Sinopec Engineering Group Co Ltd. — Annual Report 2003

Oct 21, 2003

UNIVERSE INTERNATIONAL HOLDINGS LIMITED

(incorporated in Bermuda with limited liability)

ANNUAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 30TH JUNE 2003

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 2003, together with comparative figures for the year ended 30th June 2002 as follows:

Note Turnover 1 Cost of sales Gross profit Other revenue Other operating income Selling expenses Administrative expenses Other operating expenses Operating (loss)/profit 2 Finance costs (Loss)/profit before taxation Taxation 3 (Loss)/profit attributable to shareholders Dividends 4 Basic (loss)/earnings per share (HK cents) 5 Fully diluted (loss)/earnings per share (HK cents) 5	2003 HK$’000 251,246 (211,616) 39,630 824 2,672 (5,241) (29,183) (41,691) (32,989) (1,123) (34,112) 4,656 (29,456) — (3.08) N/A	2002 HK$’000 306,741 (224,129) 82,612 1,248 2,150 (6,265) (27,429) (27,659) 24,657 (9,792) 14,865 (4,838) 10,027 — 1.05 1.04

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Notes:

1. Turnover and segment information

The Group is principally engaged in the distribution of films in various videogram formats, licensing and sublicensing of film rights, film exhibition and leasing of investment property and machineries for replication of optical discs.

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

Turnover External sales Inter-segment sales Segment results before impairment losses Less: impairment losses of film rights Segment results Add: other revenue Operating loss Less: finance costs Loss before taxation Taxation Loss attributable to shareholders

Year ended 30th June 2003 Leasing of investment Licensing, property and Sale of goods sub-licensing of machineries for and replication film rights and replication of of optical discs film exhibition optical discs Elimination Group HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 191,961 50,535 8,750 — 251,246 — 54,774 — (54,774) — 191,961 105,309 8,750 (54,774) 251,246 2,011 2,524 (1,244) — 3,291 (23,580) (13,524) — — (37,104) (21,569) (11,000) (1,244) — (33,813) 824 (32,989) (1,123) (34,112) 4,656 (29,456)

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Year ended 30th June 2002

		Licensing,
	Sale of goods	sub-licensing of
	and replication	film rights and
	of optical discs	film exhibition	Elimination	Group
	HK$’000	HK$’000	HK$’000	HK$’000
Turnover
External sales	244,494	62,247	—	306,741
Inter-segment sales	—	21,518	(21,518)	—
	244,494	83,765	(21,518)	306,741
Segment results before
impairment losses	39,691	6,118	—	45,809
Less: impairment losses
of film rights	(13,775)	(8,625)	—	(22,400)
Segment results	25,916	(2,507)	—	23,409
Add: other revenue				1,248
Operating profit				24,657
Less: finance costs				(9,792)
Profit before taxation				14,865
Taxation				(4,838)
Profit attributable
to shareholders				10,027

An analysis of the Group’s turnover and operating (loss)/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 (loss)/profit	Turnover Year ended 30th June 2003 2002 HK$’000 HK$’000 235,005 279,029 14,686 18,544 1,365 8,730 112 150 78 288 251,246 306,741	Operating (loss)/profit Year ended 30th June 2003 2002 HK$’000 HK$’000 (35,981) 19,167 1,912 3,793 209 239 14 20 33 190 (33,813) 23,409 824 1,248 (32,989) 24,657	Operating (loss)/profit Year ended 30th June 2003 2002 HK$’000 HK$’000 (35,981) 19,167 1,912 3,793 209 239 14 20 33 190 (33,813) 23,409 824 1,248 (32,989) 24,657
			23,409 1,248
			24,657

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2. Operating (loss)/profit

Operating (loss)/profit is stated after charging the following:

	Year ended	30th June
	2003	2002
	HK$’000	HK$’000
Amortisation of film rights	123,972	132,326
Impairment losses of film rights	37,104	22,400
Cost of inventories sold	65,761	76,258
Depreciation on owned fixed assets	14,740	11,979
Depreciation on fixed assets held under finance leases	9,681	12,910
Taxation
	Year ended	30th June
	2003	2002
	HK$’000	HK$’000
Hong Kong profits tax	150	(4,235)
Deferred taxation	4,506	(603)
	4,656	(4,838)

3. Taxation

Hong Kong profits tax and deferred taxation has been provided at the rate of 17.5% (2002: 16%) on the estimated assessable profit for the year. Deferred taxation represented the net timing differences in respect of accelerated depreciation allowances and tax losses.

4. Dividends

The directors do not recommend the payment of a final dividend for the year ended 30th June 2003 (2002: Nil).

5. (Loss)/earnings per share

The calculation of basic (loss)/earnings per share is based on the Group’s loss attributable to shareholders of approximately HK$29,456,000 (2002: profit of HK$10,027,000) and on the weighted average number of 956,403,580 ordinary shares in issue (2002: 954,619,681) during the year.

The diluted loss per share for the year ended 30th June 2003 is not presented because the effect of the assumed conversion of all dilutive potential ordinary shares outstanding during the year is anti-dilutive. 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 of ordinary shares in issue during the year plus the weighted average 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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OVERALL REVIEW

The financial year under review was one of the most difficult years in the Group’s history. There are no clear indication that the local economy will recover from deflation and prolonged high unemployment rate. The operating environment deteriorated during the first half of 2003 where the outbreak of Severe Acute Respiratory Syndrome (“SARS”) has severely affected the operating environment of the Group.

OPERATING RESULTS

During the financial year ended 30th June 2003, the Group’s consolidated turnover was HK$251.2 million, representing a decrease of 18.1% as compared to the last fiscal year. The Group recorded a loss for the first time since its listing. Loss attributable to shareholders for the financial year 2002/2003 was HK$29.5 million, which is mainly attributable to:-

• provisions made for impairment in value of film rights in view of the uncertain local economic situation amounted to approximately HK$37.1 million;

• escalating royalty costs due to a decline in films available; and

• decrease in revenue and profitability from core business segments due to continue pricing pressure of video products as a result of keen competition and weak sentiment.

BUSINESS REVIEW

Video distribution

Although the performance of video distribution showed an encouraging growth of 4.3% during the first half of the financial year, the performance for the whole year as compared to the financial year 2001/2002 was disappointing due to the SARS outbreak which has severely affected sales of video distribution during the first half of 2003. Revenue generated from video distribution for the current financial year was HK$186.2 million, representing a reduction of approximately 22.3%.

During the financial year, the Group attempted to implement various marketing strategies to stimulate consumer’s demand in view of the sluggish retail market such as the downward adjustment in the pricing of the Group’s products. Nevertheless, sales were still disappointing, resulting the contribution in terms of gross profit, before provision made for impairment losses of film rights for video distribution business for the current financial year reduced significantly to HK$34.3 million, as compared to HK$71.6 million in 2001/2002.

Film exhibition, film licensing and sub-licensing

Film exhibition, film licensing and sub-licensing also experienced a decline in revenue and profitability. Total revenue decreased from HK$62.2 million to HK$50.5 million during the financial year under review, while gross profit, before provision made for impairment losses of film rights for this business segment, declined by 36.2% to HK$6.0 million.

The drop in both the revenue and profitability was mainly attributable to the decreasing number of films produced by the Group in the current financial year compared to the previous year. Since early 2002, in view of the overall contraction in local demand for Chinese language films, the Group has adopted a prudent approach in investments in film productions resulting in fewer films produced and hence, available for film exhibition and film licensing.

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Replication of optical discs and leasing of investment property and machineries

The replication of optical disc services has also been adversely affected by the severe price competition within the industry during the period under review. Consequently, turnover generated from this business segment declined significantly. In view of keen competition and uncertain outlook within the industry, the Group has decided not to focus on the development of this business segment but to allocate its resources to business of higher return while at the same time maintain a stable recurring income. The Group has leased its replication machineries and investment property to a third party since 1st December 2002.

OUTLOOK

The local economy is still overshadowed by uncertainty. The Group anticipates the operating environment in Hong Kong will remain difficult for the coming year as deflationary threats persist. Price competition is expected to remain keen, thus affecting the Group’s profit margins. Nevertheless, the Group, for its long-term growth and profitability, will continue with its businesses using a more pragmatic and prudent approach.

The Group is aware of the importance in product and market expansion and diversification, especially under such economic climate. In order to achieve this, the Group embarked upon the following expansion and diversification plans:

• The Group invests in an associated company with a third party in Hong Kong for the production of the Group’s first TV series earlier this year.

• The Group has also set up a new division to launch the Universe Videoclub, jointly with Hutchison Global Communications, PowerCom Network Hong Kong Limited and Yes TV Plus, in September 2003. Members can gain access to this video club through internet websites and view movies over personal computers.

• The Group has successfully co-produced seven films with various film production companies in the People's Republic of China (the “PRC”). Three of them, namely “May & August”, “My Dream Girl” and “Heroic Duo”, were completed and had been successfully released in both Hong Kong and the PRC. The remaining four films are progressing well and are expected to be released in late 2003 and early 2004.

The Group believes that the new divisions of TV series production and the Universe Videoclub will make positive contribution towards the Group in the near future thus it will continue to seek investment opportunities in the production of quality TV series.

The Group anticipates that there will be an increasing demand for quality Chinese-language films from overseas and the PRC markets, especially in the PRC where there will be immense growth potential following the entry into the World Trade Organisation. The Group plans to continue co-producing more films with different film production companies in the PRC in the coming years. The Group believes that such collaboration, coupled with its expertise and experience in the industry, will enable it to capture a considerable market share in the PRC.

In addition in seeking film production partners in the PRC, the Group will also look for strategic partners from Japan, Korea, Thailand and other western countries to cooperate in film production. Plans are in the pipeline for the co-production of a film between Hong Kong and Thailand in early 2004.

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The Group believes that the signing of the Closer Economic Partnership Arrangement (“CEPA”) recently will provide more flexibility to Hong Kong companies engaged in film production, film distribution and film licensing in the PRC, for instance, the limit on the number of Hong Kong personnel participating in a co-production is relaxed. Requirements that the storyline must take place in the PRC has been removed, although the storyline or leading casts are still required to be related to the PRC. In addition, Hong Kong companies, engaging in the distribution of audiovisual products and investments in the operation of cinema theatres in the PRC are now permitted to have a majority stake (not more than 70 per cent.) in joint ventures.

It is the Group’s strategy that, apart from maintaining a leading position in the local market through expansion, it is also the Group’s strategies to actively explore every opportunity presented by CEPA.

Looking ahead, the Group is confident with its expertise in video distribution and film licensing, leading position in the industry and the opportunities arising from CEPA which will enable it to meet the challenging times ahead while continue to expand its market share.

LIQUIDITY AND FINANCIAL POSITION

As at 30th June 2003, the Group had cash balances of HK$43.4 million and unutilized banking facilities amounted to approximately HK$65.0 million while the corresponding figures in the last year were HK$98.6 million and HK$67.0 million respectively.

As at 30th June 2003, the Group had total assets of approximately HK$288.1 million, representing a decrease of HK$117.8 million over that of 30th June 2002. Such reduction was mainly due to redemption of the convertible notes of approximately HK$54.1 million on 25th July 2002 and a provision of HK$37.1 million for impairment in value of film rights for the year.

The gearing ratio as at 30th June 2003 was further reduced to 13.6% as compared to 14.3% excluding the convertible notes which had been redeemed on 25th July 2002 in the last year. The calculation of gearing ratio is based on the sum of the Group’s bank loans and obligations under finance leases of approximately HK$29.9 million (of which HK$11.0 million, HK$6.6 million, HK$10.5 million and HK$1.8 million are repayable within one year, in the second year, in the third to fifth year and after the fifth year respectively) and on the shareholders’ fund of approximately HK$219.8 million.

Capital expenditure for the financial year under review including the acquisition of a property amounted to HK$14.0 million, which was financed by a mortgage loan and internal cash of HK$9.5 million and HK$4.5 million respectively.

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

Finance costs reduced by 88.5%, mainly due to lower interest expenses following the redemption of interest bearing convertible notes on 25th July 2002 and the Group’s reduced borrowings. The reduction was also due to the current low interest rates of borrowings.

THE PLEDGE OF GROUP ASSETS

As at 30th June 2003, bank balances and certain fixed asset of the Group with aggregate carrying value of approximately HK$78.8 million (2002: HK$83.5 million) were pledged to secure banking facilities utilized by subsidiaries.

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EMPLOYEES AND REMUNERATION POLICIES

As at 30th June 2003, the Group employed 116 staffs (2002: 209). Remuneration is reviewed annually and certain staffs are entitled to commission. In addition to the basic salaries, staff benefits included discretionary bonus, medical insurance scheme and mandatory provident fund.

SHARE OPTION SCHEME

The Company adopted its existing share option scheme on 28th June 1999 which will expire on 27th June 2009 (the “Existing Scheme”). In view of the changes introduced in chapter 17 of the Rules Governing the Listing of Securities (the “Listing Rules”) on the Stock Exchange with effect from 1st September 2001, the Board considers that it is in the interest of the Company to adopt a new share option scheme in compliance with the Listing Rules (the “New Scheme”) and to terminate the Existing Scheme. A summary of the principal terms of the New Scheme will be set out in a circular (the “Circular”) which will be despatched to the shareholders of the Company together with the annual report of the Company for the year ended 30th June 2003. The Existing Scheme will be terminated upon the New Scheme coming into effect which in turn will be subject to the fulfillment of certain conditions set out in the Circular.

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 comprises two non-executive directors, namely Messrs. NG Kwok Tung and CHIU Shin Koi. Two meetings were held during the current financial year.

CODE OF BEST PRACTICE

The Company has complied with the Code of Best Practice as set out in Appendix 14 of the Listing Rules for the year ended 30th June 2003.

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, 20th October 2003

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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 2003 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 2003.

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 resolution as an Ordinary Resolution:

“THAT:

subject to and conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) granting approval of the listing of, and permission to deal in, any shares of HK$0.02 each in the capital of the Company (the “Share”) to be allotted and issued pursuant to the exercise of options that may be granted under the new share option scheme of the Company (the “New Share Option Scheme”) (the New Share Option Scheme is contained in the document marked “A” produced to the meeting and for the purpose of identification signed by the Chairman of the meeting) the New Share Option Scheme be and is hereby approved and adopted and the board of directors of the Company (the “Board”) be and is hereby authorised to do all such acts and to enter into all such transactions, arrangements and agreements as may by necessary or expedient in order to give full effect to the New Share Option Scheme including but without limitation;

• (a) to administer the New Share Option Scheme under which options will be granted to participants eligible under the New Share Option Scheme to subscribe for Shares;

• (b) to modify and/or amend the New Share Option Scheme from time to time provided that such modification and/or amendment is effected in accordance with the provisions of the New Share Option Scheme relating to modification and/or amendment;

• (c) to allot and issue from time to time such number of Shares as may be required to be allotted and issued pursuant to the exercise of the options under the New Share Option Scheme and subject to the Rules Governing the Listing of Securities on the Stock Exchange;

• (d) to make application at the appropriate time or times to the Stock Exchange for the listing of and permission to deal in any Shares which may hereafter from time to time be allotted and issued pursuant to the exercise of the options under the New Share Option Scheme; and

• (e) to consent, if it so deems fit and expedient, to such conditions, modifications and/or variations as may be required or imposed by the relevant authorities in relation to the New Share Option Scheme.”

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1. as special business to consider and, if thought fit, pass the following resolution as an Ordinary Resolution:

“ THAT conditional upon the passing of the Ordinary Resolution set out in 4 above, the existing share option scheme for the full-time employees of the Company and its subsidiaries (including any executive director of the Company and its subsidiaries) which was adopted by a resolution duly passed by the sole shareholder of the Company on 28th June 1999 be and is hereby terminated with immediate effect.”

1. as special business to consider and, if thought fit, pass the following resolution as an Ordinary Resolution:

“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;

• (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 Issue (as defined below): or (ii) the exercise of any option scheme or similar arrangement for the time 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 the passing 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 earliest 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 laws of Bermuda 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).”

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1. as special business to consider and, if thought fit, pass the following resolution as an Ordinary Resolution:

“THAT:

• (a) subject to sub-paragraph (b), the exercise by the Directors during the Relevant Period (as defined below) 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 subparagraph (a) during the Relevant Period shall not exceed 10% of the aggregate nominal amount of the share capital of the Company in issue as at the date of the passing 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 earliest 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 laws of Bermuda 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.”

• as special business to consider and, if thought fit, pass the following resolutions as an Ordinary Resolution:

“ THAT conditional upon the passing of the Ordinary Resolutions set out in 6 and 7 above, 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 the Ordinary Resolution set out in 7 above 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 the Ordinary Resolution set out in 6 above.”

By Order of the Board Chan Hau Chuen Company Secretary

Hong Kong, 20th October 2003

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Notes:

• (1) Any member entitled to attend and vote at the Annual General Meeting of the Company 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 Annual General Meeting of the Company. 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, and 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 of the Annual General Meeting of the Company 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 7 above will be circulated with the annual report of the Company for the year ended 30th June 2003 to be sent to shareholders.

Please also refer to the published version of this announcement in the International Herald Tribune.

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