FINANCIAL REVIEW
The undesirable economic conditions in the Asian region including Hong Kong in the second half of 1997 poised negative impacts on the Group's business for the fourteen months period ended 31st December, 1997. The Group's total turnover decreased by approximately 3.7% to HK$557.1 million comparing with last year ended 31st October, 1996. As a result of the reorganisation programs and expansion plans within the Group leading to increased overhead costs, the profit margin of the Group declined significantly. Consequently, profit attributable to shareholders dropped by 84.7% to HK$11.0 million. Basic earnings per share for the period amounted to 2.5 cents. The Board of Directors do not recommend payment of a dividend for the fourteen months period ended 31st December, 1997.
Responded to the poor economic conditions, the Group had endeavored to solidify its balance sheet position. The Group's total net assets at 31st December, 1997 showed an increase of approximately HK$25.9 million compared with 31st October, 1996. Details of variance are as follows:
During the period under review, there had been substantial investment in fixed assets, mostly financed by internal cash resources, which comprised of plant and machinery and factory premises amounting to approximately HK$73 million mainly due to the setup of the second production line for PCB manufacturing. The Group had taken a tightened sales and credit policy and had pursued vigorous debt collection procedures which resulted in a shorter debtor turnover ratio during the period and a decrease in accounts receivable at the period end. In addition, adequate provision amounting to HK$16.9 million has been made for slow moving accounts receivable. In view of more new models of electronic products being launched to the market, a higher level of raw materials had been maintained to cater for the anticipated increase in production orders and to prevent the failure in meeting customer delivery requirements and their consumption and replenishment have been closely monitored. Bank borrowings were controlled within comfortable range. As a more prudent approach is adopted for asset and liability management, revaluations of HK$12.3 million have been made for possible permanent diminutions in value of properties. The Group will continue to solidify its balance sheet position in 1998.
LIQUIDITY AND FINANCIAL RESOURCES
As at 31st December, 1997, cash and bank balances maintained by the Group were around HK$49.5 million. Working capital decreased slightly from HK$121.1 million to HK$90.6 million during the period under review. As the Group has aggregate banking facilities of approximately HK$178.5 million, the Board of Directors believes that it has adequate cash resources to meet all commitments and working capital requirements.
The outstanding bank borrowings by the Group at the end of the period under review were approximately HK$91.4 million, HK$20.6 million of which was a mortgage loan secured by one of the office premises of the Group situated in Hong Kong. The balance represented trade finance borrowings of HK$67.2 million for the normal working capital requirements and short term borrowings of HK$3.6 million required for the purchase of plant and machinery.
CAPITAL STRUCTURE
As at 31st December, 1997, the Company had 439.2 million ordinary shares in issue with total shareholders' funds of the Group amounting to HK$273.1 million.
At the beginning of the period, the Company had 80,000,000 outstanding warrants entitling the registered holders to subscribe in cash for shares of HK$0.10 each in the share capital of the Company at an exercise price of HK$1.22 per share (subject to adjustment). A total of 815 outstanding warrants was exercised resulting in the issue of 815 shares of HK$0.10 each in the Company and the balance of the warrants was expired in August 1997.
In September 1997, the Company had placed 86,000,000 warrants by way of a private placing at an issue price of HK$0.30 per warrant. The warrants entitle the holders thereof to subscribe up to HK$55,900,000 in cash for shares of HK$0.10 each in the share capital of the Company at an initial subscription price of HK$0.65 per share, subject to adjustment, at any time from the date of issue to 31st December, 1998. Upon full exercise of the subscription rights attached to the warrants, 86,000,000 shares will fall to be issued. As at 31st December, 1997, no warrants were exercised by the holders to subscribe for shares of the Company. From the placement of the warrants, the Company raised approximately HK$24 million.
Under the Share Option Scheme approved by the Company on 21st July, 1995, share options to subscribe for 40,000,000 shares had been granted to senior executives of the Group in November 1995 and January 1996 respectively, certain of which were exercised to subscribe for 34,500,000 shares in total in September 1996 through October 1996. During the period under review, the then outstanding options were exercised to subscribe for 5,500,000 shares in total. The Company raised approximately HK$3.6 million from the new issue of shares.
INVESTMENTS
The Group had invested approximately HK$63 million by means of plant and machinery and HK$10 million by means of factory premises in the joint venture at Dongguan Yifu Circuit Board Factory during the period under review.
BUSINESS PLAN
On the manufacture of PCBs, the construction project of the second production line has already been completed in late 1997. This new production line has become fully operational in April 1998 and, coupled with the upgrade of the first production line to be completed by July 1998, the production capacity will then be more than double the current capacity to ramp up from 110,000 sq. ft. to 300,000 sq. ft.
The Group will continuously invest in technology and facilities to further boost the production capability and capacity of PCBs, in particular multi-layer boards. Towards this end, the Group intends to set up a third production line but has revised its earlier schedule to have the implementation date postponed to 1999 in order to match with its reorganisation programs. An additional HK$100 million has already been earmarked for this expansion.
The Group has reviewed its long-term strategic corporate development plans against the undesirable economic conditions in the Asian region and has decided not to go ahead with the further negotiations on the Glass with Electrode project until such time as the business prospect is more certain.
EMPLOYEES AND REMUNERATION POLICIES
As at 31st December, 1997, the Group employed approximately 2,100 full time employees, 2,020 in the PRC and 80 in Hong Kong.
The Group remunerates its employees largely based on industry practice. In the PRC, the Group provides staff welfare and bonuses to its employees in accordance with the prevailing labour law. In Hong Kong, the Group provides staff benefits including medical scheme and performance related bonuses. The Group had established a defined contribution pension scheme in October 1997 for its Hong Kong employees.
YEAR 2000 PROBLEM
A committee consisting of staff from the computer, accounting and administration departments has been set up to review all operating systems and equipment to identify the areas which will be affected by the year 2000 problem. All in-house designed computer programs are in the process of being scanned through by the computer department. Suppliers of other computer software used by the Group are requested to conduct a thorough test to ensure trouble-free in this situation. These tasks are expected to be completed by the 1998 year end. In addition, an independent consultant with specialised knowledge in this area is going to be appointed to assist us to handle this project. An overall review by the consultant will be carried out to confirm the satisfactory result before June 1999.