31 January 2008
If you are in 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 Enviro Energy International Holdings Limited,
you should at once hand this circular and the accompanying form of proxy to the purchaser or
transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected
for transmission to the purchaser or transferee.
It is important to note that the purpose of distributing this circular is to provide the Shareholders
with information on a proposed acquisition by the Company, so that the Shareholders may make
an informed decision on voting in respect of the resolutions to be tabled at the EGM. This
circular does not constitute, or form part of, an offer or invitation, or solicitation or inducement
of an offer, to subscribe for or purchase any of the Shares or other securities of the Company,
nor is this circular circulated to invite offers for any Shares or other securities of the Company.
A letter from the Board is set out on pages 7 to 22 of this circular.
A notice convening the EGM to be held on Monday, 18 February 2008 at 3:00 p.m. at Unit A, 7th
Floor, Guangdong Investment Tower, 148 Connaught Road Central, Hong Kong is set out on pages
160 to 161 of this circular. Whether or not you intend to attend the EGM, please complete and
return the enclosed form of proxy in accordance with the instructions printed thereon and return it
to the Hong Kong branch share registrar and transfer office of the Company, Tricor Tengis Limited,
at 26/F., Tesbury Centre, 28 Queen’s Road East, Hong Kong as soon as possible and in any event,
not less than 48 hours before the time fixed for holding the EGM or any adjournment thereof (as the
case may be). Completion and return of the form(s) of proxy will not preclude you from attending
and voting in person at the EGM or at any adjourned meeting should you so wish.
ENVIRO ENERGY INTERNATIONAL HOLDINGS LIMITED
環能國際控股有限公司
(Incorporated in the Cayman Islands with limited liability)
website: http://www.enviro-energy.com.hk
(Stock Code: 8182)
VERY SUBSTANTIAL ACQUISITION
AND
NOTICE OF EXTRAORDINARY GENERAL MEETING
Financial adviser to the Company
BNP Paribas Capital (Asia Pacific) Limite
CONTENTS
Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Characteristic of GEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Letter from the Board
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
B. The Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
C. Information on the Vendor and the Target Group . . . . . . . . . . . . . . . . . . . . . 12
D. Reasons for and benefits of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . 15
E. Change in the shareholding structure of the Company . . . . . . . . . . . . . . . . 18
F. Financial effects of the Acquisition on the earnings and
assets and liabilities of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
G. The EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
H. Waiver application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
I. Procedure for demanding a poll by Shareholders . . . . . . . . . . . . . . . . . . . . . 21
J. Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
K. Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Appendix I – Financial information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Appendix II – Financial information of the Target Group . . . . . . . . . . . . . . . . . . . . 68
Appendix III – Unaudited pro forma financial information of
the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Appendix IV – Valuation report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Appendix V – Management discussion and analysis . . . . . . . . . . . . . . . . . . . . . . . . . 134
Appendix VI – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Notice of Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
DEFINITIONS
– 1 –
In this circular, unless the context otherwise requires, the following expressions have the
following meanings respectively:
“Acquisition” the proposed acquisition by the Company of the entire
issued share capital of Allied Resources from the
Vendor pursuant to the Agreement
“Agreement” the conditional sale and purchase agreement dated 14
September 2007 entered into between, among others,
the Company and the Vendor in respect of the
Acquisition
“Allied Resources” Allied Resources Limited, a company incorporated in
Hong Kong with limited liability
“Articles of Association” the articles of association of the Company as may be
amended from time to time
“associate” has the same meaning as ascribed to it under the GEM
Listing Rules
“Baron” Baron Capital Limited, a licensed corporation within
the meaning of the SFO to conduct type 1 (dealing in
securities) and type 6 (advising on corporate finance)
regulated activities
“Board” the board of Directors
“chief executive” has the same meaning as ascribed to it under the GEM
Listing Rules
“Colpo” Colpo Mercantile Inc., a company incorporated in the
British Virgin Islands with limited liability, the entire
issued share capital of which is solely and beneficially
owned by Mr. Chan, and a controlling Shareholder
“Company” Enviro Energy International Holdings Limited, a
company incorporated in the Cayman Islands with
limited liability and the Shares of which are listed on
GEM
“Completion” the completion of the Acquisition pursuant to the terms
and conditions of the Agreement
DEFINITIONS
– 2 –
“connected person” has the same meaning as ascribed to it in the GEM
Listing Rules
“Consideration Shares” 110,000,000 new Shares to be issued to the Vendor, as
part of the consideration of the Acquisition, upon
Completion
“controlling shareholder(s)” has the same meaning as ascribed to it under the GEM
Listing Rules
“Directors” the directors of the Company
“EGM” the extraordinary general meeting of the Company to
be convened and held on Monday, 18 February 2008,
to consider, and if thought fit, to approve the
Acquisition and the issue of the Consideration Shares
“Enlarged Group” the Group and the Target Group
“ETA” the equity transfer agreement dated 19 January 2007
entered into between Allied Resources and Mr. Xu Ying
and Mr. Xu Gui as vendors, pursuant to which Allied
Resources agreed to acquire the entire equity interest
of Jilin Hengli
“Exclusivity Agreement” the exclusivity agreement dated 10 April 2007 entered
into between the Company and the Vendor, pursuant
to which the Vendor had agreed to, among others,
grant an exclusivity period of six months from the
date of the Exclusivity Agreement to and including 9
October 2007, or such later date as mutually agreed
between the Company and the Vendor
“GEM” the Growth Enterprise Market of the Stock Exchange
“GEM Listing Rules” the Rules Governing the Listing of Securities on GEM
“General Offer” the general offer of the Shares made by Baron on behalf
of Colpo in accordance with the Takeovers Code, the
completion of which took place in December 2006
“Group” the Company and its subsidiaries
“HK$” Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong” The Hong Kong Special Administrative Region of the
PRC
DEFINITIONS
– 3 –
“Independent Third Party(ies)” a person or an entity, who, to the best of the
knowledge, information and belief of the Directors,
after making all reasonable enquiries, is not connected
with any of the Directors, chief executive or substantial
shareholders of the Company or any of its subsidiaries
or their respective associates of the Company
“Jilin Hengli”吉林null利實業有限責任公司 (Jilin Hengli Industries
Liability Co., Ltd.), a company established under the
laws of the PRC and a wholly-owned subsidiary of
Allied Resources
“Last Trading Date” 14 September 2007, being the last trading day before
the publication of the announcement of the Company
dated 18 September 2007
“Latest Practicable Date” 30 January 2008, being the latest practicable date prior
to the printing of this circular for the purpose of
ascertaining certain information for inclusion therein
“Loan” interest free, unsecured and repayable on demand loan
of HK$82.6 million advanced by the Vendor to, and
was still owing by, Allied Resources as at the Latest
Practicable Date
“Main Board” the stock market operated by the Stock Exchange other
than GEM (excluding the option market)
“Mr. Chan” Mr. Chan Wing Him, Kenny, a Director, the chairman
of the Company and the ultimate beneficial owner of
Colpo
“Mr. Ho” Mr. Peter Tak Yuen Ho, a senior executive vice
president of the Company
“Mr. Lau” Mr. Lau Kwok Kwong, the ultimate beneficial owner
of the Vendor
“Oilfields” the producing oilfields owned by Qian An, which cover
two formations namely Qianshen-12 and Qian-209,
encompass a total area of approximately 15 square
kilometers and have over 60 producing and suspended
wells and related facilities in the Jilin Qian An area of
the PRC with a current combined production of
approximately 450 barrels of light oil per day
DEFINITIONS
– 4 –
“Petromin” Petromin Resources Limited, a company listed on the
Toronto Stock Exchange Venture Board, which is
principally engaged in acquiring and developing oil
and gas properties
“PRC” the People’s Republic of China which for the purpose
of this circular, excluding Hong Kong
“Qian An”乾安石油開發有限責任公司(Qian An Oil Development
Co., Ltd.), an equity joint venture company established
under the laws of PRC
“RMB” Renminbi, the lawful currency of the PRC
“SFO” the Securities and Futures Ordinance (Chapter 571 of
the Laws of Hong Kong)
“Shares” the share(s) of HK$0.0025 each in the capital of the
Company
“Shareholders” the holder(s) of Shares
“SPA Supplemental Deed” the supplemental deed dated 17 December 2007 to the
Agreement entered into between, among others, the
Company and the Vendor pursuant to which the
parties thereto had agreed to postpone Completion to
18 February 2008 or such other date being not later
than 18 March 2008 or such other date as is agreed in
writing by the parties thereto
“Stock Exchange” 92191 to HK$1.00. No representation is made that any
amounts in RMB or HK$ could have been or could be converted at the above rate or at any other
rates or at all.)
The English names of Chinese entities are translated from their Chinese names. If there is
any inconsistency between the Chinese entities mentioned in this circular and the English translated
names, the Chinese names shall prevail.
CHARACTERISTIC OF GEM
– 6 –
GEM has been established as a market designed to accommodate companies to
which a high investment risk may be attached. In particular, companies may list on
GEM with neither a track record of profitability nor any obligation to forecast future
profitability. Furthermore, there may be risks arising out of the emerging nature of
companies listed on GEM and the business sectors or countries in which the companies
operate. Prospective investors should be aware of the potential risks of investing in
such companies and should make the decision to invest only after due and careful
consideration. The greater risk profile and other characteristics of GEM mean that it is
a market more suited to professional and other sophisticated investors.
Given the emerging nature of companies listed on GEM, there is a risk that
securities traded on GEM may be more susceptible to high market volatility than
securities traded on the Main Board and no assurance is given that there will be a
liquid market in the securities traded on GEM.
The principal means of information dissemination on GEM is publication on the
internet website operated by the Stock Exchange. Listed companies are not generally
required to issue paid announcements in gazetted newspapers. Accordingly, prospective
investors should note that they need to have access to the GEM website in order to
obtain up-to-date information on GEM-listed issuers.
LETTER FROM THE BOARD
– 7 –
ENVIRO ENERGY INTERNATIONAL HOLDINGS LIMITED
環能國際控股有限公司
(Incorporated in the Cayman Islands with limited liability)
website: http://www.enviro-energy.com.hk
(Stock Code: 8182)
Directors: Head Office and Principal Place
Executive Directors of Business in Hong Kong:
Chan Wing Him, Kenny (Chairman) Unit A, 7th Floor
Chan Man Ching Guangdong Investment Tower
148 Connaught Road Central
Non-Executive Director Hong Kong
Arthur Ross Gorrell
Registered Office:
Independent Non-Executive Directors Cricket Square
Lo Chi Kit Hutchins Drive
Poon Lai Yin, Michael P.O. Box 2681
Tam Hang Chuen Grand Cayman KY1-1111
Cayman Islands
31 January 2008
To the Shareholders
Dear Sir or Madam,
VERY SUBSTANTIAL ACQUISITION
AND
NOTICE OF EXTRAORDINARY GENERAL MEETING
A. INTRODUCTION
On 18 September 2007, the Company announced that the Company had on 14
September 2007 entered into the Agreement with, among others, the Vendor pursuant to
which the Company agreed to acquire from the Vendor the entire issued share capital of
Allied Resources at a total consideration of HK$365.88 million, which shall be satisfied by
payment of cash of HK$178 million and the issue of the Consideration Shares at an issue
price of HK$1.708 per Consideration Share to the Vendor.
On 17 December 2007, the Company further announced that the Company entered
into the SPA Supplemental Deed pursuant to which the parties thereto had agreed to
postpone Completion to 18 February 2008 or, such other date being not later than 18
March 2008 or such other date as is agreed in writing by the parties thereto.
LETTER FROM THE BOARD
– 8 –
The Acquisition constitutes a very substantial acquisition for the Company under
Rule 19.08 of the GEM Listing Rules, which is subject to the approval of the Shareholders
at the EGM, which will be held to consider, and if thought fit, to approve the Agreement
and the transactions contemplated thereunder. No Shareholders shall be required to abstain
from voting at the EGM.
The purpose of this circular is to provide you with further details of the Acquisition
and other information as required by the GEM Listing Rules and to give you notice of the
EGM at which ordinary resolutions will be proposed to seek your approval of the
Acquisition and the transactions contemplated thereunder.
B. THE AGREEMENT
Date: 14 September 2007 (signed after trading hours)
Parties:
Purchaser: the Company
Vendor: Global Richland, to the best of the Directors’ knowledge,
information and belief having made all reasonable enquiry, the
Vendor is an Independent Third Party
Assets to be acquired
Pursuant to the Agreement, the Company has agreed to buy and the Vendor
has agreed to sell:
(i) the entire issued share capital of Allied Resources; and
(ii) the Loan owed and payable by Allied Resources to the Vendor.
As at 30 November 2007, the Loan amounted to HK$82.6 million.
Consideration
The total consideration for the Acquisition is HK$365.88 million, which shall
be settled by the Company in the following manner on Completion:
(i) an aggregate of HK$128.6 million refundable deposit paid by the
Company to the Vendor pursuant to the Exclusivity Agreement and the
Supplemental Deeds shall be applied as part of the consideration;
(ii) HK$49.4 million refundable deposit, paid in cash to the Vendor by the
Company on the date of signing of the Agreement, shall be applied as
part of the consideration; and
(iii) HK$187.88 million shall be satisfied by the issue of 110,000,000 new
Shares at HK$1.708 per Consideration Share.
LETTER FROM THE BOARD
– 9 –
The Vendor shall enter into a deed of assignment with the Company, pursuant
to which the Vendor shall assign the Loan, due and owing to the Vendor, to the
Company pursuant to the Agreement upon Completion.
The consideration was determined after arm’s length negotiation between the
Company and the Vendor with reference to (1) the estimated value of the Oilfields,
the major asset of the Target Group of not less than HK$550 million, which was
preliminarily estimated by BMI Appraisals Limited (an independent firm of
professional surveyors and valuers) based on the “HKIS Valuation Standards on
Trade-related Business Assets and Business Enterprises” as at 1 August 2007; (2) the
asset appreciation potential of the major assets held by the Target Group; (3) the
unaudited book value of Jilin Hengli of approximately HK$54.78 million as at 31
December 2006; and (4) the future business prospects of the Target Group.
The Company financed the cash consideration with internal financial resources
and funds raised from previous equity placements.
Consideration Shares
The issue price of HK$1.708 per Consideration Share represents (i) a discount
of approximately 40.90% to the closing price of HK$2.89 per Share as quoted on the
Stock Exchange on the Last Trading Day; (ii) a discount of approximately 26.00% to
the 5-day average closing price of approximately HK$2.308 per Share as quoted on
the Stock Exchange for the last five trading days up to and including the Last
Trading Day; and (iii) a discount of approximately 22.36% to the 10-day average
closing price of approximately HK$2.20 per Share as quoted on the Stock Exchange
for the last ten trading days up to and including the Last Trading Day. The total
market value of the Consideration Shares amounted to approximately HK$317.9
million based on the closing price of HK$2.89 per Share as quoted on the Stock
Exchange on the Last Trading Day.
The issue price of the Consideration Shares was determined after arm’s length
negotiation between the Company and the Vendor with reference to the Company’s
Share price performance during the period of negotiation between the Company
and the Vendor. Since the initial stage of discussion of the Acquisition (as disclosed
in the Company’s announcement dated 10 April 2007), the Share price has increased
from HK$0.6 per Share (being the closing price of the Share on 10 April 2007 and as
adjusted as a result of the subdivisions of Shares as announced in the Company’s
announcements dated 20 March 2007 and 26 July 2007) to HK$2.89 (being the closing
price of the Share as at 18 September 2007). The issue price of the Consideration
Shares was determined after taking into account of the substantial appreciation of
the Share price of the Company.
The Consideration Shares represent approximately 4.94% and 4.71% of the
Company’s existing issued share capital and enlarged share capital immediately
after the Completion respectively.
LETTER FROM THE BOARD
– 10 –
The issue of the Consideration Shares shall be subject to the Shareholders’
approval at the EGM. An application will be made to the GEM Listing Committee of
the Stock Exchange for the approval for the listing of, and permission to deal in, the
Consideration Shares, which will rank pari passu in all respects with the then existing
Shares.
Restrictions on the sale of the Consideration Shares
The Consideration Shares shall be subject to a lock-up period of three months
from Completion, during which the Consideration Shares shall not be transferred,
sold, lent, charged, mortgaged, otherwise used as security or otherwise encumbered.
Refundable deposits
An aggregate of HK$178 million refundable deposits have been paid by the
Company to the Vendor prior to the Latest Practicable Date pursuant to the
Exclusivity Agreement, the Supplemental Deeds and the Agreement in the following
schedule:
Date of advance Amount
10 April 2007 HK$3.6 Million
19 July 2007 HK$10 Million
30 July 2007 HK$80 Million
16 August 2007 HK$35 Million
14 September 2007 HK$49.4 Million
Total: HK$178 Million
Conditions precedent
Completion of the Agreement shall be conditional upon the fulfillment of the
following conditions:
(i) the Company, being satisfied, at its absolute discretion, with the results
of the due diligence conducted by the Company on the Target Group;
(ii) the Company being satisfied with a legal opinion (in the terms approved
by the Company) and addressed to the Company by qualified lawyers
in the PRC on matters relating to the Target Group;
(iii) completion of the sale and purchase under the ETA shall have taken
place in accordance with the terms and conditions set out therein and
the delivery by the Vendor to the Company of a certified copy of the
legal opinion referred to in clause 4.2(ii) of the ETA;
LETTER FROM THE BOARD
– 11 –
(iv) the delivery by the Vendor to the Company of a copy of the consolidated
management accounts (certified as true and accurate by a director of the
Vendor) and the consolidated audited accounts of the Target Group for
the three financial years ended 31 December 2006 and the seven months
ended 31 July 2007;
(v) the passing of the relevant resolutions at the EGM by the Shareholders
for approving (i) the Agreement and transactions contemplated therein
as required by the GEM Listing Rules and (ii) the allotment and issue of
the Consideration Shares to the Vendor;
(vi) the valuation of the total assets of the Target Group as required by the
GEM Listing Rules to be valued by an independent valuer, shall not be
less than HK$550 million;
(vii) all liabilities of the Target Group having been settled by the Vendor (not
sourced from any asset within the Target Group) and the Target Group
will be free of any liability upon Completion, except for, among others,
the Loan;
(viii) the approval for the listing of, and permission to deal in, the
Consideration Shares having been granted by the GEM Listing
Committee of the Stock Exchange; and
(ix) if required, the relevant authorities in the PRC approving the transactions
contemplated in the Agreement.
As at the Latest Practicable Date, items (i) and (vi) above have been fulfilled.
Completion shall take place on 18 February 2008 or, if the above conditions have not been
fulfilled or waived by such date, the next business day following the day on which the
last of the conditions to be satisfied will have been fulfilled or waived or such other date
being not later than 18 March 2008 or such other date as is agreed in writing by the
parties.
Further, in the event that any of the conditions precedent is not satisfied on or
before 18 March 2008 or such other date as is agreed in writing by the parties, the Vendor
is obliged to forthwith refund unconditionally the whole amount of the deposit of HK$178
million to the Company, in any event, within three business days of termination of the
Agreement. However, only HK$49.4 million deposit will be refunded to the Company
with interest at a rate of 2% above the prime rate of The Hongkong and Shanghai Banking
Corporation Limited on the date of signing of the Agreement.
LETTER FROM THE BOARD
– 12 –
C. INFORMATION ON THE VENDOR AND THE TARGET GROUP
The Vendor
The Vendor is principally engaged in investment holding and its subsidiaries
are engaged in oil extraction business. The ultimate beneficial owner of the Vendor
is Mr. Lau. Mr. Lau is a friend of Mr. Chan, the chairman and an executive Director
and the ultimate beneficial owner of Colpo, the controlling Shareholder. Mr. Lau
and Mr. Chan first met each other in 1972 when they both worked as summer
interns at Hoilee Co., Ltd. in Hong Kong.
Mr. Lau was also a director for the period from 1996 to April 2007 of, and is a
shareholder holding less than 1% interests in, Petromin. Mr. Chan is currently a
director, co-chairman and the chief executive officer of, and is a shareholder holding
approximately 3.9% interests in, Petromin. Save as disclosed above, there is no other
relationship between Mr. Lau and Mr. Chan.
Since the completion of the General Offer, the new management of the
Company has started to consider alternative investment and development
opportunities, in particular, enviro-energy related projects, that would diversify the
business and broaden the income base of the Company.
In January 2007, Rich Concept Limited, a subsidiary of the Company, provided
service to Allied Resources to conduct a preliminary assessment on Allied Resources’s
oil-related project. As such, the Company gained knowledge of Allied Resources’s
proposed acquisition of Jilin Hengli, and later in or about March 2007, the Company
approached Mr. Lau for the purpose of the Acquisition, through Mr. Chan. Since
such approach, the Company started to contemplate on this Acquisition.
The Directors understand that Mr. Lau knows the management of the Company
has extensive experiences in the oil and gas industries and in consideration of the
sale of the Target Group to the Company, Mr. Lau, through the Vendor, will receive
both cash and Consideration Shares. The Directors believe that Mr. Lau will
appreciate the opportunity to realise his holding in and also enjoy indirectly the
development potential of the Oilfields and the Company as a result of the Acquisition.
Having made all reasonable enquiries, to the best of the Directors’ knowledge,
information and belief, Mr. Lau did not have any intention to acquire further interest
in the Company as at the Latest Practicable Date.
Mr. Chan and Mr. Lau do not per se, fall within any of the nine classes of
persons who are presumed to be acting in concert under the Takeovers Code. Further,
as a matter of fact, Mr. Chan and Mr. Lau are not acting in concert in relation to the
Company or any other companies and they have never had any agreements,
understandings or arrangements between themselves to co-operate to obtain or
consolidate control of the Company or any other companies.
LETTER FROM THE BOARD
– 13 –
Save as disclosed, the Vendor and Mr. Lau (1) are Independent Third Parties;
(2) are not parties acting in concert (as defined in the Takeovers Code) with Colpo,
Mr. Chan, each of the other Directors and their respective associates for the purpose
of the Takeovers Code; and (3) have never worked as a group with Colpo, Mr. Chan,
each of the other Directors and their respective associates for the purpose of the
Acquisition or any purpose or transaction.
The Target Group
Allied Resources, a wholly-owned subsidiary of the Vendor and was
incorporated on 21 July 2006, as purchaser, entered into the ETA on 19 January 2007
and a supplemental deed on 31 July 2007 to acquire the entire equity interest of Jilin
Hengli, as to 50% each from Mr. Xu Ying and Mr. Xu Gui, both being Independent
Third Parties. Having made all reasonable enquiries, to the best of the Directors’
knowledge, information and belief, there is no prior relationship between each of
Mr. Xu Ying and Mr. Xu Gui with the Company, Colpo, Mr. Chan, each of the other
Directors and their respective associates. Mr. Xu Ying and Mr. Xu Gui (1) are third
parties independent of the Company, Colpo, Mr. Chan, the Vendor, Mr. Lau and
each of the other Directors and their respective associates; and (2) are not parties
acting in concert (as defined in the Takeovers Code) with the Company, Colpo, Mr.
Chan, the Vendor, Mr. Lau, each of the other Directors and their respective associates
for the purpose of the Takeovers Code.
Jilin Hengli beneficially owns 50% of the equity interest of Qian An, an equity
joint venture company established under the laws of PRC. The other 50% of the
equity interest of Qian An is beneficially owned by PetroChina Company Limited,
whose “H” shares and American depository shares are listed on the Stock Exchange
and the New York Stock Exchange, Inc. respectively. Qian An is principally engaged
in the exploitation of petroleum resources activities and production of petroleum.
As at the Latest Practicable Date, the equity interests of Jilin Hengli had been
transferred to Allied Resources and the application and registration for the change
of the legal status of Qian An was being processed pursuant to the terms of the ETA
and the said supplemental deed.
The major assets of Qian An include the Oilfields, which cover two formations
namely Qianshen-12 and Qian-209, encompassing a total area of approximately 15
square kilometers and have over 60 producing and suspended wells and related
facilities in the Jilin Qian An area of the PRC with a current combined production of
approximately 450 barrels of light oil per day. The relevant exploration and
exploitation rights over the Oilfields belong to PetroChina Company Limited, which
holds 50% interests of Qian An. The duration of the exploration and exploitation
rights over the Oilfields is from 1 November 2002 to 19 December 2016. Before
expiry of such rights in 2016, the Company will take necessary steps to negotiate
with PetroChina Company Limited for extension of the term of co-operation.
Although such extension may or may not materialize, based on the expertise and
experience of the Company’s management in the energy industry, the Board is
confident in reaching an extension with PetroChina Company Limited.
Original oil in place from the Oilfields amounts to 21.7 million barrels. The
technical adviser adopted the categorization standard jointly established by the
Society of Petroleum Engineers, World Petroleum Council, Society Petroleum
Evaluation Engineers and American Association of Petroleum Geologists to arrive at
LETTER FROM THE BOARD
– 14 –
the proven oil in place of 21.7 million barrels. The categorization standard is generally
adopted by listed companies in their published information. Estimated recovery
factor under current and future production scenarios will be 28%. Original oil has
two categories of oils, namely heavy oil and light oil. The commercial use of heavy
oil is more or less the same as light oil. The only difference lies on the amount of
high-valued products to be produced e.g. gasoline, kerosene after distillation (i.e.
refinery). Larger proportion of heavy oil will be turned into residue oil e.g. bitumen,
while for light oil, most part of it can be turned into gasoline.
According to a technical report entitled “China Jilin Qian An Oilfield Geological
& Engineering Report” (referred to as the “Assessment Report” in the valuation
report prepared by BMI Appraisals Limited), prepared by the Jilin Petroleum Research
Institute
1
, Songyuan, Jilin, the PRC, dated June 2006, in Qianshen-12, the total number
of oil wells is 25 with three suspended as at June 2006 while in Qian-209, the total
number of oil wells is 37 with one suspended as at June 2006. The management of
the Company, which has extensive experience in the energy field industry, is of the
opinion that since there has not been any large scale drilling of new wells at the
Oilfields since June 2006, the recoverable oil reserve at the Oilfields will not materially
change within a period of one to two years. Accordingly, the Directors and BMI
Appraisals Limited consider that the technical report referred above is still valid
and should serve as a good reference in determining the value of the Target Group
as of 30 November 2007.
In addition, BMI Appraisals Limited has preliminarily estimated the total
recoverable oil reserve as of 30 November 2007 based on the recoverable oil reserve
as of June 2006 less any oil produced during the period from June 2006 to 30
November 2007, which was in line with the practice of the industry.
The Oilfields comprise Putaohua and Gaotaizi formations in an average depth
of 1,930 meters. Porosity and permeability range from 7-19% and 0.1-15.2 millidarcy.
Average production of each well ranges from 8.3 to 35 barrels per day, based on the
analysis of the historical data of the Oilfields as of June 2006. The Oilfields have
been on production since 1995. The usual recovery rate for a primary production of
an oilfield is about 30% of original oil in place while only 1.1 million barrels have
been produced since 1995, which represent approximately only 5% of original oil in
place. Accordingly, the Directors are of the view that the Oilfields have significant
potential for further exploitation and production capacity to improve the recovery
rate to approximately 32%-35% through better reservoir management methods as
follows:
(1) additional infill wells drillings;
(2) deeper exploration of oil/gas potentials;
(3) opening of by-pass zone; and
(4) implementation of enhanced oil recovery scheme.
1 Jilin Petroleum Research Institute has over 30 years of experience in the research of oilfield evaluations and
currently has nine research centres with over 500 employees. In recent years, Jilin Petroleum Research Institute
has compiled over 130 research reports and these research reports have been used and recognised by PetroChina
Company Limited and oilfield companies in the Jilin Province, the PRC. The research reports compiled by Jilin
Petroleum Research Institute are mainly used by PetroChina Company Limited and will not be published in other
listed companies’ publications.
LETTER FROM THE BOARD
– 15 –
Save as disclosed above, Allied Resources has not conducted any material
business activities since its incorporation. For the period from 21 July 2006 (its
incorporation date) to 31 December 2006, Allied Resources had an unaudited net
loss of approximately HK$12,600. Save for the acquisition of Jilin Hengli as disclosed
above, Allied Resources did not have any other material assets as at the Latest
Practicable Date.
Upon Completion, Allied Resources will become a wholly-owned subsidiary
of the Company and its results will be consolidated into the Group’s account. There
will not be any change in the board composition or directorships of the Company as
a result of the Acquisition.
D. REASONS FOR AND BENEFITS OF THE ACQUISITION
The Group is principally engaged in the business of provision of network
infrastructure solutions and services. It is the long term strategy of the Group to further
develop and diversify its information technology related business and to explore into
more resources-related projects. Colpo has become the controlling Shareholder since 10
November 2006, upon completion of the sale and purchase agreement of Shares dated 3
November 2006. For further details, please refer to the Company’s circular dated 29
November 2006.
As disclosed in the 2006/2007 interim report of the Company, the Group’s network
services business had suffered stiff competition and unfavorable business environment
especially in the PRC during the past few years. Although the market for this type of
service is still growing, strong local competition at deep discount has eroded the profit
margin of the Group. In view of the current business environment and the dismal financial
results due to the current operation, the management of the Company has to consider
alternative measure and business direction to increase Shareholders value.
The management of the Company has the knowledge to undertake energy-related
projects because both Mr. Chan and Mr. Ho, senior executive vice president of the
Company, have extensive experience in the energy field for over 20 years. For further
details of the expertise and qualifications of Mr. Chan, please refer to the Company’s
circular dated 29 November 2006.
Mr. Ho is currently a senior vice president of Petromin. Mr. Ho has also been the
advisor on reservoir engineering and simulation of Computer Modelling Group Limited
since 1996. Mr. Ho is an engineer with over 27 years’ experience in the energy resources
sector in North America. For further details of the expertise and qualifications of Mr. Ho,
please refer to the Company’s announcement dated 13 February 2007.
In view of the high growth potential and promising prospect of the enviro-energy
industry, the Board considers that the future of the energy-related pursuit of the Company
will benefit from the expected continuous growth in the enviro-energy and resources
market. The Acquisition is consistent with the development of the Company. That is the
main reason for the Company to enter into the Acquisition in order to broaden the income
LETTER FROM THE BOARD
– 16 –
base for the Company. Upon completion of the Acquisition, it is expected that Qian An
will become a jointly-controlled entity of the Group and its results would be included in
the financial statements of the Group using the equity method pursuant to paragraph 30
of the “Hong Kong Accounting Standard 31 – Interests In Joint Ventures”. The Board
believes that the Acquisition will generate substantial profit and cash flow to the Company.
The Directors wish to state that the disclaimer opinions given by the auditors relating
to the Target Group set out in Appendix II to this circular are either items due to difference
in accounting standard requirements or covered by indemnity provisions provided by the
Vendor, and should not be considered as any deficiency in the completeness and usefulness
of the financial information presented in this circular. As such, the Directors believe that
neither the Company nor the Shareholders are subject to material degree of uncertainty or
insufficient information in making a decision relating to the Acquisition.
Set out below are the Directors’ views on the respective disclaimer opinions:
In relation to financial information of Allied Resources
1. Going concern basis for the preparation of the financial information
It should be noted that the Group had a bank balance of approximately
HK$395.1 million as at 31 July 2007. Therefore the Directors believe that the going
concern of Allied Resources, which had net liabilities of HK$10,261 as at 31 July
2007, could be adequately addressed by financing to be provided by the Group.
2. Adverse opinion in the absence of group financial statement
This disclaimer was mainly due to absence of consolidated accounts of the
Target Group. The Directors are of the view that since the financial statements of
both Allied Resources and Jilin Hengli (including Qian An) are already presented
with detailed disclosure in Appendix II to this circular, the presentation of the
consolidated accounts will not provide additional useful information for the
Shareholders.
In relation to financial information of Jilin Hengli
1. Limitation of scope relating to other payables
The payables were incurred prior to the Acquisition. Nevertheless, the
Company is adequately protected as pursuant to the Agreement, the Vendor warrants
that members of the Target Group have paid their creditors and there are no amounts
owing by members of the Target Group which have been due for more than six
weeks, and potential claims are covered by indemnity provisions provided by the
Vendor.
LETTER FROM THE BOARD
– 17 –
2. Limitation of scope relating to the withholding tax liabilities
This relates to a potential liability to the Company under PRC tax rules and
regulations. Please refer to Appendix II to this circular for further details.
Nevertheless, the Company is adequately protected as pursuant to the Agreement,
the Vendor warrants that members of the Target Group have paid all tax liabilities
and potential claims are covered by indemnity provisions provided by the Vendor.
3. Limitation of scope relating to investment in a jointly controlled entity which includes
the following:
(i) Carrying amounts of property, plant and equipment and deferred
taxation
This disclaimer was mainly due to the valuation report on Qian An’s
property, plant and equipment being prepared with the depreciation expenses
using “straight line method”. This arises due to the different accounting
standards of the PRC which allows depreciation of oil and gas expenses using
“straight line method” as compared to the HKFRS requirement of depreciation
expenses using “unit of production method”. Nevertheless the Directors wish
to highlight that the consideration was mainly determined based on the
valuation of the oil reserves and without taking into account the values of the
property, plant and equipment.
HKFRS also requires an estimate of dismantlement expenses relating to
the property, plant and equipment, which is not presented in the valuation
report of Qian An. The Directors consider the dismantlement expenses to be
irrelevant, as there is no such requirement as to dismantlement of related
assets upon expiry of useful life in the PRC.
As a result of the different accounting standards used for the depreciation
charges calculation, the deferred taxation cannot be reasonably ascertained.
However, the Directors consider that the absence of calculation of the related
tax liability required under HKFRS would not create material uncertainty to
the financial situation of Qian An.
(ii) Related party transaction
The auditors have performed audit procedures on, and the management
of Qian An has confirmed, the amount and existence of the related party
transactions. The Directors have also verified the relationship using publicly
available information. The disclaimer was mainly due to the absence of further
underlying documents from Qian An to ensure the accuracy and completeness
of the transaction amounts with related parties for disclosure purposes. The
Directors believe that as these transaction amounts have already been fully
reflected in the income statements, the fact that the deficiency in the disclosure
of related party transactions in terms of its accuracy and completeness should
not be a material consideration for the Shareholders in making a decision in
voting for the Acquisition.
LETTER FROM THE BOARD
– 18 –
(iii) Provision for retirement benefits scheme contributions
The auditors were unable to verify the contribution of the retirement
benefits scheme by Qian An. Nevertheless, the Company is adequately
protected as pursuant to the Agreement, the Vendor warrants that members of
the Target Group have complied with all obligations imposed on them by all
statutes, regulations and codes of conduct relevant to their employees and
potential claims are covered by indemnity provisions provided by the Vendor.
Based on the above, the Directors consider that all the qualifications set out in
Appendix II to this circular are not material for the Shareholders in making decision
on voting as the Consideration was mainly based on the valuation of the oil reserves.
The Directors also consider that all material information relating to the Acquisition
has been fully disclosed in the circular despite the disclaimer opinions of the auditors.
The Directors (including the independent non-executive Directors) consider that the
Agreement is on normal commercial terms which are fair and reasonable and the entering
into of the Agreement is in the interests of the Company and its Shareholders as a whole.
The Directors have no present intention to discontinue the Group’s existing business,
which shall be maintained in the foreseeable future subsequent to the Completion.
Having made all reasonable enquiries, to the best of the Directors’ knowledge,
information and belief, none of the substantial Shareholders or their respective associates
has any material interest in the Acquisition, other than through the Company.
E. CHANGE IN THE SHAREHOLDING STRUCTURE OF THE COMPANY
As at the Latest Practicable Date, the authorised share capital of the Company was
HK$50,000,000 divided into 20,000,000,000 of HK$0.0025 each, of which 2,226,080,800 Shares
were issued and fully paid. Assuming no further Shares are issued and/or repurchased by
the Company before Completion, the shareholding structures of the Company as at the
Latest Practicable Date and immediately after Completion were shown as follows:
Shareholding structure
Shareholding structure as at upon the issue of
the Latest Practicable Date Consideration Shares
No. of Approximate No. of Approximate
Shares % Shares %
Colpo (Note) 1,182,540,000 53.12 1,182,540,000 50.62
Vendor – – 110,000,000 4.71
Public Shareholders 1,043,540,800 46.88 1,043,540,800 44.67
Total 2,226,080,800 100.0 2,336,080,800 100.0
Note: The entire issued share capital of Colpo is beneficially owned by Mr. Chan.
LETTER FROM THE BOARD
– 19 –
F. FINANCIAL EFFECTS OF THE ACQUISITION ON THE EARNINGS AND
ASSETS AND LIABILITIES OF THE COMPANY
The audited consolidated net asset value of the Group was approximately HK$483
million as at 31 July 2007. As confirmed by the Directors, the Acquisition would lead to an
overall increase in the net asset value of the Group since the total value of the Target
Group being acquired is greater than the Consideration.
The Directors also believe that there would be no immediate material impact on the
liabilities or earning position of the Group upon Completion. However, it is expected that
the Acquisition will have a positive impact on the earnings of the Group in the long run.
G. THE EGM
Set out on pages 160 to 161 of this circular is a notice convening the EGM to be held
at Unit A, 7th Floor, Guangdong Investment Tower, 148 Connaught Road Central, Hong
Kong on Monday, 18 February 2008 at 3:00 p.m. at which ordinary resolutions will be
proposed and, if thought fit, passed to approve the Agreement and transactions
contemplated thereunder.
The Acquisition constitutes a very substantial acquisition for the Company under
Rule 19.08 of the GEM Listing Rules, which is subject to the approval of the Shareholders
at the EGM. As at the Latest Practicable Date as far as the Directors were aware, none of
the Shareholders or their respective associates had any interests in the Acquisition which
was different from those of other Shareholders, other than through their interest in the
Company and no Shareholder was required to abstain from voting in respect of the
proposed resolutions to approve the Acquisition and the transactions contemplated
thereunder at the EGM.
H. WAIVER APPLICATION
Pursuant to Rule 7.05(1)(a) of the GEM Listing Rules, the Company is required to
include an accountants’ report covering results of the Target Group for each of the three
financial years immediately preceding the issue of this circular. As the circular is to be
despatched in January, 2008, it is considered unduly burdensome for the Target Group to
prepare an accountants’ report within a short period of time after the fiscal year end date
of 31 December 2007. The Company has applied for a waiver from strict compliance with
Rule 7.05(1)(a) of the GEM Listing Rules in respect of the accountants’ report of Jilin
Hengli subject to the following conditions:
(i) the Directors confirm that, they have performed sufficient due diligence (as
disclosed below) on Jilin Hengli (including Qian An) to ensure that, up to the
date of this circular, there has been no material adverse change in the financial
position or prospects of Jilin Hengli (including Qian An) since 31 July 2007,
and that there has been no event since 31 July 2007 which would materially
affect the information shown in the accountants’ reports of Jilin Hengli
(including Qian An) as set out in Appendix II to this circular; and
LETTER FROM THE BOARD
– 20 –
(ii) this circular will be despatched on or before 31 January 2008 and the EGM
will be held no later than 29 February 2008.
The due diligence works conducted by the Directors and management of the
Company on the financial position or prospects of Jilin Hengli include the following:
(i) obtained and reviewed the unaudited management accounts of Jilin Hengli
and Qian An for the year ended 31 December 2007 and Allied Resources for
the period ended 30 November 2007 (collectively, the “Management
Accounts”);
(ii) instructed the auditors to perform subsequent events review of the
Management Accounts from 1 August 2007 to 31 October 2007 during their
field work and the auditors did perform such subsequent events review;
(iii) since 31 July 2007, the Company, through Time Master International Holdings
Ltd., its consultants and contract team in Beijing, has paid regular visits to the
Oilfields, i.e. two to three times a month on average. Mr. Qian Gang and Mr.
Xu Lei, senior managers, and other staff of Time Master International Holdings
Ltd., have also visited Changchun, where the office of Jilin Hengli is located
and Songyuan, Qian An District where the operation offices of the Oilfields
are located. The purposes of these visits are to ensure that:
(a) proper order and work procedures are maintained in the operations of
the Oilfields;
(b) production is not drastically affected due to the forthcoming change of
ownership and management pursuant to the Acquisition; and
(c) proper safeguarding and monitoring procedures are implemented and
transmission of such knowledge to the existing personnel of Jilin Hengli
and Qian An to ensure no significant material changes in either assets
disposal/acquisition or unnecessary liability incurrence. These
procedures are strictly enforced to ensure the operational status of the
Oilfields is maintained during the transitional period of the forthcoming
ownership and management changes pursuant to the Acquisition;
(iv) Mr. Ho also personally visited the Oilfields in November 2007 to conduct
direct field visit, inventory checking and had discussion with PetroChina Jilin
Oilfields management team to ensure their understanding of the future
development plan of the Company in the Oilfields, including more drilling
operations. The purpose of Mr. Ho’s visit was to ensure that proper technical
works have been and will be performed to maintain the production capacity;
and
LETTER FROM THE BOARD
– 21 –
(v) Mr. Qian Gang and Mr. Xu Lei have made regular reports of the Oilfields to
Mr. Ho on a weekly basis via long distance phone calls, emails, fax etc. to
ensure no significant changes to the operations of the Oilfields that may
adversely affect its production capacity. These reports are relayed to the Board
and the senior management of the Company on a regular basis.
For further financial information relating to the Target Group, please refer to
Appendices II and III to this circular.
I. PROCEDURE FOR DEMANDING A POLL BY SHAREHOLDERS
Pursuant to Article 72 of the Articles of Association, at any general meeting a
resolution put to the vote of the meeting shall be decided on a show of hands unless a poll
is (before or on the declaration of the result of the show of hands or on the withdrawal of
any other demand for a poll) demanded:
(i) by the chairman of such meeting; or
(ii) by at least three members present in person (or, in the case of a member being
a corporation, by its duly authorised representative) or by proxy for the time
being entitled to vote at the meeting; or
(iii) by any member or members present in person (or, in the case of a member
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 the members
having the right to vote at the meeting; or
(iv) by any member or members present in person (or, in the case of a member
being a corporation, by its duly authorized representative) or by proxy and
holding Shares 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 the Shares conferring that right; or
(v) if required by the GEM Listing Rules, by any Director or Directors who,
individually or collectively, hold proxies in respect of Shares representing 5%
or more of the total voting rights at such meeting.
J. RECOMMENDATION
The Board considers that the Acquisition is in the interests of the Company and that
the terms of the Acquisition are fair and reasonable and in the interests of the Shareholders
as a whole. Accordingly, the Board recommends that the Shareholders should vote in
favour of the ordinary resolutions which will be proposed at the EGM to approve the
Agreement and the transactions contemplated thereby and in connection therewith.
LETTER FROM THE BOARD
– 22 –
K. ADDITIONAL INFORMATION
Your attention is drawn to the information set out in the Appendices to this circular.
Yours faithfully,
For and on behalf of the Board of Directors
ENVIRO ENERGY INTERNATIONAL HOLDINGS LIMITED
Chan Wing Him, Kenny
Chairman
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 23 –
Part 1
1. AUDITED FINANCIAL STATEMENTS OF THE GROUP FOR THE THREE YEARS
ENDED 31 JULY 2005, 2006 and 2007
Terms defined herein apply to this appendix only.
The following financial information is a reproduction of the relevant information
extracted from the audited financial statements of the Group for the three years ended 31
July 2005, 2006 and 2007 as published in the respective 2005, 2006 and 2007 annual reports
of the Company.
Consolidated Income Statement
For the year ended 31 July
(Expressed in Hong Kong Dollars)
Note 2007 2006 2005
Revenue 8 3,373,893 6,988,225 22,514,073
Cost of sales (2,864,823) (6,600,069) (20,238,879)
Gross profit 509,070 388,156 2,275,194
Other income 8 6,151,259 73,559 105,334
Administrative and
operating expenses (52,633,888) (8,247,844) (13,999,422)
Impairment loss recognised
in respect of an investment
in a jointly-controlled entity – – (1,457,726)
Loss from operating activities (45,973,559) (7,786,129) (13,076,620)
Finance cost – – (64,759)
Share of loss of
a jointly-controlled entity – – (477,888)
Loss before taxation 9 (45,973,559) (7,786,129) (13,619,267)
Income tax 12 –––
Net loss attributable to equity
shareholders of the Company 13 (45,973,559) (7,786,129) (13,619,267)
Loss per share 14
Basic (HK8.44 cents) (HK1.97 cents) (HK3.44 cents)
Diluted N/A N/A N/A
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 24 –
Consolidated Balance Sheet
At 31 July
(Expressed in Hong Kong Dollars)
Note 2007 2006 2005
Non-current assets
Plant and equipment 15 524,363 685,315 1,198,004
Investment in
a jointly-controlled entity 17 –––
524,363 685,315 1,198,004
Current assets
Inventories 18 – 3,874 73,402
Trade receivables 19 197,696 694,247 825,438
Deposits, prepayments and
other receivables 20 94,546,247 1,178,810 1,367,780
Available-for-sale investments/
Investments in securities – – 300,000
Cash and cash equivalents 21 395,115,097 485,791 7,513,302
489,859,040 2,362,722 10,079,922
--------------- --------------- ---------------
Current liabilities
Trade payables 22 50,519 1,526,385 476,081
Deposits received 23 258,117 1,642,675 1,265,273
Accrued liabilities and
other payables 23 6,928,667 855,976 857,939
Amount due to a director 24 – 3,187,329 5,000,000
7,237,303 7,212,365 7,599,293
--------------- --------------- ---------------
Net current assets/(liabilities) 482,621,737 (4,849,643) 2,480,629
NET ASSETS/(LIABILITIES) 483,146,100 (4,164,328) 3,678,633
CAPITAL AND RESERVES
Issued capital 25 5,372,730 3,961,800 3,961,800
Reserves 27 477,773,370 (8,126,128) (283,167)
TOTAL EQUITY 483,146,100 (4,164,328) 3,678,633
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 25 –
2. AUDITED FINANCIAL STATEMENTS
Set out below are the audited consolidated financial statements of the Group together
with accompanying notes as extracted from the annual report of the Company for the year
ended 31 July 2007:
Consolidated Income Statement
For the year ended 31 July 2007
(Expressed in Hong Kong Dollars)
Note 2007 2006
Revenue 8 3,373,893 6,988,225
Cost of Sales (2,864,823) (6,600,069)
Gross profit 509,070 388,156
Other income 8 6,151,259 73,559
Administrative and operating expenses (52,633,888) (8,247,844)
Loss from operating activities (45,973,559) (7,786,129)
Finance cost – –
Loss before taxation 9 (45,973,559) (7,786,129)
Income tax 12 ––
Net loss attributable to equity shareholders
of the Company 13 (45,973,559) (7,786,129)
Loss per share 14
Basic (HK8.44 cents) (HK1.97 cents)
Diluted N/A N/A
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 26 –
Consolidated Balance Sheet
At 31 July 2007
(Expressed in Hong Kong Dollars)
Note 2007 2006
Non-current assets
Plant and equipment 15 524,363 685,315
Investment in a jointly-controlled entity 17 ––
524,363 685,315
Current assets
Inventories 18 – 3,874
Trade receivables 19 197,696 694,247
Deposits, prepayments and
other receivables 20 94,546,247 1,178,810
Cash and cash equivalents 21 395,115,097 485,791
489,859,040 2,362,722
---------------- ----------------
Current liabilities
Trade payables 22 50,519 1,526,385
Deposits received 23 258,117 1,642,675
Accrued liabilities and other payables 23 6,928,667 855,976
Amount due to a director 24 – 3,187,329
7,237,303 7,212,365
---------------- ----------------
Net current assets/(liabilities) 482,621,737 (4,849,643)
NET ASSETS/(LIABILITIES) 483,146,100 (4,164,328)
CAPITAL AND RESERVES
Issued capital 25 5,372,730 3,961,800
Reserves 27 477,773,370 (8,126,128)
TOTAL EQUITY 483,146,100 (4,164,328)
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 27 –
Consolidated Statement of Changes in Equity
For the year ended 31 July 2007
(Expressed in Hong Kong Dollars)
Share Share
Share premium Capital option Exchange Accumulated
Note capital account reserve reserve reserve losses Total
As at 1 August 2005 3,961,800 29,685,786 19,980,000 – – (49,948,953) 3,678,633
Net loss for the year – – – – – (7,786,129) (7,786,129)
Exchange differences on
translation of the financial
statements of an overseas
subsidiary – – – – (56,832) – (56,832)
As at 31 July 2006 and
1 August 2006 3,961,800 29,685,786 19,980,000 – (56,832) (57,735,082) (4,164,328)
Net loss for the year – – – – – (45,973,559) (45,973,559)
Exchange differences on
translation of the financial
statements of an overseas
subsidiary – – – – (33,134) – (33,134)
Issue of new shares 25 1,385,430 504,892,620 – – – – 506,278,050
Share-based payment expenses 9 – – – 37,228,098 – – 37,228,098
Shares issued under share
option scheme 25 25,500 1,208,433 – (586,233) – – 647,700
Share issue expenses – (10,836,727) – – – – (10,836,727)
As at 31 July 2007 5,372,730 524,950,112 19,980,000 36,641,865 (89,966) (103,708,641) 483,146,100
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 28 –
Consolidated Cash Flow Statement
For the year ended 31 July 2007
(Expressed in Hong Kong Dollars)
Note 2007 2006
Operating activities
Loss from operating activities (45,973,559) (7,786,129)
Adjustments for:
Bank interest income (210,907) (6,101)
Waiver of amount due to a director (4,987,329) –
(Gain)/loss on disposal of plant and equipment (262) 10,370
Depreciation 514,406 531,118
Write-off of plant and equipment 21,450 14,211
Share-based payment expenses 37,228,098 –
Operating loss before changes in
working capital (13,408,103) (7,236,531)
Decrease in inventories 3,874 69,528
Decrease in trade receivables 496,551 131,191
Decrease in deposits, prepayments and
other receivables 232,563 188,970
(Decrease)/increase in trade payables (1,475,866) 1,050,304
(Decrease)/increase in deposits received (1,384,558) 377,402
Increase/(decrease) in accrued liabilities and
other payables 4,061,978 (1,963)
Net cash used in operating activities (11,473,561) (5,421,099)
---------------- ----------------
Investing activities
Bank interest received 210,907 6,101
Purchase of plant and equipment (373,304) (52,733)
Proceeds from disposal of plant and equipment 262 11,879
Proceeds from sale of
available-for-sale investments – 300,000
Deposit paid for acquisition of a subsidiary 20 (93,600,000) –
Net cash (used in)/from investing activities (93,762,135) 265,247
---------------- ----------------
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 29 –
Note 2007 2006
Financing activities
Advance from directors 3,280,000 3,187,329
Repayment to a director (1,480,000) (5,000,000)
Proceeds from issue of ordinary shares 506,278,050 –
Proceeds from exercise of share options 647,700 –
Proceeds for shares to be issued
under share option scheme 23 2,010,713 –
Share issue expenses (10,836,727) –
Net cash from/(used in) financing activities 499,899,736 (1,812,671)
---------------- ----------------
Net increase/(decrease) in cash and cash equivalents 394,664,040 (6,968,523)
Cash and cash equivalents at beginning of year 485,791 7,513,302
Effect of foreign exchange rate changes (34,734) (58,988)
Cash and cash equivalents at end of year 395,115,097 485,791
Analysis of balances of cash and cash equivalents
Cash and bank balances 21 395,115,097 485,791
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 30 –
Notes:
1. CORPORATE INFORMATION
The Company was incorporated as an exempted company in the Cayman Islands with limited
liability under the Companies Law (Revised) of the Cayman Islands on 3 July 2002. The shares of
the Company were listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong
Limited (“GEM”) on 18 February 2003.
The principal place of business of the Company is located at Unit A, 7th Floor, Guangdong
Investment Tower, 148 Connaught Road Central, Hong Kong.
The principal activity of the Company is investment holding. The principal activities of its
subsidiaries are shown in note 16 to the financial statements.
As at 31 July 2007, the Directors consider the ultimate holding company of the Group is Colpo
Mercantile Inc. (“Colpo”), a company incorporated in the British Virgin Islands.
The financial statements are presented in Hong Kong dollars, which is the same as the functional
currency of the Group.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with Hong Kong Financial Reporting
Standards (“HKFRSs”) (which include all applicable Hong Kong Accounting Standards (“HKASs”)
and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants
(“HKICPA”), accounting principles generally accepted in Hong Kong. The financial statements
comply with the applicable disclosure requirements of the Hong Kong Companies Ordinance
and the Rules Governing the Listing of Securities on the GEM (“GEM Listing Rules”). They have
been prepared under the historical cost convention, except for certain financial instruments,
which are measured at fair value.
The preparation of the financial statements in conformity with HKFRSs requires management to
make judgements, estimates and assumptions that affect the application of policies and reported
amounts of assets, 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 in 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.
Judgements made by management in the application of HKFRSs that have significant effect on
the financial statements and estimates with a significant risk of material adjustment are discussed
in note 5.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 31 –
3. IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS
In the current year, the Group has applied, for the first time, a number of new and revised
HKFRSs and HKASs and Interpretations (hereinafter collectively referred to as “new HKFRSs”)
issued by the HKICPA which are either effective for accounting periods beginning on or after 1
December 2005. The adoption of the following new HKFRSs has no material effects on how the
results and financial position for the current or prior accounting periods are prepared and
presented. Accordingly, no prior period adjustments have been made.
HKAS 19 (Amendment) Actuarial gains and losses, group plans and disclosures
HKAS 21 (Amendment) Net investment in a foreign operation
HKAS 39 (Amendment) Cash flow hedge accounting of forecast intragroup
transactions
HKAS 39 (Amendment) The fair value option
HKAS 39 & HKFRS 4 (Amendments) Financial guarantee contracts
HKFRS 6 Exploration for and evaluation of mineral resources
HKFRS – INT 4 Determining whether an arrangement contains a lease
HKFRS – INT 5 Right to interests arising from decommissioning,
restoration and environmental rehabilitation funds
HK(IFRIC) – INT 6 Liabilities arising from participating in a specific
market – waste electrical and electronic equipment
HK(IFRIC) – INT 7 Applying the restatement approach under HKAS 29
Financial Reporting in Hyperinflationary Economies
HK(IFRIC) – INT 8 Scope of HKFRS 2
HK(IFRIC) – INT 9 Reassessment of embedded derivatives
The Group has not applied any new standard or interpretation that is not yet effective for the
current accounting period (see note 32).
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these financial statements are set
out below. These policies have been consistently applied to all years presented, unless otherwise
stated.
(a) Basis of consolidation
The consolidated financial statements include the financial statements of the Company
and its subsidiaries for the year ended 31 July 2007. The results of subsidiaries acquired
or disposed of during the year are consolidated from or to their effective dates of
acquisition or disposal, respectively. All significant intercompany transactions and balances
within the Group are eliminated on consolidation.
(b) Subsidiaries
A subsidiary is an entity whose financial and operating policies the Company controls,
directly or indirectly, so as to obtain benefits from its activities.
The results of subsidiaries are included in the Company’s income statement to the extent
of dividends received and receivable. The Company’s interests in subsidiaries are stated
at cost less any impairment losses.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 32 –
(c) Jointly-controlled entities
A joint venture company is an entity set up by contractual arrangement, whereby the
Group and other parties undertake an economic activity. The joint venture company
operates as a separate entity in which the Group and the other parties have an interest.
The joint venture agreement between the venturers stipulates the capital contributions of
the joint venture parties, the duration of the joint venture entity and the basis on which
the assets are to be realised upon its dissolution. The profits and losses from the joint
venture’s operations and any distributions of surplus assets are shared by the venturers,
either in proportion to their respective capital contributions, or in accordance with the
terms of the joint venture agreement.
A jointly-controlled entity is a joint venture company which is subject to joint control,
resulting in none of the participating parties having unilateral control over the economic
activity of the jointly-controlled entity.
The Group’s share of the post-acquisition results and reserves of jointly-controlled entities
is included in the consolidated income statement and consolidated reserves, respectively.
The Group’s interests in jointly-controlled entities are stated in the consolidated balance
sheet at the Group’s share of net assets under the equity method of accounting, less any
impairment losses.
Equity accounting is discontinued from the date on which the Group ceases to have joint
control over, or have significant influence in, a jointly-controlled entity. When the carrying
amount of the investment in the jointly-controlled entity reaches zero, equity accounting
is discontinued unless the Group has obligations or guaranteed obligations in respect of
the jointly-controlled entity.
In the Company’s balance sheet, the investments in jointly-controlled entities are stated
at cost less provision for impairment losses. The results of jointly-controlled entities are
accounted for by the Company on the basis of dividends received and receivable.
(d) Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation and accumulated
impairment losses.
The cost of an item of plant and equipment comprises its purchase price and any directly
attributable costs of bringing the asset to its working condition and location for its intended
use. Major costs incurred in restoring assets to their normal working conditions are
charged to the income statement.
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 an asset,
the expenditure is capitalised as an additional cost of that asset.
Depreciation is provided to write off the cost of the assets to their estimated residual
value, if any, over their estimated useful lives from the date on which they become fully
operational, using the straight-line method, at the following rates per annum:
Leasehold improvements 33% or over the lease terms,
whichever is shorter
Computer equipment and software 30–50%
Furniture and fixtures 20%
Office equipment 20%
The gain or loss arising from the retirement or disposal of plant and equipment is
determined as the difference between the sales proceeds and the carrying amount of the
assets and is recognised as income or expense in the income statement. Improvements
are capitalised and depreciated over their expected useful lives.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 33 –
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at
each balance sheet date.
(e) Impairment of assets
At each balance sheet date, the Group reviews the carrying amounts of its assets to
determine whether there is any indication that those assets have suffered an impairment
loss. If any such indication exists, the recoverable amount of the asset is estimated in
order to determine the extent of the impairment loss, if any. Where it is not possible to
estimate the recoverable amount of an individual asset, the Group estimates the
recoverable amount of the cash-generating unit to which the asset belongs.
If the recoverable amount of an asset is estimated to be less than its carrying amount, the
carrying amount of the asset is reduced to its recoverable amount. Impairment loss is
recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the asset is
increased to the revised estimate of its recoverable amount, to the extent that the increased
carrying amount does not exceed the carrying amount that would have been determined
(net of amortisation or depreciation) had no impairment loss been recognised for the
asset in prior years. A reversal of an impairment loss is recognised as income immediately.
(f) Trade and other receivables
Trade and other receivables are initially recognised at fair value and thereafter stated at
amortised cost less impairment losses for bad and doubtful debts except where the
receivables are interest-free loans made to related parties without any fixed repayment
terms or the effect of discounting would be immaterial. In such cases, the receivables are
stated at cost less impairment losses for bad and doubtful debts.
(g) Inventories
Inventories are stated at the lower of cost and net realisable value. Cost, which comprises
all costs of purchase and, where applicable, other costs that have been incurred in bringing
the inventories to their present location and condition, is calculated using the first-in,
first-out method. Net realisable value represents the estimated selling price in the ordinary
course of business less the estimated costs necessary to make the sale.
When inventories are sold, the carrying amounts of the inventories are recognised as an
expense in the period in which the related revenue is recognised. The amount of any
write-down of inventories to net realisable value and all losses of inventories are
recognised as an expense in the period the write-down or loss occurs. The amount of any
reversal of any write-down of inventories, arising from an increase in net realisable
value, is recognised as a reduction in the amount of inventories recognised as an expense
in the period in which the reversal occurs.
(h) Trade and other payables
Trade and other payables are initially recognised at fair value and thereafter stated at
amortised cost unless the effect of discounting would be immaterial, in which case they
are stated at cost.
(i) Cash and cash equivalents
Cash and cash equivalents comprise cash and bank balances, demand deposits with banks
and short-term, highly liquid investments that are readily convertible into known amounts
of cash and which are subject to an insignificant risk of changes in value, having been
within three months of maturity at acquisition. Bank overdrafts that are repayable on
demand and form an integral part of the Group’s cash management are also included as
a component of cash and cash equivalents for the purpose of consolidated cash flow
statement.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 34 –
(j) Income tax
Income tax comprises current tax and movements in deferred tax assets and liabilities.
Current tax and movements in deferred tax assets and liabilities are recognised in the
income statement except to the extent that they relate to items recognised directly in
equity, in which case they are recognised in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates
enacted or substantively enacted at the balance sheet date, and any adjustment to tax
payable in respect of previous years.
Deferred tax assets and liabilities arise from deductible and taxable temporary differences
respectively, being the differences between the carrying amounts of assets and liabilities
for financial reporting purposes and their tax bases. Deferred tax assets also arise from
unused tax losses and unused tax credits.
Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax
assets to the extent that it is probable that future taxable profits will be available against
which the asset can be utilised, are recognised.
The amount of deferred tax recognised is measured based on the expected manner of
realisation or settlement of the carrying amount of the assets and liabilities, using tax
rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and
liabilities are not discounted.
The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is
reduced to the extent that it is no longer probable that sufficient taxable profit will be
available to allow the related tax benefit to be utilised. Any such reduction is reversed to
the extent that it becomes probable that sufficient taxable profit will be available.
(k) Provisions and contingent liabilities
Provisions are recognised for liabilities of uncertain timing or amount when the Company
or the Group has a legal or constructive obligation arising as a result of a past event, it is
probable that an outflow of economic benefits will be required to settle the obligation
and a reliable estimate can be made. Where the time value of money is material, provisions
are stated at the present value of the expenditures expected to settle the obligation.
Where it is not probable that an outflow of economic benefits will be required, or the
amount cannot be estimated reliably, the obligation is disclosed as a contingent liability,
unless the probability of outflow of economic benefits is remote. Possible obligations,
whose existence will only be confirmed by the occurrence or non-occurrence of one or
more future events are also disclosed as contingent liabilities unless the probability of
outflow of economic benefits is remote.
(l) 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:
(i) from the sale of computer hardware and software and the provision of related
network infrastructure construction services, when the installation work is
completed and the customer has accepted the goods together with significant
risks and rewards of ownership;
(ii) from the rendering of network infrastructure maintenance and reinforcement
services, on a time proportion basis over the period of the contract or when the
related services are rendered;
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 35 –
(iii) from the rendering of other professional value-added solutions and services and
data processing fee income, when the related services are rendered; and
(iv) interest income, on an accrual basis using the effective interest method.
(m) Operating leases
Leases where substantially all the risks and rewards of ownership of assets remain with
the lessor are accounted for as operating leases. Rentals applicable to such operating
leases are charged to the income statement on a straight-line basis over the lease terms.
(n) Borrowing costs
Borrowing costs are expensed in the income statement in the year in which they are
incurred, except to the extent that they are capitalised as being directly attributable to
the acquisition, construction or production of an asset which necessarily takes a substantial
period of time to get ready for its intended use or sale.
(o) 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.
Pension scheme
The Group operates a defined contribution Mandatory Provident Fund retirement benefits
scheme (the “MPF Scheme”) under the Hong Kong Mandatory Provident Fund Schemes
Ordinance, for all of its employees in Hong Kong. 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. 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.
The employees of the Group’s subsidiary which operates in Mainland China are required
to participate in a central pension scheme operated by the local municipal government
(the “PRC Scheme”). This subsidiary is required to make contributions for its employees
who are registered as permanent residents in Mainland China. The contributions are
charged to the income statement as they become payable in accordance with the rules of
the PRC Scheme.
Long service payments
No provision has been recognised as no employees of the Group have completed the
required number of years of service to the Group in order to be eligible for long service
payments under the Hong Kong Employment Ordinance in the event of the termination
of their employment.
Share option schemes
The Group operates equity-settled share-based compensation scheme (“Scheme”) to
remunerate its employees.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 36 –
For share options granted under the Scheme, the fair value of the employee’s services
rendered in exchange for the grant of the options is recognised as an expense immediately
and credited to the share option reserve under equity. Where the employees are required
to meet vesting conditions before they become entitled to the options, the Group recognises
the fair value of the options granted over the vesting periods. At each balance sheet date,
the Group revises its estimates of the number of options that are expected to become
exercisable. It recognises the impact of the revision of the original estimates, if any, in the
income statement, and a corresponding adjustment to the share option reserve.
Upon 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 exercise price over the nominal value of the shares is recorded by the Company in the
share premium account. The equity amount is recognised in the share option reserve
until the option is exercised when it is transferred to the share premium account. If the
options lapse unexercised, the related share option reserve is transferred directly to
retained earnings.
(p) Translation of foreign currencies
The financial statements are presented in Hong Kong dollars, which is the Company’s
functional and presentation currency. Each entity in the Group determines its own
functional currency and items included in the financial statements of each entity are
measured using that functional currency. Foreign currency transactions are initially
recorded using the functional currency rates ruling at the date of the transactions.
Monetary assets and liabilities denominated in foreign currencies are retranslated at the
functional currency rates of exchange ruling at the balance sheet date. All differences are
taken to profit or loss. Non-monetary items that are measured in terms of historical cost
in a foreign currency are translated using the exchange rates at the dates of the initial
transactions. Non-monetary items measured at fair value in a foreign currency are
translated using the exchange rates at the date when the fair value was determined.
The functional currencies of certain overseas subsidiaries are currencies other than the
Hong Kong dollar. As at the balance sheet date, the assets and liabilities of these entities
are translated into the presentation currency of the Company at exchange rates ruling at
the balance sheet date and, their income statements are translated into Hong Kong dollars
at the weighted average exchange rate for the year. The resulting exchange differences
are included in a separate component of equity, the exchange reserve. On disposal of a
foreign entity, the deferred cumulative amount recognised in equity relating to that
particular foreign operation is recognised in the income statement.
For the purpose of the consolidated cash flow statement, the cash flows of overseas
subsidiaries are translated into Hong Kong dollars at the exchange rates ruling at the
dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which
arise throughout the year are translated into Hong Kong dollars at the weighted average
exchange rates for the year.
(q) Segment reporting
A segment is a distinguishable component of the Group that is engaged either in providing
products or services (business segment), or in providing products or services within a
particular economic environment (geographical segment), which is subject to risks and
rewards that are different from those of other segments.
In accordance with the Group’s financial reporting, the Group has chosen business segment
information as the primary reporting format and geographical segment information as
the secondary reporting format for the purposes of these financial statements.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 37 –
Segment revenue, expenses, results, assets and liabilities include items directly attributable
to a segment as well as those that can be allocated on a reasonable basis to that segment.
For example, segment assets may include inventories, trade and other receivables and
plant and equipment. Segment revenue, expenses, assets, and liabilities are determined
before intra-group balances and intra-group transactions are eliminated as part of the
consolidation process, except to the extent that such intragroup balances and transactions
are between group enterprises within a single segment. Inter-segment pricing is based on
similar terms as those available to other external parties.
Segment capital expenditure is the total cost incurred during the year to acquire segment
assets (both tangible and intangible) that are expected to be used for more than one year.
Unallocated items mainly comprise financial and corporate assets, amount due to a
director, corporate and financial expenses.
(r) Related parties
For the purposes of these financial statements, a party is considered to be related to the
Group if:
(i) the party has the ability, directly or indirectly, through one or more intermediaries,
to control the Group or exercise significant influence over the Group in making
financial and operating policy decisions, or has joint control over the Group;
(ii) the Group and the party are subject to common control;
(iii) the party is an associate of the Group or a joint venture in which the Group is a
venturer;
(iv) the party is a member of key management personnel of the Group or the Group’s
parent, or a close family member of such an individual, or is an entity under the
control, joint control or significant influence of such individuals;
(v) the party is a close family member of a party referred to in (i) or is an entity
under the control, joint control or significant influence of such individuals; or
(vi) the party is a post-employment benefit plan which is for the benefit of employees
of the Group or of any entity that is a related party of the Group.
Close family members of an individual are those family members who may be expected
to influence, or be influenced by, that individual in their dealings with the entity.
(s) Share capital
Ordinary shares are classified as equity. Share capital is determined using the nominal
value of shares that have been issued. Any transaction costs associated with the issuing
of shares are deducted from share premium account (net of any related income tax benefit)
to the extent they are incremental costs directly attributable to the equity transaction.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 38 –
5. 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 in preparing accounting
estimates. The resulting accounting estimates may not equal to the actual results. The key estimates
and assumptions that may have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities are discussed below.
(a) Impairment on investment in a jointly-controlled entity
The Group’s management determines impairment on investment in the jointly-controlled
entity on an annual basis. In the prior year, full impairment on investment in the jointly-
controlled entity in Hangzhou has been made. Details of the basis of the impairment are
disclosed in the note 17 to these financial statements. The management will reassess the
impairment of the provision for impairment at each balance sheet date.
(b) Depreciation
The Group’s net book value of plant and equipment as at 31 July 2007 was HK$524,363.
The Group depreciates its plant and equipment on a straight line basis over the estimated
useful life as set out in note 4(d), commencing from the date the plant and equipment is
placed into productive use. The estimated useful life and dates that the Group places the
plant and equipment into productive use reflects the Directors’ estimate of the periods
that the Group intend to derive future economic benefits from the use of the Group’s
plant and equipment.
(c) Valuation of share options granted
The fair value of share options granted was calculated using the Black-Scholes valuation
model which requires the management’s estimates and assumptions on significant
calculation inputs, including the estimated life of share options granted, the volatility of
share price and expected dividend yield. Changes in the subjective input assumptions
could materially affect the fair value estimate.
6. FINANCIAL RISK MANAGEMENT
Exposure to currency, credit, interest rate, price and liquidity risks arises in the normal course of
the Group’s businesses. These risks are mitigated by the Group’s financial management policies
and practices described below.
(a) Foreign currency risk
The Group’s financial assets and financial liabilities are substantially denominated in
Hong Kong dollars. Accordingly, the management considers the foreign exchange rate
risk to the Group is not significant.
(b) Credit risk
The Group has limited exposure to credit risk due to tight control of working capital
management on the credit policies.
(c) Fair value and cash flow interest rate risks
The Group’s exposure to fair value and cash flow interest risks is minimal as the Group
does not have any material long term financial assets or liabilities.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 39 –
(d) Price risk
The Group was not exposed to equity securities price risk during the year, since it held
no investments which were classified as available-for-sale financial assets or as financial
assets at fair value through the income statement. In addition, the Group was not exposed
to commodity price risk.
(e) Liquidity risk
Internally generated cash flow and funds raising from placing of shares during the year
are the general source of funds to finance the operation of the Group. The Group regularly
reviews its major funding positions to ensure it has adequate financial resources in meeting
its financial obligations.
7. SEGMENT INFORMATION
Segment information is presented by way of the Group’s primary segment reporting basis, by
business segment.
The Group’s operating businesses are structured and managed separately, according to the nature
of their operations and the products and services they provide. Each of the Group’s business
segments represents a strategic business unit that offers products and services which are subject
to risks and returns that are different from those of the other business segments. Summary
details of the business segments are as follows:
(i) the network infrastructure construction solutions segment comprises the provision of
hardware and software for network infrastructure solutions and the design and installation
of network infrastructure systems;
(ii) the network infrastructure maintenance and reinforcement services segment comprises
the provision of support and maintenance services to customers’ existing computer
networks and systems; and
(iii) the other professional value-added solutions and services segment offers server co-location
and management services, web-hosting and e-mail hosting services, web-based software
applications and the provision of user training services.
Intersegment sales and transfers are transacted with reference to the selling prices used for sales
made to third parties at the then prevailing market prices.
No analysis for geographical segment is presented as over 90% of the Group’s revenue, assets
and liabilities were derived from services rendered in or located in Hong Kong during each of
the years ended 31 July 2006 and 2007.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 40 –
An analysis of the Group’s revenue and profit/(loss) and certain assets, liabilities and expenditure
information for the Group’s business segments is as follows:
Network Other
Network infrastructure professional
infrastructure maintenance and value-added
construction reinforcement solutions and
solutions services services
segment segment segment Consolidated
HK$ HK$ HK$ HK$
2007
Segment revenue:
Sales to external customers 919,983 1,602,410 851,500 3,373,893
Segment results 50,331 975,527 (266,279) 759,579
Unallocated income 5,308,082
Unallocated expenses (52,041,220)
Loss from operating activities (45,973,559)
Finance costs –
Loss before taxation (45,973,559)
Taxation –
Net loss attributable to equity
shareholders of the Company (45,973,559)
Segment assets 38,875 251,862 341,521 632,258
Unallocated assets 489,751,145
Total assets 490,383,403
Segment liabilities (56,628) (96,485) (282,504) (435,617)
Unallocated liabilities (6,801,686)
Total liabilities (7,237,303)
Other segment information:
Depreciation – – – –
Unallocated depreciation 514,406
514,406
Write-down of inventories 13,664 – – 13,664
Capital expenditure – – – –
Unallocated capital expenditure 373,304
373,304
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 41 –
Network Other
Network infrastructure professional
infrastructure maintenance and value-added
construction reinforcement solutions and
solutions services services
segment segment segment Consolidated
HK$ HK$ HK$ HK$
2006
Segment revenue:
Sales to external customers 3,869,256 542,143 2,576,826 6,988,225
Segment results (564,261) 98,137 (1,028,316) (1,494,440)
Unallocated income 73,559
Unallocated expenses (6,365,248)
Loss from operating activities (7,786,129)
Finance costs –
Loss before taxation (7,786,129)
Taxation –
Net loss attributable to equity
shareholders of the Company (7,786,129)
Segment assets 430,846 227,575 889,125 1,547,546
Unallocated assets 1,500,491
Total assets 3,048,037
Segment liabilities 1,548,785 1,054,923 841,062 3,444,770
Unallocated liabilities 3,767,595
Total liabilities 7,212,365
Other segment information:
Depreciation – – 110,000 110,000
Unallocated depreciation 421,118
531,118
Write-down of inventories 13,803 – – 13,803
Capital expenditure – – – –
Unallocated capital expenditure 52,733
52,733
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 42 –
8. REVENUE AND OTHER INCOME
Revenue represents the net invoiced value of goods sold, after allowances for returns and trade
discounts, and the value of services rendered.
An analysis of the Group’s revenue and other income is as follows:
2007 2006
HK$ HK$
Revenue
Network infrastructure construction solutions – Sale of
computer hardware and software and the provision of
related services 919,983 3,869,256
Rendering of network infrastructure maintenance and
reinforcement services 1,602,410 542,143
Other professional value-added solutions and services 851,500 2,576,826
3,373,893 6,988,225
---------------- ----------------
Other income
Bank interest income 210,907 6,101
Consultancy fee 80,000 –
Gain on disposal of plant and equipment 262 –
Waiver of amount due to a director 4,987,329 –
Sundry income 843,177 17,294
Exchange gain, net 29,584 50,164
6,151,259 73,559
---------------- ----------------
Total 9,525,152 7,061,784
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 43 –
9. LOSS BEFORE TAXATION
The Group’s loss before taxation is arrived at after charging/(crediting):
2007 2006
HK$ HK$
Cost of inventories sold 716,365 3,452,062
Cost of services provided 2,148,458 3,148,007
Depreciation 514,406 531,118
Write-down of inventories 13,664 13,803
Write-off of plant and equipment 21,450 14,211
Minimum lease payments under operating leases
– Leasehold property 683,823 776,062
– Dataline – 2,855
Incorporation expenses 8,030 –
Auditors’ remuneration
– Audit services 250,000 220,000
– Other services 10,000 –
260,000 220,000
Staff costs, including directors’ remuneration (note 10)
– Wages and salaries 7,660,787 5,132,124
– Pension scheme contributions 200,455 173,248
– Share-based payment expenses (note 26) 37,228,098 –
45,089,340 5,305,372
(Gain)/loss on disposal of plant and equipment (262) 10,370
Waiver of amount due to a director (4,987,329) –
Exchange gain, net (29,584) (50,164)
The cost of inventories sold includes HK$13,664 (2006: HK$13,803) relating to the write-down
of inventories, which is also included in the total amount disclosed above.
The cost of services provided includes HK$1,222,752 (2006: HK$437,710) relating to staff costs,
which are also included in the total amounts of staff costs disclosed separately above.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 44 –
10. DIRECTORS’ REMUNERATION
Directors’ remuneration for the year disclosed pursuant to the GEM Listing Rules and Section
161 of the Hong Kong Companies Ordinance, is as follows:
Salaries,
allowance Pension
Directors’ and benefits scheme Share-based
fee in kind contributions payments Total
2007 HK$ HK$ HK$ HK$ HK$
Executive directors
Chan Wing Him, Kenny (note i) – 2,601,000 7,000 3,609,607 6,217,607
Chan Man Ching (note i) – 745,000 9,000 3,609,607 4,363,607
Chan Chi Hung (note ii) – 225,707 5,000 – 230,707
Yuen Kin Tong (note iii) 3,870 – – – 3,870
3,870 3,571,707 21,000 7,219,214 10,815,791
------------- ------------- ------------- ------------- -------------
Independent non-executive
Directors
Poon Lai Yin, Michael (note iv) 36,935 – – – 36,935
Lo Chi Kit (note iv) 36,935 – – – 36,935
Tam Hang Chuen (note iv) 36,935 – – – 36,935
Lau Siu Ki, Kevin (note v) 69,678 – – – 69,678
Wang Yat Yee, Mark (note v) 46,452 – – – 46,452
Zhang Guo Xuan (note v) 10,000 – – – 10,000
236,935 – – – 236,935
------------- ------------- ------------- ------------- -------------
Total 240,805 3,571,707 21,000 7,219,214 11,052,726
Salaries,
allowance Pension
Directors’ and benefits scheme
fee in kind contributions Total
2006 HK$ HK$ HK$ HK$
Executive directors
Lam Chi Shing (note vi) – 250,000 5,000 255,000
Chan Chi Hung – 463,500 12,000 475,500
Yuen Kin Tong (note iii) 3,844 – – 3,844
3,844 713,500 17,000 734,344
-------------- -------------- -------------- --------------
Non-executive director
Yuen Kin Tong (note iii) 6,156 – – 6,156
Independent non-executive directors
Lau Siu Ki, Kevin 180,000 – – 180,000
Wong Man Chung, Francis (note vii) 15,000 – – 15,000
Wang Yat Yee, Mark 120,000 – – 120,000
Zhang Guo Xuan 10,000 – – 10,000
325,000 – – 325,000
-------------- -------------- -------------- --------------
Total 335,000 713,500 17,000 1,065,500
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 45 –
Notes:
(i) Mr. Chan Wing Him, Kenny and Mr. Chan Man Ching were appointed on 29 November
2006.
(ii) Emoluments of Mr. Chan Chi Hung for the year ended 31 July 2007 represented his
remuneration received in the capacity of Executive Director before his resignation on 20
December 2006.
(iii) The position of Mr. Yuen Kin Tong in the Company was changed from non-executive
director to executive director on 24 April 2006. Emolument of Mr. Yuen Kin Tong for the
year ended 31 July 2007 represented his remuneration received in the capacity of executive
director before his resignation on 20 December 2006.
(iv) Mr. Poon Lai Yin, Michael, Mr. Lo Chi Kit and Mr. Tam Hang Chuen were appointed on
20 December 2006.
(v) Emoluments of Mr. Lau Siu Ki, Kevin, Mr. Wang Yat Yee, Mark and Mr. Zhang Guo Xuan
for the year ended 31 July 2007 represented their remuneration received in the capacity
of independent non-executive director before their resignation on 20 December 2006.
(vi) Mr. Lam Chi Shing waived emoluments of HK$232,258 as of 20 December 2006 and he
resigned on 20 December 2006. During the year ended 31 July 2006, Mr. Lam Chi Shing
waived emoluments of HK$350,000.
(vii) Emoluments of Mr. Wong Man Chung, Francis for the year ended 31 July 2006 represented
his remuneration received in the capacity of Independent Non-executive Director before
his resignation on 31 August 2005.
(viii) There were 17,847,200 share options granted to the Directors during the year ended 31
July 2007. Details of the movements of share options are set out in note 26.
(ix) No emoluments were paid by the Group to the directors as an inducement to join, or
upon joining the Group during the years ended 31 July 2006 and 2007.
11. FIVE HIGHEST PAID EMPLOYEES
The five highest paid employees during the year included two (2006: two) Directors, whose
remuneration are disclosed in note 10 to the financial statements. Details of the remuneration of
the remaining three (2006: three) non-director, highest paid employees are as follows:
Group
2007 2006
HK$ HK$
Salaries, allowances and benefits in kind 1,162,669 1,197,907
Pension scheme contributions 23,492 34,813
Share-based payments 3,755,020 –
4,941,181 1,232,720
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 46 –
The number of non-director, highest paid employees whose remuneration fell within the following
bands is as follows:
Number of employees
2007 2006
Nil to HK$1,000,000 2 3
HK$4,000,001 to HK$4,500,000 1 –
33
During the year, no emoluments were paid by the Group to any of the five highest paid
individuals as an inducement to join or upon joining the Group.
12. INCOME TAX
Hong Kong profits tax has not been provided (2006: Nil) as the Group did not generate any
assessable profits in Hong Kong during the year. No provision for corporate income tax for a
subsidiary and the jointly controlled entity established and operating in Mainland China (2006:
Nil) has been made as no assessable profits arose from their operations during the year. The
statutory tax rate for Hong Kong profits tax is 17.5% (2006: 17.5%). The statutory tax rate of
corporate income tax in Mainland China is 33% (2006: 33%).
A reconciliation of the tax credit applicable to loss before taxation using the statutory rates for
the countries in which the Company and its subsidiaries and jointly-controlled entity are domiciled
to the tax credit at the effective tax rates, and a reconciliation of the applicable rates to the
effective tax rates, are as follows:
Group
2007 2006
HK$ % HK$ %
Loss before taxation (45,973,559) (7,786,129)
Tax credit at statutory tax rate (8,045,372) (17.5) (1,362,572) (17.5)
Tax effect of:
– higher tax rate for specific
provinces and local authority (44,814) (0.1) (188,135) (2.4)
– income not subject to tax (824,409) (1.8) (1,068) (0.1)
– expenses not deductible for tax 7,312,427 15.9 3,551 0.1
– temporary differences
not recognised 57,827 0.1 69,252 0.9
– tax losses not recognised
as deferred tax assets 1,544,341 3.4 1,478,972 19.0
Tax credit – –
The Group has unrecognised deferred tax assets from tax losses of HK$11,572,255 (2006:
HK$10,027,914) that are available 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. Included in
unrecognised tax losses are losses arising from the PRC subsidiary of HK$1,819,470 (2006:
HK$1,724,059) that will expire in five years from the respective year of loss. Other losses could
be carried forward indefinitely.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 47 –
13. NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO EQUITY SHAREHOLDERS
OF THE COMPANY
The net loss from ordinary activities attributable to equity shareholders of the Company for the
year dealt with in the financial statements of the Company was HK$50,427,454 (2006: HK$500,594)
(note 27).
14. LOSS PER SHARE
The calculation of basic loss per share is based on the net loss attributable to equity shareholders
of the Company for the year of HK$45,973,559 (2006: HK$7,786,129) and the weighted average of
544,861,454 (2006: 396,180,000) ordinary shares in issue during the year, as adjusted to reflect the
issue of shares, share subdivision and exercise of share options during the year.
2007 2006
Weighted average Weighted average
number of shares number of shares
Issued ordinary shares at beginning of year 396,180,000 396,180,000
Effect of issue of new shares 27,011,317 –
Effect of share subdivision 120,873,699 –
Effect of exercise of share options 796,438 –
Weighted average number of ordinary shares 544,861,454 396,180,000
Diluted loss per share for each of the years ended 31 July 2006 and 2007 have not been presented,
as the share options outstanding during the years had an anti-dilutive effect on the basic loss per
share for the respective years.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 48 –
15. PLANT AND EQUIPMENT
Computer
Leasehold equipment Furniture Office
improvements and software and fixtures equipment Total
HK$ HK$ HK$ HK$ HK$
Group
Cost:
As at 1 August 2005 580,222 1,505,884 242,530 251,415 2,580,051
Exchange adjustment 1,065 2,736 – 494 4,295
Additions – 51,913 820 – 52,733
Disposal (49,084) (55,944) (2,580) – (107,608)
Write-off – (117,466) (110,655) (1,700) (229,821)
As at 31 July 2006 and
1 August 2006 532,203 1,387,123 130,115 250,209 2,299,650
Exchange adjustment – 5,155 – 960 6,115
Additions 207,390 42,373 78,660 44,881 373,304
Disposal – (70,414) – (3,027) (73,441)
Write-off – (76,624) (42,956) – (119,580)
As at 31 July 2007 739,593 1,287,613 165,819 293,023 2,486,048
Accumulated depreciation:
As at 1 August 2005 22,875 1,038,553 138,193 182,426 1,382,047
Exchange adjustment 311 1,400 – 428 2,139
Charge for the year 201,943 266,567 30,472 32,136 531,118
Eliminated on disposal (38,858) (45,168) (1,333) – (85,359)
Eliminated on write-off – (117,057) (97,745) (808) (215,610)
As at 31 July 2006 and
1 August 2006 186,271 1,144,295 69,587 214,182 1,614,335
Exchange adjustment – 3,555 – 960 4,515
Charge for the year 281,096 187,170 23,784 22,356 514,406
Eliminated on disposal – (70,414) – (3,027) (73,441)
Eliminated on write-off – (76,484) (21,646) – (98,130)
As at 31 July 2007 467,367 1,188,122 71,725 234,471 1,961,685
Carrying amount:
As at 31 July 2007 272,226 99,491 94,094 58,552 524,363
As at 31 July 2006 345,932 242,828 60,528 36,027 685,315
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 49 –
Computer
equipment Furniture Office
and software and fixtures equipment Total
HK$ HK$ HK$ HK$
Company
Cost:
As at 1 August 2005 45,255 56,858 65,090 167,203
Additions 160 – – 160
Disposal – (2,580) – (2,580)
As at 31 July 2006 and
1 August 2006 45,415 54,278 65,090 164,783
Additions 29,595 2,000 – 31,595
Write-off (2,433) (4,823) – (7,256)
As at 31 July 2007 72,577 51,455 65,090 189,122
Accumulated depreciation:
As at 1 August 2005 22,696 23,566 27,921 74,183
Charge for the year 13,585 11,070 13,018 37,673
Eliminated on disposal – (1,333) – (1,333)
As at 31 July 2006 and
1 August 2006 36,281 33,303 40,939 110,523
Charge for the year 11,858 10,614 13,017 35,489
Eliminated on write-off (2,433) (3,342) – (5,775)
As at 31 July 2007 45,706 40,575 53,956 140,237
Carrying amount:
As at 31 July 2007 26,871 10,880 11,134 48,885
As at 31 July 2006 9,134 20,975 24,151 54,260
16. INTERESTS IN SUBSIDIARIES
Company
2007 2006
HK$ HK$
Unlisted shares, at cost 969,031 891,031
Due from subsidiaries 26,290,345 21,316,195
Due to a subsidiary (78,000) –
27,181,376 22,207,226
Less: Impairment loss (27,259,376) (22,207,226)
(78,000) –
The amounts due from/(to) subsidiaries are unsecured, interest-free and have no fixed terms of
repayment.
The carrying amounts of amounts due from/(to) subsidiaries approximate to their fair values.
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 50 –
Particulars of the subsidiaries are as follows:
Place of
incorporation/ Nominal value of Percentage of
establishment issued shares/ equity attributable
Name and operation paid-up capital to the Company Principal activity
Direct Indirect
Sys Solutions (BVI) British Virgin Islands/ US$10,000 100 – Investment holding
Limited
#
Hong Kong ordinary
Rich Concept Technology British Virgin Islands/ US$10,000 100 – Investment holding
Limited
#
Hong Kong ordinary
Sys Solutions (China) Hong Kong HK$1,000,000 – 100 Inactive
Limited ordinary
Sys Solutions Limited Hong Kong HK$1,000,000 – 100 Provision of network
ordinary infrastructure solutions
and services
Sys Solutions Technology Hong Kong HK$10,000 – 100 Provision of network
Consulting Limited ordinary infrastructure solutions
and services
Sys Solutions GlobalSoft Hong Kong HK$10,000 – 100 Provision of network
Limited ordinary infrastructure solutions
and services
Sys Solutions System Hong Kong HK$10,000 – 100 Investment holding
Management Limited ordinary
(“Sys Solutions System
Management”)
廣州軟迅網絡科技People’s Republic HK$2,000,400 – 100 Provision of technical
有限公司
#
/ of China services and research and
(Sys Solutions development of
(Guangzhou) Limited) web-based software
China Enviro Energy Hong Kong HK$1 – 100 Inactive
Holdings Limited ordinary
(formerly known as
Enviro Energy
International Holdings
Limited)
Sys Solutions (Guangzhou) Limited is a wholly-owned foreign enterprise established by Sys
Solutions Limited in Mainland China for a period of 11 years commencing the date of issuance of
its business licence of 2 July 2001.
#
Not audited by Lak & Associates C.P.A. Limited
APPENDIX I FINANCIAL INFORMATION OF THE GROUP
– 51 –
17. INVESTMENT IN A JOINTLY-CONTROLLED ENTITY
Group
2007 2006
HK$ HK$
Share of net assets, unlisted 1,457,726 1,457,726
Less: Impairment loss (1,457,726) (1,457,726)
––
Particulars of the jointly-controlled entity are as follows:
Place of
incorporation/ Percentage of
Business registration and ownership voting profit
Name structure operation interest power sharing Principal activity
杭州軟均信息系統Corporate People’s Republic 50 60 50 Provision of information
工程監理有限公司of China technology consulting
(“Hangzhou JV”) services
Hangzhou JV is a sino-foreign equity joint enterprise established by Sys Solutions System
Management Limited (“Sys Solutions System Management”) and a joint venturer in Mainland
China for a period of 20 years commencing from the date of issuance of its business licence of
10 October 2003. Hangzhou JV is accounted for as a jointly-controlled entity by virtue of the fact
that neither the Group nor the joint venturer can exercise unilateral control over its economic
activity.
The jointly-controlled entity is not audited by Lak & Associates C.P.A. Limited.
In view of the recurring operating losses of the jointly-controlled entity and the unfavourable
market conditions, an impairment loss of HK$1,457,726 was charged to the consolidated income
statement in the prior year.
As at 31 July 2007, Hangzhou JV had a number of unsettled obligations due to problem in
recovering of debts due from third parties with an approximate total amount of HK$3,313,000
(2006: HK$3,119,000). Due to the financial difficulty of the jointly-controlled entity, the directors
are uncertain whether it is able to repay the debts at the balance sheet date. In case of failure of
repayment, Hangzhou JV may incur additional liabilities such as penalties for late payment, or
be exposed to possible lawsuits. Since there is no clause in the joint venture agreement signed
with the joint venturer in Mainland China stating that Sys Solutions System Management has a
commitment to provide additional financial support to Hangzhou JV other than the contributed
amount stated in