Sinopec Engineering Group Co Ltd. — Annual Report 2002

Oct 23, 2002

UNIVERSE INTERNATIONAL HOLDINGS LIMITED

(incorporated in Bermuda with limited liability)

ANNUAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 30TH JUNE 2002

RESULTS

The Board of Directors of Universe International Holdings Limited (the “Company”) hereby announces the audited consolidated results of the Company and its subsidiaries (collectively the “Group”) for the year ended 30th June 2002, together with comparative figures for the year ended 30th June 2001 as follows:

		2002	2001
	Note	HK$’000	HK$’000
Turnover	1	306,741	306,576
Cost of sales		(224,129)	(214,551)
Gross profit		82,612	92,025
Other revenue		1,248	1,170
Other operating income		2,150	2,195
Selling expenses		(6,265)	(3,690)
Administrative expenses		(27,429)	(30,392)
Other operating expenses		(27,659)	(4,796)
Operating profit	2	24,657	56,512
Finance costs		(9,792)	(6,573)
Profit before taxation		14,865	49,939
Taxation	3	(4,838)	(9,751)
Profit attributable to shareholders		10,027	40,188
Dividends	4	—	2,859
Basic earnings per share_(HK cents)_	5(a)	1.05	4.24
Fully diluted earnings per share_(HK cents)_	5(b)	1.04	3.87

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Notes:

1. Turnover and segment information

The Group is principally engaged in the distribution of films in various formats, licensing and sub-licensing of film rights, film exhibition and replication of optical discs.

An analysis of the Group’s turnover and profit attributable to shareholders for the year by business segments is as follows:

Year ended 30th June 2002 Licensing, Sale of sub-licensing goods and of film rights replication of and film optical discs exhibition Elimination HK$’000 HK$’000 HK$’000 Turnover External sales 244,494 62,247 — Inter-segment sales — 21,518 (21,518) 244,494 83,765 (21,518) Segment results before impairment losses 39,691 6,118 — Less: impairment losses of film rights (13,775) (8,625) — Segment results 25,916 (2,507) — Add: other revenue Operating profit Less: finance costs Profit before taxation Taxation Profit attributable to shareholders

Group HK$’000 306,741 — 306,741 45,809 (22,400) 23,409 1,248 24,657 (9,792) 14,865 (4,838) 10,027

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Year ended 30th June 2001 Licensing, Sale of sub-licensing goods and of film rights replication of and film optical discs exhibition Elimination HK$’000 HK$’000 HK$’000 Turnover External sales 229,788 76,788 — Inter-segment sales — 41,308 (41,308) 229,788 118,096 (41,308) Segment results 48,273 7,069 — Add: other revenue Operating profit Less: finance costs Profit before taxation Taxation Profit attributable to shareholders	Group HK$’000 306,576 —
	306,576
	55,342 1,170
	56,512 (6,573)
	49,939 (9,751)
	40,188

An analysis of the Group’s turnover and operating profit for the year by geographical segment is as follows:

Hong Kong and Macau Asia (other than Hong Kong and Macau) North America Australia and New Zealand Eastern and Northern Europe Add: other revenue Operating profit	Turnover Year ended 30th June 2002 2001 HK$’000 HK$’000 279,029 278,937 18,544 25,159 8,730 2,081 150 380 288 19 306,741 306,576	Operating profit Year ended 30th June 2002 2001 HK$’000 HK$’000 19,167 48,178 3,793 6,604 239 451 20 106 190 3 23,409 55,342 1,248 1,170 24,657 56,512	Operating profit Year ended 30th June 2002 2001 HK$’000 HK$’000 19,167 48,178 3,793 6,604 239 451 20 106 190 3 23,409 55,342 1,248 1,170 24,657 56,512
			55,342 1,170
			56,512

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2. Operating profit

Operating profit is stated after charging the following:

	Year ended	30th June
	2002	2001
	HK$’000	HK$’000
Amortisation of film rights	132,326	123,907
Cost of inventories sold	76,258	72,708
Depreciation on owned fixed assets	11,979	12,458
Depreciation on fixed assets held under finance leases	12,910	11,584

3. Taxation

Hong Kong profits tax Deferred taxation	Year ended 30th June 2002 2001 HK$’000 HK$’000 4,235 6,706 603 3,045 4,838 9,751	Year ended 30th June 2002 2001 HK$’000 HK$’000 4,235 6,706 603 3,045 4,838 9,751
		9,751

Hong Kong profits tax has been provided at the rate of 16% (2001: 16%) on the estimated assessable profit for the year.

The deferred tax effect arising from timing difference is recognised in the accounts to the extent it is probable that a liability or an asset will be crystallised in the foreseeable future.

4. Dividends

The Board of Directors does not recommend the payment of a final dividend for the year ended 30th June 2002 (2001: HK0.3 cent per ordinary share).

5. Earnings per share

• (a) The calculation of basic earnings per share is based on the Group’s profit attributable to shareholders of approximately HK$10,027,000 (2001: HK$40,188,000) and on the weighted average number of 954,619,681 ordinary shares in issue (2001: 948,802,551 ordinary shares) during the year.

• (b) The calculation of diluted earnings per share for the year ended 30th June 2002 was based on the Group’s profit attributable to shareholders of approximately HK$10,027,000 and on 967,417,025 ordinary shares which is the weighted average number of ordinary shares in issue during the year plus the weighted average number of 12,797,344 ordinary shares deemed to be issued at no consideration if all outstanding options had been exercised.

The potential shares arising from the exercise of the convertible notes would increase the earnings per share of the Group for the year ended 30th June 2002 and would be regarded as anti-dilutive.

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The calculation of diluted earnings per share for the year ended 30th June 2001 was based on the Group’s profit attributable to shareholders plus the interest on convertible notes after taxation of approximately HK$843,000 and on 1,059,394,887 ordinary shares which is the weighted average number of ordinary shares in issue during the year plus the weighted average number of 110,592,336 ordinary shares deemed to be issued at no consideration if all outstanding options and convertible notes had been exercised.

OVERALL REVIEW

The year under review has been tough for the Group and the whole economy. Globally, both the United States and most of the Asian economies representing the major film licensing markets of Chinese-language films, are still suffering from further depression after the 11 September terrorists attack. Besides, persistent deflation along with high unemployment in Hong Kong also gives rise to an unfavourable operating environment with weak consumer confidence and consumption power.

Apart from the slowdown of economy, the local film industry is also facing increasing challenges from overseas including Hollywood, as well as the emerging popularity of films produced in Asia including Korea, Japan and Thailand.

Overall, given such circumstances, the management is nevertheless satisfied with the performance of the Group in the year under review.

OPERATING RESULTS

During the year ended 30th June 2002, whilst the Group’s consolidated turnover of HK$306.7 million was maintained at a similar level to last year, the profit attributable to shareholders experienced a decline by 75.1% to approximately HK$10.0 million. The major reasons for such decline are:—

1. Gross profit ratio of video distribution and film licensing decreased by 6.2% and 1.9% respectively;

2. Provision made for film right deposits and film rights amounted to HK$24.3 million due to the reduced buying power of overall film licensing markets and stagnant retail market; and

3. Additional interest of HK$7.0 million payable to convertible note holder on redemption of convertible notes subsequent to the financial year end.

BUSINESS REVIEW

Video distribution

The video distribution segment shows an encouraging growth of 10.1%, representing an increase from last year’s HK$217.6 million to current year’s HK$239.5 million, contributing 78.1% (2001: 71.0%) of the Group’s consolidated turnover.

During the year, in an attempt to mitigate the adverse impact of slack market demand, the Group continues to apply an aggressive approach on the pricing of the video products and product diversification, which have proven to be useful. Apart from the competitive pricing, increased efforts in promotions and packaging also helped to stimulate turnover and maintain our market share, although lower profit margins have continued to affect the result of the video distribution business. As a result, the gross profit on this segment has dropped by 8.8%, compared with the same period last year.

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Film licensing, film sub-licensing and film exhibition

The gross profit from the film licensing, film sub-licensing and film exhibition showed a decrease by approximately HK$1.5 million in the year under review.

Apart from challenges from mega-productions from Hollywood, Korean, Japanese and Thai movies are becoming more popular in Hong Kong in recent years. This is evident from a significant decrease in the total box office takings of the Chinese-language films in the first half of year 2002. In view of the contracted overall film exhibition business in Hong Kong, the Group has adopted a more prudent approach in investing in film productions resulting in a reduction of the total number of titles produced in the year. During the year, the Group has produced 16 titles such as “Shaolin Soccer”, “Frugal Game” and “Tiramisu” as compared to 28 titles in the last year. However, the total net theatrical income increased by 89.2% over last year. Such encouraging result is mainly due to the box office hit “Shaolin Soccer”, with gross box office takings of over HK$60 million.

The film licensing and sub-licensing business however experienced a decline in revenue from HK$66.6 million in the last year to HK$43.0 million in current year, representing a decrease by 35.4%. Such decline is mainly attributable to a general reduction of price offered by licensees particularly in South East Asia where the adverse economic climate persisted. The termination of the video-on-demand service offered by PCCW IMS and the delay in broadcast or withdrawal of new pay TV channels also led to reduced contribution from this segment of our business.

Although the Group has experienced a decline in overall contribution from film licensing and sub-licensing, we are delighted to see both the revenue and profit generated from the PRC show significant growth. While the revenue generated from the PRC was only HK$0.6 million in the last year, it reaches HK$7.2 million in the current year. Contribution in terms of profit also shows a significant increase.

Replication of optical discs

Keen competition within the optical disc replication industry has led to pressure on our revenue and profitability on this business. The total revenue generated from this business decreased to HK$4.0 million, compared to HK$9.0 million in the last financial year.

OUTLOOK

The outlook of the local economy remains uncertain and at present there is yet to be any clear indication of recovery from persistent deflation and high unemployment. Weak sentiment in the retail market and the entertainment industry as a whole create a difficult operating environment for the Group. In view of this uncertainty, the Group will continue to develop its business in a pragmatic and prudent approach so as to maintain long-term growth and profitability.

As an all-round player in the entertainment industry, diversification of products and markets will continue and the Group will, as a content provider, continue to invest in film productions. Subsequent to the year under review, the Group have produced several films, including “If you care” and “My wife is 18”. Apart from investing solely in local film productions, the Group will also seek strategic partners from Japan, Korea and mainland China to participate in film productions. The Group is co-producing a film titled “May & August” with a PRC film production company, which is shot in the PRC, and plans to release this film to cinema audiences across the PRC soon. Such co-operation will not only provide a chance to exchange ideas and production techniques, but will also establish a channel for alliances among other operators in the industry outside of Hong Kong.

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Apart from maintaining our leading position in the local market, the Group is planning to establish a joint venture company in the PRC for developing its huge video distribution market. The management expects the further growth of the Group will be fueled by opportunities arising from the deregulation and reformation of laws governing the entertainment industry in the PRC.

Looking ahead, we are confident that our exceptional expertise in video distribution and film licensing, strong leadership position and ability to generate the highest level of profitability in the industry will enable the Group to outperform in any environment and grow our market share.

LIQUIDITY AND FINANCIAL POSITION

As at 30th June 2002, the Group had cash balances of HK$98.6 million and unutilised banking facilities amounted to approximately HK$67.0 million while the corresponding figures in the last year were HK$58.0 million and HK$36.1 million respectively.

The gearing ratio as at 30th June 2002 was further reduced to 14.3% as compared to 21.4% in the last year (excluding convertible notes which have been redeemed after year end). The calculation of gearing ratio is based on the sum of the Group’s bank loans and obligations under finance leases of approximately HK$35.7 million (of which HK$14.3 million, HK$9.8 million and HK$11.6 million are repayable within one year, in the second year and in the third to fifth year respectively) and on the shareholders’ fund of approximately HK$248.9 million.

As at 30th June 2002, certain assets of the Group with aggregate carrying value of HK$76.5 million (2001: HK$90.1 million) were pledged to secure banking facilities utilised by subsidiaries.

Subsequent to the balance sheet date, the Group had redeemed the US$7.0 million convertible notes which is funded from internal resources.

In light of the fact that most of the Group’s transactions are denominated in Hong Kong Dollars, the management considered the exposure to fluctuation in exchange rates is limited and no financial instruments for hedging purposes are used by the Group.

EMPLOYEES AND REMUNERATION POLICIES

As at 30th June 2002, the Group employed 209 staffs. Remuneration is reviewed annually and certain staffs are entitled to commission. In addition to basic salaries, staff benefits included discretionary bonus, medical insurance scheme and mandatory provident fund.

AUDIT COMMITTEE

The written terms of reference which describe the authority and duties of the Audit Committee were prepared and adopted with reference to “A Guide for the Formation of An Audit Committee” published by the Hong Kong Society of Accountants.

The Audit Committee provides an important link between the Board of Directors and the Group’s auditors in matters coming within the scope of the Group’s audit. It also reviews the effectiveness of the external audit, internal controls and risk evaluation. The Audit Committee currently comprises two non-executive directors, namely Messrs. NG Kwok Tung and CHIU Shin Koi. Two meetings were held during the current financial year.

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CODE OF BEST PRACTICE

None of the Directors of the Company is aware of any information that would reasonably indicate that the Company is not, or was not, in compliance with the Code of Best Practice as set out in Appendix 14 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”) for the year ended 30th June 2002.

PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES

The Company has not redeemed any of its shares during the year. Neither the Company nor any of its subsidiaries has purchased or sold any of the Company’s listed securities during the year.

DETAILED RESULTS ANNOUNCEMENT

A detailed results announcement containing all the information required by paragraphs 45(1) to 45(3) of Appendix 16 of the Listing Rules will be subsequently published on the Stock Exchange’s website (http:// www.hkex.com.hk).

By Order of the Board Lam Shiu Ming, Daneil Chairman and Managing Director

Hong Kong, 22nd October 2002

NOTICE OF ANNUAL GENERAL MEETING

NOTICE IS HEREBY GIVEN THAT the Annual General Meeting of the Company will be held at 18th Floor, Wyler Centre Phase II, 192-200 Tai Lin Pai Road, Kwai Chung, New Territories, Hong Kong on 26th November 2002 at 12:00 noon for the following purposes:

1. to receive and consider the audited consolidated financial statements of accounts and the reports of the Directors and Auditors for the year ended 30th June 2002.

2. to re-elect retiring Directors and authorise the board to fix the Directors’ remuneration.

3. to re-appoint Auditors and authorise the board to fix their remuneration.

4. as Special Business to consider and, if thought fit, pass the following resolutions as Ordinary Resolutions:

5. A “ THAT :

   • (a) subject to sub-paragraph (c) of this Resolution, the exercise by the directors of the Company (the “Directors”) during the Relevant Period (as defined below) of all the powers of the Company to allot, issue and deal with additional shares in the capital of the Company and to make or grant offers, agreements and options which might require the exercise of such powers be and is herby generally and unconditionally approved;

   • (b) the approval in sub-paragraph (a) of this Resolution shall authorise the Directors during the Relevant Period to make or grant offers, agreements and options which might require the exercise of such powers after the end of the Relevant Period;

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• (c) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise), by the Directors pursuant to the approval in sub-paragraph (a) of this Resolution, otherwise than pursuant to (i) a Rights lssue (as defined below): or (ii) the exercise of any option scheme or similar arrangement for the times being adopted for the grant or issue to officers and/or employees of the Company and/or any of its subsidiaries of shares or rights to acquire shares of the Company, shall not exceed 20% of the aggregate nominal amount of the share capital of the Company in issue as at the date of this Resolution and the said approval shall be limited accordingly; and

• (d) for the purposes of this Resolution:

“Relevant Period” means the period from the passing of this Resolution until whichever is the earlier of:

• (i) the conclusion of the next annual general meeting of the Company;

• (ii) the expiration of the period within which the next annual general meeting of the Company is required by the Bye-laws of the Company or any applicable law to be held; and

• (iii) the date on which the authority set out in this Resolution is revoked or varied by an ordinary resolution of the shareholders in general meeting.

“Rights Issue” means an offer of shares or other securities of the Company open for a period fixed by the Directors to holders of shares of the Company or any class thereof on the register on a fixed record date in proportion to their then holdings of such shares or class thereof (subject to such exclusion or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of any recognised regulatory body or any stock exchange in, any territory outside the Hong Kong Special Administrative Region of the People’s Republic of China).”

• B. “ THAT :

• (a) subject to sub-paragraph (b), the exercise by the Directors during the Relevant Period of all the powers of the Company to purchase shares in the capital of the Company be and is hereby generally and unconditional approved;

• (b) the aggregate nominal amount of share capital of the Company to be purchased or agreed conditionally or unconditionally to be purchased by the Company pursuant to the approval in sub-paragraph (a) during the relevant period shall not exceed 10% of the aggregate nominal amount of the share capital of the Company in issue on the date of this Resolution and the said approval shall be limited accordingly; and

• (c) for the purposes of this Resolution:

“Relevant Period” means the period from the passing of this Resolution until whichever is the earlier of;

• (i) the conclusion of the next annual general meeting of the Company;

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• (ii) the expiration of the period within which the next annual general meeting of the Company is required by the Bye-laws of the Company or any applicable law to be held; and

• (iii) the date on which the authority set out in this Resolution is revoked or varied by an ordinary resolution of the shareholders in general meeting.”

• C. “ THAT conditional upon Resolution 4A and Resolution 4B set out in the notice convening this meeting of which this Resolution forms part being passed, the aggregate nominal amount of the shares of the Company which are purchased by Company after the date of the passing of this Resolution (up to a maximum of 10% of the aggregate nominal amount of the share capital of the Company as stated in Resolution 4B set out in the notice convening this meeting of which this Resolution forms part) shall be added to the aggregate nominal amount of share capital that may be allotted or agreed conditionally or unconditionally to be allotted by the Directors pursuant to Resolution 4A set out in the notice convening this meeting of which this Resolution forms part.”

By Order of the Board Chan Hau Chuen Company Secretary

Hong Kong, 22nd October 2002

Notes:

• (1) Any member entitled to attend and vote at the Meeting shall be entitled to appoint another person as his proxy to attend and vote instead of him. A member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at the Meeting. A proxy need not be a member of the Company.

• (2) In order to be valid, the form of proxy completed in accordance with the instructions set out therein, together with the power of attorney or other authority (if any) under which it is signed (or a notarially certified copy of that power or authority) must be deposited at the principal place of business of the Company in Hong Kong situated at 18th Floor, Wyler Centre Phase II, 192-200 Tai Lin Pai Road, Kwai Chung, New Territories, Hong Kong not less than 48 hours before the time appointed for holding the Meeting or any adjournment thereof.

• (3) An explanatory statement regarding the general mandate for the purchase of shares sought in the Ordinary Resolution set out in 4B above will be circulated with the 2002 Annual Report and Accounts to be sent to shareholders.

Please also refer to the published version of this announcement in The Standard.

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