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Wafer Systems Limited (incorporated in the Cayman Islands with limited liability)

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

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 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 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 GEM mean that it is a market more suited to professional and other sophisticated investors.

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

The principal means of information dissemination on GEM is publication on the internet website operated by the 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 at www.hkgem.com in order to obtain up-to-date information on GEM-listed issuers.

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

This report, for which the Directors 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 of Hong Kong Limited for the purpose of giving information with regard to the Company. The Directors, having made all responsible enquiries, confirm that, to the best of their knowledge and belief: (i) the information contained in this report is accurate and complete in all material respects and not misleading; (ii) there are no other matters the omission of which would make any statement in this report misleading; and (iii) all opinions expressed in this report have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

2 Corporate Information
4 Chairman’s Statement
7 Comparison of Business Objectives with Actual Business Progress
10 Biographical Details of Directors and Senior Management
12 Management Discussion and Analysis
14 Directors’ Report
21 Auditors’ Report
22 Consolidated Income Statement
23 Consolidated Balance Sheet
24 Balance Sheet
25 Consolidated Statement of Changes in Equity
26 Consolidated Cash Flow Statement
28 Notes to the Financial Statements
52 Financial Summary
53 Notice of Annual General Meeting

Wafer Systems Limited Annual Report 2002

Corporate Information

BOARD OF DIRECTORS

Executive Director

Mr. Chan Sek Keung, Ringo (Chairman & Chief Executive Officer)

AUTHORIZED REPRESENTATIVES

Mr. Chan Sek Keung, Ringo Mr. Pang Kin Man, Edmond

REGISTERED OFFICE

Non-Executive Directors

Mr. Alasdair Gordon Nagle

Ms. Clara Ho

Mr. Kwan Kit Tong

Independent Non-Executive Directors

Scotia Centre 4th Floor, P.O. Box 2804 George Town Grand Cayman Cayman Islands

Mr. Pang Hing Chung, Alfred

Mr. Tsoi Tai Wai, David

COMPANY SECRETARY

Mr. Pang Kin Man, Edmond

QUALIFIED ACCOUNTANT

Mr. Yau Kin Wa

HEAD OFFICE AND PRINCIPAL PLACE OF BUSINESS

Units 901-7, 9th Floor MLC Millennia Plaza 663 King’s Road North Point Hong Kong

PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE

COMPLIANCE OFFICER

Mr. Chan Sek Keung, Ringo

AUDIT COMMITTEE

Mr. Tsoi Tai Wai, David (Chairman)

Mr. Pang Hing Chung, Alfred

Bank of Butterfield International (Cayman) Limited Butterfield House 68 Fort Street P.O. Box 705 George Town Grand Cayman Cayman Islands

Mr. Chan Sek Keung, Ringo

ADVISORS

Mr. Chen Sau Chung, John

Mr. Samuel Lin Jr.

HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE

Computershare Hong Kong Investor Services Limited Shops 1712-1716, 17th Floor Hopewell Centre 183 Queen’s Road East Hong Kong

Wafer Systems Limited Annual Report 2002

Corporate Information

PRINCIPAL BANKERS

The Hongkong & Shanghai Banking Corporation Limited HSBC Main Building 1 Queen’s Road Central Hong Kong

Jian Sing Bank Limited 1st Floor 99-105 Des Voeux Road Central Hong Kong

Citibank, N.A. 30th Floor, Tower One, The Gateway 25 Canton Road Tsimshatsui Hong Kong

LEGAL ADVISORS

Woo, Kwan, Lee & Lo 27th Floor Jardine House 1 Connaught Place Hong Kong

WEBSITE ADDRESS

AUDITORS

www.wafersystems.com

Deloitte Touche Tohmatsu Certified Public Accountants 26th Floor, Wing On Centre 111 Connaught Road Central Hong Kong

STOCK CODE

8198

Wafer Systems Limited Annual Report 2002

Chairman’s Statement

TO OUR SHAREHOLDERS

For and on behalf of the board of directors (the “Board”) of Wafer Systems Limited (the “Company”), I am pleased to present the first annual report of the Company and its subsidiaries (collectively, “Wafer Systems” or the “Group”) for the year ended 31st December, 2002 (the “year under review”), since its listing on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) on 17th May, 2002.

The Company’s successful listing has enabled the Group to improve its equity capitalization and liquidity. Leveraging the proceeds from the listing, Wafer Systems has been able to implement key strategic initiatives in its three main areas of business, namely Network Infrastructure, Professional Services and Network Software. Paving the way to capture market potential in the wake of China’s accession to the World Trade Organization (“WTO”), more staff have been employed, additional presences established, and operations scaled-up. The year under review has therefore been a year of investment and an important exercise in the building up of the Group’s presence.

2002 was a year in which both low visibility of the telecommunications market in the People’s Republic of China (“Mainland China” or “the PRC”) and global slow down in IT spending seriously affected the industry. The Group, however, believes this is only a temporary adjustment with signs of recovery already starting to emerge in the fourth quarter. With the Group’s strong business foundations as well as the flourishing of Multinational Corporations (“MNCs”) and domestic enterprises in Mainland China, there are ample business opportunities ahead for the Group. More importantly, anticipating that the Next Generation Network (“NGN”) will become a growing market trend, Wafer Systems is ideally equipped to capture a significant share of this market to generate better returns for its supportive shareholders.

FINANCIAL PERFORMANCE

For the year ended 31st December 2002, the Group achieved a 21% growth in turnover, rising from approximately HK$149.6 million in 2001 to approximately HK$180.3 million in 2002. Mainland China continued to be the Group’s major market, accounting for 91% (2001: 84%) of the total turnover.

Anticipating the business opportunities created by the burgeoning number of MNCs and domestic enterprises, which require premium network infrastructure, professional services, as well as network software, Wafer Systems scaled-up operations in the PRC starting from the end of 2001. As a result, overall operating expenses increased by approximately 50% from 2001. However, as the PRC market was undergoing a series of policy and strategy changes initiated by the government and the telecommunication giants, there was a significant restructure within the industry during the year. These measures substantially affected the progress of the projects in the industry during 2002. In view of these changes and the increased operating costs, the Group recorded a loss attributable to shareholders of approximately HK$5.8 million during the year under review. (2001: profit attributable to shareholders was approximately HK$8 million). However, these results have shown 11% of improvement over the approximately HK$6.6 million loss for the nine months ended 30th September 2002.

The Group believes that the scaling-up measures were necessary to position Wafer Systems for healthy growth as the Group expects that once the consolidation of the telecommunications industry is completed , projects currently on hold will gradually be released. This positive effect has begun to be reflected in the fourth quarter results with turnover increasing 67% to approximate HK$66.9 million as compared to the third quarter of 2002. The Group also successfully turned around from losses for the first, second and third quarter of 2002 to report a net profit of approximately HK$0.7 million. As at 31st December 2002, the Group’s backlog order surged 98% to over HK$35 million in the period.

The Group’s financial resources and liquidity continued to improve over the past twelve months. As at 31st December 2002, the Group had bank balances and cash of approximately HK$14.4 million (2001: HK$10.4 million) and banking facilities of approximately HK$102.2 million (2001: HK$34.3 million), approximately HK$59.4 million (2001: HK$25.5 million) of which has been utilized.

Wafer Systems Limited Annual Report 2002

Chairman’s Statement

FINAL DIVIDENDS

The Board does not recommend the payment of a final dividend for the year ended 31st December, 2002. (2001: Nil)

BUSINESS REVIEW

During the year under review, Wafer Systems expanded its market presence in Changsha and Suzhou in the PRC. With regard to its businesses, major revenue was derived from the Network Infrastructure business, representing 85% (2001: 92%) of the Group’s total turnover. Professional Services and Network Software accounted for the remaining 15% (2001: 8%) of the Group’s turnover.

Network Infrastructure

Turnover generated by Network Infrastructure achieved a significant growth as compared to 2001. Leveraging its strong R&D capabilities, sophisticated products and solid experience, the Group successfully secured contracts to provide sophisticated infrastructure solutions to New World PCS Limited, the Vocational Training Council, Motorola and China Unicom. In addition, Jiangsu Telecom also commissioned the Group to expand and upgrade the functionality of its Data Communications Network. These contracts have enabled Wafer Systems to increase its market share in the specific market sectors and stand well ahead of its competitors.

In addition to Cisco, Nokia, Check Point and Radvision, the Group is committed to gearing up and equipping itself by forming strategic alliances with other leading industry players. In August 2002, the Group signed a Memorandum of Understanding with IBM China/Hong Kong Limited to jointly provide total e-business solutions to corporations. This move enhances Wafer Systems’ competitiveness and enlarges its customer base.

At the same time, Wafer Systems formed a partnership with EMC Corporation and leading Quality of Service (“QoS”) provider, Sitara Networks Inc., to incorporate their advanced technologies into Wafer System’s networking solutions. These alliances will enhance the Group’s competitive strengths, preparing it well for the industry’s recovery.

Professional Services

The successful penetration among MNCs and leading corporations in the domestic market resulted in a substantial turnover growth in Professional Services in 2002 as compared to 2001. The Group believes this business sector will become an important growth driver in the years to come due to the rapid development of information technology, together with the growing number of local enterprises relying on the computer and information networks for their day-to-day operations.

Wafer Systems prides itself on its comprehensive and leading solutions and services that meet specific client business requirements. These successes have enabled the Group to establish a strong reputation among MNCs and local domestic enterprises, as they plan and implement improved value-added professional services. For example, the Group, triumphed over other strong candidates, when it was chosen by the Sichuan Provincial Branch of the Industrial and Commercial Bank of China to provide round-the-clock professional networking maintenance services. This achievement demonstrates the Group’s excellence in providing premier professional services to different clients.

To further enhance its competitiveness and provide more comprehensive services to customers, the Group established a network monitoring center in Beijing. The center provides one-stop network monitoring solutions to clients through remotely controlled facilities which monitor their network systems.

Wafer Systems Limited Annual Report 2002

Chairman’s Statement

Network Software

With regard to the Network Software business, the Group is committed to developing new software products. During the year under review, the Group has launched its self-developed NextG IP Billing Software version 3.0. This compelling software aroused strong interest among the emerging New Service Providers where two Canadian IP telephone service providers signing contracts with the Group.

The Group is also placing emphasis on developing its all-in-one Network Management Software-the Wafer Management Services Support Systems (“WMSS”). Trials have been completed and the Group intends to launch the software soon.

PROSPECTS

For the year ahead, Wafer Systems is ready and able to respond to market conditions as they unfold. In view of its network solutions and products, Wafer Systems has earned a leading reputation among MNCs in the PRC market. To significantly increase its customer base in the next year, the Group plans to penetrate the scalable local enterprise market. As Professional Services and Network Software are proving crucial to the development of MNCs and local enterprises, the Group will reinforce its expansion in these areas, using them as growth drivers to eventually balance revenues generated from the Group’s three business segments including its Network Infrastructure sector.

Attracted by the sophisticated features of the Next Generation Network (“NGN”), many prominent telecommunication operators are turning to these advanced networks to accelerate their pace of development. Capturing these business opportunities, Wafer Systems is ideally placed to participate in NGN-related businesses in view of its partnership with the industry giant, Cisco Systems. This partnership will provide NGN-related products and services to a renowned telecommunications player in the PRC’s Sichuan province. Harnessing the industry’s leading network products and proven technologies, integrating these with the Group’s renowned clientele and building on its market reputation, Wafer Systems believes that it will surge forward to gain a major foothold in the NGN industry.

Meanwhile, fueled by buoyant consumer spending and its entry to the WTO, the PRC continues to thrive as one of Asia’s leading economies. By scaling up its operations in the PRC, Wafer Systems believes that the positive outcome will soon be reflected.

Against a backdrop of the current geo-political uncertainty, the outlook of the business may be challenging. Management will, however, continue to monitor the situation closely and react accordingly.

CONCLUSION

In conclusion, I would like to thank our customers, suppliers, bankers, investors and business partners for their continued trust and support. I would also like to extend my thanks to all our staff for their hard work and major contribution to the Group’s performance last year. We will continue to pursue growth into the future, bringing in better returns for our shareholders.

Chan Sek Keung, Ringo

Chairman and Chief Executive Officer

Hong Kong, 26th March, 2003

Wafer Systems Limited Annual Report 2002

Comparison of Business Objectives with Actual Business Progress

The following is a comparison of actual business progress in the year under review (“Review Period”) with the business objectives for the same period as set out in the prospectus of the Company dated 10th May, 2002 (the “Prospectus”). The Group reviews its business objectives and strategies on an ongoing basis and makes adjustments as necessary.

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----- Start of picture text -----

Business Objectives for the Review Actual Business Progress in the
Period as set out in the Prospectus Review Period
Business Re-commence the Group’s operation in Due to the unfavorable economic climate,
Development Singapore. the Group held up its plan to
re-commence its operation in Singapore
until the economic environment
improves.
Commence the operation of the network The Group has established the network
monitoring center in Beijing to provide monitoring center in the PRC.
Outsourcing Services.
Establish sales and marketing presence in Established market presence in Changsha
Suzhou and Changsha, the PRC. and Suzhou.
Product Development Network Infrastructure
and Service Launch Launch phase 1 of IP Multimedia The IP Multimedia Collaboration
Collaboration Solutions with additional Solutions is now named as Navipresenter
features of video streaming and and the Group is discussing with the
interactive video conferencing. vendor as the sole distributor in Hong
Kong.
Complete and launch phase 2 of IP The phase 2 development has been
Multimedia Collaboration Solutions. completed.
Commence the development of phase 3 The development of phase 3 is in progress
of IP Multimedia Collaboration Solutions. and targets to finish in July 2003.
Further increase its market share by The Group has been promoting its
promoting Network Infrastructure Solutions Network Infrastructure Solutions,
and Network Security Solutions, as well as Network Security Solutions and
Multimedia Solutions by adopting Multimedia Solutions by acquiring
self-developed software and integrating Cisco’s specialization certifications in
with video conferencing equipment both Hong Kong and the PRC.
supplied by PictureTel and Polycom.
----- End of picture text -----

Wafer Systems Limited Annual Report 2002

Comparison of Business Objectives with Actual Business Progress

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----- Start of picture text -----

Business Objectives for the Review Actual Business Progress in the
Period as set out in the Prospectus Review Period
Professional Services
Further increase its market share by The Group has successfully increased its
promoting Customer Services, Expert revenue generated from professional
Services and Outsourcing Services. services by recording a substantial growth
in 2002.
Network Software
Launch and Promote version 3.0 of the The Group has launched version 3.0 of
NextG IP Billing Software. NextG IP Billing Software and successfully
sold it to 2 Canadian Telecom Service
Providers.
Continue the research and development The Group is continuously developing the
of the NextG IP Billing Software. NextG IP Billing Software intends
to integrate it into the Next Generation
Network.
Launch phase 1 of the Network The Group has completed the
Management Software. development of the software and is named
as Wafer Management Services Support
System (“WMSS”).
Continue the research and development The Group is continuously developing the
of the Network Management Software. next phase of WMSS.
Complete the research and development The Group has launched the OSS/BSS
of and launch the 1st version of the Software for Next Generation Network.
Operating Support System (“OSS”)/
Business Support System (“BSS”) Software.
Commence the research and development The Group is continuously developing the
of the 2nd version of the OSS/BSS next phase of OSS/BSS Software.
Software.
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Wafer Systems Limited Annual Report 2002

Comparison of Business Objectives with Actual Business Progress

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----- Start of picture text -----

Business Objectives for the Review Actual Business Progress in the
Period as set out in the Prospectus Review Period
Sales and Marketing Enter into sales agency agreements with The Group has come up to a partnership
agents in Japan to establish distribution with a Japanese agency to resell the
networks for the NextG IP Billing Group’s self-developed products.
Software and the Network
Management Software in Japan.
Carry out marketing activities to promote The Group has been promoting its
the Network Infrastructure Solution, products and services by making
version 3.0 of the NextG IP Billing up-to-date marketing materials, and
Software and Professional Services. conducting seminars and exhibitions.
Promote its self-developed software in The Group is now promoting its self-
Southeast Asia to establish a sales developed software in Southeast Asia to
network in the region. establish a sales network in the region.
Increase efforts in brand building of the The Group has completed the
Group for its three business segments, development of its corporate identity
which are Network Infrastructure, standardization and increased public
Professional Services, and Network relations activities in order to enhance its
Software, through comprehensive corporate image in Hong Kong and the
marketing campaigns in the PRC. PRC.
----- End of picture text -----

Wafer Systems Limited Annual Report 2002

Biographical Details of Directors and Senior Management

EXECUTIVE DIRECTOR

Mr. Chan Sek Keung, Ringo , aged 43, is the founder, the chief executive officer and an executive Director of the Group. Mr. Chan founded the Group in November 1998 and is responsible for the overall management, strategic planning and development of the Group. Mr. Chan has 20 years of working experience in the networking industry. Mr. Chan holds a Bachelor’s degree in Electrical Engineering from the University of Hong Kong.

NON-EXECUTIVE DIRECTORS

Mr. Alasdair Gordon Nagle , aged 40, is a non-executive Director. Mr. Nagle joined the Group in March 1999. He is a director of HSBC Private Equity Technology (Asia) Limited, which is a wholly-owned subsidiary of HSBC Private Equity (Asia) Limited, and is a nominee of The Applied Research Council (“ARC”) on the Board. Mr. Nagle is a member of the Institute of Chartered Accountants in England & Wales and holds a Master of Arts degree in French and Business Studies from Edinburgh University.

Ms. Clara Ho , aged 31, is a non-executive Director. Ms. Ho joined the Group in May 2001. Ms. Ho is an associate director of HSBC Private Equity (Asia) Limited and is a nominee of ARC on the Board. Ms. Ho holds a Bachelor’s degree in Economics and Accounting from the University of Bristol and is a member of the Institute of Chartered Accountants in England & Wales.

Mr. Kwan Kit Tong , aged 44, is a non-executive Director. Mr. Kwan joined the Group in May 2001. He is the financial controller of QPL International Holdings Limited (“QPL”) and the nominee of QPL on the Board. Mr. Kwan holds a Bachelor’s degree in Commerce from the University of Southern Queensland and also holds fellow membership of the Chartered Association of Certified Accountants and the Hong Kong Society of Accountants.

INDEPENDENT NON-EXECUTIVE DIRECTORS

Mr. Pang Hing Chung, Alfred , aged 41, is an independent non-executive Director. Mr. Pang was appointed as an independent non-executive Director of the Company in March 1999. Mr. Pang is a director of China Vantage Technology Capital Limited. Mr. Pang holds an MBA degree from the Stanford Graduate School of Business and has a Bachelor of Arts degree in Economics from Cornell University.

Mr. Tsoi Tai Wai, David , aged 55, is an independent non-executive Director. Mr. Tsoi was appointed as an independent non-executive Director of the Company in October 2001. Mr. Tsoi is a Certified Public Accountant by profession, and he is currently the managing director of Tsoi Ha CPA Limited. Mr.Tsoi holds a Master’s degree in Business Administration from the University of East Asia, Macau and also holds fellow membership of the Chartered Association of Certified Accountants, the Hong Kong Society of Accountants and associate membership of the Association of Certified General Accountants.

Wafer Systems Limited Annual Report 2002

Biographical Details of Directors and Senior Management

SENIOR MANAGEMENT

Ms. Wang Fang , aged 34, is the vice president of the Group. Ms. Wang joined the Group in June 2001 and is responsible for the Group’s overall operations, financial performance as well as sales and marketing activities in the PRC. Ms. Wang graduated from the Faculty of Telecommunications Engineering of the Nanjing Post and Telecom University in the PRC and also holds an International MBA degree from Peking University.

Mr. Pang Kin Man, Edmond , aged 55, is the company secretary of the Company. Mr. Pang has more than 30 years of working experience. Mr. Pang holds an associate membership of the Institute of Chartered Secretaries and Administrators and the Hong Kong Institute of Company Secretaries. Mr. Pang joined the Group in August 2001.

Mr. Yau Kin Wa , aged 34, is the qualified accountant and Finance Manager of the Group, Mr. Yau is a Fellow member of the Association of Chartered Certified Accountants and an Associate member of the Hong Kong Society of Accountants. Mr. Yau joined the Group in June 1999.

Mr. Sha Xue Wen, Jack , aged 33, is the head of research and development of the Group. Mr. Sha holds a Bachelor’s degree in Applied Mathematics from Northwest Polytechnic University in Xi’an. Mr. Sha joined the Group in June 1999.

Wafer Systems Limited Annual Report 2002

Management Discussion and Analysis

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

During the year under review, the Group continued to adopt conservative policies in cash and financial management and maintained a healthy financial position. Cash was mainly placed on interest-bearing deposits with banks, with a certain portion pledged to banks to acquire banking facilities. As at 31st December 2002, the total net current assets amounted to approximately HK$53.1 million (2001: HK$33.6 million), representing a 58% increase from 2001.

The Group generally financed its operations and serviced its debts with cash generated from its business operations, banking facilities, convertible bonds and net proceeds from the Placing (as defined in the Prospectus). As at 31st December 2002, the Group had bank balances and cash of approximately HK$14.4 million (2001: HK$10.4 million), total bank borrowings of approximately HK$41.1 million (2001: HK$18.6 million) which were payable within one year, and convertible bonds of approximately HK$18.7 million (2001: nil) of which approximately HK$7.4 million was due within one year.

As at 31st December 2002, the Group had banking facilities of approximately HK$102.2 million (2001: HK$34.3 million), out of which approximately HK$59.4 million (2001: HK$25.5 million) were utilized.

The Group believes the existing financial resources are sufficient to fulfill its current working capital requirements.

As at 31st December 2002, all assets and liabilities were denominated in U.S. dollars, Hong Kong dollars and Renminbi.

ORDER BOOK AND PROSPECTS OF NEW BUSINESS

As at 31st December 2002, the Group had contracts on hand for sales amounting to approximately HK$35.5 million (2001: HK$17.9 million) which would be booked as revenue upon delivery and implementation.

While closely tracking the development of the Next Generation Network and its business opportunities, the Group will continue to concentrate on its present core business segments.

CHARGES ON GROUP ASSETS

As at 31st December 2002, the Group had banking facilities of approximately HK$102.2 (2001: HK$34.3 million) which were secured by pledged bank deposits of approximately HK$18.4 million (2001: HK$21.4 million) and corporate guarantees provided by the Company of approximately HK$103.2 million (2001: nil).

Save as disclosed above, the Group did not have any significant charges on assets as at 31st December 2002.

GEARING RATIO

As at 31st December 2002, the gearing ratio (non-current liabilities over total assets) was reduced to approximately 6.8% from approximately 18.8% as at 31st December 2001. The improvement was mainly due to net proceeds raised from the Placing and conversion of convertible note during the year under review.

FOREIGN EXCHANGE EXPOSURE

During the year under review, the Group earned revenue and incurred costs and expenses mainly in U.S. dollars, Hong Kong dollars and Renminbi. As the exchange rates of such currencies have been stable, no hedging or other alternatives have been implemented.

Wafer Systems Limited Annual Report 2002

Management Discussion and Analysis

CONTINGENT LIABILITIES

Except for those commitments and contingent liabilities set out in note 26 to note 28 to the financial statements, the Group had no significant contingent liabilities as at 31st December 2002.

ACQUISITIONS, DISPOSALS AND SIGNIFICANT INVESTMENT

The Group had no significant acquisitions, disposals and investment during the year under review.

FUTURE PLANS FOR INVESTMENTS OR CAPITAL ASSETS AND SOURCES OF FUNDING

With the exception of those plans set out in the Prospectus, there have been no plans for significant investment, capital assets and sources of funding.

EMPLOYEE INFORMATION

As at 31st December 2002, the Group had 140 employees comprising 27 employees based in Hong Kong and 113 employees based in Mainland China. The Group continues to provide remuneration package to employees according to market practices and past performance. In addition to basic remuneration, the Group also provides other benefits such as a mandatory provident fund, medical scheme, share options scheme and staff training programs to employees. There has been no major change on staff remuneration policies during the year.

The share option schemes continue to play an important role in the motivation and retention of quality employees.

USE OF PROCEEDS

The net proceeds raised from the new issue of shares by way of Placing were approximately HK$19.2 million, and were utilized in the following areas:

	Use of proceeds as stated	Use of proceeds as stated	Use of proceeds as stated
	in the Prospectus				Actual amount
			Up to 31st		utilized up to 31st
	Total	December		2002	December 2002
	*HK$’million*	*HK$’million*			*HK$’million*
Research and development	6			1.6	2.3
Expansion of geographical establishments	4			1	0.2
Establishment of network monitoring centre	3			0.8	0.7
Sales and marketing	2			0.5	0.3
Working capitals	4			4.0	4.0
Total	19			7.9	7.5

The remaining proceeds of approximately HK$11.7 million were placed with licensed banks in Hong Kong and PRC.

Wafer Systems Limited Annual Report 2002

Directors’ Report

The directors present their annual report and the audited financial statements for the year ended 31st December, 2002.

PUBLIC LISTING

The shares of the Company were listed on GEM of the Stock Exchange on 17th May, 2002.

PRINCIPAL ACTIVITIES

The Company acts as an investment holding company while its subsidiaries are engaged in the provision of network infrastructure solutions, including the sale of network equipment and software and the provision of related network infrastructure services, provision of network professional services, and sale of its proprietary network software.

The principal activities of the Company’s principal subsidiaries are set out in note 30 to the financial statements.

RESULTS

The results of the Group for the year ended 31st December, 2002 are set out in the consolidated income statement on page 22 of the annual report.

The directors do not recommend the payment of a dividend.

SHARE CAPITAL

Details of the movements in share capital of the Company are set out in note 20 to the financial statements.

RESERVES

Movements in the reserves of the Group and the Company during the year are set out on page 25 of the annual report and note 23 to the financial statements respectively.

The Company’s reserves available for distribution represent the share premium less deficit which in aggregate amounted to HK$31.2 million as at 31st December, 2002. Under the Companies Law (Revised) Chapter 22 of the Cayman Islands, the share premium of the Company is available for paying distributions or dividends to shareholders subject to the provisions of its Memorandum and Articles of Association and provided that immediately following the distribution or dividend the Company is able to pay its debts as they fall due in the ordinary course of business. In accordance with the Company’s Articles of Association, dividends shall be distributed out of the retained profits or other reserves, including the share premium account, of the Company.

PROPERTY, PLANT AND EQUIPMENT

During the year, the Group incurred HK$4.5 million in the acquisition of property, plant and equipment which mainly comprised computer equipment and tools. Details of these and other movements in property, plant and equipment of the Group are set out in note 11 to the financial statements.

Wafer Systems Limited Annual Report 2002

Directors’ Report

DIRECTORS AND SERVICE CONTRACTS

The directors of the Company during the year and up to the date of this report were as follows:

Executive director:

Chan Sek Keung, Ringo (C hairman and Chief Executive Officer)

Non-executive directors:

Alasdair Gordon Nagle Clara Ho Kwan Kit Tong

Independent non-executive directors:

Pang Hing Chung, Alfred Tsoi Tai Wai, David

The executive director has entered into a service contract with the Company for an initial term of three years commencing 1st January, 2002 which will continue thereafter until terminated by either party giving the other not less than six months’ prior written notice.

Each of the non-executive directors and independent non-executive directors has been appointed for a term of two years, commencing 1st April, 2002, subject to rotation as required by the Articles of Association of the Company.

In accordance with Article 87 of the Company’s Articles of Association, Mr. Pang Hing Chung, Alfred retires by rotation and, being eligible, offers himself for re-election.

DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS IN SECURITIES

As at 31st December, 2002, the interests of the directors and chief executive and their associates in ordinary shares of the Company and their associated corporations as recorded in the register maintained by the Company pursuant to Section 29 of the Securities (Disclosure of Interests) Ordinance (the “SDI Ordinance”), or which are required, pursuant to Rules 5.40 to 5.59 of the rules governing the listing of securities on GEM of the Stock Exchange (the “GEM Listing Rules”), to be notified to the Company and the Stock Exchange were as follows:

				Number of ordinary shares held	Number of ordinary shares held
			Personal	Family	Corporate	Other
Name	of	director	interest	interest	interest	interest
Chan	Sek	Keung, Ringo	564,000	–	56,400,000	–
					(Note)

Note: These shares, representing approximately 19.98% of the issued share capital of the Company, are held by Woodstock Management Limited, a company wholly-owned by Mr. Chan Sek Keung, Ringo. Mr. Chan Sek Keung, Ringo is deemed, by virtue of the SDI Ordinance, to be interested in these shares.

Wafer Systems Limited Annual Report 2002

Directors’ Report

Save as disclosed above and disclosed under the heading “Directors’ and chief executive’s rights to acquire shares or debentures” in this report, as at 31st December, 2002, none of the directors, chief executive nor any of their associates had any personal, family, corporate or other interests in the equity of the Company or any of its associated corporations as defined in the SDI Ordinance or which, pursuant to Rules 5.40 to 5.59 of the GEM Listing Rules, are required to be notified to the Company and the Stock Exchange.

DIRECTORS’ AND CHIEF EXECUTIVE’S RIGHTS TO ACQUIRE SHARES OR DEBENTURES

Pursuant to the Company’s pre-listing share option scheme, the directors and chief executive of the Company have personal interest in share options which were granted to them on 30th April, 2002 to subscribe for ordinary shares in the Company at an exercise price of HK$0.55 per share exercisable after six months from the date of listing, that is from 17th November, 2002 to 29th April, 2012. A summary of these share options granted is as follows:

	Number of share options
	granted during the year and
Name of director	outstanding at 31.12.2002
Chan Sek Keung, Ringo	3,000,000
Pang Hing Chung, Alfred	750,000

Save as disclosed above, at no time during the year was the Company or its subsidiaries a party to any arrangement to enable the directors or the chief executive of the Company to acquire benefits by means of the acquisition of shares in, or debt securities (including debentures) of, the Company or any other body corporate and none of the directors or the chief executive or their spouses or children under the age of 18, had any rights to subscribe for securities of the Company, or had exercised any such rights.

SUBSTANTIAL SHAREHOLDERS

So far as the directors are aware, as at 31st December, 2002, the register of substantial shareholders maintained under Section 16(1) of the SDI Ordinance showed that the following persons, in addition to the director stated under the paragraph headed “Directors’ and chief executive’s interests in securities” in this report, are interested in 10% or more of the nominal value of the issued ordinary shares of the Company:

	Number of ordinary
Name of shareholder	shares beneficially held
The Applied Research Council_(Note i)_	48,460,000
North 22 Nominees Limited_(Note ii)_	36,900,000
Ng Lai Yick_(Note ii)_	36,900,000
QPL International Holdings Limited (“QPL”)(Note iii)	27,780,000

Wafer Systems Limited Annual Report 2002

Directors’ Report

Notes:

(i) In addition to this shareholding, The Applied Research Council also holds the convertible bonds issued by the Company with face value of HK$20,048,100 in aggregate. If these convertible bonds were fully converted at their respective maturity dates, The Applied Research Council will hold an additional 38,063,603 shares in the Company.
(ii) North 22 Nominees Limited is beneficially wholly-owned by Mr. Ng Lai Yick and Mr. Ng Lai Yick is accordingly deemed by the SDI Ordinance to be interested in the shares of the Company beneficially owned by North 22 Nominees Limited.
(iii) In addition to this shareholding, QPL holds 7,676,745 warrants in the Company which are exercisable within 6 months from 17th May, 2003 at the exercise price of HK$0.01 per share.

Save as disclosed above, the Company has not been notified of any other interests representing 10% or more of the issued share capital of the Company as at 31st December, 2002.

SHARE OPTIONS

(a) Pre-listing share option scheme

A summary of the pre-listing share options granted during the year which are exercisable from 17th November, 2002 to 29th April, 2012 is as follows:

		Number of share	Number of share	options
	Exercise	Granted	Cancelled	Outstanding
	price	on	during	at
Type of participants	per share	30.04.2002	the year	31.12.2002
	HK$
Directors	0.55	3,750,000	–	3,750,000
Adviser	0.55	750,000	–	750,000
Employees	0.55	7,413,000	1,500,000	5,913,000
		11,913,000	1,500,000	10,413,000

The exercise price per share of the above share options granted under the pre-listing share option scheme represented the initial public offering price of the Company’s shares. No options granted under this scheme lapsed or were exercised since the date of grant and up to 31st December, 2002.

Options granted are exercisable as to (i) a maximum of 25% of the total number of options granted six months after 17th May, 2002, (the “Date of Listing”); (ii) a maximum additional 6.25% of the total number of options granted after the expiry of each 3-month period twelve months after the Date of Listing; and (iii) the remaining options granted on or after the third anniversary of the Date of Listing until the end of the option period or lapse of an option.

The total number of shares in respect of which options are issuable under this scheme was 11,913,000, representing 4.22% of the issued share capital of the Company at both the Date of Listing and 31st December, 2002.

Wafer Systems Limited Annual Report 2002

Directors’ Report

No participant shall be granted an option which, if exercised in full, would result in such participant becoming entitled to subcribe for such number of shares, as, when aggregated with the total number of shares already issued under all the options previously granted to him or her which have been exercised, and, issuable under all the outstanding options previously granted to him or her which are for the time being subsisting and unexercised, would exceed 1% of the total number of shares in issue in any 12-month period up to the date of grant of the option.

(b) Post-listing share option scheme

A summary of the post-listing share options granted during the year which are exercisable from 12th July, 2003 to 11th July, 2012 is as follows:

		Number	Number	of share	options
	Exercise	Granted	Cancelled		Outstanding
	price	on		during	as at
Type of participants	per share	12.07.2002		the year	31.12.2002
	HK$
Employees	0.384	5,277,000		270,000	5,007,000

The exercise price per share of the above share options granted under the post-listing share option scheme represented the average of closing prices of the Company’s shares on the Stock Exchange on the five trading days immediately preceding the date of grant. The closing price of the shares of the Company immediately before the date of grant was HK$0.385. No options granted under this scheme lapsed or were exercised since the date of grant and up to 31st December, 2002.

The post-listing share options are exercisable, starting from the first anniversary of the grant date at stepped annual increments of 25% of the total options granted, for a period not later than 10 years from the date of grant.

The total number of shares in respect of which options are issuable under this scheme was 28,226,800, representing 10% of the issued share capital of the Company at both the Date of Listing and 31st December, 2002.

No participant shall be granted an option which, if exercised in full, would result in such participant becoming entitled to subscribe for such number of shares, as, when aggregated with the total number of shares already issued under all the options previously granted to him or her which have been exercised, and issuable under all the outstanding options previously granted to him or her which are for the time being subsisting and unexercised, would exceed 1% of the total number of shares in issue in any 12-month period up to the date of grant of the option.

The directors of the Company consider that it is inappropriate to state the value of the options granted under the above share option schemes of the Company adopted on 20th April, 2002 (the “Schemes”) due to the following reasons:

(i) the calculation of the value of the options will be based on a number of undetermined but crucial variable such as the subscription price payable for the shares in the Company, the number of options to be granted under the Schemes during their duration, the exercise period, interest rate, expected volatility and other relevant variables. In particular, the duration of the Schemes of 10 years will make these volatile variables very difficult to ascertain with accuracy;

Wafer Systems Limited Annual Report 2002

Directors’ Report

(ii) the generally accepted pricing models of options normally value options which are transferable but the options granted to a grantee under the Schemes are personal to the grantee which are non-transferable and nonassignable and hence calculation of the value of the options granted under the Schemes using such pricing models may not be appropriate; and
(iii) the directors of the Company are of the view that the calculation on speculative assumptions would not be meaningful and would be misleading to shareholders of the Company.

DIRECTORS’ INTERESTS IN CONTRACTS

No contracts of significance to which the Company or its holding company or any of its subsidiaries was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

MAJOR CUSTOMERS AND SUPPLIERS

During the year, the aggregate sales attributable to the Group’s five largest customers comprised approximately 58% of the Group’s total sales while the sales attributable to the Group’s largest customer was approximately 25% of the Group’s total sales.

The aggregate purchases during the year attributable to the Group’s five largest suppliers comprised approximately 84% of the Group’s total purchases while the purchases attributable to the Group’s largest supplier was approximately 69% of the Group’s total purchases.

None of the directors, their associates or any shareholder, which to the knowledge of the directors owned more than 5% of the Company’s issued share capital, had any interest in the share capital of any of the five largest customers or suppliers of the Group.

PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES

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

PRE-EMPTIVE RIGHTS

There is no provision for pre-emptive rights under the Company’s Articles of Association or the laws of the Cayman Islands, which would oblige the Company to offer new shares on a pro-rata basis to existing shareholders.

CORPORATE GOVERNANCE

The Company has complied with the broad practices and procedures as set out in Rules 5.28 to 5.39 of the GEM Listing Rules during the period from its listing date to 31st December, 2002.

An audit committee was established on 30th October, 2001 with written terms of reference in compliance with Rules 5.23 to 5.25 of the GEM Listing Rules. The two independent non-executive directors, Mr. Tsoi Tai Wai, David and Mr. Pang Hing Chung, Alfred and the executive director, Mr. Chan Sek Keung, Ringo have been appointed to the audit committee. Mr. Tsoi Tai Wai, David was appointed as the Chairman of the audit committee.

Wafer Systems Limited Annual Report 2002

Directors’ Report

During the year, the audit committee held three meetings and the primary duties of the meetings were to review and supervise the financial reporting process and internal control system of the Group.

COMPETING INTEREST

None of the directors or the management shareholders (as defined in the GEM Listing Rules) of the Company or their respective associates had any interest in a business which competes with or may compete with the business of the Group.

SPONSOR’S INTERESTS

None of the Company’s sponsor, CSC Asia Limited, its directors, employees or associates (as referred to in Note 3 to the Rule 6.35 of the GEM Listing Rules) had any interests in any class of securities of the Company or any other company in the Group (including options or rights to subscribe for such securities) as at 31st December, 2002.

Pursuant to an agreement dated 10th May, 2002, CSC Asia Limited has been retained to act as the Company’s sponsor for the period up to 31st December, 2004 in return for a monthly advisory fee.

AUDITORS

Messrs. Arthur Andersen & Co. were the auditors of the Group up to 31st July 2002, on which date they resigned.

On 13th September 2002, at an extraordinary general meeting of the Company, Messrs. Deloitte Touche Tohmatsu were appointed as auditors of the Group till the holding of the next annual general meeting.

The financial statements accompanying this Annual Report were audited by Messrs. Deloitte Touche Tohmatsu. A resolution will be submitted to the annual general meeting of the Company to be held on 25th April 2003 for their reappointment.

On behalf of the Board of Directors of

Wafer Systems Limited

Chan Sek Keung, Ringo

Chairman and Chief Executive Officer

Hong Kong, 26th March, 2003

Wafer Systems Limited Annual Report 2002

Auditors’ Report

香港中環干諾道中111號永安中心26樓

==> picture [89 x 57] intentionally omitted <==

TO THE SHAREHOLDERS OF WAFER SYSTEMS LIMITED

(incorporated in the Cayman Islands with limited liability)

We have audited the financial statements on pages 22 to 51 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

Respective Responsibilities of Directors and Auditors

The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you.

Basis of Opinion

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Opinion

In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31st December, 2002 and of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

DELOITTE TOUCHE TOHMATSU

Hong Kong, 26th March, 2003

Wafer Systems Limited Annual Report 2002

Consolidated Income Statement

For the year ended 31st December, 2002

Notes	2002 *HK$’000*	2001 HK$’000
Turnover 4 Other operating income Materials and equipment Staff costs Depreciation and amortisation Management fees to business agents, net Other operating expenses	180,333 424 (138,836) (17,441) (4,771) – (23,923)	149,579 2,263 (109,515) (12,505) (2,697) (3,297) (12,288)
(Loss) profit from operations 5 Finance costs 8	(4,214) (2,186)	11,540 (3,342)
(Loss) profit before taxation Taxation 9	(6,400) 551	8,198 (191)
Net (loss) profit attributable to shareholders	(5,849)	8,007
(Loss) earnings per share 10 – Basic	(2.40) cents	4.85 cents
– Diluted	N/A	3.85 cents

Wafer Systems Limited Annual Report 2002

Consolidated Balance Sheet

At 31st December, 2002

Notes	2002 *HK$’000*
Non-current assets Property, plant and equipment 11 Software products development costs 12 Investments in securities 14	5,550 5,552 400
	11,502
Current assets Inventories Trade and other receivables 15 Pledged bank deposits Bank balances and cash	22,740 97,161 19,948 14,412
	154,261
Current liabilities Trade and other payables 16 Taxation Convertible bonds maturing within one year 17 Convertible note maturing within one year Short-term bank loans – secured Trust receipt and import loans 18 Bank overdrafts 19	52,531 196 7,363 – – 40,697 356
	101,143
Net current assets	53,118
Total assets less current liabilities Non-current liabilities Convertible note maturing after one year Convertible bonds maturingafter oneyear 17	64,620 – 11,294
Net assets	53,326
Capital and reserves Share capital 20 Reserves	2,823 50,503
Shareholders’ funds	53,326

The financial statements on pages 22 to 51 were approved and authorised for issue by the Board of Directors on 26th March, 2003 and are signed on its behalf by:

Chief Executive Officer

Chan Sek Keung, Ringo Chairman and

Tsoi Tai Wai, David Director

Wafer Systems Limited Annual Report 2002

Balance Sheet

At 31st December, 2002

Notes	2002 *HK$’000*	2001 HK$’000
Non-current asset Investment in a subsidiary 13	10	10
Current assets Prepayments Amount due from a subsidiary	– 53,745	3,096 20,790
	53,745	23,886
Current liabilities Accounts payables Amounts due to subsidiaries Convertible bonds maturing within one year 17	50 1,058 7,363	1,292 866 –
	8,471	2,158
Net current assets	45,274	21,728
Total assets less current liabilities Non-current liabilities Convertible bonds maturing after one year 17	45,284 11,294	21,738 –
Net assets	33,990	21,738
Capital and reserves Share capital 20 Reserves 23	2,823 31,167	1,778 19,960
Shareholders’ funds	33,990	21,738

Chan Sek Keung, Ringo Chairman and Chief Executive Officer

Tsoi Tai Wai, David

Director

Wafer Systems Limited Annual Report 2002

Consolidated Statement of Changes in Equity

For the year ended 31st December, 2002

			Statutory
			surplus	Enterprise	Staff
	Share	Share	reserve	expansion	welfare
	capital	premium	fund	fund	fund	Deficit	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
At 1st January, 2001	234	3,149	–	–	–	(7,479)	(4,096)
Issue of new shares to
satisfy a promissory
note	43	19,357	–	–	–	–	19,400
Expenses incurred in
connection with the
issue of shares	–	(946)	–	–	–	–	(946)
Capitalisation on bonus
issue of shares	1,501	(1,501)	–	–	–	–	–
Transfers	–	–	543	272	272	(1,087)	–
Net profit attributable to
shareholders	–	–	–	–	–	8,007	8,007
At 31st December, 2001	1,778	20,059	543	272	272	(559)	22,365
Exercise of conversion
rights of a convertible
note	354	17,084	–	–	–	–	17,438
Exercise of warrants	131	73	–	–	–	–	204
Issue of new shares on
listing	560	30,251	–	–	–	–	30,811
Expenses incurred in
connection with the
issue of shares	–	(11,643)	–	–	–	–	(11,643)
Net loss attributable to
shareholders	–	–	–	–	–	(5,849)	(5,849)
Transfers	–	–	460	230	230	(920)	–
At 31st December, 2002	2,823	55,824	1,003	502	502	(7,328)	53,326

As stipulated by the relevant laws and regulations for foreign investment enterprises in the Mainland China (the “PRC”), the PRC subsidiaries of the Company is required to maintain three statutory reserves, being a statutory surplus reserve fund, an enterprise expansion fund and a staff welfare fund which are non-distributable. Appropriations to such reserves are made out of net profit after taxation of the statutory financial statements of the PRC subsidiaries and the amount and allocation basis are decided by its board of directors annually. The statutory surplus reserve fund can be used to make up prior year losses of the PRC subsidiaries, if any, and can be applied in conversion into capital by means of capitalisation issue. The enterprise expansion fund is used for expanding the capital base of the PRC subsidiaries by means of capitalisation issue. The staff welfare fund, which is to be used for the welfare of the staff and workers of the Company, is of a capital nature.

Wafer Systems Limited Annual Report 2002

Consolidated Cash Flow Statement

For the year ended 31st December, 2002

	2002 *HK$’000*	2001 HK$’000
Operating activities (Loss) profit before taxation Adjustments for: Interest income Interest expenses Amortisation of discount on convertible bonds Depreciation and amortisation Gain on disposal of property, plant and equipment Gain on termination of certain warrant rights entitlements Allowance for bad and doubtful debts	(6,400) (311) 967 1,219 4,771 (18) – 2,293	8,198 (711) 3,342 – 2,697 – (1,552) 626
Operating cash flows before movements in working capital Increase in inventories Increase in trade and other receivables Increase in trade and other payables Decrease in amount due to a related company	2,521 (17,180) (43,818) 27,455 –	12,600 (2,599) (20,140) 13,552 (792)
Cash (used in) generated from operations Mainland China income tax paid	(31,022) (1,602)	2,621 –
Net cash (used in) generated from operating activities	(32,624)	2,621
Investing activities Interest received Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Software products development costs paid Acquisition of investments in securities Decrease (increase) in pledged bank deposits	311 (2,415) 94 (3,674) – 1,490	711 (3,399) – (2,523) (400) (4,238)
Net cash used in investing activities	(4,194)	(9,849)

Wafer Systems Limited Annual Report 2002

Consolidated Cash Flow Statement

For the year ended 31st December, 2002

	2002 *HK$’000*
Financing activities Interest paid Proceeds from issue of shares Expenses incurred in connection with the issue of shares Borrowings raised from trust receipt and import loans (Repayment of) borrowings raised from short-term bank loans	(966) 31,015 (11,643) 29,574 (4,421)
Net cash generated from financing activities	43,559
Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at 1st January	6,741 7,315
Cash and cash equivalents at 31st December	14,056
Analysis of the balances of cash and cash equivalents Bank balances and cash Bank overdrafts	14,412 (356)
	14,056

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

1. GENERAL

The Company is incorporated in the Cayman Islands as an exempt company with limited liability. The shares of the Company were listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) on 17th May, 2002.

2. ADOPTION OF NEW OR REVISED STATEMENTS OF STANDARD ACCOUNTING PRACTICE

In the current year, the Group has adopted for the first time the following new or revised Statements of Standard Accounting Practice (“SSAP”) issued by the Hong Kong Society of Accountants:

SSAP 1 (Revised) Presentation of financial statements SSAP 15 (Revised) Cash flow statements SSAP 34 Employee benefits

The adoption of these new or revised SSAPs has resulted in the introduction of the statement of changes in equity and a change in the format of presentation of the cash flow statement as well as additional disclosures. These changes have not had any material effect on the results for the current or prior period. Accordingly, no prior period adjustment was required.

3. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost convention and in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies adopted are as follows:

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31st December each year.

All significant inter-company transactions and balances within the Group are eliminated on consolidation.

Investments in subsidiaries

Investments in subsidiaries are stated at cost less any identified impairment loss.

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Investments in securities

Investments in securities are recognised on a trade-date basis and are initially measured at cost.

Investment securities, which are securities held for an identified long-term strategic purpose, are measured at subsequent reporting dates at cost, as reduced by any identified impairment loss that is other than temporary.

Turnover

Turnover represents the aggregate of the net amounts received and receivable from third parties in connection with the provision of network infrastructure solutions, network professional services and network software.

Revenue recognition

Sales of network equipment and software are recognised when the network equipment and software are delivered and title has passed.

Revenue from the provision of network infrastructure services and network professional services are recognised when the services are provided.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable.

Dividend income from investments is recognised when the shareholders’ right to receive payment has been established.

Property, plant and equipment

Property, plant and equipment are stated at cost less depreciation and any identified impairment loss at the balance sheet date.

The gain or loss arising from the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.

Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives, using the straight line method, at the rate of 33[1] /3% per annum.

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Software products development costs

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

An internally-generated asset arising from software products development expenditure is recognised only if it is anticipated that the development costs incurred on a clearly-defined project will be recovered through future commercial activity. The resultant asset is amortised on a straight line basis over its estimated useful life of three years.

Where no internally-generated software product can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.

Inventories

Inventories, which represent goods held for sale, are stated at the lower of cost and net realisable value. Cost, which comprises all costs of purchase and, where applicable, other costs that have been incurred in bringing the inventories to their present location and condition, is calculated using the weighted average method. Net realisable value represents the estimated selling price in the ordinary course of business less all estimated costs necessary to make the sale.

Impairment

At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Convertible bonds

Convertible bonds are separately disclosed and regarded as liabilities unless conversion actually occurs. The finance cost recognised in the income statement in respect of the convertible bonds, including the amortisation of discount payable upon the final redemption of the convertible bonds, is calculated so as to produce a constant periodic rate of charge on the remaining balance of the convertible bonds for each accounting period.

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Taxation

The charge for taxation is based on the results for the year after adjusting for items which are non-assessable or disallowed. Certain items of income and expense are recognised for tax purposes in a different accounting period from that in which they are recognised in the financial statements. The tax effect of the resulting timing differences, computed using the liability method, is recognised as deferred taxation in the financial statements to the extent that it is probable that a liability or asset will crystallise in the foreseeable future.

Foreign currencies

Transactions in foreign currencies are translated at the rates ruling on the dates of the transactions or at the contracted settlement rate. Monetary assets and liabilities denominated in foreign currencies are re-translated at the rates ruling on the balance sheet date. Gains and losses arising on translation are dealt with in the income statement.

On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rate prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Translation differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.

Operating leases

Rentals payable under operating leases are charged to the income statement on a straight line basis over the period of the respective leases.

4. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

For management purposes, the Group’s operations are organised into three operating divisions namely network infrastructure, network professional services and network software. These divisions are the basis on which the Group reports its primary segment information.

Principal activities are as follows:

Network infrastructure	–	the sale of network equipment and software and the provision of related
		network infrastructure services
Network professional services	–	provision of network professional services
Network software	–	the sale of the Group’s proprietary network software

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

4. BUSINESS AND GEOGRAPHICAL SEGMENTS (continued)

Business segments (continued)

Business segments for the year are as follows:

	2002 Turnover Results *HK$’000* *HK$’000*	2002 Turnover Results *HK$’000* *HK$’000*	2001 Turnover Results HK$’000 HK$’000	2001 Turnover Results HK$’000 HK$’000
Network infrastructure Network professional services Network software	153,650 26,326 357	(1,327) (1,169) (1,787)	136,978 10,342 2,259	6,498 1,941 886
Other operating income Central administrative expenses (Loss) profit from operations Finance costs (Loss) profit before taxation Taxation Net (loss) profit attributable to shareholders	180,333	(4,283) 424 (355) (4,214) (2,186) (6,400) 551 (5,849)	149,579	9,325 2,263 (48)
				11,540 (3,342)
				8,198 (191)
				8,007

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

4. BUSINESS AND GEOGRAPHICAL SEGMENTS (continued)

Business segments (continued)

	2002 *HK$’000*
BALANCE SHEET Assets Segment assets – network infrastructure – network professional services – network software Unallocated corporate assets	85,518 20,984 6,259 53,002
	165,763
Liabilities Segment liabilities – network infrastructure Unallocated corporate liabilities	93,228 19,209
	112,437
OTHER INFORMATION Capital additions – network infrastructure – network professional services – network software	3,070 1,316 3,784
	8,170
Depreciation and amortisation – network infrastructure – network professional services – network software	2,047 877 1,847
	4,771
Gain on disposal of property, plant and equipment – network infrastructure	18
Allowance for bad and doubtful debts – network infrastructure – network professional services – network software	1,397 890 6
	2,293

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

4. BUSINESS AND GEOGRAPHICAL SEGMENTS (continued)

Geographical segments

The Group’s operations are located in Hong Kong, Mainland China (the “PRC”) and Republic of Singapore. The following table provides an analysis of the Group’s geographical segment information:

Turnover 2002 2001 *HK$’000* HK$’000	Turnover 2002 2001 *HK$’000* HK$’000	Turnover 2002 2001 *HK$’000* HK$’000
	2002 *HK$’000*
Hong Kong PRC Republic of Singapore	15,535 164,798 –	24,066 125,513 –
	180,333	149,579

The following is an analysis of the carrying amount of segment assets and capital additions, analysed by the geographical area in which the assets are located:

Carrying amount of segment assets Capital additions 2002 2001 2002 2001 *HK$’000* HK$’000 *HK$’000* HK$’000	Carrying amount of segment assets Capital additions 2002 2001 2002 2001 *HK$’000* HK$’000 *HK$’000* HK$’000	Carrying amount of segment assets Capital additions 2002 2001 2002 2001 *HK$’000* HK$’000 *HK$’000* HK$’000	Carrying amount of segment assets Capital additions 2002 2001 2002 2001 *HK$’000* HK$’000 *HK$’000* HK$’000	Carrying amount of segment assets Capital additions 2002 2001 2002 2001 *HK$’000* HK$’000 *HK$’000* HK$’000
	2002 *HK$’000*	2001 HK$’000	2002 *HK$’000*
Hong Kong PRC	122,855 42,908	35,886 67,394	416 7,754	1,321 5,416
	165,763	103,280	8,170	6,737

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

5. (LOSS) PROFIT FROM OPERATIONS

	2002 *HK$’000*
(Loss) profit from operations has been arrived at after charging: Directors’ remuneration other than fees_(note 6)_ Other staff costs Other staff’s retirement benefits scheme contributions _Less:_Staff costs capitalised in software products development costs	1,239 18,033 679 (2,510)
	17,441
Allowance for bad and doubtful debts Amortisation of software products development costs Auditors’ remuneration Depreciation of property, plant and equipment Operating lease rentals in respect of land and buildings Research and development costs and after crediting: Gain on disposal of property, plant and equipment Interest income	2,293 1,441 450 3,330 2,823 297 18 311

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

6. DIRECTORS’ REMUNERATION

	2002 *HK$’000*	2001 HK$’000
Fees for – executive director – independent non-executive directors – other non-executive directors	– 160 –	– – –
	160	–
Other emoluments for non-executive directors Other emoluments for executive director – basic salaries and allowances – retirement benefits scheme contributions	– 1,227 12	– 1,193 12
	1,239	1,205
Total directors’ remuneration	1,399	1,205

The emoluments of the directors were within the following bands:

Number of directors 2002 2001	Number of directors 2002 2001	Number of directors 2002 2001
	2002
Up to HK$1,000,000 HK$1,000,001 to HK$1,500,000	5 1	10 1

For each of the two years ended 31st December, 2002, the details of remuneration for the executive director are set out above. The directors’ fees for each of the independent non-executive director is HK$80,000.

During the year, no emoluments were paid by the Group to the five highest paid individuals (including directors and employees) as an inducement to join or upon joining the Group or as compensation for loss of office. None of the directors has waived any emoluments during the year.

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

7. EMPLOYEES’ EMOLUMENTS

The aggregate emoluments of the five highest paid individuals included one executive director of the Company, whose emoluments are included in note 6 above. The aggregate emoluments of the remaining four highest paid individuals are as follows:

	2002 *HK$’000*
Basic salaries and allowances Bonus Retirement benefits scheme contributions Severance payments	3,009 200 54 109
	3,372

None of the four highest paid individuals received emoluments in excess of HK$1 million.

8. FINANCE COSTS

	2002 *HK$’000*
Interest on – a convertible note – bank borrowings wholly repayable within five years Amortisation of discount on convertible bonds	– (967) (1,219)
	(2,186)

9. TAXATION

	2002 *HK$’000*
The charge comprises: Hong Kong Profits Tax calculated at 16% on the estimated assessable profit for the year Overprovision in prior years PRC income tax	– 747 (196)
	551

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

9. TAXATION (continued)

No provision for Hong Kong Profits Tax has been made in the financial statements in 2002 as the Group had no assessable profit for the year.

Pursuant to the relevant laws and regulations in the PRC, the Company’s PRC subsidiaries are entitled to exemption from PRC income tax for two or three years commencing from their first profit-making year of operation and thereafter, these PRC subsidiaries will be entitled to a 50% relief from PRC income tax for the following three years. During the year, only one of the Company’s PRC subsidiaries is within its 50% tax relief period, the rest are within their tax exemption period.

10. (LOSS) EARNINGS PER SHARE

The calculation of the basic (loss) earnings per share is based on the net loss attributable to shareholders of HK$5,849,000 (2001: net profit of HK$8,007,000) and the weighted average number of 243,625,000 shares in issue during the year (2001: 165,221,000 shares after adjusting for the effect of the redenomination, subdivision and consolidation of shares as well as bonus issue made by the Company).

No diluted loss per share has been presented in 2002 as the effect of the potential shares outstanding during the year was anti-dilutive.

The calculation of the diluted earnings per share in 2001 was based on the following data:

	HK$’000
Earnings for the purposes of basic earnings per share	8,007
Effect of dilutive potential ordinary shares in respect of convertible note	2,051
Earnings for the purpose of diluted earnings per share	10,058
Weighted average number of ordinary shares for the purposes of
basic earnings per share	165,221
Effect of dilutive potential ordinary shares
– promissory note	12,557
– convertible note	70,827
– warrants	12,755
Weighted average number of ordinary shares for the
purposes of diluted earnings per share	261,360

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

11. PROPERTY, PLANT AND EQUIPMENT

		Furniture,
		fixtures
	Computer	and office	Motor
	equipment	equipment	vehicles	Tools	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
THE GROUP
COST
At 1st January, 2002	5,211	1,009	272	3,063	9,555
Additions	2,736	450	–	1,310	4,496
Disposals	–	–	–	(1,610)	(1,610)
At 31st December, 2002	7,947	1,459	272	2,763	12,441
DEPRECIATION
At 1st January, 2002	2,570	495	116	1,914	5,095
Provided for the year	2,166	388	55	721	3,330
Eliminated on disposals	–	–	–	(1,534)	(1,534)
At 31st December, 2002	4,736	883	171	1,101	6,891
NET BOOK VALUES
At 31st December, 2002	3,211	576	101	1,662	5,550
At 31st December, 2001	2,641	514	156	1,149	4,460

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

12. SOFTWARE PRODUCTS DEVELOPMENT COSTS

13.	HK$’000
	THE GROUP COST At 1st January, 2001 1,503 Additions 2,523
	At 31st December, 2001 4,026 Additions 3,674
	At 31st December, 2002 7,700
	AMORTISATION At 1st January, 2001 41 Amortised for the year 666
	At 31st December, 2001 707 Amortised for the year 1,441
	At 31st December, 2002 2,148
	CARRYING VALUES At 31st December, 2002 5,552
	At 31st December, 2001 3,319
	INVESTMENT IN A SUBSIDIARY

	THE COMPANY
	2002 & 2001
	HK$’000
Unlisted shares, at cost	10

Details of the Company’s principal subsidiaries at 31st December, 2002 are set out in note 30.

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

14. INVESTMENTS IN SECURITIES

	THE GROUP
	2002 & 2001
	HK$’000
Unlisted investments securities, at cost	400

The investments in securities at 31st December, 2002 represents the Company’s 15% shareholding in New Eracom Technology Limited which is incorporated in Hong Kong and engaged in the provision of Internet protocol multimedia collaboration applications.

15. TRADE AND OTHER RECEIVABLES

THE GROUP

	2002 *HK$’000*
Trade receivables Other receivables Amount due from a related business agent Prepaid maintenance charges	78,919 13,022 – 5,220
	97,161

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

15. TRADE AND OTHER RECEIVABLES (continued)

Payment terms with customers are mainly on credit together with deposits. Invoices are normally payable from 30 to 90 days of issuance, except for certain well established customers. The following is an aged analysis of trade receivables at the balance sheet date:

THE GROUP

	2002 *HK$’000*	2001 HK$’000
Age 0 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days 181 to 365 days Over 365 days	48,452 3,912 5,412 16,440 4,323 3,611	12,546 6,132 8,621 2,801 8,045 533
_Less:_Allowance for bad and doubtful debts	82,150 (3,231)	38,678 (938)
	78,919	37,740

16. TRADE AND OTHER PAYABLES

THE GROUP 2002 2001 *HK$’000* HK$’000	THE GROUP 2002 2001 *HK$’000* HK$’000	THE GROUP 2002 2001 *HK$’000* HK$’000
	2002 *HK$’000*
Trade payables Other payables	43,926 8,605	17,091 7,985
	52,531	25,076

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

16. TRADE AND OTHER PAYABLES (continued)

The following is an aged analysis of trade payables at the balance sheet date:

THE GROUP

	2002 *HK$’000*
Age 0 to 30 days 31 to 90 days 91 to 180 days 181 to 270 days 271 to 365 days Over 365 days	39,642 756 3,287 241 – –
	43,926

17. CONVERTIBLE BONDS

THE GROUP

	2002 *HK$’000*
Convertible bonds with an aggregate face value of HK$20,048,100 discounted at a rate of 7% per annum _Add:_Accumulated amortisation of discount upon the final redemption of the convertible bonds	17,438 1,219
	18,657
The convertible bonds mature as follows: Within one year Between one to two years Between two to five years	7,363 8,673 2,621
_Less:_Amount matures within one year shown under current liabilities	18,657 7,363
Amount matures after one year	11,294

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

17. CONVERTIBLE BONDS (continued)

The convertible bonds were issued by the Company in April 2002 to replace 50% of the convertible note issued by the Company’s subsidiary which amounted to HK$17,437,500. The redemption monies of the convertible note were used to subscribe for these convertible bonds which represent an aggregate face value of HK$20,048,100 with various maturity dates between 2003 and 2005 discounted at a rate of 7% per annum. The bondholder, The Applied Research Council, which is also a substantial shareholder of the Company, has the right, at any time during the period from 18th May, 2003 up to and including the maturity date of the convertible bond, to convert into ordinary shares of the Company at a conversion price of HK$0.5267 per share, subject to adjustments. The Company has the right to redeem the convertible bonds prior to its maturity subject to the prior consent of the bondholder.

18. TRUST RECEIPT AND IMPORT LOANS

THE GROUP

	2002 *HK$’000*	2001 HK$’000
Trust receipt and import loans – secured – unsecured	12,474 28,223	11,123 –
	40,697	11,123

19. BANK OVERDRAFTS

THE GROUP

	2002 *HK$’000*	2001 HK$’000
Bank overdrafts – secured – unsecured	335 21	3,071 –
	356	3,071

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

20. SHARE CAPITAL

		Nominal
	Number of	value per
	ordinary shares	ordinary share	Amount
			’000
Authorised:
– at 1st January, 2001	500,000,000	US$0.0002	US$100
– redenomination, subdivision and
consolidation of shares	78,000,000	HK$0.01	HK$780
– increase in authorised share capital	422,000,000	HK$0.01	HK$4,220
– at 31st December, 2001 and
at 31st December, 2002	500,000,000	HK$0.01	HK$5,000
Issued and fully paid:
– at 1st January, 2001	150,000,000	US$0.0002	US$30
– issue of new shares to satisfy a
promissory note	27,777,800	US$0.0002	US$6
	177,777,800	US$0.0002	US$36
– redenomination, subdivision and
consolidation of shares	27,733,337	HK$0.01	HK$277
– bonus issue of shares	150,044,463	HK$0.01	HK$1,501
– at 31st December, 2001	177,777,800	HK$0.01	HK$1,778
– exercise of conversion rights of
a convertible note	35,413,282	HK$0.01	HK$354
– exercise of warrants	13,045,000	HK$0.01	HK$131
– bonus issue of shares	11,918	HK$0.01	–
– issue of new shares on listing	56,020,000	HK$0.01	HK$560
– at 31st December, 2002	282,268,000	HK$0.01	HK$2,823

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

20. SHARE CAPITAL (continued)

The following changes in the issued share capital of the Company took place in May 2002:

(a) The Company issued and allotted an aggregate of 35,413,282 new ordinary shares of HK$0.01 each at HK$0.4924 per share as a result of the exercise of the conversion rights of the Company’s convertible note.
(b) The warrantholder of subscription rights to subscribe for 13,045,000 ordinary shares of HK$0.01 each had exercised their rights at HK$0.0155 per share.
(c) The Company made a bonus issue of 11,918 new ordinary shares of HK$0.01 each, credited as fully paid at par to the then existing shareholders. This bonus issue was funded by the capitalisation of a sum of HK$119 standing to the credit of the Company’s share premium account.
(d) Pursuant to the placing and underwriting agreement dated 10th May, 2002, the Company offered 52,020,000 new ordinary shares for subscription at a price of HK$0.55 per share. The net proceeds from this subscription were used for the Company’s business expansion and to provide additional general working capital.
(e) 4,000,000 new ordinary shares were issued at a price of HK$0.55 per share pursuant to the exercise of over-allotment options granted to the placing underwriters. The net proceeds from this subscription were used for the Company’s business expansion and to provide additional general working capital.

All the ordinary shares issued during the year rank pari passu with the then existing ordinary shares in all respects.

21. WARRANTS

In May 2002, the Company issued warrants to a substantial shareholder of the Company, QPL International Holdings Limited, conferring rights to subscribe 7,676,745 ordinary shares of HK$0.01 each at HK$0.01 per share exercisable during the six-month period commencing on 17th May, 2003. The issue of the warrants was approved by written resolution of the then shareholders on 20th April, 2002.

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

22. SHARE OPTIONS

(a) Pre-listing share options

Pursuant to the pre-listing share option scheme adopted by the Company on 20th April, 2002, the Company may grant options to any director, employee, adviser or business consultant of the Company or its subsidiaries, for the primary purpose of providing incentives to them, to subscribe for shares in the Company with the payment of HK$1 per offer. Options granted are exercisable for a period not later than 10 years from the date of grant of the relevant options.

Details of the movements in the number of share options granted during the year under the Company’s pre-listing share options scheme adopted on 20th April, 2002 which are exercisable from 17th November, 2002 to 29th April, 2012 are as follows:

		Number of share	Number of share	options
	Exercise	Granted	Cancelled	Outstanding
	price	during	during	at
Type of participants	per share	the year	the year	31.12.2002
	HK$
Directors	0.55	3,750,000	–	3,750,000
Adviser	0.55	750,000	–	750,000
Employees	0.55	7,413,000	1,500,000	5,913,000
		11,913,000	1,500,000	10,413,000

(b) Post-listing share options

Pursuant to the post-listing share option scheme adopted by the Company on 20th April, 2002, the Company may grant options to any director, employee, advisor or business consultant of the Company or its subsidiaries, for the primary purpose of providing incentives to them, to subscribe for shares in the Company with the payment of HK$1 per offer. The exercise price of the share option will be determined at the higher of the average of closing prices of the shares on the Stock Exchange on the five trading days immediately preceding the date of grant of the options; the closing price of the shares on the Stock Exchange on the date of grant; and the nominal value of the shares. The post-listing share options are exercisable for a period not later than 10 years from the date of grant.

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

22. SHARE OPTIONS (continued)

(b) Post-listing share options (continued)

Details of the movements in the number of share options granted during the year under the Company’s post-listing share options scheme which are exercisable from 12th July, 2003 to 11th July, 2012 are as follows:

		Number of share	Number of share	options
	Exercise	Granted	Cancelled	Outstanding
	price	during	during	as at
Type of participants	per share	the year	the year	31.12.2002
	HK$
Employees	0.384	5,277,000	270,000	5,007,000

The financial impact of share options granted is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recognised in the income statement in respect of the value of options granted during the year. Upon the exercise of the share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which lapsed or are cancelled prior to their exercise date are deleted from the register of outstanding options.

23. RESERVES

	Share
	premium	Deficit	Total
	HK$’000	HK$’000	HK$’000
THE COMPANY
At 1st January, 2001	3,149	(76)	3,073
Premium arising on issue of shares	19,357	–	19,357
Expenses incurred in connection with the issue of shares	(946)	–	(946)
Capitalisation on bonus issue of shares	(1,501)	–	(1,501)
Net loss attributable to shareholders	–	(23)	(23)
At 31st December, 2001	20,059	(99)	19,960
Exercise of conversion rights of a convertible note	17,084	–	17,084
Exercise of warrants	73	–	73
Issue of new shares on listing	30,251	–	30,251
Expenses incurred in connection with the issues of shares	(11,643)	–	(11,643)
Net loss attributable to shareholders	–	(24,558)	(24,558)
At 31st December, 2002	55,824	(24,657)	31,167

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

24. MAJOR NON-CASH TRANSACTIONS

During the year, the amount due from a related business agent of HK$5,020,000 in which a director of the Company Mr. Chan Sek Keung, Ringo has a beneficial interest, was satisfied by the right to use certain property, plant and equipment of HK$2,081,000, and prepaid maintenance charges of HK$2,939,000 held by this related business agent.

In April 2002, the redemption monies of the convertible note of HK$17,438,000 were used to subscribe for the convertible bonds detailed in note 17.

25. UNRECOGNISED DEFERRED TAXATION

At the balance sheet date, the Group has an unrecognised deferred tax asset of HK$1,093,000 (2001: HK$655,000) which represents the tax effect of timing differences arising as a result of tax losses available to set off against future assessable profits. This deferred tax asset has not been recognised in the financial statements as it is not certain that the benefit will be realised in the foreseeable future.

The Company had no significant unprovided deferred taxation for the year or at the balance sheet date.

26. OPERATING LEASE COMMITMENTS

While the Company had no outstanding operating lease commitments at the balance sheet date, its subsidiaries were committed to make the following minimum lease payments in respect of land and buildings under noncancellable operating leases which fall due as follows:

THE GROUP

	2002 *HK$’000*
Within one year In the second to fifth year inclusive	2,643 2,320
	4,963

27. CAPITAL COMMITMENTS

	THE GROUP
	2002 & 2001
	HK$’000
Capital expenditure in respect of investment in the PRC
contracted for but not provided in the financial statements	769

The Company had no capital commitments at the balance sheet date.

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

28. CONTINGENT LIABILITIES

At the balance sheet date, the Company has given corporate guarantees totalling HK$103,190,000 (2001: Nil) to banks to secure the credit facilities granted to its subsidiaries.

29. RETIREMENT BENEFITS SCHEME

The Group operates a Mandatory Provident Fund Scheme (the “Scheme”) for all qualifying employees in Hong Kong. The assets of the Scheme are held separately from those of the Group in funds under the control of trustee. The Group contributes 5%, of relevant payroll costs to the Scheme, which contribution is matched by employees.

The employees of the Company’s PRC subsidiaries are members of the state-managed retirement benefits scheme operated by the PRC government. The Company’s PRC subsidiaries are required to contribute a certain percentage of their payroll to the retirement benefits scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefits scheme is to make the required contributions under the scheme.

30. PRINCIPAL SUBSIDIARIES

Details of the Company’s principal subsidiaries, all of which are wholly-owned by the Company, at 31st December, 2002 are as follows:

	Place of
	incorporation/	Nominal value
	establishment/	of issued/
Name of subsidiary	operations	registered capital	Principal activities
北京威發新世紀信息技術有限公司	PRC for a	US$1,500,000	Operation of businesses in
(Beijing Wafer New Century	term of		network infrastructure,
Information Technology Co., Ltd.)	15 years		provision of network
	commencing		professional services
	12th January,		and sale of proprietary
	2001#		network software
上海滬威網絡系統有限公司	PRC for a	US$210,000	Operation of businesses in
(Wafer Network Systems	term of		network infrastructure,
(Shanghai) Ltd. Co.)	15 years		provision of network
	commencing		professional services
	28th July,		and sale of proprietary
	1999#		network software

Wafer Systems Limited Annual Report 2002

Notes to the Financial Statements

For the year ended 31st December, 2002

30. PRINCIPAL SUBSIDIARIES (continued)

	Place of
	incorporation/	Nominal value
	establishment/	of issued/
Name of subsidiary	operations	registered capital	Principal activities
Wafer Systems (China) Limited	Hong Kong	HK$10,000	Operation of businesses in
			network infrastructure,
			provision of network
			professional services
			and sale of proprietary
			network software
Wafer Systems Holdings Limited*	Hong Kong	HK$10,000	Investment holding
Wafer Systems (Hong Kong) Limited	Hong Kong	HK$10,000	Operation of businesses in
			network infrastructure,
			provision of network
			professional services
			and sale of proprietary
			network software
威發(西安)軟件有限公司	PRC for a	US$100,950	Research and development
(Wafer (Xi’an) Software Co., Ltd.)	term of
	15 years
	commencing
	26th July, 2001#

# These are foreign investment enterprises established in PRC.
Directly held by the Company.

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affect the results or assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

None of the subsidiaries had any debt securities outstanding at the end of the year, or at any time during the year.

Wafer Systems Limited Annual Report 2002

Financial Summary

26.11.1998 1.1.2000 1.1.2001 to to to 31.12.1999 31.12.2000 31.12.2001 HK$’000 HK$’000 HK$’000	1.1.2002 to 31.12.2002 *HK$’000*
RESULTS Turnover 124,328 85,339 149,579	180,333
Profit (loss) before taxation (7,162) 474 8,198 Taxation (1,193) 403 (191)	(6,400) 551
Net profit (loss) attributable to shareholders (8,355) 877 8,007	(5,849)

As at 31st December,	As at 31st December,
1999 2000 2001 HK$’000 HK$’000 HK$’000	2002 *HK$’000*
ASSETS AND LIABILITIES Total assets 54,901 70,495 103,280 Total liabilities (59,875) (74,591) (80,915)	165,763 (112,437)
(Deficiency) balance of shareholders’ funds (4,974) (4,096) 22,365	53,326

Wafer Systems Limited Annual Report 2002

Notice of Annual General Meeting

NOTICE IS HEREBY GIVEN THAT the annual general meeting of Wafer Systems Limited (the “Company”) will be held at the Conference Room, 28th Floor, Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Hong Kong on Friday, 25 April, 2003 at 3:30 p.m. for the following purposes:

To receive and consider the audited consolidated financial statements and reports of the directors and auditors for the year ended 31 December, 2002;
To re-elect a director Mr. Pang Hing Chung, Alfred retiring by rotation;
To re-appoint auditors and to authorize the board of directors to fix their remuneration;
As special business to consider and, if thought fit, pass with or without amendments the following resolutions as Ordinary Resolutions:

ORDINARY RESOLUTIONS

(1) “ THAT :

(a) subject to paragraph (c) of this resolution, and pursuant to the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited, the exercise by the directors of the Company during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal with additional shares in the capital of the Company and to make or grant, whether conditionally or unconditionally, offers, agreements and options (including warrants, bonds, debentures, notes and any securities which carry rights to subscribe for or are convertible into shares in the Company) which would or might require the exercise of such powers be and is hereby generally and unconditionally approved;
(b) the approval in paragraph (a) of this resolution shall authorize the directors of the Company during the Relevant Period to make or grant offers, agreements and options (including warrants, bonds, debentures, notes and any securities which carry rights to subscribe for or are convertible into the shares in the Company) which would or might require the exercise of such powers after the end of the Relevant Period;
(c) the aggregate nominal amount of share capital allotted, issued or dealt with or agreed conditionally or unconditionally to be allotted, issued or dealt with (whether pursuant to options or otherwise) by the directors of the Company pursuant to the approval in paragraph (a) of this resolution, otherwise than pursuant to (i) a Rights Issue (as hereinafter defined); or (ii) the grant or exercise of any option under any share option scheme of the Company or any other option, scheme or similar arrangement for the time being adopted for the grant or issue to officers and/or employees of the Company and/or any of its subsidiaries of shares in the Company or rights to acquire shares in the Company; or (iii) any scrip dividend or similar arrangement providing for the allotment of shares in lieu of the whole or part of a dividend on shares in the Company in accordance with the Articles of Association of the Company in force from time to time; or (iv) any issue of shares in the Company upon the exercise of rights of subscription or conversion under the terms of any warrants or convertible bonds issued by the Company or any securities

Wafer Systems Limited Annual Report 2002

Notice of Annual General Meeting

which carry rights to subscribe for or are convertible into shares in the Company, shall not exceed 20% of the aggregate nominal amount of the share capital of the Company in issue on the date of the passing this resolution and the authority pursuant to paragraph (a) of this resolution shall be limited accordingly; and

(d) for the purpose of this resolution,

“Relevant Period” means the period from the date of the passing this resolution until whichever is the earliest of:

(i) the conclusion of the next annual general meeting of the Company;
(ii) the expiration of the period within which the next annual general meeting of the Company is required by the Articles of Association of the Company or any applicable law of the Cayman Islands to be held; and
(iii) the passing of an ordinary resolution by the shareholders of the Company in general meeting revoking or varying the authority given to the directors of the Company by this resolution.

“Rights Issue” means an offer of shares in the Company, or offer or issue of warrants, options or other securities giving rights to subscribe for shares open for a period fixed by the directors of the Company to holders of shares in the Company on the register on a fixed record date in proportion to their then holdings of such shares (subject to such exclusions or other arrangements as the directors of the Company may deem necessary or expedient in relation to fractional entitlements, or having regard to any restrictions or obligations under the laws of, or the requirements of, or the expense or delay which may be involved in determining the existence or extent of any restrictions or obligations under the laws of, or the requirements of, any jurisdiction applicable to the Company, or any recognized regulatory body or any stock exchange in any territory applicable to the Company).”

(2) “ THAT :

(a) subject to paragraph (b) of this resolution, the exercise by the directors of the Company during the Relevant Period (as hereinafter defined) of all the powers of the Company to repurchase shares in the capital of the Company on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited or any other stock exchange on which the shares in the Company may be listed and recognized by the Securities and Futures Commission and The Stock Exchange of Hong Kong Limited for such purpose, subject to and in accordance with the rules and regulations of the Securities and Future Commission, The Stock Exchange of Hong Kong Limited, the Companies Law of the Cayman Islands and all other applicable laws in this regard, be and the same is hereby generally and unconditionally approved;

Wafer Systems Limited Annual Report 2002

Notice of Annual General Meeting

(b) the aggregate nominal amount of shares in the Company which the Company is authorised to repurchase pursuant to the approval in paragraph (a) of this resolution during the Relevant Period shall not exceed 10% of the aggregate nominal amount of the issued share capital of the Company as at the date of the passing of this resolution and the authority pursuant to paragraph (a) of this resolution shall be limited accordingly;
(c) for the purpose of this resolution,

“Relevant Period” means the period from the date of the passing of this resolution until whichever is the earliest of:

(i) the conclusion of the next annual general meeting of the Company;
(ii) the expiration of the period within which the next annual general meeting of the Company is required by the Articles of Association of the Company or any other applicable law of the Cayman Islands to be held; and
(iii) the passing of an ordinary resolution by the shareholders of the Company in general meeting revoking or varying the authority given to the directors of the Company by this resolution.”

(3) “ THAT :

Conditional upon resolution Nos. (1) and (2) set out in item 4 of the notice convening this meeting being passed, the general mandate granted to the directors of the Company to allot, issue and deal with additional shares in the Company pursuant to the said resolution No. (1) be and is hereby extended by the addition thereto of an amount representing the aggregate nominal amount of shares in the capital of the Company which are repurchased by the Company under the authority granted to the directors of the Company pursuant to the said resolution No. (2), provided that the amount of shares so repurchased by the Company shall not exceed 10% of the aggregate nominal amount of the issued share capital of the Company on the date of this resolution.”

(4) “ THAT :

“The refreshment of the scheme limit of the Company’s share option scheme adopted on 20 April 2002 and all other share option schemes of the Company, up to 10% of the number of shares in the capital of the Company in issue as at the date of passing this resolution (the “New Scheme Limit”) be and is hereby approved and any director of the Company be and is hereby authorised to do such acts and execute such documents to effect the New Scheme Limit.”

By Order of the Board

Chan Sek Keung, Ringo

Chairman and Chief Executive Officer

Hong Kong, 26th March, 2003

Wafer Systems Limited Annual Report 2002

Notice of Annual General Meeting

Notes:

A member of the Company entitled to attend and vote at the above meeting is entitled to appoint not more than two proxies to attend and, on a poll, vote instead of him. A proxy need not be a member of the Company.
In order to be valid, a form of proxy together with the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy thereof, must be deposited at the Company’s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong no later than 48 hours before the time appointed for the meeting (or any adjournment thereof).
With regard to ordinary resolution No. (2) set out in item 4 of this notice, an explanatory statement containing information regarding the repurchase by the Company of its own shares will be sent to shareholders of the Company together with the 2002 Annual Report of the Company.

Wafer Systems Limited Annual Report 2002

AI assistant

Crypto Flow Technology Limited — Annual Report 2003

51323_rns_2003-04-03_a353e672-1e7f-4b2a-bd3d-68893c7b1c30.pdf

Wafer Systems Limited (incorporated in the Cayman Islands with limited liability)

Table of Contents

Corporate Information

BOARD OF DIRECTORS

Executive Director

AUTHORIZED REPRESENTATIVES

REGISTERED OFFICE

Non-Executive Directors

Independent Non-Executive Directors

COMPANY SECRETARY

QUALIFIED ACCOUNTANT

HEAD OFFICE AND PRINCIPAL PLACE OF BUSINESS

PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE

COMPLIANCE OFFICER

AUDIT COMMITTEE

ADVISORS

HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE

Corporate Information

PRINCIPAL BANKERS

LEGAL ADVISORS

SPONSORS

WEBSITE ADDRESS

AUDITORS

STOCK CODE

Chairman’s Statement

TO OUR SHAREHOLDERS

FINANCIAL PERFORMANCE

Chairman’s Statement

FINAL DIVIDENDS

BUSINESS REVIEW

Network Infrastructure

Professional Services

Chairman’s Statement

Network Software

PROSPECTS

CONCLUSION

Chan Sek Keung, Ringo

Comparison of Business Objectives with Actual Business Progress

Comparison of Business Objectives with Actual Business Progress

Comparison of Business Objectives with Actual Business Progress

Biographical Details of Directors and Senior Management

EXECUTIVE DIRECTOR

NON-EXECUTIVE DIRECTORS

INDEPENDENT NON-EXECUTIVE DIRECTORS

Biographical Details of Directors and Senior Management

SENIOR MANAGEMENT

Management Discussion and Analysis

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

ORDER BOOK AND PROSPECTS OF NEW BUSINESS

CHARGES ON GROUP ASSETS

GEARING RATIO

FOREIGN EXCHANGE EXPOSURE

Management Discussion and Analysis

CONTINGENT LIABILITIES

ACQUISITIONS, DISPOSALS AND SIGNIFICANT INVESTMENT

FUTURE PLANS FOR INVESTMENTS OR CAPITAL ASSETS AND SOURCES OF FUNDING

EMPLOYEE INFORMATION

USE OF PROCEEDS

Directors’ Report

PUBLIC LISTING

PRINCIPAL ACTIVITIES

RESULTS

SHARE CAPITAL

RESERVES

PROPERTY, PLANT AND EQUIPMENT

Directors’ Report

DIRECTORS AND SERVICE CONTRACTS

Executive director:

Non-executive directors:

Independent non-executive directors:

DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS IN SECURITIES

Directors’ Report

DIRECTORS’ AND CHIEF EXECUTIVE’S RIGHTS TO ACQUIRE SHARES OR DEBENTURES

SUBSTANTIAL SHAREHOLDERS

Directors’ Report

SHARE OPTIONS

(a) Pre-listing share option scheme

Crypto Flow Technology Limited Annual Report 2003