% 100%
Sat Ieng Dore � (gaming promoter Rich Game (gaming promoter licence holder) licence holder)
100% 100% Target Richsense Company
49% 51%
Worth Perfect
Profits
– 16 – LETTER FROM THE BOARD
The diagram below shows the shareholdings structure of the relevant entities immediately after completion of the New Target Acquisition Agreement and the transfer of entire issued share capital/quota of Sat Ieng from Mr. Phua to Mr. Tang:
Mr. Tang Mr. Scolari
100% 100%
The Company Global Smart
51% 49% 100% 100% 100%
Team Jade Sat Ieng Rich Game Dore (gaming promoter (gaming promoter licence holder) licence holder)
100% 100%
Target Richsense Company
49% 51%
Worth Perfect
Profits
– 17 – LETTER FROM THE BOARD
THE NEW TARGET ACQUISITION AGREEMENT
Date: 28 August 2006
Parties:
Purchaser: Team Jade
Vendor: Rich Game
Warrantors: Rich Game, Global, Smart, Mr. Tang and Mr. Scolari
Rich Game is an investment holding company and is beneficially owned as to 51% shareholding by Global and as to 49% shareholding by Smart. Smart acquired the 49% interest in Rich Game on 28 August 2006.
Global is an investment holding company and is wholly-owned by Mr. Tang.
Smart is an investment holding company and is wholly-owned by Mr. Scolari.
Rich Game, Global, Smart and their ultimate beneficial owners, Mr. Tang and Mr. Scolari, are Independent Third Parties.
Assets to be acquired
Pursuant to the New Target Acquisition Agreement, Team Jade has agreed to acquire and Rich Game has agreed to sell and Global, Smart, Mr. Tang and Mr. Scolari have agreed to procure Rich Game to sell, as a legal and beneficial owner, the Sale Shares, being 100 shares of US$1.00 each in the share capital of the Target Company, representing the entire issued share capital of the Target Company, free from any option, charge, lien, equity, encumbrance, rights of pre-emption or any other third party rights whatsoever and together with all rights attached to them at the date of Completion or subsequently becoming attached to them.
Consideration
The total consideration for the Sale Shares is HK$539 million and shall be settled by Team Jade:
(a) paying the refundable deposit to Rich Game in a sum of HK$160 million in the following manners:
(i) as to HK$20 million, upon signing of the New Target Acquisition Agreement; and
(ii) as to HK$140 million, within 30 days from the date of the New Target Acquisition Agreement;
– 18 – LETTER FROM THE BOARD
(b) procuring the Company to issue the Convertible Bond in a principal amount of HK$134.4 million to Rich Game; and
(c) procuring the Company to issue the First Promissory Note I in a principal sum of HK$61.6 million and the First Promissory Note II in a principal amount of HK$183 million to Rich Game.
The Convertible Bond, First Promissory Note I and First Promissory Note II will be issued to Rich Game upon Completion.
As disclosed in the April Announcement, Smart Town, a controlling Shareholder holding approximately 30.79% of the shareholding of the Company, has placed 162.72 million Shares at the Placing Price of HK$1.00 per Placing Share to not less than six Placees through the Placing Agent pursuant to the Placing Agreement to finance the payment of a refundable deposit of HK$160 million to be made by Team Jade under the Target Acquisition Agreement. The Placing has been completed on 7 April 2006 and the Placing Shares had already been transferred to the Placees. The HK$160 million raised under the Placing Agreement has been paid as a refundable deposit under the Target Acquisition Agreement. However, pursuant to the Deed of Cancellation, the refundable deposit of HK$160 million returned to Team Jade within 30 days from the date of the Deed of Cancellation. The HK$160 million raised under the Placing Agreement was utilized to pay the refundable deposit under the New Target Acquisition Agreement. In return, the Company will issue the Second Promissory Note to Smart Town upon Completion. Please refer to the April Announcement for further details concerning the Placing Agreement.
The consideration is determined after arm’s length negotiation between Team Jade and Rich Game after considering the Profit Guarantees and that the Acquisition will (1) broaden the Group’s revenue source; and (2) provide a substantial and stable income source to the Group in view of the acquisition of the Profits by Worth Perfect, an associated company of the Target Company, under the Sands Profit Agreement and Wynn Profit Agreement, the recent economic boom in Macau contributed by the loosening of travel restrictions of Mainland Chinese visitors and the prospects of Macau’s gaming business. Based on the statistics in relation to “Gross revenue from different gaming activities” as published in the official website of DICJ, the revenue generated by the gaming activities is growing steadily at an average growth rate of approximately 23% each year for the period between 2001 and 2005, and the gaming revenue for the first three quarters of 2006 amounted to MOP30.25 billion. According to the annual results announcement of Las Vegas Sands Corp. dated 14 February 2006, Sands Macao, which is operated by Venetian Macau Limited, a subsidiary of Las Vegas Sands Corp., also recorded growth rate of approximately 133%, 61% and 23% for the 2nd, 3rd and 4th quarters respectively in the year 2005 in relation to its VIP chips rolling turnover. The Las Vegas Sands Corp. First Quarter 2006 Results Report dated 4 May 2006 reports Sands Macao’s VIP chips rolling turnover for the first quarter of 2006 was US$3.7 billion, compared to US$855.7 million in the first quarter of 2005. On 2 August 2006, Las Vegas Sands Corp. reported that Sands Macao’s VIP chips rolling turnover for the second quarter of 2006 is more than doubled to US$4.26 billion, compared to US$1.99 billion in the second quarter of 2005.
– 19 – LETTER FROM THE BOARD
As the terms of the New Target Acquisition Agreement are basically the same and there are also Profit Guarantees with the exception of the injection of Wynn Profit and the principals being changed to two parties (instead of one), the Board considers that the same payment term is a fair reflection of the spirit of the arrangement and as such, has referred to and adopted the same payment structure.
Although the principals in the deal under the New Target Acquisition Agreement (who are Mr. Tang and Mr. Scolari) are different from that under the Target Acquisition Agreement (that is Mr. Phua), the Board anticipates that the deal is basically the same and is comfortable with the gaming experience of Mr. Tang and Mr. Scolari because:
(a) the structure of the deal and the Profit Guarantees are the same;
(b) both Mr. Tang and Mr. Scolari have experience in acting as overseas promoters for numerous years (please refer to profile of Mr. Tang and Mr. Scolari under the section headed “Information on Sat Ieng, Dore, Mr. Tang and Mr. Scolari” in this circular);
(c) the junket business is not a one person show but involves promoters and agents/sub-agents. The person licensed to operate as a junket in Macau is licensed as a gaming promoter. As a gaming promoter, that entity is authorized to conduct junket or gaming promotion business in Macau. However, in order to go and bring players to the actual casinos, the gaming promoter will have individuals, including the agents, sub-agents and overseas promoters, who source players from all parts of the World. Mr. Tang has been and is still the overseas promoter of Sat Ieng and he has obtained the support from other agents and sub-agents of Sat Ieng;
(d) there is an additional contribution from Dore, which is beneficially owned by Mr. Scolari and is one of only three licensed junket representatives of Wynn Macau and Wynn Macau is very prudent and selective in appointing junket representatives in the competitive environment of gaming industry in Macau; and
(e) the achievement of Rolling Turnover of approximately HK$8.72 billion by Dore for the period from 5 September 2006 to 31 October 2006 adds confidence to the future profitability of the Target Group.
Pursuant to the Deed of Guarantee, Mr. Tang, who will own the entire issued share capital/quota of Sat Ieng upon completion of the agreement for the sale and purchase of the entire issued share capital/quota of Sat Ieng, and Mr. Scolari, who owns the entire issued share capital/quota of Dore have irrevocably and unconditionally, jointly and severally guaranteed to Worth Perfect that the Profits for the First Relevant Period and the Second Relevant Period shall not be less than HK$150 million and HK$250 million respectively. In the event the Profit Guarantees are not achieved, Mr. Tang and Mr. Scolari have jointly and severally undertaken to pay to Worth Perfect the difference between the
– 20 – LETTER FROM THE BOARD
Profits actually received and/or receivable by Worth Perfect for the First Relevant Period or, as appropriate, for the Second Relevant Period and the guaranteed Profits for the same period within 60 days after the relevant period.
The First Profit Guarantee of not less than HK$150 million for the First Relevant Period is determined by reference to the past performance of Sat Ieng, whose Rolling Turnover for the 18 months ended 31 August 2006 amounted to approximately HK$50.46 billion (0.4% of which amounted to approximately HK$202 million), and the prospects of Dore and Wynn Macau. The guaranteed Profits of not less than HK$250 million for the Second Relevant Period is arrived at after considering the expected business growth of Sat Ieng and Dore, and the potential of Sat Ieng and Dore to be appointed as junket representatives in other VIP gaming rooms in Macau. The Second Profit Guarantee of not less than HK$250 million for the Second Relevant Period represents a 16.66% discount to HK$300 million (which is the double of the First Profit Guarantee) and 8.1% discount to the double of the pro-rata amount of the aggregate Rolling Turnover generated by Sat Ieng for 12 month period. As such, the Directors consider that the Second Profit Guarantee should be within the means of Sat Ieng controlled by Mr. Tang and of Dore controlled by Mr. Scolari.
The Profit Guarantees are still enforceable even if the Junket Representative Agreements cannot be renewed during the relevant periods.
The requirement for the provision of Profit Guarantees is part of the commercial deal for the parties to enter into the New Target Acquisition Agreement. The Profits are arrived at after deducting the commission paid by Sat Ieng and Dore to their agents, who assist them in directing the customers to Sands Macao and Wynn Macau, administrative expenses incurred, including the salary payment, office rental, entertainment and traveling costs, and the tax payable to the Macau Government from the total amount of commission payable to Sat Ieng and Dore under the Sands Junket Representative Agreement and the Wynn Junket Representative Agreement. The payments of commission to the agents and the administrative expenses are on normal commercial terms. The services provided by Sat Ieng’s and Dore’s agents are to direct and introduce customers to Sat Ieng and Dore. The agents receive commission or fees from Sat Ieng and Dore, which are calculated at a rate on the Rolling Turnover generated by their respective customers. The rate as agreed between an agent and Sat Ieng or Dore is based on the number of customers introduced or directed, and the size, volume and frequency of betting made by its customers. The rate is fixed with reference to the market rate.
As Team Jade, which indirectly owns 49% of the shareholdings of Worth Perfect upon Completion, is entitled to share 49% of the Profits, the total consideration of HK$539 million represents approximately 7.3 times the 49% of the First Profit Guarantee, which is HK$73.5 million and 4.4 times the 49% of the Second Profit Guarantee, which is HK$122.5 million. The Directors have made reference to those price earning multiples when arriving at the consideration. Given those price earning multiples are relatively low, especially with reference to the price earning multiples of the companies engaging in gaming business, the Directors are of the view that the consideration is fair and reasonable.
– 21 – LETTER FROM THE BOARD
Other important terms
To protect the Group, Rich Game has undertaken that:
(1) the Convertible Bond in a principal sum of HK$134.4 million and the First Promissory Note I in a principal sum of HK$61.6 million will be held in escrow by the Company’s lawyers for the period commencing from Completion up to the date when Mr. Tang and Mr. Scolari fully pay the Profit Guarantees to Worth Perfect under the respective relevant periods and, if there is any shortfall between the Profit Guarantees and the Profits actually received and/ or receivable by Worth Perfect during the respective relevant periods, the shortfall;
(2) in the event that Mr. Tang and Mr. Scolari fail to pay any shortfall between the Profit Guarantees and the Profits actually received and/or receivable by Worth Perfect during the respective relevant periods, Team Jade can deduct the shortfall from the outstanding sum under the Convertible Bond and from the outstanding sum under the First Promissory Note I;
(3) the Convertible Bond shall not be converted into Shares for the period commencing from Completion up to the date when Mr. Tang and Mr. Scolari fully pay the Profit Guarantees to Worth Perfect under the respective relevant periods and, if there is any shortfall between the Profit Guarantees and the Profits actually received and/or receivable by Worth Perfect during the respective relevant periods, the shortfall; and
(4) if the gaming promoter licence of Sat Ieng or Dore is cancelled, revoked, terminated, or is not renewed, or amended in a material and adverse manner to Sat Ieng or Dore (as the case may be) by the relevant authorities in Macau at any time before the maturity date of the First Promissory Notes, Rich Game shall return the First Promissory Notes to Team Jade and Team Jade shall not be obliged to pay any outstanding sum under the First Promissory Notes even if the Profits which has been received by the Group exceed the amount of the total consideration of HK$539 million at the time of the cancellation, revocation, termination, non-renewal of or adverse and material amendments made to the gaming promoter licence of Sat Ieng or the gaming promoter licence of Dore.
The Directors understand the importance of the Junket Representative Agreements in the Acquisition as they form part of the sources of the Profits. During the arm’s length negotiation, the Directors are given to understand that (1) the Junket Representative Agreements may be terminated at any time by either party to the Sands Junket Representative Agreement or the Wynn Junket Representative Agreement; (2) terms of each of the Junket Representative Agreements are substantially shorter than that of the Profit Agreements and may or may not be renewable upon expiry and (3) the Company is not a party to either of the Junket Representative Agreements and therefore it has no control on the termination and the renewal of the Junket Representative Agreements. Also, the Directors understand that the gaming promoter licences of Sat Ieng and Dore are subject to renewal annually by the Macau Government.
– 22 – LETTER FROM THE BOARD
In the event that the Junket Representative Agreements are terminated, or expired or the renewal of the Junket Representative Agreements fail, the Rolling Turnover generated by Sat Ieng and/or Dore (as the case may be) will no longer be the sources of the Profits that the Group is entitled to share and the Group will lose this part of the Profits. The Profits will only comprise the Rolling Turnover generated by Sat Ieng or Dore in such other VIP gaming rooms whereby Sat Ieng or Dore is a duly appointed junket representative or whereby either Sat Ieng or Dore can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives. Currently, there is no other VIP gaming rooms which Sat Ieng or Dore is duly appointed as a junket representative or whereby either Sat Ieng or Dore can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives.
As the Junket Representative Agreements are confidential documents, their major terms, including the length and the expiry dates of the Junket Representative Agreements, cannot be disclosed to the Directors. However, the Directors have conducted extensive research on the junket business in Macau, including reviewing reports prepared by well- known investment banks in relation to Macau gaming business and making enquiries with the practitioners in the gaming industry, in order to understand the arrangement between the junket operators and the casino operators generally. The Directors understand that generally, the term of the agreement between the junket operator and the casino operator is tied in with the term of the gaming promoter licence. Such kind of agreement will be revoked once the renewal of the gaming promoter licence fails.
Despite this, the Directors consider that the consideration is fair and reasonable given that the Company has reported loss for the past three financial years and that:
(1) Benefits of the Acquisition
(a) The right to the Profits under the Profit Agreements are for an unlimited period of time, instead of a fixed period of time, and the sources of Profits are not just limited to the Rolling Turnover generated by Sat Ieng or Dore (as the case may be) pursuant to the respective Junket Representative Agreements but include all other VIP gaming rooms that Sat Ieng or Dore (as the case may be) is duly appointed as a junket representative or whereby either Sat Ieng or Dore can procure the sale/ assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives. It enables the Company to continually enjoy the potential strong growth in Macau gaming business.
(b) There is no share of loss under the Profit Agreements as the Profits are simply based on 0.4% of the Rolling Turnover generated by Sat Ieng or Dore (as the case may be) regardless of the actual operating expenses incurred by Sat Ieng or Dore. This removes a lot of uncertainties on the Company’s future profitability and reduces the risk of the Company.
– 23 – LETTER FROM THE BOARD
(c) There is no immediate substantial cash outlay for the Acquisition as the First Promissory Notes are only payable in the tenth year (with the exception of the yearly interest of approximately HK$12.23 million, which is calculated at an interest rate of 5% per annum on the principal sum of HK$244.6 million under the First Promissory Notes). During the ten years, the Group can enjoy the flexibility in utilizing the cash flow, which would otherwise be paid to Rich Game if the payment is to be made immediately, and can participate in any other investment opportunities, if available.
(2) Mr. Tang’s and Mr. Scolari’s personal interest
Mr. Tang’s and Mr. Scolari’s personal interest lie with the failure and success of Sat Ieng and Dore respectively. Upon Completion, Mr. Tang and Mr. Scolari together still indirectly hold 51% equity interest in Worth Perfect. That means they still have substantial interests in Worth Perfect, the one holding the Profits which depends on the renewal of Sat Ieng’s and/or Dore’s gaming promoter licences and partially on the Rolling Turnover generated by Sat Ieng and/or Dore pursuant to the Sands Junket Representative Agreement and the Wynn Junket Representative Agreement.
In view of Mr. Tang’s and Mr. Scolari’s substantial interest in Worth Perfect, the Directors believe that, after Completion, Mr. Tang and Mr. Scolari will manage Sat Ieng and Dore in a prudent and efficient manner as their performance have direct impact on them. As such, the risks of non-renewal of the gaming promoter licences of Sat Ieng and Dore, and Junket Representative Agreements upon expiry are minimized.
(3) Renewal of the Junket Representative Agreements
According to the Profit Agreements, the Profits not only include the Rolling Turnover generated by Sat Ieng in Sands Macao’s Paiza Club gaming rooms and the Rolling Turnover generated by Dore in Wynn Macau VIP gaming rooms, but also include the Rolling Turnover generated by Sat Ieng and/or Dore in such other VIP gaming rooms whereby Sat Ieng or Dore is a duly appointed junket representative or whereby either Sat Ieng or Dore can procure the sale/assignment of a percentage of its Rolling Turnover generated by the duly appointed junket representatives. The Sands Junket Representative Agreement and the Wynn Junket Representative Agreement only form parts of the sources of the Profits in the long-term.
Also, it is normal in the business world that the agreement can be terminated by either party and is fixed for a period of time rather than lasting forever so that the parties to the agreement do not need to commit for a long-term business relationship in an ever changing business environment.
Having said that, the Directors confide that the Sands Junket Representative Agreement can be renewed upon expiry due to Sat Ieng’s well-established VIP client
– 24 – LETTER FROM THE BOARD base, a proven track record with Sands Macao in 2005 and 2006, which were reflected in the Rolling Turnover generated by Sat Ieng for the 18 months ended 31 August 2006 amounting to approximately HK$50.46 billion and confirmed by the Directors by reviewing the original Junket Representative Settlement Forms.
In respect of the Wynn Junket Representative Agreement, the Directors understand that Dore was one of the only three licensed junket representatives appointed by Wynn Macau as at the Latest Practicable Date under Wynn Macau’s stringent selective process. The appointment of Dore itself already evidences the abilities of Dore and Mr. Scolari as envisaged by Wynn Macau and the Company. In addition, the Rolling Turnover generated by Dore at Wynn Macau for the period from 5 September 2006 to 31 October 2006 amounted to approximately HK$8.72 billion. The Directors confide that the Wynn Junket Representative Agreement can be renewed.
(4) Renewal of gaming promoter licences
As far as the Directors are aware, US operators, including Wynn Resorts (Macau) S.A. and Venetian Macau Limited, must conduct business under the same restrictions as they do in their country, in which they are required to conduct extensive checks on the junkets to ensure that they have sound financial background and have no linkage to organized crime. Dore has obtained its gaming promoter licence on 18 August 2006 and will be valid until 31 December 2006. The appointment of Dore as a junket representative by Wynn Resorts (Macau) S.A. on 28 August 2006 evidences Dore’s and Mr. Scolari’s credentials. So far as Dore is aware, Dore was one of the only three licensed junket representatives appointed by Wynn Macau as at the Latest Practicable Date. The Directors believe that the chance of non-renewal of Dore’s gaming promoter licence after 31 December 2006 is highly unlikely because:
(1) Dore has duly submitted the application for the renewal of the gaming promoter licence within the prescribed time limit;
(2) the Macau Government granted a gaming promoter licence to Dore only a few months ago on 18 August 2006 after considering its first application and the Directors are not aware of any change of circumstances of Dore since the date of grant of the gaming promoter licence to Dore by the Macau Government that would affect its application;
(3) the Directors are not aware of any breach of relevant rules and regulation by Dore; and
(4) Dore has the support from Wynn Resorts (Macau) S.A., the operator of Wynn Macau, who, by reputation, is very stringent in choosing gaming promoters to enter into junket business relationship and has to ensure that the gaming promoters have sound financial background and have no linkage to organized crime before co-operation with them, as evidenced by its making of a declaration accompanying with the renewal application of Dore, indicating its intention to work with Dore in the subsequent year.
– 25 – LETTER FROM THE BOARD
Similarly, Venetian Macau Limited, the operator of Sands Macao, must also conduct extensive checks on the junkets to ensure that they have sound financial background and have no linkage to organized crime. Mr. Phua and Mr. Tang have expressed the change of ownership of Sat Ieng to Venetian Macau Limited and Venetian Macau Limited has no objection to the change. This evidences Mr. Tang’s credentials. The application of the change of ownership of Sat Ieng has been made to the Macau Government. As part of the approval in respect of transfer of the entire issued share capital/quota in Sat Ieng from Mr. Phua to Mr. Tang, Mr. Tang will be subject to the probity requirement prior to the granting of the approval by the Macau Government. As advised by Mr. Tang’s Macau lawyer, the Macau Government has not yet granted approval for the transfer of the entire issued share capital/quota in Sat Ieng from Mr. Phua to Mr. Tang. Also, Sat Ieng is one of the first batch of junkets which obtained gaming promoter licences from the Macau Government in 2005 and its gaming promoter licence has been renewed by the Macau Government on 12 December 2005, which is valid until 31 December 2006. The Directors believe that the application will be approved by the Macau Government within a short period of time and the chance of non-renewal of Sat Ieng’s gaming promoter licence on 31 December 2006 is highly unlikely because:
(1) Sat Ieng has duly submitted the application for the renewal of the gaming promoter licence within the prescribed time limit;
(2) Sat Ieng is one of the first batch of junkets who obtained gaming promoter licences from the Macau Government in 2005 and its gaming promoter licence has been renewed by the Macau Government on 12 December 2005. Apart from the proposed change of ownership of Sat Ieng from Mr. Phua to Mr. Tang, the Directors are not aware of any change of circumstance of Sat Ieng since the last renewal;
(3) although there is a proposed change of ownership of Sat Ieng from Mr. Phua to Mr. Tang, there is no objection from Venetian Macau Limited, the operator of Sands Macao, which must conduct extensive checks on the junkets to ensure that they have sound financial background and have no linkage to organized crime, of such proposed change;
(4) Sat Ieng has the support from Venetian Macau Limited as evidenced by its making of a declaration accompanying the renewal application of Sat Ieng, indicating its intention to work with Sat Ieng in the subsequent year; and
(5) the Directors are not aware of any breach of relevant rules and regulation by Sat Ieng.
The application procedures for the renewal of the gaming promoter licences of Dore and Sat Ieng for the year of 2007 finished on 30 September 2006. The Macau Government will publish a list of the licensed gaming promoters on 1 January in the following year. The Company will issue an announcement in relation to the result of the renewal application.
– 26 – LETTER FROM THE BOARD
(5) Profit Guarantees
In any event, the Group will receive not less than HK$196 million for the first two years as Mr. Tang and Mr. Scolari have provided the Profit Guarantees of not less than HK$400 million in aggregate to Worth Perfect for the relevant periods and guaranteed to pay any shortfall when the Profit Guarantees cannot be achieved. As the Group is entitled to 49% of the Profits through its 49% equity interest in Worth Perfect, it will receive not less than HK$196 million for the first two years in any event.
After balancing the risks as stated in the section headed “Risk Factors of the Junket Business” with the benefits of the Acquisition, including the Group’s perpetual rights to the Profits, no share of loss by the Group and the diversified sources of the Profits under the Profit Agreements, the Directors consider that the consideration is fair and reasonable and the Acquisition is in the interest of the Company and the Shareholders as a whole.
The Board still considers that the New Target Acquisition Agreement is fair and reasonable following the change of ownership of Sat Ieng because:
(a) Mr. Tang has over 15 years of experience in Asian gaming, including working as an oversea promoter for various casinos’ VIP lounges in Macau and casinos on a number of cruise liners. He has been one of the major oversea promoters of Sat Ieng since February 2005. In addition, Venetian Macau Limited has no objection to the change of shareholding in Sat Ieng. Based on the above, the Directors believe that Mr. Tang has the ability to bring in sufficient customers for generating Rolling Turnover at Sands Macao’s Paiza Club gaming room operated by Sat Ieng;
(b) according to the representation of Mr. Tang, he has already obtained the support from the other agents and sub-agents of Sat Ieng to continue to refer customers to Sands Macao’s Paiza Club gaming room operated by Sat Ieng; and
(c) there is an extra contribution to the Profits from Dore which is one of only three licensed junket representatives appointed by the Wynn Macau, a US casino operator who has a reputation of adopting a very stringent policy in short-listing/appointing junket representatives and having appointed the smallest numbers of junket representatives amongst the concessionaires. Also, the Directors believe that under the prevailing competitive environment in gaming industry in Macau, Wynn Macau is very selective in choosing junket representatives which must demonstrate their abilities to bring in customers and be of good standing in order not to risk its business in such competitive environment. Therefore, Dore, having been appointed by Wynn Macau, is expected to be of high calibre and to have the ability to generate sufficient Rolling Turnover to Wynn Macau’s satisfaction.
As such, the Directors (including the independent non-executive Directors) consider the consideration for the Acquisition to be fair and reasonable. Please refer to the paragraph headed “Reasons for the Acquisition” for further details of the reasons for the Acquisition.
– 27 – LETTER FROM THE BOARD
Conditions precedent
Completion is subject to the following conditions having been fulfilled or waived (as the case may be):
(a) Team Jade being in its reasonable discretion satisfied with the results of the due diligence investigation in respect of the Target Group including but not limited to the affairs, business, assets, results, legal and financing structure of the Target Group (in particular, the Profit Agreements);
(b) Team Jade having received to its reasonable satisfaction a Macanese legal opinion on the legality and validity of the Profit Agreements and the transactions contemplated thereunder;
(c) no event having occurred since the date of the New Target Acquisition Agreement to Completion, the consequence of which is to materially and adversely affect the financial position, business or property, results of operations or business prospects of the Target Group and such material adverse effect shall not have been caused;
(d) the warranties given by Rich Game in the New Target Acquisition Agreement remaining true and accurate and not misleading at Completion as if repeated at Completion and at all times between the date of the New Target Acquisition Agreement and Completion;
(e) the passing by the Independent Shareholders at a SGM to be convened and held of an ordinary resolution to approve the New Target Acquisition Agreement and the transactions contemplated thereunder, including but not limited to the issue of the Convertible Bond and the First Promissory Notes to Rich Game;
(f) the Listing Committee of the Stock Exchange granting listing of and permission to deal in the Conversion Shares;
(g) if necessary, the Bermuda Monetary Authority granting consent to the allotment and issue of the Conversion Shares;
(h) completion of the Sands Profit Agreement in accordance with its terms; and
(i) completion of the Wynn Profit Agreement in accordance with its terms.
Conditions (a) to (d) are waivable by Team Jade under the New Target Acquisition Agreement. Team Jade has no current intention to waive any of the conditions above. Conditions (e) to (i) are incapable of being waived by Team Jade. The Company will issue an announcement and seek Independent Shareholders’ approval if any of the above conditions are to be waived.
As at the Latest Practicable Date, conditions (b) and (i) had been satisfied.
– 28 – LETTER FROM THE BOARD
Completion
Completion shall take place at 11:00 a.m. on the second Business Day after the last of the conditions of the New Target Acquisition Agreement having been fulfilled or waived or at such time as may be agreed between Rich Game and Team Jade.
The Company will issue the Convertible Bond and the First Promissory Notes to Rich Game upon Completion. Upon Completion, the Target Company will be accounted for as a wholly-owned subsidiary of the Company and its financial results will be consolidated into the Group’s financial statements whereas Worth Perfect will become an associated company of the Company which will be accounted for using equity method in the consolidated financial statements of the Group.
The issue of the Conversion Shares upon the exercise in full of the conversion rights attaching to the Convertible Bond will not result in a change of control of the Company.
Long-stop date
The New Target Acquisition Agreement provides that should the satisfaction of all the above conditions, if not waived by Team Jade, not occur on or before 31 December 2006 or such other date as the parties thereto may agree, the New Target Acquisition Agreement shall terminate.
UNDERTAKINGS
On 28 August 2006, Mr. Tang and Mr. Scolari have separately given their written undertakings that they will not, within ten years from the signing of the Sands Profit Agreement or the Wynn Profit Agreement (as the case may be), directly or indirectly transfer or otherwise dispose of or create any encumbrance or other rights in respect of any of the shares or directly or indirectly transfer or otherwise dispose of or create any encumbrance or other rights over any shares or quota in any company controlled by them which is for the time being the beneficial owner of any of the shares/quota of Sat Ieng or Dore (as the case may be) unless with the prior written consent given by Team Jade.
DIRECTORS’ VIEW ON THE JUNKET REPRESENTATIVE AGREEMENTS AND THE DUE DILIGENCE WORK DONE BY THE DIRECTORS
As the Junket Representative Agreements are confidential, the Directors had not reviewed the Junket Representative Agreements. However, prior to and after the signing of the New Target Acquisition Agreement, the Directors had conducted the following work:
(1) In respect of Sands Junket Representative Agreement,
(a) the Directors including the independent non-executive Directors had visited Sands Macao on several occasions to observe the business operations of Sat Ieng, i.e. business level in terms of customers head count and operation flows and procedures, and confirmed that the employees of Sat Ieng are working in the relevant gaming room in Sands Macao;
– 29 – LETTER FROM THE BOARD
(b) the Directors have reviewed the original Junket Representative Settlement Forms issued by Sands Macao to Sat Ieng, evidencing the Rolling Turnover generated by them and their commission;
(c) the Directors (including the independent non-executive Directors) had reviewed the Licenca De Promotor De Jogo Pessoa Colectiva (法人的博 彩中介人准照), the licence granted by DICJ (the relevant governmental department in Macau responsible for the issuance of gaming promoter licences) to Sat Ieng to act as a gaming promoter. It shows that the company for which Sat Ieng can work as gaming promoter is Venetian Macau Limited, that is, the company operating Sands Macao; and
(d) the Directors (including the independent non-executive Directors) had also reviewed the legal opinion of Macau lawyers instructed by the solicitors acting for Sat Ieng for the transaction, concerning the legality and validity of the Original Profit Agreement and the transactions contemplated thereunder. It is stated in the Macau legal opinion prepared by the Macau lawyers instructed by Sat Ieng that the Macau lawyers had examined the Sands Junket Representative Agreement between Venetian Macau Limited and Sat Ieng dated 27 January 2006 pursuant to which Sat Ieng has agreed to act as a gaming promoter for Sands Macao, inter alia, directing gaming patrons to Sands Macao, for the preparation of the legal opinion. The opinion from the Macau lawyers further corroborates the belief of the Directors (including the independent non- executive Directors) that the Sands Junket Representative Agreement does, in fact, exist.
(2) In respect of Wynn Junket Representative Agreement,
(a) the Directors (including the independent non-executive Directors) had visited Wynn Macau on several occasions to observe the business operations of Dore, i.e. business level in terms of customers head count and operation flows and procedures;
(b) the Directors (including the independent non-executive Directors) had reviewed the Licenca De Promotor De Jogo Pessoa Colectiva (法人的博 彩中介人准照), the licence granted by DICJ (the relevant governmental department in Macau for the issuance of gaming promoter licences) to Dore to act as a gaming promoter. It shows that the company for which Dore can work as a gaming promoter is Wynn Resorts (Macau) S.A., that is the company operating Wynn Macau;
– 30 – LETTER FROM THE BOARD
(c) the chairman of the Company, Mr. Lum Chor Wah, Richard, had met and interviewed Mr. Tang and Mr. Scolari prior to the signing of the New Target Acquisition Agreement; and
(d) the Directors (including the independent non-executive Directors) had also reviewed the legal opinion of Macau lawyers instructed by the solicitors acting for Dore for the transaction, concerning the legality and validity of the Wynn Profit Agreement and the transactions contemplated thereunder. It is stated in the legal opinion prepared by the Macau lawyers instructed by Dore that the Macau lawyers had examined the Wynn Junket Representative Agreement between Wynn Resorts (Macau) S.A. and Dore dated 28 August 2006. The opinion from the Macau lawyers further corroborates the belief of the Directors (including the independent non-executive Directors) that the Wynn Junket Representative Agreement does, in fact, exist.
The Directors consider that all of these are solid support that the Junket Representative Agreements actually exist.
Although the Directors had not reviewed the Junket Representative Agreements and do not know its exact terms, the Directors had discharged their duties including their fiduciary duties under Rule 3.08 of the Listing Rules for the following reasons:
(1) with the restraint of the confidential provision of the Junket Representative Agreements, the Directors had tried their best to search for other sources of information to verify the existence of the same. The Directors including the independent non-executive Directors had actually visited Sands Macao on several occasions to observe the business operations of Sat Ieng, i.e. business level in terms of customers head count and operation flows and procedures, and confirmed that the employees of Sat Ieng are working in the relevant gaming room in Sands Macao. Similarly, the Directors (including non-executive Directors) had visited Wynn Macau on several occasions to observe the business operations of Dore, i.e. business level in terms of customers head count and operation flows and procedures. Also, they had reviewed the original Junket Representative Settlement Forms issued by Sands Macao to Sat Ieng, evidencing the Rolling Turnover generated by them and/or their customers and the junket representative’s commission. Further, the Directors (including independent non-executive Directors) had reviewed the Licenca De Promotor De Jogo Pessoa Colectiva (法人的博彩中介人准照) granted to Sat Ieng and Dore. They show that the company for which Sat Ieng and Dore can work as gaming promoters are Venetian Macau Limited, that is, the company operating Sands Macao and Wynn Resorts (Macau) S.A., the company operating Wynn Macau respectively. The Directors consider that all of these are solid support that the Junket Representative Agreements actually exist. Moreover, the Directors (including independent non-executive Directors) have also reviewed the Macau legal opinion in which a professional, the Macau lawyers, confirmed that they had
– 31 – LETTER FROM THE BOARD
examined the Junket Representative Agreements. This shows that the Directors had flexibly adopted an alternative approach to verify the existence of the Junket Representative Agreements and had reasonable grounds to believe that the Junket Representative Agreements actually exist.
(2) Prior to the signing of the New Target Acquisition Agreement, the Directors had conducted extensive research on the junket business in Macau, including reviewing reports prepared by well-known investment banks in relation to Macau gaming business and making enquiries with the practitioners in the gaming industry. The Directors had also conducted research and background checking on Sat Ieng, Dore, Mr. Tang and Mr. Scolari. These include their respective histories, the current level of business, the existing business relationship between Sands Macao and Sat Ieng and that between Wynn Macau and Dore, their status in the gaming industry, words of mouth, the integrity of Mr. Tang and Mr. Scolari. Through such extensive research, the Directors had thorough understanding of the arrangement between the gaming promoters and the casino operators and of the background of Sat Ieng, Dore, Mr. Tang and Mr. Scolari. The Directors have also conducted the following due diligence work:
(a) following closely with the progress of the renewal of the gaming promoter licences of Sat Ieng and Dore;
(b) reviewing regularly the data as to the Rolling Turnover generated by Sat Ieng and Dore respectively;
(c) gathering information from the market in respect of Sat Ieng and Dore to see if there is any unfavourable comment about them;
(d) visiting Sands Macao and Wynn Macau on surprise basis to observe the business operations of Sat Ieng and Dore, i.e. business level in terms of customers head count and operation flows and procedures;
(e) observing the settlement of commission for July 2006 by Sands Macao to Sat Ieng; and
(f) observing the settlement of commission for September 2006 by Wynn Macau to Dore.
(3) the Directors understand from the research result that the term and renewal of the Junket Representative Agreements may tie with the term of the gaming promoter licences of Sat Ieng and Dore, which are valid for one year and are subject to renewal. However, the Directors, in making the decision, do not just focus on one or two factors. The Directors, when making the decision, have to and have considered all the circumstances and information, in particular the risk involved and evaluate the chance of the incurrence of such risk, the impact of such risk to the Company, what can be done to minimize the incurrence of such risk, and whether such risk is justified, the benefits of
– 32 – LETTER FROM THE BOARD
the Acquisition and viewed the transaction as a whole. Given the Rolling Turnover generated by Sat Ieng at Sands Macao for the 18 months ended 31 August 2006 amounted to approximately HK$50.46 billion and the Rolling Turnover generated by Dore at Wynn Macau for the period from 5 September 2006 to 31 October 2006 amounted to approximately HK$8.72 billion, the Directors confide that:
(a) Sat Ieng and Dore both have well-established customers base;
(b) Sat Ieng and Dore are operating in a prudent manner;
(c) Mr. Tang and Mr. Scolari, together with their operating teams, have the necessary connection and operating experience in running the junket business;
(d) Sat Ieng accounts for a substantial portion of the Rolling Turnover of Sands Macao which is in line with the quarterly and annual results announcements made by Las Vegas Sands Corp; and
(e) the chance of getting replacements of Sat Ieng or Dore with compatible size and relationship in the near future is not high.
Hence, the Directors believe that there should be no material difficulties for the renewal of the Junket Representative Agreements upon expiry.
(4) Moreover, the Directors estimate that the payback period of the Acquisition will be five and a half years, which they consider to be reasonable and justifiable, not to mention the potential growth of business of Sat Ieng and Dore when they operate as gaming promoters in other casinos in the future.
(5) The Directors had also considered that the Rolling Turnover generated by Sat Ieng and Dore pursuant to the respective Junket Representative Agreements are only parts of the sources of the Profits, there are still other sources, namely, the Rolling Turnover generated by Sat Ieng and Dore from such other VIP rooms whereby Sat Ieng and Dore respectively are a duly appointed junket representative and such other VIP gaming rooms whereby Sat Ieng and Dore can procure the sale/assignment of percentage of its Rolling Turnover generated by the duly appointed junket representatives. This secures the Group with the Profits in case the renewal fails, the risk of which the Directors consider to be minimal.
(6) Moreover, in entering into the New Target Acquisition Agreement, the Directors ensured that the Completion is conditional upon the result of the due diligence investigation in respect of the Target Group, which indeed includes the investigation into the Profits, is to the satisfaction of Worth Perfect. The Directors cautiously performed the due diligence investigation, including but not limited to meeting with the representatives of Sands Macao and Wynn
– 33 – LETTER FROM THE BOARD
Macau through the arrangement of Sat Ieng and Dore respectively to further understand the arrangement between Sands Macao and Sat Ieng and the arrangement between Wynn Macau and Dore. In respect of the investigation into the Profits and Wynn Macau, the Directors had appointed HLB to verify the figures shown in the monthly Junket Representative Settlement Forms issued by Sands Macao to Sat Ieng and Junket Promoter Settlement Forms issued by Wynn Macau to Dore. Also, the Directors had met with the representative of Sands Macao and reviewed the results announcements of Las Vegas Sands Corp. It is understood that:
(a) Outlook and prospects on the gaming industry
Although there is a drop in net winning per table in respect of the high rollers, the impact on Sands Macao is not much. While there may be some consolidation of the casino operation among the smaller hotels, Sands Macao, in general, is still optimistic about the future of the economy in Macau, especially for those casinos operating in Las Vegas style which suits the higher end customers, equipped with better betting atmosphere and more value-added facilities and operating on a bigger magnitude. In fact, by duplicating the world’s most successful resort and convention destination, i.e. Las Vegas, it is expected that the convention and tradeshows market in Macau will boom substantially. Also it is believed that by operating in Las Vegas Style, Sands Macao can benefit from the characteristics of the Chinese, that is, “love to travel”, “love to shop”, “love to own real estate” and “love to gamble”. Being the first operating in Las Vegas Style, Sands Macao will have the first mover advantage and will continue to have superior role in the gaming industry in Macau.
(b) The potential for further development of Sands Macao in the future
Sands Macao is positive about the future as it has already obtained a strong foothold in the mass market. It has “rescheduled” VIPs due to limited suites availability. To cater for the increasing number of high rollers, Sands Macao is (i) constructing additional suites to house the VIPs, (ii) adding additional VIP gaming rooms to entertain the anticipated increasing number of customers, and (iii) upgrading the existing facilities available so as to keep a “new” feeling for the VIP players.
Sands Macao has opened in May 2006 an expansion to its Sands Macao’s Paiza Club, which has increased VIP gaming capacity and is on track for the expansion and opening of the remainder of its expansion in August 2007. When the expansion completes, Sands Macao will have approximately 700 tables, 1,200 slot machines and 290 rooms and suites.
– 34 – LETTER FROM THE BOARD
At the same time, it has tried to quicken the pace of development of Venetian Macao so as to:
(i) provide additional varieties and facilities, i.e. 3,000 hotel rooms available (see point (f) below) to travellers; and
(ii) tap the tourists/players from two ends, i.e. main island Macau and Cotai Strip.
(c) The general criteria for the renewal of the junket representative agreements with its junket representatives
Generally, in considering whether to renew the junket representative agreements with its junket representatives, Sands Macao will consider (i) whether the junket representatives have complied with the requirements imposed by the Macau authorities; (ii) the level of rolling turnover generated by the junket representatives; and (iii) whether the junket representatives have obtained renewal of the gaming promoter licences from the Macau Government.
(d) Sands Macao’s relationship with Sat Ieng and in particular whether the performance of Sat Ieng so far is found to be satisfactory by Sands Macao
Sands Macao finds the performance of Sat Ieng satisfactory as Sat Ieng beats its expected turnover and its customers base is good and broad.
(e) Its policy, in general, in relation to junkets in Sands Macao
Sands Macao will keep locating “promising” junkets to replace those “dormant” ones. Sands Macao may develop its own high roller market when they identify high rollers in the mass market. These customers will then be invited by Sands Macao to its VIP gaming rooms to gamble. However, Sands Macao will not actively solicit those customers by themselves to avoid upsetting the junket representatives.
(f) The development of Venetian Macau Limited in Macau
Construction of Venetian Macao remains on track for the opening in the summer of 2007 and compared with its Las Vegas counterpart, it benefits from lower costs and availability of resources due to the readily available raw materials and lower labor costs as reflected in the purchase price of raw materials. Las Vegas Sands Corp. has reached agreements with more than 150 retailers for approximately 500,000 square feet of retail space on Cotai Strip, and continue to make good progress in negotiating of the definitive agreements with additional retailers.
It has also secured a number of commitments from the largest and most important tradeshow organizers in the world with a number of tradeshow organizers expressing their interests in using Venetian Macao convention and meeting facilities.
– 35 – LETTER FROM THE BOARD
It has also reached an agreement with Cirque du Soleil in providing the latter a permanent home, its first in Asia, in Venetian Macao’s 1,800 seat Cirque du Soleil theatre.
(g) General remark
Las Vegas Sands Corp. will continue making progress in Macau at all levels, i.e. at both Sands Macao and Venetian Macao. It is particularly pleased with the progress in developing “Asia’s Las Vegas” on the Cotai Strip. In fact, it has reached agreements with a prestigious group of hotel operators that will participate with Las Vegas Sands Corp. in developing the area. These include, The Four Seasons Hotels and Resorts, Starwood Hotels and Resorts Worldwide which will operate both a Sheraton and a St. Regis Hotel, Shangri-La Hotels and Resorts, which will operate both a Shangri-La and a Traders Hotel and Hilton Hotels, which will operate both a Hilton and a Conrad Hotel. It is negotiating the definitive agreements with these leading operators to manage hotels and related vacation suites on Cotai Strip.
Moreover, Las Vegas Sands Corp. remains enthusiastic about its strategy in developing the leisure and convention destination resort on Hengqin Island to complement the entertainment developments of Cotai Strip which is just a few hundred yards away. It has advanced its master plan design and is looking forward to bringing additional travel and tourism to the region in long run.
As the Directors had reasonable ground to believe the existence of the Junket Representative Agreements, had conducted various researches to understand the arrangement between junket operator and casino operator, which they found to be acceptable in view of the benefits of the Acquisition which will be brought to the Group and had thoroughly considered the Acquisition as a whole (including the risk factors involved), the Directors had acted in the best interest of the Company and therefore have discharged their duties, including the fiduciary duties under Rule 3.08 of the Listing Rules.
In respect of the renewal of gaming promoter licence of Sat Ieng, the Directors are confident that it can be renewed upon its expiry on 31 December 2006 based on the following grounds derived from the due diligence work done by the Directors:
1. through the background check of Mr. Tang, the Directors found that Mr. Tang is experienced in the junket business as he has been and is still the oversea gaming promoter of Sat Ieng and has over 15 years of experience in Asian gaming, including working as an oversea promoter for various casinos’ VIP lounges in Macau and casinos on board a number of cruise liners;
2. Sands Macao has endorsed Sat Ieng as its gaming promoter at Sands Macao when Sands Macao was notified of the proposed transfer of the entire issued share capital/quota of Sat Ieng from Mr. Phua to Mr. Tang;
– 36 – LETTER FROM THE BOARD
3. the representatives of Sands Macao expressed that they are satisfied with the performance of Sat Ieng; and
4. as informed by the management of Sat Ieng, they have submitted the application to the Macau Government to renew its gaming promoter licence before the stipulated deadline, that is, 30 September 2006.
In respect of the renewal of gaming promoter licence of Dore, the Directors are confident that it can be renewed upon its expiry on 31 December 2006 based on the following grounds deriving from the due diligence work done by the Directors:
1. through the background check of Mr. Scolari, the Directors found that Mr. Scolari is experienced in the junket business as he has over three years of experience in the gaming industry, including working as an oversea gaming promoter for two casinos’ VIP lounges in Macau and organizing leisure tours for Asian high rollers to Europe and Asian gaming tours to Macau; and
2. the trouble free experience of Dore when it applied for the gaming promoter license for acting as gaming promoter in Wynn Macau from the Macau government;
3. Dore is appointed as one of the only three licensed gaming promoters by Wynn Macau which is, by reputation, very stringent in choosing its gaming promoter and is the largest gaming promoter in Wynn Macau who operates 15 gaming tables in VIP gaming rooms; and
4. as informed by the management of Dore, they have submitted the application to the Macau Government to renew its gaming promoter licence before the stipulated deadline, that is, 30 September 2006.
INDUSTRY OVERVIEW OVER THE GAMING BUSINESS AND JUNKET BUSINESS IN MACAU
Macau Gaming Business
History and Development
Macau is the only city in China where gambling is allowed. Gaming has been lawful in Macau since 1937. In 2002, the Macau Government decided to open up the 40-year gaming monopoly held by STDM, a company controlled by Dr. Stanley Ho, after the expiry of its exclusive concession. In addition to a new concession granted to Sociedade de Jogos de Macau, S.A., a subsidiary of STDM for 18 years, two new 20-year concessions were granted to Wynn Resort (Macau), S.A. and the Galaxy/Venetian consortium.
– 37 – LETTER FROM THE BOARD
According to DICJ, as of September 2006, there were a total of 22 casinos in Macau, with 17 located in the Macau Peninsula and five casinos in the Taipa Island.
Market demand
The gaming industry is now a vital industry of Macau. According to DICJ, in 2003, the gaming tax generated 74% of Macau’s total fiscal revenue. Recently, Macau has been ahead of Las Vegas in the USA and has become the largest gaming city in the world. Based on the gaming statistics 2006 prepared by DICJ, the revenue generated by the gaming activities is growing steadily at an average growth rate of approximately 23% each year for the period between 2001 and 2005. The total revenue from the gaming activities had increased from MOP19,541 million in 2001 to MOP45,800 million in 2005 whereas the gaming revenue (from games of fortune) had increased from MOP18,109 million in 2001 to MOP44,725 million. The revenue from the gaming activities for the first three quarters of 2006 amounted to MOP39,252 million.
One of the factors contributing to the strong growth should be the liberalization of the industry and entry of new players. The new players has opened more new casinos, which drive more visitors to Macau and hence generate more gaming revenue.
Another reasons for the strong growth is the increase of total number of visitors arrived in Macau, especially the increase of the PRC visitors. When there is increase in number of visitors in Macau, especially increase in the number of PRC visitors, there will be greater demand for casinos as gaming is a popular leisure activity and Chinese have preference in gaming.
According to the Macau Statistics and Census Service, the number of visitors to Macau has increased significantly from approximately 9.2 million in 2000 to 18.7 million in 2005. During the same period, visitors from the PRC increased from approximately 2.3 million in 2000 to approximately 10.5 million in 2005.
The reason for the great increase of PRC visitors is mainly due to the relaxation of rules governing individual travelers and remittance of cash from the PRC, and the continuing strength of the Chinese economy. The easing of travel restrictions in the PRC makes travel to Macau easier and allows more Chinese middle class travel to Macau.
Different game types of games of fortunes
According to the statistics 2006 of DICJ, there are different game types of games of fortune that generate revenue in Macau.
By far, Baccarat is the most popular game type. According to the statistics 2006 of DICJ, the gross revenue come from VIP Baccarat, Baccarat and Mini Baccarat for the first three quarters of 2006 are MOP22,009 million, MOP10,698 million and MOP346 million respectively. Other popular game types include Cussec, Black Jack, Slot Machines and Fish-Prawn-Crab.
– 38 – LETTER FROM THE BOARD
Number of gaming tables and casinos in Macau
According to the statistics 2006 prepared by DICJ, there are 2,440 gaming tables in the third quarter of 2006 which shows a significant increase from 339 gaming tables in 2002.
Also, there is significant increase in the number of casinos in Macau. According to the statistics 2006 prepared by DICJ, there is a total number of 22 casinos in Macau in the third quarter of 2006 which is a double of 11 casinos in Macau in 2002.
Junket business in Macau
Market
The gaming promoters work with the casino operators in the high roller or VIP market. Many of the high rollers or VIP customers of the casinos are sourced by a network of junket operators who work with it.
Operation of gaming promotion business
Generally, the work of the gaming promoters in Macau includes marketing and organizing business trips for enticing customers to participate in the gaming activities provided by the casino operator at VIP gaming rooms and providing related services, including food and beverage services, entertainment, accommodation arrangement and even provide VIP customers with credit.
Licensing system
To become a gaming promoter in Macau, it is necessary for the gaming promoter to obtain a licence from DICJ. The licence granted to the gaming promoter is valid for one year and is renewable.
The licensing process is initiated with an application request submitted to DICJ including several documents, namely a filled form containing a questionnaire to ascertain the probity of the applicant and a declaration of a concessionaire, duly signed by a legal representative or a director with capacity to bind the company, indicating the intention of the concessionaire to work with such gaming promoter. All gaming promoters, corporate or individuals, must submit to the probity confirmation procedures and are obliged to disclose all information necessary and cooperate with the Macau government. The licence can only be granted when the applicant is found to comply with the probity requirements. If the applicant is a corporate gaming operator, the probity requirements also apply to its shareholders that hold 5% or more of the share capital and its key employees. To consider whether the applicant fulfills the probity requirement, DICJ will consider the information provided by the applicant in the questionnaire, including its corporate, business and financial information, information regarding its key employees and shareholders, judicial litigation and governmental investigation, bankruptcy and insolvency, its previous experience in junket business. The relevant authorities will also consider the information
– 39 – LETTER FROM THE BOARD provided by the corporate applicant’s shareholders that hold 5% or more of the share capital and key employees, including their personal and family background, their financial information and civil proceedings or criminal investigation that they may involve.
In order to renew the licence, the gaming promoter shall submit an application form accompanied by a declaration made by the concessionaire or sub-concessionaire, duly signed by a legal representative or a director with capacity to bind the company, indicating the intention of the concessionaire to work with such gaming promoter in the subsequent year, to DICJ by 30 September of each year.
The gaming promoter, which is a commercial company, its shareholders that hold 5% or more of the issued capital, directors and key employees are subject to a suitability verification process every six years. The purpose of this suitability verification is to ensure that the gaming promoters, their shareholders that hold 5% or more of the share capital, directors and key employees remain suitable/idoneous during a certain period of time. In accordance with the Administrative Regulation no. 6/2002, dated 20 March 2002 (Gaming Promotion Regulation), notwithstanding the periodity mentioned above, DICJ may, at its own discretion, subject the gaming promotion companies, their shareholders that hold 5% or more of the issued capital, directors and key employees, to an extraordinary assessment of suitability process. Furthermore, when the licences are renewed, the Macau Government has the discretionary power to settle any requisites or specific conditions that must be observed and accomplished by any promoter that applies for such renewal.
Unless otherwise agreed by the parties, the gaming promotion activity is not executed in exclusiveness. The gaming promoters may operate with several concessionaires.
TERMS OF THE CONVERTIBLE BOND
The terms of the Convertible Bond have been negotiated on an arm’s length basis and the principal terms of which are summarised below:
Issuer
The Company
Principal amount
HK$134.4 million
Interest
The Convertible Bond will carry interest at the rate of 5% per annum, payable annually in arrears.
– 40 – LETTER FROM THE BOARD
Maturity
A fixed term of ten years from the date of issue of the Convertible Bond. Unless previously redeemed, converted or cancelled in accordance with the Instrument, the Company shall redeem the outstanding principal amount of the Convertible Bond on the maturity date.
Conversion
Provided that the percentage shareholding of the Company’s issued share capital held by the bondholder resulting from each conversion of the Convertible Bond by the bondholder does not exceed the following thresholds in the period specified below:
(1) 6% of the issued share capital of the Company within the third year from the date of issue of the Convertible Bond;
(2) 8% of the issued share capital of the Company within the fourth year from the date of issue of the Convertible Bond;
(3) 10% of the issued share capital of the Company within the fifth year from the date of issue of the Convertible Bond;
(4) 12% of the issued share capital of the Company within the sixth year from the date of issue of the Convertible Bond;
(5) 14% of the issued share capital of the Company within the seventh year from the date of issue of the Convertible Bond;
(6) 16% of the issued share capital of the Company within the eighth year from the date of issue of the Convertible Bond;
(7) 18% of the issued share capital of the Company within the ninth year from the date of issue of the Convertible Bond; and
(8) 20% of the issued share capital of the Company within the tenth year from the date of issue of the Convertible Bond; the bondholder may at any time during the Conversion Period convert the whole or part (in multiples of HK$1 million) of the principal amount of the Convertible Bond into new Shares at the Conversion Price.
Subject to the conditions provided in the Instrument, the Company may at any time during the Conversion Period by at least seven days’ prior notice in writing request the bondholder to convert certain amount of the Convertible Bond as specified therein and the bondholder shall convert such amount of the Convertible Bond registered its name into Shares as so requested by the Company.
– 41 – LETTER FROM THE BOARD
Conversion Price
The Conversion Price is HK$1.00 per Conversion Share subject to adjustments.
The adjustments for Conversion Price include the followings:
(i) an alteration of the nominal amount of each Share by reason of any consolidation or subdivision;
(ii) an issue (other than in lieu of a cash dividend) by the Company of Shares credited as fully paid by way of capitalization of profits or reserves (including any share premium account or capital redemption reserve fund);
(iii) a capital distribution being made by the Company, whether on a reduction of capital or otherwise, to Shareholders (in their capacity as such) or a grant by the Company to Shareholders (in their capacity as such) of rights to acquire for cash assets of the Company or any of its subsidiaries;
(iv) an offer of new Shares for subscription by way of rights, or a grant of options or warrants to subscribe new Shares being made by the Company to Shareholders (in their capacity as such);
(v) an issue wholly for cash being made by the Company of securities convertible into or exchangeable for or carrying rights of subscription for new Shares and the total effective consideration per Share receivable for such securities is less than 80% of the market price on the date of announcement of the terms of the issue of such securities;
(vi) an issue of Shares wholly for cash at a price per Share which is less than 80% of the market price on the date of announcement of the terms of such issue; and
(vii) an issue of Shares for the acquisition of assets at a total effective consideration per Share which is less than 80% of the market price of the date of the announcement of the terms of such issue.
The Company will issue an announcement in respect of any adjustment made to the Conversion Price.
The Conversion Price represents (i) a discount of approximately 39% to the closing price of HK$1.64 per Share as quoted on the Stock Exchange on 28 August 2006, being the date immediately prior to the date of the suspension of trading in the Shares; (ii) a discount of approximately 37.9% to the average of the closing prices of approximately HK$1.61 per Share as quoted on the Stock Exchange for the last five trading days up to and including 28 August 2006, being the date immediately prior to the date of the suspension of trading in the Shares; (iii) a discount of approximately 35.5% to the average of the closing prices
– 42 – LETTER FROM THE BOARD of HK$1.55 per Share as quoted on the Stock Exchange for the last ten trading days up to and including 28 August 2006, being the date immediately prior to the date of the suspension of trading in the Shares; and (iv) a premium of approximately 1,389.6% over the net asset value per Share of HK$0.067 based on the audited consolidated accounts of the Group as at 31 March 2006.
The Conversion Price is arrived at after arm’s length negotiation between the parties and is based on the average of the closing prices of HK$1.50 for the last 30 trading days prior to the suspension and by taking into account the conversion price of the convertible bond under the transactions contemplated under the Target Acquisition Agreement.
The discount of the Conversion Price to the average of closing prices of the Shares for the last 30 trading days, i.e. HK$1.50 is about 33%. The Company has tried to bargain for a different Conversion Price but met with strong objection and was demanded to:
(a) amend the total consideration, including change of payment structure for more convertible bonds to be issued; and/or
(b) change the Profit Guarantees; and/or
(c) uplift the Original Profit retained by Worth Perfect since 16 March 2006 etc.
In view of the urgency in grasping the chance of acquiring the Wynn Profit and the consideration that the amendments of certain terms and/or conditions will trigger the amendments made to other terms and/or conditions, the Board and the vendor finally compromise to stick with the original terms, including the Conversion Price. The decision to stick with the terms of Target Acquisition Agreement is derived at after arm’s length negotiations. As the terms of the New Target Acquisition Agreement basically are the same as those of the Target Acquisition Agreement but the Company in return can be more certain about the outlook and the Profits as a result of the inclusion of Wynn Profit, an additional profit stream derived from another famous US casino operator in Macau, in the deal, the Directors consider that Conversion Price viewing with all other terms in the Acquisition as a whole is fair and reasonable.
Conversion Shares
Assuming there is an immediate exercise in full of the conversion rights attaching to the Convertible Bond in the aggregate principal amount of HK$134.4 million at the Conversion Price by the bondholder, the Company will allot and issue an aggregate of 134.4 million new Shares, which is the maximum number of Shares to be issued, representing approximately (i) 20% of the existing issued share capital of the Company, and (ii) 16.67% of the issued share capital of the Company as enlarged by the exercise in full of the conversion rights attaching to the Convertible Bond. The Conversion Shares will be issued pursuant to the specific mandate to be sought at the SGM.
– 43 – LETTER FROM THE BOARD
Early redemption
The Company may at any time before the maturity date, by serving at least seven days’ prior written notice on the bondholder with the total amount proposed to be redeemed from the bondholder specified therein, redeem the bond (in whole or in part) at par.
Ranking
The Conversion Shares, when allotted and issued, will rank pari passu in all respects with all existing Shares in issue on the date of allotment and issue of such Conversion Shares.
Status of the Convertible Bond
The Convertible Bond constitutes a direct, unconditional, unsubordinated and unsecured obligation of the Company and ranks pari passu without any preference (with the exception as may be provided by applicable legislation) equally with all other present and/or future unsecured and unsubordinated obligations of the Company.
Transferability
The bondholder may only assign or transfer the Convertible Bond to the transferee subject to the consent of the Company and when Mr. Tang and Mr. Scolari makes payment in full of:
(a) the Profits guaranteed under the First Profit Guarantee and, if there is any shortfall between the Profits guaranteed under First Profit Guarantee and the Profits actually received and/or receivable by Worth Perfect during the First Relevant Period, the said shortfall; and
(b) the Profits under the Second Profit Guarantee and, if there is any shortfall between Profits guaranteed under the Second Profit Guarantee and the Profits actually received and/or receivable by Worth Perfect during the Second Relevant Period, the said shortfall.
Notwithstanding that, the bondholder shall be permitted at any time to transfer the Convertible Bond to a transferee who is a wholly-owned subsidiary of the bondholder or a holding company of the bondholder who owns the entire issued share capital of the bondholder provided that the Convertible Bond will be re-transferred to the bondholder immediately upon the transferee ceasing to be a wholly-owned subsidiary of the bondholder or a holding company of the bondholder who owns the entire issued share capital of the bondholder.
– 44 – LETTER FROM THE BOARD
Voting rights
The Convertible Bond does not confer any voting rights at any meetings of the Company.
Cancellation of the Convertible Bond or deduction from the outstanding sum
The Company has right to cancel the Convertible Bond or deduct the shortfall from the outstanding sum under the Convertible Bond if Mr. Tang and Mr. Scolari do not pay the shortfall between the Profit Guarantees and the Profits actually received and/or receivable by Worth Perfect during the relevant periods.
Application for listing
No application will be made by the Company for the listing of the Convertible Bond. Application will be made by the Company to the Listing Committee for the listing of, and permission to deal in, the Conversion Shares.
TERMS OF FIRST PROMISSORY NOTE
The First Promissory Notes in a principal sum of HK$244.6 million is used to settle part of the consideration under the New Target Acquisition Agreement. The First Promissory Notes are divided into First Promissory Note I in a principal sum of HK$61.6 million and First Promissory Note II in a principal sum of HK$183 million. The First Promissory Notes (including the First Promissory Note I and the First Promissory Note II) have been negotiated on an arm’s length basis and the principal terms of which are summarised below:
Terms of the First Promissory Note I
Parties
The Company as an issuer and Rich Game as a payee
Principal amount
HK$61.6 million
Interest
The First Promissory Note I will carry interest at 5% per annum, payable annually in arrears by the Company.
Maturity
A fixed term of ten years from the date of issue of the First Promissory Note I.
– 45 – LETTER FROM THE BOARD
If the Company defaults in repayment on the maturity date of any part of the principal sum, the Company shall pay interest on such overdue sum from the maturity date until payment in full (before and after judgment) at the rate of 10% per annum.
Early repayment
The Company could, at its option, repay the First Promissory Note I in whole or in part in multiples of HK$1 million by giving ten Business Days’ prior written notice to Rich Game, from the date of issue of the First Promissory Note I up to the date immediately prior to the maturity date. There will not be any premium over or discount to the payment obligations under the First Promissory Note I for any early repayment.
Assignment
The First Promissory Note I may, subject to the ten Business Days’ prior written notice to the Company, be transferred or assigned by Rich Game to any person. The Company will issue an announcement and inform the Stock Exchange if the First Promissory Note I is transferred or assigned to the connected persons of the Company.
Return of the First Promissory Note I
If at any time before the maturity date the gaming promoter licence of Sat Ieng or the gaming promoter licence of Dore is cancelled, revoked, terminated or not renewed or amended in a material and adverse manner to Sat Ieng or Dore (as the case may be) by the relevant authorities in Macau, Rich Game shall return the First Promissory Note I to the Company and the Company shall not be obliged to pay any outstanding principal sum under the First Promissory Note I.
Terms of the First Promissory Note II
Parties
The Company as an issuer and Rich Game as a payee
Principal amount
HK$183 million
Interest
The First Promissory Note II will carry interest at 5% per annum, payable annually in arrears by the Company.
Maturity
A fixed term of ten years from the date of issue of the First Promissory Note II.
– 46 – LETTER FROM THE BOARD
If the Company defaults in repayment on the maturity date of any part of the principal sum, the Company shall pay interest on such overdue sum from the maturity date until payment in full (before and after judgment) at the rate of 10% per annum.
Early repayment
The Company could, at its option, repay the First Promissory Note II in whole or in part in multiples of HK$1 million by giving ten Business Days’ prior written notice to Rich Game, from the date of issue of the First Promissory Note II up to the date immediately prior to the maturity date. There will not be any premium over or discount to the payment obligations under the First Promissory Note II for any early repayment.
Assignment
The First Promissory Note II may, subject to the ten Business Days’ prior written notice to the Company, be transferred or assigned by Rich Game to any person. The Company will issue an announcement and inform the Stock Exchange if the First Promissory Note II is transferred or assigned to the connected persons of the Company.
Return of the First Promissory Note II
If at any time before the maturity date the gaming promoter licence of Sat Ieng or the gaming promoter licence of Dore is cancelled, revoked, terminated or not renewed or amended in a material and adverse manner to Sat Ieng or Dore (as the case may be) by the relevant authorities in Macau, Rich Game shall return the First Promissory Note II to the Company and the Company shall not be obliged to pay any outstanding principal sum under the First Promissory Note II.
TERMS OF SECOND PROMISSORY NOTE
The terms of the Second Promissory Note, which is used to settle the loan of HK$160 million granted to the Group by Smart Town for payment of refundable deposit of HK$160 made by Team Jade to Rich Game under the New Target Acquisition Agreement, have been negotiated on an arm’s length basis and the principal terms of which are summarised below:
Parties
The Company as an issuer and Smart Town as a payee
Principal amount
HK$160 million
Interest
The Second Promissory Note will not carry any interest.
– 47 – LETTER FROM THE BOARD
Maturity
A fixed term of ten years from the date of issue of the Second Promissory Note.
However, the principal sum (whether in whole or in part) under the Second Promissory Note is repayable only after the principal sum under the First Promissory Notes is fully paid by the Company.
Except that the principal sum under the Second Promissory Note is not repayable on the maturity date due to the fact that the First Promissory Notes have not been fully settled by the Company, if the Company defaults in repayment on the maturity date of any part of the principal sum, the Company shall pay interest on such overdue sum from the maturity date until payment in full (before and after judgment) at the rate of 10% per annum.
Early repayment
Subject to the full repayment of the First Promissory Notes by the Company, the Company could, at its option, repay the Second Promissory Note in whole or in part in multiples of HK$1 million by giving ten Business Days’ prior written notice to Smart Town, from the date of issue of the Second Promissory Note up to the date immediately prior to the maturity date. There will not be any premium over or discount to the payment obligations under the Second Promissory Note for any early repayment.
Assignment
The Second Promissory Note may, subject to the ten Business Days’ prior written notice to the Company, be transferred or assigned by Smart Town to any person. The Company will issue an announcement and inform the Stock Exchange if the Second Promissory Note is transferred or assigned to the connected persons of the Company.
PAYMENT SCHEDULE OF THE FIRST PROMISSORY NOTES AND SECOND PROMISSORY NOTE
The Company does not have any current intention to repay the First Promissory Notes and Second Promissory Note.
– 48 – LETTER FROM THE BOARD
CHANGES IN SHAREHOLDING STRUCTURE
The following table sets out the shareholding structure of the Company (1) before Completion; (2) immediately after Completion and after placing of the Placing Shares by Smart Town but before the conversion of Convertible Bond; and (3) after placing of the Placing Shares and immediately after issuance of Conversion Shares (assuming full conversion of the Convertible Bond):
Immediately after After placing of the Placing Completion and after placing Shares and immediately of the Placing Shares by after issuance of Before Completion and Smart Town but Conversion Shares before placing of the Placing before the conversion (assuming full conversion Shares by Smart Town of Convertible Bond of the Convertible Bond) No. of Approximate No. of Approximate No. of Approximate Shares % Shares % Shares %
Smart Town (Note 1) 369,600,000 55.00 206,880,000 30.79 206,880,000 25.65
Pan-Star Nominees 134,400,000 20.00 134,400,000 20.00 134,400,000 16.67 Limited (Note 2)
Rich Game 0 0.00 0 0.00 134,400,000 16.67
Public
Placees (Note 3) 0 0.00 162,720,000 24.21 162,720,000 20.18
Existing public Shareholders 168,000,000 25.00 168,000,000 25.00 168,000,000 20.83
Total: 672,000,000 100.00 672,000,000 100.00 806,400,000 100.00
Notes:
1. Smart Town is 50% beneficially owned by Mr. Yeung Tony Ming Kwong and Mr. Liu Ching Hua, respectively. Smart Town became a Shareholder on 30 March 2004.
2. Pan-Star Nominees Limited is 40%, 30% and 30% beneficially owned by Mr. Wei Ming, Mr. Tang Hin Keung, Alfred and Mr. Pun Yuen Sang, respectively. Pan-Star Nominees Limited had been the Shareholder since February 2002, which is before the Shares listed on the Stock Exchange in July 2002.
3. All of the Placees are Independent Third Parties.
– 49 – LETTER FROM THE BOARD
INFORMATION OF THE TARGET GROUP
Information of the Target Company
The Target Company was incorporated on 3 January 2006 and is an investment holding company.
The main asset of the Target Company is its 49% equity interest in Worth Perfect.
According to the audited accounts of the Target Company since its incorporation up to 30 September 2006, the Target Company recorded an audited profit before and after taxation and minority interests of approximately HK$32.48 million and the total assets of the Target Company as at 30 September 2006 was approximately HK$32.49 million.
Information of Worth Perfect
The Target Company owns 49% of the equity interest in Worth Perfect, a company incorporated in the British Virgin Islands on 3 January 2006. The remaining 51% equity interest of which is owned by Richsense, a wholly-owned subsidiary of Rich Game.
According to the audited accounts of Worth Perfect since its incorporation up to 30 September 2006, Worth Perfect recorded an audited profit before and after taxation and minority interests of approximately HK$66.30 million and the total assets of Worth Perfect as at 30 September 2006 was approximately HK$66.31 million.
Other than the Profit Agreements, Worth Perfect does not have any assets or liabilities as at the Latest Practicable Date.
The board of directors of Worth Perfect will have two directors. The Group, through the Target Company, and Richsense will each appoint one director to Worth Perfect. The Group will not have control over the management of Worth Perfect as it only owns 49% equity interests in Worth Perfect. As a passive investor, the Group will not engage in the operation of the junket business after completion of the Acquisition. However, the Company will request Sat Ieng and Dore from time to time to provide information concerning their operation of the junket business, including evidence concerning the actual Rolling Turnover generated by Sat Ieng and Dore at Sands Macao and Wynn Macau respectively.
On 13 March 2006, Worth Perfect as a purchaser entered into the Original Profit Agreement with Sat Ieng as a vendor and Mr. Phua as a guarantor relating to the sale and purchase of 100% interest in the Original Profit. The Original Profit Agreement was completed on 16 March 2006. However, due to the change of circumstances, Worth Perfect entered into the Deed of Termination on 28 August 2006 to terminate the Original Profit Agreement. As a result, the assignment of the Original Profit to Worth Perfect commenced on 16 March 2006 and ceased on 28 August 2006.
On 28 August 2006, Worth Perfect as a purchaser entered into (1) the Sands Profit Agreement with Global as a vendor and Mr. Tang, the ultimate beneficial owner of Global, as a guarantor; and (2) the Wynn Profit Agreement with Smart as a vendor and Mr. Scolari, the ultimate beneficial owner of Dore and Smart, as a guarantor. The major terms of the Profit Agreements are set out as follows:
– 50 – LETTER FROM THE BOARD
Sands Profit Agreement
The Sands Profit Agreement was entered into among Worth Perfect as a purchaser, Global as a vendor and Mr. Tang as a guarantor on 28 August 2006, pursuant to which Global has agreed to sell, as beneficial owner, and/or assign and Mr. Tang has agreed to procure Global to sell and/or assign to Worth Perfect absolutely Global’s right, title and interest and benefits in and to 100% of the Sands Profit at a consideration of HK$1.00. The Sands Profit generated by Sat Ieng should be accounted for in the accounts of Worth Perfect and assigned to Worth Perfect upon the completion of the Sands Profit Agreement.
The completion of the Sands Profit Agreement is conditional upon, among other things, the following conditions having been fulfilled or waived (as the case may be):
(a) Global having legally acquired the Sands Profit pursuant to the Sat Ieng Profit Agreement;
(b) all relevant governmental approvals (if any) in relation to the transactions contemplated therein having been obtained including Mr. Tang having obtained government approval for the transfer of the entire issued share capital/quota in Sat Ieng by Mr. Phua to Mr. Tang; and
(c) the obtaining of all necessary Macau Government approval relating to the change of the ownership of Sat Ieng in respect of the gaming promoter licence of Sat Ieng.
Under the Sands Profit Agreement, Mr. Tang has undertaken to Worth Perfect that he will not at any time carry on the business of directing gaming patrons to casinos in Macau without the prior written approval from the shareholders of Worth Perfect. The approval of the shareholders of Worth Perfect can only be given by the unanimous consent of both the Target Company, which will be under the Group’s control upon Completion, and Richsense, which is under the control of Mr. Tang and Mr. Scolari.
The Sat Ieng Profit Agreement will be entered into among Sat Ieng, Global and Mr. Tang once the approval from the Macau Government in respect of the transfer of the entire issued share capital/quota in Sat Ieng by Mr. Phua to Mr. Tang has been obtained. Under the Sat Ieng Profit Agreement, Sat Ieng will agree to sell, as beneficial owner, and/or assign and Mr. Tang will agree to procure Sat Ieng to sell and/or assign to Global absolutely Sat Ieng’s right, title and interest and benefits in and to 100% of the Sands Profit, at a consideration of HK$1.00.
Wynn Profit Agreement
The Wynn Profit Agreement was entered into among Worth Perfect as a purchaser, Smart as a vendor and Mr. Scolari as a guarantor on 28 August 2006, pursuant to which Smart has agreed to sell, as beneficial owner, and/or assign and Mr. Scolari has agreed to procure Smart to sell and/or assign to Worth Perfect absolutely Smart’s right, title and interest and benefits in and to 100% of the Wynn Profit at a consideration of HK$1.00.
– 51 – LETTER FROM THE BOARD
Under the Wynn Profit Agreement, Mr. Scolari has undertaken to Worth Perfect that he will not at any time carry on the business of directing gaming patrons to casinos in Macau without the prior written approval from the shareholders of Worth Perfect. The approval of the shareholders of Worth Perfect can only be given by the unanimous consent of both the Target Company, which will be under the Group’s control upon Completion, and Richsense, which is under the control of Mr. Tang and Mr. Scolari.
The Wynn Profit Agreement completed on 5 September 2006 and the Wynn Profit has begun to be accounted for in the accounts of Worth Perfect since 5 September 2006.
The Wynn Profit is acquired by Smart from Dore under the Dore Profit Agreement. The Dore Profit Agreement was entered into among Smart as a purchaser, Dore as a vendor and Mr. Scolari as a guarantor on 28 August 2006, pursuant to which Dore has agreed to sell, as beneficial owner, and/or assign and Mr. Scolari has agreed to procure Dore to sell and/or assign to Smart absolutely Dore’s right, title and interest and benefits in and to 100% of the Wynn Profit at a consideration of HK$1.00. The Dore Profit Agreement had been completed on 5 September 2006.
The acquisition of Sands Profit and Wynn Profit is ongoing. There is no expiry date of any of the Sands Profit Agreement, Wynn Profit Agreement, Sat Ieng Profit Agreement and Dore Profit Agreement so long as the gaming promoter licences are granted to Sat Ieng and Dore.
The fund flow and logistics in relation to the payment of Sands Profit amongst Sands Macao, Sat Ieng, Worth Perfect, the Target Company and the Company are as follows:
1. Sands Macao pays commissions to Sat Ieng on a monthly basis. Settlements of commissions completes within five days following the month end date. Commissions are deposited by Sands Macao directly into Sat Ieng’s front money account maintained by Sands Macao as Sat Ieng is a gaming promoter of Sands Macao.
2. In respect of the payment of Sands Profit from Sat Ieng to Global, Sat Ieng will undertake to Global to pay Global 100% of the Sands Profit for each month within 15 days after the end of each calendar month under Sat Ieng Profit Agreement to be entered into among Sat Ieng, Global and Mr. Tang.
3. According to the Sands Profit Agreement, Global has undertaken to Worth Perfect to pay Worth Perfect 100% of the Sands Profit for each month within 15 days after the end of each calendar month.
4. Under the shareholders’ agreement entered into amongst the Target Company, Richsense and Worth Perfect, the parties shall procure that for each financial quarter, the distributable profits of Worth Perfect distribute by way of dividend of not less than 95% of the profits of Worth Perfect available for distribution after appropriation of prudent and proper reserves including allowance for future working capital and provision for tax. Such distributions shall be made
– 52 – LETTER FROM THE BOARD
within 30 days of the end of each financial quarter in question or, if later, 30 days after the date of the auditors’ report on the accounts for the relevant period.
5. The dividends received by the Target Company from Worth Perfect will be distributed by the Target Company to the Company by way of dividends for each financial quarter.
The fund flow and logistics in relation to the payment of Wynn Profit amongst Wynn Macau, Dore, Worth Perfect, the Target Company and the Company are as follows:
1. Wynn Macau pays commissions to Dore on a monthly basis.
2. According to the Dore Profit Agreement, Dore has undertaken to Smart to pay Smart 100% of the Wynn Profit for each month within 15 days after the end of each calendar month.
3. According to the Wynn Profit Agreement, Smart has undertaken to Worth Perfect to pay Worth Perfect 100% of the Wynn Profit for each month within 15 days after the end of each calendar month.
4. Under the shareholders’ agreement entered into amongst the Target Company, Richsense and Worth Perfect, the parties shall procure that for each financial quarter, the distributable profits of Worth Perfect distribute by way of dividend of not less than 95% of the profits of Worth Perfect available for distribution after appropriation of prudent and proper reserves including allowance for future working capital and provision for tax. Such distributions shall be made within 30 days of the end of each financial quarter in question or, if later, 30 days after the date of the auditors’ report on the accounts for the relevant period.
5. The dividends received by the Target Company from Worth Perfect will be distributed by the Target Company to the Company by way of dividends for each financial quarter.
As shown in the accountants’ report of Worth Perfect in Appendix IV, Worth Perfect has approximately HK$51.3 million due from Mr. Tang and approximately HK$15.0 million due from Smart because Worth Perfect has not yet opened its bank account for receiving such amounts due. Both Smart and Mr. Tang have undertaken to pay Worth Perfect the amounts due on or before Completion. The Company is advised by Mr. Tang and Mr. Scolari that the bank account cannot be opened up to now because they have not actively pursued on that in view of the prolonged delay on the Acquisition. Both of them have indicated that they will actively proceed with opening the bank account of Worth Perfect once the circular is issued and the time for Completion is near. The Company is further advised that if the bank accounts of Worth Perfect cannot be opened on or before Completion, an escrow account with Worth Perfect’s lawyers will be opened, Worth Perfect will direct Smart and Mr. Tang to pay all the amounts due from Smart and Mr. Tang to Worth Perfect to such escrow account. Therefore, the total amount due to Worth Perfect of approximately HK$66.3 million will be paid to Worth Perfect (or as it may direct) on or
– 53 – LETTER FROM THE BOARD prior to Completion. If the bank accounts of Worth Perfect still cannot be opened after Completion, Worth Perfect will direct Smart and Global to pay the Sands Profit and Wynn Profit to such escrow account until the bank accounts of Worth Perfect can be opened.
According to the Sands Profit Agreement, Global has undertaken to Worth Perfect to pay Worth Perfect (or as Worth Perfect may direct) the Sands Profit. Similarly, according to Wynn Profit Agreement, Smart has undertaken to Worth Perfect to pay Worth Perfect (or as Worth Perfect may direct) the Wynn Profit. Also, according to the undertaking signed by Mr. Tang, he has undertaken to pay Worth Perfect (or as Worth Perfect may direct) the amounts owed by him to Worth Perfect. Therefore, if Worth Perfect instructs Mr. Tang, Smart and Global to pay the Profits or any amounts owed to Worth Perfect to the said escrow account, all of them have legal obligation under the Profit Agreements or the undertaking, as the case may be, to do so.
To ensure the correctness of the Sands Profit and Wynn Profit assigned, the Company and Worth Perfect will check the monthly Junket Representative Settlement Forms issued by Sands Macao and the Junket Promoter Settlement Forms issued by Wynn Macau against the amount of the Profits received by Worth Perfect from Global and Smart.
The Company will obtain the monthly Junket Representative Settlement Forms or as the case may be, the Junket Promoter Settlement Forms with proper signatories in signifying the consent by both the casinos and the respective gaming promoters for both Sands Macao and Wynn Macau, that is, Sat Ieng and Dore, in calculating the appropriate portion of commission over the Rolling Turnover Sat Ieng and Dore are respectively entitled to and thus the Company can ascertain the appropriate amount of Profits that Worth Perfect is entitled to. The Company will also on and off conduct random physical checking in attending the “signing” timing of the respective gaming promoters with the casinos.
The director of Worth Perfect representing the Group will attend the settlement of commission by Sands Macao to Sat Ieng and by Wynn Macau to Dore and will obtain copies of the settlement forms issued by each of Sands Macao and Wynn Macau during the settlements.
As advised by Mr. Tang and Mr. Scolari, both Smart and Global do not carry on any junket business, the Rolling Turnover figures provided by Wynn Macau and Sands Macao should be final and conclusive to the Company.
Moreover, as both Venetian Macau Limited (the operator of Sands Macao) and Wynn Resorts (Macau) S.A. (the operator of Wynn Macau) are subsidiaries of listed companies in the U.S., the corporations are governed by the Sarbanes-Oxley rules and therefore by virtue of the signatures of their representatives (one of whom is the Chief Financial Officer) being signed on the relevant documents, the Company is comfortable with the figures evidenced.
Nonetheless, the Company will instruct its auditors to undertake normal procedures during audit to ensure the accuracy of the figures.
– 54 – LETTER FROM THE BOARD
According to the Macau lawyers for Sat Ieng and Dore, the assignment of Sands Profit from Sat Ieng to Global and the assignment of Wynn Profit from Dore to Smart are not in contravention of any applicable laws in Macau, in particular the laws governing gaming promotion activities in Macau.
There is a shareholders’ agreement dated 13 March 2006 entered into amongst Richsense, the Target Company and Worth Perfect. The relevant terms concerning the management and dividend distribution of Worth Perfect are as follows:
(1) Business and management
(a) The parties shall procure that unless otherwise agreed unanimously by the board of directors of Worth Perfect, the business shall be the investing in profit stream of junket operators at casinos in Macau; and
(b) Each of the shareholders of Worth Perfect agrees that it will use all reasonable endeavours to promote the business of Worth Perfect.
(2) Dividend distribution
Subject to any agreement or restriction binding Worth Perfect, the shareholders of Worth Perfect shall procure that for each financial quarter, the distributable profits of the Company would be distributed by way of dividend for not less than 95% of the profits of Worth Perfect available for distribution after appropriation of prudent and proper reserves including allowance for future working capital and provision for tax for that particular quarter. Such distributions shall be made within 30 days following the end of each financial quarter in issue or, if later, 30 days after the date of the auditors’ report on the accounts for the relevant period.
INFORMATION ON SAT IENG, DORE, MR. TANG AND MR. SCOLARI
Information on Sat Ieng and Mr. Tang
Sat Ieng is a company incorporated in Macau on 14 December 2004. On 28 August 2006, Mr. Phua as a vendor has entered into a conditional agreement with Mr. Tang as a purchaser in relation to the sale and purchase of the entire issued share capital/quota of Sat Ieng.
Sat Ieng has been appointed by Sands Macao as a junket representative since 23 February 2005. Acting as a junket representative at Sands Macao is the only track record that Sat Ieng has in respect of its operation as a junket representative. Other than being a junket representative, Sat Ieng does not engage in any other business. The licence granted to Sat Ieng for acting as a gaming promoter is valid for one year and is renewable. Sat Ieng’s gaming promoter licence has been renewed on 12 December 2005 and is valid until 31 December 2006.
As a junket representative, being an independent contractor responsible for soliciting customers to casino, Sat Ieng is primarily responsible for directing gaming customers to Sands Macao and using its best endeavors to actively promote Sands Macao to existing and potential customers. It receives a commission on the Rolling Turnover from Sands Macao. The net profit it receives, after deducting commission paid by it to its agents,
– 55 – LETTER FROM THE BOARD administrative expenses and tax payable to the Macau Government, is over 0.4% of the Rolling Turnover. The Rolling Turnover generated by Sat Ieng for the 18 months ended 31 August 2006 amounted to approximately HK$50.46 billion (0.4% of which amounted to approximately HK$202 million). These figures are based on the monthly Junket Representative Settlement Forms. The Company has also cross-checked with the original monthly Junket Representative Settlement Forms to ensure the figures are true and correct.
The Directors consider the arrangement that the commission is only payable to Sat Ieng is fair and reasonable and in the interests of the Shareholders as a whole for the reasons that (1) Sat Ieng is the appointed junket representative under the Sands Junket Representative Agreement and therefore, it is fair that only Sat Ieng, the contracted party, is entitled to receive the commission from Sands Macao; and (2) it takes time for the Company to build up and establish its own junket business in view of its lack of know- how and prior experience in the operation of gaming business. Therefore, acquiring the Sands Profit generated by Sat Ieng, the one entitled to the commission is a better choice than engaging in the operation of gaming business by Company itself.
Mr. Tang has over 15 years of experience in Asian gaming, including working as an oversea promoter for various casinos’ VIP lounges in Macau and casinos on a number of cruise liners, and organizing various Asian high rollers gaming tours to Las Vegas. Mr. Tang has been an oversea promoter of Sat Ieng since February 2005 and has junket experience in Asia. In addition, Mr. Tang engages in entertainment business in Mainland China and Taiwan.
Information on Dore and Mr. Scolari
Dore has been appointed by Wynn Macau as a gaming promoter on 28 August 2006. So far as Dore is aware, there are three licensed junket representatives appointed by Wynn Macau and Dore is the first among the three. The Rolling Turnover generated by Dore at Wynn Macau for the period from 5 September 2006 to 31 October 2006 amounted to approximately HK$8.72 billion (0.4% of which amounted to approximately HK$35 million).
The commission income received by Dore for the period from 5 September 2006 to 27 September 2006 is based on a certain percentage of the Rolling Turnover generated by Dore. Since 28 September 2006, the commissions payable by Wynn Macau to Dore comprise (1) a fixed rate on the gaming win attributable to Dore’s assigned tables at Wynn Macau; and (2) a complimentary credit calculated at a fixed rate on the Rolling Turnover generated by Dore and/or its customer at Wynn Macau VIP gaming rooms. Complimentary credit is the rooms, transportation, food and beverage allowances given to Dore by Wynn Macau, which is calculated at a fixed rate on the Rolling Turnover generated by Dore. Such complimentary credit will not be deducted from the Rolling Turnover generated by Dore. Dore can use such credit to purchase/offset from Wynn Macau any room, transportation, food, beverage or spa services its customers acquire/consume and hence, does not need to make any payment back to Wynn Macau for any such services purchased. Regardless of the arrangement between Wynn Macau and Dore, the Wynn Profit payable to Worth Perfect under the Wynn Profit Agreement is 0.4% of the Rolling Turnover generated by Dore and/
– 56 – LETTER FROM THE BOARD or its customers at Wynn Macau VIP gaming rooms pursuant to Wynn Junket Representative Agreement and such other VIP gaming rooms whereby Dore is a duly appointed junket representative or such other VIP gaming rooms whereby Dore can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives.
Dore is a company incorporated in Macau on 12 July 2006 and is wholly-owned by Mr. Scolari. Mr. Scolari has over three years of experience in the gaming industry, including working as an oversea promoter for two casinos’ VIP lounges in Macau and organizing leisure tours for Asian high rollers to Europe and Asian gaming tours to Macau. He also has experience in junket representative business in Europe. In addition, Mr. Scolari has over 12 years of experience in the trading and marketing of electronic and computer related products in Europe and engaged in electronic and digital data transmission business in Hong Kong and Mainland China.
An oversea promoter is one that promotes junket business from locations outside Macau. The words junket and gaming promoter are generally used interchangeably. As the junket operation involves a network of agents, the junkets and gaming promoters, the experience of Mr. Tang and Mr. Scolari as oversea gaming promoters are directly relevant to the operation of junket business as they are part of the network which comprises the operation of a gaming promoters/junket business.
To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, Sat Ieng, Dore and their ultimate beneficial owners, Mr. Tang and Mr. Scolari, are Independent Third Parties.
REASONS FOR THE ACQUISITION
Team Jade is an investment holding company. The Group is principally engaged in the trading of timber logs, the provision and installation of fire-rated timber door sets, as well as the provision of interior decoration and renovation services and other carpentry works in Hong Kong.
Sat Ieng is among the first batch of junket representatives appointed by Sands Macao in February 2005. Sands Macao is operated by Venetian Macau Limited, a subsidiary of Las Vegas Sands Corp., the securities of which are listed on the New York Stock Exchange. Based on the monthly Junket Representative Settlement Forms, the Rolling Turnover generated by Sat Ieng for the 18 months ended 31 August 2006 amounted to approximately HK$50.46 billion.
As at the Latest Practicable Date, Dore was one of the only three licensed junket representatives appointed by Wynn Macau. Dore is operating 15 tables at the VIP gaming room at Wynn Macau. Wynn Macau is owned by Wynn Resorts (Macau) S.A. and commenced business on 5 September 2006. The Rolling Turnover generated by Dore at Wynn Macau for the period from 5 September 2006 to 31 October 2006 amounted to approximately HK$8.72 billion.
– 57 – LETTER FROM THE BOARD
Given that the Group has suffered losses in the past three consecutive financial years, the Board has been actively exploring suitable investment opportunities. The Directors believe that through the Acquisition, the Group can broaden its revenue sources and obtain a stable source of income.
Due to the loosening of travel restrictions of Mainland Chinese visitors, there is recent economic boom in Macau. Also, the gaming activities of Macau are prosperous. Based on the statistics in relation to “Gross revenue from different gaming activities” as published in the official website of DICJ, the revenue generated by the gaming activities is growing steadily at an average growth rate of approximately 23% each year for the period between 2001 and 2005, and the gaming revenue for the first three quarters of 2006 amounted to MOP39,252 million. According to the annual results announcement of Las Vegas Sands Corp. dated 14 February 2006, Sands Macao also recorded growth rate of approximately 133%, 61% and 23% for the 2nd, 3rd and 4th quarters respectively in the year 2005 in relation to its VIP chips rolling turnover. The Las Vegas Sands Corp. First Quarter 2006 Results Report dated 4 May 2006 reports Sands Macao’s VIP chips rolling turnover for the first quarter of 2006 was US$3.7 billion, compared to US$855.7 million in the first quarter of 2005. On 2 August 2006, Las Vegas Sands Corp. reported that Sands Macao’s VIP chips rolling turnover for the second quarter of 2006 more than doubled to US$4.26 billion, compared to US$1.99 billion in the second quarter of 2005.
In view of the acquisition of the Profits by Worth Perfect, an associated company of the Target Company, from Global and Smart under the Sands Profit Agreement and Wynn Profit Agreement respectively, the recent economy of Macau and the prospects of Macau’s gaming business, the Directors believe that the Acquisition provides the Group with substantial and steady income stream.
To ensure the Acquisition is fair and reasonable and in the interest of the Shareholders as a whole, (1) due diligence work has been done through reviewing the original Junket Representative Settlement Forms, and Junket Promoter Settlement Forms to verify the Rolling Turnover generated by Sat Ieng for the 18 months ended 31 August 2006 amounted to approximately HK$50.46 billion and the Rolling Turnover generated by Dore for the period from 5 September 2006 to 31 October 2006 amounted to approximately HK$8.72 billion; (2) legal opinion has been sought to ensure that the gaming businesses participated by Sat Ieng and Dore are lawful; (3) favourable terms, including Profit Guarantees are also bargained from the counterparty so as to ensure a minimum of HK$196 million can be received by the Group, which is fully secured by the Convertible Bond and the First Promissory Note I; (4) the Directors have also made reference to the price earning multiples of approximately 7.3 times the 49% of the of the guaranteed Profits for the First Relevant Period, which is HK$73.5 million and 4.4 times the 49% of the guaranteed Profits for the Second Relevant Period, which is HK$122.5 million and consider that the price earning multiples are relatively low, especially with reference to the price earning multiples of other listed issuers engaging in gaming business; and (5) to protect the Company against the risk of the non-renewal of the gaming promoter licence of Sat Ieng and that of the gaming promoter licence of Dore, the Directors have negotiated for a term that in the event the gaming promoter licence of Sat Ieng or Dore is cancelled, revoked, terminated
– 58 – LETTER FROM THE BOARD or is not renewed or amended in a material and adverse manner to Sat Ieng or Dore by the relevant authorities in Macau at any time before the maturity date of the First Promissory Notes, Rich Game shall return the First Promissory Notes to Team Jade and Team Jade shall not be obliged to pay any outstanding sum under the First Promissory Notes even if the Profits which have been received by the Group exceed the amount of the total consideration of HK$539 million at the time of the cancellation, revocation, termination or non-renewal of the gaming promoter licence of Sat Ieng or the gaming promoter licence of Dore. As such, the principal amount of the First Promissory Notes in a sum of HK$244.6 million representing 45.4% of the consideration, together with the 36.4% of the consideration covered by the Profit Guarantees, cover over 80% of the consideration.
Taking into account the benefits of the Acquisition as described above, the Directors (including the independent non-executive Directors) are of the view that the New Target Acquisition Agreement is entered into upon normal commercial terms following arm’s length negotiations between the parties, the terms of the New Target Acquisition Agreement are fair and reasonable and the Acquisition is in the interests of the Company and the Shareholders as a whole.
Moreover, the independent non-executive Directors had thorough understanding of the arrangement between the junket operators and the casino operators from the research result mentioned in the sub-section headed “Consideration” under the section headed “The New Target Acquisition Agreement”. They knew that the Group is entitled to 49% of the Profits due to the Group’s 49% equity interest in Worth Perfect, which holds the Profits. They also understand that the Profits are partially sourced from the Rolling Turnover generated by Sat Ieng and Dore pursuant to the Sands Junket Representative Agreement and Dore Junket Representative Agreement respectively. However, taking into account the benefits of the Acquisition and considering the transaction as a whole, the independent non-executive Directors are of the view that the Acquisition is fair and reasonable and is in the interests of the Company and the Shareholders as a whole.
FINANCIAL EFFECT OF THE ACQUISITION
Prior to the Acquisition, the Group does not hold any interest in the Target Company and Worth Perfect. Upon Completion, the Company will indirectly and beneficially own 49% of the equity interests in Worth Perfect. According to the accounting policies of the Group, the financial results of Worth Perfect will be accounted for under the equity accounting method and Worth Perfect will be treated as an associate of the Company. The Group’s interest in Worth Perfect will be accounted for in the consolidated balance sheet by reference to the Group’s share of net assets under the equity method of accounting less any impairment losses. The results of Worth Perfect would be equity accounted for in the Group’s consolidated income statement after Completion.
Earnings
The Group recorded an audited consolidated net loss attributable to shareholders of approximately HK$15.3 million for the year ended 31 March 2006. According to the unaudited pro forma financial information on the Enlarged Group set out in Appendix
– 59 – LETTER FROM THE BOARD
VIII to this circular, the unaudited consolidated loss attributable to shareholders of the Enlarged Group would be decreased by approximately HK$31.1 million and turned the loss to the profit of approximately HK$15.8 million after the Completion and the pro forma basic earnings per Share will be approximately 2.35 HK cents being the pro forma net earnings of the Enlarged Group divided by the total issued Shares.
Assets
As at 31 March 2006, the audited net tangible assets of the Group were approximately HK$47.3 million. As set out in the pro forma balance sheet of the Enlarged Group as set out in Appendix VIII to this circular, the unaudited pro forma total assets and net tangible assets of the Enlarged Group would be increased by approximately HK$506.5 million and approximately HK$32.5 million, respectively, to approximately HK$586.3 million and approximately HK$79.8 million. The increase are mainly attributable to goodwill of approximately HK$506.5 million and interest in an associate of approximately HK$32.5 million arising from the Acquisition.
Goodwill of approximately HK$506.5 million arising from the Acquisition, which is derived from the consideration of HK$539 million minus the net assets of the Target Company acquired which amounted to approximately HK$32.5 million as at 30 September 2006.
Despite a goodwill of approximately HK$506.5 million will be created following the Acquisition, the Directors feel justified and comfortable with that based on the following reasons:
(1) as the Target Company is involved in the service industry, it is expected that its asset level will be low. As the Company is acquiring the future earnings, it may not be that appropriate if one looks into the asset level;
(2) the consideration of the Acquisition compared with the historical Profits from April 2005 to March 2006 and with the guaranteed Profits for the First Relevant Period represent a price earning ratio of 7.5 and 7.3 times respectively which are on the low side for acquiring gaming related business. The same is also confirmed by the letter from Somerley Limited, the independent financial adviser;
(3) the Convertible Bond and part of the First Promissory Notes will be deposited with the Company’s lawyer as security against the Profit Guarantees;
(4) the “recovery” of the cash outlay during the first two years of Profit Guarantee vis-à-vis the actual cash outlay by the Company during the Acquisition (i.e. HK$196 million vis-à-vis HK$160 million);
(5) the Group has the right to cancel the First Promissory Notes if the gaming promoter licences of Sat Ieng or Dore cannot be renewed by the Macau Government at any time before the maturity date of the First Promissory Notes; and
(6) so far the Rolling Turnover already generated by the Sat Ieng and Dore together is satisfactory, which strongly suggests that the First Profit Guarantee would not be required to be enforced. – 60 – LETTER FROM THE BOARD
Liabilities
The Group recorded audited consolidated total liabilities of approximately HK$2.2 million as at 31 March 2006. As set out in the pro forma balance sheet of the Enlarged Group as set out in Appendix VIII to this circular, the unaudited pro forma liabilities of the Enlarged Group would be increased by approximately HK$457.1 million to approximately HK$459.3 million. The increase are mainly attributable to the issuance of Convertible Bond (approximately HK$107.8 million) and the First Promissory Notes (approximately HK$244.6 million) and amount due to a shareholder (approximately HK$103.1 million) arising from the Acquisition.
The gearing ratio of the Group prior to the Acquisition is 4.7%. The pro forma gearing ratio calculated on the basis of total borrowings of approximately HK$352.4 million (not taking into account the Second Promissory Note in calculating the borrowings as it is interest-free) divided by pro forma total assets of approximately HK$586.3 million of the Enlarged Group would be approximately 60.1%. The Directors consider this is within the acceptable/prudent limit because:
(1) of the low interest rate vis-à-vis the best lending rate of 8% as quoted by leading banks in Hong Kong;
(2) the gearing ratio of approximately 60% means a margin of 40% in the Company, in other words, there is a better utilization of the Company’s resources;
(3) the First Promissory Notes are ten-year promissory notes. The repayment of which can be covered by the profit generated from the attributable Profits of Target Company; and
(4) it is expected that the gearing ratio of the Group will be reduced gradually by applying the dividends received from Worth Perfect, which was generated from the Profits received each year.
There is no right gearing ratio that applies to a particular company or even a sector.
From the Board’s point of view, a low gearing ratio means the resources/borrowing capacity of the Company has not been explored, thereby, limiting the profit generating capacity of the Company.
It is the Board’s view that an optimal level of gearing to the Company should be 100% during the current timing. As such, the Company’s gearing ratio of approximately 60% after the Acquisition represents a balance of 40% cushion to the Company to allow further borrowing in case suitable opportunities arise.
The Directors are of the view that there would not be any material capital commitment nor contingent liability arising from the Acquisition that will have material adverse impact on the financial position of the Group immediately after the Completion.
– 61 – LETTER FROM THE BOARD
PROSPECT OF THE ENLARGED GROUP
Business trend of the Group since 31 March 2006 and financial and trading prospect of the Group
With the slowdown in the sales of property market in Hong Kong due to the upsurge in interest rate and the World Cup fever and in Mainland China due to the anticipation of measures adopted by the PRC Government to cool down the overheated and somewhat speculative nature of the PRC property, the Group is unable to bid successfully for projects over the supply of fire-rated timber door sets.
The trading of logs is equally disappointing as the oil price continues its upsurge trend, thereby, further undermining the profitability of the trading income.
On the other hand, the Group has identified the promising investment opportunity of possible investment in Worth Perfect – the Acquisition which would bring in steady cash flow at a minimal risk as the Group can share 49% of Profits assigned to Worth Perfect each month by taking into account only Rolling Turnover generated by Sat Ieng and Dore respectively and a fixed percentage which is 0.4%. This 0.4% is fixed and would not change even if Sat Ieng, Dore, Global or Smart suffers loss. In fact, based on the pro- forma and the business results of the Enlarged Group, the Board is confident in the profitability and cash flow position for the coming years and in the rewards to the Shareholders accordingly.
The Board is confident in the continuous prosperity of the Enlarged Group notwithstanding the temporary setback during the first two months after the commencement of the assignment of the Original Profit by Sat Ieng to Worth Perfect on 16 March 2006. The Directors are given to understand that this is attributable to the temporary effect of tourists and VIP customers being attracted to the new casinos opened in the first half of 2006. In fact, the Rolling Turnover, and in turn the Original Profit picked up again in June 2006. The Board has confidence that the shortfall will pick up and be compensated in the last quarter of 2006 and in the year 2007 because following completion of expansion of Sands Macao in 2006/2007, more hotel rooms of high quality will be opened in Sands Macao to meet the demand of VIP customers, who will take the availability of such high quality rooms into account in considering whether to play in Sands Macao. It is expected that the promotion efforts on Sands Macao conducted by Sat Ieng will be strengthened and more customers will be introduced by Sat Ieng after alleviating the supply problem of the hotel rooms and accordingly, more Rolling Turnover will be generated. Also given the Rolling Turnover generated by Dore for the period from 5 September 2006 to 31 October 2006 amounted to approximately HK$8.72 billion (0.4% of which amounted to approximately HK$35 million), the Directors are confident that the acquisition of Wynn Profit by Worth Perfect will contribute to the continuous prosperity of the Enlarged Group.
– 62 – LETTER FROM THE BOARD
Financial and trading prospect of the Target Group
According to the Target Group, the limiting factor for the generation of Rolling Turnover by Sat Ieng, which directly affects the profit earned by the Target Group, is the availability of VIP guest rooms at Sands Macao as the supply always cannot meet the demand.
It is expected that
(a) following the opening of the new wing of the Sands Macao and/or the obtaining of the VIP guest rooms at the new hotel (which is still under construction and is expected to open by mid 2007) by Sat Ieng, there will be a further supply of quality rooms. As such, Sat Ieng can bring in additional customers and/or arrange at a more frequent level and/or arranging a longer stay for the VIP customers, a higher Rolling Turnover can be generated by Sat Ieng and higher profit can then be reaped by the Target Group;
(b) the Rolling Turnover to be generated by Sat Ieng will further increase when more families go to Macau for leisure after the whole Cotai Strip has been substantially developed. As a result, the profit of the Target Group, whose single revenue is 49% of the Profits, will also increase; and
(c) the Rolling Turnover generated by Dore is satisfactory and make a reasonable contribution to the Profits.
It is expected that the Profits for the year ended 31 December 2006 will increase comparing with those of 2005. A substantial improvement is anticipated in the last quarter of 2006. However, it is anticipated that there will be a big jump for the year ending 31 December 2007 when the full year effect of the new VIP guest rooms and the effect of the Wynn Profits are achieved.
LISTING RULES IMPLICATIONS
As the relevant ratios as referred to in Chapter 14 of the Listing Rules are more than 100%, the Acquisition constitutes a very substantial acquisition on the part of the Company under Chapter 14 of the Listing Rules.
An independent financial adviser, Somerley Limited, has been appointed to advise the Independent Shareholders as to the fairness and reasonableness of the New Target Acquisition Agreement.
SGM
Set out on pages 230 to 231 is a notice convening the SGM to be held at Boardroom 3-4, M/F, Renaissance Harbour View Hotel Hong Kong, 1 Harbour Road, Wanchai, Hong Kong at 10:00 a.m. on Friday, 29 December 2006 for the purpose of considering, and if thought fit approving the Acquisition and the transactions contemplated thereunder.
– 63 – LETTER FROM THE BOARD
Accordingly, the Acquisition is subject to, among other things, the approval by the Independent Shareholders at the SGM. As disclosed in the April Announcement, Smart Town, holding approximately 30.79% of the shareholding in the Company, have financially assisted the Group in raising the refundable deposit of HK$160 million. Such HK$160 million is used as refundable deposit under the New Target Acquisition Agreement. Therefore, Smart Town, holding approximately 30.79% of the shareholding in the Company and having financially assisted the Group in the Acquisition, and Pan- Star Nominees Limited, holding 20% of the shareholding in the Company and being a party acting in concert with Smart Town under The Codes on Takeovers and Mergers in Hong Kong, their respective ultimate beneficial owners and their respective associates will abstain from voting for the relevant resolution at the SGM. Therefore, the vote of the Independent Shareholders at the SGM on the relevant resolution will be taken on a poll.
There is (i) no voting trust or other agreement or arrangement or understanding entered into by or binding upon Smart Town or Pan-Star Nominees Ltd., their ultimate beneficial owners and their respective associates; and (ii) no obligation or entitlement of each of Smart Town, Pan-Star Nominees Ltd., their ultimate beneficial owners and their respective associates as at the Latest Practicable Date, whereby it has or may have temporarily or permanently passed control over the exercise of the voting right in respect of its Shares to a third party, either generally or on a case-by-case basis.
A proxy form is enclosed. Whether or not you are able to attend the SGM, you are requested to complete the accompanying form of proxy, in accordance with the instructions printed thereon and deposit the same at the office of the Company’s Hong Kong share registrar and transfer office in Hong Kong, Union Registers Ltd. at Room 1803, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjournment thereof should you so wish.
IMPLICATIONS UNDER THE LAWS OF HONG KONG AND THE LISTING RULES
After Completion, the Group, including the Target Company and Worth Perfect, will not engage in any gaming related activities.
Having duly considered the relevant laws of Hong Kong, including the Gambling Ordinance (Cap. 148), Crimes Ordinance (Cap. 200) and laws governing money laundering activities, the Company’s legal advisers as to Hong Kong law, Michacl Li & Co., are of the view that:
(1) the Company is not in breach of any applicable laws of Hong Kong as a result of the Acquisition; and
(2) the gaming promotion business carried out by Sat Ieng and Dore does not contravene any applicable laws of Hong Kong.
– 64 – LETTER FROM THE BOARD
The Company has also been advised by its legal advisers Goncalves Pereira, Rato, Ling, Vong & Cunha as to Macau law that to the best of the Macau lawyers’ knowledge:
(1) the gaming activities carried out by Sands Macao, Wynn Macau, Dore and Sat Ieng in Macau are legal and lawful under Macau law;
(2) the gaming promoter activity carried out by Sat Ieng and Dore does not contravene any applicable laws of Macau; and
(3) the Sands Profit Agreement and Wynn Profit Agreement and the transactions contemplated thereunder do not contravene the laws of Macau.
In respect of the applicable regulatory or licensing requirement of gaming promotion business in Macau, according to the Company’s legal advisers as to Macau Laws,
(1) Administrative Regulation n.o6/2002, dated 20 March 2002 (Gaming Promotion Regulation) regulates the conditions to become a gaming promoter and conduct the activity of gaming promotion related to games of fortune or chance in casino, namely the probity verification procedures and the licensing process required to become a gaming promoter.
(2) The promotion of games of fortune or chance, also termed gaming promotion, is the activity of promoting games of fortune or chance before gaming patrons by granting certain amenities, like transportation, lodging, food and entertainment in return for a commission or other form of payment from a concessionaire;
(3) Only commercial companies, commercial entrepreneurs (empresário em nome individual) or individuals that fulfil the conditions set by Administrative Regulation n.o6/2002 are entitled to operate as a gaming promoter;
(4) DICJ may request the winding-up and judicial liquidation of any entity that carries out gaming promotion without the proper licence;
(5) If the gaming promoter is a commercial company, its scope of business must be solely the promotion of games of fortune or chance in casino and its shareholders must all be individuals;
(6) If the corporate gaming promoter is a joint stock company, the shares must all be nominative and the share capital must be fully subscribed and paid up upon incorporation;
(7) It is forbidden for corporate gaming promoters to resort to public subscription and the registration of a corporate gaming promoter can only be completed after the gaming promoter has obtained proper licence;
(8) For the gaming promoters that are commercial entrepreneurs (empresário em nome individual) the registration of its acts can only be made after obtaining of the proper licence;
– 65 – LETTER FROM THE BOARD
(9) To become a gaming promoter it is necessary that the Macau Government through the DICJ grant a gaming promoter license;
(10) This licence can only be granted when the applicant is found to comply with the probity requirements;
(11) The licensing process is initiated with an application request submitted to DICJ including several documents, namely a filled form containing a questionnaire to ascertain the probity of the applicant and a declaration of a concessionaire, duly signed by a legal representative or a director with capacity to bind the company, indicating the intention of the concessionaire to work with such gaming promoter;
(12) All gaming promoters, corporate or individuals, must submit to the probity confirmation procedures and are obliged to disclose all information necessary and cooperate with the Government;
(13) Regarding the corporate gaming promoters, the probity requirements also apply to its shareholder with 5% or more of the share capital and its key employees;
(14) The licence granted to the gaming promoters is valid for one civil year, renewable;
(15) In order to renew the licence, the gaming promoter shall submit an application form to the DICJ until 30 September of each year, the application procedures for the renewal finished on 30 September each year and the Macau Government will publish a list of licensed gaming promoters on 1 January in the following year;
(16) The application form shall be accompanied with a declaration subscribed by the concessionaire or sub-concessionaire, duly signed by a legal representative or a director with capacity to bind the company, indicating the intention of the concessionaire to work with such gaming promoter in the subsequent year;
(17) The gaming promoter, which is a commercial company - as Sat Ieng and Dore – its shareholders that hold 5% or more of the issued capital, directors and key employees are subject to a suitability verification process every six years. The purpose of this suitability verification is to ensure that the gaming promoters, their shareholders with 5% or more of the share capital, directors and key employees remain suitable/idoneous during a certain period of time. In accordance with the Administrative Regulation no.6/2002, dated 20 March 2002 (Gaming Promotion Regulation), notwithstanding the periodity mentioned above, DICJ may, at its own discretion, subject the gaming promotion companies, their shareholders that hold 5% or more of the issued capital, directors and key employees, to an extraordinary assessment of suitability
– 66 – LETTER FROM THE BOARD
process. Furthermore, when the licences are renewed, the Macau Government has the discretionary power to settle any requisites or specific conditions that must be observed and accomplished by any promoter that applies for such renewal;
(18) Unless otherwise agreed by the parties, the gaming promotion activity is not executed in exclusiveness; gaming promoters may operate with several concessionaires;
(19) The concessionaires and the gaming promoters are jointly and severally liable for the gaming promoters activity compliance with all relevant laws and regulations within its casinos;
(20) This regulation provides that the entities or individuals that already carried out gaming promotion activities at the time the regulation was enacted could temporarily continue to do so, until the first licensing process was completed.
Shareholders should be aware that under the guidelines issued by the Stock Exchange in relation to “Gambling activities undertaken by listing applicants and/or listed issuers” dated 11 March 2003, should the Group directly or indirectly be engaged in gambling activities and operation of such gambling activities (i) fail to comply with the applicable laws in the areas where such activities operate and/or (ii) contravene the Gambling Ordinance, the Company or its business may be considered unsuitable for listing under Rule 8.04 of the Listing Rules, the Stock Exchange may direct the Company to take remedial action, and/or may suspend dealings in, or may cancel the listing of, the Shares.
In relation to the prevention of the money laundering activities, as both Sat Ieng and Dore are respectively licensed to operate junket business and both Sands Macao and Wynn Macau are respectively licensed to operate gaming business by the relevant authorities in Macau and the amount of bet/Rolling Turnover on Sands Macao is properly registered by both Sat Ieng and Sands Macao, their gaming activities and businesses are subject to stringent control and regulation of the Macau Government. The Directors believe that the activities Sat Ieng, Sands Macao, Dore and Wynn Macau participate should be legal and lawful and thereby the income derived from these activities should also be lawful and proper because:
(1) Venetian Macau Limited (the operator of Sands Macao) and Wynn Resorts (Macau) S.A. (the operator of Wynn Macau) are the concessionaires licensed by the Macau Government to carry out casino business in Macau;
(2) Sat Ieng and Dore are validly licensed to act as gaming promoters in Macau, as evidenced in the “Licença De Promotor De Jogo Pessoa Colectiva”;
(3) Worth Perfect is an investment company to receive the Sands Profit from Global and Wynn Profit from Smart and it does not carry out any casino or gaming promotion activities in either Hong Kong or Macau. Therefore, the business activities of Worth Perfect will not constitute unlawful activities under the laws of Hong Kong and Macau;
– 67 – LETTER FROM THE BOARD
(4) the Target Company is an investment company holding 49% issued shares of Worth Perfect. The Target Company does not carry out any casino and gaming promotion activities in either Hong Kong or Macau. Therefore, the business activities of the Target Company will not constitute unlawful activities under the laws of Hong Kong and Macau;
(5) upon Completion, the Group holds the entire issued share capital of the Target Company and does not carry out any casino and gaming promotion activities in either Hong Kong or Macau. Therefore, the business activities of the Group will not constitute unlawful activities under the laws of Hong Kong and Macau; and
(6) the Company’s Hong Kong legal advisers, who had duly considered the relevant laws of Hong Kong, including the Gambling Ordinance (Cap. 148), Crimes Ordinance (Cap. 200) and laws governing money laundering activities, are of the view that:
(a) the gaming promotion business carried out by Sat Ieng and Dore do not convene any applicable laws of Hong Kong; and
(b) the Company is not in breach of any applicable laws of Hong Kong as a result of the Acquisition.
(7) the Company’s Macau legal advisers had advised that:
(a) gaming activities of Sands Macao, Wynn Macau, Sat Ieng and Dore involved in Macau are legal and lawful under Macau law; and
(b) the gaming promotion business carried out by Sat Ieng and Dore do not contravene any applicable laws in Macau.
Apart from relying on such stringent official control, the Company will also use its best endeavours to procure that effective internal control systems are in place to make sure that the dividend distributed from Worth Perfect is derived from proper source.
In fact, the Company has issued its internal written policies to prevent money laundering, which has been communicated to the management and relevant staff in the Company. Basically, the Company has establish and maintain procedures to combat money laundering so as to enable suspicions of money laundering to be recognized and reported to the authorities and to produce its part of the audit trail to assist in official investigation. In particular, the Company:
1. has procedures to verify the identity of new clients/counterparties;
2. has record keeping procedures and will keep the relevant records, including account ledger records, a record of all internal reports to the money laundering reporting officer regarding suspected money laundering, a record of all
– 68 – LETTER FROM THE BOARD
investigations and other information taken into account by the money laundering reporting officer when deciding whether or not to report to the authority and a record of all reports to the authority regarding the suspected money laundering, for a certain period of time;
3. has procedures for employees to report any suspicious transactions, normally, the employees have to report and discuss with the money laundering reporting officer any suspected transaction without delay;
4. will ensure that employees are suitably trained and made aware of the reporting procedures and in the recognition and handling of suspicious transactions. Periodic training will be provided to the employees so as to regularly refresh their knowledge of combating money laundering; and
5. has appointed a money laundering reporting officer. He will make further appropriate investigations into the suspected money laundering activities reported to him by the employees and will report the same to the relevant authorities, including the Hong Kong Monetary Authority and co-operate with them.
The Company will cross-check the Sands Profit received or receivable with the original monthly Junket Representative Settlement Forms issued by Sands Macao to Sat Ieng. The Company will also cross-check the Wynn Profit received or receivable with the original monthly Junket Promoter Settlement Forms issued by Wynn Macau to Dore. In addition to cross-check the original settlement forms issued by Sands Macao and Wynn Macau, the director of Worth Perfect representing the Group will perform the followings to ensure the accuracy and completeness of the Sands Profit and the Wynn Profit:
1. to observe the settlement of commission income by Sands Macao to Sat Ieng each month;
2. to observe the settlement of commission income by Wynn Macau to Dore each month; and
3. to perform a review on the internal control systems of Sat Ieng and Dore on a quarterly basis to ensure they are properly in place.
The Company has already engaged HLB to review the internal control systems as set out by Sat Ieng and Dore periodically to ensure the efficiency and effectiveness of the internal control systems for both Sat Ieng and Dore. The Company has also engaged HLB to attend the monthly meeting between (1) Sat Ieng and Sands Macao and (2) Dore and Wynn Macau, in connection with the reconciliation of the Rolling Turnover as generated by Sat Ieng and Dore and the settlement of monthly commission income earned by Sat Ieng and Dore.
– 69 – LETTER FROM THE BOARD
As an additional safeguard, the money remitted will also be routed through licensed Hong Kong banks which would exercise another level of anti-money laundering control.
Sat Ieng and Dore have also implemented its internal control procedures and regulations in assisting Sands Macao, or as the case may be, Wynn Macau to detect suspicious transactions in combating the money laundering. The measures include the followings:
1. Customer due diligence
Both Sat Ieng and Dore do not keep anonymous accounts or accounts in obviously fictitious names. They undertake customer due diligence measures, including identifying and verifying the identity of their customers by using reliable, independent source documents, data or information like official identification documents such as passport and identification card before or during the course of establishing a business relationship with the customer.
2. New and developing technologies that favour anonymity
Both Sat Ieng and Dore pay attention to any money laundering threats that may arise from any new and developing technologies that favour anonymity and, if necessary, to prevent their use in money laundering schemes.
3. Record keeping
Both Sat Ieng and Dore maintain, for at least seven years, all necessary records on transactions to enable them to comply swiftly with information requests from the competent authorities. Such record must be sufficient to permit reconstruction of individual transactions (including the amounts and types of currency involved if any) so as to provide, if necessary, evidence for prosecution of criminal activity.
Both Sat Ieng and Dore also keep records on the identification data obtained through the customer due diligence process and will make available to domestic competent authorities upon appropriate authorities.
4. Reporting of suspicious transactions
Both Sat Ieng and Dore pay attention to all settlement of unusually large sums and all unusual patterns of transactions which have no apparent economic or visible lawful purpose. If Sat Ieng and Dore suspect or have reasonable grounds to suspect that money that they deal with when providing its settlement services are the proceeds of a criminal activity, or is related to terrorist financing, or otherwise is linked to or related to, or is to be used for terrorism, they will report promptly its suspicions to competent authorities.
So far as Dore is aware, Wynn Macau has created its own corporate investigation team for the purpose of anti-money laundering.
– 70 – LETTER FROM THE BOARD
Worth Perfect does not have its own money laundering procedures as it is only acquiring a net profit stream of a company. It relies on the procedures and steps taken by both the casinos, that are, Sands Macao and Wynn Macau and also the gaming promoters, that are, Sat Ieng and Dore for this process.
INTERNAL CONTROL
SUMMARY OF PRELIMINARY COMMENTS AND RECOMMENDATIONS ON THE INTERNAL CONTROL SYSTEM OF SAT IENG AND THE INTERNAL CONTROL MANUAL FOR SAT IENG
The Board has had (i) discussions with HLB in relation to their preliminary comments and recommendations on the internal control systems of Sat Ieng and the internal control manual for Sat Ieng; and (ii) internal discussions on how to implement HLB’s recommendations and devise new measures to strengthen the internal control system of Sat Ieng. A summary extracting the points issued by HLB in their preliminary findings for the periods covered from 28 June 2006 to 29 June 2006, 19 July 2006, 31 July 2006, 3 August 2006, 8 August 2006 to 9 August 2006, 23 August 2006 to 24 August 2006, 3 October 2006 to 4 October 2006, 15 November 2006 to 16 November 2006 and 4 December to 5 December 2006 is set out below for the information of the Shareholders and investors of the Company:
Settlement of commission income
Insufficient control over settlement of commission income
HLB noted that there was and would always be an insignificant cut off difference on the records of Rolling Turnover calculated between Sat Ieng and Sands Macao due to timing difference. All gaming tables are still in operation each time when Sands Macao carries out its settlement counting procedures. As a result, there would always be a small portion of Non-negotiable Chips still kept by customers and those chips would not be counted and accounted for during the settlement counting procedures.
Recommendations for rectification of deficiency
HLB recommends that the settlement counting procedures shall be fixed at 12:00 a.m. on the settlement day of each month. Sat Ieng should record all Non-negotiable Chips hold by customers during the settlement counting procedure for their reconciliation with the records of Sands Macao. Sat Ieng should temporarily close their operations during the counting and calculation procedure, so as to minimize the cut off problem.
Implementation of HLB’s recommendations
Sat Ieng has considered the recommendations suggested by HLB and has arranged a daily counting procedure to be performed at 5:00 a.m. starting from December 2006 instead of a monthly counting procedure.
– 71 – LETTER FROM THE BOARD
Follow-up review on procedures of internal control over the settlement of commission income was performed by HLB in December 2006. HLB noted that the daily counting procedure performed by Sat Leng has commenced at 5:00 a.m. daily. Sat Ieng has temporarily closed its operations to carry out the daily counting and calculation procedures.
SUMMARY OF PRELIMINARY COMMENTS AND RECOMMENDATIONS ON THE INTERNAL CONTROL SYSTEM OF DORE AND THE INTERNAL CONTROL MANUAL FOR DORE
The Board has had (i) discussions with HLB in relation to their preliminary comments and recommendations on the internal control systems of Dore and on the internal control manual for Dore; and (ii) internal discussions on how to implement HLB’s recommendations and devise new measures to strengthen the internal control system of Dore. A summary extracting the points issued by HLB in their preliminary findings for the periods covered from 3 October 2006, 4 October 2006, 6 November 2006 and 8 November 2006 to 9 November 2006 is set out below for the information of the Shareholders and investors of the Company:
Gaming Win
Insufficient control in reconciliation of the records on daily gaming win
HLB noted that there was and would always be an immaterial difference on the daily gaming win recorded between Dore and Wynn Macau. The difference is mainly due to the difference in procedures undertaken by Wynn Macau and by Dore in determining daily gaming wins. Wynn Macau determines the daily gaming win on “per table” basis, but Dore determines the daily gaming win on “per customer” basis. Although Wynn Macau’s VIP gaming rooms operate 24 hours round the clock, each table ceases to operate for a short period of time during 3:00 a.m. to 5:00 a.m. each day for determining the table gaming win by counting and comparing its opening and closing amounts of chips assigned to each table. While Wynn Macau determined the gaming win of each table during 3:00 a.m. to 5:00 a.m., customers are requested to game on other tables. The gaming win of customers would continue to be recorded by Dore as the gaming activities of the customers continued. As a result, a cut-off timing difference on calculation of gaming win arises. However, such timing difference would immediately be reflected in the next day’s gaming win records so that the impact on the overall accumulated monthly gaming win is usually immaterial.
Recommendations for rectification of deficiency
While it is impractical to ask players to stop gaming during the “counting” period, HLB recommends that Dore should accompany Wynn Macau staff and observe the daily counting procedures of gaming win of each table performed by Wynn Macau as a means to understand, reconcile and eliminate the difference in calculation of daily gaming win.
– 72 – LETTER FROM THE BOARD
Settlement of commission income
Insufficient control in settlement of commission income
HLB noted that there was insufficient control on segregation of duties during the settlement procedure because only one manager of Dore was required to attend the counting.
Recommendation for rectification of deficiency
HLB recommends that Dore should arrange one more senior staff to attend the settlement procedure for calculating the monthly commission income.
RISK FACTORS OF JUNKET BUSINESS
The following are the risk factors in relation to the junket business operated by Sat Ieng and Dore:
(1) The provision of junket business is competitive in general. There is no guarantee that the targeted customers of Sat Ieng or Dore will not be lured away by other junket operators;
(2) The Rolling Turnover generated by Sat Ieng operating as a junket representative in Sands Macao relies on, among other factors, the attractiveness of Sands Macao to the prospective customers, Sat Ieng’s ability to procure customers to Sands Macao, annual renewal of the gaming promoter licence of Sat Ieng by the Macau Government, tenure of Sat Ieng acting as junket representative for Sands Macao under the Sands Junket Representative Agreement. There is no assurance that Sands Macao is always attractive. In the event that Sat Ieng ceases to be committed to the junket business or cease to be appointed as junket representative by Sands Macao, the junket business, and thereby the Sands Profit to be paid to Worth Perfect, may be adversely affected. Moreover, if Sat Ieng fails to obtain the renewal of its gaming promoter licence from the Macau Government, it can no longer operate its junket business and no Sands Profit can be paid to Worth Perfect as a result. The same risks are applicable to the junket business carried out by Dore;
(3) In the event that Sands Macao or Wynn Macau becomes the target for carrying out money laundering, the Rolling Turnover generated by Sat Ieng or Dore may be affected and/or interrupted;
(4) The operation of the junket business by Sat Ieng or Dore is subject to the ability of Sat Ieng or Dore in renewing its respective gaming promoter licences from the Macau Government each year;
– 73 – LETTER FROM THE BOARD
(5) The availability of the Profits relating to the Rolling Turnover generated by Sat Ieng at Sands Macao’s Paiza Club gaming rooms pursuant to the Sands Junket Representative Agreement and the Rolling Turnover generated by Dore at Wynn Macau VIP gaming rooms pursuant to the Wynn Junket Representative Agreement heavily depends on the subsistence of the respective Junket Representative Agreements and on whether the respective Junket Representative Agreements can be successfully renewed. The Junket Representative Agreements may or may not be renewed by Sands Macao or Wynn Macau at the expiry of the term of the respective Junket Representative Agreements. In general, the term of agreement between the junket operator and the casino operator is tied with the terms of the gaming promoter licence. Therefore, the term of the Junket Representative Agreements can also be tied with the terms of respective gaming promoter licences of Sat Ieng and Dore, which are valid for one year; and
(6) As parts of the Profits are sourced from Rolling Turnover generated by Sat Ieng and Dore pursuant to the respective Junket Representative Agreements, there is a risk that those parts of the Profits will cease to be sources of the Profits if the Junket Representative Agreements expire or the gaming promoter licence of Sat Ieng or Dore cannot be renewed.
RECOMMENDATION
Your attention is drawn to the letter from the independent financial adviser set out on pages 75 to 117 of this circular. The Board (including the independent non-executive Directors), having taken into account the advice of the independent financial adviser considers that the terms of the Acquisition are fair and reasonable and are in the interest of the Company and the Shareholders as a whole. Accordingly, the Board (including the independent non-executive Directors) recommends the Independent Shareholders to vote in favour of the ordinary resolution as set out in the notice of the SGM.
ADDITIONAL INFORMATION
Your attention is also drawn to the additional information contained in the appendices to this circular.
Yours faithfully For and on behalf of the Board Teem Foundation Group Ltd. Lum Chor Wah, Richard Chairman
– 74 – APPENDIX I LETTER FROM SOMERLEY LIMITED
The following is the text of a letter of advice from Somerley Limited, the independent financial adviser, which has been prepared for the purpose of incorporation into this circular, setting out its advice to the Independent Shareholders in connection with the Acquisition.
SOMERLEY LIMITED Suite 2201, 22nd Floor Two International Finance Centre 8 Finance Street Central Hong Kong
11 December 2006
To the Independent Shareholders
Dear Sirs,
VERY SUBSTANTIAL ACQUISITION
INTRODUCTION
We refer to our appointment to act as the independent financial adviser to advise the Independent Shareholders in relation to the Acquisition, details of which are contained in the circular to the shareholders of Teem Foundation Group Ltd. dated 11 December 2006 (the “Circular”), of which this letter forms part. Unless otherwise defined, terms used in this letter have the same meanings as defined in the Circular.
On 28 August 2006, Team Jade (a wholly-owned subsidiary of the Company), Rich Game, Global, Smart, Mr. Tang and Mr. Scolari entered into the New Target Acquisition Agreement, pursuant to which Team Jade has conditionally agreed to purchase the Sale Shares, representing the entire issued share capital of the Target Company, from Rich Game at HK$539 million. The Acquisition requires the approval of the Independent Shareholders at the SGM. We have been appointed as the independent financial adviser to advise the Independent Shareholders regarding the Acquisition.
In formulating our opinion and advice, we have relied on the information and facts supplied, and opinions expressed, by the Directors, which we have assumed to be true, accurate and complete. We have been provided with, among other things, (a) the accountants’ reports on the Target Company and Worth Perfect for the period from 3 January 2006 (date of incorporation) to 30 September 2006, (b) the assurance reports on the Rolling Turnover generated by (i) Sat Ieng for the period from 23 February 2005 to 31 August 2006; and (ii) Dore for the period from 5 September 2006 to 27 September 2006, (c) the audited financial statements of the Group for the three years ended 31 March 2006, (d) the unaudited pro forma financial information on the Enlarged Group, (e) the agreements relating to the Acquisition and (f) other information provided by the management of the Company, Sat Ieng and Dore relating to the operations and prospects of the Target Group. We have discussed with the Company’s management the basis on which the aforesaid financial information has been prepared and the terms on which the aforesaid agreements have been arrived at.
– 75 – APPENDIX I LETTER FROM SOMERLEY LIMITED
We have sought and received confirmation from the executive Directors that all material relevant information has been supplied to us and to the best knowledge of the executive Directors, no material facts have been omitted from the information supplied and opinions expressed by them. We consider that the information which we have received is sufficient for us to formulate the opinion and advice as set out in this letter. We have no reason to doubt the truth and accuracy of the information provided to us or that any material facts have been omitted or withheld. We have, however, not conducted an independent investigation into the business and affairs of the Group or the Target Group. We have also assumed that all facts and representations contained or referred to in the Circular were true at the time they were made and will continue to be true up to the date of the SGM.
PRINCIPAL FACTORS AND REASONS TAKEN INTO ACCOUNT
In arriving at our opinion on the Acquisition, we have taken the following principal factors and reasons into consideration:
1. Background to the Acquisition
The Company was listed on the Stock Exchange in July 2002. Since listing, the Group has been principally engaging in the provision and installation of fire-rated timber door sets, as well as the provision of interior decoration and renovation services and other carpentry works in Hong Kong. In September 2003, the Group acquired a timber trading business for manufacturing of plywood and/or furniture. Since then, the Group is also engaged in the trading of timber logs business.
However, due mainly to the global economic downturn, the profit margin of the Group has been squeezing and as a result, the Group recorded losses after its listing in 2002. In view of the competition and difficulties in the construction business, the Group has taken remedial moves during the financial year ended 31 March 2004 in order to improve its results. However, in light of the increase in local labour costs, continuous upsurge of the worldwide oil prices, the increase in interest rate and the austerity measures imposed by the PRC government to cool down the overheated property market, the business environment of the Group remained difficult.
In March 2004, Mr. Yeung Tony Ming Kwong and Mr. Liu Ching Hua, through Smart Town, acquired a majority control in the Company by way of an acquisition of the existing Shares. The said acquisition resulted in Smart Town (together with its concert parties) holding approximately 75% of the issued share capital of the Company at the time when the said subscription was completed. A mandatory offer for all the Shares was made by Smart Town in compliance with the Hong Kong Code on Takeovers and Mergers. Following the close of the mandatory offer, Smart Town had placed down its shareholding in the Company to about 75% in order to restore the minimum 25% public float level as stipulated under the Listing Rules. Mr. Lum Chor Wah, Richard was appointed as an executive Director in June 2004 and the existing management took control of the Group.
– 76 – APPENDIX I LETTER FROM SOMERLEY LIMITED
Subsequent to the change of control in 2004, the Company has been focusing on its existing business with a prime objective of turning around the loss making position of the Group into profit making. The Group has adopted various strategies including, among others, controlling daily operating expenses, improving overall efficiency of operations and exploring business that can capitalize on the resources of the Group’s reputation and the management’s expertise.
On 29 July 2005, the Board announced that the Group entered into a provisional sale and purchase agreement on 22 July 2005 to acquire a piece of land in Tuen Mun. Such acquisition, completed in September 2005, has enhanced the Group’s property portfolio in view of the then upturn of the local property market.
The major business development for the Group is the proposed acquisition by the Group of an indirect 49% interest in Worth Perfect (through the Target Company), which is currently owned as to 51% by Richsense and as to 49% by the Target Company. We note that the structure of the proposed acquisition has been revised since the principals commenced negotiations in early 2006. On 16 March 2006, Smart Town entered into a conditional sale and purchase agreement to acquire the entire issued share capital of the Target Company at a consideration of HK$539 million. On the same day, Team Jade entered into another conditional sale and purchase agreement to acquire from Smart Town the entire issued share capital of the Target Company at the same consideration. Due to further negotiation between parties, the two sale and purchase agreements were subsequently terminated and Team Jade entered into the Target Acquisition Agreement with Rich Game and Sat Ieng on 30 March 2006.
As a result of the proposed change of ownership of Sat Ieng from Mr. Phua to Mr. Tang and the injection of the Wynn Profit Agreement to Worth Perfect, the structure of the Acquisition was further revised. The Target Acquisition Agreement was terminated and Team Jade entered into the New Target Acquisition Agreement to acquire from Rich Game, a company beneficially to be owned as to 51% and 49% by Global and Smart respectively, the entire issued share capital of the Target Company at the same consideration of HK$539 million. The consideration of HK$539 million is to be satisfied partly by the Convertible Bond and the First Promissory Notes and partly by the Second Promissory Note to be issued to Smart Town which has financed the cash deposit of the Acquisition of HK$160 million.
The Acquisition constitutes a very substantial acquisition for the Company under the Listing Rules. We will assess the terms, benefits and associated risks of the Acquisition in details in the following sections of this letter.
– 77 – APPENDIX I LETTER FROM SOMERLEY LIMITED
2. Business of and financial information on the Group
(a) Business
The present principal activities of the Group comprise the trading of timber logs, the provision and installation of fire-rated timber door sets, as well as the provision of interior decoration and renovation services and other carpentry works in Hong Kong. As discussed in paragraph 1 above, the Group has been suffering losses since the Company’s listing in 2002. As advised by the management of the Company, the construction business remains competitive and difficult and it appears to us that the turnaround of the existing operations is not optimistic, at least in the forthcoming future.
(b) Audited income statement
Set out below is a summary of the audited consolidated income statement of the Group for the each of the three years ended 31 March 2006:
Year ended 31 March 2006 2005 2004 HK$’000 HK$’000 HK$’000
TURNOVER Trading of timber logs 10,539 66,619 3,257 Contract revenue generated from the provision and installation of fire-rated timber door sets and the provision of interior decoration and renovation services 106 471 19,918
10,645 67,090 23,175
Cost of sales (9,551) (60,631) (21,835)
Gross profit 1,094 6,459 1,340 Other revenue and gains 327 431 302 Administrative expenses (7,255) (12,996) (13,839) Other operating expenses (514) (5,082) (1,745) Impairment loss recognised in respect of goodwill (8,536) –– Impairment loss recognised in respect of investment property (395) ––
LOSS FROM OPERATING ACTIVITIES (15,279) (11,188) (13,942) Finance costs (28) (235) (359)
Share of results of an associate ––311 Amortisation of goodwill ––(610)
LOSS BEFORE TAX (15,307) (11,423) (14,600) Tax – (180) –
NET LOSS ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY (15,307) (11,603) (14,600)
– 78 – APPENDIX I LETTER FROM SOMERLEY LIMITED
(i) Financial year 2005
The total turnover of the Group for the year ended 31 March 2005 amounted to approximately HK$67.1 million, representing an increase of approximately 189.5% compared with that for the year 2004 which was mainly attributable to the resources vested in the trading of timber sector. Because of its fixed cost in nature, the administrative expense (including mainly staff wages, rental expenses and depreciation) was relatively high and constituted a major item in the cost structure of the Group. The net loss attributable to the equity holders of the Company for the year ended 31 March 2005 was approximately HK$11.6 million, showing an improvement of approximately 20.5% from that for the year 2004. However, due to increase in labour charges in Hong Kong, continuous upsurge of oil prices worldwide, increase in interest rate in the United States and the austerity measures imposed by the PRC government to cool down the overheated property market in PRC, the Group’s operating environment remained difficult.
(ii) Financial year 2006
The total turnover of the Group for the year ended 31 March 2006 amounted to approximately HK$10.6 million, representing a significant decrease of approximately 84.1% compared with that for the year 2005. The surge in oil and gasoline prices undermined the margin of both of the trading of timber business and the provision and installation of fire- rated timber door set contract business. In view of the losses recorded in the businesses, the Company reconsidered its strategy in respect of the trading of timber business and the provision and installation of fire- rated timber door set business as to whether or not to further expand the business to grasp a bigger market share to achieve an economy of scale. However, the Directors considered it prudent to play a more conservative role in avoiding projects with low margin and/or trading businesses that need long credit terms or projects with customers having uncertain credit standing resulting in a significant drop in the turnover from approximately HK$67.1 million in 2005 to approximately HK$10.6 million in 2006. Administrative expenses were reduced due mainly to the reduction of unnecessary headcount and relocation of office in Hong Kong. However, the net loss attributable to the equity holders of the Company for the year ended 31 March 2006 was still widen to approximately HK$15.3 million from approximately HK$11.6 million in 2005. The increase in net loss was mainly attributable to the reduction in trading volume thereby reducing the gross profit and the one-off written off of impairment loss of goodwill of a subsidiary of HK$8.5 million as the profit of that subsidiary anticipated was not sufficient to cover the goodwill. In view of the recent slowdown of property market both in Hong Kong and the PRC, it is anticipated that a jump in the operation of the supply of fire-rated timber door sets for the forthcoming year is not likely. With the continued high oil price, the logistic cost cannot be reasonably lowered, thereby, having an impact on the trading of timber logs. In overall terms, the operating environment for the Group’s existing business will continue to be competitive and difficult.
– 79 – APPENDIX I LETTER FROM SOMERLEY LIMITED
(c) Audited balance sheet
Set out below is a summary of the audited consolidated balance sheet of the Group as at 31 March 2005 and 31 March 2006:
As at 31 March 2006 2005 (Restated) HK$’000 HK$’000
NON-CURRENT ASSETS Fixed assets 519 1,248 Investment property 10,200 – Goodwill – 8,536
10,719 9,784
CURRENT ASSETS Accounts receivable – 12,749 Trade deposits – 24,301 Prepayments and other receivables 9 978 Financial assets at fair value through profit or loss 4,953 5,076 Tax recoverable 1,656 1,656 Cash and cash equivalents 29,985 11,478
36,603 56,238
CURRENT LIABILITIES Accounts payable (893) (1,680) Other payables and accruals (1,315) (3,454) Interest-bearing bank and other borrowings – (400)
(2,208) (5,534)
NET CURRENT ASSETS 34,395 50,704
TOTAL ASSETS LESS CURRENT LIABILITIES 45,114 60,488
NON-CURRENT LIABILITIES Interest-bearing bank loan, secured – (67)
45,114 60,421
EQUITY Share capital 67,200 67,200 Reserves (22,086) (6,779)
45,114 60,421
– 80 – APPENDIX I LETTER FROM SOMERLEY LIMITED
The audited net assets of the Group as at 31 March 2006 were approximately HK$45.1 million. As at 31 March 2006, the Group is basically debt free. Taking into account cash and cash equivalents of approximately HK$30.0 million and the debt free position, we consider the liquidity position of the Group is satisfactory. As disclosed in the section headed “Statement of indebtedness” contained in the Appendix VII to this Circular, the Group had no outstanding bank borrowings as at 31 October 2006.
(d) Outlook of existing business of the Group
As advised by the Company, the timber logs trading business of the Group is affected by the crude oil price and the PRC property market. The timber logs are sold by the Group to customers for the use mainly in property construction projects in the PRC. In order to stabilise the overheated PRC property market, austerity measures and policies were launched by the PRC government to slow down the PRC property investment in May 2006. Given the higher-than-expected economic growth, the People’s Bank of China ordered the PRC commercial banks to increase the benchmark one-year deposit and lending rates by 27 basis points to intensify the governmental measures to curb the overheated PRC economy on 18 August 2006. In view of the aforesaid administrative measures imposed by the PRC government and the interest rate hike, the outlook of the property market in the PRC and thus, the existing timber logs trading business of the Group, is uncertain. Moreover, driven by various causes, crude oil price has raised substantially since early January 2005 with a rise of approximately 50% from approximately US$42 per barrel in early January 2005 to approximately US$63 per barrel in late November 2006. As a result, the freight charges increased and the Group’s suppliers had increased the selling prices of the timber logs which in turn lowered the profit margin of the Group. The chance for a rebound of the Group’s timber logs trading business in early 2007 appears to be remote.
3. Business and financial information of the Target Company, Worth Perfect, Sat Ieng and Dore
(a) Business
Target Company:
The Target Company is a company incorporated in the British Virgin Islands in January 2006 with limited liability. The Target Company is an investment holding company and has not carried on any business since its incorporation except for the acquisition of the 49% equity interest in Worth Perfect. The principal asset of the Target Company is its 49% equity interest in Worth Perfect.
– 81 – APPENDIX I LETTER FROM SOMERLEY LIMITED
Worth Perfect:
Worth Perfect is a company incorporated in the British Virgin Islands in January 2006 with limited liability. Worth Perfect is owned as to 49% by the Target Company and as to 51% by Richsense, a wholly- owned subsidiary of Rich Game. Pursuant to the Sands Profit Agreement dated 28 August 2006 entered into among Worth Perfect as a purchaser, Global as a vendor and Mr. Tang as a guarantor, Global has agreed to sell and Worth Perfect has agreed to acquire 100% interest in the Sands Profit, being 0.4% of the Rolling Turnover generated by Sat Ieng and/or its customers at Sands Macao’s Paiza Club gaming rooms pursuant to the Sands Junket Representative Agreement and such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative or such other VIP gaming rooms whereby Sat Ieng can procure the sale/ assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives. Completion of the Sands Profit Agreement is subject to, among other things, Global having legally acquired the Sands Profit pursuant to the Sat Ieng Profit Agreement and the obtaining of all necessary Macau Government approval relating to the change of the ownership of Sat Ieng in respect of the gaming promoter licence of Sat Ieng. Upon completion of the Sands Profit Agreement, the Sands Profit generated from Sat Ieng will start to be accounted for in the accounts of Worth Perfect.
On 28 August 2006, Worth Perfect (as a purchaser), Smart (as a vendor) and Mr. Scolari (as a guarantor) entered into the Wynn Profit Agreement, pursuant to which Smart has agreed to sell and Worth Perfect has agreed to acquire 100% interest in the Wynn Profit, being 0.4% of the Rolling Turnover generated by Dore and/or its customers at the Wynn Macau VIP gaming rooms pursuant to Wynn Junket Representative Agreement and such other VIP gaming rooms whereby Dore is a duly appointed junket representative or such other VIP gaming rooms whereby Dore can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives. Completion of the Wynn Profit Agreement took place on 5 September 2006 and Worth Perfect has begun to account for the Wynn Profit since then.
As stipulated under the Sands Profit Agreement and the Wynn Profit Agreement, Mr. Tang and Mr. Scolari have undertaken to Worth Perfect respectively that they will not at any time carry on the business of directing gaming patrons to casinos in Macau without the prior written unanimous approval from the shareholders of Worth Perfect.
Pursuant to the Deed of Guarantee, Mr. Tang and Mr. Scolari have jointly and severally guaranteed to Worth Perfect that the Profits for the First Relevant Period, being 16 March 2006 to 15 March 2007, shall not be less than HK$150 million whereas the Profits for the Second Relevant
– 82 – APPENDIX I LETTER FROM SOMERLEY LIMITED
Period, being 16 March 2007 to 15 March 2008, shall not be less than HK$250 million. In the event that the Profits are less than the guaranteed amount, Mr. Tang and Mr. Scolari have jointly and severally undertaken to pay to Worth Perfect the shortfall within 60 days after the end of the aforesaid relevant periods.
Sat Ieng:
Sat Ieng is a company incorporated in Macau in December 2004. On 28 August 2006, Mr. Phua entered into a conditional sale and purchase agreement with Mr. Tang to sell the entire issued share capital/quota of Sat Ieng to Mr. Tang. Sat Ieng possesses a renewable gaming promoter licence granted by the Macau Government in 2005 and is valid until 31 December 2006. Sat Ieng is among the first batch of junket representatives appointed by Sands Macao in February 2005. A junket representative is an independent contractor responsible for soliciting customers to casinos. Sat Ieng, being so appointed, is primarily responsible to introduce gaming customers to Sands Macao and to actively promote Sands Macao to existing and potential customers. In return, Sat Ieng is entitled to receive a commission on the Rolling Turnover from Sands Macao. According to the assurance report on the Rolling Turnover generated by Sat Ieng issued by HLB, the reporting accountants of the Company, set out in Appendix V of the Circular, Sat Ieng generated Rolling Turnover of an aggregate sum of approximately HK$50.5 billion during the period from 23 February 2005 to 31 August 2006, averaging approximately HK$2.8 billion per month.
Mr. Tang, having been an overseas promoter of Sat Ieng since February 2005, has over 15 years of experience in Asian gaming. His experience covers working as an overseas promoter for various casinos’ VIP lounges in Macau and casinos on cruise liners, and organising various Asian high rollers gaming tours to Las Vegas. Mr. Tang also has interests in PRC and Taiwan entertainment businesses.
Dore:
Dore, a company incorporated in Macau in July 2006, is wholly- owned by Mr. Scolari and possesses a renewable gaming promoter licence granted by the Macau Government in August 2006 which is valid up to 31 December 2006. Based on Dore’s understanding, Wynn Macau has appointed three junket representatives, one of which is Dore and Dore is the first junket representative appointed by Wynn Macau. Mr. Scolari has over three years of experience in the gaming industry, including working as an overseas promoter for two casinos’ VIP lounges in Macau and organising leisure tours for Asian high rollers to Europe and Asian gaming tours to Macau. Mr. Scolari has also engaged in junket representative business in Europe.
– 83 – APPENDIX I LETTER FROM SOMERLEY LIMITED
(b) Financial Information
Target Company:
Set out below are a summary of the audited income statement of the Target Company for the period from 3 January 2006 (date of incorporation) to 30 September 2006 and a summary of the balance sheet of the Target Company as at 30 September 2006, as extracted from the accountants’ report on the Target Company contained in Appendix III to the Circular.
(i) Income statement
For the period from 3 January 2006 (date of incorporation) to 30 September 2006 (HK$)
Turnover – Expenses (5,070)
Loss from operations (5,070) Share of profit of an associate 32,487,710
Profit on ordinary activities before taxation 32,482,640 Taxation –
Profit for the period 32,482,640
Worth Perfect is a 49%-owned associated company of the Target Company and save for its interests in Worth Perfect, the Target Company does not have any other subsidiary or associated company.
Prior to the entering into of the Sands Profit Agreement and the Wynn Profit Agreement, Worth Perfect entered into the Original Profit Agreement with Sat Ieng and Mr. Phua on 13 March 2006 whereby Sat Ieng agreed to sell 0.4% of the Rolling Turnover generated by Sat Ieng and/or its customers at Sands Macao’s Paiza Club gaming rooms pursuant to the Sands Junket Representative Agreement and such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative. As its sole income source is from the share of profit of Worth Perfect pursuant to the Original Profit Agreement and the Wynn Profit Agreement, the Target
– 84 – APPENDIX I LETTER FROM SOMERLEY LIMITED
Company did not generate any turnover for the period under review. During the period from 3 January 2006 to 30 September 2006, the Target Company recorded a net profit of approximately HK$32.5 million representing the share of post-acquisition profit of Worth Perfect.
Worth Perfect recorded turnover of approximately HK$66.3 million during the period from 3 January 2006 to 30 September 2006, of which as to approximately HK$51.25 million was recognised pursuant to the Original Profit Agreement and as to approximately HK$15.05 million was recognised pursuant to the Wynn Profit Agreement. The HK$51.25 million represents the income from Sat Ieng generated in approximately 5.5 months time during which the Original Profit Agreement took effect from 16 March 2006 to 28 August 2006 while the HK$15.05 million represents the income from Smart generated in approximately 1 month time as the Wynn Profit Agreement took effect on 5 September 2006. During the review period, Worth Perfect generated a profit of approximately HK$66.3 million, 49% of which of approximately HK$32.5 million was shared by the Target Company. The share of profit by the Target Company under review was in line with the corresponding profit (being 0.4% of the respective Rolling Turnover generated by Sat Ieng and Dore) after deducting the expenses incurred by it in the same period. We understand from the management of the Company that the profit generated by Worth Perfect before Completion will not be distributed, but will be retained by Worth Perfect for the benefits of the new shareholders, being the Company, Mr. Tang and Mr. Scolari. In other commercial deals, it is not uncommon that the profit generated prior to completion of the transaction would be distributed to the then shareholders. Accordingly, we consider that such arrangement provides additional benefits to the Group.
The Original Profit shared by Worth Perfect pursuant to the Original Profit Agreement represented the contribution mainly by Mr. Phua. We understand from the Directors and Mr. Tang that Mr. Tang is experienced in gaming promoter operation for over 15 years. Mr. Tang had been an overseas promoter for a number of cruise liners and Macau casinos. He is also experienced in organising gaming tours for Asian high rollers to Las Vegas. He has been an overseas promoter of Sat Ieng since February 2005. Following the proposed change of ownership of Sat Ieng on 28 August 2006, Mr. Tang began to participate in the senior management of Sat Ieng.
– 85 – APPENDIX I LETTER FROM SOMERLEY LIMITED
(ii) Balance sheet
As at 30 September 2006 (HK$)
ASSETS Non-current assets Interest in an associate 32,488,092
Net current liabilities (4,672)
Total assets net liabilities 32,483,420
EQUITY Capital and reserves attributable to the equity holders of the Target Company Share capital 780 Retained earnings 32,482,640
Total equity 32,483,420
As is in the case of the income instatement, the balance sheet of the Target Company is very simple. The interest in an associate represents the Target Company’s interests in Worth Perfect.
– 86 – APPENDIX I LETTER FROM SOMERLEY LIMITED
Sat Ieng:
(i) Historical Rolling Turnover and Original Profit
The Company has engaged HLB to report on the Rolling Turnover and the Original Profit for the period from 23 February 2005 to 31 August 2006. Set out below is the schedule of the Rolling Turnover of Sat Ieng and the Original Profit extracted from the assurance report on the Rolling Turnover generated by Sat Ieng issued by HLB as set out in Appendix V of this Circular:
Original Profit For each of the month ended Rolling (0.4% of the (unless otherwise specified) Turnover Rolling Turnover) HK$’000 HK$’000
23 February 2005 to 31 March 2005 2,615,650 N/A 30 April 2005 3,924,110 N/A 31 May 2005 3,593,420 N/A 30 June 2005 2,718,800 N/A 31 July 2005 3,006,480 N/A 31 August 2005 2,742,800 N/A 30 September 2005 3,400,250 N/A 31 October 2005 3,554,390 N/A 30 November 2005 2,229,420 N/A 31 December 2005 3,728,110 N/A 31 January 2006 2,435,650 N/A 28 February 2006 2,558,300 N/A 1 March 2006 to 15 March 2006 1,026,300 N/A 16 March 2006 to 31 March 2006 1,594,300 6,377 30 April 2006 1,830,060 7,320 31 May 2006 2,519,750 10,079 30 June 2006 2,674,860 10,699 30 July 2006 2,326,500 9,306 1 August 2006 to 28 August 2006 1,868,300 7,473 29 August 2006 to 31 August 2006 115,500 N/A
Total 50,462,950 51,254
Average (approximately 18.2 months for the Rolling Turnover and approximately 5.5 months for the Original Profit) 2,772,690 9,319
– 87 – APPENDIX I LETTER FROM SOMERLEY LIMITED
As disclosed in its assurance report, HLB concludes that the Rolling Turnover generated by Sat Ieng for the aforesaid period reflected in the schedule of the Rolling Turnover, in all material respect, is fairly stated. We have discussed with Sat Ieng the mechanism in determining the Rolling Turnover. We have also discussed with HLB regarding their scope of work performed in forming their opinion regarding the Rolling Turnover contained in the assurance report. HLB has examined the original documents such as rolling cards of customers of Sat Ieng and original monthly Junket Representative Settlement Forms from Sands Macao to ensure the accuracy of the Rolling Turnover. HLB has also re- calculated the commission income of Sat Ieng and examined the Front Money Out Slips issued by Sands Macao to ensure the accuracy of and the payment for the commission income. Furthermore, HLB has examined the ledger account of commission income of Sat Ieng to ensure accurate recognition of the commission income. Based on our understanding of the mechanism in determining the Rolling Turnover, we consider that the scope of work undertaken by HLB is reasonable and adequate in the circumstances. We have relied on the professional judgment of HLB in performing their work and have no reason to believe that the work performed by it is not sufficient. Based on the above, we concur with the opinion of HLB that the Rolling Turnover generated by Sat Ieng for the period from 23 February 2005 to 31 August 2006 reflected in the schedule of the Rolling Turnover, in all material respect, is fairly stated.
(ii) Analysis on the performance of the Rolling Turnover
As shown in the above table, the Rolling Turnover generated by Sat Ieng for each month commencing from March 2005 to August 2006 is in general rather stable with some fluctuation. The average monthly Rolling Turnover for the period is approximately HK$2,772.7 million and in turn, the monthly Original Profit is approximately HK$9.3 million.
As advised by Sat Ieng, the Rolling Turnover is subject to seasonal fluctuation. Generally, the Rolling Turnover is expected to do well during long holidays such as Christmas and Chinese New Year holidays. The high volume generated in April and May 2005 was attributable to the opening of Sands Macao, attracting both tourists and VIPs to try. Since June 2005, the monthly Rolling Turnover maintains at a range between HK$2,200 million to HK$3,600 million except Christmas holiday in December 2005 with HK$3,728.1 million, April 2006 with HK$1,830.1 million and August 2006 with HK$1,983.8 million. Various new casinos opened in Macau in the first half of 2006 including Emperor Hotel casino in February 2006, RIO Hotel casino in around April/May 2006 and Grand Waldo Hotel casino in April 2006. As advised by Sat Ieng, the relatively low Rolling Turnover in April 2006 was in line with its expectation and was mainly attributable to the temporary effect of tourists and VIPs being attracted to those new casinos. However, following the hit of new
– 88 – APPENDIX I LETTER FROM SOMERLEY LIMITED
casinos’ opening, the Rolling Turnover from May 2006 to July 2006 picked up again. As advised by Sat Ieng, during August 2006, Mr. Phua has been in discussion with Mr. Tang on the terms of the sale of the entire issued share capital/quota of Sat Ieng and some attention was drawn away at that time, resulting in a drop of the Rolling Turnover in August 2006. Based on the Junket Representative Settlement Forms issued by Sands Macao to Sat Ieng provided by the Company, the Rolling Turnover in September 2006 picked up to its normal level with an amount of approximately HK$2,213.5 million.
As advised by Sat Ieng, another limiting factor for the generation of Rolling Turnover by Sat Ieng in Sands Macao is the availability of hotel rooms in Sands Macao as the high quality of hotel rooms in Sands Macao has competitive advantage over others and it is one of the factors considered by the VIP customers in playing in Sands Macao. At present, only 51 hotel rooms are available for such purpose and supply always cannot meet the great demand. Following completion of expansion of Sand Macao in 2007, more guest rooms will be available. It is expected that the promotion efforts on Sands Macao conducted by Sat Ieng would be strengthened and more customers would be introduced by Sat Ieng after alleviating the supply problem and accordingly, more Rolling Turnover would be generated.
Under the Sands Profit Agreement, the Rolling Turnover to be shared by Worth Perfect shall include those Rolling Turnover generated by Sat Ieng and/or its customers at such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative or such other VIP gaming rooms whereby Sat Ieng can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives. As advised by Sat Ieng, it is planning to operate as a gaming promoter in one new casino in Macau in 2007. At present, Sat Ieng has commenced preliminary negotiation with the relevant casino operator in this regard. In the event that Sat Ieng obtains additional junket representative appointments in other casinos’ VIP gaming rooms, Worth Perfect will benefit accordingly.
Dore:
Completion of the Wynn Profit Agreement took place on 5 September 2006 and Worth Perfect has begun to account for the Wynn Profit since then. As disclosed in the assurance report on the Rolling Turnover generated by Dore issued by HLB set out in Appendix VI of the Circular, Dore generated an aggregate Rolling Turnover of approximately HK$3.76 billion during the period from 5 September 2006 to 27 September 2006. As advised by the Company, during the period from 28 September 2006 to 31 October 2006, Dore generated the Rolling Turnover of approximately HK$4.96 billion. The corresponding Wynn
– 89 – APPENDIX I LETTER FROM SOMERLEY LIMITED
Profit, being 0.4% of the Rolling Turnover, was approximately HK$15.1 million and HK$19.8 million during the aforesaid two periods respectively. On average, Dore generated monthly Rolling Turnover of approximately HK$4.36 billion during its first two months of operation. As a new Las Vegas style hotel, Wynn Macau attracted both tourists and VIPs to try during its grand opening. This resulted in Dore generating a remarkable Rolling Turnover in September and October 2006. We consider that it is not unreasonable to expect that Dore may experience a drop in the Rolling Turnover after this temporary “opening” effect, just as the case experienced by Sands Macao. However, given the Las Vegas style facilities and services offered by Wynn Macau, the Directors are of the view that Wynn Macau will play a significant role in the Macau gaming market and the Rolling Turnover generated by Dore will continue to achieve promising results in future.
As is in the case under the Sands Profit Agreement, the Rolling Turnover to be shared by Worth Perfect under the Wynn Profit Agreement is not limited to the Rolling Turnover generated by Dore and/or its customers at Wynn Macau VIP gaming rooms pursuant to the Wynn Junket Representative Agreement but also includes other VIP gaming rooms whereby Dore can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives. Though Dore has no expansion plan at present, if opportunities arise, it provides flexibility to the expansion of business of Dore.
On the above basis, the Directors anticipate that growth in Rolling Turnover would be achieved by Sat Ieng and Dore in the future. Undoubtedly, the gaming business, including the VIP is competitive. However, the Directors consider the quality of Las Vegas style facilities and superior services offered by Sands Macao and Wynn Macau play a significant role in the prospects, in particular, attracting businessmen and professionals who would like to bring families in visiting or attending conference, conventions etc. Given the Las Vegas style facilities and superior services of Sands Macao and Wynn Macau, the Directors consider that Sands Macao and Wynn Macau will continue to have a superior role in the industry. In overall terms, the Rolling Turnover for the year ended 31 December 2006 would be marginally increased compared with those of 2005 and a big jump is expected in 2007 when the full year effect of the Wynn Profit is incorporated.
– 90 – APPENDIX I LETTER FROM SOMERLEY LIMITED
4. Rationale for the Acquisition
As set out in the “Letter from the Board” in the Circular, given that the Group has suffered losses in the past three consecutive financial years, the Board has been actively exploring suitable investment opportunities. The Directors believe that through the Acquisition, the Group can broaden its revenue sources and obtain a stable source of income. In view of the acquisition of the Profits by Worth Perfect from Global and Smart under the Sands Profit Agreement and the Wynn Profit Agreement respectively, the recent economy of Macau and the prospects of Macau’s gaming business, the Directors believe that the Acquisition provides the Group with substantial and steady income stream.
The latest annual results announced by the Group show that the Group made further losses of approximately HK$15.3 million for the year ended 31 March 2006. In view of the competitive and difficult market conditions of the construction business and the effort and resources the Group has invested so far, we consider that the turnaround of the existing operations is not optimistic, at least in forthcoming future. In the circumstances, the Acquisition will, in our view, give a new income stream to the Group that it does not have at the moment. And this new income stream has proven, though short, track record.
We concur with the Directors’ view that the Acquisition will give an immediate boost to the Group’s profit attributable to the Shareholders and there is commercial justification for the Acquisition.
5. Outlook and prospects of the gaming industry in Macau, Sands Macao and Wynn Macau
Following the liberalisation of the gaming industry in Macau in 2002, Macau has demonstrated itself to be one of the largest and fastest growing gaming markets in the world. According to statistics published by DICJ, Macau had generated gross gaming revenue of approximately MOP45.8 billion in 2005 representing an increase of approximately 8.3% over the previous year. In the first nine months of 2006, the gross gaming revenue amounted to approximately MOP39.3 billion representing an increase of approximately 14.8% over the corresponding period last year. VIP Baccarat is by far the most popular game and VIP gaming tables dominate the market in Macau. In 2005, gaming revenue from VIP Baccarat represents about 62.7% of the total gross revenue from games of fortune.
Following the removal of travel restrictions for certain urban centres and economically developed regions in PRC, it is expected that individual leisure travel to Macau will increase. Coupled with the opening of Hong Kong Disneyland in September 2005 and benefited from the close proximity between Hong Kong and Macau, it is expected that the gaming and tourism industry in Macau will continue to grow in future. According to statistics published by the Statistics and Census Service Department of the Government of Macau, the number of visitor arrivals in Macau in the first ten months of 2006 amounted to approximately 17.9 million,
– 91 – APPENDIX I LETTER FROM SOMERLEY LIMITED
representing an increase of approximately 15.9% over the corresponding period last year. Visitors from PRC remained the major source of visitors constituting approximately 54.6% of visitors to Macau whereas 31.5% visitors came from Hong Kong. The number of visitors from South East Asia recorded a significant growth of approximately 74.6% during the period, demonstrating the increasing attractiveness of Macau as a regional tourist destination. Another driver for tourist and high roller growth is the emergence of an affluent middle class in PRC.
As at 30 September 2006, there were a total of 22 casinos in Macau. More casinos are expected to open in the next couple of years. Large supply is expected but would be absorbed by the double-digit visitors growth. However, there may be dilution of net winning per table. Based on the statistics published by DICJ and having factored in the timing of new introductions of gaming tables, the average net winning per table recorded a decrease of approximately 32% from 2004 to 2005. However, as advised by the management of the Company, it is expected that the drop in net winning per table does not have significant impact on Sands Macao and Wynn Macau. Both Sands Macao and Wynn Macau, being the Las Vegas-style casinos situated in Macau, have achieved strong operating performance after their opening. It indicates that the operating environment of the gaming business in Macau has been changed and casinos equipped with world class facilities (like Sands Macao and Wynn Macau) have competitive edges over old style casinos which are losing market share quickly. It is stated in the second quarter 2006 results announcement of Las Vegas Sands Corp. dated 2 August 2006 that through 30 June 2006, the year- over-year gross revenue growth of Sands Macao continued to outpace the gaming market in Macau. For example, in contrast to the decline in win per table per day in Macau overall, Sands Macao delivered an all-time record win per table per day, despite significant table capacity increases at both Sands Macao and in the Macau gaming market overall. It is further stated in the third quarter 2006 results announcement of Las Vegas Sands Corp. dated 1 November 2006 that through 30 September 2006, the year-over-year gross gaming revenue from table games increased by more than 50%, which was greater than three times faster than the growth in the Macau gaming market. Moreover, Sands Macao continued to maintain its overall market share by capturing over 21% of the table game market in Macau. It validates the market’s acceptance of Las Vegas style casinos in Macau.
According to the third quarter 2006 quarterly report of Las Vegas Sands Corp., following the opening in May 2006, Sands Macao expanded its gaming facilities to approximately 229,000 square feet. It is stated in the 2005 annual report of Las Vegas Sands Corp. that Sands Macao would have approximately 700 tables and 1,200 slot machines following completion of such expansion. At the same time, it has tried to fasten the pace of development of Venetian Macao in Cotai Strip so as to provide additional varieties and facilities, i.e. 3,000 hotel rooms available to travellers. Cotai Strip, a reclaimed land between Coloane Island and Taipa, will be developed as an international destination for resorts and casinos. Construction of the Venetian Macao, being the first resort on Cotai Strip, remains on track for opening in summer of 2007. Both Sands Macao and Venetian Macao’s luxurious decoration, value added services and bigger area attract high end customers. Further information on Sands Macao’s development plan is set out in the “Letter from the Board” of this Circular.
– 92 – APPENDIX I LETTER FROM SOMERLEY LIMITED
It is disclosed in the quarterly results announcement for the period ended 30 September 2006 of Wynn Resorts, Limited dated 7 November 2006, the first phase of Wynn Macau features 600 hotel rooms and suites, approximately 212 table games and 375 slot machines in approximately 100,000 square feet of casino gaming space. Further expansion is being carried out. The second phase will include approximately 135,000 square feet of additional casino space, retail space, a theatre, and a dramatic front feature attraction, and is expected to be completed and open to the public in stages in 2007. It is further stated in the aforesaid results announcement that application has been made to the Macau Government for a land concession for an additional 54 acres of land on Cotai Strip in Macau for future development.
Despite the increasing competition in the gaming industry, we are of the view that the future outlook of the tourism and gaming business in Macau is positive in general and consider that being pioneers in the Las Vegas style casinos, Sands Macao and Wynn Macau will continue to have a superior role in the industry.
6. Principal terms of the Acquisition
(a) Assets to be acquired
Pursuant to the New Target Acquisition Agreement, the Acquisition involves the sale by Rich Game and the purchase by Team Jade the entire issued share capital of the Target Company which has a 49% interest in Worth Perfect.
(b) Consideration
The consideration for the acquisition of the entire issued share capital of Target Company which holds a 49% interest in Worth Perfect is HK$539 million (the “Consideration”). On the basis of the Consideration, the Acquisition values the entire Target Group at approximately HK$1,100 million.
As set out in the “Letter from the Board”, the Consideration was determined after arm’s length negotiation between Team Jade and Rich Game after considering the Profit Guarantees, that the Acquisition will broaden the Group’s revenue source and provide a substantial and stable income source to the Group in view of the acquisition of the Profits by Worth Perfect from Global and Smart under the Profit Agreements, the recent economic boom in Macau contributed by the loosening of travel restrictions of Mainland Chinese visitors and the prospects of Macau’s gaming business.
– 93 – APPENDIX I LETTER FROM SOMERLEY LIMITED
Evaluation of the Consideration:
(i) Comparison against comparable transactions
In order to assess the fairness and reasonableness of the Consideration, we have tried to identify acquisition of income stream generated from rolling turnover of gaming promoter business by other Hong Kong listed issuers, the structure that the Acquisition has, in the market since January 2003 up to the Latest Practicable Date.
Our result is as follows:
Comparable company Date of Price to (stock code) announcement Consideration earnings ratio
Long Success 21 August 2006 HK$230.2 million for 7.3 times (Note 1) International acquisition of 70% (Holdings) Limited interests of the entire (“Long Success”) net profit of Man Pou (8017) Gambling Promotion Company Limited (“Man Pou”) which is estimated to be approximately 0.4% of the rolling turnover generated by Man Pou and/or its customers at the Jun Ying VIP Club and the entire performance bonuses (if any) received by Man Pou
The Company 6 April 2006 and HK$539 million for 7.5 times (Note 2) 18 September a 49% interest in 7.3 times (Note 2) 2006 Worth Perfect
Source: the Stock Exchange
Notes:
1. Extracted from the announcement of Long Success dated 21 August 2006 and the price to earnings ratio is determined by using the average annual profit for the first two years based on the quarterly profit guarantee.
2. Historical Original Profit from April 2005 to March 2006 has been used for the calculation of the ratio of 7.5 times. The guaranteed Profits for the First Relevant Period has been used for the calculation of the ratio of 7.3 times.
– 94 – APPENDIX I LETTER FROM SOMERLEY LIMITED
As indicated in above table, the price to earnings ratio for the Acquisition is more or less equal to that for the acquisition of profit of Man Pou.
Being junket representatives, Sat Ieng and Dore are primarily responsible for introducing gaming customers to Sands Macao and Wynn Macau respectively and actively promoting Sands Macao and Wynn Macau to existing and potential customers respectively. In return, Sat Ieng is entitled to receive a commission on the Rolling Turnover from Sands Macao and Dore receives a fixed rate on the gaming win and a complimentary credit calculated at a fixed rate on the Rolling Turnover from Wynn Macau. The profit to be shared by the Target Group is directly related to the Rolling Turnover, being 0.4% thereof. As such, we consider that acquisition of gaming promoter business can also be used for comparison against the Acquisition. Accordingly, we have identified and reviewed for reference purpose all relevant transactions involving principally acquisition of gaming promoter business announced by companies (the “Other Comparable Companies”) listed on the Stock Exchange since January 2003 up to the Latest Practicable Date (the “Other Comparable Transactions”) as set out below:
Other Comparable Companies Date of Price to (stock code) announcement Consideration earnings ratio
Century Legend 24 November HK$11.7 million for 8 times (Note 1) (Holdings) Limited 2003 acquisition of an (“Century Legend”) aggregate of 10% (79) interests in the junket operations in casinos in Macau
Century Legend 5 February 2004 HK$23.4 million for 9.6 times (Note 2) (79) acquisition of an aggregate of 20% interests in the junket operations in casinos in Macau
Century Legend 20 September HK$15 million for 23 times (Note 3) (79) 2004 acquisition of an effective interest of 2.795% in the junket business in a casino on board a cruise liner
– 95 – APPENDIX I LETTER FROM SOMERLEY LIMITED
Other Comparable Companies Date of Price to (stock code) announcement Consideration earnings ratio
Massive Resources 25 November HK$35 million for 41.7 times (Note 4) International 2004 acquisition of 2.8% Corporation effective interests in Limited junket and other (70) related operation in a hotel in Macau
Guo Xin Group 20 December HK$96 million for 1.5 times Limited (1215) 2004 acquisition of 60% interests in junket business and settlement services relating to exchange of gambling chips for players in casinos on a cruise liner
Century Legend 19 October 2005 HK$13.6 million for 17.6 times (79) disposal of an effective interest of 2.795% in the junket business in a casino on board a cruise liner
Average 16.9 times
The Company 6 April 2006 and HK$539 million for 7.5 times (Note 5) 18 September a 49% interest in 7.3 times (Note 5) 2006 Worth Perfect
Source: the Stock Exchange
Notes:
1. The ratio represents the consideration of HK$11.7 million over the average profit of the junket operations.
2. The ratio represents the consideration of HK$23.4 million over the average of the return on the vendor’s investment into the business interests.
3. Annualized historical profit has been used for the calculation of the ratio.
4. Annualized guaranteed profit has been used for the calculation of the ratio.
5. Historical Original Profit from April 2005 to March 2006 has been used for the calculation of the ratio of 7.5 times. The guaranteed Profits for the First Relevant Period has been used for the calculation of the ratio of 7.3 times.
– 96 – APPENDIX I LETTER FROM SOMERLEY LIMITED
We note that Honesty Treasure International Holdings Limited (formerly known as Pearl Oriental Enterprises Limited) (stock code: 600) issued an announcement dated 6 January 2005 relating to, among others, an acquisition of an indirect interest in a junket business in hotel in Macau. However, as the transaction involves principally acquisition of interests in the hotel and other properties, we consider that such transaction is not directly comparable to the Acquisition. Riche Multi- Media Holdings Limited (stock code: 764) announced on 15 April 2005 that it acquired the entire interests in a company appointed as a service provider for the promotion and introduction of customers to a cruse liner and the provision of services involving exchange of gambling chips for the players in the casinos on a cruise liner. However, sufficient information was not available for the purpose of calculating the price to earnings ratio for comparison. Accordingly, we have excluded the aforesaid transactions from our analysis on Other Comparable Transactions.
The above table shows that the price to earnings ratio of the Other Comparable Transactions ranges between 1.5 and 41.7 times. Both the price to earnings ratios for the Acquisition of approximately 7.5 times and 7.3 times, calculated based on historical Original Profit for the period from April 2005 to March 2006 and the guaranteed Profits for the First Relevant Period respectively, approach the lower end of the above market range and represent a significant discount to the average of the price to earnings ratio of the Other Comparable Transactions of approximately 16.9 times.
(ii) Profits (0.4% of the Rolling Turnover)
Pursuant to the Sands Profit Agreement, Worth Perfect is entitled to receive 0.4% of the Rolling Turnover generated by Sat Ieng and/or its customers at Sands Macao’s Paiza Club gaming rooms pursuant to the Sands Junket Representative Agreement and such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative or such other VIP gaming rooms whereby Sat Ieng can procure the sale/ assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives. Completion of the Sands Profit Agreement is subject to, among other things, Global having legally acquired the Sands Profit pursuant to the Sat Ieng Profit Agreement and the obtaining of all necessary Macau Government approval relating to the change of the ownership of Sat Ieng in respect of the gaming promoter licence of Sat Ieng. Upon completion of the Sands Profit Agreement, the Sands Profit generated from Sat Ieng will start to be accounted for in the accounts of Worth Perfect.
In accordance with the Wynn Profit Agreement, Worth Perfect is also entitled to 0.4% of the Rolling Turnover generated by Dore and/or its customers at Wynn Macau VIP gaming rooms pursuant to the Wynn
– 97 – APPENDIX I LETTER FROM SOMERLEY LIMITED
Junket Representative Agreement and such other VIP gaming rooms whereby Dore is a duly appointed junket representative or such other VIP gaming rooms whereby Dore can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives.
The Profits under the Profit Agreements are simply based on 0.4% of the Rolling Turnover, no share of loss is required. The only negative effect on profitability of the Acquisition is the interest expenses to be incurred from the Convertible Bond and the First Promissory Notes, and the imputed interest expense to be recognised in relation to the interest-free Second Promissory Note. Accordingly, downside risk on profitability is limited to a manageable level. We consider such arrangement provides the Group a good opportunity to invest in the booming Macau gaming industry in a prudent approach.
As advised by Sat Ieng, the net profit it receives, after deducting commission paid by it to its agent, administrative expenses and tax payable to the Macau Government, is over the Original Profit. The amounts of commission, administrative expenses and tax payable incurred by Sat Ieng are not provided to the Company. However, we have been informed that HLB has issued a comfort letter to the Company confirming that nothing has come to their attention that causes them to believe that the net profit attributable to the shareholder of Sat Ieng is not positive after deducting the Original Profit for the period from 23 February 2005 to 28 August 2006. As advised by the Company, since the completion of the Original Profit Agreement, Sat Ieng had assigned the Original Profit to Worth Perfect up to the date of termination of the Original Profit Agreement. We are further advised by the Company that Global is set up solely for entering into of the Sands Profit Agreement and the Sat Ieng Profit Agreement once the approval from the Macau Government in respect of the transfer of the entire issued share capital/ quota in Sat Ieng by Mr. Phua to Mr. Tang has been obtained, and holding 51% interest of Rich Game and Global has no other material assets or liabilities. Based on the above, we have no reason to believe that Sat Ieng cannot honor its obligation to assign the Sands Profit to Global when the Sat Ieng Profit Agreement is executed subsequently and that Global cannot honor its obligation to assign the Sands Profit to Worth Perfect under the Sands Profit Agreement. Should Global not assign the Sands Profit to Worth Perfect, legal action can be taken against Global for the breach of terms of the Sands Profit Agreement.
As shown in the accountants’ report on Worth Perfect set out in Appendix IV to this Circular, an amount of approximately HK$51.3 million was due from Mr. Tang to Worth Perfect as at 30 September 2006, representing the amount of the Original Profit assigned to Worth Perfect for the period from 16 March 2006 to 28 August 2006 pursuant to
– 98 – APPENDIX I LETTER FROM SOMERLEY LIMITED
the Original Profit Agreement and an amount of approximately HK$15.1 million was due from Smart to Worth Perfect as at 30 September 2006, representing the amount of the Wynn Profit assigned to Worth Perfect for the period from 5 September 2006 to 27 September 2006 pursuant to the Wynn Profit Agreement. We understand from the Directors that the bank accounts of Worth Perfect cannot be opened up to now because Mr. Tang and Mr. Scolari have not actively pursued on that given the prolonged delay on the Acquisition. Therefore, the Profits assigned remained unsettled as at the Latest Practicable Date. However, both Smart and Mr. Tang have undertaken to pay Worth Perfect the amounts due on or before Completion. They have also indicated to the Company that they will actively proceed on opening the bank accounts of Worth Perfect once the Circular is issued and the time for Completion is near. We are further advised by the Directors that if the bank accounts of Worth Perfect cannot be opened on or before Completion, an escrow account with Worth Perfect’s lawyers will be opened and Worth Perfect will direct Smart and Mr. Tang to pay all the amounts due from them to such escrow account. Should the bank accounts of Worth Perfect still not be opened after Completion, Worth Perfect will direct Smart and Global to pay the Profits to such escrow account until the opening of the bank accounts.
We are advised by the Directors that the commission income received by Dore for the period from 5 September 2006 to 27 September 2006 is based on a certain percentage of the Rolling Turnover generated by Dore. We have been further informed that since 28 September 2006, the determination basis has been changed and the commission income comprises (a) a fixed rate on the gaming win attributable to Dore’s assigned tables at Wynn Macau; and (b) a complimentary credit calculated at a fixed rate on the Rolling Turnover generated by Dore and/or its customer at Wynn Macau VIP gaming rooms. Complimentary credit is the rooms, food and beverage allowances given to Dore by Wynn Macau, which is calculated at a fixed rate on the Rolling Turnover generated by Dore. Such complimentary credit will not be deducted from the Rolling Turnover generated by Dore. Dore can use such credit to purchase/offset from Wynn Macau any room, transportation, food, beverage or spa services its customers consume and hence, does not need to make any payment back to Wynn Macau for any such services purchased. The Wynn Profit is determined by reference to the Rolling Turnover instead of the commission income earned by Dore. Thus, we consider that such change would not affect Worth Perfect’s right in sharing the Wynn Profit under the Wynn Profit Agreement. As advised by Dore, the net profit it receives, after deducting commission paid by it to its agent, administrative expenses and tax payable to the Macau Government, is over the Wynn Profit. The amounts of commission, administrative expenses and tax payable incurred by Dore are not provided to the Company. Nevertheless, HLB has issued a comfort letter
– 99 – APPENDIX I LETTER FROM SOMERLEY LIMITED
to the Company confirming that nothing has come to their attention that causes them to believe that the net profit attributable to the shareholder of Dore is not positive after deducting the Wynn Profit for the period under review. As advised by the Company, since completion of the Dore Profit Agreement and the Wynn Profit Agreement, Dore and Smart have been assigning the Wynn Profit to Smart and Worth Perfect respectively. We further understand from the Company that Smart is set up solely for entering into of the Dore Profit Agreement and the Wynn Profit Agreement, and holding 49% interest of Rich Game and Smart has no other material assets or liabilities. Based on the above, we have no reason to believe that Dore and Smart cannot honour their respective obligations to assign the Wynn Profit to Smart and Worth Perfect respectively. We understand from the legal advisers to the Company as to the Macau laws that the Wynn Profit Agreement and the transactions contemplated thereunder do not contravene the laws of Macau. Should Smart not assign the Wynn Profit to Worth Perfect, legal action can be taken against Smart for the breach of terms of the Wynn Profit Agreement.
As set out in the “Letter from the Board”, Sands Macao and Wynn Macau pay commissions to Sat Ieng and Dore respectively on a monthly basis and Sat Ieng will undertake to Global to pay Global the whole amount of the Sands Profit for each month within 15 days after the end of each calendar month under Sat Ieng Profit Agreement. Similarly, Dore undertakes to Smart to pay Smart the entire amount of the Wynn Profit for each month within 15 days after the end of each calendar month pursuant to the Dore Profit Agreement. According to the Sands Profit Agreement and the Wynn Profit Agreement, Global and Smart have respectively undertaken to Worth Perfect to pay Worth Perfect the whole amount of the respective Sands Profit and the Wynn Profit for each month within 15 days after the end of each calendar month. Given that (a) the credit terms under the Sat Ieng Profit Agreement, the Dore Profit Agreement, the Sands Profit Agreement and the Wynn Profit Agreement are the same; (b) necessary time is required by Global and Smart to arrange the remittance from Macau to the Hong Kong bank account of Worth Perfect; and (c) the credit terms of 15 days are relatively short, we consider the aforesaid credit arrangement reasonable.
(iii) Profit Guarantees
Pursuant to the Deed of Guarantee, Mr. Tang and Mr. Scolari have jointly and severally guaranteed to Worth Perfect that the Profits for the First Relevant Period, being 16 March 2006 to 15 March 2007, shall not be less than HK$150 million whereas the Profits for the Second Relevant Period, being 16 March 2007 to 15 March 2008, shall not be less than HK$250 million. In the event that the Profits are less than the guaranteed amount, Mr. Tang and Mr. Scolari have jointly and severally undertaken
– 100 – APPENDIX I LETTER FROM SOMERLEY LIMITED
to pay to Worth Perfect the shortfall within 60 days after the end of the aforesaid relevant periods.
Taking into account the Group’s 49% equity interests in Worth Perfect, the Group will receive, at least, HK$73.5 million for the first year ending 15 March 2007 and HK$122.5 million for the second year ending 15 March 2008. An aggregate of HK$196 million, representing approximately 36.4% of the Consideration, will be received by the Group in the first two years in any event.
We consider the Profit Guarantees provide a reasonable comfort to the Group in view of the relative short track record of Sat Ieng and Dore and their gaming promoter operations in Macau.
(iv) Renewal of gaming promoter licences of Sat Ieng and Dore, the Sands Junket Representative Agreement and the Wynn Junket Representative Agreement
Sat Ieng possesses a renewable gaming promoter licence granted from the Macau Government in 2005 and is valid until 31 December 2006. Sat Ieng is appointed by Sands Macao as a junket representative under the Sands Junket Representative Agreement. Dore also possesses a renewable gaming promoter licence which is valid up to 31 December 2006 and is appointed by Wynn Macau as a junket representative under the Wynn Junket Representative Agreement. The gaming promoter licences and the respective Sands Junket Representative Agreement and the Wynn Junket Representative Agreement are integral parts of the existing businesses of Sat Ieng and Dore respectively.
As advised by the Company, the gaming promoter licence granted to any gaming promoter by the Macau Government is valid only for one year, but renewable. The licence can only be granted when the applicant is found to comply with the probity requirements. In order to renew the licence, the gaming promoter has to submit an application to the Macau Government by 30 September of each year. The application form shall be accompanied with a declaration of a concessionaire indicating the intention of the concessionaire to work with such gaming promoter. As advised by the management of Sat Ieng and Dore, they have submitted the respective applications to the Macau Government to renew their licences before the deadline. As advised by the Company, it is not aware of any circumstance that makes Sat Ieng or Dore fail to fulfill the probity requirement that they had fulfilled for the grant of the gaming promoter licences. Furthermore, the Directors are not aware of any breaches of Macau laws or terms of the Sands Junket Representative Agreement and the Wynn Junket Representative Agreement by Sat Ieng and Dore respectively. As more new casinos will be opened in coming years, the demand for independent gaming promoters for introducing high rollers
– 101 – APPENDIX I LETTER FROM SOMERLEY LIMITED
is increasing. Accordingly, Sat Ieng and Dore believe that there will be no difficulty in renewing their respective gaming promoter appointments with Sands Macao and Wynn Macau in foreseeable future. The Directors also believe that the chance of non-renewal of gaming promoter licences of Sat Ieng and Dore after its expiry on 31 December 2006 is highly unlikely.
Pursuant to the New Target Acquisition Agreement, in the event that the gaming promoter licence of Sat Ieng or Dore is cancelled, revoked, terminated or is not renewed or amended in a material and adverse manner to Sat Ieng or Dore (as the case may be) by the relevant authorities in Macau at any time before the maturity date of the First Promissory Notes, Rich Game shall return the First Promissory Notes to Team Jade and Team Jade shall not be obliged to pay any outstanding sum under the First Promissory Notes even if the Profits received by the Group exceed the amount of the total consideration of HK$539 million at the time of the cancellation, revocation, termination or non-renewal of or adverse and material amendments made to the gaming promoter licence of Sat Ieng or that of Dore. The aggregate principal amount of the First Promissory Notes is HK$244.6 million, representing approximately 45.4% of the Consideration. We consider that such arrangement provides a reasonable protection to the Company against the risk that the gaming promoter licence of Sat Ieng or Dore may not be renewed, though unlikely. Together with the approximately 36.4% of the Consideration covered by the Profit Guarantees as mentioned above, over 80% of the Consideration is covered either by way of cash or, in effect, reducing the Consideration. On the above basis, we consider the potential risk to the Group is mitigated to an acceptable level in this respect.
We have been informed that because of the confidentiality of the Junket Representative Agreements, the Directors had not reviewed the Junket Representative Agreements. However, extensive due diligence work has been performed by the Directors to satisfy themselves the existence of the Junket Representative Agreements. We have discussed with the Directors the scope of the due diligence work performed by them and their reviewing on (a) the Junket Representative Settlement Forms issued by Sands Macao to Sat Ieng; (b) the Licenca De Promotor De Jogo Pessoa Colectiva (法人的博彩中介人准照) granted by DICJ to Sat Ieng and Dore; and (c) the Macau legal opinions (the “Macau Legal Opinions”) prepared by the respective Macau lawyers instructed by the solicitors acting for Sat Ieng and Dore stating the Macau lawyers of Sat Ieng and Dore having examined the Sands Junket Representative Agreement and the Wynn Junket Representative Agreement respectively. We have obtained from the Company copies of (a) certain Junket Representative Settlement Forms and the Junket Promoter Settlement Forms; (b) the aforesaid Licenca De Promotor De Jogo Pessoa Colectiva
– 102 – APPENDIX I LETTER FROM SOMERLEY LIMITED
(法人的博彩中介人准照) granted to Sat Ieng and Dore; and (c) the Macau Legal Opinions. The Junket Representative Settlement Forms or as the case may be, the Junket Promoter Settlement Forms include, among other things, total monthly rolling turnover and the related commission income calculation, issued by Sands Macao to Sat Ieng and Wynn Macau to Dore. This demonstrates that Sat Ieng and Dore earn commission in respect of the Rolling Turnover from Sands Macao and Wynn Macau respectively. We also note from the Licenca De Promotor De Jogo Pessoa Colectiva (法人的博彩中介人准照) that Sat Ieng and Dore are allowed to work as a gaming promoter with Venetian Macau Limited, the company operating Sands Macao and Wynn Resorts (Macau), S.A., the company operating Wynn Macau respectively. It is stated in the Macau Legal Opinions that the Macau lawyers of Sat Ieng and Dore have examined the copy of the Sands Junket Representative Agreement and the Wynn Junket Representative Agreement respectively. Having taking into account the due diligence work performed by the Directors and our review on copies of the aforesaid documents, we have no reason to believe the Junket Representative Agreements do not exist. Details on such due diligence work are set out in the paragraphs headed “Directors’ view on the Junket Representative Agreements and the due diligence work done by the Directors” set out in the “Letter from the Board” of the Circular. As advised by the management of the Company, the Junket Representative Agreements may be terminated at any time by either party to the Sands Junket Representative Agreement and the Wynn Junket Representative Agreement, the terms of each of the Junket Representative Agreements are substantially shorter than that of the Profit Agreements and may or may not be renewable upon expiry. Moreover, as the Company is not a party to either of the Junket Representative Agreements, the Company has no control on termination or renewal of the Junket Representative Agreements. Although the major terms of the Junket Representative Agreements have not been disclosed to the Directors, the Directors understand that in general, the term of the junket representative agreement between the gaming promoter and the casino operator is tied in with the term of the gaming promoter licence. We note from the announcement of Long Success dated 21 August 2006 that Long Success experienced similar situation. Major terms of the junket representative arrangement were not disclosed to Long Success due to confidentiality. Long Success stated in its announcement that, in general, the term of the agreement between the gaming promoter and the casino operator was tied in with the term of the gaming promoter licence. We consider that it is normal business practice for the term of commercial contract to tie in with the term of the relevant licences required to carry out the business contemplated under such contracts.
As set out in the “Letter from the Board”, the Directors have met with the representative of Sands Macao and note that in considering whether to renew the junket representative agreements with its junket
– 103 – APPENDIX I LETTER FROM SOMERLEY LIMITED
representatives, Sands Macao will, in general, take into account a number of factors including, among others, (a) whether the junket representatives have complied with the requirements imposed by the Macau authorities; (b) the level of rolling turnover generated by the junket representatives; and (c) whether the junket representatives have obtained renewal of the gaming promoter licence from the Macau Government. The Directors understand that Sat Ieng is one of the most successful junket representatives appointed by Sands Macao. To the best knowledge and belief of the Directors, Sands Macao has appointed 10 junket representatives. The Rolling Turnover generated by the customers introduced by Sat Ieng for the first half of 2006 is approximately HK$14.6 billion as shown in the assurance report contained in Appendix V to this Circular. As extracted from the relevant quarterly results announcement and report of Las Vegas Sands Corp., Sands Macao generated a rolling chip volume of US$3.7 billion (equivalent to approximately HK$28.9 billion) and US$4.26 billion (equivalent to approximately HK$33.2 billion) for the three months ended 31 March 2006 and the three months ended 30 June 2006 respectively. Accordingly, the Rolling Turnover generated by Sat Ieng represents approximately 24% of the total rolling chip volume of Sands Macao for the six months ended 30 June 2006. The Directors were informed by the representatives of Sands Macao that so far, Sands Macao finds the performance of Sat Ieng satisfactory as Sat Ieng beats their expected turnover and its customers base is good and broad. We are further advised by the Directors that the change of ownership of Sat Ieng has been notified to Sands Macao which expresses no objection to the change. Dore was one of the only three licensed gaming promoters appointed by Wynn Macau as at the Latest Practicable Date under Wynn Macau’s stringent selective process and is the largest gaming promoter in Wynn Macau who operates 15 gaming tables in VIP gaming rooms. Given the outstanding performance of Sat Ieng and Dore in generating Rolling Turnover since their operations and other factors including, among others, that the chance of getting replacements of Sat Ieng and Dore with compatible size and relationship in the near future is not high, we concur with the Directors’ view that there should be no material difficulties for the renewal of the Junket Representative Agreements upon expiry.
– 104 – APPENDIX I LETTER FROM SOMERLEY LIMITED
(v) Expansion plans of Sat Ieng and Dore
Pursuant to the Sands Profit Agreement, besides the entitlement of 0.4% of the Rolling Turnover generated by Sat Ieng and/or its customers at Sands Macao, Worth Perfect is also entitled to 0.4% of the Rolling Turnover generated at such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative or such other VIP gaming rooms whereby Sat Ieng can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives. At present, Sands Macao’s Paiza Club gaming rooms are the only VIP gaming rooms at which Sat Ieng is duly appointed as a junket representative. According to public available information from various sources, there are over ten casinos scheduled to be opened in Macau in the next couple of years. Given the proven track record of Sat Ieng in Sands Macao, we concur with the Directors’ view that Sat Ieng has an ability to secure other junket appointment by other casino operators. As advised by Sat Ieng, it is planning to operate as junket in one new casino in Macau in 2007. At present, Sat Ieng is in preliminary negotiation with the relevant casino operator in this regard. Similarly, the Rolling Turnover to be shared by Worth Perfect under the Wynn Profit Agreement also includes other VIP gaming rooms whereby Dore can procure the sale/assignment of a percentage of Rolling Turnover generated by the duly appointed junket representatives. We are advised by the Directors that Dore has no expansion plan at present as it wants to focus its resources on developing and expanding its existing business in Wynn Macau.
(vi) Method of payment
The Consideration of HK$539 million has been/will be satisfied by way of deposit and the issue of convertible bond and promissory notes of the Company as discussed below. Smart Town has placed (the “Placing”) its 162.72 million existing Shares at HK$1.00 per Placing Share to the Placees pursuant to the Placing Agreement to finance the payment of the refundable deposit of HK$160 million for the Acquisition. In return, the Company will issue the Second Promissory Note to Smart Town upon Completion. The remaining balance of HK$379 million will be satisfied at Completion as to HK$134.4 million by the issue of the Convertible Bond and as to HK$244.6 million by the issue of the First Promissory Notes.
Placing Agreement and the Second Promissory Note
We have discussed with the management of the Company about the rationale of financing the deposit of HK$160 million by the aforesaid way. The Board has considered possibility of raising funds other than the Placing, such as placing of new Shares and
– 105 – APPENDIX I LETTER FROM SOMERLEY LIMITED
by way of bank and other borrowings to finance the upfront deposit. However, having considered the fundamentals of the Group and its loss-making position and the fact that the Acquisition only represents a new line of business of the Group, the results of which are yet to be proved, the valuation of the Company perceived by the placees may not be truly reflected for the time being. Accordingly, the Board considers that placing of new share with immediate dilution effect to the Shareholders is not appropriate at the time.
On the contrary, the Second Promissory Note, which has a fixed term of 10 years and does not have any premium over the payment obligations for any early repayment, could provide a greater flexibility to the Group. Its interest and security free feature would not give rise to any additional interest burden to the Group. The terms of the Second Promissory Note are set out in details in the “Letter from the Board” of the Circular. In view of the fundamentals of the Group and its loss-making position in the past years, obtaining bank and other borrowings by the Group may not be realistic and more importantly, compared with that of bank and other borrowings, the terms of the Second Promissory Note are no doubt more favourable.
Convertible Bond
The Convertible Bond bears interest of 5% per annum and has a fixed term of ten years maturity. The exercise rights attached to the Convertible Bond will only be exercisable commencing from the third year after the date of issue and the resulting shareholding to be held by the bondholder in the Company is subject to a maximum for each period, starting from 6% in the third year and 2% increment thereafter during the 10 years term. Terms of the Convertible Bond are set out in details in the “Letter from the Board” of the Circular. Analysis on the Conversion Price is set out in the section headed “Share price performance and comparison with the Conversion Price” below.
First Promissory Notes
The First Promissory Notes bear interest of 5% per annum and is an unsecured long-term debt with maturity of 10 years. Early repayment with no premium over or discount to the payment obligations, at the Company’s option, is allowed. This provides flexibility to the Group should the Group consider early repayment is in the interests of the Company at some points in time during the 10 years term, in particular, for the purpose of reducing interest expense. All the terms of the First Promissory Notes and the Second
– 106 – APPENDIX I LETTER FROM SOMERLEY LIMITED
Promissory Note are largely the same, except that the principal amount of the Second Promissory Note is repayable only after the principal amount of the First Promissory Notes is fully paid by the Company. This reflects that the controlling Shareholder agrees the priority of repayment of the loan by the Group should be given to those interest-bearing loans from third party. Such arrangement is in the interests of the Company and shows that the controlling Shareholder is committed to the benefits of the Company. Terms for the First Promissory Notes are set out in details in the “Letter from the Board” of the Circular.
Financing the Acquisition by the unsecured long term loans and the Convertible Bond enables the Group to make an acquisition of a stable income with growth potential which it could not have afforded if immediate substantial cash consideration had been required.
Based on the factors discussed above, we are of the view that the Consideration is fair and reasonable.
(c) Other material terms
Undertakings:
Mr. Tang and Mr. Scolari have separately given their written undertakings that they will not, within ten years from the signing of the Sands Profit Agreement or the Wynn Profit Agreement (as the case may be), directly or indirectly transfer or otherwise dispose of or create any encumbrance or other rights in respect of any of the shares or directly or indirectly transfer or otherwise dispose of or create any encumbrance or other rights over any shares/quota in any company controlled by them which is for the time being the beneficial owner of any of the shares/quota of Sat Ieng or Dore (as the case may be) unless with the prior written consent given by Team Jade.
As stipulated under the Sands Profit Agreement and the Wynn Profit Agreement, Mr. Tang and Mr. Scolari have respectively undertaken to Worth Perfect that they will not at any time carry on the business of directing gaming patrons to casinos in Macau without the prior written unanimous approval from the shareholders of Worth Perfect.
Given the success of the Target Group, at least for the time being, heavily rely on the ability of Mr. Tang and Mr. Scolari to introduce gaming customers to Sands Macao and Wynn Macau, the above restrictions on the transfer of Mr. Tang’s and Mr. Scolari’s respective interests in Sat Ieng and Dore, and the non-competition undertaking, which are able to give the Target Group a satisfactory degree of protection to safeguard its interests, are in the interests of the Company.
– 107 – APPENDIX I LETTER FROM SOMERLEY LIMITED
7. Share price performance and comparison with the Conversion Price
The Conversion Price of HK$1.00 per Conversion Share was arrived at after arm’s length negotiation between the parties and was based on (a) the average closing price of the Shares of approximately HK$1.50 per Share for the 30 trading days up to and including 28 August 2006, being the last trading day (the “Second Last Trading Day”) on which the Shares were traded on the Stock Exchange prior to the publication of Announcement in relation to the New Target Acquisition Agreement; and (b) the conversion price of the convertible bond under the transactions contemplated under the Target Acquisition Agreement.
We have reviewed the closing price performance and daily trading volume of the Shares in assessing the Conversion Price of HK$1.00. Set out below are charts of the closing prices and the daily trading volume of the Shares during a period (the “Period”) starting from 1 March 2005 (approximately one year preceding 15 March 2006, being the last trading day (the “First Last Trading Day”) on which the Shares were traded on the Stock Exchange prior to the publication of announcement relating to the Target Acquisition Agreement) up to and including the Latest Practicable Date:
Chart 1
HK$ per Share 2.5
2.0
1.5
1.0
Conversion Price = HK$1
0.5
0.0 1-Jul-05 1-Jul-06 1Sep-06 1-Jan-06 1-Jun-05 1-Jun-06 1-Oct-05 1-Oct-06 1-Feb-06 1-Sep-05 1-Dec-05 1-Dec-06 1-Apr-05 1-Apr-06 1-Mar-05 1-Mar-06 1-Aug-05 1-Aug-06 1-Nov-05 1-Nov-06 1-May-05 1-May-06
Source: Bloomberg
– 108 – APPENDIX I LETTER FROM SOMERLEY LIMITED
Chart 2
Trading volume (Shares) 250,000,000
200,000,000
150,000,000
100,000,000
50,000,000
0 1-Jul-05 1-Jul-06 1Sep-06 1-Jan-06 1-Jun-05 1-Jun-06 1-Oct-05 1-Oct-06 1-Feb-06 1-Sep-05 1-Dec-05 1-Dec-06 1-Apr-05 1-Apr-06 1-Mar-05 1-Mar-06 1-Aug-05 1-Aug-06 1-Nov-05 1-Nov-06 1-May-05 1-May-06
Source: Bloomberg
As shown in the Chart 1 above, the closing price of the Shares fluctuated within a narrow range of HK$1.00 and HK$1.20 per Share for the period from 1 March 2005 up to and including the First Last Trading Day. On resumption of trading in the Shares on the Stock Exchange after the release of the April Announcement for the Target Acquisition Agreement, the closing price of the Share rose from HK$1.03 to HK$1.60 per Share and the daily trading volume increased substantially. In the days following publication of the April Announcement, the closing price of the Share continued to strengthen and surged to HK$2.25 per Share on 13 April 2006, which was the highest closing price of the Share during the Period. Thereafter, the closing price of the Share fluctuated in a range between HK$1.25 and HK$2.15 per Share. The Company issued an announcement on 24 May 2006 confirming that it was not aware the reason for the decrease in the Share price. The Share price closed at HK$1.75 per Share on the Latest Practicable Date.
(i) Comparison of the Conversion Price against the Share price for the period up to and including the First Last Trading Day
The Conversion Price represents:
• a discount of approximately 3.0% to the closing price of HK$1.03 per Share as quoted on the Stock Exchange on the First Last Trading Day, being 15 March 2006;
• a discount of approximately 0.6% to the average closing price of the Shares of approximately HK$1.006 per Share for the five trading days ended on the First Last Trading Day;
– 109 – APPENDIX I LETTER FROM SOMERLEY LIMITED
• a discount of approximately 0.3% to the average closing price of the Shares of approximately HK$1.003 per Share for the ten trading days ended on the Fist Last Trading Day; and
• a discount of approximately 0.1% to the average closing price of the Shares of approximately HK$1.001 per Share for the thirty trading days ended on the First Last Trading Day.
(ii) Comparison of the Conversion Price against the Share price for the period up to and including the Second Last Trading Day and as at the Latest Practicable Date
The Conversion Price represents:
• a discount of approximately 39.0% to the closing price of HK$1.64 per Share as quoted on the Stock Exchange on the Second Last Trading Day, being 28 August 2006;
• a discount of approximately 37.9% to the average closing price of the Shares of approximately HK$1.61 per Share for the five trading days ended on the Second Last Trading Day;
• a discount of approximately 35.5% to the average closing price of the Shares of approximately HK$1.55 per Share for the ten trading days ended on the Second Last Trading Day;
• a discount of approximately 33.3% to the average closing price of the Shares of approximately HK$1.5 per Share for the thirty trading days ended on the Second Last Trading Day; and
• a discount of approximately 42.9% to the closing price of HK$1.75 per Share as quoted on the Stock Exchange as at the Latest Practicable Date.
Chart 2 showed that trading in the Shares was very thin for the period from 1 March 2005 to the First Last Trading Day.
The April Announcement has, on the basis of the above charts, a strong positive effect on both the closing price and the trading volume of the Shares, which, in our opinion, reflects a broadly positive view of the Acquisition by the market.
As illustrated from Chart 1 above, the closing prices of the Shares following the release of the April Announcement are at a premium over the Conversion Price. However, these market prices of the Shares are not, in our opinion, supported by the fundamentals of the Group. The Group made significant losses attributable to the Shareholders for each of the three years ended 31 March 2004, 2005 and 2006 of approximately
– 110 – APPENDIX I LETTER FROM SOMERLEY LIMITED
HK$14.6 million, HK$11.6 million and HK$15.3 million respectively, whilst the Shareholders’ equity decreased from approximately HK$72.0 million as at 31 March 2004 to HK$60.4 million as at 31 March 2005 and then further dropped to approximately HK$45.1 million as at 31 March 2006. We consider that the recent increase of the Share price following the release of the April Announcement mainly reflects the market’s expectation on the benefits of the Acquisition to be brought to the Group after Completion. In view of the above, we are of the view that it is not appropriate to place much weight on a comparison of the Conversion Price to the market price of the Shares following the publication of the April Announcement. It is also stated in the “Letter from the Board” that the Company and the other parties to the New Target Acquisition Agreement agree to stick with most of the original terms of the Target Acquisition Agreement including, among other things, the Conversion Price after arm’s length negotiations among themselves. As such, we consider the assessment of the Conversion Price by reference to the performance of the Share price prior to the April Announcement would be more appropriate.
Overall, the Conversion Price of HK$1.00 per Conversion Share for the Convertible Bond was set close to the average closing price of the Shares prior to the April Announcement. The restriction imposed on the exercise rights attached to the Convertible Bond as mentioned above could limit the dilution effect of the Convertible Bond, in particular, in the first few years after the date of issue. Based on the above, we consider the Conversion Price to be acceptable.
8. Effect of the Acquisition on the financial position of the Enlarged Group
Unaudited pro forma financial information on the Enlarged Group is set out in Appendix VIII to the Circular.
(a) Earnings
The Group recorded audited consolidated net loss attributable to the Shareholders of approximately HK$15.3 million for the year ended 31 March 2006. It is expected that the Acquisition will enlarge the earnings base of the Enlarged Group. According to the unaudited pro forma consolidated income statement of the Enlarged Group set out in Appendix VIII to the Circular, the unaudited pro forma net profit of the Enlarged Group would be approximately HK$15.8 million had Completion been taken place on 3 January 2006. This is mainly attributable to the combined effect of the share of profits of the Target Group of approximately HK$43.7 million and the finance costs of approximately HK$12.6 million comprising the interest expense of the Convertible Bond and the First Promissory Notes and the imputed interest expense recognised in relation to the interest-free Second Promissory Note. We would like to draw your attention that only nine months results of the Acquisition and, in
– 111 – APPENDIX I LETTER FROM SOMERLEY LIMITED
particular, only one month result of the Wynn Profit, were included in the pro forma consolidated income statement. When full year effects and more financial results of the Wynn Profit are available, it is expected that the earning effects of the Acquisition to the Enlarged Group will be more apparent.
On the above basis, we concur with the Directors’ view that the Acquisition provides the Group with substantial and steady income stream bearing in mind that there is no share of loss under the Profit Agreements and therefore downside risk on profitability is limited to a manageable level.
(b) Net assets
The audited consolidated net assets of the Group attributable to the Shareholders as at 31 March 2006 were approximately HK$45.1 million (approximately HK$0.067 per Share based on 672,000,000 Shares in issue at that date).
Upon Completion, the Company will own 49% equity interests in Worth Perfect. In accordance with the accounting policies of the Group, Worth Perfect will be accounted for as an associated company of the Enlarged Group and its results will be accounted for under the equity accounting method.
Based on the unaudited the pro forma consolidated balance sheet of the Enlarged Group set out in Appendix VIII to the Circular, the Enlarged Group would have unaudited net assets value attributable to the Shareholders of approximately HK$127.0 million (approximately HK$0.19 per Share based on 672,000,000 Shares in issue as at the Latest Practicable Date). After deducting the goodwill arising from the Acquisition of approximately HK$506.5 million, the Enlarged Group will have unaudited negative net tangible assets of approximately HK$379.5 million (a net deficit of approximately HK$0.56 per Share based on 672,000,000 Shares in issue as at the Latest Practicable Date).
As the Group is acquiring an income stream which potential should be assessed by its earning power rather than its asset base, we consider such decrease in consolidated net tangible assets value is acceptable given the Acquisition’s ability to significantly enlarge the earnings base of the Enlarged Group.
(c) Working capital
As stated in the paragraph headed “Working capital statement” in Appendix VII to the Circular, the Directors are of the opinion that, in the absence of unforeseen circumstances and after taking into account the present internal financial resources of the Enlarged Group (including principally cash at bank and listed securities investment), the Enlarged Group will, immediately following Completion, have sufficient working capital for at least 12 months from the date of this Circular.
– 112 – APPENDIX I LETTER FROM SOMERLEY LIMITED
We have reviewed the cashflow projections prepared by the Directors on the Enlarged Group for the period from 1 December 2006 to 31 December 2007 (the “Review Period”) and have discussed the projections and assumptions with the Directors. We have been informed that the Target Group has no capital commitment. As shown in the section headed “Statement of indebtedness” contained in the Appendix VII to this Circular, the Enlarged Group had provided corporate guarantee of approximately HK$667,000 to banks in relation to finance lease contracts granted to certain disposed subsidiaries as at 31 October 2006. Such contingent liability is considered to be immaterial compared with the net assets value of the Enlarged Group. On the above basis, we concur with the Directors’ view on the working capital of the Enlarged Group as set out Appendix VII to the Circular.
(d) Gearing
The Group was debt free as at 31 March 2006 and 31 October 2006. The total outstanding borrowings of the Enlarged Group would increase to approximately HK$352.4 million had the Acquisition been completed and after the issue of the Convertible Bond and the First Promissory Notes (not taking into account the Second Promissory Note in calculating the borrowings as it is interest-free). The pro forma gearing ratio (calculated on the basis of total borrowings of approximately HK$352.4 million divided by the pro forma total assets of approximately HK$586.3 million) of the Enlarged Group would be approximately 60.1%. The total Profit Guarantees provided by Mr. Tang and Mr. Scolari for the First Relevant Period and the Second Relevant Period are HK$400 million, 49% of which to be shared by the Enlarged Group is HK$196 million. Taking into account the aforesaid, the gearing ratio of the Enlarged Group would be reduced to approximately 26.7% in two years time assuming no other changes in capital structure of the Enlarged Group since then. Moreover, given the ten-year maturity of the Convertible Bond and the First Promissory Notes, the repayment will be financed by the profit generated from the attributable profit of the Target Company. In the circumstances, we consider the level of gearing acceptable.
– 113 – APPENDIX I LETTER FROM SOMERLEY LIMITED
9. Shareholding structure
The following table sets out the shareholding structure of the Company (i) before Completion and the Placing; (ii) immediately after Completion and the Placing but before conversion of the Convertible Bond; and (iii) after the Placing and Completion and upon full conversion of the Convertible Bond:
Immediately after After the Placing Completion and the and Completion Placing but before and upon full Before Completion conversion of conversion of the and the Placing Convertible Bond Convertible Bond No. of Approximate No. of Approximate No. of Approximate Shares % Shares % Shares %
Smart Town 369,600,000 55.00 206,880,000 30.79 206,880,000 25.65
Pan-Star Nominees Limited 134,400,000 20.00 134,400,000 20.00 134,400,000 16.67
Rich Game 0 0.00 0 0.00 134,400,000 16.67
Public – Placees 0 0.00 162,720,000 24.21 162,720,000 20.18 – Existing public Shareholders 168,000,000 25.00 168,000,000 25.00 168,000,000 20.83
Total 672,000,000 100.00 672,000,000 100.00 806,400,000 100.00
The consideration of the Acquisition will be partly satisfied by the Company by the issue of the Convertible Bond. The restriction imposed on the exercise rights attached to the Convertible Bond could limit the dilution effect of the Convertible Bond, in particular, in the first few years after the date of issue. Upon full conversion of the Convertible Bond, public Shareholders’ holdings (including the Placees) will be diluted from approximately 49.21% immediately after Completion and the Placing to approximately 41.01%. This degree of dilution for public Shareholders is, in our opinion, acceptable bearing in mind the size of the Acquisition.
10. Risk factors
The Acquisition will change the business risk profile of the Enlarged Group. Shareholders shall bear in mind the risk factors in relation to the junket businesses operated by Sat Ieng and Dore as discussed in detail under the paragraph headed “Risk factors of junket business” in “Letter from the Board” of the Circular. In particular, we would like to draw the Shareholders’ attention to the following risk
– 114 – APPENDIX I LETTER FROM SOMERLEY LIMITED
factors, certain of which are stated in the aforesaid paragraph in “Letter from the Board” of the Circular:
(i) The gaming promoter licences and the Junket Representative Agreements are integral parts of the existing business of Sat Ieng and Dore. In the event that the gaming promoter licences would not be renewed by the Macau Government, Sat Ieng and Dore were no longer able to operate its junket business in Macau and Worth Perfect would not be assigned any Profits. In the event that the Junket Representative Agreements for whatever reasons were terminated, the existing respective junket operations in Sands Macao by Sat Ieng and in Wynn Macau by Dore would cease. Moreover, the Directors have not been provided with the Junket Representative Agreements for review. There is a risk that the Junket Representative Agreements do not exist. As at the Latest Practicable Date, Sat Ieng and Dore and/or their customers generated the Rolling Turnover only at Sands Macao’s Paiza Club gaming rooms (for Sat Ieng) and at Wynn Macau VIP gaming rooms (for Dore) pursuant to the Junket Representative Agreements. Should the gaming promoter licences of Sat Ieng and Dore not be renewed by the Macau Government, or the Junket Representative Agreements be terminated or do not exist, no Profits would be assigned to Worth Perfect.
(ii) The provision of junket business and the gambling business in Macau is increasingly competitive. There is no assurance that the targeted customers of Sat Ieng or Dore would not be lured away by other gaming promoters and that Sands Macao or Wynn Macau is always attractive. Should certain target customers of Sat Ieng or Dore be lured away or the attractiveness of Sands Macao or Wynn Macau decreases, the business of Sat Ieng and Dore and the Profits to be assigned to Worth Perfect would be adversely affected.
(iii) The performance of the Target Group is heavily dependent on that of Sat Ieng and Dore which, in turn, is significantly influenced by the respective capabilities of Mr. Tang and Mr. Scolari. Although Mr. Tang has been an overseas promoter of Sat Ieng since February 2005, he has only begun to participate in the senior management of Sat Ieng since 28 August 2006. Moreover, Dore only commenced its junket representative businesses in Wynn Macau in early September 2006. Due to the limited operating history, their previous track record may not be indicative of their future performance. Should they perform unsatisfactorily in the future, the Profits to be assigned to Worth Perfect would be adversely affected.
– 115 – APPENDIX I LETTER FROM SOMERLEY LIMITED
DISCUSSION AND CONCLUSION
Reflected by its latest 2006 results, the Group has still been operating under difficult environment with its existing business and, in our view, the chance of having a rebound for the existing business in the forthcoming future is not optimistic. The Acquisition will allow the Group to acquire an interest that provides recurring profit stream with manageable downside risk (only relating to interest expenses) on profitability. It will also place the Group in a position in the newly opened up Macau gaming market.
Numerous casinos are expected to open in Macau in coming years. Gaming business in Macau is expected to be competitive. Despite the increasing competition in the gaming industry in Macau, we are of the view that the future outlook of the tourism and gaming business in Macau is positive in general and consider that being pioneers in the Las Vegas style casinos, Sands Macao and Wynn Macau will have competitive advantage over other local casinos in Macau. Investment in an income stream relating to junket operations without direct involvement in the daily junket operation represents a good opportunity for the Group to tap into the booming Macau gaming sector in a prudent way.
The gaming promoter licences granted by the Macau Government and the Junket Representative Agreements are integral parts of the existing business of Sat Ieng and Dore. Both gaming promoter licences of Sat Ieng and Dore are valid until 31 December 2006 but renewable. The Directors believe that the chance of non-renewal of their gaming promoter licences upon expiry is highly unlikely. In the event that the gaming promoter licences of Sat Ieng and Dore are cancelled or are not renewed during 10 years after Completion, the Consideration will be in effect adjusted downward by HK$244.6 million (being the principal sum of the First Promissory Notes), representing approximately 45.4% of the Consideration. We consider that such arrangement provides a reasonable protection to the Company against the risk that the gaming promoter licences of Sat Ieng and/or Dore may not be renewal, though unlikely.
Because of the confidentiality of the Junket Representative Agreements, the Directors have not reviewed the Junket Representative Agreements. The Directors understand that in general, the term of the junket representative agreement between the gaming promoter and the casino operator is tied in with the term of the gaming promoter licence. We consider such “tie-in” arrangement be normal business practice. In view of the satisfactory performance of Sat Ieng and Dore, we concur with the Directors’ view that the renewal of the Junket Representative Agreements provided that Sat Ieng and Dore continue to hold the gaming promoter licences is optimistic.
Taking into account the Group’s 49% equity interests in Worth Perfect, the Group will receive an aggregate of HK$196 million, representing approximately 36.4% of the Consideration in the first two years in any event under the Profit Guarantees. We consider such arrangement provides a reasonable comfort to the Group in view of the relative short track record of Sat Ieng and Dore and their gaming promoter operations in Macau.
– 116 – APPENDIX I LETTER FROM SOMERLEY LIMITED
The Acquisition will be financed by the Convertible Bond and ten-year promissory notes namely the First Promissory Notes and the Second Promissory Note. The restriction imposed on the exercise rights attached to the Convertible Bond could limit the dilution effect of the Convertible Bond, in particular, in the first few years after the date of issue. Upon full conversion of the Convertible Bond, dilution of public Shareholders’ holdings from approximately 49.21% to 41.01% is, in our view, acceptable. The early repayment feature in the promissory notes provide flexibility to the Group should it wish to reduce interest expenses. No immediate substantial cash outlay for the Acquisition is required.
The price to earnings ratio of about 7 times represented by the Consideration is around that of the comparable acquisition announced by Long Success in August 2006 and represents a significant discount to the average of that of the Other Comparable Transactions. The valuation represented by the Consideration is, in our view, fair and reasonable after taking into account factors including, in particular, the low price to earnings ratio, the Profit Guarantees, the “adjustment” mechanism of the Consideration, limited downside risk on the profitability of the investment and no immediate substantial cash outlay for the Acquisition.
After Completion, the gearing ratio of the Enlarged Group would be approximately 60.1%. Although the increase seems substantial compared with the debt free position before the Acquisition, this level of gearing seems to us to be acceptable, particularly as the gearing ratio of the Enlarged Group would be reduced to approximately 26.7% in two years time taking account of the effects of the Profit Guarantees, and the Convertible Bond and the First Promissory Notes have maturity of 10 years.
OPINION AND ADVICE
On the above basis, we consider that the terms of the New Target Acquisition Agreement are fair and reasonable so far as the Independent Shareholders are concerned and the Acquisition is in the interests of the Company and the Shareholders as a whole. We advise the Independent Shareholders to vote in favour of the resolution to implement the Acquisition at the SGM.
Yours faithfully, for and on behalf of SOMERLEY LIMITED Mei H. Leung Deputy Chairman
– 117 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
MANAGEMENT DISCUSSION AND ANALYSIS OF THE FINANCIAL INFORMATION CONDITION AND RESULT OF OPERATION OF THE ENLARGED GROUP
The Group
For the year ended 31 March 2004
General
Upon the completion of the unconditional cash offer to acquire all the issued shares of the Company by Kingston Securities Limited on behalf of Smart Town by early June 2004, the new management stepped in and tookover the management of the Group.
Financial Review
For the year under review, the turnover of the Group was approximately HK$23.2 million representing a drop of 58.3% compared to the corresponding period last year (2003: HK$55.6 million).
The net loss attributable to shareholders of the Group was HK$14.6 million comparing to last year’s loss of HK$3.0 million. Such loss was mainly due to the decrease in turnover and the squeezing in profit margin.
Review of Operation
The year under review is definitely a tough year for basically all industries whereby consolidation and rationalization is the primary trend in reaction to global economic and geo-political conditions. The Group is of no exception. This year is the year for the Group to trim down the highly competitive “project” line of business, to think again the relative strength and weakness of the Group and to re-orientate its medium to long term strategic move.
During the year under review, the Group has continued submitting a number of bids for projects for the installation of timber door sets and interior decorations. However, the result is not positive due to the still slow economy, the cut throat price competition of other bidders, the Group has only been able to get a contract for amount of approximately HK$19.8 million during the year and with a very low profit margin. The Board has reviewed the same and decided that this would not be for the best interests of the shareholder, in particular, with the long receivable days, the interest factor associated and the possibility of bad debt.
An important development during the year was the acquisition of the timber trading business, MFT Epping Trading Limited (the “Epping” and formerly known as Epping Trading Limited) in September 2003. Although the acquisition only contributed approximately HK$3.3 million to the Group’s turnover and HK$0.4 million to the Group’s profit from operating activities, the Board still anticipates that the benefits arising from Epping should be fully reflected in the next financial year.
– 118 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
The Group, in view of the competition and difficulties in the construction business, has taken remedial moves in order to reduce the impact of the restriction in new buildings to be constructed. The moves of the Group in the coming year would include:
a. the reduction in the bidding of projects that can only bring in low profit margin but high receivables;
b. the recruitment of suitable staff to fill the appropriate positions;
c. effecting vertial and horizontal integration in supplying timber to either itself or to other companies involving in timber industry; and
d. adopting a two-dimensional approach to expand the timber trading business. On the one hand, we strive to move up the market by broadening both the products and the customer base. The Group would make efforts in modernising and enhancing the operating efficiency of its trading and distribution processes so as to translate to a cost-efficient, automated platform. On another dimension, we continue to push the concession owner in expanding the production output to cope with the rising demand. While the existing capacity is adequate to meet the shipment, we plan to push the concession owner to add the output to cater for the foreseeable growth for the next financial year.
These moves are all in position and pave the way for the Group to make use of its principal relationship and strength.
In conclusion, the loss for the year under review was due to
a. the lower profit margin obtained from projects vis-a-vis the past;
b. the lower project number undertaken; and
c. the amortization of goodwill arisen from the acquisitions of a subsidiary and an associate;
The Board appreciates the importance of circumspection, vigilance and resilience in advancing through prudence adherence to existing strengths, keen awareness of macroeconomic factors and market trends, adopt to exceptional circumstances and to integrate the strength of various partners.
Liquidity and Financial Resources
The Group has maintained a stable financial position.
Despite the loss of the Group for circa HK$14.6 million during the year, the acquisition of companies during the interim period, the cash position of the Group has been maintained at roughly the same level as the last year via the chasing after and getting back of long receivables, the getting of additional suppliers’ credit and the disposal
– 119 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS of non-core operations. It has to say that the Group is in a net cash position and is relying on its own working capital. As such, the Group envisages no difficulty to meet its financial obligations as when they fall due in the foreseeable future.
As at 31 March 2004, shareholder equity was approximately HK$72.0 million (2003: HK$86.6 million), total asset of HK$91.4 million (2003: HK$98.4 million) and the outstanding hire purchase contract payables of HK$5.3 million (2003: HK$7.1 million). Gearing ratio, calculated on the basis of total debts divided by total equity, was decreased from 8.2% to 7.4%.
The current ratio, calculated on the basis of current assets divided by current liabilities, of the Group as at 31 March 2004 was 4.4 (2003: 12.6). The drop in the ratio was due to the reduction of account receivables and increase in account payable.
As the majority of the inflow and outlay are both denominated in HK$ and the US$ which are pegged together, the Group has not adopted any hedging policy.
As at 31 March 2004, the Group had not pledged any kind of asset and had no significant capital commitment or contingent liabilities.
Employment and Remuneration Policy
The Group has a total of 19 employees as at 31 March 2004 (2003: 21). During the year, total staff costs amounted to approximately HK$5.8 million. Employees are remunerated based on their performance and the prevailing industry practice, with remuneration policies and packages being reviewed on a regular basis. The Group has also established discretionary bonus and employee share option scheme which are designed to motivate and reward employees to achieve the Company’s business performance targets. Other staff benefits provided by the Group include mandatory provident fund and medical insurance schemes.
The Company maintains a share option scheme, pursuant to which share options are granted to selected director or employee of the Group, with a view to attract and retain quality personnel and to provide them with incentive to contribute to the business and operation of the Group. However, no share option has yet been granted under the share option scheme up to the date of the annual report 2004.
Use of Proceeds
The net proceeds from the Company’s issue of new Shares at the time of its listing on The Stock Exchange of Hong Kong Limited on 24 July 2002 amounted to approximately HK$39.4 million. As at 31 March 2004, the Group had utilised a total of approximately HK$14.5 million in market development in the PRC and HK$2 million as the general working capital. The remaining proceeds are placed on short-term deposits with licensed banks in Hong Kong.
– 120 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
Future Prospects
The new management has endeavoured to implement both the re-engineering of staff to their appropriate positions and to continuously rationalize the existing businesses by centralising operations, controlling the daily operating expenses and getting rid of unprofitable and no prospect businesses. Meanwhile, the management would continue to improve the overall efficiency of existing and newly acquired operations. These developments help us prepare for the ever-changing business developments.
The new management continues anticipating that the PRC will be the world’s fastest growing economic region within the next decade. Despite the slowdown of global economy, the Group remains confident that there would be abundant business opportunities with respect to our existing operations as well as new potential investments. With the anticipated soft landing of the economy in the PRC, it is expected that the demand for timber related products would be increased further, whether it is on the construction, the fire protection or on the decoration aspects.
The Board will continue to further integrate its timber trading operation to ensure its long-term success. To maximize shareholder value, the management team will continue to open doors to new business opportunities that are relating to the core business of the Group’s operation that can make use of the existing resources of the Group. Additionally, the Group would build up a greater PRC and Hong Kong presence and gain greater industry acknowledgement. While the PRC growth strategy has proven to be promising, the management team believes that more resources would be devoted over there. This is an important strategic breakthrough, taking the Company to the next level of market position.
The Group would also closely monitor the progress of the vertical and horizontal integration strategy. The management would follow closely, hold discussions and explore possibilities of participating in joint ventures and investments that could provide strategic and operational synergies to the Group’s core value.
The management is optimistic in the future development and believes that the plan will materialize in the years to come and will reward its long-term investors and shareholders. Nonetheless, the management intends to pursue an aggressive yet prudent approach in terms of participating in new contracts, projects and investments.
For the year ended 31 March 2005
Financial Review
For the year under review, the turnover of the Group was approximately HK$67.1 million representing a growth of 189% compared to the corresponding period last year (2004: HK$23.2 million).
– 121 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
The net loss attributable to shareholders of the Group was HK$11.6 million comparing to last year’s loss of HK$14.6 million, an improvement of HK$3 million. Net loss per share was 1.73 cents (2004: 2.17 cents) representing a reduction of 21% comparing to that of 2004. This is a result of improved contribution due to improved profit margin and increased turnover as well as lowering of various expenses except “Other operating expenses”. Other operating expenses increased mainly due to the one-off written off of HK$1.7 million for the leasehold improvements following the relocation of principal place of business in Hong Kong to the Two International Finance Centre and the bad-debt written off of HK$0.7 million due to the inability to collect certain long overdue receivables.
Review of Operation
The 2004/05 remained a difficult year for the Group whereby the Closer Economic Partnership Agreement (the “CEPA”) has not benefited the Group, the booming gaming business in Macau has pushed the labour charges in Hong Kong to a higher level, the continuous upsurge of the oil prices worldwide, thereby, dampening the world economy, the increase in discount/interest rate in the United States, the austerity measures imposed by the PRC government to cool down the overheated property market, etc. had all acted against the Group.
As such, the operation of the Group under the new management is basically a follow through of the strategy adopted by the management except:
(a) re-allocation of resources to more promising trading of logs while discarding the declining sector; and
(b) trimming down of unnecessary expenses while carefully adding resources when deem necessary towards the area that seems to be promising.
The financial results for the period support and affirm the strategic move of the management’s efforts in both its strategic move, rationalizing its operation and implementation of cost control measures over the period.
During the year under review, after evaluating the pros and cons of submitting the bid for projects, particularly in view of the long receivable days, the interest factor thereby associated, the bad-debt incurred, the Board continued to reduce in the bidding of projects that can only bring in low profit margin but high receivables.
Instead, more resources in term of both financial and human resources had been vested in the trading of timber sector which contributed to the bread and butter of the Groups’ operation with proper result. Turnover increased and a positive contribution towards the payment of various expenses been recorded.
Yet, the captioned development is not without pitfalls, taking into consideration factors such as control in volume of logs allowed to be exported, the increasing pressure from the environmental party had been considered, the exceptional heavy rainfall during the summer season, and the like had all caught us to a surprise and the result is not as
– 122 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS good as originally anticipated. Hence, instead of having a jump in business during the second half of the financial year through the familiarization of operation and the building up of “brand” and reputation during the past months, the Group could manage to get a similar turnover as the first half of the year.
To conclude, a company’s bottom line net profit comes from the increase in revenue/ profit and reduction of unnecessary expenses. The existing business segment has achieved improvements both in term of increase in turnover and brought in positive contribution, thus, reduced the extent of losses for the Group.
Liquidity and Financial Resources
In line with the Group’s pre-defined criteria, the Group has continued a prudent policy in maintaining its financial position.
The liquidity of the Group had improved during the second half of the financial year despite additional loss incurred during the period under review.
Certain receivable has been collected during the year under review, with the absence of fund utilization and the anticipated receivables to be collected subsequent to the year end, some funds have been vested in short term investments, mainly listed shares for dividend yield as well as possible capital appreciation. Yet, the cash position remains sound at HK$11.5 million which is more than suffice to pay off all liabilities.
Liabilities, in form of short term nature of accounts payable or hire purchase payables, had been substantially repaid, leaving a total liability of only HK$5.5 million. Corresponding, the gearing ratio, represented by total debt to equity stood low at 0.8% (2004: 7.4%). In fact, the Group is at a net cash position of HK$6 million after using the cash to apply to charge off all debts as at 31 March 2005. The net cash position would even be more prominent subsequent to the year end when the remaining receivables had been largely collected.
The Group has a net current asset of HK$50.7 million (2004: HK$53.4 million) as at 31 March 2005. The current ratio, calculated on the basis of current assets divided by current liabilities, of the Group as at 31 March 2005 was 10.2 (2004: 4.4). The improvement in current ratio is due to the disposal of motor vehicles and pleasure craft acquired in the past years.
As the majority of the inflow and outflow are both denominated in HK$ and US$ which are pegged together, the Group has not adopted any hedging policy.
As at 31 March 2005, the Group had provided corporate guarantee of HK$3.4 million (2004: Nil) to banks in connection with hire purchase contracts granted to certain subsidiaries (“Disposed Subsidiaries”) disposed of during the year under review.
– 123 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
Pursuant to the agreements for the disposal of the disposed subsidiaries, the buyer of the disposed subsidiaries agreed to provide counter indemnities to the Company for its corporate guarantees provided to the disposed subsidiaries.
The Group’s bank loan is secured by the pledge of the Group’s motor vehicle with a net book value of HK$0.6 million as at 31 March 2005.
The Group has no significant capital commitment as at 31 March 2005.
Employment and Remuneration Policy
The Group has a total of 15 employees as at 31 March 2005 (2004: 19). During the year, the Group had recruited additional staff to take care of the logs operation which resulted in a maximum of 26 staff. However, with the streamlining of the operation and the departure of certain “projects” related employees, the staff has been reduced to the current level. Total staff costs amounted to approximately HK$6.2 million (2004: HK$5.8 million) and is expected to reduce further in the next financial year unless additional business or headcount being recruited.
Employees are remunerated based on their performance and the prevailing industry practice, with remuneration policies and packages being reviewed on a regular basis. The Group has also established discretionary bonus and employee share option scheme which are designed to motivate and reward employees to achieve the Company’s business performance targets. Other staff benefits provided by the Group include mandatory provident fund and medical insurance schemes.
The Company maintains a share option scheme, pursuant to which share options are granted to selected director or employee of the Group, with a view to attract and retain quality personnel and to provide them with incentive to contribute to the business and operation of the Group. However, no share option has yet been granted under the share option scheme up to date of the annual report 2005.
Future Prospects
With the prime objective of turning around the Group, the management would adopt the following strategies, namely,
(a) rationalize the existing businesses;
(b) controlling the daily operating expenses;
(c) improving the overall efficiency of existing and to be acquired operations, if any; and
(d) exploring business that can capitalize on the resources of the Group’s reputation established and/or management’s expertise.
– 124 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
The Board would continue the proven successful story of placing resources on the trading of timber section. Yet, as mentioned above, there are factors that may affect the overall performance of this particular section.
To play safe, the Group has effected additional measures to reduce the reliance on this particular section/supplier of logs.
Apart from locating additional logging sites in other countries to diversify the concentration risk and to achieve further economy of scale, the management is evaluating the potential return vis-a-vis the additional commitment in both financial and managerial resources in order to achieve such return, in particular, the difficulty in locating candidates with relevant experience.
In fact, on 22 July 2005, the Group has entered into a provisional sales & purchase agreement over a piece of land in Tuen Mun (“the Land”) for a consideration of HK$10 million from an independent third party. The Board considered that the acquisition of the Land represented an investment opportunity for the Group and enhanced its property portfolios in view of the prevailing upturn of the Hong Kong economy and the property market. The acquisition will be funded by the Group’s internal resources.
At the same time, the Group would explore possibilities of engaging in related projects which can make use of the expertise so far developed, the reputation built and the financial resources available.
Nonetheless, the management would continue adopting the existing proven acceptable strategy that can bring contribution to the shareholders. Moreover, the management will continue exercising stringent cost control to minimize operating costs through enhanced flexibility and efficiency.
The management is conservatively optimistic about the future development and is confident that the Group will weather through the winter timing and achieve a turnaround in the coming years.
The Group
For the year ended 31 March 2006
Financial Review
For the year under review, the turnover of the Group was approximately HK$10.6 million (2005: HK$67.1 million) representing a reduction of 84.2% comparing to the last year.
– 125 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
The net loss attributable to shareholders of the Group was HK$15.3 million comparing to last year’s loss of HK$11.6 million. Net loss per share for the year was 2.28 cents (2005: 1.73 cents). The increase in net loss was a result of
a) reduction in trading volume which correspondingly brings in less gross profit; and
b) an one-off written off of the impairment loss in respect of goodwill for HK$8.5 million.
In fact, excluding the one-off written off of the impairment loss in respect of goodwill, the Group has improved its operating results. Due to the selection of orders in logs trading, the Group managed to achieve a slight improvement in gross profit margin from 9.6% in 2005 to 10.3% in 2006. Substantial reduction has also been achieved in both the administrative expenses (HK$7.3 million in 2006 vs. HK$13.0 million in 2005) and other operating expenses (HK$0.5 million in 2006 vs. HK$5.1 million in 2005) through streamlining of operation, reduction of unnecessary headcount and the relocation of principal place of business in Hong Kong.
Review of Operation
Due to the negative sentiment widely spread in the world following the successive 14 times interest rate hike by the Federal Reserve Bank of the United States and the politically instability that lead to the fluctuation and in general upward trend of the oil and gasoline prices, the Group’s performance has been suffered.
The reduction in turnover was a result of the Group’s move in reconsidering the appropriate strategy with respect to the trading of timber business and/or expanding further to grasp a bigger market share and in achieving an economy of scale.
Vertical or horizontal integrations through acquiring the rights in the upstream operations and the getting of additional suppliers had not been realised.
The acquiring of the upstream operations, i.e. the rights of logging operations either in Asia or Africa had subsequently been discarded due to
a) the inability to recruit suitable staff in supervising the operations of trimming sector, in particular, the language barrier;
b) the unclear title right as to the ownership and the other legal and political factors that may lead to the change/cancellation of the title right; and
c) the continuous pooling of fund to support the operations, especially during the rainy season, may worsen the Group’s financial position.
– 126 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
With the fluctuation and in general upsurge in the oil and gasoline prices which in turn causes the increase in freight charges, the profit margin generated from the trading of logs from Africa to the People’s Republic of China (the “PRC”) is very fluctuating. The situation is getting worse during the latter part of the year not to mention the subsequent much undermined profit margin due to the slowdown of the property market in the PRC. These, together with
a) the requirement to pay a higher unit price over the logs in view of the increasing production costs, i.e. costs of repair & maintenance of trucks incurred by the supplier;
b) the requirement to place additional number of personnel to the forest so as to monitor and to get the priority in getting the logs and to provide a larger amount of deposits to finance the supplier’s operation due to the construction of roads leading to the inner part of the forest for trimming; and
c) the unstable supply of logs and poor transportation caused by the rainy season, had made the Board decided to take back the said deposits from the supplier and would transact the logs on an ad hoc basis with consideration paid after each deal.
In view of the slowdown of the property market both in Hong Kong and the PRC due to the continuous increase in discount rate by the Federal Reserve Bank of the United States (thereby pushing Hong Kong banks to raise prime lending rate as well) and measures adopted by the PRC government to cool down the overheated and speculative PRC property market, the Group is adopting a prudent policy toward bidding for projects relating to the supply of fire-rated timber door sets. As such, the submission of bid for projects will be restricted to quality developers with good financial standing. Only a minimal turnover has thus been recorded during the year 2005/06 and the Board does not anticipate a jump in the operation in this area for the forthcoming years unless there are signs of recovery. Nonetheless, the Board is glad to mention that it has managed to recover the long overdue receivables brought forward from last year.
Liquidity and Financial Resources
During the year under review, in order to manage the risk associated with an uncertain market environment, the Group has continued its prudent financial management policy and maintains a sound financial position.
The financial position of the Group is even better than last year and ready for future expansion while keeping a sufficiently high level of cash and bank balances.
The liquidity of the Group has been improved since the second half of the financial year despite additional loss incurred and circa HK$10.0 million had been paid in the acquisition of land in Tuen Mun. This was due to the withdrawn of the deposits previously lodged for logs as the Group has preferred reassigning the fund for a more meaningful utilisation.
– 127 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
The Group continues to maintain a strong cash position. As at 31 March 2006, the Group had cash and bank balances amounted to approximately HK$30.0 million which was more than sufficient to pay off its normal engagement. Additionally, circa HK$5.0 million had been vested in equity investments, the readily available financial assets which would bring in both potential dividends and/or capital appreciation.
The Group was basically in a cash rich position with the liabilities restricted to current payables of HK$2.2 million (2005: HK$5.5 million). The Group’s gearing ratio which is defined as total liabilities over equities is correspondingly low at 4.9% (2005: 9.3%). In fact, the Group was at a net cash position of HK$27.8 million (2005: HK$5.9 million) after charging the liabilities with the cash and bank balances and even the equity investments of HK$5 million has not been included.
The Group had a net current asset of HK$34.4 million (2005: HK$50.7 million) as at 31 March 2006. The current ratio, calculated on the basis of current assets divided by current liabilities of the Group was 16.6 (2005: 10.2) as at 31 March 2006.
The Group continues to adopt a conservative treasury policy with all bank deposits in Hong Kong dollars, keeping a minimum exposure to foreign exchange risks. As the majority of the inflow and outflow are both denominated in Hong Kong Dollars and the United States Dollars which are pegged together, the Group has not adopted any hedging policy or entered into any derivative products which are considered not necessary for the Group’s treasury management activities.
As at 31 March 2006, the Group had provided corporate guarantee of HK$1.6 million (2005: HK$3.4 million) to certain financial institutions in connection with hire purchase contracts granted to certain disposed subsidiaries. Yet, this is counter-indemnified by the buyer of the disposed subsidiaries. The buyer has honoured all his obligations to the financial institutions up to the date of this report. Accordingly, no delinquent record was noted and none of the guarantees had been called.
Save for the potential commitment under the Target Acquisition Agreement entered into on 30 March 2006 of the acquisition of 100% interest in Youngrich Limited (the “Youngrich”) (see Very Substantial Acquisition below and announcement dated 6 April 2006) which is subjected to the shareholders’ approval, the Group does not have any significant commitment as at 31 March 2006. However, the Target Acquisition Agreement was teminated by the Deed of Cancellation on 28 August 2006 and the New Target Acquisition Agreement was entered into by the Group on 28 August 2006.
There is no change in the share capital structure of the Company during the year under review.
All in all, the liquidity continues to be healthy and the existing financial position can facilitate us to capitalise on future business opportunities and has sufficient working capital to meet its present and anticipated obligations.
– 128 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
Very Substantial Acquisition
The Group has on 30 March 2006 entered into Target Acquisition Agreement for acquiring 100% interest in the Target Company which holds 49% shareholding in Worth Perfect, a company that get “profit stream” from Sat Ieng, a licensed junket operator at Sands Macao’s Paiza Club gaming rooms. Total consideration is HK$539 million which is to be satisfied by
a) cash of HK$160 million;
b) a 10-year convertible bond of HK$134.4 million at 5% coupon rate with clause of pre-mature repayment possible; and
c) a 10-year promissory note of HK$244.6 million at 5% coupon rate with clause of pre-mature repayment possible.
However, the Target Acquisition Agreement was teminated by the Deed of Cancellation on 28 August 2006. Instead, the New Target Acquisition Agreement was entered into by Team Jade, a wholly-owned subsidiary of the Company on 28 August 2006.
More details about the Acquisition including the opinion from the independent financial adviser will be provided in this circular.
Some salient features of the deal are that:
a) it is an alternative type of “junket” operation which is more regulated, whereby the “junket operator” is responsible for “introducing” clients to the casino while the win/loss would be the sole responsibility of the casino (vs. the “traditional” type which have to pay a minimum to the concessionaire while bearing the risk of win/loss);
b) while acquiring effectively 49% of the profit stream of Worth Perfect which receives 0.4% of the Rolling Turnover generated by Sat Ieng and Dore provides a good investment opportunity for the Group in entering into the booming Macau gaming sector at a prudent manner - as a pure investment, not involving in the daily operation, not affected by the expenses and risk elements of being a junket operator;
c) the Convertible Bond can be converted only starting the third year and at a rate of 10% of the Convertible Bond (or 2% of the existing issued Shares) per year. The dilution effect would be none in the first two years and carefully controlled in the subsequent years; and
d) translating the consideration of the Acquisition to price earning multiple, the junket operation is acquired at a price earning multiple of circa 7.3 times the 49% of the First Profit Guarantee and circa 4.4 times the 49% of the Second Profit Guarantee with the profit of which be guaranteed for the first two years (vs. the listed stocks of the same industry trading at higher than 30 times in the market).
– 129 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
Material capital expenditures will be incurred for the Acquisition. The Board considers the Acquisition a rare and commendable investment and is confident that the Acquisition paves the way for the Group in entering into the fast growing and highly rewarding Macau business sentiment. The Group expects the project can generate sufficient cashflow in meeting its obligation upon due.
Employment and Remuneration Policy
Due to the streamlining of the timber trading operation, as at 31 March 2006, the Group reduced the number of employees to 7 (2005: 15). Accordingly, the staff costs incurred were reduced to HK$3.7 million this year (2005: HK$6.2 million).
If the Acquisition has been approved by the Independent Shareholders at the SGM, the Board intends to recruit additional staff to look after the operation in ensuring the compliance of anti-money laundering and in keeping track on the operational performance of Sat Ieng and Dore.
The Group believes that the key to success lies in its people and would strive to create an environment that enables the staff in creating a sound of belongingness. The Group recruits individuals based on their competencies, merit and development potential. The Group’s remuneration policies are formulated on the performance of individual employees, company performance, individual qualifications and performance and on the basis of the salaries trends and will be reviewed regularly. Apart from provident fund scheme and medical insurance, discretionary bonuses and employee share options are also awarded according to the assessment of individual performance for the purpose of providing competitive package and long term retention of management talents. However, no share option has yet been granted under the scheme up to date of this circular.
Emphasis would also be placed on the provision of training and development opportunities.
Future Prospects
With the surplus fund on hand following the recovery of the long overdue receivables and the re-possession of the deposits previously paid for the timber operation, the Group has identified two investment opportunities, namely,
1) the acquisition of a piece of land in Tuen Mun. Although an impairment loss of HK$0.4 million was incurred in current financial year, the Board is still confident over its potential and prospect; and
2) the investment in the Target Company (see Very Substantial Acquisition above), the Acquisition of which will bring in steady cashflow at a minimal risk. In fact, based on the financial information provided, the Board is confident in the profitability and cashflow position for the coming years and Shareholders will be rewarded accordingly.
– 130 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
The investment in the Target Company represents the very first step for the Group to see and evaluate whether additional resources would be allocated to the area and get the key to the rapidly growing economy in Macau.
In fact, the Acquisition will position the Group to capture the high growth potentials of the Macau emerging market and strengthen the long term profitability. The move has facilitated the Group in entering into the Macau business circle in possibly gaining bids for the provision and installation of fire-rated timber door sets and the provision of interior decoration and renovation services from developers, either in the commercial, hotel or residential aspects of the Macau construction sector.
Nonetheless, the Group will continue the bidding of projects and the trading of logs but at a very prudent angle, i.e.
a) positive contribution to the Group’s profit;
b) a reasonable profit margin; and
c) no or low risk on the recovery of receivables or of good standing customers (i.e. big developers or government).
On the operation aspect, the Group will continue to focus on stringent cost control, overhead reduction and efficiency enhancement. The Directors will continue to closely monitor the Group’s finance costs and improve the gearing ratio (if the Acquisition is approved) so as to enhance the Group’s profitability and liquidity.
With the investments achieved or underwent, the management is fully confident in the competitive edge of its partner in Worth Perfect and hence, is optimistic about the future development and is confident that the Group will weather through the winter timing and achieve turnaround results in the coming years.
Meanwhile, we will continue to fine-tune the execution of these projects/policies in order to keep the Group’s growing in the right direction. As a matter of self-monitoring, more and more internal controls will be deployed to regulate the growing process.
The year 2006/07 and the following couple of years will witness the Group’s dramatic growth. The plan established is based on a self-financed model once it has been kicked off. We are fully confident of achieving the goals in the near future and thereafter our shareholders can enjoy the benefit of a rapid growing cash cow company.
Contingent liability
As at 31 March 2006, the Group had provided corporate guarantee of approximately HK$1.6 million to certain financial institutions in connection with hire purchase contracts granted to certain disposed subsidiaries. Yet, this is counter-indemnified by the purchaser of the disposed subsidiaries. The purchaser has honoured all his obligations to the financial institutions up to the date of the annual report. Accordingly, no delinquent record was noted and none of the guarantees had been called.
– 131 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
Charge on Group’s assets
The Group does not have any of its assets charged.
Exposure to fluctuation to exchange rates
The Group continues to adopt a conservative treasury policy with all bank deposits in Hong Kong dollars, keeping a minimum exposure to foreign exchange risks. As the majority of the inflow and outflow are both denominated in Hong Kong dollars and the US$ which are pegged together, the Group has not adopted any hedging policy or entered into any derivative products which are considered not necessary for the Group’s treasury management activities.
The Target Group
The Target Company is an investment holding company. The major asset of the Target Company is its 49% equity interest in Worth Perfect.
Below is the management discussion and analysis on the performance of the Target Company and Worth Perfert since the incorporation of the Target Company to 30 September 2006:
Business review and Results
During the period under review, Worth Perfect entered into the following three profit agreements:
(1) The Original Profit Agreement
On 13 March 2006, Worth Perfect entered into the Original Profit Agreement with Sat Ieng as a vendor and Mr. Phua as a guarantor relating to the sale and purchase of 100% interest in the Original Profit. The Original Profit Agreement was completed on 16 March 2006. However, due to the change of circumstances, Worth Perfect entered into the Deed of Termination on 28 August 2006 to terminate the Original Profit Agreement.
(2) The Sands Profit Agreement
On 28 August 2006, Worth Perfect entered into the Sands Profit Agreement with Global as a vendor and Mr. Tang as a guarantor relating to the sale and purchase of 100% interest in the Sands Profit. As at 30 September 2006, the Sands Profit Agreement has not yet been completed. Worth Perfect expects the Sands Profit Agreement will be completed by the end of December 2006.
– 132 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
(3) The Wynn Profit Agreement
On 28 August 2006, Worth Perfect entered into the Wynn Profit Agreement with Smart as a vendor and Mr. Scolari as a guarantor relating to the sale and purchase of 100% interest in the Wynn Profit. The Wynn Profit Agreement was completed on 5 September 2006.
During the period under review, Worth Perfect recorded a profit of approximately HK$66.3 million. Worth Perfect has two sources of revenue. They are the Original Profit, which amounted to approximately HK$51.3 million, and the Wynn Profit, which amounted to approximately HK$15.0 million.
For the period from 16 March 2006 to 28 August 2006, the Rolling Turnover achieved by Sat Ieng under the Original Profit Agreement is rather stable with some fluctuation. It is able to maintain a stable Rolling Turnover of approximately HK$2,329.8 million for each of the month with the exception of April 2006 and August 2006. The low figure of April 2006 was attributable to the temporary effect of tourists and VIP customers being attracted to the new casinos opened in the first half of 2006. However, following the effect of new casinos’ opening, the Rolling Turnover for May and July picked up again. Rolling Turnover amounted to HK$1,868.3 million for the period from 1 August 2006 to 28 August 2006, a 20% decrease from HK$2,326.5 million for the month of July 2006. The decrease was attributed to the discussion between Mr. Phua and Mr. Tang in relation to the sale of the entire issued share capital/quota of Sat Ieng and some attention was drawn away at that time. As Worth Perfect entered into the Deed of Termination on 28 August 2006 to terminate the Original Profit Agreement, no Original Profit was recorded after that date.
As the Sands Profit Agreement has not yet been completed as at 30 September 2006, no Sands Profit was recorded during the period under review. As advised by Mr. Tang and Global, it is expected that the Sands Profit Agreement will be completed by the end of December 2006. Although the Sands Profit Agreement has not yet been completed, Worth Perfect has closely monitored the business operation of Sat Ieng and Mr. Tang reported that the Rolling Turnover generated by Sat Ieng in September 2006 amounted to HK$2,213.5 million. The management of the Target Group believes that the Sands Profit Agreement will contribute substantially to the Target Group’s revenue following its completion.
The Rolling Turnover generated by Dore at Wynn Macau for the period from 5 September 2006 to 27 September 2006 amounted to approximately HK$3.76 billion. According to the Wynn Profit Agreement, the Wynn Profit of approximately HK$15.0 million was recorded. As a new Las Vegas style resort hotel, Wynn Macau attracted a great number of tourists and VIP customers during its grand opening and Dore achieved a remarkable Rolling Turnover in September 2006. Given the Las Vegas style facility and services offered by Wynn Macau and the well-established customers base that Dore has, the management of the Target Group believes that Wynn Macau will play a significant role in the Macau gaming market and Dore will continue to achieve promising results in future.
As the Target Company holds 49% equity interest in Worth Perfect, the Target Company shares the net assets of Worth Perfect, which is accounted for under equity method of accounting. As at 30 September 2006, the Target Company’s share of net assets of Worth Perfect was approximately HK$32.5 million.
– 133 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
Cashflow
For the period under review, the Target Company had a net cash outflow of HK$382 which arose due to the acquisition of an associate.
For the period under review, Worth Perfect had a net cash outflow of HK$2 which arose due to the acquisitions of the Original Profit and the Wynn Profit.
Capital structure, financial resources and liquidity
General
As far as the liquidity and financial resources of the Target Company are concerned, as an investment holding company, there is no specific minimum capital requirement nor any other financial resources requirement. The balance sheet is just dominated by interest in an associate with no material liability, including borrowing. Moreover, except that the dividend to be made, declared and paid by Worth Perfect which will be received by the Target Company on a quarterly basis, the financial resources will not be affected by any seasonality. In fact, only cash position will be affected by the payment of the dividend.
As far as the liquidity and financial resources of Worth Perfect are concerned, as a profit stream receiving company, there is no specific minimum capital requirement nor any other financial resources requirement. The balance sheet is just dominated by the amounts due from Mr. Tang and Smart without any liability, including borrowing. Moreover, except that the dividend to be made, declared and paid to the Target Company on a quarterly basis, the financial resources will not be affected by any seasonality. In fact, only cash position will be affected by the payment of the dividend.
Borrowing and banking facilities
As at 30 September 2006, the Target Company and Worth Perfect had no borrowing or bank facilities.
Net current liabilities
As at 30 September 2006, the Target Company had net current liabilities of HK$4,672.
As at 30 September 2006, Worth Perfect had no net current liabilities.
Capital structure
In respect of the Target Company, during the period under review, 100 ordinary shares of US$1.00 each were issued by the Target Company to Rich Game.
– 134 – APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS
In respect of Worth Perfect, during the period under review, 49 and 51 ordinary shares of US$1.00 each were issued by Worth Perfect to the Target Company and Richsense respectively.
Charges on assets
As at 30 September 2006, the Target Company and Worth Perfect had no charges on their assets.
Capital commitments
As at 30 September 2006, the Target Company had no material capital commitments.
As at 30 September 2006, Worth Perfect had a capital commitment of HK$1.00 relating to the acquisition of the Sand Profit pursuant to the Sands Profit Agreement.
Remuneration policies and employee information
The Target Company and Worth Perfect had no full time employees and no staff costs were paid or payable during the period under review.
Significant investments and material acquisition
During the period under review, the Target Company acquired 49% equity interest in Worth Perfect at a consideration of HK$382.
In relation to the significant investments and material acquisition of Worth Perfect, please refer to the information set out at page 132 under the heading “Business review and Results” in this Appendix.
Gearing ratio
As at 30 September 2006, the gearing ratio of the Target Company and Worth Perfect, expressed as a percentage of total borrowings over total assets, was nil.
Foreign exchange exposure
The Target Company and Worth Perfect did not have any hedging activities against its foreign exchange exposure nor did they adopt any hedging policies as the majority of their transactions, assets and liabilities are denominated in HK$.
Contingent liabilities
As at 30 September 2006, the Target Company and Worth Perfect did not have any contingent liabilities.
– 135 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
The following is the text of a letter, prepared for the sole purpose of inclusion in this circular, received from HLB Hodgson Impey Cheng, Chartered Accountants, Certified Public Accountants.
31st Floor Gloucester Tower The Landmark 11 Pedder Street Central Hong Kong
11 December 2006
The Directors Teem Foundation Group Ltd. Room 2108 Two International Centre No. 8 Finance Street Central Hong Kong
Dear Sirs,
We set out below our report on the financial information regarding Youngrich Limited (the “Target Company”), for the period from 3 January 2006 (date of incorporation) to 30 September 2006 (the “Relevant Period”), for inclusion in the circular of Teem Foundation Group Ltd. (the “Company”) dated 11 December 2006 (the “Circular”) in connection with the conditional sale and purchase agreement dated 28 August 2006 (the “S&P Agreement”) entered into between Team Jade Enterprises Limited (“Team Jade”), a wholly-owned subsidiary of the Company, and Rich Game Capital Inc. (“Rich Game”) pursuant to which Team Jade would acquire 100% equity interest in the Target Company from Rich Game at an aggregate consideration of HK$539,000,000 (the “Consideration”). The Consideration shall be satisfied by Team Jade (i) paying a refundable deposit of HK$160,000,000 to Rich Game; (ii) procuring the Company to issue a convertible bond in a principal amount of HK$134,400,000 to Rich Game upon completion of the S&P Agreement; and (iii) procuring the Company to issue two promissory notes in an aggregate principal amount of HK$244,600,000 to Rich Game upon completion of the S&P Agreement.
The Target Company is a company incorporated in the British Virgin Islands with limited liability on 3 January 2006. The principal activity of the Target Company is investment holding. The major asset of the Target Company is its 49% equity interest in Worth Perfect International Limited (“Worth Perfect”). Worth Perfect is a company incorporated in the British Virgin Islands on 3 January 2006. The remaining 51% equity interest of Worth Perfect is owned by Richsense Limited (“Richsense”). Both the Target Company and Richsense are owned by Rich Game. Rich Game is in turn owned by Global Rainbow Limited (“Global”) and Smart Gallant Limited (“Smart”) with 51% and 49% equity interest respectively.
– 136 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
On 13 March 2006, Worth Perfect entered into an agreement (the “Original Profit Agreement”) with Sat Ieng Sociedade Unipessoal Limitada (“Sat Ieng”), as a vendor, and Mr. Phua Wei Seng (“Mr. Phua”), as a guarantor, pursuant to which Sat Ieng has agreed to sell and/or assign and Mr. Phua has agreed to procure Sat Ieng to sell and/or assign and Worth Perfect has agreed to purchase or accept the assignment of a profit (the “Original Profit”), being 0.4% of the rolling turnover generated by Sat Ieng and/or its customers at Sands Macao’s Paiza Club gaming rooms pursuant to the junket representative agreement dated 27 January 2006 entered between Venetian Macau Limited and Sat Ieng (the “Sands Junket Representative Agreement”) and such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative, at a consideration of HK$1.00. On 28 August 2006, Worth Perfect entered into a deed of termination with Sat Ieng and Mr. Phua to terminate the Original Profit Agreement. As a result, no assignment of the Original Profit has been accounted for subsequent to 28 August 2006.
On 28 August 2006, Worth Perfect entered into an agreement (the “Sands Profit Agreement”) with Global as a vendor and Mr. Tang Chien Chang (“Mr. Tang”) as a guarantor, pursuant to which Global has agreed to sell and/or assign and Mr. Tang has agreed to procure Global to sell and/or assign and Worth Perfect has agreed to purchase or accept the assignment of a profit (the “Sands Profit”), being 0.4% of the rolling turnover generated by Sat Ieng and its customers at Sands Macao’s Paiza Club gaming rooms pursuant to the Sands Junket Representative Agreement and such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative or such other VIP gaming rooms whereby Sat Ieng can procure the sale/assignment of a percentage of rolling turnover generated by the duly appointed junket representative, at a consideration of HK$1.00. As at 30 September 2006, the Sands Profit Agreement has not been completed and no assignment of the Sands Profit from Global to Worth Perfect was accounted for during the Relevant Period.
On 28 August 2006, Worth Perfect entered into an agreement (the “Wynn Profit Agreement”) with Smart, pursuant to which Smart has agreed to sell and/or assign and Mr. Jean, Christophe Scolari (“Mr. Scolari”) has agreed to procure Smart to sell and/or assign and Worth Perfect has agreed to purchase or accept the assignment of a profit, being 0.4% of the rolling turnover generated by Dore Entretenimento Sociedade Unipessoal Limitada (“Dore”) and/or its customers at Wynn Macau VIP gaming rooms pursuant to the junket representative agreement dated 28 August 2006 entered into between Wynn Resorts (Macau) S.A. and Dore and such other VIP gaming rooms whereby Dore is a duly appointed junket representative or such other VIP gaming rooms whereby Dore can procure the sale/assignment of a percentage of rolling turnover generated by the duly appointed junket representative, at a consideration of HK$1.00. The Wynn Profit Agreement was completed on 5 September 2006.
The Target Company has adopted 31 December as its financial year end date. No audited financial statements of the Target Company was prepared since its incorporation date.
For the purpose of this report, the director of the Target Company has prepared the unaudited management accounts of the Target Company as at 30 September 2006 in accordance with the accounting principles generally accepted in Hong Kong for which the
– 137 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY director of the Target Company is solely responsible. The income statement, the statement of changes in equity, the cash flow statement of the Target Company for the Relevant Period and the balance sheet of the Target Company as at 30 September 2006 together with the notes thereto (the “Financial Information”) set out in this report are prepared on the basis as set out in note 2 to Financial Information below.
The director of the Target Company is responsible for the preparation of the Financial Information which gives a true and fair view. In preparing the Financial Information which gives a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion solely to you.
As a basis for forming an opinion on the Financial Information, for the purpose of this report, we have carried an independent audit on the Financial Information for the Relevant Period in accordance with Hong Kong Standards on Auditing issued by Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have carried out such additional procedures as we considered necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the reporting accountant” issued by the HKICPA. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Financial Information. It also includes an assessment of the significant estimates and judgements made by the director of the Target Company in the preparation of the Financial Information, and of whether the accounting policies are appropriate to the circumstances of the Target Company, consistently applied and adequately disclosed. No adjustment was considered necessary to adjust the unaudited management accounts of the Target Company for the Relevant Period.
In forming our opinion, we planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the Financial Information is free from material misstatement. In forming our opinion, we also evaluated the overall adequacy of the presentation of the Financial Information. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, for the purpose of this report, the Financial Information gives true and fair views of the state of affairs of the Target Company as at 30 September 2006 and of the results and cash flows of the Target Company for the Relevant Period.
– 138 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
A. FINANCIAL INFORMATION OF THE TARGET COMPANY
Balance Sheet
As at 30 September 2006 Notes HK$
ASSETS Non-current assets Interest in an associate 3 32,488,092
Current assets Cash balance 398
Total assets 32,488,490
EQUITY Capital and reserves attributable to the equity holder of the Target Company Share capital 4 780 Retained earnings 32,482,640
Total equity 32,483,420
LIABILITIES Current liabilities Amount due to an immediate holding company 5 5,070
Total equity and liabilities 32,488,490
Net current liabilities (4,672)
Total assets less current liabilities 32,483,420
The accompanying notes form an integral part of the Financial Information.
– 139 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
Income Statement
For the period from 3 January 2006 (date of incorporation) to 30 September 2006 Notes HK$
Turnover 6 –
Administrative expenses (5,070)
Loss from operations 7 (5,070)
Share of profit of an associate 3 32,487,710
Profit from ordinary activities 32,482,640
Taxation 8 –
Profit for the period 32,482,640
Earnings per share attributable to the equity holder of the Target Company 10 324,826
All of the Target Company’s operation is classified as continuing.
The accompanying notes form an integral part of the Financial Information.
– 140 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
Statement of Changes in Equity
For the period from 3 January 2006 (date of incorporation) to 30 September 2006 HK$
Issue of shares upon incorporation 780
Profit for the period 32,482,640
Total equity at the end of the period 32,483,420
The accompanying notes form an integral part of the Financial Information.
– 141 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
Cash flow Statement
For the period from 3 January 2006 (date of incorporation) to 30 September 2006 HK$
Cash flows from operating activities
Profit before taxation 32,482,640 Adjustment for: Share of profit of an associate (32,487,710)
Operating cash flows before movements in working capital (5,070)
Increase in amount due to an immediate holding company 5,070
Net cash used in operating activities –
Cash flows from investing activities Acquisition of an associate (382)
Net cash used in investing activities (382)
Cash flows from financing activities Issue of shares 780
Net cash generated from financing activities 780
Cash and cash equivalents at the end of the period 398
Analysis of the balances of cash and cash equivalents Cash balance as at 30 September 2006 398
The accompanying notes form an integral part of the Financial Information.
– 142 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
Notes to Financial Information
1. General information
The registered office of the Target Company is at Palm Grove House, P.O. Box 438, Road Town, Tortola, British Virgin Islands. The ultimate holding company of the Target Company is Global, a company incorporated in the British Virgin Islands.
2. Summary of significant accounting policies
The Financial Information has been prepared in accordance with all applicable Hong Kong Financial Reporting Standards issued by HKICPA, and accounting principles generally accepted in Hong Kong (collectively refer to as “HKFRSs”) and the disclosure requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited as applicable to Accountants’ Reports including in the listing documents of circulars. The accounting policies of the Target Company are materially consistent with the Company’s accounting policies. The measurement basis used in the preparation of the Financial Information is historical cost convention.
The presentation of Financial Information in conformity with HKFRS requires management to make judgememts, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The Target Company has not early applied the following new/revised standards and interpretations that have been issued but are not yet effect.
HKAS 1 (Amendment) Capital Disclosures HKAS 19 (Amendment) Employee Benefits – Actuarial Gains and Losses, Group Plans and Disclosures HKAS 39 (Amendment) Cash Flow Hedge Accounting of Forecast Intragroup Transactions HKAS 39 (Amendment) The Fair Value Option HKAS 39 and HKFRS 4 Financial Guarantee Contracts (Amendments) HKFRS 7 Financial Instruments: Disclosures HKFRS-Int 4 Determining whether an Arrangement contains a Lease
The accounting policies set out below have been applied consistently to Relevant Period presented in this Financial Information.
(a) Investment in associate
Associates are all entities over which the Target Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investment in associate is accounted for by the equity method of accounting and is initially recognised at cost. The Target Company’s investment in associate includes goodwill (net of any accumulated impairment loss) identified on acquisition.
– 143 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
The Target Company’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Target Company’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Target Company does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealised gains on transactions between the Target Company and its associates are eliminated to the extent of the Target Company’s interest in the associate. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associate have been changed where necessary to ensure consistency with the policies adopted by the Target Company.
(b) 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 Relevant Period. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years, and it further excludes items of income or expense that are never taxable and deductible.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary difference and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences 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 in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the Target Company is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable 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 Relevant Period when the liability is settled or the asset is 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.
(c) Related party transactions
A party is considered to be related to the Target Company if:
(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Target Company; (ii) has an interest in the Target Company that gives it significant influence over the Target Company; or (iii) has joint control over the Target Company;
(b) the party is an associate;
(c) the party is a jointly-controlled entity;
– 144 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
(d) the party is a member of the key management personnel of the Target Company or its parent;
(e) the party is a close member of the family of any individual referred to in (a) or (d);
(f) the party is an entity that is controlled, jointly-controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or
(g) the party is a post-employment benefit plan for the benefit of the employees of the Target Company or of any entity that is related party of the Target Company.
A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
(d) 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 with borrowings in current liabilities on the balance sheet.
(e) Provisions
A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.
When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in financial costs in the income statement.
(f) 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, it 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 events not wholly within the control of the Target Company. Contingent assets are not recognised but are 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.
– 145 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
3. Interest in an associate
As at 30 September 2006
Share of net assets 32,488,092
As at 30 September 2006, the Target Company has the following associate:
Issued and Name of Place of Date of Principal fully paid Interest company incorporation incorporation activities capital held
Worth Perfect British Virgin 3 January 2006 Sharing of 49 ordinary 49% Islands profit shares of US$1.00 each*
* The issued share capital of Worth Perfect is HK$780. The Target Company has invested HK$382 with an equity interest of 49%.
Summary of financial information on Worth Perfect as at 30 September 2006:
Total Total assets liabilities Equity Revenue Profit HK$ HK$ HK$ HK$ HK$
100% 66,307,299 5,070 66,302,229 66,306,520 66,301,449 The Target Company’s interest 32,490,576 2,484 32,488,092 32,490,195 32,487,710
4. Share capital
US$ HK$
Authorised: 50,000 ordinary shares at no par value ––
Issued and fully paid: 100 ordinary share of US$1.00 each 100 780
The Target Company was incorporated in the British Virgin Islands and was authorised to issue 50,000 ordinary shares at no par value. On 16 January 2006, the Target Company issued 100 ordinary share of US$1.00 each for cash to Rich Game.
5. Amount due to an immediate holding company
The amount due to an immediate holding company is unsecured, interest-free and has no fixed term of repayment.
6. Turnover and segment information
The Target Company did not generate any revenue during the Relevant Period.
As per HKAS 14 “Segment Reporting”, no business analysis and segment reporting information such as segment revenue, results, assets, liabilities and other information are shown as substantially the Target Company only engages in investment in an associate. It is therefore not considered appropriate to disclose segment information.
– 146 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
7. Loss from operations
No directors’ emoluments were paid by the Target Company during the Relevant Period.
No auditors’ remuneration and employees’ emoluments were paid by the Target Company during the Relevant Period.
8. Taxation
No provision for profits tax has been made as the Target Company has no assessable profit for the Relevant Period.
There are no material unprovided deferred tax assets and liabilities as at the balance sheet date.
9. Dividend
No dividends have been paid or declared during the Relevant Period.
10. Earnings per share
The calculation of basic earnings per share is based on the profit for the period of HK$32,482,640 and 100 ordinary shares in issue during the Relevant Period.
No diluted earnings per share is presented for the Relevant Period as no diluted events occurred during the Relevant Period.
11. Employee benefits expenses
(a) Directors’ emolument for the Relevant Period
Salaries, allowance Fee and bonus Total HK$ HK$ HK$
Spade Investments Limited (appointed on 3 January 2006 and resigned on 16 January 2006) –––
Sat Ieng Sociedade Unipessoal Limitada (appointed on 16 January 2006 and resigned on 28 August 2006) –––
Global Rainbow Limited (appointed on 28 August 2006) –––
(b) Employee’s emolument
No staff was employed by the Target Company during the Relevant Period.
12. Contingent liabilities
The Target Company did not have any significant contingent liabilities as at the balance sheet date.
13. Subsequent events
No significant subsequent events took place subsequent to 30 September 2006.
– 147 – APPENDIX III ACCOUNTANTS’ REPORT ON THE TARGET COMPANY
B. SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared for the Target Company in respect of any period subsequent to 30 September 2006 and no dividends or other distributions have been declared by the Target Company in respect of any period subsequent to 30 September 2006.
Yours faithfully HLB Hodgson Impey Cheng Chartered Accountants Certified Public Accountants Hong Kong
– 148 – APPENDIX IV ACCOUNTANTS’ REPORT ON WORTH PERFECT
The following is the text of a letter, prepared for the sole purpose of inclusion in this circular, received from HLB Hodgson Impey Cheng, Chartered Accountants, Certified Public Accountants.
31st Floor Gloucester Tower The Landmark 11 Pedder Street Central Hong Kong
11 December 2006
The Directors Teem Foundations Group Ltd. Room 2108 Two International Centre No.8 Finance Street Central Hong Kong
Dear Sirs,
We set out below our report on the financial information regarding Worth Perfect International Limited (“Worth Perfect”), for the period from 3 January 2006 (date of incorporation) to 30 September 2006 (the “Relevant Period”), for inclusion in the circular of Teem Foundation Group Ltd. (the “Company”) dated 11 December 2006 (the “Circular”) in connection with the conditional sale and purchase agreement dated 28 August 2006 (the “S&P Agreement”) entered into between Team Jade Enterprises Limited (“Team Jade”), a wholly-owned subsidiary of the Company, and Rich Game Capital Inc. (“Rich Game”) pursuant to which Team Jade would acquire 100% equity interest in Youngrich Limited (the “Target Company”) from Rich Game at an aggregate consideration of HK$539,000,000 (the “Consideration”). The Consideration shall be satisfied by Team Jade (i) paying a refundable deposit of HK$160,000,000 to Rich Game; (ii) procuring the Company to issue a convertible bond in a principal amount of HK$134,400,000 to Rich Game upon completion of the S&P agreement; and (iii) procuring the Company to issue two promissory notes in an aggregate principal amount of HK$244,600,000 to Rich Game upon completion of the S&P agreement.
Worth Perfect is a company incorporated in the British Virgin Islands with limited liability on 3 January 2006. The principal activity of Worth Perfect is sharing of profit stream assigned by Sat Ieng Sociedade Unipessoal Limitada (“Sat Ieng”), Global Rainbow Limited (“Global”) and Smart Gallant Limited (“Smart”). 49% equity interest of Worth Perfect is owned by the Target Company and the remaining 51% equity interest of which is owned by Richsense Limited (“Richsense”). Both the Target Company and Richsense are owned by Rich Game. Rich Game is in turn owned by Global and Smart with 51% and 49% equity interest respectively.
– 149 – APPENDIX IV ACCOUNTANTS’ REPORT ON WORTH PERFECT
On 13 March 2006, Worth Perfect entered into an agreement (the “Original Profit Agreement”) with Sat Ieng, as a vendor, and Mr. Phua Wei Seng (“Mr. Phua”), as a guarantor, pursuant to which Sat Ieng has agreed to sell and/or assign and Mr. Phua has agreed to procure Sat Ieng to sell and/or assign and Worth Perfect has agreed to purchase or accept the assignment of a profit (the “Original Profit”), being 0.4% of the rolling turnover generated by Sat Ieng and/or its customers at Sands Macao’s Paiza Club gaming rooms pursuant to the junket representative agreement dated 27 January 2006 entered into between Venetian Macau Limited and Sat Ieng (the “Sands Junket Representative Agreement”) and such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative, at a consideration of HK$1.00. On 28 August 2006, Worth Perfect entered into a deed of termination with Sat Ieng and Mr. Phua to terminate the Original Profit Agreement. As a result, no assignment of the Original Profit has been accounted for subsequent to 28 August 2006.
On 28 August 2006, Worth Perfect entered into an agreement (the “Sands Profit Agreement”) with Global as a vendor and Mr. Tang Chien Chang (“Mr. Tang”) as a guarantor, pursuant to which Global has agreed to sell and/or assign and Mr. Tang has agreed to procure Global to sell and/or assign and Worth Perfect has agreed to purchase or accept the assignment of a profit (the “Sands Profit”), being 0.4% of the rolling turnover generated by Sat Ieng and its customers at Sands Macao’s Paiza Club gaming rooms pursuant to the Sands Junket Representative Agreement and such other VIP gaming rooms whereby Sat Ieng is a duly appointed junket representative or such other VIP gaming rooms whereby Sat Ieng can procure the sale/assignment of a percentage of rolling turnover generated by the duly appointed junket representative, at a consideration of HK$1.00. As at 30 September 2006, the Sands Profit Agreement has not been completed and no assignment of Sands Profit from Global to Worth Perfect was accounted for during the Relevant Period.
On 28 August 2006, Worth Perfect entered into an agreement (the “Wynn Profit Agreement”) with Smart, pursuant to which Smart has agreed to sell and/or assign and Mr. Jean, Christophe Scolari (“Mr. Scolari”) has agreed to procure Smart to sell and/or assign and Worth Perfect has agreed to purchase or accept the assignment of a profit (the “Wynn Profit”), being 0.4% of the rolling turnover generated by Dore Entretenimento Sociedade Unipessoal Limitada (“Dore”) and its customers at Wynn Macau VIP gaming rooms pursuant to the junket representative agreement dated 28 August 2006 entered into between Wynn Resorts (Macau) S.A. and Dore and such other VIP gaming rooms whereby Dore is a duly appointed junket representative or such other VIP gaming rooms whereby Dore can procure the sale/assignment of a percentage of rolling turnover generated by the duly appointed junket representative, at a consideration of HK$1.00. The Wynn Profit Agreement was completed on 5 September 2006.
For the purpose of this report, the director of Worth Perfect has prepared the unaudited management accounts of Worth Perfect as at 30 September 2006 in accordance with the accounting principles generally accepted in Hong Kong for which the director of Worth Perfect is solely responsible. The income statement, the statement of changes in equity, the cash flow statement of Worth Perfect for the Relevant Period and the balance sheet of Worth Perfect as at 30 September 2006 together with the notes thereto (the “Financial Information”) set out in this report are prepared on the basis as set out in note 2 to Financial Information below.
– 150 – APPENDIX IV ACCOUNTANTS’ REPORT ON WORTH PERFECT
The director of Worth Perfect is responsible for the preparation of the Financial Information which gives a true and fair view. In preparing the Financial Information which gives a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion solely to you.
As a basis for forming an opinion on the Financial Information, for the purpose of this report, we have carried out an independent audit on the Financial Information for the Relevant Period in accordance with Hong Kong Standards on Auditing issued by Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have carried out such additional procedures as we considered necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the reporting accountant” issued by the HKICPA. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Financial Information. It also includes an assessment of the significant estimates and judgements made by the director of Worth Perfect in the preparation of the Financial Information, and of whether the accounting policies are appropriate to the circumstances of Worth Perfect, consistently applied and adequately disclosed. No adjustment was considered necessary to adjust the unaudited management accounts of World Perfect for the Relevant Period.
In forming our opinion, we planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the Financial Information is free from material misstatement. In forming our opinion, we also evaluated the overall adequacy of the presentation of the Financial Information. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, for the purpose of this report, the Financial Information gives true and fair views of the state of affairs of the Worth Perfect and of the Worth Perfect as at 30 September 2006 and of the results and cash flows of Worth Perfect for the Relevant Period.
– 151 – APPENDIX IV ACCOUNTANTS’ REPORT ON WORTH PERFECT
A. FINANCIAL INFORMATION OF WORTH PERFECT
Balance Sheet
As at 30 September 2006 Notes HK$
ASSETS Non-current assets Intangible asset 2a 1
Current assets Amount due from Smart 3 15,051,440 Amount due from Mr. Tang 4 51,255,080 Cash balances 778
66,307,298
Total assets 66,307,299
EQUITY Capital and reserves attributable to the equity holders of Worth Perfect Share capital 6 780 Retained earnings 66,301,449
Total equity 66,302,229
LIABILITIES Current liabilities Amount due to an intermediate holding company 5 5,070
Total equity and liabilities 66,307,299
Net current assets 66,302,228
Total assets less current liabilities 66,302,229
The accompanying notes form an integral part of the Financial Information.
– 152 – APPENDIX IV ACCOUNTANTS’ REPORT ON WORTH PERFECT
Income Statement
For the period from 3 January 2006 (date of incorporation) to 30 September 2006 Notes HK$
Turnover 7 66,306,520
Administrative expenses (5,070)
Impairment loss recognised in respect of intangible asset (1)
Profit from ordinary activities 8 66,301,449
Taxation 9 –
Profit for the period 66,301,449
Earnings per share attributable to the equity holders of the Worth Perfect 11 663,014
All Worth Perfect’s operation is classified as continuing.
The accompanying notes form an integral part of the Financial Information.
– 153 – APPENDIX IV ACCOUNTANTS’ REPORT ON WORTH PERFECT
Statement of Changes in Equity
For the period from 3 January 2006 (date of incorporation) to 30 September 2006 HK$
Issue of shares upon incorporation 780
Profit for the period 66,301,449
Total equity at the end of the period 66,302,229
The accompanying notes form an integral part of the Financial Information.
– 154 – APPENDIX IV ACCOUNTANTS’ REPORT ON WORTH PERFECT
Cash Flow Statement
For the period from 3 January 2006 (date of incorporation) to 30 September 2006 HK$
Cash flows from operating activities
Profit before taxation 66,301,449 Adjustments for: Impairment loss recognised in respect of intangible asset 1
66,301,450 Operating profit before working capital changes Increase in amount due from Smart (15,051,440) Increase in amount due from Mr. Tang (51,255,080) Increase in amount due to an intermediate holding company 5,070
Net cash used in operating activities –
Cash flows from investing activities Payments to purchase intangible assets (2)
Net cash used in operating activities (2)
Cash flows from financing activities Issue of shares 780
Net cash generated from financing activities 780
Cash and cash equivalents at the end of the period 778
Analysis of the balances of cash and cash equivalents Cash balance as at 30 September 2006 778
The accompanying notes form an integral part of the Financial Information.
– 155 – APPENDIX IV ACCOUNTANTS’ REPORT ON WORTH PERFECT
Notes to Financial Information
1. General information
The registered office of Worth Perfect is at Palm Grove House, P.O. Box 438, Road Town, British Virgin Islands. The ultimate holding company of Worth Perfect is Global, a company incorporated in the British Virgin Islands.
2. Summary of significant accounting policies
The Financial Information has been prepared in accordance with all applicable Hong Kong Financial Reporting Standards issued by HKICPA, and accounting principles generally accepted in Hong Kong (collectively refer to as “HKFRSs”) and the disclosure requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited as applicable to Accountants’ Reports including in the listing documents of circulars. The principal accounting policies adopted in the preparation of this Financial Information are consistent with the accounting policies adopted by the Target Company and materially consistent with the Company’s accounting policies, except for the following accounting policies
(a) Intangible assets
The intangible assets represent historical costs to acquire rights for assignment of the Original Profit from Sat Ieng pursuant to the Original Profit Agreement and assignment of the Wynn Profit from Smart pursuant to the Wynn Profit Agreement. On 28 August 2006, Worth Perfect entered into a deed of termination with Sat Ieng and Mr. Phua to terminate the Original Profit Agreement. The intangible assets are not subject to amortisation as both rights have an indefinite useful life.
(b) Impairment of assets
Assets that have an indefinite useful 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 lowest levels for which there are separately identifiable cash flows (Cash-generating units).
(c) Revenue recognition
Revenue from assignment of profit is recognised when the right to receive profit is established.
3. Amount due from Smart
The amount due from Smart, a shareholder of an intermediate holding company is unsecured and interest free. The amount comprises of accounts receivable of HK$15,051,440 on agreed credit terms.
4. Amount due from Mr. Tang
The amount due from Mr. Tang, a shareholder of an intermediate holding company is unsecured and interest free. The amount comprises of accounts receivable of HK$51,255,080 on agreed credit terms.
5. Amount due to an intermediate holding company
The amount due to Rich Game is unsecured, interest-free and payable on demand.
– 156 – APPENDIX IV ACCOUNTANTS’ REPORT ON WORTH PERFECT
6. Share capital
US$ HK$
Authorised: 50,000 ordinary shares at no par value ––
Issued and fully paid: 100 ordinary share of US$1.00 each 100 780
Worth Perfect was incorporated in the British Virgin Islands and was authorised to issue 50,000 ordinary shares at no par value. On 16 January 2006, Worth Perfect issued 49 and 51 ordinary shares of US$1.00 each for cash to the Target Company and Richsense, respectively.
7. Turnover and segment information
Turnover represents the profits assigned by Sat Ieng and Smart pursuant to the Original Profit Agreement and the Wynn Profit Agreement respectively during the Relevant Period.
During the Relevant Period, more than 90% of Worth Perfect’s turnover was derived from sharing of profit from Sat Ieng and Smart in Macau, no business and geographical segmental information on turnover are presented.
8. Profit from ordinary activities
No directors’ emoluments were paid by Worth Perfect during the Relevant Period.
No auditors’ remuneration and employees’ emoluments were paid by Worth Perfect during the Relevant Period.
9. Taxation
No provision for profits tax has been made as Worth Perfect has no assessable profit in Macau for the Relevant Period.
There are no material unprovided deferred tax assets and liabilities as at the balance sheet date.
10. Dividend
No dividends have been paid or declared during the Relevant Period.
11. Earnings per share
The calculation of basic earnings per share is based on the profit for the period of HK$66,301,449 and 100 ordinary shares in issue during the Relevant Period.
No diluted earnings per share is presented for the Relevant Period as no diluted events occurred during the Relevant Period.
– 157 – APPENDIX IV ACCOUNTANTS’ REPORT ON WORTH PERFECT
12. Employee benefits expenses
(a) Directors’ emolument for the Relevant Period
Salaries, allowance Fee and bonus Total HK$ HK$ HK$
Spade Investments Limited (appointed on 3 January 2006 and resigned on 16 January 2006) –––
Sat Ieng Sociedade Unipessoal Limitada (appointed on 16 January 2006 and resigned on 28 August 2006) –––
Global Rainbow Limited (appointed on 28 August 2006) –––
(b) Employee’s emolument
No staff was employed by Worth Perfect during the Relevant Period.
13. Material related party transactions
In addition to the disclosure in notes 3 and 4 to the Financial Information, Worth Perfect had entered the following significant related party transactions during the Relevant Period, which was carried out at agreed terms.
Name of Nature of related Nature of 2006 related parties party relationship transactions HK$
Mr. Tang Shareholder of an intermediate Sharing of the profit 51,255,080 holding company – receivable
Smart Shareholder of an intermediate Sharing of the profit 15,051,440 holding company – receivable
14. Contingent liabilities
Worth Perfect did not have any significant contingent liabilities as at the balance sheet date.
15. Capital commitment
On 28 August 2006, Worth Perfect entered into the Sands Profit Agreement with Global as a vendor and Mr. Tang as a guarantor to purchase and/or accept the assignment of the Sands Profit. Capital commitment for intangible asset as at the balance sheet date is as follow:
As at 30 September 2006
Contracted but not provided for 1
16. Subsequent events
No significant subsequent events took place subsequent to 30 September 2006.
– 158 – APPENDIX IV ACCOUNTANTS’ REPORT ON WORTH PERFECT
B. SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared for Worth Perfect in respect of any period subsequent to 30 September 2006 and no dividends or other distributions have been declared by Worth Perfect in respect of any period subsequent to 30 September 2006.
Yours faithfully HLB Hodgson Impey Cheng Chartered Accountants Certified Public Accountants Hong Kong
– 159 – APPENDIX V ASSURANCE REPORT ON THE ROLLING TURNOVER GENERATED BY SAT IENG
The following is the text of a letter, prepared for the sole purpose of inclusion in this circular, received from HLB Hodgson Impey Cheng, Chartered Accountants, Certified Public Accountants.
31/F Gloucester Tower The Landmark 11 Pedder Street Central Hong Kong
11 December 2006
The Directors Teem Foundation Group Ltd. Room 2108 Two International Finance Centre No. 8 Finance Street Central HONG KONG
ASSURANCE REPORT ON THE ROLLING TURNOVER GENERATED BY SAT IENG SOCIEDADE UNIPESSOAL LIMITADA (“SAT IENG”)
We set out below our report on the rolling turnover generated by Sat Ieng for the period from 23 February 2005 to 31 August 2006 (the “Relevant Period”) and the notes thereto.
Respective responsibilities of director and auditors
For the purpose of this report, the director of Sat Ieng has prepared the unaudited schedule of rolling turnover for the Relevant Period in accordance with accounting principles generally accepted in Hong Kong for which the director of Sat Ieng is responsible. The schedule of rolling turnover set out in this report is prepared on the basis as set out in note 1 to the schedule of rolling turnover below.
The director of Sat Ieng is responsible for the preparation of the schedule of rolling turnover which gives a true and fair view. In preparing the schedule of rolling turnover which gives a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on the schedule of rolling turnover and to report our opinion solely to you.
Basis of opinion
As a basis for forming an opinion on the schedule of rolling turnover, we have examined the schedule of rolling turnover for the Relevant Period in accordance with the Hong Kong Standard on Assurance Engagement 3000 “Assurance Engagements Other
– 160 – APPENDIX V ASSURANCE REPORT ON THE ROLLING TURNOVER GENERATED BY SAT IENG
Than Audits or Review of Historical Financial Information” (“HKSAE 3000”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have carried out such additional procedures as we considered necessary. Our examination includes examination, on a test basis, of evidence relevant to the amounts and disclosure in the schedule of rolling turnover. It also includes an assessment of the significant estimates and judgments made by the director of Sat Ieng in the preparation of the schedule of rolling turnover, and of whether the accounting policies are appropriate to the circumstances of Sat Ieng, consistently applied and adequately disclosed.
We planned and performed our examination so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the schedule of rolling turnover are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information on the schedule of rolling turnover. We believe that our examination provides a reasonable basis for our opinion.
Scope of our examination
1. We have examined the original rolling cards of customers of Sat Ieng against the original daily rolling turnover reports of Sat Ieng for the Relevant Period.
2. We have examined the original daily rolling turnover reports of Sat Ieng against the original monthly rolling turnover reports of Sat Ieng for the Relevant Period.
3. We have examined the original monthly rolling turnover reports of Sat Ieng against the original monthly Junket Representative Settlement Forms from Sands Macao for the Relevant Period.
4. We have performed re-calculation on the commission income of Sat Ieng against the original monthly rolling turnover reports of Sat Ieng and against the original monthly Junket Representative Settlement Forms from Sands Macao for the Relevant Period.
5. We have examined the original Junket Representative Settlement Forms signed by Sands Macao and Sat Ieng, regarding the rolling turnover agreed by both parties for the Relevant Period.
6. We have examined the original Junket Representative Settlement Forms signed by Sands Macao and Sat Ieng, regarding the commission expense paid by Sands Macao and commission income received by Sat Ieng for the Relevant Period. We have also examined the Front Money Out Slips issued by Sands Macao, regarding the withdrawals of commission income by Sat Ieng from Sands Macao.
– 161 – APPENDIX V ASSURANCE REPORT ON THE ROLLING TURNOVER GENERATED BY SAT IENG
7. We have examined the ledger account of commission income against the original vouchers of Sat Ieng, including the original monthly Junket Representative Settlement Forms and against the results of our re-calculation on the commission income of Sat Ieng as aforementioned in point 4 above for the Relevant Period.
8. We have examined the ledger account of cash and bank balances against the original reconciliation schedules of the front money account of Sat Ieng, which is maintained by Sands Macao, for the Relevant Period.
Findings of our examination
a. Based on our examination as stated in paragraphs 1, 2, 3, 4, 5 and 7 under the “Scope of the examination”, no material discrepancy were noted between the original monthly rolling turnover reports which were prepared by Sat Ieng and the Junket Representative Settlement Forms which were issued by Sands Macao during the Relevant Period.
b. Based on our examination as stated in paragraphs 6 and 8 under the “Scope of the examination”, the amount of commission paid by Sands Macao to Sat Ieng and the commission received by Sat Ieng regarding the commission income earned by Sat Ieng, which were recorded in the Front Money Out Slips, were the same throughout the Relevant Period.
Opinion
In our opinion the rolling turnover generated by Sat Ieng for the Relevant Period reflected on the schedule of rolling turnover, in all material respect, is fairly stated.
HLB Hodgson Impey Cheng Chartered Accountants Certified Public Accountants Hong Kong
– 162 – APPENDIX V ASSURANCE REPORT ON THE ROLLING TURNOVER GENERATED BY SAT IENG
THE SCHEDULE OF ROLLING TURNOVER FOR EACH OF THE MONTH/PERIOD ENDED
0.4% of Rolling the Rolling Turnover Turnover HK$’000 HK$’000
23 February 2005 to 31 March 2005 2,615,650 N/A 30 April 2005 3,924,110 N/A 31 May 2005 3,593,420 N/A 30 June 2005 2,718,800 N/A 31 July 2005 3,006,480 N/A 31 August 2005 2,742,800 N/A 30 September 2005 3,400,250 N/A 31 October 2005 3,554,390 N/A 30 November 2005 2,229,420 N/A 31 December 2005 3,728,110 N/A 31 January 2006 2,435,650 N/A 28 February 2006 2,558,300 N/A 1 March 2006 to 15 March 2006 1,026,300 N/A 16 March 2006 to 31 March 2006 1,594,300 6,377 30 April 2006 1,830,060 7,320 31 May 2006 2,519,750 10,079 30 June 2006 2,674,860 10,699 31 July 2006 2,326,500 9,306 1 August 2006 to 28 August 2006 1,868,300 7,473 29 August 2006 to 31 August 2006 115,500 N/A
50,462,950 51,254
Notes to the schedule of rolling turnover
1. Basis of preparation of the schedule of rolling turnover
The schedule of rolling turnover has been prepared in accordance with accounting principles generally accepted in Hong Kong.
The schedule of rolling turnover has been prepared under the historical cost and accrual basis.
2. Summary of significant accounting policies
(a) 0.4% of the rolling turnover
0.4% of the rolling turnover represents the aggregate of the profit assigned to Worth Perfect International Limited (“Worth Perfect”) pursuant to the agreement dated 13 March 2006 entered into among Worth Perfect, Sat Ieng and Mr. Phua Wei Seng (the “Original Profit Agreement”) and the deed of termination dated 28 August 2006 entered into among Worth Perfect, Sat Ieng and Mr. Phua Wei Seng.
Based on the Original Profit Agreement, Sat Ieng commenced to assign the profit to Worth Perfect from 16 March 2006. Therefore, there is no profit to be assigned to Worth Perfect during the period from 23 February 2005 to 15 March 2006.
– 163 – APPENDIX VI ASSURANCE REPORT ON THE ROLLING TURNOVER GENERATED BY DORE
The following is the text of a letter, prepared for the sole purpose of inclusion in this circular, received from HLB Hodgson Impey Cheng, Chartered Accountants, Certified Public Accountants.
31/F Gloucester Tower The Landmark 11 Pedder Street Central Hong Kong
11 December 2006
The Directors Teem Foundation Group Ltd. Room 2108 Two International Finance Centre No. 8 Finance Street Central HONG KONG
ASSURANCE REPORT ON THE ROLLING TURNOVER GENERATED BY DORE ENTRETENIMENTO SOCIEDADE UNIPESSOAL LIMITADA (“DORE”)
We set out below our report on the rolling turnover generated by Dore for the period from 5 September 2006 to 27 September 2006 (the “Relevant Period”) and the notes thereto.
Respective responsibilities of director and auditors
For the purpose of this report, the director of Dore has prepared the unaudited schedule of rolling turnover for the Relevant Period in accordance with accounting principles generally accepted in Hong Kong for which the director of Dore is responsible. The schedule of rolling turnover set out in this report is prepared on the basis as set out in note 1 to the schedule of rolling turnover below.
The director of Dore is responsible for the preparation of the schedule of rolling turnover which gives a true and fair view. In preparing the schedule of rolling turnover which gives a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our examination, on the schedule of rolling turnover and to report our opinion solely to you.
Basis of opinion
As a basis for forming an opinion on the schedule of rolling turnover, we have examined the schedule of rolling turnover for the Relevant Period in accordance with the Hong Kong Standard on Assurance Engagement 3000 “Assurance Engagements Other
– 164 – APPENDIX VI ASSURANCE REPORT ON THE ROLLING TURNOVER GENERATED BY DORE
Than Audits or Review of Historical Financial Information” (“HKSAE 3000”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have carried out such additional procedures as we considered necessary. Our examination includes examination, on a test basis, of evidence relevant to the amounts and disclosure in the schedule of rolling turnover. It also includes an assessment of the significant estimates and judgments made by the director of Dore in the preparation of the schedule of rolling turnover, and of whether the accounting policies are appropriate to the circumstances of Dore, consistently applied and adequately disclosed.
We planned and performed our examination so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the schedule of rolling turnover are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information on the schedule of rolling turnover. We believe that our examination provides a reasonable basis for our opinion.
Scope of our examination
1. We have examined the original rolling cards of customers of Dore against the original daily rolling turnover reports of Dore for the Relevant Period.
2. We have examined the original daily rolling turnover reports of Dore against the original monthly rolling turnover report of Dore for the Relevant Period.
3. We have examined the original monthly rolling turnover report of Dore against the original monthly Junket Promoter Settlement Form from Wynn Macau for the Relevant Period.
4. We have performed re-calculation on the commission income of Dore against the original monthly rolling turnover report of Dore and against the original monthly Junket Promoter Settlement Form from Wynn Macau for the Relevant Period.
5. We have examined the original Junket Promoter Settlement Form signed by Wynn Macau and Dore, regarding the rolling turnover agreed by both parties for the Relevant Period.
6. We have examined the cheque issued by Wynn Macau to Dore, regarding the commission expense paid by Wynn Macau and commission income received by Dore for the Relevant Period.
7. We have examined the ledger account of commission income against the original vouchers of Dore, including the original monthly Junket Promoter Settlement Form and against the results of our re-calculation on the commission income of Dore as aforementioned in point 4 for the Relevant Period.
– 165 – APPENDIX VI ASSURANCE REPORT ON THE ROLLING TURNOVER GENERATED BY DORE
8. We have examined the ledger account of cash and bank balances against the original vouchers and supporting documents of Dore, including the bank deposit slip with regard to the commission income received from Wynn Macau and the original bank statement, for the Relevant Period.
Findings of our examination
a. Based on our examination as stated in paragraphs 1, 2, 3, 4, and 5 under the “Scope of the examination”, no material discrepancy were noted between the original monthly rolling turnover reports which were prepared by Dore and the Junket Promotor Settlement Forms which were issued by Wynn Macau during the Relevant Period.
b. Based on our examination as stated in paragraphs 6, 7 and 8 under the “Scope of the examination”, the amount of commission paid by Wynn Macau to Dore, the commission received by Dore and the original voucher of Dore regarding the commission income earned by Dore which were paid by Wynn Macau, were indifference throughout the Relevant Period.
Opinion
In our opinion the rolling turnover generated by Dore for the Relevant Period reflected on the schedule of rolling turnover, in all material respect, is fairly stated.
HLB Hodgson Impey Cheng Chartered Accountants Certified Public Accountants Hong Kong
– 166 – APPENDIX VI ASSURANCE REPORT ON THE ROLLING TURNOVER GENERATED BY DORE
THE SCHEDULE OF ROLLING TURNOVER FOR THE PERIOD ENDED
0.4% of Rolling the Rolling Turnover Turnover HK$’000 HK$’000
5 September 2006 to 27 September 2006 3,762,860 15,051
Notes to the schedule of rolling turnover
1. Basis of preparation of the schedule of rolling turnover
The schedule of rolling turnover has been prepared in accordance with accounting principles generally accepted in Hong Kong.
The schedule of rolling turnover has been prepared under the historical cost and accrual basis.
2. Summary of significant accounting policies
(a) 0.4% of the rolling turnover
0.4% of the rolling turnover represents the profit assigned to Worth Perfect International Limited as per the agreement dated 28 August 2006 entered into among Worth Perfect International Limited, Smart Gallant Limited and Mr. Jean, Christophe Scolari.
– 167 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
(A) SUMMARY OF FINANCIAL INFORMATION
The following is a summary of the audited consolidated income statements and the assets and liabilities of the Group for each of the three years ended 31 March 2004, 2005 and 2006.
Consolidated Balance Sheets
Year ended 31 March 2006 2005 2004 HK$’000 HK$’000 HK$’000 (restated) (restated)
NON-CURRENT ASSETS Property, plant and equipment 519 1,248 11,142 Investment property 10,200 –– Goodwill – 8,536 11,034
10,719 9,784 22,176
CURRENT ASSETS Accounts receivable – 12,749 18,589 Trade deposits, prepayment and other receivables 9 25,279 25,165 Financial assets at fair value through profit or loss 4,953 5,076 – Tax recoverable 1,656 1,656 1,420 Cash and cash equivalents 29,985 11,478 24,064
36,603 56,238 69,238
CURRENT LIABILITIES Accounts payable 893 1,680 10,613 Deposits received, other payables and accruals 1,315 3,454 1,821 Due to directors ––1,673 Interest-bearing bank and other borrowings – 400 1,717
2,208 5,534 15,824
NET CURRENT ASSETS 34,395 50,704 53,414
TOTAL ASSETS LESS CURRENT LIABILITIES 45,114 60,488 75,590
NON-CURRENT LIABILITIES Interest-bearing bank loan, secured – 67 – Finance lease contract payables ––3,566
NET ASSETS 45,114 60,421 72,024
CAPITAL AND RESERVES Share capital 67,200 67,200 67,200 Reserves (22,086) (6,779) 4,824
45,114 60,421 72,024
– 168 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
Consolidated Income Statement
Year ended 31 March 2006 2005 2004 HK$’000 HK$’000 HK$’000
Turnover 10,645 67,090 23,175 Cost of sales (9,551) (60,631) (21,835)
Gross profit 1,094 6,459 1,340
Other revenue and income 327 431 302 Administrative expenses (7,255) (12,996) (13,839) Other expenses, net (514) (5,082) (2,355) Impairment loss recognised in respect of goodwill (8,536) –– Impairment loss recognised in respect of investment property (395) –– Finance costs (28) (235) (359) Share of profit of an associate ––311
Loss before taxation (15,307) (11,423) (14,600) Taxation – (180) –
Loss for the year (15,307) (11,603) (14,600)
Dividends –––
Loss per share Basic (2.28 cents) (1.73 cents) (2.17 cents)
– 169 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
(B) AUDITED FINANCIAL STATEMENTS
The following is an extract of the audited financial statements of the Group from the annual reports of the Company for the year ended 31 March 2006.
Consolidated Balance Sheet At 31 March 2006 2006 2005 (Restated) Notes HK$’000 HK$’000
ASSETS Non-Current Assets Property, plant and equipment 6 519 1,248 Investment property 7 10,200 – Goodwill 8 – 8,536
10,719 9,784 Current Assets Accounts receivable 10 – 12,749 Trade deposits 11 – 24,301 Prepayments and other receivables 12 9 978 Financial assets at fair value through profit or loss 13 4,953 5,076 Tax recoverable 1,656 1,656 Cash and cash equivalents 29,985 11,478
36,603 56,238
Total Assets 47,322 66,022
EQUITY Share capital 14 67,200 67,200 Reserves 15(a) (22,086) (6,779)
Total Equity 45,114 60,421
– 170 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
2006 2005 (Restated) Notes HK$’000 HK$’000
LIABILITIES Non-Current Liabilities Interest-bearing bank loan, secured 16 – 67
Current Liabilities Accounts payable 17 893 1,680 Other payables and accruals 1,315 3,454 Interest-bearing bank and other borrowings 18 – 400
2,208 5,534
Total Liabilities 2,208 5,601
Total Equity and Liabilities 47,322 66,022
Net Current Assets 34,395 50,704
Total Assets Less Current Liabilities 45,114 60,488
– 171 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
Balance Sheet At 31 March 2006 2006 2005 (Restated) Notes HK$’000 HK$’000
ASSETS Non-Current Assets Property, plant and equipment 6 278 685 Interests in subsidiaries 9 88,187 95,002
88,465 95,687
Current Assets Prepayments and other receivables 12 – 969 Cash and cash equivalents 3,340 6,441
3,340 7,410
Total Assets 91,805 103,097
EQUITY Share capital 14 67,200 67,200 Reserves 15(b) (33,573) (9,433)
Total Equity 33,627 57,767
LIABILITIES Current Liabilities Other payables and accruals 1,180 1,440 Tax payable 30 30 Amount due to a subsidiary 56,968 43,860
58,178 45,330
Total Equity and Liabilities 91,805 103,097
Net Current Liabilities (54,838) (37,920)
Total Assets Less Current Liabilities 33,627 57,767
– 172 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
Consolidated Income Statement For the year ended 31 March 2006 2006 2005 Notes HK$’000 HK$’000
Turnover 20 10,645 67,090
Cost of sales (9,551) (60,631)
Gross profit 1,094 6,459 Other revenue 20 72 – Other income 20 255 431 Administrative expenses (7,255) (12,996) Other operating expenses (514) (5,082) Impairment loss recognised in respect of goodwill (8,536) – Impairment loss recognised in respect of investment property (395) –
Loss from operating activities 21 (15,279) (11,188) Finance costs 22 (28) (235)
Loss before taxation (15,307) (11,423) Taxation 25 – (180)
Loss for the year (15,307) (11,603)
Attributable to: Equity holders of the Company (15,307) (11,603)
Loss per share attributable to the equity holders of the Company 27 – Basic (2.28 cents) (1.73 cents)
– Diluted N/A N/A
– 173 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
Consolidated Statement of Changes in Equity For the year ended 31 March 2006
Reserves Issued Total share Contributed Accumulated capital and capital surplus losses Total reserves HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
At 1 April 2004 67,200 20,607 (15,783) 4,824 72,024
Net loss for the year ––(11,603) (11,603) (11,603)
At 31 March 2005 and at 1 April 2005 67,200 20,607 (27,386) (6,779) 60,421
Net loss for the year ––(15,307) (15,307) (15,307)
At 31 March 2006 67,200 20,607 (42,693) (22,086) 45,114
– 174 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
Consolidated Cash Flow Statement For the year ended 31 March 2006 2006 2005 (Restated) Notes HK$’000 HK$’000
Cash flows from operating activities Loss before taxation (15,307) (11,423)
Adjustments for: Finance costs 22 28 235 Gain on disposal of subsidiaries – (230) Gain on disposal of property, plant and equipment – (137) Impairment loss in respect of property, plant and equipment – 1,861 Unrealised loss/(gain) on financial assets at fair value through profit or loss 714 (64) Impairment loss recognised in respect of investment property 21 395 – Impairment loss recognised in respect of goodwill 21 8,536 – Depreciation 21 729 2,888 Goodwill amortisation – 2,498 (Write-back of provision)/provision for impairment loss on accounts receivable 21 (200) 723
Operating loss before working capital changes (5,105) (3,649)
Decrease in accounts receivable 12,949 5,117 Decrease/(increase) in trade deposits 24,301 (3,124) Decrease in prepayments and other receivables 969 3,740 Increase in financial assets at fair value through profit or loss (591) (5,012) Decrease in accounts payable (787) (8,933) Decrease in amounts due to directors – (1,673) (Decrease)/increase in other payables and accruals (2,139) 1,633
Cash generated from/(used in) operations 29,597 (11,901) Interest paid (28) (20) Interest element on finance lease contract rental payments – (215) Hong Kong profits tax paid – (416)
Net cash inflow/(outflow) from operating activities 29,569 (12,552)
– 175 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
2006 2005 (Restated) Notes HK$’000 HK$’000
Cash flows from investing activities Payments to acquire property, plant and equipment – (35) Payment to acquire investment property (10,595) – Proceeds from disposal of property, plant and equipment – 950
Net cash (outflow)/inflow from investing activities (10,595) 915
Cash flows from financing activities New bank loan – 800 Repayment of bank loan (467) (333) Capital element of finance lease contract rental payments – (1,416)
Net cash outflow from financing activities (467) (949)
Net increase/(decrease) in cash equivalents 18,507 (12,586)
Cash and cash equivalents at the beginning of the year 11,478 24,064
Cash and cash equivalents at the end of the year 29,985 11,478
Analysis of the balances of cash and cash equivalents Cash and cash equivalents 29,985 11,478
– 176 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
Notes to Financial Statements 31 March 2006
1. GENERAL INFORMATION
The Company is incorporated in Bermuda as an exempted company with limited liability and its shares are listed on The Stock Exchange of Hong Kong Limited.
The registered office of the Company is located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda and the principal place of business in Hong Kong is Unit 2108, 21/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong.
The Group was principally engaged in the trading of logs. In prior years, the Group was also principally involved in the provision and installation of fire-rated timber door sets and the provision of interior decoration and renovation services. These activities were minimal in the current year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
Basis of preparation The consolidated financial statements of the Company have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which is a collective term that includes all applicable individual HKFRSs, Hong Kong Accounting Standards (“HKASs”), and interpretation (“Ints”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. In addition, the financial statements comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.
The measurement basis used in the preparation of the financial statement is historical cost as modified for the revaluation of the investment property and financial assets at fair value through profit or loss.
The Group’s books and records are maintained in Hong Kong Dollar (“HK$”), the currency in which the majority of the Group’s transactions is denominated.
The preparation of the financial statements requires management to exercise its judgement in the process of applying the Company’s accounting polices. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements.
The Adoption of new/revised HKFRSs During the year ended 31 March 2006, the Group adopted the new/revised standards and interpretations of HKFRSs below, which are relevant to its operations. The 2005 comparative figures have been restated as required, in accordance with the relevant requirements.
– 177 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
HKAS 1 Presentation of Financial Statements HKAS 7 Cash Flow Statements HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors HKAS 10 Events after the Balance Sheet Date HKAS 12 Income Taxes HKAS 14 Segment Reporting HKAS 16 Property, Plant and Equipment HKAS 17 Leases HKAS 18 Revenue HKAS 19 Employee Benefits HKAS 21 The Effects of Changes in Foreign Exchange Rates HKAS 23 Borrowing Costs HKAS 24 Related Party Disclosures HKAS 27 Consolidated and Separate Financial Statements HKAS 32 Financial Instruments: Disclosure and Presentation HKAS 33 Earnings per Share HKAS 36 Impairment of Assets HKAS 37 Provisions, Contingent Liabilities and Contingent Assets HKAS 38 Intangible Assets HKAS 39 Financial Instruments: Recognition and Measurement HKAS 40 Investment Property HKFRS 2 Share-based Payments HKFRS 3 Business Combinations HKAS-Int 21 Income Taxes – Recovery of Revalued Non-depreciable Assets
The adoption of new/revised HKASs 1,7, 8, 10, 12, 14, 16, 17, 18, 19, 21, 23, 24, 27, 33 and 37 did not result in substantial changes to the Group’s accounting policies. In summary:
– HKAS 1 has affected the presentation of minority interest, share of net after-tax results of associates and other disclosures.
– HKASs 7, 8, 10, 12, 14, 16, 18, 19, 23, 27, 33 and 37 had no material effect on the Group’s policies.
– HKAS 17 has affected on the classification of leasehold land and land use rights from property, plant and equipment to operating leases. The up-front payments made for the leasehold land and land use rights are expensed in the income statement on a straight- line basis over the period of the lease or when there is impairment, the impairment is expensed in the income statement. In prior years, the leasehold land was accounted for at fair value or cost less accumulated depreciation and accumulated impairment.
– HKAS 21 had no material effect on the Group’s policy. The functional currency of each of the consolidated entities has been re-evaluated based on the guidance to the revised standard. All the Group entities have the same functional currency as the presentation currency for respective entity financial statements.
– HKAS 24 has affected the identification of related parties and some other related-party disclosures.
The adoption of HKASs 32 and 39 has resulted in a change in the accounting policy relating to the classification of financial assets at fair value through profit or loss and available-for-sale financial assets. It has also resulted in the recognition of derivative financial instruments at fair value and the change in the recognition and measurement of hedging activities.
The adoption of revised HKAS 40 has resulted in a change in the accounting policy of which the changes in fair values are recorded in the income statement as part of other income. In prior years, the increases in fair value were credited to the investment properties revaluation reserve. Decreases in fair value were first set off against increases on earlier valuations on a portfolio basis and thereafter expensed in the income statement.
– 178 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
The adoption of revised HKAS-Int 21 has resulted in a change in the accounting policy relating to the measurement of deferred tax liabilities arising from the revaluation of an asset. Such deferred tax liabilities are measured on the basis of tax consequences that would follow from recovery of the carrying amount of that asset through use. In prior year, the carrying amount of that asset was expected to be recovered through sale.
The adoption of revised HKFRS 2 has resulted in a change in the accounting policy for share- based payments. Until 31 March 2005, the provision of share options to employees did not result in an expense in the income statement. Effective from 1 April 2005, HKFRS 2 required the change in fair value of share options granted must be recognised in the income statement. During the year ended 31 March 2006, no share option had been granted to any person.
The adoption of HKFRS 3, HKAS 36 and HKAS 38 results in a change in the accounting policy for goodwill. Until 31 March 2005, goodwill was:
– Amortised on a straight line basis over its estimated useful life of not exceeding 20 years; and
– Assessed for an indication of impairment at each balance sheet date.
In accordance with the provisions of HKFRS 3:
– The Group ceased amortisation of goodwill from 1 April 2005;
– Accumulated amortisation as at 31 March 2005 has been eliminated with a corresponding decrease in the cost of goodwill; and
– From the year ended 31 March 2006 onwards, goodwill will be tested annually for impairment, as well as when there is indication of impairment.
The Group has reassessed the useful lives of its intangible assets in accordance with the provisions of HKAS 38. No adjustment resulted from this reassessment.
All changes in the accounting policies have been made in accordance with the transition provisions in the respective standards, wherever applicable. All standards adopted by the Group require retrospective application other than:
– HKAS 16 – the initial measurement of an item of property, plant and equipment acquired in an exchange of assets transaction is accounted at fair value prospectively only to future transactions;
– HKAS 21 – prospective accounting for goodwill and fair value adjustments as part of foreign operations;
– HKAS 39 – does not permit to recognise, derecognise and measure financial assets and liabilities in accordance with this standard on a retrospective basis. The Group applied the previous SSAP 24 “Accounting for investments in securities” to investments in securities and also to hedge relationships for the 2005 comparative information. The adjustments required for the accounting differences between SSAP 24 and HKAS 39 are determined and recognised at 1 April 2005.
– HKFRS 3 – prospectively after 1 April 2005.
– 179 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
The adoption of HKFRS 3 resulted in: 2006 2005 HK$’000 HK$’000
Goodwill, at cost (3,955) – Accumulated amortisation 3,955 –
––
The adoption of HKAS 39 resulted in: 2006 2005 HK$’000 HK$’000
Increase in financial assets at fair value through profit or loss 4,953 5,076 Decrease in short term investments (4,953) (5,076)
––
The adoption of HKFRS 3 and HKAS 39 has no impact on opening retained earnings at 1 April 2005.
No early adoption of the following new Standards or Interpretations that have been issued but are not yet effective. Unless otherwise stated, these HKFRSs are effective for annual periods beginning on or after 1 January 2006:
HKAS 1 (Amendment) Capital Disclosures HKAS 19 (Amendment) Actuarial Gains and Losses, Group Plans and Disclosures HKAS 39 (Amendment) Cash Flow Hedge Accounting of Forecast Intragroup Transaction HKAS 39 (Amendment) The Fair Value Option HKAS 39 & HKFRS 4 (Amendments) Financial Guarantee Contracts HKFRS 7 Financial Instruments: Disclosure HKFRS-Int 4 Determining whether an Arrangement contain a Lease
The HKAS 1 Amendment shall be applied for annual periods beginning on or after 1 April 2007. The revised standard will affect the disclosure about qualitative information about the Group’s objective, policies and processes for managing capital; quantitative data about what company regards as capital; and compliance with any capital requirements and the consequences of any non-compliance.
HKFRS 7 will replace HKAS 32 and has modified the disclosure requirements of HKAS 32 relating to financial instruments. This HKFRS shall be applied for annual period beginning on or after 1 April 2007.
Except as stated above, the Group expects that the adoption of the other pronouncements listed above will not have any significant impact on the Group’s financial statements in the period of initial application.
A summary of significant accounting policies followed by the Group and the Company in the preparation of the financial statements is set out below:
(a) Basis of Consolidation
The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 March 2006.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effect date of disposal, as appropriate.
– 180 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
(b) Subsidiaries
Subsidiaries are all entities over which the Company, directly or indirectly controls the composition of the board of directors and has the power to govern the financial and operating policies generally accompanying a shareholding of more than half of the voting rights. The existence and effect of potential voting rights that currently exercisable or convertible are considered when assessing whether the Company controls another entity.
Investments in subsidiaries are stated in the financial statements of the Company at cost less provision for impairment loss.
(c) Associates
Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition.
The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.
In the Company’s balance sheet the investments in associated companies are stated at cost less provision for impairment losses. The results of associated companies are accounted for by the Company on the basis of dividend received and receivable.
(d) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identifiable assets of the acquired subsidiary/associate/jointly controlled entity at the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gain and losses on the disposal of an entity include the carrying of goodwill relating the entity sold. Goodwill is allocated to cash generating units for the purpose of impairment testing.
(e) Impairment of assets
Assets that have an indefinite life are not subject to amortisation, which are at least tested 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 lowest levels for which there are separately identifiable cash flows.
– 181 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
(f) Investment property
Investment property is property which is owned or held under a leasehold interest to earn rental income and/or for capital appreciation. These include land held for a currently undetermined future use.
Investment property comprises of land held under operating leases. Land held under operating leases are classified and accounted for as investment property when the rest of the definition of investment property is met. The operating lease is accounted for as if it was a finance lease.
Investment property is measured initially at cost, including related transaction costs. Subsequent to the initial recognition, investment property is stated in the balance sheet at fair value. Any gain or loss arising from a change in fair value or from the retirement or disposal of an investment property is recognised in profit or loss.
(g) Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses.
The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the property, plant and equipment, the expenditure is capitalised as an additional cost of that asset.
Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life. The principal annual rates used for this purpose are as follows:
Leasehold improvements 20% Furniture, fixtures and office equipment 20% Motor vehicles and pleasure craft 20%
The gain or loss on disposal or retirement of a property, plant and equipment recognised in the income statement is the difference between the net sales proceeds and the carrying amount of the relevant asset.
(h) Leased assets
Leases that transfer substantially all the rewards and risks of ownership of assets to the Group, other than legal title, are accounted for as finance leases. At the inception of a finance lease, the cost of the leased asset is capitalised at the present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Assets held under capitalised finance leases are included in property, plant and equipment and depreciated over the shorter of the lease terms and the estimated useful lives of the assets. The finance costs of such leases are charged to the income statement so as to provide a constant periodic rate of charge over the lease terms.
Assets acquired through hire purchase contracts of a financing nature are accounted for as finance leases, but are depreciated over their estimated useful lives.
Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Rentals payable under the operating leases are charged to the income statement on the straight-line basis over the lease terms.
– 182 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
(i) Construction contracts
Contract revenue comprises the agreed contract amount and appropriate amounts from variation orders and claims. Contract costs incurred comprise direct materials, the costs of subcontracting, direct labour and an appropriate proportion of variable and fixed construction overheads.
Revenue from construction contracts is recognised on the percentage of completion method, measured by reference to the percentage of the value of work performed to the contract sum for each contract.
Provision is made for foreseeable losses as soon as they are anticipated by management.
Where contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is treated as an amount due from contract customers.
Where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is treated as an amount due to contract customers.
(j) Investments
Before adoption of the new HKFRSs, the Group has short term investments classified as trading securities.
Trading securities Trading securities were carried at fair value. At each balance sheet date, the net unrealised gains or losses arising from the changes in fair value of trading securities were recognised in the income statement. Profits or losses on disposal of trading securities, representing the difference between the net sales proceeds and the carrying amounts, were recognised in the income statement as the arised.
From 1 April 2005 onward, the Group classifies its investment in the following categories depends on the purpose of such investment were acquired. Management determines the classification of its investments at initial recognition and revaluate this designation at every reporting date.
(1) Financial assets at fair value through profit or loss
A financial asset is classified in this category if acquired principally for the purposed of selling in the short term or if so designated by management. Assets in this category are classified as current assets if they are either held for trading or are expected to be realized within 12 months of the balance sheet date.
(2) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading or are expected for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loan and receivables included loan receivables, convertible notes receivables and accounts receivable.
(3) Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with fixed or determinable financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. During the year, the Group did not hold any investments in the category.
– 183 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
(4) Available-for-sale financial assets
Available-for-sale financial assets are non-derivative that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.
Purchases and sales of investments are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred substantially all risk and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivable and held-to-maturity investments are carried at amortised cost using effective interest methods. Realised and unrealized gains and losses arising from changes in the fair value of the “financial assets at fair value through profit or loss” category are included in the income statement in the period in which they arise. Unrealised gains period in which they arise. Unrealised gains and losses arising from changes in the fair value of non-monetary securities classified as available-for-sale are recognised in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains or losses from investment securities.
The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models refined to reflect issuer’s specific circumstances.
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the securities is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement.
(k) Cash and cash equivalents
For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise of cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.
For the purpose of the balance sheet, cash and cash equivalents comprise of cash on hand and at banks, including term deposits, which are not restricted as to use.
– 184 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
(l) Accounts and other receivables
Accounts 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 accounts and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivable. The amount of the provision is the difference 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 income statement.
(m) Provisions
A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.
When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the income statement.
(n) Income tax
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 and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against 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 taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investment in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable 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 period 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.
– 185 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
(o) Revenue recognition
Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases:
(a) from the sale of goods, when the significant risk and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(b) from construction contracts, on the percentage of completion basis as further explained in the accounting policy for “Construction contracts” above; and
(c) Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised either as cash is collected or on a cost-recovery basis as conditions warrant.
(p) Foreign currency transactions
(i) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in HK dollars, which is the Company’s functional and presentation currency.
(ii) Transactions and balances
Foreign currency transactions are translated into the functional currency using the fixed exchange rate. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
Translation differences on non-monetary items, such as equity instruments held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation difference on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the fair value reserve in equity.
(q) Employee benefits
Paid leave carried forward
The Group provides paid annual leave to its employees under their employment contracts on a calendar year basis. Under certain circumstances, such leave which remains untaken as at the balance sheet date is permitted to be carried forward and utilised by the respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of such paid leave earned during the year by the employees and carried forward.
Retirement benefits scheme
The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme.
– 186 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme.
Share option scheme
The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. The financial impact of share options granted under the share option scheme is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recorded in the income statement or balance sheet for their cost. Upon the exercise of share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which are cancelled prior to their exercise date, or which lapse, are deleted from the register of outstanding options.
(r) Related parties transactions
A party is considered to be related to the Group if:
(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Group; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control over the Group;
(b) the party is an associate;
(c) the party is jointly-controlled entity;
(d) the party is a member of the key management personnel of the Group or its parent;
(e) the party is a close member of the family of any individual referred to in (a) or (d);
(f) the party is an entity that is controlled, jointly-controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or
(g) the party is a post-employment benefit plan for the benefit of the employees of the Group, or of any entity that is related party of the Group.
A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
3. FINANCIAL RISK MANAGEMENT
3.1 Financial risk factors
The Group’s activities expense it to a variety of financial risks: market risk (including currency risk and price risk), credit risk, liquidity risk and cash flow interest-rate risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.
– 187 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
(a) Market risks
(i) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Hong Kong dollar. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities.
(ii) Price risk
The Group is exposed to equity securities price risk because investments held by the Group are classified on the consolidated balance sheet as financial assets at fair value though profit or loss. The Group is not exposed to commodity price risk.
(b) Credit risk
The Group has no significant concentrations of credit risk. Sales to retail customers are made in cash or via major credit cards.
(c) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions.
(d) Interest rate risk
The Group has significant interest-bearing assets mainly in the form of cash and cash equivalents. As a result, the Group is exposed to changes in market interest rates.
3.2 Fair value estimation
The carrying amounts of the following other investments/financial assets and liabilities approximate their fair value: cash and cash equivalents, pledged bank deposits, accounts and other receivables less credit adjustments, deposits and prepayments, amounts due from/to related parties and a director, accounts and other payables, deposits received and accrued expenses.
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Estimates and judgements 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 Group 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.
Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment in accordance with accounting policies. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations using cash flow projections based on financial budgets approved by senior management.
– 188 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
5. SEGMENT INFORMATION
Segment information is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment; and (ii) on a secondary segment reporting basis, by geographical segment.
The Group’s operating businesses are structured and managed separately, according to the nature of their operations and the products and services they provided. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the other business segments. Summary details of the business segments are as follows:
(a) the construction segment provides and installs fire-rated timber door sets, as well as provides interior decoration and renovation services and other carpentry works;
(b) the timber segment engages in the trading of logs; and
(c) the corporate segment included general corporate income and expense items.
In determining the Group’s geographical segments, revenues are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets.
– 189 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
(a) Business segments
The following tables present revenue, profit/loss and certain asset, liability and expenditure information for the Group’s business segments.
Construction Timber Corporate Total 2006 2005 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Segment revenue: Sales to external customers 106 471 10,539 66,619 ––10,645 67,090 Other revenue ––––72 – 72 – Other income ––––255 431 255 431
Total 106 471 10,539 66,619 327 431 10,972 67,521
Segment results 304 (1,845) (79) (1,088) (6,573) (8,255) (6,348) (11,188)
Impairment loss recognised in respect of goodwill ––(8,536) –––(8,536) –
Impairment loss recognised in respect of investment property ––––(395) – (395) –
Finance cost ––––(28) (235) (28) (235)
Loss before tax (15,307) (11,423)
Taxation – (180)
Net loss attributable to equity holders of the Company (15,307) (11,603)
Segment assets and liabilities Segment assets 10 14,670 – 32,976 45,656 16,720 45,666 64,366
Unallocated assets 1,656 1,656
Total assets 47,322 66,022
Segment liabilities 1,028 1,822 – 1,873 1,180 1,906 2,208 5,601
Unallocated liabilities ––
Total liabilities 2,208 5,601
Other information: (Write-back of provision)/ provision for impairment loss on accounts receivable (200) 723 ––––(200) 723
Impairment loss on property, plant and equipment –––––1,861 – 1,861
Capital expenditure ––––10,595 35 10,595 35
– 190 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
(b) Geographical segments
The following tables present revenue and certain asset and expenditure information for the Group’s geographical segments. United States Hong Kong Mainland China of America Total 2006 2005 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Segment revenue: Sales to external customers 106 471 – 39,659 10,539 26,960 10,645 67,090 Other revenue 72 431 ––––72 431 Other income 255 –––––255 –
433 902 – 39,659 10,539 26,960 10,972 67,521
Other segment information: Segment assets 45,666 64,366 ––––45,666 64,366 Unallocated assets 1,656 1,656
47,322 66,022
Capital expenditure 10,595 35 ––– 10,595 35
6. PROPERTY, PLANT AND EQUIPMENT
Group Furniture, Motor Fixtures vehicles and Leasehold and office pleasure improvements equipment craft Total HK$’000 HK$’000 HK$’000 HK$’000 Cost: At 1 April 2004 3,505 745 13,267 17,517 Additions – 35 – 35 Disposal of subsidiaries ––(8,167) (8,167) Disposals ––(1,500) (1,500)
At 31 March 2005 and at 31 March 2006 3,505 780 3,600 7,885
Accumulated depreciation and impairment: At 1 April 2004 1,184 419 4,772 6,375 Charged for the year 652 136 2,100 2,888 Impairment loss recognised in respect of property, plant and equipment 1,669 192 – 1,861 Disposal of subsidiaries ––(3,800) (3,800) Disposals ––(687) (687)
At 31 March 2005 and at 1 April 2005 3,505 747 2,385 6,637 Charged for the year – 9 720 729
At 31 March 2006 3,505 756 3,105 7,366
Net book value: At 31 March 2006 – 24 495 519
At 31 March 2005 – 33 1,215 1,248
– 191 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
Company Furniture, Fixtures Leasehold and office Motor improvements equipment vehicles Total HK$’000 HK$’000 HK$’000 HK$’000
Cost: At 1 April 2004 3,263 433 – 3,696 Additions – 35 855 890
At 31 March 2005 and at 31 March 2006 3,263 468 855 4,586
Accumulated depreciation and impairment: At 1 April 2004 942 154 – 1,096 Charged for the year 652 92 200 944 Impairment loss recognised in respect of property, plant and equipment 1,669 192 – 1,861
At 31 March 2005 and at 1 April 2005 3,263 438 200 3,901 Charged for the year – 7 400 407
At 31 March 2006 3,263 445 600 4,308
Net book value: At 31 March 2006 – 23 255 278
At 31 March 2005 – 30 655 685
7. INVESTMENT PROPERTY
2006 2005 HK$’000 HK$’000
At 1 April –– Additions during the year 10,595 – Fair value losses on investment property (395) –
At 31 March 10,200 –
The investment property was revalued at 31 March 2006 by independent, professionally qualified valuers, Grant Sherman Appraisal Limited, on an open market basis.
The Group’s interests in investment property at their net book values are analysed as follows:
2006 2005 HK$’000 HK$’000
In Hong Kong, held on: Lease of over 50 years 10,200 –
– 192 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
8. GOODWILL
HK$’000
Cost At 1 April 2004 and at 31 March 2005 12,491 Elimination of goodwill on adoption of HKFRS 3 (3,955)
At 31 March 2006 8,536
Amortisation and impairment At 1 April 2004 1,457 Amortised for the year 2,498
At 31 March 2005 and at 1 April 2005 3,955 Elimination of goodwill on adoption of HKFRS 3 (3,955) Impairment loss recognised 8,536
At 31 March 2006 8,536
Carrying amounts At 31 March 2006 –
At 31 March 2005 8,536
(a) In prior years, the amortisation period adopted for goodwill is not exceeding 20 years. Following the adoption of HKFRS 3, amortisation of goodwill has ceased since 1 April 2005. The accumulated amortisation of goodwill would be offset against the cost. Annual impairment review was performed.
(b) Goodwill is allocated to the Group’s cash-generating unit (CGU) identified according to the business segment. The recoverable amount of CGU is determined based on the value- in-use calculations. These calculations use cash flow projections based on financial budgets approved by the management covering a five-year period. Cash flow beyond five-year period is extrapolated using the estimated rate stated below. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates.
Key assumptions used for value-in-use calculation:
2006 2005 %%
Gross margin 9.4 – Growth rate –– Discount rate 7.75 –
Management determined the budget gross margin based on past performance and its expectations for the market development. The discount rates used are pre-tax and reflect specific risks relating to the relevant segments.
Due to the continuous losses incurred by MFT Epping Limited, the directors reassessed the recoverable amount of the goodwill and made impairment loss on goodwill of approximately HK$8,536,000.
– 193 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
9. INTERESTS IN SUBSIDIARIES
Company 2006 2005 (Restated) HK$’000 HK$’000
Investment cost 36,801 36,801 Less: Provision for impairment loss (8,618) (8,618)
28,183 28,183 Amounts due from subsidiaries 78,304 66,819 Less: Provision for impairment loss (18,300) –
88,187 95,002
The amounts due from/to subsidiaries are unsecured, interest-free and have no fixed terms of repayments.
The directors of the Group had reviewed the net asset values of the Company’s subsidiaries for the year ended 31 March 2006 and considered provision for impairment in values be made in respect of the investment cost and amount due by subsidiaries to their net recoverable values.
Further particulars of the Company’s subsidiaries as at 31 March 2006 are set out in note 33 to the financial statements.
10. ACCOUNTS RECEIVABLE
An aged analysis of accounts receivable as at the balance sheet date, based on invoice date, is as follows:
Group 2006 2005 HK$’000 HK$’000
Current – 90 days –– 91 – 180 days –– 181 – 365 days –– Over 365 days – 12,071
– 12,071 Retention monies receivable – 678
– 12,749
The Group granted a credit period of seven days to the customer based upon the receipt of the settlement from main contractor. Retention monies receivable in respect of contract works, the due dates were usually six months to one year after the issue of the statements of the final accounts of the contract works.
The carrying amount of accounts receivable approximate their fair value.
11. TRADE DEPOSITS
The balance represented trade deposits advanced to a supplier for the purchase of logs for trading purposes.
– 194 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
12. PREPAYMENTS AND OTHER RECEIVABLES
Group Company 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000
Prepayments – 239 – 239 Other receivables 9 739 – 730
9 978 – 969
13. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
Group 2006 2005 (Restated) HK$’000 HK$’000
Held for trading Equity securities, at fair value – Listed in Hong Kong 4,953 5,076
14. SHARE CAPITAL
(a) Shares Company 2006 2005 HK$’000 HK$’000
Authorised: 1,000,000,000 ordinary shares of HK$0.1 each 100,000 100,000
Issued and fully paid: 672,000,000 ordinary shares of HK$0.1 each 67,200 67,200
(b) Share option scheme
A share option scheme (the “Scheme”) was conditionally approved by a written resolution of all shareholders of the Company dated 6 July 2002 and, unless otherwise cancelled or amended, will remain in force for 10 years from that date. The purpose of the Scheme is to enable the Company to grant options to selected employees and directors as an incentive or reward for their contribution to the Group. The board of directors (the “Board”) may, at its discretion, invite any executive director, non-executive director, independent non- executive director and/or full-time or part-time employee of any company in the Group from time to time whom determined by the Board as having contributed to the development and growth of the Company and/or any of its subsidiaries, to take up options at HK$1 each to subscribe for such number of shares as the Board shall determine, at a price calculated in accordance with the paragraph below.
The subscription price for shares under the Scheme will be a price determined by the Board and notified to each grantee and will be the higher of (i) the average closing prices of the shares on the Stock Exchange’s daily quotation sheets for the five business days immediately preceding the date of the grant; or (ii) the closing price of the shares as stated in the Stock Exchange’s daily quotation sheet on the date of the grant, which must be a business day; and (iii) the nominal value of a share.
The maximum number of shares to be issued upon exercise of all outstanding options under the Scheme and any other share option schemes of the Company will not exceed 30% (or where applicable, such higher percentage as may from time to time to be permitted
– 195 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
under the Listing Rules or by the Stock Exchange) of the total number of the issued shares from time to time. The total number of shares available for issue under options which may be granted under the Scheme and any other share option schemes of the Company must not in aggregate exceed 67,200,000 shares, representing 10% of the issued share capital of the Company, as at the date of listing of shares on the Stock Exchange. The Company may seek approval of its shareholders at a general meeting to renew the 10% limit. However, the total number of shares available for issue under options which may be granted under the Scheme and any other share option schemes of the Company in these circumstances, must not exceed 10% of the issued share capital of the Company at the date of approval of renewing such a limit. No option may be granted to any one person which, if exercised in full, would result in the total number of shares issued and to be issued upon exercise of all options granted and to be granted to him/her in the 12- month period up to an including the date of such a grant, to exceed 1% of the issued share capital of the Company as at the date of the grant. Any further grant of options in excess of the foregoing limit must be subject to the approval of the shareholders of the Company in a general meeting.
A grant of options to a director, chief executive or substantial shareholder of the Company or any of their respective associates (as defined in the Listing Rules) is required to be approved by all the independent non-executive directors (excluding any independent non-executive director who or whose associate is the proposed grantee of the options). If the Company proposes to grant options to a substantial shareholder (as defined in the Listing Rules) or an independent non-executive director or their respective associates (as defined in the Listing Rules) which will result in the number of shares issued and to be issued upon exercise of options granted and to be granted (including options exercised, cancelled and outstanding) under the Scheme and any other share option schemes of the Company to any such person in the 12-month period up to and including the date of such a grant (i) representing in aggregate over 0.1% of the shares in issue as at the date of such a further proposed grant; and (ii) having an aggregate value, based on the closing price of the shares as sated in the daily quotation sheets of the Stock Exchange at the date of such a grant, in excess of HK$5,000,000; such a further grant shall be subject to the approval of the shareholders of the Company in a general meeting. Shareholders’ approval must be obtained for any change in the terms of options granted to a grantee who is a substantial shareholder or an independent non-executive director of the Company or their respective associates.
An option may be exercised in accordance with the terms of the Scheme at any time during a period commencing immediately after the date on which the option is accepted and deemed to be granted and expiring on a date to be notified by the Board to each grantee which shall not be more than 10 years from the date on which the option is accepted and deemed to be granted. According to the Scheme, there is no general requirement for a minimum holding period or performance targets before an option may be exercised.
The directors may terminate the Scheme, subject to shareholders’ approval in a general meeting, at any time, but options granted prior to such termination shall continue to be valid and exercisable in accordance with the terms of the Scheme. Any cancellation of options granted, but not exercised, shall be approved by the shareholders of the Company in a general meeting.
The financial impact of share options granted is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recorded in the income statement or balance sheet for their cost. Upon the exercise of the share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercisable price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which are lapsed or cancelled prior to their exercise date are deleted from the register of outstanding options.
No share options have been granted under the Scheme during the year nor were outstanding at the balance sheet date.
– 196 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
15. RESERVES
(a) Group
The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity of the financial statements.
The Group’s contributed surplus represented the difference between the nominal value of the shares, the share premium account and the contributed surplus of the subsidiaries acquired pursuant to the Group reorganisation prior to the listing of the Company’s shares, over the nominal value of the Company’s shares issued in exchange therefor.
(b) Company
Contributed Accumulated surplus losses Total HK$’000 HK$’000 HK$’000
At 1 April 2004 20,607 (17,343) 3,264 Net loss for the year – (12,697) (12,697)
At 31 March 2005 and at 1 April 2005 20,607 (30,040) (9,433) Net loss for the year – (24,140) (24,140)
At 31 March 2006 20,607 (54,180) (33,573)
The contributed surplus of the Company represents the excess of the fair value of the shares of the subsidiaries acquired pursuant to the reorganisation, over the nominal value of the Company’s shares issued in exchange therefor.
At 31 March 2006, the Company had no reserves available for distribution.
16. INTEREST-BEARING BANK LOAN, SECURED
Group 2006 2005 Note HK$’000 HK$’000
Bank loan repayable: Within one year 18 – 400 In the second year – 67
– 467 Portion classified as current liabilities – (400)
Long term portion – 67
The Group’s bank loan was secured by the pledge of the Group’s motor vehicle with a net book value of HK$560,000 as at 31 March 2005.
– 197 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
17. ACCOUNTS PAYABLE
An aged analysis of accounts payable as at balance sheet date, based on invoice date, is as follows:
Group 2006 2005 HK$’000 HK$’000
Current – 90 days –– 91 – 180 days –– 181 – 365 days –– Over 365 days 69 786
69 786 Retention monies payable 824 894
893 1,680
The carrying amount of accounts payable approximate their fair value.
18. INTEREST-BEARING BANK AND OTHER BORROWINGS
Group 2006 2005 Note HK$’000 HK$’000
Current portion of a bank loan, secured 16 – 400 Current portion of finance lease contract payables 16 ––
– 400
19. DEFERRED TAX
No provision for deferred tax has been made as the taxable and deductible temporary differences are immaterial.
The Group has tax losses arising in Hong Kong of HK$2,737,804 (2005: HK$11,997,000) that are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as they have arisen in subsidiaries that have been loss-making for some time.
20. TURNOVER AND REVENUE
Turnover represents the net invoiced value of goods sold, after allowances for returns and trade discounts, and an appropriate proportion of contract revenue from construction contracts.
– 198 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
An analysis of turnover and other revenue and other income is as follows:
Group 2006 2005 (Restated) HK$’000 HK$’000
Turnover Trading of timber logs 10,539 66,619 Contract revenue 106 471
10,645 67,090
Other revenue Interest income 59 – Dividend income 13 –
72 –
Other income Gain on disposal of subsidiaries – 230 Gain on disposal of property, plant and equipment – 137 Realised fair value gain on financial assets through profit or loss 255 – Unrealised fair value gain on financial assets through profit or loss – 64
255 431
21. LOSS FROM OPERATING ACTIVITIES
The Group’s loss from operating activities is arrived at after charging/(crediting):
Group 2006 2005 (Restated) HK$’000 HK$’000
Depreciation 729 2,888 Impairment loss recognised in respect of goodwill 8.536 – Impairment loss recognised in respect of investment property 395 – Impairment of property, plant and equipment* – 1,861 Goodwill amortisation* – 2,498 Auditors’ remuneration 580 800
Staff cost (excluding directors’ remuneration – note 23): Salaries and wages 1,697 4,163 Pension scheme contributions 31 114
1,728 4,277 Unrealised fair value loss on financial assets through profit or loss 714 – Minimum lease payments under operating leases in respect of rented premises 495 830 (Write-back of provision)/provision for impairment loss on accounts receivable* (200) 723
* The impairment of property, plant and equipment, goodwill amortisation and write-back of provision/provision for impairment loss on accounts receivable are included in “Other operating expenses” on the face of the consolidated income statement. – 199 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
22. FINANCE COSTS
Group 2006 2005 HK$’000 HK$’000
Interest on a bank loan wholly repayable within five years 28 20 Interest on obligations under finance leases – 215
28 235
23. DIRECTORS’ REMUNERATION
The board of directors of the Company is currently composed of 4 executive directors and three independent non-executive directors. Directors’ remuneration for the year disclosed pursuant to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and Section 161 of the Hong Kong Companies Ordinance, is as follows:
Salaries Mandatory Name of director Fee and bonuses provident fund Total 2006 2005 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Executive director Mr. Lum Chor Wah, Richard ––650 407 12 7 662 414 Mr. Pun Yuen Sang ––500 500 12 12 512 512 Mr. Tang Hin Keung, Alfred ––500 500 12 12 512 512 Mr. Yeung Tony Ming Kwong ––160 – 4 – 164 – Mr. Chu Chi Ming –––108 – 3 – 111 Mr. Mak Kui Yuen –––109 – 3 – 112 Ms. Ip Siu Fung –––75 – 2 – 77 Ms. Lee Lim –––89 –––89
Independent non-executive director Mr. Leung Chi Hung 50 50 ––––50 50 Mr. Tsui Robert Che Kwong 50 25 ––––50 25 Mr. Lam Allan Shu Cheuk 50 25 ––––50 25
150 100 1,810 1,788 40 39 2,000 1,927
24. FIVE HIGHEST PAID EMPLOYEES
The five highest paid employees during the year included three (2005: three) directors, details of whose remuneration are set out in note 23 above. Details of the remuneration of the remaining two (2005: two) non-directors, highest paid employees for the year are as follows:
Group 2006 2005 HK$’000 HK$’000
Salaries, allowances and benefits in kind 954 812 Pension scheme contributions 12 12
966 824
– 200 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
The number of non-director, highest paid employees whose remuneration fell within the following bands is as follows:
Number of directors 2006 2005
Nil to HK$1,000,000 2 2
25. TAXATION
Hong Kong profits tax has been provided at the rate of 17.5% (2005: 17.5%) on the estimated assessable profits arising from Hong Kong during the year.
Group 2006 2005 HK$’000 HK$’000
Charge for the year – Hong Kong – 180
A reconciliation of the tax expenses applicable to loss before tax using the statutory rates of 17.5% for the countries in which the Company, its subsidiaries and associate are domiciled to the tax expense at the effective tax rates, and a reconciliation of the applicable rates (i.e., the statutory tax rates) to the effective tax rates, are as follows:
2006 2005 HK$’000 HK$’000
Loss before tax 15,307 % 11,423 %
Tax at the statutory tax rate (2,679) (17.5) (1,999) (17.5)
Income not subject to tax (62) (0.4) (51) (0.4)
Expenses not deductible for tax 1,626 10.6 622 5.5
Tax losses not recognised as deferred tax assets 1,115 7.3 1,608 14.0
Tax charge at the Group’s effective rate ––180 1.6
26. NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS
The net loss from ordinary activities attributable to shareholders for the year ended 31 March 2006 dealt with in the financial statements of the Company was HK$24,140,000 (2005: HK$12,697,000).
27. LOSS PER SHARE
The calculation of the basic loss per share is based on the net loss from ordinary activities attributable to shareholders for the year of HK$15,307,000 (2005: HK$11,603,000), and the ordinary shares in issue of 672,000,000 (2005: weighted average of 672,000,000 ordinary shares in issue).
Diluted loss per share amounts for the years ended 31 March 2005 and 2006 have not been disclosed as no diluting events existed during these years.
– 201 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
28. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
Disposal of subsidiaries Group 2006 2005 Note HK$’000 HK$’000
Net assets disposed of: Property, plant and equipment – 4,367 Finance lease payables – (3,867)
– 500 Gain on disposal of subsidiaries 20 – 230
– 730
Satisfied by: Other receivables* – 730
* The consideration for the disposal of subsidiaries was fully received by the Group subsequent to the year end.
The subsidiaries disposed during the year ended 31 March 2005 had no contribution to the Group’s turnover and contributed HK$1,657,000 to the consolidated loss after tax.
29. OPERATING LEASE ARRANGEMENTS
The Group leases its office properties under operating lease arrangements. Leases for the properties are negotiated for terms of three years.
At the balance sheet date, the Group had total future minimum lease payments under non- cancellable operating leases falling due as follows:
Group and Company 2006 2005 HK$’000 HK$’000
Within one year – 399
30. COMMITMENTS
At the balance sheet date, neither the Group, nor the Company had any significant commitments.
– 202 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
31. CONTINGENT LIABILITIES
At the balance sheet date, contingent liabilities not provided for in the financial statements were as follows: Group Company 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000
Guarantees given to bank in connection with: Finance lease granted to certain subsidiaries disposed in previous years (note) 1,633 3,440 1,633 3,440 Finance lease contracts and a bank loan granted to certain subsidiaries –––495
1,633 3,440 1,633 3,935
Note: During the year ended 31 March 2005, the Group disposed of certain of its subsidiaries (the “Disposed Subsidiaries”), details of which are set out in note 28 to the financial statements. As at 31 March 2006, the Company was still the guarantor in respect of the finance lease contracts of the Disposed Subsidiaries.
Pursuant to the agreement dated 21 March 2005 and 8 November 2004, the buyer of the Disposed Subsidiaries agreed to provide counter indemnities to the Company for its corporate guarantees provided to the Disposed Subsidiaries.
32. MATERIAL RELATED PARTY TRANSACTIONS
Remuneration for key personnel management, including amount paid to the Company’s directors and certain of the highest paid employee, as disclosed in notes 23 and 24 to the financial statements, is as follows:
2006 2005 HK$’000 HK$’000
Salaries and allowance 1,810 1,788 Pension scheme contributions 40 39
1,850 1,827
33. PARTICULARS OF THE SUBSIDIARIES
Particulars of the subsidiaries are as follows:
Percentage of Place of Nominal value attributable to incorporation of issued and equity interest Company name and operations paid-up capital the Company Principal activities Direct Indirect
MFT Epping British Virgin Islands/ US$1 – 100 Trading of timber logs Trading Limited The Republic of Congo Ordinary
– 203 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
Percentage of Place of Nominal value attributable to incorporation of issued and equity interest Company name and operations paid-up capital the Company Principal activities Direct Indirect
LFP Engineering Limited Hong Kong HK$200,000 – 100 Provision and Ordinary installation of fire- rated timber door sets and the provision of interior decoration and renovation services
Giant Gold Investments British Virgin Islands US$1 100 – Investment holding Limited Ordinary
Profitown Venture British Virgin Islands US$200 100 – Investment holding Corporation Ordinary
Billion Concept Limited Hong Kong HK$10,000 100 – Holding of motor Ordinary vehicles
Maxgold Far East Limited British Virgin Islands/ US$1 100 – Investment holding Hong Kong Ordinary
Triumph Bright Hong Kong HK$2 100 – Investment holding International Limited* Ordinary
Team Jade Enterprises British Virgin Islands US$1 100 – Investment holding Limited* Ordinary
* Newly incorporated during the year.
34. SUBSEQUENT EVENTS
On 30 March 2006, Team Jade Enterprises Limited (“Team Jade”), a wholly owned subsidiary of the Company entered into an acquisition agreement to acquire from Rich Game Capital Inc. (“Rich Game”), the entire share capital of Youngrich Limited for a total consideration of HK$539,000,000. The consideration for the acquisition shall be satisfied by Team Jade paying a refundable deposit of HK$160,000,000 to Rich Game; procuring the Company to issue convertible bond in a principal amount of HK$134,400,000 to Rich Game and procuring the Company to issue a promissory note in a principal amount of HK$244,600,000 to Rich Game. Please refer to details in the announcement dated 6 April 2006.
35. COMPARATIVE FIGURES
As further explained in note 2 to the financial statements, due to the adoption of the new HKFRSs during the current year, the accounting treatment and preparation of certain items and balances in the financial statements have been made to comply with the new requirements. Accordingly, certain comparative figures have been reclassified, and restated to confirm with current year’s presentation.
36. AUTHORISATION FOR ISSUE OF FINANCIAL STATEMENTS
The financial statements were approved and authorised for issue by the Board of Directors on 20 July 2006.
– 204 – APPENDIX VII FINANCIAL INFORMATION ON THE GROUP
STATEMENT OF INDEBTEDNESS
Borrowings
As at the close of business on 31 October 2006, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group had no outstanding bank borrowings.
Contingent liabilities
As at 31 October 2006, the Enlarged Group had provided corporate guarantee of approximately HK$667,000 to banks in connection with finance lease contracts granted to certain subsidiaries disposed of in previous years.
Disclaimer
Save as aforesaid and apart from intra-group liabilities, as at the close of business on 31 October 2006, the Group had no debt securities issued and outstanding, and authorised or otherwise created but unissued, term loans, distinguishing between guaranteed, unguaranteed, secured and unsecured, and guaranteed, unguaranteed, secured and unsecured bank borrowings including, bank loans and overdrafts or other similar indebtedness, liabilities under acceptances (other than normal trade bills) or acceptance credit, hire purchase or finance lease commitments, guarantees or other material contingent liabilities.
WORKING CAPITAL STATEMENT
As at the Latest Practicable Date, after due and careful enquiry, the Directors are of the opinion that, in the absence of unforeseen circumstances and after taking into account the present internal financial resources of the Enlarged Group (including principally cash at bank and listed securities investment), the Enlarged Group will, immediately following the completion of the Acquisition, have sufficient working capital for at least 12 months from the date of this circular.
MATERIAL ADVERSE CHANGE
As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 March 2006 (being the date to which the latest published audited financial statements of the Company were made up).
– 205 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
(A) PRO-FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
Introduction to the unaudited pro forma financial information of the Enlarged Group
The following is the unaudited pro forma financial information of the Enlarged Group as if the Acquisition has been completed on 31 March 2006 for the pro forma consolidated balance sheets and on 3 January 2006 for the pro forma consolidated income statements and pro forma consolidated cash flow statements. The accompanying Pro Forma Financial Information of the Enlarged Group has been prepared to illustrate the effect of the Acquisition of 100% issued share capital of Youngrich Limited (the “Target Company”) at a consideration of HK$539,000,000 which shall be satisfied by Team Jade (i) paying a refundable deposit of HK$160,000,000 to Rich Game; (ii) procuring the Company to issue convertible bond in a principal amount of HK$134,400,000 to Rich Game upon completion of the S&P agreement; and (iii) procuring the Company to issue two promissory notes in principal amounts of HK$61,600,000 and HK$183,000,000 to Rich Game upon completion of S&P agreement.
The accompanying Pro Forma Financial Information of the Enlarged Group is based on a number of assumptions, estimates, uncertainties and currently available information, and is provided for illustrative purposes. Accordingly, as a result of the uncertain nature of the accompanying Pro Forma Financial Information of the Enlarged Group, it may not give a true picture of the actual financial position or results of the Enlarged Group’s operations that would have been attained had the Acquisition actually occurred on the dates indicated herein. Further, the accompanying Pro Forma Financial Information of the Enlarged Group does not purport to predict the Enlarged Group’s future financial position or results of operations.
The Pro Forma Financial Information of the Enlarged Group should be read in conjunction with the Accountants’ Report on the Target Company as set out in Appendix III, the historical financial information on the Group as set out in Appendix VI and other financial information included elsewhere in this circular.
(I) Unaudited pro forma consolidated balance sheet of the Enlarged Group
The following is the unaudited pro forma consolidated balance sheet of the Enlarged Group, assuming that the Acquisition has been completed on 31 March 2006. The audited information is based on the audited consolidated financial statements of the Group as at 31 March 2006 and the audited consolidated financial information of the Target Company for the period ended 30 September 2006 as set out in Appendix VII and III to this circular respectively. Such information is adjusted to reflect the effect of the Acquisition.
– 206 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
As the unaudited pro forma consolidated balance sheet 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.
Unaudited Pro forma Audited Audited Consolidated Consolidated Consolidated Balance Sheet Balance Sheet Balance Sheet of the of the Group of the Target Enlarged Group as at 31 Company as at 30 Pro forma as at 31 March 2006 September 2006 Sub-total adjustments March 2006 HK$’000 HK$’000 HK$’000 HK$’000 Notes HK$’000
ASSETS Non-current assets Interest in an associate – 32,488 32,488 32,488 Property, plant and equipment 519 – 519 519 Investment property 10,200 – 10,200 10,200 Goodwill –––506,517 1(v) 506,517
10,719 32,488 43,207 549,724
Current assets Prepayments and other receivables 9 – 99 Financial assets at fair value through profit or loss 4,953 – 4,953 4,953 Tax recoverable 1,656 – 1,656 1,656 Cash and cash equivalents 29,985 – 29,985 1(ii) 29,985
36,603 – 36,603 36,603
Total assets 47,322 32,488 79,810 586,327
EQUITY Capital and reserves Share capital 67,200 1 67,201 (1) 1(iii) 67,200 Reserves (22,086) 32,482 10,396 49,389 1(iv) 59,785
45,114 32,483 77,597 126,985
– 207 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
Unaudited Audited Audited Pro forma Consolidated Consolidated Consolidated Balance Sheet Balance Sheet Balance Sheet of the Group of the Target of the Enlarged as at 31 Company as at 30 Pro forma Group as at March 2006 September 2006 Sub-total adjustments 31 March 2006 HK$’000 HK$’000 HK$’000 HK$’000 Notes HK$’000
LIABILITIES Current liabilities Accounts payable 893 – 893 893 Deposits received, other payables and accruals 1,315 – 1,315 1,551 2(i) 2,866 Amount due to an immediate holding company – 55 5
2,208 5 2,213 3,764
Non-current liabilities Convertible bonds –––107,841 2(i) 107,841 Promissory notes –––244,600 2(ii) 244,600 Amount due to a shareholder –––103,137 2(iii) 103,137
––– 455,578
Total liabilities 2,208 5 2,213 459,342
Total equity and liabilities 47,322 32,488 79,810 586,327
Net current assets/(liabilities) 34,395 (5 ) 34,390 32,839
Total assets less current liabilities 45,114 32,483 77,597 582,563
(II) Unaudited pro forma consolidated income statement of the Enlarged Group
The following is the unaudited pro forma consolidated income statement of the Enlarged Group, assuming that the Acquisition has been completed on 3 January 2006. The unaudited information is based on the audited consolidated financial statements of the Group for the year ended 31 March 2006 and the audited consolidated financial information of the Target Company for the period ended 30 September 2006 as set out in Appendix VII and III to this circular respectively. Such information is adjusted to reflect the effect of the Acquisition.
– 208 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
As the unaudited pro forma consolidated income statement of the Enlarged Group has been prepared for illustrative purpose only and because of its nature, it may not give a true picture of the results of the Enlarged Group for the year ended to which it is made up to or for any future period.
Unaudited Pro forma Audited Audited Consolidated Consolidated Consolidated Income Income Income Statement Statement Statement of the of the Group of the Target Enlarged Group for the year Company for the for the year ended 31 period ended 30 Pro forma ended 31 March 2006 September 2006 Sub-total adjustments March 2006 HK$’000 HK$’000 HK$’000 HK$’000 Notes HK$’000
Turnover 10,645 – 10,645 10,645 Cost of sales (9,551) – (9,551) (9,551)
Gross profit 1,094 – 1,094 1,094 Other revenue 72 – 72 72 Other income 255 – 255 255 Administrative expenses (7,255) (5 ) (7,260) (7,260) Other operating expenses (514) – (514) (514) Impairment loss recognised in respect of goodwill (8,536) – (8,536) (8,536) Impairment loss recognised in respect of investment property (395) – (395) (395)
Loss from operating activities (15,279) (5 ) (15,284) (15,284) Finance costs (28) – (28) (12,618) 3(i) (12,646) Share of profits of an associate – 32,488 32,488 11,258 3(ii) 43,746
(Loss)/profit before taxation (15,307) 32,483 17,176 15,816 Taxation ––– –
Net (loss)/profit from ordinary activities attributable to shareholders (15,307) 32,483 17,176 15,816
(Loss)/earnings per share contributable to the equity holders of the Company – Basic (2.28 cents) 2.35 cents
– 209 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
(III) Unaudited pro forma consolidated cash flow statement of the Enlarged Group
The following is the unaudited pro forma consolidated cash flow statement of the Enlarged Group, assuming that the Acquisition has been completed on 3 January 2006. The unaudited information is based on the audited consolidated financial statements of the Group for the year ended 31 March 2006, the audited consolidated financial statements of the Target Company for the period ended 30 September 2006 as set out in Appendix VII and III to this circular respectively. Such information is adjusted to reflect the effect of the Acquisition.
As the unaudited pro forma consolidated cash flow statement 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 cash flows of the Enlarged Group for the year ended to which it is made up to or for any future period.
Unaudited Pro forma Audited Audited Consolidated Consolidated Consolidated Cash Flow Cash Flow Cash Flow Statement Statement Statement of the of the Group of the Target Enlarged Group for the year Company for the for the year ended 31 period ended 30 Pro forma ended 31 March 2006 September 2006 Sub-total adjustments March 2006 HK$’000 HK$’000 HK$’000 HK$’000 Notes HK$’000
Operating activities (Loss)/profit before taxation (15,307) 32,483 17,176 17,176 Adjustments for: Share of profit of an associate – (32,488 ) (32,488) (32,488) Finance costs 28 – 28 28 Unrealised loss on financial assets at fair value through profit or loss 714 – 714 714 Impairment loss recognised in respect of investment property 395 – 395 395 Impairment loss recognised in respect of goodwill 8,536 – 8,536 8,536 Depreciation 729 – 729 729 Write-back of provision for impairment loss on accounts receivable (200) – (200) (200)
– 210 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
Unaudited Pro forma Audited Audited Consolidated Consolidated Consolidated Cash Flow Cash Flow Cash Flow Statement Statement Statement of the of the Group of the Target Enlarged Group for the year Company for the for the year ended 31 period ended 30 Pro forma ended 31 March 2006 September 2006 Sub-total adjustments March 2006 HK$’000 HK$’000 HK$’000 HK$’000 Notes HK$’000
Operating loss before working capital changes (5,105) (5 ) (5,110) (5,110) Decrease in accounts receivable 12,949 – 12,949 12,949 Decrease in trade deposits 24,301 – 24,301 24,301 Decrease in prepayments and other receivables 969 – 969 969 Increase in financial assets at fair value through profit or loss (591) – (591) (591) Decrease in accounts payable (787) – (787) (787) Decrease in other payables and accruals (2,139) – (2,139) (2,139) Increase in amount due to an immediate holding company – 55 5
Cash generated from operations 29,597 – 29,597 29,597 Interest paid (28) – (28) (28)
Net cash inflow from operating activities 29,569 – 29,569 29,569
Cash flows from investing activities Acquisition of an associate – (1 ) (1) (1) Payment of refundable deposit –––(160,000) 1(ii) (160,000) Payment to acquire investment property (10,595) – (10,595) (10,595)
Net cash outflow from investing activities (10,595) (1 ) (10,596) (170,596)
– 211 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
Unaudited Pro forma Audited Audited Consolidated Consolidated Consolidated Cash Flow Cash Flow Cash Flow Statement Statement Statement of the of the Group of the Target Enlarged Group for the year Company for the for the year ended 31 period ended 30 Pro forma ended 31 March 2006 September 2006 Sub-total adjustments March 2006 HK$’000 HK$’000 HK$’000 HK$’000 Notes HK$’000
Cash flows from financing activities Issue of shares – 1 1 160,000 1(ii) 160,001 Repayment of bank loan (467) – (467) (467)
Net cash (outflow)/inflow from financing activities (467) 1 (466) 159,534
Net increase in cash equivalents 18,507 – 18,507 18,507 Cash and cash equivalents at the beginning of the year 11,478 – 11,478 11,478
Cash and cash equivalents at the end of the year 29,985 – 29,985 29,985
Analysis of balances of cash and cash equivalents Cash and cash equivalents 29,985 – 29,985 29,985
– 212 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
Notes:
1. Under HKFRS 3 Business Combinations (“HKFRS 3”), the Group will apply the purchase method to account for the acquisition of the Target Company. In applying the purchase method, the identifiable assets, liabilities and contingent liabilities of the Target Company will be recorded on the consolidated balance sheet of the Group at their fair values at the date of completion. Any goodwill or discount arising on the acquisition will be determined as the excess or deficit of the purchase price to be incurred by the Group over the Group’s interests in the net fair value of the identifiable assets, liabilities and contingent liabilities of the Target Company at the date of completion. Negative goodwill resulting from the business combinations should be recognised immediately in the consolidated income statement.
The adjustments reflect the following:
(i) The total consideration is HK$539,000,000 which is to be satisfied by Team Jade (i) paying a refundable deposit of HK$160,000,000 to Rich Game; (ii) procuring the Company to issue convertible bond in a principal amount of HK$134,400,000 to Rich Game upon completion of S&P agreement (“Convertible Bond”); and (iii) procuring the Company to issue two promissory notes in principal amounts of HK$61,600,000 and HK$183,000,000 to Rich Game upon completion of the S&P agreement (“First Promissory Note I” and “First Promissory Note II”, respectively). Please also refer to 2(i) to 2(iii).
(ii) By assuming the Acquisition is completed on 31 March 2006 for the pro forma consolidated balance sheet of the Enlarged Group, Smart Town, a substantial shareholder of the Company shall enter a placing agreement with independent third parties to place approximately HK$160,000,000 shares of the Company. Smart Town shall use the proceeds from the placing to finance Team Jade as a shareholder’s loan to pay the refundable deposit to Rich Games immediately after cash is received. Collectively, there is no effect on cash and cash equivalent. Please also refer to 2(iii).
(iii) By assuming the acquisition is completed on 31 March 2006, the pro forma adjustment results of a decrease of approximately HK$1,000 for elimination of share capital of the Target Company on consolidation of the Enlarged Group.
(iv) The pro forma adjustment of approximately HK$49,389,000 represents (i) the elimination of the pre-acquisition reserves of the Target Company of approximately HK$32,482,000 on consolidation and (ii) an increase in the equity component of approximately HK$25,008,000 from the Convertible Bond as aforementioned in note 1(i) and (iii) an increase of a reserve account of approximately HK$56,863,000 due to the recognition of the difference between the principal of the shareholder loan of HK$160,000,000 and the carrying amount of the shareholder loan of approximately HK$103,137,000. The carrying amount of the shareholder loan of approximately HK$103,107,000 represents the liability component of the shareholder loan carried at amortised cost and is calculated using the effective interest rate method. (also refer to 2(iii)).
(v) Goodwill of approximately HK$506,517,000 arising from the acquisition of the Target Company, which is derived from the consideration of HK$539,000,000 minus the net assets of the Target Company acquired which amounted to approximately HK$32,483,000 as at 30 September 2006. For the purpose of preparing the Unaudited Pro Forma Financial Information of the Enlarged Group, the carrying value of the net assets of the Target Company as per the Accountants’ Report as set out in Appendix III of this circular is taken to be their fair value.
– 213 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
Pursuant to HKFRS 3, HKAS 36 Impairment of Assets and HKAS 38 Intangible Assets, amortisation of positive goodwill will be ceased and will be tested annually for impairment, as well as when there is indication of impairment.
2. (i) As aforementioned in note 1(i), the Company will issue a Convertible Bond of HK$134,400,000 upon completion of the Acquisition. Following on the adoption of Hong Kong Accounting Standard 32 and 39 issued by the Hong Kong Institute of Certified Public Accountants, an issuer of a compound financial instrument is required to separate the compound financial instrument into its liability and equity components. By using method of discounted cash flow, an amount of approximately HK$107,841,000 is classified as non-current liabilities component in the Unaudited Pro Forma Financial Information of the Enlarged Group. The pro forma adjustment of approximately HK$1,551,000 represents the interest payable on the Convertible Bond for the period from 3 January 2006 to 31 March 2006.
(ii) The pro forma adjustment of HK$244,600,000 represents the sum of the First Promissory Note I and First Promissory Note II for settlement part of the consideration as aforementioned in note 1(i). Both First Promissory Note I and First Promissory Note II bear an interest rate of 5% per annum and repayable in 10 years from date of issue.
(iii) The pro forma adjustment represents a shareholder loan of HK$160,000,000 (“Shareholder Loan”) payable to Smart Town, of which Smart Town has agreed to lend this amount to the Group for repayment of a refundable deposit of HK$160,000,000 to Rich Game as part of the consideration. The amount due to Smart Town is unsecured, interest free and repayable in 10 years from date of issue.
3. (i) The pro forma adjustment of approximately HK$12,618,000 represents a total finance cost to be expensed in the consolidated income statement of the Enlarged Group for the period from 3 January 2006 to 30 September 2006. The amount comprises of (i) interest expense of approximately HK$4,211,000 for the Convertible Bond, (ii) interest expense of approximately HK$5,998,000 for both First Promissory Note I and First Promissory Note II and (iii) imputed interest expense of approximately HK$2,409,000 for the Shareholder Loan based on an interest rate of 5% per annum. These interest expenses shall have continuing effect on the financial statements of the Group in subsequent years.
(ii) In recognition of the interest expenses incurred from 3 January 2006 to 30 September 2006 for the financial liabilities as aforementioned in note 3(i), relevant income generated during that period shall also be accounted for in order to satisfy the matching principle of accounting. The pro forma adjustment of approximately HK$11,258,000 represents an increase in share of profit of an associate, Worth Perfect for the period from 3 January 2006 to 30 September 2006 by assuming that the Acquisition was completed on 3 January 2006 and share of profit of the associate commenced on the same day for inclusion in the proforma consolidated income statement.
– 214 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
The following is the text of a letter, prepared for the sole purpose of inclusion in this circular, received from HLB Hodgson Impey Cheng, Chartered Accountants, Certified Public Accountants.
31st Floor Gloucester Tower The Landmark 11 Pedder Street Central Hong Kong
11 December 2006
The Directors Teem Foundation Group Ltd. Room 2108 Two International Finance Centre No. 8 Finance Street Central HONG KONG
Dear Sirs,
We report on the unaudited pro forma financial information (the “Pro Forma Financial Information”) of Teem Foundation Group Ltd. (the “Company”) and its subsidiaries (collectively referred to as the “Group”) and Youngrich Limited (the “Target Company”) (together with the Group hereinafter referred to as the “Enlarged Group”) which has been prepared by the directors of the Company for illustrative purpose only, to provide information about how the proposed acquisition of 100% issued share capital of the Target Company (the “Acquisition”), might have affected the financial information presented for inclusion as Appendix VII of the circular of the Company dated 11 December 2006 (the “Circular”). The basis of preparation for the Pro Forma Financial Information is set out on page 206 to this circular.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS OF THE COMPANY AND REPORTING ACCOUNTANTS
It is the responsibility solely of the directors of the Company to prepare the Pro Forma Financial Information in accordance with Rules 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by Hong Kong Institute of Certified Public Accountants.
– 215 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
It is our responsibility to form an opinion as required by paragraph 4.29(7) of the Listing Rules, on the 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 Pro Forma Financial Information beyond that owned to those to whom those reports were addressed by us at the dates of their issue.
BASIS OF OPINION
We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagement (“HKSIR”) 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants. Our work consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro Forma Financial Information with the directors of the Company. The 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 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 Pro Forma Financial Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.
The 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 31 March 2006 or any future date; or
• the financial results and cash flows of the Enlarged Group for the year ended 31 March 2006 or for any future period.
– 216 – APPENDIX VIII UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP
OPINION
In our opinion:
• the Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;
• such basis is consistent with the accounting policies of the Group; and
• the adjustments are appropriate for the purposes of the Pro Forma Financial Information as disclosed pursuant to Rule 4.29(1) of the Listing Rules.
Yours faithfully HLB Hodgson Impey Cheng Chartered Accountants Certified Public Accountants Hong Kong
– 217 – APPENDIX IX PROPERTY VALUATION REPORT
The valuation report on the property interests of the Enlarged Group has been prepared for the inclusion in this circular. The following is the text of the letter and the valuation certificates received from Grant Sherman Appraisal Limited and addressed to the Company in connection with its valuation as at 30 September 2006 of the property interests of the Enlarged Group.
Room 904 9th Floor, Harbour Centre 25 Harbour Road Wanchai Hong Kong
December 11, 2006
The Directors Teem Foundation Group Ltd Room 2108, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong
Dear Sirs,
In accordance with your instructions for us to value the property interests held and leased/licensed by Teem Foundation Group Ltd (the “Company”) and its subsidiaries (the “Group”) as well as by Youngrich Limited, its subsidiaries and associates (including Worth Perfect International Limited) (the “Target Group”) (the Target Group together with the Group, the “Enlarged Group”), we confirm that we have carried out inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing our opinion of the market value of the properties as at 30 September 2006 (the “valuation date”).
Our valuation is our opinion of market value which we would define as intended to mean the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
For property No. 1, we have valued the property by comparison approach assuming sale in their existing state by making reference to comparable sales evidences as available in the relevant market.
For property No. 2 which is leased by the Group in Hong Kong, we are of the opinion that no commercial value attribute to the Group due mainly to the short term nature or the prohibition against assignment or sub-letting or otherwise due to the lack of substantial profit rents.
– 218 – APPENDIX IX PROPERTY VALUATION REPORT
In valuing the property interests, we have complied with all the requirements contained in Chapter 5 of the Rules Governing the Listing of Securities on the Stock Exchange (“Listing Rules”) and The HKIS Valuation Standards on Properties (1st Edition 2005) published by The Hong Kong Institute of Surveyors.
We have assumed that the owner sells the property on the open market without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any similar arrangement which would serve to affect the property value. In addition, no forced sale situation in any manner is assumed in our valuations.
We have caused searches to be made at the Land Registry. However, we have not examined the original documents to verify ownership or to ascertain the existence of any amendments. We have relied on a considerable extent on information provided by the Company on such matters as statutory notices, easements, tenure, particulars of occupancy, identification of the properties, floor areas and all other relevant matters. All documents and leases have been used as reference only. All dimensions, measurements and areas are approximations. We have not carried out on-site measurements to verify the site areas of the properties and we have assumed that the site area shown on the copies of the documents handed to us are correct. We have had no reason to doubt the truth and accuracy of the information provided to us by the Company which is material to the valuations. We were also advised by the Company that no material facts have been omitted from the information supplied
We have inspected the exteriors and where possible, the interiors of the properties. However, no structural survey has been carried out and it was not possible to inspect the wood work and other parts of the structure which were covered, unexposed or inaccessible. We are therefore, unable to report that the properties are free of rot, infestation or any structural defects. No tests have been carried out on any of the building services.
No allowance has been made in our report for any charges, mortgages or amounts owing on the properties nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the properties are free from encumbrances, restrictions and outgoings of an onerous nature which could affect their values.
We enclose herewith the valuation certificates.
Yours faithfully, For and on behalf of GRANT SHERMAN APPRAISAL LIMITED Peggy Y. Y. Lai MRICS MHKIS RPS Associate Director Real Estate Group
Note: Ms. Peggy Y.Y. Lai is a member of the Royal Institution of Chartered Surveyors, a member of the Hong Kong Institute of Surveyors and Register Professional Surveyors in the General Practice Section, who has over 5 years experience in the valuation of properties in Hong Kong, the PRC and the Asian Region.
– 219 – APPENDIX IX PROPERTY VALUATION REPORT
VALUATION CERTIFICATE
Property interests held by the Enlarged Group for investment
Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 30 September 2006 (HK$)
1. Section A and The property is an irregular As at the valuation 10,200,000 Section B of shaped site with an area of date, the property is Lot No. 391 in approximately 2,421.4 sq.m. vacant. D.D. 131, Tuen Mun The property is held under a District, government lease for a term of New Territories, 75 years renewable for 24 years Hong Kong. commencing from 1 July 1898 and statutorily extended to 30 June 2047.
The Government Rent is $2.62 per annum for Lot No. 391 in Demarcation District No. 131.
Notes:
i. The registered owner of the subject property is Triumph Bright International Limited, a wholly- owned subsidiary of the Company, vide Memorial No. 05101800010015 dated 30 September 2005.
ii. According to a letter issued by Tuen Mun District Office (“TMDO Letter”) dated 3 February 2005 provided by the instructing party, the property is subject to certain land exchange conditions which extracted below:
Proposed surrendered area : Approximately 2,361.4 sq.m. Proposed re-granted area : Approximately 2,160 sq.m. Lease Term : 50 years Land Premium : The government will, if necessary, demand HK$1 Usage : Residential care homes for the elderly Maximum Gross Floor Area : 5,400 sq.m.
According to Tuen Mun Outline Zoning Plan S/TM/21, subject property is under the zoning of Government, Institution or Community. This zone is intended primarily for the provision of Government, institution or community facilities serving the needs of the local residents and/or a wider district, region or the territory. It is also intended to provide land for uses directly related to or in support of the work of the Government, organizations providing social services to meet community needs, and other institutional establishments.
iii. Our valuations have been made on the assumption that subject property could be developed according to the terms and conditions specified in the TMDO Letter and the land premium have been fully settled.
iv. According to the land search record from the Land Registry, subject property is not subject to any charge, legal charge, mortgage or any other similar material encumbrances.
– 220 – APPENDIX IX PROPERTY VALUATION REPORT
Capital value in Particulars of existing state as at Property Description and Tenure Occupancy 30 September 2006 (HK$)
2. Unit Nos. 3810 The property comprises 2 units The property is leased No Commercial Value and 3811, on the 38th Floor of an to the Group as office. 38th Floor, commercial building completed West Tower, in about 1985. Shun Tak Centre, Nos. 168-200 The total lettable area is Connaught Road approximately 3,265 sq.m. Central, Hong Kong. The property is leased to Top Jade Limited, a wholly-owned subsidiary of the Company, for a term of 3 years commencing from 1 May 2006 at the monthly rental of HK$91,420 exclusive of management fee, rates and all the outgoings.
– 221 – APPENDIX X GENERAL INFORMATION
1. RESPONSIBILITY STATEMENT
This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement contained in this circular misleading.
2. SHARE CAPITAL
Authorized: HK$
1,000,000,000 Shares 100,000,000
Issued and to be issued, fully paid or credited as fully paid:
672,000,000 Shares in issue as at the Latest Practicable Date 67,200,000
134,400,000 Shares to be issued upon exercise in full of 13,440,000 the conversion rights attaching to the Convertible Bond
806,400,000 Shares 80,640,000
3. DISCLOSURE OF INTERESTS
(a) Director’s interests and short positions in the securities of the Company and its associated corporations
As at the Latest Practicable Date, the interests and short positions of the Directors and the chief executive of the Company in the shares, underlying shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which were required (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in
– 222 – APPENDIX X GENERAL INFORMATION
the register referred to therein; or (c) pursuant to Model Code for Securities Transactions by Directors of Listed Issuers, were as follows:
Long positions in Shares
Approximate percentage of the Company’s Number issued share Name of Director of Shares Type of interests capital
Mr. Tang Hin Keung, 134,400,000 Through a controlled 20.00 Alfred (note) corporation
Mr. Pun Yuen Sang 134,400,000 Through a controlled 20.00 (note) corporation
Note: Mr. Tang Hin Keung, Alfred and Mr. Pun Yuen Sang are interested in these Shares through Pan-Star Nominees Limited, a company which is 40%, 30% and 30% beneficially owned by Mr. Wei Ming, Mr. Tang Hin Keung, Alfred and Mr. Pun Yuen Sang, respectively.
Save as disclosed above, as at the Latest Practicable Date, none of the Directors nor the chief executive of the Company had or was deemed to have any interests or short positions in the Shares, underlying Shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were required (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) pursuant to Model Code for Securities Transactions by Directors of Listed Issuers, to be notified to the Company and the Stock Exchange.
(b) Persons who have an interest or short position which is discloseable under Divisions 2 and 3 of Part XV of the SFO and substantial Shareholders
So far as is known to the Directors, as at the Latest Practicable Date, the following person (not being Director or chief executive of the Company) had, or was deemed to have, interests or short positions in the Shares or underlying Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO or who were directly or indirectly interested in 10% or more of the nominal value of any class of share
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capital carrying rights to vote in all circumstances at general meetings of any other member of the Group:
Long positions in the Shares Approximate percentage of the Company’s Number of issued share Name Notes Shares Type of interests capital
Smart Town (1) 206,880,000 Directly 30.79 beneficially owned
Mr. Liu Ching Hua (1) 206,880,000 Through a 30.79 corporation
Ms. Lam Ngar Lan (2) 206,880,000 Interest of spouse 30.79
Mr. Yeung Tony (1) 206,880,000 Through a 30.79 Ming Kwong corporation
Ms. Ho Wai Chun Priscilla (3) 206,880,000 Interest of spouse 30.79
Pan-Star Nominees (4) 134,400,000 Directly 20.00 Limited beneficially owned
Mr. Wei Ming (4) 134,400,000 Through a 20.00 corporation
PMA Capital (5) 128,640,000 Investment manager 19.14 Management Ltd.
Deutsche Bank (6) 121,744,000 Having a security 18.12 Aktiengesellschaft interest in Shares
Diversified Asian (7) 55,432,000 Beneficial owner 8.25 Strategies Fund
PMA Prospect Fund (8) 36,000,000 Beneficial owner 5.36
PMA Asian Opportunities (9) 35,000,000 Beneficial owner 5.21 Fund
Notes:
1. The Shares are held by Smart Town, which is 50% and 50% beneficially owned by Mr. Yeung Tony Ming Kwong and Mr. Liu Ching Hua, respectively.
2. Ms. Lam Ngar Lan is the spouse of Mr. Liu Ching Hua, who beneficially owns 50% of the shareholdings of Smart Town which holds 206,880,000 Shares.
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3. Ms. Ho Wai Chun Priscilla is the spouse of Mr. Yeung Tony Ming Kwong, who beneficially owns 50% of the shareholdings of Smart Town which holds 206,880,000 Shares.
4. The Shares are held by Pan-Star Nominees Limited, which is 40%, 30% and 30% beneficially owned by Mr. Wei Ming, Mr. Tang Hin Keung, Alfred and Mr. Pun Yuen Sang, respectively.
5. The 128,640,000 Shares were held by PMA Capital Management Ltd. as investment manager.
6. The 121,744,000 Shares were held as security interest by Deutsche Bank Aktiengesellschaft.
7. Diversified Asian Strategies Fund beneficially owned 55,432,000 Shares, Diversified Asian Strategies Fund is 100% controlled by its immediate holding company, PMA Capital Management Ltd.
8. PMA Prospect Fund beneficially owned 36,000,000 Shares. PMA Prospect Fund is 100% controlled by its immediate holding company, PMA Capital Management Ltd.
9. PMA Asian Opportunities Fund beneficially owned 35,000,000 Shares. PMA Asian Opportunities Fund is 100% controlled by its immediate holding company, PMA Capital Management Ltd.
Save as disclosed above, as at the Latest Practicable Date, the Directors were not aware of any other person (other than the Directors and the chief executive of the Company) who had, or was deemed to have, interests or short positions in the Shares or underlying Shares (including any interests in options in respect of such capital), which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Company.
4. DIRECTORS’ OTHER INTERESTS
As at the Latest Practicable Date, so far as the Directors are aware of, none of themselves or their respective associates had any interest in a business which competes or may compete with the business of the Group or any other conflicts of interests with the Group.
As at the Latest Practicable Date, none of the Directors, Somerley Limited, HLB, Grant Sherman Appraisal Limited, Michael Li & Co. and Goncalves Pereira, Rato Ling, Vong & Cunha has any interests, either direct or indirect, in any assets which have been acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Company since 31 March 2006, being the date to which the latest published audited consolidated financial statements of the Group were made up.
There is no contract or arrangement entered into by any member of the Group subsisting at the date of this circular in which any Director is materially interested and which is significant to the business of the Group.
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5. LITIGATION AND CLAIMS
As at the Latest Practicable Date, none of the members of the Group was engaged in any litigation or claims of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened by or against any member of the Group.
6. SERVICE CONTRACTS
Mr. Pun Yuen Sang and Mr. Tang Hin Keung, Alfred, have each entered into a service contract with the Company for a term of two years commencing on 1 July 2002, which shall continue thereafter until terminated by either party giving to the other not less than six months’ prior written notice, with such notice not expiring earlier than 1 July 2004.
Mr. Lum Chor Wah, Richard, has entered into a service contract with the Company for a term of two years commencing on 1 August 2004, which shall continue thereafter until terminated by either party giving to the other not less than six months’ prior written notice, with such notice not expiring earlier than 1 August 2006.
Mr. Yeung Tony Ming Kwong had entered into a service contract with the Company for a term of two years commencing on 1 August 2005, which shall continue thereafter until terminated by either party giving to the other not less than six months’ prior written notice, with such notice not expiring earlier than 1 August 2007. The service contract was mutually terminated by the Company and Mr. Yeung Tony Ming Kwong on 30 November 2005 as Mr. Yeung Tony Ming Kwong has resigned as a director of the Company on the same day.
7. EXPERTS
HLB, Somerley Limited, Grant Sherman Appraisal Limited, Michael Li & Co. and Goncalves Pereira, Rato, Ling, Vong & Cunha have given and have not withdrawn their written consent to the issue of this circular with the inclusion herein of their letters and/ or references to their names in the form and context in which they respectively appear.
The following are the qualifications of the experts who has provided its advice and reports (as the case may be), which are contained in this circular:
Name Qualification
HLB Hodgson Impey Cheng Chartered Accountants Certified Public Accountants
Somerley Limited a licensed corporation under the SFO permitted to engage in type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) of the regulated activities as defined in the SFO
Grant Sherman Professional valuer Appraisal Limited
Michael Li & Co. Legal adviser as to Hong Kong Laws
Goncalves Pereira, Rato Legal adviser as to Macau Laws Ling, Vong & Cunha
– 226 – APPENDIX X GENERAL INFORMATION
As at the Latest Practicable Date, HLB, Somerley Limited, Grant Sherman Appraisal Limited, Michael Li & Co. and Goncalves Pereira, Rato Ling, Vong & Cunha were not beneficially interested in the share capital of any member of the Group nor did they have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for any Shares, convertible securities, warrants, options or derivatives which carry voting rights in any member of the Group.
8. MATERIAL CONTRACTS
Save for the Provisional Agreement, the Assignment and the Target Acquisition Agreement, Deed of Cancellation and the New Target Acquisition Agreement, no contracts, not being contracts in the ordinary course of business of the Company or any of its subsidiaries, has been entered into by the members of the Group within the two years immediately preceding the Latest Practicable Date.
9. MISCELLANEOUS
(a) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.
(b) The head office and the principal place of business of the Company in Hong Kong is located at Room 2108, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong.
(c) The principal share registrar and transfer office of the Company is Butterfield Fund Services (Bermuda) Limited, Rosebank Centre, 11 Bermudiana Road, Pembroke, Bermuda.
(d) The Hong Kong branch share registrar and transfer office of the Company is Union Registrars Ltd. at Room 1803, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong.
(e) The company secretary and qualified accountant of the Company is Mr. Ng Kwok Keung, who is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants.
(f) The English text of this circular and the accompanying form of proxy shall prevail over their respective Chinese texts in case of inconsistency.
10. PROCEDURES FOR THE DEMAND BY POLL
The following sets out the procedures by which the Shareholders may demand a poll at the SGM.
Pursuant to Bye-law 66 of the Bye-laws, at any general meeting a resolution put to the vote of the meeting shall be voting by way of poll if required by the rules of the designated stock exchange or decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand
– 227 – APPENDIX X GENERAL INFORMATION for a poll) a poll is demanded (i) by the chairman of the meeting; or (ii) by at least three Shareholders present in person (or in the case of a Shareholder being a corporation by its duly authorised representative) or by proxy for the time being entitled to vote at the meeting; or (iii) by a Shareholder or Shareholders present in person (or in the case of a Shareholder being a corporation by its duly authorised representative) or by proxy and representing not less than one-tenth of the total voting rights of all Shareholders having the right to vote at the meeting; or (iv) by a Shareholder or Shareholders present in person (or in the case of a Shareholder being a corporation by its duly authorised representative) or by proxy and holding Shares in the Company conferring a right to vote at the meeting being Shares on which an aggregate sum has been paid up equal to not less than one- tenth of the total sum paid up on all Shares conferring that right; or (v) if required by the rules of the designated stock exchange, by any Director or Directors who, individually or collectively, hold proxies in respect of Shares representing five per cent. or more of the total voting rights of all the Shareholders having the right to vote at the meeting.
11. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents are available for inspection during normal business hours at the head office and principal place of business of the Company in Hong Kong at Room 2108, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong:
(a) the memorandum and articles of association of the Company;
(b) the service contracts referred to in the paragraph headed “Service contracts” in this appendix;
(c) the material contracts referred to in the paragraph headed “Material contracts” in this appendix;
(d) the letter of advice from Somerley Limited, the text of which is set out in Appendix I to this circular;
(e) the accountants’ report on the Target Company, the text of which is set out in Appendix III to this circular;
(f) the accountants’ report on Worth Perfect, the text of which is set out in Appendix IV to this circular;
(g) the assurance report on the Rolling Turnover generated by Sat Ieng, the text of which is set out in Appendix V to this circular;
(h) the assurance report on the Rolling Turnover generated by Dore, the text of which is set out in Appendix VI to this circular;
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(i) the annual reports of the Company for each of the three financial years ended 31 March 2006;
(j) the letter from HLB in respect of the unaudited pro forma financial information on the Enlarged Group, the text of which is set out in Appendix VIII to this circular;
(k) the valuation report prepared by Grant Sherman Appraisal Limited, the text of which is set out in Appendix IX to this circular;
(l) the written consents from the experts referred to in the paragraph headed “Experts” in this appendix;
(m) the New Target Acquisition Agreement;
(n) the draft note instrument which sets out the terms and conditions of the Convertible Bond;
(o) the draft First Promissory Notes;
(p) the draft Second Promissory Note; and
(q) this circular.
– 229 – NOTICE OF SGM
TEEM FOUNDATION GROUP LTD. 浩基集團有限公司* (Incorporated in Bermuda with limited liability) (Stock Code: 628)
Notice is hereby given that a special general meeting (the “Meeting”) of Teem Foundation Group Ltd. (the “Company”) will be held at Boardroom 3-4, M/F, Renaissance Harbour View Hotel Hong Kong, 1 Harbour Road, Wanchai, Hong Kong on Friday, 29 December 2006 at 10:00 a.m. for the purpose of considering and, if thought fit, passing the following resolution as an ordinary resolution:
ORDINARY RESOLUTION
“THAT
(a) the conditional sale and purchase agreement (the “New Target Acquisition Agreement”) dated 28 August 2006 and entered into among Team Jade Enterprises Limited (“Team Jade”), a wholly-owned subsidiary of the Company, as purchaser, Rich Game Capital Inc. (“Rich Game”) as vendor and warrantor and Global Rainbow Ltd., Smart Gallant Limited, Mr. Tang Chien Chang and Mr. Jean, Christophe Scolari, as warrantors in relation to the sale and purchase of 100 ordinary shares of US$1.00 each in the share capital of Youngrich Limited (the “Target Company”), representing the entire issued share capital of the Target Company, at a consideration of HK$539 million (a copy of which has been produced to the Meeting marked “A” and signed by the chairman of the Meeting for the purpose of identification) and the transactions contemplated thereunder, be and are hereby approved, confirmed and ratified;
(b) any one or more of the directors (the “Directors”) of the Company be and is/ are hereby authorised to do all other acts and things and execute all documents which he/they consider necessary or expedient for the implementation of and giving effect to the New Target Acquisition Agreement and the transactions contemplated thereunder;
(c) the issue of a convertible bond (the “Convertible Bond”) in the principal amount of HK$134.4 million by the Company in accordance with the terms and conditions of the New Target Acquisition Agreement and the transactions contemplated thereunder be and is hereby approved; and
* For identification purposes only
– 230 – NOTICE OF SGM
(d) any one or more of the Directors be and is/are hereby authorised to take all steps necessary or expedient in his/their opinion to implement and/or give effect to the issue of the Convertible Bond including but not limited to the allotment and issue of ordinary shares of HK$0.10 each in the share capital of the Company of which may fall to be issued upon the exercise of the conversion rights attached to the Convertible Bond.”
By order of the Board Teem Foundation Group Ltd. Lum Chor Wah, Richard Chairman
Hong Kong, 11 December 2006
Registered office: Principal place of business in Hong Kong: Clarendon House Room 2108 2 Church Street Two International Finance Centre Hamilton HM11 No.8 Finance Street Bermuda Central Hong Kong
Notes:
1. A member entitled to attend and vote at the Meting convened by the above notice is entitled to appoint one or more proxy to attend and, subject to the provisions of the bye-laws of the Company, vote in his stead. A proxy need not be a member of the Company but must be present in person at the Meeting to represent the member. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed.
2. A form of proxy for use at the Meeting is enclosed. In order to be valid, the form of proxy must be duly completed and signed in accordance with the instructions printed thereon and deposited together with a power of attorney or other authority, if any, under which it is signed, or a notarially certified copy of such power or authority, at the office of the Company’s Hong Kong share registrar in Hong Kong, Union Registrars Ltd. at Room 1803, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding the Meeting or any adjournment thereof. Completion and return of a form of proxy will not preclude a member from attending in person and voting at the above Meeting or any adjournment thereof, should he so wish.
3. In the case of joint holders of shares, any one of such holders may vote at the Meeting, either personally or by proxy, in respect of such share as if he was solely entitled thereto, but if more than one of such joint holders are present at the meeting personally or by proxy, that one of the said persons so present whose name stands first in the register of members of the Company in respect of such shares shall alone be entitled to vote in respect thereof.
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