AV Concept Holdings Limited — Proxy Solicitation & Information Statement 2005

Jul 18, 2005

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in the Company, you should at once hand this circular to the purchaser or transferee or to the bank, the stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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AV CONCEPT HOLDINGS LIMITED

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 595)

MAJOR TRANSACTION INVOLVING A DISPOSAL OF EQUITY INTERESTS IN AV CHASEWAY IN CONSIDERATION FOR CERTAIN INTERESTS IN BRECONRIDGE

A notice convening an extraordinary general meeting of the Company to be held at The Conference Room, 6th Floor, Enterprise Square Three, 39 Wang Chiu Road, Kowloon Bay, Hong Kong on Friday, 29 July 2005 at 11:00 a.m. is set out on pages 99 to 100 of this circular. Whether or not you are able to attend the meeting, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Company’s Hong Kong branch share registrar, Tengis Limited, at G/F, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the meeting or any adjournment thereof should you so wish.

15 July 2005

CONTENTS

			Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			5
Appendix I	–	Financial information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Appendix II	–	Financial information of BreconRidge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	64
**Appendix III **	–	Unaudited pro forma financial information of the enlarged Group . . . . . .	85
Appendix IV	–	Profit estimates of AV Chaseway. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	90
Appendix V	–	General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	94
Notice of EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			99

DEFINITIONS

In this circular, the following expressions have the following meanings unless the context requires otherwise:

“Agreed Adjustment”

any adjustment, which may be applicable to the BreconRidge Warrant Shares and the Final Closing BreconRidge Shares as more fully described in the paragraph headed “Agreed Adjustment” in the letter from the Board as set out in this circular

• “Agreement” an agreement dated 25 April 2005 (as amended by a supplemental agreement dated 28 April 2005) entered into between AVCC and BreconRidge as set out in the section headed “The Agreement” in the letter from the Board as set out in this circular

• “Announcement”

• the announcement of the Company dated 9 May 2005 regarding the Agreement

• “associates”

has the same meaning as ascribed to it under the Listing Rules

• “AVCC”

• AV Concept (China) Industrial Co., Limited, a company incorporated in Hong Kong and a wholly owned subsidiary of the Company

• “AVCM”

• AVC Manufacturing Services Limited, a company incorporated in Hong Kong and a wholly owned subsidiary of the Company

• “AV Chaseway” AV Chaseway Limited, a company incorporated in Hong Kong and a wholly owned subsidiary of the Company

• “Board”

the board of Directors

• “BreconRidge” BreconRidge Manufacturing Solutions Corporation, a company incorporated in Canada

• “BreconRidge Convertibles” the outstanding preferred shares, options and warrants of BreconRidge conferring the holders the rights to subscribe for common shares of BreconRidge

• “BreconRidge Warrant Shares”

• 7.5 million common shares of BreconRidge (subject to Agreed Adjustment) to be issued by BreconRidge to AVCC upon the exercise or deemed exercise of the Warrant by AVCC

• “Change of Control Event”

an amalgamation, merger or other arrangement (other than (i) a change in the relative shareholdings of the two largest shareholders of BreconRidge so long as they together hold greater than 50% of the votes attached to all outstanding shares of BreconRidge (on an as-if converted to common shares basis); (ii) issuance of new shares for

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DEFINITIONS

the purpose of completing an acquisition; or (iii) a Liquidity Event) leading to a change in control of more than 50% of the votes attached to all outstanding shares of BreconRidge (on an as-if converted to common shares basis) as more fully described in the Agreement

• “Company”

• “connected person(s)”

• “Directors”

• “Disposal”

• “EGM”

• “Exit Notice”

• “Extension Fee”

• “EYCFL”

• “Final Closing”

• “Final Closing BreconRidge Shares”

AV Concept Holdings Limited, a company incorporated in the Cayman Islands with limited liability and the shares of which are listed on the main board of the Stock Exchange

has the same meaning as ascribed to it under the Listing Rules

the directors of the Company

• the disposal of the First Tranche Shares and the possible disposal of the Second Tranche Shares by AVCC to BreconRidge pursuant to the Agreement

• the extraordinary general meeting of the Company to be convened and held to consider and, if thought fit, to approve, among other things, the transactions contemplated under the Agreement and ancillary agreements/documents, the notice of which is set out on pages 99 to 100 of this circular

• the notice to be issued by either AVCC or BreconRidge as provided in the Agreement indicating such party’s intention to exit the transaction contemplated under the Agreement

• a sum of US$2 million to be paid in cash on or before the second anniversary of the date of Initial Closing as an extension fee for the Liquidity Event to take place after the second anniversary of Initial Closing

• Ernst & Young Corporate Finance Limited, a licensed corporation to carry out types 1 (dealing in securities) and 6 (advising on corporate finance) regulated activities for the purposes of the SFO

• completion of the sale and purchase of the Second Tranche Shares under the Agreement

• such number of common shares in BreconRidge to be issued by BreconRidge to the Company at Final Closing pursuant to the Agreement as set out under the paragraph headed “Occurrence of a Liquidity Event and Final Closing” in the letter from the Board as set out in this circular

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DEFINITIONS

“First Tranche Shares”

• “Group”

• “Hong Kong”

• “HK$”

• “Initial Closing”

• “Joint Venture Period”

• “Latest Practicable Date”

• “Liquidity Event”

• “Listing Rules”

• “PRC”

• “Pre-Initial Closing Transactions”

• “Second Tranche Shares”

• “SFO”

• “Share(s)”

• “Shareholder(s)”

shares of AV Chaseway representing 50% of the issued share capital of AV Chaseway as at the date of Initial Closing

the Company and its subsidiaries

The Hong Kong Special Administrative Region of the PRC

Hong Kong dollars, the lawful currency of Hong Kong

• completion of the sale and purchase of the First Tranche Shares and the issue of the Warrant under the Agreement

• the period between Initial Closing and Final Closing

• 12 July 2005, being the latest practicable date prior to the printing of this circular for ascertaining certain information for inclusion in this circular

• the event upon which, among other things, Final Closing is conditional, which consist of the listing of BreconRidge or the listing of any entity that has acquired the business or assets of BreconRidge on one or more of The Toronto Stock Exchange, the New York Stock Exchange, the NASDAQ National Market system, the AMEX Exchange, the AIM Exchange or the Stock Exchange; or the sale of all the shares of BreconRidge, or the sale of all or substantially all of the assets of BreconRidge, or any other transaction, that will result in AVCC being entitled to receive cash or tradeable shares

the Rules Governing the Listing of Securities on the Stock Exchange

The People’s Republic of China

• the transactions to be carried out by AV Chaseway before Initial Closing as more fully described in the paragraph headed “Pre-Initial Closing Transactions” in the letter from the Board as set out in this circular

• shares of AV Chaseway representing the remaining 50% of the issued share capital of AV Chaseway

• the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

• ordinary share(s) of HK$0.10 each in the share capital of the Company

• holder(s) of the Share(s)

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DEFINITIONS

“Shareholders’ Agreement” the shareholders’ agreement to be entered into amongst AV Chaseway, AVCC and BreconRidge to govern, among other things, the management and operation of AV Chaseway during the Joint Venture Period “Stock Exchange” The Stock Exchange of Hong Kong Limited “Supply Agreement” the supply agreement to be entered into amongst AV Chaseway, AVCM and BreconRidge in respect of the supply by AV Chaseway of manufacturing services “Total Consideration Shares” the BreconRidge Warrant Shares and the Final Closing BreconRidge Shares “Warrant” a warrant entitling AVCC to subscribe for the BreconRidge Warrant Shares on the terms and conditions specified in the Agreement, being the consideration for the sale of the First Tranche Shares “US$” United State dollars, the lawful currency for the time being of the United States of America “%” per cent.

For the purpose of this circular, amounts denominated in US$ have been translated, for the purpose of illustration only, into HK$ at a rate of US$1 = HK$7.8. No representation is made that any amount in US$ or HK$ could have been or could be converted at the above rate or at any other rates or at all.

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LETTER FROM THE BOARD

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AV CONCEPT HOLDINGS LIMITED

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 595)

Directors: So Yuk Kwan (Chairman) Lee Jeong Kwan So Chi On Lai Yat Hung, Edmund Dr. Hon. Lui Ming Wah, SBS, JP Charles Edward Chapman Wong Ka Kit*

Registered office: P.O. Box 309 Ugland House South Church Street George Town Grand Cayman Cayman Islands British West Indies

* Independent non-executive Directors

Principal office: 6th Floor Enterprise Square Three 39 Wang Chiu Road Kowloon Bay Hong Kong 15 July 2005

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION INVOLVING A DISPOSAL OF EQUITY INTERESTS IN AV CHASEWAY IN CONSIDERATION FOR CERTAIN INTERESTS IN BRECONRIDGE

INTRODUCTION

It was announced on 9 May 2005 that on 25 April 2005, AVCC (as seller) and BreconRidge (as purchaser) entered into the Agreement pursuant to which AVCC has agreed to dispose of equity interests in AV Chaseway to BreconRidge in consideration for certain interests in the common shares of BreconRidge. Upon Initial Closing, AVCC will dispose of the First Tranche Shares (representing 50% of the entire issued share capital of AV Chaseway) to BreconRidge in consideration for the Warrant entitling AVCC to subscribe for the BreconRidge Warrant Shares. The Warrant will be deemed exercised at Final Closing upon the occurrence of a Liquidity Event (including the listing of the shares of BreconRidge on certain international stock exchanges). After Initial Closing, AV Chaseway will be held as to 50% by AVCC and as to 50% by BreconRidge and will be managed and operated by both AVCC and BreconRidge as a joint venture. Depending on the circumstances, Final Closing may or may not occur. Upon Final Closing, the Company will further dispose of the Second Tranche Shares (representing the remaining 50% of the entire issued share capital in AV Chaseway) to BreconRidge. The consideration for the sale of

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LETTER FROM THE BOARD

the First Tranche Shares and the Second Tranche Shares may vary depending on the event triggering Final Closing as well as the timing of such event. However, the total consideration for the First Tranche Shares and the Second Tranche Shares under the Agreement, if Final Closing occurs as a result of the occurrence of a Liquidity Event within 2 years of Initial Closing or after 2 years of such date but an Extension Fee has been paid, will in any event be not less than US$20 million in the form of cash and/or securities. If Final Closing occurs as a result of the occurrence of a Liquidity Event after 2 years of Initial Closing and no Extension Fee has been paid, the total consideration will in any event be not less than US$22 million. The Agreement also provides for a number of alternatives in the event that no Liquidity Event occurs within 3 years of Initial Closing, including certain exit mechanisms whereby AVCC will get back the 50% equity interest from BreconRidge and the Warrant will be cancelled or the joint venture relationship may be maintained. Further details will be described in the following paragraphs.

The Disposal constitutes a major transaction of the Company pursuant to Chapter 14 of the Listing Rules which is subject to the approval of the Shareholders. An EGM will be convened by the Company at which an ordinary resolution will be proposed to approve the transactions contemplated under the Agreement and ancillary agreements/documents.

The purpose of this circular is to provide you with further details of the Agreement and certain relevant ancillary agreements. A notice of the EGM is set out on pages 99 to 100 of this circular.

THE AGREEMENT

The Disposal

Pursuant to the Agreement, AVCC has conditionally agreed to dispose of and BreconRidge has conditionally agreed to acquire the equity interests of AV Chaseway, in consideration for certain interests in BreconRidge. The Company has also undertaken to BreconRidge by a separate ancillary agreement that it will procure the due and punctual performance of each obligation of AVCC and AVCM (both wholly owned subsidiaries of the Company) contained in the Agreement and certain relevant ancillary agreements (including the Shareholders’ Agreement and the Supply Agreement) and agrees to indemnify (and keep indemnified) BreconRidge on demand any loss, liability or cost incurred by BreconRidge as a result of any of AVCC’s or AVCM’s failure to perform such obligation. AVCM, a party to the Supply Agreement, is the operating entity within the Group designated to utilise the manufacturing services provided by AV Chaseway upon Initial Closing. Please refer to the section headed “Supply Agreement” below.

The percentage holdings of AVCC in BreconRidge set out in this circular are for illustration purposes only because the Warrant and certain of the BreconRidge Convertibles may only be exercised/ converted upon the occurrence of certain events. Furthermore, the illustrative percentage holdings have not taken into account any possible dilution effect which may be caused by BreconRidge issuing further securities upon the occurrence of the Liquidity Event (such as a public offering).

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LETTER FROM THE BOARD

Initial Closing

Upon Initial Closing, AVCC will dispose of the First Tranche Shares (representing 50% equity interest in AV Chaseway) to BreconRidge in consideration for the Warrant entitling AVCC to subscribe for the BreconRidge Warrant Shares (comprising 7.5 million common shares of BreconRidge, subject to Agreed Adjustment). The Agreement does not contain any provision attaching any options, warrants or preferred shares, subject to Agreed Adjustment, to the BreconRidge Warrant Shares.

Upon Initial Closing, AV Chaseway will cease to be a subsidiary of the Company and will be held as to 50% by AVCC and as to 50% by BreconRidge as a jointly-controlled entity. Unless expressly provided for in the Agreement and the relevant ancillary agreements/documents, BreconRidge shall not dispose of its interest in the First Tranche Shares after the date of Initial Closing. BreconRidge will also grant a first charge on the First Tranche Shares in favour of AVCC at Initial Closing by a separate ancillary agreement.

The Warrant is not transferable except amongst AVCC and the Company and their respective wholly owned subsidiaries. The Warrant shall be exercised or deemed to be exercised in whole but not in part by AVCC, without any further additional payment. The Warrant shall be deemed exercised by AVCC at Final Closing upon the occurrence of a Liquidity Event. AVCC shall have the right to exercise the Warrant at any time after the third anniversary of the date of Initial Closing if a Liquidity Event has not occurred by then. The Warrant shall terminate in accordance with the relevant terms of the Agreement.

Initial Closing is conditional upon, among other things, the Shareholders having approved the transactions contemplated under the Agreement and the ancillary agreements and documents in the manner required under the Listing Rules, and all necessary approvals and consents having been obtained.

The date of Initial Closing was expected to be 30 June 2005. However, since certain conditions to the Initial Closing had not been satisfied on 30 June 2005, the date of Initial Closing shall be 10 days after the day on which the last condition is satisfied or waived. The parties may also agree in writing any other date for Initial Closing. Unless otherwise agreed by the parties, the long stop date for Initial Closing is 30 October 2005. The Company will make a further announcement in the event that the parties agree in writing to change the long stop date.

AVCC will not nominate any representative to the board of directors of BreconRidge. Pursuant to the Agreement, AVCC has the right to appoint an observer to attend all meetings of the board of directors of BreconRidge from the date of the Agreement until the Warrant is exercised, terminated or ceases to have any effect.

Occurrence of a Liquidity Event and Final Closing

It is the intention of the parties that a Liquidity Event should occur within 2 years after Initial Closing. Upon the notification by BreconRidge to AVCC of the anticipated occurrence of a Liquidity Event, the parties shall proceed with Final Closing on or before the completion of the Liquidity Event.

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LETTER FROM THE BOARD

Final Closing

Upon Final Closing, AVCC will further dispose of the Second Tranche Shares (representing the remaining 50% of the entire issued share capital of AV Chaseway) to BreconRidge. AV Chaseway will then be wholly owned by BreconRidge.

The consideration for the sale of the First Tranche Shares and the Second Tranche Shares by AVCC to BreconRidge as well as the form of such consideration (common shares of BreconRidge and/or cash) may vary depending on the event triggering Final Closing as well as the timing of such event. Please refer to the following paragraphs for details.

If a public offering of shares of BreconRidge takes place and AVCC is required to comply with certain mandatory obligations in respect of its ownership of shares of BreconRidge (including but not limited to escrow obligations and restriction of sale) under any laws or regulations in relation to such public offering of shares, AVCC has agreed to comply with such obligations.

If a Liquidity Event occurs on or before the second anniversary of Initial Closing or if a Liquidity Event occurs after the second anniversary of Initial Closing and the Extension Fee has been paid

If a Liquidity Event occurs within 2 years after Initial Closing or if a Liquidity Event occurs after the second anniversary of Initial Closing and the Extension Fee has been paid prior to the second anniversary of Initial Closing, the Final Closing BreconRidge Shares to be issued at Final Closing will be 7.5 million common shares of BreconRidge (subject to Agreed Adjustment). The Warrant will also be deemed to be exercised by AVCC upon Final Closing and BreconRidge shall issue the BreconRidge Warrant Shares to AVCC. In such case, the Total Consideration Shares to be issued by BreconRidge to AVCC will be 15 million common shares of BreconRidge (subject to Agreed Adjustment). Based on the number of common shares of BreconRidge in issue as at the date of the Agreement, 15 million common shares of BreconRidge represent approximately 16.9% of the issued common share capital of BreconRidge as enlarged by the issue of such common shares and approximately 7.8% of the common share capital of BreconRidge as further enlarged by the full exercise/conversion of the BreconRidge Convertibles.

If the fair market value of the Total Consideration Shares as at the date of the Liquidity Event is less than US$20 million, BreconRidge will pay to AVCC the difference between the fair market value of the Total Consideration Shares and US$20 million in cash or, if AVCC so elects, wholly or partly by issuing additional shares of BreconRidge at the then market value of such shares. In the event that AVCC elects to receive additional shares of BreconRidge, the Company will comply with the relevant Listing Rules in respect of such acquisition by that time. No payment will be required to be made by BreconRidge if the fair market value of the Total Consideration Shares as at the date of the Liquidity Event is US$20 million or more.

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LETTER FROM THE BOARD

If a Liquidity Event occurs after the second anniversary of Initial Closing and no Extension Fee has been paid

If a Liquidity Event occurs after the second anniversary of Initial Closing and no Extension Fee has been paid, the Final Closing BreconRidge Shares to be issued at Final Closing will be 9 million common shares of BreconRidge (subject to Agreed Adjustment). The Warrant will also be deemed to be exercised by AVCC upon Final Closing and BreconRidge shall issue the BreconRidge Warrant Shares to AVCC. In such case, the Total Consideration Shares to be issued by BreconRidge to AVCC will be 16.5 million common shares of BreconRidge (subject to Agreed Adjustment). Based on the number of common shares of BreconRidge in issue as at the date of the Agreement, 16.5 million common shares of BreconRidge represent approximately 18.3% of the issued common share capital of BreconRidge as enlarged by the issue of such common shares and approximately 8.2% of the common share capital of BreconRidge as further enlarged by the full exercise/conversion of the BreconRidge Convertibles.

If the fair market value of the Total Consideration Shares as at the date of the Liquidity Event is less than US$22 million, BreconRidge will pay to AVCC the difference between the fair market value of the Total Consideration Shares and US$22 million in cash or, if AVCC so elects, wholly or partly by issuing additional shares of BreconRidge at the then market value of such shares. In the event that AVCC elects to receive additional shares of BreconRidge, the Company will comply with the relevant Listing Rules in respect of such acquisition by that time. No payment will be required to be made by BreconRidge if the fair market value of the Total Consideration Shares as at the date of the Liquidity Event is US$22 million or more.

Occurrence of a Change of Control Event after Initial Closing and before the occurrence of a Liquidity Event

Upon the notification of a Change of Control Event after Initial Closing and before the occurrence of a Liquidity Event, AVCC may elect to:

• (i) proceed to Final Closing, i.e. exercising the Warrant and disposing of the remaining 50% interest in AV Chaseway to BreconRidge and receive the Total Consideration Shares (being 15 million common shares of BreconRidge (subject to Agreed Adjustment) if the Change of Control Event takes place within 2 years after Initial Closing or if the Change of Control Event takes place after the second anniversary of Initial Closing and the Extension Fee has been paid by BreconRidge; or 16.5 million common shares of BreconRidge (subject to Agreed Adjustment) if the Change of Control Event takes place after the second anniversary of Initial Closing and no Extension Fee has been paid by BreconRidge); or

• (ii) exit the transaction contemplated under the Agreement (i.e. transfer of the First Tranche Shares from BreconRidge to AVCC and termination of the Warrant) by issuing an Exit Notice; or

• (iii) continue to wait for the possible occurrence of a Liquidity Event.

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LETTER FROM THE BOARD

If AVCC issues an Exit Notice under the above circumstances, BreconRidge may within 15 business days elect to proceed to Final Closing by paying cash to AVCC as the aggregate consideration for the First Tranche Shares and the Second Tranche Shares. Such cash payment shall be in the amount of US$20 million if the Change of Control Event takes place within 2 years after Initial Closing or if the Change of Control Event takes place after the second anniversary of Initial Closing and the Extension Fee has been paid by BreconRidge; or US$22 million if the Change of Control Event takes place after the second anniversary of Initial Closing and no Extension Fee has been paid by BreconRidge. The Warrant under these circumstances will be terminated and cease to have any effect. In such case, AV Chaseway would become a wholly owned subsidiary of BreconRidge and AVCC would not hold any shares in BreconRidge.

If AVCC issues an Exit Notice and BreconRidge does not elect to proceed to Final Closing within the 15 business day period, the parties will proceed to exit the transaction under which the First Tranche Shares will be transferred by BreconRidge to AVCC and the Warrant will be terminated. In such case, AV Chaseway would become a wholly owned subsidiary of AVCC and AVCC would not hold any shares in BreconRidge. Further, upon such exit of the transaction, BreconRidge shall pay to AVCC an additional amount of US$3 million in cash as consideration for taking part in the operation of AV Chaseway during the period from Initial Closing to the exit date. The flat exit fee of US$3 million has been determined based on arm’s length negotiations between the Group and BreconRidge.

No Liquidity Event occurs by the third anniversary of Initial Closing

If no Liquidity Event occurs by the third anniversary of Initial Closing and provided the parties have not proceeded to Final Closing or exit the transaction as a result of a Change of Control Event as mentioned above, each of AVCC and BreconRidge will have certain rights to deal with its interest in AV Chaseway.

At any time after the third anniversary of Initial Closing, AVCC has the right to indicate its intention to exit the transaction. Further, at any time after the third anniversary of Initial Closing and before AVCC electing to indicate its intention to exit the transaction, AVCC may elect to exercise the Warrant and subscribe for the BreconRidge Warrant Shares. If AVCC elects to exercise the Warrant after the third anniversary of Initial Closing, AV Chaseway would be held as to 50% by AVCC and as to 50% by BreconRidge as a jointly-controlled entity and AVCC would hold 7.5 million common shares in BreconRidge (subject to Agreed Adjustment). Based on the number of common shares of BreconRidge in issue as at the date of the Agreement, 7.5 million common shares in BreconRidge represent approximately 9.2% of the issued common share capital of BreconRidge as enlarged by the issue of such common shares and approximately 3.9% of the common share capital of BreconRidge as further enlarged by the full exercise/conversion of the BreconRidge Convertibles.

If AVCC does not elect to exercise the Warrant, at any time after the third anniversary of Initial Closing, AVCC may elect to indicate its intention to exit the transaction contemplated under the Agreement.

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LETTER FROM THE BOARD

If AVCC indicates its intention to exit the transaction, BreconRidge may:

• (i) within 15 business days elect to proceed to Final Closing by paying cash to AVCC as the aggregate consideration for the First Tranche Shares and the Second Tranche Shares. Such cash payment shall be in the amount of US$22 million if the Extension Fee has not been paid before the second anniversary of Initial Closing or US$20 million if the Extension Fee has been paid. The Warrant under these circumstances will be terminated and cease to have any effect. In such case, AV Chaseway would become a wholly owned subsidiary of BreconRidge and AVCC would not hold any shares in BreconRidge;

• (ii) if BreconRidge does not elect to proceed to Final Closing, BreconRidge may within another 15 business days elect to maintain the joint venture relationship by terminating the Warrant and paying cash of US$11 million (or US$9 million if the Extension Fee has been paid) to AVCC as the consideration for acquiring the First Tranche Shares. In such case, AV Chaseway would be held as to 50% by the Company and as to 50% by BreconRidge as a jointlycontrolled entity and AVCC would not hold any shares in BreconRidge; and

• (iii) in the event BreconRidge does not elect to maintain the joint-venture relationship after expiration of the relevant period, BreconRidge is deemed to have elected to exit the transaction contemplated under the Agreement. In such case, AV Chaseway would become a wholly owned subsidiary of AVCC and AVCC would not hold any shares in BreconRidge. Upon the exit of the transaction, BreconRidge shall pay to AVCC an additional amount of US$3 million in cash as consideration for taking part in the operation of AV Chaseway during the period from Initial Closing to the exit date.

Agreed Adjustment

In respect of the BreconRidge Warrant Shares

If, after the date of the Agreement, either of the following events occurs:

• (a) the common shares of BreconRidge are changed into the same or a different number of shares of any class or series, whether by capital reorganization, reclassification or otherwise; or

• (b) BreconRidge completes a consolidation, amalgamation, arrangement or merger with or into any other corporation or sells all or substantially all of its property and assets as an entirety to any other person,

then, provided, the Warrant remains valid but unexercised as at the occurrence of such event, AVCC shall thereafter be entitled to receive and shall accept, in lieu of the BreconRidge Warrant Shares and without the requirement for the payment of any additional consideration therefor, the number of shares or other securities or property of BreconRidge or of the corporation resulting from such capital reorganization, reclassification, consolidation, amalgamation, arrangement or merger or of the entity to which such sale of all or substantially all of the assets of BreconRidge may be made, as the case may be, that AVCC would have been entitled to receive on the effective date of such capital reorganization, reclassification, consolidation, amalgamation, arrangement, merger or sale if AVCC had been the registered holder of the BreconRidge Warrant Shares immediately prior to the occurrence of such event.

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LETTER FROM THE BOARD

In respect of the Final Closing BreconRidge Shares

• If, after the date of the Agreement, either of the following events occurs:

• (a) the common shares of BreconRidge are changed into the same or a different number of shares of any class or series, whether by capital reorganization, reclassification or otherwise; or

• (b) BreconRidge completes a consolidation, amalgamation, arrangement or merger with or into any other corporation or sells all or substantially all of its property and assets as an entirety to any other person,

then, AVCC shall thereafter be entitled to receive and shall accept, in lieu of the Final Closing BreconRidge Shares and without the requirement for the payment of any additional consideration therefor, the number of shares or other securities or property of BreconRidge or of the corporation resulting from such capital reorganization, reclassification, consolidation, amalgamation, arrangement or merger or of the entity to which such sale of all or substantially all of the assets of BreconRidge may be made, as the case may be, that AVCC would have been entitled to receive on the effective date of such capital reorganization, reclassification, consolidation, amalgamation, arrangement, merger or sale if AVCC had been the registered holder of the Final Closing BreconRidge Shares immediately prior to the occurrence of such event.

Pre-Initial Closing Transactions

Prior to Initial Closing, AVCC will procure AV Chaseway to carry out the following Pre-Initial Closing Transactions so that as at Initial Closing, AV Chaseway will not have any inventory, accounts receivable, accounts payable, outstanding indebtedness, guarantee or liability under any contract, understanding, arrangement or commitment:

• (i) settle all amounts due to and due from AV Chaseway on one hand and AVCC and all members of the Group on the other hand;

• (ii) release and discharge all of AV Chaseway’s existing bank borrowing facilities with AV Chaseway’s bankers, other than any finance leases outstanding as at Initial Closing;

• (iii) release and discharge all outstanding guarantees, cross guarantees and other financial commitments given by AV Chaseway to AVCC or any member of the Group;

• (iv) transfer all trade-related working capital items, including inventories, accounts receivable and accounts payable, on a nil gain nil loss basis to AVCC or an entity nominated by AVCC;

• (v) declare and distribute dividends from AV Chaseway to AVCC such that as at Initial Closing, the net asset value of AV Chaseway will not be less than HK$38 million; and

• (vi) ensure that after the Pre-Initial Closing Transactions are completed and as at Initial Closing, the balance sheet of AV Chaseway will comprise fixed assets stated at their net book value, outstanding liabilities under finance leases, prepayments, accruals, other receivables, other payables and cash in bank.

– 12 –

LETTER FROM THE BOARD

SHAREHOLDERS’ AGREEMENT

During the Joint Venture Period between Initial Closing and Final Closing, AV Chaseway will be owned as to 50% by the Company and as to 50% by BreconRidge as a jointly-controlled entity. Upon Initial Closing, AV Chaseway, AVCC and BreconRidge will enter into the Shareholders’ Agreement to govern, among other things, the management and operation of AV Chaseway during the Joint Venture Period.

AV Chaseway shall have a maximum of seven directors. Each of AVCC and BreconRidge shall have the right to nominate three directors to AV Chaseway. The seventh director of AV Chaseway shall be the chief executive officer of AV Chaseway appointed by the board of directors of AV Chaseway. The quorum at any board meeting shall be four directors including two appointed by AVCC and two appointed by BreconRidge.

SUPPLY AGREEMENT

Upon Initial Closing, AV Chaseway, AVCM and BreconRidge will enter into the Supply Agreement to govern the terms on which AV Chaseway will provide manufacturing services to AVCM and BreconRidge, as the sole source of supply of such manufacturing services for certain products to be manufactured for export from the PRC.

The Supply Agreement shall become effective on the date of Initial Closing and, unless otherwise terminated at an earlier date, shall remain in full force and effect for an initial term of 3 years. Thereafter, unless otherwise terminated, the Supply Agreement shall be automatically renewed for additional consecutive 3 year terms on the same terms and conditions as specified in the Supply Agreement. Notwithstanding the foregoing, if Final Closing or an exit occurs, the Supply Agreement shall terminate on the date that is 18 months thereafter.

During the term of the Supply Agreement, AVCM and BreconRidge shall engage AV Chaseway as their sole source of supply of manufacturing services for products manufactured for export from the PRC. AV Chaseway shall procure that all manufacturing services provided to parties other than AVCM and BreconRidge shall be on terms substantially similar to those contained in the Supply Agreement.

AV Chaseway shall charge AVCM and BreconRidge a commercially reasonable electronic manufacturing service fee based on a pricing model to be adopted by the board of directors of AV Chaseway from time to time. The pricing model shall reflect the obligation of each of AVCM and BreconRidge to provide to AV Chaseway all materials necessary for the provision of the manufacturing services and shall be formulated with an intention to maintain a commercially reasonable level of profit in AV Chaseway.

INFORMATION ON THE GROUP, AV CHASEWAY AND BRECONRIDGE

The Company’s principal activity is investment holding. The Group is principally engaged in the marketing and distribution of electronic components, and design and manufacture of electronic products. AVCC is a wholly owned subsidiary of the Company and is principally engaged in investment holding. AVCM is a wholly owned subsidiary of the Company and is principally engaged in marketing and procurement of electronic products.

– 13 –

LETTER FROM THE BOARD

AV Chaseway is a wholly owned subsidiary of the Company. AV Chaseway’s principal activities are the manufacture and trading of electronic products and Internet appliances. Set out below are the net profits/(losses) before and after taxation of AV Chaseway for the each of the two years ended 31 March 2004 and the six months ended 30 September 2004:

	For the year ended	For the year ended	For the six
	31 March		months ended 30
	2003	2004	September 2004
	(audited)	(audited)	(unaudited)
	HK$’000	HK$’000	HK$’000
Net profit/(loss) before taxation	(4,104)	13,596	10,894
Net profit/(loss) after taxation	(4,104)	11,741	9,894

The net asset values of AV Chaseway amounted to approximately HK$26.2 million (audited) as at 31 March 2004 and approximately HK$36.0 million (unaudited) as at 30 September 2004 respectively.

The excess of the value of US$20 million (equivalent to approximately HK$156 million) attached to the entire equity interest of AV Chaseway over the unaudited net asset value of approximately HK$36 million of AV Chaseway as at 30 September 2004 is approximately HK$120 million.

BreconRidge, a company incorporated in Canada, is principally engaged in the provision of electronic manufacturing services which include manufacturing, engineering services, test development, component management and global procurement, new product introduction expertise, order fulfilment and distribution services, and product repair and end of life support. Set out below are the audited net losses before and after taxation of BreconRidge for the financial year ended 1 June 2003 and the financial year ended 30 May 2004 prepared in accordance with accounting principles generally accepted in Canada:

	US$’000		HK$’000	HK$’000
	2003	2004	2003	2004
Net loss before tax	(169)	(11,445)	(1,318)	(89,271)
Net loss after tax	(314)	(11,898)	(2,449)	(92,804)

The above net losses before tax include restructuring charges of approximately US$1.9 million (equivalent to approximately HK$14.8 million) and approximately US$10.7 million (equivalent to approximately HK$83.5 million) for the financial year ended 1 June 2003 and the financial year ended 30 May 2004 respectively.

As at 30 May 2004, the audited net deficiency in assets of BreconRidge amounted to approximately US$1.8 million (equivalent to approximately HK$14.0 million).

Please refer to Appendix II for the audited financial statements of BreconRidge for the financial year ended 30 May 2004 prepared in accordance with accounting principles generally accepted in Canada.

– 14 –

LETTER FROM THE BOARD

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, BreconRidge and its ultimate beneficial shareholders are third parties independent of the Company and connected persons of the Company (i.e. the directors, chief executive and substantial shareholders of the Company or its subsidiaries or any of their respective associates). To the best of the Directors’ knowledge and based on information provided by BreconRidge, none of the Company or its connected persons holds any common shares of BreconRidge or the BreconRidge Convertibles.

REASONS FOR AND BENEFITS OF THE AGREEMENT AND THE SUPPLY AGREEMENT

The Directors consider that the Agreement enables the Group to join force with BreconRidge in the joint development of AV Chaseway’s business now and to proceed with a second stage disposal of AV Chaseway later subject to BreconRidge obtaining a listing. The joint venture in AV Chaseway may be unwound if BreconRidge does not list. The structure of the Agreement also enables the Group to retain joint control of AV Chaseway until such time as it is paid by BreconRidge in listed securities or cash and to benefit from the synergistic effect arising from the joint development of AV Chaseway’s business by the Group and BreconRidge as set out in the following paragraph.

The Directors understand that, apart from its own manufacturing facilities in North America, BreconRidge currently procures manufacturing services from AV Chaseway as well as other suppliers in the PRC. Pursuant to the Supply Agreement, AV Chaseway will become the sole supplier of BreconRidge in the PRC. Furthermore, the Directors believe that the cost efficient and effective production operation of AV Chaseway in the PRC (as compared to production operations in the North America) may enable BreconRidge to effectively increase its volume of business. The Directors believe that the creation of the joint venture will bring in additional electronic manufacturing service business to AV Chaseway, thus benefiting AV Chaseway (and the Group throughout the period during which the Group retains its joint control in AV Chaseway).

The terms of the Agreement and ancillary agreements/documents (including the total consideration) have been determined based on arm’s length negotiations between the Group and BreconRidge. As stated in the paragraph headed “Occurrence of a Liquidity Event and Final Closing”, it is the intention of the parties that a public offering and listing of the shares of BreconRidge should occur within 2 years after Initial Closing. If a Liquidity Event occurs within 2 years after Initial Closing, AVCC will receive 15 million common shares of BreconRidge (subject to Agreed Adjustment); and if the fair value of such securities as at the date of the Liquidity Event is less than US$20 million, BreconRidge will have to pay to AVCC the shortfall in cash or in additional shares. As stated in the section “Information on the Group, AV Chaseway and BreconRidge” above, the Directors understand that the recent losses recorded by BreconRidge as shown in its financial statements set out in Appendix II was primarily caused by the substantial restructuring charges incurred by BreconRidge. Based on the discussions with BreconRidge and the understanding of BreconRidge’s business plan, there is nothing that has come to the attention of the Directors that would cast serious doubt on their belief that BreconRidge may be able to list its shares through a public offering in two or three years’ time.

– 15 –

LETTER FROM THE BOARD

In agreeing to the above terms, the parties have effectively attached a value of US$20 million to the entire equity interest of AV Chaseway. In assessing whether such terms are fair and reasonable from the Group’s point of view, the Directors have made reference to, among other things, an internal estimate of the financial parameters of AV Chaseway, the market statistics of certain publicly traded companies which are considered to be comparables or near comparables to AV Chaseway, the industry trends and the anticipated synergistic effect of AVCC and BreconRidge joining forces in the development of AV Chaseway’s business as mentioned in the preceding paragraph. AVCC has agreed to wait one more year for a Liquidity Event to occur provided a 10% premium is paid on the total consideration in return. BreconRidge may elect to pay the Extension Fee (US$2 million, being an amount equal to the amount of above-mentioned premium) on or before the second anniversary of Initial Closing.

In attaching a value of US$20 million to the entire equity interest of AV Chaseway, the Directors have made reference to, among other things, AV Chaseway’s estimated unaudited net profit attributable to shareholders for the year ended 31 March 2005 (being approximately HK$13 million, hereinafter referred to as the “Profit Estimate”), estimated earnings before interest, tax, depreciation and amortization for the same year (being approximately HK$23 million, hereinafter referred to as the “Estimated EBITDA”), the Profit Estimate minus the Adjustment (defined below) (being approximately HK$9 million, hereinafter referred to as the “Adjusted Profit Estimate”) and the Estimated EBITDA minus the Adjustment (defined below) (being approximately HK$19 million, hereinafter referred to as the “Adjusted EBITDA”). The “Adjustment” refers to the Directors’ estimate of the gross profit contribution from business derived from BreconRidge for the year ended 31 March 2005 (being approximately HK$4 million). The value of US$20 million represents approximately 12 times the Profit Estimate and approximately 7 times the Estimated EBITDA. The value of US$20 million further represents approximately 17 times the Adjusted Profit Estimate and approximately 8 times the Adjusted EBITDA. The bases and assumptions and the comfort letters issued by Ernst & Young and EYCFL in relation to the profit estimates of AV Chaseway are set out in Appendix IV to this circular.

The Directors believe that the terms of the Agreement and ancillary agreements/documents are fair and reasonable and in the interests of the Shareholders as a whole.

FINANCIAL EFFECTS OF THE TRANSACTION ON THE GROUP

Earnings

The Directors anticipate that the Group’s interests in BreconRidge will be accounted for in the Group’s accounts as an investment upon Initial Closing and, in situations where BreconRidge issues shares to AVCC, upon Final Closing. As such, the results of BreconRidge will not be consolidated or equity accounted for in the financial statements of the Group and therefore the results of BreconRidge will not directly affect the earnings level of the Group. AVCC will not immediately become a shareholder of BreconRidge upon Initial Closing and therefore dividend payment, if any, by BreconRidge will not affect the earnings of the Group until AVCC receives shares in BreconRidge under certain situations upon Final Closing. Pursuant to the Agreement, BreconRidge has undertaken to AVCC that it will not declare any dividend during the period between Initial Closing and the earlier of Final Closing or the exit date. In situations where AVCC receives listed BreconRidge shares upon Final Closing, the Group’s future earnings may be affected by the change in market value of the Group’s investment in such listed securities depending on the then holding intention of the Group.

– 16 –

LETTER FROM THE BOARD

The Group currently accounts for 100% of AV Chaseway’s earnings as AV Chaseway is a whollyowned subsidiary of the Company. Upon Initial Closing, AV Chaseway will cease to be a subsidiary of the Company and will be held as to 50% by AVCC and as to 50% by BreconRidge as a jointly-controlled entity. The Directors anticipate that the results of AV Chaseway will be proportionately (50%) consolidated into the financial statements of the Group in accordance with the relevant Hong Kong Accounting Standards issued by the Hong Kong Institute of Certified Public Accountants effective for financial periods commencing from 1 January 2005. As stated in the section “Information on the Group, AV Chaseway and BreconRidge” above, AV Chaseway recorded net profit after taxation of approximately HK$11.7 million (audited) and approximately HK$9.9 million (unaudited) for the year ended 31 March 2004 and the six months ended 30 September 2004 respectively. Through the disposal of 50% of the Group’s equity interest in AV Chaseway and as long as AV Chaseway remains an entity jointly-controlled by AVCC and BreconRidge, the Group’s earnings (or losses) will include 50% of the earnings (or losses) of AV Chaseway after Initial Closing. Upon Final Closing, the Group will cease to hold any shares in AV Chaseway.

The actual gain or loss on Disposal to be recorded at the appropriate juncture will depend on the occurrence of the exact event leading to the disposal of the First Tranche Shares and/or the Second Tranche Shares, the timing of such event and the future fair values of AV Chaseway and BreconRidge at that particular juncture. As such, Shareholders are advised to interpret any estimated amounts with caution. The Directors estimate that the expected gain on disposal of the First Tranche Shares upon Initial Closing would amount to approximately HK$40 million. Such expected gain was estimated by the Directors on the basis of 50% of the anticipated consideration of US$20 million, 50% of the expected net book value of AV Chaseway of HK$38 million at Initial Closing and the costs to the Group relating to and arising from the transaction. However, the actual gain or loss on Disposal upon Initial Closing may depend on a number of factors as explained above and therefore there is no guarantee that the Group’s future audited accounts will record a gain of such amount. The Company will make further announcement(s) upon the transfer of the BreconRidge Warrant Shares and/or the Final Closing BreconRidge Shares and/ or the Second Tranche Shares or an exit. The Company will include the then expected gain or loss on disposal in the further announcement to be made regarding the relevant event.

As stated in the section headed “Reasons for and benefits of the Agreement and the Supply Agreement” above, the Directors believe that the creation of the joint venture will bring in additional electronic manufacturing service business to AV Chaseway, thus benefiting AV Chaseway and the Group. Furthermore, the Directors have effectively attached a value of US$20 million to the entire equity interest of AV Chaseway provided Final Closing takes place within two years. The Directors anticipate that the Group’s earnings in the medium term would be enhanced by the possibility of realizing an expected gain on disposal of AV Chaseway. Having regard to the possible capital gain and the synergistic effect of joining force with BreconRidge in the development of AV Chaseway’s business as described above, the Directors consider that the drop in recurring earnings (on the assumption that AV Chaseway may continue to be profitable) of the Group as a result of the disposal of AV Chaseway to be acceptable. As discussed above, the actual gain or loss on Disposal will depend on a number of future events. As such, there is no certainty that the Group will record a gain on disposal of AV Chaseway; and there is a risk that there may eventually be a loss on Disposal, although the Directors do not currently anticipate that this will happen. At the same time, there is no guarantee that AV Chaseway will continue to be profitable and therefore contribute to the recurring earnings of the Group.

– 17 –

LETTER FROM THE BOARD

Net asset value

As stated in the paragraph headed “Occurrence of a Liquidity Event and Final Closing”, it is the intention of the parties that a public offering and listing of the shares of BreconRidge should occur within two years after Initial Closing. As such, for the purpose of the unaudited pro forma assets and liabilities statement of the enlarged Group as set out in Appendix III to this circular, the Directors have prepared the Final Closing scenario using figures stipulated in the Agreement that are applicable to the occurrence of a Liquidity Event within 2 years after Initial Closing, i.e. assuming a value of US$20 million for 15 million common shares in BreconRidge. In the event that Final Closing takes places upon occurrence of a Liquidity Event after the second anniversary of Initial Closing and no Extension Fee has been paid, the value of US$20 million would be replaced with US$22 million and the number of the Total Consideration Shares would be 16.5 million instead of 15 million common shares in BreconRidge.

The Group recorded unaudited net assets of approximately HK$337.0 million as at 30 September 2004. Based on the unaudited pro forma assets and liabilities statement of the enlarged Group as set out in Appendix III to this circular had Initial Closing taken place on 30 September 2004 and had Final Closing taken place on 30 September 2004 upon the occurrence of a Liquidity Event, the unaudited pro forma consolidated net assets of the enlarged Group would be approximately HK$396.0 million at Initial Closing and approximately HK$455.0 million at Final Closing upon the occurrence of a Liquidity Event. The pro forma assets and liabilities statement is prepared for illustrative purposes only and, because of its nature, may not give a true picture of the financial position of the Group had Initial Closing and Final Closing actually taken place on 30 September 2004 or the financial position of the Group at any future date. Shareholders are advised to interpret any pro forma financial information with caution.

In the event that no Liquidity Event occurs by the third anniversary of Initial Closing, AVCC has the right to indicate its intention to exit the transaction. Upon an exit as indicated by AVCC, one of three situations may happen depending on BreconRidge’s choice as disclosed in the subsection “No Liquidity Event occurs by the third anniversary of Initial Closing” under the section headed “The Agreement” above:

• (i) If BreconRidge elects to proceed to Final Closing by paying cash to AVCC, AV Chaseway would become a wholly-owned subsidiary of BreconRidge. AVCC would not hold any shares in BreconRidge and would receive cash in the aggregate amount of US$22 million.

• (ii) If BreconRidge elects to maintain the joint venture relationship with AVCC in AV Chaseway, AV Chaseway will be held as to 50% by AVCC and as to 50% by BreconRidge as a jointlycontrolled entity. AVCC would not hold any shares in BreconRidge and would receive cash in the aggregate amount of US$11 million.

• (iii) If BreconRidge elects neither to proceed to Final Closing or maintain the joint venture relationship and therefore deemed to have elected to exit the transaction contemplated under the Agreement, AV Chaseway will become a wholly-owned subsidiary of the Company again. BreconRidge shall pay to AVCC an exit fee of US$3 million in cash.

– 18 –

LETTER FROM THE BOARD

RELAXATION OF THE REQUIREMENT TO INCLUDE AN ACCOUNTANTS’ REPORT ON BRECONRIDGE

Pursuant to Rule 14.67(4)(a)(i), a circular issued in relation to an acquisition constituting a major transaction must contain an accountants’ report on the company being acquired should be prepared in accordance with Chapter 4 of the Listing Rules provided that, where any company in question has not or will not become a subsidiary of the listed issuer, the Stock Exchange may be prepared to relax this requirement.

The Agreement involves the possible acquisition by the Group of an equity interest in BreconRidge which constitutes a major transaction. The Company has applied for a relaxation of the above requirement based on the following major reasons:

• (i) The essence of the transaction from the Group’s perspective is to dispose of AV Chaseway at a minimum consideration of US$20 million either in form of listed shares of BreconRidge and/or cash.

• (ii) The Group will not hold any BreconRidge shares upon Initial Closing.

• (iii) The Agreement effectively provides for a minimum consideration for the disposal of the entire equity interest of AV Chaseway in consideration for listed shares in BreconRidge with a market value of US$20 million or cash or a combination of the two. The Agreement does not specify any percentage shareholding in BreconRidge to be held by the Group. Under certain circumstances, the Group may not hold any BreconRidge shares upon Final Closing.

• (iv) The Agreement provides for a number of exit mechanisms if no Liquidity Event occurs by the third anniversary of Initial Closing and the Group will not come to hold any shares in BreconRidge if the parties elect to exit the transaction.

• (v) Based on the Directors’ current estimate, the Group will not come to hold 20% or more of the common shares of BreconRidge and may actually hold a lost less (on a fully diluted basis as set out in the possible scenarios in the section headed “The Agreement” above). The Directors anticipate that the Group’s interests in BreconRidge will be accounted for in the Group’s accounts as an investment. BreconRidge will not even be an associated company of the Company and the results of BreconRidge will not be presented in the Company’s financial statements as forming part of the results of the Group.

• (vi) The Group will not nominate any representative to the board of directors of BreconRidge.

Having considered the facts and circumstances of the Company, the Stock Exchange has agreed to grant a dispensation of the requirement under Rule 14.67(4)(a)(i) of the Listing Rules on condition that the circular will include the latest financial statements of BreconRidge. The audited consolidated financial statements of BreconRidge for the financial year ended 30 May 2004 prepared in accordance with accounting principles generally accepted in Canada are set out in Appendix II to this circular for information purpose only. Shareholders should note that there may be material differences in the financial information had it been prepared in accordance with accounting principles generally accepted in Hong Kong. Shareholders are advised to interpret such financial information with caution.

– 19 –

LETTER FROM THE BOARD

GENERAL

Further announcement(s) will be made by the Company upon the transfer of the BreconRidge Warrant Shares and/or the Final Closing BreconRidge Shares and/or the Second Tranche Shares or an exit. In the event the Group receives cash eventually for the Disposal, the Company will include the then intended use of such cash in the further announcement to be made regarding the relevant event.

Shareholders should note that the Agreement is conditional upon a number of conditions which may or may not be fulfilled. Accordingly, Shareholders and the public should exercise caution when dealing in the Shares.

EGM

Set out on pages 99 to 100 of this circular is a notice convening the EGM at which an ordinary resolution will be proposed to approve the transactions contemplated under the Agreement and ancillary agreements/documents.

A form of proxy for use at the EGM is enclosed. Whether or not you are able to attend the EGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the Company’s branch share registrar in Hong Kong, Tengis Limited, at G/F, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the EGM. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM should you so wish.

At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is required under the Listing Rules or (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is duly demanded. A poll may be demanded by:

• (a) the Chairman of the meeting; or

• (b) at least five members present in person or by proxy and entitled to vote; or

• (c) any member or members present in person (or in the case of a corporation, by its duly authorised representative) or by proxy and representing in the aggregate not less than onetenth of the total voting rights of all members having the right to attend and vote at the meeting; or

• (d) any member or members present in person (or in the case of a corporation, by its duly authorised representative) or by proxy and holding Shares conferring a right to attend and vote at the meeting on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all Shares conferring that right.

– 20 –

LETTER FROM THE BOARD

RECOMMENDATION

The Directors consider that the transactions contemplated under the Agreement and ancillary agreements/documents are fair and reasonable and in the interests of the Shareholders as a whole and recommend the Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve the transactions comtemplated under the Agreement and ancillary agreements/documents. To the best of the Directors’ knowledge, no Shareholder has to abstain from voting on the said resolution.

ADDITIONAL INFORMATION

Your attention is also drawn to the additional information set out in the Appendices to this circular and the notice convening the EGM.

Yours faithfully, For and on behalf of the Board

AV CONCEPT HOLDINGS LIMITED So Yuk Kwan Chairman

– 21 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. THREE YEARS FINANCIAL SUMMARY

Set out below is a summary of the results of the Group for the three years ended 31 March 2004 as extracted from the annual reports of the Company for the relevant years:

(i) Audited Consolidated Profit and Loss Account

TURNOVER Cost of sales Gross profit Other revenue Selling and distribution costs Administrative expenses Gain on partial disposal of a long term listed investment Other operating expenses PROFIT/(LOSS) FROM OPERATING ACTIVITIES Finance costs Share of profits and losses of associates Amortisation of goodwill on acquisition of an associate PROFIT/(LOSS) BEFORE TAX Tax NET PROFIT/(LOSS) FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS DIVIDENDS – Interim – Special – Proposed final EARNINGS/(LOSS) PER SHARE Basic Diluted	For the year ended 31 2004 2003 HK$’000 HK$’000 1,771,473 1,689,296 (1,621,307) (1,588,425) 150,166 100,871 4,061 2,253 (25,134) (17,039) (54,676) (45,390) 85,880 – (8,823) (11,828) 151,474 28,867 (9,077) (10,125) – (1,204) – (240) 142,397 17,298 (16,427) (4,732) 125,970 12,566 10,079 3,615 40,508 – 32,407 3,615 82,994 7,230 33.3 cents 3.6 cents N/A N/A	March 2002 HK$’000 (Restated) 1,194,465 (1,132,130) 62,335 1,646 (16,934) (40,825) – (45,257) (39,035) (13,881) 718 – (52,198) (395) (52,593) – – – – (21.3 cents) N/A

– 22 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(ii) Audited Consolidated Balance Sheet

NON-CURRENT ASSETS Fixed assets Intangible assets Interests in associates Long term investments Other assets Deferred tax assets CURRENT ASSETS Loan to an investee company Short term investment Tax recoverable Inventories Trade receivables Prepayments, deposits and other receivables Cash and bank balances CURRENT LIABILITIES Trade payables and accrued expenses Tax payable Dividend payable Interest-bearing bank borrowings Finance lease payables NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Finance lease payables Other long term payable Deferred tax liabilities CAPITAL AND RESERVES Issued capital Reserves Proposed final dividend	2004 HK$’000 71,967 2,430 – 27,811 2,057 154 104,419 – 2,062 – 215,564 296,339 23,320 152,595 689,880 174,997 10,957 40,508 252,591 2,629 481,682 208,198 312,617 (3,469) (449) (1,854) (5,772) 306,845 40,508 233,930 32,407 306,845	As at 31 March 2003 2002 HK$’000 HK$’000 (Restated) 58,906 64,223 3,031 2,250 – 1,538 33,837 34,812 2,327 2,435 – – 98,101 105,258 – 12,000 1,379 1,874 – 1,074 206,411 142,376 183,784 177,286 15,595 16,575 64,103 30,672 471,272 381,857 119,944 90,005 3,805 264 – – 229,009 219,004 2,638 3,319 355,396 312,592 115,876 69,265 213,977 174,523 (1,728) (3,005) (460) (475) (301) (301) (2,489) (3,781) 211,488 170,742 36,153 23,632 171,720 147,110 3,615 – 211,488 170,742

– 23 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Set out below are the audited financial statements of the Group for the year ended 31 March 2004 as extracted from the 2004 annual report of the Company. References to page numbers are the page numbers of such annual report of the Company.

Consolidated Profit and Loss Account

Year ended 31 March 2004

Notes TURNOVER 5 Cost of sales Gross profit Other revenue Selling and distribution costs Administrative expenses Gain on partial disposal of a long term listed investment 18 Other operating expenses PROFIT FROM OPERATING ACTIVITIES 6 Finance costs 7 Share of profits and losses of associates Amortisation of goodwill on acquisition of an associate PROFIT BEFORE TAX Tax 10 NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS 11 DIVIDENDS 12 – Interim – Special – Proposed final EARNINGS PER SHARE 13 Basic Diluted	2004 HK$’000 1,771,473 (1,621,307) 150,166 4,061 (25,134) (54,676) 85,880 (8,823) 151,474 (9,077) – – 142,397 (16,427) 125,970 10,079 40,508 32,407 82,994 33.3 cents N/A	2003 HK$’000 1,689,296 (1,588,425) 100,871 2,253 (17,039) (45,390) – (11,828) 28,867 (10,125) (1,204) (240) 17,298 (4,732) 12,566 3,615 – 3,615 7,230 3.6 cents N/A

– 24 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

31 March 2004

Notes NON-CURRENT ASSETS Fixed assets 14 Intangible assets 15 Interests in associates 17 Long term investments 18 Other assets 19 Deferred tax assets 27 CURRENT ASSETS Short term investment 20 Inventories 21 Trade receivables 22 Prepayments, deposits and other receivables Cash and bank balances CURRENT LIABILITIES Trade payables and accrued expenses 23 Tax payable Dividend payable 12 Interest-bearing bank borrowings 24 Finance lease payables 25 NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Finance lease payables 25 Other long term payable 26 Deferred tax liabilities 27 CAPITAL AND RESERVES Issued capital 28 Reserves 30(a) Proposed final dividend 12	2004 HK$’000 71,967 2,430 – 27,811 2,057 154 104,419 2,062 215,564 296,339 23,320 152,595 689,880 174,997 10,957 40,508 252,591 2,629 481,682 208,198 312,617 (3,469) (449) (1,854) (5,772) 306,845 40,508 233,930 32,407 306,845	2003 HK$’000 58,906 3,031 – 33,837 2,327 – 98,101 1,379 206,411 183,784 15,595 64,103 471,272 119,944 3,805 – 229,009 2,638 355,396 115,876 213,977 (1,728) (460) (301) (2,489) 211,488 36,153 171,720 3,615 211,488

– 25 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

Year ended 31 March 2004

Notes At 1 April 2002 Exchange realignment and net gain not recognised in the profit and loss account Rights issue 28 Share options exercised during the year 28 Share issue expenses 28 Net profit for the year Interim 2003 dividend 12 Proposed final 2003 dividend 12 At 31 March 2003 and 1 April 2003 Exchange realignment and net gain not recognised in the profit and loss account Placement of shares 28 Share options exercised during the year 28 Share issue expenses 28 Net profit for the year Final 2003 dividend declared 12 Interim 2004 dividend 12 Special 2004 dividend 12 Proposed final 2004 dividend 12 At 31 March 2004 Company and subsidiaries Associates At 31 March 2004 Company and subsidiaries Associates At 31 March 2003	Issued share capital HK$’000 23,632 – 11,951 570 – – – – 36,153 – 1,700 2,655 – – – – – – 40,508 40,508 – 40,508 36,153 – 36,153	Share premium account HK$’000 121,507 – 19,121 686 (1,948) – – – 139,366 – 11,900 5,416 (382) – – – – – 156,300 156,300 – 156,300 139,366 – 139,366	Exchange Capital fluctuation reserve# reserve HK$’000 HK$’000 13,872 (7,723) – 1,415 – – – – – – – – – – – – 13,872 (6,308) – 2,300 – – – – – – – – – – – – – – – – 13,872 (4,008) 13,872 (4,044) – 36 13,872 (4,008) 13,872 (6,344) – 36 13,872 (6,308)	Retained profits## HK$’000 19,454 – – – – 12,566 (3,615) (3,615) 24,790 – – – – 125,970 – (10,079) (40,508) (32,407) 67,766 69,627 (1,861) 67,766 26,651 (1,861) 24,790	Proposed final dividend HK$’000 – – – – – – – 3,615 3,615 – – – – – (3,615) – – 32,407 32,407 32,407 – 32,407 3,615 – 3,615	Total HK$’000 170,742 1,415 31,072 1,256 (1,948) 12,566 (3,615) – 211,488 2,300 13,600 8,071 (382) 125,970 (3,615) (10,079) (40,508) – 306,845 308,670 (1,825) 306,845 213,313 (1,825) 211,488

Included in the balance of the capital reserve as at 31 March 2004 is a capital redemption reserve balance amounting to approximately HK$12,491,000 (2003: HK$12,491,000).

Certain amounts of goodwill arising on the acquisition of certain subsidiaries in prior years remain eliminated against consolidated retained profits and the details of which are set out in note 30(a) to the financial statements.

• These reserves accounts comprise the consolidated reserves of HK$233,930,000 (2003: HK$171,720,000) in the consolidated balance sheet.

– 26 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

Year ended 31 March 2004

Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax Adjustments for: Depreciation 6 Amortisation of intangible assets 6 Write off of intangible assets 6 Provision for bad and doubtful debts 6 Impairment of a long term unlisted investment 6 Impairment of other assets 6 Gain on disposal of fixed assets 6 Unrealised holding (gain)/loss on a short term listed investment 6 Dividend income received from a long term listed investment 6 Interest income 6 Impairment of interest in an associate 6 Impairment of fixed assets 6 Impairment of goodwill 6 Finance costs 7 Gain on partial disposal of a long term listed investment 18 Share of profits and losses of associates Amortisation of goodwill on acquisition of an associate Operating profit before working capital changes Increase in other assets Increase in inventories Increase in trade receivables Decrease/(increase) in prepayments, deposits and other receivables Increase in trade payables and accrued expenses Decrease in other long term payable Cash generated from operations Hong Kong profits tax paid Overseas tax paid Net cash inflow/(outflow) from operating activities	2004 HK$’000 142,397 13,744 1,528 186 3,395 975 335 (5) (683) (2,327) (27) – – – 9,077 (85,880) – – 82,715 – (7,800) (114,909) (8,306) 54,759 (11) 6,448 (7,561) (322) (1,435)	2003 HK$’000 17,298 11,868 310 – 1,760 975 441 (578) 495 (657) (492) 386 553 958 10,125 – 1,204 240 44,886 (269) (63,167) (7,275) 1,637 29,696 (15) 5,493 (24) (103) 5,366

– 27 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement (Continued) Year ended 31 March 2004

Notes CASH FLOWS FROM INVESTING ACTIVITIES Interest received 6 Purchases of fixed assets Proceeds from disposal of fixed assets Additions to intangible assets 15 Capital contribution to an interest in an associate Proceeds from placing of shares in connection with a long term listed investment 18 Placing expenses 18 Dividend income received from a long term listed investment Repayment of loan to an investee company Net cash inflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of share capital 28 Share issue expenses 28 New bank loans Repayment of bank loans Increase in import and trust receipt loans Capital element of finance lease rental payments Interest paid Dividend paid Net cash inflow from financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes, net CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCE OF CASH AND CASH EQUIVALENTS Cash and bank balances	2004 HK$’000 27 (18,747) 264 (1,113) – 92,598 (1,667) 2,984 – 74,346 21,671 (382) – (4,000) 26,494 (6,171) (9,077) (13,694) 14,841 87,752 64,103 740 152,595 152,595	2003 HK$’000 492 (3,727) 874 (1,091) (1,250) – – – 12,000 7,298 32,328 (1,948) 12,000 (10,000) 7,132 (5,181) (10,125) (3,615) 20,591 33,255 30,672 176 64,103 64,103

– 28 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Balance Sheet

31 March 2004

Notes NON-CURRENT ASSETS Interests in subsidiaries 16 Long term investment 18 CURRENT ASSETS Prepayments, deposits and other receivables Cash and bank balances CURRENT LIABILITIES Accrued expenses 23 Tax payable Dividend payable 12 NET CURRENT ASSETS CAPITAL AND RESERVES Issued capital 28 Reserves 30(b) Proposed final dividend 12	2004 HK$’000 220,652 26,429 247,081 2,462 52,521 54,983 625 10,242 40,508 51,375 3,608 250,689 40,508 177,774 32,407 250,689	2003 HK$’000 162,004 31,480
		193,484
		783 126
		909
		407 56 –
		463
		446
		193,930
		36,153 154,162 3,615
		193,930

– 29 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes to Financial Statements

31 March 2004

1. CORPORATE INFORMATION

The registered office of AV Concept Holdings Limited is located at Ugland House, South Church Street, P.O. Box 309, George Town, Grand Cayman, the Cayman Islands, British West Indies and its principal place of business is located at Units 11 – 15, 11th Floor, Block A, Focal Industrial Centre, 21 Man Lok Street, Hunghom, Kowloon, Hong Kong.

During the year, the Group was involved in the following principal activities:

• Marketing and distribution of electronic components

• Design, manufacture and original equipment manufacture of electronic products and Internet appliances

2. IMPACT OF A REVISED STATEMENT OF STANDARD ACCOUNTING PRACTICE (“SSAP”)

SSAP 12 (Revised): “Income taxes” is effective for the first time for the current year’s financial statements. This SSAP prescribes the accounting for income taxes payable or recoverable, arising from the taxable profit or loss for the current period (current tax); and income taxes payable or recoverable in future periods, principally arising from taxable and deductible temporary differences and the carryforward of unused tax losses (deferred tax).

The principal impact of the revision of this SSAP on these financial statements is described below.

The measurement and recognition of deferred tax assets and liabilities relating to the difference between capital allowances for tax purposes and depreciation for financial reporting purposes and other taxable and deductible temporary differences are provided for, whereas previously the deferred tax was recognised for timing differences only to the extent that it was probable that the deferred tax asset or liabilities would crystallise in the foreseeable future. A deferred tax has been recognised for tax losses arising in the current/prior periods to the extent that it is probable that there will be sufficient future taxable profits against which such losses can be utilised.

The disclosure of deferred tax assets and liabilities are presented separately on the balance sheet, whereas previously they were presented on a net basis.

The SSAP has had no significant impact for these financial statements on the amounts recorded for income taxes. However, the related note disclosures are now more extensive than previously required. These are detailed in notes 3 and 10 to the financial statements and include a reconciliation between the accounting profit and the tax expense for the year.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

These financial statements have been prepared in accordance with Hong Kong Statements of Standard Accounting Practice, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, except for the remeasurement of certain equity investments, as further explained below.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 March 2004. The results of subsidiaries acquired or disposed of during the year are consolidated from or to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Subsidiaries

A subsidiary is a company whose financial and operating policies the Company controls, directly and indirectly, so as to obtain benefits from its activities.

The results of subsidiaries are included in the Company’s profit and loss account to the extent of dividends received and receivable. The Company’s interests in subsidiaries are stated at cost less any impairment losses.

– 30 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Joint venture companies

A joint venture company is a company set up by contractual arrangement, whereby the Group and other parties undertake an economic activity. The joint venture company operates as a separate entity in which the Group and the other parties have an interest.

The joint venture agreement between the venturers stipulates the capital contributions of the joint venture parties, the duration of the joint venture and the basis on which the assets are to be realised upon its dissolution. The profits and losses from the joint venture company’s operations and any distributions of surplus assets are shared by the venturers, either in proportion to their respective capital contributions, or in accordance with the terms of the joint venture agreement.

A joint venture company is treated as:

• (a) a subsidiary, if the Company has unilateral control, directly or indirectly, over the joint venture company;

• (b) a jointly-controlled entity, if the Company does not have unilateral control, but has joint control, directly or indirectly, over the joint venture company;

• (c) an associate, if the Company does not have unilateral or joint control, but holds, directly or indirectly, generally not less than 20% of the joint venture company’s registered capital and is in a position to exercise significant influence over the joint venture company; or

• (d) a long term investment, if the Company holds, directly or indirectly, less than 20% of the joint venture company’s registered capital and has neither joint control of, nor is in a position to exercise significant influence over, the joint venture company.

Associates

An associate is a company, not being a subsidiary, in which the Group has a long term interest of generally 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 associates is included in the consolidated profit and loss account and consolidated reserves, respectively. The Group’s interests in associates are stated in the consolidated balance sheet at the Group’s share of net assets under the equity method of accounting, less any impairment losses. Goodwill arising from the acquisition of associates, which was not previously eliminated or recognised in the consolidated reserves, is included as part of the Group’s interests in associates.

The results of associates are included in the Company’s profit and loss account to the extent of dividends received and receivable. The Company’s interests in associates are treated as long term assets and are stated at cost less any impairment losses.

Goodwill

Goodwill arising on the acquisition of subsidiaries and associates represents the excess of the cost of the acquisition over the Group’s share of fair values of the identifiable assets and liabilities acquired as at the date of acquisition.

Goodwill arising on acquisition is recognised in the consolidated balance sheet as an asset and amortised on the straight-line basis over its estimated useful life of five to twenty years. In the case of associates, any unamortised goodwill is included in the carrying amount thereof, rather than as a separately identified asset on the consolidated balance sheet.

Prior to the adoption of SSAP 30 “Business combinations” in 2001, goodwill arising on acquisitions was eliminated against consolidated reserves in the year of acquisition. On the adoption of SSAP 30, the Group applied the transitional provision of the SSAP that permitted such goodwill to remain eliminated against consolidated reserves. Goodwill on acquisitions subsequent to the adoption of the SSAP is treated according to the SSAP 30 goodwill accounting policy above.

On disposal of subsidiaries and associates, the gain or loss on disposal is calculated by reference to the net assets at the date of disposal, including the attributable amount of goodwill which remains unamortised and any relevant reserves, as appropriate. Any attributable goodwill previously eliminated against consolidated reserves at the time of acquisition is written back and included in the calculation of the gain or loss on disposal.

– 31 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Goodwill (Continued)

The carrying amount of goodwill, including goodwill remaining eliminated against consolidated reserves, is reviewed annually and written down for impairment where it is considered necessary. A previously recognised impairment loss for goodwill is not reversed unless the impairment loss was caused by a specific external event of an exceptional nature that was not expected to recur, and subsequent external events have occurred which have reversed the effect of that event.

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. Related parties may be individuals or corporate entities.

Impairment of assets

An assessment is made at each balance sheet date of whether there is any indication of impairment of any asset, or whether there is any indication that an impairment loss previously recognised for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s value in use or its net selling price.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the profit and loss account in the period in which it arises.

A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation), had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is credited to the profit and loss account in the period in which it arises.

Fixed assets and depreciation

Fixed assets are stated at cost less accumulated depreciation and any impairment losses. 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 fixed assets have been put into operation, such as repairs and maintenance and overhaul costs, 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 an asset, the expenditure is capitalised as an additional cost of that asset.

Depreciation is calculated on the straight-line basis to write off the cost of each asset over its estimated useful life. The principal annual rates used for this purpose are as follows:

Leasehold land	Over the remaining lease terms
Buildings	2%
Leasehold improvements	20% – 331/3%
Furniture, fittings and office equipment	20% – 331/3%
Plant, machinery and tools	20% – 50%
Motor vehicles	20%

Freehold land is not depreciated.

The gain or loss on disposal or retirement of a fixed asset recognised in the profit and loss account is the difference between the net sales proceeds and the carrying value of the relevant asset.

– 32 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Intangible assets

Research and development costs

All research costs are charged to the profit and loss account as incurred.

Expenditure incurred on projects to develop new products is capitalised and deferred only when the projects are clearly defined; the expenditure is separately identifiable and can be measured reliably; there is reasonable certainty that the projects are technically feasible; and the products have commercial value. Product development expenditure which does not meet these criteria is expensed when incurred.

Deferred development costs are stated at cost less any impairments and are amortised using the straight-line basis over the estimated commercial lives of the underlying products ranging from two to five years, commencing from the date when the products are put into commercial production.

Other assets

Other assets held on a long term basis are stated at cost less any impairment losses, on an individual asset basis.

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 leased 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 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 lessor are accounted for as operating leases. Where the Group is the lessee, rentals payable under operating leases are charged to the profit and loss account on the straight-line basis over the lease terms.

Long term investments

Long term investments in listed and unlisted equity securities intended to be held for a continuing strategic or long term purposes, are stated at cost less any impairment losses, on an individual investment basis.

When a decline in the fair value of a security below its carrying amount has occurred, unless there is evidence that the decline is temporary, the carrying amount of the security is charged to the profit and loss account for the period in which it arises. When the circumstances and events which led to the impairment in value cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future, the amount of the impairment previously charged is credited to the profit and loss account to the extent of the amount previously charged.

Short term investments

Short term investments are investments in equity securities not held for an identified long term purpose and are stated at their fair values on the basis of their quoted market prices at the balance sheet date on an individual investment basis. The unrealised gains or losses arising from changes in the fair value of a security are credited or charged to the profit and loss account in the period in which they arise.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads. Allowance is made for any obsolete or slow-moving items. Net realisable value is based on estimated selling prices less any estimated costs to completion and disposal.

– 33 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

Income tax

Income tax comprises current and deferred tax. Income tax is recognised in the profit and loss account, or in equity if it relates to items that are recognised in the same or a different period directly in equity.

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences:

• (i) except where the deferred tax liability arises from the initial recognition of an asset or liability and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• (ii) in respect of taxable temporary differences associated with investments in subsidiaries and associates, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax assets and unused tax losses, to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax assets and unused tax losses can be utilised:

• (i) except where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• (ii) in respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and future taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient future taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are recognised to the extent that it is probable that sufficient future taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Revenue recognition

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) from 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;

• (b) commission income, in the accounting period in which the services are provided;

• (c) interest income, on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable; and

• (d) dividend income, when the shareholder’s right to receive payment has been established.

– 34 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Employee benefits

Paid leave carried forward

The Group provides paid annual leave to its employees under their employment contracts. Under certain circumstances, such leave which remains untaken as at the balance sheet date is permitted to be carried forward and utilised by the respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of such paid leave earned during the year by the employees and carried forward.

Employment ordinance long service payments

Certain of the Group’s employees have completed the required number of years of service to the Group in order to be eligible for long service payments under the Hong Kong Employment Ordinance in the event of the termination of their employment. The Group is liable to make such payments in the event that such a termination of employment meets the circumstances specified in the Employment Ordinance. A provision has not been recognised in respect of such possible payments, as it is not considered probable that the situation will result in a material future outflow of resources from the Group.

Pension schemes

The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate in the Scheme. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the profit and loss account as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer mandatory contributions vest fully with the employees when contributed into the MPF Scheme. The Group’s employer voluntary contributions are refundable to the Group when the employee leaves employment prior to the contributions vesting fully in accordance with the rules of the MPF Scheme.

The employees of the Group’s subsidiary which operates in Mainland China are required to participate in a central pension scheme operated by the local municipal government. This subsidiary operating in Mainland China is required to contribute a certain percentage of its payroll costs to the central pension scheme. The contributions are charged to the profit and loss account as they become payable in accordance with the rules of the central pension scheme.

Share option schemes

The Company operates share option schemes for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. The financial impact of share options granted under the share option scheme is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recorded in the profit and loss account or balance sheet for their cost. Upon the exercise of share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which are cancelled prior to their exercise date, or which lapse, are deleted from the register of outstanding options.

Dividends

Final dividends proposed by the directors are classified as a separate allocation of retained profits within the capital and reserves section of the balance sheet, until they have been approved by the shareholders in a general meeting. When these dividends have been approved by the shareholders and declared, they are recognised as a liability.

Interim and special dividends are simultaneously proposed and declared, because the Company’s memorandum and articles of association grant the directors the authority to declare such dividends. Consequently, interim and special dividends are recognised immediately as a liability when they are proposed and declared.

Foreign currencies

Foreign currency transactions are recorded at the applicable exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable exchange rates ruling at that date. Exchange differences are dealt with in the profit and loss account.

– 35 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreign currencies (Continued)

On consolidation, the financial statements of overseas subsidiaries and associates are translated into Hong Kong dollars using the net investment method. The profit and loss accounts of overseas subsidiaries and associates are translated into Hong Kong dollars at the weighted average exchange rates for the year, and their balance sheets are translated into Hong Kong dollars at the exchange rates at the balance sheet date. The resulting translation differences are included in the exchange fluctuation reserve.

For the purpose of the consolidated cash flow statement, the cash flows of overseas subsidiaries are translated into Hong Kong dollars at the exchange rates at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the year are translated into Hong Kong dollars at the weighted average exchange rates for the year.

4. SEGMENT INFORMATION

Segment information is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment; and (ii) on a secondary segment reporting basis, by geographical segment.

The Group’s operating businesses are structured and managed separately, according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the other business segments. Summary details of the business segments are as follows:

• a. the marketing and distribution segment engages in the sale and distribution of electronic components; and

• b. the design and manufacture segment engages in the design, manufacture and original equipment manufacture of electronic products and Internet appliances.

In determining the Group’s geographical segments, revenues are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets.

Intersegment sales and transfers are transacted with reference to the selling prices used for sales made to third parties at the then prevailing market prices.

– 36 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. SEGMENT INFORMATION (Continued)

Business segments

The following tables present revenue, profit and certain asset, liability and expenditure information for the Group’s business segments.

Group

Segment revenue: Sales to external customers Intersegment sales Other revenue Total Segment results Interest income Dividend income Unrealised holding gain/(loss) on a short term listed investment Gain on partial disposal of of a long term listed investment Impairment of a long term unlisted investment Impairment of other assets Impairment of fixed assets Impairment of goodwill Unallocated expenses Profit from operating activities Finance costs Share of profits and losses of associates Amortisation of goodwill on acquisition of an associate Profit before tax Tax Net profit from ordinary activities attributable to shareholders	Marketing and distribution 2004 2003 HK$’000 HK$’000 1,484,312 1,332,546 85,572 33,402 92 503 1,569,976 1,366,451 40,038 37,433	Design and manufacture 2004 2003 HK$’000 HK$’000 287,161 356,750 2,085 7,207 1,615 601 290,861 364,558 24,925 (5,144)	Eliminations 2004 2003 HK$’000 HK$’000 – – (87,657) (40,609) – – (87,657) (40,609) – –	Consolidated 2004 2003 HK$’000 HK$’000 1,771,473 1,689,296 – – 1,707 1,104 1,773,180 1,690,400 64,963 32,289 27 492 2,327 657 683 (495) 85,880 – (975) (975) (335) (441) – (553) – (958) (1,096) (1,149) 151,474 28,867 (9,077) (10,125) – (1,204) – (240) 142,397 17,298 (16,427) (4,732) 125,970 12,566

– 37 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. SEGMENT INFORMATION (Continued)

Business segments (Continued)

Group

Marketing and Design and distribution manufacture 2004 2003 2004 2003 HK$’000 HK$’000 HK$’000 HK$’000 Segment assets 391,314 375,775 309,863 147,953 Unallocated assets Total assets Segment liabilities (88,738) (64,287) (85,574) (55,171) Unallocated liabilities Total liabilities Other segment information: Depreciation 2,435 1,909 11,303 9,756 Unallocated depreciation Amortisation and write off of intangible assets – – 1,714 310 Other non-cash expenses – – – – Impairment of fixed assets – 553 – – Impairment of goodwill – – – – Provision for bad and doubtful debts 1,890 1,760 1,505 – Capital expenditure 4,634 2,408 23,061 5,581

Consolidated 2004 2003 HK$’000 HK$’000 701,177 523,728 93,122 45,645 794,299 569,373 (174,312) (119,458) (313,142) (238,427) (487,454) (357,885) 13,738 11,665 6 203 13,744 11,868 1,714 310 1,310 1,802 – 553 – 958 3,395 1,760 27,695 7,989

Geographical segments

The following table presents revenue and certain asset and expenditure information for the Group’s geographical segments.

Group

==> picture [399 x 133] intentionally omitted <==

----- Start of picture text -----

Mainland
Hong Kong China Singapore Korea Other locations Consolidated
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Segment revenue:
Sales to external
customers 1,486,703 1,204,097 – – 193,942 144,021 50,842 327,455 39,986 13,723 1,771,473 1,689,296
Other segment
information:
Segment assets 361,125 337,041 277,466 139,237 62,586 47,450 – – – – 701,177 523,728
Capital expenditure 7,968 1,829 19,373 4,490 354 1,670 – – – – 27,695 7,989
----- End of picture text -----

– 38 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. TURNOVER

Turnover comprises the net invoiced value of goods sold, net of returns and discounts and after the eliminations of intra-group transactions, and commissions received on distribution.

Marketing and distribution of electronic components Design, manufacture and original equipment manufacture of electronic products and Internet appliances	Group 2004 2003 HK$’000 HK$’000 1,484,312 1,332,546 287,161 356,750 1,771,473 1,689,296	Group 2004 2003 HK$’000 HK$’000 1,484,312 1,332,546 287,161 356,750 1,771,473 1,689,296
		1,689,296

6. PROFIT FROM OPERATING ACTIVITIES

The Group’s profit from operating activities is arrived at after charging/(crediting):

Notes Depreciation 14 Amortisation of intangible assets 15 Write off of intangible assets 15 Provision for bad and doubtful debts Minimum lease payments under operating leases in respect of land and buildings Auditors’ remuneration Impairment of interest in an associate 17 Impairment of a long term unlisted investment 18 Impairment of other assets 19 Impairment of fixed assets Impairment of goodwill Staff costs (including directors’ remuneration – note 8): Wages and salaries Pension scheme contributions Less: Forfeited contributions* Net pension scheme contributions Gain on disposal of fixed assets Exchange (gains)/losses, net Unrealised holding (gain)/loss on a short term listed investment Dividend income received from a long term listed investment Interest income	2004 HK$’000 13,744 1,528 186 3,395 3,347 950 – 975 335 – – 50,182 1,845 (474) 1,371 51,553 (5) (64) (683) (2,327) (27)	2003 HK$’000 11,868 310 – 1,760 2,837 988 386 975 441 553 958 40,789 1,170 (193
		977
		41,766
		(578 530 495 (657 (492

• The amortisation and write off of intangible assets for the year are included in “Cost of sales” on the face of the consolidated profit and loss account.

• ** All these items are included in “Other operating expenses” on the face of the consolidated profit and loss account.

• *** The amounts of forfeited contributions available to the Group to reduce contributions in future years are not material.

– 39 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. FINANCE COSTS

Interest on bank loans and overdrafts wholly repayable within five years Interest on finance leases	Group 2004 2003 HK$’000 HK$’000 8,879 9,820 198 305 9,077 10,125	Group 2004 2003 HK$’000 HK$’000 8,879 9,820 198 305 9,077 10,125
		10,125

8. DIRECTORS’ REMUNERATION

Directors’ remuneration for the year, disclosed pursuant to the Listing Rules and Section 161 of the Hong Kong Companies Ordinance, is as follows:

Fees Other emoluments: Salaries, housing, other allowances and benefits in kind Pension scheme contributions	Group 2004 2003 HK$’000 HK$’000 100 100 10,527 9,081 452 352 10,979 9,433 11,079 9,533	Group 2004 2003 HK$’000 HK$’000 100 100 10,527 9,081 452 352 10,979 9,433 11,079 9,533
		9,081 352
		9,433
		9,533

Fees of HK$100,000 (2003: HK$100,000) were payable to the independent non-executive directors. There were no other emoluments payable to the independent non-executive directors for the year (2003: Nil).

The number of directors whose remuneration fell within the following bands is set out below:

Nil – HK$1,000,000 HK$1,000,001 – HK$1,500,000 HK$2,500,001 – HK$3,000,000 HK$4,500,001 – HK$5,000,000 HK$5,000,001 – HK$5,500,000	Number 2004 4 1 1 – 1 7	of directors 2003 5 1 1 1 –
		8

There was no arrangement under which a director waived or agreed to waive any remuneration during the year.

During the year, 3,900,000 share options were granted to the directors of the Company in respect of their services to the Group, further details of which are set out in note 29 to the financial statements. No value in respect of the share options granted during the year has been charged to the profit and loss account or included in the above directors’ remuneration disclosures.

– 40 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

9. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees during the year included four (2003: three) directors, details of whose remuneration are set out in note 8 above. Details of the remuneration of the remaining one (2003: two) non-director, highest paid employee for the year are as follows:

Salaries, allowances and benefits in kind Pension scheme contributions	Group 2004 2003 HK$’000 HK$’000 1,242 2,104 – 91 1,242 2,195	Group 2004 2003 HK$’000 HK$’000 1,242 2,104 – 91 1,242 2,195
		2,195

The number of non-director, highest paid employees whose remuneration fell within the following band is set out below:

		2004	2003
		Number of	Number of
		employees	employees
HK$1,000,001	– HK$1,500,000	1	2

During the year, 750,000 share options were granted to a non-director, highest paid employee in respect of his service to the Group, further details of which are included in the disclosures in note 29 to the financial statements. No value in respect of the share options granted during the year has been charged to the profit and loss account, or is otherwise included in the above non-director, highest paid employees’ remuneration disclosures.

10. TAX

Hong Kong profits tax has been provided at the rate of 17.5% (2003: 16%) on the estimated assessable profits arising in Hong Kong during the year. The increased Hong Kong profits tax rate became effective from the year of assessment 2003/2004, and so is applicable to the assessable profits arising in Hong Kong for the whole of the year ended 31 March 2004. Taxes on profits assessable elsewhere have been calculated at rates ranging from 11% to 22% (2003: 22%) in the countries in which the Group operates, based on existing legislations, interpretations and practices in respect thereof.

Current: Hong Kong – Charge for the year Hong Kong – Overprovision in prior years Elsewhere – Underprovision in prior years Elsewhere – Charge for the year# Deferred – note 27 Total tax charge for the year	Group 2004 2003 HK$’000 HK$’000 5,297 4,732 (636) – 181 – 10,186 – 1,399 – 16,427 4,732	Group 2004 2003 HK$’000 HK$’000 5,297 4,732 (636) – 181 – 10,186 – 1,399 – 16,427 4,732
		4,732

– 41 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10. TAX (Continued)

A reconciliation of the tax expense applicable to profit before tax using the statutory rate for the countries in which the Company and its subsidiaries are domiciled to the tax expense at the effective tax rate are as follows:

Profit before tax Tax at the applicable rates to profits in the countries concerned# Adjustments in respect of current tax of previous periods Income not subject to tax Expenses not deductible for tax purpose Temporary differences not recognised Tax charge at the Group’s effective rate	Group 2004 2003 HK$’000 HK$’000 142,397 17,298 35,125 3,070 (455) – (16,690) (711 1,305 3,282 (2,858) (909 16,427 4,732	Group 2004 2003 HK$’000 HK$’000 142,397 17,298 35,125 3,070 (455) – (16,690) (711 1,305 3,282 (2,858) (909 16,427 4,732
		3,070 – (711 3,282 (909
		4,732

• Amount includes capital gains tax on gain on partial disposal of a long term listed investment.

11. NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS

The net profit from ordinary activities attributable to shareholders for the year ended 31 March 2004 dealt with in the financial statements of the Company was HK$89,672,000 (2003: HK$1,248,000) (note 30(b)).

12. DIVIDENDS

Interim – HK2.5 cents (2003: HK1 cent) per ordinary share Special – HK10 cents (2003: Nil) per ordinary share Proposed final – HK8 cents (2003: HK1 cent) per ordinary share	2004 HK$’000 10,079 40,508 32,407 82,994	2003 HK$’000 3,615 – 3,615
		7,230

The proposed final dividend for the year is subject to the approval of the Company’s shareholders at the forthcoming annual general meeting.

13. EARNINGS PER SHARE

The calculation of basic earnings per share is based on the net profit from ordinary activities attributable to shareholders of HK$125,970,000 (2003: HK$12,566,000) and the weighted average of 378,318,857 (2003: 353,672,244) ordinary shares in issue during the year.

Diluted earnings per share amounts for the years ended 31 March 2004 and 2003 have not been disclosed, as the share options outstanding during these years had an anti-dilutive effect on the basic earnings per share for these years.

– 42 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14. FIXED ASSETS

Group

Land and buildings (Hong Kong) HK$’000 At cost: At beginning of year 20,970 Additions 1,882 Disposals – Exchange realignment – At 31 March 2004 22,852 Accumulated depreciation and impairment: At beginning of year 11,639 Provided during the year 360 Disposals – Exchange realignment – At 31 March 2004 11,999 Net book value: At 31 March 2004 10,853 At 31 March 2003 9,331	Land and buildings Leasehold (Overseas) improvements HK$’000 HK$’000 8,761 16,227 – 798 – – 528 – 9,289 17,025 2,367 9,774 135 3,320 – – 170 – 2,672 13,094 6,617 3,931 6,394 6,453	Furniture, fittings and office equipment HK$’000 9,654 2,527 (316) 142 12,007 7,342 1,237 (74) 129 8,634 3,373 2,312	Plant, machinery and tools HK$’000 56,689 20,292 (155) – 76,826 25,720 7,327 (138) – 32,909 43,917 30,969	Motor vehicles HK$’000 6,256 1,083 – 174 7,513 2,809 1,365 – 63 4,237 3,276 3,447	Total HK$’000 118,557 26,582 (471 844
					145,512
					59,651 13,744 (212 362
					73,545
					71,967
					58,906

The land and buildings at cost included above are held under the following lease terms:

Freehold Medium term leases	Hong Kong HK$’000 – 22,852 22,852	Overseas HK$’000 9,289 – 9,289	Total HK$’000 9,289 22,852
			32,141

Certain land and buildings with a carrying value of HK$8,246,000 (2003: HK$8,442,000) held by the Group were pledged to banks to secure certain bank borrowings and banking facilities granted to the Group (note 24).

The net carrying value of fixed assets held under finance leases as at 31 March 2004 included motor vehicles of HK$1,468,000 (2003: HK$1,981,000) and plant, machinery and tools of HK$10,002,000 (2003: HK$10,180,000). The depreciation charge for the year in respect of such assets amounted to HK$1,782,000 (2003: HK$1,883,000).

– 43 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15. INTANGIBLE ASSETS

Group

	Deferred
	development costs
	HK$’000
Cost:
At beginning of year	3,341
Additions	1,113
Write off –note 6	(321)
At 31 March 2004	4,133
Accumulated amortisation:
At beginning of year	310
Provided during the year –note 6	1,528
Write off –note 6	(135)
At 31 March 2004	1,703
Net book value:
At 31 March 2004	2,430
At 31 March 2003	3,031

16. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Due from subsidiaries Due to subsidiaries Provision for impairment	Company 2004 2003 HK$’000 HK$’000 55,015 55,015 197,877 139,009 (15,676) (15,676) 237,216 178,348 (16,564) (16,344) 220,652 162,004

The amounts due from/(to) subsidiaries included in the Company’s balance sheet are unsecured, interest-free and not repayable within the next twelve months from the balance sheet date.

– 44 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. INTERESTS IN SUBSIDIARIES (Continued)

Particulars of the principal subsidiaries are as follows:

		Nominal
		value of
	Place of	issued
	incorporation/	ordinary/	Equity interest
	registration and	registered	attributable		Principal
Name	operations	share capital	to the Company		activities
			Direct	Indirect
AV Electronics	British Virgin Islands/	US$40,000	100%	–	Investment
Group Limited	Hong Kong				holding
AVT Holdings	British Virgin Islands/	US$1	100%	–	Investment
Limited	Hong Kong				holding
AV Chaseway Limited	Hong Kong	HK$10,000,000	–	100%	Manufacture
					and trading
					of electronic
					products and
					Internet
					appliances
AV Concept	Hong Kong	HK$10,000	–	100%	Investment
(China) Industrial					holding
Co., Limited
AV Concept Limited	Hong Kong	HK$2	–	100%	Trading of
		HK$1,000,000@	–	100%	electronic
					components
AVC Technology	Hong Kong	HK$9,900,000	–	100%	Trading of
Limited		HK$100,000@	–	100%	electronic
					products
					and Internet
					appliances
AV Concept Singapore	Singapore	S$4,000,000	–	100%	Trading of
Pte. Ltd (formerly					electronic
known as					components
Bostex Electronics
Pte Ltd)

@ Represents deferred shares issued by AV Concept Limited and AVC Technology Limited.

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

– 45 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. INTERESTS IN ASSOCIATES

					Group
				2004	2003
				HK$’000	HK$’000
Share of net assets				386	386
Goodwill on acquisition				958	958
				1,344	1,344
Provision for impairment –note 6				(1,344)	(1,344)
				–	–
Particulars of the associates are as follows:
		Place of
		incorporation/	Equity	interest
	Business	registration and	attributable		Principal
Name	structure	operations	to the Group		activities
			2004	2003
Easyband Broadband	Corporate	British	36%	36%	Investment
Holdings Limited		Virgin			holding
(“Easyband”)* (Note)		Islands
Easyband Technology	Corporate	People’s	36%	36%	Trading of
(Guangzhou) Co.,		Republic			hardware
Limited (“GZ		of China/			and software
Easyband”)* (Note)#		Mainland			products and the
		China			provision of
					broadband and
					related technical
					support services
Guangzhou Thinker	Corporate**	People’s	35%	35%	Provision of
E-Commerce Co., Ltd.		Republic			systems
(“Thinker”)*		of China/			integration and
		Mainland			e-commerce
		China			related services

• GZ Easyband was incorporated and registered in the People’s Republic of China on 15 May 2002.

• Not audited by Ernst & Young Hong Kong or other Ernst & Young International member firms.

• ** This associate has no issued share capital and is formed under a joint venture agreement.

Each of the above associates has a financial year end of 31 December. The consolidated financial statements have been adjusted for material transactions between these associates and the Company and its subsidiaries for the period from 1 January to 31 March.

The interests in Easyband and Thinker are held through a wholly-owned subsidiary of the Group.

Note: In the prior year, an impairment loss of HK$1,344,000 (representing the Group’s share of net assets in Easyband of HK$386,000 plus its unamortised goodwill of HK$958,000) was charged to the consolidated profit and loss account.

– 46 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. LONG TERM INVESTMENTS

Listed equity investment, at cost Unlisted equity investment, at cost Provision for impairment –note 6	Group 2004 2003 HK$’000 HK$’000 27,811 – 1,950 34,812 (1,950) (975) 27,811 33,837	Company 2004 2003 HK$’000 HK$’000 26,429 – – 31,480 – – 26,429 31,480	Company 2004 2003 HK$’000 HK$’000 26,429 – – 31,480 – – 26,429 31,480
			31,480

Long term investments represent a 12.4% (2003: 19.4%) equity interest in Reigncom Limited (“Reigncom”) and an investment in preference shares of Digital 5 Inc., (“Digital 5”). In the opinion of the directors, the Group is not in a position to exercise significant influence over Reigncom and Digital 5 and accordingly, they are treated as long term investments.

Reigncom is a Korean company and together with its subsidiaries are principally engaged in the design and sale of MP3 players and other electronic products worldwide. On 19 December 2003, Reigncom was listed on the KOSDAQ Stock Exchange, Inc. (the “KOSDAQ”) in the Republic of Korea. Immediately after the listing of Reigncom’s shares on the KOSDAQ, the Company’s equity interest in Reigncom was diluted from 19.4% to 14.7%.

On 28 January 2004, the Company entered into an agreement with a placing agent to place 150,000 shares in Reigncom (the “Reigncom Placing Shares”) held by the Company at an aggregate consideration of HK$92,598,000 (the “Reigncom Placing”). Upon completion of the Reigncom Placing, the Company’s equity interest in Reigncom was further reduced from 14.7% (representing 975,840 shares in Reigncom) to 12.4% (representing 825,840 shares in Reigncom). The Reigncom Placing resulted in a gain of HK$85,880,000, net of the cost of the Reigncom Placing Shares of HK$5,051,000, and placing fees and sales taxes paid of HK$1,667,000. In connection with the gain on partial disposal of Reigncom, the Group recorded a capital gains tax payable of HK$10,186,000 (note 10).

The market value of the long term listed equity investment at the balance sheet date and at the date of approval of these financial statements was approximately HK$535,788,000 and HK$440,937,000, respectively.

19. OTHER ASSETS

Other assets, at cost Provision for impairment –note 6 Exchange realignment 20. SHORT TERM INVESTMENT Listed equity investment in Hong Kong, at market value	Group 2004 2003 HK$’000 HK$’000 2,768 2,768 (776) (441 65 – 2,057 2,327 Group 2004 2003 HK$’000 HK$’000 2,062 1,379

– 47 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

21. INVENTORIES

Raw materials Work in progress Finished goods	Group 2004 2003 HK$’000 HK$’000 56,561 47,070 6,368 8,506 152,635 150,835 215,564 206,411	Group 2004 2003 HK$’000 HK$’000 56,561 47,070 6,368 8,506 152,635 150,835 215,564 206,411
		206,411

The carrying amount of inventories included in the above that are carried at net realisable value is approximately HK$44,753,000 (2003: HK$39,480,000).

22. TRADE RECEIVABLES

Trading terms with customers vary with the type of products supplied. Invoices are normally payable within 30 days of issuance, except for well-established customers, where the terms are extended to 60 days. On customerspecific and highly specialised items, deposits in advance or letters of credit may be required prior to the acceptance and delivery of the products. Each customer has a maximum credit limit. The Group seeks to maintain strict control over its outstanding receivables and has a credit control policy to minimise credit risk. A credit committee consisting of senior management and the directors of the Group has been established to review and approve large customer credits.

An aged analysis of the trade receivables at 31 March 2004, based on invoice due date and stated net of provision for doubtful debts, is as follows:

Trade receivables: Current Less than 30 days 31 – 60 days Over 60 days	Group 2004 2003 HK$’000 HK$’000 167,064 111,215 93,983 43,583 16,499 15,576 18,793 13,410 296,339 183,784	Group 2004 2003 HK$’000 HK$’000 167,064 111,215 93,983 43,583 16,499 15,576 18,793 13,410 296,339 183,784
		183,784

23. TRADE PAYABLES AND ACCRUED EXPENSES

An aged analysis of the trade payables at 31 March 2004, based on invoice due date, is as follows:

Trade payables: Current Less than 30 days 31 – 60 days Over 60 days Accrued expenses	Group 2004 2003 HK$’000 HK$’000 85,348 55,671 60,323 50,072 8,535 2,270 1,723 1,707 155,929 109,720 19,068 10,224 174,997 119,944	Company 2004 2003 HK$’000 HK$’000 – – – – – – – – – – 625 407 625 407	Company 2004 2003 HK$’000 HK$’000 – – – – – – – – – – 625 407 625 407
			– 407
			407

– 48 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

24. INTEREST-BEARING BANK BORROWINGS

Amounts repayable within one year or on demand: Revolving bank loans under trade facilities, secured Import and trust receipt loans	Group 2004 2003 HK$’000 HK$’000 – 4,000 252,591 225,009 252,591 229,009	Group 2004 2003 HK$’000 HK$’000 – 4,000 252,591 225,009 252,591 229,009
		229,009

Certain of the above bank borrowings and of the Group’s banking facilities are secured by fixed charges over certain of the land and buildings held by the Group, which had a net carrying value at the balance sheet date of approximately HK$8,246,000 (2003: HK$8,442,000) (note 14) .

25. FINANCE LEASE PAYABLES

The Group leases certain of its motor vehicles and plant and machinery for its marketing and distribution business and design and manufacture business, respectively. These leases are classified as finance leases and have remaining lease terms ranging from two to six years.

At 31 March 2004, the total future minimum lease payments under finance leases and their present values were as follows:

Group

Amounts payable: Within one year In the second year In the third to fifth years, inclusive After five years Total minimum finance lease payments Future finance charges Total net finance lease payables Portion classified as current liabilities Long term portion of finance lease payables	Minimum lease payments 2004 HK$’000 2,767 2,302 1,250 111 6,430 (332) 6,098 (2,629) 3,469	Minimum lease payments 2003 HK$’000 2,759 828 819 285 4,691 (325) 4,366 (2,638) 1,728	Present value of minimum lease payments 2004 HK$’000 2,629 2,223 1,152 94 6,098	Present value of minimum lease payments 2003 HK$’000 2,638 771 716 241
				4,366

26. OTHER LONG TERM PAYABLE

The other long term payable represented the long term portion of an amount payable for the acquisition of a sports and social club debenture.

– 49 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

27. DEFERRED TAX

The movements in deferred tax liabilities and assets during the year are as follows:

DEFERRED TAX LIABILITIES

Accelerated tax depreciation

At beginning of year Deferred tax charged to the profit and loss account during the year –note 10 Gross deferred tax liabilities at end of year DEFERRED TAX ASSETS Losses available for offset against future taxable profit At beginning of year Deferred tax credited to the profit and loss account during the year –note 10 Gross deferred tax assets at end of year There are no income tax consequences attaching to the payment of dividends

Group 2004 2003 HK$’000 HK$’000 301 301 1,553 – 1,854 301 Group 2004 2003 HK$’000 HK$’000 – – 154 – 154 – by the Company to its shareholders.

28. SHARE CAPITAL

Shares

Authorised: 800,000,000 ordinary shares of HK$0.10 each Issued and fully paid: 405,082,419 (2003: 361,532,419) ordinary shares of HK$0.10 each	2004 HK$’000 80,000 40,508	2003 HK$’000 80,000
		36,153

During the year, the movements in the Company’s share capital were as follows:

(a) On 9 December 2003, B.K.S. Company Limited, the controlling shareholder of the Company (the “Controlling Shareholder”) placed through a placing agent, VC CEF Brokerage Limited, a total number of 17,000,000 ordinary shares in the Company at a price of HK$0.80 per share to not less than six independent third party investors (the “Placing”). The Placing was completed on 12 December 2003.

Pursuant to the subscription agreement dated 9 December 2003 entered into between the Company and the Controlling Shareholder, the Controlling Shareholder also subscribed for 17,000,000 new ordinary shares of the Company at a subscription price of HK$0.80 per share upon completion of the Placing (the “Subscription”). The Subscription was completed on 22 December 2003. The net proceeds from the Subscription of HK$13,218,000 were used to finance new product development, the marketing of the Group’s original design manufactured MP3 players and the expansion in the Group’s manufacturing facilities in Mainland China.

(b) During the year, the subscription rights attached to 26,550,000 share options were exercised by certain employees of the Company at the subscription price of HK$0.304 per share (note 29), resulting in the issue of 26,550,000 shares of HK$0.10 each for a total cash consideration of HK$8,071,000.

– 50 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. SHARE CAPITAL (Continued)

A summary of the transactions during the year with reference to the above movements in the Company’s issued share capital and share premium account is as follows:

Number of shares in issue At 1 April 2002 236,321,613 Rights issue 119,510,806 Share options exercised during the year 5,700,000 361,532,419 Share issue expenses – At 31 March 2003 and 1 April 2003 361,532,419 Placement of shares (a) 17,000,000 Share options exercised during the year (b) 26,550,000 405,082,419 Share issue expenses – At 31 March 2004 405,082,419	Issued share capital HK$’000 23,632 11,951 570 36,153 – 36,153 1,700 2,655 40,508 – 40,508	Share premium account HK$’000 121,507 19,121 686 141,314 (1,948) 139,366 11,900 5,416 156,682 (382) 156,300	Total HK$’000 145,139 31,072 1,256 177,467 (1,948) 175,519 13,600 8,071 197,190 (382) 196,808

Share options

Details of the Company’s share option schemes and the movements in share options under the schemes are included in note 29 to the financial statements.

29.

SHARE OPTION SCHEMES

On 1 April 1996, the Company adopted a share option scheme (the “Old Scheme”) under which the directors may, at their discretion, grant options to the executive directors of the Company and employees of the Group to subscribe for ordinary shares in the Company. In order to comply with the new requirements of Chapter 17 of the Listing Rules, a new share option scheme was approved at the extraordinary general meeting held on 13 May 2002 (the “New Scheme”). All share options granted prior to such amendment shall continue to be valid and exercisable in accordance with the Old Scheme. The Company operates the New Scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Eligible participants of the New Scheme include the Company’s directors, including independent non-executive directors, other employees of the Group, suppliers of goods or services to the Group, customers of the Group, and any minority shareholder in the Company’s subsidiaries. The New Scheme became effective on 13 May 2002 and, unless otherwise cancelled or amended, will remain in force for 10 years from that date.

The maximum number of unexercised share options currently permitted to be granted under the New Scheme is an amount equivalent, upon their exercise, to 30% of the shares of the Company in issue at any time. The maximum number of shares issuable under share options to each eligible participant in the New Scheme within any 12-month period, is limited to 1% of the shares of the Company in issue at any time. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.

Share options granted to a director, chief executive or substantial shareholder of the Company, or to any of their associates, are subject to approval in advance by the independent non-executive directors. In addition, any share options granted to a substantial shareholder or an independent non-executive director of the Company, or to any of their associates, in excess of 0.1% of the shares of the Company in issue at any time or with an aggregate value (based on the price of the Company’s shares at the date of the grant) in excess of HK$5 million, within any 12month period, are subject to shareholders’ approval in advance in a general meeting.

The offer of a grant of share options may be accepted within 28 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the directors, and commences after a certain vesting period and ends on a date which is not later than the expiry date of the New Scheme.

– 51 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

29. SHARE OPTION SCHEMES (Continued)

The exercise price of the share options is determinable by the directors, but may not be less than the higher of (i) the Stock Exchange closing price of the Company’s shares on the date of the offer of the share options; and (ii) the average Stock Exchange closing price of the Company’s shares for the five trading days immediately preceding the date of the offer.

Share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.

The following share options were outstanding under the New and Old Schemes during the year:

Name or category of participant Directors Lee Jeong Kwan Lai Yun Wing Lai Yat Hung, Edmund Lai Yat Hung, Edmund Lai Yat Hung, Edmund So Chi On Sub-total Other employees In aggregate Sub-total Total		Number of share options	Number of share options	Number of share options	Company’s share price At Date of Exercise Exercise at grant 31 March grant of period of price of date of 2004 share share share share options options options options (both dates inclusive) (Note 1) (Note 2) (Note 3) HK$ HK$ 2,000,000 23 March 23 March 1.52 1.55 2004 2005 – 12 May 2012 1,000,000 23 March 23 March 1.52 1.55 2004 2005 – 12 May 2012 500,000 23 March 23 March 1.52 1.55 2004 2005 – 12 May 2012 – 28 December 28 June 0.72 1.72 1999 2000 – 27 June 2003 – 20 October 20 April 0.31 0.53 2000 2001 – 19 April 2003 400,000 23 March 23 March 1.52 1.55 2004 2005 – 12 May 2012 3,900,000 – 28 December 28 June 0.72 1.72 1999 2000 – 27 June 2003 – 20 October 20 April 0.31 0.53 2000 2001 – 19 April 2003 – 22 May 23 May 0.304* 0.31 2002 2002 – 12 May 2012 11,100,000 23 March 23 March 1.52 1.55 2004 2005 – 12 May 2012 11,100,000 15,000,000
	At 1 April 2003 – – – 4,125,000@ 2,250,000@ – 6,375,000 4,125,000@ 3,000,000@ 27,000,000 # – 34,125,000 40,500,000	Granted during the year 2,000,000 # 1,000,000 # 500,000 # – – 400,000 # 3,900,000 – – – 11,100,000 # 11,100,000 15,000,000	Exercised during the year (Note 4) – – – – – – – – – (26,550,000 ) – (26,550,000 ) (26,550,000 )	Lapsed during the year – – – (4,125,000 ) (2,250,000 ) – (6,375,000 ) (4,125,000 ) (3,000,000 ) (450,000) – (7,575,000 ) (13,950,000 )

• The number of outstanding share options granted under the New Scheme.

@ The number of outstanding share options under the Old Scheme.

• The exercise prices of these share options were adjusted from HK$1.08 to HK$0.72; HK$0.47 to HK$0.31 and HK$0.346 to HK$0.304 per share after taking into account of the effect of rights issue completed in the prior year.

– 52 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

29. SHARE OPTION SCHEMES (Continued)

Notes:

1. The vesting period of the share options is from the date of grant until the commencement of the exercise period.

2. The exercise price of the share options is subject to adjustment in the case of rights or bonus issues, or other similar changes in the Company’s share capital.

3. The price of the Company’s shares disclosed as at the date of the grant of the share options is the Stock Exchange closing price on the trading day immediately prior to the date of the grant of the options.

4. During the year, certain employees exercised a total of 26,550,000 share options, of which the weighted average of the Stock Exchange closing price immediately before the dates on which those options were exercised was HK$0.76 per share.

During the year, the 26,550,000 share options exercised resulted in the issue of 26,550,000 ordinary shares of the Company and new share capital of HK$2,655,000 and share premium of HK$5,416,000, as detailed in note 28 to the financial statements.

At the balance sheet date, the Company had 15,000,000 share options outstanding under the New Scheme, which represented approximately 3.7% of the Company’s shares in issue as at that date. The exercise in full of these share options would, under the present capital structure of the Company, result in the issue of 15,000,000 additional ordinary shares of the Company and additional share capital of HK$1,500,000 and share premium of HK$21,300,000 (before issue expenses).

30. RESERVES

(a) Group

The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity on pages 29 and 30 of the financial statements.

The amounts of goodwill remaining in the consolidated retained profits as at 31 March 2004 which arose from the acquisition of certain subsidiaries prior to 1 April 2001 amounted to HK$12,470,000. During the year under review, in the opinion of the directors, there have been no impairments in values of the goodwill.

(b) Company

Notes At 1 April 2002 Rights issue 28 Exercise of share options 28 Share issue expenses 28 Interim 2003 dividend 12 Proposed final 2003 dividend 12 Net profit for the year At 31 March 2003 and 1 April 2003 Issue of shares 28 Exercise of share options 28 Share issue expenses 28 Interim 2004 dividend 12 Special 2004 dividend 12 Proposed final 2004 dividend 12 Net profit for the year At 31 March 2004	Share premium account HK$’000 121,507 19,121 686 (1,948) – – – 139,366 11,900 5,416 (382) – – – – 156,300	Capital redemption reserve HK$’000 12,491 – – – – – – 12,491 – – – – – – – 12,491	Retained profits HK$’000 8,287 – – – (3,615) (3,615) 1,248 2,305 – – – (10,079) (40,508) (32,407) 89,672 8,983	Total HK$’000 142,285 19,121 686 (1,948) (3,615) (3,615) 1,248 154,162 11,900 5,416 (382) (10,079) (40,508) (32,407) 89,672 177,774

In accordance with the Companies Law (2003 Revision) of the Cayman Islands, the share premium account is distributable in certain circumstances.

– 53 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

31. NOTE TO THE CONSOLIDATED CASH FLOW STATEMENT

Major non-cash transaction

During the year, the Group entered into finance lease arrangements in respect of fixed assets with a total capital value at the inception of the leases of HK$7,835,000 (2003: HK$3,171,000).

32. CONTINGENT LIABILITIES

At the balance sheet date, contingent liabilities not provided for in the financial statements were as follows:

Guarantees given in respect of facilities granted to: Subsidiaries* A supplier Bills discounted with recourse	Group 2004 2003 HK$’000 HK$’000 – – 3,900 3,900 10,654 – 14,554 3,900	Company 2004 2003 HK$’000 HK$’000 693,009 440,809 – – – – 693,009 440,809	Company 2004 2003 HK$’000 HK$’000 693,009 440,809 – – – – 693,009 440,809
			440,809

• At the balance sheet date, an amount of HK$325,208,000 (2003: HK$270,536,000) had been utilised by subsidiaries of the Company.

33. OPERATING LEASE ARRANGEMENTS

The Group leases certain of its factory buildings and staff quarters under operating lease arrangements. Leases for properties are negotiated for terms ranging from one to nine years.

At 31 March 2004, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive After five years	Group 2004 2003 HK$’000 HK$’000 3,269 2,752 9,781 9,195 567 2,663 13,617 14,610	Group 2004 2003 HK$’000 HK$’000 3,269 2,752 9,781 9,195 567 2,663 13,617 14,610
		14,610

At the balance sheet date, the Company had no operating lease arrangements (2003: Nil).

34. COMMITMENTS

In addition to the operating lease commitments detailed in note 33 above, the Group and the Company had the following commitments at the balance sheet date:

		Group
	2004		2003
	HK$’000		HK$’000
Capital commitments on the acquisition of fixed assets, contracted for	33,210		3,233

At the balance sheet date, the Company had no significant commitments (2003: Nil).

35. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 30 June 2004.

– 54 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Set out below are the unaudited interim financial statements of the Group for the six months ended 30 September 2004 as extracted from the 2004 interim report of the Company.

Condensed Consolidated Profit and Loss Account

Notes TURNOVER 2 Cost of sales Gross profit Other revenue Gain on partial disposal of a long term listed investment Selling and distribution costs Administrative expenses Other operating expenses PROFIT FROM OPERATING ACTIVITIES 3 Finance costs 4 PROFIT BEFORE TAX Tax 5 NET PROFIT FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS INTERIM DIVIDEND 6 EARNINGS PER SHARE 7 Basic Diluted	Six months ended 30 September 2004 2003 (unaudited) (unaudited) HK$’000 HK$’000 1,134,613 835,764 (1,050,596) (761,773) 84,017 73,991 1,349 602 46,893 – (24,613) (13,303) (26,044) (20,421) (5,004) (3,673) 76,598 37,196 (4,538) (4,582) 72,060 32,614 (9,511) (4,494) 62,549 28,120 11,342 9,308 15.4 cents 7.7 cents N/A 7.7 cents

– 55 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Condensed Consolidated Balance Sheet

30 September 2004 (unaudited) Notes HK$’000 NON-CURRENT ASSETS Fixed Assets 112,928 Intangible assets 1,843 Long term investments 22,254 Other assets 2,057 Deferred tax assets 154 139,236 CURRENT ASSETS Short term investment 1,540 Inventories 8 248,463 Trade receivables 9 317,899 Prepayments, deposits and other receivables 23,245 Cash and bank balances 89,455 680,602 CURRENT LIABILITIES Trade and other payables 10 168,599 Tax payables 18,686 Interest-bearing bank borrowings 271,353 Finance lease payables 2,531 461,169 NET CURRENT ASSETS 219,433 TOTAL ASSETS LESS CURRENT LIABILITIES 358,669 NON-CURRENT LIABILITIES Finance lease payables (3,182) Bank loan – secured (15,378) Other long term payable (443) Deferred tax liabilities (2,679) (21,682) 336,987 CAPITAL AND RESERVES Share capital 11 40,508 Reserves 296,479 336,987

31 March 2004 (audited) HK$’000 71,967 2,430 27,811 2,057 154 104,419 2,062 215,564 296,339 23,320 152,595 689,880 215,505 10,957 252,591 2,629 481,682 208,198 312,617 (3,469) – (449) (1,854) (5,772) 306,845 40,508 266,337 306,845

– 56 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Condensed Statement of Changes in Equity

	Issued		Share			Exchange	Exchange
	share	premium			**Capital **	fluctuation		Retained
	capital		account		reserve		reserve		profits		Total
	(unaudited)	(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)
	HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000
As at 1 April 2003	36,153		139,366		13,872		(6,308)		28,405		211,488
Exercise of share options	1,080		2,203		–		–		–		3,283
Net profit for the period	–		–		–		–		28,120		28,120
2003 final dividend paid	–		–		–		–		(3,615)		(3,615)
As at 30 September 2003	37,233		141,569		13,872		(6,308)		52,910		239,276
As at 1 April 2004	40,508		156,300		13,872		(4,008)		100,173		306,845
Net profit for the period	–		–		–		–		62,549		62,549
2004 final dividend paid	–		–		–		–		(32,407)		(32,407)
As at 30 September 2004	40,508		156,300		13,872		(4,008)		130,315		336,987

Condensed Consolidated Cash Flow Statement

Cash outflow from operating activities Cash inflow/(outflow) from investing activities Cash inflow/(outflow) from financing activities NET DECREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances	Six months ended 30 September 2004 2003 (unaudited) (unaudited) HK$’000 HK$’000 (63,298) (63,018) 3,348 (15,869) (3,190) 59,992 (63,140) (18,895) 152,595 64,103 89,455 45,208 89,455 45,208

– 57 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes to Unaudited Condensed Consolidated Financial Statements

1. PRINCIPAL ACCOUNTING POLICIES

The unaudited condensed consolidated interim financial statements (“Interim Financial Statements”) have been prepared in accordance with the Hong Kong Statement of Standard Accounting Practice (“SSAP”) No. 25 “Interim Financial Reporting” and the applicable disclosure requirement of Appendix 16 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”). These Interim Financial Statements should be read in conjunction with the annual report for the year ended 31 March 2004.

2. SEGMENT INFORMATION

The Group principally engages in the marketing and distribution of electronic components and the design, manufacture and original equipment manufacture of electronic products.

An analysis of the Group’s turnover and contribution to profit from operating activities for the Group’s business segments is as follows:

	Segment turnover	Segment turnover	Segment results	Segment results
	Six months ended		Six months ended
	30 September		30 September
	2004	2003	2004	2003
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
	HK$’000	HK$’000	HK$’000	HK$’000
By business segments:
Marketing and distribution	919,288	721,822	14,687	23,978
Design, manufacture and original equipment
manufacture	215,325	113,942	15,977	13,811
	1,134,613	835,764	30,664	37,789
Interest income			49	11
Unallocated corporate expenses			(486)	(417)
Unrealised holding loss on a short term
investment			(522)	(187)
Gain on partial disposal of a long term listed
investment			46,893	–
Profit from operating activities			76,598	37,196

An analysis of the Group’s turnover by geographical segment is as follows:

Geographical segments: Hong Kong Singapore USA and Canada Korea Japan EU Other locations	Segment turnover Six months ended 30 September 2004 2003 (unaudited) (unaudited) HK$’000 HK$’000 798,079 663,004 144,402 89,104 107,017 54,143 42,932 16,531 31,768 5,058 10,399 7,525 16 399 1,134,613 835,764	Segment turnover Six months ended 30 September 2004 2003 (unaudited) (unaudited) HK$’000 HK$’000 798,079 663,004 144,402 89,104 107,017 54,143 42,932 16,531 31,768 5,058 10,399 7,525 16 399 1,134,613 835,764
		835,764

– 58 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. PROFIT FROM OPERATING ACTIVITIES

Profit from operating activities is arrived at after charging/(crediting):

	Six months ended	Six months ended
	30 September
	2004		2003
	(unaudited)	(unaudited)
	HK$’000	HK$’000
Depreciation	7,799		6,821
Amortisation of intangible assets	978		843
Unrealised holding loss on a short term
investment	522		187
Exchange (gains)/losses, net	(121)		333
Interest income	(49)		(11)

4. FINANCE COSTS

Interest on bank loans and overdrafts Interest on finance leases	Six months ended 30 September 2004 2003 (unaudited) (unaudited) HK$’000 HK$’000 4,435 4,430 103 152 4,538 4,582	Six months ended 30 September 2004 2003 (unaudited) (unaudited) HK$’000 HK$’000 4,435 4,430 103 152 4,538 4,582
		4,582

5. TAX

Hong Kong profits tax has been provided at the rate of 17.5% (2003: 17.5%) on the estimated assessable profits arising in Hong Kong during the period. Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the countries in which the Group operates, based on existing laws, interpretations and practices in respect thereof.

Current: Hong Kong Elsewhere Deferred Tax charge for the period	Six months ended 30 September 2004 2003 (unaudited) (unaudited) HK$’000 HK$’000 3,695 3,714 4,991 8 825 772 9,511 4,494	Six months ended 30 September 2004 2003 (unaudited) (unaudited) HK$’000 HK$’000 3,695 3,714 4,991 8 825 772 9,511 4,494
		4,494

6. INTERIM DIVIDEND

The Board of Directors has resolved to declare an interim dividend of HK 2.8 cents per ordinary share in issue in respect of the six months ended 30 September 2004 (2003: HK 2.5 cents) payable on or before 7 January 2005 to shareholders whose names appear on the register of members of the Company on 30 December 2004.

– 59 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. EARNINGS PER SHARE

The calculation of basic earnings per share is based on the net profit from ordinary activities attributable to shareholders of HK$62,549,000 (2003: HK$28,120,000) and the weighted average of 405,082,419 (2003: 363,302,749) ordinary shares in issue during the period.

Diluted earnings per share for the six months ended 30 September 2004 have not been disclosed as the share options outstanding during the period had an anti-dilutive effect on the basic earnings per share for the period.

Diluted earnings per share for the six months ended 30 September 2003 is based on the net profit from ordinary activities attributable to shareholders of HK$28,120,000 and the weighted average number of ordinary shares of 366,551,443, after adjusting for the effects of all dilutive potential shares.

8. INVENTORIES

Raw materials Work in progress Finished goods	30 September 2004 (unaudited) HK$’000 74,740 6,199 167,524 248,463	31 March 2004 (audited) HK$’000 56,561 6,368 152,635
		215,564

9. TRADE RECEIVABLES

The Group seeks to maintain strict control over its outstanding receivables and has a credit control policy to minimise credit risk. A credit committee consisting of senior management and the directors of the Group has been established to review and approve large customer credits.

The aged analysis of the accounts receivable as at 30 September 2004, based on the invoice due date and stated net of provision for doubtful debts, is as follows:

Trade receivables: Current Less than 30 days 31 - 60 days Over 60 days	30 September 2004 (unaudited) HK$’000 199,373 74,571 22,021 21,934 317,899	31 March 2004 (audited) HK$’000 167,064 93,983 16,499 18,793
		296,339

– 60 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10.

TRADE AND OTHER PAYABLES

The aged analysis of the trade payable as at 30 September 2004, based on the invoice due date, is as follows:

Trade payables: Current Less than 30 days 31 - 60 days Over 60 days Other payables 11. SHARE CAPITAL Ordinary shares of HK$0.10 each Authorised: At 30 September 2004 and 31 March 2004 Issued and fully paid: At 30 September 2004 and 1 April 2004	30 September 2004 (unaudited) HK$’000 101,348 28,884 7,300 3,157 140,689 27,910 168,599 Number of shares (unaudited) 800,000,000 405,082,419	31 March 2004 (audited) HK$’000 85,348 60,323 8,535 1,723
		155,929 59,576
		215,505
		Share capital (unaudited) HK$’000 80,000
		40,508

– 61 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. INDEBTEDNESS

As at the close of business on 31 May 2005 (being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular), the Group had total outstanding borrowings of approximately HK$362,450,000, comprising a mortgage loan of approximately HK$16,146,000, import and trust receipt loans of approximately HK$342,312,000 and obligations under finance leases of approximately HK$3,992,000. Additionally, the Group had contingent liabilities in respect of guarantees given in connection with certain facilities granted to a supplier of approximately HK$26,520,000 and bills discounted of approximately HK$13,839,000 as at 31 May 2005.

As at 31 May 2005, the mortgage loan granted to the Group was secured by a fixed charge over certain leasehold land and buildings held by the Group, which had an aggregate net book value of approximately HK$37,784,000 as at that date.

Save as aforesaid and apart from intra-group liabilities and normal accounts payables, the Group did not have any outstanding mortgages, charges, debentures, loan capital and overdraft, debt securities or other similar indebtedness, finance leases or hire purchase commitment, liabilities under acceptances or acceptance credits or any guarantees or other material contingent liabilities as at the close of business on 31 May 2005.

5. WORKING CAPITAL

Taking into account the Group’s internal resources and banking facilities, the Directors are of the opinion that the Group will have sufficient working capital for its present requirements.

6. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

Looking ahead, building on the established marketing and distribution core operation, the Group will strive to focus on accelerating the development of its high-growth original design business.

The Group will continue to maintain its position as one of the leading semiconductors distributors in Asia by distributing the Samsung Electronics and Fairchild Semiconductors component, and also expanding its distribution portfolio by adding complimentary product lines, including organic light emitting diode (“OLED”) displays from Ness Display Co., Ltd. and other application specific design house solutions.

In October 2004, the Group’s electronic manufacturing services (“EMS”) division commenced pilot production of Internet protocol (“IP”) phone-sets for BreconRidge. The pilot production has been successful and full-scale production is scheduled to commence towards the end of the financial year. The manufacture of IP phone sets represent a diversification of the Group’s EMS manufacture division into non-MP3 related products. Further scope for cooperation and more manufacturing orders for other EMS products may follow.

– 62 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Directors understand that, apart from its own manufacturing facilities in North America, BreconRidge currently procures manufacturing services from AV Chaseway as well as other suppliers in the PRC. Pursuant to the Supply Agreement, AV Chaseway will become the sole supplier of BreconRidge in the PRC. Furthermore, the Directors believe that the cost efficient and effective production operation of AV Chaseway in the PRC (as compared to production operations in the North America) may enable BreconRidge to effectively increase its volume of business. The Directors believe that the creation of the joint venture will bring in additional EMS business to AV Chaseway, thus benefiting AV Chaseway (and the Group throughout the period during which the Group retains its joint control in AV Chaseway).

Boasting strong capability in design and engineering of stylish consumer electronic products, the Group’s ODM business will continue to be its major growth driver in the years ahead.

The Group’s own brand manufacture (“OBM”) operation shall become the Group’s another growth driver in the future. Apart from the current local and the PRC markets, the Group is expanding its footprint to Japan by establishing more distribution channels. Boasting award winning product designs, the Group is motivated to continue to refine its product styling and industrial design to develop quality and leading-edge products. The management believes the further strengthening of its OBM operation shall create a prosperous future for the Group.

7. MATERIAL ADVERSE CHANGES

The Directors are not aware of any material adverse changes in the financial or trading position of the Group since 31 March 2004, the date to which the latest published audited consolidated accounts of the Company have been made up.

– 63 –

FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

Set out below are the audited consolidated financial statements of BreconRidge for the financial year ended 30 May 2004 prepared in accordance with accounting principles generally accepted in Canada. Shareholders should note that the financial statements set out below are provided for information purpose only and that there may be material differences in the financial information had it been prepared in accordance with accounting principles generally accepted in Hong Kong. Shareholders are advised to interpret such financial information with caution. Terms defined herein apply to this Appendix only.

CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)

As at May 30, 2004 ASSETS Current assets: Cash and cash equivalents $ 3,173 Accounts receivable, less allowance of $340 (2003 – $785)(note 14) 23,989 Taxes receivable 1,581 Future income taxes – Inventories_(note 4) 17,281 Prepaid expenses 1,424 47,448 Deferred financing costs 4,593 Future income taxes – Property and equipment(note 5) 15,114 $67,155 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities(note 6) $24,349 Restructuring provision(note 17) 9,302 Income and other taxes payable 460 Current portion of long-term debt(note 7) 1,980 36,091 Long-term debt(note 7) 4,572 Future income taxes – Deferred lease inducements 987 Redeemable preferred shares(note 9) 25,000 Accrued interest on redeemable preferred shares 2,275 68,925 Commitments, contingencies, and guarantees(note 8) Shareholders’ equity: Share capital(note 10) 3,823 Additional paid-in capital – warrants(note 10)_ 2,555 Retained earnings (deficit) (8,410) Cumulative translation account 262 (1,770) $67,155	As at June 1, 2003 $ 9,890 12,763 – 498 8,268 889
	32,308 4,411 443 6,371
	$43,533
	$12,768 1,199 34 463
	14,464 496 152 – 20,000 412
	35,524 2,457 1,819 3,488 245
	8,009
	$43,533

(See accompanying notes to the consolidated financial statements)

– 64 –

FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

CONSOLIDATED STATEMENTS OF NET LOSS AND RETAINED EARNINGS (DEFICIT) (in thousands of U.S. dollars, except per share amounts)

Twelve months	Twelve months	Twelve months	Twelve months		Twelve	months
			ended			ended
May		30, 2004			June	1, 2003
Revenue_(note 14)_		$151,532			$128,183
Cost of revenue_(note 14)_		143,415				119,819
Gross margin			8,117			8,364
Expenses:
Selling, general and administrative_(note 14)_			5,276			5,884
Restructuring charges_(note 17)_			10,728			1,908
Earnings (loss) from operations			(7,887)			572
Interest expense on other debt			514			211
Imputed interest expense on redeemable preferred shares_(note 10)_			1,863			412
Interest income			(3)			(18)
Amortization of deferred financing charges_(notes 3 & 9)_			1,184			136
Loss before income taxes			(11,445)			(169)
Income tax expense_(note 12)_			453			145
Net loss		$(11,898)			$	(314)
Retained earnings, beginning of period			3,488			4,801
Share repurchase in excess of book value_(note 10)_			–			(999)
Retained earnings (deficit), end of period		$	(8,410)		$	3,488
Net loss per common share:
Basic		$	(0.18)		$	(0.004)
Diluted		$	(0.18)		$	(0.004)
Weighted average number of common shares outstanding (in thousands):
Basic			66,625			79,050
Diluted		148,706				112,407

(See accompanying notes to the consolidated financial statements)

– 65 –

FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of U.S. dollars)

	Twelve	months		Twelve	months
		ended			ended
	May 30, 2004			June	1, 2003
CASH PROVIDED BY (USED IN)
Operating activities:
Net loss	$(11,898)			$	(314)
Amortization		3,379			2,989
Imputed interest expense on redeemable preferred shares		1,863			412
Interest expense on other debt		–			130
Deferred lease inducements		987			–
Amortization of deferred financing costs		1,184			–
Restructuring		10,728			1,908
Restructuring, cash draw-downs		(2,459)			(709)
Future income taxes		789			(1,041)
Decrease in working capital_(note 19)_		(10,677)			(2,727)
Cash provided by (used in) operations		(6,104)			648
Investing activities:
Net additions to property and equipment		(3,851)			(1,640)
Business acquisitions_(note 13)_		(6,163)			–
Cash used in investing activities		(10,014)			(1,640)
Financing activities:
Issuance of shares, net_(note 9 and 10)_		6,366			20,046
Repurchase of shares_(note 9 and 10)_		–			(8,577)
Proceeds from long-term debt		5,000			–
Deferred financing costs		(630)			(2,728)
Proceeds from notes receivable		–			385
Repayment of notes payable		–			(5,770)
Repayment of long-term debt		(1,352)			(424)
Cash provided by financing activities		9,384			2,932
Effect of foreign currency translation on cash		17			199
Increase (decrease) in cash and cash equivalents		(6,717)			2,139
Cash and cash equivalents, beginning of period		9,890			7,751
Cash and cash equivalents, end of period	$	3,173		$	9,890
Supplemental cash flow information_(note 19)_

(See accompanying notes to the consolidated financial statements)

– 66 –

FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

Notes:

1. Nature of Operations

BreconRidge Manufacturing Solutions Corporation (the “Company”) is a global provider of electronic manufacturing services. The Company’s services include high tech manufacturing, engineering services, test development for complex products, component management and global procurement, new product introduction expertise, order fulfillment and distribution services, and product repair and end of life support.

2. Background

The Company was incorporated under the laws of Canada on March 31, 1993 as Ridgeway Research Corporation. In July of 2001, the Company was restructured in order to facilitate the acquisition of the assets related to the manufacturing operations of Mitel Networks Inc., Mitel Networks Corporation, and Mitel Networks Limited (collectively “Mitel”), which are companies controlled by one of the Company’s principal shareholders (see Note 14 – “Related Party Transactions and Economic Dependence”). This asset purchase occurred on August 31, 2001. On September 1, 2001 the name of the Company was changed to BreconRidge Manufacturing Solutions Corporation.

3. Accounting Policies

The consolidated financial statements have been prepared in United States dollars and in accordance with Canadian generally accepted accounting principles. These principles conform with United States generally accepted accounting principles for income statement measurement purposes except as disclosed in Note 18 and include the following significant accounting policies:

a) Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: BreconRidge Manufacturing Solutions Limited, a United Kingdom company; BreconRidge Manufacturing Solutions (Asia) Limited, a Hong Kong company; and BreconRidge Manufacturing Solutions Inc., a United States company. All intercompany accounts and transactions have been eliminated.

b) Fiscal Period

The Company’s fiscal year is fifty-two weeks in duration ending on the Sunday closest to May 31. Interim quarters will close on a Sunday and will be 13 weeks long. As such, the quarterly and year end reporting dates may vary slightly.

c) Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to, the determination of the allowance for doubtful accounts, inventory allowances, warranty costs, taxes and contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from these estimates.

d) Cash and cash equivalents

All highly liquid investments with original maturities of three months or less are classified as cash and cash equivalents. The fair value of cash equivalents approximates the amounts shown in the financial statements.

e) Inventories

Inventories are valued at market for work-in-process and finished goods, and current replacement cost for raw materials. Market is the lower of average cost and net realizable value. The cost of finished goods and work-inprocess includes material, labor and manufacturing overhead.

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FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

f) Property and Equipment

Property and equipment are initially recorded at cost. Amortization is provided on a straight-line basis over the anticipated useful lives of the assets. Estimated lives range from two to ten years for equipment and twenty-five years for buildings. Leasehold improvements are amortized over the term of the lease. The Company performs reviews for the impairment of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is assessed by comparing the carrying amount to the projected future net cash flows the assets are expected to generate.

g) Foreign Currency Translation & Hedging

The functional currency of the Company and its subsidiaries is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars at the year end rate of exchange. Non-monetary assets and liabilities denominated in foreign currencies are translated at historic rates and transactions included in earnings are translated at rates prevailing during the fiscal period. Exchange gains and losses are reflected in the consolidated statements of net earnings.

The Company uses forward exchange contracts and options to hedge certain transactions denominated in foreign currencies. Foreign currency gains and losses on these contracts are not recognized in the financial statements until the underlying transaction is recorded in net loss. At that time the gains or losses on such derivatives are recorded in net loss in foreign currency transaction gains (losses), as an adjustment to the underlying transaction. The Company does not enter into financial instruments for trading or speculative purposes.

For the first four months of 2004 and for prior years, the accounts of the Company’s self-sustaining foreign operations for which the functional currency was other than the Unities States dollar were translated into United States dollars using the current rate method. Assets and liabilities were translated at the period end exchanges rates and transactions included in earnings were translated at rates prevailing during the fiscal period. Gains and losses arising from the translation of the financial statements of these operations were deferred in the “Cumulative translation account” and included as a separate component of shareholders’ equity. Effective in month five of fiscal 2004 all operations adopted the United States dollar as the functional currency.

h) Revenue Recognition and Warranties

Revenue is comprised of manufacturing, engineering, distribution, and repair services. Revenue from manufacturing services is recognized upon shipment of goods to customers. Revenue from engineering, distribution and repair services is recognized as services are performed. The Company accrues the estimated potential warranty costs for manufacturing services, based on the Company’s experience, when revenue is recognized.

i) Income Taxes

Income taxes are accounted for using the liability method. Under this approach, future tax assets and liabilities are determined based on differences between the carrying amounts and the tax basis of assets and liabilities, and are measured using the substantively enacted tax rates and laws. Future tax assets are recognized only to the extent that it is more likely than not, in the opinion of management, that the future tax assets will be realized in the future.

j) Stock-Based Compensation Plan

The Company has a stock-based compensation plan. Currently, no compensation expense is recognized for this plan when stock or stock options are issued to employees. Any consideration paid by employees on exercise of stock options or purchase of stock is credited to share capital. If stock or stock options are repurchased from employees, the excess of the consideration paid over the carrying amount of the stock or stock option cancelled is charged to retained earnings.

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FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

Effective June 2, 2003 the Company adopted certain of the accounting recommendations in the new CICA Handbook Section 3870, “Stock-Based Compensation and Other Stock-Based Payments” that establishes the standards for recognition, measurement and disclosure of stock-based compensation. The new section requires that stock options and warrants granted to both non-employees and all direct awards of stock to employees be accounted for using the fair value based method. In regards to stock-based transactions with employees, the new section only requires the recognition of compensation expense for fiscal years commencing on or after January 1, 2005 for non-public companies. In the interim, it requires pro forma disclosure of net income and earnings per share as if these rewards were accounted for using the fair value method. The pro forma disclosure of net income and earnings per share is required only for awards granted after the date of adoption.

The disclosures in the following table show the Company’s net loss and loss per share on a pro forma basis using the fair value method, on a straight line basis, as determined using the minimum value option pricing model and the following assumptions:

	Twelve months ended
	May 30, 2004
Net loss:
As reported	$(11,898)
Pro forma	$(11,932)
Basic and diluted loss per share:
As reported	$ (0.18)
Pro forma	$ (0.18)
Rish-free interest rate	4.00%
Weighted-average expected life of the options	5 years
Dividend yield	Nil

k)

Earnings (Loss) per Common Share

Basic earnings (loss) per common share is computed using the weighted monthly average number of shares outstanding during the period. Diluted earnings (loss) per common share is computed using the treasury stock method. The diluted earnings (loss) per share includes stock options and the conversion of the redeemable preferred shares, and assumes that, if a dilutive effect is produced, all dilutive securities had been exercised at the later of the beginning of the fiscal period and the security issue date. The effect of all options, warrants, and the conversion of preferred shares have been excluded as they are anti-dilutive.

l) Deferred Financing Costs

Costs relating to the issuance of Redeemable Preferred Shares are deferred and amortized until the earliest redemption date. Costs relating to the financing secured in August 2003 are deferred and amortized over the course of the loan repayment. For the twelve month period ended May 30, 2004 amortization costs were $1,172,000 for the Preferred Shares (twelve months ended June 1, 2003 – $136,000) and $12,000 for the financing (twelve months ended June 1, 2003 – NIL).

m) Redeemable Preferred Shares

Preferred shares can be redeemed in the future at the option of the holders based on certain conditions. Accordingly, those shares are accounted for as debt instruments. The prescribed appreciation on the redemption value is accounted for as interest expense.

4. Inventories

Raw materials Work-in-process Finished goods	May 30, 2004 $11,464 4,620 1,197 $17,281	June 1, 2003 $6,105 1,525 638
		$8,268

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FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

5. Property and Equipment

Cost: Buildings Leasehold improvements Equipment Equipment under capital leases Less accumulated amortization: Buildings Leasehold improvements Equipment Equipment under capital leases 6. Accounts Payable and Accrued Liabilities Trade payables Employee-related payables Goods received not invoiced Other accrued liabilites	May 30, 2004 $ 259 447 19,990 2,618 $23,314 $ 121 33 7,568 478 $ 8,200 $15,114 May 30, 2004 $15,619 2,214 4,121 2,395 $24,349	June 1, 2003 $ 215 201 10,045 877
		$11,338
		$ 75 49 4,686 157
		$ 4,967
		$ 6,371
		June 1, 2003 $ 6,774 1,685 1,650 2,659
		$12,768

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FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

7. Long-Term Debt

Capital lease bearing interest at prime rate plus 3.0%, payable in monthly installments with a maturity date of October 2006, secured by the leased assets Capital lease bearing interest at 20.0%, payable in monthly installments with maturity date of June 2005, secured by the leased assets Capital lease bearing interest at 17.6%, payable in monthly installments with maturity date of June 2005, secured by the leased assets Capital lease bearing interest at 7.5%, payable in monthly installments with a maturity date of July, 2006, secured by the leased assets Capital lease bearing interest at 10.3%, payable in monthly installments with a maturity date of October 2004, secured by the leased assets Capital lease bearing interest at 15.4%, payable in monthly installments with a maturity date of April 2007, secured by the leased assets Loan bearing interest at 6.5%, payable in monthly installments, due in March 2004 Loan bearing interest at 6.5%, payable in monthly installments, due in August 2005 Loan bearing interest at the lender’s floating base rate plus 5%, payable in monthly installments, due in December 2008 Non interest bearing loan payable in monthly installments, due in October 2003 Non interest bearing loan payable in quarterly installments, due in September 2005 Less current portion	May 30, 2004 $ 247 198 132 1,188 97 24 – 23 4,583 – 60 6,552 1,980 $4,572	June 1, 2003 $ 330 345 – – – – 29 41 – 122 92
		959 463
		$496

Interest expense related to the long-term debt, including obligations under capital leases for the twelve-month period ended May 30, 2004 was $451,000 (twelve months ended June 1, 2003 – $107,000).

Future minimum lease payments under capital leases are as follows: 2005 – $1,061,000; 2006 – $866,000 and 2007 – $147,000. Estimated interest costs of $188,000 are included in the total future lease payments.

Scheduled principal debt repayments are as follows: 2005 – $1,062,000; 2006 – $1,021,000; 2007 – $1,000,000; 2008 – $1,000,000 and 2009 & thereafter – $583,000.

8. Commitments, Contingencies, and Guarantees

The Company enters on a regular basis into agreements that include indemnification obligations, whose terms range in duration and often are not explicitly defined. The nature of these indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay its customers and suppliers. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the consolidated financial statements with respect to these guarantees.

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FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

In the normal course of operations the Company may be subject to litigation and claims from customers, suppliers, and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to estimate the extent of potential costs, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse effect on the financial position of the Company.

(a) Operating leases

The future minimum lease payments for operating leases for which the Company is committed are as follows: 2005 – $4,932,000; 2006 – $4,941,000; 2007 – $2,704,000; 2008 – $1,959,000; 2009 – $1,936,000; 2010 and beyond – $12,447,000. Also see Note 14. Rental expense on operating leases for the twelve-month period ended May 30, 2004 amounted to $4,599,000 (twelve months ended June 1, 2003 – $3,094,000).

(b) Letters of Credit

The Company had letters of credit outstanding as at May 30, 2004 amounting to approximately $3,491,000 (June 1, 2003 – $1,339,000). These letters of credit cover various payments including customs and excise taxes, operating lease commitments and certain bank guarantees.

9. Redeemable Preferred Shares

On February 27, 2003, the Company authorized an unlimited number of Series 1 Class A Preferred Shares, ranking in priority to all other classes of shares of the Company (see note 10 – Share Capital). The Series 1 Class A Preferred Shares are entitled to one vote per share and non-cumulative dividends, are convertible to Common Shares at any time at the option of the holder, and will automatically convert to Common Shares upon the closing of a qualified initial public offering or non-qualified initial public offering with the approval of the holders. The conversion price of the Series 1 Class A Preferred Shares is subject to reductions on a continuous basis commencing on the date of issue to result in an effective annual yield of 8.0% for the first three years from the date of issue, 10.0% for the fourth year and 12.0% thereafter, in each case on a non-compounded basis, calculated and prorated on the basis of a year of 365 days. The conversion to Common Shares would be on the basis of the then applicable conversion rate as determined by the ratio of the initial price per share to the conversion price per share.

The holders of the Series 1 Class A Preferred Shares have the right to require the Company to redeem the Series 1 Class A Preferred Shares upon the earlier of five years and one day, a sale or merger of the Company, a sale of substantially all of its assets, or any change in control (other than a change in control that may arise in a public offering), or the occurrence of a bankruptcy and insolvency event. Upon liquidation or redemption, the holders of the Series 1 Class A Preferred Shares are entitled to receive, before any payment is made to any other classes of shares of the Company other than to the holders of the Series 2 Class A Preferred Shares, an amount equal to the original paid-up capital amount, any dividends paid in kind or accrued and unpaid, and an amount equal to 8.0% per annum for each of the first three years from the date of issue, 10.0% for the fourth year and 12.0% thereafter of the original paid-up capital. After distribution of the Series 1 Class A Preferred Share liquidation preference amounts, the remaining assets of the Company, if any, will be distributed rateably to all other classes of shares and the Series 1 Class A Preferred Shares on an as-converted basis. In the event of (i) a qualified inital public offering where the per share conversion price at the time of the inital public offering is at least $1.50 within three years of the issue date or (ii) any other liquidation event which pays or distributes to the holders a minimum of $1.50 per share within three years of the issue date or (iii) a voluntary conversion of some or all of the Series 1 Class A Preferred Shares by the holders other than as part of a public offering, the holders of the Series 1 Class A Preferred Shares shall not receive the above noted liquidation preference.

On February 27, 2003, the Company entered into a subscription agreement and issued 44,444,444 Series 1 Class A Preferred Shares for cash proceeds of $20,000,000 and incurred share issue costs of $2,729,000 and additional warrants valued at $1,819,000.

On September 30, 2003, the Company issued, pursuant to the share subscription agreement dated February 27, 2003, 11,111,111 Series 1 Class A Preferred Shares for cash proceeds of $5,000,000 and incurred share issue costs of $550,000 and additional warrants valued at $736,000.

The Series 1 Class A Preferred Shares can be redeemed in the future at the option of the holders based on certain conditions as noted above. Accordingly, these shares are accounted for as debt instruments. The accrued annual yield accumulating on those shares is accounted for as interest expense. The share issue costs relating to the Series 1 class A Preferred Shares are deferred and amortized over the five year period ending February 27, 2008 or if earlier until the redemption date.

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FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

The Series 1 Class A Preferred shares would be considered short-term preferred shares pursuant to the Income Tax Act of Canada (the “Act”). Tax under Part VI.1 of the Act may be applicable to the extent that dividends are paid or are deemed to be paid on the Series 1 Class A Preferred Shares. Such tax would be payable by the Company at a rate of 50% of dividends paid or deemed to be paid in a year in excess of Cdn $500,000.

10. Share Capital

On July 23, 2001, the Company amended its Articles of Incorporation to increase the authorized capital by creating an unlimited number of Class B Preferred Shares, Class C Preferred Shares, Class D Preferred Shares and Common Shares. It then cancelled all authorized but unissued Class A Preferred Shares and all authorized but unissued Common Shares.

On February 27, 2003, the Company amended its Articles of Incorporation to increase the authorized capital by creating an unlimited number of Class A Preferred Shares, issuable in series, designated as an unlimited number of Series 1 Class A Preferred Shares (see note 9 – Redeemable Preferred Shares) and designated as an unlimited number of Series 2 Class A Preferred Shares. It then cancelled all authorized but unissued Class B Preferred Shares and Class D Preferred Shares.

Authorized:

Series 2 Class A Preferred Shares

The Series 2 Class A Preferred Shares are redeemable at any time at the option of the holder or the Company for an amount per share equal to the original paid-up capital amount in respect of each Series 2 Class A Preferred Share. Upon liquidation, the holders of Series 2 Class A Preferred Shares are entitled to receive, before any payment is made to any other classes of shares of the Company, an amount per share equal to the original paid-up capital amount in respect of each Series 2 Class A Preferred Share. The Series 2 Class A Preferred Shares are redeemable, entitled to one vote per share and non-cumulative dividends.

Class B Preferred Shares

An unlimited number of Class B Preferred Shares, convertible after September 14, 2001 into Common Shares on the basis of 1:1. The Company is required to convert the Class B Preferred Shares to Common Shares on the basis of 1:1 upon the execution of a Supply Agreement having a value of at least Cdn $20 million in gross sales revenue in the first year thereof and upon completion of an equity or convertible equity investment of at least Cdn $10 million based upon a pre-money valuation of Cdn $100 million on a fully diluted basis, from subscribers other than the initial registered holders of any Class C or D Preferred Shares. The Supply Agreement was completed on August 31, 2001 and the equity investment was completed on February 27, 2003. Upon liquidation, the holders of the Class B Preferred Shares are entitled to receive, before any payment is made to any other classes of shares of the Company other than to the holders of the Class A Preferred Shares, Class C Preferred Shares and the Class D Preferred Shares, an amount per share equal to Cdn $1.00 in respect of each Class B Preferred Share. The holders of a Class B Preferred Share are entitled to one vote for each Class B Preferred Share held and are not entitled to dividends.

Class D Preferred Shares

An unlimited number of Class D Preferred Shares, ranking in priority to all other classes of shares of the Company other than the Class A Preference Shares. The Company is required to convert all the outstanding Class D Preferred Shares into Common Shares on the basis of 1:1 upon the execution of the Supply Agreement noted above and upon completion of an equity or convertible equity investment of at least Cdn $10 million based upon a pre-money valuation of Cdn $100 million on a fully diluted basis, from subscribers other than the initial registered holders of any Class C or D Preferred Shares. The Supply Agreement was completed on August 31, 2001 and the equity investment was completed on February 27, 2003. Upon liquidation, the holders of the Class D Preferred Shares are entitled to receive, before any payment is made to any other classes of shares of the Company other than to the holders of the Class A Preferred Shares, an amount per share equal to the original paid-up amount in respect of each Class D Preferred Share. The Class D Preferred Shares are entitled to one vote per share and are not entitled to dividends.

Common Shares

An unlimited number of Common Shares, voting, entitled to receive dividends when declared by the Directors and, subject to the rights of holders of shares ranking prior thereto, the holders of the Common Shares are entitled to receive the remaining property of the Company on dissolution.

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FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

The Company has entered into a Restricted Stock agreement, herein referred to as non-vested stock, with certain employees under which a total of 22,275,000 Common Shares were initially issued. Under the terms of the Restricted Stock agreement, if the shareholder ceases to be an employee of the Company, the unvested and vested Common Shares issued can be repurchased by the Company. The unvested shares can be repurchased at a price equal to the shares’ original per-share issue price and vested shares can be repurchased at a price equal to the shares’ fair market value at the date of repurchase.

The non-vested stock was issued for total consideration of Cdn $22,000. The non-vested stock vest at various dates throughout the year with an overall vesting schedule of 25% vesting at the date of issue thereof with 1/60th of the remaining shares vesting monthly thereafter such that all shares are vested after 60 months. As at May 30, 2004 12,740,615 shares had vested (June 1, 2003 - 9,909,371).

Issued:

Issued:
				May	30, 2004	June 1, 2003
69,310,161	Common Shares (2003	–	64,969,946)		$3,823	$2,457

2003 Capital Transactions:

• a) On February 27, 2003, as a result of the issuance of Series 1 Class A Preferred Shares, 27,777,778 Class D Preferred Shares were converted to Series 2 Class A Preferred Shares on the basis of 1:1, and the remaining 36,105,554 of Class D Preferred Shares and 11,447,127 Class B Preferred Shares were converted to Common Shares on the basis of 1:1.

• b) On March 17, 2003, the Company repurchased the 27,777,778 of Series 2 Class A Preferred Shares at a price of $0.27 per share which was equal to the shares’ original per share issue price.

Other capital transactions during the twelve month period ended June 1, 2003 included the exercise of 683,534 of Class B Preferred Share options for cash proceeds of $46,000, the repurchase of 1,147,500 vested Common Shares at a price of $0.48 per share and 208,333 Class D Preferred Shares at a price of $0.64 per share for a total of $685,000, and the repurchase of 1,457,775 Common Shares at a price of $0.27 per share for a total of $394,000. The excess of the purchase price over the original issue price of $999,000 has been charged to retained earnings.

The Company has cancelled these shares and the 2,252,500 of unvested Common Shares repurchased on May 9, 2002.

2004 Capital Transactions:

• a) On January 15, 2004, the Company issued 4,225,807 Common Shares at $0.31 per share for total cash proceeds of $1,310,000. Share issue costs of $2,000 were recorded.

During the twelve months ended May 30, 2004, an additional 114,408 Common Shares have been created from the exercise of options for cash proceeds of $20,000. The value of share capital has increased by an additional $37,000 as a result of the repayment of a note receivable that had previously been offset against share capital.

As a result of the issuance of the Series 1 Class A Preferred Shares on February 27, 2003 and the conversion of the Class B Preferred Shares, the notes receivable from the Class B Preferred shareholders were transferred to the Common Shares under the same terms and conditions. As at May 30, 2004, the Company had notes receivable from certain Common shareholders in the amount of Cdn $12,000 (June 1, 2003 – Cdn $70,000) with no repayment terms. The notes receivable is shown as a reduction to share capital. The 16,582 Common Shares held by the shareholders at an average weighted price of Cdn $0.23 per share have been pledged as security.

Additional Paid-in Capital – Warrants

During the twelve month period ended June 1, 2003, the Company issued warrants to purchase 11,111,111 common shares at a price of $0.45 per share and 1,388,888 common shares at a price of $0.27 per share in connection with the issuance of the Series 1 Class A Preferred Shares on February 27, 2003. The estimated fair value of these warrants on their grant date was $1,819,000. This amount is being deferred and amortized over the five year period ending February 27, 2008 or if earlier until the redemption date.

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FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

During the twelve month period ended May 30, 2004, the Company issued warrants to purchase 2,777,778 common shares at a price of $0.45 per share and 1,388,889 common shares at a price of $0.27 per share in connection with the issuance of the Series 1 Class A Preferred Shares on September 30, 2003. The estimated fair value of these warrants on their grant date was $736,000. This amount is being expensed over the five year period ending September 30, 2008 or, if earlier, until the redemption date.

Stock Option Plan

Preferred Shares

As a result of the reorganization of the share capital of Ridgeway Research Corporation, the existing Common Share option holders exchanged their options for Class B Preferred Share options on the basis of 1.9437 Class B Preferred Share option for each existing Common Share option on July 23, 2001.

As a result of the issuance of the Series 1 Class A Preferred Shares on February 27, 2003, the existing Class B Preferred Share options were converted to Common Share options on the basis of 1:1.

The vesting period is 8.33% of the option shares at the beginning of each three month period after the date of the grant until all options are exercisable. The options will expire on the tenth anniversary or upon termination of employment.

Common Shares

On July 18, 2001, the Company’s shareholders approved the BreconRidge Manufacturing Solutions Corporation Employee Stock Option Plan (the “Plan”) applicable to the Company’s employees, directors, consultants and others and authorized 20,000,000 Common Shares for issuance thereunder. The options are granted at the then-current fair market value of the common shares of the Company. Commencing on the first anniversary of the date of grant, 25% may be exercised and commencing on the first anniversary until the fourth anniversary of the date of grant the remaining 75% may be exercised at the rate of 1/12 every three months, and expire on the earlier of the seventh anniversary or termination of employment. Available for grant at May 30, 2004 were 12,449,166 common shares.

A summary of the Company’s stock option activity and related information:

	Twelve months ended	Twelve months ended	Twelve months ended	Twelve months ended	Twelve months ended	Twelve months ended	Twelve months ended
	May 30, 2004				June 1,	2003
	Number of		Weighted		Number of		Weighted
	Common Share			Average	Common Share		Average
	Options	Exercise Price			Options	Exercise Price
Balance, beginning of period	8,633,940			$0.44	6,096,387		$0.50
Granted	2,179,350			$0.50	179,500		$0.50
Conversion	–			–	3,005,923		$0.31
Exercised	(114,408)			$0.34	–		–
Forfeited	(454,349)			$0.49	(647,870)		$0.47
Balance, end of period	10,244,533			$0.45	8,633,940		$0.44
	Twelve months ended				Twelve months ended
	May 30, 2004				June 1,	2003
	Number of Class B			Weighted	Number of Class B		Weighted
	Preferred Share			Average	Preferred Share		Average
	Options	Exercise Price			Options	Exercise Price
Balance, beginning of period	–			$0.23	3,711,487		$0.23
Granted	–			–	–		–
Exercised	–			$0.07	(683,534)		$0.07
Conversion	–			$0.31	(3,005,923)		$0.31
Forfeited	–			$0.52	(22,030)		$0.52
Balance, end of period	–			–	–		–

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FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

A summary of Common Share options outstanding at May 30, 2004 is as follows:

Exercise Price $0.07 $0.19 $0.38 $0.53 $0.50	Total Outstanding Weighted Average Number of Remaining Options Contractual Life 923,258 1.3 years 242,769 2.2 years 616,025 4.5 years 926,522 6.7 years 7,535,959 5.0 years 10,244,533	Total Exercisable Weighted Average Number of Remaining Options Contractual Life 923,258 1.3 years 242,769 2.2 years 616,025 4.5 years 895,790 6.7 years 3,555,979 4.5 years 6,233,821

Warrants

On February 27, 2003, the Company issued, to the holders of the Series 1 Class A Preferred Shares, warrants to acquire 11,111,111 Common Shares. The warrants have a seven-year term from the issue date, are exercisable after the third anniversary of the issue date, and have a strike price of $0.50625 per share in the fourth year from the date of issue and $0.5625 per share thereafter. After the third year from the date of issue, the warrants will automatically be exercised or cancelled contemporaneously with a qualified initial public offering and will be exercisable and convertible on a cashless exercise basis in the event of a sale of the Company or its assets or an initial public offering at the holders’ option.

Pursuant to an agency agreement entered into between the Company and the lead placement agent, the Company granted the lead placement agent 1,388,888 Common Share options at an exercise price of $0.27 per share. These Common Share options expire on the date which is the earlier of: (i) the 12 month anniversary of an initial public offering of Common Shares of the Company; (ii) February 27, 2007.

On September 30, 2003, the Company issued warrants to purchase 2,777,778 common shares. The warrants have a sevenyear term from the issue date, are exercisable after the third anniversary of the issue date, and have a strike price of $0.50625 per share in the fourth year from the date of issue and $0.5625 per share thereafter. After the third year from the date of issue, the warrants will automatically be exercised or cancelled contemporaneously with a qualified initial public offering and will be exercisable and convertible on a cashless exercise basis in the event of a sale of the Company or its assets or an initial public offering at the holders’ option.

On September 30, 2003, pursuant to an agency agreement entered into between the Company and the lead placement agent, the Company granted the lead placement agent 1,388,890 Common Share options at an exercise price of $0.27 per share 833,334 Common Share options expire on the date which is the earlier of: (i) the 12 month anniversary of an initial public offering of Common Shares of the Company; (ii) February 27, 2007, and 555,556 Common Share options expire on the date which is the earlier of: (i) the 12 month anniversary of an initial public offering of Common Shares of the Company; (ii) September 30, 2007.

11. Cumulative Translation Account

The following table summarizes changes in the cumulative translation account:

Balance, beginning of period Movements in exchange rates Canadian dollar Other Balance, end of period	May 30, 2004 $245 – 17 $262	June 1, 2003 $ 94 151 –
		$245

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FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

12. Income Taxes

Details of income taxes were as follows:

Earnings (loss) before income taxes: Canadian Foreign Income tax expense (recovery): Canadian – current – future Foreign – current – future	Twelve months ended May 30, 2004 $ (9,369) (2,076) $(11,445) $ (247) 154 (86) 632 $ 453	Twelve months ended June 1, 2003 $ 216 (385) $(169) $ 594 (390) 576 (635) $ 145

The provision for income taxes reported differs from the amount computed by applying the Canadian statutory rate to the loss before income taxes for the following reasons:

Statutory income tax rate Expected expense (recovery) for income tax purposes Manufacturing tax rate reduction Non-deductible interest expense on redeemable preferred shares Write down of futures tax assets Capital Tax Tax effect of losses and temporary differences not recognised Other Foreign tax differential Reported income tax expense	Twelve months ended May 30, 2004 37% $(4,240) 472 633 789 481 2,319 31 (32) $ 453	Twelve months ended June 1, 2003 38% $(59) (18) 124 – – – 9 89 $145

– 77 –

FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

Future income tax assets and liabilities are comprised of the following:

Assets: Net operating loss carryforwards Accounting provisions not currently deductible Property and equipment Financing costs Total future tax assets Liabilities Property and equipment Total future tax liabilities Future tax assets, net Valuation allowance Total future tax assets	May 30, 2004 $1,988 3,178 160 71 $5,397 (192) (192) $5,205 (5,205) $ –	June 1, 2003 $682 167 – 92 $941 (152) (152) $789 – $789

A valuation allowance of $5,205,000 (2003 – Nil) has been established due to uncertainty regarding the realization of the future benefit related to that amount.

As at May 30, 2004, the Company and its subsidiaries had tax loss carryforwards of approximately $7,107,000 (2003 – $822,000) available to reduce future years’ income for tax purposes. The tax loss carryforwards relate to operations in Canada and United Kingdom and expire as follows: 2014 – $1,030,000; 2015 and beyond – $6,077,000. As a result of the related party acquisition on August 31, 2001, there are restrictions on the use of certain of these losses to offset taxable income in future periods.

The Company does not expect that the unremitted earnings of its subsidiaries will be subject to income tax and withholding taxes as it plans to reinvest the earnings of its subsidiaries indefinitely. Accordingly, no provision has been made for potential income tax and withholding taxes on repatriation of subsidiary earnings.

13. Business Combinations

On August 11, 2003, the Company acquired certain manufacturing assets of Nortel Networks for total consideration of $6,163,000, including direct costs associated with the acquisition of $855,000. Consideration paid included a promissory note payable to Nortel Networks in the amount of $1,000,000. The notes bears interest at 7.5% and was settled on January 2, 2004 for $1,030,000, including interest. As part of this transaction, the Company has entered into a three-year supply agreement with Nortel Networks under which the Company will be a supplier of high speed modules for use in Nortel Networks 10 Gbit/s optical transmission systems. The Company also agreed to pay additional consideration based on the revenue derived from sales of high speed modules for the period August 11, 2003 to December 31, 2004. This additional purchase price was not recorded at the acquisition date as it could not be reasonably estimated at the time. During the initial measurement period from August 11, 2003 through December 31, 2003 the revenue criteria was not achieved. As a result, there has been no further adjustment to the initial purchase price. The acquisition was accounted for using the purchase accounting method with the results of operations included from the date of purchase. The purchase transaction, excluding the acquisition costs is summarized as follows:

Property and equipment Current liabilities Long term debt assumed Total net assets Purchase price consideration: Cash Note payable Acquisition related costs	$8,059 (329) (1,567) $6,163 $4,308 1,000 855 $6,163

– 78 –

FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

14. Related Party Transactions and Economic Dependence

On August 31, 2001, the Company entered into supply agreements with Mitel whereby the Company will supply certain products and services. The initial term of the agreement is three years and will be, unless otherwise terminated, automatically renewed on the same terms and conditions for an additional term of three years and thereafter shall be automatically renewed for additional consecutive one-year periods. On February 27, 2003, the terms of the agreement was extended to December 31, 2007 with the same terms and conditions.

On August 31, 2001, the Company entered into service agreements with Mitel for the purchase of inventory and services. The term of the agreements are one year in length and currently expire on August 31, 2004 and December 31, 2004.

Revenue

During the twelve month period ended May 30, 2004, the Company sold $81,715,000 (twelve months ended June 1, 2003 – $104,505,000) of products and services to Mitel under the above noted agreements.

During the twelve month period ended May 30, 2004, the Company sold $2,000 (twelve months ended June 1, 2003 – $1,093,000) of products and services to Mitel that were not included in the above noted supply agreements.

During the twelve month period ended May 30, 2004, the Company sold $4,004,000 (twelve months ended June 1, 2003 – $4,904,000) of product and services to March Networks and $591,000 (twelve months ended June 1, 2003 – $1,012,000) of product and services to Encore Networks. One of the Company’s principal shareholders has a significant investment in these companies.

Revenue earned from related parties has been recorded at the exchange amount.

Cost of Revenue

During the twelve month period ended May 30, 2004, the Company purchased $2,520,000 of inventory and $2,356,000 of services (twelve months ended June 1, 2003 – $5,678,000 of inventory and, $2,869,000 of services) under the above noted agreements.

Cost of revenue charged by Mitel has been recorded at the exchange amount.

Accounts Receivable

As at May 30, 2004, the Company had a receivable balance of $7,771,000 (June 1, 2003 – $8,763,000) and a payable balance of $506,000 (June 1, 2003 – $485,000) with Mitel in respect to the agreements noted above.

As at May 30, 2004, the Company’s accounts receivable included $Nil (June 1, 2003 – $36,000) owing from Mitel with respect to products and services that were not included in the above noted supply agreement, $869,000 (June 1, 2003 – $1,004,000) owing from March Networks Corporation, $165,000 owing from Encore Networks (June 1, 2003 – $373,000).

Other

The Company has entered into lease agreements for premises located in Kanata, Ontario, and Portskewett Monmouthshire, Wales with a company controlled by the principal shareholder, under terms and conditions reflecting prevailing market conditions at the time the leases were entered into. The lease agreements are for terms of 0.5 to 2.25 years expiring October 2004 to August 2006. The leases provide for approximate future annual rental payments of $2,978,000. During the twelve month period ended May 30, 2004, the Company paid $2,978,000 (twelve months ended June 1, 2003 – $2,743,000) in rent for these leased premises, which represented the exchange amount.

15. Pension Plans

The Company has defined contribution employee savings plans in Canada, the United States, and the United Kingdom. The Company matches the contributions of participating employees on the basis of the percentages specified in each plan. Pension expense for the twelve-month period ended May 30, 2004 amounted to $936,000 (twelve months ended June 1, 2003 – $721,000).

– 79 –

FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

16. Financial Instruments

• (a) Fair value

The Company’s financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. Due to their short-term maturity, the carrying values of these instruments are reasonable estimates of their fair value. Due to the terms and conditions of long term debt and the redeemable preferred shares, the carrying values of these instruments also approximate their fair value.

(b) Credit risk

The Company’s financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company performs ongoing credit evaluations of its customers’ financial conditions. In some cases, the Company will require payment in advance or security in the form of letters or credit of thirdparty guarantees. The Company maintains cash and cash equivalents in high quality short-term investments or on deposit with major financial institutes. The Company is exposed to higher credit risk than normal because it derives a substantial portion of its revenues from two customers (see Note 20).

(c) Interest rate risk

The Company’s financial instruments include capital leases bearing interest rates of prime rate plus 3.0%, and a loan bearing an interest rate based on the lender’s floating base rate plus 5.0% and therefore subject to risks relating to interest rate fluctuations.

(d) Foreign currency risk

The Company is exposed to currency rate fluctuations related primarily to its future net cash flows of Canadian dollars, British pounds and Hong Kong dollars from operations. The Company uses financial instruments, principally forward exchange contracts and options, in its management of foreign currency exposures. These contracts primarily require the Company to purchase and sell certain foreign currencies with or for United States dollars at contractual rates.

At year end, the Company had call options to sell $29,000,000 United States dollars by March 2, 2005 to a financial institution in exchange for Canadian dollars at an exchange rate of 1.3910. The Company also had put options with the same institution to sell $38,400,000 United States dollars over the same period in exchange for Canadian dollars at an exchange rate of 1.4030. The unrecognized foreign exchange gain based on market forward rates as at May 30, 2004 was $499,000.

A Canadian chartered bank is the counterparty to the Company’s forward exchange contracts. The Company monitors the financial standing of this counterparty and, while the Company may be exposed to a credit loss in the event of non-performance, it does not anticipate such non-performance.

• (e) Unused bank line of credit

As at May 30 2004, the Company had an unused and available line of credit of $8,509,000 at an interest rates of U.S. base rate plus 1.375% collateralized by a general security agreement.

– 80 –

FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

17. Restructuring Charges

The following table summarizes changes in the restructuring provision.

Provision at June 2, 2002 Charge during 2003 Cash draw-downs Provision at June 1, 2003 Change during 2004 Cash draw-downs Non-cash draw-down Provision at May 30, 2004	Workforce Reduction – 1,908 (709) 1,199 2,000 (1,243) – 1,956	Lease and other contractual obligations – – – – 7,428 (947) – 6,481	Facility exit costs and other – – – – 1,000 (269) (11) 720	Asset impairment (non-cash) – – – – 300 – (155) 145	Total – 1,908 (709) 1,199 10,728 (2,459) (166) 9,302

2003

During the twelve month period ended June 1, 2003, the Company recorded restructuring charges of $1,908,000 related to the rationalization of certain operations resulting in workforce reduction costs of $1,908,000 for severance and benefits associated with those employees notified of termination.

2004

During the twelve month period ended May 30, 2004, the Company recorded restructuring charges of $10,728,000 related to the rationalization of operations. The charge includes $2,000,000 for severance and benefits associated with those UK employees notified of termination, $7,428,000 for lease and other contractual obligations, $1,000,000 for facility exit costs and other, and $300,000 related to redundant assets. The workforce reduction provision was drawn down by $1,243,000 during the year, of which $1,099,000 related to the 2003 restructuring and $144,000 to the 2004 actions. The restructuring program related to the workforce reduction is expected to be completed by January 2005, while the drawdown related to facilities restructuring will continue through August 2006.

18. United States Accounting Principles

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP) which, in the case of the Company, conform with United States (U.S. GAAP) for income statement measurement purposes, except as follows:

• (A) U.S. GAAP requires the presentation of comprehensive income which includes all changes in shareholders’ equity during a period except shareholders transactions. In addition, item defined as other comprehensive income such as foreign currency translation adjustments, are separately classified in the financial statements and the accumulated balance of other comprehensive earnings (loss) is reported separately in shareholders’ equity on the balance sheet.

• (B) As allowed under SFAS 123, Accounting for Stock-Based Compensation, management has determined that it will apply Accounting Principles Board Opinion No. 25 (APB 25), in accounting for its employee stock options for purposes of reconciliation to U.S. GAAP. In accordance with Company policy, the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant. Accordingly under the rules of APB 25, no related compensation expense was recorded in the Company’s results of operations for U.S. GAAP purposes.

• (C) The financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended by SFAS No. 137 and SFAS No. 138. The Company does not designate foreign currency option contracts as hedges under SFAS No. 133. Accordingly, the changes in fair value of these undesignated freestanding foreign currency derivative instruments are recognized in current earnings/(loss). The unrealized gain on Foreign Currency options outstanding at year end is $334,000, net of tax.

– 81 –

FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

• (D) At May 30, 2004 the Company had issued and outstanding Series 1 Class A Preferred Shares that have been presented as long-term debt under Canadian GAAP as described in note 9 with the annual yield recorded as interest expense.

• (E) As required under FIN 45, the following table reflects continuity with regards to product warranty liability.

Balance at the beginning of the period Charged to costs and expenses Use of provision Balance at the end of the period	Twelve months ended May 30, 2004 $580 336 (288) $628	Twelve months ended June 1, 2003 $736 215 (371) $580

The following table reconciles the net loss as reported on the consolidated statement of earnings and retained earnings to the net earnings that would have been reported had the financial statements been prepared in accordance with U.S. GAAP. The components of comprehensive earnings were as follows:

Net loss – Canadian GAAP Interest expense on redeemable preferred shares, net of tax Gain on foreign exchange option contracts, net of tax Net loss – U.S. GAAP Change in foreign currency adjustment Comprehensive income (loss)	Twelve months ended May 30, 2004 $(11,898) 1,248 334 $(10,316) 17 $(10,299)	Twelve months ended June 1, 2003 $(314) 276 – $ (38) 151 $ 113

Pro Forma financial information required by SFAS 123 has been determined as if the Company had accounted for its employee stock options using the minimum value option pricing model with the following weighted-average assumptions:

Risk-free interest rate Weighted-average expected life of the options Dividend yield U.S. GAAP net loss Pro forma compensation expense U.S. GAAP Pro Forma net loss U.S. GAAP Pro Forma net loss per share: Basic Diluted	Twelve months ended May 30, 2004 $(10,316) (201) $(10,517) $ (0.16) $ (0.16)	4.00% 5 years Nil Twelve months ended June 1, 2003 $ (38) (167) $ (205) $(0.003) $(0.003)

For purposes of Pro Forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period on a straight-line basis (see also Note 10).

– 82 –

FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

19. Supplementary Cash Flow Information

Change in non-cash working capital: Accounts receivable Inventories Prepaid expenses Accounts payable and accrued liabilities Income taxes payable Interest paid Interest received Taxes paid Taxes received Non-cash financing activities: Capital leases Long terms debt Note payable Note receivable Deferred financing costs	Twelve months ended May 30, 2004 $(11,226) (9,013) (535) 11,252 (1,155) $(10,677) $ 523 5 – – $ 378 – – – 736	Twelve months ended June 1, 2003 $ (936 3,689 (321 (4,297 (862
		$(2,727
		$ 379 15 2,031 – $ 841 382 – – 1,819

20. Business Segment Information

The Company monitors operations as principally one business segment – electronics manufacturing services consisting of high tech manufacturing, engineering services, test development for complex products, component management and global procurement, order fulfillment and distribution services, and product repair and end of life support.

The Company determines the geographic location of revenues based on the location of its customers.

Revenue by geographic location Canada United States United Kingdom Other	Twelve months ended May 30, 2004 $116,779 20,546 13,217 990 $151,532	Twelve months ended June 1, 2003 $ 89,694 11,318 26,860 311
		$128,183

Revenues more than 10 percent of the Company’s total revenue were earned from two customers during the twelve month period ended May 30, 2004. For the twelve month period ended May 30, 2004, Mitel accounted for 54% (twelve months ended June 1, 2003 – 82%) and Nortel for 20% (twelve months ended June 1, 2003 – Nil) respectively of all sales. As disclosed in Note 14, one of these customers is a corporation controlled by one of the principal shareholders of the Company.

The following is the geographical location of the Company’s capital assets:

Assets by geographic location Capital assets: Canada United Kingdom Other	May 30, 2004 $14,536 264 314 $15,114	June 1, 2003 $4,190 1,770 411
		$6,371

– 83 –

FINANCIAL INFORMATION OF BRECONRIDGE

APPENDIX II

21. Comparative Figures

Certain of the Fiscal 2003 comparative figures have been reclassified to conform to the presentation adopted in Fiscal 2004.

– 84 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

1. UNAUDITED PRO FORMA ASSETS AND LIABILITIES STATEMENT OF THE ENLARGED GROUP

Set out below is the unaudited pro forma assets and liabilities statement of the enlarged Group as if Initial Closing had taken place on 30 September 2004 and Final Closing had taken place on 30 September 2004 upon the occurrence of a Liquidity Event. The pro forma assets and liabilities statement has been prepared based on the unaudited consolidated balance sheet of the Group as at 30 September 2004 as extracted from the Company’s published interim report for the six months ended 30 September 2004 as set out in Appendix I to this circular, with adjustments to reflect the effect of Initial Closing and Final Closing upon the occurrence of a Liquidity Event.

As stated in the paragraph headed “Occurrence of a Liquidity Event and Final Closing” in the letter from the Board, it is the intention of the parties that a public offering and listing of the shares of BreconRidge should occur within two years after Initial Closing. For the purpose of the unaudited pro forma assets and liabilities statement of the enlarged Group, the Directors have prepared the Final Closing scenario using figures stipulated in the Agreement that are applicable to the occurrence of a Liquidity Event within 2 years after Initial Closing.

The unaudited pro forma assets and liabilities statement has been prepared in accordance with Hong Kong Statements of Standard Accounting Practice issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) and accounting principles generally accepted in Hong Kong which are consistent with those available accounting standards used in the preparation of the unaudited interim financial statements of the Group for the six months ended 30 September 2004 without considering the impacts of Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards issued by the HKICPA effective for financial periods commencing from 1 January 2005.

The pro forma assets and liabilities statement is prepared for illustrative purposes only and, because of its nature, may not give a true picture of the financial position of the Group had Initial Closing and Final Closing actually taken place on 30 September 2004 or the financial position of the Group at any future date. Shareholders are advised to interpret any pro forma financial information with caution.

– 85 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

	The Group			The enlarged		The enlarged
	as at 30			Group		Group
	September 2004	Pro	forma	as at Initial	Pro forma	as at Final
	(Unaudited)	adjustments		**Closing **	adjustments	Closing
		Note (a)	Note (b)		Note (c)
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
NON-CURRENT ASSETS
Fixed assets	112,928	(44,200)		68,728		68,728
Intangible assets	1,843			1,843		1,843
Interest in a jointly-controlled
entity	–	19,000		19,000	(19,000)	–
Long term investments
Interest in BreconRidge	–		78,000	78,000	78,000	156,000
Others	22,254			22,254		22,254
Other assets	2,057			2,057		2,057
Deferred tax assets	154			154		154
	139,236			192,036		251,036
CURRENT ASSETS
Short term investment	1,540			1,540		1,540
Inventories	248,463			248,463		248,463
Trade receivables	317,899			317,899		317,899
Prepayments, deposits and
other receivables	23,245	(647)		22,598		22,598
Cash and bank balances	89,455	(8,488)		80,967		80,967
	680,602			671,467		671,467
CURRENT LIABILITIES
Trade payables and accrued
expenses	(168,599)	9,642		(158,957)		(158,957)
Tax payables	(18,686)			(18,686)		(18,686)
Interest-bearing bank
borrowings	(271,353)			(271,353)		(271,353)
Finance lease payables	(2,531)	2,213		(318)		(318)
	(461,169)			(449,314)		(449,314)
NET CURRENT ASSETS	219,433			222,153		222,153
TOTAL ASSETS LESS
CURRENT LIABILITIES	358,669			414,189		473,189
NON-CURRENT LIABILITIES
Finance lease payables	(3,182)	1,626		(1,556)		(1,556)
Interest-bearing bank borrowings	(15,378)			(15,378)		(15,378)
Other long term payable	(443)			(443)		(443)
Deferred tax liabilities	(2,679)	1,854		(825)		(825)
	(21,682)			(18,202)		(18,202)
NET ASSETS	336,987			395,987		454,987

– 86 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Notes:

• (a) The pro forma adjustments reflect the deconsolidation of assets and liabilities of AV Chaseway from the Group’s assets and liabilities arising from the disposal of a 50% equity interest in AV Chaseway by AVCC upon Initial Closing after taking into account the Pre-Initial Closing Transactions. As part of the Pre-Initial Closing Transactions, all trade-related working capital items, including inventories, accounts receivable and accounts payable of AV Chaseway prior to the date of Initial Closing would be transferred to AVCC or other Group companies nominated by AVCC on a nil gain nil loss basis.

Pursuant to the Pre-Initial Closing Transactions, the net asset value of AV Chaseway at Initial Closing should not be less than HK$38 million. Accordingly, AV Chaseway may distribute any amount in excess of HK$38 million back to AVCC in the form of dividend distribution.

Upon Initial Closing, the remaining 50% equity interest in AV Chaseway held by the Group would be stated in the consolidated balance sheet of the Group as a jointly-controlled entity.

• (b) The adjustment reflects the Directors’ valuation of the Warrant issued by BreconRidge to AVCC as consideration for the first 50% equity interest in AV Chaseway at Initial Closing. The Warrant will be accounted for as a long term investment and will be converted into 7.5 million common shares in BreconRidge at Final Closing upon the occurrence of a Liquidity Event.

• (c) The adjustments reflect the disposal of the remaining 50% equity interest in AV Chaseway by AVCC to BreconRidge at Final Closing upon the occurrence of a Liquidity Event and the Final Closing BreconRidge Shares issued by BreconRidge to AVCC. The Final Closing BreconRidge Shares represent another 7.5 million common shares in BreconRidge. The Warrant will also be deemed exercised at Final Closing upon the occurrence of a Liquidity Event, resulting in the issue by BreconRidge to AVCC of 7.5 million common shares in BreconRidge. The Total Consideration Shares represent 15 million common shares in BreconRidge. The Directors’ valuation of the Total Consideration Shares is US$20 million for the purpose of the pro forma adjustments.

– 87 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

2. LETTER FROM THE AUDITORS ON THE UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is the text of a letter received from Ernst & Young, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.

15 July 2005

The Board of Directors AV Concept Holdings Limited 6th Floor Enterprise Square Three 39 Wang Chiu Road Kowloon Bay Hong Kong

Dear Sirs

AV Concept Holdings Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) in connection with the major transaction involving the disposal of equity interests in AV Chaseway Limited in consideration for certain interests in BreconRidge Manufacturing Solutions Corporation (the “Transaction”)

We report on the unaudited pro forma assets and liabilities statement of the enlarged Group (the “Pro Forma Financial Information”) set out on pages 85 to 87 in Appendix III “Unaudited Pro Forma Financial Information Of The Enlarged Group” to the Company’s circular dated 15 July 2005 (the “Circular”) in connection with the Transaction. The Pro Forma Financial Information has been prepared by the directors of the Company, solely for illustrative purposes, to provide information about how the Transaction might have affected the historical financial information in respect of the Group.

The historical financial information used in the preparation of the Pro Forma Financial Information is derived from the unaudited published interim report of the Group dated 30 November 2004 for the six months ended 30 September 2004 as set out in Appendix I to the Circular. The basis of preparation of the Pro Forma Financial Information is set out in the accompanying introductory paragraph of Appendix III to the Circular.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the Pro Forma Financial Information in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

– 88 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

It is our responsibility to form an opinion, as required by the Listing Rules, on the Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

Basis of opinion

We conducted our work in accordance with the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 “Reporting on pro forma financial information pursuant to the Listing Rules” issued by the Auditing Practices Board in the United Kingdom, where applicable. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro Forma Financial Information with the directors of the Company.

Our work did not constitute an audit or a review made in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants, and accordingly, we do not express any such audit or review assurance on the Pro Forma Financial Information.

The Pro Forma Financial Information is for illustrative purposes only, based on the directors’ judgements and assumptions, and because of its nature, it does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the enlarged Group had the Transaction actually occurred as at 30 September 2004 or at any future date.

Opinion

In our opinion:

• (a) the Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;

• (b) such basis is consistent with the accounting policies of the Group, and

• (c) the adjustments are appropriate for the purposes of the Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Yours faithfully Ernst & Young

– 89 –

PROFIT ESTIMATES OF AV CHASEWAY

APPENDIX IV

As described in the section headed “Reasons for and benefits of the Agreement and the Supply Agreement” in the letter from the Board contained in this circular, in attaching a value of US$20 million to the entire equity interest of AV Chaseway, the Directors have made reference to, among other things, an internal estimate of the financial parameters of AV Chaseway. Such financial parameters include AV Chaseway’s estimated unaudited net profit attributable to shareholders for the year ended 31 March 2005 (the “Profit Estimate”), estimated earnings before interest, tax, depreciation and amortization for the same year (the “Estimated EBITDA”), the Profit Estimate minus the Adjustment (defined below) (the “Adjusted Profit Estimate”) and the Estimated EBITDA minus the Adjustment (defined below) (the “Adjusted EBITDA”). The “Adjustment” refers to the Directors’ estimate of the gross profit contribution from business derived from BreconRidge for the year ended 31 March 2005. The above profit estimates of AV Chaseway are regarded as profit forecast under Rule 14.62 of the Listing Rules.

1. BASES AND ASSUMPTIONS

Set out below are the principal bases and assumptions adopted by the directors of AV Chaseway and the Company in the preparation of AV Chaseway’s profit estimates for the year ended 31 March 2005.

• the company history of AV Chaseway;

• the economic and industry outlooks affecting AV Chaseway’s business;

• the continuous operation of AV Chaseway;

• there will be no material changes in the political, legal, economic, financial aspects in the jurisdictions in which AV Chaseway currently runs or intends to run its business which will materially affect its operation;

• there will be no substantial market fluctuation in the industry in the jurisdictions or states in which AV Chaseway currently runs or intends to run its business, which will materially affect its operations and the revenues attributed to shareholders;

• there will be no substantial fluctuation in current interest rates and foreign currency exchange rates in the jurisdictions or states in which AV Chaseway currently runs or intends to run its business, which will materially affect its operations and the revenues attributed to shareholders;

• the management of AV Chaseway will not make any decision, which is harmful to the revenue generation ability of AV Chaseway’s business;

• save as provided in the Profit Estimate, there will be no event or actions, intended or actual, such as contemplated capital projects, loss of any significant customers, suppliers, investments or acquisitions or pending or threatened litigation subsequent to 31 March 2005, that could materially affect the Profit Estimate; and

• AV Chaseway will allocate sufficient resources to keep abreast of its future expansion.

The Profit Estimate has also been prepared taken into account the significant accounting policies of AV Chaseway.

– 90 –

PROFIT ESTIMATES OF AV CHASEWAY

APPENDIX IV

9 May 2005

2. LETTERS

(i) Letter from Ernst & Young

Set out below is the text of the letter prepared by Ernst & Young, the auditors of the Company, to report on AV Chaseway’s profit estimates as required under Rule 14.62 of the Listing Rules.

The Board of Directors AV Concept Holdings Limited 6/F, Enterprise Square Three 39 Wang Chiu Road Kowloon Bay Hong Kong

and

Ernst & Young Corporate Finance Limited 12/F, Two International Finance Centre 8 Finance Street Central Hong Kong

Dear Sirs

• Re: AV Concept Holdings Limited (the “Company”) and its subsidiaries (the “Group”) – Disposal of equity interests in AV Chaseway Limited (“AV Chaseway”) in consideration for certain interests in BreconRidge Manufacturing Solutions Corporation (“BMS”) (the “Transaction”)

We have reviewed the accounting policies and calculations adopted in arriving at AV Chaseway’s estimated unaudited net profit attributable to shareholders (the “Profit Estimate”) and estimated earnings before interest, tax, depreciation and amortisation (the “Estimated EBITDA”) for the year ended 31 March 2005 (the “Year”) for which the directors of the Company and AV Chaseway (the “Directors”) are solely responsible, in connection with the Transaction.

We emphasis that the Profit Estimate and the Estimated EBITDA were prepared based on the bases and assumptions made by the Directors which may be different from the audited figures of AV Chaseway for the Year. Consequently, it cannot be relied upon to the same extent as information derived from the audited financial statements of AV Chaseway for the Year. We express no opinion as to how closely the actual profit for the Year will correspond to the Profit Estimate as we have not conducted an audit of the results of AV Chaseway for the Year.

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PROFIT ESTIMATES OF AV CHASEWAY

APPENDIX IV

Based on our examination, the Profit Estimate and the Estimated EBITDA, so far as the accounting policies and calculations are concerned, have been properly compiled in accordance with the bases and assumptions adopted by the Directors in preparing the financial statements of AV Chaseway for the Year and are presented on a basis consistent in all material respects with the accounting policies normally adopted by AV Chaseway.

In arriving at the adjusted Profit Estimate and the adjusted Estimated EBITDA for the Year, the Directors have excluded the estimated gross profit contribution derived from AV Chaseway’s existing business with BMS for the Year (the “Adjustment”). In connection with the Adjustment made by the Directors, we do not express any opinion thereon.

Yours faithfully, Ernst & Young

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PROFIT ESTIMATES OF AV CHASEWAY

APPENDIX IV

(ii) Letter from EYCFL

Set out below is the text of the letter prepared by EYCFL, the financial adviser to the Company, reporting on AV Chaseway’s profit estimates as required under Rule 14.62 of the Listing Rules.

Ernst & Young Corporate Finance Limited 香港中環金融街8號 12th Floor 國際金融中心2期12樓 Two International Finance Centre 電話：(852) 2846 9888 8 Finance Street, Central 傳真：(852) 2501 0343 Hong Kong Phone: (852) 2846 9888 Fax: (852) 2501 0343

9 May 2005

The Board of Directors AV Concept Holdings Limited 6/F, Enterprise Square Three 39 Wang Chiu Road Kowloon Bay Hong Kong

Dear Sirs,

AV Concept Holdings Limited (the “Company”)

Disposal of equity interests in AV Chaseway Limited (“AV Chaseway”) in consideration for certain interests in BreconRidge Manufacturing Solutions Corporation (“BreconRidge”)

We refer to the estimated unaudited net profit attributable to shareholders (the “Profit Estimate”) of AV Chaseway for the year ended 31 March 2005 (the “Year”) and the estimated earnings before interest, tax, depreciation and amortisation (the “Estimated EBITDA”) for the Year as set forth in the announcement issued by the Company and dated 9 May 2005 (the “Announcement”). We note that the Directors have made an adjustment to exclude the estimated gross profit contribution derived from AV Chaseway’s business with BreconRidge for the Year (the “Adjustment”) to arrive at the Profit Estimate after the Adjustment (the “Adjusted Profit Estimate”) and the Estimated EBITDA after the Adjustment (the “Adjusted EBITDA”) as set forth in the Announcement.

We have discussed with you the bases and assumptions upon which the Profit Estimate has been made and the calculation of the Estimated EBITDA. We have also considered the letter dated 9 May 2005 addressed to the directors of the Company (the “Directors”) and ourselves from Ernst & Young regarding the accounting policies and calculations upon which the Profit Estimate has been based as well as the calculation of the Estimated EBITDA.

On the basis of the foregoing, we are satisfied that the Profit Estimate and Estimated EBITDA, for which the Directors and the directors of AV Chaseway are solely responsible, has been made after due and careful enquiry. In connection with the Adjustment, we do not express any view thereon.

Yours faithfully, For and on behalf of

Ernst & Young Corporate Finance Limited Cecilia Ng Executive Director

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GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement contained in this circular misleading.

2. DISCLOSURE OF INTERESTS

(a) Directors’ interests and short positions in the securities of the Company and its associated corporations

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executive of the Company in the shares, underlying shares and debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO), the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules or which were required to be entered into the register required to be kept under section 352 of the SFO were as follows:

Long position in the Shares

• (i) Interests in the Shares

Number of Shares and nature of interests

					Approximate
		Personal	Other		percentage
Name of Directors	Capacity	interests	interests	Total	shareholding
Mr. So Yuk Kwan	Founder of a	–	140,814,300	140,814,300	34.76%
	discretionary trust		(Note)
Mr. Lee Jeong Kwan	Beneficial owner	3,000,000	–	3,000,000	0.74%
Mr. So Chi On	Beneficiary of a	–	140,814,300	140,814,300	34.76%
	trust		(Note)
Mr. Lai Yat Hung, Edmund	Beneficial owner	3,742,607	–	3,742,607	0.92%

Note: B.K.S. Company Limited, which is a wholly-owned subsidiary of Credit Cash Limited, is the legal and beneficial owner of 140,814,300 Shares. The entire issued share capital of Credit Cash Limited is held by Trident Corporate Services (B.V.I.) Limited, which is the trustee of a discretionary trust, the beneficiaries of which include Mr. So Chi On and other family members of Mr. So Yuk Kwan.

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GENERAL INFORMATION

APPENDIX V

(ii) Interests in underlying Shares

Certain Directors were granted share options to subscribe for Shares under the Company’s share option scheme, details of which as at the Latest Practicable Date were as follows:

were as follows:
		Number of
		share options	Exercise period
		outstanding	of share options	Exercise price
	Date of grant of	as at the Latest	(both dates	of share
Name of Directors	share options	Practicable Date	inclusive)	options
		(Note 1)		HK$
Lee Jeong Kwan	23 March 2004	2,000,000	23 March 2005 –	1.52
			12 May 2012
Lai Yat Hung, Edmund	23 March 2004	500,000	23 March 2005 –	1.52
			12 May 2012
So Chi On	23 March 2004	400,000	23 March 2005 –	1.52
			12 May 2012

Notes:

1. The vesting period of the share options is from the date of grant until the commencement of the exercise period.

2. The exercise price of the share options is subject to adjustment in the case of rights or bonus issues, or other similar changes in the Company’s share capital.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or chief executive of the Company had any interests and short positions in the shares, underlying shares and debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO), the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules or which were required to be entered into the register required to be kept under section 352 of the SFO.

As at the Latest Practicable Date:

• (i) none of the Directors had any direct or indirect interests in any assets which have since 31 March 2004 (being the date to which the latest published audited accounts of the Group were made up) been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group; and

• (ii) none of the Directors was materially interested in any contracts or arrangements subsisting at the Latest Practicable Date which is significant in relation to the business of the Group.

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GENERAL INFORMATION

APPENDIX V

• (b) Persons or corporations who have an interest or short position which is discloseable under Divisions 2 and 3 of Part XV of the SFO and substantial shareholders of members of the Group

As at the Latest Practicable Date, so far as is known to, or can be ascertained after reasonable enquiry by the Directors and the chief executive of the Company, the following persons or corporations had an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Division 2 and 3 of Part XV of the SFO, or who/which was, directly or indirectly, interested in 10 per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any other member of the Group, or had any option in respect of such capital.

Long position in the Shares

		Percentage of the
	Number of	Company’s issued
Name	Shares held	share capital
B.K.S. Company Limited_(Note 2)_	140,814,300_(Note 1)_	34.76%
Credit Cash Limited	140,814,300_(Note 1)_	34.76%
Trident Corporate Services (B.V.I.)
Limited	140,814,300_(Note 1)_	34.76%
Madam Yeung Kit Ling	140,814,300_(Note 1)_	34.76%
Madam Leung Hoi Man	140,814,300_(Note 1)_	34.76%

Notes:

1. 140,814,300 Shares are beneficially held by B.K.S. Company Limited which is a wholly-owned subsidiary of Credit Cash Limited. Credit Cash Limited is a company wholly-owned by Trident Corporate Services (B.V.I.) Limited, which is the trustee of a discretionary trust, the beneficiaries of which include Mr. So Chi On, Madam Yeung Kit Ling and other family members of Mr. So Yuk Kwan. Madam Leung Hoi Man is the spouse of Mr. So Chi On. Therefore, B.K.S. Company Limited, Credit Cash Limited, Trident Corporate Services (B.V.I.) Limited, Madam Yeung Kit Ling and Madam Leung Hoi Man are interested in the same block of Shares.

2. The following Director(s) is/are director(s)/employee(s) of the company/companies which has/have an interest or short position in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO:

3. Mr. So Yuk Kwan is a director of B.K.S. Company Limited.

So far as is known to any director or chief executive of the Company, as at the Latest Practicable Date, the following companies/persons were interested in 10 per cent. or more of the nominal value of the voting share capital of the following subsidiary of the Company:

		Percentage of
Name of subsidiary	Name of shareholder	shareholding
AVC Germany Limited	Mr. Ralf Burkhardtsmayer	30%
AVC Germany Limited	Cross Cultural Link Consultant Limited	10%

Save as disclosed above, the Directors and the chief executive of the Company are not aware that there is any person or corporation (other than the Directors and chief executive of the Company whose interests are disclosed in 2(a) above) who/which, as at the Latest Practicable Date, had an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who/which was, directly or indirectly, interested in 10 per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any other member of the Group or had any option in respect of such capital.

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GENERAL INFORMATION

APPENDIX V

3. MATERIAL CONTRACTS

The following are all the material contracts (not being contracts in the ordinary course of business) entered into by the Group during the two year period prior to the Latest Practicable Date:

• (a) the subscription agreement dated 9 December 2003 entered into between the Company and B.K.S. Company Limited in respect of the subscription of 17,000,000 new Shares at HK$0.80 per new Share;

• (b) the agreement dated 28 January 2004 entered into between the Company and CLSA Equity Capital Markets Limited in respect of the placing of 150,000 shares in Reigncom Limited; and

• (c) the Agreement and the relevant ancilliary agreements/documents.

4. COMPETING BUSINESS

As at the Latest Practicable Date, none of the directors of the Company and its subsidiaries and their respective associates had any interests in a business, other than the Group’s business, which competes or is likely to compete with the business of the Group.

5. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the directors or proposed directors of the Company and its subsidiaries had entered, or is proposing to enter, into any service contract with the Company or its subsidiaries which is not expiring or may not be terminated by the Company within a year without payment of any compensation (other than statutory compensation).

6. LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries was engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against the Company or any of its subsidiaries.

7. EXPERTS AND CONSENTS

The following is the qualifications of the experts who have been named in this circular or have given opinion or advice which are contained in this circular:

Name	Qualifications
EYCFL	a licensed corporation to carry out type 1 (dealing in
	securities) and type 6 (advising on corporate finance)
	regulated activities for the purposes of the SFO
Ernst & Young	Certified Public Accountants

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GENERAL INFORMATION

APPENDIX V

EYCFL and Ernst & Young have given and have not withdrawn their written consents to the issue of this circular with the inclusion herein of their letters or references to their names in the form and context in which they respectively appear.

None of EYCFL and Ernst & Young have any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

None of EYCFL and Ernst & Young have any direct or indirect interests in any assets which have been, since 31 March 2004 (being the date to which the latest published audited accounts of the Group were made up), acquired or disposed of by or leased to any member of the Group, or which are proposed to be acquired or disposed of by or leased to any member of the Group.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at The Conference Room, 6th Floor, Enterprise Square Three, 39 Wang Chiu Road, Kowloon Bay, Hong Kong up to and including 29 July 2005:

• (a) the memorandum and articles of association of the Company;

• (b) the material contracts referred to in the paragraph headed “Material Contracts” in this Appendix;

• (c) the annual reports of the Company for each of the two years ended 31 March 2003 and 31 March 2004;

• (d) a letter from Ernst & Young reporting on the unaudited pro forma financial information of the enlarged Group, the text of which is set out in Appendix III to this circular;

• (e) the letters from Ernst & Young and EYCFL reporting on the profit estimates of AV Chaseway, the texts of which are set out in Appendix IV to this circular;

• (f) the written consents referred to under the section headed “Experts and consents” in this appendix; and

• (g) the circular issued by the Company dated 24 June 2005 relating to a discloseable transaction.

9. GENERAL

• (a)

• The secretary of the Company is Ms. Chan Lap Sau, Anita, ACIS .

• (b) The qualified accountant of the Company is Mr. Lai Yat Hung, Edmund, who is a member of the Institute of Chartered Accountants in England and Wales.

• (c) The share registrar and transfer office of the Company in the Cayman Islands is HSBC Financial Services (Cayman) Limited, P.O. Box 1109 GT, North Church Street, Grand Cayman, Cayman Islands, British West Indies. The branch share registrar and transfer office of the Company in Hong Kong is Tengis Limited, Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.

• (d) The English text of this circular should prevail over the Chinese text in the case of inconsistency.

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NOTICE OF EGM

==> picture [79 x 45] intentionally omitted <==

AV CONCEPT HOLDINGS LIMITED

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 595)

NOTICE IS HEREBY GIVEN that the extraordinary general meeting (the “EGM”) of AV Concept Holdings Limited (the “Company”) will be held at The Conference Room, 6th Floor, Enterprise Square Three, 39 Wang Chiu Road, Kowloon Bay, Hong Kong on Friday, 29 July 2005 at 11:00 a.m. for the purpose of considering and, if thought fit, passing, with or without modifications, the following ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT :

• (i) the terms and conditions of and the transactions contemplated under:

• (a) the share purchase agreement between BreconRidge Manufacturing Solutions Corporation (“ BMSC ”) and AV Concept (China) Industrial Co., Limited (“ AVCC ”) dated 25 April 2005 (as amended by a supplemental agreement entered into by the same parties on 28 April 2005) regarding certain shares in the share capital of AV Chaseway Limited (“ AV Chaseway ”) (a copy of the agreement and the supplemental agreement (the “ SPA ”) marked “A” has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification), in particular, the exercise or termination of the Warrant (as defined in the SPA) contemplated under the SPA;

• (b) the deed of undertaking entered into by the Company and BMSC on 25 April 2005 (the “ Deed ”) (a copy of which marked “B” has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification);

• (c) the shareholders’ agreement to be entered into between BMSC and AVCC in relation to AV Chaseway upon Initial Closing (as defined in the SPA) (a copy of which marked “C” has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification);

• (d) the escrow agreement to be entered into amongst AVCC, BMSC and HSBC International Trustee Limited upon Initial Closing (as defined in the SPA) (a copy of which marked “D” has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification);

• (e) the supply agreement to be entered into amongst AV Chaseway, AVC Manufacturing Services Limited and BMSC upon Initial Closing (as defined in the SPA) (a copy of which marked “E” has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification); and

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NOTICE OF EGM

• (f) the share charge to be entered into between BMSC and AVCC upon Initial Closing (as defined in the SPA) (a copy of which marked “F” has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification);

(the above agreements be collectively referred to as the “ Documents ”)

be hereby approved, ratified and/ or confirmed; and

• (ii) the entering into of the Deed by the Company be hereby approved, ratified and confirmed; and

• (iii) the directors of the Company be and are hereby authorised on behalf of the Company to sign, seal, execute, perfect, deliver and do all such documents, deeds, acts, matters and things as they may in their discretion consider necessary or desirable or expedient to implement and/or to give effect to the Documents and the transaction thereby contemplated.”

By Order of the Board AV CONCEPT HOLDINGS LIMITED So Yuk Kwan Chairman

Hong Kong, 15 July 2005

Notes:

1. A member entitled to attend and vote at the meeting is entitled to appoint one or more proxies to attend and, on a poll or on a show of hands, vote on his behalf. A proxy need not be a member of the Company.

2. To be valid, a form of proxy together with the power of attorney or other authority, if any, under which it is signed, or a notarially certified copy of such power of attorney or authority, must be lodged with the Company’s Hong Kong branch share registrar, Tengis Limited, at G/F, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding the meeting.

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