Basis of accounting
These financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance.
Basis of presentation and consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31st December, 1998. The results of the subsidiaries acquired or disposed of during the year are accounted for from or to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances have been eliminated on consolidation.
Subsidiaries
A subsidiary is a company in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or controls the composition of its board of directors. Interests in subsidiaries are stated at cost unless, in the opinion of the directors, there have been permanent diminutions in values, when they are written down to values determined by the directors.
Associated companies
An associated company is a company, not being a subsidiary, in which the Group has a long term interest of not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence.
The Group's share of the post-acquisition results and reserves of associated companies is included in the consolidated profit and loss account and consolidated reserves, respectively. The Group's investments in associated companies are stated in the consolidated balance sheet at the Group's share of net assets under the equity method of accounting less any provisions for permanent diminutions in values deemed necessary by the directors.
Goodwill and capital reserve
Goodwill arising on consolidation of subsidiaries and on acquisition of associated companies represents the excess purchase consideration paid for such companies over the fair values ascribed to the net underlying assets and is eliminated against reserves in the year of acquisition.
Negative goodwill arising on consolidation of subsidiaries and acquisition of associated companies represents the excess fair values ascribed to the net underlying assets acquired over the purchase consideration paid for such companies and is credited to a capital reserve in the year of acquisition.
Upon disposal of subsidiaries or associated companies, the relevant portion of attributable goodwill previously eliminated against or credited to reserves is realised and taken into account in determining the gain or loss on sale of the investments.
Fixed assets and depreciation
Fixed assets are stated at cost or valuation less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the fixed assets have been put into operation, such as repairs and maintenance, is normally charged to the profit and loss account in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the fixed asset, the expenditure is capitalised as an additional cost of the fixed asset.
Depreciation is calculated on the straight-line basis to write off the cost or valuation of each asset over its estimated useful life. The principal annual rates used for this purpose are as follows:
| Land held under medium term leases | Over the remaining lease terms |
| Buildings | 4% |
| Leasehold improvements | 10 -- 20% |
| Plant and machinery | 10 -- 20% |
| Furniture, fixtures and office equipment | 10 -- 20% |
| Motor vehicles | 20% |
Changes in values of fixed assets resulting from revaluations are dealt with, on an individual asset basis, as movements in the asset revaluation reserve. Deficits arising from revaluation, to the extent they cannot be offset against the revaluation surplus in respect of the same asset, are charged to the profit and loss account.
The gain or loss on disposal or retirement of a fixed asset recognised in the profit and loss account is the difference between the sale proceeds and the carrying amount of the relevant asset. On disposal or retirement, the attributable revaluation surplus not previously dealt with in retained profits is transferred directly to retained profits.
Deferred product development costs
Deferred product development costs are written off as expenses when incurred, except those relating to specific products, the expenditure of which is separately identified and can be measured reliably and for which the technical feasibility and commercial viability are reasonably assured. Such deferred development costs are deferred and amortised, using the straight-line method over the expected useful life of the products, not exceeding seven years commencing from the date of commercial production of the related products.
Deferred pre-operating expenses
Deferred pre-operating expenses, which represent expenses incurred in respect of establishing new manufacturing operations, are amortised over a period of eight years using the straight-line method from the date of commencement of the manufacturing operations.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first-in, first-out basis and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is based on the estimated selling prices less any estimated costs to be incurred to completion and disposal.
Deferred taxation
Deferred taxation is provided, under the liability method, on all significant timing differences to the extent it is probable that the liability will crystallise in the foreseeable future. A deferred tax asset is not recognised until its realisation is assured beyond reasonable doubt.
Leased assets
Leases that transfer substantially all the rewards and risks of ownership of assets to the Group, other than legal title, are accounted for as finance leases. At the inception of a finance lease, the cost of the asset is capitalised at the present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Assets held under capitalised finance leases are included in fixed assets and depreciated over the shorter of the lease terms and the estimated useful lives of the assets. The finance costs of such finance leases are charged to the profit and loss account so as to provide a constant periodic rate of charge over the lease terms.
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rentals applicable to such operating leases are credited or charged to the profit and loss account on the straight-line basis over the lease terms.
Staff retirement scheme
The Group operates a defined contribution staff retirement scheme (the "Scheme") for certain of its employees, the assets of which are held separately from those of the Group in an independently administered fund. Contributions are made based on a percentage of the eligible employees' basic salaries and are charged to the profit and loss account as they become payable in accordance with the rules of the Scheme. When an employee leaves the Scheme prior to his/her interest in the Group's employer contributions vesting fully, the ongoing contributions payable by the Group may be reduced by the relevant amount of forfeited contributions.
Related parties
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.
Cash equivalents
Cash equivalents represent short term highly liquid investments which are readily convertible into known amounts of cash and which were within three months of maturity when acquired, less advances from banks repayable within three months from the date of the advance.
Revenue
Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases:
| (a) | on the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold; and |
| (b) | interest, on a time proportion basis, taking into account the principal outstanding and the effective interest rate applicable. |
Foreign currencies
Foreign currency transactions are recorded at the applicable rates of exchange ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange ruling at that date. Exchange differences are dealt with in the profit and loss account.
On consolidation, the financial statements of overseas subsidiaries are translated into Hong Kong dollars at the applicable rates of exchange ruling at the balance sheet date. The resulting translation differences are included in the exchange fluctuation reserve.
Turnover represents the invoiced value of goods sold, net of returns and allowances.
The Group's operating profit/(loss) before exceptional item is arrived at after charging:
Period from
1st November,
Year ended 1996 to
31st December, 31st December,
1998 1997
HK$'000 HK$'000
Cost of inventories sold 401,667 464,458
Depreciation:
Owned fixed assets 16,836 12,402
Leased fixed assets 26 60
Amortisation of deferred
product development costs 1,273 1,034
Amortisation of deferred
pre-operating expenses 1,103 1,352
Amortisation of prepaid rental 737 860
Operating lease rentals in
respect of land and buildings 1,087 1,120
Interest on:
Bank loans and facilities 6,878 8,282
Finance leases 35 78
Auditors' remuneration 930 1,000
Provision for doubtful debts 14,787 16,924
Provision for inventories 2,705 910
Loss on disposals of fixed assets 678 137
and after crediting:
Interest income 1,195 2,604
======= =======
Period from
1st November,
Year ended 1996 to
31st December, 31st December,
1998 1997
HK$'000 HK$'000
Fees 360 420
Other emoluments 6,174 6,034
----- -----
6,534 6,454
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Exceptional item for the year represents the deficit arising from the revaluation of the Group's leasehold land and buildings.
Hong Kong profits tax has been provided at the rate of 16% (1997: 16.5%) on the estimated assessable profits arising in Hong Kong during the year/period.
Period from
1st November,
Year ended 1996 to
31st December, 31st December,
1998 1997
HK$'000 HK$'000
Group:
The People's Republic of China:
Hong Kong
Current year/period provision 1,629 2,948
Overprovision in prior period/year (1,457) (196)
Deferred (note 19) (1,196) (129)
Mainland China 36 92
Associated companies -- --
----- -----
Taxation charge/(credit) for the year/period (988) 2,715
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In accordance with the applicable enterprise income tax law of the People's Republic of China (the "PRC"), the Group's subsidiaries registered in the PRC, Dongguan Yifu Circuit Board Factory ("Yifu") and Gaojin Electronics (Shenzhen) Co., Limited ("Gaojin"), are exempt from income tax for the first two profitable years of operations and are entitled to 50% relief on the income tax that would otherwise be charged for the succeeding three years. As Yifu began its first profitable year in 1994, Yifu is entitled to a 50% relief on income tax, at an effective rate of 12% in 1998 (1997: 12%). Gaojin has yet to achieve profitable operations and so its income tax exemption holiday has not yet commenced.
The net profit attributable to shareholders dealt with in the financial statements of the Company is HK$4,000 (1997: HK$777,000).
The calculation of basic earnings/(loss) per share is based on the loss attributable to shareholders for the year of HK$26,486,000 (1997: profit of HK$11,027,000) and the weighted average of 439,228,815 shares (1997: 436,051,211 shares) in issue during the year/period.
There were no dilutive potential ordinary shares as at 31st December, 1998 so the calculation of diluted loss per share is not necessary. There is no diluted earnings per share shown for the period ended 31st December, 1997 as the dilution effects arising from the exercise of warrants would have been anti-dilutive.
The adoption of the revised Statement of Standard Accounting Practice No. 5 "Earnings Per Share" issued by the Hong Kong Society of Accountants has resulted in some modifications to the basis of calculation of earnings/(loss) per share amounts and the disclosures presented for earnings/(loss) per share.
Group
Furniture,
Leasehold Leasehold fixtures
land and improve- Plant and and office Motor
buildings ments machinery equipment vehicles Total
HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000
Cost or valuation:
At beginning
of year 95,060 18,604 85,719 9,361 5,687 214,431
Additions -- 4,300 20,118 2,046 -- 26,464
Disposals -- (40) (1,370) (68) (734) (2,212)
Revaluation
deficit (17,060) -- -- -- -- (17,060)
------- ------ ------- ------ ----- -------
At 31st December,
1998 78,000 22,864 104,467 11,339 4,953 221,623
------- ------ ------- ------ ----- -------
Accumulated depreciation:
At beginning
of year -- 2,797 13,938 3,723 1,809 22,267
Provided during
the year 2,369 2,317 9,366 1,735 1,075 16,862
Disposals -- (13) (502) (13) (419) (947)
Write back on
revaluation (2,369) -- -- -- -- (2,369)
------- ------ ------- ------ ----- -------
At 31st December,
1998 -- 5,101 22,802 5,445 2,465 35,813
------- ------ ------- ------ ----- -------
Net book values:
At 31st December,
1998 78,000 17,763 81,665 5,894 2,488 185,810
======= ====== ====== ====== ===== =======
At 31st December,
1997 95,060 15,807 71,781 5,638 3,878 192,164
======= ====== ====== ====== ===== =======
The analysis of the leasehold land and buildings at 31st December, 1998 is as follows:
At
valuation
HK$'000
Medium term leasehold land
and buildings situated in Mainland China 28,000
Medium term leasehold land and buildings situated in Hong Kong 50,000
------
78,000
======
The leasehold land and buildings have been valued on an open market value basis, based on their existing use by A A Property Services Limited, an independent firm of professional valuers, on 31st December, 1998 at HK$78,000,000.
Had the Group's land and buildings stated at valuation been carried at cost less accumulated depreciation, they would have been included in the financial statements at approximately HK$79,440,000 (1997: HK$82,352,000).
Certain of the above leasehold land and buildings were pledged to secure the mortgage loan granted to the Group (note 18). The net book values of the pledged assets included in the total amount of fixed assets at 31st December, 1998 amounted to HK$30,000,000 (1997: HK$40,000,000).
The net book value of assets held under finance leases included in the total amount of fixed assets at 31st December, 1998 amounted to HK$Nil (1997: HK$157,000). The depreciation charge for the year in respect of such assets amounted to HK$26,000 (1997: HK$60,000).