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ZTC Telecoms plc (ZTC)

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Monday 30 March, 2009

ZTC Telecoms plc

Final Results

RNS Number : 6768P
ZTC Telecommunications plc
30 March 2009
 



ZTC Telecommunications Plc


('ZTC Plc' or the 'Company')


Final Results for Year Ended 30 June 2008


The Company announces that it has today sent its report and accounts for the year ended 30 June 2008 to shareholders. 


The Chairman's Statement, Directors' Report, Report of the Independent Auditors and the financial statements are set out below. Copies of the report and accounts are available on request from the Company's registered office at 14 New Street, London EC2M 4HE and on the Company's website at www.chinaevoline.com


Contact:

 

ZTC Telecommunications plc

Frank Lewis, Chairman 

+44 (0)7775 504 313


Fairfax I.S. PLC 

Nominated Adviser and Broker

Adam Hart / Laura Littley

+44 (0)207 598 5368



Chairman's Statement


On 13 October 2008 we informed shareholders that trading and credit conditions for small and medium-sized entities (SME's) in the People's Republic of China (PRC) had become increasingly difficult throughout the third quarter of 2008. This was due to deteriorating macro economic conditions outside the PRC, slowing economic growth and restrictive credit policies in China. As a consequence, our markets became increasingly competitive, disrupted and oversupplied. 


Following this announcement, and as notified on 10 November 2008, the Directors became aware that Charles Huang, CEO, majority shareholder and major creditor of the Company's subsidiary Zhong Tian and Yang Ruqiang, the General Manager of the Group's China Operating subsidiary, Shenzhen Zhongtian Communication Equipments Co Ltd ('Zhong Tian'), and Charles Huang's brother in law, had been absent from the Group's offices and factory in Longgang, Shenzhen, (China) and had been uncontactable since 5 November 2008. 


The unexplained absence of key personnel in the highly charged economic environment of southern China, destabilised the Group's employees and creditors and, your Board believes, resulted in the unauthorised removal of some of Zhong Tian's assets from its factory site in Longgang, Shenzhen (China)The local authorities subsequently moved to take control of the situation and the People's Court of the Longgang district of Shenzhen (the 'People's Court') sealed the factory and its buildings, sequestering all of the assets.  Up to the date of this report, none of the Directors or employees of the Group have been able to gain access to the factory and its buildings which remain sealed.


As a result of the management control issues arising and in order to ensure that an orderly market in the Company's shares was maintained, the Directors requested a suspension of trading in the Existing Ordinary Shares on AIM, and such suspension was granted by the London Stock Exchange on 7 November 2008.


Further investigations by the Directors revealed that on, 14 November 2008, the local government paid compensation to, and dismissed, a majority of the employees of Zhong Tian. It is believed that the People's Court subsequently auctioned the Group's remaining inventory and equipment for RMB 1,220,765 (approximately £90,000) and this sum was, the Directors believe, credited against the Government payments to employees (although this has not been capable of verification by the Directors).


The Directors of Praise Ease ('PE'), the Company's wholly-owned Hong Kong holding company and the sole shareholder of Zhong Tian, appointed China legal counsel on 12 November 2008 and instructed them to conduct legal due diligence, interacting with the local relevant authorities and other stakeholders including employees, debtors and creditors, and to provide an opinion as to the prospects of any economic recovery. Following the official authorisations and requisite payments, China legal counsel commenced its investigations on 25 November 2008. 


China legal counsel found that as of 19 December 2008, 29 creditor claims had been lodged against Zhong Tian, totalling approximately RMB21m (approximately £2.2m).


At the end of November 2008, it transpired that Tomorrow's Focus Limited (Tomorrow's Focus'), the company which then held 68,000,000 Ordinary Shares beneficially owned by Charles Huang, had, without the knowledge of the Company or the Directors and in contravention of the AIM Rules, entered into loan agreements with Maiden Undertaking Limited ('Maiden Undertaking'), a company beneficially owned by Mr Tong. Documentation produced to the Company showed that Maiden Undertaking had lent an aggregate amount of HK$27,390,000 (approximately £2,000,000) to Tomorrow's Focus, and that the repayment of the loans was secured against the Ordinary Shares held by Tomorrow's Focus (representing approximately 62.57 per cent. of the total issued share capital) and by personal guarantees given by Charles Huang in favour of Maiden Undertaking (the 'Charges'). 


It further transpired during the preparations for putting the Proposals to Shareholders that Charles Huang on 14 April 2008 had transferred his holding of shares in Pan Europe Capital Limited, the legal entity which held 12,750,000 Existing Ordinary Shares amounting at that time to approximately 11.7% of the then issued Existing Ordinary Share capital, to Ms.Cheung Yiu Shan. The Company has been unable to contact Ms. Cheung Yiu Shan to establish the basis for the transfer of the shares in Pan Europe Capital Limited to her and whether that shareholding is for the benefit of Ms. Cheung Yiu Shan or another person, but, as yet, has had no response to its enquiries.


To date, the factory and all buildings remain under seal and all assets sequestered by the People's Court. All key management of the Subsidiaries have continued to take unexplained leave and all remaining employees have been dismissed. The whereabouts of Charles Huang and Mr Yang Ruqiang remain unknown.


While the Company's investigations continue, it is the Board's unanimous view that Zhong Tian is unlikely to be able to continue as a going concern. Following the alleged looting at the factory and the auction conducted by the People's Court, the quantity of remaining equipment and inventory is unknown and its value is likely to be negligible.


Further legal opinion indicates that, in order for the Company to gain access to the assets of Zhong Tian, it would have to replace Charles Huang as legal representative of Zhong Tian, a lengthy and expensive procedure, and then commence one of the following processes:


i)    The settlement of existing claims and/or appointment of a liquidation team (any voluntary liquidation process could take up to two years and would incur considerable expense including the payment of uncalled capital, being approximately RMB 170m (£12.4m); or


ii)    An involuntary winding up process initiated by the local relevant authority of Shenzhen, which the Directors believe, could also be very time consuming and the likely focus on tangible assets would mean that any proceeds are likely to be minimal.


After due investigations, taking into account the limited resources of the Companythe Directors have concluded that the Company's business in China will be unable to resume trading and, as such, the ability to realise any net assets for the benefit of Shareholders will be extremely difficult and not cost-effective. Given the potentially long recovery procedures and the Company's limited resources, the Directors have concluded that the Subsidiaries of the Company have negligible or no recoverable value. In addition, the disposal of Praise Ease is also a condition precedent of the party wishing to assist in the refinancing of the Company. 


Following discussions between the Company and Maiden Undertaking, and on the basis that there had been a breach of the terms of the two loan agreements dated 16 May 2008 and 3 June 2008 by Tomorrow's Focus and Charles Huang, Maiden Undertaking is entitled, under the Charges, to retain the Charged Shares and register itself as owner of the Charged Shares or sell or dispose the Charged Shares in its absolute discretion. It was subsequently agreed that Maiden Undertaking would assert its rights under the Charges and assign the Charged Shares to Staybest Limited ('Staybest'), an associated company, and, subject to the passing of the resolutions at the forthcoming General Meeting (the 'Proposals') (details of which are set out in the circular to shareholders dated 27 March 2009 (the 'Circular')), that Staybest and Wellhigh Limited (a company introduced to ZTC Plc by the principals of Maiden Undertaking ('Wellhigh')) would support the Company by making the Investment to allow it to continue to operate and in due course, seek to acquire new businesses.


On the basis that the Board has no reason to believe that the Charges are not enforceable and against appropriate indemnities received from Staybest Limited, the Directors, pursuant to the Investment Agreement, on 27 March 2009 agreed to register Staybest Limited as the holder of the Charged Shares. As a result of the discussions with Maiden Undertaking and conditional upon the passing of the Resolutions and Admission, Staybest Limited and Wellhigh Limited have agreed to make the Investment which will provide the Company with sufficient working capital to operate for at least the next 12 months so that, following the passing of the Resolutions, the Company will be able to instruct Fairfax to apply to the London Stock Exchange for the suspension of dealings in the Company's shares on AIM to be lifted.


The Directors believe that Charles Huang's personal guarantee and the indebtedness of his company to Maiden Undertaking may have been the reason for his sudden disappearance. As at the date of this report, the Directors, having made reasonable enquiries, are not aware of any other circumstances which may relate to his disappearance.


Proposed Disposal of PE


PE must be disposed of as a condition of the refinancing arrangements. PE is currently the intermediate holding company of Zhong Tian, and since Zhong Tian is no longer considered a going concern, the Directors have concluded to dispose of PE for a nominal sum subject to shareholder approval on 21 April 2009, on the terms that the Company will participate in any economic recovery of PE.


The Directors believe, based on legal advice, that ZTC Plc is not liable for any of the liabilities within PE's subsidiary, Zhong Tian.


Operating Results - 2008


Turnover in the year ended 30 June 2008 showed an increase of £4,375,000 over the previous year (an increase of 19.7%, while gross margins remained steady at 20.8% (2007: 21.5%). Whilst business was generally buoyant in the first half trading conditions in the second half were difficult due to the Sichuan earthquake, severe winter conditions and flooding in southern China. Competition increased significantly post the year end and, following the holding of the Olympic Games in Beijing in August 2008, wholesale orders fell dramatically reflecting reduced consumer demand and economic activity.


In the event, while the operating profit for the year ended 30 June 2008, net of finance income and costs, amounted to £2,415,000 (2007: £2,016,000), the final audited loss before tax for the year of £16,581,000 reflects an impairment charge in respect of assets in the subsidiary of £18,996,000. 


Recent Board Changes


Dr Yi Xie, Non-executive director, resigned from the Board on 18 December 2008. Following Charles Huang's disappearance in November 2008 and his failure to reappear, the Board resolved to remove him as a director of the Company on 22 December 2008.


Basis of preparation of the 2008 Report and Financial Statements


Based on the best information available to the Directors, and taking into account the prospects for the Company following the implementation of the Proposals as set out in the circular to shareholders dated 27 March 2009 (the 'Circular'), your Board has concluded that it is appropriate to prepare the accounts for the parent company on a going concern basis. This basis is considered appropriate on the basis that the company has secured new finance of £280,000 (which is subject to shareholder approval on 21 April 2009) which is an integral part of proposals to shareholders as set out in the Circular to shareholders. Clearly the ability of the company with limited resources to continue to trade as a going concern after the fund raising will be dependent upon the successful execution of the changed investment strategy which again is set out in the Circular to shareholders. Given the difficulty of establishing the legal ownership of any remaining assets in China, and the likely costs of achieving any recovery and of settling any liabilities of Zhong Tian, the Board does not believe that Zhong Tian is a going concern, and hence has prepared its accounts under a break up basis.


Due to the loss of all value of Zhong Tian, it is appropriate to write off the investment and inter-company debtors in the accounts of the ultimate parent company ZTC Plc.  


Further details of the impact of these assumptions are set out in the Directors' Report.


Outlook


Assuming the Proposals are implemented, the strategy of the Directors will be for the Company to invest in one or more companies established in the Asia Pacific region, but which have a significant focus on the People's Republic of China (the 'PRC') (assets, customers or suppliers) and have the need for capital prior to them achieving a flotation on the public markets, either within or outside the PRC, or achieving a trade sale in due course. Such companies will be sourced largely through the contacts of the Directors, and any funding required by the Company to make such an investment will be raised prior thereto. While the Company is not currently able to identify the specific types of businesses which it might invest in, it is more likely than not that the sectors which will be targeted will be resources, technology and property - all areas where the Board has existing knowledge and contacts.


The Board believes that the Directors have relevant experience in identifying, assessing, and negotiating such acquisitions. The Directors believe that their broad collective experience in acquisitions, accounting, corporate and financial management together with their wide industry contacts will enable the Company to achieve its objectives.

Investment propositions will be considered when the Directors consider that enhanced values may be achieved. A particular consideration will be to identify investments where the Directors believe that their expertise and experience can be deployed to facilitate growth or unlock value. There is no limit to the number of projects in which the Company may invest.


The Directors will conduct initial due diligence appraisals of potential projects and where they believe further investigation is warranted they will appoint suitably qualified, and where appropriate independent persons to conduct further due diligence.


The Company, as currently proposed, is unlikely to have sufficient cash resources to expend in undertaking due diligence on any potential projects. In the event that a suitable project is identified, the Company would either seek to raise further funds in order to finance any due diligence and acquisition costs or seek to pass on the costs to a third party, possibly in return for a success-related fee payable in shares or in cash. Staybest and Wellhigh have indicated that they would be willing to participate in the funding of such costs.


The Directors intend to take an active role in assessing and management of any investment that the Company may make. Accordingly, the Company is likely to seek participation in the board of directors of any company which the Company acquires with a view to improving its performance and using of its assets in such ways as should result in an increase in the value of such a company. The Directors hope that the resulting benefit would provide a satisfactory return to the Company's Shareholders.


In the event no substantial acquisition is made within 12 months of the date of the 2009 AGM, in accordance with the AIM rules for Companies, trading in the Company's shares will be suspended and if no reverse transaction is achieved in the following 6 months, the London Stock Exchange will cancel the admission of the shares.


If for any reason the Company's shares are not re-admitted to trading on the Alternative Investment Market on the London Stock Exchange by 30 April 2009, the £280,000 new finance will become immediately repayable.


If the company fails to secure a new investment opportunity or additional new finance within the next 12 months, the company will be unable to continue as a going concern as it will have insufficient funds to trade.


Frank Lewis 

Chairman

27 March 2009


Directors' Report


The Directors present their report on the affairs of the Company and the Group, together with the audited financial statements, for the year ended 30 June 2008.


Principal activities


On 21 March 2007, following the acquisition of the whole of the issued share capital of Praise Ease Limited ('Praise Ease' or 'PE'), the Company was admitted to the Alternative Investment Market ('AIM') of the London Stock Exchange. Praise Ease is the holding company of Shenzhen Zhong Tian Communication Equipments Co. Ltd ('Zhong Tian') which is incorporated in China and which, during the year ended 30 June 2008, designed, assembled and marketed mobile phone handsets under the ZTC brand name in China. Zhong Tian is located in the Longgang District of Shenzhen, China, and was the principal operating company in the Group during the year.


Business review and future developments


Details of the Group's business and expected future developments are also set out in the Chairman's Statement and the Circular to shareholders.


Cessation of trading of subsidiary


As noted in the Chairman's Statement, Mr Chaohui (aka Charles) Huang, CEO, major creditor and majority shareholder of ZTC Plc and Mr Yang Rugiang,, Zhong Tian's General Manager have been absent from the Zhong Tian and uncontactable since 5 November 2008. As a result of the uncertainty that this caused and the interruption to the running of the business, trading of shares in ZTC Plc was suspended as of 7 November 2008.


The main company in the Group that has been affected by this is Zhong Tian', the trading company of the Group. Due to the events noted in the Chairman's statementand the fact that Zhong Tian has not traded since 5 November 2008, the Directors believe that the assets and liabilities of Zhong Tian should be valued on a break-up basis, that this is the only appropriate basis for valuing the assets and liabilities of Zhong Tian, and that this basis should be applied at the balance sheet date.


As the Directors have no access to any of Zhong Tian's financial information, the Directors have made the following write-downs, based on best estimates, of Zhong Tian's assets in preparing the year end financial statements:



Going concern value at

30 June 2008

GBP)

Amounts written off

30 June 2008

GBP)

Written down value at

30 June 2008

GBP)

Property, Plant & Equipment

495,675

(405,647)

90,028

Inventories

1,255,021

(1,255,021)

-

Trade receivables

12,016,929

(10,121,523)

1,895,406

Prepayments

7,153,810

(6,160,508)

993,302

Other receivables

1,052,389

(1,052,389)

-

Cash & cash equivalents

1,616,760

-

1,616,760

TOTAL

23,590,584

(18,995,088)

4,595,496


The consolidated position of the Group reflects these adjustments, with a total of £23,590,584 of assets held within Zhong Tian at 30 June 2008 being written down to their recoverable value.  The liabilities of Zhong Tian have not been written down since these liabilities have not been legally extinguished and therefore continue to be recognised at their year end values. This is in accordance with IAS 39 paragraph 39.


Although the values above represent the directors' best estimate of recoverable amounts, the recoverability would have occurred within Zhong Tian, and ZTC Plc would have received no financial benefit from their recovery.


As discussed in the Chairman's statement, directors' report and Circular to shareholders, as part of the re-financing of the Company, Zhong Tian and its immediate holding company, PE, are being disposed of for a nominal sum.


In the parent company, the investment and intercompany receivables have been written down to zero value to reflect the non-recoverability of these assets. A total charge of £18,066,000 has been reflected in the accounts of the parent company in respect of these write-downs.


Based on the best information available to the Directors, and taking into account the prospects for the Company following the implementation of the Proposals, your Board has concluded that it is appropriate to prepare the accounts for the parent company on a going concern basis, subject to fundamental uncertainty and accordingly continue to present these accounts on that basis. The board also believe that the accounts of the intermediate parent companyPraise Ease Limited should be prepared on the going concern basis however, the Board does not believe the subsidiary Zhong Tian is a going concern, and hence have prepared its accounts under a break up basis. 


The Directors believe, based on legal advice, that ZTC Plc is not liable for any of the liabilities within Zhong Tian and also believe that, subject to completion of the proposed transaction, details of which are set out in the Circular to shareholders dated 27 March 2009, there is sufficient funding available to the Company to enable it to continue to meet its own liabilities (excluding that of other Group companies) for the foreseeable future. Clearly the future prospects of the company will be wholly dependent on the ability of the Board and the new major investors to successfully implement the investment strategy as outlined in the Chairman's statement and the Circular to shareholders.

    

Results and dividend


The results of the Group for the year ended 30 June 2008 are set out below. 


The Directors do not recommend the payment of a dividend for the year.


Directors


The present Directors of the Company, who served throughout the year, are as follows:

Frank Lewis

Mark Syropoulo

Michael Liu


On 18 December 2008, Dr Yi Xie tendered his resignation from his position as a Non-Executive Director of ZTC Plc


On 22 December 2008, the Board resolved to remove Charles Huang as a director of the Company with immediate effect.


Directors' interests


The beneficial interests of the present Directors and their families at 30 June 2008 in the ordinary share capital of the Company were as follows:


 

30-Jun-08

30-Jun-07

 

Ordinary Share

Share Options

Ordinary Share

Share Options

F Lewis

-

100,000

-

100,000

M Syropoulo

425,000

500,000

350,000

500,000

M Liu

3,400,000

500,000

2,800,000

500,000


The ordinary shares beneficially owned by Mr Syropoulo and Mr Liu are registered in the name of Higher Performance Team Limited.


A full list of share options outstanding during the year is set out below:


Share options









At 1 July


Exercised/

At 30 June


Exercise

Exercisable


2007

Granted

Lapsed

2008


Price

From    To

F Lewis

100,000

-

-

100,000

**

20p

21.03.08    20.03.17

C Huang

500,000

-

-

500,000

***

20p

21.03.08    20.03.17

M Syropoulo

500,000

-

-

500,000

**

20p

21.03.08    20.03.17

M Liu

500,000

-

-

500,000

**

20p

21.03.08    20.03.17

Dr Y Xie

100,000

-

-

100,000

***

20p

21.03.08    20.03.17

Ru qiang Yang

100,000

-

-

100,000

*

20p

21.03.08    20.03.17

Qing min Qu

80,000

-

-

80,000

*

20p

21.03.08    20.03.17

Jian yang Shu

100,000

-

-

100,000

*

20p

21.03.08    20.03.17

Jian Wang

20,000

-

-

20,000

*

20p

21.03.08    20.03.17

Fei zhou Yie

20,000

-

-

20,000

*

20p

21.03.08    20.03.17

Guo hong Li

30,000

-

-

30,000

*

20p

21.03.08    20.03.17

Guang jun Zhu

20,000

-

-

20,000

*

20p

21.03.08    20.03.17

Xiu shan Guan

20,000

-

-

20,000

*

20p

21.03.08    20.03.17

Guo ji Jiang

10,000

-

-

10,000

*

20p

21.03.08    20.03.17

Shuang qiang Yuan

30,000

-

-

30,000

*

20p

21.03.08    20.03.17

Jian Guo

30,000

-

-

30,000

*

20p

21.03.08    20.03.17


The share options set out above were exercisable in three equal successive annual instalments commencing on and/or after the first anniversary of the date of grant.


No performance conditions were imposed on any of the above share options and no consideration was payable for their award.


Since 30 June 2008, the share options above marked** have been surrendered for nil consideration. Those marked *** relate to the former Directors Charles Huang Dr Xie whose options, under the Rules of the Option Plan, lapse after they cease to hold office with the Group. In case of Charles Huang these options will therefore lapse on 21 July 2009 and in case of Dr Xie these have lapsed on 18 February 2009. Those marked * will lapse on 14 May 2009.


The market price of the Company's ordinary shares at 30 June 2008 was 8.25p; the range during the year was 6p to 17p.


Related party transactions


During the year, the Group entered into the following transactions with related parties:

An amount of £1,487,209 (30 June 2007: £1,519,345) was owed to Charles Huang (a Director of ZTC) at 30 June 2008, being the balance of funds loaned to ZTC by Charles Huang.

A rental expense of circa £67,813 (year ended 30 June 2007: £65,630) was incurred and payable to a relative of Charles Huang. A balance of £255,694 (30 June 2007: £164,588) was outstanding in respect of rental payments to Charles Huang's relative at 30 June 2008.


Financial Instruments and Treasury policy


During the year, the following were the policies adopted by the Board. The Chairman's statement provides an updated assessment of the current position of the company.


The Group's multi-national operations could expose it to certain financial risks.


The most significant financial risk occurs upon translation of the foreign operation's results into sterling upon consolidation. Almost 100% of foreign revenues and the bulk of operating costs are incurred in the local currency, the RMB. Group companies therefore do not engage in foreign exchange risk hedges.


Prudent liquidity risk management in the context of the Group implies maintaining sufficient cash balances or marketable securities in the necessary currencies to be able to pay creditors as and when they fall due. The bulk of the Group's balances are held in RMB, sterling and HK dollars.


Funds surplus to monthly requirements are normally kept on interest bearing financial instruments. Cash balances are deposited with banks carrying high credit ratings in their respective country jurisdictions.


Creditor payment policy


During the year, the following were the policies adopted by the Board. The Chairman's statement provides an updated assessment of the current position of the company.


The Company's policy is to agree payment terms with all suppliers when establishing the terms of each business transaction and to abide by the agreed terms of payment. Trade creditors of the Company at 30 June 2008 were equivalent to 76 days purchases based on the average daily amount invoiced by the suppliers during the year ended on that date.


Substantial shareholdings


At 23 March 2009 the Directors had been notified or were otherwise aware of the following registered holdings of 3% or more of the Company's issued share capital:



Number of ordinary shares

Percentage of issued ordinary share capital

Tomorrow's Focus Limited

68,000,000

62.57%

Pan-Europe Capital Limited

12,750,000

11.73%

Albany Capital Limited

5,448,008

5.01%

Higher Performance Team Limited

4,250,000

3.91%


As noted above, during the year, Charles Huang was beneficially interested in the shares which were registered in the names of Tomorrow's Focus Limited and Pan-Europe Capital Limited. 


Mr Syropoulo and Mr Liu are beneficially interested in 425,000 and 3,400,000 of the ordinary shares, respectively, which are registered in the name of Higher Performance Team Limited.


Share capital


On 13 February 2007, Praise Ease Limited was acquired by ZTC Plc for an initial consideration of 70 million ordinary shares of 10p each ('Ordinary Shares'), issued at 20p per Ordinary Share. 


The acquisition agreement provided for the issue of up to 15 million Ordinary Shares by way of deferred consideration to the previous shareholders of Praise Ease Limited, subject to the main operating subsidiary, Shenzhen Zhong Tian Communication Equipments Co Ltd ('Zhong Tian') achieving a post tax profit in excess of RMB 35 million in the 12 month period to 30 June 2007. 


Zhong Tian achieved the agreed level of profitability for the year ended 30 June 2007, and accordingly an additional 15 million Ordinary Shares were issued to the vendors of Praise Ease Limited on 21 December 2007.

 

Employees


During the year, the following were the policies adopted by the Board. The Chairman's statement provides an updated assessment of the current position of the company.


The commitment and ability of our employees are key factors in achieving the Group's objectives. We seek to give equal opportunities in employment and ensure that all employees receive fair treatment irrespective of sex, religion, ethnic origin or disability including those who become disabled during their employment. The Group supports and aids employee welfare as well as personal and career development.


Our communications aim is to increase the understanding of the business through regular employee briefings at all levels.


Charitable and political donations


The Company made no charitable or political donations in the financial year (2007: Nil).


International Financial Reporting Standards


The financial statements have been prepared in accordance with applicable International Financial Reporting Standards as endorsed by the European Union. The financial statements of the company's own accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice.


Events after the Balance Sheet date


The events referred to in this Directors' Report and the Chairman's statement regarding the cessation of trading of Zhong Tian are disclosed further in note 2 and note 3 to the consolidated financial statements.


Disclosure of information to auditors


So far as each Director at the date of approval of this report is aware, there is no relevant audit information of which the Company's auditors are unaware and each Director has taken all steps that he ought to have taken to make himself aware of any relevant audit information and to establish that the auditors are aware of that information.


Auditors


BDO Stoy Hayward LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.


Recommendation


The Board considers that the resolutions to be proposed at the Annual General Meeting are in the best interests of the Company and it is their unanimous recommendation that shareholders support these proposals as the Board intends to do so in respect of their own holdings.


By order of the Board

J P Gorman FCACompany Secretary

27 March 2009




Report of the Independent Auditors

Independent auditor's report to the shareholders of ZTC Telecommunications Plc

We have audited the financial statements of ZTC Telecommunications Plc for the year ended 30 June 2008 which comprise the consolidated income statement, the consolidated statement of changes in equity, the consolidated balance sheet, the company balance sheet, the consolidated cash flow statement and the related notes. These financial statements have been prepared under the accounting policies set out therein.


Respective responsibilities of directors and auditors

The directors' responsibilities for preparing the group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union, and for preparing the parent company financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the statement of directors' responsibilities.


Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).


We report to you our opinion as to whether the financial statements give a true and fair view and have been properly prepared in accordance with the Companies Act 1985 and whether the information given in the directors' report is consistent with those financial statements. We also report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and other transactions is not disclosed.


We read other information contained in the annual report, and consider whether it is consistent with the audited financial statements. The other information comprises only Directors and Advisors, the Chairman's Statement, the Directors' Report, the Corporate Governance Statement, the Report of the Remuneration Committee and the Statement of Directors' Responsibilities. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Our report has been prepared pursuant to the requirements of the Companies Act 1985 and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of the Companies Act 1985 or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.


Basis of audit opinion

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board, except that the scope of our work was limited as explained below. 

 

An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed.


We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error, however, the information available to us was limited. 

 

As noted in further detail in the Chairman's Statement and the notes to the financial statements, the disappearance of Charles Huang in early November and the subsequent serious disruptions to the trading operations in China, resulted in the Group losing control of certain assets held in the trading subsidiary company Shenzehn Zhong Tian Communications Equipments Co. Limited. After consideration, and taking legal advice on the options available to recover control of the subsidiary company, the ultimate conclusion by the Directors was that in the circumstances they had no option but to prepare the financial statements of this subsidiary company using the break-up basis of accounting. However, due to the fact that the directors no longer had access to the assets or accounting records of this subsidiary, the evidence available to us in respect to the ownership and existence of these assets and the impairments made against them was limited. In particular, we have been unable to obtain sufficient appropriate audit evidence concerning the write down of assets with an original going concern value of £23,590,584 by £18,995,088 to £4,595,496 included within the consolidated balance sheet and further detailed in note 3 to the financial statements. 


Any adjustments to these figures would have a corresponding adjustment to the consolidated loss and consolidated net assets for the year ended 30 June 2008. Further information regarding the circumstances contributing to these limitations of audit evidence is contained within the Chairman's Statement, Directors' Report and notes 1 and 31 to the financial statements.


In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.


Qualified opinion arising from limitation in audit scope

Except for the financial effect on the group financial statements of such adjustments, if any, that might have been determined to be necessary had we been able to satisfy ourselves as to the break-up values to assets, in our opinion: 


•    the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group's affairs as at 30 June 2008 and of its loss for the year then ended;


• the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the parent company's affairs as at 30 June 2008; and


•    the group and parent company financial statements have been properly prepared in accordance with the Companies Act 1985.


In respect solely of the limitation on our work relating to the ownership and existence of group assets and related impairments:


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


•    we were unable to determine whether proper accounting records have been maintained.


In our opinion the information given in the directors' report is consistent with the financial statements.


Emphasis of matter - going concern

In forming our opinion on the financial statements of ZTC Plc, which is qualified as above, we have considered the adequacy of the disclosures made in note 1 to the financial statements concerning the company's ability to continue as a going concern. The company has secured new finance of £280,000 (subject to shareholder approval on 21 April 2009) to fund working capital requirements until the company sources a new investment opportunity. As described in note 1 this funding in also contingent upon shareholder approval for the sale of the subsidiary company 'Praise Ease' and if the company fails to resume trading of its shares on the Alternative Investment Market of the London Stock Exchange by 30 April 2009 then this funding becomes immediately repayable in full. 


The Directors expect shareholder approval to be granted for both the sale of the subsidiary company and the refinancing package and hence the subsequent reinstatement of its Shares on the Alternative Investment Market. However, should any of these approvals not be granted, or the shares not be re-admitted for trading purposes, then the company would be unable to continue as a going concern.


In addition, if the company fails to secure a new investment opportunity or additional new finance within the next 12 months, the company will be unable to continue as a going concern as it will have insufficient funds to trade.  


These conditions along with the matters disclosed in note 1 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the company's ability to continue as a going concern. The financial statements of the parent company do not include the adjustments that would result if the company was unable to continue as a going concern.


BDO Stoy Hayward LLP

Chartered Accountants and Registered Auditors 

Epsom, Surrey


27 March 2009



ZTC Telecommunications Plc

Consolidated Income Statement

for the year ended 30 June 2008


2008

£'000

2007

£'000

Revenue

26,532

22,157

Cost of sales

(20,990)

(17,384)

Gross profit

5,542

4,773

Other operating income

445

435

IPO expenses

-

(280)

Impairment of assets in subsidiary

(18,996)

-

Other administrative expenses

(1,464)

(1,151)

Total administrative expenses

(20,460)

(1,431)

Distribution costs

(1,828)

(1,368)

Other operating expenses

(219)

(373)

Operating (loss) / profit

(16,520)

2,036

Finance income

70

19

Finance costs

(131)

(39)

(Loss)/profit before tax

(16,581)

2,016

Tax 

(251)

(128)

(Loss)/profit for the year attributable to equity holders of the parent 

(16,832)

1,888

Basic (loss)/earnings per share

(16.6p)

2.4p

Diluted (loss)/earnings per share

(16.6p)

2.3p




ZTC Telecommunications Plc

Consolidated Statement of Changes in Equity

for the year ended 30 June 2008


Share capital



£'000

Reverse acquisition reserve


£'000

Share premium reserve

£'000

General reserve



£'000

Merger reserve



£'000

Translation reserve


£'000

Capital contribution reserve 


£'000

Retained earnings



£'000

Total equity



£'000

At 1 July 2006

1

-

-

178

766

(42)

-

1,596

2,499

Foreign currency translation

-

-

-

-

-

(54)

-

-

(54)

Net expense recognised directly in equity

-

-

-

-

-

(54)

-

-

(54)

Profit for the year

-

-

-

-

-

-

-

1,888

1,888

Total recognised income and expense for the year

-

-

-

-

-

(54)

-

1,888

1,834

Transfer of profit to general reserve

-

-

-

249

-

-

-

(249)

-

Share premium recognised on reverse acquisition

-

-

151

-

-

-

-

-

151

Issue of share capital, (net of issue expenses)

9,367

-

6,226

-

-

-

-

-

15,593

Acquisition of subsidiary

Share based payment charge

-


-

(12,583)


-

-


-

-


-

-


-

-


-

-


-


260

(12,583)


260

At 1 July 2007

9,368

(12,583)

6,377

427

766

(96)

-

3,495

7,754


ZTC Telecommunications Plc




Consolidated Statement of Changes in Equity

for the year ended 30 June 2008


Share capital



£'000

Reverse acquisition reserve


£'000

Share premium reserve

£'000

General reserve



£'000

Merger reserve



£'000

Translation reserve


£'000

Capital contribution reserve 


£'000

Retained earnings



£'000

Total equity



£'000

At 1 July 2007

9,368

(12,583)

6,377

427

766

(96)

-

3,495

7,754

Foreign currency translation

-

-

-

-

-

588

-

-

588

Net income recognised directly in equity

-

-

-

-

-

588

-

-

588

Loss for the year

-

-

-

-

-

-

-

(16,832)

(16,832)

Total recognised income and expense for the period

-

-

-

-

-

588

-

(16,832)

(16,244)

Issue of deferred shares 

1,500

(1,987)

487

-

-

-

-

-

-

Issue of share capital by subsidiary 

-

-

-

-

-

-

448

-

448

Transfer to of loss from general reserve

-

-

-

(427)

-

-

-

427

-

Recognition of share based payments

-

-

-

-

-

-

-

172

172

At 30 June 2008

10,868

(14,570)

6,864

-

766

492

448

(12,738)

(7,870)





Share capital account


Share capital records the nominal value of shares in issue.


Reverse acquisition reserve


A reverse acquisition reserve is established to take account of acquisitions that are deemed to be reverse acquisitions under International Financial Reporting Standards.


Share premium reserve


Share premium records the receipts from issue of share capital above the nominal value of the shares. Share premium is stated net of direct issue costs.


General reserve


In accordance with the 'Law of China on Joint Ventures Using Chinese and Foreign Investment', 10% of the retained earnings has been transferred as ZTC Plc's general reserve fund.


Merger reserve


The merger reserve arose as a result of the acquisition by the group's subsidiary undertaking, Praise Ease Limited of Shenzhen Zhong Tian Communication Equipments Co. Ltd, which was acquired through a transaction under common control and accounted for using the pooling of interests method.


Translation reserve


Translation gains and losses arising on the retranslation of net assets of subsidiaries whose presentational currency is not sterling are recognised directly in equity in the Translation reserve.


Capital contribution reserve


Contributions provided to entities by shareholders that are not intended by either party to be repaid are accounted for as capital contributions.


Retained earnings


Retained earnings records the cumulative profits less losses recognised in the income statement, net of any distributions and share-based payments made.


ZTC Telecommunications Plc

Consolidated Balance Sheet

as at 30 June 2008



2008

£'000

2007

£'000

Non-current assets

 

 

Property, plant and equipment

90

571

Deferred tax asset

-

1

Total non-current assets

90

572

Current assets

 

 

Inventories

-

889

Trade and other receivables

2,919

10,898

Cash and cash equivalents

1,962

2,499

Total current assets

4,881

14,286

Total assets

4,971

14,858

Current liabilities

 

 

Trade and other payables

(6,977)

(4,525)

Interest bearing liabilities

(2,877)

(1,688)

Current tax liabilities

(2,987)

(891)

Total current liabilities

(12,841)

(7,104)

Total liabilities

(12,841)

(7,104)

Net (liabilities)/assets

(7,870)

7,754




2008

£'000

2007

£'000

Equity

 

 

Share capital

10,868

9,368

Reverse acquisition reserve

(14,570)

(12,583)

Share premium reserve

6,864

6,377

General reserve

-

427

Merger reserve

766

766

Capital contribution reserve

448

-

Translation reserve

492

(96)

Retained earnings

(12,738)

3,495

Total equity attributable to equity holders of the parent

(7,870)

7,754




ZTC Telecommunications Plc

Consolidated Cash Flow Statement

as at 30 June 2008



2008

£'000

2007

£'000

Cash flows from operations

 

 

Net cash outflow from operations

(734)

(1,399)

Interest paid

-

-

Tax refunded

1

-

Net cash outflows from operating activities

(733)

(1,399)

Investing activities

 

 

Interest received

37

19

Purchase of property, plant and equipment

(26)

(23)

Acquisition of parent through reverse acquisition, net cash used

-

(226)

Net cash generated from/(used in) investing activities

11

(230)

Financing activities

 

 

Issue of shares prior to acquisition

-

763

Issue of share capital

-

1,605

Interest paid

-

(39)

Net increase in cash from financing activities

-

2,329

Net (decrease)/increase in cash and cash equivalents

(722)

700

Cash and cash equivalents at beginning of year

2,499

1,772

Exchange gains on cash and cash equivalents

185

27

Cash and cash equivalents at end of year

1,962

2,499





The financial information included in this announcement does not comprise statutory accounts within the meaning of section 240 of the Companies Act 1985.


The annual report and accounts of the Company for the year ended 30 June 2008, including the notes to the financial statements, are being posted to shareholders today and can be viewed on the Company's website at www.chinaevoline.com



This information is provided by RNS
The company news service from the London Stock Exchange
 
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