Crypto Flow Technology Limited - Annual Report 2002

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Wafer Systems Limited

(Incorporated in the Cayman Islands with limited liability)

FOR THE YEAR ENDED 31ST DECEMBER 2002

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 GEMlisted issuers.

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

This announcement, for which the Directors 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 announcement 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 announcement misleading; and (iii) all opinions expressed in this announcement have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

CHAIRMAN’S STATEMENT

The successful listing of Wafer Systems Limited (the “Company”) has enabled Wafer Systems Limited and its subsidiaries (collectively “Wafer Systems” or 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 the Group’s presence.

2002 was a year in which both low visibility of the telecommunications market in 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 started 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 the 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 shares 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. 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, who 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 as compared with 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 approximate 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 continued to improve financial resources and liquidity 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.

FINAL DIVIDENDS

The Board of Directors 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 the PRC by establishing sales offices in Changsha and Suzhou. 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 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.

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.

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 service 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 in 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.

CONTINGENT LIABILITIES

Except for those commitments and contingent liabilities set out in Note 9 to Note 11 of 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 continues 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:

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

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

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.

CORPORATE GOVERNANCE

The Company has complied with the broad practices and procedures as set out in Rules 5.28 to 5.39 of the Rules Governing the Listing of Securities on the GEM of the Stock Exchange (the “GEM Listing Rules”) during the period from its listing date to 31st December, 2002.

RESULTS

The board of Directors (the “Board”) announces the audited consolidated results of the Group for the year ended 31st December, 2002 together with the comparative audited consolidated results for 2001 as follows:

Notes Turnover 3 Other operating income Materials and equipment Staff costs Depreciation and amortisation Management fees to business agents, net Other operating expenses (Loss) profit from operations 4 Finance costs 5 (Loss) profit before taxation Taxation 6 Net (loss) profit attributable to shareholders (Loss) earnings per share 7 – Basic – Diluted	2002 *HK$’000* 180,333 424 (138,836) (17,441) (4,771) – (23,923) (4,214) (2,186) (6,400) 551 (5,849) (2.40) cents N/A	2001 HK$’000 149,579 2,263 (109,515) (12,505) (2,697) (3,297) (12,288) 11,540 (3,342) 8,198 (191) 8,007 4.85 cents 3.85 cents

Notes

1. 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.

2. 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.

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.

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.

Taxation

The charge for taxation is based on the results for the year after adjusting for items which are nonassessable 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.

3. 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

Business segments for the year are as follows:

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

BALANCE SHEET Assets Segment assets – network infrastructure – network professional services – network software Unallocated corporate assets Liabilities Segment liabilities – network infrastructure Unallocated corporate liabilities OTHER INFORMATION Capital additions – network infrastructure – network professional services – network software Depreciation and amortisation – network infrastructure – network professional services – network software Gain on disposal of property, plant and equipment – network infrastructure Allowance for bad and doubtful debts – network infrastructure – network professional services – network software	2002 *HK$’000* 85,518 20,984 6,259 53,002 165,763 93,228 19,209 112,437 3,070 1,316 3,784 8,170 2,047 877 1,847 4,771 18 1,397 890 6 2,293	2001 HK$’000 39,537 5,822 5,720 52,201
		103,280

		40,620 40,295
		80,915

		2,803 852 3,082
		6,737

		1,364 415 918
		2,697

		–

		552 58 16
		626

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:

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

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

4. (LOSS) PROFIT FROM OPERATIONS

(Loss) profit from operations has been arrived at after charging: Directors’ remuneration other than fees Other staff costs Other staff’s retirement benefits scheme contributions _Less:_Staff costs capitalised in software products development costs 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	2002 *HK$’000* 1,239 18,033 679 (2,510) 17,441 2,293 1,441 450 3,330 2,823 297 18 311	2001 HK$’000 1,205 12,636 640 (1,976) 12,505 626 666 220 2,031 1,350 455 – 711

5. FINANCE COSTS

Interest on – a convertible note – bank borrowings wholly repayable within five years Amortisation of discount on convertible bonds 6. TAXATION 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	2002 *HK$’000* – (967) (1,219) (2,186) 2002 *HK$’000* – 747 (196) 551	2001 HK$’000 (2,441) (901) – (3,342) 2001 HK$’000 (191) – – (191)

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.

7. (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:

Earnings for the purposes of basic earnings per share
Effect of dilutive potential ordinary shares in respect of convertible note
Earnings for the purpose of diluted earnings per share
Weighted average number of ordinary shares for the purposes of
basic earnings per share
Effect of dilutive potential ordinary shares
– promissory note
– convertible note
– warrants
Weighted average number of ordinary shares for the
purposes of diluted earnings per share

HK$’000
8,007
2,051
10,058
165,221
12,557
70,827
12,755
261,360

8. RESERVES

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

9. 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 non-cancellable operating leases which fall due as follows:

Within one year In the second to fifth year inclusive CAPITAL COMMITMENTS Capital expenditure in respect of investment in the PRC contracted for but not provided in the financial statements	THE GROUP 2002 2001 *HK$’000* HK$’000 2,643 2,587 2,320 2,764 4,963 5,351 THE GROUP 2002 & 2001 HK$’000 769

10. CAPITAL COMMITMENTS

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

11. 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.

By Order of the Board Wafer Systems Limited Chan Sek Keung, Ringo Chairman and Chief Executive Office

Hong Kong, 26th March 2003

This announcement will remain on the “Latest Company Announcements” page of the GEM website for at least seven days from its date of publication.