Crypto Flow Technology Limited — Annual Report 2004

Mar 30, 2005

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Wafer Systems Limited 威發系統有限公司[*]

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8198)

ANNUAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 31 DECEMBER 2004

CHARACTERISTICS OF THE GROWTH ENTERPRISE MARKET (“GEM”) OF THE STOCK EXCHANGE OF HONG KONG LIMITED (THE “STOCK EXCHANGE”)

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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. GEM-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 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.

As at the date of this report, the executive director of the Company is Mr. Chan Sek Keung, Ringo, the non-executive directors are Ms. Clara Ho, Mr. Alasdair Gordon Nagle and Mr. Kwan Kit Tong and the independent non-executive directors are Mr. Pang Hing Chung, Alfred, Mr. Tsoi Tai Wai, David and Mr. Yu Zhonghou.

This announcement, for which the directors of the Company (the “Director(s)”) 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 (“GEM Listing Rules”) for the purpose of giving information with regard to the Company. The Directors, having made all reasonable 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.

* For identification purpose only

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CHAIRMAN’S STATEMENT

To Our Shareholders

For and on behalf of the board of Directors (the “Board”), I am pleased to present the annual report of Wafer Systems Limited (the “Company”) and its subsidiaries (collectively, “Wafer Systems” or the “Group”) for the year ended 31 December 2004 (the “Review Period”).

Leveraging our efforts in developing businesses surrounding Next Generation Network (“NGN”) technologies, we made progress in business performance during the 2004 financial year, with improvements in both turnover and profits. During the Review Period, turnover increased to approximately HK$270 million (2003: HK$166 million) while net profits improved to approximately HK$3.02 million (2003: HK$0.86 million)

With customer satisfaction in mind as our prime motivator, we will continue to provide the most suitable network infrastructure, professional services and network software to clients who wish to reap the full benefits of NGN operation.

Financial Performance

For the year ended 31 December 2004, the Group achieved a turnover of approximately HK$270 million. It represented an increase of approximately 63% compared with last year’s turnover of approximately HK$166 million. Net profit attributable to shareholders reached approximately HK$3.02 million, an increase of approximately 2.5 times compared with the approximately HK$0.86 million recorded in the year ended 31 December 2003.

Mainland China continued to contribute a substantial portion to the Group’s revenue, accounting for approximately 95% of the Group’s total turnover, while the remaining approximately 5% came from Hong Kong.

During 2004, Network Infrastructure business remained as the Group’s main revenue contributor, generating turnover of approximately HK$241 million, accounting for approximately 89% of the Group’s total turnover. (2003: HK$136 million and 82%). The turnover from Professional Services business amounted to approximately HK$25 million (2003: HK$28 million) while turnover from Network Software was approximately HK$4 million (2003: approximately HK$1.9 million).

As at 31 December 2004, the Group had bank balances and cash totaling approximately HK$40.8 million (2003: HK$45.2 million). Total banking facilities was approximately HK$72 million (2003: HK$67 million), of which approximately HK$49 million (2003: HK$43 million) had been utilized.

Final Dividend

The Board of Directors does not recommend the payment of any dividend for the year ended 31 December 2004. (2003: Nil)

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Business Review

Network infrastructure provides the foundation for service providers in building their NGN-backed operations. During the Review Period, we won contracts from major telecommunications service providers in China, including China Telecom, Shandong Netcom, Shanghai Netcom and China Unicom. The services and technologies we provided, helped strengthen their competitive edges and facilitated their advancement to NGN-backed operations.

In addition to broadening our customer base in major telecommunication service providers, we continued to serve well our traditionally strong market segment, the multinational corporations (the “MNCs”). New customers in this category included KONE Corporation, Federal Express, Dupont, Amway, the German software group SAP and many joint venture industrial undertakings between foreign and Chinese corporations. The Group was awarded the “2004 Cisco China Best IP Communications Partner Award” during the year.

During the Review Period, Wafer Systems also offered a broad range of professional services that met the evolving needs of MNCs as well as large domestic corporations like Shanghai Port & Telecommunication Equipment Co. Ltd., the Shanghai Media Group, Huawei Technologies, Sichuan Chang Hong Electronics, Xin Xiang CATV, etc.

Like in Mainland China, network optimization and security solutions are also in much demand for corporations in Hong Kong. Schneider Electric (Hong Kong), QAD Asia Limited, Bookham Technology plc., Hong Kong Interbank Clearing Ltd., and the outlets of Sogo department stores were our new customers during the Review Period.

On the software front, the Group continued its research and development of the NextG IP Billing Software. The Group developed a suite of Internet Protocol (“IP”) network management and network optimization solutions for customers in the IP telephony industry. Additional sets of software developed also included business support system (“BSS”), operation support system (“OSS”) and network security solutions.

In alliance with the China Division of Cisco Systems Inc. and their headquarters research and development team, the Group expects to accelerate its development of NGN software and solutions, further consolidating its position as an NGN pioneer in the industry.

Prospects

With our first mover advantage in the development of NGN and extensive experience and expertise in providing network infrastructure, professional services and network solutions, Wafer Systems has a solid base for future growth. In fiscal year 2005, NGN will remain as a dominant IT trend and the demand for NGN applications from MNCs and telecommunication service providers is expected to see persistent growth. We will continue to capitalize on this trend and help customers streamline their operations and deliver to them new business applications.

We draw on years of experience in delivering high quality services and solutions to MNCs, telecommunication service providers, manufacturing and enterprise customers. They will continue to support our growth in the coming years. Most importantly, we will actively identify new clients on top of strengthening our recent entry into the cable TV sector. The Group will provide bundled service and products to a number of cable TV operators in major cities in Mainland China.

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As the Group enters the new fiscal year, we will continue our software research and development to meet the needs of NGN operations, and particularly to meet the needs of customers from the IP Telephony sector, a business area of promising prospects for the Group. The Group will also continue to actively promote its NGN operation support systems, network security systems and business support systems, to enlarge its market share.

Customer satisfaction will continue to be the focus of the Group’s business philosophy. No efforts will be spared, while providing customers with what they need for communications efficiency, to assure our customers of our commitment for their satisfaction. This business philosophy is also a guarantee to the continued success of your Group to build on the satisfactory performance of the Review Period.

Conclusion

The accomplishments we made in year 2004 were the direct result of the concerted efforts of our dedicated staff. In addition to the teamwork, for which I am most thankful, the Group’s insistence in observing its vision and mission, and its emphasis on its corporate values were also vital in driving our achievements in the challenging market.

I take the opportunity to also thank our customers, suppliers, bankers, investors, business partners and advisors for their continued trust and support.

I would also like to thank my fellow directors for their wise counsel and contributions during the year.

CHAN Sek Keung, Ringo Chairman and Chief Executive Officer

Hong Kong, 29 March 2005

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MANAGEMENT DISCUSSION AND ANALYSIS

Liquidity, Financial Resources and Capital Structure

During the Review Period, the Group kept its conservative policies in cash and financial management. Surplus funds were placed on interest-bearing deposits with banks. The Group generally financed its operations and serviced its debts with its internal resources, short-term bank loans and convertible bonds.

The Group remained healthy in the financial and liquidity position during the Review Period. As at 31 December 2004, the Group maintained its net current assets steady at approximately HK$46.2 million (2003: HK$45.7 million), a current ratio of 1.57 (2003: 1.67). Net current assets included bank balances and cash of approximately HK$40.8 million (2003: HK$45.2 million), total short term bank loans of approximately HK$47.9 million (2003: HK$33.1 million) and convertible bonds maturing within one year of HK$3.0 million (2003: HK$9.3 million).

The Group had no non-current liabilities (2003: HK$2.8 million) as at year end.

As at 31 December 2004, all assets and liabilities of the Group were denominated in U.S. dollars, Hong Kong dollars and Renminbi.

Order Book and Prospects of New Business

As at 31 December 2004, the Group had contracts on hand for sales amounting to approximately HK$36.6 million (2003: HK$28.1 million) which would be booked as revenue upon delivery and implementation.

Significant Investment Held

The Group had not made any significant investment since floatation or during the Review Period.

Segmental Information

The segmental information of the Group is covered in the second paragraph of Financial Performance under the Chairman’s Statement and in note 2 to the financial statements.

Charges on Group Assets

As at 31 December 2004 and 2003, the Group did not have any significant charges on assets.

Gearing Ratio

As at 31 December 2004, the gearing ratio, i.e. total liabilities over total assets, slightly increased to approximately 0.59 from approximately 0.56 as at 31 December 2003.

Foreign Exchange Exposure

During the Review Period, 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.

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Acquisitions, Disposals and Significant Investment

The Group had not made any significant acquisition, disposal or investment during the Review Period.

Future Plans for Investments or Capital Assets and Sources of Funding

With the exception of those plans set out in the Prospectus, there are no plans for any significant investments in capital assets and sources of funding.

Employee Information

As at 31 December 2004, the Group had 142 employees comprising 21 employees based in Hong Kong and 121 employees based in mainland China. Total staff costs, excluding for directors, was approximately HK$17.3 million (2003: HK$15.5 million) during the Review Period. The Group continues to provide remuneration packages to employees according to market practices and past performance. In addition to basic remuneration, the Group also provides employees with other benefits such as a mandatory provident fund, medical insurance scheme, share option schemes and staff training program. There has been no major change on staff remuneration policies during the year.

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 throughout the year ended 31 December 2004 with the board practices and procedures as set out in Rules 5.28 to 5.39 of the GEM Listing Rules.

In accordance with the revised GEM Listing Rules, Mr. Chan Sek Keung, Ringo, the Chairman and Chief Executive Officer, resigned from the Audit Committee on 23 September 2004 and the vacancy was taken up on the same day by Mr. Yu Zhonghou, independent non-executive director appointed on the same day.

The audit committee comprises of three independent non-executive directors, namely Mr. Tsoi Tai Wai, David, Mr. Pang Hing Chung, Alfred and Mr. Yu Zhonghou. Mr. Tsoi Tai Wai, David is the Chairman of the audit committee.

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

The Company established the remuneration committee of the Board at its meeting held on 26 February 2004 with written terms of reference. The remuneration committee comprises three members, namely independent non-executive directors, Mr. Tsoi Tai Wai, David and Mr. Pang Hing Chung, Alfred and a non-executive director, Ms. Clara Ho. Mr. Tsoi Tai Wai, David is the Chairman of the remuneration committee.

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The Company has adopted a code of conduct regarding securities transactions by directors on terms no less exacting than the required standard of dealings set out in Rules 5.48 to 5.67 of the GEM Listing Rules. Having made specific enquiry of all directors, all directors confirmed they have complied with the required standard set out in the Model Code/the required standard of dealings, and the code of conduct regarding securities transactions by directors adopted by the Company.

The Company has received, from each of the independent non-executive directors, an annual confirmation of his independence pursuant to Rule 5.09 of the GEM Listing Rules. The Company considers all of the independent non-executive directors are independent.

RESULTS

The Board announces the audited consolidated results of the Group for the year ended 31 December 2004 together with the comparative audited consolidated results for 2003 as follows:

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2004

Notes Turnover 2 Other operating income Charges in materials and equipment Staff costs Depreciation and amortisation Other operating expenses Profit from operations 3 Finance costs 4 Profit before taxation Taxation 5 Profit before minority interest Minority interest Net profit attributable to shareholders Earnings per share – Basic 6 – Diluted 6	2004 HK$’000 269,688 747 (219,059) (16,650) (5,297) (23,375) 6,054 (2,593) 3,461 (473) 2,988 35 3,023 1.04 cents 1.04 cents	2003 HK$’000 165,879 510 (125,577) (14,461) (5,134) (16,868) 4,349 (3,207) 1,142 (285) 857 – 857 0.30 cents 0.29 cents

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NOTES

1. BASIS OF PRESENTATION

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

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:

In 2004, the Hong Kong Institute of Certified Public Accountants issued a number of new or revised Hong Kong Accounting Standards and Hong Kong Financial Reporting Standards (herein collectively referred to as “new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new HKFRSs in the financial statements for the year ended 31 December 2004.

The Group has commenced considering the potential impact of these new HKFRSs but is not yet in a position to determine whether these HKFRSs would have a significant impact on how its results of operations and financial position are prepared and presented. These HKFRSs may result in changes in the future as to how the results and financial position are prepared and presented.

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.

2. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business Segments

Business segments for the year are as follows:

Network infrastructure Network professional services Network software Other operating income Central administrative expenses Profit from operations Finance costs Profit before taxation Taxation Profit before minority interest Minority interest Net profit attributable to shareholders	Turnover 2004 2003 HK$’000 HK$’000 240,694 135,775 24,973 28,241 4,021 1,863 269,688 165,879	Results 2004 2003 HK$’000 HK$’000 5,473 3,088 1,728 1,813 (1,437) (725) 5,764 4,176 747 510 (457) (337) 6,054 4,349 (2,593) (3,207) 3,461 1,142 (473) (285) 2,988 857 35 – 3,023 857

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Geographical Segments

The Group’s operations are located in the PRC and Hong Kong. The following table provides an analysis of the Group’s geographical segment information:

PRC Hong Kong	Turnover 2004 2003 HK$’000 HK$’000 255,663 146,830 14,025 19,049 269,688 165,879	Turnover 2004 2003 HK$’000 HK$’000 255,663 146,830 14,025 19,049 269,688 165,879
		165,879

3.

PROFIT FROM OPERATIONS

Profit from operations has been arrived at after charging: Directors’ remuneration Other staff’s retirement benefits scheme contributions Other staff costs Less: Staff costs capitalised in software product development costs Allowance for bad and doubtful debts Amortisation of software product development costs Auditors’ remuneration – current year – overprovision in prior years Depreciation of property, plant and equipment Loss on disposal of investments in securities Loss on disposal of property, plant and equipment Operating lease rentals in respect of land and buildings and after crediting: Interest income FINANCE COSTS Interest on bank borrowings wholly repayable within five years Amortisation of discount on convertible bonds	2004 HK$’000 1,455 1,317 15,974 (2,096) 16,650 2,435 1,989 440 – 3,308 – 9 2,630 261 2004 HK$’000 (2,217) (376) (2,593)	2003 HK$’000 1,470 714 14,747 (2,230)
		14,701
		45 1,762 430 (64) 3,372 362 122 2,314 222
		2003 HK$’000 (2,192) (1,015)
		(3,207)

4. FINANCE COSTS

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5. TAXATION

The charge represents PRC income tax which is calculated at rates applicable to respective PRC subsidiaries.

No provision for Hong Kong Profits Tax has been made in the financial statements 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, two of the Company’s PRC subsidiaries are within their 50% tax relief period, the rest is within its tax exemption period.

6. EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share is based on the following data:

Earnings: Net profit attributable to shareholders for the purposes of basic and diluted earnings per share Number of shares: Weighted average number of ordinary shares for the purposes of basic earnings per share Effect of dilutive potential ordinary shares – warrants – options Weighted average number of ordinary shares for the purposes of diluted earnings per share	2004 HK$3,023,000 289,944,745 – 177,389 290,122,134	2003 HK$857,000
		287,021,272 2,705,303 –
		289,726,575

The computation of diluted earnings per share does not assume the conversion of the Company’s outstanding convertible bonds for both years since their exercise would result in an increase in earnings per share from continuing ordinary operations for both years.

The effect of share options of 2003 was excluded from the calculation of diluted earnings per share because certain exercise price of the Company’s share options was higher than the average market price of ordinary shares.

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MOVEMENT OF RESERVE

At 1 January 2003 Exercise of warrants Net profit attributable to shareholders At 31 December 2003 Net profit attributable to shareholders At 31 December 2004	Share capital HK$’000 2,823 77 – 2,900 – 2,900	Share premium HK$’000 55,824 – – 55,824 – 55,824	Statutory surplus Enterprise reserve expansion fund fund HK$’000 HK$’000 1,003 502 – – – – 1,003 502 – – 1,003 502	Staff welfare fund HK$’000 502 – – 502 – 502	Deficit HK$’000 (7,328) – 857 (6,471) 3,023 (3,448)	Total HK$’000 53,326 77 857
						54,260 3,023
						57,283

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

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