11th Apr 2006 07:01
Sinosoft Technology plc11 April 2006 11 April 2006 SINOSOFT TECHNOLOGY PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 Sinosoft Technology plc ("Sinosoft" or the "Company"), the China based developerand provider of e-Government software and services, which recently listed onAIM, announces maiden preliminary results for the year ended 31 December 2005. The Company (EPIC: SFT), has established itself as a market leader in theprovision of specialised export tax management software and e-Governmentservices in Jiangsu through its wholly owned subsidiaries Nanjing Skytech Co.Ltd and Nanjing Skytech Software Co. Ltd (together referred to as "Skytech").Skytech has contracts with a number of government bodies and has over 29,000customers including subsidiaries of multinational companies like Hitachi andMitsubishi. Highlights from the results include: * Turnover up 24% to US$6.16 million (2004: US$4.98 million) * Net profit up 34% to US$3.52 million (2004: US$2.63 million) * Net profit margin increased to 57% (2004: 53%) * Skytech awarded "Golden Tax Tender" by the Chinese State Administration of Taxation. Roll out of automated export tax process to thirty six provincial tax offices in China being finalized * Successfully raised US$17 million and admitted to AIM Commenting on the results Miss Xin, CEO of Sinosoft said: "The Sinosoft groupcontinues to benefit from China's technological advancement and the upsurge inChinese export activity. The successful fundraising has enabled the Group todevelop its strategy to grow beyond Jiangsu and to further develop our expandingproduct suite. The board is confident that 2006 will be a year of excitinggrowth and we look forward to continuing our development and delivering valuefor shareholders." For further information please contact: Sinosoft Ms. Helen Xin, +86 025 84815959 Chief Executive Officer Westhouse Securities Tim Metcalfe 020 7601 6100 Tavistock Communications Paul Dulieu 020 7920 3150 Matt Ridsdale SINOSOFT TECHNOLOGY PLC OPERATING COMPANIES' FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 CHAIRMAN'S STATEMENT I am pleased to announce the audited results of Sinosoft's trading subsidiaries,namely, Nanjing Skytech Co. Ltd and Nanjing Skytech Software Co. Ltd (togetherreferred to as "Skytech") for the year ended 31 December 2005. These are thefirst trading results announced since the Company was admitted to AIM on 6 March2006. The financial results for Skytech set out below relate entirely to thepre-flotation period and have been prepared on a combined basis for Nanjing Skytech Co. Ltd and Nanjing Skytech Software Co. Ltd. The results for Skytech'sholding companies, namely Infotech Holdings Pte. Ltd and Sinosoft have seen nomaterial change from the information disclosed in the AIM Admission Documentpublished on 28 February 2006. Financial highlights I am pleased that Skytech's results for the year ended 31 December 2005 arebetter than market expectations. Skytech achieved a year-on-year growth inturnover of 24%. In addition to strong revenue growth Skytech achieved improvements in its margins with the net profit margin increasing from 53% to 57%. The Company continues to work on expanding Skytech's product range and improvingthe quality of its software products and services. This includes investing inadditional research and development facilities and new software products whichwere specifically developed for Skytech and this investment will allow it toenhance its current software range. The increasing move by the Chinese government towards digitisation at all levelsis driving demand for all the Company's products, in particular its e-governmentand export tax software. We are delighted with the progress Sinosoft is making. We have had a successfuldebut on AIM which has raised the profile of the enlarged group (being Sinosoftand its subsidiaries (the "Group")) and has provided the funds to expand ouractivities and further develop the business. May I take this opportunity to thank all the board members, and particularly ouremployees who have worked extremely hard to bring the Group to its currentposition. Mao NingChairman CHIEF EXECUTIVE OFFICER'S STATEMENT Operational update It gives me great pleasure to release my first Chief Executive's statement. 2005was a successful year for the Group at an operating level. During the yearSkytech focused on growing market share and this was achieved in all three ofthe Group's principal revenue streams of e-government software, export taxsoftware and information integration. The awarding of the Golden Tax Tender bythe Chinese State Administration of Taxation ("SAT") will, in the opinion of theboard, enable Skytech to target exporting enterprises across China. Since the publication of the AIM Admission Document on 28 February 2006 Sinosoftand its subsidiaries have seen further developments in the business including:- * Securing a contract for the provision of existing e-government products to Yangzhou City for an initial value of $110,000. In addition to this one off revenue this new contract will provide Skytech with ongoing support income and enable Skytech to develop additional sales to agencies in Yangzhou. * Following the awarding to Skytech of the Golden Tax Tender by the SAT, Skytech has been working with the SAT to finalise the rollout across thirty six provincial bureaus. The receipt of the Golden Tax Tender is an important step in developing the Group's activities outside of Jiangsu province. * Sales of the Group's export tax software continue to grow in Jiangsu province. In the first three months of 2006 approximately 1,000 new exporting enterprises have begun to use Skytech's export tax products. These include subsidiaries of multinational companies including Hitachi, Atlas Copco and Mitsubishi. Following Sinosoft's admission to AIM the Group has repaid its borrowings ofUS$2.3 million, invested in increasing its research and development capabilitiesand begun the process of setting up a new office in Shanghai. I am pleased toannounce that we have recruited a number of new technical staff with the Group'semployees now totalling 160. The Sinosoft group continues to benefit from China's technological advancementand the upsurge in Chinese export activity. The successful fundraising hasenabled the Group to develop its strategy to grow beyond Jiangsu and to furtherdevelop our expanding product suite. The board is confident that 2006 will be ayear of exciting growth and we look forward to continuing our development anddelivering value for shareholders. Helen XinChief Executive Officer COMBINED INCOME STATEMENT Year ended 31 Year ended 31 December 2005 December 2004 Notes Audited Audited US$ US$ Revenue 6 6,155,852 4,979,029Cost of sales (1,673,880) (1,458,877) -----------------------------------Gross profit 4,481,972 3,520,152 Other operating income 7 622,185 458,692Research and development cost (519,462) (483,460)Selling and distribution expenses (421,417) (315,378)Administrative expenses (605,549) (434,866)Other operating expenses (1,173) (3,226) -----------------------------------Profit from operations 8 3,556,556 2,741,914 Finance cost 9 (22,144) (18,981)Finance income 10 26,348 10,687Share of associates losses - (80,929)Gain on disposal of subsidiary - 104,384Trading investment loss - (88,116) -----------------------------------Profit before income tax 3,560,760 2,668,959 -----------------------------------Taxation 11 ----------------------------------- Current tax 11(a) | - (4,477)| Deferred tax 11(b) | (44,913) - | ----------------------------------- (44,913) (4,477) -----------------------------------Net profit for the year 3,515,847 2,664,482 Minority interest - (32,049) -----------------------------------Profit for the year 3,515,847 2,632,433 =================================== COMBINED BALANCE SHEET 31 December 31 December Notes 2005 2004 Audited Audited US$ US$ASSETS Current assets Cash and cash equivalents 3,956,182 1,596,822Trade receivables 12 2,010,203 1,557,442Other receivables 13 1,238,253 1,059,600Inventories 14 557,415 236,195 -----------------------------------Total current assets 7,762,053 4,450,059 -----------------------------------Non-current assets Property, plant and equipment 15 381,238 365,620Intangible assets 16 1,238,636 469,304Investments 17 185,795 181,598 -----------------------------------Total non-current assets 1,805,669 1,016,522 ----------------------------------- Total assets 9,567,722 5,466,581 -----------------------------------LIABILITIES & EQUITY Current liabilities Trade payables 369,598 258,340Other payables 18 477,496 317,788Bank loans 19 371,591 363,196 -----------------------------------Total current liabilities 1,218,685 939,324 -----------------------------------Non-current liabilities Deferred income 148,636 48,426Deferred tax 11(b) 45,636 - -----------------------------------Total non-current liabilities 194,272 48,426 ----------------------------------- Total liabilities 1,412,957 987,750 -----------------------------------Capital and reserves Share capital 20 1,452,785 1,452,785General reserves 758,522 334,653Retained earnings 5,783,371 2,691,393Exchange reserve 160,087 - -----------------------------------Total shareholders' equity 8,154,765 4,478,831 ----------------------------------- Total liabilities & equity 9,567,722 5,466,581 ----------------------------------- COMBINED STATEMENT OF CASH FLOWS Year ended 31 Year ended 31 December 2005 December 2004 Audited Audited US$ US$ Income before taxation 3,560,760 2,668,959Adjustments for: Depreciation of property, plant and equipment 36,065 18,133Amortisation of intangible assets 108,560 57,207Provision for impairment on investment in associate - 80,929Provision for balance due from associate - (35,522)Loss on disposal of investment held for trading - 88,116Provision for impairment for receivables 20,381 66,886Interest income (26,348) (10,687)Interest expense 22,144 18,981 -----------------------------------Operating cash flows before working capital changes 3,721,562 2,953,002 Increase in trade and other receivables (582,268) (1,939,519)Increase in inventories (310,761) (141,358)Increase/(decrease) in trade and other payables 351,092 (146,185) -----------------------------------Cash used in operations (541,937) (2,227,062) ----------------------------------- Income taxes paid - (4,477)Interest paid (22,144) (18,981) -----------------------------------Net cash generated by operating activities 3,157,481 702,482 Cash flows from investing activities Interest received 26,348 10,687Cash held on deposit - 152,692Proceeds on disposal of trading investments - 554,517Purchase of property, plant and equipment (43,234) (175,952)Purchase of intangible assets (867,045) (435,835)Purchase of investments for trading - (193,705) -----------------------------------Net cash used in investing activities (883,931) (87,596) ----------------------------------- Cash flows from financing activities Capital injections from investors - 217,918Repayment of borrowings (371,591) (363,196)New borrowings 371,591 363,196 -----------------------------------Net cash generated from financing activities - 217,918 ----------------------------------- Net increase in cash and cash equivalents 2,273,550 832,804Cash and cash equivalent at the beginning of the financial year 1,596,822 764,018Effects of exchange rate changes 85,810 - -----------------------------------Cash and cash equivalent at the end of the financial year 3,956,182 1,596,822 =================================== STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Share Retained Statutory Exchange Capital Earnings Reserves Reserve Total US$ US$ US$ US$ US$ Balance at 1 January 2004 1,210,654 358,274 35,339 - 1,604,267Issue of share capital 242,131 - - - 242,131Net profit for the year - 2,632,433 - - 2,632,433Transfer to statutory reserve - (299,314) 299,314 - - --------------------------------------------------------------------------Balance at 31 December 2004 1,452,785 2,691,393 334,653 - 4,478,831 ========================================================================== Balance at 1 January 2005 1,452,785 2,691,393 334,653 - 4,478,831Net profit for the year - 3,515,847 - - 3,515,847Transfer to statutory reserve - (423,869) 423,869 - -Translation difference - - - 160,087 160,087 --------------------------------------------------------------------------Balance at 31 December 2005 1,452,785 5,783,371 758,522 160,087 8,154,765 ========================================================================== Notes to the financial information 1. The companies and their operation/general Nanjing Skytech Co. Ltd was incorporated on 14 December 1998 in the People'sRepublic of China ("PRC"). Its principal activity is that of the development andsale of computer software, computer and external equipment and relatedaccessories for communication products, digital products and other electricalappliances. Nanjing Skytech Co. Ltd became a 100% subsidiary of Infotech Holdings Pte Ltd on31 July 2004. On 20 January 2006 Infotech Holdings Pte Ltd became a wholly ownedsubsidiary of Sinosoft Technology plc. Nanjing Skytech Software Co. Ltd was incorporated on 2 July 2003 in the People'sRepublic of China. Its principal activity is that of the development, sales andservice of computer software and technology. Nanjing Skytech Software Co. Ltd was a 90% subsidiary of Nanjing Skytech Co. Ltdfrom incorporation until 31 July 2004, when Nanjing Skytech Co. Ltd's investmentwas acquired by Nanjing Sky Investment Information Co. Ltd. In January 2005,Infotech Holdings Pte Ltd acquired 100% of the issued share capital of NanjingSkytech Software Co. Ltd. The registered offices of Nanjing Skytech Co. Ltd and Nanjing Skytech SoftwareCo. Ltd are 3rd Floor, No. 50 Building, Jiangsu Software Park, No. 168 Long PanZhong Road, Nanjing, People's Republic of China. 2. Basis of preparation of the financial information This financial information has been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS"). The directors of Sinosoft Technology plcare responsible for preparing the financial information. The financial information represents the combination of the financialinformation of Nanjing Skytech Co. Ltd and Nanjing Skytech Software Co. Ltd("the combined entity"), which at 31 December 2005 are both 100% subsidiaries ofInfotech Holdings Pte Ltd. For the period during which Nanjing Skytech SoftwareCo. Ltd was a 90% subsidiary of Nanjing Skytech Co. Ltd the accounts have beenconsolidated for the group. For the subsequent period, the accounts of the two fellow subsidiaryundertakings have been combined but not consolidated. All transactions andbalances between the two companies have been eliminated in the preparation ofthe financial information for the combined entities. The financial informationdoes not constitute a consolidation of the results of the two companies and doesnot reflect the changes in the legal ownership and structure of the Infotech'group' of companies during the year covered by the financial information. The combined entity maintains its accounting records in Chinese Renminbi ("RMB")and prepares its statutory financial statements in accordance with People'sRepublic of China ("PRC") generally accepted accounting practices. The financialinformation is based on the statutory records, with adjustments andreclassifications recorded for the purpose of the fair presentation inaccordance with IFRS. The financial information has been prepared under the historical cost conventionexcept as disclosed in the accounting policies below. The financial information presented does not constitute statutory accounts forthe years under review. Adoption of IFRSThe financial information has been prepared under IFRS standards currently inissue as if they had been in issue for years covered by the financialinformation. The adoption of these standards did not result in substantial changes to thecombined entities accounting policies. The principal accounting policies adopted by the combined entity are consistentwith those disclosed for the years in this financial information. Management estimatesThe presentation of financial information under IFRS requires management to makeprudent estimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial information preparation and thereported amounts of revenue and expenses during the reporting year. Estimateshave been made principally in respect of the amounts capitalised as, and theuseful economic life of, intangible assets, useful economic life of property,plant and equipment, provisions for impairment of accounts receivable andinvestments. 3. Significant accounting policies 3.1. Functional and presentation currencyThe Chinese Renminbi (RMB) is the functional currency of the combined entity asit is the currency of the primary economic environment in which it operates. TheUnited States Dollar ("US$") is the currency used to present the financialinformation in order to improve the understanding of the results and thefinancial position of the combined entity outside of the PRC. The functional currency transactions are translated into the presentationcurrency using the average exchange rate of US$1:RMB8.2033 during the financialyear (FY2004: fixed rate at US$1:RMB8.26). Functional currency assets andliabilities are translated into the presentation currency at the rates ofexchange prevailing at the balance sheet date of US$1:RMB8.0734 (FY2004: fixedrate at US$1:RMB8.26). All resulting exchange differences are taken to theforeign currency translation reserve. Fixed exchange rate of US$:RMB was used for FY2004 as the RMB held a fixedexchange rate with the US$ during the previous financial year until July 2005when the currency began to float against a 'basket of currencies'. 3.2. Investments in associatesAn associate is an entity over which the combined entity exercises significantinfluence and is neither a subsidiary nor an interest in a joint venture.Significant influence is the power to participate in the financial and operatingpolicy decisions of the investee but is not control or joint control over thosepolicies. The results and assets and liabilities of associates are incorporated in thisfinancial information using the equity method of accounting, except when theinvestment is classified as held for sale, in which case it is accounted forunder IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Underthe equity method, investments in associates are carried in the consolidatedbalance sheet at cost as adjusted for post-acquisition changes in the combinedentity's share of the net assets of the associate, less any impairment in thevalue of the individual investments. Losses of an associate in excess of thecombined entity's interest in that associate (which includes any long-terminterests that, in substance, form part of the combined entity's net investmentin the associate) are not recognised. Any excess of the cost of acquisition over the net entity's share of the netfair value of the identifiable assets, liabilities and contingent liabilities ofthe associate recognised at the date of acquisition is recognised as goodwill.The goodwill is included within the carrying amount of the investment and isassessed for impairment as part of the investment. Any excess of the combinedentity's share of net fair value of the identifiable assets, liabilities andcontingent liabilities over the cost of acquisition, after reassessment, isrecognised immediately in profit or loss. Where the combined entity transacts with an associate of the combined entity,profits and losses are eliminated to the extent of the combined entity'sinterest in the relevant associate. 3.3. Revenue recognitionRevenue is measured at the fair value of consideration received or receivableand represents amounts receivable for goods and services provided in the normalcourse of business, net of discounts and sales related taxes. Revenue from the sale of goods is recognised when the significant risks andrewards of ownership are transferred to the buyer and the amount of revenue andthe costs of the transaction can be measured reliably. Revenue from installation contracts is recognised in accordance with thecombined entities' accounting policy on installation contracts (see below). Revenue from rendering of services that are of a short duration is recognisedwhen the services are completed. Other income includes Value Added Tax (VAT) rebates, which are recognised on anaccruals basis. Interest income is accrued on a time proportionate basis, by reference to theprincipal outstanding and at the interest rate applicable, on an effective yieldbasis. 3.4. Installation contractsWhen the outcome of a contract for the installation of network systems can beestimated reliably, revenue and costs are recognised on the percentage ofcompletion method, measured by reference to the proportion that costs incurredto date bear to estimated total costs for each contract, except where this wouldnot be representative of the stage of completion. Variations in contract work,claims and incentive payments are included to the extent that they have beenagreed with the customer. When the outcome of a contract cannot be estimated reliably, revenue isrecognised to the extent of contract costs incurred that it is probable thatthey are recoverable. Contract costs are recognised as expenses in the period inwhich they are incurred. When it is probable that the total contract costs will exceed total contractrevenue, the expected loss is recognised as an expense immediately. 3.5. Government grantsGovernment grants relating to expenditure that is not capitalised is credited tothe income statement to match the related expenditure when it is incurred. Government grants relating to the purchase of property, plant and equipment areincluded in the balance sheet by deducting the grant in arriving at the carryingamount of the assets. 3.6. Employee benefitsPost-employment benefit plans costDefined contribution plans are post-employment benefit plans under which Skytechpays fixed contributions into separate entities such as the Mandatory ProvidentFund ("MPF") scheme, and will have no legal or constructive obligation to payfurther contributions if any of the funds do not hold sufficient assets to payall employee benefits relating to employee service in the current and precedingfinancial years. Skytech's contribution to defined contribution plans arerecognised in the financial year to which they relate. 3.7. TaxationIncome tax expense represents the sum of tax currently payable and deferred tax. Current taxationThe tax currently payable is based on the taxable profit for the year. Taxableprofit differs from profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. Thecombined entity's liability for current tax is calculated using tax rates thathave been enacted or substantially enacted by the relevant balance sheet date. Deferred taxationDeferred tax is determined on the basis of tax effect accounting, using theliability method, and it is applied to all significant temporary differencesarising between the carrying amount of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, except that the potential tax savings relating to a tax loss carryforward is not recorded as an asset unless there is a reasonable expectation ofrealisation in the foreseeable future. Deferred tax assets and liabilities are measured using the tax rates that areexpected to apply to the period when the asset is realised or the liability issettled, based on tax rates (and tax laws) that have been enacted orsubstantially enacted by the balance sheet date. Deferred tax is charged orcredited to the profit or loss statement, except when it relates to itemscharged or credited to equity, in which case the deferred tax is also dealt within equity. Deferred tax assets and liabilities are offset when they relate toincome taxes levied by the same tax authority. 3.8. Cash and cash equivalentsCash and cash equivalents comprise cash in hand and cash held on demand withbanks, and other short-term highly liquid investments that are readilyconvertible to a known amount of cash and are subject to an insignificant riskof changes in value. 3.9. InventoriesInventories are measured at the lower of cost and net realisable value. Costincludes all costs of purchase, cost of conversion and other costs incurred inbringing the inventories to their present location and condition. Cost iscalculated using the first in first out method. Net realisable value is theestimated selling price less all estimated costs to completion and costs to beincurred in marketing, selling and distribution. 3.10. InvestmentsInvestments are recognised and derecognised on a trade-date basis and areinitially measured at cost, including transaction costs. At subsequent reporting dates, debt securities that the combined entity has theexpressed intention and ability to hold to maturity (held-to-maturity debtsecurities) are measured at amortised cost, less any impairment loss recognisedto reflect irrecoverable amounts. The annual amortisation of any discount orpremium on the acquisition of a held-to-maturity security is aggregated withother investment income receivable over the term of the instrument so that therevenue recognised in each period represents a constant yield on the investment.An impairment loss is recognised in profit or loss when there is objectiveevidence that the asset is impaired, and is measured as the difference betweenthe investment's carrying amount and the present value of estimated future cashflows discounted at the effective interest rate computed at initial recognition.Impairment losses are reversed in subsequent periods when an increase in theinvestment's recoverable amount can be related objectively to an event occurringafter the impairment was recognised, subject to the restriction that thecarrying amount of the investment at the date of the impairment is reversedshall not exceed what the amortised cost would have been had the impairment notbeen recognised. Investments other than held-to-maturity debt securities are classified as eitherheld-for-trading or available-for-sale, and are measured at subsequent reportingdates at fair value. Where securities are held for trading purposes, gains andlosses arising from changes in fair value are included in profit and loss forthe period. For available-for-sale investments, gains and losses arising fromchanges in fair value are recognised directly in equity, until the security isdisposed of or is determined to be impaired, at which time the cumulative gainor loss previously recognised in equity is included in the net profit or lossfor the period. Impairment losses recognised in profit or loss fordebt-instruments classified as available-for sale are subsequently reversed ifan increase in the fair value of the instrument can objectively be related to anevent occurring after recognition of the impairment loss. 3.11. Property, plant and equipmentProperty, plant and equipment are recorded at historic cost, less accumulateddepreciation and any impairment loss where the recoverable amount of the assetis estimated to be lower than its carrying amount. Property in the course of construction for production or administrative purposesis carried at cost, less any recognised impairment loss. Cost includesprofessional fees and, for qualifying assets, borrowing costs capitalised inaccordance with the combined entity's accounting policy. Depreciation of theseassets commences when the assets are ready for their intended use. Depreciation is charged so as to write off the cost of the assets over theirestimated useful lives, using the straight-line method, as follows: Property - 20 yearsElectronic equipment, furniture and fixtures - 5 yearsMotor vehicles - 8 years The assets' residual values and useful lives are reviewed, and adjusted, ifappropriate, at each balance sheet date. The gain or loss arising on the disposal or retirement of an item of property,plant and equipment is determined as the difference between the sales proceedsand the carrying amount of the asset and is recognised in profit or loss. 3.12. Internally generated intangible assets - research and developmentexpenditureResearch expenditure is recognised as an expense as incurred. Costs incurred on development projects are recognised as internally generatedintangible assets only if all of the following conditions are met: * an asset is created that can be identified (such as software and new processes); * it is probable that the asset created will generate future economic benefits; and * the development cost of the asset can be measured reliably. Internally generated intangible assets are amortised on a straight-line basisover their estimated useful lives, from the commencement of commercialproduction. Development costs that have been capitalised as intangible assets are amortisedon a straight-line basis over the period of its expected benefits, whichnormally does not exceed 3 years. 3.13. Patents and trademarksPatents and trademarks are measured initially at purchase cost and are amortisedon a straight-line basis over their estimated useful economic lives. Patents - 3 yearsTrademarks - 2 years 3.14. Impairment of tangible and intangible assetsAt each balance sheet date, the combined entity reviews the carrying amounts ofits assets to determine whether there is any indication that those assets havesuffered an impairment loss. If any such indication exists, the recoverableamount of the asset is estimated to determine the extent of the impairment loss(if any). When it is not possible to estimate the recoverable amount of an individualasset, the combined entity estimates the recoverable amount of thecash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value inuse. If the recoverable amount of an asset is estimated to be less than its carryingamount, the carrying amount of the asset is reduced to its recoverable amount.Impairment losses are recognised as an expense immediately. When an impairment loss subsequently reverses, the carrying amount of the assetis increased to the revised estimate of its recoverable amount, to the extentthat the increased carrying amount does not exceed the carrying amount thatwould have been determined had no impairment loss been recognised for the assetin prior years. A reversal of an impairment loss is recognised as incomeimmediately. 3.15. Financial assetsThe principal financial assets are cash, trade receivables, other receivablesand other investments. Trade and other receivables are stated at their nominalvalue as reduced by appropriate allowances for estimated irrecoverable amounts.The accounting policy of other investments is outlined above. 3.16. Financial liabilities and equityFinancial liabilities and equity instruments are classified according to thesubstance of the contractual arrangements entered into. Significant financialliabilities include interest-bearing short-term bank loans, trade and otherpayables. Interest-bearing short-term bank loans are recorded at the proceeds received,net of direct issue costs. Finance charges, including premiums payable onsettlement or redemption, are accounted for on an accrual basis and are added tothe carrying amount of the instrument to the extent that they are not settled inthe period in which they arise. Finance costs are accounted for on an accrualbasis (effective yield method) and are added to the carrying amount of theinstrument to the extent that they are not settled in the period in which theyarise. Trade and other payables are stated at their nominal value. Equity instruments are recorded at the fair value of consideration received, netof direct issue costs. 3.17. Borrowings and borrowing costsBorrowings are recognised initially at fair value, net of transaction costsincurred. Borrowings are subsequently stated at amortised cost; any differencebetween the proceeds (net of transaction costs) and the redemption value istaken to the profit and loss statement over the period of the borrowings usingthe effective interest method. All borrowing costs are taken to the profit and loss statement over the periodof borrowing using the effective interest method. 3.18. Foreign currency transactionsIn preparing the financial statements of the individual entities, transactionsin currencies other than the entity's functional currency (RMB) are recorded atrates of exchange prevailing on the dates of the transactions. At each balancesheet date, monetary balances denominated in foreign currencies are retranslatedat the rates ruling at the balance sheet date. Exchange differences arising on the settlement of monetary items, and on theretranslation of monetary items, are included in the income statement for theyear. 3.19. ProvisionsProvisions are recognised when the combined entity has a present legal orconstructive obligation as a result of a past event where it is probable thatthe obligation will result in an outflow of economic benefits that can bereasonably estimated. 3.20. LeasesLeases where the lessor retains substantially all the risks and benefits ofownership of the asset are classified as operating leases. Initial direct costsincurred in negotiating an operating lease are added to the carrying amount ofthe leased asset and recognised over the lease term on the same bases as thelease income. Operating lease payments are recognised as an expense in theincome statement on a straight-line basis over the lease term. 3.21. Segment reportingA business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. A geographical segment is engaged inproviding products or services within a particular economic environment that aresubject to risks and returns that are different from those of segments operatingin other economic environments. 3.22. Statutory reserveStatutory reserve is in respect of the PRC companies and has been set aside inaccordance with the legislation in the country. 4. Financial risks and management 4.1. Financial risk factorsThe combined entity's activities expose it to a variety of financial risks. Thecombined entity's overall risk management programme focuses on theunpredictability of financial markets and seeks to minimise potential adverseeffects on the financial performance of the combined entity. Risk management is carried out by Sinosoft's Board of Directors. The Boardidentifies and evaluates financial risks in close co-ordination with the combined entity's operating units. The Board provides principles for overall riskmanagement, as well as policies covering specific areas such as credit risk,interest rate risk, foreign currency risk and liquidity risk. (i) Credit risk The combined entity has no significant concentration of credit risk. The combined entity has policies in place to ensure that sales are made to customers with an appropriate credit history. (ii) Interest rate risk The combined entity obtains additional financing through bank borrowings. The combined entity's policy is to obtain the most favourable interest rates available. The terms and interest rates payable are disclosed in Note 19 to the financial information. Surplus funds are placed with reputable banks. (iii) Foreign currency risk The combined entity's sales and purchases are mainly denominated in Chinese Renminbi. The residual risk after the natural hedging effects of any foreign currency denominated assets and liabilities are not expected to have a significant impact on the combined entity's financial position and future cash flows. (iv) Liquidity risk The combined entity has sufficient cash and cash equivalents to meet its operational requirements. (v) Fair values of financial assets and financial liabilities The carrying amounts of financial assets and financial liabilities reported in the balance sheet approximate their fair values. 5. Segment information The combined entity is principally engaged in the development and sales ofcomputer software, computer and external equipment, and related accessories forcommunication products, digital products and other electrical appliances in thePRC and all of its customers are based in the PRC. In addition, all identifiableassets of the combined entity are located principally in the PRC. Accordingly,no segmental analysis is presented. 6. Revenue Year ended 31 Year ended 31 December 2005 December 2004 Audited Audited US$ US$ Software 4,338,422 3,345,002System Integration 1,817,430 1,634,027 ----------------------------------- 6,155,852 4,979,029 =================================== For management purpose, the combined entity's operations are organised into oneoperating division namely software development which includes sales of softwareproducts and system integration. 7. Other operating income Year ended 31 Year ended 31 December 2005 December 2004 Audited Audited US$ US$ VAT refund 565,998 456,261Government grants and rebates 56,187 2,431 ----------------------------------- 622,185 458,692 =================================== 8. Profit from operations The profit from operations is stated after charging/(crediting) the following: Year ended 31 Year ended 31 December 2005 December 2004 Audited Audited US$ US$ Staff costs (excluding directors' remuneration) 579,742 378,183Less: Staff costs included in research and development costs (359,632) (200,418) ----------------------------------- 220,110 177,765 =================================== Directors' remuneration 149,696 107,506Cost of defined contribution plans included in staff costs 114,478 41,214Provision against trade receivables 20,381 66,886Provision against receivables from associate - (35,522)Depreciation charge 36,065 18,133Amortisation charge 108,560 57,207Provision for impairment in investment - 80,929 ===================================Number of employees - year end 142 117 =================================== 9. Finance cost Year ended 31 Year ended 31 December 2005 December 2004 Audited Audited US$ US$ Interest on bank loans 22,144 18,981 =================================== 10. Finance income Year ended 31 Year ended 31 December 2005 December 2004 Audited Audited US$ US$ Interest income 26,348 10,687 =================================== Interest income is calculated at 2.07% per annum (2004: 2.07 %). 11. Taxation (a) Current tax Year ended 31 Year ended 31 December 2005 December 2004 Audited Audited US$ US$ Current tax - 4,477 =================================== The charge for the year can be reconciled to the results of the combined entityas follows: US$ US$ Profit before tax 3,560,760 2,668,959 -----------------------------------Tax at applicable income tax rate of 33% 1,175,051 880,756Tax effect of non-deductible expenses 34,857 414,269Tax effect of exempt income (980,459) (656,367)Tax effect of income not taxable (229,449) (634,181) -----------------------------------Tax expense for the year - 4,477 =================================== (b) Deferred tax The following are the major deferred tax liabilities recognised by the combinedentity and the movements thereon during the current and prior reporting periods: Accelerated depreciation & amortisation for tax purposes US$ As at 1 January 2004 and 31 December 2004 - =================================== At 1 January 2005 -Current year charge 44,913Translation difference 723 -----------------------------------At 31 December 2005 45,636 =================================== 12. Trade receivables 31 December 2005 31 December 2004 Audited Audited US$ US$ Trade receivables 2,118,782 1,640,546Less: provision for doubtful debts (108,579) (83,104) ----------------------------------- 2,010,203 1,557,442 =================================== 13. Other receivables 31 December 2005 31 December 2004 Audited Audited US$ US$ Other receivables 162,009 196,370Amount due from parent company 435,231 142,254VAT receivable 82,391 24,753Prepayments 375,676 609,298Deposits 182,946 86,925 ----------------------------------- 1,238,253 1,059,600 =================================== Amount due from parent company is unsecured, interest free, and have no fixedterms of repayment. 14. Inventories 31 December 2005 31 December 2004 Audited Audited US$ US$ Goods for resale 536,031 230,322Work in progress 21,384 5,873 ----------------------------------- 557,415 236,195 =================================== 15. Property, plant and equipment Land and Properties Plant and Motor Total buildings under equipment vehicles construction US$ US$ US$ US$ US$Cost Balance at 1 January 2005 48,382 206,402 42,660 93,298 390,742Additions 36,812 - 6,422 - 43,234Reclassification 211,173 (211,173) - - -Translation difference 1,118 4,771 986 2,155 9,030 --------------------------------------------------------------------------Balance at 31 December 2005 297,485 - 50,068 95,453 443,006 -------------------------------------------------------------------------- Accumulated depreciation Balance at 1 January 2005 3,132 - 11,008 10,982 25,122Depreciation charge 12,176 - 12,554 11,335 36,065Translation difference 72 - 255 254 581 --------------------------------------------------------------------------Balance at 31 December 2005 15,380 - 23,817 22,571 61,768 -------------------------------------------------------------------------- Net book value Balance at 31 December 2005 282,105 - 26,251 72,882 381,238 ==========================================================================Balance at 1 January 2005 45,250 206,402 31,652 82,316 365,620 ========================================================================== 16. Intangible assets Development Patents and Total costs trademarks US$ US$ US$ Cost At 1 January 2005 631,962 12,205 644,167Additions 867,045 - 867,045Translation difference 14,606 283 14,889 ----------------------------------------------------At 31 December 2005 1,513,613 12,488 1,526,101 ---------------------------------------------------- Accumulated amortisation At 1 January 2005 162,698 12,165 174,863Charge for the year 108,518 42 108,560Translation difference 3,761 281 4,042 ----------------------------------------------------At 31 December 2005 274,977 12,488 287,465 ---------------------------------------------------- Net book value Balance at 31 December 2005 1,238,636 - 1,238,636 ====================================================Balance at 1 January 2005 469,264 40 469,304 ==================================================== 17. Investments 31 December 2005 31 December 2004 Audited Audited US$ US$ Associate: Investment, at cost - 242,131Share of post acquisition results - (161,202)Provision for impairment - (80,929) ----------------------------------- - - Other equity investments, at cost 185,795 181,598 ----------------------------------- 185,795 181,598 =================================== The details of the associate are described below: Name of associate Country of Principal activity Effective equity incorporation/ held by the business combined entity Nanjing Nanhua People's Development andConsulting Co. Republic of sales of hardware 33%Ltd * China and software and systems integration services * The associate had been placed under liquidation in 2005, which a provision for impairment has been made in respect of the combined entity's investment in FY2004. Summarised financial information in respect of the combined entity's associatesis set out below: 31 December 2005 31 December 2004 Audited Audited US$ US$ Total assets - 404,244Total liabilities - 248,974 -----------------------------------Net assets - 155,270 ----------------------------------- Combined entity's share of associate's net assets - 51,757 =================================== Revenue - 461,733 -----------------------------------Loss of the year - (87,516) -----------------------------------Combined entity's share of associate's loss for the period - - ----------------------------------- 18. Other payables 31 December 2005 31 December 2004 Audited Audited US$ US$ Deposits received 52,435 60,166Other tax payable 72,066 33,265Dividend payable 61,346 59,961Other payables 291,649 164,396 -----------------------------------Total 477,496 317,788 =================================== 19. Bank loans 31 December 2005 31 December 2004 Audited Audited US$ US$ Bank loans 371,591 363,196 =================================== The bank loan is a revolving bank loan secured by corporate guarantee. Theguarantee for the loan was provided by Nanjing Nanhua Consulting Co. Ltd until31 December 2004. From 1 January 2005 the guarantee was provided by NanjingSkytech Software Co. Ltd. The loan facility expired on 6 January 2006 and wasrepaid accordingly. The average interest rates paid were 6.26% (2004:5.54%) per annum as at 31December 2005. 20. Share capital 31 December 2005 31 December 2004 Audited Audited US$ US$ Registered capital: Nanjing Skytech Co. Ltd 1,210,654 1,210,654Nanjing Skytech Software Co. Ltd 242,131 242,131 ----------------------------------- 1,452,785 1,452,785 =================================== The registered capital of Nanjing Skytech Co. Ltd increased as follows: - investment of US$ 242,131 on 8 November 2002; - investment of US$ 605,327 on 2 August 2003. Nanjing Skytech Software Co. Ltd had registered capital of US$ 242,131 onincorporation. 21. Operating lease arrangements 31 December 2005 31 December 2004 US$ US$ Minimum lease payments under operating leases included in the income statement 111,650 78,639 =================================== At the balance sheet date, the commitments in respect of non-cancellableoperating leases for office building, workshop and warehouses with a term ofmore than one year were as follows: 31 December 2005 31 December 2004 US$ US$ Future minimum lease payments payable: Within one year 118,511 83,274In two to five years 12,551 191,012 ----------------------------------- 131,062 274,286 =================================== 22. Related party transactions From 31 July 2004, the immediate parent company of Nanjing Skytech Co. Ltd wasInfotech Holdings Pte Ltd. From incorporation until 31 July 2004, the immediate parent company of NanjingSkytech Software Co. Ltd was Nanjing Skytech Co. Ltd. From 31 July 2004 untilJanuary 2005 the immediate parent undertaking was Nanjing Sky InvestmentInformation Co. Ltd. From January 2005, the immediate parent undertaking wasInfotech Holdings Pte Ltd, a company incorporated in Singapore. At the date of this report the immediate parent company of each of the companiesmaking up the combined entity was Infotech Holdings Pte Ltd, a companyincorporated in Singapore. The ultimate parent undertaking was SinosoftTechnology plc, a company incorporated in England. The ultimate controlling party throughout the year of this report was Ms XinYingmei by virtue of her majority shareholding in the companies or theirimmediate and ultimate parent undertakings. Transactions between the companies that form the combined entity, which arerelated parties, have been eliminated in the preparation of the financialinformation set out in this report and are not disclosed in this note. During the financial year ended 31 December 2004, Nanjing Skytech Co. Ltd madeworking capital loans to Infotech Holdings Pte Ltd of US$142,254. This balancewas outstanding at that year end. During the financial year ended 31 December2005, further working capital loans of US$292,976 were made to Infotech HoldingsPte Ltd. The balance outstanding at the year end was US$435,231. This loan isunsecured, interest free and has no fixed repayment terms. Included within other payables at 31 December 2005 was a balance of US$61,346(2004:US$59,961) in relation to dividends payable to a former minorityshareholder, Ning Yingmei, in Nanjing Skytech Software Co. Ltd. Included within other receivables at 31 December 2005 was a balance of US$40,875 (2004:nil) in relation to working capital loan to Nanjing Sky InvestmentInformation Co., Ltd, which was the immediate parent company of Nanjing SkytechSoftware Co., Ltd from July 2004 until January 2005, and the majority shareholder of the company is Ms Xin Yingmei. This balance is unsecured, interest freeand has been repaid after year ended. 23. Comparative figures Certain comparative figures have been reclassified to conform with the currentyear's presentation. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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