Crypto Flow Technology Limited - Interim / Quarterly Report 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)

INTERIM REPORT FOR THE SIX MONTHS ENDED 30 JUNE 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 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 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 and Mr. Tsoi Tai Wai, David.

This report, 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 report is accurate and complete in all material respects and not misleading; (ii) there are no other matters the omission of which would make any statement in this report misleading; and (iii) all opinions expressed in this report have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

* For identification purpose only

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 six months ended 30 June 2004 (the “Review Period”) together with the comparative unaudited figures for the corresponding period in 2003.

In the first half of 2004, the Group continued to execute its business strategy and aligned closely with the evolving needs of its customers. While serving the traditional market segments which the Group is strong at, such as the telecom service providers and multi-national corporations (“MNCs”), the Group managed to go deeper, such as into the automobile manufacturing sector amongst the MNCs in China, during the Review Period.

BUSINESS OVERVIEW AND REVIEW

Financial Highlights

Q2/2004 Q1/2004 Change Q2/2003 Change HK$’000 HK$’000 HK$’000	Q2/2004 Q1/2004 Change Q2/2003 Change HK$’000 HK$’000 HK$’000	Q2/2004 Q1/2004 Change Q2/2003 Change HK$’000 HK$’000 HK$’000
Turnover Operating profit (loss) Net profit (loss) Basic EPS (HK cents) Contracts on hand at quarter end	55,917 2,106 1,501 0.52 92,700	40,493 +38% 36,085 +55% (596) N/A 1,006 +109% (987) 50 (0.34) 0.02 37,000 +151% 13,800 +572%

Financial Review

The Group’s business in the 2004 second quarter rebounded with sales increased 38% from approximately HK$$40.5 million for the quarter ended 31 March 2004 to approximately HK$55.9 million for the quarter ended 30 June 2004. At the same time, the Group’s bottom line improved significantly from a loss of approximately HK$1.0 million for the quarter ended 31 March 2004 to a profit of approximately HK$1.5 million for the quarter ended 30 June 2004.

During the Review Period, the Group recorded a turnover of approximately HK$96.4 million (2003: HK$94.2 million), a slight 2% increase from that recorded in the corresponding period in 2003. Net profit attributable to shareholders for the Review Period decreased by approximately 52% to approximately HK$514,000 (2003: HK$1.1 million).

Mainland China continued to be the Group’s major market during the Review Period, accounting for approximately 92% (2003: 90%) of the total turnover with the remaining 8% (2003: 10%) generated in Hong Kong. Turnover generated from the Group’s Network Infrastructure business remained at about the same level as the corresponding period in last year amounting to approximately HK$83.2 million. The turnover of the Group’s Professional Services business amounted to approximately HK$12.1 million, while the Group’s Network Software business enjoyed encouraging growth of some 282% to approximately HK$1.1 million during the Review Period.

Interim Dividend

The Board does not recommend the payment of an interim dividend for the six months ended 30 June 2004 (2003: Nil).

– 1 –

Business Review

With well-defined marketing strategy, the Group placed extra efforts into the further penetration of both the MNCs and telecommunication markets by leveraging its next generation network (“NGN”) capabilities. By providing network infrastructure and security solutions to leading operators, such as China Telecom Corporation, the Group has expanded its telecommunications clientele. Penetrating further into the MNCs market segment, the Group now goes to industrial sectors of such market segments. The Group has won contracts from Volkswagen Automotive Co., Ltd., DaimlerChrysler (Mercedes Benz and Chrysler), Toyota Motor Corporation and SAIC GM Wuling Automobile Co., Ltd. and KONE Corporation, paving the way for gaining a strong position in the industrial sector.

Professional Services are at the core of the Group offering. During the Review Period, the Group’s professional services met the evolving needs of MNCs customers and large local corporations in Mainland China, such as Sybase Software (China) Co., Ltd. and EDS (China) Co., Ltd. as well as new customers in the sector of domestic enterprises like Shanghai Posts & Telecommunications Equipment Co. Ltd. and China Telecom Corporation. Besides, the Group also offers network optimization and security solutions to a host of local and international customers, including Schneider Electric (Hong Kong) Limited, QAD Asia Limited, Bookham Technology plc., Hong Kong Interbank Clearing Ltd., and the Sogo department store outlets in both Mainland China and Hong Kong.

In line with the Group’s commitment to research and development, the Group is constantly sharpening its network software to improve their competitiveness. These suites of software include business support systems (“BSS”), operation support systems (“OSS”) and network security solutions, among others. Additionally, the Group has also built up a strategic alliance with the China Division of Cisco Systems Inc. and has also developed good working relations with their Asia Pacific research and development team, with a view to accelerate its development pace in relation to NGN software and solutions, so as to further consolidate its position as a NGN pioneer in the industry.

Prospects

The Group kicked off its business for the third quarter of 2004 with a very healthy backlog order on hand. As at 30 June 2004, total value of the backlog order on hand was approximately HK$92.7 million, comparing with backlog orders of approximately HK$37.0 million and HK$13.8 million, as at 31 March 2004 and 30 June 2003, respectively.

The advent of the NGN is hailed as a milestone in the history of the telecommunications industry. In view of this, the Group has been laying the appropriate groundwork for NGN developments over the years. By providing customers with a portfolio of synergistic businesses including Network Infrastructure, Professional Services and Network Software, the Group has established a strong foothold in the telecommunication industry and MNCs markets. To fully capture the business opportunities arising from the increasing awareness of the NGN trend among telecommunication and MNCs customers, the Group will continue to sharpen its competitiveness in the next half of 2004.

Internet Protocol (“IP”) telephony is another main focus of the Group in the coming quarters. The Group is now negotiating with a number of potential customers to offer them with sophisticated systems and services. A number of new contracts are expected to be concluded in the second half of the year.

Good foundations for the Group’s future growth have been laid in the most functional areas. With the large backlog of orders on hand and the traditionally busier months impending, the Group remains dedicated to achieving the goals of maximizing profitability and value for its investors.

– 2 –

COMPARISON OF BUSINESS OBJECTIVES WITH ACTUAL BUSINESS PROGRESS

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

Business objectives for the Review Period as set Actual business progress in the Review Period out in the Prospectus

Business Development

Establish one additional sales and marketing presence in the Asia Pacific region

The Group was doing this in collaboration with its partners in the region.

Product Development and Service Launches

Network Infrastructure

Further enhance the research and development of IP Multimedia Collaboration Solutions

Enhancement of the IP Multimedia Collaboration Solutions continued during the Review Period.

Promote the latest version of IP Multimedia Collaboration Solutions

Promotion of the latest version if IP Multimedia Collaboration Solutions continues as planned.

Further increase its market share by promoting Infrastructure Solutions and Network Security Solutions, as well as Multimedia Solutions by adopting self-developed software and integrating with video conferencing equipment.

This was in progress as planned.

Professional Services

Further increase its market share by promoting Customer Services, Expert Services and Outsourcing Services

Revenue from this segment stayed at about the same level.

Network Software

Continue the research and development of the NextG IP Billing Software, the Network Management Software and the OSS/BSS Software.

The Group continued the research and development of the NextG Billing Software, etc. under the NGN OSS solutions.

Further increase its market share by promoting the NextG IP Billing Software, the Network Management Software and the OSS/BSS Software.

The Group continued to actively promote its NGN OSS solution.

Sales and Marketing

Promote self-developed software in Asia Pacific Region and further enhance the sales network in the PRC and Southeast Asia.

The Group has been promoting its self-developed software in collaboration with its partners in the region.

Increase efforts in brand building of the Group for its three business segments through comprehensive marketing campaigns in the PRC.

Increased efforts have been put into these areas.

– 3 –

Use of Proceeds from Initial Public Offer

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

	Use of Proceeds	Use of Proceeds
	as stated in the Prospectus		Actual amount
		Up to	utilized up to
	Total	30 June 2004	30 June 2004
	(in HK$ million)	(in HK$ million)	*(in HK$ million)*
Research and development*	6.0	4.9	7.0
Expansion of geographical establishments**	4.0	3.3	0.8
Establishment of network monitoring center	3.0	2.5	2.2
Sales and marketing***	2.0	1.6	1.1
Working capital	4.0	4.0	4.0
Total	19.0	16.3	15.1

The remaining proceeds of approximately HK$ 4.1 million were placed with licensed banks in Hong Kong and Mainland China.

The higher than projected spending on R&D was due to the speeding up of researches on NGN.
** The lower than projected spending was due to the postponement of expansion plans.
*** The lower than projected spending was due to postponement of additional geographical establishment.

MANAGEMENT DISCUSSION & ANALYSIS

Liquidity, Financial Resources and Capital Structure

During the Review Period, the Group continued 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-terms bank loans and convertible bonds.

As at 30 June 2004, the Group had net current assets of approximately HK$43.4 million (31 December 2003: HK$45.7 million), including bank balances and cash of approximately HK$27.8 million (31 December 2003: HK$45.2 million), total short terms bank loans of approximately HK$31.5 million (31 December 2003: HK$33.1 million) and convertible bonds maturing within one year of approximately HK$7.5 million (31 December 2003: HK$9.3 million). The current ratio fell slightly from 1.67 as at 31 December 2003 to about 1.63 as at 30 June 2004. In addition, the Group had total banking facilities of approximately HK$78.5 million (31 December 2003: HK$67.0 million) as at 30 June 2004, of which approximately HK$45.5 million (31 December 2003: HK$43.0 million) had been utilized.

The Group recorded no non-current liabilities (31 December 2003: HK$2.8 million) as at 30 June 2004.

As at 30 June 2004, all assets and liabilities of the Group were denominated in U.S. dollars, Hong Kong dollars and Renminbi.

Acquisitions, Disposals and Significant Investment

The Group had not made any significant acquisitions, disposals and investments during the Review Period.

– 4 –

Segmental Information

The segmental information of the Group is set out in Note 3 of the “Financial Information” in this report.

Employee Information

As at 30 June 2004, the Group had 130 employees (30 June 2003: 131 employees) comprising 22 employees (30 June 2003: 23 employees) based in Hong Kong and 108 employees (30 June 2003: 108 employees) based in Mainland China. The Group continues to provide remuneration packages to employees in accordance with market practices and past performance. In addition to basic remuneration, the Group also provides other benefits such as a mandatory provident fund, medical scheme, share option scheme and staff training programs to employees.

Charges on Group Assets

As at 30 June 2004, the Group did not have any significant charges on its assets.

Gearing Ratio

As at 30 June 2004, the Group’s gearing ratio, total liabilities over total assets, reduced to approximately to 55.7% from approximately 56.5% 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.

Order Book & Prospects for New Business

As at 30 June 2004, the Group had contracts on hand for sales amounting to approximately HK$92.7 million (30 June 2003: HK$13.8 million) which would be booked as revenue upon delivery and implementation.

Contingent Liabilities

Except for those commitments and contingent liabilities set out in the Notes 12 to 13 in the Financial Information section of this Report, the Group had no significant contingent liabilities as at 30 June 2004.

Future plans for Investments or Capital Assets and Sources of Funding

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

– 5 –

FINANCIAL INFORMATION

Condensed Consolidated Income Statement

Notes Turnover 2 Other operating income Changes in materials and equipment Staff costs Depreciation and amortization Other operating expenses Profit from operations 4 Finance costs Profit before taxation Taxation 5 Profit after taxation Minority interest Net profit attributable to shareholders Earnings per share – Basic (cents) 6 – Diluted (cents) 6	(Unaudited) For the three months ended 30 June 2004 2003 *HK$’000* HK$’000 55,917 36,085 36 49 (41,740) (26,224) (4,191) (3,964) (1,290) (1,434) 6,626 (3,506) 2,106 1,006 (585) (956) 1,521 50 (45) – 1,476 50 25 – 1,501 50 0.52 0.02 0.52 N/A	(Unaudited) For the six months ended 30 June 2004 2003 *HK$’000* HK$’000 96,410 94,198 59 88 (72,415) (69,743) (8,110) (8,121) (2,602) (2,819) (11,832) (10,754) 1,510 2,849 (967) (1,784) 543 1,065 (45) – 498 1,065 16 – 514 1,065 0.18 0.37 0.18 N/A	(Unaudited) For the six months ended 30 June 2004 2003 *HK$’000* HK$’000 96,410 94,198 59 88 (72,415) (69,743) (8,110) (8,121) (2,602) (2,819) (11,832) (10,754) 1,510 2,849 (967) (1,784) 543 1,065 (45) – 498 1,065 16 – 514 1,065 0.18 0.37 0.18 N/A
			2,849 (1,784)
			1,065 –
			1,065 –
			1,065

			0.37

			N/A

– 6 –

Condensed Consolidated Balance Sheet

Notes Non-current assets Property, plant and equipment 7 Software product development costs Current assets Inventories Trade and other receivables 8 Pledged bank deposits Bank balances and cash Current liabilities Trade and other payables 9 Taxation Convertible bonds maturing within one year 10 Short-term bank loans Trust receipt and import loans Bank overdrafts Net current assets Total assets less current liabilities Non-current liabilities Convertible bonds maturing after one year 10 Minority interest Net assets Capital and reserves Share capital 11 Reserves Shareholders’ funds	(Unaudited) (Audited) As at As at 30 June 2004 31 December 2003 *HK$’000* HK$’000 4,441 4,606 6,980 6,795 11,421 11,401 13,851 10,623 70,462 56,490 – 1,042 27,834 45,167 112,147 113,322 29,252 24,842 477 481 7,534 9,280 10,935 14,953 19,465 18,103 1,112 – 68,775 67,659 43,372 45,663 54,793 57,064 – 2,804 – – 54,774 54,260 2,900 2,900 51,874 51,360 54,774 54,260	(Unaudited) (Audited) As at As at 30 June 2004 31 December 2003 *HK$’000* HK$’000 4,441 4,606 6,980 6,795 11,421 11,401 13,851 10,623 70,462 56,490 – 1,042 27,834 45,167 112,147 113,322 29,252 24,842 477 481 7,534 9,280 10,935 14,953 19,465 18,103 1,112 – 68,775 67,659 43,372 45,663 54,793 57,064 – 2,804 – – 54,774 54,260 2,900 2,900 51,874 51,360 54,774 54,260
		11,401
		10,623 56,490 1,042 45,167
		113,322
		24,842 481 9,280 14,953 18,103 –
		67,659
		45,663
		57,064
		2,804 –
		54,260

		2,900 51,360
		54,260

– 7 –

Condensed Consolidated Cash Flow Statement

(Unaudited) Six months ended 30 June 2004 *HK$’000* Net cash (used in) generated from operating activities (9,694) Net cash (used in) generated from investing activities (1,580) Net cash used in financing activities (6,059) Net (decrease) increase in cash and cash equivalents (17,333) Cash and cash equivalents at the beginning of period 45,167 Cash and cash equivalents at the end of period 27,834 Analysis of the balances of cash and cash equivalents Bank balances and cash 27,834 Bank overdrafts (1,112) 26,722	(Unaudited) Six months ended 30 June 2003 HK$’000 10,576 1,476 (3,975)
	8,077 14,412
	22,489

	22,489 –
	22,489

Condensed Consolidated Statement of Changes in Equity (Unaudited)

As at 1 January 2003 Exercise of warrants Profit for the six months ended 30 June 2003 As at 30 June 2003 As at 1 January 2004 Profit for the six months ended 30 June 2004 As at 30 June 2004	Share capital HK$’000 2,823 77 2,900 2,900 2,900	Share premium HK$’000 55,824 55,824 55,824 55,824	Statutory surplus reserve fund HK$’000 1,003 1,003 1,003 1,003	Enterprise expansion fund HK$’000 502 502 502 502	Staff welfare fund HK$’000 502 502 502 502	Deficit HK$’000 (7,328) 1,065 (6,263) (6,471) 514 (5,957)	Total HK$’000 53,326 77 1,065
							54,468

							54,260 514
							54,774

– 8 –

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

(1) Basis of Presentation

The condensed financial statements have been prepared in accordance with Hong Kong Financial Reporting Standard – Statement of Standard Accounting Practice No. 25 “Interim Financial Reporting” issued by the Hong Kong Society of Accountants and the applicable disclosure requirements of the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited.

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

The condensed financial statements are unaudited but 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 and the six months ended 30 June 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 thre ended 3 2004 *HK$’000* 49,826 4,946 1,145 55,917 36 55,953	e months 0 June 2003 HK$’000 30,716 5,069 300 36,085 49 36,134	For the six ended 3 2004 *HK$’000* 83,154 12,111 1,145 96,410 59 96,469	months 0 June 2003 HK$’000 81,034 12,864 300
				94,198 88
				94,286

(3) Segment Information

a. Business Segment

An analysis of the Group’s turnover and results by business segment is as follows:

Network infrastructure Professional services Network software Other operating income Central administrative expenses Profit from operations Finance costs Profit before taxation Taxation Profit after taxation Minority interest Net profit attributable to shareholders	(Unaudited) For the six months ended 30 June 2004 Turnover Results *HK$’000* *HK$’000* 83,154 1,625 12,111 502 1,145 (515) 96,410 1,612 59 (161) 1,510 (967) 543 (45) 498 16 514	(Unaudited) For the six months ended 30 June 2003 Turnover Results HK$’000 HK$’000 81,034 2,575 12,864 1,386 300 (866) 94,198 3,095 88 (334) 2,849 (1,784) 1,065 0 1,065 0 1,065	(Unaudited) For the six months ended 30 June 2003 Turnover Results HK$’000 HK$’000 81,034 2,575 12,864 1,386 300 (866) 94,198 3,095 88 (334) 2,849 (1,784) 1,065 0 1,065 0 1,065
			3,095 88 (334)
			2,849 (1,784)
			1,065 0
			1,065 0
			1,065

– 9 –

b. Geographical segment

An analysis of the Group’s turnover by geographical location is as follows:

Hong Kong PRC	(Unaudited) For the six months ended 30 June 2004 2003 *HK$’000* HK$’000 7,659 9,412 88,751 84,786 96,410 94,198	(Unaudited) For the six months ended 30 June 2004 2003 *HK$’000* HK$’000 7,659 9,412 88,751 84,786 96,410 94,198
		94,198

(4) Profit from operations

Profit from operations has been arrived at after charging:

	For the three months		For the six months
	ended 30 June		ended 30 June
	2004	2003	2004	2003
Amortization of software product
development costs	483	565	965	1,153
Depreciation of property, plant and equipment	807	869	1,637	1,666
Staff costs (including directors’ remuneration)	4,191	3,964	8,110	8,121
Loss on disposal of investments in securities	–	360	–	360
Loss on disposal of property, plant and
equipment	10	–	10	–

(5) Taxation

Taxation charges consisted of:

Current taxation: Hong Kong profits tax PRC income tax	For the thre ended 3 2004 *HK$’000* – 45 45	e months 0 June 2003 HK$’000 – – –	For the six ended 3 2004 *HK$’000* – 45 45	months 0 June 2003 HK$’000 – –
				–

No provision for Hong Kong profits tax has been made for the three and six months ended 30 June 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.

(6) Earnings per share

The calculation of basic earnings per share for the three months and the six months ended 30 June 2004 is based on the unaudited net profit attributable to shareholders of approximately HK$1,501,000 (2003: HK$50,000) and approximately HK$514,000 (2003: HK$1,065,000), respectively, and on the weighted average number of approximately 289,945,000 (2003: 285,980,000) shares and approximately 289,945,000 (2003: 284,134,000) shares respectively in issue during these periods.

The calculation of the diluted earnings per share for the three months and the six months ended 30 June 2004 is based on the net profit attributable to shareholders of approximately HK$1,501,000 and approximately HK$514,000, respectively, and on the weighted average number of approximately 290,029,000 shares and approximately 290,309,000 shares respectively.

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

– 10 –

(7) Property, plant and equipment

Movements in property, plant and equipment were:

Cost At 1 January 2004 Additions Disposals At 30 June 2004 Accumulated depreciation At 1 January 2004 Additions Disposals At 30 June 2004 Net book value At 30 June 2004 At 31 December 2003	Computer equipment HK$’000 7,891 1,127 (26) 8,992 5,767 824 (21) 6,570 2,422 2,124	Furniture, fixtures and equipment office equipment HK$’000 1,779 (21) (99) 1,659 1,328 167 (99) 1,396 263 451	Motor vehicle HK$’000 438 – – 438 254 55 – 309 129 184	Tools HK$’000 4,602 421 (174) 4,849 2,755 591 (124) 3,222 1,627 1,847	Total HK$’000 14,710 1,527 (299)
					15,938
					10,104 1,637 (244)
					11,497
					4,441

					4,606

(8) Trade and other receivables

Trade receivables Other receivables Prepaid maintenance charges	As a 30 June 2004 *HK$’000* 60,034 6,764 3,664 70,462	t 31 December 2003 HK$’000 44,132 8,155 4,203
		56,490

There was no change on the Group’s credit policies since 31 December 2003.

The aged analysis of trade receivables is as follows:

Age 0 to 90 days 91 to 180 days 181 to 365 days over 365 days _Less:_allowance for bad and doubtful debts	As a 30 June 2004 *HK$’000* 44,323 5,756 4,266 7,643 61,988 (1,954) 60,034	t 31 December 2003 HK$’000 30,710 4,313 9,942 227
		45,192 (1,060)
		44,132

– 11 –

(9) Trade and other payables

Trade payables Other payables The aged analysis of trade payables is as follows: Age 0 to 90 days 91 to 180 days over 180 days Convertible bonds Within 1 year Between 1 to 2 years	As a 30 June 2004 *HK$’000* 23,562 5,690 29,252 As a 30 June 2004 *HK$’000* 21,296 1,056 1,210 23,562 As a 30 June 2004 *HK$’000* 7,534 – 7,534	t 31 December 2003 HK$’000 14,772 10,070
		24,842

		t 31 December 2003 HK$’000 11,726 28 3,018
		14,772

		t 31 December 2003 HK$’000 9,280 2,804
		12,084

(10) Convertible bonds

In January 2004, the Company redeemed a convertible bond at its face value of HK$4,800,000 on its maturity date.

(11) Share Capital

Authorized – ordinary shares of HK$0.01 each Issued and fully paid – at 1 January 2004 and 30 June 2004	Number of shares 500,000,000 289,944,745	Nominal value HK$’000 5,000

		2,900

(12) Operating lease commitments

As at 30 June 2004, the Group had operating lease commitments of approximately HK$3,636,000 (31 December 2003: HK$4,043,000), out of which approximately HK$2,441,000 was payable within 1 year (31 December 2003: HK$2,540,000).

(13) Contingent liabilities

As at 30 June 2004, the Company has given corporate guarantees totaling approximately HK$67,600,000 (31 December 2003: HK$52,000,000) to banks to secure the credit facilities granted to its subsidiaries.

– 12 –

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

As at 30 June 2004, the interests and short positions of the Directors, the chief executive of the Company and their respective associates 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 (“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 4,368,000 Beneficial owner	Family interest –	Corporate interest Capacity 56,400,000 Interest of a (Note) controlled corporation	Other interest –	Total interest in shares 60,768,000	Approximate percentage of the Company’s issued share capital 20.96%

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.

– 13 –

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 June 2004 1 January 2004 30 June 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 to 0.55	Ringo owner 29 April 2012	20 February 2003 – – 1,200,000 1,200,000 20 February 2004 to 0.138	19 February 2013	4,200,000 1.45%	Mr. Pang Hing Chung, Beneficial 30 April 2002 750,000 750,000 – – 17 November 2002 to 0.55	Alfred owner 29 April 2012	20 February 2003 – – 750,000 750,000 20 February 2004 to 0.138	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 to 0.138 0.26%	David owner 19 February 2013	Mr. Alasdair Gordon Beneficial 20 February 2003 – – 375,000 375,000 375,000 20 February 2004 to 0.138 0.13%	Nagle owner 19 February 2013	Ms. Clara Ho Beneficial 20 February 2003 – – 375,000 375,000 375,000 20 February 2004 to 0.138 0.13%	owner 19 February 2013	Mr. Kwan Kit Tong Beneficial 20 February 2003 – – 375,000 375,000 375,000 20 February 2004 to 0.138 0.13%	owne 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”).

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Other than as disclosed above, none of the Directors, the chief executive and their respective associates, 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 June 2004.

REQUIRED STANDARD OF SECURITIES DEALINGS BY DIRECTORS

During the six months ended 30 June 2004, the Company had adopted a code of conduct for directors’ securities transactions 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 with all the Directors, the Directors of the Company confirmed that they had complied with the required standard of dealings and the code of conducts for directors’ securities transactions during the six months ended 30 June 2004.

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

As at 30 June 2004, the following persons or corporations, in addition to the Director 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	Company’s issued
Name of Shareholder	Capacity	interests	of 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	Interest of a controlled	Corporate	48,460,000	16.71%
(Asia) Limited_(Note 2)_	corporation
North 22 Nominees Limited	Beneficial Owner	Corporate	36,900,000	12.73%
Mr. Ng Lai Yick	Beneficial owner	Personal	3,134,744	1.08%
(Note 3)	Interest of a controlled	Corporate	36,900,000	12.73%
	corporation
QPL International	Beneficial Owner	Corporate	35,456,745	12.23%
Holdings Limited
(“QPL”)(Note 4)
Mr. Li Tung Lok	Interest of a controlled	Corporate	35,456,745	12.23%
(Note 4)	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 two convertible bonds issued by the Company with a face value of HK$7,660,000 in aggregate. If these convertible bonds were fully converted on their respective maturity dates, ARC would hold an additional 14,543,383 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$7,660,000	14,543,383
HSBC Private Equity	Investment manager	HK$7,660,000	14,543,383
Technology (Asia)
Limited_(Note 2)_
HSBC Private Equity	Interest of a controlled	HK$7,660,000	14,543,383
(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 June 2004, the Company had redeemed three convertible bonds of face value of HK$4,188,100, HK$3,400,000 and HK$4,800,000 respectively on their maturity date leading to ARC’s underlying interests in Company’s shares being decreased from 38,063,603 shares to 14,543,383 shares.

(2) HSBC Private Equity Technology (Asia) Limited is deemed, by virtue of the SFO, to be interested in 14,543,383 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 14,543,383 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 June 2004.

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 PostIPO Share Option Schemes had lapsed or had been exercised during the Review Period.

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(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 June 2004, options comprising an aggregate of 9,853,000 shares were outstanding, as detailed below:

Exercise price per share HK$ Type of Participants: Directors 0.55 Advisor 0.55 Employees 0.55	Number of share options
	Outstanding Cancelled as at during 1.1.2004 Review Period 3,750,000 – 750,000 – 5,473,000 120,000_(Note)_ 9,973,000 120,000	Outstanding as at 30.6.2004 3,750,000 750,000 5,353,000
		9,853,000

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.

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(b) Post-IPO Share Option Schemes

There have been a total of 4 Post-IPO share options grants. The number 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.

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

	Number of sh	are options
Outstanding G as at 1.1.2004 3,419,000 3,825,000 300,000 3,351,000 7,476,000 385,000 – 11,280,000	ranted during Ca Review Period – – – – – – 2,844,000 2,844,000	ncelled during Review Period (Note1) 175,000 – – 165,000 165,000 – 70,000 410,000	Outstanding as at 30.6.2004 3,244,000
			3,825,000 300,000 3,186,000
			7,311,000
			385,000
			2,774,000
			13,714,000

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.

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Valuation of Share Options

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

(i) the calculation of the value of the options will be based on a number of undetermined but crucial variables such as the subscription price payable for the shares in the Company, the number of options to be granted under the Schemes during their duration, the exercise period, interest rate, expected volatility and other relevant variables. In particular, the duration of the Schemes of 10 years will make these volatile variables very difficult to ascertain with accuracy;
(ii) the generally accepted pricing models of options normally value options which are transferable but the options granted to a grantee under the Schemes are personal to the grantee which are nontransferable and non-assignable and hence calculation of the value of the options granted under the Schemes using such pricing models may not be appropriate; and
(iii) the Directors are of the view that the calculation on speculative assumptions would not be meaningful and would be misleading to shareholders of the Company.

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 competes or may compete with the business of the Group or any other conflict of interests with the interests of the Group.

SPONSOR’S INTERESTS

As confirmed by the Company’s sponsor, CSC Asia Limited (the “Sponsor”), as at 30 June 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.

The Audit Committee consists of two independent non-executive Directors, namely, Mr. Tsoi Tai Wai, David and Mr. Pang Hing Chung, Alfred and the executive Director, Mr. Chan Sek Keung, Ringo. 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.

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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 August 2004

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