PERIOD ENDED MARCH 31, 2004 REPORT OF THE DIRECTORS Year ended 1. The main activities of the company during the year consisted of: (i) receiving deposits from customers and paying interest thereon; (ii) making loans to customers and receiving interest there-from; (iii) leasing of motor vehicles and equipment; and (iv) dealing in all foreign currencies and foreign currency instruments. 2. The company commenced dealing in all foreign currencies and foreign currency instruments since the commencement of the year to which the financial statements relate. 3. From their knowledge of the company s affairs, the directors are of the opinion that the current assets shown in the company s balance sheet are realisable in the ordinary course of business at amounts not less than those shown, after making allowances for all appropriate costs, including cost of realisation and financing. On behalf of the Board Peter Bunting June 29, 2004 Director Garfield Sinclair Director To the Members of DB&G MERCHANT BANK LIMITED Auditors' Report We have audited the financial statements of DB&G Merchant Bank Limited (the company) as of and for the year ended, set out on pages 3 to 28, and have obtained all the information and explanations which we required. These financial statements are the responsibility of the company s management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, proper accounting records have been kept and the financial statements, which are in agreement therewith and have been prepared in accordance with International Financial Reporting Standards, give a true and fair view of the state of affairs of the company as at March 31, 2004, and of the results of its operations and its cash flows for the year then ended and comply with the provisions of the Companies Act. Balance Sheet June 29, 2004 Notes (Restated*) ASSETS Cash resources 4 154,984,724 35,553,456 Loans 5 400,097,677 14,556,424 Net investment in leases 6 1,878,300 - Investments 7 793,397,220 52,706,955 Other receivables 8 30,108,121 2,028,523 Taxation recoverable 2,879,517 1,744,360 Due from parent company - 608,899 Property, plant and equipment 9 4,696,981 2,469,723 Deferred tax asset 10 8,811,260 34,474,032 Customers' liabilities under guarantees issued, as per contra 40,458,962 2,800,000 $1,437,312,762 146,942,372 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Instalment loan 11 21,898,151 27,500,000 Deposits 12(a) 1,066,932,356 4,864,525 Customers savings account 12(b) 7,380,278 5,036,155 Accounts payable and accrued charges 6,314,443 3,127,416 Guarantees issued, as per contra 40,458,962 2,800,000 1,142,984,190 43,328,096 SHAREHOLDERS' EQUITY Share capital 13 237,423,365 212,423,365 Share premium 8,898,480 8,898,480 Statutory reserve fund 14 27,915,655 4,592,359 Other reserves 15 32,912,318 175,270 Retained earnings reserve 13(d) 86,500,000 - Deficit ( 99,321,246) (122,475,198) 294,328,572 103,614,276 $1,437,312,762 146,942,372 The financial statements were approved by the Board of Directors on June 29, 2004 and signed on its behalf by: Statement of Changes in Shareholders Equity Year ended Statutory Retained Share Share reserve Other earnings capital premium fund reserves reserve Deficit Total (note 13) (note 14) (note 15) [note 13(d)] Balances at March 31, 2002: As previously reported using Jamaica GAAP 212,423,365 8,898,480 3,272,129 - - (164,430,531) 60,163,443 Effect of first-time adoption of International Financial Reporting Standards (IFRS) [note 22 (a)] - - - - - 37,442,312 37,442,312 Balances at March 31, 2002 as restated using IFRS 212,423,365 8,898,480 3,272,129 - - (126,988,219) 97,605,755 Restated net profit for the year [note 22 (b)] - - - - - 6,008,521 6,008,521* Transfers [note 22 (b), (e)(ii)] - - - 175,270 - ( 175,270) - Transfer to Statutory reserve fund - - 1,320,230 - - ( 1,320,230) - Balances at March 31, 2003 as restated 212,423,365 8,898,480 4,592,359 175,270 - (122,475,198) 103,614,276 Share capital issued 25,000,000 - - - - - 25,000,000 Changes in fair value of available-for-sale investments - - - 28,506,752 - - 28,506,752* Transfer loan loss reserves - - - 4,230,296 - ( 4,230,296) - Net profit for the year - - - - - 28,821,970 28,821,970* Assumed from Issa Trust [note 13(d)] - - 19,000,000-86,500,000 2,885,574 108,385,574 Transfer to Statutory reserve fund (note 14) - - 4,323,296 - - ( 4,323,296) - Balances at $237,423,365 8,898,480 27,915,655 32,912,318 86,500,000 ( 99,321,246) 294,328,572 Peter Bunting Director * Total recognised gains for the year - $57,328,722 (2003: $6,008,521). * [see note 3(a)] The accompanying notes form an integral part of the financial statements.
Profit and Loss Account Year ended Notes (Restated*) Interest revenue: Loans 101,973,841 718,114 Securities purchased under resale agreements 29,123,139 10,503,252 Interest from securities and deposits 34,117,585-165,214,565 11,221,366 Interest expense: Customers deposits and savings accounts ( 55,035,326) ( 1,133,865) Borrowed funds ( 31,391,299) ( 1,054,795) ( 86,426,625) ( 2,188,660) Net interest income 78,787,940 9,032,706 Other operating revenue: Foreign exchange gains 19,937,371 27,724,777 Commission and fee income 4,373,765 - Other income - 59,984 24,311,136 27,784,761 Other operating expenses, net: Staff costs 16 ( 30,755,721) (17,739,224) Depreciation ( 2,037,309) ( 623,593) Provision for probable loan losses ( 10,728,543) ( 6,065) Bad debts ( 577,091) ( - ) Loss on disposal of property, plant and equipment ( 261,169) ( 215,572) Other administration costs ( 20,254,501) ( 9,256,212) ( 64,614,334) (27,840,666) Profit before taxation 17 38,484,742 8,976,801 Taxation 18(a) ( 9,662,772) ( 2,968,280) Net profit for the year $ 28,821,970 6,008,521 * [see note 3(a)] The accompanying notes form an integral part of the financial statements. Statement of Cash Flows Year ended (Restated*) CASH FLOWS FROM OPERATING ACTIVITIES Net profit for the year 28,821,970 6,008,521 Adjustments to reconcile net profit for the year to net cash provided/(used) by operating activities: Deferred taxation 9,662,772 2,968,280 Provision for probable loan losses 10,728,543 ( 6,065) Loss on disposal of property, plant and equipment 261,169 215,572 Depreciation 2,037,309 623,593 51,511,763 9,809,901 Funds from other sources, excluding investing and financing activities: Other receivables 19,831,286 216,821 Due to/(from) parent company 608,899 ( 749,349) Taxation recoverable 1,553,732 ( 643,909) Net cash provided by operating activities 73,505,680 8,633,464 CASH FLOWS FROM INVESTING ACTIVITIES Loans ( 16,244,535) (14,020,157) Additions to property, plant and equipment ( 1,612,262) ( 314,011) Investments (571,183,658) 1,736,877 Net cash used by investing activities (589,040,455) (12,597,291) CASH FLOWS FROM FINANCING ACTIVITIES Instalment loan ( 5,601,849) 27,500,000 Customers deposits 491,134,441 841,695 Customers savings accounts 2,344,123 ( 2,685,948) Other liabilities ( 4,738,312) 1,898,466 Net cash provided by financing activities 483,138,403 27,554,213 Net (decrease)/increase in cash resources ( 32,396,372) 23,590,386 Cash resources from Issa Trust 151,827,640 - Cash resources at beginning of the year 35,553,456 11,963,070 Cash resources at end of the year $154,984,724 35,553,456 * [see note 3(a)] Notes to the Financial Statements 1. The company The company, incorporated in Jamaica, is a 100% (2003: 100%) owned subsidiary of Dehring Bunting & Golding Limited (DB&G), which is also incorporated in Jamaica. The registered office is located at 2 Holborn Road, Kingston 10, Jamaica, W.I. During the year, DB&G acquired all of the share capital of Issa Trust & Merchant Bank Limited (Issa Trust). DB&G received unconditional regulatory approval to proceed with the transaction. The purchase price of not less than $115M was settled by way of an exchange of securities. The acquired entity was combined with this company under the acquisition method, effective August 1, 2003, and the merged entity now operates under the name of DB&G Merchant Bank Limited (DB&GMB). The DB&G Merchant Bank Limited (Transfer to and vesting of Assets and Liabilities of Issa Trust and Merchant Bank Limited) Order, 2003 dated August 29, 2003 transferred and vested the Assets and all interests, rights and easements which belong to Issa Trust to DB&GMB. These are subject to all third party rights and to all debts, liabilities and obligations affecting any such assets. The principal activities of the company consist of receiving deposits from customers and paying interest thereon, making loans to customers and receiving interest there-from, leasing of motor vehicles and equipment and dealing in all foreign currencies and foreign currency instruments. 2. Licence The company is licensed, and the financial statements are delivered, under the Financial Institutions Act (FIA). During the year and as at March 31, 2003, the company did not comply with sections 18(3) and 30(2) of the FIA. Subsequent to the yearend, the non-compliances were rectified. 3. Basis of preparation, statement of compliance and significant accounting policies (a) Basis of preparation: The financial statements have been prepared in accordance with the provisions of the Companies Act, the Financial Institution Act and International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB), as well as interpretations issued by the International Financial Reporting Interpretations Committee of the IASB and practice statements issued by the Institute of Chartered Accountants of Jamaica. These are the company s first financial statements prepared in accordance with IFRS. Consequently, there have been significant changes in the accounting policies followed in these financial statements compared with those used in previous years. Accordingly, comparative figures have been restated to conform with the provisions of IFRS and the significant accounting policies in paragraphs (b) to (i) below. IFRS 1, First-time Adoption of International Financial Reporting Standards, has been applied before its effective date of accounting periods beginning on or after January 1, 2004, in the preparation of the company s financial statements. Explanations of the effects of adopting IFRS on the equity, results of operations and cash flows are provided in note 22. The financial statements are presented in Jamaica dollars and are prepared on the historical cost basis, except for available-for-sale investments which are stated at fair value. The preparation of the financial statements in accordance with IFRS requires the directors and management to make estimates and assumptions that affect the reported amount of assets, liabilities, contingent assets and contingent liabilities at the balance sheet date and the income and expenses for the year then ended. Actual amounts could differ from those estimates. (b) Depreciation: Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses [note (i)]. Property, plant and equipment, with the exception of leasehold improvements which are depreciated over the shorter of the lease term and the life of the assets, are depreciated on the straight-line basis at annual rates estimated to write off the assets over their expected useful lives. The depreciation rates are as follows:
(b) Depreciation cont d: Furniture and fixtures 10% Computer equipment 20% Leasehold improvements 25% Buildings 2.5% Motor vehicles 20% (c) Interest: (i) Interest income and interest expense are recorded on the accrual basis, except where collection of interest income is considered doubtful or payment is outstanding for more than 90 days. In those cases, interest income is recorded on the cash basis and accrued interest on loans, which are in arrears for 90 days and over, is excluded from income. (ii) (iii) (d) Foreign currencies: Foreign currency balances at the balance sheet date are translated at the rates of exchange ruling on that date. Transactions in foreign currencies are converted at the rates of exchange ruling on the dates of those transactions. Gains and losses arising from fluctuations in exchange rates are included in the profit and loss account. (e) Provision for probable losses on loans and guarantees: The provision for probable losses on loans and guarantees is maintained at a level which management considers adequate to provide for potential losses. The level of the provision is based on the requirements of the Financial Institutions Act, management's evaluation of the composition of the loan portfolio, past experience, the anticipated net realisable value of security held and the prevailing and anticipated economic conditions. Amounts are written off from the provision whenever management has concluded that such amounts may not be recovered. General provisions for doubtful credits are established against the loan portfolio where a prudent assessment by the company of adverse economic trends suggests that losses may occur, but where such losses cannot be determined on an item-by-item basis. This provision is set at the minimum 1%, established by the Bank of Jamaica. IFRS only permit specific loan loss provision, plus a percentage of the remaining debts based upon the company s actual loan loss experience and requires that the future cash flows of impaired loans be discounted and the increase in the present value be reported as interest income. The loan loss provision required under the FIA maybe in excess of the requirements of IFRS. Any such excess is treated as an appropriation of retained earnings and included in a non-distributable loan loss reserve (note 15). (f) IFRS requires that when collection of loans becomes doubtful, such loans are to be written down to their recoverable amounts after which interest income is to be recognised based on the rate of interest that was used to discount the future cash flows in arriving at the recoverable amount. The difference between the bases of interest recognition of the FIA and IFRS has been assessed as immaterial. Interest income from demand loans is calculated on the "simple interest" basis. Employee benefits: Employee benefits are all forms of consideration given by the company in exchange for service rendered by employees. These include current or short-term benefits such as salaries, bonuses, NIS contributions, annual leave, and non-monetary benefits such as medical care and loans; post-employment benefits such as pensions; and other long-term employee benefits such as termination benefits. Employee benefits that are earned as a result of past or current service are recognised in the following manner: Short-term employee benefits are recognised as a liability, net of payments made, and charged as expense. The expected cost of vacation leave that accumulates is recognised when the employee becomes entitled to the leave. Post-employment benefits are accounted for as described below. The company participates in a pension scheme (note 21) the assets of which are held separately from those of the company. Contributions to the scheme, made on the basis provided for in the rules, are charged to the profit and loss account when due. (g) Provisions: A provision is recognised in the balance sheet when the company has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (h) Taxation: (i) Income tax: Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the profit and loss account except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity. (i) Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted at the balance sheet date, and any adjustment to tax payable and tax losses in respect of previous years. (ii) Deferred tax: Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Impairment: The carrying amounts of the company s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the assets recoverable amounts are estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or the cash-generating unit to which it belongs exceeds its recoverable amount. Impairment losses are recognised in the profit and loss account. (i) Calculation of recoverable amount The recoverable amount of the company s receivables is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. (ii) Reversals of impairment An impairment loss in respect of a receivable is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. (j) (i) (ii) In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Financial instruments: Classification of investments: Management determines the classification of investments at the time of purchase and takes account of the purpose for which the investments were purchased. Investments are classified as available-for-sale and originated securities. Originated loans and receivables are created by the company by providing money to a debtor other than those created with the intention of short-term profit taking. Originated loans and receivables are recognised on the day they are transferred to the company. Available-for-sale instruments are those that are not held for trading purposes, or originated by the company. Available-for-sale assets are recognised on the date the company commits to purchase the assets. From this date, any gains and losses arising from changes in fair value of the assets are recognised in equity. Measurement: Financial instruments are measured initially at cost, including transaction costs. Subsequent to initial recognition, all available-for-sale assets are measured at fair value, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably determined, is stated at cost, including transaction costs, less impairment losses. All non-trading financial liabilities and originated loans and receivables are measured at amortised cost, less impairment losses. Amortised cost is calculated on the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. Based on the above guidelines, the company's investments are measured as follows: [i] Loans are classified as originated loans and receivables and are stated at cost (amortised cost), less provision for losses as appropriate. [ii] Government of Jamaica securities purchased on the primary market, securities purchased under reverse repurchase agreements and interest-bearing deposits are stated at historical or amortised cost. [iii] Government of Jamaica securities purchased on the secondary market are classified as available-forsale and measured at fair value. Appreciation and depreciation are carried to investment revaluation reserve (note 15). [iv] Securities purchased under resale agreements: A repurchase agreement ( Reverse repo ) is a short-term transaction whereby securities are bought with simultaneous agreements for reselling the securities on a specified date and at a specified price. Reverse repos are accounted for as short-term collateralised lending, and are carried at cost. It is the policy of the company to obtain possession of collateral with a market value equal to, or in excess of, the principal amount loaned under resale agreements. The difference between the purchase and resale considerations is recognised on an accrual basis over the period of the agreements, using the effective yield method, and is included in interest.
6. Net investment in leases 7. Investments (a) Available-for-sale securities: Government of Jamaica Global Bonds 459,659,469 - Government of Jamaica Local Registered Stock 61,746,291 Development Bank Bond Issue 1,481,166 116,000 522,886,926 116,000 Originated securities: Securities purchased under resale agreements [note 20(a)] 270,510,294 52,590,955 $793,397,220 52,706,955 (b) This balance is shown net of an allowance for probable losses of $Nil (2003: Nil) and is made up as follows: Minimum lease payments receivable, net of unearned income receivable, with reference to balance sheet date: One to twelve months 90,856 Nil One to two years 1,409,082 - Two to five years 378,362 - $1,878,300 Nil Investments: Due from the date of the balance sheet as follows: Within 3 months 270,510,294 52,590,955 3 months to 5 years 191,055,767 116,000 5 years and over 331,831,159 - $793,397,220 52,706,955 8. Other receivables Staff loan scheme - 8,298 Prepayments 1,123,699 976,917 Interest receivable 28,747,648 517,007 Cambio receivable - 286,301 Sundry receivables 236,774 240,000 $30,108,121 2,028,523 Amounts due within twelve months from balance sheet date $30,108,121 2,028,523 9. Property, plant and equipment Furniture Computer Leasehold Motor and fixtures equipment improvements Buildings vehicles Total At cost: March 31, 2003 3,583,170 6,862,931 928,363 451,473 11,825,937 Assumed from Issa Trust 3,496,782 9,232,505 2,795,161-6,640,012 22,164,460 Additions 522,432 1,089,830 - - - 1,612,262 Disposals (1,761,556) ( 3,111,089) ( 2,759,503) - (5,242,992) (12,875,140) 5,840,828 14,074,177 964,021 451,473 1,397,020 22,727,519 Depreciation: March 31, 2003 2,010,574 6,862,931 463,008 19,701 9,356,213 Assumed from Issa Trust 2,620,191 8,946,399 2,732,310 1,365,198 15,664,098 Charge for the year 607,874 316,290 272,139 11,287 829,720 2,037,310 Eliminated on disposals (1,607,785) ( 3,075,678) (2,759,503) - (1,584,118) ( 9,027,084) 3,630,854 13,049,942 707,954 30,988 610,800 18,030,538 Net book values: $2,209,974 1,024,233 256,067 420,485 786,220 4,696,981 March 31, 2003 $1,572,596-465,355 431,772-2,469,723 10. Deferred tax asset (a) The deferred tax asset is attributable to the following: Assets Liabilities Net Property, plant and equipment - 333,599 800,886 - ( 800,886) 333,599 Other liabilities - - 16,000,000 - (16,000,000) - Tax losses carried forward 25,612,146 34,140,433 - - 25,612,146 34,140,433 25,612,146 34,474,032 16,800,886-8,811,260 34,474,032 (b) Movements in temporary differences during the year: Balance at Recognised Recognised Balance at April 1, 2003 in income in equity Property, plant and equipment 333,599 (1,134,485) - ( 800,886) Assumed from Issa Trust - - (16,000,000) (16,000,000) Utilised tax value of loss carry forwards 34,140,433 (8,528,287) - 25,612,146 34,474,032 (9,662,772) (16,000,000) 8,811,260 11. Instalment loan Instalment loan 10% $21,898,151 27,500,000 Amounts due within twelve months from balance sheet date $ 6,111,108 4,201,431 This loan represents the company s portion of an $80 million loan, given in consortium with the RBTT Bank Jamaica Limited by the Development Bank of Jamaica for on-lending to Restaurants of Jamaica Limited. The loan carries an interest rate of 10% per annum and has a term of five years with six months moratorium on principal payments from the date of initial drawdown (November 30, 2002). Repayment date of the first principal payment is the repayment date immediately following expiration of the moratorium period (May 31, 2003). 12. Deposits and customers savings accounts (a) Deposits The maturity profile of deposits, with reference to the balance sheet date, is as follows: No $ No $ Local currency: Less than one month 157 201,046,511 13 3,905,835 1 to 3 months 88 44,843,448 4 958,690 Over 3 months 35 19,272,136 - - 280 265,162,095 17 4,864,525 Foreign currency: Less than one month 58 193,467,524 - - 1 to 3 months 47 298,130,380 - - Over 3 months 36 310,172,357 - - 141 801,770,261 - - 421 1,066,932,356 17 4,864,525 Depositors whose deposits exceed 10% of deposits in the class are as follows: No $ No $ Local currency: Less than one month 2 32,813,091 2 2,387,106 1 to 3 months 1 27,455,787 2 840,522 Over 3 months 6 52,833,954 - - 9 113,102,832 4 3,227,628 Foreign currency: Less than one month 3 37,056,845 - - 1 to 3 months 2 23,332,738 - - Over 3 months 9 280,010,318 - - 14 340,399,901 - - 23 453,502,733 4 3,227,628 (b) Customers savings accounts These amounts are all due within one year after the balance sheet date. 13. Share Capital Authorised, issued and fully paid: 2,374,233,650 (2003: 96,612,174) ordinary shares of 10 (2003: $1) each 237,423,365 96,612,174 Nil (2003: 110,947,826) 121 2 % cumulative redeemable preference shares of $1 each - 110,947,826 Nil (2003: 4,863,365) 121 2 % non-cumulative redeemable preference shares of $1 each - 4,863,365 $237,423,365 212,423,365
4. Cash resources (j) Financial instruments (cont d): (iii) Fair value measurement principles: (iv) The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. Where a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques or a generally accepted alternative method. Where discounted cash flow techniques are used, estimated future cash flows are based on management s best estimates and the discount rate is a market related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date. Gains and losses on subsequent measurement: Gains and losses arising from a change in the fair value of available-for-sale assets are recognised directly in equity. When the financial assets are sold, collected or otherwise disposed of, the cumulative gain or loss recognised in equity is transferred to the profit and loss account. (a) (b) Cash floats 40,022 24,940,778 Cash reserve - Bank of Jamaica 75,010,116 1,098,826 Cash at bank 79,934,586 9,513,852 $154,984,724 35,553,456 A minimum of 23% (2003: 23%) of prescribed liabilities is required to be maintained in liquid assets. This includes a cash reserve deposit of 9% (2003: 9%) of the amount of the prescribed liabilities, which is required to be maintained with the Bank of Jamaica at Nil% interest as well as an additional 5% (2003: 5%) special deposit reserve introduced January 10, 2003, earning 6% (2003: 6%) per annum. Cash resources: Due from the date of the balance sheet as follows: 5. Loans receivable Within 3 months 79,986,695 24,940,778 From 3 months to 1 year 74,998,029 10,612,678 $154,984,724 35,553,456 Demand and long-term loans $400,097,677 14,556,424 (v) (vi) (vii) Trade and other payables: Trade and other payables, including provisions, are stated at their cost. A provision is recognised in the balance sheet when the company has a legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate of the amount can be made. If the effect is material provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate the risks specific to the liability. Cash resources, including short-term deposits, with maturities ranging between three and twelve months from balance sheet date, are shown at cost. Trade and other receivables: These are stated at their cost, less impairment losses. (viii) Derecognition: A financial asset is derecognised when the company loses control over the contractual rights that comprise that asset. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when it is extinguished. Available-for-sale assets that are sold are derecognised and corresponding receivables from the buyer for the payment are recognised as of the date the company commits to sell the assets. Originated loans and receivables are derecognised on the day they are transferred by the company. (a) (b) (c) (d) Amounts due: Within twelve months from balance sheet date 148,992,694 1,242,829 More than twelve months from balance sheet date 251,104,983 13,313,595 $400,097,677 14,556,424 Loans receivable are shown net of a provision for probable loan losses of $22,815,280 (2003: $Nil). Loans which exceeded 10% of the total loans owing to the company and also exceeded 10% of the total deposits due by the company totalled $Nil (2003: $14,285,528). Concentration of loans The loan portfolio is concentrated as follows: Agriculture 9,800,340 - Manufacturing 157,800 - Construction, land development, and real estate acquisition 52,607,871 - Transport, storage and communication 35,267,200 - Distribution 61,363,126 - Tourism and entertainment 27,524,142 - Professional and other service 18,861,446 14,432,798 Individuals 217,331,032 123,626 422,912,957 14,556,424 Less: provision for probable loan losses [see (c) below] ( 22,815,280) - $400,097,677 14,556,424 Provision for probable loan losses: Provision made during the year 10,728,543 6,065 Issa Trust s provision at July 31, 2003 13,769,649-24,498,192 6,065 Provisions no longer required ( 1,682,912) ( 6,065) At end of the year $22,815,280 - Loans on which interest is suspended amounted to $66,740,215 (2003: $77,710). These loans are included in the financial statements at their estimated net realisable value of $51,219,321 (2003: $76,933). Provision made in accordance with Bank of Jamaica provisioning requirements is as follows: J$ J$ Specific provisions 22,815,280 - General loan loss provision [see 15(b)] 4,000,976 147,270 $26,816,256 147,270
13. Share Capital continued (a) (b) (c) (d) At an Extraordinary General Meeting of the Company held on November 26, 2003, the following resolutions were duly passed: BE IT RESOLVED 1. That the 96,612,174 authorised and issued ordinary shares of $1.00 each in the capital of the Company be and are hereby sub-divided into 966,121,740 ordinary shares of $0.10 each in the capital of the Company. 2. That the existing authorised and issued ordinary share capital of the Company of $212,423,365 be and is hereby increased by $13,338,557.40 to $225,761,922.40 by the creation of 133,385,574 new ordinary shares of $0.10 each in the capital of the Company, such new shares to rank pari passu in all respects with the existing ordinary shares in the Company. At a Meeting of the Board of Directors of the Company held November 26, 2003, the following resolutions were duly passed: WHEREAS by virtue of The DB&G Merchant Bank Limited (Transfer to and Vesting of Assets of Issa Trust & Merchant Bank Limited) Order, 2003 made by the Hon. Minister of Finance and Planning, as of July 9, 2003 the assets of Issa Trust & Merchant Bank Limited ( Issa Trust ) have been transferred to and vested in the Company subject to all third party rights and to all debts, liabilities and obligations affecting such assets AND WHEREAS the Bank of Jamaica recommended that the equity of Issa Trust which has been transferred to the Company (such equity being in the sum of $133,385,574) be converted into additional equity in the Company and form part of the Company s permanent capital base AND WHEREAS the Company s Board of Directors wish to adopt the Bank of Jamaica s recommendations in this connection BE IT RESOLVED: 1. That the 212,423,365 authorised and issued ordinary shares of $1.00 each in the capital of Company be and are hereby sub-divided into 2,124,233,650 ordinary shares of $0.10 each in the capital of the Company. 2. That the existing authorised and issued share capital of the Company of $212,423,365 be and is hereby increased by $13,338,557.40 to $225,761,922.40 by the creation of 133,385,574 new ordinary shares of $0.10 each in the capital of Company, such new shares to rank pari passu in all respects with the existing ordinary shares in the Company. 3. That the sum of $13,338,557.40 be credited to the company s share capital account and the sum of $120,047,016.60 be credited to the company s share premium account, in respect of the said issue of 133,385,574 new ordinary shares. At an Extraordinary General Meeting of the Company held March 17, 2004, the following resolutions were duly passed: BE IT RESOLVED that the existing authorised and issued share capital of the Company of $225,761,922.40 be and is hereby increased by $11,661,442.60 to $237,423,365.00 by the creation of 116,614,426 new ordinary shares of $0.10 each in the capital of the Company, such new shares to rank pari passu in all respects with the existing ordinary shares in the Company. At a Meeting of the Board of Directors of the Company held March 17, 2004, the following resolutions were duly passed: BE IT RESOLVED: 1. That the resolutions listed 1, 2 and 3 passed by the Company s directors on November 26, 2003 be and are hereby rescinded and cancelled. 2. That Issa Trust s paid up share capital in the sum of $25,000,000 be added to the paid up share capital of the Company, by the issuance to Dehring Bunting & Golding Limited of 250,000,000 new ordinary shares of $0.10 each in the capital of the Company, such shares being fully paid up at par in replacement of the issued shares in Issa Trust which have been cancelled. 3. That the amount of $19,000,000 comprising Issa Trust s statutory reserve fund, and the amount of $86,500,000 comprising Issa Trust s retained earnings reserve fund, be added to the statutory reserve fund and the retained earnings reserve fund of the Company respectively. 4. That the sum of $2,885,574 comprising Issa Trust s unappropriated profits account, be added to the unappropriated profits account of the Company. Arrears of preference dividends for 4 1 (e) 4 years to March 31, 2003 amounted to $58,941,033. In satisfaction of a Bank of Jamaica condition for approval of the purchase of Issa Trust, the 121 2 % preference shares were converted to ordinary shares and the arrears of preference dividends were written off during 2004. (f) At a Meeting of the Company s Directors held on July 9, 2003, the following resolutions were duly passed: 13. Share Capital (f) continued BE IT RESOLVED that: (a) the 110,947,826 121 2 % cumulative redeemable preference shares of $1.00 each in the capital of the Company, and (b) the 4,863,826 121 2 % non-cumulative redeemable preference shares of $1.00 each comprising part of the Company s authorised and issued share capital, BE AND ARE HEREBY CONVERTED into 115,811,191 ordinary shares of $1.00 each in the capital of the Company. 14. Statutory reserve fund Under Section 8 of the Financial Institutions Act, the company is required to transfer at least 15% of the profit after taxation in each year to a reserve fund until the amount of credit in the fund equals fifty percent (50%) of the paid-up capital, and thereafter, 10% of the net profit until the amount of credit in the said fund is equal to the paid-up capital. 15. Other reserves These represent the following: Investment revaluation reserve [see (a) and note 3(j), (i), (ii), (iii)] 28,506,752 - General loan loss provision [see (b) and note 3(e)] 4,405,566 175,270 $32,912,318 175,270 (a) This represents the unrealised gains/losses on the revaluation of available-for-sale investments. (b) This is a non-distributable reserve representing general credit loss provision, broken down as follows: J$ J$ Loans [note 5(d)] 4,000,976 147,270 Customers liabilities under guarantees issued, as per contra 404,590 28,000 $4,405,566 175,270 16. Staff costs Salaries and incentive pay 22,425,485 12,405,072 Statutory contributions 2,800,556 2,160,533 Pension contributions 1,876,462 1,448,048 Other 3,653,218 1,725,571 $30,755,721 17,739,224 The average number of full-time employees during the year was 14 (2003: 28). 17. Profit before taxation Profit before taxation is stated after charging: Directors emoluments - Fees Nil Nil - Management remuneration Nil Nil Auditors remuneration 950,000 734,500 18. Taxation (a) Recognised in the profit and loss account: (i) Current tax expense: Income tax at 331 3 % Nil Nil (ii) Deferred taxation: Origination and reversal of temporary differences [note 10(b)] 1,134,485 206,626 Tax benefit of unused tax losses 8,528,287 2,761,654 Total taxation recognised in profit and loss account 9,662,772 2,968,280 (b) The company has pre-tax profits of $38,484,742 (2003: $8,976,801). The actual tax expense differed from the expected tax expense for the year as follows: Profit before taxation 38,480,742 8,976,801
18. Taxation continued Computed expected tax expense 12,828,247 2,992,267 Difference between profit for financial statements and tax reporting purposes on:- Depreciation and capital allowances ( 287,933) ( 171,355) Loss on disposal of property, plant and equipment 87,056 71,857 General provision 1,527,767 59,488 Other disallowed expenses 1,345,975 140,935 Tax losses set-off ( 5,838,340) ( 124,912) Actual tax expense 9,662,772 2,968,280 Taxation losses, subject to agreement by the Commissioner of Taxpayer Audit and Assessment, available for set-off against future taxable profits, amounted to approximately $76,836,000 (2003: $101,450,000). 19. Financial instruments A financial instrument is any contract which gives rise to a financial asset of one enterprise and a financial liability or equity instrument of another enterprise. (a) Fair value: Fair value amounts represent estimates of the arm s length consideration that would be currently agreed upon between knowledgeable, willing parties who are under no compulsion to act and is best evidenced by a quoted market price, if one exists. Many of the company s financial instruments lack an available trading market. Therefore, these instruments have been valued using present value or other valuation techniques and may not necessarily be indicative of the amounts realisable in an immediate settlement of the instruments. (b) Financial instruments risk continued: (i) Interest rate risk 2004 Immediately Within 3-12 Over 12 Non-rate Total rate sensitive 3 months months months sensitive Assets Cash resources 79,986,695 - - 51,855,993 23,142,036 154,984,724 Loans 59,023,959 17,556,770 67,492,604 253,445,704 2,578,640 400,097,677 Net investment in leases - 22,157-1,856,143-1,878,300 Investments 161,483 192,550,520 128,328,776 472,356,441-793,397,220 Other receivables - - - - 30,108,121 30,108,121 Customers liabilities under guarantees issued, as per contra - - - - 40,458,962 40,458,962 Taxation recoverable - - - - 2,879,517 2,879,517 Deferred tax assets - - - - 8,811,260 8,811,260 Property, plant and equipment - - - - 4,696,981 4,696,981 Total assets 139,172,137 210,129,447 195,821,380 779,514,281 112,675,517 1,437,312,762 Liabilities and shareholders equity Instalment loan - - - - 21,898,151 21,898,151 Deposits - 727,466,031 313,005,991 14,953,206 11,507,128 1,066,932,356 Customers savings account 7,380,278 - - - - 7,380,278 Accounts payable and accrued charges - - - - 6,314,443 6,314,443 Guarantees issued, as per contra - - - - 40,458,962 40,458,962 Shareholder s equity - - - - 294,328,572 294,328,572 Total liabilities and shareholders equity 7,380,278 727,466,031 313,005,991 14,953,206 374,507,256 1,437,312,762 Gap 131,791,859 (517,336,584) (117,184,611) 764,561,075 (261,831,739) - Cumulative gap $131,791,859 (385,544,725) (502,729,336) 261,831,739 - Fair Carrying Fair Carrying Value Value Value Value Assets Cash resources 154,984,724 154,984,724 35,553,456 35,553,456 Loans receivable 400,097,677 400,097,677 14,556,424 14,556,424 Other receivables 30,108,121 30,108,121 2,028,523 2,028,523 Investments 793,397,220 793,397,220 52,706,955 52,706,955 Liabilities Instalment loan 21,898,151 21,898,151 27,500,000 27,500,000 Deposits 1,066,932,356 1,066,932,356 4,864,525 4,864,525 Customers savings accounts 7,380,278 7,380,278 5,036,155 5,036,155 Accounts payable and accrued charges 6,314,443 6,314,443 3,127,416 3,127,416 The carrying amounts included in the financial statements for cash resources (excluding cash floats), other receivables, customers deposits, customers savings accounts, loan and other liabilities are assumed to reflect their approximate fair values because of the short-term nature of these instruments. The estimated fair value of loans payable and receivable are considered to be equal to the carrying value, as the directors are of the opinion that, based on prevailing economic conditions, the carrying value approximates estimated realisable value. 2003 Immediately Within 3-12 Over 12 Non-rate Total rate sensitive 3 months months months sensitive Assets Cash resources 34,454,630 - - - 1,098,826 35,553,456 Loans 76,933 - - 14,479,491-14,556,424 Investments 35,497,630 2,093,325 15,116,000-52,706,955 Other receivables - - - - 2,028,523 2,028,523 Taxation recoverable - - - - 1,744,360 1,744,360 Deferred tax asset - - - - 34,474,032 34,474,032 Due from parent company - - - - 608,899 608,899 Property, plant and equipment - - - - 2,469,723 2,469,723 Customers liabilities under guarantees issued, as per contra - - - - 2,800,000 2,800,000 Total assets 34,531,563 35,497,630 2,093,325 29,595,491 45,224,363 146,942,372 Liabilities and shareholders equity Instalment loan - - - - 27,500,000 27,500,000 Deposits - 4,758,203 - - 106,322 4,864,525 Customers savings accounts 5,032,488 - - - 3,667 5,036,155 Accounts payable and accrued charges - - - - 3,127,416 3,127,416 Guarantees issued, as per contra - - - - 2,800,000 2,800,000 Shareholder s equity - - - - 103,614,276 103,614,276 Total liabilities and shareholders equity 5,032,488 4,758,203 - - 137,151,681 146,942,372 Total interest rate sensitivity gap (29,499,075) 30,739,427 2,093,325 29,595,491 (91,927,318) - Cumulative gap $(29,499,075) 60,238,502 62,331,827 91,927,318 - (b) Financial instruments risk: Exposure to interest rate, credit, foreign currency, market, liquidity and cash flow risks arises in the ordinary course of the company s business. Derivative instruments are not used by the company as a risk management strategy. Average effective yields by the earlier of the contractual repricing and maturity dates: 2004 Immediately Within 3-12 Over 12 rate sensitive 3 months months months Total % % % % % Loans receivable - 22.82 18.60 19.11 16.35 Deposits payable - 10.12 8.50 11.06 9.65 Customers savings accounts 9.70 - - - 9.70
19. Financial instruments (b)(i) continued 19. Financial instruments (b)(v) continued The company manages this risk by matching assets to liabilities within the maturities profile. 2003 Immediately rate sensitive Within 3 months 3-12 months Over 12 months Total % % % % % Loans receivable - - - 14.50 14.50 Deposits payable - 14.15 - - 14.15 Customers savings accounts 12.00 - - - 12.00 (ii) Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The company monitors its credit risk by establishing a credit committee which reviews and assesses the company s credit portfolio with a view to reducing and controlling the company s credit risk. The tools utilised by the credit committee are based on local and international credit guidelines. The following table summarises the credit exposure of the company to individuals, Government and businesses by sector. 2004 Other Cash Loans receivables resources Total Public sector - 16,690,544-16,690,544 Financial institutions - 3,870,598 154,984,724 158,855,322 Professional & other services 182,766,645 7,411,052-190,177,697 Individuals 217,331,032 2,135,927-219,466,959 $400,097,677 30,108,121 154,984,724 585,190,522 2003 Other Cash Loans receivables resources Total Financial institutions - 525,305 35,553,456 36,078,761 Professional & other services 14,432,798 1,503,218-15,936,016 Individuals 123,626 - - 123,626 $14,556,424 2,028,523 35,553,456 52,138,403 At the balance sheet date, except for investments in securities purchased under resale agreements, there were no significant concentrations of credit risk. The credit exposure is limited to the carrying value of financial instruments in the balance sheet. (iii) Foreign currency risk Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The company incurs foreign currency risk on transactions that are denominated in a currency other than the Jamaica dollar. The main currency giving rise to this risk is the United States Dollar. The company ensures that the net exposure is kept to an acceptable level by matching foreign currency assets with foreign currency liabilities. At the balance sheet date, the net foreign currency assets were as follows: United States dollars US$ 1,256,800 94,110 Canadian dollars Cdn$ 44 7,550 Pounds sterling 7,229 27,512 (iv) Market risk Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices whether those changes are caused by factors specific to the individual security or its issuer or factors affecting all securities traded in the market. The company has no significant exposure to market risk as the financial instruments subject to this risk are not material. (v) Liquidity risk Liquidity risk, also referred to as funding risk, is the risk that the company will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at or close to, its fair value. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, and the availability of funding through an adequate amount of committed facilities. (vi) Cash flow risk Cash flow risk is the risk that future cash flows associated with a monetary financial instrument will fluctuate in amount. The company manages this risk through budgetary measures ensuring, as far as possible, that financial assets and liabilities are matched to mitigate any significant adverse cash flows. 20. Related party balances and transactions A related company is one which controls or exercises significant influence over, or is controlled or significantly influenced by, the company in making financial and operating decisions, or, along with the company, is subject to common control or significant influence. (a) The balance sheet includes related party balances, arising in the ordinary course of business as follows: Other receivables: Parent company Nil 943,986 Due from parent company Nil 608,899 Investments: Parent company (note 6) 270,510,294 52,590,955 Deposits: Firm in which a director is a partner Nil ( 2,679,381) (b) The profit and loss account includes the following income earned from, and expenses incurred in, transactions with related parties in the ordinary course of business: Interest income: Parent company (29,117,007) (10,251,249) Other administration costs: Payment made to a director for professional services 808,575 204,750 21. Pension Scheme The parent company operates a defined contribution pension scheme for all employees who have satisfied certain minimum service requirements. The scheme is funded by equal employee and employer contributions each equivalent to 5% of basic salary. The company s contributions for the year amounted to $1,345,375 (2003: $1,448,048). 22. Effects of first-time adoption of IFRS The effects of first-time adoption of IFRS are summarised below: (a) Effect on 2002 equity: (b) Reconciliation of 2003 net profit: Share Capital capital reserves Deficit Total IAS 12 Income taxes [e (i)] $ - - (37,442,312) (37,442,312) Net profit As previously reported under Jamaica GAAP (JGAAP) 8,801,531 Effect of first-time adoption of IFRS: IAS 12 Income taxes [e(i)] (2,968,280) IAS 39 Financial instruments Recognition and measurements [e(ii)] 175,270 (2,793,010) As restated $6,008,521 (c) Reconciliation of 2003 balance sheet items affected by IFRS: As previously reported under IFRS JGAAP adjustments Total Assets Loans 14,409,154 147,270 14,556,424 Customers liabilities under guarantees issued, as per contra 2,772,000 28,000 2,800,000 Deferred tax asset [e(i)] - 34,474,032 34,474,032 $17,181,154 34,649,302 51,830,456