TCL 2618 cover o/p 25/4 con.tclcom.tcl.com/admin/documents/freport/200711221852486541_eng… · TCL Communication Technology Holdings Limited Annual Report 2005 9 BUSINESS PERFORMANCE

CORPORATE PROFILE

TCL Communication Technology Holdings Limited (“TCT” or the “Company”)and its subsidiaries (collectively the “Group”) are engaged in the design,manufacture and marketing of a wide range of mobile handsets for globalmarket. The Group’s handsets are sold in the PRC, Europe and LatinAmerica under two key brands - “TCL” and “Alcatel”. TCT operates its highlyefficient manufacturing plants and R&D centres in various provinces of Chinaand France with headquarters in Shenzhen, China. Currently, TCLCorporation (“TCL Corp.”) is the Group’s largest shareholder.

For more information, please visit the Group’s website: www.tclcom.com.

CONTENTS

Financial Highlights 2Corporate Structure 4Year in Review 5Chairman’s Statement 8Management Discussion and Analysis 14Directors and Senior Management 24Corporate Governance Report 28Human Resources and

Social Responsibility 47Company Information 48

Report of the Directors 49Report of the Auditors 59Consolidated Income Statement 60Consolidated Balance Sheet 61Consolidated Statement of Changes 63

in EquityConsolidated Cash Flow Statement 65Balance Sheet 67Notes to Financial Statements 68Five Years Financial Summary 112

2

FINANCIAL

HIGHLIGHTS

FINANCIAL PERFORMANCE

(HK$ Million) 2005 2004

Revenue 5,664 7,310

Gross profits 88 1,028

Gross profit margin (%) 2% 14%

Net loss (1,608) (185)

Basic LPS (HK cents) (55.6) (6.5)

FINANCIAL POSITION

(HK$ Million) 2005 2004

Property, plant & equipment and prepaid land lease payments 372 440

Net current (liabilities)/assets (189) 1,464

Cash and pledged deposits 460 2,017

Total liabilities 4,043 3,617

Interest bearing borrowings 771 175

Net assets 41 1,904

KEY FINANCIAL INDICATORS

2005 2004

Inventory turnover (days) * 24 20

Trade receivable turnover (days) 80 60

Trade payable turnover (days) 90 92

Current ratio (times) 1.0 1.4

Interest bearing borrowings/Total assets 18.9% 3.2%

* Finished goods only

Note: The above turnover days are calculated on average balance of the year.

3TCL Communication Technology Holdings Limited Annual Report 2005

REVENUE BY PRODUCTS

Colour21%

57% Multimedia

22%Monochrome

2005Colour 39%

33% Multimedia

28%

Monochrome

2004

66% Overseas

34%The PRC

200527% Overseas

73%

The PRC

2004REVENUE BY MARKETS

4

CORPORATE

STRUCTURE

55%

100% 100%

11% 34%

TCL Corporation(Listed on Shenzhen Stock Exchange,

Stock Code: 000100)

Directors Public

TCL Communication TechnologyHoldings Limited

(Listed on Hong Kong Stock Exchange, Stock Code: 2618))

Huizhou TCL MobileCommunication Co., Ltd.

(Sales and manufacture of TCL

brand mobile handsets )

T&A MobilePhones Limited(Sales of Alcatel brand

mobile handsets)


2005

YEAR IN REVIEW

JanuaryDr. LIU Fei appointed as T&A Mobile Phone Limited’s (“T&A”) Chief Executive Officer (“CEO”)

MayIssued convertible notes to strengthen the Group’s financial position

Entered into Framework Agreement with Alcatel Participations with aim to further evolve T&A businessplatform

JuneDr. LIU Fei appointed as the Company’s CEO

JulyCompletion of Framework Agreement. T&A became a wholly-owned subsidiary of TCT

SeptemberNew range of core value handset models was highly recommended in the sub-US$30 handsets tenderprogram by the GSM Association

DecemberProposed open offer of new shares to shareholders to raise approximately HK$600 million

6

MUSIC

THE POWER OF

MUSIC


Mission

To become a globally competitive and

innovative mobile phone producer,

supplying quality products that satisfy the

ever-changing needs of customers, and

providing employees with career

advancement and job satisfaction.

8

CHAIRMAN’S

STATEMENT

Dear Shareholders,

The Company has experienced a very difficult year in 2005. The

handset market is ever-changing and the fierce competition

worldwide has given rise to the absolute leading position of top-tier

brands. It was therefore very difficult for small handset manufacturers

to counter this trend. Although the business scale of the Company

is far larger than its domestic peers, it is still comparatively smaller

than the global giants. In view of this market landscape, the new

management team of TCT has led the Company to implement

reforms and enhancement programmes to form a new organizational

structure, to reposition its products, to redefine R&D direction and

to broaden customer base, with an aim to enhance its core

competitiveness and build a strong foundation for sustainable growth

in the long run.


BUSINESS PERFORMANCE

During the year under review, the Company redefined its R&D

strategies and decided to slow down the pace of R&D. New product

launches were delayed, hampering overall sales, especially in the

PRC market. Furthermore, the change in the operating mode of

sales channels and the initiatives to assist distributors to clear

channel inventories affected the Group’s sales performance in the

PRC. Meanwhile, the Group aspired to enhance its operation

efficiency and strengthen its supply chain management capability,

rather than seeking sheer sales volume growth. Although these

measures have caused reduction in sales, the management believes

that will benefit the Company’s long term development.

Upon the establishment of T&A, the Company actively expanded to

overseas markets through Alcatel’s global network, targeting high-

demand global operators and aiming to exploring new room for

development by providing cost effective and high quality entry level

handsets to these operators. The Group recorded satisfactory results

during the year under review. Notable achievements were made in

the second half of the year, which was marked by the breakeven of

the overseas business in the month of December 2005.

INTERNATIONAL AND PROFESSIONAL MANAGEMENT

In the year under review, the Company appointed Dr. LIU Fei as

executive director and CEO. Including Dr. Liu, the management team

now comprises 25 professional members with international

experience. Steered by a new management team, we believe that

the Group’s management and business development will be further

strengthened in the future.

SHAREHOLDING AND ORGANIZATION RESTRUCTURING

During the past year, the Company completed its shareholding

restructuring through a share swap. Alcatel exercised its option and

transferred its interest in T&A into a stake in TCT. Hence, Alcatel

became a strategic shareholder of TCT and T&A became a wholly

owned subsidiary of the Company. Upon completion of the

shareholding restructure, the resources of the two subsidiaries were

utilized efficiently. Restructuring of the operating structure facilitated

integration and realization of synergies.

Jan

Feb

Mar

Apr

May Jun

Jul

Aug Sep Oct

Nov

Dec

Overseas market monthly unit shipment in 2005’0001,500

1,200

900

600

300

10

CHAIRMAN’S

STATEMENT

Upon completion of shareholding restructure, the Companyendeavoured to reform its organizational structure in order tomaterialize the synergies through the integration of the two wholly-owned subsidiaries. In terms of organizational restructuring, theCompany has established six sales and marketing centers aroundthe world, namely Europe, the Middle East and Africa (“EMEA”),Latin America (“LATAM”), Alcatel brand in the PRC (“Alcatel PRC”),TCL brand in the PRC (“TCL PRC”), Asia Pacific (“APAC”) and ODM.At the same time, the Company also consolidated its manufacturing,R&D and after sales services to optimize resource allocation throughcentralized operation and integration. To further enhancemanufacturing and operation efficiency, reduce management costsand avoid mismatching of resources, the Company has graduallystreamlined its product line and started the outsourcing of productdevelopment projects. In addition, the Company also implementedcentral ized procurement to reduce costs and improvecompetitiveness.

STRENGTHENING FINANCIAL POSITION

To achieve sustainable growth in the global market, we have setpriority to the stregthening of our financial position. The Groupentered into Framework Agreement with its strategic shareholderAlcatel and obtained €20 million as a result of this. Additional fundingwas obtained from its ultimate controlling shareholder TCL Corp.

through the issue of approximately HK$185 million convertible notes.In addition, the Company successfully completed an open offer toshareholders and raised approximately HK$600 million in February2006. The related proceeds will be applied for R&D, settlement ofaccounts payable and as general working capital. These moveshave greatly strengthened the Company’s financial position.

PRODUCT R&D

During the year under review, the Company has repositioned itsproducts with focuses on manufacturing the most competitive entrylevel voice phones and innovative multimedia phones. Amid fiercecompetition in the global handset market, the availability of R&Dresources is not only the key to success, but also one of thedetermining factors for the Company to achieve sustainable growth.

Huge R&D investment is needed to support the development ofinnovative ideas to solidify the Company’s core competitivenessand market position. In view of this, the Company announced inApril 2006 its plan to increase investment in a handset R&D jointventure which was established with strategic partners. Byconsolidating R&D expertise and resources, the Company seeksto strike a balance between strengthening product developmentand controlling costs. According to the plan, the Company willtransfer a certain part of the product development assets and therelated staff to the joint venture in order to integrate the R&D

Vision

To be a trusted and respected mobile

terminal product provider in the global

marketplace with sustainable growth.


resources. On the other hand, the Company will retain its productdevelopment and strategy team to ensure sufficient internal expertiseand close relationship with customers.

In the future, the Company will significantly reduce fixed internalR&D expenses and effectively realise the R&D advantages of thejoint venture through outsourcing product R&D projects andcooperation with the joint venture. In the meantime, TCT will deployadditional resources for promoting the brand recognition of TCLand Alcatel, strengthening advantages in manufacturing anddistribution network, and solidifying the relationship with strategicpartners to produce quality products and enhance operationefficiency.

ACCOUNTABLE, RESPECTABLE AND SUSTAINABLECORPORATION

Faced with the unprecedented challenges in 2005, the Companyremained perseverance as always and made its best effort toimplement substantial restructuring and reform. Year 2006 will be acrucial year for the development of TCT. With the new structure andnew business model in place, we are confident that TCT will be ableto implement its new business strategies more effectively andenhance profitability across the board. We believe the profitabilityof our overseas business will continue to improve and begin to makecontribution to the Company while the market position of TCL brandwill be strengthened in the PRC.

“Practicality, progress and boundlessness” are the three themes ofour progressive and perseverant corporate culture. We value staffopinion on the development of the Company and encouragecommunication between management and staff. We aim to cultivateholistic and people-oriented working atmosphere to promotecorporate development and to bring the Company to new heights.

With a well-defined business strategy, precise market positioningand dedicated team of staff, we aim to become an accountable,respectable and sustainable global mobile terminal product provider,a leading manufacturer of quality handsets and a partner of choicefor operators.

Finally, on behalf of the Board of Directors (“Board”), I would like tothank all staff members for their contribution in the past year and atthe same time, I would also like to express our gratitude towardsour shareholders, consumers, suppliers and business partners fortheir long-term support.

LI Dong Sheng

Chairman

27 April 2006

12

THE POWER OF

DISPLAY


DISPLAY

With a well-defined business strategy,

precise market positioning and the

dedication of our staff, TCL Communication

Technology Holdings Limited aims to

become an accountable, respectable and

sustainable global mobile terminal product

provider

14

MANAGEMENT

DISCUSSION

AND ANALYSIS

Leveraging on the strengths of the Alcatel

brand name in Europe and LATAM and

the low-cost manufacturing base in the

PRC, the Company will optimize its

strategy of “Chinese value @ Western

quality” to capture market opportunities

worldwide

INDUSTRY OVERVIEW

Global handset shipment recorded double digit growth in 2005 and

reached over 800 million units, creating business opportunity for

handset manufacturers in an apparent growing market. But in fact,

2005 was a challenging year for manufacturers of all scale.

Small handset manufacturers in particular, faced a tough operating

environment. Fierce competit ion worldwide has forced

manufacturers to lower handset prices while increasing investment

in developing new products to cope with the changing consumer

preference. In 2005, according to Strategy Analytics, emerging

markets accounted for one half of the worldwide handset shipment.

Consumer in emerging markets typically purchased lower priced

handsets pushing the average selling price down. Owing to

economies of scale, top tier manufacturers were able to offer lower

prices without sacrificing profitability. Unfortunately for second or

third-tier manufacturers, profit margin was greatly hampered and

profitability eroded. In developed markets, on the other hand,

customer preferences changed rapidly, driving manufacturers to

increase R&D investment to keep up with the product lifecycle. Large

global brands had substantial market share so that the top three

global handset players already accounted for over half of the world’s

handset market share.

In the PRC market, global players gain more market share as they

expanded their product line to penetrate every market segment.

Despite the fierce competition, new domestic manufacturers


continued to enter the market. In 2005, telecommunication

authorities in the PRC issued 20 licenses in four batches for

developing, manufacturing and selling handsets within the country.

Coupled with the flourishing illegal and parallel-imported handset

markets, competition was further intensified, pushing small domestic

players out of the market. Furthermore, the pending issuance of 3G

licenses continued to stir uncertainty in the market notwithstanding

that the industry expects tremendous business potential.

BUSINESS REVIEW

Overall performance

Facing the challenges, TCT adopted measures to counter the

unfavourable operating environment by completing corporate

restructuring. As a result, the Company successfully cultivated strong

overseas market sales, which has brought improvement to the sales

as a whole. In 2005, the Company repositioned itself as a global

company and regained growth momentum amid difficult business

environment. During the year, the Company recorded a total handset

shipment of 10.9 million, representing an increase of 9% compared

with last year (T&A was established in September 2004 and only

four months were included in 2004) . Overseas shipment increased

136% to 7.5 million while the PRC shipment decreased 50% to 3.4

million units.

Sales Volume Breakdown by Geography

’000 units 2005 2004* Change

Overseas market 7,500 3,177 +136%

PRC market 3,389 6,838 -50%

Total 10,889 10,015 +9%

*T&A was established in September 2004 and only 4 months were included in2004

In a bid to streamline the corporate structure and enhance overall

competitiveness, TCT entered into Framework Agreement with

Alcatel in May 2005 which was completed in July 2005. Upon

completion, Alcatel became the Company’s strategic shareholder

and T&A became a wholly-owned subsidiary of TCT. The new

structure improved the operation efficiency and enhanced the

business development, sales and marketing and product

development. The Company has successfully achieved a rise in

overseas shipment. Overseas sales continued to increase over the

second half of 2005, and the Company’s overseas business

achieved breakeven in the month of December 2005.

16

In June 2005, Dr. LIU Fei was appointed CEO of the Company to

further strengthen the management team. The newly appointed

management reviewed the Company’s business and operations in

the past few years and recognized the difficulties. New strategies

were formulated with a focus on improving operating efficiency. The

management adopted a pragmatic approach in terms of operations,

taking into account the resources available. As for company culture,

the management advocated passion, emphasizing the sense of

belonging and teamwork, encouraging staff of all levels to aim higher,

working together for the benefit of the Company. The transformation

of organizational structure contributed to this goal by giving the

Company full control of procurement, manufacturing and R&D,

helping it realize bigger synergy. As a result, operating costs were

reduced across the board.

Markets

TCT develops, manufactures and sells handsets under two brands,

“TCL” and “Alcatel”. In the overseas markets, handsets are mainly

marketed under the Alcatel brand while in the PRC market handsets

are mainly marketed under the TCL brand. In 2005, the two brands

took up a global market share of 1 to 2% (Source: Strategy Analytics

and Company data). Taken into consideration the changing market

landscape, the Company strategically adopted a more aggressive

approach to expand overseas markets, with emphasis on emerging

markets such as Latin America, India and Russia where demand

for entry level handsets was increasing. The Company continued to

strengthen its brand recognition in regions such as Mexico, Argentina

and other LATAM countries in 2005.

During the year, emerging markets like Latin America became one

of the Company’s growth drivers, partly attributable to Alcatel’s good

relationship with operators in the region. In September 2005, aiming

to supply affordable and robust handsets for people in developing

countries, the Company’s proposal of “connecting the unconnected”

was highly commended by GSM Association as efforts to serve

emerging markets. It was also the Company’s commitment to

delivering high-value handsets tailored to emerging markets, building

on the Company’s values of f lexibi l i ty, innovation and

entrepreneurship. Sales volume and brand recognition began to

build up in the region in the fourth quarter in 2005.

For the PRC market, the Company targeted urban wage-earners,

students and first-time buyers in the counties with lower end products

and strategically tapped into the upper market with advanced

products in a bid to strengthen its brand image.

Products development

The restructuring of the Company effectively slimmed the R&D team,

R&D facilities were slowly shifted to the PRC to maximize cost

efficiency. The R&D division in Huizhou was relocated to Shenzhen

for better coordination. Owing to the unfavourable market conditions

in 2005, the Company redefined its R&D strategy, with a focus on

cost competitive entry level products.

Strengthening R&D capability is the Company’s long-term goal. To

achieve this, the Company fostered a strategic partnership for a 3G

project with a major platform supplier in September 2005. It also

won strategic support from Texas Instruments to ramp up the most

competitive GSM phones.

The Company is devoted to strengthening the brand recognition of

Alcatel handsets in the European and Latin American markets, where

Alcatel has always been recognized as the equivalence of style.

Taking full advantage of its manufacturing bases in the PRC, the

Company was able to deliver Chinese value@Western quality.

During the period under review, the Company launched 12 models

of Alcatel handsets. In addition, fashionable model “Elle” was

launched through brand licensing to target female users. This

product was well received by the market and results were very

encouraging.

The Company launched 48 models in the PRC during the period

under review, out of which 11 models were MPEG4 multimedia

handsets designed to fill a relatively unexplored market space. Initial

sales were very encouraging, which paved the way for brand building

in the high-end market. In order to make full use of its resources,

the Company streamlined its product line as to maintain a reasonable

portfolio and put more emphasis on quality control.

Sales & Marketing

The Company operates six sales & marketing centers worldwide,

namely, EMEA, LATAM, TCL PRC, Alcatel PRC, APAC and ODM.

The full integration of T&A and Huizhou TCL Mobile Communication

Co., Ltd. (“TCL Mobile”) has given rise to an opportunity for the

Company to further fine-tune its sales network. In the overseas

market, the Company’s strategy is to focus on fostering relationship

with main operators and explore new business opportunities in

emerging markets. In the PRC market, on the one hand the Company

continued to streamline its sales network in the year, and on the

other hand efforts were invested in exploring and cultivating loyal

provincial distributors while strengthening the cooperative

relationship with super chain stores of PRC mobile handset markets.

The Company further reduced distribution layers in a bid to maintain

profit margins.

MANAGEMENT

DISCUSSION AND

ANALYSIS


OUTLOOK

TCT experienced difficult years, yet it never ceased to adjust and

improve in terms of business strategies or product development in

order to overcome the hurdles. During 2005, the Company had

undergone restructuring; the Company believes that 2006 will be a

year of revival. Looking ahead, the Company will focus on global

operations, business model, synergy and new strategies with the

goal to turnaround in 2006.

In 2005, the Company has established a solid foundation as a global

handset player. The Company will continue to develop its overseas

market and aim to turn it into the growth engine. Leveraging on the

strengths of the Alcatel brand name in Europe and the low-cost

manufacturing base in the PRC, the Company will optimize its

strategy of “Chinese value @ Western quality” to capture worldwide

market share.

In the PRC market, the Company will maintain its market position.

The Company will implement measures to improve product quality

and to build brand recognition in the long-run. The launch of MPEG4

models in the end of 2005 has stirred positive sales and market

response. These new models will help re-establish the Company’s

position as one of the premier brands in the PRC. Along this line,

the Company will strategically seek to recapture the high-end market.

In terms of product strategy, the Company introduced the most

competitive entry level voice phones in 2005. Leveraging on the

success, the Company will focus on the most competitive entry level

camera phone in 2006 and the most competitive entry level 3G

handset in 2007/08. The Company’s strategy is to streamline the

product line and focus on cost competitive entry level products,

emphasize quality and enhance brand recognition.

More will be done in 2006 as the Company’s continuously reinforces

its R&D capability. In order to fully utilize its R&D resources to support

the large production volume, the Company has announced to form

an R&D joint venture with outside parties. The Company expects

that the joint venture will generate income by providing R&D services

to other manufacturers in the future. Hence, this will release the

burden on the R&D cost.

All in all, the Company will continue to materialize the synergy from

restructuring and adopt effective cost control measures to enhance

its competitiveness. The Company has full confidence in achieving

profitability in 2006.

18

FINANCIAL REVIEW

Results

For the year ended 31 December 2005, the Group’s audited

consolidated revenue amounted to HK$5,664 million (2004:

HK$7,310 million), representing a decrease of 22.5% as compared

to the last year. Loss attributable to equity holders of parent increased

by 769.2% to HK$1,608 million. (2004: HK$185 million). Basic loss

per share was HK55.6 cents (2004: HK6.5 cents).

Expenses

Completion of full integration between TCL Mobile & T&A in fourth

quarter 2005 gave rise to slight reduction of selling and distribution

costs and administrative expenses during the period compared with

the third quarter 2005. Selling and distribution costs and

administration expenses in the fourth quarter 2005 accounted for

12% and 15% of the total revenue respectively (third quarter 2005:

14% and 16% respectively).

Significant Investments and Acquisitions

On 11 May 2005, the Company entered into the Framework

Agreement with Alcatel Participations pursuant to which the

Company conditionally agreed to acquire 45% interest of T&A in

exchange for such number of shares of the Company equivalent to

5% of the issued share capital of the Company or approximately

4.76% of the enlarged issued share capital of the Company

immediately after completion of the aforesaid share swap. As Alcatel

Participations by virtue of its then 45% interest in T&A was a

connected person of the Company, the Framework Agreement

constituted a connected transaction for the Company under the

Listing Rules. Given the amount involved thereunder exceeds 2.5%

of the applicable percentage ratio (as defined in Rule 14.07 of the

Listing Rules), the Framework Agreement was subject to the

requirements of reporting, announcement and independent

shareholders’ approval which was duly obtained by the Company

at the extraordinary general meeting of its shareholders held on 22

June 2005. The Framework Agreement also constituted a

discloseable and share transaction for the Company under the

Listing Rules. On 18 July 2005, the transaction was completed and

T&A became a wholly-owned subsidiary of the Company. For further

details of the Framework Agreement, please refer to the circular of

the Company dated 6 June 2005.

On 9 March 2006, TCL Corp. entered into the Investment Agreement

with TCL Mobile Communication (Hohhot) Co., Ltd. (“TCL Mobile

Hohhot”) (an indirect wholly-owned subsidiary of the Company) in

relation to the establishment of the Finance Company. The Finance

Company will be owned as to 62% by TCL Corp., 14% by an indirect

wholly-owned subsidiary of TCL Multimedia Technology Holdings

Limited, 4% by TCL Mobile Hohhot and 20% by The Bank of East

Asia Limited. The Finance Company will be a connected person of

the Company. Further, the Company will enter into a Financial

Services Framework Agreement with TCL Corp. after the

establishment of the Finance Company. Pursuant to the Financial

Services Framework Agreement, the subsidiaries of the Company

may from time to time utilize the financial services which may be

provided by the Finance Company including the deposit services,

the services of money lending and other financing and financial

MANAGEMENT

DISCUSSION AND

ANALYSIS


services. Accordingly, the transactions between the Finance

Company and the Group under the Financial Services Framework

Arrangement will constitute continuing connected transactions for

the Company under the Listing Rules. Since the maximum

outstanding balances of the deposits to be placed by the Group

with the Finance Company are expected to exceed 2.5% of the

applicable percentage ratio of the Company (as defined in Rule

14.07 of the Listing Rules), the deposit services to be provided by

the Finance Company to the Group will be subject to the

requirements of reporting, announcement and the independent

shareholders’ approval. The independent shareholders’ approval

was duly obtained by the Company at the extraordinary general

meeting of its shareholders held on 13 April 2006 in respect of the

aforesaid deposit services and the related caps for the 3 years

ending 31 December 2008. For further details of establishment of

the Finance Company and the aforesaid continuing connected

transactions, please refer to the announcement and the circular of

the Company dated 9 March 2006 and 27 March 2006 respectively.

On 31 March 2006, the Company entered into the Share Purchase

Agreement with Power Century Investments Limited (“Power

Century”) pursuant to which the Company agreed to purchase from

Power Century 771,500 shares of JRD Communication Inc. (“JRDC”),

representing 38.58% equity interest in JRDC, at a cash consideration

of US$12.3 million (equivalent to approximately HK$95.33 million).

JRDC was established by the Company and Power Century under

the Joint Venture Agreement dated 19 December 2005 as a joint

venture company which was initially held by the Company and Power

Century as to approximately 9.45% and approximately 90.55%

respectively. Immediately after the completion of the Share Purchase

Agreement, the shareholding of the Company and Power Century

in JRDC was changed to approximately 46.25% and 35%

respectively. The consideration payable by the Company under the

Share Purchase Agreement was financed by the proceeds from the

open offer of the Company completed on 27 February 2006 (“Open

Offer”). The Joint Venture Agreement and the Share Purchase

Agreement have been aggregated pursuant to Rule 14.22 to

constitute a discloseable transaction for the Company under Rule

14.06 of the Listing Rules. The Share Purchase Agreement was

completed in April 2006. Reference is made to the announcement

of the Company dated 21 April 2006 in relation to the director of the

Joint Venture Agreement.

Fund Raising

On 11 May 2005, the Company entered into the Subscription

Agreement with its ultimate controlling shareholder, pursuant to

which the Company conditionally agreed to issue to TCL Corp. an

aggregate of €20 million principal amount (equivalent of

HK$185,100,000) of 3% convertible notes (“Convertible Notes”). The

Convertible Notes were issued on 29 July 2005 (“Issue Date”) under

which the Subscriber has the right to convert the Convertible Notes

during a period of three years from the Issue Date, in whole or part

in the principal amount into shares of the Company at the initial

conversion price of HK$0.58175 (subject to adjustment in certain

circumstances including rights issue). The Company has option to

redeem, in whole or any part, the Convertible Notes at 100% of their

principal amount plus interest accrued to but excluding the date of

redemption after 24 months from the Issue Date. Unless previously

20

redeemed, converted or purchased and cancelled, the Company

shall repay such principal moneys outstanding under the Convertible

Notes to the holder thereof together with all interest accrued thereon

up to and including on the third anniversary of the Issue Date.

As TCL Corp. is the ultimate controlling shareholder of the Company,

the Subscription Agreement constituted a connected transaction

for the Company under the Listing Rules. Given the amount involved

thereunder exceeds 2.5% of the applicable percentage ratio (as

defined in Rule 14.07 of the Listing Rules), the Subscription

Agreement was subject to the requirements of reporting,

announcement and independent shareholders’ approval which was

duly obtained by the Company at the extraordinary general meeting

of its shareholders held on 22 June 2005. The Subscription

Agreement also constituted a discloseable transaction for the

Company under the Listing Rules. For further details of the

Subscription Agreement, please refer to the circular of the Company

dated 6 June 2005.

Of the total funds raised by the issue of the Convertible Notes,

approximately HK$40 million was applied by the Company to settle

the balance of the expenses incurred for the listing of the shares of

the Company on the Main Board of the Stock Exchange in

September 2004, HK$120 million was applied as working capital

for Huizhou TCL Mobile (an indirect wholly-owned subsidiary of the

Company) and the remaining was for general operating usage of

the Group.

On 22 December 2005, the Company proposed to issue

2,968,875,000 new shares (“Offer Shares”) at a price of HK$0.2 per

Offer Share by way of Open Offer, on the basis of one Offer Share

for every one share of the Company held on 6 February 2006. The

open offer was completed on 27 February 2006 with a result of

application of 4,768,225,969 Offer Shares, representing

approximately 160.6% of the total number of Offer Shares. Out of

the entire net proceeds from the Open Offer of HK$587.8 million,

HK$200 million will be used for the R&D activities of the Group in

advanced technology of the industry including but not limited to 3G

mobile handsets, about HK$150 million will be used for settlement

of the payables incurred by the Group in its ordinary business, and

the remaining about HK$237.8 million will be used as the general

working capital of the Group including financing the increase in trade

receivables as a result of the growth of the Group’s business. For

further details of the Open Offer, please refer to the prospectus of

the Company dated 7 February 2006.

Of the total equity funds raised by the Open Offer, the Group has

utilized approximately HK$150 million to settle the payables incurred

in its ordinary business, about HK$237.8 million in the general

working capital and about HK$30 million in research and

development activities of advanced technology of the industry.

MANAGEMENT

DISCUSSION AND

ANALYSIS

As a result of the completion of the Open Offer, the conversion

price of the Convertible Notes had been adjusted from HK$0.58175

per share to HK$0.528324 per share in accordance with the relevant

terms of Convertible Notes and accordingly the Convertible Notes

will now entitle the holder thereof to convert them into up to

350,353,192 shares (instead of 318,177,911 shares as previously

envisaged). Further, the exercise price and the number of the share

options (“Share Options”) granted under the share option scheme

adopted by the Company on 13 September 2004 (“Share Option

Scheme”) and outstanding as at 27 February 2006 had also been

adjusted in accordance with the terms of the Share Option Scheme

and the relevant requirements of the Listing Rules as follows:

BEFORE THE OPEN OFFER AFTER THE OPEN OFFER

Adjusted Adjusted

Exercise No. of exercise no. of

price outstanding price outstanding

Grant Date per share Share Options per share Share Options

31 May 2005 HK$0.415 120,570,000 HK$0.3804 131,531,019

16 January 2006 HK$0.230 162,180,000 HK$0.2108 176,923,784

Total: 282,750,000 308,454,803

For further details of the adjustments, please refer to the Company’s

announcement dated 28 February 2006.

Proforma Consolidated Net Asset Value Statement

The following is a summary of the adjusted unaudited proforma

consolidated net asset value of the Group after the completion of

the Open Offer which has a material impact on the net assets value

of the Group:

HK$ million

Audited consolidated net asset value

of the Group as at 31 December 2005 40.9

Add: Issue of 2,968,875,000 ordinary shares

at the price of HK$0.2 per share 593.8

Less:Open Offer estimated expenses (6.0)

Adjusted unaudited pro-forma consolidated

net asset value of the Group 628.7

Inventory

The Group’s finished goods turnover period was 24 days. Over 80%

of the inventories have an aging period of less than 3 months.


Revenue Breakdown

(HK$ million) 2005 2004* Change

Overseas market 3,736 66% 1,995 27% +87.3%

PRC market 1,928 34% 5,315 73% –63.7%

Total 5,664 100% 7,310 100% –22.5%

*T&A was established in September 2004 and only 4 months of its sales figures were included in 2004

Liquidity and Financial Resources

The Group maintained a liquidity position throughout the year. The

cash and cash equivalents balances as at 31 December 2005

amounted to HK$406 million, of which 12% was in Hong Kong

dollars, 24% in Renminbi, 37% in US dollars, 27% in Euros and in

other currencies for the operations. The Group had total assets of

HK$4,084 million and a gearing ratio of 19% at the end of the year

calculated based on the Group’s total interest-bearing borrowings

and total assets.

Pledged Bank Deposits

Discounted notes of HK$118,156,000 (2004: nil) which were secured

by the pledge of deposits amounted to HK$35,447,000 (2004:nil).

Deposit balance of HK$18,870,000 (2004:nil) represented the

retention guarantee for factored trade receivable.

Capital Commitment and Contingent Liabilities

As at 31 December 2005, the Group had capital commitments of

(i) approximately HK$18,111,000 contracted, but not provided

for (2004: HK$23,845,000); and

(ii) US$1.5 million contracted for an investment at the balance

sheet date.

As at 31 December 2005, the group had no contingent liabilities in

respect of discounted notes and endorsed notes with recourse not

provided for in the financial statements (2004: HK$48,657,000).

One of the Group’s subsidiaries, T&A Mobile Phones Suzhou Limited

(“T&A Suzhou”) was involved in a patent infringement litigation

brought by Hubin, Huxuanhua and Dalian Hanpu Applied

Technology Co., Ltd. (the “plaintiff”) in March 2001. In May 2002,

the PRC trial court rendered civil judgment in favor of T&A Suzhou

with no damages or expenses to be borne by them. In the same

month, the plaintiff appealed to the High Court and up to date, the

appellate proceeding is still in progress.

According to the legal opinion from the Group’s PRC lawyer, it is

very likely for the appellate court to render judgment in favor of T&A

Suzhou again. Accordingly, no provision was made for such litigation

in the financial statements.

Foreign Exchange Exposure

The Group has transactional currency exposures. Such exposures

arise from sales or purchases by operating units in currencies other

than the units’ functional currency, where the revenue is

predominately in Euro, USD and RMB. The Group tends to accept

foreign currency exchange risk avoidance or allocation terms when

arriving at purchase and sales contracts. The Group takes rolling

forecast on foreign currency revenue and expenses, matches the

currency and amount incurred, so as to alleviate the impact to

business due to exchange rate fluctuation.

Employees and Remuneration Policy

The Group had 5,172 employees as at 31 December 2005. Total

staff costs for the year were approximately HK$700 million. The

remuneration policy was reviewed in line with current legislation,

market conditions and both individual and company performance.

22

DESIGN

THE POWER OF

DESIGN


The Company’s strategy is to streamline

the product line and focus on cost

competit ive entry level products,

emphasize quality and enhanced brand

recognition.

24

DIRECTORS AND

SENIOR MANAGEMENT

Mr. YUAN Xin Cheng, 54, is the executive director and general

manager of TCL Mobile. He is also the vice chairman and chief

operating office of TCL Corp.. Mr. Yuan has over 20 years of

management experience in production, sales and marketing of

consumer electronic products. He also has extensive business

connections in China. In 1985, Mr. Yuan received the distinguished

awards of “National Labour” and “National Excellent Manager”. Mr.

Yuan is an economist and graduated from the Institute of Beijing

Economics and Management.

Mr. WONG Toe Yeung, Chambers, 65, has over 30 years of

experience in the consumer electronic products industry. He was

previously a director of Toyo (Holdings) Limited, a company listed

on the main board of the Hong Kong Stock Exchange.

EXECUTIVE DIRECTORS

Mr. LI Dong Sheng, 48, is the founder and Chairman of the

Company. He is responsible for formulating corporate strategy and

leading the Company’s management. He was awarded the following

titles:

1994 “Distinguished Contributor to Development of PRC Electrical

Appliance Industry”;

1995 “National Excellent Young Entrepreneur”;

2000 “Model of National Work Force”;

2002 Representative of the 16th Central Committee of the

Communist Party;

“CCTV Man of the Year in the Chinese Economy”;

“Annual Innovation Award”;

2003 Delegate of the 10th National People’s Congress;

One of the most influential entrepreneurs by magazine

“China Entrepreneur”;

2004 “CCTV Man of the Year in the Chinese Economy”,

One of the worldwide most influential business leaders by

Time and CNN,

French National Honor Metal (OFFICIER DE LA LEGION

D’HONNEUR).

Mr. Li has more than 20 years of experience in various aspects of

the electronics industry particularly in the manufacture and sales of

electronic products. He is an engineer and holds a Bachelor of

Science Degree from Huanan Polytechnic University. Mr. Li is now

the Chairman of Board of TCL Multimedia Technology Holdings

Limited and TCL Corp.. He is also the president of TCL Corp. and a

director of a number of subsidiaries of TCL Corp.


Dr. LIU Fei, 41, is the CEO of the Company and T&A. He is also the

vice president of TCL Corp.. He has over 13 years of experience in

wireless industry in the USA. Dr. Liu had been working for TCL Mobile

previously and rejoined the Company in January 2005. Prior to

rejoining the Company, Dr. Liu was president and CEO in JCT Mobile,

senior vice president and head of business and product strategy of

TCL Mobile, wireless strategic business development manager of

Texas Instruments, and chief scientist and application manager in

Biomagnetic Technology Inc. Dr. Liu went through a joint PhD

programme of The University of California and The University of

Electronic Science and Technology of CDMA communication system

analysis and design.

Mr. YAN Yong, Vincent, 43, is the director of T&A, responsible for

strategic planning for the Company. His additional roles include

senior vice president at TCL Corp., managing director at TCL

Multimedia Technology Holdings Limited, chief financial officer at

TTE Corporation and CEO at Opta Corporation. He was previously

the country general manager, China, of Tulips Computers (Asia)

Limited. Mr. Yan received an MBA from Stanford University and an

MS in Computer Science from Peking University.

Mr. DU Xiao Peng, Simon, 38, is senior vice president of the

Company. Prior to joining the Company, he was project officer for

the China Aerospace Industry Company. Mr. Du graduated in 1993

from The Chinese Academy of Space Technology with a Master’s

degree in Telecommunication and Electronic System.

Dr. GUO Ai Ping, George, 42, is senior vice president responsible

for human resources and administration of the Company. He is also

a deputy general manager of TCL Mobile and director of T&A. Prior

to joining the Company, he held positions as manager in SB Global,

project coordinator of IBM, senior business consultant in Arthur

Andersen and chief technology officer in Zhaodaola Internet

Company. Dr. Guo graduated from Stanford University with a PhD

in Management Science and Engineering.

26

DIRECTORS AND

SENIOR MANAGEMENT

INDEPENDENT NON-EXECUTIVE DIRECTORS

Mr. SHI Cuiming, 66, was graduated in 1963 from the Department

of Management Engineering at the Beijing University of Posts and

Telecommunications. From 1981 to 1987, Mr. Shi served as deputy

director of the Department of Postal Economic Research and as

deputy director general of the Bureau of Finance of the Ministry of

Posts and Telecommunications. From 1987 to 1997, he was director

general of the Bureau of Finance, director general of the Department

of Operations and Finance and director general of the Department

of Finance of the Ministry of Posts and Telecommunications. He

was previously the Chairman of the Board and the CEO of China

Mobile (Hong Kong) Limited, and an executive director and executive

vice-president of China Unicom Limited, both companies listed on

the main board of the Hong Kong Stock Exchange and the New

York Stock Exchange. He is currently a consultant to CITIC Pacific

Limited and the Chairman of CITIC Telecom 1616 Ltd.

Mr. WANG Chong Ju, 57, was graduated in 1987 from Changsha

Railway University with a Master’s degree in economics and

mathematics. He has been engaged in the research and teaching

of economics and management for a long period of time. He is

president of Chongqing Technology and Business University, vice

president of the China Quantitative Economics Society, and

executive council member of the China Marketing Society. Mr. Wang

has participated in various national research projects in the PRC

and won various awards for his research.

Mr. LAU Siu Ki, Kevin, 47, is a fellow member of both the Hong

Kong Institute of Certified Public Accountants and the Association

of Chartered Certified Accountants (“ACCA”). He has over twenty

years of experience in corporate finance, financial advisory and

management, accounting and auditing and had worked for an

international accounting firm for over fifteen years. He is now working

as a consultant in the financial advisory field and also acting as an

independent non-executive director of a number of listed companies

in Hong Kong. Mr. Lau is a member of the ACCA Council and a

member of the Executive Committee of the Hong Kong branch of

ACCA, and was the Chairman of the Hong Kong branch of ACCA.


SENIOR MANAGEMENT

Mr. YU En Jun, Robert, 37, is the chief operation officer and thegeneral manager of the global manufacturing centre of theCompany, as well as a director of TCL Mobile. Mr. Yu joined TCLCorp. in August 2000 and had served as the senior vice presidentof TCL Computer and the general manager of Highly InformationIndustry Co. Ltd. Prior to joining TCL Corp., Mr. Yu held a position atHisense Group. Mr. Yu graduated from Gansu University ofTechnology, majoring Industrial Accounting, and obtained EMBA atChina Europe International Business School.

Mr. YUAN Yi, 45, is the executive vice president of the Company,responsible for product definition and R&D. Mr. Yuan joined theCompany in 2005, prior to joining the Company, he had been thechief representative and the general manager in the Greater Chinaregion of Broadcom Corporation as well as the manager of globalnew business marketing and development in Texas Instruments.Mr. Yuan graduated from Shanghai Jiao Tong University in 1982and obtained his Master degree in Electronic Engineering fromNorthern Illinois University in 1988.

Mr. WONG Kwok Chung, Albert, 34, is the executive vice presidentof the business & product strategy and coordination committee ofthe Company, responsible for product planning and solutions. Mr.Wong joined the Company in 2005, he has 10 years of experiencein computers and electronics industry in Hong Kong, Canada andthe PRC. He had been the senior software engineer of KEGOTechnology Limited, chief information officer of Inmobo Limited, CEOand chief operation officer of JCT Mobile. Mr. Wong graduated fromthe University of Toronto with a Bachelor degree of Science andobtained his Master’s degree in Electrical and ElectronicsEngineering from The Hong Kong University of Science &Technology.

Mr. Jean-Luc RINO, 47, is senior vice president of the Company,responsible for Europe, Middle East and Africa business. Mr. Rinohas 22 years financial experience on multinational companies inretailing and steel industries. He joined the Company in December2004, prior to joining the Company, he held positions in financeand operations with Alcatel in France, the PRC and Vietnam. Heholds a Bachelor of Arts degree in economics from Paris Universityand graduated from Sciences-Po Paris.

Mr. Nicolas ZIBELL, 38, is senior vice president of the Companyand general manager of T&A Mexico, responsible for the Company’sbusiness in the Americas. Mr. Zibell has over 16 years of experiencein sales, marketing and management in Automotive andTelecommunications industries in Europe and Latin America. Hegraduated from École Superieure de Commerce de Lyon andESADE Business School with an MBA in 1990.

Mr. Alain LEJEUNE, 42, is senior vice president of the Company,responsible for global operations. Mr. Lejeune joined the Companyin 2004, prior to joining the Company, he was the vice president ofAsia Pacific and supply chain director of Alcatel mobile phonedivision, finance and administration director for the North Asia areaof Alcatel cables and components division. Mr. Lejeune graduatedin 1987 from École Centrale de Paris, an engineering school inFrance.

Mr. LIU Yuk Tung, Thomas, 42, is senior vice president and chieffinancial officer of the Company. He is also the chief financial officerof T&A. Mr. Liu has about 20 years experience in area of audit,international finance and trading business. Prior to joining theCompany, he was the Asia Pacific regional financial controller ofStratus Technologies Inc., sales and marketing director and generalmanager of Neo-Neon Holdings Ltd.. Mr. Liu holds a Bachelor’sdegree major in Economics from Hong Kong University and a MBAfrom University of New South Wales. He is also a CPA of HKICPA,Chartered Accountant of ICAEW and fellow member of ACCA.

Mr. NG Kwok Lun, Norman, 46, the former Company’s chieffinancial officer, is senior vice president and secretary of the Boardof the Company. Mr. Ng has over 23 years experience in corporatefinance and management from professional accounting, banking,international retailing and manufacturing industries. Prior to joiningthe Company in January 2005, he served in multinationalcorporations such as Nu Skin Enterprises Inc. as regional treasurerand assistant regional controller, and held senior managementpositions in Hong Kong main board listed companies in thecapacities of chief financial officer and company secretary. Mr. Nggraduated from the City University of Hong Kong with an honorsdegree in Accountancy. He is a fellow member of the ACCA, andan associate member of the HKICPA, the Institute of CharteredSecretary and Administrators and the Hong Kong Institute ofCompany Secretaries.

28

CORPORATE

GOVERNANCE REPORTCORPORATE

GOVERNANCE REPORT

While TCT is moving into the world market at an unprecedented pace, the Group is also becoming increasingly responsible to shareholders

worldwide. The Board is committed to enhancing the Group’s corporate governance standards by improving corporate transparency through

effective channels of information disclosure. The Board believes that good corporate governance is beneficial for maintaining close and

trustful relationships with its employees, business partners, shareholders and investors.

CODE ON CORPORATE GOVERNANCE PRACTICES AND CORPORATE GOVERNANCE REPORTIn November 2004, the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) introduced the “Code on Corporate Governance

Practices” (the “Code”), which has become effective for accounting periods commencing on or after 1 January 2005, with one exception on

internal controls, which comes into effect for accounting periods commencing on or after 1 July 2005. The Code sets out a series of code

provisions (“Code Provisions”) with which listed issuers must comply or give considered reasons for any deviations. The rules on the

Corporate Governance Report are found in a new Appendix 23 of the Rules Governing the Listing of Securities of the Stock Exchange

(“Listing Rules”).

In April 2005, the Board adopted the Code Provisions as the guidelines for corporate governance of the Group, and has taken steps to

comply with the Code wherever appropriate.

Throughout the year ended 31 December 2005, the Group complied fully with the Code, with one exception. Dr. LIU Fei, who was appointed

as an executive director in June 2005, was not subject to election by shareholders at the extraordinary general meeting (“EGM”) held on 6

February 2006, i.e. the first general meeting of the Company after his appointment, as required by provision A.4.2 of the Code. Given the

Articles of Association of the Company stipulate that such a director shall hold office until the next annual general meeting (“AGM”) following

his appointment, the Board considers that it is more appropriate to have the election be considered by shareholders in the forthcoming AGM

so that re-election of all eligible directors can be considered by shareholders at the same time in the AGM. Therefore, the Board considers

that it will be in the shareholders’ interest that Dr. Liu’s election be postponed to the 2006 AGM, at which time the re-election of directors

subject to expiry of a specific term or rotation will be considered together.

Meanwhile, to be consistent with the provisions in the Articles of Association, the Board has, in the Board meeting held on 16 April 2006,

amended the corporate governance code of the Company, so that in the future, directors appointed to fill casual vacancies will hold office

until the AGM following their appointment, thus avoiding re-occurrence of the abovementioned deviation.

1. THE BOARD

A. The Board

Code Principle

The Code requires that an issuer should be headed by an effective Board which should assume responsibility for

leadership and control of the issuer and be collectively responsible for promoting the success of the issuer by directing

and supervising the issuer’s affairs. Directors should take decisions objectively in the interests of the issuer.

The members of the Board, all being industry veterans, are responsible to the shareholders for formulating the overall business

development targets and long-term company strategies, assessing results of management policies and monitoring performance

of the management.

Code Provisions Alignment Remarks

At least four meetings a year. Yes The Board met 4 times in person at about

quarterly intervals throughout 2005, and it met

on 17 other occasions when a Board decision

is required on major issues. Attendance of

individual directors is stated in the Table A.



All directors be given an opportunity to

include matters in the agenda for

regular board meetings.

Notice of at least 14 days be given of a

regular Board meeting.

Access to advice and services of the

company secretary.

Minutes of meetings kept by company

secretary and open for inspection.

Draft and final minutes sent to all

directors for comments within a

reasonable time

Agreed procedure for directors to seek

independent professional advice at the

company’s expense.

If a substantial shareholder/director has

a conflict of interest in a material matter,

board meeting should be held. Such

director must abstain from voting and

not be counted in quorum.

Yes

Yes

Yes

Yes

Yes

Yes

All the directors are supplied with board papers

and relevant materials within a period of time

acceptable to members of the Board in

advance of the intended meeting date of every

Board meeting.

The Company generally gives notice and draft

agenda of regular Board meetings at least 14

days in advance.

All directors have access to the company

secretary to seek advice and consultancy

services.

The company secretary is responsible for taking

minutes of Board and Board Committee

meetings, which would be sent to directors

within a reasonable time after each meeting and

generally be made available for inspection by

directors/committee members.

Al l the d i rectors have access to the

management for enquiries and to obtain

information when required. They may also take


expense of the Group, if necessary.

The Board follows an established procedure

for entering into material transactions, which

provides that material transactions with

connected persons must be discussed in a

Board meeting, during which such director

must abstain from voting and not be counted

in quorum.

The directors meet regularly to review the Group’s financial and operational performance and to discuss and formulate future

development plans.

Regular Board meetings are attended to by a majority of the directors in person or through other electronic means of

communication.

Besides the regular Board meetings, special Board meetings are convened from time to time for the Board to discuss major

matters that require the Board’s timely attention. Since the special Board meetings are concerned with the day-to-day

management of the Company which often requires prompt decisions, usually only the executive directors attend.

30

CORPORATE

GOVERNANCE REPORT

Table A

Attendance*

Regular Board Meetings Special Board Meetings

Executive Directors

LI Dong Sheng (Chairman) 3/4 6/17

YUAN Xin Cheng 2/4 3/17

WONG Toe Yeung, Chambers 2/4 12/17

LIU Fei1 1/2 3/10

WAN Mingjian2 – –

YAN Yong, Vincent 3/4 2/17

DU Xiaopeng, Simon 3/4 7/17

GUO Aiping, George 3/4 10/17

Independent Non-Executive

Directors

SHI Cuiming 3/4 –

WANG Chongju 2/4 –

LAU Siu Ki, Kevin 3/4 1/17

1. Dr. LIU Fei was appointed as a director on 22 June 2005.

2. Dr. WAN Mingjian ceased to be a director from 22 June 2005.

* This attendance rate counts only the Board meetings held during the period when a director holds such office.

B. Board Composition

Code Principle

The Board should have a balance of skills and experience appropriate for the requirements of the business of the issuer.

The Board should ensure that changes to its composition can be managed without undue disruption. The Board should

include a balanced composition of executive and non-executive directors (including independent non-executive directors)

so that there is a strong independent element on the Board, which can effectively exercise independent judgement.

Non-executive directors should be of sufficient calibre and number for their views to carry weight.

The Board comprises 10 directors, 7 of whom are executive directors and 3 are independent non-executive directors (“INEDs”).

In June 2005, Dr. WAN Mingjian retired as an executive director and Dr. LIU Fei was appointed as an executive director and

the CEO of the Group. All the other directors served for the full year of 2005. The biographies of the directors are given on the

section under “Directors and Senior Management” of this annaul report. There are no relationships (including financial,

business, family or other material or relevant relationships) among members of the Board.


Yes

Yes

INEDs of the Group were disclosed in all major

corporate materials as well as on the corporate

website: www.tclcom.com

Please refer to the corporate

website: www.tclcom.com

Identify the INEDS in all corporate

communications.

Recommended Best Practice

Maintain on the website an updated list

of its directors identifying their role,

function and (where applicable)

independence.


The non-executive directors, 100% of whom are independent, also play an important role on the Board. Accounting for 30%

of the Board members, they are experienced professionals in their respective fields. They are responsible for ensuring that

the Board maintains high standards of financial and other mandatory reporting as well as providing adequate checks and

balances for safeguarding the interest of shareholders and the Group as a whole. Pursuant to the Listing Rule 3.13, the Group

has received a written confirmation from each INED of his independence to the Group. The Group considers all of the INEDs

to be independent in accordance with the Listing Rules.

C. Management Functions

Code Principle

An issuer should have a formal schedule of matters specifically reserved to the Board for its decision. The Board should

give clear directions to management as to the matters that must be approved by the Board before decisions are made

on behalf of the issuer.


The types of decisions which are to be taken by the Board include those relating to:

• Corporate and capital structure;

• Corporate strategy;

• Significant policies affecting the Group as a whole;

• Business plan, budgets and public announcements;

• Delegation to the Chairman, and delegation to and by Board Committees;

• Key financial matters;

• Appointment, removal or reappointment of Board members, senior management and auditors;

• Remuneration of directors and senior management; and

• Communication with key stakeholders, including shareholders and regulatory bodies

Board must give clear directions as to

the powers of management, including

circumstances where management

should obtain prior approval from the

Board.

Formalise the functions reserved to

the Board and those delegated to

management.

Yes

Yes

All senior management appointment and their

remunerations should obtain prior approval

from the Board.

The functions reserved to the Board are listed

below:

32

CORPORATE

GOVERNANCE REPORT

The types of decisions that the Board has delegated to management include:

• Approving the extension of the Group’s activities not in a material manner into a new geographic location or a new

business;

• Approving assessing and monitoring the performance of all business units and ensuring that all necessary corrective

actions have been taken;

• Approving expenses up to a certain limit;

• Approving entering into any connected transactions not requiring disclosure under the Listing Rules;

• Approving the nomination and appointment of personnels;

• Approving of press release concerning matters decided by the Board;

• Approving any matters related to the routine matters or day-to-day operation of the Group (including the entering into

of any transaction not requiring disclosure under the Listing Rules and the cease of non-material part of the Group’s

business); and

• Carrying out any other duties as the Board may delegate from time to time.

D. Financial Reporting

Code Principle

The Board should present a balanced, clear and comprehensible assessment of the Company’s performance, position

and prospects.


Management to provide explanation

and information to enable Board to

make informed assessment of relevant

matters.

Acknowledgement of director

responsibility for preparing the

accounts; a statement by the auditors

regarding reporting responsibilities in

auditors’ report.

Board responsibilities to present a

balanced, clear and understandable

assessment in annual/interim reports,

price-sensitive announcements; other

financial disclosures/reports under

the Listing Rules and statutory

requirements.

Yes

Yes

Yes

Directors are regularly provided with

comprehensive reports on the management’s

strategic plans, updates on lines of business,

financial objectives, plans and actions.

A Statement of Director Responsibilities for

Financial Statements is set out in the section

under “Report of DIrector” of this Annual Report.

The Auditors’ Report states auditors’ reporting

responsibilities.

The Board aims to present a comprehensive,

balanced and understandable assessment of

the Group position and prospects in all

shareholder communications.

The Board is responsible for the integrity of financial information. The directors acknowledge their responsibility for the

preparation of the accounts for each financial period which give a true and fair view of the state of affairs of the Group and of

the results and cash flows for that period.

The directors, having made appropriate enquiries, consider that the Group has adequate resources to continue in operational

existence for the foreseeable future and that, for this reason, it is appropriate to adopt the going concern basis in preparing

the financial statements.


E. Responsibilities of Directors

Code Principle

Every director is required to keep abreast of his responsibilities as a director of an issuer and of the conduct, business

activities and development of that issuer.


Every newly appointed director should

receive a comprehensive, formal

induction

Functions of non-executive directors

include:

• Bring an independent judgment at

the Board meeting;

• Take the lead where there is

potential conflicts of interests;

• Serve on committees if invited;

• Scrutinize the issuer’s performance

Directors should ensure that they can

give sufficient time and attention to the

affairs of the issuer.

Yes

Yes

Yes

Upon being appointed to the Board, each new

director receives a comprehensive induction

programme on the business of the Group, the

duties of a director under both general law

(common law and legislation) and the Listing

Rules, and the terms of reference of the Board

Committees.

The directors receive further briefings when

there are new developments to such

information.

Strategic planning and monitoring are two

major roles for the Company’s directors. On

an on-going basis, the Board will review with

management how the strategic environment is

changing, what major risks and opportunities

have emerged, how they are being managed

and what, if any, adjustments in strategic

direction would be required.

To ensure that the directors can give sufficient

time and attention to the affairs of the Group,

they have disclosed the number and nature of

offices they held in public companies or

o rgan iza t ions and o the r s ign i f i can t

commitments. For details regarding the offices

held by the directors, please refer to sections

under “Report of the Director” of this annual

report.

34

CORPORATE

GOVERNANCE REPORT

F. Appointment, Re-election and Removal

Code Principle

There should be a formal, considered and transparent procedure for the appointment of new directors to the Board.

There should be plans in place for orderly succession for appointments to the Board. All directors should be subject to

re-election at regular intervals. An issuer must explain the reasons for the resignation or removal of any director.


G. Roles of Chairman and CEO

Code Principle

The Code requires the roles of Chairman and CEO to be separate and should not be performed by the same individual.

The division of responsibilities between the Chairman and CEO should be clearly established and set out in writing.


Non-executive directors should be

appointed for a specific term, subject

to re-election.

All directors appointed to fill a casual

vacancy should be subject to election

at the first and subsequent general

meeting.

Every director should be subject to

rotation at least once every three years.

Yes In the last AGM held on 22 June 2005, all three

non-executive directors were elected to hold

office for a specific term of approximately one

year until the next AGM, subject to re-election

by shareholders. One-third (or such number

nearest to and not less than one-third) of the

directors are subject to retirement by rotation

at the AGM in each year. A retiring director is

eligible for re-election.

Roles of Chairman and should be

separate; clearly established and set

out in writing.

The Chairman should ensure all

directors be briefed on issues arising

at the Board meeting.

The Chairman should ensure directors

to receive adequate information.

Yes

Yes

Yes

The positions of Chairman and CEO are held

respectively by Mr. LI Dong Sheng and Dr. LIU

Fei. This ensures a clear distinction between

the Chairman’s duty to manage the Board and

the CEO’s duty to oversee the overall internal

operation of the Group.

Please refer to the responsibilities of the

Chairman listed below.

Please refer to the responsibilities of the

Chairman listed below.


The respective responsibilities of the Chairman and the CEO are as follows:

Responsibilities of the Chairman

• Oversee the development of the long-term strategies, objectives and policies for the Company

• Ensure that appropriate objectives, policies and strategies are adopted for each of the businesses of the Company,

that appropriate budgets are set for the businesses, that their performance is effectively monitored, and that guidance

or direction is given where appropriate

• Ensure all directors are properly briefed on matters to be discussed at Board meetings

• Ensure all directors receive adequate, complete and reliable information in a timely manner

• Provide leadership for the Board

• Ensure that the Board works effectively and discharges its responsibilities

• Ensure that all key and appropriate issues are discussed by the Board in a timely manner

• Ensure that agenda for Board meetings are drawn up and approve them, taking into account any matters proposed

by the other directors for inclusion in the agenda

• Ensure that good corporate practices and procedures are in place

• Encourage all directors to make a full and active contribution to the Board’s affairs and take the lead to ensure that

the Board acts in the best interests of the Company

• Ensure appropriate steps are taken to provide effective communication with shareholders and that views of shareholders

are communicated to the Board as a whole

• Facilitate the effective contribution of non-executive directors in particular and build constructive relations between

executive and non-executive directors

• Ensure that queries raised by directors on Board papers and related materials are responded to in a timely manner

• Ensure the Board’s responsibility to represent a balanced, clear and understandable assessment extends to annual

and interim reports, other price-sensitive announcements and other financial disclosures required under the Listing

Rules, and reports to regulators as well as to information required to be disclosed pursuant to statutory requirements

• Attend the AGM and arrange for the Chairman of the Audit and Remuneration Committees or in the absence of the

Chairman of such Committees, another member of the Committee or failing this his duly appointed delegate, to be

available to answer questions at the AGM

36

CORPORATE

GOVERNANCE REPORT

Responsibilities of the CEO

• Provide leadership to the management

• Implement the Company’s policy and report to the Board

• Oversee the realisation by the Company of the objectives set by the Board

• Provide all such information to the Board as necessary to enable it to monitor the performance of management

• Put in place programmes for management development and succession

• With the chief financial officer, establish and maintain proper internal controls and systems as well as disclosure

controls and procedures

• Discharge such duties and authority as may be delegated to him by the Board

• Be responsible to the Board for the development of the Company and its operation, including the profits, cash and

costs of all businesses

• Ensure that such action is taken as is necessary to secure the timely and effective implementation of the objectives,

policies and strategies set by the Board and other decisions taken by or on behalf of the Board

• Lead the Company’s processes for communicating to, and consulting with, employees

• Lead the Company’s stakeholder relations, including relations with the Company’s shareholders, governments, other

public organizations, other companies and the public generally

• Regularly keep the Chairman informed of all matters that may be of importance to the Company, including its current

performance and progress

H. Directors’ Securities Transactions

The Group has adopted the Model Code for Securities Transactions by Directors of Listed Issuers (the “Model Code”)

contained in Appendix 10 of the Listing Rules as the code of conduct regarding the directors and relevant employees’

transactions in securities of the Group.

All directors have confirmed, following specific enquiry by the Group that throughout year 2005 they complied with the

required standard set out in the Model Code for securities transactions.

The directors’ interests in shares of the Group as at 31 December 2005 are set out on sections under “Report of the Directors”

in this Annual Report.


I. Supply of and Access to Information

Code Principle

Directors should be provided in a timely manner with appropriate information in such form and of such quality as will

enable them to make an informed decision and to discharge their duties and responsibilities as directors of an issuer.


Board papers should be sent to all

directors at least three days before the

date of Board/Committee meeting (or

such other period as agreed).

Each director should have separate

and independent access to senior

management.

Directors are entitled to have access

to board papers; steps must be taken

to respond properly and fully to director

queries.

Yes

Yes

Yes

Board papers are dispatched to Board/

Committee members within a time agreed by

the directors prior to meetings.

Al l the d i rectors have access to the

management for enquiries and to obtain

information when required. They may also take


expense of the Group, if necessary.

Board papers and minutes are made available

for inspection by directors and Committee

members.

2. BOARD COMMITTEES

Code Principle

Board Committees should be formed with specific written terms of reference which deal clearly with the Committees’ authority

and duties.

The Board has set up two Board Committees, namely the Remuneration Committee and the Audit Committee, both with specific

terms of reference, to oversee particular aspects of the Group’s affairs.


Clear terms of reference to enable proper

discharge of Committee functions.

The terms of reference should require

Committees to report their decisions to the

Board.

Yes

Yes

Please v is i t the Company’s webs i te

www.tclcom.com to download the “Terms of

Reference”

38

CORPORATE

GOVERNANCE REPORT

A. Remuneration of Directors and Senior Management

Code Principle

Issuers should establish a Remuneration Committee with specific written terms of reference which deal clearly with its

authority and duties. A majority of the members of the Remuneration Committee should be INED.

The Remuneration Committee, set up in 2005 pursuant to the requirements of the Code, makes recommendations to the

Board on the Company’s policy and structure for all remuneration of directors and senior management, and on the establishment

of a formal and transparent procedure for developing policy on such remuneration. The Remuneration Committee also

reviews and approves the performance-based remuneration by reference to corporate goals and objectives resolved by the

Board from time to time.

The Remuneration Committee is governed by its terms of reference, which are available at the Group’s

website: www.tclcom.com.

The Remuneration Committee consists of 4 members, 3 of whom are INEDs, namely Mr. SHI Cuiming, who is also the

Chairman of the Committee, Mr. LAU Siu Ki, Kevin and Mr WANG Chongju. The other member is executive director Mr. YUAN

Xin Cheng.

During 2005, the full Remuneration Committee met once and accomplished the following:

• determining the terms of a special share option scheme to reward the senior management personnel;

• reviewing the emolument policy and the levels of remuneration paid to the directors and senior management of the

Group in 2005; and

• reviewing the proposed bonus scheme for senior management personnel for 2006, including the bonus eligibility

criteria and the amount.

Details of the members’ attendance at the Remuneration Committee meeting in 2005 are as follows:

Attendance

Mr. YUAN Xin Cheng 1/1

Mr. SHI Cuiming 1/1

Mr. WANG Chongju 1/1

Mr. LAU Siu Ki, Kevin 1/1

Emolument Policy and Long-Term Incentive Plan

The Group provides a competitive remuneration package to its directors to attract and retain talent. A large portion of the

package for executive directors is linked to their performance, which in turn is aligned with the interests of the shareholders,

so as to provide an incentive for the executive directors to achieve the best performance. Part of the remuneration of executive

directors may comprise of long-term incentive schemes and stock option plans. The emoluments payable to the directors are

determined with reference to their duties and responsibilities with the Company and the market rate for the positions.

The purpose of the long-term incentive scheme of the Group is to reward outstanding performance that is measured by

achieved targets, and is closely linked with the performance of the Group. The award under this scheme is made by installments

over a period so as to provide an incentive for the executives to consistently perform at a high standard and bring along long-

term benefits to the Group.


The non-executive directors’ compensation relates to the time commitment and responsibilities. They receive fees which

comprise the following components:

• Directors’ fee, which is usually paid annually;

• Additional fee for additional responsibilities such as directorship in Board Committees; and

• Shares of the Group, which is awarded subject to the discretion of the Board.

In view of the increasing demand on the time and effort from the INEDs on the Group’s business, in January 2005, the Board

resolved to increase the fees for them from HK$120,000 to HK$180,000 per annum with effect from 1 January 2005.

The details of the fees and any other reimbursement or emolument payable to the directors are set out in details on sections

under “Report of Directors” of this Annual Report.

B. Nomination of Directors

Code Principle

There should be a formal, considered and transparent procedure for the appointment of new directors to the Board.

There should be plans in place for orderly succession for appointments to the Board. All directors should be subject to

re-election at regular intervals. An issuer must explain the reasons for the resignation or removal of any director.

The Board has not established a Nomination Committee, and the Board itself is responsible for the selection and approval of

new directors. When there is a nomination to directorship, the Board will assess the suitability of the nominee and decide

whether to accept the nomination. A director appointed by the Board is subject to election by shareholders at the first general

meeting after the appointment.

In 2005, the Board held one meeting during which the nomination and appointment of directors were discussed. The directors’

attendance at this meeting is as follows:

Attendance

Executive Directors

LI Dong Sheng (Chairman) 1/1

YUAN Xincheng –

WONG Toe Yeung, Chambers 1/1

LIU Fei 1/1

WAN Mingjian –

YAN Yong, Vincent 1/1

DU Xiaopeng, Simon 1/1

GUO Aiping, George 1/1

Independent Non-Executive Directors

SHI Cuiming 1/1

WANG Chongju 1/1

LAU Siu Ki, Kevin 1/1

40

CORPORATE

GOVERNANCE REPORT

In October 2005, the Board adopted a procedure and criteria for nomination of directors, the details of which are set out

below:

Procedures for Nomination of Directors

1. When there is a vacancy in the Board, the Board evaluates the balance of skills, knowledge and experience of the

Board, and identifies any special requirements for the vacancy (e.g. independence status in the case of an INED).

2. Prepare a description of the role and capabilities required for the particular vacancy.

3. Identify a list of candidates through personal contacts / recommendations by Board members, senior management,

business partners or investors.

4. Arrange interview(s) with each candidate for the Board to evaluate whether he/she meets the established written

criteria for nomination of directors. One or more members of the Board will attend the interview.

5. Conduct verification on information provided by the candidate.

6. Convene a Board meeting to discuss and vote on which candidate to nominate or appoint to the Board.

Criteria for Nomination of Directors

1. Common criteria for all directors

(a) Character and integrity

(b) The willingness to assume Board fiduciary responsibility

(c) Present needs of the Board for particular experience or expertise and whether the candidate would satisfy

those needs

(d) Relevant experience, including experience at the strategy/policy setting level, high level managerial experience

in a complex organization, industry experience and familiarity with the products and processes used by the

Company

(e) Significant business or public experience relevant and beneficial to the Board and the Company

(f) Breadth of knowledge about issues affecting the Company

(g) Ability to objectively analyse complex business problems and exercise sound business judgment

(h) Ability and willingness to contribute special competencies to Board activities

(i) Fit with the Company’s culture

2. Criteria applicable to non-executive directors/INEDs

(a) Willingness and ability to make a sufficient time commitment to the affairs of the Company in order to effectively

perform the duties of a director, including attendance at and active participation in Board and Committee

meetings

(b) Accomplishments of the candidate in his or her field

(c) Outstanding professional and personal reputation

(d) The candidate’s ability to meet the independence criteria for directors established in the Listing Rules


C. Auditors’ Remuneration

In 2005, the fees in respect of audit and non-audit services payable by the Company to the auditors, Messrs Ernst & Young,

amounted to HK$2,597,000 and HK$180,000 respectively.

D. Audit Committee

Code Principle

The Board should establish formal and transparent arrangements for considering how it will apply the financial reporting and

internal control principles and for maintaining an appropriate relationship with the Company’s auditors. The Audit Committee

established by an issuer pursuant to the Exchange Listing Rules should have clear terms of reference.

The Audit Committee usually meets 4 times a year to review the truthfulness, completeness, and accuracy of the Group’s

financial statements. It is accountable to the Board and assists the Board in meeting its responsibilities in ensuring an

effective and adequate system of internal controls and for meeting its external financial reporting obligations and compliance

with other legal and regulatory requirements. The Committee also oversees the scope of work of external auditors.


Minutes be kept by a duly appointed

secretary; and should be sent to all

Committee members within a

reasonable time.

A former partner of the existing auditors

should not sit on the Audit Committee.

The terms of reference of Audit

Committee (containing the minimum

prescribed duties) be made available

on request and on the website.

Disclosure – statement from the Audit

Committee explaining its

recommendation on the appointment,

resignation or dismissal of external

auditors; express disclosure where

the Board disagree with the

Committee’s view.

The Audit Committee should be

provided with sufficient resources to

discharge its duties.

Yes

Yes

Yes

Yes

Yes

Minutes are kept by the company secretary and

are sent to all members within a reasonable time

after each meeting.

The Audit Committee does not have any

members who used to work for the firm of

external auditors of the Company.

Please visit www.tclcom.com to download/view

the information

The Audit Committee has recommended to re-

appoint Messrs. Ernst & Young to be the

Company’s auditors, and the Board agrees to

this recommendation.

There is an agreed procedure for Audit

Committee members to take independent

professional advice at Company’s expense.

The Audit Committee comprises 3 members, namely Mr. LAU Siu Ki, Kevin, Mr. SHI Cuiming and Mr. WANG Chongju, all of

whom are INEDs. Mr. LAU Siu Ki, Kevin the Chairman of the Audit Committee, is a professional accountant with profound

financial and accounting expertise.

42

CORPORATE

GOVERNANCE REPORT

During 2005, the Audit Committee met 4 times, and the details of the members’ attendance in such meetings are as follows:

Attendance

Mr. SHI Cuiming 4/4

Mr. WANG Chongju 4/4

Mr. LAU Siu Ki, Kevin 4/4

Other attendees at the Audit Committee meetings include the Group’s chief financial officer and the external auditors for

discussion of the audit of the interim and annual results only.

The Audit Committee’s work in 2005 includes consideration of the following matters:

• The completeness and accuracy of the 2004 annual and 2005 quarterly and interim financial statements;

• The Group’s compliance with statutory and regulatory requirements;

• Developments in accounting standards and the financial implication on the Group;

• The audit report submitted by the external auditors summarizing matters arising from their audit of the Group for year

2004;

• Detailed analysis of the business of T&A, the Group’s former joint venture with the French company Alcatel, including

its system of financial management, the impact of its upcoming reorganization, costs management, and its quarterly

performance;

• The reason for the large amount of accounts receivable of the Group and the risk involved;

• Analysis of the areas of improvement within the Group’s business, including the system of financial management,

inventory management and control on subsidiaries

• The decision to set up an internal audit department; and

• The consideration for making provisions for the Group’s inventory;

• The audit fees payable to external auditors for year 2005; and

• Recommendations to the Board, for the approval by shareholders, for the reappointment of Ernst & Young as the

external auditors, which the Board agreed and accepted;

3. INTERNAL CONTROLS

Code Principle

The Board should ensure that the issuer maintains sound and effective internal controls to safeguard the shareholders’ interest

and the issuer’s assets.

The Audit Committee has scheduled to devise a plan to review the systems of internal control of the Group in early 2006, and will carry

out the plan accordingly within 2006.


4. SHAREHOLDERS

A. Effective Communication

Code Principle

The Board should endeavour to maintain an on-going dialogue with shareholders and in particular, use AGM or other

general meetings to communicate with shareholders and encourage their participation.

The Company follows a policy of disclosing relevant information to shareholders in a timely manner. The Company’s AGM

and EGM allow the directors to meet and communicate with shareholders. The Chairman is actively involved in organizing the

AGM and personally chairs it, to ensure that shareholders’ views are communicated to the Board.

AGM proceedings are reviewed periodically to ensure that the Company follows best corporate governance practices. An

AGM circular is distributed to all shareholders at least 21 days prior to the AGM, setting out details of each proposed

resolution, voting procedures and other relevant information.

Shareholders can convene an EGM by following the procedure set out below:

• Any one or more shareholders holding not less than one-tenth of the paid up capital of the Group, can deposit a

written request to convene an EGM addressed to the Board or the secretary at Room 1502, Tower 6, China Hong

Kong City, 33 Canton Road, Tsimshatsui, Kowloon, Hong Kong, the principal office of the Group in Hong Kong.

• The written request must specify the business to be covered in the meeting.

• Upon verification by the Group’s share registrars, the company secretary will ask the Board of directors to convene

an EGM by serving sufficient notice in accordance with the statutory requirements to all the registered shareholders.

Such an EGM should be held within 2 months after the deposit of the request.

The most recent shareholders’ meeting was the EGM held on 13 April 2006 at the JW Marriott Hotel in Hong Kong. The item

discussed and the percentage of vote cast in favour of the resolution regarding this item is set out below:

• Approve the deposit services under the financial services framework agreement and the proposed annual cap: 100%;

44

CORPORATE

GOVERNANCE REPORT

B. Voting by Poll

Code Principle

The issuer should regularly inform shareholders of the procedure for voting by poll and ensure compliance with the

requirements about voting by poll in the Listing Rules and the constitutional documents of the issuer.


Disclosure in general meeting

circulars of procedures and rights of

shareholders to demand a poll.

Ensure that votes cast are properly

counted and recorded.

Chairman of meeting should

adequately explain the poll

procedures at commencement of

meeting.

Procedures for demanding a poll were set out

in the circular accompanying the notices of

general meetings. The procedures were also

explained during the general meeting

proceedings.

The Company’s Hong Kong branch share

registrar was appointed as scrutineer for the

vote-taking.

Poll results were published in major Hong Kong

newspapers on the business day following the

meeting and posted on the websites of the

Stock Exchange and the Company.

Yes

Yes

Yes


C. Investor Relations

To ensure the Company’s key groups like shareholders1, investors, analysts and bankers understand the corporate strategies

and business operations is one of the missions for the Company’s investor relations team.

Headed by an executive director, the investor relations department receives great emphasis from the Company and maintains

frequent dialogues with its key groups to make sure that important information is disclosed on a timely basis through multiple

channels, such as meetings and teleconferencings with investors, annual and interim reports and press releases.

For the year ended 31 December 2005, the Company’s dedicated investor relations department held various activities to

promote interaction with investment community and keep them up to date on the Company’s latest developments. The

Company took part in several investor conferences which organized by investment banks during the year, and holds regular

meetings with investors in Hong Kong and overseas. In addition, the Company also holds press conferences, analyst briefings

and investor calls right after results are announced, with directors and senior management present to answer questions.

Key Investor Events in 2005

Event Date

2004 Annual Results Announcement 18 Apr 2005

– Press Conference

– Analyst Briefing

2005 1st Quarter Results Announcement 29 Apr 2005

– Investor Call

2005 Annual General Meeting 22 Jun 2005

EGM – Framework Agreement and Issuance of Convertible Notes 22 Jun 2005

2005 Interim Results Announcement 30 Aug 2005



2005 3rd Quarter Results Announcement 28 Oct 2005

– Investor Call

Continuous efforts were made to enhance the quality of communication. In order to ensure easy access of the Company’s

updated information, all published information, including all the statutory announcements, press release and event calendars,

is promptly posted on the Company’s web site www.tclcom.com. Public can also put enquiries to the Board or senior

management by contacting the investor relations department at (+852) 2437 7481 or email at [email protected] or directly by

questions at an AGM or EGM.

1 the Company has a diversified shareholding structure with public float of 34%, for detailed structure please refer to “Corporate Structure” section of this AnnualReport

46

CORPORATE

GOVERNANCE REPORT

Key Investor Events in 2006

Event Date

EGM – Open Offer and Increase Authorized Share Capital 6 Feb 2006

EGM – Financial Service Framework Agreement 13 Apr 2006

2005 Annual Results and 2006 1st Quarter Results Announcement 27 Apr 2006



2006 Annual General Meeting Mid-Jun 2006

2006 Interim Results Announcement End-Aug 2006



2006 3rd Quarter Results Announcement End-Oct 2006

– Investor Call

5. BEYOND THE CODEAs part of our commitment towards good corporate governance, we do not limit ourselves to the requirements under the Code and

we extend them in the following aspects:

• The Audit Committee comprises only INEDs.

• Appropriate insurance cover has been arranged in respect of legal action against the directors and senior officers. Such

insurance cover is reviewed by the Board from time to time to ensure that it remains relevant and sufficient.

• All Board Committees adopt the same principles applicable to Board meetings to govern the procedures for their meetings,

including but not limited to the length of notice given to members in advance of meetings, and the mechanism for members

to inspect the meeting minutes.

• A significant proportion of the executive directors’ remuneration is structured so as to link rewards to corporate and individual

performance.

• Since listing, the Group has adopted the practice to announce its quarterly financial results to enable shareholders to better

assess our performance, financial position and prospects. Such quarterly financial reports are prepared using the same

accounting policies applied to the interim and annual accounts.

• The Group has taken the initiative to disclose its monthly sales figures to provide investors and the public with additional

information for evaluating the Group’s performance in a timely manner. Such figures are available at the Company’s

website: www.tclcom.com.


HUMAN RESOURCES AND

SOCIAL RESPONSIBILITY

HUMAN RESOURCESEmployees are always considered as the most important asset of the Company. As of 31 December 2005, the Company had a total of 5,172

employees. The Company committed to cultivating a working environment that encourages lifelong learning and a sense of belonging. In

2005, TCT conducted extensive training programmes focusing on enhancing the leadership and management skills of mid to upper

management.

A total of 186 training sessions designed for general staff to upgrade skills, meet the Company’s needs and facilitate personal growth were

organized in different departments such as R&D, manufacturing and human resources. Other innovative training programmes included

English Corner and Close-up with the Manager which aimed at creating a friendly learning and communication environment for staff of all

levels.

Managerial staff has been benefited from courses and seminars about the financial management, effective human resources management

and distribution channel management led by leading experts in different fields.

All in all, during the year the employees received on average 43 hours of training session and the overall satisfaction rate reached 91%.

SOCIAL RESPONSIBILITYTCT commits to sharing the fruit of its development with the community and helping the people in need.

In its effort to connect the unconnected, TCT submitted a proposal to GSM Association to supply affordable handsets to the underprivileged

people in developing countries. The proposal was selected as a highly recommended entry.

In joint effort with its parent company TCL Corp. and its sister company TCL Multimedia Technology Holdings Limited (collectively the “TCL

Group”), the Company conducted a series of charity campaign in Mainland China. Donations were made to the Guangdong Youth Development

Foundation, to fund a primary school in Huizhou, Guangdong Province and to establish scholarships to finance university education of poor

students. Up to 2005, the Group has completed a total of 23 Hope School projects in different regions of the PRC.

48

COMPANYINFORMATION

BOARD OF DIRECTORS

CHAIRMAN

Mr. LI Dong Sheng

EXECUTIVE DIRECTORS

Mr. YUAN Xin Cheng

Mr. WONG Toe Yeung, Chambers

Dr. LIU Fei

Mr. YAN Yong, Vincent

Mr. DU Xiaopeng, Simon

Dr. GUO Aiping, George

INDEPENDENT NON-EXECUTIVE DIRECTORS

Mr. SHI Cuiming

Mr. WANG Chongju

Mr. LAU Siu Ki, Kevin

COMPANY SECRETARYMs PANG Siu Yin, Solicitor, Hong Kong

Cheung, Tong & Rosa

Room 1621-33, 16/F

Sun Hung Kai Centre

30 Harbour Road

Hong Kong

PRINCIPAL BANKERSThe Hongkong and Shanghai Banking

Corporation Limited

1 Queen’s Road Central

Central

Hong Kong

Nanyang Commercial Bank, Ltd.

151 Des Voeux Road Central

Central

Hong Kong

AUDITORErnst & Young

Certified Public Accountants

18/F Two International Finance Centre

8 Finance Street

Central

Hong Kong

PRINCIPAL REGISTRARButterfield Fund Services (Cayman) Ltd.

Butterfield House

68 Fort Street

P.O. Box 705

George Town, Grand Cayman

Cayman Islands

BRANCH REGISTRARTricor Investor Services Limited

26th Floor

Tesbury Centre

28 Queen’s Road East

Wanchai

Hong Kong

PRINCIPAL OFFICERoom 1502, Tower 6

China Hong Kong City

33 Canton Road

Tsimshatsui, Kowloon

Hong Kong

REGISTERED OFFICECentury Yard

Cricket Square

Hutchins Drive

P.O. Box 2681 GT

George Town

Grand Cayman

Cayman Islands

British West Indies

INVESTOR AND MEDIA RELATIONSiPR Ogilvy Ltd.

Room 850-809

8/F Alexandra House

16-20 Chater Road

Central

Hong Kong


REPORT OF THE DIRECTORS

The directors of TCL Communication Technology Holdings Limited (the “Company”) are pleased to present the audited financial statements

of the Company and the Group for the year ended 31 December 2005.

PRINCIPAL ACTIVITIESThe Company is an investment holding company. The principal activities of its principal subsidiaries comprise research, development,

manufacturing and sale of mobile phones. There were no significant changes in the nature of the Group’s principal activities during the year.

RESULTS AND DIVIDENDSThe Group’s loss for the year ended 31 December 2005 and the state of affairs of the Company and the Group at that date are set out in the

financial statements on pages 60 to 111.

The directors do not recommend the payment of any dividend for the year.

SUMMARY FINANCIAL INFORMATIONA summary of the published results and assets, liabilities and minority interests of the Group for the last five financial years, as extracted from

the audited financial statements and the Prospectus and reclassified as appropriate, is set out on page 112. This summary does not form

part of the audited financial statements.

PROPERTY, PLANT AND EQUIPMENTDetails of movements in the property, plant & equipment of the Company and the Group during the year are set out in note 17 to the financial

statements.

SHARE CAPITAL, SHARE OPTIONS AND CONVERTIBLE NOTESDetails of movements in the Company’s share capital, share options and convertible notes during the year was disclosed in note 33, 34 and

29 to the financial statements respectively.

PRE-EMPTIVE RIGHTSThere are no provisions for pre-emptive rights under the Company’s Articles of Association or the laws of Cayman Islands which would oblige

the Company to offer new shares on a pro rata basis to existing shareholders.

PURCHASE, REDEMPTION OR SALE OF LISTED SECURITIES OF THE COMPANYNone of the Company or its subsidiaries purchased, redeemed or sold any of the Company’s listed shares during the year.

RESERVESDetails of movements in the reserves of the Company and the Group during the year are set out in note 35 to the financial statements and in

the consolidated statement of changes in equity, respectively.

DISTRIBUTABLE RESERVESAt 31 December 2005, the Company’s reserves available for distribution, calculated in accordance with the provisions of the Companies Law

of the Cayman Islands, amounted to HK$109,132,000. Among the total, the Company’s share premium account, in the amount of

HK$1,140,835,000, may be distributed, provided that immediately following the date on which the distribution or dividend is proposed to be

paid, the Company will be able to pay off its debts as they fall due in the ordinary course of business.

50


MAJOR CUSTOMERS AND SUPPLIERSIn the year under review, sales to the Group’s five largest customers accounted for 26% of the total sales for the year and sales to the largest

customer included therein amounted to 8%. Purchases from the Group’s five largest suppliers accounted for 52% of the total purchases for

the year and purchase from the largest supplier included therein amounted to 25%.

None of the directors of the Company, their associates or shareholders (which, to the best knowledge of the directors, own more than 5% of

the Company’s issued share capital) had any beneficial interest in the Group’s five largest customers or five largest suppliers, except that

disclosed in note 40a to the financial statements.

DIRECTORSThe directors of the Company during the year were:

Executive directors:

Mr. LI Dong Sheng

Mr. YUAN Xin Cheng

Dr. LIU Fei (appointed on 22 June 2005)

Dr. WAN Mingjian (retired on 22 June 2005)

Mr. YAN Yong, Vincent

Mr. DU Xiaopeng, Simon

Dr. GUO Aiping, George

Mr. WONG Toe Yeung, Chambers

Independent non-executive directors:

Mr. SHI Cuiming

Mr. WANG Chongju

Mr. LAU Siu Ki, Kevin

In accordance with article 87(1) of the Company’s Articles of Association, Mr. Li Dong Sheng, Mr. Wong Toe Yeung, Chambers, Dr. Guo

Aiping, George and Mr. Du Xiaopeng, Simon will retire by rotation at the conclusion of the forthcoming annual general meeting of the

Company (“AGM”). Mr. Li being eligible, will offer himself but Mr. Wong, Dr. Guo and Dr. Du will not offer themselves for re-election at the

AGM. Dr. Liu Fei who was appointed by the Board as an executive director on 22 June 2005 will also be subject to election by the shareholders

at the AGM. Mr. Shi Cuiming, Mr. Wang Chongju and Mr. Lau Siu Ki, Kevin will hold office until the conclusion of the AGM and being eligible,

will offer themselves for re-election.

Each of the independent non-executive directors has confirmed his independence to the Company pursuant to Rule 3.13 of the Listing Rules

and the Company considers the independent non-executive directors to be independent.

DIRECTORS’ AND SENIOR MANAGEMENT’s BIOGRAPHIESBiographical details of the directors of the Company and the senior management of the Group are set out on pages 24 to 27 of the annual

report.

DIRECTORS’ SERVICE CONTRACTSEach of the executive directors has a service contract with the Company for a term of three years commencing from 1 September 2004,

except for Mr. Yuan who has not entered into any service contract with the Company and Dr. Liu, who has a term of service contract of three

years started from 22 June 2005.

Save as disclosed above, no directors proposed for re-election at the forthcoming AGM has a service contract with the Company which is not

determinable by the Company within one year without payment of compensation, other than statutory compensation.


EMOLUMENTS OF DIRECTORS AND THE 5 HIGHEST-PAID INDIVIDUALSParticulars of the emoluments of the directors and the 5 highest-paid individuals during the financial year are set out in note 12 to the financial

statements.

EMOLUMENT POLICY AND LONG-TERM INCENTIVE SCHEMESPlease refer to the Corporate Governance Report contained on pages 28 to 46 of this annual report of the Group’s emoluments policy and

long-term incentive schemes, as well as the basis for determining the emolument payable to the directors.

PENSION SCHEMEParticulars of the Group’s pension schemes are set out in note 6 to the financial statements.

DIRECTORS’ INTERESTS IN CONTRACTSSave as disclosed in note 40 to the financial statements under the heading “Related Party Transactions”, there were no other contracts of

significance to which the Company or any of its subsidiaries was a party and in which a director of the Company had a material interest,

whether directly or indirectly subsisting at the end of the year or at any time during the year.

MANAGEMENT CONTRACTSSave as disclosed under the heading “Related Party Transactions”, no other contracts concerning the management and administration of the

whole or any substantial part of the business of the Group were entered into or in existence during the year.

DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS AND SHORT POSITIONS IN SHARES AND UNDERLYING SHARESAt 31 December 2005, the interests and short positions of the directors and chief executive in the share capital and underlying shares of the

Company or its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)), as recorded in

the register required to be kept by the Company pursuant to Section 352 of the SFO, or as otherwise notified to the Company and the Stock

Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers, were as follows:

Long positions in shares of the Company:

Percentage of

Number of shares of the Company’s

Name of director Type of interest the Company held issued share capital

Mr. WONG Toe Yeung, Chambers Interest of controlled corporation 288,317,500 (Note 1) 9.71%

Mr. LI Dong Sheng Beneficial owner 36,614,400 1.23%

Mr. DU Xiaopeng, Simon Interest of controlled corporation 8,064,030 (Note 2) 0.27%

Dr. LIU Fei Beneficial owner 40,000 0.001%

Dr. GUO Aiping, George Beneficial owner 26,400 0.001%

Note:

1. Mr. WONG Toe Yeung, Chambers was deemed to be interested in the 288,317,500 shares of the Company held by Mate Fair Group Limited, acompany which is wholly owned by him.

2. Mr. DU Xiaopeng, Simon was deemed to be interested in the 8,064,030 shares of the Company held by Union Grand International Limited, a companywhich is wholly owned by him.

The interests of the directors in the share options of the Company are separately disclosed under the heading of “Share option scheme”.

52


EMOLUMENTS OF DIRECTORS AND THE 5 HIGHEST-PAID INDIVIDUALSLong positions in shares of associated corporations of the Company:

Percentage of the

Name of relevant associated

associated Numbers of corporation’s issued

Name of director corporation Type of interest shares held share capital

(Notes)

Mr. LI Dong Sheng TCL Corp Beneficial owner 144,521,730 5.59%

Mr. LI Dong Sheng TCL Multimedia Beneficial owner 17,232,000 0.44%

Mr. YUAN Xin Cheng TCL Corp Beneficial owner 24,791,527 0.96%

Notes:

(a) TCL Corporation (“TCL Corp”) is the ultimate controlling shareholder of the Company

(b) TCL Multimedia Technology Holdings Limited (“TCL Multimedia”) (formerly TCL International Holdings Limited), a company controlled by TCL Corp, isa subsidiary of TCL Corp.

Options outstanding to subscribe for shares of associated corporations of the Company:

Percentage of

the relevant

Name of associated

associated Numbers of corporation’s

Name of director corporation Type of interest shares involved issued share capital

Mr. LI Dong Sheng TCL Multimedia Beneficial owner 5,000,000 0.13%

Mr. YAN Yong, Vincent TCL Multimedia Beneficial owner 3,518,000 0.09%

Mr. WONG Toe Yeung, Chambers TCL Multimedia Beneficial owner 3,000,000 0.08%

Mr. YUAN Xin Cheng TCL Multimedia Beneficial owner 3,000,000 0.08%

Mr. DU Xiaopeng, Simon TCL Multimedia Beneficial owner 400,000 0.01%

Dr. LIU Fei TCL Multimedia Beneficial owner 400,000 0.01%

Dr. GUO Aiping, George TCL Multimedia Beneficial owner 318,000 0.01%

Save as disclosed above, as at 31 December 2005, none of the Directors or chief executives of the Company had any interests or short

positions in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV

of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO

(including interests and short positions in which he was taken or deemed to have under such provisions of the SFO) or which were required,

pursuant to Section 352 of the SFO, to be entered in the register referred to therein or which were required to be notified to the Company and

the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies in the Listing Rules.

DIRECTORS’ RIGHTS TO ACQUIRE SHARES OR DEBENTURESSave as disclosed above and in the share option scheme disclosures in note 34 to the financial statements, at no time during the year was

the Company, its holding company, or any of its subsidiaries or fellow subsidiaries a party to any arrangement to enable any director of the

Company, his spouse or children under 18 years of age to acquire benefits by means of an acquisition of shares or underlying shares in or

debentures of the Company or its associated corporations.


SUBSTANTIAL SHAREHOLDERS’ INTERESTS IN SHARES AND UNDERLYING SHARESAt 31 December 2005, the interests and short positions of the following persons (other than a director or chief executive of the Company) in

shares and underlying shares of the Company as recorded in the register of interests required to be kept by the Company pursuant to

Section 336 of the SFO were as follows:

Long positions in shares of the Company:

Percentage of

Number of the Company’s

Name Type of interest shares held issued share capital

TCL Corp Interest of 1,622,748,480 54.66%

controlled corporation (Note (a))

Choi Koon Shum Jonathan Interest of 1,057,809,020 17.81%

controlled corporation (Note (b)) (Note (c))

Innovation Assets Limited Interest of 1,057,809,020 17.81%


Kingsway Financial Services Interest of 1,057,809,020 17.81%

Group Limited controlled corporation (Note (b)) (Note (c))

Kingsway International Interest of 1,057,809,020 17.81%

Holdings Limited controlled corporation (Note (b)) (Note (c))

Kwan Wing Kum, Janice Interest of 1,057,809,020 17.81%


Lam William Ka Chung Interest of 1,057,809,020 17.81%


Lam Wong Yuk Sin Mary Interest of 1,057,809,020 17.81%


SW Kingsway Capital Group Interest of 1,057,809,020 17.81%

Limited controlled corporation (Note (b)) (Note (c))

SW Kingsway Capital Interest of 1,057,809,020 17.81%

Holdings Limited controlled corporation (Note (b)) (Note (c))

World Developments Limited Interest of 1,057,809,020 17.81%


Mate Fair Group Limited Beneficial owner 288,317,500 9.71%

Notes:

(a) TCL Corp was deemed to be interested in the 1,622,748,480 shares of the Company held by T.C.L. Industries Holdings (H.K.) Limited, a direct whollyowned subsidiary of TCL Corp.

(b) These interests refer to the same underwritten shares which Kingsway Financial Services Group Limited agreed to underwrite under the UnderwritingAgreement entered into between it and the Company dated 22 December 2005 in relation to the open offer of the Company. On 27 February 2006, thedate of completion of the open offer, the holders of these interests ceased to have a notifiable interest in the Company.

(c) These percentages are based on the issued share capital of the Company as enlarged by the issue of the 2,968,875,000 Shares allotted on 6 February2006 under the open offer of the Company.

54


Save as disclosed above, as at 31 December 2005, no persons, other than the directors of the Company, whose interests are set out in the

section “Directors’ and chief executive’s interests and short positions in shares and underlying shares” above, had notified the Company of

an interest or short position in the shares or underlying shares of the Company that was required to be recorded pursuant to Section 336 of

the SFO.

SHARE OPTION SCHEMEThe following share options were outstanding under the share option schemes of the Company during the period:

Name or category At January Number of share options At 31

of participant 2005 Grant during the year Lapsed during the year December 2005

(Note)

Directors

Mr. LI Dong Sheng – 5,000,000 5,000,000

Mr. WONG Toe Yeung, Chambers – 5,000,000 5,000,000

Mr. YUAN Xin Cheng – 3,000,000 3,000,000

Mr. DU Xiaopeng, Simon – 3,200,000 3,200,000

Dr. LIU Fei – 1,600,000 1,600,000

Mr. YAN Yong, Vincent – 1,050,000 1,050,000

Dr. GUO Aiping, George – 950,000 950,000

Mr. SHI Cuiming – 300,000 300,000

Mr. WANG Chongju – 300,000 300,000

Mr. LAU Siu Ki, Kevin – 300,000 300,000

– 20,700,000 20,700,000

Employees – 109,750,000 (8,125,000) 101,625,000

Those who have contributed or

may contribute to the group 46,770,000 46,770,000

– 177,220,000 (8,125,000) 169,095,000

Note:

Such share options were granted on 31 May 2005 at an exercise price of HK$0.415 per share. Share price of the Company at grant date is HK$0.41 per share,

which is the Stock Exchange closing price on the trading day immediately prior to the date of grant of the options. As disclosed in the Company’s announcement

dated 28 February 2006, as a result of the open offer of the Company, the aforesaid share options outstanding as at 27 February 2006, the date of completion

of the open offer, have been adjusted (with calculation confirmed by Ernst & Young, the auditors of the Company) in term of their exercise price (from HK$0.415

to HK$0.3804 per share) and the number of shares of the Company to be issued upon exercise of them (from 120,570,000 to 131,531,019).

One-third of such share options are exercisable after the expiry of 9 months from the date of grant, a further one-third is exercisable after the expiry of 18 months

from the date of grant, and the remaining one-third is exercisable after the expiry of 27 months from the date of grant, up to 30 November 2008.

The fair value of the options granted in the current period totalled approximately HK$16,938,000, after adjusting the fair value of any shares options being

lapsed as a result of any grantees left the Company during the period between 1 June 2005 to 31 December 2005 and the fair value of any shares options being

granted to parties other than the Directors and employees of the Company and the Group. The following assumptions were used to derive the fair value, using

the Binomial Model:

a. an expected volatility of 50% based on the movement of share prices during the period from August 2002 to July 2005 of 5 comparators whose major

business is manufacturing and sale of mobile phones, which is similar to that the Company;

b. an expected dividend yield of 1% per annum;

c. an estimated average life of the options granted during the year is 2.88 years;


d. the average risk-free interest rate of 3.13% per annum, is taken to be linearly interpolated yields using Hong Kong Exchange Fund Notes as at the grant

date;

e. an early exercise assumption that option holders will exercise when the share is at least 200% of the exercise price; and

f. an estimated rate of leaving service of 20% per annum for the first year after the Grant Date and a rate of 15% per annum thereafter.

Watson Wyatt Hong Kong Limited is appointed to perform a valuation of the share option for the period ended 30 June 2005 with a report issued on 5 October

2005.

CONNECTED TRANSACTIONSa) On 15 April 2005, 14 June 2005, 9 September 2005 and 19 October 2005, Huizhou TCL Mobile Communication Co., Ltd. (“TCL

Mobile”), a wholly-owned subsidiary of the Company, entered into four lease agreements with Huizhou TCL King Electronics Co., Ltd.

(“TCL Electric”) in relation to the premises located in the second production land of TCL Electric, Huizhou, the PRC (the “Lease

Agreements”) to be used as TCL Mobile’s production site, cafeteria and dormitories. The term of each of the Lease Agreements is

one year. During the year, the total rental paid by TCL Mobile amounted to HK$2,380,000.

As TCL Electric is an indirect subsidiary of TCL Corp, the ultimate controlling shareholder of the Company, the transactions under the

Lease Agreements constitute connected transactions of the Company under Chapter 14A of the Listing Rules and are subject to the

disclosure requirements as set out in Chapter 14A of the Listing Rules. Waiver from strict compliance with the relevant disclosure

requirements under Listing Rule 14A.47 for two financial years ended 31 December 2005 has been applied for and granted by the

Stock Exchange.

b) On 31 August, 2004, Alcatel and T&A Mobile Phones Limited (formerly TCL & Alcatel Mobile Phones Limited) (“T&A”), entered into an

operations agreement (“Operations Agreement”). Under the Operations Agreement, T&A agreed to appoint Alcatel or any designated

member of Alcatel to be its non-exclusive sales and marketing agent to provide agency services on an engagement by engagement

basis with respect to the sales of certain of T&A’s mobile handset products in designated territories. The Operations Agreement is for

an initial term of three years, and thereafter shall be automatically renewed for another three years. Any renewal of the Operations

Agreement will be subject to the requirements of Chapter 14A of the Listing Rules.

During the period from 31 August 2004 to 18 July 2005, T&A was held by the Company and Alcatel as to 55% and 45% respectively,

Alcatel was a connected person of the Company under the Listing Rules during that period. Accordingly, the transactions under the

Operations Agreement during that period constituted connected transactions of the Company under Chapter 14A of the Listing

Rules and were subject to the disclosure requirements as set out in Chapter 14A of the Listing Rules. Waiver from strict compliance

with the relevant disclosure requirements under Listing Rule14A.47 for three financial years ending 31 December 2006 has been

applied for and granted by the Stock Exchange.

On 11 May 2005, the Company entered into the Framework Agreement with Alcatel Participations, under which the Company would

acquire the then remaining 45% share capital of T&A. The said acquisition was completed on 18 July 2005. Upon completion of the

said acquisition, Alcatel was no longer a connected person of the Company under the Listing Rules. During the period up to 18 July

2005, there was no agency fee paid by T&A.

c) Pursuant to a master supply agreement (“Master Supply Agreement”) dated 13 September 2004 entered between the Company and

TCL Corp, its ultimate controlling shareholder, the Master Supply Agreement provides the following services:

i) purchase by the Group and the members of the Group of imported raw materials through TCL Corp, only if at the request of

the PRC subsidiaries of the Company, and resale of such goods to the PRC subsidiaries;

ii) purchase by the Group of PRC manufactured raw materials from members of the TCL Group (other than the Group); and

iii) sale by the Group of mobile communication products to members of the TCL Group (other than the Group).

The Master Supply Agreement is for a period of three years with an option to renew the same on substantially the same terms by the

parties’ mutual agreement. Any renewal of the Master Supply Agreement will be subject to the requirements of Chapter 14A of the

Listing Rules. During the year, the considerations paid and received by the Group are of HK$1,366,255,000, HK$92,219,000 and

HK$1,947,000 respectively under this agreement.

56


As TCL Corp is the Company’s ultimate controlling shareholder, the transactions under the Master Supply Agreement constitute

connected transactions of the Company under Chapter 14A of the Listing Rules and are subject to the disclosure and shareholders’

approval requirements as set out in Chapter 14A of the Listing Rules. Waiver from strict compliance with the relevant disclosure

requirements under Listing Rule 14A.47 and shareholders’ approval requirements under Listing Rule 14A.48 for three financial years

ending 31 December 2006 has been applied for and granted by the Stock Exchange.

d) Pursuant to a brand promotion agreement (“Brand Promotion Agreement”) dated 13 September 2004 entered between the Company

and TCL Corp, the Group agreed to contribute a certain percentage of the Group’s net sales (before value added tax) from the sale

of mobile communication products bearing the “TCL” name and products sold for each of our financial quarters ending on 31 March,

30 June, 30 September and 31 December to the TCL Brand Common Fund. The Brand Promotion Agreement is for a term of three

years from 1 January 2004. During the year, the Group contributed HK$10,155,000 under this agreement.

As TCL Corp is the Company’s ultimate controlling shareholder, the transactions under the Brand Promotion Agreement constitute


approval requirements as set out in Chapter 14A of the Listing Rules. Waivers from strict compliance with the relevant disclosure

requirements under Listing Rule 14A.47 and shareholders’ approval requirements under Listing Rule 14A.48 for three financial years

ending 31 December 2006 has been applied for and granted by the Stock Exchange.

e) Pursuant to a transitional services agreement (“Transitional Services Agreement”) entered between Alcatel Business Systems (“ABS”),

a wholly-owned subsidiary of Alcatel, and T&A on 31 August 2004. ABS provides or causes its affiliates to provide T&A with administrative

& management services to enable T&A and its subsidiaries (collectively the “Joint Venture Group”) to independently operate the

business previously operated by Alcatel mobile phone division. The Transitional Services Agreement is for a term commencing on the

date of the agreement and will remain in force until the last termination date of the services provided thereunder (which is in any event

not later than one and a half years from the date of the agreement).

As Alcatel and ABS were connected persons of the Company during the period from 31 August 2004 to 18 July 2005 by virtue of

Alcatel’s 45% shareholding in T&A, the transactions under Transitional Services Agreement during that period constituted connected

transactions of the Company and were subject to the disclosure and shareholders’ approval requirements as set out in Chapter 14A

of the Listing Rules. Waivers from strict compliance with the relevant disclosure requirements under Listing Rule 14A.47 and

shareholders’ approval requirements under Listing Rule 14A.48 for three financial years ending 31 December 2006 has been applied

for and granted by the Stock Exchange.

Upon completion of the Framework Agreement on 18 July 2005, ABS was no longer a connected person of the Company under the

Listing Rules. During the period up to 18 July 2005, T&A paid the services fee of HK$159,125,000 under this agreement.

f) The Alcatel mobile phones division has in the past entered into service arrangement (“Alcatel Sales Support Arrangements”) with

members of Alcatel in different territories or countries for the provision of local sales and marketing services by relevant Alcatel

members. In connection with the establishment of T&A, relevant Alcatel members have been providing, and will continue to provide

the said services to T&A. The Alcatel Sales Support Arrangements have a term of one year and either will be automatically renewed

for successive periods of one year unless and until terminated by either party or are expected to be renewed at the expiry of their

terms.

As during the period from 31 August 2004 to 18 July 2005, Alcatel was a connected person of the Company by virtue of Alcatel’s 45%

shareholding in T&A, transactions under Alcatel Sales Support Arrangements during that period constituted connected transactions

of the Company and were subject to the disclosure and shareholders’ approval requirements as set out in Chapter 14A of the Listing

Rules. Waivers from the Stock Exchange from strict compliance with the relevant disclosure requirements under Listing Rule 14A.47

and shareholders’ approval requirements under Listing Rule 14A.48 for three financial years ending 31 December 2006 has been

applied for and granted by the Stock Exchange.

Upon completion of the Framework agreement on 18 July 2005, Alcatel was no longer a connected party of the Company. During the

period up to 18 July 2005, T&A paid the services fee of HK$37,573,000 under this agreement.


g) Pursuant to a master manufacturing agreement (“Master Manufacturing Agreement”) dated 30 June 2005 entered between the

Company and TCL Corp, its ultimate controlling shareholder, the Master Manufacturing Agreement provides manufacturing and / or

value-added service to TCL Corp and its subsidiaries in respect of the products including but not limited to digital products, computer

products, communication products, high frequency products and their relevant components which require Manufacturing Service.

During the year, the Group received consideration of HK$3,463,000 under this agreement.

As TCL Corp is the Company’s ultimate controlling shareholder, the transactions under the Master Manufacturing Agreement constitute

continuing connected transactions of the Company under Chapter 14A of the Listing Rules and are subject to the disclosure and

shareholders’ approval requirements as set out in Chapter 14A of the Listing Rules. Waiver from strict compliance with the relevant

disclosure requirements under Listing Rule 14A.47 and shareholders’ approval requirements under Listing Rule 14A.48 for three

financial years ending 29 June 2008 has been applied for and granted by the Stock Exchange.

h) Pursuant to the framework agreement (“Framework Agreement”) with Alcatel Participations on 11 May 2005, under which the Company

would acquire from Alcatel Participations the then remaining 45% of the share capital of T&A by way of Share Swap, the Company

issued 141,375,000 shares which was equivalent to 5% of the then issued share capital of the Company, representing about 4.76%

of the enlarged issued share capital of the Company immediately after the completion of the Share Swap.

During the period from 31 August 2004 to 18 July 2005, Alcatel was a connected person of the Company by virtue of Alcatel’s 45%

shareholding in T&A, the Framework Agreement constituted a connected transaction for the Company and was subject to the

disclosure and shareholders’ approval requirements as set out in Chapter 14A of the Listing Rules. The Framework Agreement and

the transactions thereunder were duly approved by the shareholders of the Company in an extraordinary general meeting held on 22

June 2005 and the said acquisition was completed on 18 July 2005.

i) Pursuant to the subscription agreement (“Subscription Agreement”) entered into between the Company and TCL Corp on 11 May

2005, under which the Company has agreed to issue and TCL Corp has agreed to subscribe for, an aggregate of Eur20,000,000

principal amount (in its HK$ equivalent of HK$185,100,000) of 3% Convertible Notes. The transaction was completed on 29 July

2005. During the year, the Company paid an interest expenses of about HK$2,373,000 under this agreement.

As TCL Corp is the Company’s ultimate controlling shareholder, the transactions under the Subscription Agreement constituted


approval requirements as set out in Chapter 14A of the Listing Rules. The Subscription Agreement and the transactions thereunder

were duly approved by the shareholders of the Company in an extraordinary general meeting held on 22 June 2005 and the transaction

was completed on 29 July 2005.

The independent non-executive directors of the Company have reviewed the continuing connected transactions set out above and

have confirmed that these continuing connected transactions were entered into: (i) in the ordinary and usual course of the Group’s

business; (ii) in accordance with the terms of the relevant agreements governing such transactions on terms that were fair and

reasonable and in the interests of the shareholders of the Company as a whole; and (iii) either on normal commercial terms, or on

terms no less favourable to the Group than those available to or from independent third parties.

Furthermore, the auditors of the Company have confirmed to the board of directors of the Company (“Board”) that the above

continuing connected transactions:

(i) have been approved by the Board;

(ii) have been entered into in accordance with the terms of the relevant agreements governing the transactions;

(iii) have not exceeded the relevant caps disclosed in the prospectus of the Company (where applicable); and

(iv) are in accordance with the pricing policies of the Group where the transactions involved provision of goods or services by the

Group.

58


POST BALANCE SHEET EVENTSDetails of the significant post balance sheet events of the Group are set out in note 42 to the financial statements.

CORPORATE GOVERNANCEDetails of the Group’s governance practices can be found in the Corporate Governance Report contained on pages 28 to 46 in this annual

report.

MODEL CODE FOR SECURITIES TRANSACTIONS BY DIRECTORSThe Board has adopted a Code of Conduct regarding directors’ securities transactions on the same terms as set out in the Model Code for

Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Listing Rules. Having made specific enquiry of all

directors, there were not any non-compliance with the standard set out in the Model Code and the Company’s Code of Conduct regarding

directors’ securities transactions during the year ended 31 December 2005.

SUFFICIENCY OF PUBLIC FLOATBased on information that is publicly available to the Company and within the knowledge of the directors of the Company, at least 25% of the

Company’s total issued share capital was held by the public as at the date of this annual report.

AUDIT COMMITTEEThe Company has established an audit committee in compliance with Rule 3.21 of the Listing Rules for the purposes of reviewing and

providing supervision over the Group’s financial reporting process and internal controls. The audit committee comprises the three independent

non-executive directors of the Company.

AUDITORSThe accounts for the year ended 31 December 2005 have been audited by Ernst & Young, who shall retire and, being eligible, shall offer

themselves for reappointment as auditors of the Company at the forthcoming AGM.

ON BEHALF OF THE BOARD

Li Dong Sheng

Chairman

Hong Kong

27 April 2006


REPORT OF THE AUDITORS

To the members

TCL Communication Technology Holdings Limited

(Incorporated in the Cayman Islands with limited liability)

We have audited the financial statements on pages 60 to 111 which have been prepared in accordance with accounting principles generally

accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORSThe Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial

statements which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is

our responsibility to form an independent opinion, based on our audit, on those financial statements and to report our opinion solely to you,

as a body and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this

report.

BASIS OF OPINIONWe conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants.

An audit includes an 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 judgements made by the directors in the preparation of the financial statements,

and of whether the accounting policies are appropriate to the Company’s and the Group’s circumstances, consistently applied and adequately

disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide

us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In

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

audit provides a reasonable basis for our opinion.

OPINIONIn our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December

2005 and of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure

requirements of the Hong Kong Companies Ordinance.

Ernst & Young

Certified Public Accountants

Hong Kong

27 April 2006

60

Year ended 31 December 2005

CONSOLIDATED

INCOME STATEMENT

2005 2004

Notes HK$’000 HK$’000

(Restated)

REVENUE 9 5,663,696 7,309,738

Cost of sales (5,575,958) (6,281,442)

Gross profits 87,738 1,028,296

Other revenue and gains 9 187,551 203,684

Research and development expenses (346,795) (215,057)

Selling and distribution costs (877,340) (789,234)

Administrative expenses (894,264) (443,409)

Other operating expenses (7,469) (68,233)

Finance costs 11 (20,867) (20,252)

LOSS BEFORE TAX 10 (1,871,446) (304,205)

Tax 13 (24,630) 2,998

LOSS FOR THE YEAR (1,896,076) (301,207)

ATTRIBUTABLE TO:

Equity holders of the parent (1,608,204) (184,897)

Minority interests (287,872) (116,310)

(1,896,076) (301,207)

DIVIDENDS

Interim 15 – 1,376,132

LOSS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS

OF THE PARENT (HK cents) 16

Basic (55.6) (6.5)

Diluted (64.5) (10.2)


31 December 2005

CONSOLIDATED

BALANCE SHEET

2005 2004


(Restated)

NON-CURRENT ASSETS

Property, plant and equipment 17 360,149 427,940

Prepaid land lease payments 18 11,400 11,736

Intangible assets 19 13,541 33,867

Deferred tax assets 32 8,815 14,630

Other non-current assets 3,459 3,711

397,364 491,884

CURRENT ASSETS

Inventories 22 709,279 1,031,817

Trade receivables 23 1,127,063 1,210,520

Factored trade receivables 24 106,981 –

Notes receivable 371,093 174,363

Prepayments, deposits and other receivables 511,156 544,578

Due from related companies 40 347,750 50,830

Tax recoverable 53,010 –

Pledged bank deposits 25 54,317 11,373

Cash and cash equivalents 25 405,755 2,005,683

3,686,404 5,029,164

CURRENT LIABILITIES

Interest bearing bank borrowings 26 157,834 175,300

Trade and notes payable 27 1,740,610 1,877,713

Bank advance on discounted notes receivable and

factored trade receivables 375,083 –

Tax payable – 11,925

Other payables and accruals 922,532 1,218,194

Provision for warranties 28 108,294 143,248

Due to related companies 40 571,386 114,209

Due to minority interests – 24,258

3,875,739 3,564,847

NET CURRENT (LIABILITIES)/ASSETS (189,335) 1,464,317

TOTAL ASSETS LESS CURRENT LIABILITIES 208,029 1,956,201

62

CONSOLIDATED

BALANCE SHEET

31 December 2005

2005 2004


(Restated)

NON-CURRENT LIABILITIES

Retirement indemnities 30 908 45,030

Long service medals 31 506 7,609

Convertible notes 29 165,670 –

167,084 52,639

TOTAL ASSETS LESS TOTAL LABILITIES 40,945 1,903,562

EQUITY

Equity attributable to equity holders of the parent

Issued capital 33 296,888 282,750

Reserves 35(a) (255,943) 1,278,856

40,945 1,561,606

Minority interests – 341,956

TOTAL EQUITY 40,945 1,903,562

LI Dong Sheng LIU Fei

Director Director



CONSOLIDATED

STATEMENT OF CHANGES IN EQUITY

Attributable to equity holders of the parent

Retained

Issued Share Exchange profits/ Proposed

share premium Capital Contributed Statutory fluctuation (accumulated final Minority

capital account reserve surplus reserves reserve losses) dividend Total interests Total equity

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

(Note 35(a)) (Note 35(a))

At 1 January 2004 232,215 – 340 – 119,951 (242 ) 1,391,447 271,098 2,014,809 – 2,014,809

Dividend declared – – – – – – (1,376,132 ) – (1,376,132 ) – (1,376,132 )

Dividend paid – – – – – – – (271,098 ) (271,098 ) – (271,098 )

Arising from the issue of shares

by the intermediate holding

companies for the acquisition

of subsidiaries (148,616 ) – (218 ) 148,834 – – – – – – –

Arising from the cash

consideration paid by an

intermediate holding company

for the acquisition of

subsidiaries (83,597 ) 133,771 (122 ) 83,719 – – – – 133,771 – 133,771

Arising from the issue of shares

by the Company for the

acquisition of the intermediate

holding companies (2 ) (133,771 ) 2 (133,771 ) – (133,771 )

Issue of new shares 282,750 1,093,475 – – – – – – 1,376,225 – 1,376,225

Arising from the joint venture

established pursuant to the

subscription agreement entered

in between the Company and

Alcatel on 18 June 2004 – 456,057 456,057

Exchange realignment and total

income and expenses for the year

recognized directly in equity – – – – – 2,699 – – 2,699 2,209 4,908

Net loss for the year (as restated) – – – – – – (184,897 ) – (184,897 ) (116,310 ) (301,207 )

At 31 December 2004

(as restated) 282,750 1,093,475 – 232,555 119,951 2,457 (169,582 ) – 1,561,606 341,956 1,903,562

64

CONSOLIDATED

STATEMENT OF CHANGES IN EQUITY


Attributable to equity holders of the parent

Equity

Issued Share Share component Exchange

share premium option of convertible Contributed Statutory fluctuation Accumulated Minority

capital account reserve notes surplus reserve reserve losses Total interest Total equity

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

(Note 35(a)) (Note 35(a))

At 1 January 2005 282,750 1,093,475 – – 232,555 119,951 2,457 (169,582 ) 1,561,606 341,956 1,903,562

Issue of share for acquisition

of minority interests 14,138 47,360 – – – – – – 61,498 (55,318 ) 6,180

Equity-settled share option

arrangements – – 7,737 – – – – – 7,737 – 7,737

Issue of convertible bonds – – – 19,430 – – – – 19,430 – 19,430

Exchange realignment and

total income and losses

for the year recognized

directly in equity – – – – – – (1,122)* – (1,122 ) 1,234 112

Net loss for the year – – – – – – – (1,608,204)* (1,608,204 ) (287,872 ) (1,896,076 )

At 31 December 2005 296,888 1,140,835 7,737 19,430 232,555 119,951 1,335 (1,777,786 ) 40,945 – 40,945

(i) The contributed surplus arose as a result of the Reorganization as at 25 August 2004 which represented the excess of the par value

of the 100% shares of Huizhou TCL Mobile Communication Co., Ltd. acquired over the nominal value of the shares of TCL

Communication Technology Holdings Limited issued in exchange therefore.

* These reserve accounts comprise total losses for the year ended 31 December 2005 amounted to approximately HK$1,609,326,000 (2004:HK$182,198,000).



CONSOLIDATED

CASH FLOW STATEMENT

2005 2004


(restated)

CASH FLOWS FROM OPERATING ACTIVITIES

Loss before tax (1,871,446) (304,205)

Adjustments for:

Interest income, other than from loans receivable 9 (16,522) (16,469)

Interest expense 11 20,867 20,252

Depreciation 10 113,240 64,731

Prepaid land lease recognised 10 548 390

Amortisation of intangible assets 10 22,416 1,292

Loss on disposal of property, plant & equipment 10 6,072 901

Equity-settled share option expenses 10 7,737 –

Impairment loss of trade receivables and other receivables 50,367 –

Excess over the cost of business combinations in the acquisition of

minority interest 9 (6,812) –

Negative goodwill recognised – (41,398)

Gain on disposal of a subsidiary – (1,268)

Written back on impairment of property, plant and equipment – (239)

Unrealized exchange gain – (91,535)

Excess fund contributed from minority interest for the release of

intellectual property royalties guarantee 9 (91,791) –

Operating cash flow before working capital changes (1,765,324) (367,548)

Decrease/(increase) in inventories 322,538 (195,523)

Decrease/(increase) in trade receivables (56,133) 29,971

Decrease/(increase) in notes receivable (196,730) 1,184,165

Decrease in prepayments, deposits and other receivables 15,916 138,668

(Increase) in due from related companies (296,920) (57,072)

Decrease in trade and notes payable (137,103) (300,691)

Decrease in other payables and accruals (422,771) (374,087)

Decrease in retirement indemnities (44,122) –

Increase/(decrease) in amounts due to related companies 379,804 (34,184)

Decrease in long service medal (7,103) –

Advances on discounted notes and factored trade receivables 375,083 –

Increase in long term liabilities – 9,052

Decrease in due to minority shareholder (24,258) (134)

Cash (used in)/generated from operations (1,857,123) 32,617

Overseas taxation paid (83,811) –

PRC income tax received – 5,954

Interest paid (18,494) (19,981)

Net cash inflow/(outflow) from operating activities (1,959,428) 18,590

66

CONSOLIDATED

CASH FLOW STATEMENT


2005 2004


(restated)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property, plant and equipment 17 (54,203) (180,698)

Increase in prepaid land lease payments – (4,872)

Acquisition of intangible assets 19 (4,509) (3,856)

Proceeds from disposal of property, plant and equipment 2,467 2,070

Acquisition of subsidiaries – 1,255,034

Cash contribution from minority interests 195,814 –

Increase in other long term assets – (3,153)

(Increase)/decrease in pledged bank deposits (42,944) 149,981

Disposal of a subsidiary – (11,188)

Decrease in advance to related companies – 94,340

Interest received 16,522 16,469

Net cash inflow from investing activities 113,147 1,314,127

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issue of share capital – 495,408

Proceeds from issue of convertible notes 29 185,100 –

Repayment of bank loans (161,561) –

New bank loans 144,095 161,449

Advance from related companies 3,514,194 4,068,383

Repayment of advance from related companies (3,439,194) (4,068,383)

Capital element of finance leases – (2,332)

Interest element on finance lease rental payments – (271)

Dividend paid – (766,506)

Net cash inflow/(outflow) from financing activities 242,634 (112,252)

NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (1,603,647) 1,220,465

Cash and cash equivalents at beginning of year 2,005,683 697,100

Effect of foreign exchange rate changes, net 3,719 88,118

CASH AND CASH EQUIVALENTS AT END OF YEAR 405,755 2,005,683


31 December 2005

BALANCE SHEET

2005 2004


NON-CURRENT ASSETS

Property, plant and equipment 17 822 1,065

Intangible assets 19 7 10

Investments in subsidiaries 21 – 1,185,912

829 1,186,987

CURRENT ASSETS

Due from subsidiaries 21 581,000 841,470

Other receivables 845 509

Cash and cash equivalents 25 3,078 2,492

584,923 844,471

CURRENT LIABILITIES

Trade payables 27 3,330 38,218

Due to related companies 40 3,120 –

Due to subsidiaries 21 3,100 –

Other payables and accruals 4,512 10,042

14,062 48,260

NET CURRENT ASSETS 570,861 796,211

TOTAL ASSETS LESS CURRENT LIABILITIES 571,690 1,983,198

NON-CURRENT LIABILITIES

Convertible notes 29 165,670 –

TOTAL ASSETS LESS TOTAL LIABILITIES 406,020 1,983,198

EQUITY

Issued capital 33 296,888 282,750

Reserves 35(b) 109,132 1,700,448

406,020 1,983,198

LI Dong Sheng LIU Fei

Director Director

68

NOTES TO

FINANCIAL STATEMENTS

31 December 2005

1. CORPORATE INFORMATIONThe Company was incorporated as an exempted company with limited liability in the Cayman Islands on 26 February 2004 under theCompanies Law, Cap.22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands. The principal office of the Companyis located at Room 1502, Tower 6, China Hong Kong City, 33 Canton Road, Tsimshatsui, Kowloon, Hong Kong.

During the year, the Company and its subsidiaries (collectively referred to as the “Group”) were principally engaged in the research,development, manufacturing and sale of mobile phones.

In the opinion of the directors, the ultimate holding company of the Group is TCL Corporation, a limited liability company registeredin the PRC and listed in the Shenzhen Stock Exchange.

2. BASIS OF PREPARATIONThese financial statements have been prepared in accordance with Hong Kong Financial Reporting standards (“HKFRSs”) (whichalso include Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by the Hong Kong Institute of Certified PublicAccountants, accounting principles generally accepted in Hong Kong and disclosure requirements of the Hong Kong CompaniesOrdinance. They have been prepared under the historical cost convention. These financial statements are presented in Hong Kongdollars and all values are rounded to the nearest thousand (HK$’000) except when otherwise indicated.

Basis of consolidationThe consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31December 2005. The results of the subsidiaries are consolidated from the date of acquisition, being the date of which the Groupobtains control, and continues to be consolidated until the date that such control ceased.

All significant intercompany transactions and balances within the Group are eliminated in the preparation of the consolidated financialstatements.

Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries.

3. IMPACT OF NEW AND REVISED STATEMENT OF HONG KONG FINANCIAL REPORTING STANDARDSThe following new and revised HKFRSs affect the Group and are adopted for the first time for the current year’s financial statements:

HKAS 1 “Presentation of Financial Statements”HKAS 2 “Inventories”HKAS 7 “Cash Flow Statements”HKAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”HKAS 10 “Events after the Balance Sheet Date”HKAS 12 “Income Taxes”HKAS 14 “Segment Reporting”HKAS 16 “Property, Plant and Equipment”HKAS 17 “Leases”HKAS 18 “Revenue”HKAS 19 “Employee Benefits”HKAS 20 “Accounting for Government Grants and Disclosure of Government Assistance”HKAS 21 “The Effects of Changes in Foreign Exchange Rates”HKAS 23 “Borrowing Costs”HKAS 24 “Related Party Disclosures”HKAS 27 “Consolidated and Separate Financial Statements”HKAS 32 “Financial Instruments: Disclosure and Presentation”HKAS 33 “Earnings per Share”HKAS 36 “Impairment of Assets”HKAS 37 “Provisions, Contingent Liabilities and Contingent Assets”HKAS 38 “Intangible Assets”HKAS 39 “Financial Instruments: Recognition and Measurement”HKAS 39 “Transition and Initial Recognition of Financial Assets and Financial Liabilities Amendment”HKFRS 2 “Share-based Payment”HKFRS 3 “Business Combinations”HKFRS-INT 4 “Leases - Determination of the Length of Lease Term in respect of Hong Kong Land Leases”

31 December 2005

NOTES TO



3. IMPACT OF NEW AND REVISED STATEMENT OF HONG KONG FINANCIAL REPORTING STANDARDS (continued)

The adoption of HKASs 2,7,8,10,12,14,16,18,19,20,23,27,33,37,38 and HK-Int4 has no material impact on the accounting policies of

the Group and the Company and the methods of computation in the Group’s and the Company’s financial statements.

HKAS 1 has affected the presentation of minority interests on the face of the consolidated balance sheet, consolidated income

statement, consolidated statement of changes in equity and other disclosures.

HKAS 24 has expanded the definition of related party disclosures.

The major effect of adoption of these HKFRSs is summarized as follows:

(a) HKAS 17 – Leases

In prior years, leasehold land and buildings held for own use were stated at cost less accumulated depreciation and any

impairment losses.

Upon the adoption of HKAS 17, the Group’s leasehold interest in land and buildings is separated into leasehold land and

buildings. The Group’s leasehold land is classified as an operating lease, because the title of the land is not expected to pass

to the Group by the end of the lease term, and is reclassified from property, plant and equipment to prepaid land premiums/

land lease payments, while buildings continue to be classified as part of property, plant and equipment. Prepaid land premiums

for land lease payments under operating leases are initially stated at cost and subsequently amortised on the straight-line

basis over the lease term. When the lease payments cannot be allocated reliably between the land and buildings elements,

the entire lease payments are included in the cost of the land and buildings as a finance lease in property, plant and equipment.

This change in accounting policy has had no effect on the consolidated income statement and retained profits. The comparative

amounts for the year ended 31 December 2004 in the consolidated balance sheet have been restated to reflect the

reclassification of the leasehold land.

(b) HKFRS2 – Share-based Payment

Upon the adoption of HKFRS2, when employees (including directors) render services as consideration for equity instruments

(“equity-settled transactions”), the cost of the equity-settled transactions with employees is measured by reference to the fair

value at which the instruments are granted.

The main impact of HKFRS 2 on the Group is the recognition of the cost of these transactions and a corresponding entry to

equity for employee share options.

The revised accounting policy for share-based payment transactions is described in more detail in note 5 “Summary of

significant accounting policies” below.

As the Company did not have any share options granted before 31 December 2004, the adoption of HKFRS2 had no impact

on the retained profits as at 31 December 2004. The Company has recognised the cost of options which were granted during

the year in the current year’s income statement in accordance with the revised accounting policy.

The effects of adopting HKFRS2 are summarized in note 5 to the financial statement.

70

NOTES TO


31 December 2005

3. IMPACT OF NEW AND REVISED STATEMENT OF HONG KONG FINANCIAL REPORTING STANDARDS (continued)

(c) HKFRS3 – Business Combinations

In prior years, negative goodwill arising on acquisition was carried in the balance sheet and was recognized in the consolidated

income statement on a systematic basis over the remaining average useful life of the acquired depreciable/amortizable

assets.

The adoption of HKFRS3 has resulted in the Group derecognising the carrying amounts of negative goodwill (including that

remaining in the consolidated capital reserve) against retained profits.

The effects of the above changes are summarized in note 4 to the financial statements.

(d) HKAS 32 and HKAS 39 – Financial Instruments

Upon the adoption of HKAS 32, convertible bonds are split into liability and equity components. The effects of the above

changes are summarised in note 4 to the financial statements.

4. IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDSThe Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial

statements. Unless otherwise stated, these HKFRSs are effective for annual periods beginning on or after 1 January 2006:

HKAS 1 Amendment Capital Disclosures

HKAS 19 Amendment Actuarial Gains and Losses, Group Plans and Disclosures

HKAS 39 Amendment Cash Flow Hedge Accounting of Forecast Intragroup Transactions

HKAS 39 Amendment The Fair Value Option

HKAS 39 & HKFRS 4 Amendments Financial Guarantee Contracts

HKFRSs 1 & 6 Amendments First-time Adoption of Hong Kong Financial Reporting Standards and Exploration for and

Evaluation of Mineral Resources

HKFRS 6 Exploration for and Evaluation of Mineral Resources

HKFRS 7 Financial Instruments: Disclosures

HK(IFRIC)-Int 4 Determining whether an Arrangement contains a Lease

HK(IFRIC)-Int 5 Rights to Interests arising from Decommissioning, Restoration and Environmental

Rehabilitation Funds

HK(IFRIC)-Int 6 Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic

Equipment

HK(IFRIC)-Int 7 Applying the Restatement Approach under HKAS 29 Financial Reporting in

Hyperinflationary Economies

HKAS 21 Amendment The Effects of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operation

The HKAS 1 Amendment shall be applied for annual periods beginning on or after 1 January 2007. The revised standard will affect the

disclosures about qualitative information about the Group’s objective, policies and processes for managing capital; quantitative data

about what the Company regards as capital; and compliance with any capital requirements and the consequences of any non-

compliance.

HKFRS 7 will replace HKAS 32 and has modified the disclosure requirements of HKAS 32 relating to financial instruments. This

HKFRS shall be applied for annual periods beginning on or after 1 January 2007.

The HKAS 19 Amendment, HKAS 39 Amendment regarding cash flow hedge accounting of forecast intragroup transactions, HKFRSs 1

and 6 Amendments, HKFRS 6, HK(IFRIC)-Int 5 and HK(IFRIC)-Int 6 do not apply to the activities of the Group. HK(IFRIC)-Int 6 shall

be applied for annual periods beginning on or after 1 December 2005.

Except as stated above, the Group expects that the adoption of the other pronouncements listed above will not have any significant

impact on the Group’s financial statements in the period of initial application.


5. SUMMARY SIGNIFICANT ACCOUNTING POLICIES(a) Effect on the consolidated balance sheet at 1 January 2005 and 1 January 2004

Effect of adopting

HKFRS 3 &

At 1 January 2005 HKAS 17 HKAS 38

Prepaid Derecognition

Effect of new policies land lease of negative

(increase/(decrease)) payments goodwill Total

HK$’000 HK$’000 HK$’000

Assets

Property, plant and equipment (11,736) – (11,736)

Prepaid land lease payment 11,736 – 11,736

Negative goodwill – 38,638 38,638

– 38,638 38,638

Equity

Accumulated losses – 38,638 38,638

– 38,638 38,638

# Adjustments/presentation taken effect retrospectively

Effect of adopting

At 1 January 2004 HKAS17

Prepaid

Effect of new policies land lease

(increase/(decrease)) payments

HK$’000

Assets

Property, plant and equipment (7,254)

Prepaid land lease payment 7,254

–

72

NOTES TO


31 December 2005

5. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) Effect on the consolidated income statement for the years ended 31 December 2005 and 2004

Effect of adopting

HKFRS 2 HKFS 3

Recognition

Equity-settled of negative

share option goodwill

Effect of new policies arrangement as income Total

HK$’000 HK$’000 HK$’000


Increase in administrative expenses (7,737) – (7,737)

Increase in other revenues and gains – 6,812 6,812

Increase in loss (925)

Increase in basic loss per share (HK cents) (0.3)

Increase in diluted loss per share (HK cents) (0.3)


Increase in other revenue and gains 38,638 38,638

Total decrease in loss 38,638

Decrease in basic loss per share (HK cents) 1.4

Decrease in diluted loss per share (HK cents) 1.3

6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESSubsidiaries

A subsidiary is an entity whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits

from its activities.

The results of subsidiaries are included in the Company’s income statement to the extent of dividends received and receivable. The

Company’s investments in subsidiaries are stated at cost less any impairment losses.

Joint ventures

A joint venture is an entity set up by contractual arrangement, whereby the Group and other parties undertake an economic activity.

The joint venture operates as a separate entity in which the Group and the other parties have an interest.

The joint venture agreement between the ventures stipulates the capital contributions of the joint venture parties, the duration of the

joint venture entity and the basis on which the assets are to be realized upon its dissolution. The profits and losses from the joint

venture’s operations and any distributions of surplus assets are shared by the venturers, either in proportion to their respective

capital contributions, or in accordance with the terms of the joint venture agreement.

A joint venture is treated as a subsidiary, if the Group/Company, directly or indirectly, controls more than half of its voting power or

issued share capital or controls the composition of its board of directors, if the Group/Company has unilateral control, directly or

indirectly, over the joint venture.


6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Excess over the cost of business combinations

Any excess of the Group’s interest in the net fair value of the acquirees’ identifiable assets, liabilities and contingent liabilities over the

cost of the acquisition of subsidiaries (previously referred to as negative goodwill), after reassessment, is recognized immediately in

the income statement.

Impairment of assets

Where an indication of impairment exists, or when annual impairment testing for an asset is required, other than inventories, deferred

tax assets and financial assets, the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the

higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual

asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets,

in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use,

estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflect current market assessments

of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in

which it arises, unless the asset is carried at a revalued amount, in which case the impairment loss is accounted for in accordance

with relevant accounting policy for that revalued asset.

An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses

may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized

impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the

recoverable amount of that asset, however not to an amount higher than the carrying amount that would have been determined (net

of any depreciation/amortization), had no impairment loss been recognized for the asset in prior years. A reversal of such impairment

loss is credited to the income statement in the period in which it arises.

Related parties

A party is considered to be related to the Group if:

(a) directly, or indirectly through one or more intermediaries, the party (i) controls, is controlled by, or is under common control

with, the Company/Group; (ii) has an interest in the Company that gives it significant influence over the Company/Group; or

(iii) has joint control over the Company/Group;

(b) the party is an associate;

(c) the party is a jointly-controlled entity;

(d) the party is a member of the key management personnel of the Company or its parent;

(e) the party is a close member of the family of any individual referred to in (a) or (d); or

(f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in

such entity resides with, directly, or indirectly, any individual referred to in (d) or (e); or

(g) the party is post-employment benefit plan for the benefit of employees of the Company/Group, or any entity that is a related

party of the Company/Group.

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any

impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable

costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of property,

plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement

in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase

in the future economic benefits expected to be obtained from the use of an item if property, plant and equipment and the cost of the

item can be measured reliably, the expenditure is capitalized as an additional cost of that asset or as a replacement.

74

NOTES TO


31 December 2005


Property, plant and equipment and depreciation (continued)

Depreciation is calculated on the straight-line basis to write off the cost or valuation of each asset over its estimated useful life less

any estimated residual value. The principal annual rates used for this purpose are as follows:

Leasehold land and buildings 2.86%

Plant and machinery 10% to 20%

Furniture, fixtures and office equipment 20%

Motor vehicles 16.67%-20%

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its

use or disposal. Any gain or loss on disposal or retirement recognized in the income statement in the year is derecognised as the

difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents a building under construction, which is stated at cost less any impairment losses, and is not

depreciated. Cost comprises the direct costs of construction and capitalized borrowing costs on related borrowed funds during the

period of construction. Construction in progress is reclassified to the appropriate category, plant and equipment when completed

and ready for use.

Intangible assets (other than goodwill)

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over

the useful economic life and assessed for impairment whenever there is an indication that intangible asset may be impaired. The

amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least each balance

sheet date.

Computer software

Purchased computer software is stated at cost, less any impairment losses, and is amortised on straight-line basis over its estimated

useful life of five years.

Intellectual property

Purchased intellectual property is stated at cost, less any impairment losses, and is amortised on the straight-line basis over its

estimated useful life.

Research and development costs

All research costs are charged to the income statement as incurred.

Expenditure incurred on projects to develop new products is capitalised and deferred only when the Group can demonstrate the

technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability

to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the project and

the ability to measure reliably the expenditure during the development. Product development expenditure which does not meet these

criteria is expensed when incurred.

Leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating

leases. Where the Group is the lessor, assets leased by the Group under operating leases are included in non-current assets, and

rentals receivable under the operating leases are credited to the income statement on the straight-line basis over the lease terms.

Where the Group is the lessee, rentals payable under the operating leases net of any incentives received from the lessor are charged

to the income statement on the straight-line basis over the lease terms.

Prepaid land premiums/land lease payments under operating leases are initially stated at cost and subsequently recognised on the

straight-line basis over the lease terms. When the lease payments cannot be allocated reliably between the land and buildings

elements, the entire lease payments are included in the cost of the land and buildings as a finance lease in property, plant and

equipment.



Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of the group of similar financial assets) is derecognised

where:

• the rights to receive cash flows from the asset have expired;

• the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without

material delay to a third party under a “pass-through” arrangement; or

• the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the

risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset,

but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially

all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s

continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured

at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required

to repay.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on weighted average or standard costing basis

and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of

overheads. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and

disposal.

Loan and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active

market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the income

statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits,

and short term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant

risk of changes in value and have a short maturity of generally within three months when acquired, less bank overdrafts which are

repayable on demand and form an integral part of the Group’s cash management. For the purpose of the balance sheet, cash and

bank balances comprise cash on hand and at banks, including term deposits, and assets similar in nature to cash, which are not

restricted as to use.

Interest-bearing bank borrowings

All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction

costs.

After initial recognition, interest-bearing bank borrowings are subsequently measured at amortised cost using the effective interest

method.

Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the amortisation process.

76

NOTES TO


31 December 2005


Convertible notes

The component of convertible notes that exhibits characteristics of a liability is recognised as a liability in the balance sheet, net of

transaction costs. On issuance of convertible notes, the fair value of the liability component is determined using a market rate for an

equivalent non-convertible notes; and this amount is carried as a long term liability on the amortised cost basis until extinguished on

conversion or redemption. The remainder of the proceeds is allocated to the conversion option that is recognised and included in

shareholders’ equity, net of transaction costs. The carrying amount of the conversion option is not remeasured in subsequent years.

Transaction costs are apportioned between the liability and equity components of the convertible bonds based on the allocation of

proceeds to the liability and equity components when the instruments are first recognised.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on sub terms, or the terms of an existing liability are

substantially modified, such an exchange treated as a derecognition of the original liability and the recognition of a new liability, the

respective carrying amounts is recognised in profit or loss.

Provisions

A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that

a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of

the obligation.

When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the

future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising

from the passage of time is included in finance costs in the income statement.

Provisions for product warranties granted by the Group on certain products are recognised based on sales volume and past experience

of the level of repairs and returns.

Income tax

Income tax comprises current and deferred tax. Income tax is recognised in income statement or in equity if it relates to items that are

recognised in the same or a different period directly in equity.

Current tax and liability for the current and prior period are measured at the amount expected to be recovered from or paid to taxation

authorities.

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of

assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable

temporary differences:

• except where the deferred tax liability arises from the initial recognition of an asset or liability and, at the time of the transaction,

affects neither the accounting profit nor taxable profit or loss; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint

ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the

temporary differences will not reverse in the foreseeable future.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

• where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a

business combination and°Aat the time of the transaction, affects neither the accounting profit or loss; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint

ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary

differences will not reverse in the foreseeable future.



Income tax (continued)

Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax

losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the

carry forward of unused tax credits and unused tax losses can be utilised except:

• where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or

liability in a transaction that is not a business combination and°Aat the time of the transaction, affects neither the accounting

profit or loss; and

• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint

ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in

the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer

probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously

unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it is probable that

sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or

the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current

tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured

reliably, on the following bases:

(a) From the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided

that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective

control over the goods sold;

(b) Interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated

future cash receipts through the expected life of the financial instatement to the net carrying amount of the financial asset;

(c) Subsidy income, when there is reasonable assurance that the subsidy will be received and all attaching conditions have been

complied with; and

(d) Value-added services income, upon provision of the relevant services.

Employee benefits

Share-based payment transactions

The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who

contribute to the success of the Group’s operations. Employees (including directors) of the Group receive remuneration in the form

of share-based payment transactions, whereby employees render services as consideration for equity instruments (“equity-settled

transactions”).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are

granted. The fair value is determined by an external valuer using a binomial model, further details of which are given in note 34. In

valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the

shares of the Company (“market conditions”), if applicable.

78

NOTES TO


31 December 2005


Employee benefits (continued)

Share-based payment transactions (continued)

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the

performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the

award (the “vesting date”). The cumulative expense recognised for equity-settled transactions at each balance sheet date until the

vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity

instruments that will ultimately vest. The charge or credit to the income statement for a period represents the movement in the

cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market

condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance

conditions are satisfied.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been

modified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment

arrangement, or is otherwise beneficial to the employee as measured at the date of modification

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet

recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated

as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the

original award, as described in the previous paragraph.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.

Central Pension Scheme

Subsidiaries operating in Mainland China have participated in the Central Pension Scheme (the “CPS”) operated by the PRC government

for all of their staff. These PRC subsidiaries are required to contribute a certain percentage of their covered payroll to the CPS to fund

the benefits. The only obligation of the Group with respect to the CPS is to pay the ongoing required contributions under the CPS.

Contributions under the CPS are charged to the profit and loss account as they become payable in accordance with the rules of the

CPS.

Mandatory Provident Fund

The Company’s subsidiaries, incorporated in Hong Kong, operate a defined contribution Mandatory Provident Fund retirement

benefits scheme (the “Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for all of its employees in Hong Kong.

Contributions are made based on a percentage of the employees’ basic salaries and are charged to the profit and loss account as

they become payable in accordance with the rules of the Scheme. The assets of the Scheme are held separately from those of the

Group in an independently administered fund. The employer contributions vest fully with the employees when contributed into the

Scheme except for the employer voluntary contributions, which are refunded to the Company and its subsidiaries which are incorporated

outside the PRC when an employee leaves employment prior to the contributions vesting fully, in accordance with the rules of the

Scheme.



Employee benefits (continued)

Retirement indemnities

T&A Mobile Phones SAS (“T&A SAS”) (formerly TCL & Alcatel Mobile Phones SAS), which is incorporated in France, operates a

defined contribution plan (the “contribution plan”) and a defined benefit pension plan (the “pension plan”). For the contribution plan,

T&A SAS is not liable for any legal or constructive obligations under the contribution plan beyond the contributions paid, and no

provision as such is made. For the pension plan, corresponding to retirement indemnities relating to T&A SAS’s employees, liabilities

and prepaid expenses are determined as follows:

• using the Projected Unit Credit Method, with projected final salary, which considers that each period of service gives rise to

an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. Actuarial assumptions

comprise mortality, rates of employee turnover and projection of future salary levels; and

• recognizing, over the expected average remaining working lives of the employees participating in the plan, actuarial gains

and losses in excess of more than 10% of the present value of the defined benefit obligation or 10% of the fair value of any

plan assets.

Government grant

Government grants are recognized at their fair value where there is reasonable assurance that the grant will be received and all

attaching conditions will be complied with. When the grant relates to an expense item, it is recognized as income over the periods

necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant related to an

asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of

the relevant asset by equal annual instalments.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction on production of qualifying assets, i.e. assets that necessarily

take a substantial period of time to get ready for their intended use or sales, are capitalized as part of the cost of those assets. The

capitalization of such borrowing costs ceases when the assets are substantially ready for their intended use or sales. Investment

income earned on the temporary investment of specific borrowings pending their expenditure qualifying assets is deducted from the

borrowing costs capitalized. Borrowing costs are recognized as expenses in the income statement in the period in which they are

incurred.

Dividends

Interim dividends are simultaneously proposed and declared, because the Company’s memorandum and articles of association

grant the directors the authority to declare interim dividends. Consequently, interim dividends are recognised immediately as a

liability when they are proposed and declared.

Foreign currencies

These financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency. Each

entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured

using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the

date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency

rates of exchange ruling at the balance sheet date. All differences are taken to profit or loss. Non-monetary items that are measured

in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-

monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value

was determined.

80

NOTES TO


31 December 2005


Foreign currencies (continued)

The functional currencies of certain overseas subsidiaries are currencies other than the Hong Kong dollar. As at the balance sheet

date, the assets and liabilities of these entities are translated into the presentation currency of the Company at exchange rates ruling

at the balance sheet date and, their income statements are translated into Hong Kong dollars at the weighted average exchange

rates for the year. The resulting exchange differences are included in a separate component of equity. On disposal of a foreign entity,

the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

For the purpose of the consolidated cash flow statement, the cash flows of overseas subsidiaries are translated into Hong Kong

dollars at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries, which

arise throughout the year, are translated into Hong Kong dollars at the weighted average exchange rates for the year.

7. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATESEstimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a

significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are

disclosed below:

Impairment of property, plant and equipment

The Group determines whether property, plant and equipment are impaired when there is an indication of impairment. This requires

an estimation of the value in use of the cash-generating units to which the property, plant and equipment were allocated. Estimating

the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to

choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of property, plant and

equipment was approximately HK$360,149,000 (2004: HK$427,940,000). More details are set out in note 17.

Management carries out the impairment review on property, plant and equipment by comparing the lower of carrying amount and

recoverable amount of property, plant and equipment.

An impairment loss is recognised when the carrying amount of property, plant and equipment exceeds the recoverable amount. An

impairment loss is charged to the income statement in the period in which it arises. Management assesses the recoverable amount

by the higher of the fair value less costs to sell and the expected value in use which is determined by the expected useful life and the

expected discounted net cashflow of property, plant and equipment.

Warranty claims

The Group generally offers warranties for its products for 12 to 24 months. Management estimates the related provision for future

warranty claims based on historical warranty claim information, as well as recent trends that might suggest that past cost information

may differ from future claims.

Factors that could impact the estimated claim information include the success of the Group’s productivity and quality initiatives, as

well as parts and labour costs.

Were claims costs to differ by 10% from management’s estimates, the warranty provisions would be an estimated amount of

approximately HK$11 million higher or lower in the year of 2006.

Cross licensing compensation

The Group received Euro 20 million from Alcatel Participation for covering the potential mobile handsets intellectual property royalties

claims by the original cross licensees who had entered into the cross licensing agreement with the Alcatel Group regarding the

waived royalties payment among all the cross licensees in respect of the usage of the mobile handsets intellectual properties owned

by the respective cross licensees.

Since Alcatel Group had transferred all their mobile handsets intellectual properties to the Group, the Group need to renegotiate with

all the original cross licensees for a new cross licensing agreement where there might be risk that the Group might need to pay

royalties to these cross licensees.


7. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Cross licensing compensation (continued)

Accordingly, the management had based on their production plan and their past experience on royalties rate estimated the potential

exposure on future royalties claims by the original cross licensees.

Were the future royalties claims by the original cross licensees to differ by 10% from management’s estimates, the estimated potential

exposure on future royalties claims would be an estimated amount of approximately Euro 1 million higher or lower in the future year.

8. SEGMENT INFORMATIONThe Group is principally engaged in the manufacture and sale of mobile phones and related components. All of the Group’s products

are of a similar nature and subject to similar risk and returns. Accordingly, the Group’s operating activities are attributable to a single

business segment.

The Group’s revenue, and assets are principally attributable to various geographical regions. Each of the Group’s geographical

segments represents the location of the business division’s production or service facilities, which are subject to risks and returns that

are different from those of the other geographical segments.

The following tables present revenue, assets and expenditure information for the Group’s geographical segments.

France The PRC Mexico Consolidated

Year ended Year ended Year ended Year ended

31 December 31 December 31 December 31 December

2005 2004 2005 2004 2005 2004 2005 2004

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

Segment revenue:

Sales to external customers 2,167,591 1,433,237 2,444,296 5,759,694 1,051,809 116,807 5,663,696 7,309,738

France The PRC Mexico Eliminations Consolidated

31 December 31 December 31 December 31 December 31 December

2005 2004 2005 2004 2005 2004 2005 2004 2005 2004

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

Other segment information:

Segment assets 820,516 1,730,545 6,596,664 4,087,584 509,535 127,428 (3,842,947) (424,509) 4,083,768 5,521,048

82

NOTES TO


31 December 2005

9. REVENUE, OTHER REVENUE AND GAINSRevenue, which is also the Group’s turnover, represents the net invoiced value of mobile phones and related accessories sold and

services rendered during the year, after allowances for returns and trade discounts. All significant intra-group transactions have been

eliminated on combination.

An analysis of turnover, other revenue and gains is as follows:

2005 2004


(Restated)

Revenue

Sale of mobile phones and related components 5,663,696 7,309,738

Other revenue

Interest income 16,522 16,469

Subsidy income 22,043 48,315

Value-added services income 19,521 10,211

Excess fund contributed from minority interest for the release of

intellectual properties royalties guarantee 91,791 –

Reversal of restructuring reserves contributed from minority interest 24,258 –

Exchange gain – 82,465

Other 6,604 3,558

180,739 161,018

Gains

Gain on disposal of a subsidiary 36 – 1,268

Excess over the cost of business combination/ negative

goodwill recognised 6,812 41,398

6,812 42,666

Other revenue and gains 187,551 203,684

Negative goodwill recognized represents the portion of negative goodwill arising on acquisition in expectation of identified future

losses and expenses, which did not represent identifiable liabilities as at the date of acquisition, recognized during the year.


10. LOSS BEFORE TAXThe Group’s loss before tax is arrived at after charging / (crediting):

2005 2004Notes HK$’000 HK$’000

(Restated)

Cost of inventories sold* 5,453,371 6,124,561Depreciation of property, plant and equipment 17 113,240 64,731Prepaid land lease recognised 18 548 390Amortisation of intangible assets 19 22,416 1,292Brand management fee/TCL Brand Common Fund 10,155 27,816Minimum lease payments under operating leases in respect of

land and buildings 23,966 20,024Auditors’ remuneration 2,864 1,922Employee benefits expense (including directors’

remuneration (note 12)):Salaries and wages 663,132 343,408Equity-settled share option expense 7,737 –Pension Scheme contributions

Defined contribution scheme 29,304 27,195Defined benefit schemes (40,349) 3,098

659,824 373,701

Impairment loss of trade receivables*** 32,609 4,335Provision against inventory obsolescence and

net realizable value 122,587 156,881Product warranty provisions 28 156,470 88,472Loss on disposal of property, plant & equipment 6,072 901Reversal of impairment of property, plant & equipment ** 17 – (239)

* The provision against inventory obsolescence and net realisable value is included in “Cost of sales” on the face of the consolidated incomestatement.

** The reversal of impairment of property, plant and equipment is included in “Other operating expenses” on the face of the consolidated incomestatement.

*** Impairment loss of trade receivables is mainly made for the Group’s customers operating in the PRC.

11. FINANCE COSTSGroup

2005 2004HK$’000 HK$’000

Interest on bank loans, and other loans wholly repayable within five years 12,613 14,620Interest on finance leases – 271Interest on convertible notes 2,373 –Interest on discounted notes and factored trade receivables* 5,881 5,361

20,867 20,252

* The effective interest rates of discounted notes and factored trade receivables are 0.35% per month and 0.17% per month respectively.

84

NOTES TO


31 December 2005

12. DIRECTORS’ REMUNERATION AND FIVE HIGHEST PAID EMPLOYEESDirectors’ remuneration for the year, disclosed pursuant to the Listing Rules and Section 161 of the Companies Ordinance, are as

follows:

Group

2005 2004

HK$’000 HK$’000

Fees 1,623 773

Other emoluments:

Salaries, allowances and benefits in kind 2,875 1,306

Performance related bonuses – –

Employee share option benefits 2,073 –

Pension scheme contributions 70 43

6,641 2,122

During the year, certain directors were granted share options, in respect of their services to the Group, under the share option

scheme of the Company, further details of which are set out in note 34 to the financial statements. The fair value of such options,

which has been amortised to income statement, was determined as at the date of the grant and included in the above directors’

remuneration disclosures.

(a) Independent non-executive directors

The fees paid to independent non-executive directors during the year were as follows:

2005 2004

HK$’000 HK$’000

Mr. Shi Cuiming 180 31

Mr. Wang Chongju 180 31

Mr. Lau Siu Ki 180 31

540 93

During the year, all independent non-executive directors were granted share options, in respect of their services to the Group,

under the share option scheme of the Company, further details of which are set out in note 34 to the financial statements. The

fair value of such options, which has been amortised to income statement, was determined as at the date of the grant and

included in the above directors’ remuneration disclosures (2004: Nil).


12. DIRECTORS’ REMUNERATION AND FIVE HIGHEST PAID EMPLOYEES (continued)

(b) Executive directors

Salaries

allowances Employee

and share Pension

benefits option scheme Total

2005 Fees in kind benefits contributions remuneration

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

Executive directors

Mr. Li Dong Sheng 120 10 501 7 638

Mr. Wan Mingjian – 206 – 7 213

Mr. Yuan Xin Cheng – – 300 – 300

Dr. Liu Fei 63 1,435 160 14 1,672

Mr. Yan Yong, Vincent 120 10 105 7 242

Mr. Du Xiaopeng, Simon 120 318 321 7 766

Dr. Guo Aiping, George 120 851 95 26 1,092

Mr. Wong Toe Yeung, Chambers 540 45 501 2 1,088

1,083 2,875 1,983 70 6,011

Salaries,

allowances Employee

and share Pension

benefits in option scheme Total

2004 Fees kind benefits contributions remuneration

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

Executive directors

Mr. Li Dong Sheng 40 4 – 2 46

Mr. Wan Mingjian 40 399 – 7 446

Mr. Yuan Xin Cheng – – – – –

Mr. Yan Yong, Vincent 40 4 – 2 46

Mr. Du Xiaopeng, Simon 40 272 – 7 319

Dr. Guo Aiping, George 40 281 – 9 330

Mr. Wong Toe Yeung 480 40 – 4 524

680 1,000 – 31 1,711

There was no arrangement under which a director waived or agreed to waive any remuneration during the year.

The five highest paid employees during the year included two (2004: two) directors, details of whose remuneration are set out

above.

86

NOTES TO


31 December 2005

12. DIRECTORS’ REMUNERATION AND FIVE HIGHEST PAID EMPLOYEES (continued)(b) Executive directors (continued)

Details of the remuneration of the remaining three (2004: three) non-directors, highest paid employees for the year are asfollows:

2005 2004HK$’000 HK$’000

Salaries, allowances and benefits in kind 4,280 1,810Performance related bonuses – –Employee share option benefits – –Pension scheme contributions 378 77

4,658 1,887

The number of non-directors, highest paid employees whose remuneration fell within the following bands is as follows:

Number of Non-directors2005 2004

Nil to HK$1,000,000 – 3HK$1,000,001 to HK$1,500,000 1 –HK$1,500,001 to HK$2,000,000 2 –

3 3

During the year, share options were granted to a non-director, highest paid employee in respect of his services to the Group,further details of which are included in the disclosures in note 34 to the financial statements. The fair value of such options,which should be amortised to the income statement, was determined as at the date of the grant and was included in theabove non-director, highest paid employees’ remuneration disclosures.

13. TAXGroup:

2005 2004HK$’000 HK$’000

Current year provision:Hong Kong 323 348Mainland China

Charge for the year 2,639 48,106Overprovision in prior years – (45,950)

Elsewhere 15,914 (4,181)Deferred (notes 32) 5,754 (1,321)

Tax charge/(credit) for the year 24,630 (2,998)

Hong Kong profits tax has been provided at a rate of 17.5%, (2004: 17.5%) on the estimated assessable profits arising in Hong Kongduring the year.

Taxes on profits assessable elsewhere have been calculated at the rate of tax prevailing in the countries of which the Group operates,based on existing legislation, interpretations and practices in respect thereof.


13. TAX (continued)

The normal national income tax rate in China is 30%. However, China provides a number of tax benefits to foreign investment

enterprises. Those foreign investment enterprises accredited as high and new technology enterprises in the high and new technology

development parks designated by the State Council enjoy a national income tax rate of 15%. Those foreign investment enterprises

located in the designated western areas of China (including Inner Mongolia) also enjoy a national income tax rate of 15% from 2001

to 2010. In addition, foreign investment enterprises that are in manufacturing business and scheduled to operate no less than 10

years are exempt from national income tax for two years starting from the first profit-making year and enjoy a 50% reduction in the

applicable national income tax rate for the following three years. Furthermore, those manufacturing foreign investment enterprises

designated as advanced technology enterprises enjoy additional three years’ 50% reduction in the applicable national income tax

rate subject to a minimum rate of 10%. Local enterprise income tax is often waived or reduced during this tax incentive period.

Huizhou TCL Mobile Communication Co., Ltd. (“TCL Mobile”), a subsidiary of the Company in the PRC, has a high and new technology

enterprise accreditation effective until 28 May 2005. It was exempt from the national income tax in 2000 and 2001 and has been

subject to a national income tax rate of 7.5% since 2002. The 7.5% income tax rate for TCL Mobile was expired at the end of 2004. By

the end of 2004, TCL Mobile obtained its advanced technology enterprise accreditation and hence was subject to a national income

tax rate of 10% from 2005 to 2007.

According to the Income Tax Law of the PRC on the Enterprises with Foreign Investment and Foreign Enterprises, TCL Mobile

Communication (Hohhot) Co., Ltd. (“Mobile Hohhot”), a subsidiary of the Company in the PRC, is entitled to exemption from the PRC

corporate income tax for two years commencing from its first profit-making year and thereafter is entitled to a 50% reduction in its

PRC corporate income tax for the subsequent three years. Mobile Hohhot also enjoys preferential tax treatment granted to foreign

investment enterprises located in the western region of China, including 50% reduction in national corporate income tax until 2010.

As Mobile (Hohhot) commenced to make profits in 2002, it was exempt from PRC corporate income tax in 2002 and 2003, and the

applicable PRC corporate income tax rate in 2004 to 2006 is 7.5%. If Mobile (Hohhot) received its advanced technology enterprise

accreditation at or before the end of 2006 and the relevant PRC tax law remains effective, Mobile (Hohhot) would enjoy a PRC

corporate income tax rate of 10% for three years starting 2007. Otherwise, Mobile (Hohhot) would be subject to the PRC corporate

income tax rate of 15% from 2007 to 2010 and 30% thereafter.

A reconciliation of the tax expense applicable to loss before tax using the statutory rates for the countries in which the Company and

its subsidiaries, are domiciled to the tax expense at the effective tax rates, and a reconciliation of the applicable rates (i.e. the

statutory tax rates) to the effective tax rates, are as follows:

2005 2004

HK$’000 % HK$’000 %

Loss before tax (1,871,446) (304,205)

Tax at the applicable rates

– 33% (566,082) 30.2 (128,631) 42.3

– 17.5% (27,308) 1.5 14,977 (4.9)

Sub-total (593,390) 31.7 (113,654) 37.4

Lower tax rate for specific provinces or local authority 258,479 (13.8) 25,292 (8.3)

Income not subject to tax (20,322) 1.1 (30,542) 10.0

Expenses not deductible for tax 6,882 (0.4) 275 (0.1)

Tax loss not recognised 372,981 (19.9) 161,581 (53.1)

Adjustments in respect of current tax of previous periods – – (45,950) 15.1

Tax charge/(credit) at the Group’s effective rate 24,630 (1.3) (2,998) 1.0

88

NOTES TO


31 December 2005

14. NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENTLoss from ordinary activities attributable to equity holders of the parent for the year ended 31 December 2005 dealt with in the

financial statements of the Company, was HK$1,665,843,000 (2004: HK$62,934,000) (note 35(b)).

15 DIVIDENDSNo dividend has been paid or declared by the Company for the year ended 31 December 2005.

In 2004, TCL Mobile declared an interim dividend of HK$1,376,132,000 (RMB1,458,700,000) to its then shareholders. Subsequently

on 25 August 2004, except for T.C.L. Industries Holdings (H.K.) Limited whose reinvestment was in the form of cash.

16. LOSS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENTThe calculations of basic and diluted earnings per share are based on:

2005 2004

(Restated)

HK$’000 HK$’000

Loss

Loss attributable to ordinary equity holders of the parent, used in the basic loss

per share calculation (1,608,204) (184,897)

Loss attributable to minority interest (287,872) (116,310)

Loss for the purposes of diluted loss per share (1,896,076) (301,207)

Number of shares

Shares 2005 2004

Weighted average number of ordinary shares in issue during the year used in the

basic loss per share calculation 2,892,183,904 2,827,500,000

Effect of diluted weighted average number of ordinary shares:

Assumed issued on deemed exercise of option by the minority shareholder of the

joint venture formed between the Company and Alcatel (the “Joint Venture”)

by converting its interest in the Joint Venture into the shares of the Company 48,849,041 131,409,915

2,941,032,945 2,958,909,915

The calculation of the diluted loss per share for 2005 has also taken into account the convertible notes and share options outstanding

during the year. As the Company incurred loss during the year, any conversion of convertible notes is anti-dilutive. Since the exercise

price of the share option during the year is higher than the fair market value of the ordinary share, the share option outstanding during

the year does not have a dilutive effect to the Company.


17. PROPERTY, PLANT AND EQUIPMENTGroup

Furniture,

fixtures and

Plant and office Motor Construction

Buildings machinery equipment vehicles in progress Total

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

(Restated)

31 December 2005

At 31 December 2004 and at

1 January 2005:

Cost 83,411 442,294 78,272 12,462 1,525 617,964

Accumulated depreciation and

impairment (3,117) (136,445) (43,945) (6,517) – (190,024)

Net carrying amount 80,294 305,849 34,327 5,945 1,525 427,940

At 1 January 2005, net of accumulated

depreciation and impairment 80,294 305,849 34,327 5,945 1,525 427,940

Additions 5,065 39,849 5,633 667 2,989 54,203

Disposals (137) (9,605) (5,199) (812) – (15,753)

Depreciation provided during the year (2,501) (96,434) (12,518) (1,787) – (113,240)

Written back on disposals – 3,835 2,819 560 – 7,214

Transfers – 1,878 – – (1,878) –

Exchange realignments 890 (306) (867) 68 – (215)

At 31 December 2005, net of

accumulated depreciation and

impairment 83,611 245,066 24,195 4,641 2,636 360,149

At 31 December 2005:

Cost 90,119 472,778 78,723 12,533 2,636 656,789


impairment (6,508) (227,712) (54,528) (7,892) – (296,640)


90

NOTES TO


31 December 2005

17. PROPERTY, PLANT AND EQUIPMENT (continued)

Group (continued)

Furniture,

fixtures and

Plant and office Motor Construction

Buildings machinery equipment vehicles in progress Total

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

(Restated)

31 December 2004

At 31 December 2003 and at

1 January 2004:

Cost 27,742 244,558 21,718 11,174 10,833 316,025


impairment (1,670) (57,013) (5,572) (3,385) – (67,640)


At 1 January 2004, net of


impairment 26,072 187,545 16,146 7,789 10,833 248,385

Additions 41,496 121,234 12,116 987 4,865 180,698

Disposals – (2,318) (1,459) (583) – (4,360)

Acquisition of subsidiaries – 47,104 13,270 59 319 60,752

Depreciation provided during the year (1,447) (53,451) (7,165) (2,668) – (64,731)

Impairment provided/(reversal) during

the year – 239 – – – 239

Depreciation written back on disposals – 503 525 361 – 1,389

Transfers 14,173 337 – – (14,510) –

Exchange realignments – 4,656 894 – 18 5,568

At 31 December 2004, net of


impairment 80,294 305,849 34,327 5,945 1,525 427,940


Cost 83,411 442,294 78,272 12,462 1,525 617,964


impairment (3,117) (136,445) (43,945) (6,517) – (190,024)


During the year, impairment provision was made in respect of assets that the directors believe the respective recoverable amount in

the future is lower than the carrying amount.



Company

Furniture,

fixtures and

Leasehold office Motor

improvements equipment vehicles Total

HK$’000 HK$’000 HK$’000 HK$’000

31 December 2005

At 31 December 2004 and at 1 January 2005:

Cost 256 466 429 1,151

Accumulated depreciation and impairment (42) (30) (14) (86)

Net carrying amount 214 436 415 1,065

At 1 January 2005, net of accumulated depreciation

and impairment 214 436 415 1,065

Additions 4 84 – 88

Disposals – (18) – (18)

Depreciation provided during the year (129) (101) (86) (316)

Depreciation written back on disposals – 3 – 3

Transfers – – – –

Exchange realignments – – – –

At 31 December 2005, net of accumulated

depreciation and impairment 89 404 329 822


Cost 260 532 429 1,221


Net carrying amount 89 404 329 822

92

NOTES TO


31 December 2005


Company

Furniture,

fixtures and

Leasehold office Motor

improvements equipment vehicles Total

HK$’000 HK$’000 HK$’000 HK$’000

31 December 2004

At 31 December 2003 and at 1 January 2004:

Cost – – – –

Accumulated depreciation and impairment – – – –

Net carrying amount – – – –

At 1 January 2004, net of accumulated depreciation

and impairment

Additions 256 466 429 1,151

Disposals

Depreciation written back on disposals (42) (30) (14) (86)

Depreciation provided during the year – – – –

Transfers – – – –

Exchange realignments – – – –

At 31 December 2004, net of accumulated

depreciation and impairment 214 436 415 1,065


Cost 256 466 429 1,151


Net carrying amount 214 436 415 1,065


18. PREPAID LAND LEASE PAYMENTS2005 2004

HK$’000 HK$’000

Carrying amount at 1 January 2005As previously reported – –Effect of adopting HKAS 17 (note 3a) 11,736 7,254

As restated 11,736 7,254Addition during the year – 4,872Recognised during the year (548) (390)Exchange realignment 212 –

Carrying amount at 31 December 2005 11,400 11,736

As at 31 December 2005, the Group’s land and buildings situated in Mainland China are held under long-term land use rights in thePRC.

19. INTANGIBLE ASSETSGroup

Computer Intellectualsoftware property TotalHK$’000 HK$’000 HK$’000

31 December 2005:Cost at 1 January 2005, net of accumulated amortisation and impairment 7,670 26,197 33,867Additions 4,509 – 4,509Retirements and disposals (24) – (24)Amortisation provided during the year (9,361) (13,055) (22,416)Exchange realignment (7) (2,388) (2,395)

At 31 December 2005 2,787 10,754 13,541

At 31 December 2005:Cost 14,184 23,809 37,993Accumulated amortisation and impairment (11,397) (13,055) (24,452)

Net carrying amount 2,787 10,754 13,541

31 December 2004:Cost at 1 January 2004, net of accumulated amortisation and impairment 3,689 – 3,689Additions 3,856 – 3,856Acquisition of a subsidiary 1,274 23,510 24,784Amortisation provided during the year (1,292) – (1,292)Exchange realignment 143 2,687 2,830

At 31 December 2004 7,670 26,197 33,867

At 31 December 2004:Cost 10,182 26,197 36,379Accumulated amortisation and impairment (2,512) – (2,512)

Net carrying amount 7,670 26,197 33,867

94

NOTES TO


31 December 2005

19. INTANGIBLE ASSETS (continued)Company

ComputersoftwareHK$’000

31 December 2005:Cost at 1 January 2005, net of accumulated amortisation and impairment 10Amortisation provided during the year (2)Exchange realignment (1)

At 31 December 2005 7

At 31 December 2005:Cost 10Accumulated amortisation and impairment (3)

Net carrying amount 7

31 December 2004:Cost at 1 January 2004, net of accumulated amortisation and impairmentAdditions 11Amortisation provided during the year (1)Exchange realignment

At 31 December 2004 10

At 31 December 2004:Cost 11Accumulated amortisation and impairment (1)

Net carrying amount 10

20. NEGATIVE GOODWILLThe amount of the negative goodwill recognised in the consolidated balance sheet, arising from the acquisition of subsidiaries, is asfollows:

Group:

HK$’000

31 December 2004Cost:

At 1 January 2004 –Acquisition of subsidiaries 41,398

At 31 December 2004 41,398

Accumulated recognition as income –Recognised as income (2,760)Effect on HKFRS 3 (note 5(a)) (38,638)

At 31 December 2004 (41,398)

Net book value:At 31 December 2004 –


21. INTERESTS IN SUBSIDIARIESCompany

2005 2004HK$’000 HK$’000

Unlisted shares, at cost 1,248,039 1,185,912Due from subsidiaries 974,809 841,470Impairment on interests in subsidiaries (1,641,848) –

581,000 2,027,382

The amounts due from subsidiaries included in the Company’s current assets are unsecured, interest-free and have no fixed termsof repayment.

Particulars of the principal subsidiaries are as follows:

Nominal value Percentage ofPlace and of issued and attributable equitydate of fully paid interest Principal

Name incorporation Share capital Direct Indirect Activities

TCL Mobile Communication (HK) Hong Kong HK$5,000,000 – 100% Trading of mobile phonesCompany Limited 21 April 1999 components

Huizhou TCL Mobile Communication The PRC US$29,800,000 – 100% Manufacturing and saleCo., Ltd. (Notes(i)) 29 March 1999 of mobile phones

TCL Mobile Communication The PRC RMB30,000,000 – 100% Manufacturing and sale(Hohhot) Co., Ltd. (Notes (i)) 29 April 2002 of mobile phones

T&A Mobile Phones Limited (“T&A”) Hong Kong HK$10,000,000 100% – Manufacturing and sale(formerly TCL & Alcatel Mobile 17 May 2004 of mobile phonesPhones Limited)

T&A Mobile Phones SAS France Euro87,540,000 – 100% Development and distribution(formerly TCL & Alcatel Mobile 1 January 2004 of mobile phonesPhones SAS)

T&A Mobile Phones SA de CV Mexico US$4,300 – 100% Distribution of mobile phonesLimited 24 May 2004

T&A Mobile Phones Suzhou Limited The PRC US$28,000,000 – 100% Development and distribution(formerly Alcatel Suzhou 14 December 1998 of mobile phonesTelecommunications Co., Ltd) (Note(i))

T&A Mobile Phones International Hong Kong HK$1 – 100% Development and distributionLimited 11 May 2005 of mobile phones

T&A Mobile Phones Europe SAS France Euro40,000 – 100% Distribution of mobile phones(formerly TCL & Alcatel Mobile 30 August 2005Phones Europe SAS)

Note:(i) This is a wholly foreign owned enterprise.

On 11 May 2005, the Company entered into the Framework Agreement with Alcatel Participation, pursuant to which the Company toagreed to acquire all Alcatel Participation’s shares in T&A Mobile Phones Limited (“T&A”), representing 45% of the share capital ofT&A, in exchange for 141.375.000 Shares, representing 5% of the then issued share capital of the Company. The transaction wascompleted on 18 July 2005.

The above table lists all the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for theyear or formed a substantial portion of the net assets of the Group.

96

NOTES TO


31 December 2005

22. INVENTORIESGroup

2005 2004

HK$’000 HK$’000

Raw materials 455,366 664,590

Work in progress 20,015 62,510

Finished goods 411,676 525,374

887,057 1,252,474

Provision against inventory obsolescence and net realized value (177,778) (220,657)

709,279 1,031,817

23. TRADE RECEIVABLESAn aged analysis of the trade receivables as at the balance sheet date, based on the invoice date is as follows:

Group

2005 2004

HK$’000 HK$’000

Within 1 month 939,808 578,002

1 to 2 months 66,109 433,951

2 to 3 months 44,197 27,385

Over 3 months 121,006 182,630

1,171,120 1,221,968

Impairment loss of trade receivables (44,057) (11,448)

1,127,063 1,210,520

Included in the total provision for doubtful debts, an amount of HK$34,569,000 was made for a customer operating in the PRC.

24. FACTORED TRADE RECEIVABLESAt 31 December 2005, a subsidiary of the Group factored trade receivables of HK$106,981,000 to a bank on a without-recourse basis

for cash. As the subsidiary of the Group still retained the risks and rewards associated with the delay in payment by the customers,

the financial asset derecognition conditions as stipulated in HKAS 39 have not been fulfilled. Accordingly, bank advances from the

factoring of the Group’s trade receivables have been accounted for as liabilities in the consolidated balance sheet.


25. PLEDGED BANK DEPOSITS, CASH AND CASH EQUIVALENTSGroup Company

2005 2004 2005 2004

HK$’000 HK$’000 HK$’000 HK$’000

Cash and cash equivalents 405,755 2,005,683 3,078 2,492

Pledged bank deposits 54,317 11,373 – –

460,072 2,017,056 3,078 2,492

Less: Pledged deposits:

– for factored trade receivables (note 24) 18,870 – – –

– for the discount of notes receivable 35,447 – – –

– for notes issued – 11,373 – –

Cash and cash equivalents 405,755 2,005,683 3,078 2,492

At the balance sheet date, the cash and bank balances of the Group denominated in Renminbi (“RMB”) amounted to approximately

HK$94,612,000 (2004: HK$665,992,000). The RMB is not freely convertible into other currencies. However, under Mainland China’s

Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the

Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.

26. INTEREST BEARING BANK BORROWINGSGroup

2005 2004

HK$’000 HK$’000

Bank borrowings, wholly repayable within one year:

Secured 13,739 175,300

Unsecured 144,095 –

157,834 175,300

(a) The Group’s secured bank borrowings are trust receipt loan which bear interest rate of 4.15% per annum.

(b) The Group’s unsecured borrowings are bank advances in respect of the discounted commercial notes. Such bank advances

are guaranteed by TCL Corporate, the ultimate holding company of the Company.

98

NOTES TO


31 December 2005

27. TRADE AND NOTES PAYABLESAn aged analysis of the Group’s trade and bills payables as at the balance sheet date, based on the invoice date, is analysed as

follows:

Group Company

2005 2004 2005 2004

HK$’000 HK$’000 HK$’000 HK$’000

Within 6 months 1,690,543 1,866,416 3,330 38,218

7 to 12 months 42,248 1,124 – –

More than 1 year 7,819 10,173 – –

1,740,610 1,877,713 3,330 38,218

Included in trade and notes payables are notes payables of HK$367,030,000 (2004: HK$107,568,000), which are secured by the no

pledge of deposits (2004: 11,373,000).

28. PROVISION FOR WARRANTIESThe movement of provision for warranties during the year is summarised as follows:

Group

2005 2004

HK$’000 HK$’000

At beginning of year 143,248 12,755

Acquisition of subsidiaries – 143,416

Provision 156,470 88,472

Utilized (179,052) (112,574)

Exchange difference (12,372) 11,179

At end of year 108,294 143,248

The Group generally provides one to two years warranty to its customers on all products, under which faulty products are repaired or

replaced. The amount of the provision for the warranties is estimated based on sales volumes and past experience of the level of

repairs and return. The estimation basis is reviewed on an ongoing basis and revised where appropriate. During the year, the

provision of warranties was not discounted, as the effect of discounting was not material.


29. CONVERTIBLE NOTESOn 11 May 2005, the Company entered into the subscription agreement with TCL Corporation, its ultimate controlling shareholder,

for the issue of an aggregate of Euro 20,000,000 principal amount equivalent to HK$185,100,000) of 3% Convertible Notes (“CN”) to

TCL Corporation. The CN was issued on 29 July 2005. As at the balance sheet date, there was no movement in the number of these

CN. The CN has a term of 3 years and TCL Corporation has the right to convert the CN at the conversion price of HK$0.58175 per

share in whole or in part in the principal amount into ordinary shares in amounts of not less than HK$10,000,000 on each conversion.

Subsequent to the open offer completed on 27 February 2006, the conversion price of CN is adjusted to HK$0.528324 per share.

The Company has the option to redeem, in whole or any part, the CN at 100% of their principal amount plus interest accrued to but

excluding the date of redemption after 24 months from the Issue Date.

The fair value of the liability component was estimated at the issuance date using an equivalent market interest rate for a similar note

without a conversion option. The residual amount is assigned as the equity component and is included in shareholder’s equity.

The net proceeds received from the issue of the convertible notes have been split into the liability and equity components, as follows:

2005

HK$’000

Nominal value of convertible note issued during the year 185,100

Equity component (19,430)

Liability component at the issuance date 165,670

Interest expense 2,373

Liability component at 31 December 168,043

30. RETIREMENT INDEMNITIESRetirement indemnities in respect of the defined benefits scheme plan for the year ended 31 December 2005 amounted to HK$908,000

(2004: HK$45,030,000).

Group

2005 2004

HK$’000 HK$’000

Present value of fund obligation 908 45,030

Unrealized actuarial losses – –

Retirement Indemnities 908 45,030

100

NOTES TO


31 December 2005

30. RETIREMENT INDEMNITIES (continued)

Movement of Retirement Indemnities is as follow:

Group

2005 2004

HK$’000 HK$’000

Balance beginning of year 45,030 –

Acquisition of subsidiaries – 37,418

Benefit expenses (reversed)/recognized in the consolidated results (note 10) (40,349) 3,098

Exchange realignment (3,773) 4,514

Balance end of year 908 45,030

The Group does not have any unfunded obligations.

The main assumptions used in the retirement indemnity computation for the defined benefit plan are as follows:

• Discount rate: 3.8%

• Future salary increase: 5% per annum

31. LONG SERVICE MEDALST&A Mobile Phones SAS provides for the probable future long service medals expected to be made to employees. The provision is

based on the best estimate of the probable future payments which have been earned by the employees from their service to T&A

Mobile Phones SAS to the balance sheet date.


32. DEFERRED TAX ASSETSGroup:

2005

Product Provision Impairment

warranty for obsolete for fixed Tax

provision stock assets losses Total

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

At 1 January 2005 9,445 4,524 242 419 14,630

Exchange realignment (61) – – – (61)

Deferred tax charged to income statement

during the year (note 13) (5,754) – – – (5,754)

Net deferred tax assets at 31 December 2005 3,630 4,524 242 419 8,815

At 31 December 2005, there was no significant unrecognised deferred tax liability (2004:Nil) for taxes that would be payable on the

unremitted earnings of certain of the Group’s subsidiaries as the Group has no liability to additional tax should such amounts be

remitted.

2004

Product Provision Impairment

warranty for obsolete for fixed Tax

provision stock assets losses Total

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

At 1 January 2004 957 4,524 242 442 6,165

Acquisition of subsidiaries 7,143 – – – 7,143

Exchange realignment 1 – – – 1

Deferred tax credited/(charged) to

income statement during the year (note 13) 1,344 – – (23) 1,321

Net deferred tax assets at 31 December 2004 9,445 4,524 242 419 14,630

102

NOTES TO


31 December 2005

33. SHARE CAPITALShares 2005 2004

HK$’000 HK$’000

Authorised:5,000,000,000 (2004: 5,000,000,000) ordinary shares of HK$0.10 each 500,000 500,000

Issued and fully paid or credited as fully paid:2,968,875,000 (2004: 2,827,500,000) ordinary shares of HK$0.10 each 296,888 282,750

The following changes in the Company’s authorised and issued share capital took place during the year:

On 11 May 2005, the Company entered into the Framework Agreement with Alcatel Participation, pursuant to which the Companyagreed to acquire all Alcatel Participation’s shares in T&A, representing 45% of the share capital of T&A in exchange for 141,375,000shares of the Company, representing 5% of the then issued share capital of the Company as of this report date. The transaction wascompleted on 18 July 2005.

A summary of the transactions with reference to the above movements in the Company’s issued ordinary share capital is as follows:

Issued ShareNumber of shares premium

share in issue capital account TotalHK$’000 HK$’000 HK$’000

Shares allotted and issued nil paid followingincorporation 1 – – –

Shares issued as consideration for the acquisitionof the entire issued share capital ofCommunication Holdings 408 – – –

Shares issued as consideration for the acquisitionof the entire issued share capital ofCommunication BVI 359 – – –

Shares issued as consideration for the acquisitionof the entire issued share capital ofAlpha Alliance 232 – – –

Shares issued as consideration for the acquisitionof the entitlement of dividends declared byTCL Mobile 1,809,599,360 180,960 699,857 880,817

Shares issued as consideration for the cashcontribution by TCL Industries 1,017,899,640 101,790 393,618 495,408

At 31 December 2004 and 1 January 2005 2,827,500,000 282,750 1,093,475 1,376,225Shares allotted and issued pursuant to

the Framework Agreement 141,375,000 14,138 47,360 61,498

At 31 December 2005 2,968,875,000 296,888 1,140,835 1,437,723

On 18 July 2005, pursuant to the Framework Agreement, The Company issued 141,375,000 shares of the Company to AlcatelParticipation for acquisition of 45% shareholding interest of T&A. Detail of the transaction is stated in Note 19.

On 27 February 2006, the Company completed the Open Offer under which 2,968,875,000 new shares of the Company were issued

and allotted.


34. SHARE OPTION SCHEMEThe Company has adopted a share option scheme (the “Scheme”) for the purpose of providing incentives and rewards to eligible

participants who contribute to the success of the Group’s operations. Eligible participants of the Scheme include directors, including

independent non-executive directors, or employees, holders of any securities, business or joint venture partners, contractors, agents

or representatives, persons or entities that provide research, development or technological support or any advisory, consultancy,

professional services for the business of the Group, investors, vendors, suppliers, developers or licensors and customers, licensees,

wholesalers, retailers, traders or distributors of goods or services of the Group, the Company’s controlling shareholders or companies

controlled by a Company’s controlling shareholder. The Scheme became effective on 20 June 2003 and, unless otherwise cancelled

or amended, will remain in force for 10 years from that date.

The maximum number of unexercised share options currently permitted to be granted under the Scheme is an amount equivalent,

upon their exercise, to 10% of the shares of the Company in issue at any time. The maximum number of shares issuable under share

options to each eligible participant in the Scheme within any 12-month period, is limited to 1% of the shares of the Company in issue

at any time. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.

Share options granted to a director, chief executive or substantial shareholder of the Company, or to any of their associates, are

subject to approval in advance by the independent non-executive directors. In addition, any share options granted to a substantial

shareholder or an independent non-executive director of the Company, or to any of their associates, in excess of 0.1% of the shares

of the Company in issue at any time and with an aggregate value (based on the price of the Company’s shares at the date of the

grant) in excess of HK$5 million, within any 12-month period, are subject to shareholders’ approval in advance in a general meeting.

The offer of a grant of share options may be accepted within 21 days from the date of the offer, upon payment of a nominal

consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the directors, and

commences after a certain vesting period and ends on a date which is not later than 10 years from the date of the offer of the share

options or the expiry date of the Scheme, if earlier.

The exercise price of the share options is determinable by the directors, but may not be less than the higher of: (i) the Stock Exchange

closing price of the Company’s shares on the date of the grant of the share options; and (ii) the average Stock Exchange closing

price of the Company’s shares for the five trading days immediately preceding the date of the grant.

Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.

104

NOTES TO


31 December 2005

34. SHARE OPTION SCHEMEThe following share options were outstanding under the Scheme during the year:

Price of Company’s shares***Exercise Immediately

At Granted Exercised Expired Lapsed At 31 Date of grant Exercise price of At grant before the At exerciseName or category 1 January during the during the during the during the December of share period of share date of exercise date ofof participant 2005 year year year year 2005 options* share options options** options date options

HK$ HK$ HK$ HK$

Directors:

Mr. LI Dong Sheng – 5,000,000 – – – 5,000,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/Ato 30 Nov 2008

Mr. WONG Toe Yeung – 5,000,000 – – – 5,000,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/Ato 30 Nov 2008

Mr. DU Xiaopeng – 3,200,000 – – – 3,200,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/Ato 30 Nov 2008

Mr. YUAN Xin Cheng – 3,000,000 – – – 3,000,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/Ato 30 Nov 2008

Dr. LIU Fei – 1,600,000 – – – 1,600,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/Ato 30 Nov 2008

Mr. YAN Yong, Vincent – 1,050,000 – – – 1,050,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/Ato 30 Nov 2008

Dr. GUO Aiping – 950,000 – – – 950,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/Ato 30 Nov 2008

Mr. SHI Cuiming – 300,000 – – – 300,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/Ato 30 Nov 2008

Mr. WANG Chongju – 300,000 – – – 300,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/Ato 30 Nov 2008

Mr. LAU Siu Ki, Kevin – 300,000 – – – 300,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/Ato 30 Nov 2008

20,700,000 – – – 20,700,000

Employees – 109,750,000 – – (8,125,000 ) 101,625,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/Ato 30 Nov 2008

Those who have contributed ormay contribute to the group – 46,770,000 – – – 46,770,000 31 May 2005 31 May 2005 0.415 0.41 N/A N/A

to 30 Nov 2008

– 156,520,000 – (8,125,000 ) 148,395,000

– 177,220,000 – – (8,125,000 ) 169,095,000


34. SHARE OPTION SCHEME (continued)

Notes to the reconciliation of share options outstanding during the year

* The vesting period of the share options is from the date of the grant until the commencement of the exercise period.

** As disclosed in note 40 (a), as a result of the open offer of the Company, the share options outstanding as at 27 February 2006, the date ofcompletion of the open offer, have been adjusted in term of their exercise price (from HK$0.415 to HK$0.3804 per share).

*** The price of the Company’s shares disclosed as at the date of the grant of the share options is the Stock Exchange closing price on the tradingday immediately prior to the date of the grant of the options.

At the balance sheet date, the Company had 169,095,000 share options outstanding under the Scheme.

Subsequent to the balance sheet date, on 16 January 2006 122,092,000 share options were granted to the directors and employeesof the Company and the Group. 41,259,000 share options were granted to those who have contributed or may contribute to theGroup. Such Share Options were granted at an exercise price of HK$0.23 per share (before adjustment on 6 February 2006). Shareprice of the Company at grant date was HK$0.23 per share.

One-third of such share options are exercisable after the expiry of 6 month, from the date of grant, a further one-third is exercisableafter the expiry of 6 months from the date of grant, a further one-third is exercisable after the expiry of 12 months from the date of grantand the remaining one-third is exercisable after the expiry of 18 months from the date of grant, up to 15 July 2008.

At the date of approval of these financial statements, the Company had 322,446,000 share options outstanding under the Scheme,which represented approximately 5.6% of the Company’s shares in issue as at that date.

35. RESERVES(a) Group

The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in theconsolidated statement of changes in equity on pages 63 and 64 of the financial statements.

The Group’s capital reserve arose mainly from the capital injection.

The Group’s contributed surplus represents the difference between the nominal value of the shares and the share premiumaccount of the subsidiaries acquired pursuant to the Group reorganisation prior to the listing of the Company’s shares, overthe nominal value of the Company’s shares issued in exchange therefore.

Pursuant to the relevant laws and regulations in the PRC, a portion of the profits of the Group’s subsidiaries established in thePRC should be transferred to the statutory reserves which are restricted as to use.

(b) Company

ShareContributed premium Share based Convertible Accumulated

surplus account payment note losses TotalHK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Balance at 1 January 2005 669,907 1,093,475 – – (62,934) 1,700,448Issue of new shares for

acquisition of 45%shareholding interest ofT&A from AlcatelParticipants – 47,360 – – – 47,360

Equity settled share optionsarrangements – – 7,737 – – 7,737

Issue of convertible note – – 19,430 – 19,430Loss for the year – (1,665,843) (1,665,843)

At 31 December 2005 669,907 1,140,835 7,737 19,430 (1,728,777) 109,132

106

NOTES TO


31 December 2005

36. DISPOSAL OF A SUBSIDIARY2005 2004


Net assets disposed of:

Fixed assets – 21

Cash and bank balances – 11,488

Other receivables – 134

Other payables and accruals – (4,930)

Amounts due to related companies – (7,681)

– (968)

Gain on disposal of a subsidiary 9 – 1,268

– 300

Satisfied by:

Cash – 300

An analysis of the net outflow of cash and cash equivalents in respect of the disposal of a subsidiary is as follows:

2005 2004

HK$’000 HK$’000

Cash consideration – 300

Cash and cash equivalents disposed of – (11,488)

Net outflow of cash and cash equivalents in respect of the disposal of a subsidiary – (11,188)

37. CONTINGENT LIABILITIES(i) As at 31 December 2005, contingent liabilities in respect of discounted notes and endorsed notes with recourse not provided

for in the financial statements were as follows:

2005 2004

HK$’000 HK$’000

Notes discounted or endorsed with recourse – 48,657

(ii) One of the Group’ subsidiaries, T&A Mobile Phones Suzhou Limited (T&A Suzhou) was involved in a patent infringement

litigation brought by Hubin, Huxuanhua and Dalian Hanpu Applied Technology Co., Ltd. (the “plaintiff”) in March 2001. In May

2002, the PRC trial court rendered civil judgement in favour of T&A Suzhou with no damages or expenses to be borne by

them. In the same month, the plaintiff appealed to the high Court and up to date, the appellate proceeding is still in progress.

According to the legal letter and the opinion from the engaged lawyer, it is very likely for the appellate court to render

judgement in favor of T&A Suzhou again. Accordingly, no provision was made for such litigation in the financial statement.


38. OPERATING LEASE ARRANGEMENTSThe Group leases certain of its office premises, warehouses and staff dormitories under operating lease arrangements. Leases for

these properties are negotiated for terms ranging from one to three years.

At 31 December 2005, the Group had total future minimum lease payments under non-cancellable operating leases falling due as

follows:

Group Company

2005 2004 2005 2004

HK$’000 HK$’000 HK$’000 HK$’000

Within one year 22,723 41,455 2,546 1,003

In the second to fifth years, inclusive 21,984 59,364 3,458 523

Over five years – 45,572 – –

44,707 146,391 6,004 1,526

39. COMMITMENTSIn addition to the operating lease commitments detailed above, the Group had the following capital commitments for the procurement

of production facilities of HK$18,111,000 and the acquisition of an associate of HK$11,630,000 (note 42(c)) at the balance sheet

date:

Group Company

2005 2004 2005 2004

HK$’000 HK$’000 HK$’000 HK$’000

Contracted, but not provided for 29,741 23,845 – –

108

NOTES TO


31 December 2005

40. RELATED PARTIES TRANSACTIONS(a) Transaction with related parties

2005 2004

HK$’000 HK$’000

Transaction with ultimate controlling shareholder

Brand name management fee/TCL Brand Common Fund 10,155 27,816

Interest expenses 10,544 12,636

Issuance of Convertible note 185,100 –

Interest on Convertible note 2,373 –

Short-term loan obtained 3,514,194 4,068,383

Purchases of raw material – 2,400,354

Transactions with subsidiaries of ultimate controlling shareholder

Purchases of raw materials 1,456,630 601,188

Fund advanced 38,425 7,880,342

Interest Income – 871

Master manufacturing service 3,463 –

Rental charges 2,380 2,625

Sales of finished goods 1,947 19,822

Transactions with a company in which a director of the Company

is a shareholder

Consultancy fee 975 990

Transactions with subsidiaries of the Group’s minority shareholder

Agency services obtained – 1,960

Administrative and management services obtained 159,125 83,802

Sales support service obtained 37,573 16,703

During the year, the Company entered into the Framework Agreement with Alcatel Participation. The transaction is summarised

in note 21.


(b) Outstanding balance with related parties

Particulars of the amounts due from related companies disclosed pursuant to Section 161B of the Companies Ordinance are

as follows:

Due from Due to

related companies related companies

2005 2004 2005 2004

HK$’000 HK$’000 HK$’000 HK$’000

Ultimate controlling Shareholder – 46,381 83,893 –

Subsidiaries of ultimate controlling shareholder 347,750 2,378 487,493 68,310

Subsidiaries of the Group’s minority shareholder – 2,071 – 45,899

347,750 50,830 571,386 114,209

* The amounts due are mainly trading balances, and are unsecured, interest free and have no fixed terms of repayment.

Particulars of the maximum outstanding balance of amounts due from related companies are as follows:

Year ended 31 December

2005 2004

HK$’000 HK$’000

TCL通訊設備（國際）有限公司(“TCL Communication (Int’l) Ltd.”) * – 72

TCL Integrated Marketing Inc. * 116 234

TCL Communication Equipment (Huizhou) Co., Ltd* 4,513 2,071

TCL Corporation* 345,658 59,058

* The balances are mainly trading balances, and are unsecured, interest free and have no fixed terms of repayment.

(c) Compensation of key management personnel of the Group

2005 2004

HK$’000 HK$’000

Short term employee benefits 12,709 3,982

Post-employment benefits 498 120

Share-based payment 3,045 –

Total compensation paid to key management personnel 16,252 4,102

110

NOTES TO


31 December 2005

41. FINANCIAL RISKS MANAGEMENT OBJECTIVES AND POLICIESThe main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk.Generally, the Group introduces conservative strategies on its risk management. As the Group’s exposure to these risks is kept to aminimum, the Group has not used any derivatives and other instruments for hedging purposes. The Group does not hold or issuederivative financial instruments for trading purposes. The board of directors reviews and agrees policies for managing each of theserisks and they are summarised as follows:

Interest rate riskAt 31 December 2005, the bank loans of the Group and the Company are a combination of fixed and floating rate debts. The Groupand the Company have no significant concentration of interest rate risk.

Foreign currency riskThe Group has transactional currency exposures. Such exposures arise from sales or purchases by operating units in currenciesother than the units’ functional currency, where the revenue is predominately in Euro, USD and RMB. The Group tends to acceptforeign currency exchange risk avoidance or allocation terms when arriving at purchase and sales contracts. The Group takes rollingforecast on foreign currency revenue and expenses, matches the currency and amount incurred, so as to alleviate the impact tobusiness due to exchange rate fluctuation.

Credit riskWith respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, and tradereceivables, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to thecarrying amount of these instruments.

In order to minimise the credit risk, the management of the Group has delegated a team responsible for determination of credit limits,credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, theGroup reviews regularly the recoverable amount of each individual trade receivables to ensure that adequate impairment losses aremade for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is minimal.

Liquidity riskThe Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and otherinterestbearing loans.

42. POST BALANCE SHEET EVENTS(a) On 22 December 2005, the Company proposed to issue 2,968,875,000 new shares (“Offer Shares”) at a price of HK$0.2 per

Offer Share by way of Open Offer, on the basis of one Offer Share for every one share of the Company held on 6 February2006. The Open Offer was completed on 27 February 2006 of which the Company obtained a net proceeds of approximatelyHK$587,800,000. As a result of the completion of the Open Offer, the conversion price of the Convertible Notes had beenadjusted from HK$0.58175 per share to HK$0.528324 per share in accordance with the relevant terms of Convertible Notesand accordingly the Convertible Notes will now entitle the holder thereof to convert them into up to 350,353,192 shares(instead of 318,177,911 shares as previously envisaged). Further, the exercise price and the number of the share options(“Share Options”) granted under the share option scheme adopted by the Company on 13 September 2004 (“Share OptionScheme”) and outstanding as at 27 February 2006 has also been adjusted in accordance with the terms of the Share OptionScheme and the relevant requirements of the Listing Rules as follows:

Before the Open Offer After the Open OfferGrant Date Exercise No. of Adjusted Adjusted no. of

per share outstanding exercise price outstandingShare Options per share Share Options

31 May 2006 HK$0.415 120,570,000 HK$0.3804 131,531,019

16 January 2006 HK$0.230 162,180,000 HK$0.2108 176,923,784

Total: 282,750,000 308,454,803

For further details of the adjustments, please refer to the Company’s announcement dated 28 February 2006.


42. POST BALANCE SHEET EVENTS (continued)

(b) On 9 March 2006, TCL Corporation (“TCL Corp.”) (the ultimate controlling shareholder of the Company) entered into the

Investment Agreement with Mobile Hohhot (an indirect wholly-owned subsidiary of the Company) in relation to the establishment

of the Finance Company. The Finance Company is owned as to 62% by TCL Corp., 14% by an indirect wholly-owned

subsidiary of TCL Multimedia Technology Holdings Limited, 4% by Mobile Hohhot and 20% by The Bank of East Asia, Limited.

The Finance Company will be a connected person of the Company. Further, the Company will enter into a Financial Services

Framework Agreement with TCL Corp. after the establishment of the Finance Company. Pursuant to the Financial Services

Framework Agreement, the subsidiaries of the Company may from time to time utilize the financial services which may be

provided by the Finance Company including the deposit services, the services of money lending and other financing and

financial services.

(c) Pursuant to the Joint Venture Agreement dated 19 December 2005, the Company agreed to contribute US$1.5 million in cash

for 153,499 shares in JRD Communication Inc. (“JRDC”), representing approximately 9.45% in JRDC.

(d) On 31 March 2006, the Company entered into the Share Purchase Agreement with Power Century, pursuant to which the

Company agreed to purchase from Power Century 771,500 shares of JRDC, representing 38.58% equity interest in JRDC, at

a cash consideration of US$12.3 million (equivalent to approximately HK$95.33 million). JRDC was established by the Company

and Power Century under the Joint Venture Agreement dated 19 December 2005 as a joint venture company which was

initially held by the Company and Power Century as to approximately 9.45% and approximately 90.55% respectively. Immediately

after the completion of the Share Purchase Agreement, the shareholding of the Company and Power Century in JRDC was

changed to approximately 46.25% and 35% respectively. The consideration payable by the Company under the Share Purchase

Agreement was financed by the proceeds from the open offer of the Company completed on 27 February 2006.

43. COMPARATIVE AMOUNTSAs further explained in notes 3 and 4 to the financial statements, due to the adoption of new HKFRSs during the current year, the

accounting treatment and presentation of certain items and balances in the financial statements have been revised to comply with

the new requirements. Accordingly, certain comparative amounts have been reclassified and restated to conform to the current

year’s presentation.

44. APPROVAL OF THE FINANCIAL STATEMENTSThe financial statements were approved and authorized for issue by the board of directors on 27 April 2006.

112

Five Years

Financial Summary

Year ended 31 December

2005 2004 2003 2002 2001

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

(Restated)

RESULTS

REVENUE 5,663,696 7,309,738 9,019,503 7,875,762 2,044,032

Cost of sales (5,575,958) (6,281,442) (7,128,862) (5,758,879) (1,342,814)

Gross profits 87,738 1,028,296 1,890,641 2,116,883 701,218

Other revenue and gains 187,551 203,684 21,201 30,838 10,193

Research and development expenses (346,795) (215,057) (114,898) (84,931) (53,148)

Selling and distribution costs (877,340) (789,234) (843,115) (655,267) (292,147)

Administrative expenses (894,264) (443,409) (146,366) (133,750) (43,894)

Other operating expenses (7,469) (68,233) (3,124) (5,613) (5,807)

Finance costs (20,867) (20,252) (9,948) (17,053) (6,482)

Profit/(loss) before tax (1,871,446) (304,205) 794,391 1,251,107 309,933

Tax (24,630) 2,998 (10,227) (54,561) –

Profit/(loss) for the year (1,896,076) (301,207) 784,164 1,196,546 309,933

ATTRIBUTABLE TO:

Equity holders of the parent (1,896,076) (184,897) 784,164 1,196,546 309,933

Minority interests – (116,310) – – –

(1,896,076) (301,207) 784,164 1,196,546 309,933

ASSETS, LIABILITIES AND MINORITY INTERESTS

Total assets 4,083,768 5,482,410 4,191,301 4,439,973 1,243,398

Total liabilities (4,042,823) (3,617,486) (2,176,492) (2,833,689) (851,345)

Minority interests – (341,956) – – –

40,945 1,522,968 2,014,809 1,606,284 392,053

Documents

TCL 2618 cover o/p 25/4 con.tclcom.tcl.com/admin/documents/freport/200711221852486541_eng… · TCL Communication Technology Holdings Limited Annual Report 2005 9 BUSINESS PERFORMANCE