FINANCIAL REVIEW
For the year ended 31st December, 1998, the Group's business were still affected by the unfavourable market condition in the Asian region and the keen competition in the electronic industry as a whole. The Group's total turnover for the year ended 31st December, 1998 recorded at HK$483.6 million, representing 13 per cent decrease compared with the fourteen months period ended 31st December, 1997. Due to the lower profit margins and increased overhead costs, the Group inevitably suffered a loss in its operations for the year under review. Together with the general provision made for doubtful accounts receivable and slow moving inventories in total of HK$17.5 million and the deficit of HK$7.9 million arising from property revaluation as of 31st December, 1998, net loss attributable to shareholders amounted to HK$26.5 million. Basic loss per share for the year is 6.0 cents. The Board of Directors do not recommend the payment of final dividend for the year ended 31st December, 1998.
As a result of the deficit on the property revaluation and the provision for doubtful accounts receivable and slow moving inventories, the Group's total net assets at 31st December, 1998 decreased by approximately HK$33.3 million compared with last year. Details of variance are summarised as follows:
Increase/(Decrease)
in the Group's
total net assets
HK$ million
Fixed assets (6.4)
Prepaid rental (0.7)
Deferred product development costs 1.9
Deferred pre-operating expenses (1.1)
Interests in associated companies (0.7)
Cash and bank balances (6.6)
Accounts receivable, deposits and prepayments (23.8)
Inventories (27.6)
Bank borrowings 34.9
Accounts payable and accrued liabilities (4.6)
Finance lease payables 0.2
Taxation 1.2
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Net decrease in Group's total net assets (33.3)
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As of 31st December, 1998, the properties owned by the Group including a factory situated in Mainland China were revalued by a professional surveyor. Under this revaluation, the value of the properties decreased by approximately HK$14.7 million of which HK$6.8 million had been absorbed by property revaluation reserve. On the other hand, the Group had spent around HK$26.5 million during the year mainly to complete the setup of the second production line for PCB manufacturing. As a persistent effort since 1997, tightened sales and credit policies and control were pursued throughout 1998. Severe control was also aggressively instituted in all aspects of the Group's functional operations relating to inventories and purchases. These successfully helped to reduce accounts receivable and inventories balances to a healthy position, acknowledged by the shorter debtor turnover of 2.0 months (1997: 2.6 months) and stock turnover of 2.9 months (1997: 3.2 months) during the year. As a result of the effective liquidity management, bank borrowings decreased by approximately HK$34.9 million which derived a more comfortable liquid ratio.
LIQUIDITY AND FINANCIAL RESOURCES
Cash and bank balances maintained by the Group as at 31st December, 1998 were HK$42.8 million. As the Group had made additional provision for doubtful accounts receivable and slow moving inventories balances during the year of approximately HK$17.5 million, working capital decreased from HK$90.6 million to HK$59.5 million. The Group has current banking facilities of HK$152.9 million, the Board of Directors believes that it has adequate cash resources to meet all commitments and working capital requirements.
As at 31st December, 1998, the Group had outstanding bank borrowings of HK$56.5 million, including a mortgage loan of HK$16.9 million secured by one of the office premises of the Group situated in Hong Kong. The balance of HK$39.6 million represented trade finance borrowings for the normal working capital requirements.
CAPITAL STRUCTURE
During the year under review, there were no movements in the share capital of the Company. As at 31st December, 1998, the Company had 439.2 million ordinary shares in issue with total shareholders' funds of the Group amounting to HK$239.9 million.
The Company had issued 86,000,000 warrants by way of a private placing in September 1997 which expired on 31st December, 1998. None of these warrants were exercised during the year. The warrant subscription reserve of HK$24.4 million arising therefrom was transferred to the retained profits.
INVESTMENTS
To enhance the second production line in PCB manufacturing, the Group had additionally invested by approximately HK$20 million by means of plant and machinery and HK$4 million by means of factory renovation in Dongguan Yifu Circuit Board Factory during the year.
BUSINESS PLAN
The Group are currently undergoing a thorough office automation programme, with emphasis on upgrading the Group's computer operating system, to strengthen management planning and control and to gain operating advantages within the Group. In addition, conservative credit and inventory control will be continued in the coming year together with effective cost reduction measures.
In the Electronic Products Division, the Group will continue to develop its OEM business. On the other hand, in order to catch up with the ever-changing electronics industry, the Group has persisted to spend more emphasis on the research and development. It is in the progress to develop new type of electronic products like radio frequency items which may enlarge the product range in both ODM and OEM business in the future.
In the Electronic Components and Parts Division, the Group remains to focus its development on the manufacture of PCBs. With the setup of the second production line for PCB manufacturing by early 1998, it is operationally prepared to meet with any new market demand for its products. Negotiations are being undertaken with several new well-known U.S. and Japanese customers for future large orders. Although the Group has development plans for further expansion of the PCB operations, it will take a conservative approach in the implementation in order to closely monitor the recovery of the economy.
The recessionary environment in Hong Kong and Mainland China still affect the trading and distribution business. Apart from the closure of Beijing and Tokyo representative office in late 1998, the Group will continue to consolidate its operations to confront with the unfavourable market condition.
EMPLOYEES AND REMUNERATION POLICIES
As at 31st December, 1998, the Group employed approximately 2,300 full time employees, 2,100 in Mainland China and 100 in Hong Kong.
The Group remunerates its employees largely based on industry practice. In Mainland China, 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, performance related bonuses and defined contribution pension scheme.
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") issue has arisen because many computer systems and equipment embedded with chip-based devices which store date information based on a two-digit year sequence are unable to accurately process dates for the Year 2000 and beyond. Non-compliance with the Y2K issue by the Group, its suppliers, customers and other business associates may cause disruption to the operations of the Group.
The Group has formed a steering committee in early 1998 to address the Y2K issue. A thorough office automation programme has been carried out since the second half of 1998, as a part of which all of the computer hardware, software and operating systems which are not or are not sure to be Y2K compliant have been or will be replaced by the end of September 1999. Up to the present time, the Group is in the progress to execute a parallel run test in the implementation of a new operating and accounting system and a manufacturing system to further improve computing efficiency and reliability and to remove Y2K sensitivity. Most of the computer hardware and software have been replaced under the office automation programme. The Group is also undergoing a complete survey to receive assurances from its major suppliers and customers that they are aware of the Y2K issue and are taking appropriate steps to ensure that their computer systems are Y2K compliant.
As a contingency plan, the Group has decided to obtain hardcopy report being generated from all computer systems for both master and transaction files from October 1999 until the end of the year. These serve as back up copies to ensure the continuity of its operations.
The total estimated cost of the project is approximately HK$3.8 million, which includes HK$1.7 million for the purchase of new computer software. The balance of HK$2.1 million is mainly for the replacement of computer hardware where HK$1.6 million out of which will be covered by an operating lease agreement signed with the supplier. No capital expenditure is to be incurred but the monthly lease rentals will be treated as normal operating expenses and charged to the profit and loss. The aggregate amount of commitments authorised by the directors is HK$2.2 million where approximately HK$0.2 million has been contracted for at 31st December, 1998.