Persistence Gold Group Ltd — Annual Report 2003

Aug 17, 2004

Shanghai Merchants Holdings Limited announced on 16/08/2004:

(stock code: 01104 )

Year end date: 31/12/2003

Currency: HKD

Auditors' Report: Qualified

(Audited )

(Audited ) Last

Current Corresponding

Period Period

from 01/01/2003 from 01/01/2002

to 31/12/2003 to 31/12/2002

Note ('000 ) ('000 )

Turnover : 62,198 403,749

Profit/(Loss) from Operations : (54,817) (49,748)

Finance cost : (118) (582)

Share of Profit/(Loss) of

Associates : N/A N/A

Share of Profit/(Loss) of

Jointly Controlled Entities : N/A N/A

Profit/(Loss) after Tax & MI : (54,935) (49,994)

% Change over Last Period : N/A %

EPS/(LPS)-Basic (in dollars) : (0.1405) (0.2074)

-Diluted (in dollars) : N/A N/A

Extraordinary (ETD) Gain/(Loss) : N/A N/A

Profit/(Loss) after ETD Items : (54,935) (49,994)

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

Notes:

1. DISCLAIMER OF LIABILITIES

In preparing this announcement and the consolidated audited financial statements for the year ended 31 December 2003 in collaboration with the auditors, the Directors have taken all reasonable steps and used their best endeavours to ensure the sufficiency of disclosure regarding the same in accordance with the pertinent requirements of the Rules Governing the Listing of Securities (the “Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

Owing to the onset of receivership proceedings, the change in management and the continued investigations by the authorities into the affairs of the Company, all of which had precluded the full access of the books and records of the Group, this announcement has been prepared on the basis of the financial information prepared and payment records for the relevant period maintained by the former receivers and managers of the Company (the “Receivers”) who were appointed on 17 June 2003 and discharged on 2 July 2004. As such, the Directors are unable to give representation on the accuracy and completeness of the financial statements contained herein or whether the same are free from material mis-statements. In particular, the Directors are unable to give representation that all transactions affecting the Group for the year ended 31 December 2003 have been included in the financial statements herein or such information presents a true and fair view of the Group’s operations and the cash flows for the year ended 31 December 2003 and financial position as at 31 December 2003.

For reasons of the foregoing, the reasons stated in the notes below, the Directors have at a meeting held on 16 August 2004 resolved to disclaim any and all liabilities in respect of the release of the financial results of the Group for the year ended 31 December 2003.

Shareholders and other investors are hereby advised to exercise caution when considering the information contained herein and should seek independent professional advice if in doubt.

1. BASIS OF PREPARATION OF FINANCIAL STATEMENTS

Following the assumption of powers to manage the affairs of the Company on 2 July 2004, the Directors have found that the Group’s accounting records and supporting vouchers for the year ended 31 December 2003 were incomplete. Accordingly, the financial ­statements of the Group for the year ended 31 December 2003 have been prepared on the following bases:

(A) Financial information provided by the Receivers

The financial statements have been prepared based on the management accounts prepared by the Receivers. The Receivers prepared the management accounts on the basis of the information available to them, i.e. unaudited management accounts of the Group as at 30 April 2003, vouchers prepared by the Group’s former employees as well as the Group’s books and records seized by Independent Commission Against Corruption on or about 1 June 2003 and subsequently made available to the Receivers. However, the Receivers were not in a position to verify the validity or authenticity of any of such information or records made available to them. In light of the above, the Receivers are unable to give representation that all transactions affecting the Group have been included in the management accounts and the management accounts present a true and fair view of the Group’s financial position as of the date presented. The Receivers therefore disclaim all liabilities in respect of the management accounts of the Group and in relation to the affairs of the Group as of the date presented.

In addition, the Receivers had only limited access to the books and records of certain of the Company’s subsidiaries, Park Well International Group Limited (“Park Well”) and its subsidiaries (the “Park Well Group”). Accordingly, the management accounts of Park Well Group as at 31 March 2003 were used by the Receivers in the preparation of the Group’s management accounts as at 31 December 2003 because Park Well Group’s management accounts for the period from 1 April 2003 to 31 December 2003 were not available to the Receivers.

(B) The disclosure of litigation and contingent liabilities and related party transactions set out in the financial statements is based on press announcements and/or circulars made by the Company prior to the appointment of the Receivers and those made by the Receivers following their appointment.

(C) In the absence of complete books and records, the Directors are unable to quantify the effect and make appropriate disclosures in respect of deferred taxation in accordance with the requirements of Statement of Standard Accounting Practice No. 12 (Revised) “Income Taxes” issued by the Hong Kong Society of Accountants (“SSAP 12 (Revised)”).

(D) Due to the limited access to the books and records of Park Well Group, the Directors are unable to quantify the depreciation and amortisation charge for Park Well Group’s property, plant and equipment for the year ended 31 December 2003 and make appropriate disclosures in accordance with the requirements of Statement of Standard Accounting Practice No. 17 “Property, Plant and Equipment” issued by the Hong Kong Society of Accountants (“SSAP 17”).

(E) The comparative figures have been extracted from the financial statements for the year ended 31 December 2002. However, as disclosed in the Company’s announcement dated 16 June 2003, the former executive directors of the Company indicated that (i) they required extra time to consider whether the recent events as defined in that announcement would affect the truth and fairness of the financial statements for the year ended 31 December 2002 and (ii) until such time as the effect of the recent events on the financial statements for the year ended 31 December 2002 could be determined, reliance should not be placed on the financial statements or on the auditors’ report thereon. In addition, the financial statements for the year ended 31 December 2002 have not been adopted by members in general meeting.

Against the above background, the Directors are unable to satisfy themselves as to whether the financial statements are free from material misstatement.

1. ADOPTION OF HONG KONG FINANCIAL REPORTING STANDARDS

In the current year, the Group has adopted, for the first time, SSAP 12 (Revised) which is one of the Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Society of Accountants (“HKSA”). The term of HKFRS is inclusive of Statements of Standard Accounting Practice and Interpretations approved by the HKSA. SSAP 12 (Revised) requires the adoption of a balance sheet liability method, whereby deferred tax is recognised in respect of all temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, with limited exceptions. In the absence of any specific transitional requirements in SSAP 12 (Revised), the new accounting policy has been applied retrospectively.

As explained in note 2(C) in light of the incomplete books and records maintained by the Group for the year ended 31 December 2003, the Directors are unable to quantify the effect and make appropriate disclosures in respect of the adoption of SSAP 12 (Revised).

1. SEGMENTAL INFORMATION

For management purposes, the Group is currently organised into two operating divisions - trading in base metals and trading in fabric. These divisions are the basis on which the Group reports its primary segment information.

Principal activities are as follows:

Continuing operations:

Trading in base metals - trading in base metals

Trading in fabric - trading in fabric

Discontinued operations:

Fabric processing - processing of raw fabric and the sale of finished fabric

Snack food - manufacture and sale of potato chips

Segment information about these businesses is presented below.

2003

Continuing operations Discontinued operations

Trading in Trading Fabric

base metals in fabric Others processing Snack food Consolidated

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

TURNOVER

External sales 53,827 8,371 - - - 62,198

RESULTS

Segment (loss) profit (7,509) 81 - - - (7,428)

Unallocated corporate expenses (47,389)

Interest on bank borrowings

wholly repayable within

five years (118)

Loss for the year (54,935)

2002

Continuing operations Discontinuing operations

Trading in Trading Fabric

base metals in fabric Others processing Snack food Consolidated

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

TURNOVER

External sales 346,072 52,567 3,129 1,632 349 403,749

RESULTS

Segment profit (loss) 4,505 (11,442) (2) (36,095) (361) (43,395)

Unallocated corporate expenses (6,353)

Interest on bank borrowings

wholly repayable within

five years (582)

Gain on disposal of subsidiaries 261

Loss before taxation (50,069)

Taxation (24)

Loss before minority interests (50,093)

1. OTHER OPERATING EXPENSES

Other operating expenses comprise the followings:

2003 2002

HK$’000 HK$’000

Allowance for bad and doubtful debts 29,013 12,371

Loss on disposal of property, plant and equipment - 5,363

29,013 17,734

1. LOSS FROM OPERATIONS

2003 2002

HK$’000 HK$’000

Loss from operations has been arrived at after charging (crediting):

Depreciation and amortisation 77 4,765

Interest income from bank deposits (35) (30)

1. TAXATION

Hong Kong Profits Tax is calculated at 17.5% (2002: 16%) of the assessable profit for the year. In June 2003, the Hong Kong Profits Tax rate was increased from 16% to 17.5% with effect from the 2003/2004 year of assessment.

Pursuant to the relevant laws and regulations in the People’s Republic of China (the “PRC”), the Company’s PRC subsidiary is entitled to an exemption from the PRC enterprise income tax for two years commencing from its first profit-making year of operation, followed by a 50% relief from the PRC enterprise income tax for the following three years. No provision for PRC enterprise income tax has been made in the financial statements as the Company’s PRC subsidiary had no assessable profit for the current year.

As explained note 2(C), in light of the incomplete books and records maintained by the Group for the year ended 31 December 2003, the Directors are unable to quantify the effect and make appropriate disclosures in respect of the adoption of SSAP 12 (Revised).

1. LOSS PER SHARE

The calculation of the basic loss per share is based on the loss for the year of HK$54,935,000 (2002: HK$49,994,000) and on a weighted average number of 391,082,192 (2002: 241,014,247) shares in issue during the year.

Diluted loss per share has not been presented as the share options outstanding during the year had an anti-dilutive effect on the basic loss per share for the year.

1. LITIGATION AND CONTINGENT LIABILITIES

As explained in note 2(A), in light of the incomplete books and records maintained by the Group for the year ended 31 December 2003, the following information on the Group’s litigation and contingent liabilities is prepared based on press announcements and/or circulars made by the Company prior to the appointment of the Receivers and those made by the Receivers following their appointment. The Directors make no representation as to the completeness of the information disclosed.

(i) Having obtained legal advice, the Receivers commenced legal proceedings on 2 July 2003 against Great Center Limited (“Great Center”), a company incorporated in the British Virgin Islands, for the repayment of two sums totaling US$4.5 million (or approximately HK$35.1 million), remitted on or about 21 May 2003 with no apparent justification, from the bank accounts of Merchants (Hong Kong) Limited (“Merchants HK”), a wholly-owned subsidiary of the Company, to a bank account maintained in the name of Great Center, and interest thereon, damages and costs of the legal proceedings (“the Great Center Action”). In order to prevent the dissipation of Great Center’s assets, an injunction order was applied for, and successfully obtained on 30 June 2003, from the High Court of Hong Kong (“High Court”) to restrict Great Center from, inter alia, disposing of or otherwise dealing with or diminishing assets of Great Center up to the value of US$4.5 million (the “Injunction Order”). The relevant bank, the lawyers of Great Center and other relevant persons have been notified of the Injunction Order. The Injunction Order remained valid up to and including 11 July 2003 on which date the Injunction Order was continued until further order or final determination of the Great Center Action.

(ii) The writ of summons issued on 2 July 2003 in relation to the claim against Great Center for the repayment of US$4.5 million was amended on 10 July 2003 (the “Amended Writ”) to include the claims for (i) the repayment of HK$12.8 million remitted from the bank account of the Company to a bank account in the name of Great Center on or about 17 April 2003; and (ii) the repayment of HK$22.0 million remitted from the bank account of the Company to a bank account in the name of Modern Shine Enterprises Limited (“Modern Shine”), a company incorporated in the British Virgin Islands, on or about 22 April 2003, interest thereon, damages and costs of legal proceedings. The sum of claims under the Amended Writ amounts to approximately HK$69.9 million (the “Great Center Claim”). The Amended Writ also includes a bank in Hong Kong, Modern Shine, certain former executive directors, officers and employees of the Group, and all directors or authorised signatories of Great Center and Modern Shine as defendants (the “Defendants”) for the purposes of seeking orders against them for the disclosure of documents and/or information. An application was made on 10 July 2003 to the High Court for an order (the “Disclosure Order”) that the Defendants disclose to the Company and Merchants HK all relevant information and documents relating to the transfers of the amounts comprising the Great Center Claim. The Disclosure Order was granted by the High Court on 18 July 2003.

(iii) As a result of the information provided to the Company and Merchants HK under the Disclosure Order, the Receivers have discovered that, together with certain funds out of the Great Center Claim, an aggregate amount of approximately HK$37 million was transferred, by a series of transfers, by Great Center and Modern Shine to Win Victory Holdings Limited (“Win Victory”), a company incorporated in Hong Kong and Mr. Chau Ching Ngai and Ms. Mo Yuk Ping are the registered shareholders of 49% and 51%, respectively, of the issued share capital of Win Victory, without apparent legitimate commercial reason. Having obtained legal advice, the Receivers commenced legal proceedings on 23 August 2003 against Win Victory (the “Win Victory Action”) for the repayment of the HK$37 million, interest thereon, damages and costs of legal proceedings (the “Win Victory Claim”). It should be noted that should any of the amount claimed against Win Victory be recovered from Great Center and/or Modern Shine in the Great Center Claim such amounts will be taken into account in the Win Victory Action. In order to prevent the dissipation of Win Victory’s assets, the Company applied for, and obtained on 22 August 2003, from the High Court an injunction order against Win Victory (the “Win Victory Injunction Order”) to restrict Win Victory from, among other things, disposing of or otherwise dealing with or diminishing the value of its assets up to the value of HK$37 million. On 29 August 2003, the Win Victory Injunction Order was continued until further order or final determination of the Win Victory Action.

(iv) Having obtained legal advice, the Receivers, on behalf of the Company, petitioned for the winding-up of Win Victory on the grounds that Win Victory is unable to pay its debts and/or it is just and equitable for Win Victory to be wound up and obtained an order from the High Court on 24 September 2003, among other things, appointing Messrs. Desmond Chung Seng Chiong and Roderick John Sutton of Ferrier Hodgson Limited of 14th Floor, Hong Kong Club Building, 3A Chater Road, Hong Kong as the provisional liquidators of Win Victory. In the first instance, this order will remain valid up to and including 7 October 2003, on which date the matter will be heard again by the High Court.

(v) A sale and purchase agreement dated 12 April 2003 was entered into by the Company to dispose of the entire issued share capital of Park Well, a wholly owned subsidiary of the Company, to Show Goods Inc., a company incorporated in the British Virgin Islands, for a consideration of RMB15 million (the “Park Well Disposal Agreement”). Based on their own investigations, the Receivers are of the view that, despite the Park Well Disposal Agreement, the Company remains the beneficial owner of Park Well and therefore have taken steps to secure control over Park Well. Should Show Goods Inc. dispute the Receivers’ view and actions, claims and losses to the Group may arise.

At 31 December 2002, the Group had discounted bills with recourse of HK$39,270,000.

SUMMARY OF AUDITORS’ REPORT

The auditors’ report on the Group’s financial statements for the year ended 31 December 2003 contained a disclaimed opinion arising from limitation of audit scope and disagreements about accounting treatment and extent of disclosure. The followings are extracts from the auditors’ report.

“Basis of Opinion

We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us was limited as set out below.

1. As explained in note 2(A), the financial statements for the year ended 31 December 2003 have been prepared based on the management accounts prepared by the Receivers. The Receivers prepared the management accounts on the basis of the information available to them, i.e. the management accounts of the Group as at 30 April 2003, vouchers prepared by the Group’s former employees as well as the Group’s books and records seized by Independent Commission Against Corruption on or about 1 June 2003 and subsequently made available to the Receivers. However, the Receivers were not in a position to verify the validity or authenticity of any of such information or records made available to them. In light of the above, the Receivers are unable to give representation that all transactions affecting the Group have been included in the management accounts and the management accounts present a true and fair view of the Group’s financial position as of the date presented. The Receivers therefore disclaim all liabilities in respect of the management accounts of the Group and in relation to the affairs of the Group as of the date presented.

In addition, the Receivers had only limited access to the books and records of certain of the Company’s subsidiaries, Park Well Group. Accordingly, the management accounts of Park Well Group as at 31 March 2003 were used by the Receivers in the preparation of the Group’s management accounts for the year ended 31 December 2003 because Park Well Group’s management accounts for the period from 1 April 2003 to 31 December 2003 were not available to the Receivers.

Against the above background, the Directors are unable to satisfy themselves as to whether the financial statements are free from material misstatement. Accordingly, we are unable to satisfy ourselves as to whether the financial statements are free from material misstatement.

1. Included in the balance sheet at 31 December 2003 are property, plant and equipment of HK$23,895,000. In the absence of information relating to their future usage, we are unable to satisfy ourselves as to whether any provision for impairment in value relating to these assets was necessary as at 31 December 2003.

2. We are unable to obtain sufficient documentary evidence to verify the ownership of the Group’s leasehold land and buildings situated in the PRC and which are held under the ownership of the Park Well Group.

3. Includes in trade and other receivables at 31 December 2003 is an amount of approximately HK$35.1 million due from Great Centre Limited. We are unable to obtain financial information of Great Centre Limited so as to assess whether allowance for bad and doubtful debts is required in respect of this amount. Further details of this debt are set out in notes 9(i) and 9(ii).

4. Included in the balance sheet at 31 December 2003 is taxation payable of HK$10,700,000. We are unable to ascertain the current status of this tax liability and are therefore unable to satisfy ourselves as to whether this provision was adequate or otherwise as at 31 December 2003.

5. As disclosed in note 9(v), the Receivers have taken the view that, despite the Park Well Disposal Agreement, as defined in the note, the Company remains the beneficial owner of Park Well. In the absence of an independent legal opinion relating thereto, we are unable to satisfy ourselves as to whether any claims or losses will arise from the non-recognition of the Park Well Disposal Agreement.

There were no other satisfactory audit procedures that we could adopt to satisfy ourselves as to the matters set out above. Any adjustment found to be necessary would affect the results or cash flows of the Group for the year ended 31 December 2003 and/or the assets and liabilities of the Company or the Group as at that date.

In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Qualification arising from disagreements about accounting treatment and extent of disclosure

1. As explained in note 2(C), the Directors are unable to quantify the effect and make appropriate disclosures in respect of deferred taxation in accordance with the requirements of SSAP 12 (Revised). In light of the incomplete books and records maintained by the Group, it is not practicable to quantify the effects of departure from these requirements.

2. As explained in note 2(D), due to the limited access to the books and records of Park Well Group, the Directors are unable to quantify the depreciation and amortisation charge for Park Well Group’s property, plant and equipment for the year ended 31 December 2003 and make appropriate disclosures in accordance with the requirements of SSAP 17. It is not practicable to quantify the effects of departure from these requirements.

Disclaimer of opinion

Because of the significance of the possible effect of the limitation in evidence available to referred to in the basis of opinion section of this report, we 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 Company and of the Group as at 31 December 2003 or 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 disclosure requirements of the Hong Kong Companies Ordinance.

In respect alone of the limitation on our work as set out above,

• we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and

• we are unable to determine whether proper books of account have been kept.

Without qualifying our opinion, we draw attention to note 2(E) which explains that the comparative figures have been extracted from the financial statements for the year ended 31 December 2002. However, as disclosed in the Company’s announcement dated 16 June 2003, the former executive directors of the Company indicated that (i) they required extra time to consider whether the recent events as defined in that announcement would affect the truth and fairness of the financial statements for the year ended 31 December 2002 and (ii) until such time as the effect of the recent events on the financial statements for the year ended 31 December 2002 could be determined, reliance should not be placed on such financial statements or on the auditors’ report thereon. In addition, the financial statements for the year ended 31 December, 2002 have not been adopted by members in general meeting.”