PegBio Co., Ltd. — Annual Report 2002

Jul 22, 2002

HUNG FUNG GROUP HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 31 MARCH 2002

The Board of Directors (the “Board”) of Hung Fung Group Holdings Limited (the “Company”) herein announces the audited consolidated results of the Company and its subsidiaries (the “Group”) for the year ended 31 March 2002 together with comparative figures for the previous year as follows:

Notes TURNOVER 2 Cost of sales Gross loss Other revenue and gain Selling and distribution costs Administrative expenses Other operating expenses LOSS FROM OPERATING ACTIVITIES 3 Finance costs LOSS BEFORE TAX Tax 4 NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS LOSS PER SHARE 6 Basic	2002 HK$’000 47,408 (57,759) (10,351) 1,751 (2,164) (24,330) (8,355) (43,449) (15,835) (59,284) – (59,284) HK2.30 cents	2001 HK$’000 202,682 (209,240) (6,558) 772 (2,032) (31,158) (231,018) (269,994) (13,695) (283,689) 4,354 (279,335) HK10.84 cents

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Notes:

1. Basis of presentation

The Group adopted the following Statements of Standard Accounting Practice (“SSAPs”) and related Interpretations issued and revised by the Hong Kong Society of Accountants for the first time in the preparation of financial statements for the current year.

SSAP 9 (Revised)	:	“Events after the balance sheet date”
SSAP 14 (Revised)	:	“Leases”
SSAP 18 (Revised)	:	“Revenue”
SSAP 26		“Segment reporting”
SSAP 28	:	“Provisions, contingent liabilities and contingent assets”
SSAP 29	:	“Intangible assets”
SSAP 30	:	“Business combinations”
SSAP 31	:	“Impairment of assets”
SSAP 32	:	“Consolidated financial statements and accounting for investment in subsidiaries”
Interpretation 12	:	“Business combinations – subsequent adjustment of fair values and goodwill
		initially reported”
Interpretation 13	:	“Goodwill – continuing requirements for goodwill and negative goodwill previously
		eliminated against/credited to reserves”

2. Turnover and segment information

Turnover represents the invoiced value of goods sold, net of discounts and returns.

(a) Business segments

The following table presents revenue, loss and expenditure information for the Group’s business segments.

Group

Segment revenue: Sales to external customers Other revenue Segment results Interest income and unallocated gains Unallocated expenses Loss from operating activities Other segment information: Depreciation expenses Unallocated amounts Capital expenditure Unallocated amounts	Toddler cars 2002 2001 HK$’000 HK$’000 16,670 53,669 487 198 17,157 53,867 (9,950) (34,633) 912 2,667 228 1,786	Cycling 2002 2001 HK$’000 HK$’000 17,002 128,078 495 467 17,497 128,545 (11,436) (119,316) 1,701 1,730 150 4,532	Corporate and others 2002 2001 HK$’000 HK$’000 13,736 20,935 405 77 14,141 21,012 (10,099) (16,810) 1,226 2,403 114 5,604	Consolidated 2002 2001 HK$’000 HK$’000 47,408 202,682 1,387 742 48,795 203,424 (31,485) (170,759) 364 30 (12,328) (99,265) (43,449) (269,994) 3,839 6,800 10,911 11,173 14,750 17,973 492 11,922 4,920 3,446 5,412 15,368

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(b) Geographical segments

The following table presents revenue, result and certain asset and expenditure information for the Group’s geographical segments.

Group

Segment revenue: Sales to external customers Segment results Other segment information: Segment assets Capital expenditure	North America 2002 2001 HK$’000 HK$’000 11,204 52,546 (8,595) (38,061) 1,979 1,241 – –	Europe 2002 2001 HK$’000 HK$’000 14,060 36,231 (9,280) (17,113) 557 323 – –	Central and South America 2002 2001 HK$’000 HK$’000 11,640 25,963 (7,697) (20,229) 48 402 – –	Asia Pacific region (including Hong Kong) and the PRC) 2002 2001 HK$’000 HK$’000 7,942 77,705 (4,320) (86,119) 124,062 138,882 5,412 15,368	Middle East and other region 2002 2001 HK$’000 HK$’000 2,562 10,237 (1,593) (9,237) 470 156 – –	Consolidated 2002 2001 HK$’000 HK$’000 47,408 202,682 (31,485) (170,759) 127,116 141,004 5,412 15,368	Consolidated 2002 2001 HK$’000 HK$’000 47,408 202,682 (31,485) (170,759) 127,116 141,004 5,412 15,368
							(170,759)
							141,004 15,368

3. Loss from operating activities

The Group’s loss from operating activities is arrived at after charging:

2002 HK$’000 Depreciation 14,750 Provision for bad and doubtful debts: Accounts receivable 690 Other receivables – 690 Minimum lease payments under operating leases in respect of land and buildings 971 Auditors’ remuneration 750 Staff costs (excluding directors’ remuneration): Salaries and wages 12,028 Retirement benefits scheme contributions 137 Provision for impairment of fixed assets – Provision for advances to a company – Provision for deposits made to certain suppliers – Provision for unrecoverable inventories held by a company – Revaluation deficit on land and buildings 2,638 Provision for inventories – Provision for potential claims – Loss on disposal of fixed assets 39	2001 HK$’000 17,973 117,781 6,734
	124,515
	675 1,680 15,086 41 54,981 5,177 4,635 11,791 3,073 6,615 18,000 2,231

The cost of sales includes approximately HK$18,092,000 (2001: HK$22,494,000) relating to staff costs and depreciation which are also included in the respective total amounts disclosed separately above for each of these types of expenses.

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As at 31 March 2002, the Group had no forfeited contributions available to reduce its contributions to retirement benefits schemes in future years (2001: Nil).

4. Tax

No Hong Kong profits tax has been provided as the Group did not generate any assessable profits in Hong Kong during the year. Taxes on profit assessable elsewhere have been calculated at the rates of tax prevailing in the countries in which the Group operates, based on existing legislation, interpretations and practices in respect thereof.

Hong Kong: Overprovision in the prior year Deferred tax Tax credit for the year	2002 HK$’000 – – –	2001 HK$’000 54 4,300
		4,354

There was no unprovided deferred tax in respect of the year (2001: Nil).

5. Final dividend

The directors do not recommend the payment of any dividend for the year ended 31 March 2002 (2001: Nil).

6. Loss per share

The calculation of basic loss per share is based on the net loss from ordinary activities attributable to shareholders for the year of HK$59,284,000 (2001: HK$279,335,000) and the weighted average of 2,577,581,176 (2001: 2,577,565,117) ordinary shares in issue during the year, as adjusted to reflect the share offer with assured allotments of three offer shares for every two shares of HK$0.01 each in the Company, which was completed on 27 May 2002 (“Open Offer”).

Diluted loss per share amounts for the years ended 31 March 2002 and 2001 have not been disclosed, as the potential ordinary shares of the Company outstanding during these years had an anti-dilutive effect on the basic loss per share for these years.

EXTRACT OF AUDITORS’ REPORT

The auditors of the Group disclaimed their opinion on the financial statements of the Group and the Company for the year ended 31 March 2001 for reasons which included the significance of the possible effects of several limitations on the scope of audit which are further detailed in the auditors’ report dated 26 July 2001. Accordingly, the auditors were unable to form an opinion as to whether the 2001 financial statements gave a true and fair view of the state of affairs of the Group and the Company as at 31 March 2001 and of the loss and cash flows of the Group for the year then ended. Any adjustments found to be necessary to the opening net liabilities of the Group and the Company would have a consequential effect on the results of the Group and the Company for the current year ended 31 March 2002.

In the auditors’ opinion, the financial statements give a true and fair view of the state of affairs of the Group and the Company as at 31 March 2002, and except for any adjustments that might have been found to be necessary in respect of the foregoing scope limitations, in the auditors’ opinion, the financial statements give a true and fair view of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

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RESULTS

The financial year of 2001/2002 continued to be a difficult year for the Group. Net loss from ordinary activities attributable to shareholders for the year was HK$59,284,000 as compared to HK$279,335,000 last year. The loss is the result of the Group’s significantly smaller scale of operations, as a result of which the Group’s turnover could not reach a scale that could recover the Group’s fixed costs.

BUSINESS OVERVIEW

During the year, the Group had operated under financial difficulties whereby financial creditors either suspended or terminated the credit facilities granted to the Group and some of them further demanded for the repayment of all outstanding debts. This made it difficult for the Group to carry on its normal operations with its tight working capital position. Together with the imposition of stringent credit control by the Group on sales, turnover dropped from HK$202,682,000 in 2001 to HK$47,408,000 in the current year.

In order to enhance the competitiveness of the Group’s toys products to improve the turnover of the Group, the management adopted several measures including modifying existing product features to lengthen their life cycles, developing new products to diversify the Group’s product range and expanding market penetration into new regions over the world.

Other than the traditional ride-on cars, cycling toys and other pre-school toys manufactured by the Group, the introduction of house-ware products has gained initial success in the South-American market. The Group has not only been trying to enrich its product range by entering into die-casting model car and battery-operated bicycle segments, but also at the same time considering to fade out some of its less popular items. In addition, the Group is now considering to enter into strategic alliances with certain partners with a view to diversify its product range and to increase its product competitiveness as well as to reduce the effect of seasonal fluctuations in the toy industry in the coming years.

Due to keen market competition, strict cost control is one of the determinant factors for the Group’s success in the ensuing years. The Group will continue to source from high-quality suppliers at the lowest possible prices in order to maintain its cost competitiveness in the international market.

CHARGES ON GROUP’S ASSETS

Certain leasehold land and buildings, plant and machinery and equipment with an aggregate carrying value of HK$48,384,000 as at 31 March 2002 were pledged to secure bank borrowings advanced to the Group.

PENDING LITIGATION

As at the date of this report, writs of summons had been issued by certain creditors aggregating approximately HK$3,056,000 together with claims for interests thereon in respect of purchases of goods by, and the provision of services to, the Group. The directors are either negotiating with these creditors with a view to a settlement or seeking legal advice on the handling of such actions. The directors believe that satisfactory resolutions to the actions can be achieved without material adverse impact on the Group. In the opinion of the directors, adequate provisions have been made by the Group in respect of all the claims in the Group’s financial statements as at 31 March 2002.

CONTINGENT LIABILITIES

In the opinion of the directors, there is no significant contingent liabilities noted as at 31 March 2002.

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LIQUIDITY AND FINANCIAL POSITION

As at 31 March 2002, the Group had neither unutilized banking facilities nor any hedging financial instruments. All borrowings of the Group are denominated either in Hong Kong dollars or Renminbi at floating interest rates. The total indebtedness of the Group was approximately HK$255,512,000 and all the indebtedness is due within one to two years. The Group had net current liabilities and deficiency in assets of approximately HK$238,481,000 and HK$128,396,000, respectively. The ratio of total indebtedness to total assets of the Group was approximately 2.01 times.

Subsequent to the balance sheet date, upon the completion of the debt restructuring exercises of the Group in late May 2002, the cash position of the Group has been improved as follows:

• (a) cash proceeds of HK$30,000,000 before related expenses were received for the issue of new ordinary shares pursuant to a subscription agreement;

• (b) total borrowings owed by the Group to its bankers of approximately HK$103,104,000 as at 31 March 2002 was fully settled by (i) a cash payment of approximately HK$20,039,000 and (ii) the issues of convertible notes with an aggregate principal amount of HK$6,500,000 to its bankers; and

• (c) cash proceeds of approximately HK$40,259,000 before related expenses were received pursuant to the Open Offer.

Furthermore, the Group also entered into various settlement agreements with certain creditors whereas the completion dates for such settlements will be on or before 31 July 2002. Upon the completion of such settlement agreements, the Group’s indebtedness as at 31 March 2002 will be further reduced by approximately HK$16,264,000 in aggregate by way of waiver and capitalization of debts by issuing to such creditors of new shares. The Group shall continue to restructure its debts and seek to raise long-term equity finance should suitable opportunity arises.

As at the balance sheet date, there were no significant capital commitments which required a substantial use of the Group’s present cash resources or external funding.

FOREIGN CURRENCY EXPOSURE

Significant foreign currency exposure was not expected by the Group as sales to foreign customers were settled in US dollars and purchases of materials were in Hong Kong dollars or Renminbi. The directors believe that the recent weakening of the US dollars against other major currencies will benefit the Group in terms of pricing competitiveness and assist the Group in its international marketing efforts.

HUMAN RESOURCES

The directors consider the Group’s employees’ efforts have significantly helped the Group to recover from financial difficulties and are a crucial asset to fuel the future growth of the Group. As at 31 March 2002, the Group had a total of approximately 1,140 full-time employees among which 1,120 were based in the PRC and approximately 20 in Hong Kong. In addition to competitive remuneration packages being offered to its employees, the Group has a share option scheme but no share option has been granted during the year.

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PROSPECTS

Having completed the debt restructuring in late May 2002, the Group has substantially improved its financial position and the directors expect the level of the operations of the Group will increase in the coming year. The directors are confident that their experience and professional training together with the efforts of its employees will help the Group to restore to profitability in the near future. The Group will also endeavor to develop and strengthen its core business in toys manufacturing and distribution businesses.

With a significantly improved financial position, the Group will seek to identify suitable investment targets which can improve its revenue base and cashflow.

PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES

Neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities during the year.

CODE OF BEST PRACTICE

In the opinion of the directors, the Company has complied with the Code of Best Practice (the “Code”), as set out in Appendix 14 of the Listing Rules of the Stock Exchange (the “Listing Rules”), throughout the accounting period covered by the annual report, except that the independent non-executive directors of the Company are not appointed for a specific term as required by paragraph 7 of the Code, but are subject to retirement by rotation in accordance with the bye-laws of the Company.

PUBLICATION OF ANNUAL RESULTS ON WEBSITE OF THE STOCK EXCHANGE OF HONG KONG LIMITED

The detailed results containing all the information required by paragraphs 45(1) to 45(3) of Appendix 16 to the Listing Rules will be published on the website of The Stock Exchange of Hong Kong Limited in due course.

By Order of the Board Lo Ming Chi Chairman

Hong Kong, 19 July 2002

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NOTICE OF ANNUAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that the 2002 Annual General Meeting of Hung Fung Group Holdings Limited (the “Company”) will be held at Plaza I-III, Lower lobby, Novotel Century Hong Kong, 238 Jaffe Road, Wanchai, Hong Kong on 23 August 2002 at 10:00 a.m. for the following purposes:

1. To receive and consider the audited financial statements and the Reports of the Directors and Auditors for the year ended 31 March 2002;

2. To determine the maximum number of the directors of the Company (the “Directors”);

3. To elect the Directors and to authorise the Board of Directors (the “Board”) to fix their remuneration;

4. To appoint auditors and to authorise the Board to fix their remuneration; and

5. As special business to consider and, if thought fit, pass the following resolutions as ordinary resolutions:

6. A. “ THAT :

   • (a) subject to paragraph (c), the exercise by the Directors during the Relevant Period of all the powers of the Company to allot, issue and deal with additional shares in the capital of the Company and to make or grant offers, agreements and options which might require the exercise of such power be and is hereby generally and unconditionally approved;

   • (b) the approval in paragraph (a) shall authorise the Directors during the Relevant Period to make or grant offers, agreements and options which might require the exercise of such power after the end of the Relevant Period;

   • (c) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) by the Directors pursuant to the approval in paragraph (a), otherwise than pursuant to a Rights Issue or the exercise of the subscription rights under the share option scheme of the Company, shall not exceed 20 per cent of the aggregate nominal amount of the share capital of the Company in issue as at the date of this resolution and the said approval shall be limited accordingly; and

   • (d) for the purposes of this resolution:

“Relevant Period” means the period from the passing of this resolution until whichever is the earlier of:

• (i) the conclusion of the next annual general meeting of the Company;

• (ii) the expiration of the period within which the next annual general meeting of the Company is required by the Bye-laws of the Company or any applicable laws to be held; and

• (iii) the revocation or variation of this resolution by an ordinary resolution of the shareholders of the Company in general meeting.

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“Rights Issue” means an offer of shares open for a period fixed by the Directors to holders of shares on the Register of Members of the Company on a fixed record date in proportion to their then holdings of such shares (subject to such exclusion or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or having regard to and restrictions or obligations under the laws of or the requirements of any recognized regulatory body or any stock exchange in any territory outside Hong Kong).”

• B. “ THAT :

• (a) the exercise by the Directors during the Relevant Period of all powers of the Company to purchase its own shares subject to and in accordance with all applicable laws, be and is hereby generally and unconditionally approved;

• (b) the aggregate nominal amount of shares of the Company purchased by the Company pursuant to the approval in paragraph (a) during the Relevant Period shall not exceed 10 per cent of the aggregate nominal amount of the share capital of the Company in issue as at the date of this resolution and the said approval be limited accordingly; and

• (c) for the purposes of this resolution:

“Relevant Period” means the period from the passing of this resolution until whichever is the earlier of:

• (i) the conclusion of the next annual general meeting of the Company;

• (ii) the expiration of the period within which the next annual general meeting of the Company is required by the Bye-laws of the Company or any applicable laws to be held; and

• (iii) the revocation or variation of this resolution by an ordinary resolution of the shareholders of the Company in general meeting.”

• C. “THAT conditional, upon resolution no. 5B above being passed, the aggregate nominal amount of the number of shares in the capital of the Company which are repurchased by the Company under the authority granted to the Directors as mentioned in resolution no. 5B above shall be added to the aggregate nominal amount of share capital that may be allotted or agreed conditionally or unconditionally to be allotted by the Directors pursuant to resolution no. 5A above.”

By Order of the Board Yu Wai Man Company Secretary

Hong Kong, 19 July 2002

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Notes:

1. A member entitled to attend and vote at the meeting convened by the above notice is entitled to appoint another person as his proxy to attend and vote instead of him. A proxy need not be a member of the Company.

2. A form of proxy for the meeting will be enclosed in the 2002 Annual Report. In order to be valid, the form of proxy must be deposited at the principal place of business of the Company in Hong Kong at Room 3A03-06, 3/F., New Manderin Plaza, 14 Science Museum Road, Tsimshatsui East, Kowloon, Hong Kong together with a power of attorney or other authority (if any) under which it is signed, or a certified copy of such power or authority, not less than 48 hours before the time appointed for holding the meeting or adjourned meeting.

3. An explanatory statement containing further details as regarding resolution no. 5B above will be sent to shareholders of the Company together with the 2002 Annual Report.

"Please also refer to the published version of this announcement in The Standard"

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