Tonic Industries Holdings Limited



Overall the Group's performance during the year has improved significantly as compared to last year.


Major financial indicators and ratios were improved and the Group is now operating in a more healthy position. In view of the instability of the market, the Group has adopted a conservative approach in its financial management, the Group has retained HK$153 million (1997: HK$46 million) cash and deposits at banks and has limited the interest bearing borrowings to similar amount as last year. This has helped to improve the working capital of the Group and to reduce interest expenses. In addition, a majority of the Group's borrowings were priced on prime basis, thus interest exposure of the Group were not much affected by the volatile HIBOR during the year. The gearing ratio was reduced from 2.29 to 0.61 at the year end date. As a result of adopting stringent financial management policy, the Group's liquidity was improved significantly over the year. Current ratio was strengthened from 0.80 to 0.99. The shortening of inventory turnover from 59 days to 54 days and accounts receivable turnover from 24 days to 21 days provided further efficient working capital management. Net profit margin was maintained despite severe market competition.


The major category of products manufactured by the Group such as Portable CD/cassette recorders and CD portables are still the most popular items of the Group. Sales of these two categories amounted to approximately 73% of the Group's total sales as compared to approximately 62% of last year. We believe demand for these products will remain strong next year. The new Dolby Prologic range of products have started to contribute to the profit for this year and will become more significant next year. Another range of products will be the Mini-disc products which is expected to be in mass production at the end of this year. We believe the potential for this category of products is high and will become another successful line of products to complement the CD type products.


The profit attributable to shareholders for the year ended 31 March 1998 of HK$41.5 million exceeded the HK$32 million forecasted profit as shown in the Company's prospectus dated 30 September 1997. The major reasons were due to the strong demand of sales during the year and the increase in interest income.

The period from December to March is traditionally the slack season for the industry. However, the Group's level of sales for the period from December 1997 to March 1998 remained high due to strong demand from the Group's European and American customers and this is not originally anticipated. To a lesser extent, interest income generated from the increased cashflows due to the increase of sales and the oversubscription money also contributed to the difference of profit forecasted.


The listing proceeds, net of expenses, amounting to approximately HK$60 million were applied as follows during the year;

- as to approximately HK$6 million for the acquisition of production equipment;

- as to approximately HK$12 million for the construction of the new factory buildings; and

- as to approximately HK$2 million for the development of new products.

The Group planned to apply a further approximately HK$30 million for the acquisition of production equipment and construction of the new factory buildings.

The remaining proceeds have been retained for use as working capital and any surplus have been placed on short term deposits.


As at the latest practicable date of preparing this annual report, the Company's share price was trading above the offer price on its initial public offering, this is encouraging and reflects confidence from investors of the Group's future performance. The Directors have recommended the issue of bonus shares and bonus warrants in order to improve the liquidity of the Company's shares and to provide a channel for the Group to raise additional capital.


The Group realises the importance of providing quality services to its customers and that quality products could only be manufactured by company having good internal control and quality standards. Therefore, the Group has employed professional consulting company to assist the Group in restructuring its internal control system and setting out quality standards in a view to achieve the above objectives.


Year 2000 Problem refers to date-related problems that occur in all systems where a two number digit year is used. These systems may not be able to handle leap year or to roll forward from year 1999 to 2000. As a result, all activities which are initiated and operated in connection with the date may be affected. Management understands that those systems, including both IT and non-IT systems, as well as items containing embedded chips, are Year 2000 compliant only if such date-related problems are eliminated.

As far as the Group is concerned, Year 2000 Problem may cause potential errors in purchasing, material planning and accounting functions where the impact of date-related problems on the operations will be the most significant. When running from year 1999 to 2000, the computer may, for instance, record wrongly the shipment date on the customer order, leading to disorder material planning. There may be risks of material shortage for productions or of excessive materials for warehouse resulting from inaccurate planning. Hence, the Group may not deliver the goods to the customers on time and they may claim for their losses from delay shipments. For accounting function, the preparation of certain management reports that are date-dependent may also be affected. For example, aging analysis of accounts receivable and payable may be wrongly generated and thus affecting the management decision on cash receipt and collection accordingly.

Being a leading audio products manufacturer, the Group realises the importance of maintaining good relationship with customers and suppliers. Therefore, in March 1998, an ad hoc committee ("the Committee") was formed and conducted meetings with department heads to discuss the Year 2000 Problem, the associated risks and the user requirement of Year 2000 compliant system. In addition, the Committee is responsible for the communication between the Group and external parties such as customers, suppliers and bankers, in respect of Year 2000 issues. In April 1998, the Committee selected a computer engineering house to commence conversion exercise of the current system to Year 2000 compliant system. System testing is now scheduled to be performed starting late August 1998. The implementation of the new system is expected to be completed in March 1999 and will be fully operational for all departments.

The total estimated costs to be spent for the Year 2000 compliant project, including software and hardware modifications, by the Group are approximately HK$2.5 million. The costs will be capitalised as fixed asset costs once they are incurred, and be depreciated at an appropriate rate in accordance with the Group's depreciation policy. As at 31 March 1998, there exist no significant authorised or contracted commitments in respect of Year 2000 compliant modification costs.

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