ICO Group Limited — Annual Report 2003

Apr 28, 2004

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JACKIN INTERNATIONAL HOLDINGS LIMITED （輝影國際集團有限公司） *

(Incorporated in Bermuda with limited liability)

(Stock Code: 630)

ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2003

RESULTS

The Board of Directors (“Board”) of Jackin International Holdings Limited (the “Company”) is pleased to announce the audited consolidated results of the Company and its subsidiaries (the “Group”) for the year ended 31 December 2003, together with the comparative figures for the previous year, as follows:

Notes Turnover 2 Cost of sales Gross profit Other operating income 4 Selling and distribution costs Administrative expenses Profit from operations Finance costs Share of profit of an associate Loss on disposal of an associate 5 Profit on disposal of a subsidiary	2003 HK$’000 321,275 (240,512) 80,763 4,880 (15,023) (55,858) 14,762 (11,397) 751 – 3,200	2002 HK$’000 (Restated) 379,759 (278,262) 101,497 5,923 (23,899) (60,512) 23,009 (13,757) 1,609 – 3,559

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JACKIN INTERNATIONAL HOLDINGS LIMITED – Announcement

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Profit before taxation Taxation 6 Profit for the year Minority interests Profit attributable to shareholders Dividends 7 Earnings per share 8 Basic	7,316 (455) 6,861 5,200 12,061 – 3.31 cents	14,420 2,339 16,759 (320) 16,439 1,792 4.59 cents

Notes:

1. ADOPTION OF HONG KONG FINANCIAL REPORTING STANDARD

In the current year, the Group has adopted, for the first time, the following Hong Kong Financial Reporting Standard (“HKFRS”) issued by the Hong Kong Society of Accountants (“HKSA”), the term of HKFRS is inclusive of Statements of Standard Accounting Practice (“SSAP”s) and Interpretations approved by the HKSA:

SSAP 12 (Revised) Income Taxes

The principal effect of the implementation of SSAP 12 (Revised) is in relation to deferred tax. In previous years, partial provision was made for deferred tax using the income statement liability method, i.e. a liability was recognised in respect of timing differences arising, except where those timing differences were not expected to reverse in the foreseeable future. SSAP 12 (Revised) requires the adoption of a balance sheet liability method, whereby deferred tax is recognised in respect of all temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, with limited exceptions. In the absence of any specific transitional requirements in SSAP 12 (Revised), the new accounting policy has been applied retrospectively. Comparative amounts for 2002 have been restated accordingly.

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As a result of this change in policy, the balance of retained profits at 1 January 2002 has been increased by HK$1,031,000, representing the cumulative effect of the change in policy on the results for periods prior to 1 January 2002. The balance on the Group’s properties revaluation reserve at 1 January 2002 has been decreased by HK$1,805,000, representing the deferred tax liability recognised in respect of the revaluation surplus on the Group’s properties at that date. The change has resulted in a decrease in properties revaluation reserve of HK$70,000 for the year ended 31 December 2003 (2002: a decrease of HK$155,000 in the profit for the year ended 31 December 2002).

2. TURNOVER

Turnover represents the aggregate of the amounts received and receivable for goods sold and services rendered, net of returns and allowances, by the Group to outside customers during the year and is analysed as follows:

Manufacture and trading of media products Total fulfilment services Distribution of media products Manufacture and trading of computer accessories	2003 HK$’000 167,678 13,355 122,193 18,049 321,275	2002 HK$’000 229,107 58,377 80,831 11,444
		379,759

3. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

For management purposes, the Group is currently organised into four operating divisions – the manufacture and trading of media products and computer accessories, total fulfilment services, and distribution of media products. These divisions are the basis on which the Group reports its primary segment information.

Segment information about these business segments is presented below.

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	**Manufacture **	Manufacture
	and trading	and trading	Total	Distribution
	of media	of computer	fulfilment	of media
	products	accessories	services	products	**Eliminations **	Consolidated
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Year ended 31 December 2003
Turnover
External sales	203,733	27,223	13,355	122,193	(45,229)	321,275
Inter-segment sales	(36,055)	(9,174)	–	–	45,229	–
Total	167,678	18,049	13,355	122,193	–	321,275
Inter-segment sales are charged at prevailing market rates.
Results
Segment results	36,838	3,781	2,239	27,380	–	70,238
Other operating income						168
Unallocated corporate expenses						(55,644)
Profit from operations						14,762
Finance costs						(11,397)
Share of profit of an associate	751					751
Profit on disposal of a subsidiary	3,200					3,200
Profit before taxation						7,316
Taxation charge						(455)
Profit for the year						6,861

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	**Manufacture **	Manufacture
	and trading	and trading	Total	Distribution
	of media	of computer	fulfilment	of media
	products	accessories	services	products	**Eliminations **	Consolidated
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
						(Restated)
Year ended 31 December 2002
Turnover
External sales	256,828	42,201	58,473	98,576	(76,319)	379,759
Inter-segment sales	(27,721)	(30,757)	(96)	(17,745)	76,319	–
Total	229,107	11,444	58,377	80,831	–	379,759
Inter-segment sales are charged at prevailing market rates.
Results
Segment results	46,851	13,128	5,950	11,030	–	76,959
Other operating income						2,941
Unallocated corporate expenses						(56,891)
Profit from operations						23,009
Finance costs						(13,757)
Share of profit of an associate	1,609					1,609
Profit on disposal of a subsidiary	3,559					3,559
Profit before taxation						14,420
Taxation credit						2,339
Profit for the year						16,759

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4. OTHER OPERATING INCOME

Commission income Interest income Operating lease rental income from plant and machinery Others 5. TAXATION The taxation (charge) credit comprises: Current tax Hong Kong Overseas (Under)overprovision in prior years Hong Kong Overseas Deferred tax credit Current year	The Group 2003 2002 HK$’000 HK$’000 2,746 1,320 168 393 865 1,662 1,101 2,548 4,880 5,923 2003 2002 HK$’000 HK$’000 (Restated) (45) (889) (326) (149) (371) (1,038) (84) – – 90 (84) 90 – 3,427

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Taxation attributable to the Company and its subsidiaries Share of taxation attributable to an associate	(455) – (455)	2,479 (140) 2,339

Hong Kong Profits Tax is calculated at 17.5% (2002:16%) of the estimated assessable profits for the year. The Hong Kong Profits Tax rate has been increased from 16% to 17. 5% with effect from year of assessment 2003/04. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

6. LOSS ON DISPOSAL OF AN ASSOCIATE

During the year, the Group disposed of its associate at a consideration of approximately HK$10 million resulting in a loss of approximately HK$12 million. The directors, based on legal advice, considered such loss would be fully reimbursed by a claim to a customer.

7. DIVIDENDS

Final dividend at Nil (2002: HK0.5 cent) per share proposed EARNINGS PER SHARE The calculation of the basic earnings per share is based on Earnings Earnings for the purposes of basic earnings per share	2003 2002 HK$’000 HK$’000 – 1,792 the following data: 2003 2002 HK$’000 HK$’000 (Restated) 12,061 16,439

8. EARNINGS PER SHARE

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Number of shares

2003

2002

Number of shares for the purposes of basic earnings per share 364,081,059 358,494,000

No diluted earnings per share has been presented as the exercise price of the Company’s outstanding share options and convertible notes was higher than the average market price for both 2003 and 2002.

CHAIRMAN’S STATEMENT

Results

For the year ended 31 December 2003, the Group achieved a profit attributable to shareholders of approximately HK$12 million on a turnover of approximately HK$321 million, as compared with the profit attributable to shareholders of approximately HK$16 million on a turnover of approximately HK$380 million in 2002. The decrease in the turnover and profit was mainly attributable to the SARS outbreak in the first half of the year and the discontinuance of CDs production during the year under review.

Review of Operations

As a consequence of fierce competition within the CDs production industry, the Group (following its scale down and rationalization in this segment in the previous year) has completely ceased its CDs production business during the year under review, which also adversely affected the total fulfillment services business. Whilst these negative factors contributed to the decrease in the Group’s turnover and profit, the Group has however managed to mitigate the effects and maintain its profitability through an increase in sales of conventional media products such as floppy disk.

Distribution of Media Products

The distribution business segment continued to generate revenues for the Group during the reporting year. Turnover this year was approximately HK$122 million, representing a 50.6% growth from approximately HK$81 million recorded last year. The satisfactory performance of the distribution business was mainly achieved by an increase in the variety of its products and the addition of more sub-distributors.

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Although the distribution business was affected by the slack Asian economy because of the SARS epidemic in the first half of the year under review, this business segment was quickly rejuvenated with improving market sentiment when the outbreak of SARS came under control in the second half of the year.

The Group’s higher distribution turnover was achieved through successful expansion of product scope to cover high margin new products, such as digital imaging and consumable data recording products. In order to further expand its income source, the Group continued to explore and solicit distribution rights of new computer accessories and media products, such as DVDR, DVDRW, optical mouse, 8mm storage video cassettes, digital camera, and data cartridge from suppliers with world recognized and reputable brand names. In specific, the sales of USB storage media experienced substantial growth during the year under review.

In line with the Group’s rationalization plan to shift to the distribution business from its manufacturing business, the Group further consolidated its distribution business by obtaining the distribution rights of the media products of a reputable Japanese brand in the PRC. Expansion plans were mapped out to set up retail shops under this Japanese brand name in promoting distribution sales in the years ahead. The Group believes that this new business operation will be able to boost sales volume as the economy bounces back in 2004 and beyond.

On track with its shift in target market from the United States to Asia and China, the sales contribution from the Asian markets (including the PRC) reached approximately HK$178.5 million, accounting for 55.6% of the Group’s total turnover for the year under review. The sales contribution from Europe markets dropped by 51.2% to approximately HK$54.2 million while the sales contribution from the North America markets further dropped by 65.4% to approximately HK$17.1 million.

Computer Media and Accessories Production and Total Fulfillment Services

Sales of computer media, accessories product and total fulfillment services amounted to approximately HK$199.1 million, representing a decrease of 33.4% as compared to last year.

The drop in sales of this segment was mainly attributable to the discontinuance of the CDs production and supply chain management businesses. With the cautious steps it took to scale down the CDs production business in the previous years, the Group succeeded in completely terminating the operations early this year. This movement is favorable to the long-term development of the Group, and is essential in cutting the substantial loss incurred by the business sector in recent years. However, this has also incurred special item expenses involved

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in compensating redundant staff and other finance costs, which impacted adversely on the Group’s total profit for the year under review.

In line with the CDs production business, there was decreasing demand for total fulfillment services. Revenue from total fulfillment services remained minimal.

Nevertheless, the Group continued to gain more floppy disk business from the reducing number of competitors due to consolidation within the industry. The substantial growth in sales of floppy disk helped to offset the reduced revenue from the CDs production and total fulfillment services sectors. Attracted by its competitive prices, major well-known brand names have turned to the Group to meet their conventional demands, further driving the Group’s floppy disk sales. The Group also became one of the two largest floppy disk suppliers in Asia, and anticipated an increase in the number of reputable customers in the future, especially leading Japanese brands.

Prospects

Steady improvement in the global economy since late 2003 has boosted consumer demand for digital imaging products. The Group will continue to rapidly capture such profitable opportunities by diversifying into retail businesses and extending the distribution network throughout the PRC. To cope with this expansion plan, the Group will direct more resources to enrich its product range through soliciting and obtaining more dealerships from leading brands worldwide.

To capture the booming market potential in the PRC, the Group has put special focus in extending its reach to retail consumers of the PRC market during the year under review. Obtaining the distribution rights of the media products of a reputable Japanese brand, the Group set up a retail shop under this brand name in Guangzhou in early 2004, and planned to establish a second retail shop in Shenyang in the second quarter of 2004. These retail shops will focus on the exclusive sale of computer accessories and media products of the renowned Japanese brand. Apart from introducing more product varieties to the consumers in the PRC market, this retail operation is also expected to contribute to the Group’s sales growth in 2004.

In light of the further consolidation of the floppy disk market and the reduction in the number of floppy disk suppliers in worldwide market, the Group aims to secure even more wellknown customers, especially leading Japanese customers, who have continuous demand for blank information storage media products. Looking ahead, the Group is confident that this segment will be a reliable revenue stream with stable growth.

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Meanwhile, in order to enhance profit margins and achieve profitable returns for shareholders, the Group will continue to improve its competitive edge. Steps to be taken will include the implementation of stringent cost control measures, and the generation of business synergies among various segments to enrich operational efficiencies. The Group is also committed to devoting more resources to staff training, empowering both the employees and the Group to become even more sensitive to, and fully capitalize on, new market opportunities.

Conclusion

On behalf of the Board, I would like to express my sincere gratitude to our devoted colleagues for their support and encouragement over the past year. Their efforts have been reflected clearly in the favorable results achieved by the Group during the year. Barring unforeseen circumstances and following the rationalization of the Group’s operation over the last two years, the Board is confident that the Group will be in a better position to meet the challenges ahead.

FINANCIAL REVIEW

Capital and debt structure

The Group continued to maintain a stable financial position. As at 31 December 2003, the Group’s total net assets was approximately HK$300 million (31 December 2002: approximately HK$231 million), representing approximately HK$69 million increase compared with that of previous year, mainly attributable to the following matters incurred during the year under review: (a) profit attributable to shareholders of approximately HK$12 million, (b) issue of shares on exercise of conversion rights under convertible notes of approximately HK$37 million, (c) issue of shares pursuant to placing of approximately HK$10 million and (d) realization on disposal of an associated company of approximately HK$10 million.

As at 31 December 2003, the Group’s total bank borrowings and obligations under finance leases increased by approximately HK$24 million to approximately HK$180 million (31 December 2002: approximately HK$156 million), of which approximately HK$159 million was payable within one year and approximately HK$21 million was payable after one year. Most of the bank borrowings and obligations under finance leases are denominated in Hong Kong dollars and subject to floating interest rates. Hence the risk of currency exposure was minimal. The Group’s total cash and bank balances amounted to approximately HK$44 million (31 December 2002: approximately HK$41 million), representing an increase of approximately HK$3 million.

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The Group’s net debt to equity ratio was 45% (31 December 2002: 50%), which is expressed as a percentage of total bank borrowings and obligations under finance leases after deducting cash and bank balances over the total net assets. The decrease in net debt ratio was mainly due to the Group’s total net assets were strengthened during the year.

Working capital and liquidation

As at 31 December 2003, the Group continued to maintain a stable working capital. The Group slightly improved its current ratio by 0.1 to 1.3 as at 31 December 2003 (31 December 2002: 1.2), also its quick ratio by 0.2 to 1.0 as at 31 December 2003 (31 December 2002: 0.8). However, receivable turnover deteriorated to 61 days (31 December 2002: 44 days) which was mainly due to the concentration of sales orders received from distribution business in the 4th quarter of 2003. Inventory turnover increased to 80 days (31 December 2002: 66 days) due to the accumulation of inventory for the expansion of distribution business in 2004.

The Group had unutilized banking facilities of approximately HK$169 million as at 31 December 2003 (31 December 2002: approximately HK$239 million), which the Directors consider that the unutilized banking facilities are sufficient to meet the Group’s working capital requirement.

Convertible Notes

On 5 January 2001, the Group issued for four interest-free convertible notes for the acquisition of distribution and logistic business.

On 9 September 2003, the holder of two convertible notes, each having a principal amount of HK$2.3 million, exercised the conversion right to convert the whole of the principal amount outstanding under these convertible notes into shares of the Company at HK$0.55 per share. A total of 8,360,000 shares were allotted and issued to the holder upon the exercise of the conversion rights under two of the convertible notes by the holder.

On 24 December 2003, the holder of one convertible note of a principal amount of HK$32.7 million, exercised the conversion right to convert the whole of the principal amount outstanding under this convertible note into shares of the Company at HK$0.55 per share. A total of 59,454,545 shares were allotted and issued to the holder upon the exercise of the conversion right under the convertible note by the holder.

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Subsequently, on 5 January 2004, the remaining convertible note was redeemed (without interest) at the outstanding principal amount of HK$2.3 million, which will be financed by the internal resources of the Group. No new share in the Company was, or will be, issued in relation to such a redemption.

Through the issue of new shares of the Company to the holders of the convertible notes, it increased the Group’s net assets value and improved the Group’s net debt to equity ratio as at 31 December 2003.

Employees and Remuneration Policies

As at 31 December 2003, the number of employees of the Group was approximately 1,000. The remuneration packages of the Group’s employees are mainly based on their performance and experience, taking into account the current industry practices. Remuneration package of employees includes salaries, insurance and medical cover, mandatory provident fund and share option scheme. Other employee benefits include educational allowance and discretionary bonuses.

Contingent Liabilities and Charges on the Group’s Assets

The Company gave guarantees of approximately HK$372 million (2002: approximately HK$363 million) to financial institutions in respect of banking facilities granted to subsidiaries. The Group had pledged its assets with an aggregate net book value of approximately HK$70.2 million (2002: approximately HK$55.2 million) to secure bank and other loans granted, and obligations under finance and hire purchases contracts to its subsidiaries.

FINAL DIVIDEND

The Directors do not recommend the payment of a final dividend for the year ended 31 December 2003.

CORPORATE GOVERNANCE

The Company has complied throughout the year ended 31 December, 2003 with the Code of Best Practice as set out in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Listing Rules”).

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PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES

During the year ended 31 December, 2003, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities.

PUBLICATION OF DETAILED RESULTS ANNOUNCEMENT ON THE STOCK EXCHANGE OF HONG KONG LIMITED (“STOCK EXCHANGE”) WEBSITE

All the financial and other related information of the Company required by paragraphs 45(1) to 45(3) of Appendix 16 of the Listing Rules will be published on the Stock Exchange’s website in due course.

By Order of the Board Ho Yin King, Helena Chairman

Hong Kong, 27 April, 2004

• for identification purpose only

Please also refer to the published version of this announcement in China Daily.

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