Hysan Development Co Ltd
Annual Report 2002

Plain-text annual report

IN A CLEAR DIRECTION 2002ANNUAL REPORT Mission Hysan Development is committed to building and owning quality buildings, and being the occupier’s partner of choice in the provision of real estate accommodation and services, thereby delivering attractive and sustainable returns to shareholders. Contents Highlights 2002 Chairman’s Statement Operating and Financial Review Case Studies Social Responsibility Human Resources Principal Investment Properties Report of the Valuer Schedule of Principal Properties Directors, Officers and Advisers Corporate Governance Audit Committee Report Directors’ Report Auditors’ Report Consolidated Income Statement Consolidated Balance Sheet Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Financial Statements Five-Year Financial Summary 1 2 4 11 18 19 20 22 23 24 30 38 39 42 43 44 46 47 48 50 78 Inside back cover Shareholder Information Highlights 2002 ANNUAL REPORT 2002 1 Year 2002 remained a difficult one for the Hong Kong economy generally. We regard it of paramount importance that we keep a clear focus amidst the challenging environment and continue to invest in areas that will enhance our asset value and underlying competitiveness. Achieved strong occupancy: office: 95%, retail: 96% Strong balance sheet with maturity profile further strengthened Asset enhancement programme: re-launch of Bamboo Grove residential property well-received; works on Caroline Centre retail podium commenced Year ended 31 December 2002 2001 Change HK$’000 HK$’000 % 926,839 1,066,738 (13.1 ) 543,874 600,343 Operating Profit Net Profit Gross rental income 1,229,599 1,351,892 Gross rental income=(excluding Bamboo Grove)* 1,170,497 1,231,024 Earnings per share (basic) Earnings per share (diluted) Dividend per share HK¢ 52.66 52.66 36.5 HK$ HK¢ 58.26 58.24 38 HK$ (9.4) (9.0) (4.9) % (9.6) (9.6) (3.9) % Net asset value per share (before final dividend) 18.45 20.62 (10.5 ) Note: *in the light of renovations of Bamboo Grove residential property Hysan Development Company Limited (cid:1) (cid:1) (cid:1) ANNUAL REPORT 2002 2 Chairman’s Statement We regard it of paramount importance that we keep a clear focus amidst the challenging environment. Our goal is to continue investing in areas which will enhance our asset value and underlying competitiveness. Our objective is asset management: we constantly ask ourselves how to put our properties to the highest and best use. Bamboo Grove residential property. If Bamboo Grove is excluded, the fall in gross rental income was 4.9%. Earnings per share were HK52.66 cents, a decrease of 9.6% (HK58.26 cents for the same period in 2001). The Group’s investment property portfolio, as valued externally by independent professional valuers, was HK$24,841 million as at 31 December 2002 (2001: HK$26,639 million). Largely due to the net valuation deficit, shareholders’ funds at 2002 year-end were HK$19,087 million, compared to HK$21,267 million in 2001. Net asset value per share (before final dividend) decreased by 10.5% to HK$18.45. Detailed commentary on our performance and assets valuation are set out in “Operating and Financial Review” on pages 4 to 10. DIVIDENDS The Board recommends the payment of a final dividend of HK26.5 cents per share, which together with the interim dividend of HK10 cents per share, represents an aggregate distribution of HK36.5 cents per share, a decrease of 3.9% for the year. Subject to shareholder approval, the final dividend will be payable in cash with a scrip dividend alternative. Details on the payment of final dividend, including the scrip dividend arrangements, are set out in “Shareholder Information” on the inside back cover. Mr. Peter T.C. Lee RESULTS The property investment sector, like the rest of the Hong Kong economy, experienced another challenging year in 2002. In this context, I am pleased to report that the overall occupancy levels throughout the Group’s commercial property portfolio remained strong during the review year (office: 95%, retail: 96%). Net profit for the year ended 31 December 2002 was HK$543.9 million, 9.4% lower than in 2001 (HK$600.3 million). The fall in gross rental income (2002: HK$1,229.6 million; 2001: HK$1,351.9 million) was largely attributable to negative rental reversions and the upgrading renovation works at the Hysan Development Company Limited ANNUAL REPORT 2002 3 A CHALLENGING YEAR The past year remained a difficult one for the Hong Kong economy generally. We regard it of paramount importance that we keep a clear focus amidst the challenging environment. Our goal is to continue investing in areas which will enhance our asset value and underlying competitiveness. As a property investment company, we look clearly beyond leasing as our key activity. Our objective is asset management: we constantly ask ourselves how to put our properties to the highest and best use. This involves developing a building, leasing, managing as well as servicing it; and most important of all, constantly reviewing and assessing it within its particular market segment, and following up with appropriate enhancement programmes including market repositioning and upgrades. In addition to having achieved strong occupancy rates, we have further enhanced the asset value of our portfolio during the year. We completed the market repositioning of our Bamboo Grove residential property, which was well-received by the market. Upgrades have been completed for some of our other buildings. We further improved our property service levels and our operating efficiency generally. Our balance sheet remains strong with our maturity profile further strengthened. Details of these initiatives and the progress we made in implementing our strategic principles, are further discussed in the “Operating and Financial Review” on pages 4 to 10. CORPORATE GOVERNANCE AND FINANCIAL TRANSPARENCY A commitment to good corporate governance and financial transparency has always been a clear element of our management philosophy. I am pleased that our efforts in this area are being recognized, with our board having been elected Directors of the Year by the Hong Kong Institute of Directors. General progress we made in these areas are set out in the “Corporate Governance Statement” in this report. SOCIAL RESPONSIBILITY Hysan is committed to playing its role as a responsible corporate citizen. Additional information on our policies in this area can be found in a separate section later in this report. DIRECTORS AND STAFF Our Company owes much to its supportive Board of Directors and I would like to extend my thanks to them for their wise counsel. Dr. Victor K. K. Fung, having served on the board since 1998, gave notice that he would not stand for re-election as at the forthcoming annual general meeting to be held in May. The Board is greatly indebted to Dr. Fung for his invaluable guidance and contribution to the success of Hysan. of experience and skills. The Company has been further strengthened by the appointment of Michael T.H. Lee as Chief Operating Officer as from June 2002. My thanks go to our staff for their hard work and all they have achieved over the very challenging year, while extending my welcome to new executives who bring different skills and thinking to the Group. THE FUTURE At the strategic level, our aim is to operate a property investment company of choice, capable of delivering attractive returns for investors. Looking into 2003, works have commenced for a market repositioning of the retail podium of Caroline Centre. We are committed to further enhancing our portfolio value generally. Of course, we are not immune from economic or financial pressure outside our control. Current global political and general economic uncertainties may continue to adversely impact the Hong Kong economy. Well-judged management decisions, implementation and risk management will thus be as important as ever. I am confident that we have, as demonstrated in the year under review, a clear focus as well as the financial and management capabilities to face these challenges. It is important that any organization which is facing a challenging environment has a combination Peter T. C. Lee Chairman and Managing Director Hong Kong, 11 March 2003 Hysan Development Company Limited ANNUAL REPORT 2002 4 Operating and Financial Review We have had an active year, making further progress in implementing the strategic principles mapped out two years ago. Market conditions continued to be challenging, but our underlying strategic principles remained the same. OPERATING REVIEW (cid:1) Maximize tenant retention through In summing up the work of the past year, we have followed these general directions: Optimize occupancy levels across the portfolio (achieved: office: 95%; retail: 96%) the provision of superior customer-focused services and enhancement of our properties Diligently pursuing leasing opportunities by closely managing lease renewals and securing new leases Seek asset enhancements: completed market repositioning of Bamboo Grove and renovations of One Hysan Avenue. Improvement works for Leighton Centre and Sunning Court are in progress; with works having commenced for repositioning the retail podium of Caroline Centre in March 2003 Aggressively pursuing revenue generation opportunities by stepping up carpark marketing and leasing (cid:1) Maximize operating efficiency: set clear benchmarks for property services; promoted energy efficiency. Also further enhanced credit control measures and kept rental arrears at a very low level. In progress in implementing an enterprise resource planning system to enhance administrative efficiency generally. Hysan Development Company Limited (cid:1) (cid:1) (cid:1) (cid:1) The case studies on pages 11 to 17 illustrate how we have put these directions in action. In this way, we minimize vacancy levels and the associated disruption to a stable rental income stream. INVESTMENT PROPERTIES Office Retail (cid:1) Market Overview (cid:1) Market Overview The office market continued to be soft in the light of the overall economic conditions, leading to weakening rentals. Better-quality buildings under single ownership, particularly in prime locations with no major new supply remain better market- performers. Our Performance In this context, Group achieved a high occupancy rate of 95% at year-end 2002. This reflects the effectiveness of measures that we have put in place to maximize tenant retention. We closely monitor lease renewals and pursue advance leasing negotiations with tenants. While the general economy and consumer confidence remained weak, the retail sector had some support from increased tourist arrivals. Retail rentals in prime locations, like Causeway Bay, continue to be firm. Shopper’s preference for an attractive shopping environment with a diversity of shopping as well as leisure activities became even more distinct. The trend for large-scale flagship stores also continued. Our Performance Our retail portfolio achieved a 96% occupancy rate at year-end 2002. We made further progress in furthering our objective to create in our retail portfolio an attractive environment ANNUAL REPORT 2002 5 Mr. Michael T.H. Lee for dining, shopping and recreation. During the year, a hub of specialty food and beverage outlets was successfully established. We also continued our efforts to refine the tenant mix in our portfolio generally. Hysan Development Company Limited (cid:1) (cid:1) ANNUAL REPORT 2002 6 Operating and Financial Review The planned market repositioning of Caroline Centre in 2003 to capitalize its synergy with the high-end Lee Gardens shopping centre is another step to further grow our retail portfolio. Works commenced in March, 2003. Residential (cid:1) Market Overview Leasing activities in the luxury residential market remained to be weak. Relocating activities were more active, with tenants taking advantage of the market environment to relocate to better- quality premises given the same budget. The general downward rental pressure was particularly felt in multi-owned developments with some individual owners having been more willing to offer incentives. Our Performance The re-launch of the repositioned Bamboo Grove which commenced during the second half of 2002 was well received by the market, and we were particularly encouraged by the success in capturing a good market share of new expatriate arrivals in Hong Kong. We continue to focus on expatriate tenants, with a strong tenant base drawn from multi-national corporations engaged in a diversity of activities. DEVELOPMENT PROPERTIES Shanghai The retail podium of the Phase I joint- venture Grand Gateway development achieved high occupancy. This multi- level retail complex in Puxi offers a fascinating one-stop shopping and dining destination for people of all age groups. Green and the Gardens at Bishan, and 25% interest in Amaryllis Ville. PROPERTY SERVICES At Hysan, we see completion of a lease as just the beginning of a long-term partnership. We have always managed our properties ourselves in furtherance of this partnership objective. We further enhanced our service levels during the year. A system of tenant service levels was piloted in selected buildings, which will be introduced to our portfolio generally during the first-half of 2003. Energy efficiency measures were also introduced to enhance operating effectiveness without compromising services. Singapore Sales of the three joint-venture residential developments were continuing, amidst generally slow market conditions in Singapore. The Group has 10% interest in Sanctuary CAPITAL IMPROVEMENT PROJECTS As a continuous process to enhance long-term value, management undertake regular reviews of building performance and, based on Hysan Development Company Limited (cid:1) ANNUAL REPORT 2002 7 Implementation of Corporate Strategic Principles Strategic principles identified Progress to date 1. To upgrade overall operational efficiency including facilities management, emphasizing good customer service Introduce Comprehensive Tenants Service Levels to achieve total customer satisfaction Introduce energy efficiency initiatives resulting in enhanced operating effectiveness without compromising service standards Customer service generally enhanced with training and audit efforts stepped up 2. To further grow our retail sector (cid:1) Occupancy rate of 96% for retail achieved located in the retail hub of Causeway Bay Proactive management of tenant-mix, including the creation of a food and beverage hub in our neighbourhood Stepped-up marketing and promotions efforts to further strengthen partnership relations with tenants 3. To continually focus on the current (cid:1) Occupancy rate of 95% for office portfolio and future needs of our commercial and residential customers who occupy our space and use our services 4. To continually review the performance of individual properties and improve the quality and value of the portfolio by selective refurbishment and re-development 5. To utilize our relationships and financial strength as a competitive advantage in pursuing investment opportunities and to keep risk and return in balance demonstrates our success in anticipating and meeting the needs of our customers Introduce personalized resident service at Bamboo Grove which was well-received Introduce a children’s floor in Bamboo Grove Clubhouse offering one of the largest indoor play equipment in Hong Kong private residential clubhouses Completed refurbishment and market repositioning of Bamboo Grove which was well-received by the market Completed renovation of external facade for One Hysan Avenue; improvement works for Leighton Centre and Sunning Court in progress Finalized plans for refurbishment and market repositioning of retail podium of Caroline Centre with works having commenced in March 2003 Strong balance sheet with debt maturity profile lengthened and diversified funding sources Prudent financial management principles and strong financial position geared to complement strategic decisions Continue to strengthen corporate governance practices; recognition achieved with 2002 Directors of the Year Award by the Institute of Directors experience and market knowledge, assess the future opportunities for our properties. Appropriate capital improvement projects, including refurbishment, renovation, upgrading of building facilities and market repositioning initiatives are recommended and implemented. The year saw the completion and market repositioning of Bamboo Grove. We also finalized design plans for the renovations and market repositioning of the retail podium of Caroline Centre, with works scheduled to be carried out between March to October 2003. In addition, we completed refurbishment of the building exterior for One Hysan Avenue. Improvement works had also commenced for Sunning Court which include re-tiling of external walls and renovating the main lobby; and for upgrading the building exterior and building facilities of Leighton Centre. Hysan Development Company Limited (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) ANNUAL REPORT 2002 8 Operating and Financial Review FINANCIAL REVIEW CONSOLIDATED PROFIT AND LOSS ACCOUNT Rental Income The Group’s gross rental income of HK$1,229.6 million was 9.0% lower year-on-year mainly because of negative rental reversions and high vacancy at Bamboo Grove due to renovation for repositioning. Excluding the impact of Bamboo Grove, the rental fall was 4.9%. Operating Expenses Property expenses increased by 5.5% to HK$235.8 million year-on-year largely due to the significant increase in utilities and insurance expenses which are largely out of the Group’s control, and higher marketing expenses associated with active leasing activities, in particular for the repositioning of Bamboo Grove. The higher property expenses were partly offset by a 4.6% decrease in administration expenses to HK$85.8 million due to cost reduction. Financial Expenses Further helping with cost reduction was a substantial 30.6% year-on-year decrease in net financial expenses to HK$215.7 million, despite relatively stable debt level, as the Group was able to take advantage of Hong Kong’s prevailing low interest rates. Profit Attributable to Shareholders The Group’s profit attributable to shareholders for the year ended 31 December 2002 decreased by 9.4% year-on-year to HK$543.9 million (recurring profit decreased by 4.1% as 2001’s result included a gain on disposal of an associate of HK$33.5 million). Earnings per share were correspondingly 9.6% lower at HK52.66 cents. CONSOLIDATED BALANCE SHEET Assets Total assets decreased by 7.2% to HK$26,555.2 million mainly due to the decrease in the valuation of investment properties as the Hong Kong property market continues to be weak. Current Liabilities Current liabilities decreased by HK$1,280.3 million to HK$1,282.2 million mainly due to the HK$2 billion five-year floating rate notes being repaid in March 2002 and reclassification of long-term bank loans of HK$597.8 million due within one year. Non-current Liabilities The increase in non-current liabilities of HK$1,478.6 million to HK$5,309.6 million reflected the refinancing of the HK$2 billion floating rate notes through the issue of the US$200 million 7% ten-year fixed rate notes under the Medium Term Note (MTN) Programme. Shareholders’ Funds Shareholders’ funds decreased by 10.3% to HK$19,087 million principally due to the decrease in property valuation of HK$2,073.2 million, partially offset by profits retained during the year of HK$440.5 million from strong recurring income. Net Interest Coverage at Year-end Ratio 5 4 3 2 1 4.7 4.2 3.1 3.6 3.7 1998 1999 2000 2001 2002 Net Interest Coverage Note: Net interest coverage ratio (defined as profit from operations before depreciation less dividend and interest income, divided by net interest expenses) Net Gearing at Year-end 31.1 16.2 14.6 25.7 21.4 % 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 1998 1999 2000 2001 2002 Net debt / Shareholders’ funds Note: Net gearing (defined as gross debt less cash and cash equivalents and marketable securities at year-end market value, divided by shareholders’ funds) Capital Expenditure at Year-end HK$million 800 600 400 714 399 200 248 208 0 1998 1999 2000 2001 2002 88 Hysan Development Company Limited ANNUAL REPORT 2002 9 KEY FINANCIAL RATIOS Net Interest Coverage As of year-end 2002, the net interest coverage ratio (defined as profit from operations before depreciation less dividend and interest income, divided by net interest expenses) was 4.7. This is the highest the ratio has been in the past five years principally because of modest debt outstanding and low interest rates. Net Gearing The year-end 2002 net gearing (defined as gross debt less cash and cash equivalents and marketable securities at year-end market value, divided by shareholders’ funds) was 25.7%, which is close to its average for the past five years. The re-investment in the Group’s property portfolio, as discussed in the next section, and the downward revaluation of assets are reflected in the gearing rise of the past two years. CAPITAL EXPENDITURE Investment Appraisal The Group appraises the feasibility and priority of proposed capital expenditure projects based on their strategic importance as well as their ability to improve rental yield or reduce operating cost. Project financial feasibility is generally assessed by net present value and internal rate of return calculated from projected discounted cash flows. Capital Expenditure During 2002 The Group spent HK$399.3 million during the past year. Most of this was incurred for refurbishment of the Group’s investment properties, including Bamboo Grove and One Hysan Avenue. In addition, HK$25 million were incurred on the China and Singapore projects and HK$9.4 million were spent for upgrades to the Group’s computer system. Capital Expenditure Funding Capital expenditures were primarily financed by internally generated funds from operations. With substantial committed banking facilities in place and solid recurrent rental cash flow, the Group is in a strong liquidity position and has sufficient financial resources to satisfy its capital commitments and ongoing working capital requirements. CONTINGENT LIABILITIES The Group has provided guarantees for banking facilities granted to associated companies and investee companies. At 31 December 2002, the Group’s share of guarantees and counter guarantees amounted to HK$156 million (2001: HK$148 million) and HK$84 million (2001: HK$79 million) respectively. FINANCING Total gross debt was relatively unchanged at HK$5.71 billion versus HK$5.63 billion at 2001 year-end, of which, all were unsecured and over 97% were on a committed basis. Sources of Financing The Group maintains diversified sources of funding to minimize over- dependence on any one source as well as to reach new investors for the Group’s debt instruments, particularly as the Group grows going forward. Within the bank segment, the Group maintains bilateral funding relationship with over 15 banks. Sources of Financing at 2002 Year-end 34.3% 5.3% 2,266 1,618 60.4% Capital market issuances Syndicated and club loans Bank bilateral loans Maturity Profile At 2002 year-end Total gross debt : HK$ 5,707 million HK$million 2,500 2,000 1,500 1,000 500 0 1,086 737 2002 At 2001 year-end Total gross debt : HK$ 5,628 million HK$million 3,000 2,500 2,000 2,140 1,500 1,000 500 0 2,572 436 480 2001 Within 1 year After 2 years but within 5 years After 1 year but within 2 years After 5 years Note: Subsequent to the balance sheet date, a HK$300 million loan originally maturing in 2004 has been prepaid and refinanced by a 7-year bank loan with maturity in 2010. Hysan Development Company Limited ANNUAL REPORT 2002 10 Operating and Financial Review Fund Raising During 2002 The Group took a major step forward in the process of developing and maintaining access to the international capital markets by launching a MTN Programme, and subsequently issuing in early 2002 US$200 million ten-year inaugural notes on the European and Asian capital markets. The proceeds were used to help repay HK$2 billion five-year floating rate notes that matured later in the year. The new ten-year issuance was well received and established a benchmark for the Group going forward. During the past year, the Group also refinanced HK$1.2 billion of bank and syndicated loans to take advantage of the current high-liquidity, low-cost banking environment in Hong Kong. Maturity Profile To improve the tenor matching of assets and liabilities as well as to reduce refinancing risk, the Group during the year moved to a mix of short-term and intermediate-term maturities from a previous dependence on shorter-term instruments. The 2002 year-end maturity is significantly stronger with little short-term maturity pressure and balanced repayment schedule over the intermediate term. CREDIT RATINGS The current credit ratings assigned by Moody’s and Standard and Poor’s are Baa1 and BBB respectively. Both investment credit ratings continue to reflect the Group’s strong financial position. It should be noted that the Group’s rating is to some extent capped by Hong Kong’s foreign currency long-term debt ratings of A3 from Moody’s and A+ from Standard and Poor’s. FINANCIAL RISK MANAGEMENT The Group’s normal business operation involves a number of financial risks and are mitigated and managed as described below. Liquidity Risk The Group maintains sufficient liquidity at all times to fund its working capital. Liquidity requirements are met by strong recurring cash flows from the investment property portfolio and low- cost standby revolving bank facilities. At year-end 2002, the Group had HK$1,367 million undrawn committed facilities. Funding Risk The Group maintains diversified sources of funding to reduce the risk of being unable to draw sufficiently from any one source. The diversification includes drawing from international capital markets as well as multiple banks. The latter include banks of various nationalities, including a significant number who have been working with the Group for many years. Standby revolving bank facilities are also maintained to reduce refinancing risk. Currency Risk The Group aims to have minimal mismatches in currency and does not speculate in currency movements. Over 97% of the Group’s assets by value and all rental income are in Hong Kong and denominated in Hong Kong dollars, the balance is in Singapore dollars and Renminbi corresponding to the Group’s property projects in those two countries. At year-end 2002, all of the Group’s debts were in Hong Kong dollars with the exception of the US$200 million ten-year notes, which in turn has been hedged by appropriate hedging instruments. Interest Rate Risk The Group manages its interest rate exposure based on interest rate level and outlook as well as potential impact on the Group’s financial position arising from volatility. At year- end 2002, 91% of the Group’s gross debt were on a floating rate basis, but could change with changes to the interest rate trend going forward. The Group’s weighted average cost of borrowing for the past year was 3.65% vis-á-vis 5.81% for 2001. Credit Risk The Group manages its credit risk mostly on two fronts: rent receivable from tenants and counter-party financial obligations in currency and interest rate derivative contracts. For the former, credit checks are part of the normal leasing process and stringent procedures are in place to deal with delinquent rent (over one month overdue). As of year-end 2002, the amount of delinquent rent was HK$0.8 million or less than 1% of the Group’s average monthly rental income. To mitigate counter-party risk, the Group enters into derivative contracts only with sound financial institutions with strong investment-grade credit ratings, limits exposure to each, and monitors each’s rating regularly. Michael T. H. Lee Chief Operating Officer and Director Hong Kong, 11 March 2003 Hysan Development Company Limited ANNUAL REPORT 2002 11 Case Studies Hysan's objective is to deliver value by putting our properties to the highest and best use. We work with present and prospective tenants to deliver property that works for them, their employees and their customers. The following case studies illustrate how we have been putting our principles into action over the past year. ANNUAL REPORT 2002 12 Hysan aims to anticipate and meet the changing needs of our present and prospective tenants. Bamboo Grove, our luxurious residential development, has always been a popular choice for expatriate families with young children. This is our clear focus when we embarked upon the recent refurbishment and market repositioning exercise. We, therefore, dedicated a floor in the clubhouse for a "Children's World", which houses one of the largest "Tuff N Tumble" indoor play equipment in Hong Kong private residential clubhouses. Other purpose-built facilities include a music room, a dance hall and a special play area for toddlers. Even the washroom facilities are built to suit the needs of children. In addition, the 30,000 square feet traffic-free spacious outdoor podium is welcome by mothers and children alike. The refurbishment and market repositioning of Bamboo Grove not only demonstrates Hysan's foresight to enhance asset value, but also our commitment to meet the changing needs of our tenants. " Your enthusiasm and your ability to motivate your staff have resulted in making our occupants' living in Bamboo Grove as comfortable as humanly possible." Geoffrey H. Moore Supervisory General Service Officer for a major corporate tenant Delivering value through Customer Focus Delivering value through a Bamboo Grove Customer Focus Bamboo Grove Delivering value through Market Repositioning Caroline Centre ANNUAL REPORT 2002 13 Caroline Centre was built in 1992. Situated right next to The Lee Gardens to which it is connected by a footbridge, it has an established retail podium with a particularly successful children's concept. Hysan is committed to achieving asset enhancement and income growth through a continuous programme of selective refurbishment and repositioning. Each property's position within its particular market segment is continually reviewed and assessed. Appropriate capital improvements, including renovations and marketing repositioning initiatives will be implemented. In Hong Kong, shopping destinations with a larger store layout and a diversity of shopping and leisure activities are becoming more distinct. The trend for flagship store also continued. We took the view, as confirmed by market studies, that we could further enhance the value of the Caroline Centre retail podium by a market repositioning exercise. We therefore finalised a major programme to re-design the retail podium, to enhance shop front, internal finishes, as well as layout. These, coupled with our efforts to refine the tenant mix and introduce appropriate specialty themes, seek to capitalise the property's synergy with The Lee Gardens and enhance its asset value generally. Refurbishment works for Caroline Centre have commenced in March 2003, to be completed by late October. ANNUAL REPORT 2002 14 Delivering value through Creative Solutions Retail leasing In our retail portfolio, our objective is to create an attractive environment for dining, shopping and recreation in our neighbourhood. Our leasing team therefore keeps a constant look-out and is keen on introducing new retail concepts and fresh tastes. Pret A Manger, a trendy boutique sandwich shop, which has been hugely successful in other international cities like London, Paris, Milan, New York, Tokyo and Singapore, has opened a major outlet in our property, AIA Plaza. To create an enjoyable seating environment with indoor comfort and unobstructed street views, our leasing team has provided useful suggestions on spatial planning, seating arrangement and shop ambience. The new shop has been almost an instant success, adding to the rich variety of eateries to satisfy the diverse tastes and lifestyles for all walks-of-life in our vibrant hub. " We started to develop our business in Hong Kong over a year ago. And in a short space of time, we've recognised the importance of building strong relationship with the landlords. We really appreciate the hard work and commitment Hysan has shown us. The emphasis that you place on customer service is a credit to your company. You should be very proud of the people who are now working for you, their support has been valuable in our endeavours to grow a successful business in the AIA Plaza." Pret A Manger (Hong Kong) Limited Delivering value through Partnership Approach “Culinary Journey on Hysan Avenue” ANNUAL REPORT 2002 15 Hysan's year-round marketing programme aims to enhance the attractiveness of our retail portfolio for our long-term growth as well as that of our tenants. In the light of the many existing food and lifestyle outlets in our portfolio, a special promotional activity called "Culinary Journey on Hysan Avenue" was launched. This seasonal event stretched over the summer months of July and August. Activities covered the whole range of culinary activities: including table and social etiquette, table-setting, cooking demonstrations, wine and caviar tasting, floral arrangements and ballroom dancing. " The response to the joint-promotion of culinary classes at our restaurant last summer was encouraging and fruitful. The idea was avant-garde, interesting and practical, making use of tenant expertise to capture the attention and interest of our guests in western food, wine and table etiquette. We look forward to exploring new promotional ideas with Hysan." COVA Caffé-Ristorante ANNUAL REPORT 2002 16 Delivering value through Innovative Work Processes Comprehensive Tenant Service Levels Hysan is committed to managing our portfolio to the highest standards, providing commercial tenants with the best operating environment for their businesses and customers, and ensuring the most comfortable surroundings for residential tenants to build their homes. A new service model, known as the Comprehensive Tenant Service Levels, was introduced with an aim to achieving total customer satisfaction. The service levels are sets of performance measurement standards aiming to deliver cohesive and tenant-focused services while improving service performance and enhancing operational efficiency. The service levels cover services such as cleaning, maintenance and security as well as handling tenant requests and managing hand-over of properties to tenants. The new system provides clear and specific targets. Staff will know precisely the level of service standards expected by Hysan in better servicing our tenants. " We really appreciate that Hysan management staff have been responding promptly and enthusiastically to our every request and will enlist our feedback after completing their services. In fact, the efficient management service of Hysan has been one of our major determinants in substantiating our recent decision of tenancy renewal." Yahoo! Holdings (Hong Kong) Ltd ANNUAL REPORT 2002 17 A key component of our strategy is to develop strong relationships with tenants. We interact closely with our tenants to ensure that we anticipate and meet their needs. Willis China (Hong Kong), an international insurance brokerage company, was considering a possible expansion in Hong Kong when its lease of our property expired in mid- 2002. Hysan offered a solution to Willis so as to minimise any mismatch of timing by way of a special short-term lease. While the short-term lease was still subsisting, Willis finalised its plans for an expansion in Hong Kong with a 60% rise in space needs. Again, Hysan offered a solution to swap the unexpired short- term lease with a new lease for the desired expanded space in The Lee Gardens. In this way, the tenant's expansion needs are immediately satisfied. " Hysan delivered a flexible solution to what is a mismatch of timing for corporate decisions for us. After scouting around all office premises in the territory, we finally decide Hysan is our preferred choice for office accommodation." Willis China (Hong Kong) Delivering value through Flexible Solutions Office leasing ANNUAL REPORT 2002 18 Social Responsibility continually investigate energy efficiency initiatives (cid:1) monitor fresh air quality within our buildings and ensure that we provide an acceptably healthy environment actively market the need for energy efficiency and environmentally- friendly practices to our employees, contractors and tenants review the use of environmentally- friendly and recyclable materials and supplies in project works and operations wherever appropriate and remain aware of developments in recycling technology recycle consumables and waste wherever practical in our business operations provide regular safety, health and environmental training to our employees to remain current of regulations, technology and to continue to raise corporate and individual SHE awareness Initiatives implemented during the review period under the SHE policy are set out below: Energy Conservation We adopt the Government’s Code of Practice and Guidelines on Energy Efficiency for the operation and maintenance of air conditioning systems. Following an in-depth review of individual building operating schedules, appropriate measures were implemented resulting in cost savings without compromising service standards. Air Quality Air quality tests were conducted by independent institutions with generally satisfactory results. We are in the process of implementing further enhancement measures. Environmentally Focused Processes As part of the campaign for the environment, we promote recycling of domestic waste in residential premises and provide a free paper recycling service to all commercial tenants. Our procurement policy places a priority on the use of environmentally- friendly refrigerants in our air- conditioning system. Strict procedures are in place to ensure that all waste is properly handled in accordance with relevant environmental regulations and requirements. We also adopt an enzyme flushing system in selected buildings and seek to minimize the use of chemicals used in seawater toilet sanitation. COMMUNITY We support various charitable institutions in Hong Kong through donations, sponsorship and the provision of free venues. Staff volunteers also organise charitable events for the less-privileged. Members of our management continue to serve on various government and industry organisations. We consider it important for our business to support the community in which it operates and from which it generates its revenue. For us, this not only means Hong Kong but more specifically our hub in Causeway Bay. For Hysan, being a socially responsible company means going beyond fulfilling regulatory and compliance requirements and investing in the environment, the community, and generally towards developing positive stakeholder relations. SAFETY, HEALTH AND THE ENVIRONMENT (SHE) POLICY Hysan is committed to practices that protect safety, health and the environment. We have formally adopted a safety, health and environmental (SHE) policy in 2003 with the Chief Operating Officer taking overall responsibility at Board level. Under the policy, Hysan will: remain current with all relevant legislation and ensure compliance by our employees and contractors advise tenants on practices that may impact on safety, health and the environment and actively encourage them to be environmentally aware reduce energy consumption wherever possible without compromising service and Hysan Development Company Limited (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Human Resources ANNUAL REPORT 2002 19 RIGOROUS WORKFORCE PLANNING As at 31 December 2002, we have a total of 550 staff members. 128 are head office asset management teams and supporting units; 422 are building management, technical and security services staff. In the light of our corporate strategy, specific job functions, including property services with an emphasis on customer relations, were expanded. This is achieved by developing and re- deploying our staff as well as bringing in new people. Senior executives in town planning and property services also joined the Group. Amidst the challenging business environment, our human resources strategy continues to focus on ensuring that we have the right number of employees with the right skills and attitude to serve our customers and to achieve our corporate objectives. This was achieved by strengthening performance management, developing our talent pool, and fostering staff commitment. PERFORMANCE MEASUREMENT AND REWARD We continued our efforts to strengthen our performance management system. As in past years, clear corporate and individual objectives were set. Communications of corporate objectives, including formal and informal briefings by top management, were stepped up; all towards ensuring alignment of corporate and individual objectives. The appraisal system is further enhanced, emphasizing the need for ongoing and specific feedback. Hysan has always rewarded our staff based on performance. We further tightened the link between individual performance and reward during the year. TALENT DEVELOPMENT We have been broadening our training and development activities across the Group to ensure that we maximise the potential of all our employees and help them achieve their own as well as the Group’s business objectives: employee involvement – we actively involve our staff in developing our training programmes. Staff representatives are involved in designing the Company-wide customer service enhancement programme. Special cross- departmental task forces were formed in developing new service levels and concierge training. Staff are also involved in the delivery stage, through a “train-the-trainer” approach that we adopt. ongoing measurement – effective measurements after training sessions were emphasised. We conducted a series of audit programmes including telephone and client-handling skills audits, the results of which were satisfactory. These were followed up by appropriate feedback and improvement steps. Graduate trainee programme – our two-year graduate trainee programme is designed to develop our talent pool through structured job rotations and project assignments. The programme is now in its fourth year, and the results are encouraging. A learning culture – in addition to organizing in-house training courses, the need for individual initiative to learn and develop is stressed and encouraged. COMMUNICATION AND COMMITMENT We understand that effective communication is crucial to foster staff commitment to the Group. This is particularly critical in the context of a challenging business environment. We continue to develop our employee communication programme. This is currently achieved in a number of ways, through formal and informal presentations to employees, updates and publications of result announcements and other important corporate developments, regular newsletters, and gatherings involving senior management. Hysan Development Company Limited (cid:1) (cid:1) (cid:1) (cid:1) ANNUAL REPORT 2002 20 Principal Investment Properties AIA Plaza 18 Hysan Avenue, Causeway Bay Hennessy Centre 500 Hennessy Road, Causeway Bay Lee Theatre Plaza 99 Percival Street, Causeway Bay AIA Plaza is a 25-level office and retail complex and is within easy walking distance to the MTR Causeway Bay station. The building boasts a bright and spacious lobby, and an array of specialty food and beverage outlets. Total Gross Floor Area: 139,119 sq.ft. Number of Floors Year Completed / Renovated : 1989 : 25 Located on a busy thoroughfare, Hennessy Centre is an office and retail complex. It is served by a multitude of public transport including the MTR and the bus and tram stops on its doorstep. Home to a popular Japanese Department store and three levels of Chinese restaurants, it is a popular destination for shopping and dining. Total Gross Floor Area: 719,642 sq.ft. Number of Floors Carparks Year Completed / Renovated : 45 : 263 : 1981 Caroline Centre 28 Yun Ping Road, Causeway Bay This is a 34-level office and retail complex. A comprehensive refurbish- ment of the retail podium commenced in March 2003 and upon completion by October 2003, it will be repositioned to synergise with the neighbouring Lee Gardens shopping center. Total Gross Floor Area: 626,882 sq.ft. Number of Floors Carparks Year Completed / Renovated : 34 : 193 : 1992 / renovations of retail podium to be completed in 2003 The Lee Gardens 33 Hysan Avenue, Causeway Bay Located right at the hub of Causeway Bay’s commercial and recreation area, this is the Company’s flagship development which comprises an office tower and a high-end shopping centre. The development, adjacent to the MTR Causeway Bay station, enjoys spectacular views of the Harbour and Happy Valley and is home to many international corporations and luxury brands. Total Gross Floor Area: 902,797 sq.ft. Number of Floors Carparks Year Completed / Renovated : 53 : 200 : 1997 Hysan Development Company Limited Like its predecessor the Lee Theatre, the Lee Theatre Plaza is a Hong Kong landmark and among the territory’s first Ginza-style shopping, dining and entertainment complexes, within easy access to various kinds of transport and the MTR Causeway Bay station. The Plaza houses many of the world’s favourite lifestyle brands and is a popular venue for shopping and one-stop entertainment, with cinema, fitness centres and some of the finest dining establish- ments in Causeway Bay. Total Gross Floor Area: 315,749 sq.ft. Number of Floors : 24 (with two basement floors) Year Completed / Renovated : 1995 Leighton Centre 77 Leighton Road, Causeway Bay The 28-level office and retail complex enjoys close proximity to all forms of public transport. Its central location in the Causeway Bay area makes it a well-sought after location for many professional practices. Upgrading work on building facilities are being carried out in 2003. Total Gross Floor Area: 435,008 sq.ft. Number of Floors Carparks Year Completed / Renovated : 28 : 332 : 1977 / renovations to be completed in 2003 111 Leighton Road 111 Leighton Road, Causeway Bay 111 Leighton Road is an office and retail complex located in a pleasant and tranquil area in the heart of Causeway Bay, an ideal office location for professional and designer firms. Total Gross Floor Area: 79,905 sq.ft. Number of Floors Year Completed / Renovated : 1988 : 24 Sunning Plaza 10 Hysan Avenue, Causeway Bay Designed by the renowned architect I.M. Pei, Sunning Plaza greets tenants and visitors with a spacious entrance and lift lobby. The office and retail complex has 30 levels. Among its tenants are popular food and beverage outlets, which have established the Plaza a hub for relaxation and social recreation. Total Gross Floor Area: 279,717sq.ft. Number of Floors Carparks Year Completed / Renovated : 30 : 150 : 1982 One Hysan Avenue 1 Hysan Avenue, Causeway Bay Located at the junction of three busy streets in the heart of Causeway Bay, the office and retail Entertainment Building 30 Queen’s Road Central Enjoying a prime location in Hong Kong’s Central financial and commercial district, the post-modern- design Entertainment complex enjoys a prime location and a diversity of retail facilities in the surrounding area. In 2002, external facade refurbishment was completed. Building has 34 levels, comprising 211,148 square feet of office and retail space. The building covers a variety of retail mix including hair & beauty salon, small cafes and hifi shop, etc. Total Gross Floor Area: 169,019 sq.ft. Number of Floors Year Completed / Renovated : 1976 / 2002 : 26 Total Gross Floor Area: 211,148 sq.ft. Number of Floors Year Completed / Renovated : 1993 : 34 ANNUAL REPORT 2002 21 Bamboo Grove 74 - 86 Kennedy Road, Mid-levels A luxury residential complex in the Mid-Levels, Bamboo Grove underwent major refurbishment in 2002 to enhance both the value and quality of the complex. The complex commands panoramic views of the harbour and the greenery of the Peak, and is served by a multitude of public transport. In addition to superb property management services and full club house and sports facilities, tenants also enjoy a personalized Resident Services which help ensure a comfortable and hassle free lifestyle. Total Gross Floor Area: 697,940 sq.ft. Number of Units Carparks Year Completed / Renovated : 1985 / 2002 : 345 : 436 Sunning Court 8 Hoi Ping Road, Causeway Bay The 17-level Sunning Court is a unique residential tower in the dynamic Causeway Bay area. Located in a pleasant environment with streets lined with trees, and within easy reach of all forms of relaxation and entertain- ment activities in the district, the building provides maximum comforts for its tenants. The building is undergoing external facade refurbishment to further enhance its value. Total Gross Floor Area: 97,516 sq.ft. Total number of units : 59 Carparks : available at Year Completed / Renovated Sunning Plaza : 1981 / renovations to be completed in 2003 Hysan Development Company Limited ANNUAL REPORT 2002 22 Report of the Valuer TO THE BOARD OF DIRECTORS HYSAN DEVELOPMENT COMPANY LIMITED Dear Sirs, Annual revaluation of investment properties as at 31 December 2002 In accordance with your appointment of Knight Frank (Services) Limited to value the investment properties in Hong Kong owned by Hysan Development Company Limited and its subsidiaries, we are pleased to advise that the open market value of the properties as at 31st December 2002 was in the approximate sum of Hong Kong Dollars Twenty Four Billion Eight Hundred Forty One Million and Ten Thousand Only (i.e. HK$24,841,010,000). We valued the properties on an open market value basis by capitalizing the net income as provided to us with due allowance for outgoings and provisions for reversionary income potential. However, no allowance has been made in our valuation for any expenses or taxation which may be incurred in effecting a sale. Yours faithfully, KNIGHT FRANK (SERVICES) LIMITED Hong Kong, 28 February 2003 Hysan Development Company Limited Schedule of Principal Properties as at 31 December 2002 ANNUAL REPORT 2002 23 Investment Properties Address Lot No. Use Category of the lease Percentage held by the Group 1. The Lee Gardens 33 Hysan Avenue Causeway Bay Hong Kong 2. Hennessy Centre 500 Hennessy Road Causeway Bay Hong Kong 3. Bamboo Grove 74-86 Kennedy Road Hong Kong 4. Caroline Centre 2-38 Yun Ping Road Causeway Bay Hong Kong 5. Leighton Centre 77 Leighton Road Causeway Bay Hong Kong Sec. DD of I.L. 29 and Sec. L of I.L. 457, Sec. MM of I.L. 29, the R.P. of Sec. L of I.L. 29, and the R.P. of I.L. 457 Commercial Long lease 100% Sec. FF of I.L. 29 and the R.P. of Marine Lot 365 Commercial Long lease 100% I.L. 8624 Residential Long lease 100% Sec. A and O of I.L. 457 and Sec. G of I.L. 29, Sec. F and the R.P. of Sec. C, D, E, and G, Subsec. 1 of Sec. C, D, E and G and Subsec. 2 of Sec. E of I.L. 457, Sec. H of I.L. 457, Subsec. 1, 2 and 3 and the R.P. of Sec. C of I.L. 461 Commercial Long lease 65.36% Sec. B, C and the R.P. of I.L. 1451 Commercial Long lease 100% 6. Lee Theatre Plaza I.L. 1452 and the R.P. of I.L. 472 and 476 Commercial Long lease 100% 99 Percival Street Causeway Bay Hong Kong 7. Sunning Plaza 10 Hysan Avenue Causeway Bay Hong Kong 8. Sunning Court 8 Hoiping Road Causeway Bay Hong Kong 9. Entertainment Building 30 Queen’s Road Central Hong Kong 10. One Hysan Avenue 1 Hysan Avenue Causeway Bay Hong Kong 11. AIA Plaza 18 Hysan Avenue Causeway Bay Hong Kong Commercial Long lease 100% The R.P. of Subsec. 1 of Sec. J, Subsec. 2 and the R.P. of Sec. J of I.L. 29 Residential Long lease 100% The R.P. of I.L. 16 and the extension thereto Commercial Long lease 100% The R.P. of Sec. GG of I.L. 29 Commercial Long lease 100% Sec. N of I.L. 457 and Sec. LL of I.L. 29 Commercial Long lease 100% 12. 111 Leighton Road Sec. KK of I.L. 29 Commercial Long lease 100% 111-117 Leighton Road Causeway Bay Hong Kong Hysan Development Company Limited ANNUAL REPORT 2002 24 Directors, Officers and Advisers BOARD OF DIRECTORS Peter Ting Chang LEE J.P. (I) Chairman and Managing Director Peter T. C. Lee first joined the Board in 1988, became Managing Director in 1999, and Chairman and Managing Director in 2001. A non-executive director of Cathay Pacific Airways Limited, Hang Seng Bank Limited, SCMP Group Limited, Maersk Hong Kong Limited, and a director of a number of other companies. A vice president of the Real Estate Developers Association of Hong Kong. Also a director of Lee Hysan Estate Company, Limited. Received a Bachelor of Science Degree in Civil Engineering from the University of Manchester, he also qualified as a Solicitor of the Supreme Court of England and Wales. He is aged 49. Dr. Victor Kwok King FUNG (I) Independent Non-Executive Director Hans Michael JEBSEN (I) Non-Executive Director Chairman of the Li & Fung Group, the Hong Kong Airport Authority and the Hong Kong University Council, a non-executive director of Bank of China (Hong Kong) Limited, Anglogold Limited, PCCW Limited, Kerry Properties Ltd., Orient Overseas (International) Ltd., DBS Kwong On Bank, Ltd., Sun Hung Kai Properties Limited, Dao Heng Bank Group Limited and its three operating subsidiaries, which are authorized institutions. He holds a Bachelor and a Master Degree in Electrical Engineering from the Massachusetts Institute of Technology, a Doctorate in Business Economics from Harvard University. Appointed a Director in 1998 and is aged 57. Chairman of Jebsen and Company Limited as well as a director of other Jebsen Group companies worldwide. Appointed a Director in 1994 and is aged 46. Per JORGENSEN (A) Independent Non-Executive Director A director of A.P. Moller, Denmark and a number of A.P. Moller-Maersk companies in Asia, Africa and Europe; also a non- executive Chairman of Lee Gardens International Holdings Limited. Appointed a Director in 1981 and is aged 67. Fa-kuang HU (E) G.B.S., C.B.E., J.P. Non-Executive Director Chairman of Ryoden (Holdings) Limited and its subsidiary companies. Also a director of i-CABLE Communications Limited. Holds a Bachelor of Science Degree from Shanghai Jiao Tong University. Appointed a Director in 1979 and is aged 79. Sir David AKERS-JONES (A,E) G.B.M., K.B.E., C.M.G., J.P. Independent Non-Executive Deputy Chairman Chairman of Global Asset Management (HK) Limited. Vice chairman of CNT Group Limited and a non-executive director of various other companies. He is also a chairman and member of various voluntary organisations. Received his Master of Arts Degree at Oxford University. He was formerly the Chief Secretary of Hong Kong. Appointed a Director in 1989 and became the Deputy Chairman in 2001. He is aged 75. Hysan Development Company Limited Anthony Hsien Pin LEE (I) Non-Executive Director A director and substantial shareholder of the Australian-listed Beyond International Limited, principally engaged in television programme production and international sales of television programmes and feature films. Received a Bachelor of Arts Degree from Princeton University and a Master of Business Administration Degree from The Chinese University of Hong Kong. Also a director of Lee Hysan Estate Company, Limited. Appointed a Director in 1994 and is aged 45. ANNUAL REPORT 2002 25 Chien LEE (A) Non-Executive Director Michael Chi Kung MOY Chief Financial Officer and Director Pauline Wah Ling YU WONG Director, Property A director of Scottish and Eastern Investments Limited, Lee Gardens International Holdings Limited and a number of other companies. Non-executive director of Swire Pacific Limited. Also a director of Lee Hysan Estate Company, Limited. Received a Bachelor of Science Degree in Mathematical Science, a Master of Science Degree in Operations Research and a Master of Business Administration Degree from Stanford University. Appointed a Director in 1988 and is aged 49. Responsible for Group finance. Received a BSE in Aeronautical Engineering from Princeton University, a Master Degree in Aeronautical Engineering from the University of Washington, and MBA with Distinction from The Wharton School of the University of Pennsylvania. Before joining the Company in 1999, he was a management consultant with Mckinsey & Company, and head of Asia for an international direct investment firm. He became Chief Financial Officer and Director in 1999 and is aged 46. Responsible for the Group’s property portfolio. Having obtained a Bachelor of Arts Degree from The University of Hong Kong, she qualified as a Fellow Member of the Chartered Institute of Housing. She joined the Company in 1981 and has over thirty years of experience in the property field. She was appointed a Director in 1991 and is aged 54. Michael Tze Hau LEE (I) Chief Operating Officer and Director Dr. Deanna Ruth Tak Yung RUDGARD Non-Executive Director Received a Master of Arts Degree, Bachelor of Medicine and of Surgery Degree from Oxford University. Also a director of Lee Hysan Estate Company, Limited. Appointed a Director in 1993 and is aged 63. Michael T.H. Lee first joined the Board in 1990 and became Chief Operating Officer in 2002. A non-executive director of Tai Ping Carpets International Limited. A member of the Executive Committee of HK Society for Protection of Children and Vice Chairman of Helping Hand. He was formerly Managing Director of an investment management company with extensive experience in equity investments and management in the Asia Pacific region. Also a director of Lee Hysan Estate Company, Limited. Received his Bachelor of Arts Degree from Bowdoin College and a Master of Business Administration Degree from Boston University. He is aged 41. Dr. Geoffrey Meou-tsen YEH (E) S.B.S., M.B.E., J.P., D.C.S., M.Sc., F.C.I.O.B., F.Inst. D. Independent Non-Executive Director Former Chairman of Hsin Chong Construction Group Ltd. Holds a Bachelor degree of Science from University of Illinois and a Master degree of Science from Harvard University. Appointed Non- Executive Director in 1979 and became an Independent Non-Executive Director in 2001. He is aged 71. (A) (E) (I) Audit Committee Emoluments Review Committee Investment Committee Hysan Development Company Limited ANNUAL REPORT 2002 26 Directors, Officers and Advisers Structure The Board Audit Committee Emoluments Review Committee Investment Committee Chairman and Managing Director Chief Operating Officer and Director Finance Secretarial & Corporate Services Property Investment Property Services Property Development Chairman and Managing Director Peter Ting Chang LEE J.P. (I) Independent Non-Executive Deputy Chairman Sir David AKERS-JONES (Chairing A, E) G.B.M., K.B.E., C.M.G., J.P. Independent Non-Executive Directors Dr. Victor Kwok King FUNG (I) Per JORGENSEN (A) Dr. Geoffrey Meou-tsen YEH (E) S.B.S., M.B.E., J.P., D.C.S., M.Sc., F.C.I.O.B., F.Inst.D. Non-Executive Directors Fa-kuang HU (E) G.B.S., C.B.E., J.P. Hans Michael JEBSEN (I) Anthony Hsien Pin LEE (I) Chien LEE (A) Dr. Deanna Ruth Tak Yung RUDGARD Executive Directors Michael Tze Hau LEE (I) Michael Chi Kung MOY Pauline Wah Ling YU WONG Company Secretary Wendy Wen Yee YUNG (A) Audit Committee (E) Emoluments Review Committee (I) Investment Committee Hysan Development Company Limited ANNUAL REPORT 2002 27 Front row from right: Peter T.C. Lee, Michael T.H. Lee Middle row from right: Wendy Wen Yee Yung, Michael Chi Kung Moy, Pauline Wah Ling Yu Wong, Prof. Alex Chun Wan Lui Back row from right: Deric Probst Wallace, Ben Sau Shun Lui, Lora Wing Sze Luke, Mark Sun Wah Chim, Hoi Yee Yau COMPANY SECRETARY Wendy Wen Yee YUNG General Counsel and Company Secretary Responsible for Group corporate services including legal, secretarial, human resources, corporate communications and office administration. She holds a Master of Arts Degree from Oxford University and is a solicitor of the High Court of the HKSAR. Prior to joining the Group in 1999, she was a partner of an international law firm in Hong Kong. Aged 41. SENIOR MANAGEMENT Alex Chun Wan LUI Senior Advisor, Urban Design and Architectural Services Responsible for the Group’s urban design and architectural services. A Registered Architect and an Authorized Person (Architect). Also a member of the Town Planning Board. He holds a Master Degree in City Planning from the Massachusetts Institute of Technology and a Bachelor of Architecture Degree from the University of Hong Kong. Before joining the Group in 2002, he was Professor in Architecture of the Chinese University of Hong Kong and has practised architecture & urban design for almost thirty years in Hong Kong, Singapore and USA. Aged 59. Mark Sun Wa CHIM General Manager, Office Leasing Responsible for the Group’s office leasing activities. He holds a MBA Degree from Heriot-Watt University. Before joining the Group in 1999, he was National Director, Commercial Department, of an international real estate consultancy firm with over fourteen years’ experience in leasing. Aged 39. Ben Sau Shun LUI General Manager, Project and Technical Services Responsible for the Group’s project and technical services. A Registered Professional Engineer and a Chartered Civil and Structural Engineer, he holds a Master of Science Degree in Construction Project Management and a Bachelor of Science Degree in Civil Engineering, both from the University of Hong Kong. Before joining the Group in 2000, he has served senior project management positions in other major listed companies. Aged 44. Lora Wing Sze LUKE General Manager, Retail Leasing Responsible for the Group’s retail leasing activities. Prior to joining the Group in 2000, she was senior leasing manager of a major listed property investment company. She holds a MBA Degree from University of Reading in Real Estate and Construction. Aged 42. Deric PROBST-WALLACE General Manager, Property Services Responsible for the Group’s property services. He holds a MBA degree from the Cranfield School of Management, a diploma from the Chartered Institute of Marketing and a Bachelor of Science Degree from the University of Stirling. Before joining the Group in 2002, he was a Director of an international property services and construction-related consulting firm. Aged 40. Hoi Yee YAU Head of Corporate Planning Heads the Group’s Corporate Planning Department, Finance Division. She holds a MBA Degree from Harvard University and a Bachelor of Science Degree from Stanford University. Prior to joining the Group in 2002, she has served senior management positions in investment and consulting companies. Aged 34. Advisers Auditors Deloitte Touche Tohmatsu Principal Bankers The Hongkong and Shanghai Banking Corporation Limited Hang Seng Bank Limited Share Registrars and Transfer Office Standard Registrars Limited G/F., Bank of East Asia Harbour View Centre 56 Gloucester Road, Wanchai Hong Kong Registered Office 49/F., Manulife Plaza The Lee Gardens 33 Hysan Avenue Hong Kong Hysan Development Company Limited ANNUAL REPORT 2002 28 Notes Hysan Development Company Limited ANNUAL REPORT 2002 29 DIRECTORS’ REPORT AND ACCOUNTS 2002 ANNUAL REPORT 2002 30 Corporate Governance Statement STATEMENT OF CORPORATE GOVERNANCE POLICY The Board of Directors are committed to maintaining a high standard of corporate governance. The Company has complied throughout the review period with the Code of Best Practice (the “Code of Best Practice”) as set out in the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”). The Board aims to continually review and enhance corporate governance practices in the light of international best practices, in addition to complying with applicable statutory requirements. Board efforts in this area are being recognized. The Board was awarded “Directors of the Year” by the Hong Kong Institute of Directors. BOARD EFFECTIVENESS Board Responsibilities and Board/Management Relationship The principal task of the Board is, firstly, to formulate strategy and, secondly, to monitor and control operating and financial performance in pursuit of Group strategic objectives. The Board’s role is not to manage the business which responsibility remains vested with management. The Board is responsible for overseeing the processes that management has in place to identify business opportunities and risks. The Hysan Board and management fully appreciate their respective roles and are supportive of building a healthy corporate governance culture. Board Composition The Board currently comprises Peter T. C. Lee, Chairman and Managing Director, Michael T. H. Lee, Chief Operating Officer and Director, Pauline W. L. Yu Wong, Director, Property and Michael C. K. Moy, Chief Financial Officer and Director, and nine other non-executive Directors. Sir David Akers-Jones acts as the independent non-executive Deputy Chairman, also chairing the two corporate governance committees, namely the Audit Committee and Emoluments Review Committee. The biographies of the Directors appear on pages 24 and 25. These demonstrate a range of experience and calibre to bring judgment on issues of strategy, performance, and resources. Independent non-executive Directors also sit on the corporate governance committees of the Board. The Board as a whole is responsible for the selection and approval of candidates for appointment to the Board, and has not therefore established a Nomination Committee. On appointment, new Directors will be given a comprehensive introduction to Group activities and induction into the responsibilities of non-executive Directors. Under the Company’s articles of association, all Directors are subject to retirement by rotation. The three Directors who have been longest in office as at each Annual General Meeting will retire from office and be subject to re-election. Independent Non-executive Deputy Chairman The Board structure, including the presence of an independent non-executive Deputy Chairman on the Board, is designed to ensure that the Board functions effectively and independent of management where appropriate. At the same time, the fact that the Chairman is also Managing Director means that the Chairman has a more detailed knowledge of the business and activities of the Company than would be possible for a Chairman who was not a member of management. The executive Board was further strengthened by the appointment of Michael T. H. Lee as Chief Operating Officer effective 10 June 2002, responsible for the day-to-day management and co-ordination of the overall development of the Company. The Chairman and Managing Director will continue to have overall responsibility for strategic planning of the Group and developments generally. Hysan Development Company Limited ANNUAL REPORT 2002 31 Board Process The Board meets at least quarterly. Its principal task is to formulate strategy and to monitor and control operating and financial performance in pursuit of the Group’s strategic objectives. Certain significant transactions, including material bank facilities, material acquisitions and disposals, and material transactions with connected parties are reserved for Board decision. An important element of the Board’s corporate governance programme is the continuous improvement in the quality and timeliness of the dissemination of information to Directors. Where appropriate, communications are sent electronically. At least quarterly, Directors are provided with comprehensive reports on the management’s strategic plans, updates by business unit heads on their lines of business, financial objectives, plans and actions. During the year, following every committee meeting, committee chairs report to the Board on the activities of their respective committees. All Directors have access to the Company Secretary who is responsible for ensuring that Board procedures are complied with and advises the Board on corporate governance and compliance matters. Board Committees The Board currently has three Board committees, namely the Audit Committee, Emoluments Review Committee and Investment Committee. The Audit and Emoluments Review Committees, being corporate governance committees, have 100% non-executive membership with a majority of independent Directors. These three committees deal with specific aspects of the Group’s affairs, as detailed below: Audit Committee The Audit Committee which is chaired by Sir David Akers-Jones, its other current members being Per Jorgensen and Chien Lee, meets not less than twice per annum with a 100% attendance recorded in 2002. The Committee provides a forum of reporting by the Group’s external auditors. Meetings are also attended by invitation by the Chief Operating Officer and the Chief Financial Officer. The Committee presents a report to the Board after each meeting, which addresses its work and findings. Details on the mandate and work performed by the Audit Committee during the review year are set out in the Audit Committee Report on page 38. Emoluments Review Committee The Group’s Emoluments Review Committee is also chaired by Sir David Akers-Jones. Other members are F. K. Hu and Geoffrey M. T. Yeh. The function of the Committee is to review and determine the remuneration of the executive Directors. The Chairman and Managing Director makes recommendations to the Committee on the Company’s framework for, and cost of, executive Director remuneration and the Committee then reviews these recommendations. On matters other than those concerning him, the Chairman and Managing Director may be invited to Committee meetings. No Director is involved in deciding his own remuneration. Details of each Director’s emoluments and options are shown in section headed “Directors’ Remuneration and Interests”. Investment Committee The Group’s Investment Committee comprises the Chairman and Managing Director, the Chief Operating Officer and Director, Victor K. K. Fung, Hans Michael Jebsen, with Anthony H. P. Lee as the Chairman. The five Directors, demonstrating a range of experience and background, meet as necessary to advise and make recommendations on the investment strategies of the Group within agreed terms of reference. Hysan Development Company Limited ANNUAL REPORT 2002 32 Corporate Governance Statement DIRECTORS’ REMUNERATION AND INTERESTS Director Compensation Executive Director Emoluments Details on Directors’ emoluments are set out in note 6 to the financial statements. As detailed above, the Emoluments Review Committee reviews and determines the remuneration of the executive Directors. Non-Executive Director Emoluments The annual remuneration of the non-executive Directors for year 2002 was HK$546,918 per annum. The independent non-executive Deputy Chairman receives an annual fee of HK$65,000, with the other non-executive Directors being entitled to an annual fee of HK$50,000. Members of the Audit Committee receive an additional annual fee of HK$20,000. None of the non-executive Directors receive any pension benefits from the Company, nor do they participate in any bonus or incentive schemes. Service Contracts No Director has a service contract that is not determinable by the Group within one year without payment of compensation (other than statutory compensation). Directors’ Interests Directors’ Interests in Shares As at 31 December 2002, the interests of the Directors and Alternate Directors in the ordinary shares of the Company, as recorded in the register maintained by the Company pursuant to Section 29 of the Securities (Disclosure of Interests) Ordinance (the “SDI Ordinance”) were as follows: Family interests No. of shares held Corporate interests Other interests 4,083,823 (Note 1) 255,012 (Note 2) 2,432,914 (Note 1) — — — — — 4,083,823 (Note 1) 3,750,000 (Note 3) Name Peter Ting Chang Lee Fa-kuang Hu Hans Michael Jebsen Per Jorgensen Chien Lee Michael Tze Hau Lee Michael Chi Kung Moy Deanna Ruth Tak Yung Rudgard Pauline Wah Ling Yu Wong Geoffrey Meou-tsen Yeh Personal interests 2,000,000 — 60,000 6,678 970,000 1,023,233 — 1,871,600 254,000 249,619 V-nee Yeh (Alternate to Geoffrey Meou-tsen Yeh) 43,259 Hysan Development Company Limited — — — — — — 131,565 (Note 4) — — — — — — — — 1,000 (Note 1) 84,575 (Note 1) Total 6,083,823 255,012 2,492,914 6,678 8,803,823 1,023,233 131,565 1,871,600 254,000 250,619 — — — — — — 127,834 ANNUAL REPORT 2002 33 Notes: (1) (2) Such shares were held through corporations in which the respective Directors were members entitled to exercise one-third or more of the voting power at general meetings. Corporate interests of Peter T. C. Lee and Chien Lee relate to the same corporation. Such shares were held by a company which was wholly-owned by Fa-kuang Hu and he was deemed to have beneficial interests in all these shares. (3) Such shares were held through a discretionary trust of which Chien Lee was a beneficiary. (4) These shares were held by the wife of Michael Chi Kung Moy who was therefore deemed to have interest in them. As at 31 December 2002, certain Directors had personal interests in options to subscribe for ordinary shares in the Company granted under the Company’s Executive Share Option Scheme, details of which are set out below under “Executive Share Options” (also see note 31 to the financial statements). Apart from the above, as at 31 December 2002, there was no other interest or right recorded in the register required to be kept under Section 29 of the SDI Ordinance. Executive Share Options The Company operates an Executive Share Option Scheme (the “Scheme”) under which options may be granted to employees of the Company or any of its wholly-owned subsidiaries to subscribe for ordinary shares of the Company, thereby strengthening the links between individual staff and shareholder interests. Approved by shareholders on 28 April 1995, the Scheme has a term of ten years. The maximum number of shares in respect of which options may be granted under the Scheme (together with shares issued and issuable under the Scheme) is three per cent of the issued share capital of the Company (excluding shares issued pursuant to the Scheme) from time to time. The maximum entitlement of each participant under the Scheme is 25 per cent of the maximum number of shares in respect of which options may at any time be granted under the Scheme. The exercise price was fixed at 80 per cent of the average of the closing prices of the shares on the Hong Kong Stock Exchange for the twenty trading days immediately preceding the date of grant. Consideration to be paid on each grant of option is HK$1.00, with full payment for exercise price to be made on exercise of the relevant option. As at 31 December 2002, Scheme participants were executive Directors of the Company with shares issuable under options granted representing less than 0.4% of the then issued share capital of the Company. Options expiring, granted and outstanding to them are as follows: Changes During the Year Balance as at 1.1.2002 Date of Cancelled/ Lapsed grant Granted Exercised Balance as at 31.12.2002 Exercise price (HK$) Exercisable period Peter Ting Chang Lee 1,350,000 7.1.99 Pauline Wah Ling Yu Wong 900,000 3.5.95 Michael Chi Kung Moy 1,200,000 23.12.99 NIL NIL NIL NIL NIL NIL NIL 1,350,000 9.22 7.1.01-6.1.09 NIL 900,000 13.46 3.5.97-2.5.05 NIL 1,200,000 7.54 23.12.01-22.12.09 All options referred to above are subject to a five-year vesting period and a bar on the exercise of options within the first two years of their issue. No options have been granted since the coming into force of certain new Listing Rules requirements. Future grants will only be made under the existing Scheme where new Listing Rules requirements are complied with. Hysan Development Company Limited ANNUAL REPORT 2002 34 Corporate Governance Statement The Chairman and Managing Director has been delegated by the Board the authority to make grants to other management staff, with the view to further strengthening the links between staff and shareholder objectives and to balance the interests of shareholders generally. The exercise price will be set at at least the higher of (i) the closing price of the Company’s ordinary shares on the date of grant; and (ii) the average closing price of such shares for the five days immediately before the grant. Interests of shareholders will be balanced by having appropriate aggregate and individual grant limits, also being in line with new Listing Rules requirements. A clear performance criterion will be the main driver. The Group has in place appropriate Code of Practice and procedures regulating dealings in Company shares by Directors and employees. Disclosure of Directors’ Interests in Competing Business under the Listing Rules The Group is engaged principally in the development, ownership and management of high quality investment properties in Hong Kong. The following Directors are considered to have interests in other activities (“Deemed Competing Business”) that compete or are likely to compete with the said core business of the Group, all within the meaning of the Listing Rules. For the reasons stated below, and coupled with the diligence of the Group’s independent non-executive Directors and the Audit Committee, the Group is capable of carrying on its business independent of and at arm’s length from the Deemed Competing Business. (i) (ii) Peter T. C. Lee, Anthony H. P. Lee, Chien Lee, Michael T. H. Lee and Deanna R. T. Y. Rudgard are members of the founding family whose range of general investment activities include property investments in Hong Kong and overseas. In the light of the size and dominance of the portfolio of the Group, such disclosed Deemed Competing Business is considered immaterial. F. K. Hu (and his alternate, Raymond L. M. Hu) are substantial shareholders and directors of Ryoden (Holdings) Limited, Ryoden Development Limited, Designcase Limited and their respective subsidiaries and associates, which are engaged in investment holding, property investment and development, property agency and management, project management in both the People’s Republic of China and Hong Kong. The Company’s management team is separate and independent from that of the companies listed above. In addition, the aforementioned Director has a non-executive role and is not involved in the Company’s day-to-day operations and management. Related Party and Connected Transactions The Group has provided shareholder loans to a non-wholly owned subsidiary in proportion to its shareholding. The quasi-equity loans were provided in the ordinary course of the Group’s business. These activities constitute financial assistance and “Connected Transactions” under the Listing Rules. The Group also entered into certain transactions with parties regarded as “Related Parties” under applicable accounting principles. These mainly relate to contracts entered into by the Company in the ordinary course of business, which contracts were negotiated on normal commercial terms and on an arm’s length basis. Further details are set out in Note 37 to the financial statements. Directors’ Interests in Contracts of Significance Except as disclosed above, no contract of significance to which the Company or any of its subsidiaries was a party and in which a Director had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. Hysan Development Company Limited ANNUAL REPORT 2002 35 INTERNAL CONTROL AND RISK MANAGEMENT The Group regularly reviews its internal control system. The key features of our system of internal control include: (a) (b) (c) systems of delegated authorities: there are in place defined organizational responsibilities and limits of authority. Details on capital projects appraisal process are set out in “Capital Expenditure - Investment Appraisal” under “Operating and Financial Review - Financial Review”; financial monitoring: annual and long-term revenue, cashflow, and capital forecasts, updated regularly during the year; monthly monitoring of revenue, cashflow, and capital expenditure and reporting to top management, quarterly reporting of key financial information to Board; risk management: details on financial risk management are set out in the relevant section in “Operating and Financial Review - Financial Review”. FINANCIAL TRANSPARENCY AND DISCLOSURE The Group is committed to open and timely disclosure of relevant information on its activities to stakeholders, subject to applicable legal requirements. We aim to continually improve on the quality of our reporting. The Group had in operation during 2002 a communication programme, and will continue to enhance the same. Communication is made through: • • • • • • • • the Company’s annual and interim reports, which has been enhanced to present a comprehensive, balanced and understandable assessment of Group position and prospects notices of and explanatory memoranda for annual and other general meetings, which have been enhanced to provide shareholders with additional information in an understandable manner regular analyst briefings press briefings for Group annual results and other briefings, as appropriate press releases on major developments of the Group disclosures to the Stock Exchange of Hong Kong Limited and relevant regulatory bodies inquiries from investors, media or the public are responded to by Chief Financial Officer, Company Secretary or the appropriate members of senior management Company’s web-site at http://www.hysan.com.hk from which shareholders can access information on the Group. The web-site provides, inter alia, corporate announcements, press releases, annual reports, and corporate information of the Group Hysan Development Company Limited ANNUAL REPORT 2002 36 Corporate Governance Statement SHAREHOLDINGS INFORMATION AND SHAREHOLDER RIGHTS Shareholdings Information As at 31 December 2002: Authorised share capital: HK$7,250,000,000, comprising of 1,450,000,000 ordinary shares of HK$5.00 each. Issued and fully paid-up capital: HK$5,173,084,625, comprising of 1,034,616,925 ordinary shares of HK$5.00 each. Class of shares: one class of ordinary shares of HK$5.00 each with equal voting rights. Top 10 Largest Shareholders (as at 31 December 2002, as per register of members of the Company) 1. 2. 3. 4. 5. 6. 7. 8. 9. HKSCC Nominees Limited HSBC Nominees (Hong Kong) Limited Hang Seng (Nominee) Limited Lee Hysan Estate Co, Ltd* Kenwin Assets Limited* Overton Holdings Limited* Atlas Corporate Management Ltd* Shanghai Commercial Bank (Nominees) Ltd Liu Chong Hing (Nominees) Ltd 10. Clipperton Company Limited* Number of Shares 376,077,646 126,597,346 125,602,454 90,118,724 43,902,720 43,902,720 39,809,001 32,510,110 20,248,255 17,019,739 % 36.35 12.24 12.14 8.71 4.24 4.24 3.85 3.14 1.96 1.64 Total 915,788,715 88.51 Note: * denotes entities whose interests are attributable to the substantial shareholder: Lee Hysan Estate Company, Limited (see “Substantial Shareholders” under Directors’ Report) Hysan Development Company Limited ANNUAL REPORT 2002 37 Number of shares 1,024,743,032 4,379,714 5,125,512 88,766 279,901 % 99.04 0.42 0.50 0.01 0.03 1,034,616,925 100.00 Location of Shareholders (as at 31 December 2002, as per register of members of the Company) Location of shareholders Hong Kong U.K. US and Canada Singapore Others Total Shareholder Rights All ordinary shares of the Company have equal voting rights. The Board welcomes moves towards a more constructive use of Annual General Meetings and regards the Annual General Meeting as the principal opportunity to meet private shareholders. Annual General Meeting proceedings are continually reviewed in the light of corporate governance best practices. Separate resolutions are proposed at the Annual General Meeting on each substantially separate issue, including the election of individual directors. Comprehensive information on businesses to be transacted at the forthcoming Annual General Meeting, together with frequently asked questions regarding the voting procedures, has been included in the circular accompanying the Annual Report. The Company arranges for the Annual Report and Financial Statements and related papers to be posted to shareholders so as to allow at least 35 days for consideration prior to the Annual General Meeting. Financial and other information on the Group is also made available at the Group’s website at www.hysan.com.hk. By order of the Board Wendy W. Y. Yung Company Secretary Hong Kong, 11 March 2003 Hysan Development Company Limited ANNUAL REPORT 2002 38 Audit Committee Report The Audit Committee has three members, a majority of whom are independent non-executive Directors. The Committee oversees the financial reporting process. In this process, management is primarily responsible for the preparation of Group financial statements including the selection of suitable accounting policies. External auditors are responsible for auditing and attesting to Group financial statements and evaluating Group system of internal controls. The Audit Committee oversees the respective work of management and external auditors to endorse the processes and safeguards employed by them. The Audit Committee has reviewed and discussed with management and external auditors the 2002 consolidated financial statements included in the 2002 Annual Report. In this regard, the Committee had discussions with management with regard to new or changes in accounting policies as applied, and significant judgments affecting the Group financial statements. The Committee also received reports and met with the external auditors to discuss the general scope of their audit work, their assessment of Group internal controls. Based on these review and discussions, and the report of the external auditors, the Audit Committee recommended to the Board of Directors approval of the consolidated financial statements for the year ended 31 December 2002, with the Auditors’ Report thereon. The Audit Committee also reviewed and recommended to the Board of Directors approval of the unaudited financial statements for the first six months of 2002, prior to public announcement and filing. The Committee recommended to the Board that the shareholders be asked to re-appoint Deloitte Touche Tohmatsu as the Group’s external auditors for 2003. The Committee presents a report to the Board on its findings after each Committee meeting. MEMBERS OF THE AUDIT COMMITTEE David AKERS-JONES (Chairman) Per JORGENSEN Chien LEE Hong Kong, 11 March 2003 Hysan Development Company Limited ANNUAL REPORT 2002 39 Directors’ Report The Directors submit their report together with the audited financial statements for the year ended 31 December 2002, which were approved by the Board of Directors on 11 March 2003. PRINCIPAL ACTIVITIES The principal activities of the Group continued throughout 2002 to be property development and investment and investment holding. Details of the Group’s associates and principal subsidiaries at 31 December 2002 are set out in notes 15 and 39 respectively to the financial statements. An analysis of Group’s turnover is set out in note 4 to the financial statements. As the Group’s turnover is derived principally from rental income and wholly in Hong Kong, no segment financial analysis is provided. A detailed review of the development of the business of the Group during the year, and likely future developments, is set out in the Chairman’s Statement and the Operating and Financial Review of the Annual Report. RESULTS AND APPROPRIATIONS The results of the Group for the year ended 31 December 2002 are set out in the consolidated income statement on page 43. An interim dividend of HK$0.10 per share amounting to HK$103,355,198 was paid to shareholders during the year. The Board of Directors recommends the payment of a final dividend of HK$0.265 per share with a scrip alternative to the shareholders on the register of members on 13 May 2003, absorbing HK$274,173,485. The ordinary dividends paid and proposed in respect of the full year 2002 will absorb HK$377,528,683, the balance of the profit will be retained. RESERVES Movements during the year in the reserves of the Group and the Company are set out in notes 29 and 30 to the financial statements. INVESTMENT PROPERTIES All of the Group’s investment properties were revalued by an independent professional valuer at 31 December 2002. The revaluation resulted in a deficit as compared to carrying amount of HK$2,158 million, with the Group’s attributable share being HK$2,073 million, which has been charged directly to the investment property revaluation reserve. Details of movements during the year in the investment properties of the Group and the Company are set out in note 13 to the financial statements. Details of the major investment properties of the Group at 31 December 2002 are set out in section under “Schedule of Principal Properties” of the Annual Report. PROPERTY, PLANT AND EQUIPMENT Details of movements during the year in the property, plant and equipment of the Group and the Company are set out in note 12 to the financial statements. Hysan Development Company Limited ANNUAL REPORT 2002 40 Directors’ Report SHARE CAPITAL AND FIXED RATE NOTES The Company issued a total of 3,313,550 ordinary shares under the scrip dividend scheme accompanying year 2001 final dividends and year 2002 interim dividends. During the year, neither the Company nor its subsidiaries purchased, sold or redeemed any of the Company’s listed securities. Details of movements during the year in the share capital of the Company are set out in note 28 to the financial statements. During the year, a subsidiary of the Company issued an aggregate of US$200 million 7% ten-year notes under the established medium term note programme with a full guarantee of the Company. The notes were listed on the Luxembourg Stock Exchange. The net proceeds were predominately used to refinance the maturing debts and for general corporate purpose. CORPORATE GOVERNANCE The Company is committed to a high standard of corporate governance and has complied throughout the year with the Code of Best Practice (the “Code of Best Practice”) as set out in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”). Further information on the Company’s corporate governance practices is set out in the section “Corporate Governance”. Such section sets out detailed information on (a) Board effectiveness (including workings of Audit Committee and other Board committees); (b) Directors’ remuneration and interests (including information on Directors’ emoluments, service contracts, interests in shares, executive share options, interests in contracts of significance and interests in competing businesses under the Listing Rules); and (c) Connected and Related Party Transactions. Further information on Group human resources and social responsibility are set out in relevant sections of the Annual Report. THE BOARD The Board currently comprises Peter T. C. Lee, Chairman and Managing Director, Michael T. H. Lee, Chief Operating Officer and Director, Pauline W. L. Yu Wong, Director, Property and Michael C. K. Moy, Chief Financial Officer and Director, and nine other non-executive Directors, Sir David Akers-Jones acts as the Independent non-executive Deputy Chairman, also chairing the two corporate governance committees, namely the Audit Committee and Emoluments Review Committee. The biographies of the Directors appear on pages 24 and 25. Under the Company’s articles of association, all Directors are subject to retirement by rotation. The three Directors who have been longest in office as at each Annual General Meeting will retire from office and be subject to re-election. Dr. Victor K.K. Fung, having served on the Board since 1998, gave notice that he would not stand for re-election as at the forthcoming Annual General Meeting. Accordingly, Peter T. C. Lee and Chien Lee will retire from office at the forthcoming Annual General Meeting and, being eligible, offer themselves for re-election. During the year, Claus Michael Valentin Hemmingsen, Raymond Liang- ming Hu, Markus Friedrich Jebsen and V-nee Yeh served as alternate Directors. Hysan Development Company Limited ANNUAL REPORT 2002 41 DIRECTORS’ RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS The Companies Ordinance requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the Group as at the end of the financial year and of their respective profit or loss for the year then ended. In preparing the financial statements, the Directors are required to: (a) select suitable accounting policies and apply them on a consistent basis, making judgments and estimates that are prudent, fair and reasonable; (b) state the reasons for any significant departure from accounting standards; and (c) prepare the financial statements on the going concern basis, unless it is not appropriate to presume that the Company and the Group will continue in business for the foreseeable future. The Directors are responsible for keeping proper accounting records, for safeguarding the assets of the Company and of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities. SUBSTANTIAL SHAREHOLDERS The register of substantial shareholders maintained under Section 16(1) of the Securities (Disclosure of Interests) Ordinance shows that as at 31 December 2002, the Company has been notified of the following interests, being ten per cent (10%) or more of the Company’s issued share capital: Lee Hysan Estate Company, Limited and certain of its subsidiaries No. of shares 429,046,912 These interests are in addition to those disclosed in “Corporate Governance” section of the Annual Report in respect of the Directors. MAJOR CUSTOMERS AND SUPPLIERS The aggregate turnover attributable to the Group’s five largest customers was less than 30% of total turnover. The aggregate purchases attributable to the Group’s five largest suppliers was less than 30% of total purchases. POST BALANCE SHEET EVENT Details of the post balance sheet event are set out in note 38 to the financial statements. DONATIONS During the year, the Group made donations totalling HK$1,457,382 for charitable and other purposes. AUDITORS A resolution for the re-appointment of Messrs. Deloitte Touche Tohmatsu as auditors of the Company is to be proposed at the forthcoming Annual General Meeting. By order of the Board Peter T. C. Lee Chairman and Managing Director Hong Kong, 11 March 2003 Hysan Development Company Limited ANNUAL REPORT 2002 42 Auditors’ Report TO THE SHAREHOLDERS OF HYSAN DEVELOPMENT COMPANY LIMITED 希慎興業有限公司 (Incorporated in Hong Kong with limited liability) We have audited the financial statements on pages 43 to 77 which have been prepared in accordance with accounting principles generally accepted in Hong Kong. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Companies Ordinance requires the directors to prepare 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 statements and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstance of the Company and the Group, 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. OPINION In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2002 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Ordinance. DELOITTE TOUCHE TOHMATSU Certified Public Accountants Hong Kong, 11 March 2003 Hysan Development Company Limited Consolidated Income Statement for the year ended 31 December 2002 ANNUAL REPORT 2002 43 Turnover Property expenses Cost of property sales Gross profit Impairment loss (arising) reversed in respect of investments in securities Other operating income Release of negative goodwill arising on acquisition of additional interest in a subsidiary Administrative expenses Profit from operations Finance costs Gain on disposal of an associate Impairment loss arising in respect of interests in associates Share of results of associates Profit before taxation Taxation Profit after taxation Minority interests Net profit for the year Dividends Earnings per share Basic Diluted Notes 4 5 8 9 29 10 11 2002 HK$’000 1,233,398 (235,841) (50) 2001 HK$’000 1,355,450 (223,598) — 997,507 1,131,852 (800) 15,908 60 (85,836) 926,839 (220,553) — (10,064) 143 696,365 (97,903) 598,462 (54,588) 6,225 18,557 60 (89,956) 1,066,738 (314,428) 33,531 (4,880) (2,338) 778,623 (114,903) 663,720 (63,377) 543,874 600,343 377,529 391,598 HK52.66 cents HK58.26 cents HK52.66 cents HK58.24 cents Hysan Development Company Limited ANNUAL REPORT 2002 44 Consolidated Balance Sheet at 31 December 2002 Non-current assets Property, plant and equipment Investment properties Interests in associates Investments in securities Negative goodwill Staff housing loans, secured Current assets Cash and bank balances Time deposits Accounts receivable Interest receivable Staff housing loans, secured - due within one year Prepayments and deposits Current liabilities Long term bank loans - due within one year Floating rate notes Creditors and accruals Interest payable Rental deposits from tenants Deferred income Taxation payable Unclaimed dividends Net current liabilities Notes 2002 HK$’000 2001 HK$’000 12 13 15 16 17 18 19 18 24 25 20 21 56,329 24,841,010 61,317 1,483,821 (1,076) 16,452 50,158 26,638,500 61,324 1,754,059 (1,136) 20,936 26,457,853 28,523,841 1,574 21,372 10,117 24,215 1,863 38,183 457 26,612 9,445 14 2,764 59,459 97,324 98,751 737,638 — 108,598 74,234 233,530 686 126,122 1,412 139,837 1,999,547 58,233 13,220 248,911 — 100,673 2,137 1,282,220 2,562,558 (1,184,896) (2,463,807) Total assets less current liabilities carried forward 25,272,957 26,060,034 Hysan Development Company Limited ANNUAL REPORT 2002 45 Total assets less current liabilities brought forward 25,272,957 26,060,034 Notes 2002 HK$’000 2001 HK$’000 Non-current liabilities Advances from investees Amounts due to minority shareholders Long term bank loans - due after one year Floating rate notes Fixed rate notes Deferred income Deferred taxation MINORITY INTERESTS NET ASSETS CAPITAL AND RESERVES Share capital Accumulated profits Other reserves 22 23 24 25 26 21 27 28 29 30 51,676 292,765 3,009,223 398,090 1,551,003 5,541 1,295 52,571 292,765 3,088,634 397,047 — — — 5,309,593 3,831,017 19,963,364 22,229,017 876,388 962,092 19,086,976 21,266,925 5,173,084 3,747,017 10,166,875 5,156,516 3,580,672 12,529,737 19,086,976 21,266,925 The financial statements on pages 43 to 77 were approved and authorised for issue by the Board of Directors on 11 March 2003 and are signed on its behalf by: Peter T.C. Lee Director David Akers-Jones Director Hysan Development Company Limited ANNUAL REPORT 2002 46 Balance Sheet at 31 December 2002 Non-current assets Property, plant and equipment Investment properties Investments in subsidiaries Interests in associates Investments in securities Staff housing loans, secured Current assets Cash and bank balances Time deposits Accounts receivable Staff housing loans, secured - due within one year Prepayments and deposits Current liabilities Long term bank loans - due within one year Creditors and accruals Interest payable Rental deposits from tenants Amounts due to subsidiaries Taxation payable Unclaimed dividends Net current liabilities Total assets less current liabilities Non-current liabilities Long term bank loans - due after one year Deferred taxation NET ASSETS CAPITAL AND RESERVES Share capital Accumulated profits Other reserves Notes 2002 HK$’000 2001 HK$’000 12 13 14 15 16 18 19 18 24 20 24 27 28 29 30 12,475 3,295,000 12,990,625 3 2,031 16,452 5,735 3,500,000 12,908,172 3 2,831 20,936 16,316,586 16,437,677 939 882 1,614 1,863 9,547 14,845 687,638 14,177 11,458 27,366 622,700 16,332 1,412 1,381,083 1,023 925 2,416 2,764 15,289 22,417 139,837 16,711 11,066 27,307 7,473 6,696 2,137 211,227 (1,366,238) (188,810) 14,950,348 16,248,867 2,200,123 1,295 3,088,634 — 2,201,418 3,088,634 12,748,930 13,160,233 5,173,084 3,741,503 3,834,343 5,156,516 3,957,698 4,046,019 12,748,930 13,160,233 The financial statements on pages 43 to 77 were approved and authorised for issue by the Board of Directors on 11 March 2003 and are signed on its behalf by: Peter T.C. Lee Director Hysan Development Company Limited David Akers-Jones Director Consolidated Statement of Changes in Equity for the year ended 31 December 2002 ANNUAL REPORT 2002 47 At beginning of the year Unrealised loss on investments in other securities Deficit on revaluation of investment properties Deficit on revaluation of land and buildings Deficit on revaluation of investment properties shared by minority shareholders Net losses not recognised in the income statements Net profit for the year Dividends paid during the year Issue of shares in lieu of cash dividend Premium on issue of shares in lieu of cash dividend Share issue expenses Shares repurchased and cancelled Reversal of capital reserve and translation reserve on disposal of an associate Realisation on disposal of investment properties At end of the year Represented by: Balance after amount set aside for dividend Amount set aside for dividend 2002 HK$’000 2001 HK$’000 21,266,925 23,478,424 (284,395) (2,158,317) (856) 86,600 (2,356,968) 543,874 (392,120) 16,568 10,199 (10) — — (1,492) (566,708) (1,972,248) (2,823) 131,703 (2,410,076) 600,343 (422,211) 40,080 30,847 (31) (64,320) 13,869 — 19,086,976 21,266,925 18,812,802 274,174 20,978,160 288,765 19,086,976 21,266,925 Hysan Development Company Limited ANNUAL REPORT 2002 48 Consolidated Cash Flow Statement for the year ended 31 December 2002 OPERATING ACTIVITIES Profit from operations Adjustments for: Impairment loss arising (reversed) in respect of investments in securities Interest income Dividend income Depreciation Gain on property sales Bank charges Medium Term Note Programme expenses Loss on disposal of property, plant and equipment Release of negative goodwill arising on acquisition of 2002 HK$’000 2001 HK$’000 926,839 1,066,738 800 (4,842) (10,512) 4,793 (1,500) (9,543) (509) 2 (6,225) (3,749) (14,408) 6,029 — (7,930) (1,967) — additional interest in a subsidiary (60) (60) Operating cash flows before movements in working capital 905,468 1,038,428 Decrease (increase) in accounts receivable, prepayments and deposits Decrease in staff housing loans, secured Increase (decrease) in rental deposits from tenants, creditors and accruals Cash generated from operations Hong Kong Profits Tax paid 20,604 5,385 35,118 966,575 (71,159) (41,142) 7,781 (19,856) 985,211 (73,367) NET CASH FROM OPERATING ACTIVITIES 895,416 911,844 INVESTING ACTIVITIES Interest received Dividends received from investments in securities Dividends received from associates Additions to investment properties Additions to property, plant and equipment Proceeds on disposal of investment properties Proceeds on disposal of property, plant and equipment Acquisition of additional interest in a subsidiary Advance to an associate Repayments from an associate Net proceeds received on disposal of an associate Advances to investees Construction costs paid 4,222 9,617 150 (362,465) (11,872) 1,550 50 — (10,064) — — (14,957) (38) 3,826 8,612 — (178,098) (2,380) — — (243,947) (7,288) 1,601 35,929 (17,207) (179) NET CASH USED IN INVESTING ACTIVITIES (383,807) (399,131) Hysan Development Company Limited ANNUAL REPORT 2002 49 2002 HK$’000 2001 HK$’000 6,855 (171,213) (366,078) (53,692) (10) — — 1,750,038 1,550,016 (1,231,648) (2,000,000) — — (316,019) (351,429) (63,502) (31) (64,320) (263,754) 1,604,814 — (1,081,843) — (1,115) FINANCING ACTIVITIES Net proceeds received on derivatives Interest paid Dividends paid Dividends paid to minority shareholders of subsidiaries Share issue expenses Repurchase of own shares Repayment of long term loan in respect of acquisition of additional interest in a subsidiary New unsecured bank loans Issue of fixed rate notes Repayment of unsecured bank loans Repayment of floating rate notes Repayment to investees NET CASH USED IN FINANCING ACTIVITIES (515,732) (537,199) NET DECREASE IN CASH AND CASH EQUIVALENTS (4,123) (24,486) CASH AND CASH EQUIVALENTS AT 1 JANUARY 27,069 51,555 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 22,946 27,069 ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Time deposits 1,574 21,372 457 26,612 22,946 27,069 Hysan Development Company Limited ANNUAL REPORT 2002 50 Notes to the Financial Statements for the year ended 31 December 2002 1. GENERAL The Company is a public listed limited company incorporated in Hong Kong and its shares are listed on The Stock Exchange of Hong Kong Limited. The principal activities of the Group are property development and investment and investment holding. 2. ADOPTION OF STATEMENTS OF STANDARD ACCOUNTING PRACTICE In the current year, the Group has adopted, for the first time, a number of new and revised Statements of Standard Accounting Practice (SSAPs) issued by the Hong Kong Society of Accountants. The adoption of these SSAPs has resulted in a change in the format of presentation of the cash flow statement and the statement of changes in equity but has had no material effect on the results for the current or prior accounting periods. Accordingly, no prior period adjustment has been required. Foreign Currencies The revisions to SSAP 11 “Foreign Currency Translation” have eliminated the choice of translating the income statements of overseas associates at the closing rate for the period, the policy previously followed by the Group. They are now required to be translated at an average rate. This change in accounting policy has not had any material effect on the results for the current or prior accounting periods. Cash Flow Statements In the current period, the Group has adopted SSAP 15 (Revised) “Cash Flow Statements”. Under SSAP 15 (Revised), cash flows are classified under three headings — operating, investing and financing, rather than the previous five headings. Interests received and interests paid, which were previously presented under a separate heading, are classified as investing and financing cash flows respectively. Cash flows arising from taxes on income are classified as operating activities, unless they can be separately identified with investing or financing activities. Cash flows of overseas associates have been re-translated at the rates prevailing at the dates of the cash flows rather than the rate of exchange ruling on the balance sheet date. The change in exchange rates used for translation of the cash flows of overseas associates has not had any material effect on the results for the current or prior accounting periods. Employee Benefits In the current period, the Group has adopted SSAP 34 “Employee Benefits”, which introduces measurement rules for employee benefits, including retirement benefit plans. Because the Group participates only in defined contribution retirement benefit schemes, the adoption of SSAP 34 has not had any material impact on the financial statements. 3. SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared under the historical cost convention, as modified for the revaluation of properties and investments in securities. The financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies adopted are set out below: Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 December each year. All significant intercompany transactions and balances within the Group have been eliminated on consolidation. Hysan Development Company Limited ANNUAL REPORT 2002 51 3. SIGNIFICANT ACCOUNTING POLICIES continued Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or an associate at the date of acquisition. Goodwill arising on acquisitions on or after 1 January 2001 is capitalised and amortised on a straight line basis over its useful life. Goodwill arising on the acquisition of an associate is included within the carrying amount of the associate. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet. Goodwill arising on acquisitions prior to 1 January 2001 continues to be held in reserves, and will be charged to the income statement at the time of disposal of the relevant subsidiary or associate, or at such time as the goodwill is determined to be impaired. Negative goodwill Negative goodwill represents the excess of the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or an associate at the date of acquisition over the cost of acquisition. Negative goodwill arising on acquisitions on or after 1 January 2001 is presented as deduction from assets and will be released to income based on an analysis of the circumstances from which the balance resulted. To the extent that the negative goodwill is attributable to losses or expenses anticipated at the date of acquisition, it is released to income in the period in which those losses or expenses arise. The remaining negative goodwill is recognised as income on a straight line basis over the remaining average useful life of the identifiable acquired depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable non-monetary assets, it is recognised in income immediately. Negative goodwill arising on the acquisition of an associate is deducted from the carrying value of that associate. Negative goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet as a deduction from assets. Negative goodwill arising on acquisitions prior to 1 January 2001 continues to be held in reserves and will be credited to income at the time of disposal of the relevant subsidiary or associate. Investments in subsidiaries Investments in subsidiaries are included in the Company’s balance sheet at cost less any identified impairment loss. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable during the year. Interests in associates The results and assets and liabilities of associates are incorporated in the consolidated financial statements using the equity method of accounting. The carrying amount of such interests is reduced to recognise any identified impairment loss in the value of individual investments. The results of associates are accounted for by the Company on the basis of dividends received and receivable during the year. Hysan Development Company Limited ANNUAL REPORT 2002 52 Notes to the Financal Statements 3. SIGNIFICANT ACCOUNTING POLICIES continued Investments in securities Investments in securities are recognised on a trade date basis and are initially measured at cost. All securities other than held-to-maturity debt securities are measured at fair value at subsequent reporting dates. Where securities are held for trading purposes, unrealised gains and losses are included in net profit or loss for the year. For other securities, unrealised gains and losses are dealt with in the investment revaluation reserve, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss is included in net profit or loss for the year. Investment properties Investment properties are completed properties which are held for their investment potential, any rental income being negotiated at arm’s length. Investment properties are stated at their open market value based on independent professional valuations at each balance sheet date. Any surplus or deficit arising on the revaluation of investment properties is credited or charged to the investment property revaluation reserve unless the balance on this reserve is insufficient to cover a deficit, in which case the excess of the deficit over the balance on the investment property revaluation reserve is charged to the income statement. Where a deficit has previously been charged to the income statement and a revaluation surplus subsequently arises, this surplus is credited to the income statement to the extent of the deficit previously charged. On disposal of an investment property, the balance on the investment property revaluation reserve attributable to the property disposed of is transferred to the income statement. No depreciation is provided on investment properties except where the unexpired term of the relevant lease is 20 years or less. Property, plant and equipment Property, plant and equipment are stated at cost or valuation less accumulated depreciation and any accumulated impairment losses. Land and buildings are stated in the balance sheet at their revalued amount, being the fair value on the basis of their existing use at the date of revaluation less any subsequent accumulated depreciation and any subsequent impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. Any surplus arising on revaluation of land and buildings is credited to the asset revaluation reserve, except to the extent that it reverses a revaluation decrease of the same asset previously recognised as an expense, in which case this surplus is credited to the income statement to the extent of the deficit previously charged. A decrease in net carrying amount arising on revaluation of an asset is dealt with as an expense to the extent that it exceeds the balance, if any, on the asset revaluation reserve relating to a previous revaluation of that asset. On the subsequent sale or retirement of a revalued asset, the attributable revaluation surplus is transferred to accumulated profits. Hysan Development Company Limited ANNUAL REPORT 2002 53 3. SIGNIFICANT ACCOUNTING POLICIES continued Property, plant and equipment continued Depreciation is provided to write off the cost or valuation of items of property, plant and equipment over their estimated useful lives, using the straight line method, at the following rates per annum: Leasehold land Buildings Furniture, fixtures and equipment Computers Motor vehicles Over the remaining term of the lease Over the shorter of the term of the lease, or 40 years 20% 20% 25% The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in the income statement. Impairment At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment loss is recognised as an expense immediately, unless the asset is carried at revalued amount under another SSAP, in which case the impairment loss is treated as revaluation decrease under that SSAP. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately, unless the asset is carried at revalued amount under another SSAP, in which case the impairment loss is treated as revaluation increase under that SSAP. Fixed rate notes / floating rate notes issue expenses Expenses incurred directly in connection with the issue of fixed rate notes / floating rate notes are deferred and amortised on a straight line basis over the terms of the notes. Foreign currencies Transactions in currencies other than Hong Kong dollars are initially recorded at the rates of exchange ruling on the dates of the transactions or at the contracted settlement rate. Monetary assets and liabilities denominated in such currencies are re-translated at the rates ruling on the balance sheet date, with the exception of those items covered under forward exchange contracts, which are re-translated at the contracted settlement rate. Gains and losses arising on exchange are dealt with in the income statement. On consolidation, the financial statements of associates which are denominated in currencies other than Hong Kong dollars are translated at the rates ruling on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classified as equity and are recognised as income or as expenses in the period in which the interests in associates are disposed of. Hysan Development Company Limited ANNUAL REPORT 2002 54 Notes to the Financal Statements 3. SIGNIFICANT ACCOUNTING POLICIES continued Taxation The charge for taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. Timing differences arise from the recognition for tax purposes of certain items of income and expense in a different accounting period from that in which they are recognised in the financial statements. The tax effect of the resulting timing differences, computed using the liability method, is recognised as deferred taxation in the financial statements to the extent that it is probable that a liability or an asset will crystallise in the foreseeable future. Operating leases Rentals receivable and payable under operating leases are credited and charged respectively to the income statement on a straight line basis over the relevant lease term. Retirement benefit costs Payments to the Mandatory Provident Fund Scheme are charged as an expense as they fall due. Recognition of income Rental income is recognised on a straight line basis over the relevant lease term. Income from property sales is recognised on the execution of a binding sales agreement. Management fee income and security service income are recognised when the services are rendered. Dividend income from investments is recognised when the shareholders’ right to receive payment has been established. Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable. Financial instruments and derivatives Interest rate and currency swaps are used to manage the Group’s exposure to interest rate and foreign exchange rate fluctuation. It is the Group’s policy not to enter into derivative transactions for speculative purposes. The notional amounts of interest rate and currency swaps are recorded off balance sheet. Interest flows arising on the interest rate swaps are accounted for on an accrual basis. 4. TURNOVER Turnover comprises: Gross rental income from properties Income from property sales Management fee and security service income 2002 HK$’000 2001 HK$’000 1,229,599 1,550 2,249 1,351,892 — 3,558 1,233,398 1,355,450 As the Group’s turnover is derived principally from rental income and wholly in Hong Kong, no segment financial analysis is provided. Hysan Development Company Limited 5. PROFIT FROM OPERATIONS Profit from operations has been arrived at after charging (crediting): Staff costs Retirement benefits scheme contributions (Note 32) Forfeited contributions Depreciation Auditors’ remuneration Rental income arising from operating leases less out-goings Dividends from – listed investments – unlisted investments Gain on property sales Interest income Loss on disposal of property, plant and equipment 6. DIRECTORS’ REMUNERATION Directors’ fees Other emoluments: Basic salaries Housing, other allowances and benefits in kind Bonus paid Retirement benefits scheme contributions ANNUAL REPORT 2002 55 2002 HK$’000 2001 HK$’000 111,699 4,821 (1,189) 107,645 4,456 (2,742) 115,331 109,359 4,793 1,629 (996,702) 6,029 1,636 (1,131,580) (3,145) (7,367) (1,500) (4,842) 2 (8,612) (5,796) — (3,749) — 2002 HK$’000 2001 HK$’000 757 7,809 2,739 1,552 232 792 7,776 3,556 1,625 210 13,089 13,959 Hysan Development Company Limited ANNUAL REPORT 2002 56 Notes to the Financal Statements 6. DIRECTORS’ REMUNERATION continued The number of Directors whose remuneration / fees within the bands set out below is as follows: HK$ 0 – HK$1,000,000 HK$1,000,001 – HK$1,500,000 HK$1,500,001 – HK$2,000,000 HK$2,000,001 – HK$2,500,000 HK$2,500,001 – HK$3,000,000 HK$3,000,001 – HK$3,500,000 HK$3,500,001 – HK$4,000,000 HK$4,000,001 – HK$4,500,000 HK$4,500,001 – HK$5,000,000 2002 No. of Directors 2001 No. of Directors 9 1 — — — 2 — 1 — 13 11 1 — — — 1 1 — 1 15 Directors’ fees paid to independent non-executive Directors during the year totalled HK$255,000 (2001: HK$249,740). They received no other emoluments from the Company or any of its subsidiaries. 7. EMPLOYEE COSTS The five highest paid individuals included four (2001: three) Directors, details of whose remuneration are set out in note 6. The remuneration of the one individual (2001: two individuals) is detailed as follows: Basic salaries, housing, other allowances and benefits in kind Bonus paid Retirement benefits scheme contributions Remuneration within the band: HK$1,000,001 – HK$1,500,000 HK$1,500,001 – HK$2,000,000 HK$2,000,001 – HK$2,500,000 Hysan Development Company Limited 2002 HK$’000 2001 HK$’000 2,120 277 12 2,409 3,886 369 24 4,279 2002 No. of employees 2001 No. of employees — — 1 1 — 1 1 2 8. FINANCE COSTS Interest on – bank loans, overdraft and other loans: wholly repayable within five years not repayable within five years – floating rate notes – fixed rate notes Amortisation of fixed rate and floating rate notes issue expenses Bank charges Net exchange loss Medium Term Note Programme expenses 9. TAXATION The charge comprises: Hong Kong Profits Tax – for the year – (over) underprovision in prior years Deferred taxation (note 27) ANNUAL REPORT 2002 57 2002 HK$’000 2001 HK$’000 78,625 16,292 24,952 88,149 179,209 4,789 117,678 — 208,018 301,676 2,401 9,543 82 509 2,855 7,930 — 1,967 220,553 314,428 2002 HK$’000 2001 HK$’000 106,703 (10,095) 96,608 1,295 114,799 104 114,903 — Taxation attributable to the Company and its subsidiaries 97,903 114,903 Hong Kong Profits Tax is calculated at 16% (2001: 16%) of the estimated assessable profit for the year. Details of the potential deferred tax charge not provided for in the year are set out in note 27. Hysan Development Company Limited ANNUAL REPORT 2002 58 Notes to the Financal Statements 10. DIVIDENDS Ordinary shares: Interim dividend, paid – HK$0.10 per share (2001: HK$0.10) Final dividend, proposed – HK$0.265 per share (2001: HK$0.28) 2002 HK$’000 2001 HK$’000 103,355 274,174 102,833 288,765 377,529 391,598 The 2002 final dividend of HK$0.265 (2001: HK$0.28) per share has been proposed by the directors and is subject to approval by the shareholders in general meeting. The proposed final dividend for 2002 will be payable in cash with a scrip dividend alternative. During the year, scrip dividend alternatives were offered to shareholders in respect of the 2001 final and 2002 interim dividends. These alternatives were accepted by the shareholders as follows: Dividends: Cash Share alternative 11. EARNINGS PER SHARE The calculation of the basic and diluted earnings per share is based on the following data: Earnings for the purposes of basic and diluted earnings per share (net profit for the year) Weighted average number of ordinary shares for the purposes of basic earnings per share Effect of dilutive potential ordinary shares: Share options Weighted average number of ordinary shares for the purposes of diluted earnings per share 2002 Interim HK$’000 96,646 6,709 2001 Final HK$’000 268,707 20,058 103,355 288,765 2002 HK$’000 2001 HK$’000 543,874 600,343 ’000 ’000 1,032,758 1,030,485 — 358 1,032,758 1,030,843 The computation of diluted earnings per share does not assume the exercise of certain of the Company’s outstanding share options as the exercise prices are higher than the fair value per share. Hysan Development Company Limited ANNUAL REPORT 2002 59 12. PROPERTY, PLANT AND EQUIPMENT Land and buildings in Hong Kong under long lease HK$’000 Furniture, fixtures and equipment HK$’000 Computers HK$’000 Motor vehicles HK$’000 Total HK$’000 42,500 — — (1,500) 39,999 2,441 (305) — 5,280 9,431 — — 1,611 — — — 89,390 11,872 (305) (1,500) THE GROUP COST OR VALUATION At 1 January 2002 Additions Disposals Deficit on revaluation At 31 December 2002 41,000 42,135 14,711 1,611 99,457 Comprising: At cost At valuation 2002 — 41,000 42,135 — 14,711 — 1,611 — 58,457 41,000 41,000 42,135 14,711 1,611 99,457 ACCUMULATED DEPRECIATION At 1 January 2002 Provided for the year Eliminated on disposals Adjustment on revaluation — 644 — (644) 34,786 3,165 (253) — At 31 December 2002 — 37,698 2,835 984 — — 3,819 1,611 — — — 39,232 4,793 (253) (644) 1,611 43,128 NET BOOK VALUES At 31 December 2002 41,000 4,437 10,892 At 31 December 2001 42,500 5,213 2,445 — — 56,329 50,158 Hysan Development Company Limited ANNUAL REPORT 2002 60 Notes to the Financal Statements 12. PROPERTY, PLANT AND EQUIPMENT continued THE COMPANY COST At 1 January 2002 Additions At 31 December 2002 ACCUMULATED DEPRECIATION At 1 January 2002 Provided for the year At 31 December 2002 NET BOOK VALUES At 31 December 2002 At 31 December 2001 Furniture, fixtures and equipment HK$’000 Computers HK$’000 Motor vehicles HK$’000 Total HK$’000 19,757 1,126 20,883 16,457 2,363 18,820 2,063 3,300 5,266 8,900 14,166 2,831 923 3,754 10,412 2,435 1,611 — 1,611 1,611 — 1,611 — — 26,634 10,026 36,660 20,899 3,286 24,185 12,475 5,735 The leasehold land and buildings of the Group were revalued at 31 December 2002 by Knight Frank (Services) Limited, an independent professional valuer, on an open market value basis. The deficit arising on revaluation has been charged to asset revaluation reserve. If leasehold land and buildings of the Group had not been revalued, they would have been included in these financial statements at cost less accumulated depreciation at HK$33,560,049 (2001: HK$34,084,593). Furniture, fixtures and equipment of the Group and the Company include assets carried at cost of HK$21,897,838 (2001: HK$20,512,083) and HK$1,266,778 (2001: HK$846,317) respectively and accumulated depreciation of HK$19,216,069 (2001: HK$18,692,470) and HK$841,662 (2001: HK$804,179) respectively in respect of assets held for use under operating leases. Depreciation charges in respect of those assets for the year amounted to HK$776,954 (2001: HK$944,589) and HK$37,483 (2001: HK$21,352) respectively. Hysan Development Company Limited ANNUAL REPORT 2002 61 13. INVESTMENT PROPERTIES At 1 January Additions Adjustment resulted from cost variation Disposals Deficit on revaluation THE GROUP THE COMPANY 2002 HK$’000 2001 HK$’000 26,638,500 362,465 (96) (1,542) (2,158,317) 28,432,700 178,098 (50) — (1,972,248) 2002 HK$’000 3,500,000 2,274 — — (207,274) 2001 HK$’000 3,740,000 1,331 — — (241,331) At 31 December 24,841,010 26,638,500 3,295,000 3,500,000 The value of investment properties comprises: Land in Hong Kong: – Medium term lease – Long lease THE GROUP THE COMPANY 2002 HK$’000 2001 HK$’000 2002 HK$’000 2001 HK$’000 4,000,000 20,841,010 4,300,000 22,338,500 — 3,295,000 — 3,500,000 24,841,010 26,638,500 3,295,000 3,500,000 The investment properties of the Group and the Company were revalued at 31 December 2002 by Knight Frank (Services) Limited, an independent professional valuer, on an open market value basis. The deficit arising on revaluation has been charged to investment property revaluation reserve. All of the investment properties of the Group and the Company are held for use under operating leases. 14. INVESTMENTS IN SUBSIDIARIES Unlisted shares, at cost Amounts due therefrom Less: Impairment loss THE COMPANY 2002 HK$’000 2001 HK$’000 5 13,394,620 5 13,312,167 13,394,625 (404,000) 13,312,172 (404,000) 12,990,625 12,908,172 The Directors consider that the unlisted investments are worth at least their cost. Details of the principal subsidiaries held by the Company at 31 December 2002 are set out in note 39. Hysan Development Company Limited ANNUAL REPORT 2002 62 Notes to the Financal Statements 15. INTERESTS IN ASSOCIATES Unlisted shares, at cost Share of net liabilities Amounts due therefrom Less: Impairment loss THE GROUP THE COMPANY 2002 HK$’000 — (77,171) (77,171) 159,850 82,679 (21,362) 2001 HK$’000 — (77,164) (77,164) 149,786 72,622 (11,298) 61,317 61,324 2002 HK$’000 2001 HK$’000 3 — 3 — 3 — 3 3 — 3 — 3 — 3 The aggregate attributable share of results of the associates is based on the unaudited management accounts of Parallel Asia Engineering Company Limited and Wingrove Investment Pte Limited for the year ended 31 December 2002. The Group’s share of post-acquisition losses of an associate exceeds the carrying amount of its equity investment in that associate, since the Group has obligation to meet its funding requirements. Details of the Group’s associates at 31 December 2002 are as follows: Form of business structure Place of incorporation and operation Class of share held Proportion of nominal value of issued share capital held by the Company directly indirectly Name of associate Parallel Asia Engineering Incorporated Hong Kong Ordinary — 25% Company Limited Wingrove Investment Incorporated Singapore Ordinary 25% — Pte Limited Principal activity Investment holding Property development and investment Hysan Development Company Limited 16. INVESTMENTS IN SECURITIES THE GROUP Equity securities: Listed in Hong Kong Other investments: Club debentures Less: Impairment loss Unlisted shares Amounts due therefrom Less: Impairment losses ANNUAL REPORT 2002 63 Other securities 2002 HK$’000 2001 HK$’000 772,827 1,057,222 2,831 (800) 2,031 136,856 700,440 837,296 (128,333) 2,831 — 2,831 136,856 685,483 822,339 (128,333) 708,963 694,006 710,994 696,837 1,483,821 1,754,059 Market value of securities listed in Hong Kong 772,827 1,057,222 Carrying amount analysed for reporting purposes as: Non-current 1,483,821 1,754,059 THE COMPANY Other investments: Club debentures Less: Impairment loss Carrying amount analysed for reporting purpose as: Non-current Other securities 2002 HK$’000 2001 HK$’000 2,831 (800) 2,031 2,831 — 2,831 2,031 2,831 Hysan Development Company Limited ANNUAL REPORT 2002 64 Notes to the Financal Statements 17. NEGATIVE GOODWILL Carrying amount at 1 January Negative goodwill arising on acquisition of additional interest in a subsidiary during the year Released to income during the year Carrying amount at 31 December THE GROUP 2002 HK$’000 2001 HK$’000 1,136 — (60) 1,076 — 1,196 (60) 1,136 The negative goodwill which arose on the Group’s acquisition of additional interest in a subsidiary is released to income on a straight line basis over a period of twenty years. 18. STAFF HOUSING LOANS, SECURED Staff housing loans, secured Less: Amounts due within one year shown under current assets THE GROUP AND THE COMPANY 2002 HK$’000 2001 HK$’000 18,315 (1,863) 23,700 (2,764) 16,452 20,936 The secured advances arise in connection with an established Staff Housing Loan scheme granted to the employees who meet the qualifying criteria. The advances bear a fixed interest rate of 4% per annum. 19. ACCOUNTS RECEIVABLE Accounts receivables are mainly in respect of rents which are normally payable in advance. Rents in arrears of the Group as at 31 December 2002 and 2001 were aged less than 90 days. Hysan Development Company Limited ANNUAL REPORT 2002 65 20. CREDITORS AND ACCRUALS All of the trade payables of the Group as at 31 December 2002 and 2001 were aged less than 90 days. 21. DEFERRED INCOME Deferred income Less: Amount due within one year shown under current liabilities THE GROUP 2002 HK$’000 2001 HK$’000 6,227 (686) 5,541 — — — In connection with the US$200 million ten-year inaugural notes, the Group has entered into derivative transactions to lock in the ten-year US Treasury rate so as to manage its interest rate exposures. The gain on the transactions is deferred and recognised on a straight line basis over the term of the ten-year notes, with final maturity in February 2012. 22. ADVANCES FROM INVESTEES The advances are unsecured, interest free and are not repayable within one year. 23. AMOUNTS DUE TO MINORITY SHAREHOLDERS The amounts are unsecured, interest free and are not repayable within one year. Hysan Development Company Limited ANNUAL REPORT 2002 66 Notes to the Financal Statements 24. LONG TERM BANK LOANS THE GROUP THE COMPANY 2002 HK$’000 2001 HK$’000 2002 HK$’000 2001 HK$’000 Bank loans, unsecured 3,746,861 3,228,471 2,887,761 3,228,471 The bank loans are repayable as follows: Within one year More than one year, but not exceeding two years More than two years, but not exceeding five years More than five years 737,638 139,837 687,638 139,837 685,600 435,500 685,600 435,500 1,617,600 706,023 2,172,634 480,500 1,200,500 314,023 2,172,634 480,500 3,746,861 3,228,471 2,887,761 3,228,471 Less: Amounts due within one year shown under current liabilities (737,638) (139,837) (687,638) (139,837) 3,009,223 3,088,634 2,200,123 3,088,634 25. FLOATING RATE NOTES Floating rate notes Less: Unamortised notes issue expenses THE GROUP 2002 HK$’000 400,000 (1,910) 2001 HK$’000 2,400,000 (3,406) 398,090 2,396,594 Less: Amount due within one year shown under current liabilities — (1,999,547) 398,090 397,047 HD Treasury (BVI) Limited and HD Finance (BVI) Limited, wholly-owned subsidiaries of the Company, issued HK$2,000 million and HK$400 million five-year floating rate notes on 27 March 1997 and 3 November 1999 respectively. The notes are guaranteed as to principal and interest by the Company, bear interest at the rate of 0.565% and 1.25% over the 3- month HIBOR and are repayable in full in March 2002 and November 2004 respectively. Hysan Development Company Limited 26. FIXED RATE NOTES Fixed rate notes Less: Unamortised notes issue expenses ANNUAL REPORT 2002 67 THE GROUP 2002 HK$’000 1,559,977 (8,974) 1,551,003 2001 HK$’000 — — — Hysan (MTN) Limited, a wholly-owned subsidiary of the Company, issued US$200 million ten-year fixed rate notes in February 2002. The notes are guaranteed as to principal and interest by the Company, bear interest at the rate of 7% per annum and are repayable in full in February 2012. 27. DEFERRED TAXATION At the balance sheet date, the deferred taxation provided represents the tax effect of timing differences because of excess of tax allowances over depreciation. A deferred tax asset has not been recognised in the financial statements in respect of tax losses available to offset future profits as it is not certain that the tax losses will be utilised in the foreseeable future. Deferred taxation has not been provided on the surplus arising on the valuation of investment properties, land and buildings and investments in securities because profits arising on the disposal of these assets would not be subject to taxation. Accordingly, the surplus arising on valuation does not constitute a timing difference for taxation purposes. 28. SHARE CAPITAL THE COMPANY Ordinary shares of HK$5 each Authorised: Number of shares Share capital 2002 ’000 2001 ’000 2002 HK$’000 2001 HK$’000 At 1 January and 31 December 1,450,000 1,450,000 7,250,000 7,250,000 Issued and fully paid: At 1 January Issued in lieu of cash dividend Shares repurchased and cancelled 1,031,303 3,314 — 1,030,251 8,016 (6,964) 5,156,516 16,568 — 5,151,256 40,080 (34,820) At 31 December 1,034,617 1,031,303 5,173,084 5,156,516 On 13 June 2002 and 21 October 2002 respectively, the Company issued and allotted a total of 2,248,645 shares and 1,064,905 shares of HK$5 each in the Company at HK$8.92 and HK$6.30 to the shareholders who elected to receive shares in the Company in lieu of cash for the 2001 final and 2002 interim dividends pursuant to the scrip dividend scheme announced by the Company on 14 May 2002 and 18 September 2002. These shares rank pari passu in all respects with other shares in issue. None of the Company’s subsidiaries purchased, sold or redeemed any of the Company’s listed securities during the year. Hysan Development Company Limited ANNUAL REPORT 2002 68 Notes to the Financal Statements 29. ACCUMULATED PROFITS THE GROUP THE COMPANY 2002 HK$’000 2001 HK$’000 2002 HK$’000 2001 HK$’000 At 1 January 3,580,672 3,436,247 3,957,698 4,077,068 Shares repurchased and cancelled: – Nominal value of shares repurchased – Premium on shares repurchased Net profit for the year — — 543,874 (34,820) (29,500) 600,343 — — 161,334 (34,820) (29,500) 336,548 Profit available for distribution Dividends 4,124,546 (377,529) 3,972,270 (391,598) 4,119,032 (377,529) 4,349,296 (391,598) At 31 December 3,747,017 3,580,672 3,741,503 3,957,698 The accumulated profits of the Group include accumulated losses of HK$87,987,293 (2001: HK$88,130,335) attributable to associates of the Group. The distributable reserves of the Company as at 31 December 2002 amounted to HK$3,841,503,255 (2001: HK$4,057,697,703), being its accumulated profits and general reserve at that date. Hysan Development Company Limited 30. OTHER RESERVES THE GROUP At 1 January 2001 Premium on issue of shares in lieu of cash dividend Share issue expenses Shares repurchased and cancelled Unrealised loss on investments in other securities Deficit on revaluation of investment properties Deficit on revaluation of land and buildings Deficit on revaluation of investment properties shared by minority shareholders Reversed on disposal of an associate Final dividend for 2000 paid Amount set aside for 2001 dividend Interim dividend for 2001 paid At 31 December 2001 Premium on issue of shares in lieu of cash dividend Share issue expenses Unrealised loss on investments in other securities Deficit on revaluation of investment properties Deficit on revaluation of land and buildings Deficit on revaluation of investment properties shared by minority shareholders Realisation on disposal of investment properties Final dividend for 2001 paid Amount set aside for 2002 dividend Interim dividend for 2002 paid ANNUAL REPORT 2002 69 Share Investment property premium revaluation reserve account HK$’000 HK$’000 Investment revaluation reserve HK$’000 Asset revaluation reserve HK$’000 Capital reserve HK$’000 Capital Translation redemption reserve HK’000 reserve HK$’000 General reserve HK’000 Dividend reserve HK’000 Total HK$’000 1,272,538 11,408,707 1,170,205 11,552 501,102 (12,736) 120,175 100,000 319,378 14,890,921 30,847 (31) — — — — — — — — — (566,708) — (1,972,248) — — — — — — — 131,703 — — — — — — — — — — — — — — — — (2,823) — — — — — — — — — — — — — — — — — — — 1,133 — 12,736 — — — 1,303,354 9,568,162 603,497 8,729 502,235 10,199 (10) — — — — — — (284,395) — (2,158,317) — — — — — — — 86,600 (1,492) — — — — — — — — — — — — — — (856) — — — — — — — — — — — — — — — — — 34,820 — — — — — — — — — — — — — — — — — — — — — — — 30,847 (31) 34,820 (566,708) — (1,972,248) — (2,823) — 131,703 — (319,378) 13,869 (319,378) 391,598 (102,833) 391,598 (102,833) 154,995 100,000 288,765 12,529,737 — — — — — — — — — — — — — — — — — — — — — — — 10,199 (10) (284,395) — (2,158,317) — — (856) 86,600 — (288,765) (1,492) (288,765) 377,529 (103,355) 377,529 (103,355) 154,995 100,000 274,174 10,166,875 Hysan Development Company Limited — — — — — — — — — — — — — — At 31 December 2002 1,313,543 7,494,953 319,102 7,873 502,235 ANNUAL REPORT 2002 70 Notes to the Financal Statements 30. OTHER RESERVES continued Share Investment property premium revaluation reserve account HK$’000 HK$’000 Capital redemption reserve HK$’000 General reserve HK$’000 Dividend reserve HK$’000 Total HK$’000 1,272,538 2,440,236 120,175 100,000 319,378 4,252,327 30,847 (31) — — — — — — — (241,331) — — — — — — — 34,820 — — — — — — — — — — — — — 30,847 (31) (241,331) — (319,378) 34,820 (319,378) 391,598 (102,833) 391,598 (102,833) 1,303,354 2,198,905 154,995 100,000 288,765 4,046,019 10,199 (10) — — — — — — (207,274) — — — — — — — — — — — — — — — — 10,199 (10) — (288,765) (207,274) (288,765) 377,529 (103,355) 377,529 (103,355) THE COMPANY At 1 January 2001 Premium on issue of shares in lieu of cash dividend Share issue expenses Deficit on revaluation of investment properties Shares repurchased and cancelled Final dividend for 2000 paid Amount set aside for 2001 dividend Interim dividend for 2001 paid At 31 December 2001 Premium on issue of shares in lieu of cash dividend Share issue expenses Deficit on revaluation of investment properties Final dividend for 2001 paid Amount set aside for 2002 dividend Interim dividend for 2002 paid At 31 December 2002 1,313,543 1,991,631 154,995 100,000 274,174 3,834,343 (a) (b) General reserve General reserve was set up from the transfer of accumulated profits. Capital reserve Capital reserve comprises negative goodwill of HK$516,142,884 (2001: HK$516,142,884) arising from acquisition of subsidiaries prior to 1 January 2001 and capitalisation issue of a subsidiary. Hysan Development Company Limited ANNUAL REPORT 2002 71 31. EXECUTIVE SHARE OPTION SCHEME The Company operates an Executive Share Option Scheme (the “Scheme”) under which options may be granted to employees of the Company or any of its wholly-owned subsidiaries to subscribe for ordinary shares of the Company, thereby strengthening the links between individual staff and shareholder interests. Approved by shareholders on 28 April 1995, the Scheme has a term of ten years. The maximum number of shares in respect of which options may be granted under the Scheme (together with shares issued and issuable under the Scheme) is 3% of the issued share capital of the Company (excluding shares issued pursuant to the Scheme) from time to time. The maximum entitlement of each participant under the Scheme is 25% of the maximum number of shares in respect of which options may at any time be granted under the Scheme. The exercise price was fixed at 80% of the average of the closing prices of the shares on the Hong Kong Stock Exchange for the twenty trading days immediately preceding the date of grant. Consideration to be paid on each grant of option is HK$1.00, with full payment for exercise price to be made on exercise of the relevant option. As at 31 December 2002, Scheme participants were executive Directors of the Company with shares issuable under options granted representing less than 0.4% (2001: 0.4%) of the then issued share capital of the Company. Options expiring, granted and outstanding to them are as follows: Changes During The Year Balance as at 1.1.2001 and 1.1.2002 Date of grant Cancelled/ Lapsed Granted Exercised Balance as Exercise price (HK$) at 31.12.2001 and 31.12.2002 Exercisable period Peter Ting Chang Lee Pauline Wah Ling Yu Wong Michael Chi Kung Moy 1,350,000 900,000 1,200,000 7.1.99 3.5.95 23.12.99 NIL NIL NIL NIL NIL NIL NIL NIL NIL 1,350,000 900,000 1,200,000 9.22 13.46 7.54 7.1.01-6.1.09 3.5.97-2.5.05 23.12.01-22.12.09 All options referred to above are subject to a five-year vesting period and a bar on the exercise of options within the first two years of their issue. No options have been granted since the coming into force of certain new Listing Rules requirements. Future grants will only be made under the existing Scheme where new Listing Rules requirements are complied with. The Chairman and Managing Director has been delegated by the Board the authority to make grants to other management staff, with the view to further strengthening the links between staff and shareholder objectives and to balance the interests of shareholders generally. The exercise price will be set at at least the higher of (i) the closing price of the Company’s ordinary shares on the date of grant; and (ii) the average closing price of such shares for the five days immediately before the grant. Interests of shareholders will be balanced by having appropriate aggregate and individual grant limits, also being in line with new Listing Rules requirements. A clear performance criterion will be the main driver. 32. RETIREMENT BENEFITS PLANS With effect from 1 December 2000, the Group set up an enhanced MPF scheme (the “Enhanced MPF Scheme”), a defined contribution scheme, for all qualifying employees. The Enhanced MPF Scheme is registered with the Mandatory Provident Fund Schemes Authority under Section 124(1) of the Mandatory Provident Fund Schemes (General) Regulation. Pursuant to the rules of the Enhanced MPF Scheme, the Group’s contributions to the plan are based on fixed percentages of members’ salaries, ranging from 5% of MPF Relevant Income to 15% of basic salary. Members’ mandatory contributions are fixed at 5% of MPF Relevant Income, in compliance with MPF legislation. Total contributions made by the Group during the year amounted to HK$4,820,554 (2001: HK$4,456,482). Forfeited contributions for the year of HK$1,189,078 (2001: HK$2,741,993) were fully utilised to fund the Group’s contributions. Hysan Development Company Limited ANNUAL REPORT 2002 72 Notes to the Financal Statements 33. CONTINGENT LIABILITIES As at 31 December 2002, there were contingent liabilities in respect of the following: Corporate guarantee to a third party in respect of the sale of the interest in an associate Corporate guarantee to subsidiaries – for issue of floating rate notes – for issue of fixed rate notes Undertaking given to a bank in proportion to shareholding regarding facilities granted to a joint venture property project Guarantees to banks to provide finance to – An associate – A property development project – Subsidiaries THE GROUP THE COMPANY 2002 Million 2001 Million 2002 Million 2001 Million HK$3.6 HK$3.6 HK$3.6 HK$3.6 — — — — HK$400.0 US$200.0 HK$2,400.0 — S$18.6 S$18.6 — — S$12.0 S$22.0 — S$12.0 S$22.0 — S$12.0 S$22.0 HK$2,840.0 S$12.0 S$22.0 — 34. CAPITAL COMMITMENTS As at 31 December 2002, the Group had capital commitments in respect of the following: (a) Investment properties: Contracted but not provided for (b) Share of capital commitments for joint ventures: Contracted but not provided for 2002 Million 2001 Million HK$171.4 HK$70.9 HK$7.7 HK$20.2 Hysan Development Company Limited ANNUAL REPORT 2002 73 35. LEASE COMMITMENTS The Group and the Company as lessee As at 31 December 2002, the Group and the Company had commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows: Within one year In the second to fifth year inclusive THE GROUP THE COMPANY 2002 HK$’000 2001 HK$’000 2002 HK$’000 — — — — — — 5,884 138 6,022 2001 HK$’000 11,916 5,608 17,524 Operating lease payments represent rental payable by the Company to its subsidiaries for its staff quarters and office premises which are negotiated and fixed for an average of two years and three years respectively. The Group and the Company as lessor At the balance sheet date, the Group and the Company had contracted with tenants for the following future minimum lease payments: Within one year In the second to fifth year inclusive After five years THE GROUP THE COMPANY 2002 HK$’000 829,154 1,139,991 253,768 2001 HK$’000 894,372 1,240,792 313,466 2002 HK$’000 126,789 148,671 15,525 2001 HK$’000 131,887 105,997 16,509 2,222,913 2,448,630 290,985 254,393 36. OFF BALANCE SHEET FINANCIAL INSTRUMENTS Details of the Group’s outstanding derivative instruments at balance sheet date are as follows: Forward rate agreement – less than one year Interest rate swaps – one to five years Currency swaps – after five years Notional Principal Amount 2001 HK$’000 2002 HK$’000 400,000 428,983 1,559,977 — 650,000 — 2,388,960 650,000 The Group has used off balance sheet derivative instruments to manage the interest rate and foreign exchange exposures. These instruments, such as interest rate swaps and currency swaps, are employed solely for hedging purpose and no speculative positions have been taken. The Group has also followed the established policy on monitoring and managing the counter-party risk by restricting the derivative transactions to financial institutions with strong investment-grade ratings and limiting the exposures to each counter-party at prudent levels. Hysan Development Company Limited ANNUAL REPORT 2002 74 Notes to the Financal Statements 37. RELATED PARTY AND CONNECTED TRANSACTIONS A. Related party transactions During the year, the Group has the following transactions with related parties: Substantial shareholder 2002 HK$’000 2001 HK$’000 Directors 2002 HK$’000 2001 HK$’000 — — 20,823 21,070 6,147 6,167 36,567 46,054 Notes (a) (b) (c) — — — 179 Repairs and maintenance expenses paid to Gross rental income from Construction cost paid during the year for investment properties completed in previous years As at 31 December 2002, the Group has the following balances with related parties: Included in creditors and accruals were repairs and maintenance expenses payable to Amount due to a minority shareholder Notes (a) (d) Substantial shareholder 2002 HK$’000 2001 HK$’000 Directors 2002 HK$’000 2001 HK$’000 — — — — 1,737 1,671 84,486 84,486 Hysan Development Company Limited ANNUAL REPORT 2002 75 37. RELATED PARTY AND CONNECTED TRANSACTIONS continued A. Related party transactions continued Notes: (a) Such expenses were incurred in connection with the repair and maintenance charges for lift, electrical installation and gondola services. (i) (ii) In relation to the lift and electrical installation and maintenance services, F. K. Hu (and his alternate, Raymond L. M. Hu) are directors of Ryoden Lift Services Limited (“RLS”) and Ryoden Engineering Contracting Company Limited (“REC”) and have indirect equity interests in RLS and REC. RLS and REC entered into a number of lift maintenance contracts and electrical installation maintenance and repair contracts respectively with a subsidiary of the Company. In relation to the gondola maintenance services, Hans Michael Jebsen is a director and shareholder of Jebsen and Company Limited which entered into a number of gondola maintenance contracts with a subsidiary of the Company. These transactions were carried out in the normal course of business and the fees were determined with reference to market rates. The Group has, in the ordinary course of its business, entered into lease agreements with related parties to lease premises for varying periods. The leases were entered into in the normal course of business and the rentals were determined with reference to market rates. During the year ended 31 December 2001, Geoffrey M. T. Yeh (and his alternate, V-nee Yeh) are substantial shareholders and directors of Hsin Chong Construction Group Limited whose associate entered into a MVAC/BAS contract with a subsidiary of the Company relating to the construction of The Lee Gardens. The contract had been completed, with the relevant sum being the amount fully paid under the contract last year. Such transaction was entered into on normal commercial terms and on arm’s length basis. The sum represents outstanding loan advanced by Jebsen and Company Limited to a non-wholly owned subsidiary of the Group, Barrowgate Limited, in proportion to its shareholding for general funding purpose. Details of the terms are set out in note 23. (b) (c) (d) B. Connected transaction Loans totalling HK$552,096,609 were advanced by the Group to Barrowgate Limited (The Group: 65.36%; Hang Seng Bank: 24.64%; Jebsen and Company Limited: 10%) for general funding purpose which sum has been included in the disclosure in note 14. Loans totalling HK$292,764,698 advanced by the other shareholders in proportion to their respective shareholdings are disclosed in note 23. These quasi-equity loans are non-interest- bearing and have no fixed settlement date and are not repayable within one year. The grant of loans by the Group constitutes a grant of financial assistance and is a connected transaction under Rule 14.25(2) of the Listing Rules. 38. POST BALANCE SHEET EVENT On 15 January 2003, a subsidiary of the Company acquired additional 1,313,158 ordinary shares of HK$1 each of Country Link Enterprises Limited, grouped under investments in securities, for an aggregate consideration of HK$1,313,158 which is satisfied by setting off the amounts due therefrom. As a result, the Group increases its shareholding from 18.75% to 26.3%. Hysan Development Company Limited ANNUAL REPORT 2002 76 Notes to the Financal Statements 39. PRINCIPAL SUBSIDIARIES AT 31 DECEMBER 2002 Name of subsidiary Place of incorporation Place of operation Admore Investments Limited Golden Capital Investment Limited HD Finance (BVI) Limited HD Treasury Limited HD Treasury Management Limited Hysan China Holdings Limited Hysan Treasury Limited Hysan (MTN) Limited Hysan Property Management Limited Kwong Hup Holding Limited Kwong Wan Realty Limited Minsal Limited Mondsee Limited Stangard Limited Teamfine Enterprises Limited Tohon Development Limited Bamboo Grove Recreational Services Limited HD Investment Limited Jarrow Properties Limited Kochi Investments Limited Lee Theatre Realty Limited Leighton Property Company Limited Main Rise Development Limited OHA Property Company Limited Perfect Win Properties Limited Silver Nicety Company Limited South Eagle Investments Limited Barrowgate Limited Hong Kong Hong Kong British Virgin Islands Hong Kong Hong Kong British Virgin Islands Hong Kong British Virgin Islands Hong Kong British Virgin Islands Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong British Virgin Islands British Virgin Islands British Virgin Islands Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong British Virgin Islands Hong Kong Hong Kong Hong Kong British Virgin Islands Hong Kong Hong Kong British Virgin Islands Hong Kong Hong Kong Hong Kong British Virgin Islands Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong British Virgin Islands British Virgin Islands British Virgin Islands Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong The Directors are of the opinion that a complete list of all subsidiaries and their particulars will be of excessive length and therefore the above table contains only those subsidiaries which materially affected the results or assets of the Group. Other than the fixed rate notes issued by Hysan (MTN) Limited as disclosed in note 26, none of the subsidiaries had issued any debt securities at the year-end. Class of share held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Hysan Development Company Limited ANNUAL REPORT 2002 77 Class of share held Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Proportion of nominal value of issued share capital held by the Company Issued share capital indirectly directly Principal activities HK$2 HK$2 HK$1 HK$2 HK$2 HK$1 HK$2 US$1 HK$2 HK$1 HK$1,000 HK$2 HK$2 HK$300,000 HK$2 HK$2 HK$2 HK$1 HK$1 HK$1 HK$10 HK$2 HK$2 HK$2 HK$2 HK$20 US$1 HK$10,000 — — — — — — — — — — — — — — — — 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 65.36% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% — — — — — — — — — — — — Investment holding Investment holding Treasury operation Treasury operation Treasury operation Investment holding Treasury operation Treasury operation Property management Investment holding Property investment Property investment Property investment Provision of security services Investment holding Property investment Resident club management Investment holding Investment holding Capital market investment Property investment Property investment Investment holding Property investment Property investment Property investment Property investment Property investment of operation Hong Kong Hong Kong rgin Islands Hong Kong Hong Kong rgin Islands Hong Kong Hong Kong Hong Kong rgin Islands Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong rgin Islands rgin Islands rgin Islands Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong cessive length and ts of the Group. bsidiaries had Hysan Development Company Limited ANNUAL REPORT 2002 78 Five-year Financial Summary 1998 HK$’000 1999 HK$’000 2000 HK$’000 2001 HK$’000 2002 HK$’000 CONSOLIDATED INCOME STATEMENT Turnover 3,590,656 2,295,717 1,480,246 1,355,450 1,233,398 Profit from operations Finance costs Gain on disposal of an associate Impairment loss (arising) reversed in respect of interests in associates Share of results of associates 2,773,264 (1,251,944) — 1,994,930 (526,819) — 1,474,517 (449,020) — 1,066,738 (314,428) 33,531 926,839 (220,553) — (108,000) (75,702) (98,418) (4,284) 3,419 4,210 (4,880) (2,338) (10,064) 143 Profit before taxation Taxation Profit after taxation Minority interests 1,337,618 (111,550) 1,365,409 (86,795) 1,033,126 (117,210) 778,623 (114,903) 696,365 (97,903) 1,226,068 (86,797) 1,278,614 (74,656) 915,916 (65,743) 663,720 (63,377) 598,462 (54,588) Net profit for the year 1,139,271 1,203,958 850,173 600,343 543,874 Dividends 381,099 412,795 433,064 391,598 377,529 Earnings per share – Basic HK$1.11 HK$1.16 HK$0.82 HK$0.58 HK$0.53 – Diluted N/A HK$1.16 HK$0.82 HK$0.58 HK$0.53 Hysan Development Company Limited ANNUAL REPORT 2002 79 CONSOLIDATED BALANCE SHEET Property, plant and equipment Investment properties Interests in associates Investments in securities Negative goodwill Staff housing loans, secured Net current liabilities Advances from investees Amounts due to minority shareholders Long term loan Long term bank loans Convertible bonds Floating rate notes Fixed rate notes Deferred income Deferred taxation 1998 HK$’000 1999 HK$’000 2000 HK$’000 2001 HK$’000 2002 HK$’000 56,060 25,949,000 241,487 1,847,563 — 53,201 (615,596) 56,443 25,173,000 66,467 2,468,742 — 43,151 (1,476,134) 56,632 28,432,700 51,384 2,297,335 — 28,898 (1,149,722) 50,158 26,638,500 61,324 1,754,059 (1,136) 20,936 (2,463,807) 56,329 24,841,010 61,317 1,483,821 (1,076) 16,452 (1,184,896) 27,531,715 26,331,669 29,717,227 26,060,034 25,272,957 140,520 292,765 263,754 3,796,000 1,108,239 1,994,107 — — — 51,316 292,765 263,754 1,660,000 — 2,390,884 — — — 59,482 292,765 263,754 1,890,000 — 2,393,739 — — — 52,571 292,765 — 3,088,634 — 397,047 — — — 51,676 292,765 — 3,009,223 — 398,090 1,551,003 5,541 1,295 7,595,385 4,658,719 4,899,740 3,831,017 5,309,593 Net assets 19,936,330 21,672,950 24,817,487 22,229,017 19,963,364 Minority interests 1,169,607 1,146,458 1,339,063 962,092 876,388 18,766,723 20,526,492 23,478,424 21,266,925 19,086,976 Share capital Reserves 5,158,136 13,608,587 5,183,810 15,342,682 5,151,256 18,327,168 5,156,516 16,110,409 5,173,084 13,913,892 Shareholders’ funds 18,766,723 20,526,492 23,478,424 21,266,925 19,086,976 Hysan Development Company Limited ANNUAL REPORT 2002 80 Notes Hysan Development Company Limited Shareholder Information FINANCIAL CALENDAR Full year results announced Ex-dividend date for final dividend Share registers closed Annual General Meeting Record date for final dividend Despatch of scrip dividend circular and election form Despatch of final dividend warrants / definitive share certificates 2003 interim results to be announced 2003 interim dividend payable * subject to change 11 March 2003 6 May 2003 9 to 13 May 2003 13 May 2003 13 May 2003 (on or about) 20 May 2003 (on or about) 13 June 2003 August 2003 * October 2003 * DIVIDEND SHAREHOLDER SERVICES The Board recommends the payment of a final dividend of HK26.5 cents per share. Subject to shareholder approval, the final dividend will be payable in cash with a scrip dividend alternative to shareholders on the register of members as at Tuesday, 13 May 2003. The scrip dividend alternative is conditional upon the granting by the Listing Committee of The Stock Exchange of Hong Kong Limited of the listing of and permission to deal in the new shares to be issued pursuant thereto. A circular containing details of the scrip dividend and the form of election will be mailed to shareholders on or about Tuesday, 20 May 2003. Shareholders who elect for the scrip dividend, in lieu of the cash dividend, in whole or in part, shall return the form of election to the Company’s Registrars on or before Monday, 9 June 2003. Definitive share certificates in respect of the scrip dividend and cheques (for those shareholders who do not elect for scrip dividend) will be despatched to shareholders on or about Friday, 13 June 2003. The share register will be closed from Friday, 9 May 2003 to Tuesday, 13 May 2003, both dates inclusive. In order to qualify for the proposed final dividend, all transfer documents accompanied by the relevant share certificates must be lodged with the Company’s Registrars not later than 4:00 p.m. on Wednesday, 7 May 2003. For enquiries about share transfer and registration, please contact the Company’s Registrars:- Standard Registrars Limited G/F, Bank of East Asia Harbour View Centre 56 Gloucester Road Wanchai, Hong Kong Telephone : (852) 2980 1768 Facsimile : (852) 2861 1465 Holders of the Company’s ordinary shares should notify the Registrars promptly of any change of their address. INVESTOR RELATIONS For enquiries relating to investor relations, please email to investor@hysan.com.hk or write to:- Investor Relations, Hysan Development Company Limited 49/F., Manulife Plaza The Lee Gardens, 33 Hysan Avenue Hong Kong Telephone : (852) 2895 5777 Facsimile : (852) 2577 5153 Press releases and other information of the Group can be found at our Internet website at “www.hysan.com.hk” k h . m o c . a d t . w w w . d t L s e t a i c o s s A n g i s e D e h T : n g i s e D www.hysan.com.hk 

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