Crypto Flow Technology Limited — Interim / Quarterly Report 2004

Nov 15, 2004

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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)

THIRD QUARTERLY RESULTS ANNOUNCEMENT FOR THE 9 MONTHS ENDED 30 SEPTEMBER 2004

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 of the Exchange 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. 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 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 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 (the “Directors”) of Wafer Systems Limited (the “Company”) collectively and individually accept full responsibility, includes particulars given in compliance with the Rules Governing the Listing of Securities on GEM (the “GEM Listing Rules”) 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.

* For identification purpose only

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TO OUR SHAREHOLDERS

The board of Directors (the “Board”) is pleased to announce the unaudited consolidated results of the Company and its subsidiaries (collectively, the “Group”) for the nine months ended 30 September 2004 (the “Review Period”) together with comparative unaudited figures for the corresponding period in 2003.

BUSINESS OVERVIEW AND REVIEW

Financial Highlights

	Q3/2004 Q3/2003 Change HK$’000 HK$’000	Q1-Q3/ Q1-Q3/ 2004 2003 Change HK$’000 HK$’000
Turnover Operating Profit Net Profit/(Loss) Basic Earnings/(Loss) Per Share_(HK cents)_ Contracts on hand at quarter end	112,078 33,721 +232% 2,295 233 +885% 1,382 (582) N/A 0.48 (0.20) N/A	208,488 127,919 +63% 3,805 3,082 +23% 1,896 483 +293% 0.65 0.17 +282% 29,058 22,497 +29%

Financial Review

For the Review Period, the Group achieved a turnover of approximately HK$208 million. It represented an increase of approximately 63% compared with the turnover of approximately HK$128 million for the corresponding period last year. Net profit attributable to shareholders rose to approximately HK$1.9 million, representing an increase of approximately 293% against approximately HK$0.5 million in the corresponding period last year. Basic earnings per share and fully diluted earnings per share were both 0.65 HK cents.

During the Review Period, turnover from the Network Infrastructure business increased by approximately 82% to approximately HK$188 million (2003: HK$103 million), accounting for approximately 90% of the Group’s total turnover. As for the Network Software business, turnover increased by approximately 198% to approximately HK$2 million (2003: HK$677,000), while turnover from the Professional Services business was approximately HK$19 million (2003:HK$24 million). Geographically, mainland China continued to be the Group’s major market.

Interim Dividend

The Board does not recommend the payment of an interim dividend for the Review Period. (2003: Nil)

Business Review

The Company’s continuous efforts in developing business surrounding the next generation network (“NGN”) technologies over the years have forged a solid base for the Group’s future growth and created for itself and its clients a win-win situation. The Group is committed to helping clients to strengthen their competitive edges in the industry and progress into NGN-backed operation. These endeavours also underscored new contract wins by the Group from renowned telecommunications service providers including China Telecom, Shandong Netcom, Shanghai Netcom and Guangdong Unicom during the Review Period. With first mover advantages, the Group has been able to provide high quality NGN products, services and solutions compatible with international requirements, capturing the eyes of visionary telecommunications service providers.

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During the Review Period, repeat orders continued to come from the Group’s strong base of multinational corporation (“MNCs”) customers such as the automobile manufacturers, telecommunication service providers and large local enterprises in mainland China. New additions to the Group’s major customers list include SAP, a German software group and locally the Shanghai Media Group. Additionally, with the experience in serving MNCs, the Group also enjoys the trust of customers to capture the immense opportunities arising from the growing trend of MNCs to outsource security management services, including Intrusion Detection Systems (“IDS”) and Intrusion Prevention Systems (“IPS”).

Keeping abreast of market trends and armed with a strong understanding of customer needs, the Group is strategically developing a suite of network software. These advanced software, including internet protocol (“IP”) network management and network optimization solutions, are tailored for customers from the IP telephony industry, a business area of promising prospects for the Group. The Group was recently presented by Cisco Inc. with the Cisco China Best IP Communication Partner Award.

Prospects

The Group kicked off its business for the fourth quarter of 2004 with a healthy backlog of orders on hand. As at 30 September 2004, the total value of the backlog orders on hand was approximately HK$29.1 million, compared with approximately HK$22.5 million as at 30 September 2003.

While the Group’s investment in NGN during the past few years has started to bear fruit, the recurrent traditional business is still very important to us. On one hand, the Group will continue to exploit from its strong hold on market segments like the MNCs, the particular industries, telecommunications service providers and reputable mainland China enterprises for our Network Infrastructure and Professional Services businesses. On the other hand, the Group will continue its foundation laying for the ultimate profit harvesting in the coming years.

Leveraging its solid foundation in NGN, the Board has confidence in the Group attaining even greater advancements in the future and bringing satisfactory returns to our shareholders.

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FINANCIAL INFORMATION

Unaudited Consolidated Financial Results

Notes Turnover 2 Other operating income Changes in materials and equipment Staff costs Depreciation and amortization Other operating expenses Profit from operations 3 Finance costs Profit/(loss) before taxation Taxation 4 Profit/(loss) after taxation Minority interests Net profit/(loss) attributable to shareholders Earnings/(loss) per share – Basic_(cents) _5 – Diluted_(cents) _5

For the three months For the nine months ended 30 September ended 30 September 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 112,078 33,721 208,488 127,919 40 28 99 116 (94,269) (22,737) (166,684) (92,480) (4,280) (4,065) (12,390) (12,186) (1,435) (1,332) (4,037) (4,151) (9,839) (5,382) (21,671) (16,136) 2,295 233 3,805 3,082 (918) (815) (1,885) (2,599) 1,377 (582) 1,920 483 (27) – (72) – 1,350 (582) 1,848 483 32 – 48 – 1,382 (582) 1,896 483 0.48 (0.20) 0.65 0.17 N/A N/A 0.65 N/A

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL RESULTS

(1) Basis of presentation

The unaudited consolidated results have been prepared in accordance with accounting principles generally accepted in Hong Kong and comply with the Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants.

The principal accounting policies and basis of preparation adopted for the preparation of the unaudited consolidated results are consistent with those adopted by the Group in its annual financial statements for the year ended 31 December 2003.

The unaudited consolidated results have been reviewed by the audit committee of the Company (the “Audit Committee”).

(2) Turnover and revenue

An analysis of the Group’s turnover and revenue recognized for the three months and the nine months ended 30 September 2004 together with the comparative figures for the corresponding period in 2003 are as follows:

Network infrastructure Professional services Network software Total turnover Interest income Total revenue	For the three months ended 30 September 2004 2003 HK$’000 HK$’000 104,513 22,218 6,691 11,126 874 377 112,078 33,721 40 28 112,118 33,749	For the nine months ended 30 September 2004 2003 HK$’000 HK$’000 187,667 103,252 18,802 23,990 2,019 677 208,488 127,919 99 116 208,587 128,035	For the nine months ended 30 September 2004 2003 HK$’000 HK$’000 187,667 103,252 18,802 23,990 2,019 677 208,488 127,919 99 116 208,587 128,035
			127,919 116
			128,035

(3) Profit from operations

Profit from operations has been arrived at after charging:

	For the three months	For the three months	For the nine months	For the nine months
	ended 30	September	ended 30 September
	2004	2003	2004	2003
	HK$’000	HK$’000	HK$’000	HK$’000
Amortization of software product development costs	582	462	1,547	1,615
Depreciation of property, plant and equipment	853	870	2,490	2,536
Staff costs (including Directors’ remuneration)	4,280	4,065	12,390	12,186
Loss on disposal of investments in securities	–	–	–	360
Loss on disposal of property, plant and equipment	–	–	10	–

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(4) Taxation

Taxation charges consisted of:

Current taxation – Hong Kong profits tax PRC income tax	For the three months ended 30 September 2004 2003 HK$’000 HK$’000 – – 27 – 27 –	For the nine months ended 30 September 2004 2003 HK$’000 HK$’000 – – 72 – 72 –	For the nine months ended 30 September 2004 2003 HK$’000 HK$’000 – – 72 – 72 –
			–

No provision for Hong Kong profits tax has been made for the three months and nine months ended 30 September 2004 as the Group had no assessable profit arising in or derived from Hong Kong (2003: Nil).

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 Review Period, one of the Company’s PRC subsidiaries is within its tax exemption period, the rest are within their 50% tax relief period.

No deferred tax asset has been recognized in respect of the unutilized tax losses due to the unpredictability of future profit streams.

(5) Earnings per share

The calculation of basic earnings per share for the three months and the nine months ended 30 September 2004 is based on the unaudited net profit attributable to shareholders of approximately HK$1,382,000 (2003: net loss of HK$582,000) and approximately HK$1,896,000 (2003: HK$483,000), respectively and on the weighted average number of approximately 289,945,000 (2003: 289,945,000) shares and approximately 289,945,000 (2003: 286,092,000) shares, respectively, in issue during the period.

The calculation of the diluted earnings per share for the nine months ended 30 September 2004 is based on the net profit attributable to shareholders of approximately HK$1,896,000 and on the weighted average number of approximately 290,215,000 shares.

Diluted earnings per share has not been presented for the three months ended 30 September 2004 and for the three months and nine months ended 30 September 2003 since the effect is anti-dilutive.

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(6) Reserves

As at 1 January 2003 Profit for the nine months ended 30 September 2003 As at 30 September 2003 As at 1 January 2004 Profit for the nine months ended 30 September 2004 As at 30 September 2004	Share premium HK$’000 55,824 – 55,824 55,824 – 55,824	Statutory surplus Enterprise reserves expansion fund fund HK$’000 HK$’000 1,003 502 – – 1,003 502 1,003 502 – – 1,003 502	Staff welfare fund HK$’000 502 – 502 502 – 502	Deficit HK$’000 (7,328) 483 (6,845) (6,471) 1,896 (4,575)	Total HK$’000 50,503 483
					50,986
					51,360 1,896
					53,256

DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS OR SHORT POSITION IN SHARES AND UNDERLYING SHARES OF THE COMPANY

As at 30 September 2004, the interests and short positions of the Directors, the chief executive of the Company and their respective associates (as defined in the GEM Listing Rules) in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)), as recorded in the register required to be kept by the Company pursuant to Section 352 of the SFO or as otherwise notified to the Company and the Exchange pursuant to the required standard of dealings by Directors as referred to in Rule 5.46 of the GEM Listing Rules, were as follows:

(a) Long positions in shares in the Company

Name of Director Mr. Chan Sek Keung, Ringo	Number of shares held	Number of shares held	Number of shares held	Number of shares held	Number of shares held	Number of shares held
	Personal interest Capacity 4,956,000 Beneficial owner	Family interest –	Corporate interest Capacity 56,400,000 Interest of a (Note) controlled corporation	Other interest –	Total interest in shares 61,356,000	Approximate percentage of the Company’s issued share capital 21.16%

Note: Such shares in the Company are held by Woodstock Management Limited (“Woodstock”), a company wholly owned by Mr. Chan Sek Keung, Ringo, who is deemed, by virtue of the SFO, to be interested in these shares.

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(b) Long positions in underlying shares in the Company (Directors’ rights to acquire shares)

										Approximate
			Number of	Number of	Number of	Number of				percentage
			unlisted pre-IPO	unlisted pre-IPO	unlisted post-IPO	unlisted post-IPO				of the
			share option	share option	share option	share option			Exercise	Company’s
			outstanding as at	outstanding as at	outstanding as at	outstanding as at	Aggregate	Exercise period	price of	issued share
Name of Director	Capacity	Date of grant	1 January 2004	30 September 2004	1 January 2004	30 September 2004	interests	of share options	share options	capital
									(HK$)
Mr. Chan Sek Keung,	Beneficial	30 April 2002	3,000,000	3,000,000	–	–		17 November 2002	0.55
Ringo	owner							to 29 April 2012
		20 February 2003	–	–	1,200,000	1,200,000		20 February 2004	0.138
								to 19 February 2013
							4,200,000			1.45%
Mr. Pang Hing Chung,	Beneficial	30 April 2002	750,000	750,000	–	–		17 November 2002	0.55
Alfred	owner							to 29 April 2012
		20 February 2003	–	–	750,000	750,000		20 February 2004	0.138
								to 19 February 2013
							1,500,000			0.52%
Mr. Tsoi Tai Wai,	Beneficial	20 February 2003	–	–	750,000	750,000	750,000	20 February 2004	0.138	0.26%
David	owner							to 19 February 2013
Mr. Alasdair Gordon	Beneficial	20 February 2003	–	–	375,000	375,000	375,000	20 February 2004	0.138	0.13%
Nagle	owner							to 19 February 2013
Ms. Clara Ho	Beneficial	20 February 2003	–	–	375,000	375,000	375,000	20 February 2004	0.138	0.13%
	owner							to 19 February 2013
Mr. Kwan Kit Tong	Beneficial	20 February 2003	–	–	375,000	375,000	375,000	20 February 2004	0.138	0.13%
	owner							to 19 February 2013

Note: Each of the Directors’ interests represent their respective long positions in the underlying shares in the Company by virtue of options granted to the Directors pursuant to a pre-IPO share option scheme and a post-IPO share option scheme both adopted by the Company on 20 April 2002 (further details are set out under the section headed “Share Option Schemes”).

Other than as disclosed above, none of the Directors, the chief executive of the Company and their respective associates (as defined in the GEM Listing Rules), had any interests or short positions in any shares, underlying shares or debentures of the Company or any of its associated corporations as at 30 September 2004.

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REQUIRED STANDARD OF SECURITIES DEALINGS BY DIRECTORS

During the Review Period, the Company had adopted a code of conduct for directors’ securities transactions on terms no less exacting than the required standard of dealing set out in Rules 5.48 to 5.67 of the GEM Listing Rules.

Having made specific enquiry with all the Directors, the Directors confirmed that they had complied with the required standard of dealings and the code of conducts for Directors’ securities transactions during the Review Period.

SUBSTANTIAL SHAREHOLDERS AND OTHER SHAREHOLDERS WHOSE INTERESTS RECORDED UNDER SECTION 336 OF THE SFO

As at 30 September 2004, the following persons or corporations, in addition to the Directors, stated under the section headed “Directors’ and chief executive’s interests or short position in shares and underlying shares of the Company” had interests in the shares and underlying shares in the Company as recorded in the register of interests required to be kept by the Company pursuant to Section 336 of the SFO.

(a) Long positions in share in the Company

				Approximate
				Percentage of the
		Type of	Number of	Company’s issued
Name of shareholder	Capacity	Interests	shares	share capital
The Applied Research	Beneficial owner	Corporate	48,460,000	16.71%
Council (“ARC”)(Note 1)
HSBC Private Equity	Investment manager	Corporate	48,460,000	16.71%
Technology (Asia)
Limited_(Note 2)_
HSBC Private Equity (Asia)	Interest of a controlled	Corporate	48,460,000	16.71%
Limited_(Note 2)_	corporation
North 22 Nominees Limited	Beneficial owner	Corporate	36,900,000	12.73%
Mr. Ng Lai Yick_(Note 3)_	Beneficial owner	Personal	3,134,744	1.08%
	Interest of a controlled	Corporate	36,900,000	12.73%
	corporation
QPL International Holdings	Beneficial owner	Corporate	35,456,745	12.23%
Limited (“QPL”)(Note 4)
Mr. Li Tung Lok_(Note 4)_	Interest of a controlled	Corporate	35,456,745	12.23%
	corporation
Madam Su Ching Wah	Interest of spouse	Family	35,456,745	12.23%
(Note 4)

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Notes:

• (1) ARC is the beneficial owner of these shares. In addition to these shares, ARC also holds a convertible bond issued by the Company with a face value of HK$3,000,000. If this convertible bond were converted on its maturity date on 1 January 2005, ARC would hold an additional 5,695,842 shares in the Company.

• (2) HSBC Private Equity Technology (Asia) Limited is deemed, by virtue of the SFO, to be interested in these shares as it is the investment manager of ARC.

HSBC Private Equity (Asia) Limited is deemed, by virtue of the SFO, to be interested in these shares as HSBC Private Equity Technology (Asia) Limited is its wholly-owned subsidiary.

• (3) Mr. Ng Lai Yick is deemed, by virtue of the SFO, to be interested in the 36,900,000 shares held by North 22 Nominees Limited as the company is wholly-owned by him.

• (4) Mr. Li Tung Lok is the controlling shareholder of QPL and is deemed, by virtue of the SFO, to be interested in the 35,456,745 shares held by QPL.

Madam Su Ching Wah is the spouse of Mr. Li Tung Lok and is deemed, by virtue of the SFO, to be interested in the 35,456,745 shares held by QPL.

(b) Long positions in underlying shares in the Company

		Amount of
		convertible bonds of	Number of
Name of Shareholder	Capacity	the Company issued	underlying Shares
ARC_(Note 1)_	Beneficial owner	HK$3,000,000	5,695,842
HSBC Private Equity	Investment manager	HK$3,000,000	5,695,842
Technology (Asia)
Limited_(Note 2)_
HSBC Private Equity	Interest of a controlled	HK$3,000,000	5,695,842
(Asia) Limited_(Note 2)_	corporation

Notes:

• (1) Pursuant to an agreement dated 26 April 2002 entered into among ARC, the Group and Woodstock, ARC would subscribe for five convertible bonds to be issued by the Company with respective face values of HK$4,188,100, HK$3,400,000, HK$4,800,000, HK$4,660,000 and HK$3,000,000. As at 30 September 2004, the Company had redeemed four convertible bonds of face value of HK$4,188,100, HK$3,400,000, HK$4,800,000 and HK$4,660,000 respectively on their maturity dates leading to ARC’s underlying interests in Company’s shares being decreased from 38,063,603 shares to 5,695,842 shares.

• (2) HSBC Private Equity Technology (Asia) Limited is deemed, by virtue of the SFO, to be interested in 5,695,842 underlying shares held by ARC as the Company is the investment manager of ARC.

HSBC Private Equity (Asia) Limited is deemed, by virtue of the SFO, to be interested in 5,695,842 underlying shares held by ARC as HSBC Private Equity Technology (Asia) Limited is its wholly-owned subsidiary.

Other than as disclosed above, the Company has not been notified of any other relevant interests or short positions in the shares or underlying shares in the Company as at 30 September 2004.

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SHARE OPTION SCHEMES

The Company, in a general meeting held on 20 April 2002, adopted both a pre-IPO share option scheme (the “Pre-IPO Share Option Scheme”) and a post-IPO share option scheme (the “Post-IPO Share Option Scheme”).

Save as disclosed below, no options granted pursuant to either the Pre-IPO Share Option Scheme or the Post-IPO Share Option Schemes had lapsed or had been exercised during the Review Period.

(a) Pre-IPO Share Option Scheme

One single grant of 11,913,000 shares in aggregate was made to various participants on 30 April 2002 under this scheme. As at 30 September 2004, options comprising an aggregate of 9,768,000 shares were outstanding, as detailed below:

			Number of share options	Number of share options
	Exercise		Cancelled
	price	Outstanding	during	Outstanding
	per share	as at 1.1.2004	Review Period	as at	30.9.2004
	HK$
Type of Participants:
Directors	0.55	3,750,000	–		3,750,000
Advisor	0.55	750,000	–		750,000
Employees	0.55	5,473,000	205,000_(Note)_		5,268,000
		9,973,000	205,000		9,768,000

Note: These options were cancelled according to the rules of this scheme due to the employees having left the Group.

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

The above outstanding options may be exercised, in accordance with the terms of the Pre-IPO Share Option Scheme, before 30 April 2012.

(b) Post-IPO Share Option Schemes

There have been a total of 4 Post-IPO share options grants. The numbers of share options granted were 5,277,000 shares on 12 July 2002, 7,859,000 shares on 20 February 2003, 385,000 shares on 10 October 2003 and 2,844,000 shares on 23 February 2004.

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A summary of the Post-IPO Share Option Scheme movements during the Review Period and as at 30 September 2004 is as follows:

Type of Exercisable Exercise Price Date of grant Participants Period per share HK$ 12.7.2002 Employees 12.7.2003 to 0.384 11.7.2012 20.2.2003 Directors 20.2.2004 to 0.138 19.2.2013 Advisors 20.2.2004 to 0.138 19.2.2013 Employees 20.2.2004 to 0.138 19.2.2013 10.10.2003 Employees 10.10.2004 to 0.142 9.10.2013 23.2.2004 Employees 23.2.2005 to 0.165 22.2.2014 (Note 2)	Number of share options
	Outstanding Granted during Cancelled during as at 1.1.2004 Review Period Review Period (Note 1) 3,419,000 – 353,000 3,825,000 – – 300,000 – – 3,351,000 – 248,000 7,476,000 – 248,000 385,000 – 65,000 – 2,844,000 298,000 11,280,000 2,844,000 964,000	Outstanding as at 30.9.2004 3,066,000
		3,825,000 300,000 3,103,000
		7,228,000
		320,000
		2,546,000
		13,160,000

Notes:

• (1) These options were cancelled according to the rules of this scheme due to the employees having left the Group.

• (2) The closing price of the share of the Company immediately before the date on which the options were granted was HK$0.155.

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

The above outstanding options may be exercised within the exercisable period in accordance with the terms of the Post-IPO Share Option Scheme.

COMPETITION AND CONFLICT OF INTERESTS

Each of the Directors and the management shareholders of the Company and their respective associates (as defined in the GEM Listing Rules) has confirmed that none of them had any business or interest in companies that competed or might compete with the business of the Group or any other conflict of interests with the interests of the Group.

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SPONSOR’S INTERESTS

As confirmed by the Company’s sponsor, CSC Asia Limited (the “Sponsor”), as at 30 September 2004, neither the Sponsor nor its directors, employees and associates (as referred in Note 3 to Rule 6.35 of the GEM Listing Rules) had any interest in the securities of the Company or any member of the Group or any right to subscribe for or to nominate persons to subscribe for the securities of the Company, or any members of the Group.

At the time of and subsequent to the listing of shares in the Company on GEM, the Sponsor received and will receive fees under a sponsor’s agreement dated 10 May 2002 between the Company and the Sponsor in connection with services rendered and to be rendered by the Sponsor pursuant to Rules 6.01 and 17.81 of the GEM Listing Rules.

AUDIT COMMITTEE

The Company established the Audit Committee on 29 October 2001 with written terms of reference in compliance with Rules 5.28 to 5.30 of the GEM Listing Rules and with reference to the guidelines published by the Hong Kong Society of Accountants.

In accordance with the revised listing rules, Mr. Ringo Chan, 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, an independent non-executive Director.

The present Audit Committee consists of three independent non-executive Directors, namely, Mr. Tsoi Tai Wai, David, Mr. Pang Hing Chung, Alfred and Mr. Yu Zhonghou. Mr. Tsoi is the chairman of the Audit Committee.

The Audit Committee has reviewed the draft of this report and has provided advice and comments thereon.

BOARD PRACTICES AND PROCEDURES

The Company has complied with the board practices and procedures as set out in Rules 5.34 to 5.45 of the GEM Listing Rules during the Review Period.

PURCHASE, REDEMPTION OR SALE OF LISTED SECURITIES OF THE COMPANY

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

By Order of the Board WAFER SYSTEMS LIMITED CHAN Sek Keung, Ringo Chairman and Chief Executive Officer

Hong Kong, 12 November 2004

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

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