Crypto Flow Technology Limited - Annual Report 2007

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Melco LottVentures Limited 新濠環彩有限公司

(formerly known as Wafer Systems Limited)

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 8198)

ANNUAL RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 31 DECEMBER 2007

CHARACTERISTICS OF THE GROWTH ENTERPRISE MARKET (“GEM”) OF THE STOCK EXCHANGE OF HONG KONG LIMITED (THE “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 be 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 Exchange takes no responsibility for the contents of this announcement, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

As at the date of this announcement, the Board consists of two executive Directors, namely Mr. CHAN Sek Keung, Ringo and Mr. KO Chun Fung, Henry, and three independent non-executive Directors, namely Mr. David TSOI, PANG Hing Chung, Alfred and Mr. SO Lie Mo, Raymond.

This announcement, for which the directors (the “Directors”) of Melco LottVentures Limited (the “Company”) collectively and individually accept full responsibility, includes particulars given in compliance with the Rules Governing the Listing of Securities on the GEM of the Exchange (the “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.

CHAIRMAN’S STATEMENT

TO OUR SHAREHOLDERS

For and on behalf of the board of directors (the “Board”), I am pleased to present the annual results of Melco LottVentures Limited (the “Company”) (formerly known as Wafer Systems Limited) and its subsidiaries (collectively, “Melco LottVentures” or the “Group”) for the year ended 31 December 2007 (the “Review Period”).

During the Review Period, turnover of the Group increased by approximately 11% to approximately HK$362 million (2006: HK$327 million). However, a technical application of the accounting rules required an accrual for an impairment loss on goodwill of approximately HK$416 million in connection with a very substantial acquisition completed at the end of the Review Period; and this led to the Group reporting a net loss of HK$416.38 million (2006: net profit HK$5.10 million). Should such non-cash expenses be excluded, the Group EBITDA would increase by approximately 15% to HK$17.10 million (2006: HK$14.81 million).

Details of the Group’s segmental performance during the Review Period are discussed further in the following pages under the Management Discussion and Analysis section.

FINAL DIVIDEND

The Board does not recommend payment of any dividend for the year ended 31 December 2007 (2006: Nil).

BUSINESS REVIEW

The Group’s traditional network system integration business continued to improve during the Review Period despite keen competition in the market. The improved performance of this segment was mainly attributable to the ability of the Group to offer higher value-added solutions, seamless collaboration with suppliers, continued trust from loyal customers and the innovation and hard work of its staff.

The past year was a ground breaking one for the Group. Hitherto, the Group was in the sole business of network system integration. During the year, the Group gained access to the lucrative and fast growing lottery market in Asia by acquiring a lottery business owned by a consortium led by Hong Kong-listed Melco Group (HKEx: 200), and partnered by Taiwan-listed Firich Enterprises Co. Ltd. (“Firich”: 8076 TT) and Singapore-listed LottVision Ltd. (“LottVision”: LottVis SI) on 22 October 2007. The three companies have great faith in the management of the Group and confidence in the synergies that would arise from partnering with us and accordingly, have injected their Asian lottery businesses into the

Group in exchange for shares and convertible bonds in the Company. This gave the Group immediate entry into the China lottery market. It now owns one of the largest lottery sales networks in the PRC and provides a comprehensive range of lottery-related services including:

Venue management consultancy services (over 550 venues under management);
Provision of game software;
Lottery terminal distribution (The Group’s terminal distribution arm, is one the largest suppliers to the China Sports Lottery Administrative Centre (“CSLA”), and supplied 60% of all terminals acquired by the CSLA in 2006;
Wholesale distribution of scratch cards; and
Manufacture of lottery vending terminals

The lottery business will continue to benefit from the networks, pedigree and connections of the consortium in their capacity as strategic shareholders in the Company.

To reflect the close relationship the Company has with Melco Group, its English name was changed to Melco LottVentures Limited and its official Chinese name is now “新濠環彩有限公司”.

PROSPECTS

In the coming years, the Group will continue to capitalise on its capability in network system integration to strengthen its foothold in China with development emphasis on the lottery business management service.

For lottery related business, the Group is looking at the large and lucrative Asian market. Starting with China, where the group already has a strong presence across the various industry verticles, such as venue management, supply of games, scratch card distribution, and lottery vending terminal manufacturing and distribution.

The lottery market has seen explosive growth in:–

Lottery sales in China grew 15-fold from 1997 to 2006, to reach RMB82 billion.
In 2007, total lottery sales reached RMB100 billion, a year-on-year growth of 22%.

Furthermore, new products and services are expected to be approved by the Chinese sports authorities for the lottery playing public and the growth in this market is expected to maintain its existing trajectory.

Apart from expanding service coverage and number of outlets, the Group is also expanding its geographical footprint in Asia. The Group has reached an agreement to acquire KTeMS Co. Ltd., which is the operator of, and holds a 14% stake in, the Nanum Lotto Consortium. Nanum Lotto is the government authorised consortium that has the monopoly over the South Korean Welfare Lottery market estimated at US$2.3 billion in 2007. The proposed acquisition is currently pending shareholder approval.

The Group will also aggressively pursue other lottery opportunities in Asia. With its booming economies backed by solid economic growth of the past years, there is a greater propensity for Asia’s large populations to apportion disposal income to entertainment avenues such as lotteries.

The Group has assembled a comprehensive suite of service offerings for the Asian Lottery market. This is an opportune time for a strong Asian player with an understanding of local markets to take the lead in the lottery industry. The Group is poised for success by leveraging the considerable resources at its disposal, namely:–

The strength and exposure of the Group in lottery business management;
The professional expertise of its management team;
Support from international partners; and
Synergies with the renowned Melco Group and other strategic shareholders.

Together, these will propel Melco LottVentures Ltd. into the league of top lottery market players in Asia.

CONCLUSION

On behalf of the Board of Directors, I would like to take the opportunity to thank all staff members for their contribution in the past year. My thanks also go to our customers, suppliers, bankers, business partners, shareholders for their continued trust and support in the past year. I look forward to building Melco LottVentures into a successful corporation and growing its business with all staff members in the years ahead.

Last but not least, to my fellow directors, thank you for your wise counsel and support to me personally and your contribution of time and efforts to the Group during the year.

To our faithful shareholders, I would say, that it has been six years now since the Group was listed on the GEM Board of the Hong Kong Stock Exchange. Over the six years, in spite of the very keen competition and incessant changes in the market, the Group continued to be well-managed, viable and financially healthy. Entering lottery-related businesses has provided the Group new horizons for the coming years. On the one hand, this poses challenges to the leadership capability of the Board leadership, the Group’s senior management and its staff. On the other, the Group, as a cohesive team, will work in concert to overcome these challenges and exploit the exciting opportunities that lie ahead.

CHAN Sek Keung, Ringo

Chairman and Chief Executive Officer

Hong Kong, 26 March 2008

MANAGEMENT DISCUSSION AND ANALYSIS

SIGNIFICANT EVENTS AND DEVELOPMENTS

2007 marked the foray of Melco LottVentures Limited (“the Group”) into the lucrative and fast-growing lottery market in Asia. This move also consolidated our close relationship with Melco International Development Limited (“Melco”), one of the biggest gaming conglomerates listed on the Main Board of the Hong Kong Stock Exchange and founder of the NASDAQ-listed Melco PBL Entertainment (Macau) Limited which holds one of the six gaming licenses in Macau.

During the Review Period, the Group acquired an 80% interest in PAL Development Limited (“PAL”) which was previously jointly owned by Melco and Singapore listed LottVision Limited (“LottVision”) as well as a 60% interest in Oasis Rich International Limited (“Oasis Rich”). which was previously owned by Taiwan listed Firich Enterprises Co., Limited (“Firich”). PAL is engaged in various lotteryrelated businesses and ventures in China. Wu Sheng Computer Technology (Shanghai) Co. Ltd., a wholly owned subsidiary of Oasis Rich, is a Shanghai-based manufacturer of lottery vending terminals and point of sales (POS) systems.

The acquisition was satisfied by the issuance of 72 million new shares and HK$606.8 million worth of convertible bonds to Power Way Group Limited, a consortium led by Melco and is owned as to 54.8% by Melco, 26.9% by Firich and 18.3% by LottVision.

The Group has also recently forayed into the Korean lottery market through a series of loan and equity swaps. On 6 March 2008, it was announced that the Group will acquire the entire issued share capital of a Korean company, KTeMS Co., Ltd (“KTeMS”), at an aggregate consideration of US$12 million (equivalent to approximately HK$93.6 million). The transaction is subject to in-depth due diligence.

KTeMS has a 14% equity interest in Nanum Lotto Co., Ltd (“Nanum Lotto”) which has an exclusive national license to operate off-line lotto games in South Korea. Nanum Lotto is a consortium formed by renowned international and Korean partners. This recent foray into the Korean lotto market marks our first move to expand our lottery business beyond China. Our ultimate goal is to build a company with lottery operations across Asia.

As regards financing, on 19 December 2007, the Group completed a placement of 58 million new shares to international institutional investors and successfully raised net proceeds of approximately HK$104.1 million. The successful fund-raising provides us with the necessary working capital to expand our lottery business in Asia.

In January 2008, the Group proposed to change its name to “Melco LottVentures Limited 新濠環彩有限公司” to highlight its new principal business focus on lottery-related ventures as well as its close relationship with Melco. Backed by the strong gaming expertise and financial strength of the Melco Group, the Group is confident that our experienced international management team will be able to make Melco LottVentures one of the top lottery operators in Asia.

OUTLOOK

The lottery industry in China is going through an industry revolution at the moment. We have already seen substantial growth in lottery sales over the last two years due primarily to the introduction of new games such as scratch cards. Going forward, the proposed introduction of fixed odds sports betting and interactive mobile gaming will no doubt spur further growth.

We are confident that the new lottery business will bring about a transformational change to the Group’s earnings profile as well as its growth potential.

FINANCIAL REVIEW

For the year under review, the Group was engaged in two main business streams, namely (i) network system integration and (ii) lottery management services.

The segmental information shown in Note 4 to the financial statements is reproduced below with some minor re-arrangements:

Segment Result: Network system integration Segment Result: Lottery business management services Group’s operating results Other income Share of profits of jointly controlled entities Impairment loss on goodwill Impairment loss on intangible assets Unallocated corporate expenses Finance costs (Loss)/profit before taxation Income tax expenses (Loss)/profit for the year Minority interests (Loss)/profit for the year attributable to equity holders of the Company	Year ended 31-Dec-07 *HK$’000* 12,890 (4,247 ) 8,643 812 691 (416,000 ) (1,001 ) (390 ) (7,460 ) (414,705 ) (1,676 ) (416,381 ) 933 (415,448 )	Year ended 31-Dec-06 HK$’000 9,864 – 9,864 639 – – – (342 ) (4,104) 6,057 (956) 5,101 – 5,101

Consolidated loss attributable to equity holders of the Company amounted to approximately HK$415.4 million for the Review Period (2006: net profit of approximately HK$5.1 million). The loss was primarily due to the following non-cash items:

(i) A deemed non-cash expense on convertible bonds amounting to HK$1.9 million and;
(ii) An impairment loss on goodwill of HK$416.0 million

Should these non-cash expenses be excluded, the Group would have recorded a consolidated operating EBITDA of approximately HK$17.1 million for the year, an increase of 15.5% over the previous year (2006: HK$14.8 million).

Network System Integration Business

This segment generated revenue of approximately HK$361.6 million (2006: HK$326.6 million), an increase of 10.7% over the previous year. A breakdown of the sales by main business segments is set out as follows:

Network infrastructure service Network professional services Sales of Network software Total	Year ended 31-Dec-2007 *HK$’000* 299,124 58,781 3,740 361,645	Year ended 31-Dec-2006 HK$’000 286,398 38,008 2,205
		326,611

Contribution from Network System Integration increased from approximately HK$9.9 million to approximately HK$12.9 million, an increase of 30.3% over the previous year.

Lottery Business Management Services

The Group’s lottery business is conducted via 80%-owned PAL Development Limited (“PAL”). Its business comprises the following:–

1) Provision of venue management services to over 500 venues for Sports Lottery in 7 provinces in China.
2) Wholesales distribution of scratch cards for both Sports Lottery and Welfare Lottery in China.
3) Provision of technological solutions for Interactive Lottery Games on Mobile Phones.
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For the year ended 31 December 2007, losses from this segment amounted to approximately HK$4.2 million (2006: Nil). Such losses were primarily due to the infrastructure and expansion costs incurred at the early stage of development. As PAL is still in its early investment phase, contribution to the Group’s profitability was negligible in 2007.

Other Income

During the Review Period, other income amounted to HK$812,000 (2006: HK$639,000), the bulk of which was attributable to bank interests which amounted to HK$523,000 (2006: HK$227,000).

Share of profits of jointly controlled entities

During the Review Period, the share of profits of jointly controlled entities amounted to HK$691,000 (2006: Nil). These are made up of the following:

Share of profit of Beijing Telenet Information Technology Limited (“BTI”)(1) Share of loss of PALTECH Company Limited (“PALTECH”)(2)	Year ended 31-Dec-07 *HK$’000* 747 (56 ) 691	Year ended 31-Dec-06 HK$’000 – –
		–

(1) Share of profit of BTI

BTI is a jointly controlled entity owned as to 51% by PAL. BTI is engaged in the distribution of lottery vending terminals in 22 provinces in China. It is the largest authorized lottery vending terminal supplier approved by Sports Lottery.

During the Review Period, operational profit attributable to the Group amounted to approximately HK$747,000 (2006: Nil).

(2) Share of loss of PALTECH

PALTECH is a jointly controlled entity owned as to 60% by PAL. PALTECH is principally engaged in the development of computer systems and software applications and related technologies in connection with the printed lottery and/or online or mobile lottery operations worldwide with a particular focus on Asian market.

During the Review Period, operational loss attributable to the Group amounted to approximately HK$56,000 (2006: Nil).

Loss on Goodwill Impairment

A loss on goodwill impairment amounting to HK$416 million was recorded during the Review Period. This is a non-cash item resulting from the difference between the fair value of the convertible bonds and shares issued at the date of the acquisition of the new businesses and the value of these businesses as estimated by an independent valuers as at 31 December 2007.

Unallocated Corporate Expenses

During the Review Period, unallocated corporate expenses amounted to HK$390,000 (2006: HK$342,000).

Finance Costs

During the Review Period, finance costs amounted to approximately HK$7.5 million (2006: HK$4.1 million). The increase was primarily attributable to the deemed interest expense on the liability component of convertible bonds issued as part of the consideration on the acquisition of PAL and OASIS amounting to approximately HK$1.9 million in order to comply with HKAS 32. It should be noted that this deemed interest expense is notional and of a non-cash nature.

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 other loans.

The Group’s financial and liquidity position remained healthy. As at 31 December 2007, the Group had net current assets of approximately HK$196.6 million, a 222.6% increase over last year end of HK$61.0 million. The current ratio increased from 1.47 to 2.20. Net current assets included bank balances and cash of approximately HK$143.8 million (2006: HK$47.3 million), bank borrowings of approximately HK$45.7 million (2006: HK$49.8 million) and current portion of other loans of approximately HK$31.6 million (2006: HK$23.8million). The increase in bank and cash during the year was mainly due to the net proceeds raised from the issue of new shares in December 2007.

Non-current portion of other loans at year end amounted to approximately HK$5.6 million (2006: HK$5.6 million).

As at 31 December 2007, all assets and liabilities of the Group were denominated in U.S. dollars, Hong Kong dollars and Renminbi.

As at 31 December 2007, the total number of issued ordinary shares of the Group was 432,198,495 of HK$0.01 each (2006: 289,944,745 of HK$0.01 each). The increase in issued shares was due to the allotment of 72,000,000 consideration shares for the acquisition of the new businesses, 58,000,000 subscription share referred to above, as well as the exercise of share options.

ORDER BOOK AND PROSPECTS OF NEW BUSINESS

As at 31 December 2007, the Group had contracts on hand for sales amounting to approximately HK$38.3 million (2006: HK$20.2 million) which would be booked as revenue upon delivery and implementation.

SIGNIFICANT INVESTMENT HELD

The Group did not hold any significant investment at the beginning of the Review Period. Acquisitions during the Review Period are detailed below under the heading “Acquisitions, disposals and significant investments”.

SEGMENTAL INFORMATION

The segmental information of the Group is covered in note 4 to the financial statements.

CHARGES ON GROUP ASSETS

As at 31 December 2007, the Group had a pledged bank deposit of approximately HK$12.4 million (2006: HK$5.0 million) for securing certain banking facilities. No trade receivable was pledged for securing banking facilities as at 31 December 2007 (2006: HK$6.9 million).

Save as disclosed above, the Group did not have any significant charges on assets.

GEARING RATIO

As at 31 December 2007, the gearing ratio, expressed as. total liabilities over total assets, dropped to approximately 0.47 times from approximately 0.68 times as at 31 December 2006.

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 impact of foreign exchange exposure has been insignificant and positive, no hedging or other alternatives have been implemented.

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ACQUISITIONS, DISPOSALS AND SIGNIFICANT INVESTMENT

During the Review Period, the Group had completed the following acquisition:

On 13 December 2007, Rising Move International Limited, a wholly-owned subsidiary of the Group, entered into the agreement with Power Way Group Limited to purchase the 80% of the issued share capital of PAL Development Limited and 60% of the issued share capital of Oasis Rich International Ltd. in a very substantial acquisition. The acquisition was at the consideration of HK$668 million, with approximately HK$61.2 million for the consideration shares and approximately HK$606.8 million being the Convertible bonds. The details please refer to the Circular of the Company dated 19 November 2007.

FUTURE PLANS FOR INVESTMENTS OR CAPITAL ASSETS AND SOURCES OF FUNDING

Other from abovementioned, there are no immediate plans for any significant investments in capital assets. However, the Group will continuously identify investment opportunities which add to the synergetic well being of the Group in the lottery business management sector, to be financed from internal funds or by the bringing in of strategic business partners.

EMPLOYEE INFORMATION

As at 31 December 2007, the Group had 350 employees comprising 27 employees based in Hong Kong and 323 employees based in mainland China. Total employee expense, excluding for directors, was approximately HK$25.5 million (2006: HK$21.5 million) during the Review Period. 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 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.

CONTINGENT LIABILITIES

As at 31 December 2007, the Company has issued corporate guarantees to banks in respect of their general banking facilities totaling HK$77,472,000 (2006: HK$50,400,000) granted to the wholly owned subsidiaries of the Company.

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.

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CORPORATE GOVERNANCE PRACTICES

The Company applies the principles set out in the Code on Corporate Governance Practices (the “Code”) contained in Appendix 15 to the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited (“GEM Listing Rules”) to provide a sound system of checks and balance in the leadership, executive management and business operations of the Group.

In practising corporate governance in line with, sometimes exceeding, the Code provisions, the board of directors of the Company (“Directors” or “the Board”) are conscientious as to the need for transparency of operations of the Company for the benefits of its shareholders and the investing public.

During the year ended 31 December 2007 under review, the Company complied with all the Code provisions except that the roles of the Chairman and Chief Executive Officer of the Company have been performed by the same individual, Mr. Ringo Chan.

The Board considers that, with the board structure and scope of business of the Group, there was no immediate need to divide the two roles between two individuals, as Mr. Chan was able to perform these two roles to the satisfaction of the Board. The Board has been keeping the current structure under review and will propose changes as and when it becomes appropriate in the future.

With the Group having recently expanded into a new business segment and the appointment of a second executive director, the Board is currently evaluating the situation with the view of bringing the Company in compliance with this Code provision.

AUDIT COMMITTEE

The Audit Committee was established for the purposes of reviewing and providing supervision over the financial reporting process and internal controls of the Group.

AUDITED CONSOLIDATED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007

The Board announces the audited consolidated results of the Group for the year ended 31 December 2007 together with the comparative audited consolidated results for 2006 as follows:

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CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2007

Notes
Turnover
3
Cost of sales and services
Gross profit
Other income
Employee benefits costs
Depreciation and amortisation
Impairment loss on goodwill
Impairment loss on intangible assets
Share of profits of jointly controlled entities
Other operating expenses
Finance costs
5
(Loss)/profit before taxation
6
Income tax expenses
7
(Loss)/profit for the year
Attributable to:
Equity holders of the Company
Minority interests
(Loss)/earnings per share – Basic
8

2007
2006
HK$’000
HK$’000
361,936
326,611
(282,323 )
(268,055)

79,613
58,556
812
639
(24,470 )
(20,575 )
(7,331 )
(4,647 )
(416,000 )
–
(1,001 )
–
691
–
(39,559 )
(23,812 )
(7,460 )
(4,104)

(414,705 )
6,057
(1,676 )
(956)

(416,381 )
5,101

(415,448 )
5,101
(933 )
–

(416,381 )
5,101

HK(139.02) cents
HK1.76 cents

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CONSOLIDATED BALANCE SHEET

As at 31 December 2007

Notes Non-current assets Property, plant and equipment 9 Goodwill Intangible assets Interests in jointly controlled entities Loan receivable Current assets Inventories Trade and other receivables 10 Amount due from a jointly controlled entity Amount due from a shareholder of a jointly controlled entity Pledged bank deposits Cash and cash equivalents Current liabilities Trade and other payables 11 Tax payable Amount due to a jointly controlled entity Bank borrowings 12 Other loans 13 Net current assets Total assets less current liabilities Non-current liabilities Other loans 13 Convertible bonds Net assets Capital and reserves Share capital 14 Reserves Total equity attributable to equity holders of the Company Minority interests Total equity	2007 *HK$’000* 32,051 485,026 194,711 97,633 396 809,817 12,057 159,861 1,431 30,348 12,424 143,816 359,937 81,774 2,163 2,140 45,712 31,565 163,354 196,583 1,006,400 5,600 380,030 385,630 620,770 4,322 539,756 544,078 76,692 620,770	2006 HK$’000
		2,032 – 7,753 – –
		9,785
		5,602 133,065 – – 5,013 47,276
		190,956
		54,721 1,548 – 49,843 23,843
		129,955 61,001 70,786
		5,573 –
		5,573 65,213 2,900 62,313 65,213 – 65,213

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2007

At 1 January 2006 Exchange differences on translation of foreign operations Profit for the year Total recognised income and expenses for the year Recognition of equity settled share-based payments At 31 December 2006 and 1 January 2007 Exchange differences on translation of foreign operations Loss for the year Total recognised income and expenses for the year Recognition of equity settled share-based payments Exercise of share options, net of expenses Recognition of equity component of convertible bonds Issue of new shares Transaction costs attributable to issue of new shares Shares issued on acquisition of subsidiaries Minority interests arising from acquisition of interests in subsidiaries At 31 December 2007	Share capital HK$’000 2,900 – – – – 2,900 – – – – 122 – 580 – 720 – 4,322	Share premium HK$’000 55,824 – – – – 55,824 – – – – 4,305 – 103,555 (2,464 ) 172,800 – 334,020	Share-based payments reserve HK$’000 587 – – – 56 643 – – – 157 (441 ) – – – – – 359	Statutory surplus reserve fund HK$’000 1,505 – – – – 1,505 – – – – – – – – – – 1,505	Enterprise expansion fund HK$’000 502 – – – – 502 – – – – – – – – – – 502	Convertible bonds equity reserve HK$’000 – – – – – – – – – – – 611,692 – – – – 611,692	Retained profits/ Exchange (Accumulated reserve losses ) HK$’000 HK$’000 566 (2,458 ) 630 – – 5,101 630 5,101 – – 1,196 2,643 3,287 – – (415,448 ) 3,287 (415,448 ) – – – – – – – – – – – – – – 4,483 (412,805 )	Attributable to equity holders of the Company HK$’000 59,426 630 5,101 5,731 56 65,213 3,287 (415,448 ) (412,161 ) 157 3,986 611,692 104,135 (2,464 ) 173,520 – 544,078	Minority interests HK$’000 – – – – – – – (933 ) (933 ) – – – – – – 77,625 76,692	Total HK$’000 59,426 630 5,101
										5,731 56
										65,213 3,287 (416,381)
										(413,094 ) 157 3,986 611,692 104,135 (2,464 ) 173,520 77,625
										620,770

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NOTES TO THE FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of Compliance

These financial statements have been prepared in accordance with all applicable new and revised Hong Kong Financial Reporting Standards (“HKFRSs”), which collectively includes all applicable individual HKFRSs, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance.

(b) Basis of Preparation of the Financial Statements

The consolidated financial statements for the year comprise the Company and its subsidiaries.

The measurement basis used in the preparation of the financial statements is historical cost basis, except for certain financial instruments, which are measured at fair value.

The preparation of financial statements in conformity to HKFRSs requires management to make judgements, estimates and assumptions that affect the application to policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

2. APPLICATION OF NEW AND REVISED HKFRSs

In the current year, the Group has applied, for the first time, the following new HKFRSs issued by the HKICPA, which are effective for the Group’s financial year beginning on 1 January 2007.

HKAS 1 (Amendment) Capital Disclosures HKFRS 7 Financial Instruments: Disclosures HK(IFRIC) – Int 8 Scope of HKFRS 2 HK(IFRIC) – Int 9 Reassessment of Embedded Derivatives

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The adoption of the new HKFRSs had no material effect on how the results and financial position for the current or prior accounting periods have been prepared and presented. Accordingly, no prior period adjustment has been required.

The Group has not early applied the following new HKFRSs that have been issued but not yet effective.

HKAS 1 (Revised)	Presentation of Financial Statements1
HKAS 23 (Revised)	Borrowing Costs1
HKFRS 8	Operating segments1
HK(IFRIC) – Int 11	HKFRS 2 – Group and Treasury Share Transactions2
HK(IFRIC) – Int 12	Service Concession Arrangements3
HK(IFRIC) – Int 13	Customer Loyalty Programmes4
HK(IFRIC) – Int 14	HKAS 19 – The Limit on a Defined Benefit Asset,
	Minimum Funding Requirements and their Interaction3

1 Effective for annual periods beginning on or after 1 January 2009
2 Effective for annual periods beginning on or after 1 March 2007
3 Effective for annual periods beginning on or after 1 January 2008
4 Effective for annual periods beginning on or after 1 July 2008

The directors of the Company anticipate that the application of these standards or interpretations will have no material impact on the results and the financial position of the Group.

3. TURNOVER

An analysis of the Group’s turnover for the year is as follows:

Network system integration Network infrastructure service Network professional services Sales of network software Lottery business management services Service fee income from management of electronic gaming machine lounges Commission income	2007 *HK$’000* 299,124 58,781 3,740 361,645 161 130 291 361,936	2006 HK$’000 286,398 38,008 2,205
		326,611
		– –
		–
		326,611

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4. SEGMENT REPORTING

Segment information is presented in respect of the Group’s business and geographical segments. Business segment information is chosen as the primary reporting format because this is more relevant to the Group’s internal financial reporting.

Business segments

The Group comprises the following main business segments:

a) Network system integration; and
b) Lottery business management services

An analysis by business segments is as follows:

Network system integration Lottery business management services Other income Share of profits of jointly controlled entities Lottery business management services Impairment loss on goodwill Lottery business management services Impairment loss on intangible assets Network system integration Unallocated corporate expenses Finance costs (Loss)/profit before taxation Income tax expenses (Loss)/profit for the year	Revenue 2007 2006 *HK$’000* HK$’000 361,645 326,611 291 – 361,936 326,611	Results 2007 2006 *HK$’000* HK$’000 12,890 9,864 (4,247 ) – 8,643 9,864 812 639 691 – (416,000 ) – (1,001 ) – (390 ) (342 ) (7,460 ) (4,104) (414,705 ) 6,057 (1,676 ) (956) (416,381 ) 5,101
	2007 *HK$’000* 361,645 291 361,936	2007 *HK$’000* 12,890 (4,247 ) 8,643 812 691 (416,000 ) (1,001 ) (390 ) (7,460 ) (414,705 ) (1,676 ) (416,381 )

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BALANCE SHEET Assets Segment assets Network system integration Lottery business management services Interests in jointly controlled entities Lottery business management services Unallocated corporate assets Total assets Liabilities Segment liabilities Network system integration Lottery business management services Unallocated corporate liabilities Total liabilities OTHER INFORMATION Capital expenditure Network system integration Lottery business management services Depreciation and amortisation Network system integration Lottery business management services Impairment loss on goodwill Lottery business management service Impairment loss on intangible assets Network system integration Impairment loss on trade and retention money receivables Network system integration	2007 *HK$’000* 278,933 97,633 793,188 – 1,169,754 139,949 29,005 380,030 548,984 5,283 1,362 6,645 4,785 2,546 7,331 416,000 1,001 6,829	2006 HK$’000 139,162 – – 61,579
		200,741

		54,722 – 80,806
		135,528

		3,643 –
		3,643

		4,647 –
		4,647

		–

		–

		391

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Geographical segments

The Group’s operations are located in the PRC and Hong Kong (“HK”). An analysis of the Group’s geographical segment information is as follows:

PRC, other than HK HK	Revenue	Revenue
	2007 *HK$’000* 340,553 21,383 361,936	2006 HK$’000 305,263 21,348
		326,611

An analysis of the carrying amount of segment assets and capital expenditure by the geographical area in which the assets are located is as follows:

Carrying amount of Capital expenditure segment assets incurred during theyear 2007 2006 2007 2006 *HK$’000* HK$’000 *HK$’000* HK$’000 PRC, other than HK 1,093,223 191,104 6,518 3,630 HK 76,531 9,637 127 13 1,169,754 200,741 6,645 3,643 FINANCE COSTS 2007 2006 *HK$’000* HK$’000 Interest expenses on bank borrowings wholly repayable within five years 3,054 3,127 Interest expenses on other loans wholly repayable within five years 2,478 977 Effective interest expenses on convertible bonds 1,928 – 7,460 4,104	Capital expenditure incurred during theyear	Capital expenditure incurred during theyear	Capital expenditure incurred during theyear
			2006 HK$’000 3,630 13
			3,643

			2006 HK$’000 3,127 977 –
			4,104

5. FINANCE COSTS

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6. (LOSS)/PROFIT BEFORE TAXATION

(Loss)/profit before taxation has been arrived at after charging/(crediting):

	2007	2006
	*HK$’000*	HK$’000
Amortisation of intangible assets	5,410	2,689
Auditor’s remuneration	990	470
Cost of inventories	282,323	268,055
Depreciation of property, plant and equipment	1,921	1,958
Impairment loss on goodwill	416,000	–
Impairment loss on intangible assets	1,001	–
Impairment loss on inventories	854	551
Impairment loss on trade and retention money receivables	6,829	391
Loss on disposal of property, plant and equipment	2	–
Write off of property, plant and equipment	–	15
Operating lease rentals in respect of minimum
lease payments of land and buildings	2,929	2,096
Research and development costs	361	329
Exchange loss/(gain)	50	(351 )
Bank interest income	(523 )	(227 )
Other interest income	(78 )	–
Reversal of impairment loss on trade and retention money
receivables recognised in prior years	–	(1,444 )

7. INCOME TAX EXPENSES

a) Income tax in the consolidated income statement represents:

Current tax – Provision for PRC enterprise income tax Provision for the year Deferred taxation Origination and reversal of temporary differences	2007 *HK$’000* 1,676 – 1,676	2006 HK$’000 956 –
		956

Hong Kong Profits Tax has not been provided for in the financial statements as the Group has sufficient taxation losses brought forward to offset against the estimated assessable profits for the years ended 31 December 2007 and 2006.

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The charge represents PRC income tax calculated on the estimated assessable profit for the year at the rates applicable to respective PRC subsidiaries.

Certain subsidiaries of the Group operating in the PRC are eligible for certain tax holidays and concessions and were exempted from PRC income tax.

On 16 March 2007, the People’s Republic of China promulgated the Law of the People’s Republic of China on Enterprise Income Tax (the “New Law”) by Order No.63 of the President of the People’s Republic of China. On 6 December 2007, the State Council of the PRC issued Implementation Regulations of the New Law. The New Law and Implementation Regulations will change the tax rate from 33% to 25% for certain subsidiaries of the Group from 1 January 2008. The Group has unutilised tax losses available for offset against future profits; therefore, there is no impact on the deferred tax balance of the Group.

b) Reconciliation between tax expense and accounting (loss)/profit at applicable tax rates:

The charge for the year is reconciled to (loss)/profit before taxation per consolidated income statement as follows:

(Loss)/profit before taxation Notional tax at the rates applicable to profits in the tax jurisdictions concerned Tax effect of non-deductible expenses Tax effect of non-taxable income Tax effect of unrecognised tax losses Tax effect of utilisation of tax losses previously not recognised Tax effect of temporary timing differences Income tax expenses	2007 *HK$’000* (414,705 ) 72,421 (113,267 ) 39,032 (14 ) 221 (69 ) (1,676 )	2006 HK$’000 6,057 (1,403 ) (35,907 ) 37,599 (1,321 ) 187 (111 ) (956 )

8. (LOSS)/EARNINGS PER SHARE

a) Basic (loss)/earnings per share

The calculation of basic (loss)/earnings per share is based on the loss attributable to equity holders of the Company of approximately HK$415,448,000 (2006: profit of HK$5,101,000) and the weighted average of 298,846,213 (2006: 289,944,745) ordinary shares in issue during the year.

b) Diluted (loss)/earnings per share

No diluted loss per share is presented during the year ended 31 December 2007 as the exercises of the potential dilutive ordinary shares would result in a reduction in loss per share.

The diluted earnings per share during the year ended 31 December 2006 was the same as the basic earnings per share as the exercise price of the Company’s outstanding share option was higher than the fair price per share of the Company during the year ended 31 December 2006.

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9. PROPERTY, PLANT AND EQUIPMENT

The Group

Cost At 1 January 2006 Exchange differences Additions Write off At 31 December 2006 and 1 January 2007 Exchange differences Additions Disposal Acquisition of subsidiaries At 31 December 2007 Accumulated depreciation At 1 January 2006 Exchange differences Charge for the year Written back on write off At 31 December 2006 and 1 January 2007 Exchange differences Charge for the year Written back on disposal At 31 December 2007 Net book value At 31 December 2007 At 31 December 2006	Furniture, Machinery fixtures Lottery and and office terminals equipment equipment HK$’000 HK$’000 HK$’000 – 9,572 1,915 – 98 21 – 261 102 – (338 ) (179) – 9,593 1,859 386 531 723 – 1,563 852 – (483 ) (107 ) 9,942 1,476 16,151 10,328 12,680 19,478 – 8,505 1,755 – 92 19 – 705 127 – (335 ) (179 ) – 8,967 1,722 4 484 117 95 628 358 – (450 ) (107 ) 99 9,629 2,090 10,229 3,051 17,388 – 626 137	Motor vehicles HK$’000 894 7 256 – 1,157 61 – – – 1,218 504 6 221 – 731 43 90 – 864 354 426	Tools HK$’000 6,232 75 222 (23) 6,506 425 888 (591 ) 47 7,275 4,707 62 905 (11 ) 5,663 385 750 (552 ) 6,246 1,029 843	Total HK$’000 18,613 201 841 (540) 19,115 2,126 3,303 (1,181 ) 27,616 50,979 15,471 179 1,958 (525) 17,083 1,033 1,921 (1,109) 18,928 32,051 2,032

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10. TRADE AND OTHER RECEIVABLES

Notes Trade receivables (a), (b) Retention money receivables (c) Other receivables Prepaid maintenance charges (d) Prepayment and deposits	The Group	The Group
	2007 *HK$’000* 102,441 11,596 30,020 17 15,787 159,861	2006 HK$’000 113,079 10,696 7,458 1,832 –
		133,065

Notes:

a) An ageing analysis of trade receivables at the balance sheet date is as follows:

Age 0 to 30 days 31 to 90 days 91 to 180 days 181 to 365 days Over 365 days Less: Impairment loss	The Group	The Group
	2007 *HK$’000* 25,539 25,444 24,067 20,409 17,544 113,003 (10,562 ) 102,441	2006 HK$’000 40,652 38,100 17,285 15,909 4,224
		116,170 (3,091)
		113,079

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. All of the trade and other receivables are expected to be recovered within one year.

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b) Impairment of trade receivables

Impairment losses in respect of trade debtors are recorded using an allowance account unless the management of the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is made against trade receivables directly.

The movement in the allowance for doubtful debts during the year, including both specific and collective loss components, is as follows:

At 1 January Impairment loss recognised during the year Reversal of impairment loss recognised in prior years Exchange differences At 31 December	The Group	The Group
	2007 *HK$’000* 3,091 6,829 – 642 10,562	2006 HK$’000 2,986 391 (1,444 ) 1,158
		3,091

Trade receivables are collectively considered to be impaired in accordance with their ageing.

The ageing analysis of trade receivables that are past due but not impaired:

Over 90 days	The Group
	2007 2006 *HK$’000* HK$’000 62,020 37,418

Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, the management of the Group believes that no impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold any collateral over these balances.

c) Retention money receivable represents the progress payments receivable on the contract works of network infrastructure, with age over 180 days.
d) Prepaid maintenance charges which are expected to be expensed within twelve months after the balance sheet date is classified under current assets as it is expected to be realised in the Company’s normal operating cycle.
e) The carrying amounts of trade and other receivables approximate their fair value.
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11. TRADE AND OTHER PAYABLES

Notes Trade payables (a) Other payables	The Group	The Group
	2007 *HK$’000* 33,097 48,677 81,774	2006 HK$’000 43,480 11,241
		54,721

a) An ageing analysis of trade payables at the balance sheet date is as follows:

Age 0 to 30 days 31 to 90 days 91 to 180 days 181 to 365 days Over 365 days 12. BANK BORROWINGS Short-term bank loan repayable within one year Trust receipts and import loans Analysed by: – Secured – Unsecured	The Group	The Group
	2007 2006 *HK$’000* HK$’000 22,659 11,996 6,320 26,637 1,404 3,024 919 949 1,795 874 33,097 43,480 The Group	2006 HK$’000 11,996 26,637 3,024 949 874
		43,480

	2007 *HK$’000* 16,050 29,662 45,712 23,058 22,654 45,712	2006 HK$’000 14,563 35,280
		49,843

		6,208 43,635
		49,843

Short-term bank loan is arranged at fixed interest rate of 6.732% (2006: 6.138%) per annum.

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Trust receipts and import loans are arranged at prevailing market rates ranging from 6.93% to 8.25% (2006: 7.34% to 8.25%).

The management of the Group considers that the carrying amounts of bank borrowings approximate their fair value.

13. OTHER LOANS

Current portion repayable within one year Non-current portion repayable after one year but within two years	The Group	The Group
	2007 *HK$’000* 31,565 5,600 37,165	2006 HK$’000 23,843 5,573
		29,416

Other loans represent advances from a financial institution which is related to a major supplier of the Group. The amounts are unsecured, interest-bearing at rates ranging from 6.69% to 8.06% (2006: 8.05% to 9.54%) and have fixed terms of repayment.

14. SHARE CAPITAL

Notes Ordinary shares of HK$0.01 each Authorised: At 1 January 2006, 31 December 2006 and 1 January 2007 Increase in share capital on 5 December 2007 (a) At 31 December 2007 Issued and fully paid: At 1 January 2006, 31 December 2006 and 1 January 2007 Shares issued on acquisition of subsidiaries (b) Issue of new shares (c) Exercise of share options At 31 December 2007	Number of shares 500,000,000 1,500,000,000 2,000,000,000 289,944,745 72,000,000 58,000,000 12,253,750 432,198,495	Amount HK$’000 5,000 15,000
		20,000

		2,900 720 580 122
		4,322

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Notes:

a) By a special resolution passed at an extraordinary general meeting of the Company held on 5 December 2007, the authorised share capital of the Company was increased from 500 million to 2,000 million ordinary shares of HK$0.01 each.
b) On 13 December 2007, the Company issued and allotted 72,000,000 ordinary shares of the Company of HK$0.01 each at the issue price of HK$0.85 each as part of the consideration for the acquisition of PAL Development Limited and Oasis Rich International Limited. These shares rank pari passu in all respects with other shares in issue.
c) On 19 December 2007, the Company issued and allotted 58,000,000 ordinary shares of the Company of HK$0.01 each at the issue price of HK$1.8 each to certain subscribers, pursuant to the subscription agreement entered into between the Company and the subscribers. These shares rank pari passu in all respects with other shares in issue. The details of the above transaction refer to the Company’s announcement dated 31 October 2007.

15. POST BALANCE SHEET EVENTS

a) On 9 January 2008, Wu Sheng Computer Technology (Shanghai) Co., Limited (“Wu Sheng”), an indirect subsidiary of the Group, entered into (i) a purchase agreement with Firich Enterprise Co., Ltd (“Firich”) to purchase the materials and unfinished parts for manufacture of point-on-sale and lottery vending terminals from Firich at the maximum amounts of approximately HK$265,000,000, HK$275,000,000 and HK$350,000,000 for the three years ending 31 December 2008, 2009 and 2010 respectively; and (ii) a sale agreement for sale of point-on-sale and lottery vending terminals to Firich at the maximum amounts of approximately HK$115,000,000, HK$200,000,000 and HK$260,000,000 for the three years ending 31 December 2008, 2009 and 2010 respectively. Firich is a shareholder of the substantial shareholder, Power Way Group Limited, of the Company. The details of the above transaction refer to the Company’s announcement dated 9 January 2008.
b) On 26 March 2008, the Company changed its name from Wafer Systems Limited to “Melco LottVentures Limited”. The details refer to the Company announcement dated 26 March 2008.
c) On 28 February 2008, Gain Advance Group Limited, a wholly owned subsidiary incorporated by the Group in 2008, entered into an agreement with Ho Sung Nam (“Mr. Ho”), who is a shareholder of KTeMS Co., Ltd (“KTeMS”) and director of the Group’s jointly controlled entity, and certain independent third parties for the acquisition of the entire issued share capital of KTeMS, which was incorporated in Korea with limited liability, for a consideration of US$12,000,000 (equivalent to approximately HK$93,600,000) and the acquisition of the debts due from KTeMS of approximately HK$78,720,000. The acquisition consideration of US$12,000,000 is satisfied by (i) cash of US$3,500,000 (equivalent to approximately HK$27,300,000); (ii) the Company’s new shares of US$6,500,000 (equivalent to approximately HK$50,700,000); and (iii) the reassignment of loans due from Mr. Ho to the Group and LottVision Limited (“LottVision”) of approximately HK$7,400,000 and HK$8,200,000 respectively. LottVision is a shareholder of the substantial shareholder, Power Way Group Limited, of the Company. The details of the above transaction refer to the Company’s announcement dated 6 March 2008.

By Order of the Board Melco LottVentures Limited Chan Sek Keung, Ringo Chairman and Chief Executive Officer

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

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