Auditors' Report To The Members Of Inno-Pacific Holdings Ltd
31st Mar, 2004  
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1. We have audited the financial statements of Inno-Pacific Holdings Ltd (‘the Company”) for the financial year ended December 31, 2003 set out on pages 7 to 40. These financial statements comprise the balance sheets of the Company and of the Group as at December 31, 2003, the statements of changes in equity of the Company and of the Group, the profit and loss account and the cash flow statement of the Group for the year ended December 31, 2003, and notes thereto. These financial statements are the responsibility of the Company’s Directors. Our responsibility is to express an opinion on these financial statements based on our audit.

2. The financial statements for the year ended December 31, 2002 were audited by another firm of auditors, whose report dated April 22, 2003 was qualified as follows: “The Company has a tax suspense of $4,931,905 arising from tax assessed by the Comptroller of Income Tax (“CIT”) for years of assessment 1988 to 2000. The Company has raised an objection against the CIT’s assessments and the Directors are of the opinion that these assessments can be resisted and accordingly, the amount has not been charged to the profit and loss account. We have presently not been able to satisfy ourselves as to the final settlement of these assessments. In the event that the Company is unable to obtain the agreement with the Comptroller of Income Tax in discharging these tax liabilities, the amount will be charged to the profit and loss account. Had the amount been charged to the profit and loss accounts, the losses of the Group and Company for the year would have been increase from $6.07 million to $11.00 million and $8.61 million to $13.54 million respectively. Accordingly, the net current assets position of the Group would have been decreased from $1.40 million to a net current liabilities position of $3.53 million and the net current liabilities position of the Company would have been increase from $0.79 million to a net current liabilities position of $5.72 million respectively”

3. For the current financial year, except as discussed in paragraphs 4 and 5 below, we conducted our audit in accordance with Singapore Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Directors, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

4. As detailed in Notes 9 and 17, the Company has tax suspense of $3.38 million arising from tax assessed by the Comptroller of Income Tax (“CIT”) for years of assessment 1988 to 2000. The Company has raised an objection against the CIT’s assessments and the Directors are of the opinion that these assessments can be resisted and, accordingly, the amount has not been charged to the profit and loss account and has instead been included as tax suspense amount in “Other Receivables and Prepayments”. Pending the final settlement of these assessments, we have presently not been able to satisfy ourselves as to the recoverability of the amount of tax suspense included in “Other Receivables and Prepayments”. In the event that the Company is unable to obtain the agreement with the Comptroller of Income Tax in discharging these tax liabilities, the amount of $3.38 million will have to recognised in the profit and loss account as expense. Had the amount been charged to the profit and loss account, the losses of the Group and Company for the year would have been increased from $1.89 million to $5.27 million and $0.55 million to $3.93 million respectively.

5. We draw your attention to Note 33 to the financial statements. One of the Company’s indirect subsidiaries, Shakey’s Incorporated, is the defendant in a lawsuit alleging breach of the covenant of good faith and fair dealing, fraud, negligent misrepresentation and accounting. Shakey’s Incorporated believes that the allegations and claims are without merit and are vigorously defending the case. It is, however, not possible at this stage to predict the eventual outcome of the lawsuit with reasonable certainty. No provision for any liability has been made in the financial statements in respect of this lawsuit.

6. In our opinion, except of the effects on the financial statements of such adjustments, if any, as might have been required had the outcome of the uncertainties referred to in the paragraphs, been known, (a) the consolidated financial statements of the Group and the balance sheet and statement of changes in equity of the Company are properly drawn up in accordance with the provisions of the Singapore Companies Act, Cap. 50 (the “Act”) and Singapore Financial Reporting Standards (“FRS”) so as to give a true and fair view of the state of affairs of the Group and of the Company as at December 31, 2003, changes in equity of the Group and of the Company, the results and cash flows of the Group for the year ended on that date; and (b) the accounting and other records required by the Act to be kept by the Company and by those subsidiary companies incorporated in Singapore of which we are the auditors have been properly kept in accordance with the provisions of the Act.

7. We have considered the financial statements and auditors’ reports of the subsidiary companies of which we have not acted as auditors, being financial statements included in the consolidated financial statements. The names of the subsidiary companies are stated in Note 11 to the financial statements.

8. We are satisfied that the financial statements of the subsidiaries that are consolidated with the financial statements of the Company are in form and content appropriate and proper for the purposes of the preparation of the consolidated financial statements and we have received satisfactory information and explanations as required by us for those purposes.

9. The auditors’ reports on the financial statements of the subsidiaries were not subject to any qualification, except for Shakey’s Holdings Pte Ltd which is qualified in respect of the matter set out in paragraph (5) above, and in respect of the subsidiaries incorporated in Singapore did not include any comment made under Section 207(3) of the Act.

10. Without further qualifying our opinion, we draw your attention to Note 2 of the financial statements. The Group and the Company have incurred losses of $1.89 million and $0.55 million respectively for the financial year ended December 31, 2003. These matters, together with the matters described in paragraphs 4 and 5 above concerning recoverability of the tax suspense account, amounting to $3.38 million as at December 31, 2003, and uncertainties concerning the eventual outcome of the litigation which an indirect subsidiary is facing, cast significant doubt on the ability of the Group and the Company to continue as going concerns. The validity of the going concern assumption on which the financial statements are prepared depends on the satisfactory outcome of these matters and on the ability of the Group and the Company to have access to funds in order for the Group and the Company to meet their obligations as and when they fall due. If the Group and the Company were unable to continue in operational existence, adjustments may have to be made to reflect that assets may need to be realised other than in the ordinary course of business and at amounts which may differ significantly from amounts at which they are currently recorded in the balance sheet. In addition, the Group and the Company may have to reclassify long-term assets and long-term liabilities as current assets and current liabilities. The financial statements do not include such adjustments.

DELOITTE & TOUCHE
Certified Public Accountants

William Lim Choon Hock
Partner
Appointed on May 29, 2003


2 GOING CONCERN
As disclosed in Note 33 to the financial statements, one of the Company’s indirect subsidiaries, Shakey’s Incorporated is the defendant in a lawsuit alleging inter-alia, breach of contract, breach of the covenant of good faith and fair dealing, fraud, negligent misrepresentation and accounting. Shakey’s Incorporated believes that the allegations and claims are without merit and are vigorously defending the case. It is, however, not possible at this stage to predict the eventual outcome of the lawsuit with reasonable certainty. No provision for any liability has been made in the financial statements in respect of this lawsuit.

The Group and the Company have incurred losses of $1.89 million and $0.55 million respectively for the financial year ended December 31, 2003. These matters, together with the matter described in the preceding paragraph concerning uncertainties about the eventual outcome of the litigation which the subsidiary is facing and the matters described in Note 17 to the financial statements concerning recoverability of the tax suspense account, amounting to $3,376,000 as at December 31, 2003 cast significant doubt on the ability of the Group and the Company to continue as going concerns. The validity of the going concern assumption on which the financial statements are prepared depends on the satisfactory outcome of these matters and on the ability of the Group and the Company to have access to funds in order for the Group and the Company to meet their obligations as and when they fall due. If the Group and the Company were unable to continue in operational existence, adjustments may have to be made to reflect that assets may need to be realised other than in the ordinary course of business and at amounts which may differ significantly from amounts at which they are currently recorded in the balance sheet. In addition, the Group and the Company may have to reclassify longterm assets and long-term liabilities as current assets and current liabilities. The financial statements do not include such adjustments.

9 OTHER RECEIVABLES AND PREPAYMENTS
 
Group
Company
 
2003
2002
2003
2002
 
$’000
$’000
$’000
$’000
Staff loan
-
9
-
9
Tax recoverable
1
11
-
-
Tax suspense (Note 17)
3,376
4,932
3,376
4,932
Other receivables
358
2,084
226
285
Prepayments
102
114
4
8
Less allowance for doubtful debts
-
(31)
-
(17)
 
3,837
7,119
3,606
5,217

17 INCOME TAX PAYABLE

 
Group
Company
 
2003
2002
2003
2002
 
$’000
$’000
$’000
$’000
 
Provision for income tax
-
(54)
-
(58)
Tax suspense
3,309
4,932
3,376
4,932
Provision for withholding tax
17
17
17
17
 
3,326
4,895
3,326
4,891

The Comptroller of Income Tax (“CIT”) has assessed the Company to be liable to income tax for the years of assessment 1988 to 2000 amounting to $3,376,000, as amended (2002 : $4,931,905), after deducting tax deducted at source. The tax assessment for these years arose from the CIT assessing the Company on the basis that it was a passive investment holding company, as a result of which deduction of certain expenses incurred by the Company in the ordinary course of business was disallowed. The Company has raised objections against the CIT’s assessments. As at December 31, 2003, the Company has made a provision of $3,326,000 (2002 : $4,931,905) in the financial statements in respect of the tax assessed net of subsequent payments and deducting tax deducted at source, and recognised tax suspense of $3,376,000 based on CIT’s assessment. Based on professional advice received, the Directors are of the opinion that these assessments can be successfully resisted.

33 CONTINGENT LIABILITIES AND COMMITMENTS

Continuing financial support

As at December 31, 2003, the Company has given undertakings to some of its subsidiaries to provide financial support to these companies, where necessary, to enable them to operate as going concerns and to meet their obligations for at least 12 months from the date of their reports. At the end of the financial year, these subsidiaries had capital deficiencies totaling $44,850,000 (2002 : $43,998,000).

Outstanding litigation

As at the end of the year, a lawsuit entitled Ahmed, et al v. Shakey’s Incorporated filed on December 30, 2002 in the Los Angeles Superior Court is still pending. This lawsuit was filed by a number of Shakey’s franchisees against Shakey’s Incorporated, an indirect subsidiary of the Company alleging, inter-alia, breach of contract, breach of the covenant of good faith and fair dealing, fraud, negligent misrepresentation and accounting. Shakey’s Incorporated believes that the allegations and claims are without merit and are vigorously defending the case. It is, however, not possible in respect of this lawsuit to predict the outcome of the case at this time. No provision for any liability has been made in the financial statements.