INTERIM FINANCIAL STATEMENTS AND INTERIM AUDITORS REVIEW REPORT
INTERIM FINANCIAL STATEMENTS AND REVIEW REPORT THE THREE-MONTH PERIOD ENDED MARCH 31, 2011 (UNAUDITED) INDEX PAGE Interim auditors review report 1 Interim balance sheet 2 Interim statement of income 3 Interim statement of cash flows 4 Notes to the interim financial statements 5 12
-1-
INTERIM BALANCE SHEET (UNAUDITED) AS AT MARCH 31, 2011 ASSETS Notes 2011 2010 Current assets Cash on hand and at banks 14,810,751 8,537,684 Inventories, net 288,910,005 274,973,146 Prepayments and other receivables 3 91,659,674 100,382,371 Total current assets 395,380,430 383,893,201 Non-current assets Investment in associated company and others 108,881,724 103,577,836 Property and equipment, Net 5 904,777,007 572,606,135 Projects in progress 6 39,395,260 271,299,982 Intangible assets, net 14,219,206 - Total non-current assets 1,067,273,197 947,483,953 TOTAL ASSETS 1,462,653,627 1,331,377,154 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short term loans and Murabaha 7 - a 10,010,857 - Current portion of long term loans and Murabaha 7 - b 97,496,943 42,758,901 Trade payables 677,413,981 608,889,328 Other payables and accrued expenses 75,185,480 65,976,869 Accrued dividends 8-56,250,000 Total current liabilities 860,107,261 773,875,098 Non-current liabilities End-of-service indemnities 30,453,922 23,756,057 Long term loans and Murabaha 7 b 154,568,989 215,413,277 Total non-current liabilities 185,022,911 239,169,334 Total liabilities 1,045,130,172 1,013,044,432 Shareholders' equity Share capital 1 225,000,000 225,000,000 Statutory reserve 9 41,974,094 25,781,233 Voluntary Reserve 10 12,453,336 12,453,336 Retained earnings 138,096,025 55,098,153 Total shareholders' equity 417,523,455 318,332,722 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,462,653,627 1,331,377,154 The accompanying notes form an integral part of these interim financial statements -2-
INTERIM STATEMENT OF INCOME (UNAUDITED) Revenues 2011 2010 Sales 934,193,049 779,564,125 Rent 32,337,630 17,686,787 Total revenues 966,530,679 797,250,912 Cost of revenues ) 893,693,728( ) 741,975,155( Gross profit 72,836,951 55,275,757 Selling and distribution expenses ) 20,565,957( ) 18,086,647( General and administrative expenses ) 19,059,760( ) 8,920,007( Income from continuous main operations 33,211,234 28,269,103 Company's share in the net profit of associated company 3,691,216 4,346,260 Other income, net 600,955 725,921 Income before Zakat 37,503,405 33,341,284 Zakat ) 1,000,000( ) 1,600,000( NET INCOME 36,503,405 31,741,284 Earnings per share From continuous main operations (Note 11) 1.48 1.26 From net income (Note 11) 1.62 1.41 The accompanying notes form an integral part of these interim financial statements -3-
INTERIM STATEMENT OF CASH FLOWS (UNAUDITED) 2011 2010 OPERATING ACTIVITIES Income before Zakat 37,503,405 33,341,284 Adjustments Depreciation 18,075,001 12,168,524 Amortization of intangible assets 334,626 - Income from sale of property and equipment ) 121,955( )587,991( Company's share in the net profit of an associated company ) 3,691,216( )4,346,260( End-of-service indemnities 1,570,403 1,883,661 Changes in working capital: Inventories ) 3,634,273( )54,752,642( Prepayments and other receivables ) 9,981,581( )4,156,387( Trade payables, other payables and accrued expenses 100,185,931 131,144,509 Net cash from operating activities 140,240,341 114,694,698 INVESTING ACTIVITIES Additions to property and equipment ) 11,214,202( )105,435,721( Projects in progress ) 3,303,792 ( ) 30,091,049 ( Proceeds from sale of property and equipment 122,760 811,248 Net cash used in investing activities ) 14,395,234( )134,715,522( FINANCING ACTIVITIES Loans and Murabaha ) 88,770,262( )78,702,500( Cash Dividends ) 67,500,000( Net cash used in financing activities ) 156,270,262( )78,702,500( Net change in cash on hand and at banks ) 30,425,155( )98,723,324( CASH on hand and at banks, January 1 45,235,906 107,261,008 CASH ON HAND AND AT BANKS, MARCH 31 14,810,751 8,537,684 Non cash transactions: Projects in progress transferred to property and equipment 3,351,455 23,582,905 Accrued dividends 56,250,000 The accompanying notes form an integral part of these interim financial statements -4-
1. ORGANIZATION AND ACTIVITY Abdullah Al-Othaim Markets Company is a Saudi Joint Stock company registered on Rajab 7, 1400H (May 21, 1980) in Riyadh under Commercial Registration Number 1010031185. The Company was converted from a limited liability into a joint stock Company according to the ministerial decree No. 227/G on Ramadan 3, 1428H (corresponding to September 15, 2007). The share capital of the Company amounting to 225 million consists of into 22.5 million shares of 10 each. The main activity of the Company is to undertake wholesale trading in food supplies, fish, meat, cars and its spare parts, agricultural crops and livestock, household equipment, constructing, managing, operating and maintaining of super markets and malls, cooked and non-cooked catering services, computer services, operating and maintaining electrical and mechanical equipment, constructing, operating and maintaining of storage and cooling warehouses. The board of directors agreed in its meeting held on August 17, 2010 to acquire the rest of the shares of "Abdulla Al-Othaim Real Estate Investment & Development Company" (an associate), in which the company currently owns 13.65% of its shares through increasing the share capital by issuing new shares for the other shareholders of the target company. The board has delegated its chairman to appoint the advisors to complete the acquisition. On August 26, 2010, the two companies signed MOU to start the acquisition procedures in accordance with the applicable rules and regulations. The Board of Directors decided in its meeting held on February 23, 2011, in agreement with "Abdulla Al-Othaim Real Estate Investment & Development Company" to extend the MOU with the same conditions prior to the end of the month of May 2011, unless the parties agreed to extend the MOU in writing for a further period if necessary.. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying interim financial statements have been prepared in accordance with the interim financial reports standard issued by the Saudi Organization for Certified Public Accountants. The significant accounting policies applied by the Company in the preparation of the interim financial statements, and summarized below, are consistent with the policies of the annual audited financial statements for the year ended December 31, 2010. Use of estimates The preparation of the interim financial statements in conformity with generally accepted accounting standards requires use of estimates and assumptions that could affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the reporting date of the interim financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management s best knowledge of current event and activities available with the management actual result ultimately may differ from those estimate. -5-
Accounting convention The interim financial statements are prepared under the historical cost and accrual conventions, except for the investment in an associated company which is accounted for using equity method. Revenue recognition Sales are recognized upon delivery of goods to customers. Income from rent is recognized on accrual basis over the period of lease contracts. Expenses Selling and distribution expenses principally comprise of costs incurred in the distribution and sale of the Company s products. All other expenses are classified as general and administrative expenses. General and administrative expenses include direct and indirect costs not specifically part of cost of revenues as required under generally accepted accounting standards. Allocations between general and administrative expenses and cost of revenues, when required, are made on consistent basis. Investments Investment in an associated company which is 13.65% owned and in which the Company exercises significant influence through its participation in its financial and operational policies is accounted for using equity method, under which the investment is initially stated at cost and adjusted thereafter for the change in the Company's share in net assets of the investee. Company's share of the net profit or loss of the investee is reported in the statement of income. Investments in companies which are less than 20% owned and where the fair value is no readily determinable are stated at cost. Appropriate provision is made for any other than temporary impairment in the value of these investments. Cost of sales Cost of sales includes cost of purchases and expenses related to the outlets. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average costing method. Property and equipment Property and equipment are stated at cost less accumulated depreciation. Expenditure on maintenance and repairs is expensed, while expenditure for betterment is capitalized. Depreciation is provided over the estimated useful lives of the applicable assets using the straight line method. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining term of the lease. The estimated lives of the principal classes of assets are as follows: -6-
Years Plant and machinery 10 Buildings 5 25 Vehicles 5 7 Computers 5 7 Furniture and fixtures 7 Leasehold improvements 10 Impairment of long-term assets The Company reviews annually the carrying amount of its tangible assets to determine whether there is any indication that those assets have suffered impairment. In case such indication exists, the recoverable amount of the assets is estimated in order to determine the extent of the impairment, if any. Where it is not possible to estimate the recoverable amount of individual assets, the Company estimates the recoverable amount of the cash generating unit to which the asset belongs. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the assets or cash-generating unit is reduced to its recoverable amount. Impairment loss is recognized as an expense in the interim statement of income immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit 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 recognized for the assets or cashgenerating unit in prior years. A reversal of an impairment loss is recognized as income in the interim statement of income immediately. Borrowing costs Borrowing costs directly attributable to acquisitions or constructions of qualifying assets, which are the assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets until the assets are substantially ready for their intended use or sale. All other borrowing costs are charged to income in the period in which they are incurred. Intangible assets Intangible assets represent costs incurred for the purpose of using rented stores. These assets are amortized over the term of the related contract lease. Foreign currency translation Foreign currency transactions are translated into Saudi Riyals at the rates of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at that date. Gains and losses from settlement and translation of foreign currency transactions are included in the interim statement of income. -7-
Accounting for Lease agreements All leases entered into by the Company are classified as operating leases. Rental payments are charged to interim statement of income using the straight-line method over the term of the operating lease contract. The lease amounts received by the Company as a lessor in operating lease contracts are recognized in the interim statement of income using the straight-line method over the period of the related leases. End-of-service indemnities End-of-service indemnities are provided in accordance with the Saudi Arabian Labor Law and are reduced by the payments to employees. Differences in indemnities, if any, are computed and paid to employees upon termination. Zakat The Company is subject to the Regulations of the Department of Zakat and Income Tax ( DZIT ) in the Kingdom of Saudi Arabia. Zakat is provided on an accrual basis. The zakat charge is computed on the zakat base. Any difference in the estimate is recorded when the final assessment is approved, at which time the provision is cleared. 3. PREPAYMENTS AND OTHER RECEIVABLES Prepayments include 25 million as prepaid rent paid in advance to a related party against early payment discount. 4. RELATED PARTY TRANSACTIONS During the period, the Company transacted with the following related parties. The terms of these transactions and expense were executed in accordance with the Company s management approval. Company Name AlOthaim Holding Company Abdullah AlOthaim Investment and Real Estate Co. Dar Alkhuyool Contracting Co. Relationship Shareholder Founder Associated Company Affiliated Company The significant transactions and related amounts are as follows: 2011 2010 Rent expenses 1,565,119 1,641,083 Rent income * 8,541,750 1,147,546 Purchase of property and equipment 210,540 - * Rent income includes rent of shopping mall leased to a related party -8-
5. PROPERTY AND EQUIPMENT Land Machinery and equipment Buildings Vehicles Computers Furniture and fixtures Leasehold improveme nts Cost January 1, 2011 199,189,040 165,403,510 480,266,188 47,731,567 70,570,271 105,705,657 97,407,150 1,166,273,383 Additions - 5,162,451-1,159,766 4,188,871 1,734,108 2,320,461 14,565,657 Disposals - ) 12,844( - ) 239,498( ) 303,961( ) 716,751( - ) 1,273,054( March 31, 2011 199,189,040 170,553,117 480,266,188 48,651,835 74,455,181 106,723,014 99,727,611 1,179,565,986 Depreciation January 1, 2011-65,609,899 32,437,559 30,285,727 34,994,222 60,980,276 32,178,544 256,486,227 Charge for the period - 3,752,086 6,625,652 1,709,337 1,187,704 2,423,269 2,376,953 18,075,001 Provision for impairment of property and equipment - 1,500,000 - - - - - 1,500,000 Disposals - ) 12,781( - ) 239,490( ) 303,756( ) 716,222( - ) 1,272,249( March 31, 2011-70,849,204 39,063,211 31,755,574 35,878,170 62,687,323 34,555,497 274,788,979 Net book value March 31, 2011 199,189,040 99,703,913 441,202,977 16,896,261 38,577,011 44,035,691 65,172,114 904,777,007 March 31, 2010 172,312,040 94,471,210 151,802,126 21,376,820 24,107,307 43,804,038 64,732,594 572,606,135 Total - The company has purchased an investment land in Medina on March 29, 2010 for an amount of 98 million for building a shopping mall and investment in residential and office buildings. The approval for this transaction was granted in the shareholders' ordinary general assembly meeting held on April 7, 2010. Some title deeds of the land were transferred to the name of company while other title deeds amounting 37 million are still under progress. - On August 6, 2010 the company purchased an investment land in Ha'el city for an amount of 26 million. The purpose of this land is to build investment projects. The transfer of the land's title deeds to the name of company has been accomplished. - Land amounting to 64 million is mortgaged to a local bank as collateral against bank facilities (Note 7b). No capital commitments are associated with the above mentioned Medina and Ha'el city projects existed as of the balance sheet date. -9-
6. PROJECTS IN PROGRESS Projects in progress represent mainly of the contractor s bills for constructing malls and for establishing and developing new stores. Contingent liabilities related to projects in progress as of March 31, 2011 totaled 3, 2 million. (March 31, 2010: 101.6 million). 7. LOANS AND MURABAHA a) Short-term murabaha The company has facilities with local banks in the form of short-term murabaha to finance working capital. Unutilized balance of these Murabaha loans was 230 million as at March 31, 2011 (March 31, 2010: 240 million). b) Long-term loans and murabaha: March 31, 2011 Current Non-current Total Saudi Industrial Development Fund Loan 400,000 643,500 1,043,500 Bank Albilad Loan 49,096,943 116,647,711 165,744,654 Saudi British Bank Loan 16,666,667 11,111,111 27,777,778 Saudi Hollandi Bank Loans 31,333,333 26,166,667 57,500,000 97,496,943 154,568,989 252,065,932 March 31, 2010 Current Non-current Total Saudi Industrial Development Fund Loan 400,000 1,043,500 1,443,500 Bank Albilad Loan 8,724,901 165,758,666 174,483,567 Saudi British Bank Loan 16,666,667 27,777,778 44,444,445 Saudi Hollandi Bank Loan 16,967,333 20,833,333 37,800,666 42,758,901 215,413,277 258,172,178 These facilities are secured by personal guarantees of one of the shareholders and mortgage of land deeds owned by the Company with a book value of 64 million as at March 31, 2011. (March 31, 2010: 25.5 million) 8. DIVIDENDS In its meeting held on March 28, 2011, the shareholder's General Assembly approved the distribution of cash dividends of 67.5 million, which represents 3 per share for the year ended December 31, 2010. In its meeting held on April 7, 2010, the shareholder's General Assembly approved the distribution of cash dividends of 56.25 million, which represents 2.5 per share for the year ended March 31, 2009. -10-
9. STATUTORY RESERVE In accordance with Regulations for Companies in Saudi Arabia, the Company has established a statutory reserve by the appropriation of 10% of net income until the reserve equals 50% of the share capital. This reserve is not available for dividend distribution. 10. VOLUNTARY RESERVE The extraordinary general assembly in its meeting held on Jumad Al-Awal 2, 1430 (corresponding to April 27, 2009) approved a voluntary reserve of 20% of 2008 net income and appropriated it for the expansion of the Company s operations. 11. EARNINGS PER SHARE Earnings per share are calculated based on net income for the period and income from continuous main operations divided by the weighted average number of shares for the three-month period ended March 31, 2011 and 2010 amounting to 22.5 million shares. 12. COMMITMENTS AND CONTINGENCIES a) On March 31, 2011 the Company had the following commitments and contingencies: 2011 2010 Letters of credit 23,079,290 11,933,467 Letters of guarantee 19,793,010 20,253,010 Capital commitments on projects in progress 3,208,706 101,566,566 b) Commitments against operating lease agreements The outstanding lease commitments of the Company related to non-cancellable longterm operating leases for the Company s branches and malls as at March 31 were as follows: 2011 2010 Less than one year 37,823,989 34,177,786 More than one year, but less than 5 years 128,807,310 86,513,416 More than 5 years, but less than 23 years 243,161,404 234,880,679-11-
13. SEGMENTAL INFORMATION The Company's activities are focused on retail and wholesale of food stuff and carries out its operations in the Kingdom of Saudi Arabia, in addition to constructing commercial malls and investing in their sales or leases. Some selected information was summarized below as at March 31, 2011 for each business segment. March 31, 2011 Retail and Real Estate Total Wholesale and Leasing Sales 934,193,049-934,193,049 Rent Revenue 16,711,940 15,625,690 32,337,630 Property and equipment, net 447,550,804 457,226,203 904,777,007 Gross Profit 66,074,022 6,762,929 72,836,951 14. PERIOD RELATED ADJUSTMENTS The adjustments which the management believes to be important were prepared for the interim financial statements to present fairly the financial position and the results of operations. The results of operations for the interim financial period might not give an exact indication about the actual results of the whole year operations. 15. COMPARATIVE FIGURES Certain comparative figures have been reclassified to be consistent with the presentation of the current period. -12-