CHYY Development Group Limited — Annual Report 2004

Dec 29, 2004

IIN INTERNATIONAL LIMITED 國訊國際有限公司[*]

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8128)

ANNUAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2004

Characteristics of the Growth Enterprise Market (the “GEM”) of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”)

The GEM has been established as a market designed to accommodate companies to which a high investment risk may be attached. In particular, companies may list on the GEM with neither a track record of profitability nor any obligation to forecast future profitability. Furthermore, there may be risks arising out of the emerging nature of companies listed on the GEM and the business sectors or countries in which the companies operate. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of the GEM mean that it is a market more suited to professional and other sophisticated investors.

Given the emerging nature of companies listed on the GEM, there is a risk that securities traded on the GEM may be more susceptible to high market volatility than securities traded on the Main Board and no assurance is given that there will be a liquid market in the securities traded on the GEM.

The principal means of information dissemination on the GEM is publication on the Internet website operated by the Stock Exchange. Listed companies are not generally required to issue paid announcements in gazetted newspapers. Accordingly, prospective investors should note that they need to have access to the GEM website in order to obtain up-to-date information on the GEM-listed issuers.

The Stock Exchange takes no responsibility for the contents of this announcement, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for and loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

This announcement, for which the directors of IIN International Limited collectively and individually accept full responsibility, includes particulars given in compliance with the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Stock Exchange (the “GEM Listing Rules”) for the purpose of giving information with regard to IIN International Limited. The directors of IIN International Limited, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief: (1) the information contained in this announcement is accurate and complete in all material respects and not misleading; (2) there are no other matters the omission of which would make any statement in this announcement misleading; and (3) all opinions expressed in this announcement have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

This announcement will remain on the GEM website at www.hkgem.com on the “Latest Company Announcements” page for at least 7 days from the date of its posting.

* For identification purpose only

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IIN INTERNATIONAL LIMITED 國訊國際有限公司[*]

(Incorporated in the Cayman Islands with limited liability)

ANNUAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2004

RESULTS

The board of directors (the “Directors”) of IIN International Limited (the “Company”) is pleased to announce the audited consolidated results of the Company and its subsidiaries (collectively referred to as the “Group”) for the year ended 30 September 2004, together with the comparative figures for the previous year, prepared in accordance with generally accepted accounting principles in Hong Kong, as follows:

CONSOLIDATED INCOME STATEMENT

for the year ended 30 September 2004

Notes Turnover 3 Cost of sales Gross profit Other revenue and gains 3 Selling and distribution costs Administrative expenses Other operating expenses Impairment of goodwill Loss from operating activities 4 Finance costs 5 Loss before taxation Taxation 6 Loss before minority interests Minority interests Net loss from ordinary activities attributable to shareholders Loss per share 8 Basic Diluted	(Audited) 2004 HK$’000 113,944 (97,790) 16,154 1,480 (9,321) (28,213) (14,668) (15,000) (49,568) (2,057) (51,625) (920) (52,545) 4,083 (48,462) HK3.31 cents N/A	(Audited) 2003 HK$’000 166,849 (143,183) 23,666 2,416 (11,581) (32,360) (14,397) (3,407) (35,663) (3,757) (39,420) (900) (40,320) 2,717 (37,603) HK2.63 cents N/A

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1. BASIS OF PREPARATION

These financial statements have been prepared in accordance with and comply with all applicable Statements of Standard Accounting Practice (“SSAPs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants and the disclosure requirements of the Hong Kong Companies Ordinance. The financial statements are prepared under the historical cost convention, as modified by the revaluation of certain fixed assets as further described in the respective accounting policy below.

Adoption of revised SSAP

In the current year, the Group has adopted SSAP 12 (Revised) “Income taxes”. The principal effect of the implementation of SSAP 12 (Revised) is in relation to deferred tax. In previous years, partial provision was made for deferred tax using the income statement liability method, i.e. a liability was recognised in respect of timing differences arising, except where timing differences were not expected to reverse in the foreseeable future. Deferred tax assets were not recognised unless their realisation was assured beyond reasonable doubt. SSAP 12 (Revised) requires the adoption of a balance sheet liability method, whereby deferred tax is recognised in respect of all temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, with limited exceptions.

In the absence of any specific transitional requirements in SSAP 12 (Revised), the new accounting policy has been applied retrospectively. The adoption of SSAP 12 (Revised) has no material effect on the net assets and results for the current and prior years. Accordingly, no prior year adjustments is required.

2. SEGMENT INFORMATION

Segment information is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment; and (ii) on a secondary segment reporting basis, by geographical segment.

The Group’s operating businesses are structured and managed separately, according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers product and services which are subject to risks and returns that are different from those of the other business segments. Summary details of the business segments are as follows:

• (a) the telecommunications network infrastructure solutions segment consists of the sale of the broadband data network information platform developed by the Group as well as the integration of third-party software and hardware for telecommunications sectors;

• (b) the network management solutions segment consists of the sale of network management software for telecommunications sectors;

• (c) the other network solutions for sectors other than telecommunications segment consists of the design, implementation and maintenance of network systems for customers in sectors other than telecommunications sectors;

• (d) the transmission segment consists of the manufacturing and sale of communication cables and optical cables, primarily for communications sectors; and

• (e) the corporate and other segment consists of the Group’s investing holding, corporate assets and liabilities items.

– 3 –

In determining the Group’s geographical segments, revenues and results are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets.

Intersegment sales and transfers are transacted with reference to the selling prices used for sales made to third parties at the then prevailing market prices.

(a) Business segments

The following tables present revenue and result information for the Group’s business segments.

Group Segment revenue: Sales to external customers Intersegment sales Total Segment results Unallocated income and gains Unallocated expenses Loss from operating activities Finance costs Loss before taxation Taxation Loss before minority interests Minority interests Loss from ordinary activities attributable to shareholders	Telecommunications Network Other network solutions network infrastructure management for sectors other than solutions solutions telecommunications Transmission 2004 2003 2004 2003 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 51,721 95,522 2,838 23,255 14,467 13,915 44,918 34,157 1,868 12,794 – – 15 – – – 53,589 108,316 2,838 23,255 14,482 13,915 44,918 34,157 (19,944) (19,157) (6,178) (2,783) (4,753) (7,798) (5,173) (4,934)	Eliminations 2004 2003 HK$’000 HK$’000 – – (1,883) (12,794) (1,883) (12,794) – –	Consolidated 2004 2003 HK$’000 HK$’000 113,944 166,849 – – 113,944 166,849 (36,048) (34,672) 1,480 2,416 (15,000) (3,407) (49,568) (35,663) (2,057) (3,757) (51,625) (39,420) (920) (900) (52,545) (40,320) 4,083 2,717 (48,462) (37,603)

(b) Geographical segments

Over 90% of the Group’s revenue, assets and liabilities are derived from customers based in the PRC and accordingly, no further detailed analysis of the Group’s geographical segments is disclosed.

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3. TURNOVER, OTHER REVENUE AND GAINS

Turnover represents the net invoiced value of goods sold, after allowances for returns, trade discounts and business tax where applicable, and services rendered. All significant intra-group transactions have been eliminated on consolidation.

An analysis of the Group’s turnover, other revenue and gains is as follows:

4.

Turnover Other revenue and gains: Bank interest income Others LOSS FROM OPERATING ACTIVITIES The Group’s loss from operating activities is arrived at after charging: Cost of inventories sold and services provided Depreciation Research and development costs: Deferred development costs amortised Current year expenditure Goodwill: Amortisation for the year Impairment arising during the year Minimum lease payments under operating leases in respect of land and buildings Auditors’ remuneration Staff costs (including directors’ emoluments (Note 7)): Wages and salaries Pension scheme contributions Provision for bad and doubtful debts Provision for other receivables Provision for obsolete inventories Loss on disposal of fixed assets	2004 HK$’000 113,944 232 1,248 1,480 2004 HK$’000 97,790 4,780 958 5,820 6,778 3,872 15,000 18,872 1,153 580 13,186 163 13,349 6,889 2,821 – 128	2003 HK$’000 166,849
		778 1,638
		2,416
		2003 HK$’000 143,183 4,959 1,375 6,850
		8,225
		2,773 3,407
		6,180
		3,308 780 16,764 274
		17,038
		8,765 1,275 165 44

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• Amortisation of deferred development costs, amortisation of goodwill, provision for bad and doubtful debts, provision for other receivables, provision for obsolete inventories and loss on disposal of fixed assets for the year are included in “Other operating expenses” on the face of the consolidated income statement.

The current year research and development costs included approximately HK$3,520,000 (2003: HK$3,642,000) relating to staff costs which is also included in the staff costs total amount disclosed above.

5. FINANCE COSTS

Interest on bank loans wholly repayable within five years Interest on other loans TAXATION Current tax – Hong Kong Tax for the year Current tax – PRC Under-provision in respect of prior years	Group 2004 2003 HK$’000 HK$’000 1,496 3,283 561 474 2,057 3,757 Group 2004 2003 HK$’000 HK$’000 725 900 195 – 920 900

6. TAXATION

Hong Kong profits tax has been provided at the rate of 17.5% (2003: 17.5%) on the estimated assessable profits arising in Hong Kong during the year. Taxes on profit assessable elsewhere have been calculated at the applicable rates of tax prevailing in the jurisdictions in which the Group operate, based on existing legislation, interpretations and practices in respect thereof during both years.

Loss before taxation Tax at the statutory tax rate of 17.5% (2003: 17.5%) Different tax rate of other jurisdiction Expenses not deductible for tax Income not subject to tax Tax losses not recognised Adjustments in respect of current tax of previous periods Tax losses utilised from previous periods Actual tax expense	2004 HK$’000 (51,625) (9,034) (605) 7,982 (210) 2,631 195 (39) 920	2003 HK$’000 (39,420) (6,899) (161) 3,652 (238) 4,546 – – 900

Actual tax expense

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The Group has tax losses of HK$88,483,000 (2003: HK$64,221,000) that are available for offsetting against future taxable profits of the companies which incurred the losses. Deferred tax assets have not been recognised in respect of these losses as it is not probable that future taxable profit will be available against which these unused tax losses can be utilitised.

As at 30 September 2004, the Group and the Company did not have any significant unprovided deferred tax liabilities (2003: Nil).

7. DIVIDEND

The Company resolved not to declare a final dividend in respect of the year (2003: Nil)

8. LOSS PER SHARE

The calculation of basic loss per share is based on the net loss from ordinary activities attributable to shareholders for the year of HK$48,462,000 (2003: HK$37,603,000) and the weighted average of 1,464,197,941 (2003: HK$1,431,608,528) ordinary shares in issue during the year.

Diluted loss per share amounts for the years ended 30 September 2004 and 2003 have not been disclosed as the potential ordinary shares outstanding had an anti-dilutive effect on the basic loss per share for these years.

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9. MOVEMENT OF SHARE CAPITAL AND RESERVE

For the year ended 30 September 2004 and 2003

At 1 October 2002 Issue of shares upon acquisition of subsidiaries Surplus arising on revaluation of leasehold land and buildings Net gains not recognised in the income statement Goodwill transferred to income statement on impairment Net loss for the year At 30 September 2003 and 1 October 2003 Issue of shares upon acquisition of subsidiaries Surplus arising on revaluation of leasehold land and buildings Net gains not recognised in the income statement Goodwill transferred to income statement on impairment Net loss for the year At 30 September 2004	Issued share capital HK$’000 110,272 1,769 – – – – 112,041 8,318 – – – – 120,359	Share premium account HK$’000 54,102 862 – – – – 54,964 – – – – – 54,964	Capital reserve HK$’000 (7,742) – – – 3,000 – (4,742) – – – 2,500 – (2,242)	Statutory reserve HK$’000 4 – – – – – 4 – – – – – 4	Asset revaluation reserve HK$’000 4,463 – 105 105 – – 4,568 – 493 493 – – 5,061	Exchange fluctuation reserve HK$’000 (13) – – – – – (13) – – – – – (13)	Accumulated losses HK$’000 (29,468) – – – – (37,603) (67,071) – – – – (48,462) (115,533)	Total HK$’000 131,618 2,631 105
								105
								3,000 (37,603)
								99,751 8,318 493
								493
								2,500 (48,462)
								62,600

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CHAIRMAN’S STATEMENT

IIN International Limited (the “Company”) together with its subsidiaries (the “Group” or “IIN”) has since its establishment been focused on delivering high quality telecommunications network solutions to the PRC telecommunications carriers, both in telecommunications network infrastructure and comprehensive network management and services.

With the continually liberalizing telecommunications industry in the PRC, competition in the network solutions industry became increasingly intense, both from domestic vendors and international vendors entering the PRC market. Telecommunications network hardware and system software have become increasingly commoditized, squeezing margin of traditional network infrastructure solution providers. As an active participant, the Group’s performance was unavoidably adversely impacted in 2004.

During the past year, the Group has undergone significant restructuring process in order to streamline the workforce as well as to improve the overall operational efficiency and productivity. The total workforce of the Group was reduced to a minimal but efficient level. Apart from much efforts contributed to enlarge revenue of the Group, we also aggressively pressed our expenditure by introducing various cost-control measures.

For improving the Group’s profitability, the management endeavored to explore new opportunities to expand the revenue source as well as to improve profit margin. In June 2004, we had acquired 51% equity interests of TM Technology Corporation (“TM Technology”) which in turn owned 100% of Chengdu TM Network Corporation (“Chengdu TM”), a company armed with a strong research and development team, using its proprietary distributed system generator platform as core technology, specialized in telecommunications network management and other distributed application softwares. We believe that the acquisition will further strengthen the Group’s ability in providing services to enterprise customers and will benefit the Group in broadening the business scope including the entry into the wireless network management system arena.

It is expected that the PRC telecommunications market in the coming year would remain competitive in a more customer-driven market. The demand from end-customers for high quality and variety of services will be increasing. Therefore, high quality and variety of services as well as competitive pricing would be the key competing strategies for the telecommunications carriers to outstrip their competitors. In addition, the grant of 3G licenses in China will be a main focus with great influence on the market development.

In view of the existing market environment, the Group will allocate more of our internal resources and greater emphasis in developing high quality services including high quality telecommunications network solutions as well as related value-added services. We will put a concerted effort to utilize our know-how gained from providing network management solutions to telecommunications carriers to migrate downstream through carriers by providing communication and information network services to enterprise customers.

Accordingly, the Group completed the research and development of a new service platform version 2 tailored to meet the needs of enterprises to centrally manage, maintain and service IP network and components.

We will also explore new value-added service segments, and have identified online payment platform as a means to enable carriers to offer convenient and reliable payment collection services to merchants and customers, therefore enabling carriers to capture incremental revenue and profit. To this end, we have signed a cooperative agreement with a leading supplier of payment solutions to jointly develop an online payment platform.

With our strong capability in research and development and market exposure, the Company will dedicate its every endeavor in enlarging its customer base, enhancing the businesses of the Company, advancing our technology and improving profit margin with a prime objective to improve the Group’s performance particularly to deliver higher profit to our shareholders.

I would like to take this opportunity to express our deepest sincerity and gratitude for the continuing supports of our valued shareholders, customers, business partners and suppliers, and also for the dedication and hard-work of our directors and staff members during the fiscal year 2004.

Wu Shu Min Chairman

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MANAGEMENT DISCUSSIONS AND ANALYSIS

FINANCIAL REVIEW

Turnover

Turnover for the fiscal year ended 30 September 2004 amounted to approximately HK$113.9 million compared with approximately HK$166.8 million last year, representing a drop of 31.7%. The decrease in turnover was mainly due to the keen market competition. Following the completion of the acquisition of Wujiang Shengxin Optoelectronics Technology Co, Ltd. (“Shengxin”), contribution from transmission solutions became a sizeable revenue source to the Group during the year under review.

Excluding provision of trade receivable and other receivable and impairment of goodwill totaling approximately HK$24.7 million (2003: approximately HK$13.4 million), the Group recorded net loss from ordinary activities attributable to shareholders of approximately HK$23.8 million during the year (2003: approximately HK$24.2 million). During the year, the Group continued its efforts in implementing cost control measures but the decrease in turnover during the year offset the effect of cost control measures taken.

Gross profit margin

Gross profit margin for the year under review was 14.2% which was in line with last year. As a result of the keen market competition, the gross profit margin for system integration solutions projects showed a downward trend. During the year under review, the group has taken cautious steps in its bidding price and did not submit tender for those projects of unacceptable margin. Therefore the Group still achieved last year’s gross profit margin but unavoidably recorded a decrease in turnover.

Selling and distribution costs and administrative expenses

Selling and distribution costs for the year under review totaled approximately HK$9.3 million (2003: approximately HK$11.6 million). The decrease in selling and distribution cost was in line with the decrease in turnover of the Group during the year.

Administrative expenses decreased to approximately HK$28.2 million in 2004 (2003: approximately HK$32.4 million). The decrease in administrative expenses was due to the Group’s concerted efforts to maximize operational efficiency and streamline operational expenses.

Segmental information

Turnover generated from providing network infrastructure solutions accounted for approximately HK$51.7 million, equivalent to 45.4% of turnover for the year under review (2003: approximately HK$95.5 million) and representing a decrease of 45.9%. The substantial decrease in turnover of network infrastructure solutions, customarily the Group’s core revenue generator, was due to the keen market competition.

Turnover generated from providing network management solutions decreased to approximately HK$2.8 million (2003: approximately HK$23.2 million). This represented 2.5% of turnover for the year under review. Turnover generated from providing other network solutions for customers in other market sectors in the PRC, focusing on governmental and enterprise projects, was approximately HK$14.5 million, representing 12.7% of turnover for the year under review (2003: HK$13.9 million). From the second quarter starting 1 January 2004 onwards, revenue from Shengxin was consolidated to the Group’s financial results. Turnover generated from Shengxin amounted to approximately HK$44.9 million for the year under review, amounting to approximately 39.4% of the Group’s turnover (2003: 34.2 million).

Order book

As at the date of this report, the Group has secured approximately HK$20.0 million contracts on hand.

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Financial resources and liquidity

Net current assets of the Group as at 30 September 2004 was approximately HK$8.4 million (2003: approximately HK$29.5 million). As at 30 September 2004, the Group has short-term cash and bank deposits of approximately HK$15.7 million (2003: approximately HK$68.8 million). The decrease in value of net current assets and cash and bank deposits balance was a result of the operating losses recorded during the year under review.

As at 30 September 2004, the Group’s total bank and other borrowings amounted to approximately HK$36.5 million at fixed interest rates ranging from 5.04% p.a. to 8% p.a. (2003: approximately HK$58.7 million at fixed interest rates ranging from 5.04% p.a. to 6% p.a.). Among of which, approximately HK$22.5 million is repayable within one year or on demand and approximately HK$14.0 million is repayable beyond one year.

Charge on group assets

As at 30 September 2004, the Group’s bank loans and other bank facilities are secured by:

• (i) charges on the Group’s fixed deposits of approximately HK$11.1 million (2003: approximately HK$46.0 million), legal charges on the Group’s leasehold land and buildings, plant and machinery and motor vehicles with carrying values of approximately HK$27.2 million (2003: approximately HK$27.5 million), approximately HK$5.1 million (2003: approximately HK$6.0 million) and approximately HK$0.3 million (2003: approximately HK$0.3 million) respectively; and

• (ii) corporate guarantee executed by an independent third party.

Exposure to fluctuations in exchange rates

The Group continues to adopt a conservative treasury policy with all bank deposits being kept in either Hong Kong Dollars, or in the local currencies of the operating subsidiaries, keeping a minimum exposure to foreign exchange risks.

Gearing ratio

The Group’s gearing ratio as at 30 September 2004 increased to 55.1% (2003: 52.9%). The gearing ratio was based on the Group’s total liabilities over its total assets.

Employees

As at 30 September 2004, the Group has 265 employees including 146 employees of Shengxin and 38 employees of Chengdu TM as compared with 287 for the same period of last year. The staff cost, including directors’ emoluments, was approximately HK$13.3 million for the year under review (2003: approximately HK$17.0 million). During the year, the Group put concerted efforts to streamline operations and rationalize the costs. Improvements were reflected in the year under review as to the decreased number of employees (excluding employees of Shengxin and Chengdu TM) and the decreased amount of staff costs.

Share option schemes

The Group has adopted two share option schemes whereby certain directors and employees of the Group may be granted options to acquire shares of the Company. Details of the share option schemes are fully set out under the sub-heading of “Share Option Scheme”.

Contingent liabilities

As at the date of this report, the Directors are not aware of any material contingent liabilities.

Dividend

The directors do not recommend the payment of a final dividend for the year ended 30 September 2004 (2003: Nil).

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Capital structure

During the year under review, the movement of the share capital of the Company was as follows:

On 28 June 2004, 49,029,480 shares of US$0.01 each were allotted and issued to an independent third party for the acquisition of 51% interests in TM Technology and its subsidiaries.

On 28 June 2004, 57,613,640 shares of US$0.01 each were allotted and issued to two independent third parties for the assignment of two investor’s loan due and payable by TM Technology to the two independent third parties.

As at 30 September 2004, 1,543,160,470 shares of the Company were issued and fully paid.

Capital commitment and significant investments

In June 2004, the Group completed the acquisition and subscription of 51% equity interest in TM Technology, the investment holding company that holds 100% equity interest in Chengdu TM (the “TM Acquisition”) together with two investor’s loan. The total consideration of HK$15.8 million was satisfied by the issue and allotment of 49,029,480 new shares and 57,613,640 new shares of the Company at an issue price of HK$0.13 per share and HK$0.088 per share, respectively and cash payment of HK$4.3 million.

Future plans for material investment or capital assets

As at the date of this report, the Group does not have any plans for material investment or capital assets.

Material acquisitions or disposals

Apart from the TM Acquisition, the Group did not have any material acquisitions or disposals during the year under review. Details of which were disclosed in the Company’s circular dated 23 June 2004.

Disclosure of trade receivables under chapter 17 of the GEM Listing Rules

As at 30 September 2004, there was a trade receivable due from 北京國創華利科技有限公司 (“Beijing Guochuang”) amounted to approximately HK$9.9 million which was arisen from the provision of system integration solutions including the sales of software and hardware systems. The balance was overdue more than one year.

Since the disclosure made in the Company’s third quarterly report dated 12 August 2004, an approximate amount of HK$1.4 million due from Beijing Guochuang was offset with the same amount due from the Group’s subsidiaries to a supplier. Moreover, taking into account of the Group’s progress in negotiation with Beijing Guochuang and its corresponding supplier, a provision of HK$5.2 million was made as at 30 September 2004. As a result of these, the net exposure of the amount due from Beijing Guochuang reduced to approximately HK$9.9 million.

The Group will take appropriate steps to collect the trade receivable in accordance with the terms of the contracts.

The balance fell within the disclosure requirement under Chapter 17 of the GEM Listing Rules. Details of which is also disclosed in the Company’s annual report under the heading “Report of the Directors”.

BUSINESS REVIEW

Network infrastructure solutions

The network infrastructure solutions business has been a significant revenue generator of the Group in the past few years and this remained the same for the year under review. However, profit margin of the projects in this business segment continued to be under pressure. We had taken cautious steps in selecting projects with acceptable profit margin. The turnover generated from this business segment dropped by 45.9% as compared to that of the previous year. During the year under review, the Group was awarded repeating orders from Provincial Telecommunications Corporation in Shanghai for construction of Metropolitan Area Networks.

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Network management solutions

In fiscal year 2004, the turnover generated from network management solutions which usually has a higher profit margin dropped by 87.9% as compared to that of fiscal year 2003. The results recorded in this business segment was much lower than anticipated and it was mainly attributable to less contracts being secured from China Telecom due to the fact that the construction of local network management projects carried in the past few years was close to completion. For this business segment, we have based on our existing technology and transformed to focus in developing the software application of communication and information network services.

Other network solutions

The revenue contributed by the other network solutions recorded an increase of 4.3% as compared to that of previous year. Major projects included provision of network solutions to educational institute and construction of business intelligent platform for mobile customers.

Transmission solutions

The Group conducts the transmission business indirectly through its 51% equity interests of Shengxin. Shengxin is mainly engaged in manufacturing and sale of communication cables and optical fiber cables. This business segment attributed a sizeable portion of turnover of the Group in the year under review, representing 39.4%. However, the business of transmission solution was adversely affected by the elevation of cost of copper which is the key raw material. Some of the projects taken in the beginning of the year suffered loss as a result.

Research and development

Our research and development team has in fiscal year 2004 commenced research and development of “Enterprise IP Network Management and Maintenance Service Platform” to enable enterprises to centrally manage and maintain IP networks and elements.

Corporate development

In May 2004, the Group made strategic move to acquire 51% equity interests of TM Technology which in turn owned 100% of Chengdu TM, a company armed with a strong research and development team, engaged primarily in the businesses of research and development of software and hardware of computer, sale and provision of maintenance services to retail customers, provision of technical consultation services to automation control system and sophisticated computer network engineering and management system. Their products include (i) Calling Data Recording System, (ii) Wireless Management and Monitoring System; and (iii) IP Management System.

USE OF PROCEEDS

Including the proceeds from the exercise of the over-allotment option, the total net cash proceeds from the Group’s placing in November 2001 (the “Placing”) amounted to HK$127.8 million. In line with the prospectus of the Company dated 26 November 2001 (the “Prospectus”), the Group utilized HK$37.0 million of the net cash proceeds for the repayment of convertible bonds.

The Group will use HK$17.5 million to facilitate its expansion of research and development capabilities in developing new network solutions as stated in the Prospectus. As at 30 September 2004, the Group fully used the amount of HK$17.5 million for this purpose.

As stated in the Prospectus, the Group will use HK$14.0 million to facilitate its development of upgraded versions of existing network solutions. As at 30 September 2004, the Group fully used the amount of HK$14.0 million for this purpose.

According to the Prospectus, HK$10.0 million will be used for purchase of new network equipment and/or software for the existing offices of the Group and establishment of new representative offices in major provinces in the PRC. The Group re-directed HK$6.5 million from this portion of the proceeds for the acquisition of Shengxin. After the above redirection, as at 30 September 2004, the Group used HK$2.7 million, with HK$0.8 million remaining unutilized for this purpose.

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HK$49.3 million from the net cash proceeds of the Placing will be used as ongoing working capital of the Group. During the financial year ended 30 September 2002, owing to changes in market environment and the restructuring of China Telecom, the Group’s largest customer, the demand for the Group’s services decreased. Accordingly, the funding requirement for daily operations of the Group was reduced and HK$39.5 million were re-directed for the acquisition of Shengxin. After the above re-direction, as at 30 September 2004, the Group used HK$9.8 million, with nil remaining unutilized for the purpose of ongoing working capital. The ongoing working capital will be funded from internal resources.

The table below summarises the actual and intended uses of proceeds from the Placing by the Company:

				Amount
				used for the	Proceeds
				Acquisition	remaining
			Actual usage	of Shengxin	unutilised
		Planned usage	as at 30	as at 30	as at 30
Use	of Proceeds	according to	September	September	September
from the Placing		the Prospectus	2004	2004	2004
		(HK$ million)	(HK$ million)	(HK$ million)	(HK$ million)
				Note
1.	Repayment of convertible	37.0	37.0	0	0
	bonds
2.	Research and development	17.5	17.5	0	0
	in developing new network
	solutions
3.	Upgrade of existing network	14.0	14.0	0	0
	solutions
4.	Purchase of new network	10.0	2.7	6.5	0.8
	equipment and/or
	software for the existing
	offices of the Group and
	establishment of new
	representative offices in
	major PRC provinces
5.	Ongoing working capital	49.3 (including	9.8	39.5	0
		proceeds
		from exercise of
		over-allotment
		options of
		approximately 14.0)

Note: Details of which are stated in the Company’s circular dated 16 December 2002.

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BUSINESS OBJECTIVES AND ACTUAL BUSINESS PROGRESS COMPARISON

The following is a comparison of actual business progress in the year ended 30 September 2004 (“Review Period”) with the business objectives for the same period as set out in the Prospectus. The Group reviews its business objectives and strategies on an ongoing basis and makes adjustments as necessary.

Research and Product Development

Business objectives for the Actual business progress Review Period as set out in in the Review Period the Prospectus China Telecom version 9.0 and China Complete the development by 30 This system has been covered by a Mobile version 4.0 for the CPEM September 2004 generalized version 7.0. The 8000 Power and Environmental generalized version 7.0 is applicable Monitoring System to China Telecom, China Mobile and Unicom. China Telecom version 4.0 for the Complete the development by 30 This system has been integrated with Network Management and Safeguard September 2004 the IP Network Management and System Monitoring System and is collectively called as the IP Network Management and Monitoring System. The Group plans to use this IP Network Management and Monitoring System as its platform and incorporates new functionalities into it so as to develop communications and information network service for the enterprise. China Telecom version 4.0 and China Complete the development by 30 This system has been integrated with Mobile version 3.0 for the IP Network September 2004 the Network Management and Management and Monitoring System Safeguard System and is collectively called as the IP Network Management and Monitoring System. The Group plans to use this IP Network Management and Monitoring System as its platform and incorporates new functionalities into it so as to develop communications and information network service for the enterprise. China Telecom version 3.0 for the Complete the development by 30 The development and marketing of B ro a d b a n d A c c e s s N e t w o rk September 2004 this system were delayed pending Management System market readiness.

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Sales and Marketing

Business objectives for the Actual business progress Review Period as set out in in the Review Period the Prospectus

China Telecom version 9.0 and China Mobile version 4.0 for the CPEM 8000 Power and Environmental Monitoring System

China Telecom version 9.0 and China Formally launch the system by 30 The generalized version 7.0 for the Mobile version 4.0 for the CPEM September 2004 system will be launched in accordance 8000 Power and Environmental with market demands. Monitoring System China Telecom version 4.0 for the Formally launch the system by 30 This system has been integrated with Network Management and Safeguard September 2004 the IP Network Management and System Monitoring System and is collectively called as the IP Network Management and Monitoring System. The system will be promoted to existing clients. China Telecom version 4.0 and China Formally launch the system by 30 This system has been integrated with Mobile version 3.0 for the IP Network September 2004 the Network Management and Management and Monitoring System Safeguard System and is collectively called as the Network Management and Safeguard System. The system will be promoted to existing clients. China Telecom version 3.0 for the Formally launch the system by 30 The development and marketing of B ro a d b a n d A c c e s s N e t w o rk September 2004 this system were delayed pending Management System market readiness. Establish a new branch office by Officially implement by 30 September The decision to establish new branch upgrading one of the existing 2004 office will be made in accordance representative office with the business need.

Strategic Alliance and Acquisition

Business objectives for the Review Period as set out in the Prospectus

Actual business progress in the Review Period

Continue business pursuit of previous years

The Group is actively seeking strategic and cooperative partners which have synergistic effects with the Group, especially those with products and technologies that are complementary to the Group and are beneficial to the Group’s business growth. For this respect, we have signed a co-operative agreement with a leading supplier of payment solutions to jointly develop an online payment platform.

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DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS OR SHORT POSITIONS IN THE SHARES AND UNDERLYING SHARES OF THE COMPANY AND ITS ASSOCIATED CORPORATION

At 30 September 2004, the interests or short positions of the directors and the chief executive of the Company in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)) which will be required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short position which they are taken or deemed to have taken under such provisions of SFO), or which will be required to be entered into the register kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to Rules 5.46 to 5.68 of the GEM Listing Rules, were as follows:

Long positions in ordinary shares of the Company:

Number of issued share of US$0.01 each in the Company held and the capacity

			Percentage of the
			Company’s issued
Name of director	Capacity	Total	share capital
Mr. Chang Ye Min, William	Beneficial owner	16,840,000	1.09%
Mr. Wu Shu Min	Beneficial owner	154,823,000	10.03%
Mr. Zhu Rong	Beneficial owner	87,638,000	5.68%
Mr. Leong Ka Cheong, Christopher_(note)_	Nominee	371,988,350	24.11%

Note: The sole shareholder of Multico Holdings Limited (“MHL”) and Huiya South China Investments Limited (“Huiya”) is Transpac Nominees Pte Ltd. (“TNPL”) which is a wholly-owned subsidiary of Transpac Capital Pte Ltd. (“TCPL”). TNPL, through MHL and Huiya, holds the 371,988,350 shares as nominee for three investment funds, namely Transpac Capital 1996 Investment Trust, Transpac Capital Parallel 1996 Investment Trust and Transpac Managers III Ltd in respect of approximately 96.0 per cent, 3.0 per cent and 1.0 per cent of the 371,988,350 shares. TCPL is the manager of a number of venture capital funds including those specified herein and Mr. Leong is a director of TCPL. Transpac Managers III Ltd is a venture capital fund contributed by the staff of TCPL to invest in parallel to funds managed by TCPL.

The interests of the directors and the chief executive of the Company in the share options of the Company are separately disclosed under the sub-heading of “Share Option Scheme” below.

Save as disclosed above, as at 30 September 2004, none of the directors and chief executive of the Company or their associates had any interest or short position in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Division 7 and 8 of Part XV of the SFO (including interests and short position which they were taken or deemed to have taken under such provisions of the SFO), or which were required to be entered into the register kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to Rules 5.46 to 5.68 of the GEM Listing Rules.

DIRECTORS’ RIGHTS TO ACQUIRE SHARES OF DEBENTURES

Apart from as disclosed under the sub-heading of “Share Option Scheme” below, at no time during the year there were rights to acquire benefits by means of the acquisition of shares in or debentures of the Company granted to any director or their respective spouse or minor children, or were any such rights exercised by them; or was the Company or any of its subsidiaries a party to any arrangement to enable the directors to acquire such rights in any other body corporate.

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SHARE OPTION SCHEME

The principal purpose of the share option schemes of the Company is to recognise the significant contributions of the directors and employees of the Group to the growth of the Group, by rewarding them with opportunities to obtain an ownership interest in the Company and to further motivate and give incentive to these persons to continue to contribute to the Group’s long term success and prosperity. The Company has a share option plan adopted on 7 January 2000 and a share option plan adopted on 22 November 2001.

(a) Pre-IPO Share Option Plan

On 7 January 2000, the Company adopted an employee share option plan (the “Pre-IPO Share Option Plan”). The Pre-IPO Share Option Plan was valid and effective for a period not exceeding eight years commencing from 7 January 2000.

Under the Pre-IPO Share Option Plan, the grantees may include (a) any full-time employee and director (including non-executive director and independent non-executive director) of the Company or any of its subsidiaries; (b) any part-time employee with weekly working hours of 15 hours and above of the Company or any of its subsidiaries; (c) any advisor or consultant (in the areas of technical, financial or corporate managerial) to the Company or any of its subsidiaries; and (d) any other person who, at the sole determination of the board of directors, has contributed to the Group based on certain assessment criteria.

The offer of a grant of share options may be accepted within 21 days from the date of the offer with no consideration being payable by the grantee.

The share subscription price in respect of any particular option granted under the Pre-IPO Share Option Plan was determined by the board of directors from time to time. The maximum number of shares in respect of the options granted under the Pre-IPO Share Option Plan in an amount equivalent, upon their exercise, to 10% of the shares of the Company in issue at any time, excluding for this purpose shares issued upon the exercise of options granted under the Pre-IPO Share Option Plan. At 30 September 2004, the number of shares issuable under share options granted under the Pre-IPO Share Option Plan was 39,278,000 which represented approximately 2.5% of the Company’s shares in issue as at that date.

Upon listing of the Company’s shares on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited (“Stock Exchange”) on 30 November 2001, no further share options will be granted under the PreIPO Share Option Plan.

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The following share options were outstanding under the Pre-IPO Share Option Plan during the year:

Number of share options outstanding under Pre-IPO Share Option Plan

Directors Mr. Chang Ye Min, William Mr. Wu Shu Min Other employees In aggregate	As at 1 October 2003 15,000,000 5,000,000 5,000,000 10,000,000 35,000,000 6,278,000 1,650,000 7,928,000 42,928,000	Exercised during the year – – – – – – – – –	Cancelled during the year – – – – – – – – –	Adjusted Date of Exercise exercise Lapsed As at grant period of price during 30 September of share share per share the year 2004 options options HK$* – 15,000,000 7 January 2000 7 January 2000 0.150 to 6 January 2008 – 5,000,000 23 May 2000 23 May 2000 0.515 to 22 May 2008 – 5,000,000 7 January 2000 7 January 2000 0.150 to 6 January 2008 – 10,000,000 26 February 2000 26 February 2000 0.150 to 25 February 2008 – 35,000,000 (2,000,000) 4,278,000 Note 1 Note 2 0.150 (1,650,000) – Note 3 Note 4 0.515 (3,650,000) 4,278,000 (3,650,000) 39,278,000

• The exercise price per share was adjusted for the consolidation and capitalisation issue of the Company’s shares on 22 November 2001, as well as conversion from US$ to HK$.

Notes:

1. Approximately 88% and 12% of the outstanding share options were granted on 7 January 2000 and 26 February 2000, respectively.

2. Approximately 88% and 12% of the outstanding share options granted are exercisable during the periods from 7 January 2000 to 6 January 2008 and 26 February 2000 to 25 February 2008, respectively.

3. Approximately 91% and 9% of the outstanding share options were granted on 23 May 2000 and 20 July 2001, respectively.

4. Approximately 91% and 9% of the outstanding share options granted are exercisable during the periods from 23 May 2000 to 22 May 2008 and 20 July 2001 to 19 July 2009, respectively.

(b) Share Option Plan

On 22 November 2001, the Company adopted a share option scheme (the “Share Option Plan”) conditionally upon the listing of the Company’s shares on the GEM of the Stock Exchange on 30 November 2001. The Share Option Plan became valid and effective on 30 November 2001 and, unless otherwise cancelled or amended, will remain in force for a period of ten years commencing from the date of adoption.

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Under the Share Option Plan, the grantees may include (i) any full-time employee, director (including nonexecutive director and independent non-executive director) and part-time employee with weekly working hours of 15 hours and above of the Company and any of its subsidiaries; (ii) any advisor or consultant (in the areas of technical, financial or corporate managerial) to the Company or any of its subsidiaries; and (iii) any other person who, at the sole determination of the board of directors, has contributed to the Group based on certain assessment criteria.

No option may be granted to any one person which if exercised in full would result in the total number of shares of the Company already issued and issuable to him under all the options previously granted to him and the said option exceeding one percentage of the number of the shares of the Company in issue in any 12-month period up to the date of grant. Any further grant of options in excess of the one percentage limit must be subject to shareholders’ approval, with that participant and his associates abstaining from voting.

The maximum number of shares in respect of which options may be granted under the Share Option Plan and any other share option scheme of the Company is an amount equivalent, upon their exercise, to 10% of the shares of the Company in issue at any time, excluding for this purpose shares issued upon the exercise of options granted under the Share Option Plan or any other share option scheme. At 30 September 2004, the number of shares issuable under share options granted under the Share Option Plan was 86,500,000, which represented approximately 5.6% of the Company’s shares in issue as at that date. The limit on the number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Share Option Plan and any other schemes must not exceed 30% of the shares of the Company from time to time.

The offer of a grant of share options may be accepted within 28 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the board of directors, and commences on any date after the date of grant and ends on a date which is not later than ten years from the date of offer of the share options or the expiry date of the Share Option Plan, if earlier.

The exercise price of share options is determined by the board of directors, but may not be less than the higher of (i) the closing price of the Company’s shares on the GEM of the Stock Exchange on the date of grant of the option; (ii) the average of the closing prices of the Company’s shares on the GEM of the Stock Exchange for the five trading days immediately preceding the date of grant of the option; and (iii) the nominal value of the shares of the Company.

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The following share options were outstanding under the Share Option Plan during the year:

Number of share options outstanding under Share Option Plan

Directors Mr. Chang Ye Min, William Mr. Wu Shu Min Mr. Jin Feng Mr. Ng Ching Wo Mr. Chan Wai Dune Mr. Chen Junliang Other employees In aggregate Others In aggregate	As at 1 October 2003 10,000,000 3,000,000 10,000,000 3,000,000 3,000,000 1,000,000 1,000,000 1,000,000	Granted during the year – – – – – – – –	Exercised during the year – – – – – – – –	Cancelled during the year – – – – – – – –	Lapsed during the year – – – – – – – –	Company’s share price at the date immediately Exercise before the As at 30 Date of Exercise price of grant date September grant of period of share options of options 2004 share options share options HK$ HK$ 10,000,0007 March 2002 7 March 2002 to 0.465 0.455 21 December 2011 3,000,000 5 June 2003 5 June 2003 to 0.078 0.045 21 December 2011 10,000,000 7 March 2002 7 March 2002 to 0.465 0.455 21 December 2011 3,000,000 5 June 2003 5 June 2003 to 0.078 0.045 21 December 2011 3,000,000 5 June 2003 5 June 2003 to 0.078 0.045 21 December 2011 1,000,000 5 June 2003 5 June 2003 to 0.078 0.045 21 December 2011 1,000,000 5 June 2003 5 June 2003 to 0.078 0.045 21 December 2011 1,000,000 5 June 2003 5 June 2003 to 0.078 0.045 21 December 2011 32,000,000 20,000,000 1 March 2002 1 March 2002 to 0.475 0.470 21 December 2011 27,000,000 5 June 2003 5 June 2003 to 0.078 0.045 21 December 2011 47,000,000 7,500,000 1 March 2002 1 March 2002 to 0.475 0.470 1 March 2005 86,500,000
	32,000,000	–	–	–	–
	31,100,000 36,000,000 67,100,000	– – –	– – –	– – –	(11,100,000) (9,000,000) (20,100,000)
	7,500,000	–	–	–	–
	106,600,000	–	–	–	(20,100,000)

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INTERESTS OF SUBSTANTIAL SHAREHOLDERS DISCLOSEABLE UNDER SFO

So far as is notified to the directors of the Company, as at 30 September 2004, shareholders (other than directors or chief executive of the Company) who had interests or short positions in the shares or underlying shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provision of Divisions 2 and 3 of Part XV of the SFO or which were required pursuant to Section 336 of the SFO, to be entered into the register referred to therein, were as follows:

Long positions:

					Interests
			Interest	Percentage	under equity	Aggregate
Name	Notes	Capacity	in shares	of interests	derivatives	interests
Multico Holdings Limited	1	Beneficial owner	362,948,350	23.52%	–	362,948,350
Transpac Nominees Pte Ltd	1	Nominee	371,988,350	24.11%	–	371,988,350
Transpac Capital Pte Ltd.	1	Nominee	371,988,350	24.11%	–	371,988,350
Ms. Lei Dong Ling	2	Interests of spouse	154,823,000	10.03%	28,000,000	182,823,000
Ms. Wu Yong Jun	3	Interests of spouse	87,638,000	5.68%	–	87,638,000
Notes

1. Multico Holdings Limited (“MHL”) and Huyia South China Investments Limited (“Huyia”) held 362,948,350 shares and 9,040,000 shares respectively and the sole shareholder of MHL and Huiya is Transpac Nominees Pte Ltd. (“TNPL”) which in turn is a wholly-owned subsidiary of Transpac Capital Pte Ltd. (“TCPL”). Both TNPL and TCPL therefore are deemed to be interested in 371,988,350 shares in which MHL and Huiya are interested. TNPL through MHL and Huiya, holds the 371,988,350 shares as nominee for three investment funds, namely Transpac Capital 1996 Investment Trust, Transpac Capital Parallel 1996 Investment Trust and Transpac Managers III Ltd in respect of approximately 96.0 per cent, 3.0 per cent and 1.0 per cent of the 371,988,350 shares. TCPL is the manager of a number of venture capital funds including those specified herein.

2. Ms. Lei Dong Ling is the spouse of Mr. Wu Shu Min. Under section 316 of the SFO, Ms. Lei Dong Ling is therefore deemed to be interested in all 154,823,000 shares and 28,000,000 share options in which Mr. Wu Shu Min is interested.

3. Ms. Wu Yong Jun is the spouse of Mr. Zhu Rong. Under section 316 of the SFO, Ms. Wu Yong Jun is therefore deemed to be interested in all 87,638,000 shares in which Mr. Zhu Rong is interested.

Save as disclosed above, as at 30 September 2004, the directors of the Company were not aware of any other person (other than directors or chief executive of the Company) who had an interest or short position in the shares or underlying shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO or which were required pursuant to Section 336 of the SFO, to be entered into the register referred to therein.

COMPETITION AND CONFLICT OF INTERESTS

None of the directors, the management shareholders or substantial shareholders of the Company or any of their respective associates has engaged in any business that competes or may compete with the business of the Group or has any other conflict of interests, with the Group.

SPONSORS’ INTERESTS

As updated and notified by the Company’s retained sponsor for the period from 30 November 2001 to 30 September 2004, Core Pacific-Yamaichi Capital Limited (“CPY”), as at 30 September 2004 neither CPY nor its directors, employees or associates had any interests in the share capital of the Company or any of its subsidiaries, or had any right to subscribe for or to nominate persons to subscribe for the share capital of the Company or any of its subsidiaries.

Pursuant to the agreement dated 26 November 2001 entered into between the Company and CPY, CPY received fees for acting as the Company’s retained sponsor for the period from 30 November 2001 to 30 September 2004.

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AUDIT COMMITTEE

The Company has an audit committee (the “Committee”) established with written terms of reference in compliance with GEM Listing Rules. The primary duties of the Committee are to review and supervise the financial reporting process and internal controls of the Group and to provide advice to the directors of the Company. The Committee comprises Mr. Chan Wai Dune, Mr. Ng Ching Wo and Mr. Chen Junliang, independent non-executive directors of the Company. Mr. Chan Wai Dune is the chairman of the Committee. The Committee has reviewed the Group’s financial statements for the year ended 30 September 2004 and has provided advice and comments thereon. The Committee held four meetings during the year.

COMPLIANCE WITH RULES 5.34 TO 5.45 OF THE GEM LISTING RULES

In the opinion of the directors, the Company has complied with Board Practices and Procedures as set out in Rules 5.34 to 5.45 of the GEM Listing Rules for the year under review.

SECURITIES TRANSACTIONS BY DIRECTORS

The Company has not adopted its own code of conduct regarding securities transactions by directors, but having made specific enquiry of all directors, the Company reported that during the year, the directors have complied with the required standard of dealings as set out in Rules 5.46 to 5.68 of the GEM Listing Rules.

PURCHASE, REDEMPTION OR SALE OF LISTED SECURITIES OF THE COMPANY

Neither the Company, nor any of its subsidiaries purchased, redeemed or sold any of the Company’s listed securities during the year.

As at the date of this announcement, the member of the Board comprises executive directors namely, Wu Shu Min, Chang Ye Min, William, Jin Feng, non-executive directors namely Zhu Rong, Lo Wai Shun, Christopher Leong Ka Cheong and independent non-executive directors namely, Chan Wai Dune, Ng Ching Wo and Chen Junliang.

By Order of the Board IIN International Limited Chang Ye Min, William President & Chief Executive Officer

Hong Kong, 28 December 2004

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