IRC Limited — Audit Report / Information 2004

Nov 12, 2004

Listed Company Information

Listed Company Information
LAI SUN DEV<00488> - Results Announcement Lai Sun Development Company Limited announced on 12/11/2004: (stock code: 00488 ) Year end date: 31/07/2004 Currency: HKD Auditors' Report: Qualified (Audited ) (Audited ) Last Current Corresponding Period Period from 01/08/2003 from 01/08/2002 to 31/07/2004 to 31/07/2003 Note ($ ) ($ ) Turnover : 2,109,513,000 906,590,000 Profit/(Loss) from Operations : 262,021,000 331,449,000 Finance cost : (351,362,000) (473,255,000) Share of Profit/(Loss) of Associates : 6,596,000 (5,745,000) Share of Profit/(Loss) of Jointly Controlled Entities : N/A N/A Profit/(Loss) after Tax & MI : (39,313,000) (476,566,000) % Change over Last Period : N/A % EPS/(LPS)-Basic (in dollars) 3 : (0.01) (0.13) -Diluted (in dollars) : N/A N/A Extraordinary (ETD) Gain/(Loss) : N/A N/A Profit/(Loss) after ETD Items : (39,313,000) (476,566,000) Final Dividend : NIL NIL per Share (Specify if with other : N/A N/A options) B/C Dates for Final Dividend : N/A Payable Date : N/A B/C Dates for (-) General Meeting : N/A Other Distribution for : N/A Current Period B/C Dates for Other Distribution : N/A Remarks: 1. BASIS OF PRESENTATION The Group sustained net loss from ordinary activities attributable to shareholders of HK$39 million (2003: HK$477 million (as restated)). At the balance sheet date, the Group had consolidated net current liabilities of HK$5,664 million (2003: HK$7,654 million) and a consolidated deficiency in assets of HK$116 million (2003: HK$418 million (as restated)). The improvement in the Group's operating results during the year was mainly attributable to the reversal of impairment losses made in prior years against fixed assets, long term unlisted investments and interests in associates, and the write-back of certain profits tax provisions made in prior years. The financial position of the Group improved during the year due to the disposal of certain investment properties and subsidiaries which contributed additional funds to the Group that were partially used for the reduction of its indebtedness. At the balance sheet date, the Group had outstanding borrowings of approximately HK$5,965 million, comprising (i) secured bank and other borrowings of approximately HK$2,292 million; (ii) an accrued loan repayment premium of approximately HK$32 million under a loan facility; (iii) an outstanding amount of approximately HK$881 million payable under the exchangeable bonds (principal amount of HK$622 million and accrued bond redemption premium of HK$259 million) (the "Exchangeable Bonds"); (iv) an outstandinzg amount of approximately HK$1,260 million payable under the convertible bonds (principal amount of HK$907 million and accrued bond redemption premium of HK$353 million) (the "Convertible Bonds"); and (v) an amount payable to Golden Pool Enterprise Limited ("GPEL"), a wholly-subsidiary of eSun Holdings Limited ("eSun"), of approximately HK$1,500 million (the "Debt"). As previously reported in the financial statements of prior years, the Exchangeable Bonds and the Convertible Bonds (collectively defined as the "Bonds") were originally due for repayment on 31st December, 2002. During formal meetings with holders of the Bonds (collectively the "Bondholders") in December 2002, the Bondholders passed resolutions to defer the repayment date of the Bonds to 31st March, 2003. At 31st March, 2003, the Group was unable to repay the outstanding Bonds and was not able to reach any other settlement agreement or restructuring plan with the Bondholders. Consequently, the Group has been in default on repayment of the Bonds since 31st March 2003 and remained so as at 31st July, 2004. At 31st July 2004, the Group was also in default on repayment of the Debt to GPEL, which was originally due for repayment on 31st December 2002. Since 31st March, 2003, the Group had ongoing discussions with all of its financial creditors (including the Bondholders and GPEL) with a view to formulating a consensual debt restructuring proposal and with an objective of refinancing the Group's indebtedness in order to put the Group in a better financial position. Bonds Settlement and eSun Settlements Agreement During the year, the Company reached an agreement, in principle, with the informal committee of the Bondholders (the "Informal Committee") concerning the proposed settlement of the Bonds owed by the Group to the Bondholders (the "Bonds Settlement"). The Bonds Settlement included the settlement of the outstanding principal amount, accrued outstanding interest, redemption premium of the Bonds that amounted to approximately HK$2,279 million as at 31st July, 2004 and an agreed settlement premium of approximately US$33 million (equivalent to approximately HK$257 million) payable to the Bondholders upon the completion of the Bonds Settlement as determined after arm's length negotiation between the Informal Committee and the Company. Principal proposed terms of the Bonds Settlement are summarised as follows: The total amount due to the Bondholders is to be settled by: (i) cash repayments of approximately US$38 million (equivalent to approximately HK$300 million); (ii) the residual principal indebtedness in the amount of HK$266 million (the "Residual Indebtedness") and a further principal amount of approximately HK$70 million (the "Contingent Indebtedness") which remain due to the Bondholders, would be settled on or before 31st December, 2005. The Residual Indebtedness and the Contingent Indebtedness are non interest-bearing and are to be secured by a package of securities (the "Bonds Security") as further explained below; and (iii) the issuance of approximately 3,800 million settlement shares of the Company at a price of HK$0.50 each (the "Bond Settlement Shares"). It is proposed that Mr. Peter Lam, the Chairman, an executive director and a shareholder of the Company, will grant the Bondholders a non-assignable right to put to him the Bond Settlement Shares in two tranches (the "Put Options"): (i) 1,000,600,000 Bond Settlement Shares (the "First Tranche Shares") at HK$0.07 per share, exercisable during a period commencing from two months after the completion (the "Completion") of the Bonds Settlement and the eSun Settlement Agreement (as defined below) and ending by end of in the third month after the Completion; and (ii) 2,799,440,000 Bond Settlement Shares (the "Second Tranche Shares") at HK$0.03 per share, exercisable during a period commencing on 1st November 2005 and ending on 30th November, 2005. To secure the Residual Indebtedness and Contingent Indebtedness due to the Bondholders, the Company, subject to obtaining the necessary consents, permits, approvals authorisations and waviers, will afford to the Bondholders the Bonds Security as follows: (i) a first charges over the Group's 10% equity interest in Avondale Properties Limited (the "Waterfront Security Interest"); (ii) a first charge over the Group's 26.01% equity interest in Chains Caravelle Hotel Joint Venture Co. Ltd. (the "Caravelle Security Interest"); (iii) a first charge over the Group's 62.625% equity interest in Indochina Beach Hotel Joint Venture (the "Danang Security Interest"); (iv) a limited recourse right to share in the Ritz-Carlton Security (as defined and detailed below) on a pari passu basis with GPEL; and (v) charges over the Company's 42.54% indirect shareholding interest in eSun and its subsidiaries (the "eSun Group"). The Waterfront Security Interest, the Caravelle Security Interest and the Danang Security Interest are collectively known as the Three Planned Sale Interests under the Bonds Settlement, further details of which are included in pages 20 to 21 of the Company's circular dated 15 September, 2004 (the "Circular"). On 28th June, 2004, the Company also entered into a settlement agreement with eSun (the "eSun Settlement Agreement") in connection with the proposed settlement of the Debt. The eSun Settlement Agreement included the settlement of the principal amount of the Debt of approximately HK$1,500 million and an agreed settlement premium of approximately HK$1,345 million payable upon the completion of the eSun Settlement Agreement. The principal terms of the eSun Settlement Agreement are summarised as follows: The total amount due to eSun is to be settled by: (i) cash repayment of HK$20 million; (ii) a 5-year secured interest-bearing term loan in the principal amount of HK$225 million owed by Furama Hotel Enterprises Limited ("FHEL") to GPEL (the "eSun Loan"). The eSun Loan will bear interest at a rate of 4.5% per annum, payable semi-annually, with the principal amount to be repaid in five years after the completion of the eSun Settlement Agreement, and is secured by the Group's interests in The Ritz Carlton, Hong Kong (the "Ritz-Carlton Security"); and (iii) the issuance of 5,200 million settlement shares of the Company at a price of HK$0.50 each (the "eSun Settlement Shares") upon which the eSun Group will hold 40.8% interest in the Company. Upon completion of the cash repayments under the Bonds Settlement and the eSun Settlement Agreement, the existing parties to the current second charge over the Ritz-Carlton Security in favour of GPEL and the Bondholders shall amend the existing second charge to adjust their respective security interests existing as at the relevant date thereof to take account of payment by the Company of HK$20 million to GPEL and ofapproximately US$38 million to the Bondholders. In relation to the eSun Settlement Shares, eSun or GPEL has covenanted and undertaken to the Company not to dispose of them until the earlier of the purchase by Mr. Peter Lam of such Second Tranche Shares as are put to him or 31st January 2006. Subject to the Completion taking place, the accrued overdue interest on the Debt owed to GPEL will be waived. At 31st July, 2004, the accrued overdue interest amounted to approximately HK$119 million. Further details of the principal terms of the Bonds Settlement and the eSun Settlement Agreement are set out in the Circular. On 6th October, 2004, the Bondholders held a meeting in accordance with the terms of the Bonds and passed the necessary resolutions to duly approve the terms agreed between the Informal Committee and the Company. Pursuant to the resolutions, the conditions precedent must be fulfilled or otherwise waived on or before 31st January, 2005. Pursuant to a resolution passed at a special general meeting held by eSun on 13th October, 2004, the independent shareholders of eSun approved the eSun Settlement Agreement. On the same date, pursuant to a resolution passed at the extraordinary general meeting held by the Company, the Bonds Settlement and the eSun Settlement Agreement (collectively, the "Settlements") were duly approved by independent shareholders of the Company. On 18th October, 2004, upon fulfillment of certain specified conditions, cash repayments of HK$20 million and approximately US$38 million were made to eSun and the Bondholders, respectively and the amended second charge to adjust the respective security interests in favour of GPEL and the Bondholders as at that date was duly executed as agreed. The completion of the Settlements is subject to certain other conditions, as detailed in the Circular, being fulfilled, which include, among other things: (i) The Company obtaining all relevant consents, permits, approvals, authorisations and waivers necessary for the purposes of putting in place the Three Planned Sale Interests; (ii) The Company and eSun obtaining any or all the consents, permits, approvals, authorisations and waivers necessary or appropriate for the entering into and consummation of the transactions contemplated under the Settlementss; (iii) The Stock Exchange of Hong Kong Limited granting the approval of the listing of, and permission to deal in, the eSun Settlement Shares and the Bond Settlement Shares; and (iv) The simultaneous completion of the Bonds Settlement and the eSun Settlement Agreement. Under the eSun Settlement Agreement, if each of the conditions was not fulfilled or waived by the respective party, by 1st November, 2004 (the "Longstop Date") or such other date as the parties shall agree from time to time in writing, the Settlements will terminate. On 29th October, 2004, the Longstop Date was agreed to be extended to 31st December 2004. The Company is currently working closely with its legal advisers to finalise the formal documentation applicable for the Bonds Settlement. In addition, the Company, with the assistance of its legal advisers, continues to work with the relevant parties to obtain the necessary consents, permits, approvals, authorisations and waivers with a view to complete the Settlements in the near future. Bank and other borrowings As a result of the cross-default triggered by the defaults in the repayment of the Bonds and the eSun Debt, the Group was in technical default of bank and other borrowings and accordingly such bank and other borrowings have been classified as current liabilities in the financial statements. These financial creditors have the right to serve notice to the Group to declare the bank and other borrowings to be immediately due and repayable. To date, no such notices have been served. As at 31st July, 2004, all outstanding bank and other borrowings were stated as current liabilities. All principal banks had shown their intention to provide continued financial support to the Group by continuously granting short-term extension to the loan repayment dates as necessary. The Group is having ongoing discussions with these financial creditors with an objective to refinance the Group's bank and other borrowings for a longer term (the "Long-term Financing"). If the Settlements are implemented in accordance with the terms described above, the consolidation profit and loss account of the Group will be affected by inter alia, the recognition of the settlement premium provision, the consolidated indebtedness of the Group will be significantly reduced and the net assets position of the Group will turn from negative to positive. The directors of the Company believe that the Group will be successful in fulfilling the outstanding conditions and all necessary procedures required for the Settlements such that the necessary the Settlements could be implemented and that the Group will be successful in securing Long-term Financing. On this basis, the directors of the Company consider that the Group will be able to significantly reduce its liabilities and will have sufficient working capital to finance its operations in the foreseeable future. Accordingly, the directors of the Company are satisfied that it is appropriate to prepare the financial statements on a going concern basis. If the going concern basis were not appropriate, adjustments would have to be made to restate the values of the assets to their recoverable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities, respectively. The effects of these potential adjustments have not been reflected in the financial statements. 2. IMPACT OF A REVISED STATEMENT OF STANDARD ACCOUNTING PRACTICE ("SSAP") AND A NEW INTERPRETATION The revised SSAP 12 "Income taxes" ("SSAP 12 (Revised)") and the new Interpretation 20 "Income taxes - Recovery of revalued non-depreciable assets" are effective for the first time for the current year's financial statements and have had a significant impact thereon. SSAP 12 (Revised) prescribes the accounting for income taxes payable or recoverable, arising from the taxable profit or loss for the current period (current tax); and income taxes payable or recoverable in future periods, principally arising from taxable and deductible temporary differences and the carry forward of unused tax losses (deferred tax). SSAP 12 (revised) was adopted during the year. This caused a change in accounting policy which has resulted in an increase in the Group's deferred tax liability at 31st July, 2003 and 2002 by HK$48,112,000 and HK$31,162,000, respectively. The consolidated net loss attributable to shareholders for the year ended 31st July, 2003 have been increased by HK$15,526,000, respectively and the consolidated accumulated losses at 1st August, 2003 and 2002 have been increased by HK$44,161,000 and HK$28,635,000, respectively, as detailed in the consolidated statement of changes in equity. 3. LOSS PER SHARE The calculation of basic loss per share is based on the net loss from ordinary activities attributable to shareholders for the year of HK$39,313,000 (2003: HK$476,566,000 (as restated)) and the weighted average number of 3,746,002,000 (2003: 3,746,002,000) ordinary shares in issue during the year. Diluted loss per share amount for the year ended 31st July, 2004 has not been disclosed, as no diluting event existed during the year. Diluted loss per share amount for the year ended 31st July, 2003 has not been disclosed, as the potential ordinary shares of the Group outstanding during that year had an anti-dilutive effect on the basic loss per share for that year. 4. INTEREST IN ASSOCIATES The Group's share of net assets of the eSun Group included in the Group's interests in associates as at 31st July, 2004 was HK$793,145,000. At 31st July, 2004, FHEL owed the Debt to GPEL, a wholly-owned subsidiary of eSun. Pursuant to an intercompany debt deed (the "Debt Deed") entered into by the Company, eSun, FHEL and GPEL on 30th June, 2000, the Debt bears interest at a rate of 5% per annum. The settlement date of the Debt was the earlier of 31st December, 2002, or the day on which the Exchangeable Bonds and the Convertible Bonds are repaid in full. The Debt was not repaid on 31st December, 2002 and remained outstanding as at 31st July, 2004. On 28th June, 2004, the Company, eSun, FHEL and GPEL entered into the eSun Settlement Agreement with respect to the restructuring of the Debt. Upon the Completion, the overdue interest payable to GPEL will be waived. Details of the terms and conditions of the eSun Settlement Agreement are disclosed in note 1 to the announcement and the Circular. The extent of the possible recovery by the eSun Group in respect of the Debt depends upon the successful implementation of the Settlements as detailed in note 1 to the announcement. At 30th June, 2004, the film rights held by the eSun Group amounted to HK$192,142,000 which represented all rights, titles and interests in 127 films (the "127 Film Rights") valued at HK$197,541,000 as at 31st December, 2003. The directors of eSun had engaged an independent third party (the "Valuer") to perform a valuation (the "Valuation") on the 127 Film Rights as at 31st December, 2003. Having regard to the Valuation performed by the Valuer and having regard to the current market conditions, the directors of eSun are of the opinion that there is no impairment on the film rights held by eSun as at 30th June, 2004. With respect to the financial statements of the eSun Group for the year ended 31st December, 2003, the auditors of eSun stated in their reports that: (i) they had been unable to obtain sufficient reliable information, or to carry out alternative auditing procedures to satisfy themselves as to the recoverability of the Debt; (ii) they had also been unable to obtain sufficient reliable information to carry out the auditing procedures required by Statement of Auditing Standards 520 "Using the Work of an Expert", issued by Hong Kong Institute of Certified Public Accountants, to satisfy themselves as to (a) the competence and objectivity of the Valuer; and (b) the adequacy of the scope of the Valuer's work as to the 127 Film Rights. They stated that they were unable to obtain sufficient reliable information, or carry out alternative auditing procedures to satisfy themselves as to the appropriateness of the basis of computation of the amount of the amortisation charge for the Film Rights; and (iii) they were not able to determine whether the going concern basis adopted in the preparation of the financial statements of the eSun Group was appropriate because of the significance of the uncertainty relating to the success of the measures being undertaken by the eSun Group such as obtaining funding from the bankers and financial creditors, and the tightening of cost controls. Because of the significance of each of the possible effects of the scope limitations in the evidence available to them and the fundamental uncertainty relating to the going concern basis, the auditors of eSun issued a disclaimed opinion on the financial statements of the eSun Group for the year ended 31st December, 2003. 5. SUMMARY OF AUDITORS' REPORT Scope limitations - Interest in an associate, eSun Holdings Limited ("eSun") and its subsidiaries (the "eSun Group") Included in the Group's interests in associates as at 31st July, 2004 is the Group's share of net assets of the eSun Group of HK$793,145,000. As further detailed in note 8 to this announcement, the auditors of eSun issued a disclaimer opinion on the financial statements of the eSun Group for the year ended 31st December, 2003 because of (a) the possible effects of scope limitations in respect of (i) the recoverability of HK$1,500,040,000 due by the Group to the eSun Group (the "Debt") and (ii) the impairment of film rights owned by the eSun Group with a carrying amount of HK$197,655,000; and (b) the fundamental uncertainty relating to the going concern basis. The auditors considered that they have been unable either to obtain sufficient reliable information and explanation or to carry out any alternative audit procedures to satisfy themselves as to the value of the Group's share of net assets of the eSun Group included in the consolidated balance sheet as at 31st July, 2004. Included in the Company's balance sheet as at 31st July, 2004 is its 37.86% interest in eSun of HK$896,277,000 and the Company's interests in subsidiaries, which in turn held a 4.68% interest in eSun, with an aggregate carrying value of HK$170,806,000. The auditors also considered that they have been unable either to obtain sufficient reliable information and explanation, or to carry out alternative audit procedures to satisfy themselves as to the carrying value of the Company's interests in eSun and in these subsidiaries as at 31st July, 2004. Any adjustments that might have been found necessary in respect of the above scope limitations would have a consequential impact on the deficiency in assets of the Group and the Company as at 31st July, 2004 and the net loss attributable to the shareholders for the year then ended. In forming their opinion the auditors also evaluated the overall adequacy of the presentation of information in the financial statements. The auditors believe that their audit provides a reasonable basis for their opinion. Fundamental uncertainties relating to the going concern basis In forming their opinion, the auditors have considered the adequacy of the disclosures made in note 1 to this announcement which explain the circumstances giving rise to concerns regarding the fundamental uncertainties relating to (1) the successful implementation of the debt settlement arrangements agreed by the Company with each of eSun and the holders of the Exchangeable Bonds and the Convertible Bonds (the "Settlements") and (2) the successful refinancing of the Group's short- term bank and other borrowings to longer term financing (the "Long-term Financing"). These financial statements have been prepared on a going concern basis, the validity of which depends upon the successful implementation of the Settlements and securing the Long-term Financing. These financial statements do not include any adjustments that may be necessary if the Company fails to successfully implement the Settlements and secure the Long-term Financing. The auditors consider that appropriate disclosures have been made and their opinion is not qualified in this respect. Disclaimer of opinion Because of the significance of the possible effects of the scope limitations in evidence available to them as mentioned in the above, the auditors are unable to form an opinion as to whether the financial statements give a true and fair view of the state of affairs of the Group and of the Company as at 31st July, 2004 and of the loss and cash flows of the Group for the year then ended and as to whether the financial statements have been properly prepared in accordance with the Companies Ordinance. In respect alone of the limitation on their work relating to the carrying value of eSun, the auditors have not obtained all the information and explanations that they considered necessary for the purpose of their audit.