I am pleased to present my review of the results and operations of the Herald Group ("The Group") for the year ended 31 March 1998.

RESULTS

The Group's turnover ("Turnover") and profit attributable to shareholders ("Net Profit") for the year under review amounted to HK$1,039 million and HK$5 million respectively. As compared to last year, the Turnover increased slightly by 1% while the Net Profit had a drop of 63%. The earnings per share for the year decreased to 0.79 cent from last year's 2.25 cents.

The Net Profit is stated after accounting for exceptional items of HK$24.2 million and credits arising from contributions of losses by minority interests amounting to HK$24.4 million, details of which are described below.

REVIEW OF OPERATIONS

During the year under review the toy division, the timepiece division and the houseware division all performed well with higher turnover as compared to the previous year. The toy division had a healthy recovery in its turnover and profitability compared to the previous year. The business of both the timepiece division and the houseware division remained steady. In the timepiece division, the children's character watches and the newly acquired licenses "Head" and "The Spice Girls" watches all experienced strong sales during the year under review. The business in the houseware division remained stable with an encouraging increase in sales in the United Kingdom market, which made up for the decline in sales in the Japanese market.

Due to the fading-out of the business for metal heads and the weak demand for thin-film heads, the computer head division experienced a severe drop in its turnover. The division had operating losses of HK$24 million which primarily accounted for the drop in the Group's operating profit. The directors decided to close down the division's production facilities in Shanghai and concentrate the manufacturing capacities in the factories in Zhuhai. The costs of closure of the Shanghai operation amounting to HK$7.6 million are shown as an exceptional item in the accounts. In order to establish its technology and market position, much effort has been placed on research and development in higher-end head products, particularly the half-inch ferrite heads. The related research and development costs amounting to HK$16.6 million were also charged to the accounts as an exceptional item. As the Group has approximately 52% to 69% interests in the companies under this division, the division's net losses attributable to the Group are reduced by $21 million which represents minority shareholders' share of the division's operating losses and the above-mentioned exceptional items.

LIQUIDITY AND FINANCIAL RESOURCES

As at 31 March 1998 the Group had total assets of HK$616 million which were financed by current liabilities of HK$127 million, deferred taxation of HK$1 million, minority interests of HK$34 million and shareholders' equity of HK$454 million.

At the end of the financial year, the Group had a strong balance sheet with a healthy liquidity position. As at 31 March 1998 the Group maintained fixed deposits and cash balances aggregating HK$123 million and had bank borrowings of only HK$13 million. At the balance sheet date the working capital ratio was 2.78, as compared to 2.19 last year and the quick ratio has improved to 1.56 from 0.94.

PROSPECTS AND GENERAL OUTLOOK

The recent Asian financial crisis has adversely affected the general business environment in Hong Kong. The current high interest rates and tightening of credit provisions have little short-term impact on the Group's operations as the Group now maintains a net cash position. However both the toy division and the houseware division are now facing more severe competition, not just from local manufacturers but also factories from neighbouring countries which benefit from lower costs due to devaluation of their currencies. Both divisions started the current financial year with a lower sales order book compared to that of the previous year. The computer head division remains difficult in the first half of the new fiscal year and its ability to return to profitability depends on the market demand of its new higher-end head products developed in 1997. On the other hand, the directors are positive on the prospects for the timepiece division which now concentrates more on the European markets.

DIVIDENDS

The Directors will recommend a final dividend of 1 cent per share at the forthcoming Annual General Meeting to be held on 15 September 1998. Together with the interim dividend of 1 cent per share, total dividends for the year under review will amount to 2 cents per share.

APPRECIATION

On behalf of the board of directors and shareholders, I should like to extend my sincere thanks to all the Group's employees for their efforts and hard work.

George Bloch
Chairman

Hong Kong, 30 July 1998

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