Beijing Enterprises Holdings Limited - Proxy Solicitation & Information Statement 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in China Logistics Group Limited (the “Company”), you should at once hand this circular together with the accompanying form of proxy to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the 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 disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

CHINA LOGISTICS GROUP LIMITED �� !"#$%&'

(incorporated in Hong Kong with limited liability)

PROPOSED SETTLEMENT AND MUTUAL RELEASE AS A VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION, PROPOSED CHANGE OF COMPANY NAME, PROPOSED TERMINATION OF THE EXISTING SHARE OPTION SCHEME AND ADOPTION OF A NEW SHARE OPTION SCHEME

Independent Financial Adviser to the Independent Board Committee

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A wholly-owned subsidiary of Value Convergence Holdings Limited

A letter from the board of the Company (the “Board”) is set out on pages 6 to 19 of this circular, a letter from the independent board committee of the Board (the “Independent Board Committee”) is set out on page 20 of this circular and a letter from VC CEF Capital Limited to the Independent Board Committee containing its advice to the Independent Board Committee is set out on pages 21 to 29 of this circular.

A notice convening an extraordinary general meeting of the Company to be held at 11:00 a.m. on Tuesday, 24 June 2003 at Room 1302, 13th Floor, MassMutual Tower, 38 Gloucester Road, Wanchai, Hong Kong is set out on pages 123 to 125 of this circular. Whether or not you are able to attend the meeting, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon and deposit the same as soon as possible and in any event not later than 48 hours before the time of the meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting at the meeting or any adjournment thereof should you so wish.

30 May 2003

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
– Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
– The Settlement Agreement, the First Supplemental Settlement Deed
and the Second Supplemental Settlement Deed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
– Merry World and the Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
– Very substantial acquisition and connected transaction . . . . . . . . . . . . . . . . . . . . . . . . .	12
– Proposed change of company name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
– Proposed termination of the Existing Scheme and adoption of the New Scheme . . . .	14
– Information on the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
– EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
– Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
– Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Letter from VC CEF Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
Appendix I – Accountants’ report on Merry World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
Appendix II – Financial information relating to the Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	40
Appendix III – Financial information relating to the Enlarged Group . . . . . . . . . . . . . . . . . . . .	96
Appendix IV – Valuation report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	98
Appendix V – Principal terms of the New Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	107
Appendix VI – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	116
Notice of the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	123

DEFINITIONS

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

“Acquisition”

the acquisition of 75 per cent. interest in the issued share capital of Galaxy Gain by Shine Ocean from Trade Sense pursuant to the Acquisition Agreement;

“Acquisition Agreement”
an agreement dated 18 March 1998 made between, among others, Shine Ocean and Trade Sense, pursuant to which Shine Ocean acquired a 75 per cent. interest in the issued share capital of Galaxy Gain from Trade Sense for a total consideration of HK$520 million;
“associates” has the meaning as defined under the Listing Rules;
“Board” the board of Directors;
“China Huatong”
China Huatong Distribution and Industry Development Corporation, a state-owned enterprise incorporated in the PRC;
“China Logistics” or “Company”
China Logistics Group Limited, a company incorporated in Hong Kong, the shares of which are listed on the Stock Exchange;
“Completion”
completion of the Settlement and Mutual Release;
“Composite Document”
the composite offer document dated 5 February 2003 jointly issued by the Company and World Gain Holdings Limited in relation to the mandatory conditional cash offers by ICEA Capital Limited on behalf of World Gain Holdings Limited to acquire all issued shares (including the Conversion Shares) in the share capital (other than those shares already owned by World Gain Holdings Limited or parties acting in concert with it) of, and to cancel all outstanding options issued by, the Company;
“Consideration”
the consideration for the transfer of the Merry World Share and the assignment of the Merry World Debt from Hong Kong Huatong, being HK$105 million;
“Conversion Shares”
the 219,000,000 Shares allotted and issued at HK$1.40 per Share by the Company on 30 January 2003 pursuant to the mandatory convertible note in the principal amount of HK$306.6 million issued by the Company to United City Trading Limited on 27 April 2001;

“Directors”

directors of the Company;

– 1 –

DEFINITIONS

“Disputed Claims”

the claims which may be made by the Group against, among others, the Huatong Group and/or certain of their previous directors for the damages which the Group has incurred or may incur as a result of or in connection with the Acquisition;

“EGM”

the extraordinary general meeting of the Company convened to be held at 11:00 a.m. on Tuesday, 24 June 2003 at Room 1302, 13th Floor, MassMutual Tower, 38 Gloucester Road, Wanchai, Hong Kong;

“EGM Notice”

the notice for convening the EGM as set out on pages 123 to 125 of this circular;

“Enlarged Group”

the Group immediately after the Completion;

“EVS”
Everlasting Value Securities Limited, a company incorporated in the British Virgin Islands, a wholly-owned subsidiary of Hong Kong Huatong and a 17 per cent. shareholder of Galaxy Gain;

“Existing Scheme” the existing share option scheme of the Company adopted by the Company on 22 September 1998;

“First Supplemental Settlement Deed”
the supplemental settlement deed dated as of 31 March 2003 to the Settlement Agreement made between China Logistics, Shine Ocean, Ocean-Land Heat, China Huatong, Trade Sense, Hong Kong Huatong, EVS and Merry World;
“Galaxy Gain” Galaxy Gain Limited, a company incorporated in the British Virgin Islands and is 75 per cent., 8 per cent. and 17 per cent. owned by Shine Ocean, Trade Sense and EVS respectively;
“Group”
the Company and its subsidiaries and the expression “member(s) of the Group” shall be construed accordingly;
“Hong Kong Huatong” Huatong Group Holdings Limited, a company incorporated in Hong Kong and a wholly-owned subsidiary of China Huatong;
“Hong Kong”
the Hong Kong Special Administration Region of the PRC;
“Huatong Group” the group of companies consisting of China Huatong, Trade Sense, EVS, Hong Kong Huatong, Huatong Heat and Merry World and the expression “member(s) of the Huatong Group” shall be construed accordingly;

“Huatong Heat” Huatong Heat Energy Technique Company Limited, a company incorporated in the PRC and a wholly-owned subsidiary of China Huatong;

– 2 –

DEFINITIONS

“Independent Board Committee”
“Independent Financial Adviser” or “VC CEF Capital”
“Independent Shareholders”
“Latest Practicable Date”
“Listing Rules”
“Merry World”
“Merry World Debt”
“Merry World Share”
“New Scheme”
“Ocean-Land Heat”
“Outstanding Guaranteed Income”
“PRC”
an independent board committee of the Board comprising the independent non-executive Directors, Mr Kwong Che Keung, Gordon and Mr Lao Youan, established to advise the Independent Shareholders in respect of the Settlement and Mutual Release;
VC CEF Capital Limited, which is deemed under the provision of the SFO to be licensed for regulated activities of dealing in securities, advising on securities, corporate finance and asset management and the independent financial adviser to the Independent Board Committee;
Shareholders not being members of the Huatong Group and their respective associates;
27 May 2003, being the latest practicable date prior to the printing of this circular for ascertaining certain information in this circular;
the Rules Governing the Listing of Securities on the Stock Exchange;
Merry World Associates Limited, a company incorporated in the British Virgin Islands and a wholly-owned subsidiary of Hong Kong Huatong;
the entire unsecured and interest-free shareholder’s loan due from Merry World to Hong Kong Huatong, which as at 28 February 2003 amounted to HK$93,622,862 and is expected to remain outstanding from Merry World as at the date of the Completion;
the 1 ordinary share of US$1 in the share capital of Merry World, representing its entire issued share capital;
the new share option scheme proposed to be adopted by the Company at the EGM for the benefit of the employees and directors of the Company and its subsidiaries and other eligible participants;
Ocean-Land Heat Supply Limited (formerly known as Wetterhorn Limited), a company incorporated in Hong Kong and a whollyowned subsidiary of Galaxy Gain;
HK$40 million, being the guaranteed annual income receivable by Ocean-Land Heat for the financial year ended 31 March 2002 pursuant to the Technical Support Agreement, the payment of which has been guaranteed by China Huatong;

the People’s Republic of China;

– 3 –

DEFINITIONS

“Property”
“Repurchase Option Announcement”
“Second Supplemental Settlement Deed”
“Settlement Agreement”
“Settlement and Mutual Release”
“Share(s)”
“SFO”
“Shareholder(s)”
“Shine Ocean”
“Stock Exchange”
“Technical Support Agreement”

�� ! " # $ % 9�� ! " #$% & ' A �� C �� (transliteration being “Zone A and Zone C on Level 3, Li Wan Plaza, No. 9 Dexing Lu, Guangzhou, the PRC”);

the announcement of the Company dated 24 April 2003 in relation to the exercise of the option to repurchase shares in and shareholder’s loan to Success Project Investments Limited;

the second supplemental settlement deed dated 15 May 2003 to the Settlement Agreement (as amended by the First Supplemental Settlement Deed) made between China Logistics, Shine Ocean, Ocean-Land Heat, China Huatong, Trade Sense, Hong Kong Huatong, EVS and Merry World;

the settlement agreement entered into by China Logistics, Shine Ocean, Ocean-Land Heat, China Huatong, Trade Sense, Hong Kong Huatong, EVS and Merry World on 21 March 2003 relating to, among other matters, the Settlement and Mutual Release and the expression “Settlement Agreement (as amended)” shall be construed to mean the Settlement Agreement (as amended and varied by the First Supplemental Settlement Deed and the Second Supplemental Settlement Deed);
the settlement and mutual release in relation to claims arising from or in connection with the Technical Support Agreement and the Disputed Claims as described in the Settlement Agreement (as amended);

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

Securities and Futures Ordinance, Chapter 571 of the Laws of Hong Kong;

shareholder(s) of the Company;

Shine Ocean Limited, a company incorporated in Hong Kong and a wholly-owned subsidiary of China Logistics;

The Stock Exchange of Hong Kong Limited;

an agreement dated 18 March 1998 and made between Huatong Heat and Ocean-Land Heat, pursuant to which Ocean-Land Heat was appointed by Huatong Heat on an exclusive basis to provide services including the supply, installation and management of environmentally friendly heating systems in the PRC for an initial period of 20 years;

– 4 –

DEFINITIONS

“Trade Sense” “HK$”

Trade Sense International Limited, a company incorporated in the British Virgin Islands and a wholly-owned subsidiary of Hong Kong Huatong; and

Hong Kong dollars, the lawful currency of Hong Kong.

– 5 –

LETTER FROM THE BOARD

CHINA LOGISTICS GROUP LIMITED �� !"#$%&'

(incorporated in Hong Kong with limited liability)

Executive Directors: Zhang Guotong (Vice Chairman) Li Tiefeng (Managing Director) Gu Laiyun (Finance Director) Wu Chun Wah

Registered office: Room 1302, 13th Floor MassMutual Tower 38 Gloucester Road Wanchai, Hong Kong

Non-executive Directors: Ma Zhengwu (Chairman) Hong Shuikun Chen Shengjie

Independent non-executive Directors: Tsui Yiu Wa, Alec Kwong Che Keung, Gordon Lao Youan

30 May 2003

To the Shareholders

Dear Sir or Madam,

PROPOSED SETTLEMENT AND MUTUAL RELEASE AS A VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION, PROPOSED CHANGE OF COMPANY NAME, PROPOSED TERMINATION OF THE EXISTING SHARE OPTION SCHEME AND ADOPTION OF A NEW SHARE OPTION SCHEME

INTRODUCTION

On 8 April 2003, the Directors announced that the Company had entered into the Settlement Agreement and the First Supplemental Settlement Deed pursuant to which, among other matters, the Company had agreed, subject to the satisfaction of the conditions referred to in the paragraph headed “Conditions” below, to reduce the amount claimed against the Huatong Group under the Disputed Claims by HK$105 million in consideration of China Huatong agreeing to:

(a) release and procure Huatong Heat to release Ocean-Land Heat from any claims (if any) which they might have under the Technical Support Agreement; and

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LETTER FROM THE BOARD

(b) procure Hong Kong Huatong to transfer the Merry World Share and assign the Merry World Debt to China Logistics at the Consideration free from all encumbrances.

On 15 May 2003, the Directors announced that the Company had entered into the Second Supplemental Settlement Deed pursuant to which the last date on which all the conditions referred to in the paragraph headed “Conditions” below must be satisfied was extended from 30 May 2003 to 30 June 2003. Save for such extension of time, all other terms of the Settlement Agreement (as amended by the First Supplemental Settlement Deed) remain unchanged.

The Settlement and Mutual Release contemplated under the Settlement Agreement (as amended) constitutes a very substantial acquisition for the Company. By virtue of the relationships between the parties to the Settlement Agreement, the First Supplemental Settlement Deed and the Second Supplemental Settlement Deed as detailed in the paragraph headed “Relationships between the parties and connected transaction” below, the transfer of the Merry World Share and the assignment of the Merry World Debt, in each case, to the Group also constitute a connected transaction for the Company. Accordingly, the Settlement and Mutual Release is required to be approved by the Independent Shareholders at the EGM.

The Directors also propose to seek the approval of the Shareholders for the change of name of the Company to “China Chengtong Development Group Limited �� ! " # $ % & ' ( ) ”, the termination of the Existing Scheme and the adoption of the New Scheme at the EGM.

The principal purposes of this circular are to provide you with further information regarding the Settlement and the Mutual Release, the financial information on Merry World and the Group, a valuation of the Property, the proposed change of company name, the proposed termination of the Existing Scheme and the adoption of the New Scheme, to set out the advice of the Independent Financial Adviser to the Independent Board Committee and the recommendation of the Independent Board Committee in respect of the Settlement and Mutual Release and to give you notice of the EGM.

THE SETTLEMENT AGREEMENT, THE FIRST SUPPLEMENTAL SETTLEMENT DEED AND THE SECOND SUPPLEMENTAL SETTLEMENT DEED

Background

Hong Kong Huatong and Huatong Heat are wholly-owned subsidiaries of China Huatong. Trade Sense, EVS and Merry World are wholly-owned subsidiaries of Hong Kong Huatong. Galaxy Gain was a wholly-owned subsidiary of Trade Sense until the sale of a 75 per cent. of its shareholding to Shine Ocean pursuant to the Acquisition Agreement.

Huatong Heat carries on the business of supplying heating supply system, equipment, facilities and related products for domestic usage in the PRC. On 18 March 1998, China Logistics through Shine Ocean entered into the Acquisition Agreement with Trade Sense to acquire a 75 per cent. shareholding interest in Galaxy Gain at HK$520 million and on the same date, Galaxy Gain through its wholly-owned subsidiary Ocean-Land Heat entered into the Technical Support Agreement with Huatong Heat.

– 7 –

LETTER FROM THE BOARD

Pursuant to the Technical Support Agreement, Ocean-Land Heat was entitled to receive an annual fee from Huatong Heat which guaranteed that the aggregate amounts payable to Ocean-Land Heat thereunder for the four financial years ended 31 March 2002 would not be less than HK$25 million, HK$58 million, HK$35 million and HK$40 million respectively. These annual fee incomes were guaranteed by China Huatong. The Group received a total of HK$118 million in respect of such guaranteed annual incomes, leaving HK$40 million being the guaranteed income for the financial year ended 31 March 2002 unpaid.

Huatong Heat disputes that the Outstanding Guaranteed Income is not payable as Ocean-Land Heat has not fulfilled its obligations under the Technical Support Agreement.

There is evidence that leads to suggest that the Acquisition is not in the best interest of the Group and this may give rise to the Disputed Claims. The Group is seeking legal advice in respect of the Disputed Claims and will take appropriate action to recover losses by way of legal proceedings or otherwise. Separate announcement will be issued by the Company to inform the Shareholders in due course of the proposed course of action to be taken by the Group.

Hong Kong Huatong is the sole beneficial shareholder of Merry World and the sole beneficial owner of the Merry World Debt. Merry World is the registered and beneficial owner of the Property.

The Group and the Huatong Group have agreed to deal with the disputes regarding, among other matters, the Technical Support Agreement and the Disputed Claims by entering into the Settlement Agreement (as amended).

Date

Date of the Settlement Agreement:	21 March 2003
Date of the First Supplemental Settlement Deed:	31 March 2003
Date of the Second Supplemental Settlement Deed:	15 May 2003

Parties

The parties to each of the Settlement Agreement, the First Supplemental Settlement Deed and the Second Supplemental Settlement Deed are the same and comprise:

(a) China Logistics;
(b) Shine Ocean;
(c) Ocean-Land Heat;
(d) China Huatong;
(e) Trade Sense;

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LETTER FROM THE BOARD

(f) Hong Kong Huatong;
(g) EVS; and
(h) Merry World.

Details of the relationship between the parties are set out in the paragraph headed “Relationships between the parties and connected transaction” below.

Settlement and Mutual Release

The Company has entered into the Settlement Agreement (as amended) pursuant to which, among other matters, the Company has agreed, subject to the satisfaction of the conditions referred to in the paragraph headed “Conditions” below, to reduce the amount claimed against the Huatong Group by HK$105 million under the Disputed Claims, in consideration of China Huatong agreeing to:

(a) release and procure Huatong Heat to release Ocean-Land Heat from any claims (if any) which they may have under the Technical Support Agreement; and
(b) procure Hong Kong Huatong to transfer the Merry World Share and assign the Merry World Debt to China Logistics at the Consideration which was determined after arm’s length negotiation, free from all encumbrances.

Conditions

As set out in the Company’s announcement dated 8 April 2003, pursuant to the terms of the Settlement Agreement (as amended by the First Supplemental Settlement Deed), the Settlement and Mutual Release is conditional on the satisfaction of the following conditions (“Conditions”) on or before 30 May 2003 or such later date as the parties may agree in writing:

(a) China Logistics obtaining a valuation report by an internationally recognised valuer that the current market value of the Property shall not be less than HK$105 million;
(b) China Logistics obtaining a legal opinion issued by practising PRC lawyers (in form and substance reasonably satisfactory to China Logistics) confirming that Merry World has a valid title to the Property free from encumbrances;
(c) China Logistics complying with all relevant requirements of the Listing Rules; and
(d) China Huatong providing evidence to the satisfaction of China Logistics that (i) Merry World has no business other than the holding of the Property; (ii) Merry World has no liability other than the Merry World Debt and (iii) the Merry World Debt is free from all encumbrances.

– 9 –

LETTER FROM THE BOARD

In the event that the Conditions are not fulfilled on or before 30 May 2003 or such later date as the parties may agree in writing, without prejudice to any settlement which has taken effect prior to the satisfaction of the Conditions, the Settlement Agreement (as amended by the First Supplemental Settlement Deed) will be terminated.

Given that the Settlement and Mutual Release constitutes a very substantial acquisition and connected transaction for the Company, it is required to be approved by the Independent Shareholders. Accordingly, the Board will only be in a position to confirm whether Condition (c) is satisfied after the conclusion of the EGM. In view of such, the Second Supplemental Settlement Deed has been entered into by the parties whereby the last date on which all the Conditions must be satisfied is now extended from 30 May 2003 to 30 June 2003. Save for such extension of time, all other terms of the Settlement Agreement (as amended by the First Supplemental Settlement Deed) remain unchanged. The entering into of the Second Supplemental Settlement Deed was announced by the Company on 15 May 2003.

As regards Condition (a), the Company has already obtained a valuation report as set out in Appendix IV to this circular which confirms that the current market value of the Property is HK$105 million.

As regards Condition (b), the Company has also obtained a PRC legal opinion in which the PRC lawyers have confirmed that, having made the general and such investigations as they consider necessary, there was no record of mortgage, charge, pledge, distraint or other restrictions of right over the Property. As such, the Directors consider that the Company has obtained a legal opinion issued by practicing PRC lawyers confirming that Merry World has a valid title to the Property free from encumbrances.

Given that the bank account of Merry World was closed more than two years ago on 23 April 2001 and the sole director of Merry World has represented to the Directors that there has not been any litigation or claim brought or threatened against Merry World by the relevant bank up to the date of this letter, the Directors are of the view that the likelihood of existence of any potential or contingent liabilities of Merry World due to the relevant bank is very remote. Based on such facts, the Directors are reasonably satisfied that apart from the Merry World Debt, which has been disclosed in the accountants’ report on Merry World, Merry World does not have any other material liability notwithstanding the qualification made by the Company’s reporting accountants in respect of bank transactions in the accountants’ report on Merry World.

Based on the reasons set out above, the Directors consider that Conditions (a), (b) and (d) have already been satisfied as at the date of this circular.

– 10 –

LETTER FROM THE BOARD

Completion of the Settlement and Mutual Release

The Completion will take place on or before the second business day after the date on which the Conditions are fulfilled, whereupon China Logistics shall procure the Group to reduce the amount claimed against the Huatong Group under the Disputed Claims by HK$105 million and Hong Kong Huatong shall, among other matters, deliver to China Logistics all necessary documents to transfer the title to and the benefits of the Merry World Share and the Merry World Debt.

As a result of the Completion, Merry World will become a wholly-owned subsidiary of the Company. As set out in Appendix III to this circular, the unaudited pro forma adjusted consolidated net tangible assets of the Enlarged Group will be about HK$72,236,000, which represents an increase in net tangible assets of about HK$75,056,000 as compared to the unaudited pro forma adjusted consolidated net tangible deficit of the Group as at 30 January 2003 of HK$(2,820,000) as published in the Composite Document.

There will not be any variation to the remuneration payable to and benefits in kind receivable by the Directors as a result of the Completion.

Reservation of rights and release of rights

Nothing contained in the Settlement Agreement (as amended) shall prejudice the rights and titles of the Group to recover from the Huatong Group and/or other parties any shortfall in respect of the Disputed Claims by way of legal proceedings or otherwise.

As at the Latest Practicable Date, the Group had not received any claims or counterclaims from the Huatong Group in respect of the Technical Support Agreement. China Huatong has agreed to release and procure Huatong Heat to release Ocean-Land Heat from any claims (if any) which they may have under the Technical Support Agreement on the Completion.

MERRY WORLD AND THE PROPERTY

Merry World was incorporated in the British Virgin Islands on 15 October 1997 and is a whollyowned subsidiary of Hong Kong Huatong. The only business activity of Merry World is the holding of the Property. Set out in Appendix I to this circular is the accountants’ report on Merry World for the period from 15 October 1997 (its date of incorporation) up to 28 February 2003. For the two years ended 28 February 2003, the net loss of Merry World were about HK$(3,005,549) and HK$(3,588,730) respectively while the deficiency of Merry World as at 28 February of each of 2002 and 2003 were about HK$(33,340,981) and HK$(14,163,141) respectively.

Shareholders should note that the reporting accountants of the Company, in forming their opinion as to the financial statements of Merry World for the period from 15 October 1997 to 28 February 2003, have expressed concerns on Merry World’s ability to continue as a going concern and the audit procedures taken to confirm the bank transactions during the period under review. Please refer to Appendix I to this circular for the details of the concerns of the reporting accountants of the Company.

– 11 –

LETTER FROM THE BOARD

As regards the bank transactions (if any) effected by Merry World, given that Merry World has already lost contact with the then sole authorised signatory of the bank account and Merry World is not a member of the Group, the Directors are not in a position to carry out any investigation regarding the bank transactions (if any) effected by Merry World.

The Property, which is permitted for commercial use, comprises two zones (namely, Zone A and Zone C) in a shopping complex situated in Li Wan Plaza, No.9 Dexing Lu, Guangzhou, the PRC with an aggregate gross floor area of 10,857.87 square meters. Li Wan Plaza is a large-scale commercial/residential development with eight high-rise residential towers built over a 6-storey commercial/retail podium. The development was built in 1997 and the retail podium has a total gross floor area of approximately 140,000 square meters. So far as the Directors are aware, the Property was acquired by Merry World in April 2001 and since its acquisition by Merry World, it has not generated any income. As set out in the valuation report on the Property prepared by S.H. Ng & Co., Ltd. set out in Appendix IV to this circular, at the time of inspection made by the valuer on 14 March 2003, save for a portion of the Property which was then occupied by an unknown party (the “Unknown Party”) for commercial use, the Property was vacant. The Directors at present intend that shortly after the Completion, they will enquire about the right of occupation of the Unknown Party and if it is established that the Unknown Party’s right of occupation is not legally enforceable against Merry World, the Directors will take appropriate action to evict such Unknown Party from the Property or to enter into a legally binding lease agreement with that Unknown Party in respect of leasing such portion of the Property to it.

Given that the sole director of Merry World has represented to the Directors that no tenancy agreement or arrangement of any nature has been entered into between Merry World and the Unknown Party in respect of the occupation of the Property or any part thereof and no litigation or claim has been brought or threatened against Merry World, the Directors are of the view that the likelihood of existence of any claim or potential claim made by the Unknown Party against Merry World is remote. In addition, the Company has obtained a PRC legal opinion confirming that Merry World is entitled to the rights to possess, use or deal with the Property and any rights derived from the Property, and such rights are not subject to any restriction. Based on such facts, the Directors reasonably conclude that the Unknown Party does not have any legal and valid rights to occupy the Property and that upon the Completion, the Group will be in a position to take appropriate action to evict such Unknown Party from the Property or to enter into a legally binding lease agreement with that Unknown Party in respect of leasing such portion of the Property to it.

Save as disclosed above, the Directors, at present, do not have any plan as to the intended use of the Property.

The Property has been valued at an aggregate amount of HK$105 million as at 20 March 2003 by S.H. Ng & Co., Ltd. The text of a letter together with a summary of valuation of the Property prepared by S.H. Ng & Co., Ltd. are set out in Appendix IV to this circular.

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

Very substantial acquisition

As published in the Composite Document, the Group recorded an unaudited adjusted consolidated net tangible deficit of HK$(2,820,000) as at 30 January 2003. In view of the last published net tangible deficit status of the Group, any acquisition concluded by the Group would technically be treated as a very substantial acquisition for the Company under the Listing Rules.

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LETTER FROM THE BOARD

The Settlement and Mutual Release accordingly constitutes a very substantial acquisition for the Company. However, the Company is not treated as a new listing applicant under the Listing Rules as a result of entering into such transaction.

Relationships between the parties and connected transaction

As set out in the paragraph headed “Background” above, Shine Ocean is a wholly-owned subsidiary of the Company and holds 75 per cent. interest in Galaxy Gain, which in turn holds 100 per cent. of the issued share capital of Ocean-Land Heat.

Hong Kong Huatong and Huatong Heat are wholly-owned subsidiaries of China Huatong. Trade Sense, EVS and Merry World are wholly-owned subsidiaries of Hong Kong Huatong. By virtue of the aggregate interests of 25 per cent. in the issued share capital of Galaxy Gain held by EVS and Trade Sense, each of EVS and Trade Sense is a substantial shareholder of a subsidiary of the Company and thus a connected person of the Company. Hong Kong Huatong, being the holding company of both EVS and Trade Sense, is an associate of EVS and thus also a connected person of the Company. Accordingly, the transfer of the Merry World Share and the assignment of the Merry World Debt as between the Group and Hong Kong Huatong pursuant to the Settlement and Mutual Release is also a connected transaction for the Company.

Given the Settlement and Mutual Release constituting a very substantial acquisition and connected transaction for the Company, the Settlement and Mutual Release is required to be approved by the Independent Shareholders at the EGM. Shareholders being members of the Huatong Group and their respective associates shall abstain from voting in respect of the ordinary resolution in relation to the Settlement and Mutual Release to be proposed at the EGM.

To the best knowledge of the Directors, none of the members of the Huatong Group and their respective associates held any shares in the Company as at the Latest Practicable Date.

The Board has appointed Mr Kwong Che Keung, Gordon and Mr Lao Youan, each being an independent non-executive Director, to establish the Independent Board Committee to advise the Independent Shareholders in respect of the Settlement and Mutual Release. Mr Tsui Yiu Wa, Alec, another independent non-executive Director, has not been appointed as a member of the Independent Board Committee because Mr Tsui is an independent non-executive director of Value Convergence Holdings Limited, the holding company of VC CEF Capital, which, has been appointed by the Company as the Independent Financial Adviser to advise the Independent Board Committee as to the fairness and reasonableness of the terms of the Settlement and Mutual Release, and is thus considered as not sufficiently independent to advise the Independent Shareholders in respect of the Settlement and Mutual Release.

PROPOSED CHANGE OF COMPANY NAME

The Directors propose to change the name of the Company from its existing name to “China Chengtong Development Group Limited �� !"#$%&'() ”. The proposed change of company name is subject to:

(i) the passing of a special resolution by the Shareholders at the EGM; and
(ii) the approval of the Registrar of Companies in Hong Kong.

– 13 –

LETTER FROM THE BOARD

Further announcement will be made by the Company when the proposed change of name becomes effective. Thereafter, the Company will carry out necessary filing procedures with the Registrar of Companies in Hong Kong.

Free exchange of the existing share certificate

Subject to the change of company name becoming effective, the Shareholders may submit their existing share certificates for the Shares to the Company’s share registrar, Computershare Hong Kong Investor Services Limited at Shops 1712-16, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, in exchange for new share certificates at the expense of the Company for a period of 30 days after the change of name having become effective. Any submission after 4:00 p.m. on the last day of the mentioned 30-day period will only be accepted for the exchange at a fee of HK$2.50 (or such higher amount as may from time to time be allowed by the Stock Exchange) per new share certificate. The new share certificates will be available to the Shareholders for collection after 10 business days from the date of submission for the exchange.

A further announcement about the exchange of the new share certificates will be made when the change of Company name has become effective.

Status of the existing share certificates

The change of company name will not affect any rights of the Shareholders. All existing share certificates for the Shares in issue bearing the present name of the Company will after the new company name becoming effective continue to be evidence of title to the Shares and will be valid for trading, settlement, registration and delivery for the same number of Shares in the new company name.

Any issue of share certificates after the name change having became effective will be in the new name of the Company.

PROPOSED TERMINATION OF THE EXISTING SCHEME AND ADOPTION OF THE NEW SCHEME

As at the Latest Practicable Date, there were 1,684,954,968 Shares in issue. Certain options have been granted under the Existing Scheme. The particulars of the such options granted as at the Latest Practicable Date were set out below:

				Outstanding
				as at the
				Latest
	Originally		Cancelled	Practicable
	granted	Exercised	or lapsed	Date
Number of Shares
underlying the options
granted under
the Existing Scheme	111,900,000	9,100,000	100,250,000	2,550,000

– 14 –

LETTER FROM THE BOARD

The Directors confirm that they will not further exercise their authorities in granting options under the Existing Scheme and no further option will be granted under the Existing Scheme prior to its termination and the adoption of the New Scheme at the EGM.

Upon the termination of the Existing Scheme, no further options would be offered pursuant to the Existing Scheme but the Existing Scheme would in all other respects remain in force to the extent necessary to give effect to the exercise of the outstanding options (the “Existing Options”) prior to the termination of the Existing Scheme. The Existing Options will continue to be valid and exercisable in accordance with the provisions of the Existing Scheme.

Reasons for the proposed termination of the Existing Scheme and adoption of the New Scheme

The Existing Scheme was adopted on 22 September 1998. Since 1 September 2001, major amendments have been introduced to Chapter 17 of the Listing Rules. Under the amended Listing Rules, options may no longer be granted under the Existing Scheme by the Company unless such grants are made in compliance with the amended Chapter 17 of the Listing Rules. In this connection, the Board wishes to propose to the Shareholders to approve at the EGM that, among other matters, the Company should terminate the Existing Scheme and adopt the New Scheme, the terms of which comply with the amended Chapter 17 of the Listing Rules. The Directors consider that the adoption of the New Scheme is in the interests of the Company and the Shareholders as a whole because it enables the Company to reward and provide incentives to, and strengthen the Group’s business relationship with, the prescribed classes of participants whom the Directors believe may contribute to the growth and development of the Group. Under the New Scheme, the Director may impose minimum period required for the holding of an option and performance target on the option granted before it can be exercised. The minimum period (if any) for holding of an option, the performance target (if any) and the subscription price set in accordance with the New Scheme will secure the long term service of the relevant eligible participants to the Group and act as incentive to the eligible participants to contribute more efforts for the benefits of the Group.

The New Scheme

Set out in Appendix V to this circular is a summary of the principal terms of the New Scheme, under which the maximum number of Shares which might be allotted and issued upon exercise of all outstanding options granted and yet to be exercised under the New Scheme could represent up to 10 per cent. of the issued share capital of the Company on the date of approval of the New Scheme by the Shareholders at the EGM, which maximum number may however be refreshed as detailed in paragraph (iii) of Appendix V to this circular.

Assuming no Shares will be issued or repurchased between the period from the Latest Practicable Date and up to the date of the EGM on which the New Scheme is expected to be adopted by the Shareholders, the total number of Shares in issue as at the date of the EGM will be 1,684,954,968. Subject to the New Scheme becoming effective and assuming that no options will be proposed to be granted under the New Scheme prior to the date of the EGM, the Board may grant options in respect of which up to 168,495,496 Shares may be issued under the New Scheme.

None of the Directors is a trustee of the New Scheme or has a direct or indirect interest in the

trustee.

– 15 –

LETTER FROM THE BOARD

Conditions of the adoption of the New Scheme

The adoption of the New Scheme is conditional upon, among other matters, (i) the termination of the Existing Scheme by an ordinary resolution at the EGM; (ii) the approval of (aa) the adoption of the New Scheme and (bb) the allotment and issue of the Shares which fall to be allotted and issued upon the exercise of the options granted under the New Scheme by an ordinary resolution at the EGM; and (iii) the Stock Exchange granting the listing of, and permission to deal in, such number of Shares, representing 10 per cent. of the issued Shares as at the date of the EGM, which may fall to be allotted and issued by the Company pursuant to the exercise of the options granted under the New Scheme.

Application will be made to the Stock Exchange for the approval of the listing of, and permission to deal in, such number of Shares, representing 10 per cent. of the issued Shares as at the date of the EGM, which may fall to be allotted and issued by the Company pursuant to the exercise of the options granted under the New Scheme.

Values of all options that can be granted under the New Scheme

The Directors consider that it is not appropriate or helpful to the Shareholders to state the value of all options that can be granted pursuant to the New Scheme as if they had been granted at the Latest Practicable Date. The Directors believe that any statement regarding the value of the options as at the Latest Practicable Date will not be meaningful to the Shareholders as the calculation of the value of the options is based on a number of variables such as the exercise price, the exercise period, interest rate, expected volatility and other relevant variables. The Directors believe that any calculation of the value of the options as if they had been granted at the Latest Practicable Date based on a great number of speculative assumptions would not be meaningful and would be misleading to the Shareholders.

INFORMATION ON THE ENLARGED GROUP

Principal activities

The Group is principally engaged in logistics business, property investment and other strategic investment such as cement plant.

Business review and prospect

The Group recorded an audited consolidated net loss of about HK$ (1,395,000,000) for the financial year ended 31 March 2002 and an audited consolidated net tangible deficit of about HK$ (255,351,000) as at 31 March 2002. Based on the audited consolidated financial statements of the Group as at 31 March 2002, the unaudited interim report of the Group as at 30 September 2002 and taking into account the transactions which have taken place after the publication of the Group’s audited consolidated financial statements as at 31 March 2002, and following the allotment and issue of the Conversion Shares, the pro forma unaudited adjusted consolidated net tangible deficit of the Group as at 30 January 2003 is about HK$(2,820,000).

The Group has adopted a prudent approach in making significant provisions in relation to certain irregular transactions, including the Acquisition and the Outstanding Guaranteed Income, in the audited consolidated financial statements of the Group as at 31 March 2002. These irregular transactions are all non-recurring in nature and are not expected to have any material adverse impact on the Group in the future.

– 16 –

LETTER FROM THE BOARD

The Group’s present operation and investment strategy is to continue to streamline its overall operations in Hong Kong, disposing of its non-core investments and exploring opportunities in trading in commodities, such as aluminium and copper.

Looking ahead, the Directors have confidence in the positive outlook of the retail property market in Guangzhou, the PRC. Accordingly, the Directors believe that upon the Completion, the Enlarged Group would be able to generate income from leasing out the Property, which is designated for commercial purposes.

Indebtedness

Borrowings

As at 31 March 2003, being the latest practicable date for the purpose of ascertaining information contained in this indebtedness statement prior to the printing of this circular, the Group had total loans of approximately HK$269.7 million comprising of long-term loans of approximately HK$164 million, short term secured borrowings of approximately HK$79.4 million, and other short-term loans of approximately HK$26.3 million.

As at 31 March 2003, the amount of the indebtedness of the Enlarged Group was same as that of the Group given that save for the Merry World Debt, which would be assigned to the Company upon the Completion and would be eliminated upon consolidation, Merry World did not have any material outstanding mortgages, charges, debentures, bank overdrafts, liabilities under acceptances (other than normal trade bills), acceptance credit loans, borrowings, or other similar indebtedness, or any hire purchase or finance lease commitments, or any guarantee or other material contingent liabilities.

Disclaimer

Save as aforesaid or as otherwise disclosed herein, and apart from intra-group liabilities, at the close of business of 31 March 2003, the Enlarged Group did not have any material outstanding mortgages, charges, debentures, bank overdrafts, liabilities under acceptances (other than normal trade bills), acceptance credit loans, borrowings, or other similar indebtedness, or any hire purchase or finance lease commitments, or any guarantee or other material contingent liabilities.

The Directors have confirmed that there have not been any material adverse changes in the indebtedness and contingent liabilities of the Enlarged Group since 31 March 2003.

Working capital

The Directors are of the opinion that, taking into consideration the financial resources available to the Group, including the Group’s internal resources and the available banking facilities, the Enlarged Group will have sufficient working capital for its present requirements.

– 17 –

LETTER FROM THE BOARD

Material acquisition

Save for the acquisition of the Merry World Share and the Merry World Debt as disclosed herein and save as disclosed in the Repurchase Option Announcement, after 31 March 2002, no member of the Group has acquired or agreed to acquire or is proposing to acquire a business or an interest in the share capital of a company whose profits or assets make or will make a material contribution to the figures in the auditors’ report or next published accounts of the Group.

EGM

Set out on pages 123 to 125 of this circular is a notice convening the EGM to be held at 11:00 a.m. on Tuesday, 24 June 2003 at Room 1302, 13th Floor, MassMutual Tower, 38 Gloucester Road, Wanchai, Hong Kong.

At the EGM, special and ordinary resolutions will be proposed to approve, among other matters, the following:

(a) the change of company name;
(b) the Settlement Agreement, the First Supplemental Settlement Deed and the Second Supplemental Settlement Deed and the transactions contemplated thereunder;
(c) the termination of the Existing Scheme; and
(d) the adoption of the New Scheme.

Whether or not you are able to attend the EGM in person, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon as soon as possible and, in any event not later than 48 hours before the time for the EGM or any adjournment thereof to the Company’s share registrar, Computershare Hong Kong Investor Services Limited at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong. Completion and return of the form of proxy will not preclude you from attending and voting at the EGM or any adjournment thereof should you so wish.

RECOMMENDATION

The Directors (including the independent non-executive Directors) consider that the terms of the Settlement Agreement (as amended) are fair and reasonable and in the interests of the Company and the Shareholders (including the Independent Shareholders) for the following reasons:

(a) the Group is able to secure HK$105 million of partial payment in relation to the Disputed Claims before any legal proceedings is commenced; and
(b) the Settlement Agreement (as amended) provides a reservation of rights in favour of the Group to recover from the Huatong Group for any shortfall in respect of the Disputed Claims.

– 18 –

LETTER FROM THE BOARD

After taking into account the principal factors and reasons considered by the Independent Financial Adviser and its advice, the Independent Board Committee is of the opinion that the Settlement and Mutual Release contemplated under the Settlement Agreement (as amended) is in the interests of the Company and the terms of the Settlement Agreement (as amended) are fair and reasonable so far as the Shareholders (including the Independent Shareholders) are concerned. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the ordinary resolution set out in the EGM Notice for the approval of, among others, the Settlement Agreement, the First Supplemental Settlement Deed and the Second Supplemental Settlement Deed and the transactions contemplated thereunder.

The Directors believe that the proposed change of company name, proposed termination of the Existing Scheme and adoption of the New Scheme are beneficial to the Company and the Shareholders as a whole. As regards the proposed adoption of the New Scheme, the Directors further believe that the performance targets (if any) and the subscription price to be set in accordance with the New Scheme will act as incentive to the eligible participants of the New Scheme to contribute more efforts for the benefits of the Company.

Accordingly, the Directors recommend the Shareholders to vote in favour of the special and ordinary resolutions set out in the EGM Notice for the approval of, among other matters, the change of company name, the termination of the Existing Scheme and the adoption of the New Scheme.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendices to this circular and the EGM Notice.

Yours faithfully For and on behalf of the Board China Logistics Group Limited Li Tiefeng Managing Director

– 19 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CHINA LOGISTICS GROUP LIMITED �� !"#$%&'

(incorporated in Hong Kong with limited liability)

30 May 2003

To the Independent Shareholders

Dear Sir/Madam

We refer to the circular of China Logistics Group Limited dated 30 May 2003 (“Circular”), of which this letter forms part. Terms used in this letter shall have the same respective meanings as defined in the Circular unless the context otherwise requires.

As the Independent Board Committee, we have been appointed to advise the Independent Shareholders on whether the Settlement and Mutual Release contemplated under the Settlement Agreement (as amended) is fair and reasonable so far as the Independent Shareholders are concerned. VC CEF Capital has been appointed as independent financial adviser to advise the Independent Board Committee to give advice in relation thereto.

We wish to draw your attention to the letter of advice of VC CEF Capital as set out on pages 21 to 29 of the Circular and the letter from the Board (“Letter from the Board”) as set out on pages 6 to 19 of the Circular.

Having considered the terms and conditions of the Settlement and Mutual Release as set out in the Letter from the Board, the factors and reasons considered by, and the opinions of, VC CEF Capital as stated in its aforementioned letter of advice, we consider that the Settlement and Mutual Release contemplated under the Settlement Agreement (as amended) is fair and reasonable so far as the Independent Shareholders are concerned and accordingly recommend the Independent Shareholders to vote in favour of the ordinary resolution in relation to the Settlement Agreement, the First Supplemental Settlement Deed and the Second Supplemental Settlement Deed to be proposed at the EGM.

Yours faithfully

Independent Board Committee

Kwong Che Keung, Gordon Lao Youan

Independent non-executive Directors

– 20 –

LETTER FROM VC CEF CAPITAL

The following is the text of the letter from VC CEF Capital Limited, the Independent Financial Adviser to the Independent Board Committee, prepared for the purpose of incorporation in this circular.

==> picture [19 x 19] intentionally omitted <==

A wholly-owned subsidiary of Value Convergence Holdings Limited

38th Floor The Centrium 60 Wyndham Street Central Hong Kong

30 May 2003

The Independent Board Committee China Logistics Group Limited Room 1302, 13th Floor, MassMutual Tower 38 Gloucester Road Wanchai Hong Kong

Dear Sirs,

PROPOSED SETTLEMENT AND MUTUAL RELEASE AS

A VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee in connection with the fairness and reasonableness of the terms of the Settlement and Mutual Release. Details of the Settlement and Mutual Release, among other things, are contained in the circular of the Company to its Shareholders dated 30 May 2003 (the “Circular”), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as defined in the Circular, unless the context otherwise requires.

The Settlement and Mutual Release, if proceeds, shall constitute a very substantial acquisition and connected transaction for the Company under Chapter 14 of the Listing Rules. As referred to in the letter from the Board contained in the Circular, the Company is not treated by the Stock Exchange as a new listing applicant under the Listing Rules as a result of making arrangement for the Settlement and Mutual Release, which constitutes a very substantial acquisition for the Company. However, as the Settlement and Mutual Release constitutes a non-exempted connected transaction for the Company (as explained below), it shall require to be approved by the Independent Shareholders at the EGM.

– 21 –

LETTER FROM VC CEF CAPITAL

Mr. Tsui Yiu Wa, Alec (“Mr. Tsui”), Mr. Kwong Che Keung, Gordon (“Mr. Kwong”) and Mr. Lao Youan (“Mr. Lao”) are independent non-executive Directors. Mr. Tsui is also an independent non-executive director of Value Convergence Holdings Limited, that is the holding company of VC CEF Capital. Therefore, Mr. Tsui is not considered to be sufficiently independent to be appointed by the Company to constitute the Independent Board Committee to advise the Independent Shareholders in relation to the Settlement and Mutual Release. Accordingly, the Independent Board Committee comprises of Mr. Kwong and Mr. Lao to advise the Independent Shareholders as regards the fairness and reasonableness of the terms of the Settlement and Mutual Release.

We are not connected with (i) the Company and its substantial shareholder and the associates of any of them and (ii) any other parties to the Settlement Agreement, the First Supplemental Settlement Deed and the Second Supplemental Settlement Deed (collectively the “Operative Documents”). Apart from normal professional fee payable to us in connection with this appointment, no arrangement exists whereby we will receive any fees or benefits from any parties mentioned herein.

BASIS OF OUR OPINION

In forming our recommendation and arriving at our opinion as to the fairness and reasonableness of the terms of the Settlement and Mutual Release, we have relied to a considerable extent on the information and facts supplied, opinions expressed and representations made by the Directors and the senior management of the Group and on the information, opinions, representations and statements contained or referred to in the Circular.

While we have not carried out any independent verification of such information or the bases of such opinions, representations and statements, we have no reason to doubt the truth, accuracy and completeness of such information, opinions, representations and statements and have confirmed with the Directors that no material facts have been omitted or withheld from such information, opinions, representations and statements. We have assumed that all such information, opinions, representations and statements, for which the Directors are wholly responsible, were true and accurate at the time they are prepared, given or made and continue to be true and accurate up to the date of the EGM. We did not assist the Company nor involve in the negotiation of the terms of any of the Operative Documents.

In particular, we have assumed that the independent valuation of the Property carried out by S.H. Ng & Co., Ltd. (the “Valuer”), the independent property valuer appointed by the Company, may be relied upon in all respects. As an emphasis of matter, the Valuer has assumed that the full vacant possession of the Property can be acquired in the event of a sale and the Property can be sold free from encumbrances and liabilities (such as outgoing, management fees and government tax) and the PRC legal opinion confirming Merry World is entitled to the rights to possess, use or deal with the Property and any rights derived from the Property and such rights are not subject to any restriction. We have not performed any site visit to and/or physical inspection of the Property. It is not within our terms of appointment to comment on the commercial merits of the Property, which remains the responsibility of the Directors. We have discussed with the Directors in relation to the calculation of the unaudited pro forma adjusted consolidated net tangible assets value of the Enlarged Group as set out in Appendix III to the Circular which has been reviewed by the Company’s auditors. We have, therefore, relied on such property valuation prepared by the Valuer and the unaudited pro forma adjusted consolidated net tangible assets value of the Enlarged Group to arrive at our opinion as stated in this letter.

– 22 –

LETTER FROM VC CEF CAPITAL

We have also assumed that each party to the Operative Documents has represented and warranted to the other parties that it has full power, authority and legal right to enter into such documents and to incur and perform its obligations thereunder and all documents and transactions contemplated thereby in accordance with the terms.

We consider that we have been provided with sufficient information that is presently available to enable us to reach an informed view on the fairness and reasonableness of the terms of the Settlement and Mutual Release so far as the Independent Shareholders are concerned. We have not, however, conducted any independent investigation into the terms and conditions and the legality of the Acquisition Agreement and the Technical Support Agreement which were entered into by the relevant parties in March 1998, nor have we carried out any independent research on the Property or the current state of likely prospects of the property market in Guangzhou, the PRC and into the business and affairs and financial position of the Group. We had discussions with the Directors and its legal advisers in relation to the recoverability of the Disputed Claims and the Settlement and Mutual Release. Our opinion is necessarily based upon market, economic and other conditions as they existed and could be evaluated on, and on the information available to us as of the date of this letter. As such, we have no obligation to update our opinion set out in this letter to take into account events occurring subsequent to the date of this letter.

PRINCIPAL FACTORS CONSIDERED

In formulating our recommendation and arriving at our opinion as to the fairness and reasonableness of the terms of the Settlement and Mutual Release, we have considered the factors and reasons set out below:

Historical fact pattern

The Group is principally engaged in logistics business, property investment and other strategic investment such as cement plant.

In March 1998, the Company and the relevant parties entered into the Acquisition Agreement at a consideration of about HK$520 million and the Technical Support Agreement in relation to a thermal supply project in the PRC (the “Investment”). Details of the Investment, among other things, were set out in the circular of the Company dated 8 April 1998. As disclosed in the annual report of the Company for the financial year ended 31 March 2002, the Company has made a provision of impairment loss of about HK$429 million in respect of the Investment. The Company appointed certified public accountants in July 2002 to investigate into the disputes in connection with the Investment between the Group and the Huatong Group. Such investigation remained outstanding as at the Latest Practicable Date.

As referred to in the paragraph headed “Background” in the letter from the Board contained in the Circular, the Directors stated that there is evidence leading to suggest that the Investment is not in the best interest of the Group. In connection with this unsatisfactory Investment, the Directors consider that monetary claims may be made by the Group against, among others, the Huatong Group and/or certain of their previous directors for the damages which the Group incurred or may incur as a result of and in connection with the Investment. We are advised by the Directors that the aggregate amount to be claimed by the Group under the Disputed Claims could be higher than HK$105 million, being the amount equal

– 23 –

LETTER FROM VC CEF CAPITAL

to the consideration for the transfer of the Merry World Share and the assignment of the Merry World Debt (in essence, the Property) to the Group pursuant to the arrangement under the Settlement and Mutual Release. In summary, the terms of the Settlement and Mutual Release enables the Company to secure a reconciliation agreement with a PRC company over a heat supply project by receiving the Property as a compensation.

Conditions of the Settlement and Mutual Release

Based on the information set out in the paragraph headed “Conditions” in the letter from the Board contained in the Circular, we understand that the conditions of the Settlement and Mutual Release, in summary, are as follows:

the obtaining of a valuation report showing that the current market value of the Property being no less than HK$105 million;
the obtaining of a legal opinion confirming that Merry World has a legal ownership to the Property free from all encumbrances;
the Company being in compliance with the applicable Listing Rules; and
the receiving of evidence to the satisfaction of the Company that Merry World has no business other than the holding of the Property and no liability other than the Merry World Debt and the Merry World Debt is free from all encumbrances.

As referred to in the paragraph headed “Conditions” in the letter from the Board contained in the Circular, conditions (1) (2) and (4) have already been satisfied. In order to fulfill condition (3) above, we understand that on 30 May 2003, the Company dispatches the Circular which serves to provide Shareholders with further information, among other things, regarding the Settlement and Mutual Release and to give Shareholders notice of the EGM at which an ordinary resolution will be proposed to consider, and if thought fit, to approve the Settlement and Mutual Release. The Company will be in a position to confirm whether this condition is satisfied after the conclusion of the EGM which is expected to be on 24 June 2003. In relation to condition (4), although the auditors and reporting accountants of the Company have been unable to satisfy as to whether all potential or contingent liabilities due to the bank are properly stated in the financial statements, we are advised by the Directors that given that the bank account of Merry World was closed more than two years ago and the sole director of Merry World has represented to the Directors that there has not been any litigation or claim brought or threatened against Merry World by the relevant bank up to the date hereof. We concur with the Directors that the likelihood of existence of any potential or contingent liabilities of Merry World due to the relevant bank is very remote and they are reasonably satisfied that apart from the Merry World Debt, Merry World does not have any other material liability notwithstanding the qualification made by the Company’s auditors and reporting accountants in respect of bank transactions in the accountants’ report on Merry World. In this regard, we consider that the Company has performed its best to fulfill all conditions pursuant to the terms of the Settlement and Mutual Release.

– 24 –

LETTER FROM VC CEF CAPITAL

Connected transaction

By virtue of the relationships between the parties to the Operative Documents as explained in the paragraph headed “Relationship between the parties and connected transaction” in the letter from the Board contained in the Circular, the transfer of the Merry World Share and the assignment of the Merry World Debt as between the Group and Hong Kong Huatong pursuant to the Settlement and Mutual Release constitute a connected transaction for the Company under Chapter 14 of the Listing Rules and, thus are subject to, among other things, the approval by the Independent Shareholders at the EGM. In this regard, we are appointed by the Company as the independent financial adviser to advise the Independent Board Committee as to the fairness and reasonableness of the terms of the Settlement and Mutual Release so that the Independent Board Committee can, in turn, give recommendation to the Independent Shareholders (i.e. Shareholders not being members of the Huatong Group and their respective associates) as to the manner of voting in respect of the ordinary resolution in relation to the Settlement and Mutual Release to be proposed at the EGM.

Solution to the Disputed Claims

We understand from the Directors that the Disputed Claims resulting from the Investment has caused inconvenience to the business activities of the Group and is detrimental to the corporate image, profile and normal operation of the Group. It is necessary to find whatever possible actions to solve this aftermath as soon as possible. We concur with the Directors that, in consideration of China Huatong and/ or its related parties agreeing to (i) release them from any claims that they may have under the Technical Support Agreement; and (ii) procure them to transfer the Merry World Share and assign the Merry World Debt to the Group at the consideration of HK$105 million, can achieve the objective of securing a partial settlement in relation to the Disputed Claims and solve this problem partially which, in turn, is in the interest to the Shareholders (including the Independent Shareholders) and the Company as a whole.

We noted that China Huatong, being one of the parties to the Disputed Claims, has applied to the Beijing People’s High Court in November 2002 for liquidation and no longer carries on any business. As China Huatong is in the process of liquidation, it is highly uncertain as to whether the Group could eventually recover from it any amount under the Disputed Claims even if the Group pursued the Disputed Claims in full by way of legal proceedings.

Accordingly, we concur with the Directors’ view that it would be in the interest of the Company and the Shareholders (including the Independent Shareholders) to recover the Disputed Claims from the Huatong Group in whatever possible amount as soon as possible when the Huatong Group is capable of minimising its potential liabilities to the Group under the Disputed Claims in such amount thereunder to the benefits of the Group. In this regard, we consider that the Settlement and Mutual Release is a sensible move of the Directors as a “moving forward” strategy for the Group to tackle the corporate problem and it is in the interests of the Shareholders (including the Independent Shareholders) and Company as a whole to complete the Settlement and Mutual Release without any delay.

There would be no direct opportunity cost to the Group of pursuing the Settlement and Mutual Release vis-a-vis pursuing the Disputed Claims in full by way of legal proceedings in the perspective that the Group has reserved its rights to recover from the Huatong Group and/or other parties any shortfall in respect of the Disputed Claims by way of legal proceedings or otherwise, under the Operative Documents.

– 25 –

LETTER FROM VC CEF CAPITAL

Description and tenure

Li Wan Plaza is a large-scale commercial retail/residential development with a 8 high-rise residential towers built over a 6-storey commercial/retail podium. The development was built in 1997 and the commercial/retail podium has a total gross floor areas of about 140,000 square meters. As referred to in the Valuation Report set out in Appendix IV to the Circular, Li Wan Plaza occupies a large site surrounded by Changshou Lu to its north, Xiji Nan Lu to its west, Shangjiu Lu to its south and Dexing Lu to its east. This part of Li Wan Plaza is an established commercial/retail area with a number of larger scale commercial and residential developments in the vicinity. Shangjiu Lu is a pedestrian walkway destined as a traffic free shopping street. Changshou Lu is a public traffic route. The mass transit railway station is about 10 minutes walk to the west of Li Wan Plaza and the development is also conveniently served by various modes of public transports. The open podium is mainly of open design and central air-conditioned. The central part on both sides of the podium is an atrium with natural roof-light. The interior is finished with mainly marble tiled floor and walls and good proportion common passage along the periphery of the atrium. The podium floors are served by 4-bubble lifts, 48 units of escalators and 8 staircases.

The Property, being a property which can be used as a retail space, comprises two zones (being Zone A and Zone C) on the third level in a 6-storey commercial/retail podium situated in Li Wan Plaza, No. 9 Dexing Lu, Li Wan District, Guangzhou, the PRC with an aggregate gross floor area of about 11,000 square meters. So far as the Directors are aware, Merry World acquired the Property in April 2001 but since its acquisition, it has not generated any income.

As set out in the valuation report in respect of the Property prepared by the Valuer after its site visit to the Property, the status of the Property as at 14 March 2003 could be summarized as follows:

i. A substantial part of Zone C (the “Area”) was occupied by a mobile phone company and used for retail and showroom purposes (the “Occupant”). The remaining part of Zone C was vacant. However, no record regarding this occupancy is available; and
ii. Zone A was vacant at the time of inspection by the Valuer. There were still some partitions within the unit. The Valuer was informed that previously it was part of a department store.

We were given to understand that so far as the Directors are aware, Merry World has not properly managed the Property since its acquisition in April 2001.

In relation to the status of the Area, given that the sole director of Merry World has represented to the Directors that no tenancy agreement or arrangement of any nature has been entered into between Merry World and the Occupant in respect of the occupancy of the Area and no litigation or claim has been brought or threatened against Merry World, we concur with the Directors’ view that the likelihood of existence of any claim or potential claim made by the Occupant against Merry World is remote. We understand that the Company has obtained a PRC legal opinion confirming Merry World is entitled to the rights to possess, use or deal with the Property and any rights derived from the Property and such rights are not subject to any restriction. In addition, we also note that the Directors at present intend that shortly after Completion, they will enquire about the right of occupancy of the Occupant and if it is established that the Occupant’s right of occupancy is not legally enforceable against Merry World, the Directors will take appropriate action to evict such Occupant from the Area or to enter into a legally binding tenancy

– 26 –

LETTER FROM VC CEF CAPITAL

agreement with the Occupant in respect of the leasing of the Area. In this regard, we consider this is a logical and remedial action of the Directors to exercise the rights of Merry World over the Property and is in the interest of the Shareholders (including the Independent Shareholders) and the Company as a whole.

Basis of determining the consideration

The purpose of the valuation of the Property is intended to determine a basis of the consideration which will be treated as a reference point to reduce the potential liabilities of the Huatong Group to the Group under the Disputed Claims. Such valuation conducted by the Valuer is set out in Appendix IV to the Circular. We have discussed with the Valuer on the methods adopted in the evaluation of the Property and, in particular, the assumption of full vacant possession of the Property. Given the methods are generally adopted by property valuers in evaluating investment properties, we consider that the methods adopted by the Valuer in the evaluation of the Property is appropriate. Moreover, based on (i) the PRC legal opinion obtained by the Company that Merry World is entitled to the rights to possess, use or deal with the Property and any rights derived from the Property, and (ii) the reasons as set out in the valuation report to prepare the valuation on the basis of vacant possession in respect of the Property, we concur with the Valuer that the assumption of full vacant possession of the Property is reasonable. As the Disputed Claims is to be reduced by the same amount of HK$105 million of the open market value of the Property as at 20 March 2003 on a fair basis of determining the consideration of the Settlement and Mutual Release (ignoring the liabilities owed by Merry World as at 28 February 2003 other than the Merry World Debt), we are of the view that such consideration for the Settlement and Mutual Release is fair and reasonable so far as the Independent Shareholders and the Company are concerned.

Financial effects of the Settlement and Mutual Release on the Group

The following sets out the impact of the Settlement and Mutual Release on the Group:

i. Consolidated net tangible assets value

Upon completion of the Settlement and Mutual Release, the Property would become one of the core assets of the Group and will be categorized under investment properties by the Group.

The statement of unaudited pro forma adjusted consolidated net tangible assets of the Enlarged Group based on the audited consolidated net tangible deficit of the Group as at 31 March 2002 adjusted to take into the account the necessary adjustments and the net effect of acquisition of Merry World is set out in Appendix III to the Circular. Based on the aforesaid, upon Completion, the unaudited pro forma adjusted consolidated net tangible assets of the Enlarged Group as at 28 February 2003 will be increased to about HK$72.24 million (after adjusting for the net effect of acquisition of Merry World) from the unaudited pro forma adjusted consolidated net tangible deficit of about HK$7.22 million (before adjusting for the net effect of acquisition of Merry World) of the Group as at 28 February 2003.

In this regard, upon Completion, the Company would have a significant turnaround in consolidated net tangible assets. The Company would have a better position to seek outside financings from financial institutions which would normally, among other things, look into the

– 27 –

LETTER FROM VC CEF CAPITAL

strength of the balance sheet of the Company. In addition, the improved consolidated net tangible assets value of the Enlarged Group would facilitate the Enlarged Group to carry out transactions in the future. Accordingly, we concur with the Directors that the Settlement and Mutual Release is in the interests of the Shareholders (including the Independent Shareholders) and the Company as a whole.

ii. Profit and loss account

As set out in the accountants’ report on Merry World contained in Appendix I to the Circular, the audited net losses of Merry World for the period from 15 October 1997 to 28 February 2001 and each of the two financial years ended 28 February 2002 and 2003 were about HK$30.3 million, HK$3.0 million and HK$3.6 million respectively. However, as also stated in such accountants’ report, the auditors and reporting accountants of the Company have expressed concerns on Merry World’s ability to continue as a going concern and the audit procedures taken to confirm the bank transactions during the period under review. As Merry World will become a subsidiary of the Company upon Completion, the profit and loss accounts of Merry World will be consolidated with the accounts of the Group thereafter.

As part of our effort to gain some overall view into the current property market in Guangzhou in general from market commentary available in news articles, we have also reviewed independent research publications issued by another chartered surveyor (not being the Valuer), we understand the general view is that the retail property market of Guangzhou is expected to gather momentum in view of the continued growth in the national economy, coupled with China’s accession to the World Trade Organization, the supply shortage, and the completion of the Guangzhou mass transit railway projects. Albeit the Property, since acquired by Merry World, has not generated any income, taking into account the prime location, the design and furbishing of the Property as described above, we believe that the Company would not have a great concern to identify prospective tenants supporting with a well designed marketing campaign so as to generate rental income pursuant to a leasing agreement on normal commercial terms from the Property for the Group which, in turn, would enhance the return to the Shareholders. Moreover, due to the good quality of the Property, it might enjoy a reasonable capital appreciation potential gradually in the medium and long term in the event that the retail property market in Guangzhou gathers momentum. The Group might then choose to dispose of the Property at a higher price resulting in a capital gain. We concur with the Directors that the asset to be acquired under the Settlement and Mutual Release is in the interest of the Shareholders (including Independent Shareholders) and the Company as a whole though no decision on the proposed use of the Property has been finalized as at the date of this opinion.

iii. Gearing

As the acquisition of the Property contemplated under the Settlement and Mutual Release would not involve any financing, there is no adverse impact on the gearing of the Enlarged Group.

iv. Working capital and cash flow

The Directors confirmed that the Group had cash balance of about HK$4.3 million as at the Latest Practicable Date. At present, an annual management fee in respect of the Property of about

– 28 –

LETTER FROM VC CEF CAPITAL

HK$3.6 million is payable and Merry World had an accrued current liability of about HK$6.59 million as at 28 February 2003. The Directors expect that based on normal commercial terms, once a tenancy agreement for leasing out the Property or part thereof is entered into, the identified tenants would assume the obligation of paying the necessary ancillary fees. The Directors do not expect that substantial cost or expense will be incurred to the Enlarged Group in the negotiation for establishing a lease agreement on normal commercial terms. The Company has obtained a legal opinion confirming that Merry World has a legal ownership to the Property free from all encumbrances. We are of the view that there will not be materially adverse impact on the working capital of the Group (assuming that the Group will not be obliged to assume the above mentioned accrued current liability of about HK$6.59 million). Hence, we are of the view that the arrangement under the Settlement and Mutual Release is in the interest to the Shareholders (including the Independent Shareholders) and the Company as a whole.

BUSINESS OUTLOOK

As stated in the paragraph headed “Business review and prospect” in the letter from the Board contained in the Circular, the Group has adopted a prudent approach in making significant provisions (being about HK$429 million) in relation to this Investment in the audited consolidated financial statements of the Group for the year ended 31 March 2002. The Directors believe that the Investment is an irregular transaction which is non recurrent in nature and expect that it will not have any material adverse effect on the Group in the future. We understand that the Group is to continue to streamline its overall operation in Hong Kong including disposing of its non-core investments and explore opportunity in trading in commodities such as aluminium and copper. We believe that, the Directors, with a broad base of business and management experience and strong business connection in the PRC, may bring a new momentum and inspiration to the Group in the future. Based on the reasons as discussed above, we consider this kind of corporate move together with entering into the Operative Documents to be fair and reasonable so far as the Shareholders (including the Independent Shareholders) and the Company are concerned as a whole.

RECOMMENDATION

Based on the above principal factors and reasons, we consider that the terms of the Settlement and Mutual Release (in summary, enabling the Company to secure a HK$105 million of partial settlement in relation to the Disputed Claims before any legal proceedings are commenced and providing the Company a reservation of rights in favor of the Group to recover from the Huatong Group for any shortfall in respect of the Disputed Claims) are fair and reasonable to the Independent Shareholders and we advise the Independent Board Committee to recommend the Independent Shareholders to approve the ordinary resolution to be proposed at the EGM to consider, and, if thought fit, approve the ordinary resolution to approve each of the Operative Documents and the transactions contemplated thereunder.

Yours faithfully,

For and on behalf of

VC CEF Capital Limited Catherine Wong

Managing Director

– 29 –

ACCOUNTANTS’ REPORT ON MERRY WORLD

APPENDIX I

The following is the text of a report, prepared for the purpose of incorporation in this circular, received from the auditors and reporting accountants of the Company, Moore Stephens, Certified Public Accountants, Hong Kong.

30 May 2003

The Directors

China Logistics Group Limited

Dear Sirs,

We set out below our report on the financial information regarding Merry World Associates Limited (the “Company”) for inclusion in the circular of China Logistics Group Limited dated 30 May 2003 (the “Circular”). The Company was incorporated in the British Virgin Islands on 15 October 1997 as a limited liability company. The Company commenced business in December 1997 and it is principally engaged as a property investment holding company since April 2001 following the transfer of investment properties in the People’s Republic of China from the borrower for the loan advanced by the Company to the borrower in December 1997.

For the period from 15 October 1997 to 28 February 2001 and the two years ended 28 February 2003 (the “Relevant Period”), the financial statements of the Company were audited by Poon & Tong C.P.A. Limited. We have examined the audited financial statements of the Company for the Relevant Period and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline “Prospectuses and the Reporting Accountant” issued by the Hong Kong Society of Accountants (“HKSA”).

The financial information of the Company as set out in sections 1 to 8 below has been prepared based on the audited financial statements of the Company for the Relevant Period. The director of the Company is responsible for preparing the financial statements which give a true and fair view. In preparing these financial statements which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion on the financial statements.

For the period from 15 October 1997 to 28 February 2001 and the year ended 28 February 2002, bank confirmation has not been sent as the Company has lost contact with the authorized signatory. Although the bank account was closed on 23 April 2001, we have been unable to satisfy ourselves as to whether all potential or contingent liabilities due to the bank are properly stated in the financial statements. Moreover, the evidence available to us was limited because no bank statements and other accounting records relating to the bank transactions, if any, were kept by the Company. There were no other satisfactory audit procedures that we could adopt to confirm that all bank transactions were properly recorded.

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ACCOUNTANTS’ REPORT ON MERRY WORLD

APPENDIX I

As set out in section 3 note (a) below, investment properties were stated at cost as at 28 February 2002 and which is not in accordance with the provisions of Statement of Standard Accounting Practice 13 “Accounting for Investment Properties” issued by the HKSA. However, such provisions have been complied with as at 28 February 2003 as the investment properties were stated at directors’ valuation based on the estimated open market value of the properties as determined by an independent qualified valuer.

In forming our opinion, we have considered the adequacy of the disclosures made in the financial statements concerning the Company’s net current liabilities and deficiency of HK$6,610,279 and HK$14,163,141 as at 28 February 2003 respectively, and the Company’s ability to continue as a going concern. As disclosed in section 1 note (b) below, the immediate holding company, Huatong Group Holdings Limited, has undertaken to provide financial support to enable the Company to meet its liabilities and obligations, both present and future, for at least 12 months from the balance sheet date. Accordingly, we consider that the fundamental uncertainty has been adequately accounted for and our opinion is not qualified in this respect.

Except for any adjustments that might have been found to be necessary had we been able to obtain sufficient evidence concerning bank transactions, and had the investment properties been stated at their open market value as at 28 February 2002, in our opinion, the financial statements give a true and fair view, in all material aspects, of the state of the Company’s affairs as at 28 February 2001, 28 February 2002 and 28 February 2003 and of its results for the period from 15 October 1997 to 28 February 2001 and the years ended 28 February 2002 and 2003 and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

In respect alone of the limitation on our work relating to the foregoing reservations:

we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and
we were unable to determine whether proper books of accounts had been kept.

1 PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of the financial statements are set out below:

(a) Basis of preparation

The financial statements have been prepared using the historical cost basis of accounting and have been prepared in accordance with the Statements of Standard Accounting Practice (“SSAPs”) of Hong Kong, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance, except as stated below for the requirements relating to investment properties.

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ACCOUNTANTS’ REPORT ON MERRY WORLD

APPENDIX I

(b) Going concern

The immediate holding company, Huatong Group Holdings Limited, has undertaken to provide continuing financial support to enable the Company to meet its liabilities and obligations, both present and future, for at least 12 months from the balance sheet date.

(c) Revenue recognition

Interest income is recognised on the amount of loan outstanding.

(d) Investment properties

Investment properties are interests in land and buildings in respect of which construction work and development have been completed and which are intended to be held on a long term basis for their investment potential, any rental income being negotiated at arm’s length. Such properties were stated at cost as at 28 February 2002 because a professional valuation of the investment properties had not been arranged at that date. This accounting treatment is a departure from SSAP 13 “Accounting for Investment Properties” which requires investment properties be included in the balance sheet at their open market value. The investment properties, however, were stated at their open market value as at 28 February 2003 in accordance with the requirements of SSAP 13.

Investment properties are not depreciated except where the unexpired term of the lease is 20 years or less, in which case depreciation is provided on the carrying amount over the remaining term of the lease.

Changes in values of investment properties based on valuation are dealt with as movements in the investment properties revaluation reserve. If the total of this reserve is insufficient to cover a deficit, on a portfolio basis, the excess of the deficit is charged to the profit and loss account. Any subsequent revaluation surplus is credited to the profit and loss account to the extent of the deficit previously charges.

On disposal of an investment property, the relevant portion of the investment property revaluation reserve realized in respect of previous valuations is released to the profit and loss account.

(e) Loan receivable

Provision is made against loan receivable to the extent collectibility of the loan is considered to be doubtful. Loan receivable in the balance sheet is stated net of such provision.

(f) Deferred taxation

Deferred taxation is accounted for in respect of timing differences between profit or loss as computed for taxation purposes and profit or loss as stated in the accounts to the extent that a liability or asset is expected to be payable or receivable in the foreseeable future.

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ACCOUNTANTS’ REPORT ON MERRY WORLD

APPENDIX I

(g) Foreign currencies

Transactions in foreign currencies are translated at the approximate rates ruling on the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at the approximate rates ruling on the balance sheet date. Profits and losses arising on exchange are dealt with in the profit and loss account.

(h) Cash and cash equivalents

Cash and cash equivalents represent short term highly liquid investments which are readily convertible into known amounts of cash and which were within three months of maturity when acquired, less advances from banks repayable within three months from the date of the advance. For the purpose of balance sheet classification, cash and cash equivalents represent assets similar in nature to cash, which are not restricted as to use.

2 RESULTS

The results of the Company for the period from 15 October 1997 to 28 February 2001 and the years ended 28 February 2002 and 2003 are as follows:

				From 15 October
		Year ended	Year ended	1997 to
		28 February 2003	28 February 2002	28 February 2001
	Notes	HK$	HK$	HK$
Turnover	(a)	–	–	–

Other income		–	–	6,240,000
Administrative expenses		(3,588,730)	(3,005,549)	(36,575,440)
Loss from operating
activities	(b)	(3,588,730)	(3,005,549)	(30,335,440)
Taxation	(c)	–	–	–
Net loss for the year/period		(3,588,730)	(3,005,549)	(30,335,440)
Accumulated losses brought
forward		(33,340,989)	(30,335,440)	–
Accumulated losses carried
forward		(36,929,719)	(33,340,989)	(30,335,440)

– 33 –

ACCOUNTANTS’ REPORT ON MERRY WORLD

APPENDIX I

Notes:

(a) Turnover

The Company did not generate any turnover during the year/period.

(b) Loss from operating activities

Loss from operating activities has been arrived at after charging: Auditors’ remuneration Bad and doubtful debts Director’s remuneration fee other and after crediting: Interest income	Year ended 28 February 2003 HK$ 19,000 – – – –	Year ended 28 February 2002 HK$ 17,000 – – – –	From 15 October 1997 to 28 February 2001 HK$ 16,000 36,536,570 – –

			6,240,000

(c) Taxation

No provision for taxation has been made in the financial statements as there is no estimated assessable profit for the year/ period.

– 34 –

ACCOUNTANTS’ REPORT ON MERRY WORLD

APPENDIX I

3 BALANCE SHEETS

The balance sheets of the Company as at 28 February 2003, 28 February 2002 and 28 February 2001 are as follows:

		28 February 2003	28 February 2002	28 February 2001
	Notes	HK$	HK$	HK$
Non-current assets
Investment properties	(a)	105,000,000	63,303,430	–
Current assets
Loan receivable	(b)	–	–	63,303,430
Current liabilities
Accruals		6,587,209	3,003,549	16,000
Amount due to a
shareholder	(c)	–	–	93,622,862
Amount due to a
fellow subsidiary	(c)	23,070	18,000	–
		6,610,279	3,021,549	93,638,862
Net current liabilities		(6,610,279)	(3,021,549)	(30,335,432)
Amount due to immediate
holding company	(d)	(93,622,862)	(93,622,862)	–
Deferred taxation	(e)	(18,930,000)	–	–
Net liabilities		(14,163,141)	(33,340,981)	(30,335,432)

Financed by:
Share capital	(f)	8	8	8
Revaluation surplus		22,766,570	–	–
Accumulated losses		(36,929,719)	(33,340,989)	(30,335,440)
Deficiency		(14,163,141)	(33,340,981)	(30,335,432)

– 35 –

ACCOUNTANTS’ REPORT ON MERRY WORLD

APPENDIX I

Notes:

(a) Investment properties

Cost Revaluation surplus At cost At valuation	28 February 2003 HK$ 63,303,430 41,696,570 105,000,000 – 105,000,000	28 February 2002 HK$ 63,303,430 – 63,303,430 63,303,430 –	28 February 2001 HK$ – –
			–

			–

			–

The investment properties are situated in the People’s Republic of China held under medium-term leases and are stated at director’s valuation as at 28 February 2003, based on the estimated open market value of the investment properties of HK$105,000,000 as determined by S.H. Ng & Co., Ltd, an independent qualified valuer, on 20 March 2003.

(b) Loan receivable

Loan principal Loan interest Less: Provision for bad and doubtful debts Less: Settlement on transfer of ownership and title in investment properties	28 February 2003 HK$ – – – – –	28 February 2002 HK$ 93,600,000 6,240,000 (36,536,570) (63,303,430) –	28 February 2001 HK$ 93,600,000 6,240,000 (36,536,570) –
			63,303,430

The loan facility of USD12,000,000 was granted to a third party at interest rate of 16% per annum for 5 months in December 1997. The facility was secured against 60,000,000 shares of listed company, Nam Fong International Holdings Limited, and a personal guarantee from Mr. Wong Wah. Repayment of the loan was overdue; however, no overdue interest was charged following negotiation between the Company and the third party. An agreement of settlement was signed on 24 April 2001. As a result, the loan was settled by transferring ownership and title of two investment properties in the People’s Republic of China to the Company.

(c) Amounts due to a shareholder and a fellow subsidiary

The amounts are unsecured, interest-free and they do not have any fixed terms of repayment.

(d) Amount due to immediate holding company

The amount is unsecured, interest-free and it is not repayable within the next twelve months.

(e) Deferred taxation

Deferred taxation was provided on the revaluation surplus of the investment properties situated in the People’s Republic of China (“PRC”) based on the relevant applicable tax rates in the PRC.

– 36 –

ACCOUNTANTS’ REPORT ON MERRY WORLD

APPENDIX I

(f) Share capital

Authorized: 50,000 ordinary shares of US$1.00 each Issued and fully paid: 1 ordinary share of US$1.00 each	28 February 2003 US$ 50,000 HK$ 8	28 February 2002 US$ 50,000 HK$ 8	28 February 2001 US$ 50,000

			HK$ 8

The Company was incorporated in the British Virgin Islands with an authorised share capital of US$50,000 dividing into 50,000 shares of US$1 each, of which 1 share was taken up by the subscriber on incorporation.

4 STATEMENT OF CHANGES IN EQUITY

The statement of changes in equity of the Company for the period from 15 October 1997 to 28 February 2001 and the years ended 28 February 2002 and 2003 are as follows:

Issue of share Net loss for the period As at 28 February 2001 and 1 March 2001 Net loss for the year As at 28 February 2002 and 1 March 2002 Revaluation surplus Deferred taxation relating to revaluation surplus Net loss for the year As at 28 February 2003	Revaluation surplus HK$ – – – – – 41,696,570 (18,930,000) – 22,766,570	Share Capital HK$ 8 – 8 – 8 – – – 8	Accumulated losses HK$ – (30,335,440) (30,335,440) (3,005,549) (33,340,989) – – (3,588,730) (36,929,719)	Total HK$ 8 (30,335,440)
				(30,335,432) (3,005,549)
				(33,340,981) 41,696,570 (18,930,000) (3,588,730)
				(14,163,141)

– 37 –

ACCOUNTANTS’ REPORT ON MERRY WORLD

APPENDIX I

5. CASH FLOW STATEMENTS

The cash flow statements of the Company for the period from 15 October 1997 to 28 February 2001 and the years ended 28 February 2002 and 2003 are as follows:

			From 15 October
	Year ended	Year ended	1997 to
28	February 2003	28 February 2002	28 February 2001
	HK$	HK$	HK$
Cash flows from operating activities
Loss from operating activities	(3,588,730)	(3,005,549)	(30,335,440)
Adjustments for:
Bad and doubtful debts	–	–	36,536,570
Accrued interest income	–	–	(6,240,000)
Operating loss before changes in
working capital	(3,588,730)	(3,005,549)	(38,870)
Increase in accruals	3,583,660	2,987,549	16,000
Increase in amount due to a fellow subsidiary	5,070	18,000	–
Net cash used in operating activities	–	–	(22,870)
Investing activities
Loan receivable	–	–	(93,600,000)
Net cash used in investing activities	–	–	(93,600,000)
Financing activities
Issue of share	–	–	8
Loan from a shareholder	–	–	93,622,862
Net cash generated from financing activities	–	–	93,622,870
Increase in cash and cash equivalents	–	–	–
Cash and cash equivalents brought forward	–	–	–
Cash and cash equivalents carried forward	–	–	–

Analysis of the balance of cash and
cash equivalents
Bank balance	–	–	–

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ACCOUNTANTS’ REPORT ON MERRY WORLD

APPENDIX I

Major non-cash items

The net loan receivable of HK$63,303,430 was settled by transferring ownership and title of two investment properties in the PRC.
The loan from a shareholder of HK$93,622,862 was assigned to Huatong Group Holdings Limited during the year ended 28 February 2002.

6 CORPORATE AFFILIATION AND ULTIMATE HOLDING COMPANY

The Company is a subsidiary of Huatong Group Holdings Limited, which is incorporated in Hong Kong.

As at 28 February 2003, the director of the Company considered that Trade Sense International Limited, a company incorporated in the British Virgin Islands, as the ultimate holding company of the Company.

7 SUBSEQUENT EVENT

On 21 March 2003, Trade Sense International Limited entered into an agreement with, amongst other companies, China Logistics Group Limited, a company incorporated and listed in Hong Kong, in that the Company’s share would be transferred to China Logistics Group Limited, subject to, inter alia, China Logistics Group Limited complying with all relevant requirements of the Listing Rules and obtaining the approval by the independent shareholders of the transfer of share.

8 SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared for the Company in respect of any period subsequent to 28 February 2003 and up to date of this report and no dividend or other distribution has been declared, made or paid by the Company in respect of any period subsequent to 28 February 2003.

Yours faithfully,

Moore Stephens

Certified Public Accountants Hong Kong

– 39 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

1. SHARE CAPITAL

The authorised and issued share capital of the Company as at 28 February 2003 were as follows:

Nominal Value HK$

Authorised: 5,000,000,000 Shares as at 28 February 2003 Issued and fully paid: Shares: 1,463,704,968 Shares in issue as at 31 March 2002 1,700,000 Shares issued pursuant to the exercise of options granted under the Existing Scheme 219,000,000 Issue of the Conversion Shares on 30 January 2003 1,684,404,968 Shares in issue as at 28 February 2003	500,000,000

	146,370,497 170,000 21,900,000
	168,440,497

All Shares in issue rank pari passu in all respects including all rights as to dividends, voting and capital.

If Shares were issued pursuant to exercise of the subscription rights attaching to all the outstanding 7,200,000 options as at 28 February 2003, the issued share capital of the Company would be:

Shares: 1,684,404,968 Shares in issue as at 28 February 2003 7,200,000 Shares to be issued by exercise of the options 1,691,604,968	HK$ 168,440,497 720,000
	169,160,497

As at the Latest Practicable Date,

(1) the authorised share capital of the Company is HK$500,000,000 comprising 5,000,000,000 Shares;
(2) there were 1,684,954,968 Shares in issue, after the allotment and issue of 550,000 shares upon the exercise of 550,000 options granted under the Existing Scheme on 8 April 2003; and
(3) there were outstanding options entitling holders to subscribe for 2,550,000 Shares at a subscription price of HK$0.1491 per Share and the options were held by seven fulltime employees of the Group.

– 40 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

2. FINANCIAL SUMMARY

(a) Summary of audited financial results of the Group for each of the three financial period ended 31 March 2002

Set out below is a summary of the results of the Group for each of the three financial periods ended 31 March 2002, which have been extracted from the audited financial statement of the Group for the year ended 31 March 2002.

	Year ended 31	Year ended 31	March
	2002	2001	2000
	HK$’000	HK$’000	HK$’000
Turnover	207,322	258,497	176,694
Cost of sales	(173,503)	(152,298)	(69,475)
Gross profit	33,819	106,199	107,219
Other revenue	872	1,191	1,027
Distribution costs	(5,405)	(6,605)	(3,423)
Administrative Expenses	(57,140)	(53,297)	(35,338)
Other operating (expenses)/income, net	(54,633)	(40,857)	32,164
Impairment/revaluation deficit of tangible assets	(233,193)	–	–
Impairment of intangible assets	(428,999)	–	–
Provision for CNCC Acquisition_(Note 20(b))_	(232,657)	–	–
Provision for doubtful debts	(391,248)	(15,822)	(1,086)
Operating (loss)/profit	(1,368,584)	(9,191)	100,563
Finance costs	(14,072)	(10,958)	(17,466)
Share of (losses)/profits of associates	(6,980)	7,225	6,437
(Loss)/profit before taxation	(1,389,636)	(12,924)	89,534
Taxation	(527)	277	(2,223)
(Loss)/profit before minority interests	(1,390,163)	(12,647)	87,311
Minority interests	(4,875)	(2,127)	(14,196)
Net (loss)/profit attributable to shareholders	(1,395,038)	(14,774)	73,115
Dividends	–	–	6,015
(Loss)/earnings per share
– Basic	(95.47) cents	(1.01) cents	6.64 cents
Dividends per share	–	–	0.4 cents

There is no extraordinary items in the last three financial years.

– 41 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

(b) Auditors’ report for the year ended 31st March 2002

Auditors’ report to the members of China Logistics Group Limited

(Incorporated in Hong Kong with limited liability)

We have audited the financial statements on pages 40 to 95 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

Respective responsibilities of directors and auditors

The Companies Ordinance requires the directors to prepare financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you.

Basis of opinion

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants (“HKSA”), except that the scope of our work was limited as explained below.

An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s and the Group’s circumstances, consistently applied and adequately disclosed.

We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us was limited because of the following matters:

As more fully explained in Note 1(b) to the financial statements, there were several changes to the board of directors of the Company during the year and subsequent to the year end. The present board of directors of the Company has represented that all transactions entered into in the name of the Company and its subsidiaries during the year have been appropriately included in the financial statements, except for the items referred to in 2. below. We have accordingly been unable to obtain full representations from the directors for the purposes of our audit. We were also unable to assess the completeness and accuracy of related party disclosures.

– 42 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

Statement of Auditing Standards 450 “Opening Balances and Comparatives” issued by the HKSA requires that the auditors obtain sufficient audit evidence that opening balances do not contain misstatements which materially affect the current year financial statements. We have considered the adequacy of the disclosures made in the financial statements concerning losses incurred by the Group in connection with:
(a) a provision in the amount of HK$358,445,000 against payments made by the Group in the current year to Sharp Class International Limited (“Sharp Class”), a company apparently unconnected with the Group, and classified by the Group as a receivable. The amounts paid to Sharp Class appear to have been funded by settlement in the current year of other receivables which were carried forward from 31st March 2001. We have not been able to verify whether or not these transactions are related; and
(b) a pr ovision against payments made totalling HK$232,657,000, HK$200,000,000 of which was classified by the Group as a deposit at 31st March 2001, paid to Sharp Class International Limited, as collection agent, in connection with the purchase of an exclusive right to enter into negotiation with China National Container Corporation (“CNCC”) for the acquisition of a substantial stake in a logistics and distribution network joint venture in the People’s Republic of China (“PRC”). As more fully disclosed in Note 20(b) to the financial statements, CNCC have advised that they have not received such payments; and
(c) an impairment charge in the amount of HK$428,999,000 against the carrying value of an intangible asset relating to a service contract entered into by the Group with Huatong Heat Energy Technique Company Limited (“Huatong Heat”), a company connected with the Group, for the provision of management and technical services relating to the supply, installation and management of heating systems by Huatong Heat in the PRC. As more fully disclosed in Note 13 to the financial statements, the directors consider that there may have been irregularities in relation to the guaranteed minimum income received in previous years in connection with the Huatong Heat contract, the proceeds of which appear to have been remitted out of the Group shortly after receipt.

The above provisions and impairment charge have been recorded in the current year but may well relate to and should have been recorded in prior years. It was not possible for us to perform the auditing procedures necessary to obtain sufficient appropriate audit evidence concerning these charges in the year ended 31st March 2002 and whether or not these amounts were correctly included as assets in preceding years’ financial statements. Accordingly, we were unable to confirm that comparative figures as at 31st March 2001 are fairly stated.

– 43 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

We have not been able to verify the Group’s title to certain land in Suzhou, PRC, held through a 71% subsidiary (with the remaining 29% held by a Chinese party), on which buildings with net book value of HK$50,722,000 (cost of HK$70,333,000 less accumulated depreciation of HK$19,611,000) have been erected, because the relevant PRC authority has yet to give its formal approval. It is the responsibility of the Chinese party to ensure that the appropriate land use rights certificate is granted. However, to date this formality has not been completed. As a consequence, we were unable to determine if the net book value of the buildings should be written down and whether or not liabilities would have to be accrued in the financial statements for restoration costs that would be incurred in returning the land to the PRC government.
The following amounts in respect of the Group’s associates have been included in the financial statements based on unaudited management accounts:
share of results of the associates amounting to a loss of HK$6,980,000 included in the consolidated profit and loss account for the year ended 31st March 2002; and
share of net assets of an associate, Goodwill (Overseas) Limited, of HK$197,967,000 included in the consolidated balance sheet as at 31st March 2002.

We were unable to obtain sufficient information and explanations to satisfy ourselves that such amounts were fairly stated in the financial statements.

As more fully explained in Note 18 to the financial statements, the interest in associate relates to a 32% interest held by a subsidiary in Goodwill (Overseas) Limited. The company’s only activity apparently is the holding of a 95% interest in a Shanghai property development via a Macau incorporated company; however, its financial statements have not been audited. Financial statements in respect of the Shanghai property development have been audited by PRC auditors, whose report was unqualified.

Any adjustments in respect of the foregoing items may have consequential significant effects on the Group loss for the year and net assets at 31st March 2002 and 31st March 2001.

In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

– 44 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

Fundamental uncertainty relating to the going concern basis

In forming our opinion, we have considered the adequacy of the disclosures made in the financial statements concerning the Company’s and the Group’s deficiency of net current assets amounting to HK$10,566,000 and HK$229,252,000, respectively, and the Company’s and the Group’s ability to continue as a going concern, the validity of which assumption for the preparation of the financial statements depends inter alia on the Company and the Group obtaining continuing financial support from the prospective new controlling shareholder of the Company or significantly reducing the Company’s and the Group’s level of operating costs.

We consider that the fundamental uncertainty has been adequately accounted for and that sufficient disclosures of the details of the circumstances relating to this fundamental uncertainty have been made in Note 3 to the financial statements. Our opinion is not qualified in this respect.

Qualified opinion: Disclaimer on view given by financial statements

Because of the significance of the possible effects of the limitations in evidence available to us set out in the basis of opinion section of our audit report above, we are unable to form an opinion as to whether the financial statements give a true and fair view of the state of the affairs of the Company and the Group at 31st March 2002 and of the loss and cash flows of the Group for the year then ended.

In respect alone of the limitations on our work as set out in the basis of opinion section of this report:

we have not obtained the information and explanations that we considered necessary for the purpose of our audit; and
we were unable to determine whether proper books of account have been kept.

Moore Stephens

Certified Public Accountants

Hong Kong, 22nd November 2002

(c) Audited financial statements of the Group for each of the two financial years ended 31 March 2002

Set out below is a summary of the consolidated profit and loss account, and the consolidated statement of recognised gains and losses and the consolidated cash flow statement for each of the two years ended 31 March 2002 and the consolidated balance sheets as at 31 March 2001 and 2002 of the Group together with the relevant notes as extracted from the audited financial statements of the Group for the year ended 31 March 2002.

– 45 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

Consolidated Profit and Loss Account

For the year ended 31st March 2002

Note Turnover 4 Cost of sales Gross profit Other revenue 4 Distribution costs Administrative expenses Other operating expenses, net Impairment loss/revaluation deficit of tangible assets Impairment loss of intangible assets 13 Provision for CNCC Acquisition 20(b) Provision for doubtful debts 20(c) Loss from operating activities 6 Finance costs 7 Share of (losses)/profits of associates Loss before taxation Taxation 8 Loss before minority interests Minority interests Net loss attributable to shareholders 9 Loss per share Basic 10 Diluted 10	2002 HK$’000 207,322 (173,503) 33,819 872 (5,405) (57,140) (54,633) (233,193) (428,999) (232,657) (391,248) (1,368,584) (14,072) (6,980) (1,389,636) (527) (1,390,163) (4,875) (1,395,038) Cents (95.47) N/A	2001 HK$’000 258,497 (152,298) 106,199 1,191 (6,605) (53,297) (40,857) – – – (15,822) (9,191) (10,958) 7,225 (12,924) 277 (12,647) (2,127) (14,774) Cents (1.01) N/A

– 46 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

Consolidated Statement of Recognised Gains and Losses

For the year ended 31st March 2002

Note Net gains/(losses) not recognised in the consolidated profit and loss account Revaluation deficit on investment properties 28 Revaluation deficit realised on disposal of investment properties 28 Exchange translation difference on consolidation 28 Exchange reserve in respect of disposal of associates 28 Net loss attributable to shareholders Total recognised losses Goodwill eliminated directly against reserves 28	2002 HK$’000 (2,934) – – (333) (3,267) (1,395,038) (1,398,305) – (1,398,305)	2001 HK$’000 (70,634) 2,836 (24) – (67,822) (14,774) (82,596) (302,409) (385,005)

– 47 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

Consolidated Balance Sheet

31st March 2002

Note Non-current assets Intangible assets 13 Investment properties 14 Property under development 15 Properties, plant and equipment 16 Interests in associates 18 Current assets Inventories 19 Trade and other receivables 20 Other investments in securities Pledged bank deposits 21 Cash and bank balances 21 Current liabilities Trade and other payables 22 Trust receipt loans, secured Tax payable Bank loans, secured 23 Other loans 24 Net current (liabilities)/assets Total assets less current liabilities Non-current liabilities Bank loans, secured 23 Other loans 24 Loans from minority shareholders of subsidiaries 26 Minority interests Capital and reserves Share capital 27 Reserves 28 Mandatory convertible note 29	2002 HK$’000 – 230,521 – 80,627 197,967 3,000 40,923 – – 2,625 46,548 113,228 3,192 4,161 136,323 18,896 275,800 (229,252) 279,863 – (51,111) (112,932) (164,043) (64,571) (228,614) 51,249 146,370 (401,721) (255,351) 306,600 51,249	2001 HK$’000 441,999 410,364 40,683 16,030 296,871 20,355 681,397 330 4,000 9,604 715,686 121,660 29,941 3,503 108,069 – 263,173 452,513 1,658,460 (21,005) – (163,501) (184,506) (25,420) (209,926) 1,448,534 145,685 996,249 1,141,934 306,600 1,448,534

– 48 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

Consolidated Cash Flow Statement

For the year ended 31st March 2002

Note Net cash outflow from operating activities 30(a) Returns on investments and servicing of finance Interest received Interest paid Dividends received from associates Dividends paid Net cash inflow/(outflow) from returns on investments and servicing of finance Taxation Hong Kong profits tax refunded Hong Kong profits tax paid Taxes refunded/(paid) Investing activities Purchases of properties, plant and equipment Investment in property under development Acquisition of subsidiaries, net 30(b) Net advances from associates Net advances to investee companies Proceeds on disposal of: Properties, plant and equipment Associates Other investments in securities Net cash inflow/(outflow) from investing activities Net cash inflow/(outflow) before financing activities	2002 HK$’000 (12,431) 27,647 (14,111) – – 13,536 288 (155) 133 (566) (667) 7,646 – – 10 – 389 6,812 8,050	2001 HK$’000 (159,329) 2,564 (11,124) 4,762 (5,827) (9,625) 275 (351) (76) (8,076) (4,878) 9,117 1,735 (1,428) 1,225 1,355 – (950) (169,980)

– 49 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

Note Net cash inflow/(outflow) before financing activities Financing activities 30(c) Proceeds from issue of share capital New bank loans Repayment of bank loans Pledged bank deposits Other loans Loans from minority shareholders of subsidiaries Net cash inflow from financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Analysis of balances of cash and cash equivalents Cash and bank balances Trust receipt loans with maturity within three months from the date of advance	2002 HK$’000 8,050 1,020 – (12,738) 4,000 18,896 542 11,720 19,770 (20,337) (567) 2,625 (3,192) (567)	2001 HK$’000 (169,980) 3 35,082 (24,400) (4,000) – 279 6,964 (163,016) 142,679 (20,337) 9,604 (29,941) (20,337)

– 50 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

Notes to the Financial Statements

31st March 2002

1. GENERAL

(a) Business activities

During the year, the Group was engaged in the following activities:

Trading
Property investment
• Investment holding • Information technology
Cement manufacturing

(b) Changes to the Board of directors

The four executive directors, Mr. Mongkon Cherloemchoedchoo, Mr. Wu Guang Liang (changed to executive director from non-executive director on 29th October 2001), Mr. Li Xianghong and Mr. Li Tiefeng and two non-executive directors, Mr. Chung Ho (changed to non-executive director from executive director on 15th August 2002) and Mr. Lee Hoong Seun, who were directors as at 31st March 2002 remain in office at the date of these financial statements. The former chairman, Mr. Yuen Wai resigned on 28th May 2002 and has not been contactable thereafter. The independent non-executive director, Mr. Lao Youan was appointed only in April 2002. The financial statements have been prepared based on the books and records maintained by the Company and its subsidiaries. However, no representations as to the completeness of the books and records of the Group during the year could be given by the present directors although care has been taken in the preparation of the financial statements to mitigate the effects of the incomplete records. The existing directors are therefore, unable to represent that the effects of all transactions affecting the Group during the reporting year have been included in the financial statements. Notwithstanding the foregoing, the directors have, in the assessment of the Group’s assets and liabilities, taken such steps as they considered practicable, to establish these assets and liabilities based on the information of which they are aware and have made provisions and adjustments as they considered appropriate in the preparation of the financial statements.

2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

(a) Basis of preparation

These financial statements have been prepared in accordance with Hong Kong Statements of Standard Accounting Practice (“SSAP”), 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, modified with respect to the measurement of investment properties, and other investments, as explained in the respective accounting policies below.

(b) Adoption of statements of standard accounting practice

During the current year, the Group has adopted the following SSAPs issued by the Hong Kong Society of Accountants (“HKSA”) which are effective for accounting periods commencing on or after 1st January 2001:

SSAP 9 (revised) Events after the balance sheet date SSAP 10 (revised) Accounting for investments in associates SSAP 14 (revised) Leases SSAP 26 Segment reporting SSAP 28 Provisions, contingent liabilities and contingent assets SSAP 29 Intangible assets SSAP 30 Business combinations SSAP 31 Impairment of assets SSAP 32 Consolidated financial statements and accounting for investments in subsidiaries

– 51 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

The significant changes in the Group’s accounting policies resulting from the adoption of the new SSAPs are set out below.

(i) Events after the balance sheet date

In accordance with revised SSAP 9, the Group no longer recognises dividends proposed or declared after the balance sheet date as a liability at the balance sheet date. This change in accounting policy has been applied retrospectively so that the comparatives presented have been restated to conform to the changed policy.

As stated in note 28, this change has resulted in an increase in opening retained profits at 1st April 2000 by HK$5,827,000 which is the reversal of the provision for the proposed final dividend for the year ended 31st March 2000 previously recorded as a liability as at 31st March 2000 although not declared until after the balance sheet date.

(ii) Leases

SSAP 14 (revised) “Leases” requires disclosure on the aggregate future minimum lease payments of noncancellable leases analysed into the following periods:

not later than one year

later than one year and not later than five years
later than five years

Comparative figures have been restated to conform with the current year’s presentation.

(iii) Segment reporting

In note (4) to these financial statements the Group has disclosed segment revenue and results as defined under SSAP 26. In accordance with the Group’s internal financial reporting the Group has determined that business segments be presented as the primary reporting format and geographically as the secondary reporting format. Comparative information has been given.

(iv) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired subsidiaries and associates at the date of acquisition.

In accordance with SSAP 30, goodwill on acquisitions occurring on or after 1st January 2001 is included in intangible assets and is amortised using the straight-line method over its estimated useful life. Goodwill of the Group is amortised over a period of 20 years. Where an indication of impairment exists, the carrying amount is assessed and written down immediately to its recoverable amount.

Goodwill on acquisitions that occurred prior to 1st April 2001 was written off against reserves. The Group has taken advantage of the transitional provision 1(a) in SSAP 30 and goodwill previously written off against reserves has not been restated. However, any impairment loss arising on such goodwill is accounted for in accordance with SSAP 31.

(c) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31st March. The results of subsidiaries acquired or disposed of during the year are consolidated from or to their effective dates of acquisition to 31st March, or up to the effective date of disposal, as appropriate. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

The gain or loss on the disposal of a subsidiary represents the difference between the proceeds of the sale and the Group’s share of its net assets together with any goodwill or capital reserve which was not previously charged or recognised in the consolidated profit and loss account.

Minority interests represent the interests of outside shareholders in the operating results and net assets of subsidiaries.

– 52 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

(d) Subsidiaries

A subsidiary is a company in which the Company, directly or indirectly, controls more than half of its voting power or issued share capital or controls the composition of its board of directors.

Investments in subsidiaries are stated in the Company’s balance sheet at cost less provision for impairment loss, if any, as determined by the directors. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

(e) Associates

An associate is a company, not being a subsidiary, in which the Group holds a substantial longterm interest in the equity share capital and over which the Group is in a position to exercise significant management influence.

The consolidated profit and loss account includes the Group’s share of results of associates for the year, and the consolidated balance sheet includes the Group’s share of net assets of 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 stated at cost less any provisions for impairment loss, if any, as determined by the directors.

(f) Goodwill

Positive goodwill arising on consolidation represents the excess of the cost of the acquisition over the Group’s share of the fair value of the identifiable assets and liabilities acquired.

In respect of acquisitions of subsidiaries:

(i) before 1st April 2001, positive goodwill is eliminated against reserves; and
(ii) since 1st April 2001, positive goodwill is amortised to the consolidated profit and loss account on a straight-line basis over its estimated useful life. Positive goodwill is stated in consolidated balance sheet at cost less accumulated amortisation and impairment losses, if any.

On disposal of a subsidiary, any attributable amount of purchased goodwill not previously amortised through the consolidated profit and loss account or which has previously been dealt with as a movement on the group reserves is included in the calculation of the profit or loss on disposal.

(g) Intangible assets

Intangible assets are capitalised and amortised over the minimum estimated useful life of the assets. Provision is made to the extent that the directors considered an impairment loss has taken place.

(h) Investment properties

Investment properties ar e those properties which are held for their investment potential, are income producing and are intended to be held on a long term basis. They are stated at their open market values on the basis of annual valuations. Any surplus or deficit on revaluation is taken to the investment properties revaluation reserve unless the total of this reserve is insufficient to cover a deficit, in which case the amount by which the deficit exceeds the amount in the reserve is charged to the profit and loss account. Where a deficit has previously been charged to the profit and loss account and a revaluation surplus subsequently arises, the surplus is credited to the profit and loss account to the extent of the deficit previously c harged.

The gain or loss on disposal of an investment property, representing the difference between the net sales proceeds and the carrying amount of the relevant asset, is recognised in the profit and loss account. Any revaluation reserve balance attributable to the relevant asset being sold is transferred to retained profits upon disposal of the asset.

No depreciation is provided in respect of investment properties with an unexpired lease term of more than 20 years since the valuations take into account the state of the buildings.

– 53 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

(i) Properties under development

Properties under development are investments in land and buildings under construction. The investments are stated at cost which includes development and construction expenditure incurred and interest and other direct costs attributable to the development, less any impairment loss deemed necessary by the directors.

(j) Properties, plant and equipment

Properties, plant and equipment are stated at cost less accumulated depreciation. Leasehold land and buildings is depreciated over the period of the lease while other properties, plant and equipment are depreciated at rates sufficient to write off their cost over their estimated useful lives on a straight-line basis. The principal annual rates are as follows:

Leasehold land and buildings 1.67% – 3.6% Plant and machinery 10% – 20% Furniture, fixtures and computer equipment 10% – 20% Motor vehicles 20%

Major costs incurred in restoring properties, plant and equipment to their normal working condition are charged to the profit and loss account. Improvements are capitalised and depreciated over their expected useful lives to the Group.

The carrying amounts of properties, plant and equipment are reviewed regularly to assess whether their recoverable amounts have declined below their carrying amounts. Expected future cash flows have been discounted in determining the recoverable amount.

The gain or loss on disposal of a property, plant and equipment is the difference between the net sale proceeds and the carrying amount of the relevant asset, and is recognised in the profit and loss account.

(k) Impairment of assets

Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or an impairment loss previously recognised no longer exists or may have decreased:

intangible assets
properties, plant and equipment (other than properties carried at revalued amounts)
investments in subsidiaries and associates

If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount.

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

In respect of assets other than goodwill, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is reversed only if the loss was caused by a specific external event of an exceptional nature that is not expected to recur, and the increase in recoverable amount relates clearly to the reversal of the effect of that specific event.

A reversal of impairment losses is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to the profit and loss account in the year in which the reversals are recognised.

– 54 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

(l) Other investments in securities

Other investments in securities are carried at fair value. At each balance sheet date, the net unrealised gains or losses arising from the changes in fair value of other investments are recognised in the profit and loss account. Profits or losses on disposal of other investments in securities, representing the difference between the net sales proceeds and the carrying amounts, are recognised in the profit and loss account as they arise.

(m) Inventories

Inventories are valued at the lower of cost, on the first-in, first-out basis, and net realisable value after making due allowance for any obsolete or slow moving items. In the case of finished goods and work in progress, cost includes direct materials, direct labour, subcontracting charges and, where applicable, production overheads. Net realisable value is determined by reference to estimated selling prices less all further costs to be incurred in selling and distribution.

(n) Accounts receivable

Provision is made against accounts receivable to the extent they are considered to be doubtful. Accounts receivable in the balance sheet are stated net of such provision.

(o) Cash equivalents

For the purpose of the consolidated cash flow statement, cash equivalents represent short term highly liquid investments which are readily convertible into known amounts of cash and which were within three months of maturity when acquired, less advances from banks repayable with three months from the date of the advance.

(p) Deferred taxation

Deferred taxation is accounted for at the current taxation rate in respect of timing differences between profit as computed for taxation purpose and profit as stated in the financial statements to the extent that a liability or an asset is expected to be payable or recoverable in the foreseeable future.

(q) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Company or the Group has a legal or constructive obligation arising as a result of a past event; it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

(r) Revenue recognition

Revenue from the sale of goods is recognised on the transfer of risks and rewards of ownership, which generally coincides with the time when goods are delivered to customers and title has passed.

Operating leases rental income is recognised on a straight-line basis over the lease term.

Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.

Revenue from provision of services is recognised when the services are rendered.

(s) Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset.

All other borrowing costs are charged to the profit and loss account in the year in which they are incurred.

– 55 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

(t) Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases are charged to the profit and loss account on a straight-line basis over the lease periods.

(u) Retirement benefit costs

The Group’s contributions for employee’s retirement benefits are charged to the profits and loss account in the year in which such costs are incurred.

(v) Translation of foreign currencies

Transactions in foreign currencies are translated at exchange rates ruling at the transaction dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date are translated at the rate of exchange ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in the profit and loss account.

The financial statements of subsidiaries and associates expressed in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. Exchange differences arising are dealt with as a movement in reserves.

(w) 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.

3. GOING CONCERN BASIS OF PREPARATION

Since the last balance sheet date, the Group has experienced serious financial difficulties, which inter alia led to a winding up petition in November 2001, the withdrawal of banking facilities and the termina tion of the PUMA distribution agreement. Substantial provisions have been made during the year for various transactions, which the present Board of Directors consider may not have been in the best interests of the Group. Legal action is in process for possible recovery in connection therewith. To minimise the adverse effects of the above, the Group has taken active steps to streamline the operations, dispose of non-core assets and reduce overheads so as to minimise losses and restore the Group to profitability. It has also sought new shareholders.

Additionally, the Board has been assured by China Chengtong Holdings Company, a major state-owned enterprise in the PRC and the ultimate holding company of World Gain Holdings Limited (the prospective controlling shareholder in the Company) that it will provide continuing financial support to the Company and the Group once the application for resumption of trading in the Company’s shares is granted by the Stock Exchange of Hong Kong Limited.

In the event that the application for trading in the Company’s shares is not granted by the Stock Exchange of Hong Kong Limited, the Board will take additional measures to improve its cash flows by increasing the productivity of its cement factory in Suzhou, utilising leasing areas both in Hong Kong and in China for additional rental income, procuring further realisation of non-core assets, streamlining the operations and reducing operating expenses.

In every respect, the present Board is confident that the cash flows over the next 12 months from the date of these financial statements will be sufficient to confirm that the Group can continue as a going concern.

– 56 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

4. REVENUE AND TURNOVER AND SEGMENT INFORMATION

(a) Revenue and turnover

Turnover represents the aggregate of the net invoiced value of goods sold, rental income, interest income and estate management income but excludes intra-group transactions. Turnover is reconciled to total revenues as follows:


	2002	2001
	HK$’000	HK$’000
Turnover
Sale of goods	191,859	160,598
Gross rental income from investment properties	14,525	18,236
Estate management income	784	1,254
Interest income	154	43,409
Heating supply technical services income	–	35,000
	207,322	258,497
Other revenues
Dividends	24	–
Sales commission income	848	1,191
	872	1,191
Total revenues	208,194	259,688

– 57 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

(b) Segment information

By principal activities:

Sale of goods 2002 2001 HK$’000 HK$’000 191,859 160,598 (49,313 ) (15,546 34,869 108,553 (58,133 ) (111,216 84 828	Sale of goods 2002 2001 HK$’000 HK$’000 191,859 160,598 (49,313 ) (15,546 34,869 108,553 (58,133 ) (111,216 84 828	Property investment 2002 2001 HK$’000 HK$’000 15,309 19,490 ) (154,027 ) 10,236 296,588 484,463 ) (30,874 ) (23,390 8 67	Property investment 2002 2001 HK$’000 HK$’000 15,309 19,490 ) (154,027 ) 10,236 296,588 484,463 ) (30,874 ) (23,390 8 67	Property investment 2002 2001 HK$’000 HK$’000 15,309 19,490 ) (154,027 ) 10,236 296,588 484,463 ) (30,874 ) (23,390 8 67	Property investment 2002 2001 HK$’000 HK$’000 15,309 19,490 ) (154,027 ) 10,236 296,588 484,463 ) (30,874 ) (23,390 8 67	Property investment 2002 2001 HK$’000 HK$’000 15,309 19,490 ) (154,027 ) 10,236 296,588 484,463 ) (30,874 ) (23,390 8 67	Property investment 2002 2001 HK$’000 HK$’000 15,309 19,490 ) (154,027 ) 10,236 296,588 484,463 ) (30,874 ) (23,390 8 67	Property investment 2002 2001 HK$’000 HK$’000 15,309 19,490 ) (154,027 ) 10,236 296,588 484,463 ) (30,874 ) (23,390 8 67
								(439,843
								322
4,739	401	298 311	–	–	443	1,267 408	815	5,888

– 58 –

APPENDIX II

FINANCIAL INFORMATION RELATING TO THE GROUP

By geographical location:

	Hong	Kong	Mainland China	Mainland China	Taiwan	Taiwan	Consolidated	Consolidated
	2002	2001	2002	2001	2002	2001	2002	2001
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Revenue
Total revenue	46,552	34,186	120,089	190,465	40,681	33,846	207,322	258,497
Result
Segment result	1,995	20,642	(272,896 )	39,032	2,308	(5,596)	(268,593 )	54,078
Unallocated corporate
expenses							(34,087 )	(21,447)
Amortisation of
intangible assets							(13,000 )	(26,000)
Impairment of
intangible assets							(428,999 )	–
Provision for CNCC
Acquisition							(232,657 )	–
Provision for doubtful
receivables							(391,248 )	(15,822)
Share of results
of associates							(6,980)	7,225
Finance costs							(14,072 )	(10,958)
Loss before taxation							(1,389,636 )	(12,924)
Taxation							(527 )	277
Loss before minority interests							(1,390,163 )	(12,647)
Assets
Segment assets	359,041	338,531	192,097	1,583,006	4,525	96	555,663	1,921,633
Other information
Bank overdrafts	(1,108)	(1,398 )	(102)	(39)	–	–	(1,210)	(1,437)

5. DIVIDEND

No interim dividend was paid during the year (2001: Nil) and the directors do not recommend the payment of a final dividend in respect of the year (2001: Nil).

– 59 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

6. LOSS FROM OPERATING ACTIVITIES

The loss from operating activities is arrived at:


	2002	2001
	HK$’000	HK$’000
After Charging:
Amortisation of intangible assets	13,000	26,000
Auditors’ remuneration:
Current year provision	1,798	797
Prior year underprovision	392	–
Cost of inventories	165,182	145,963
Depreciation:
Owned properties, plant and equipment	4,767	2,654
Leased properties, plant and equipment	1,121	140
Exchange losses, net	–	139
Loss on disposal of associates	–	2,213
Loss on disposal of investment properties	–	2,338
Loss on disposal of properties, plant and Equipment	947	4,274
Operating lease rentals for land and buildings	3,884	5,259
Outgoings in respect of investment properties	5,654	6,335
Provision for advances to investee companies	–	1,428
Provision for doubtful receivables	391,248	15,822
Provision for inventories	11,329	1,200
Provision for loans to associates	148	–
Provision for other investments in securities	283	96
Retirement benefit costs	2,276	697
Staff costs (including directors’ emoluments)	25,448	27,633
After crediting:
Exchange gains, net	943	–
Gain on disposal of other investments	59	–
Provision for loans to associates written back	–	10,990

– 60 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

7. FINANCE COSTS

Interest and similar charges on: Bank loans and overdrafts wholly repayable within five years Other loans_(note) Amount due to an associate Less: Amount capitalised(note 15)_	Group 2002 2001 HK$’000 HK$’000 7,392 10,490 6,719 – 634 14,111 11,124 (39) (166) 14,072 10,958	Group 2002 2001 HK$’000 HK$’000 7,392 10,490 6,719 – 634 14,111 11,124 (39) (166) 14,072 10,958
		11,124 (166)
		10,958

Note: Including interest of HK$6,066,000 on other loans from New Era Foundation (China) Limited that the Group has fully repaid during the year.

8. TAXATION

Hong Kong profits tax is provided at 16% on the estimated assessable profits for the year. Taxes on profits assessable outside Hong Kong have been calculated at the rates of taxation prevailing in the countries in which the Group operates, based on existing law, practice and interpretation thereof.

Current year provision: Hong Kong Outside Hong Kong Prior years over-provision: Hong Kong Outside Hong Kong Share of tax of associates Deferred tax_(note 25)_ Tax charge/(credit) for the year	Group 2002 2001 HK$’000 HK$’000 525 – – – 525 – – (280) – – – (280) 525 (280) 2 3 – – 527 (277)	Group 2002 2001 HK$’000 HK$’000 525 – – – 525 – – (280) – – – (280) 525 (280) 2 3 – – 527 (277)
		–
		(280) –
		(280)
		(280) 3 –
		(277)

9. NET LOSS ATTRIBUTABLE TO SHAREHOLDERS

The net loss attributable to shareholders dealt with in the financial statements of the Company is HK$1,453,686,000 (2001: HK$220,314,000).

10. LOSS PER SHARE

The calculation of basic loss per share is based on the net loss attributable to shareholders of HK$1,395,038,000 (2001: HK$14,774,000) and the weighted average of 1,461,205,379 (2001: 1,456,851,397) shares in issue during the year.

The diluted loss per share for the years ended 31st Marc h 2002 and 2001 have not been shown as the exercise of options, warrants and the conversion of the mandatory convertible note would have no dilutive effect on the basic loss per share.

– 61 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

11. DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS

(a) Directors’ emoluments

Directors’ remuneration disclosed pursuant to the Listing Rules and Section 161 of the Companies Ordinance is as follows:

Fees Other emoluments Contributions to retirement schemes	Group 2002 2001 HK$’000 HK$’000 1,042 780 4,505 2,818 112 90 5,659 3,688	Group 2002 2001 HK$’000 HK$’000 1,042 780 4,505 2,818 112 90 5,659 3,688
		3,688

Directors’ fees include HK$453,000 (2001: HK$280,000) payable to independent non-executive directors during the year. No other emoluments (2001: Nil) are payable to independent non-executive directors.

During the year, no share options were granted to directors under the Company’s Share Option Scheme (2001:41,000,000 shares options granted to a total of 6 directors). Each of the existing share options entitles the holder to subscribe for one ordinary shar e of HK$0.1 each in the Company at the subscription price of HK$0.1491. During the year and up to the date of this report, 6,500,000 share options had been exercised by the directors (2001: Nil).

There were no arrangements under which a director waived or agreed to waive any emolument in respect of the years ended 31st March 2002 and 2001.

Emoluments of the directors fell within the following bands:

HK$Nil to HK$1,000,000 HK$1,000,001 to HK$1,500,000 HK$1,500,001 to HK$2,000,000	Group 2002 2001 Number of Number of directors directors 14 9 – 1 1 – 15 10	Group 2002 2001 Number of Number of directors directors 14 9 – 1 1 – 15 10
		10

– 62 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

(b) Five highest paid individuals

Of the five individuals with the highest emoluments in the Group, two directors (2001: one) of the company whose emoluments have been included in note 11(a) above. The emoluments of the remaining three (2001: four) individual are as follows:


	2002	2001
	HK$’000	HK$’000
Salaries and other benefits	3,476	4,179
Contributions to retirement schemes	174	211
	3,650	4,390

Emoluments of the highest paid individuals fell within the following bands:

HK$Nil to HK$1,000,000 HK$1,000,001 to HK$1,500,000 HK$1,500,001 to HK$2,000,000	Group 2002 2001 Number of Number of individuals individuals 2 3 – 1 1 – 3 4	Group 2002 2001 Number of Number of individuals individuals 2 3 – 1 1 – 3 4
		4

12. RETIREMENT BENEFIT COSTS

Before 1st December 2000, the Group contributed to a defined contribution retirement scheme in Hong Kong. The scheme was converted to a Mandatory Provident Fund scheme (“MPF scheme”) on 1st December 2000. Contributions by the Group to both the previous retirement scheme and the MPF scheme are calculated at 5% of employees’ basic salaries. The assets of the two schemes were held separately from those of the Group in an independently administered fund.

The Group’s subsidiaries in the PRC participate in defined contribution schemes managed by the PRC local governments. Contributions are made at 22% of the employee’s basic salaries.

For the year ended 31st March 2002, contributions totalling HK$2,276,000 (2001: HK$697,000) were paid by the Group.

– 63 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

13. INTANGIBLE ASSETS

Cost 1st April 2001 and 31st March 2002 Accumulated amortisation 1st April 2001 Amortisation for the year Impairment loss 31st March 2002 Net book value 31st March 2002 31st March 2001	Group HK$’000 519,999
	78,000 13,000 428,999
	519,999 –
	441,999

(a) In 1998, the Group entered into an agreement with Trade Sense International Limited, a company incorporated in the British Virgin Islands with limited liability, a wholly-owned subsidiary of China Huatong Distribution & Industry Development Corp. (“China Huatong”), a state-owned enterprise incorporated in Beijing, the PRC under which the Group acquired a 75% interest in the issued share capital of Galaxy Gain Limited (“Galaxy”). Galaxy’s wholly-owned subsidiary, OceanLand Heat Supply Limited (“Ocean-Land Heat”), was appointed under an agreement for the provision of technical services relating to the supply, installation and management of heating systems to Huatong Heat Energy Technique Company Limited (“Huatong Heat”) in the Mainland China on an exclusive basis (“Heat Supply Project”). Huatong Heat was to pay Ocean-Land Heat an annual fee, calculated in accordance with the total areas of heating systems to be installed by Huatong Heat plus a 55% share of its net profit after tax, for a minimum period of 20 years. The principal asset acquired by the Group was effectively an intangible asset which represents the fair value of future distributions. The consideration for the acquisition was capitalised and amortised over the minimum useful life of the asset of 20 years.

Pursuant to guarantee letters provided by China Huatong, the holding company of Huatong Heat, the Group is entitled to receive minimum income of HK$25,000,000, HK$58,000,000 million, HK$35,000,000 and HK$40,000,000 for the first four years of the Heat Supply Project respectively, commencing from the year ended 31st March 1999. The Company received HK$118,000,000 from Huatong Group Holdings Limited and Proficient Company Limited for the three years ended 31st March 2001. It appears, however, that HK$114,000,000 relating thereto was paid out of the Group shortly after receipt.

(b) The guaranteed minimum income of HK$40,000,000 for the year ended 31st March 2002 in respect of the Heat Supply Project has yet to be received by the Group. The Board has decided not to recognise the guaranteed minimum income of HK$40,000,000 relating to the year ended 31st March 2002 for the sake of prudence. The Company has received a letter dated 6th August 2002 from China Huatong that it has not paid any “guaranteed income” to the Group and it is not capable to honour its commitment. Huatong Heat also alleges that Ocean-Land Heat has not honoured its obligations to provide technical services etc. under the agreement referred to in (a) above and hence, is not entitled to payment or share of profit under that agreement. On the basis of the available information, the Group decided to make a full provision in respect of the intangible asset to reduce its carrying value to zero. The Board appointed Deloitte Touche Tohmatsu on 22nd July 2002 to investigate into this matter and will take all necessary actions to recover the loss incurred by the Group from this transaction.

– 64 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

14. INVESTMENT PROPERTIES

1st April 2001/2000 Disposals Revaluation deficit/impairment loss Exchange adjustments 31st March 2002/2001 Analysed by lease term and geographical location: Medium term leasehold properties situated in Hong Kong Long term leasehold properties situated in Hong Kong Long term leasehold properties situated outside Hong Kong	Group 2002 2001 HK$’000 HK$’000 410,364 487,632 – (7,144 (180,559) (70,634 716 510 230,521 410,364 150,500 235,900 19,100 20,180 60,921 154,284 230,521 410,364	Group 2002 2001 HK$’000 HK$’000 410,364 487,632 – (7,144 (180,559) (70,634 716 510 230,521 410,364 150,500 235,900 19,100 20,180 60,921 154,284 230,521 410,364
		410,364
		235,900 20,180 154,284
		410,364

The investment properties were revalued on the basis of their open market value at 15 and 31st March 2002 by David C. Lee Surveyors Ltd, a firm of independent professional valuers. Investment properties in Hong Kong and overseas with an aggregate carrying value of HK$169,600,000 and HK$3,929,000 (2001: HK$256,080,000 and HK$5,025,000) respectively have been pledged as securities for the Group’s bank loans and facilities. Subsequent to 31st March 2002, investment properties in Hong Kong with an aggregate carrying value of HK$89,600,000 were disposed of and the sales proceeds were used in part to settle the Group’s secured bank loans and the remaining portion as the Group’s general working capital.

15. PROPERTY UNDER DEVELOPMENT

1st April 2001/2000 Exchange adjustments Interest capitalised_(note 7)_ Development cost incurred Impairment loss 31st March 2002/2001	Group 2002 2001 HK$’000 HK$’000 40,683 30,139 80 – 39 166 667 10,378 (41,469) – – 40,683	Group 2002 2001 HK$’000 HK$’000 40,683 30,139 80 – 39 166 667 10,378 (41,469) – – 40,683
		40,683

Property under development relates to the Waterfront Project in Panyu, PRC. The Waterfront Project constitutes a part of property no. 1 in the valuation report. Due to the severe problems experienced by the Group, the directors decided to suspend the development of the project and to make full provision against all costs incurred up to the balance sheet date.

The property under development is held under a lease of over 50 years in the PRC. The land at a cost of HK$10,614,000 (2001: HK$10,614,000) has been pledged as security for the Group’s bank loans and facilities.

– 65 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

16. PROPERTIES, PLANT AND EQUIPMENT

			Group	Group
		Leasehold		Furniture
	Land use	land and	Plant and	and	Motor
	rights	buildings	machinery	equipment	vehicles	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Cost
1st April 2001	–	3,937	–	16,761	3,730	24,428
Exchange adjustments	–	8	–	5	1	14
Acquisition of subsidiaries	2,058	75,992	78,126	934	6,605	163,715
Additions	–	244	–	322	–	566
Disposals	–	–	–	(1,342)	–	(1,342)
31st March 2002	2,058	80,181	78,126	16,680	10,336	187,381
Accumulated depreciation
1st April 2001	–	321	–	4,957	3,120	8,398
Exchange adjustments	–	–	–	3	1	4
Acquisition of subsidiaries	1,603	22,574	49,982	654	3,937	78,750
Charge for the year	25	1,121	1,639	2,345	758	5,888
Impairment loss	430	1,885	2,565	6,798	2,421	14,099
On disposals	–	–	–	(385)	–	(385)
31st March 2002	2,058	25,901	54,186	14,372	10,237	106,754
Net book value
31st March 2002	–	54,280	23,940	2,308	99	80,627
31st March 2001	–	3,616	–	11,804	610	16,030

The leasehold land and buildings are situated outside Hong Kong and are held under long term leases. Certain leasehold land and buildings with an aggregate net book value of HK$50,722,000 and the plant and machinery (2001: Nil) have been pledged as security for the Group’s bank loans.

	Company Furniture
	and equipment
	HK$’000
Cost
1st April 2001 and 31st March 2002	353
Accumulated depreciation
1st April 2001	164
Charge for the year	28
31st March 2002	192
Net book value
31st March 2002	161
31st March 2001	189

– 66 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

17. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Less: Provisions for impairment loss Due from subsidiaries Less: Provision for doubtful receivables Due to subsidiaries	Company 2002 2001 HK$’000 HK$’000 1,001 1,001 (1,000) (1,000 1 1 1,853,808 1,838,926 (1,615,519) (399,963 238,289 1,438,963 (119,549) (95,986 118,741 1,342,978	Company 2002 2001 HK$’000 HK$’000 1,001 1,001 (1,000) (1,000 1 1 1,853,808 1,838,926 (1,615,519) (399,963 238,289 1,438,963 (119,549) (95,986 118,741 1,342,978
		1
		1,838,926 (399,963
		1,438,963
		(95,986
		1,342,978

Balances with subsidiaries are unsecured, interest-free and have no fixed terms of repayment.

Particulars of the principal subsidiaries are as follows:

		Total paid-up
	Place of	and issued		Equity
	incorporation/	ordinary share/	interest owned		Principal
Company	registration	registered capital	by	the Group	activities
			2002	2001
			%	%
Directly held:
Asset Operation and	British Virgin	1 ordinary share of	100	100	Investment
Management Limited*	Islands	US$1 each			holding
Beasley International	Bahamas	2 ordinary shares of	100	100	Investment
Limited*		US$1 each			holding
Digital Sun Holdings	British Virgin	1 ordinary share of	100	100	Investment
Limited*	Islands	US$1 each			holding
Fenugreek International	British Virgin	1 ordinary share of	100	100	Investment
Limited*	Islands	US$1 each			holding
Galactic Investment	Hong Kong	2 ordinary shares of	100	100	Investment
Limited		HK$1 each			holding
Meryton Enterprises	British Virgin	1 ordinary share of	100	100	Investment
Limited*	Islands	US$1 each			holding
Ocean-Land (China	Hong Kong	1,000,000 ordinary	100	100	Investment
Investments) Limited*		shares of HK$1 each			holding
Ocean-Land Sports	British Virgin	100 ordinary shares	100	100	Investment
Holding Limited	Islands	of US$1 each			holding
Rich Access Limited*	British Virgin	1 ordinary share	100	100	Investment
	Islands	of US$1 each			holding

– 67 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

		Total paid-up
	Place of	and issued		Equity
	incorporation/	ordinary share/	interest owned		Principal
Company	registration	registered capital	by	the Group	activities
			2002	2001
			%	%
Indirectly held:
�� !"#$%	People’s Republic	US$400,000	70	70	Software
�� !*	of China				development
�� !"#$%	People’s Republic	US$600,000	70	70	Provision of
�� !*	of China				Internet service
Boxhill Limited*	British Virgin	1 ordinary share	100	100	Investment
	Islands	of US$1 each			holding
Caesar Assets Limited*	British Virgin	100 ordinary shares	70	70	Investment
	Islands	of US$1 each			holding
China-eDN.com Limited	Hong Kong	10,000,000 ordinary	70	70	Trading
		shares of HK$1 each
Chinaserve.com Inc.*	U.S.A.	500,000 ordinary shares	70	70	Software
		of US$2 each			development
Evolve Limited	Hong Kong	500 ordinary shares	100	100	Property
		of HK$10 each			investment
Galawell Development	Hong Kong	20,000 ordinary shares	88.24	65.22	Investment
Limited		of HK$1 each			holding
Galaxy Gain Limited*	British Virgin	100 ordinary shares	75	75	Investment
	Islands	of US$1 each			holding
Hong Kong Car Park	Hong Kong	500,000 ordinary shares	100	100	Property
Limited*		of HK$10 each			investment
Nardu Company Limited	Hong Kong	1,000,000 ordinary	45	47.5	Investment
		shares of HK$10 each			holding
Ocean-Land Estate Agents	Hong Kong	2 ordinary shares	100	100	Land and
Limited		of HK$100 each			estate agents
Ocean-Land Heat Supply	Hong Kong	100 ordinary shares	75	75	Provision of
Limited		of HK$100 each			heat supply
					technical
					services in PRC
Ocean-Land Sports (H.K.)	Hong Kong	2 ordinary shares	100	100	Trading
Limited		of HK$1 each
Ocean-Land Trading	Hong Kong	2 ordinary shares	100	100	Investment
Limited		of HK$1 each			holding
Panyu Lucky Rich	People’s Republic	RMB 30,000,000	45	47.5	Property
Real-Estates	of China				development
Development
Limited*

– 68 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

		Total paid-up
	Place of	and issued		Equity
	incorporation/	ordinary share/	interest owned		Principal
Company	registration	registered capital	by	the Group	activities
			2002	2001
			%	%
Indirectly held: (continued)
Price Sales Limited*	Hong Kong	10,000 ordinary shares	100	100	Investment
		of HK$1 each			holding
Sea-Land Mining Limited*	Hong Kong	1,000,000 ordinary	100	50	Investment
		shares of HK$10 each			holding
Shine Ocean Limited*	Hong Kong	2 ordinary shares	100	100	Investment
		of HK$1 each			holding
Suzhou Nanda Cement	People’s Republic	RMB 101,262,000	71.03	35.52	Manufacture
Company Limited	of China				of cement
Tat Yeung Investments	Hong Kong	10,100 ordinary shares	100	50	Investment
Limited*		of HK$100 each and			holding
		10,100 non-voting
		deferred shares
		of HK$100 each
Winner Artificial Flowers	Hong Kong	4,000 ordinary shares	100	100	Property
Limited		of HK$100 each			investment
World Asia Properties	Hong Kong	2 ordinary shares	100	100	Property
Limited		of HK$1 each			investment

Subsidiaries not audited by Moore Stephens.

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results of 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.

All principal subsidiaries operate in their respective places of incorporation/registration, except for those subsidiaries incorporated in the British Virgin Islands and Bahamas, the operation of which are in Hong Kong.

18. INTERESTS IN ASSOCIATES

Share of net assets, including goodwill Loans to and amounts due from associates Less: Provision for doubtful receivables Loans from associates	Group 2002 2001 HK$’000 HK$’000 – 34,079 198,631 401,075 (664) (48,005 197,967 353,070 – (90,278 197,967 296,871	Group 2002 2001 HK$’000 HK$’000 – 34,079 198,631 401,075 (664) (48,005 197,967 353,070 – (90,278 197,967 296,871
		401,075 (48,005
		353,070
		(90,278
		296,871

The loans to and amounts due from associates and loans from associates are unsecured, interest-free and have no fixed terms of repayment, except for a loan of HK$84,553,000 from an associate in 2001 which carried interest at commercial rates.

– 69 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

Particulars of the Group’s associate at the balance sheet date are as follows:

		Place of		Equity
	Class of	incorporation/	interest owned		Principal
Company	shares held	operation	by	the Group	activities
			2002	2001
Goodwill (Overseas)	Ordinary	British Virgin Islands	32%	32%	Investment
Limited					holding

Goodwill (Overseas) Limited has lent HK$614,000,000 to a company called Kingdom Land Investment & Development Co. Limited (“Kingdom Land”), which is incorporated in the Macau Special Administrative Region. Kingdom Land has a 95% interest in Shanghai Xing Tai Real Estate Development Incorporation Limited (“Xing Tai”), which is incorporated in the PRC. Xing Tai holds a 100% interest in Shanghai East Ocean Centre (Shanghai East) Phase II. The financial statements of Xing Tai have been audited by PRC auditors whose report was unqualified. At 31st October 2002, the property was valued at US$92,800,000 (approximately HK$723,840,000) by American Appraisal Hongkong Limited.

The Group’s investment in associate has been pledged to secure other loans of HK$15,000,000 (see also note 24).

On 28th January 2002, the Group disposed of its 35% interest in Success Project Investments Ltd., which holds a 52% interest in an investment company that owns Shilu International Shopping Centre in Suzhou, PRC for HK$15,000,000. The Group has an option to repurchase the investment before the end of 2002 at HK$15,000,000, plus interest at 10% per annum thereon.

Supplementary financial information relating to the Group’s associate as required under SSAP 10 “Accounting for investments in associates” is as follows:

Long term investments Current assets Due from investee companies Other current assets Current liabilities Other accounts payable Net current assets Non-current liabilities Shareholders’ loans Net (liabilities)/assets Group’s share of net (liabilities)/assets	Group 2002 2001 HK$’000 HK$’000 (unaudited) (unaudited) 614,265 884,910 – 70,417 726 99,339 726 169,756 (561) (79,361 165 90,395 (616,505) (973,329 (2,075) 1,976 (664) 882	Group 2002 2001 HK$’000 HK$’000 (unaudited) (unaudited) 614,265 884,910 – 70,417 726 99,339 726 169,756 (561) (79,361 165 90,395 (616,505) (973,329 (2,075) 1,976 (664) 882
		169,756 (79,361
		90,395 (973,329
		1,976
		882

In the Company’s balance sheet, the loan to an associate of HK$530,000 is interest-free and carries no fixed terms for repayment.

– 70 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

19. INVENTORIES

Raw materials Finished goods Less: Provision	Group 2002 2001 HK$’000 HK$’000 4,513 – 13,686 24,225 18,199 24,225 (15,199) (3,870) 3,000 20,355	Group 2002 2001 HK$’000 HK$’000 4,513 – 13,686 24,225 18,199 24,225 (15,199) (3,870) 3,000 20,355
		24,225 (3,870)
		20,355

20. TRADE AND OTHER RECEIVABLES

Note Due from a related company Trade receivables (a) Prepayments and deposits (b) Other receivables (c)	Group 2002 2001 HK$’000 HK$’000 – 35,000 18,123 67,962 6,343 219,176 16,457 359,259 40,923 681,397	Group 2002 2001 HK$’000 HK$’000 – 35,000 18,123 67,962 6,343 219,176 16,457 359,259 40,923 681,397
		681,397

(a) Trade receivables

The Group conducts its business by accepting letters of credit fr om customers and allowing certain credit period to its customers. The Group allows an average credit period of 60 days to its trade customers on open account credit terms. The ageing analysis of the trade receivables at 31st March 2002 is as follows:

Current One to three months Over three months (b) Prepayments and deposits Prepayments and deposits Less: Provision	Group 2002 2001 HK$’000 HK$’000 15,651 21,092 1,696 11,174 776 35,696 18,123 67,962 Group 2002 2001 HK$’000 HK$’000 239,000 219,176 (232,657) – 6,343 219,176	Group 2002 2001 HK$’000 HK$’000 15,651 21,092 1,696 11,174 776 35,696 18,123 67,962 Group 2002 2001 HK$’000 HK$’000 239,000 219,176 (232,657) – 6,343 219,176
		219,176

Included in prepayments and deposits is a deposit of HK$200,000,000 (2001: HK$200,000,000) paid by the Company to Sharp Class International Limited (“Sharp Class”), a company incorporated in the British Virgin Islands, as collection agent, pursuant to the terms of a memorandum of understanding dated 28th February 2000 (the “MOU”) made between the Company and China National Container Corporation (“CNCC”), an independent third party, incorporated in the PRC. As a result of the payment of this amount (“the earnest money”), the Company had the exclusive right to enter into negotiation with CNCC for the acquisition of a substantial stake in a logistics and distribution network joint venture in the PRC (“the CNCC Acquisition”).

– 71 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

The completion of the CNCC Acquisition pursuant to the terms of an agreement dated 19th February 2001 was conditional upon fulfilment of certain conditions which include obtaining the approval from the relevant authorities and finalising of certain legal procedures in the PRC. The completion date of the acquisition was originally scheduled to take place on 2nd May 2001 and it was extended six times until 31st March 2002. Since the conditions were not fulfilled by CNCC by 31st March 2002, the directors terminated the transaction on 2nd April 2002 and demanded refund of the earnest money and the related interest at 7% per annum.

Also included in prepayments and deposits are interest receivable on the earnest money of HK$14,000,000 (2001: HK$14,000,000), a temporary advance of HK$13,000,000 (2001: HK$Nil) made to Epoch Development Holdings Limited (a related company of CNCC) and deferred expenses of HK$5,657,000 (2001: HK$4,830,000).

The Company has on 1st August 2002 received a letter from CNCC stating that it has not received the earnest money of HK$200,000,000 paid by the Group in March 2000 nor has CNCC authorised any person to receive such sum from the Group. After careful considera tion, the directors decided to make a full provision of HK$232,657,000, including the earnest money of HK$200,000,000 paid to Sharp Class pursuant to the MOU, an advance of HK$13,000,000 to Epoch Development Holdings Limited, interest income accrued on the earnest money of HK$14,000,000 for the year ended 31st March 2001 and deferred expenses of HK$5,657,000.

Deloitte & Touche Corporate Finance Limited (“DTCF”) submitted its limited review re port dated 5th August 2002 on the CNCC Acquisition to the directors for review. The directors have instructed the legal advisers to the Group to take legal actions to recover the earnest money of HK$200,000,000 together with the interest accrued thereon and the advance of HK$13,000,000 to Epoch Development Holdings Limited.

(c) Other receivables

Other receivables Less: Provision	Group 2002 2001 HK$’000 HK$’000 407,705 375,081 (391,248) (15,822) 16,457 359,259	Group 2002 2001 HK$’000 HK$’000 407,705 375,081 (391,248) (15,822) 16,457 359,259
		359,259

Included in other receivables is a total sum of HK$358,445,000 paid to Sharp Class (the “Receivable”) out of the settlement in July 2001 of other receivables carried forward from 31st March 2001. In view of the lack of satisfactory documentation and adequate evidence to substantiate the nature, existence, substance and recoverability of the Receivable, the directors decided to make a full provision in respect of the Receivable in the financial statements. DTCF submitted its limited review report dated 5th August 2002 on the Receivable to the Company for review. On 7th September 2002, the Group commenced legal actions against Sharp Class and Mr. Lo Chu Kong, the former chief executive officer and one of the authorised bank signatories of China-eDN.com Limited, a 70% subsidiary of the Company, which made the payments totalling HK308,445,000 to Sharp Class. On 4th November 2002, the Group also commenced legal actions against Sharp Class, Mr. Yuen Wai (the former Chairman of the Company) and Mr. Chung Ho (formerly an executive director and currently a non-executive director of the Company) for the recovery of HK$50,000,000 advanced to Sharp Class.

Other receivable of HK$11,700,000 has been pledged for other loan of HK$15,000,000 (see also note 24).

– 72 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

21. BANK DEPOSITS, CASH AND BANK BALANCES

(a) Pledged bank deposits

At 31st March 2001, bank deposits of HK$4,000,000 had been pledged as security for the Group’s bank loans and facilities.

(b) Cash and bank balances

Included in cash and bank balances is an equivalent amount of HK$2,339,000 (2001: HK$3,635,000) which represents cash and bank balances denominated in Reminbi. Reminbi is not a freely convertible currency.

22. TRADE AND OTHER PAYABLES

Trade payables Deposits received, other payables and accruals	Group 2002 2001 HK$’000 HK$’000 26,557 64,275 86,671 57,385 113,228 121,660	Group 2002 2001 HK$’000 HK$’000 26,557 64,275 86,671 57,385 113,228 121,660
		121,660

The ageing analysis of the trade payables at 31st March 2002 is as follows:


	2002	2001
	HK$’000	HK$’000
Current	6,114	16,050
One to three months	517	12,720
Over three months	19,926	35,505
	26,557	64,275

23. BANK LOANS, SECURED

Bank loans were repayable as follows: Within one year In the second year In the third to fifth years inclusive Beyond the fifth year Current portion of bank loans	Group 2002 2001 HK$’000 HK$’000 136,323 108,069 – 10,217 – 8,166 – 2,622 136,323 129,074 (136,323) (108,069 – 21,005	Group 2002 2001 HK$’000 HK$’000 136,323 108,069 – 10,217 – 8,166 – 2,622 136,323 129,074 (136,323) (108,069 – 21,005
		129,074 (108,069
		21,005

For details of securities, please refer to notes 14, 15 and 16 to the financial statements.

Subsequent to 31st March 2002, approximately HK$71,000,000 of the bank loans have been repaid.

– 73 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

24. OTHER LOANS


	2002	2001
	HK$’000	HK$’000
Other loans are repayable as follows:
Within one year	18,896	–
In the second to fifth years	51,111	–
	70,007	–
Current portion of other loans	(18,896)	–
	51,111	–

Other loans in the amount of HK$15,000,000 is secured against the Group’s investment in associate and other receivable of HK$11,700,000, and it carries interest at 10% per annum.

The remaining other loans are unsecured and interest-free.

25. DEFERRED TAX

The Group’s net deferred tax liability/(asset) not recognised in the financial statements is as follows:

Accelerated capital allowances Tax losses	Group Not provided 2002 2001 HK$’000 HK$’000 360 436 (15,238) (13,805) (14,878) (13,369)	Group Not provided 2002 2001 HK$’000 HK$’000 360 436 (15,238) (13,805) (14,878) (13,369)
		(13,369)

The revaluation of the Group’s investment properties and land and buildings does not constitute a timing difference and, consequently, the amount of potential deferred tax thereon has not been quantified.

26. LOANS FROM MINORITY SHAREHOLDERS OF SUBSIDIARIES

Loans from minority shareholders of subsidiaries are unsecured, interest-free and they are not repayable in the next twelve months.

27. SHARE CAPITAL

	Ordinary shares
	of HK$0.1 each
	Number of shares	Amount
	’000	HK$’000
Authorised
At 31st March 2002 and 31st March 2001	5,000,000	500,000
Issued and fully paid
At 1st April 2001	1,456,855	145,685
Exercise of options	6,850	685
At 31st March 2002	1,463,705	146,370

– 74 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

(a) Increase in issued and paid-up capital

During the year, the following changes in the Company’s share capital took place:

(i) On 8th August 2001, the subscription rights attaching to 6,500,000 share options were exercised at the subscription price of HK$0.1491 per share, resulting in the issue of 6,500,000 shares of HK$0.1 each for a total cash consideration, before expenses, of HK$969,000.
(ii) On 29th October 2001, the subscription rights attaching to 350,000 share options were exercised at the subscription price of HK$0.1491 per share, resulting in the issue of 350,000 shares of HK$0.1 eac h for a total cash considera tion, before expenses, of HK$52,000.

All the shares issued by the Company during the year rank pari passu with the then existing shares in issue in all respects.

(b) Bonus warrants

Pursuant to a resolution passed at the Extraordinary General Meeting of the Company on 10th May 1999 (“record date”), a bonus issue of 182,571,000 warrants on the basis of one warrant for every five shares held as at the record date was made. Each warrant entitled the holders to subscribe in cash for shares of HK$0.10 each at the subscription price of HK$0.42, subject to adjustment, at any time from 10th May 1999 to 9th May 2001. 112,634,800 warrants were outstanding at 31st March 2001 and such warrants expired on 10th May 2001.

(c) Share options

The Company adopted a share option scheme (the “Scheme”) at the Annual General Meeting held on 22nd September 1998 under which the directors may, at their discretion, grant options to directors and employees of the Company and its subsidiaries to subscribe for shares in the Company. The maximum number of shares issued upon exercise of options granted under the Scheme shall not exceed 10% of the share capital of the Company in issue from time to time (excluding the shares issued upon exercise of options granted pursuant to the Scheme). The Scheme will remain in force for a period of ten years from 22nd September 1998 to 21st September 2008.

Pursuant to a resolution of the directors passed on 15th July 1999, share options entitling the holders to subscribe for 47,250,000 shares at the price of HK$0.8432 per share during the two years from 16th January 2000 to 15th January 2002 were granted under the Scheme. These share options lapsed during the year.

Pursuant to a resolution of the directors passed on 30th March 2001, share options entitling the holders to subscribe at the price of HK$0.1491 per share for 21,225,000 shares, 32,325,000 shares and 11,100,000 shares within the three years commencing from 1st July 2001, 1st October 2001 and 31st March 2002 respectively were granted under the Scheme. A total of 6,850,000 share options were exercised and 16,700,000 share options lapsed during the year. At 31st March 2002, a total of 41,100,000 share options were outstanding.

In accordance with the provisions of the Scheme, share options will be lapsed upon the grantee ceasing to be an employee (including a director) of the Company after one month following the date of such cessation.

– 75 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

28. RESERVES

Group

	Investment				Retained
	properties			Capital	profits/
	revaluation	Exchange	General	redemption	(accumulated	Share
	reserve	reserve	reserve	reserve	losses)	premium	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
1st April 2000
– as previously stated	70,732	767	44,942	402	610,359	654,049	1,381,251
– effect of adopting SSAP9
(revised)(note 2b(i))	–	–	–	–	5,827	–	5,827
– as restated	70,732	767	44,942	402	616,186	654,049	1,387,078
Loss attributable to shareholders	–	–	–	–	(14,774 )	–	(14,774)
2000 final dividend paid	–	–	–	–	(5,827 )	–	(5,827)
Goodwill on acquisition of subsidiaries	–	–	–	–	(301,847 )	–	(301,847)
Goodwill on acquisition of further
interest in an associate	–	–	–	–	(562 )	–	(562)
Deficit on revaluation	(70,634)	–	–	–	–	–	(70,634)
Disposal of investment properties	2,836	–	–	–	–	–	2,836
Exchange differences	–	(24 )	–	–	–	–	(24)
Issue of new shares	–	–	–	–	–	3	3
31st March 2001	2,934	743	44,942	402	293,176	654,052	996,249
Loss attributable to shareholders	–	–	–	–	(1,395,038 )	–	(1,395,038)
Issue of new shares upon
exercise of options	–	–	–	–	–	336	336
Share issue expenses	–	–	–	–	–	(1)	(1)
Disposal of associates	–	(333 )	–	–	–	–	(333)
Transfer	–	–	(44,942 )	–	44,942	–	–
Deficit on revaluation	(2,934)	–	–	–	–	–	(2,934)
31st March 2002	–	410	–	402	(1,056,920 )	654,387	(401,721)

Company

				Retained
			Capital	profits/	Share
	General		redemption	(accumulated	premium
	reserve		reserve	losses)	account	Total
	HK$’000		HK$’000	HK$’000	HK$’000	HK$’000
1st April 2000	44,942		402	630,165	654,049	1,329,558
Loss for the year	–		–	(220,314)	–	(220,314 )
Issue of new shares	–		–	–	3	3
31st March 2001 and 1st April 2001	44,942		402	409,851	654,052	1,109,247
Loss for the year	–		–	(1,453,686)	–	(1,453,686)
Issue of new shares upon exercise
of options	–		–	–	336	336
Share issue expenses		–	–	–	(1)	(1)
Transfer	(44,942)		–	44,942	–	–
31st March 2002	–		402	(998,893)	654,387	(344,104 )

– 76 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

29. MANDATORY CONVERTIBLE NOTE

The mandatory convertible note (“Note”) is redeemable at the Company’s option at par value before its maturity. Any principal amount of the Note outstanding on maturity will be mandatorily converted into shares of the Company at a conversion rate of HK$1.40 per share. The Note currently dated 27th April 2001 was issued to United City Trading Limited (“United City”). The maturity date of the Note was extended from 27th April 2001 to 27th April 2002 by an ordinary resolution passed at the extraordinary general meeting of the Company held on 5th June 2001. At the time of the extension of the maturity date, the Company was advised that United City was wholly owned b y Huatong Group Holdings Limited (“Huatong”). On 23rd April 2002, Huatong brought to the notice of the Company that the ownership of United City is subject to dispute and demanded in writing on 26th April 2002 that the Company withheld allotting and issuing the conversion shares to United City, failing which the Company would be held responsible for Huatong’s losses and damages. On 29th April 2002, however, United City instructed the Company to allot and issue the conversion shares to a third party. The Company has withheld the allotment and issuance of the conversion shares pending resolution of such dispute.

30. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a) Reconciliation of loss before tax to net cash outflow from operating activities

Loss before tax Interest income Interest expense Share of losses/ (profits) of associates Amortisation of intangible assets Depreciation Impairment of intangible assets Impairment/revaluation deficit of intangible assets Loss on disposal of associates/ an associate Loss on disposal of investment properties Loss on disposal of properties, plant and equipment, net Gain on disposal of other investments Provision for advance to investee companies Provision for CNCC Acquisition Provision for doubtful receivables Provision for inventories Provision for loans to associates Provision for other investments in securities Provision for loans to associates written back Decrease/(increase) in inventories Decrease/(increase) in trade and other receivables Decrease in amount due from a related company (Decrease)/increase in trade and other payables Exchange difference Net cash outflow from operating activities	Group 2002 2001 HK$’000 HK$’000 (1,389,636) (12,924) (154) (43,409) 14,072 10,958 6,980 (7,225) 13,000 26,000 5,888 2,794 428,999 – 233,193 – – 2,213 – 2,338 947 4,274 (59) – – 1,428 232,657 – 391,248 – 11,329 – 148 – 283 96 – (10,990) 11,747 (4,770) 21,528 (207,185) 35,000 23,000 (28,795) 54,550 (806) (477) (12,431) (159,329)	Group 2002 2001 HK$’000 HK$’000 (1,389,636) (12,924) (154) (43,409) 14,072 10,958 6,980 (7,225) 13,000 26,000 5,888 2,794 428,999 – 233,193 – – 2,213 – 2,338 947 4,274 (59) – – 1,428 232,657 – 391,248 – 11,329 – 148 – 283 96 – (10,990) 11,747 (4,770) 21,528 (207,185) 35,000 23,000 (28,795) 54,550 (806) (477) (12,431) (159,329)
		(159,329)

– 77 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

(b) Acquisition of subsidiaries

Group 2002 2001 HK$’000 HK$’000 Net (liabilities)/assets acquired: Properties, plant and equipment 84,965 214 Inventories 5,721 – Trade and other receivables 67,452 11,368 Other investments in securities 283 – Cash and bank balances 7,646 9,117 Trade and other payables (20,363) – bank loans, secured (19,987) (13,119 125,717 7,580 Minority interests (34,276) (2,827 Goodwill – 301,847 91,441 306,600 Non-cash consideration (see note 30(d) below) 91,441 306,600 Net cash inflow in respect of acquisition of subsidiaries Cash and bank balances acquired 7,646 9,117 (c) Analysis of changes in financing during the year Share capital Loans from (including Pledged minority Mandatory share Bank bank Other shareholders convertible Minority premium) loans deposits loans of subsidiaries note Interests HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 1st April 2000 799,734 118,392 – – 163,222 – 20,418 Acquisition of subsidiaries – – – – – 306,600 2,827 Share of profits by minority interests – – – – – – 2,127 Other movement – – – – – – 48 Cash inflows from financing 3 35,082 – – 279 – – Cash outflows from financing – (24,400 ) (4,000 ) – – – – 31st March 2001 and 1st April 2001 799,737 129,074 (4,000 ) – 163,501 306,600 25,420 Acquisition of subsidiaries – 19,987 – – – – 34,276 Share of profits by minority interests – – – – – – 4,875 Transfer – – – 51,111 (51,111 ) – – Cash inflows from financing 1,020 – 4,000 18,896 542 – – Cash outflow from financing – (12,738 ) – – – – – 31st March 2002 800,757 136,323 – 70,007 112,932 306,600 64,571	Group 2002 2001 HK$’000 HK$’000 Net (liabilities)/assets acquired: Properties, plant and equipment 84,965 214 Inventories 5,721 – Trade and other receivables 67,452 11,368 Other investments in securities 283 – Cash and bank balances 7,646 9,117 Trade and other payables (20,363) – bank loans, secured (19,987) (13,119 125,717 7,580 Minority interests (34,276) (2,827 Goodwill – 301,847 91,441 306,600 Non-cash consideration (see note 30(d) below) 91,441 306,600 Net cash inflow in respect of acquisition of subsidiaries Cash and bank balances acquired 7,646 9,117 (c) Analysis of changes in financing during the year Share capital Loans from (including Pledged minority Mandatory share Bank bank Other shareholders convertible Minority premium) loans deposits loans of subsidiaries note Interests HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 1st April 2000 799,734 118,392 – – 163,222 – 20,418 Acquisition of subsidiaries – – – – – 306,600 2,827 Share of profits by minority interests – – – – – – 2,127 Other movement – – – – – – 48 Cash inflows from financing 3 35,082 – – 279 – – Cash outflows from financing – (24,400 ) (4,000 ) – – – – 31st March 2001 and 1st April 2001 799,737 129,074 (4,000 ) – 163,501 306,600 25,420 Acquisition of subsidiaries – 19,987 – – – – 34,276 Share of profits by minority interests – – – – – – 4,875 Transfer – – – 51,111 (51,111 ) – – Cash inflows from financing 1,020 – 4,000 18,896 542 – – Cash outflow from financing – (12,738 ) – – – – – 31st March 2002 800,757 136,323 – 70,007 112,932 306,600 64,571	Group 2002 2001 HK$’000 HK$’000 Net (liabilities)/assets acquired: Properties, plant and equipment 84,965 214 Inventories 5,721 – Trade and other receivables 67,452 11,368 Other investments in securities 283 – Cash and bank balances 7,646 9,117 Trade and other payables (20,363) – bank loans, secured (19,987) (13,119 125,717 7,580 Minority interests (34,276) (2,827 Goodwill – 301,847 91,441 306,600 Non-cash consideration (see note 30(d) below) 91,441 306,600 Net cash inflow in respect of acquisition of subsidiaries Cash and bank balances acquired 7,646 9,117 (c) Analysis of changes in financing during the year Share capital Loans from (including Pledged minority Mandatory share Bank bank Other shareholders convertible Minority premium) loans deposits loans of subsidiaries note Interests HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 1st April 2000 799,734 118,392 – – 163,222 – 20,418 Acquisition of subsidiaries – – – – – 306,600 2,827 Share of profits by minority interests – – – – – – 2,127 Other movement – – – – – – 48 Cash inflows from financing 3 35,082 – – 279 – – Cash outflows from financing – (24,400 ) (4,000 ) – – – – 31st March 2001 and 1st April 2001 799,737 129,074 (4,000 ) – 163,501 306,600 25,420 Acquisition of subsidiaries – 19,987 – – – – 34,276 Share of profits by minority interests – – – – – – 4,875 Transfer – – – 51,111 (51,111 ) – – Cash inflows from financing 1,020 – 4,000 18,896 542 – – Cash outflow from financing – (12,738 ) – – – – – 31st March 2002 800,757 136,323 – 70,007 112,932 306,600 64,571
		7,580 (2,827 301,847
		306,600
		306,600
		9,117
		Minority Interests HK$’000 20,418 2,827 2,127 48 – –
		25,420 34,276 4,875 – – –
		64,571

(d) Major non-cash transactions

The acquisition of subsidiaries was satisfied by relinquishing certain interests in associates with a net carrying value of HK$91,441,000.

– 78 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

31. CONTINGENT LIABILITIES

Guarantees for banking facilities granted to an investee company Litigation	Group 2002 2001 HK$’000 HK$’000 – 7,706 4,844 4,844 4,844 12,550	Group 2002 2001 HK$’000 HK$’000 – 7,706 4,844 4,844 4,844 12,550
		12,550

The litigation represents the maximum contingent liability of the Group estimated by the directors in respect of a claim lodged against a subsidiary of the Company. The directors, based on the advice of the Group’s legal advisors, considered that the Group has a good defence against the alleged claim and accordingly did not make any provision for liabilities in respect of the claim for the year.

Note 34 contains information regarding litigation entered into by and against the Group subsequent to the balance sheet date.

At 31st March 2002, HK$114,807,000 (2001: HK$160,797,000) of the banking facilities were utilised by subsidiaries that were guaranteed by the Company.

Guarantees for bank facilities granted to: – subsidiaries – an investee company 32. COMMITMENTS (a) Capital commitments Contracted but not provided for (b) Operating leases commitments	Company 2002 2001 HK$’000 HK$’000 254,850 249,050 24,960 11,263 279,810 260,313 Group 2002 2001 HK$’000 HK$’000 – 18,149	Company 2002 2001 HK$’000 HK$’000 254,850 249,050 24,960 11,263 279,810 260,313 Group 2002 2001 HK$’000 HK$’000 – 18,149

At 31st March 2002, the Group had future minimum lease payments payable under noncancellable operating leases in respect of land and buildings as follows:

Operating leases which fall due: Within one year In the second to fifth years inclusive	Group 2002 2001 HK$’000 HK$’000 3,886 5,455 1,768 5,205 5,654 10,660	Group 2002 2001 HK$’000 HK$’000 3,886 5,455 1,768 5,205 5,654 10,660
		10,660

– 79 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

(c) Operating leases arrangements

At 31st March 2002, the Group had contracted with tenants for future minimum lease payments under non-cancellable operating leases in respect of land and buildings owned by the Group as lessor as follows:

Operating leases which fall due: Within one year In the second to fifth years inclusive	Group 2002 2001 HK$’000 HK$’000 4,255 5,029 6,012 1,910 10,267 6,939	Group 2002 2001 HK$’000 HK$’000 4,255 5,029 6,012 1,910 10,267 6,939
		6,939

33. RELATED PARTY TRANSACTIONS

The following is a summary of significant related party transactions during the year:


	2002	2001
	HK$’000	HK$’000
Guaranteed income on provision of heat supply service
from Huatong Heat_(note 13)_	–	35,000
Issuance of a Convertible Note to Huatong Group
Holdings Limited (“Huatong”)(note 29)	–	306,600
Rental income received from a related company	–	92

The above transactions were entered into in normal course of business and on normal commercial terms by the directors in the previous year.

34. SIGNIFICANT POST BALANCE SHEET EVENTS

(a) On 3rd April 2002, an indirect wholly-owned subsidiary of the Company entered into an agreement for the sale of Upper Ground and Service Floors, 2nd to 6th Floors and the Roof Floor of Kwai Chung Car Park and Shopping Centre (the “1st Property”) at a consideration of HK$70,500,000. Completion took place on 30th April 2002. The original book value of the 1st Property was HK$6,947,000 which was subsequently revalued to HK$134,900,000, a revaluation surplus of HK$127,953,000 being booked in previous years. According to the Group’s accounting policy for investment properties, increases in valuation are credited to the investment properties revaluation reserve. Decreases in valuation are first set-off against increases on earlier valuations on a portfolio basis and then debited to operating profit. The Group’s investment property revaluation reserve has dropped to zero on a portfolio basis as at 31st March 2002.

The purpose of the disposal is to reduce the Group’s current bank borrowing to an acceptable level in order to reduce the pressure from the Group’s bankers. The Group applied approximately HK$67,200,000 for the repayment of secured bank loans. The balance of the proceeds are being used for the Group’s general working capital.

(b) On 12th June 2002, an indirect wholly-owned subsidiary of the Company entered into an agreement for the sale of Unit No. 302 East Ocean Centre, 98 Granville Road, Tsimshatsui East, Kowloon, Hong Kong (the “2nd Property”) at a consideration of HK$10,000,000. Completion took place on 22nd July 2002. The Group applied the entire sale proceeds after deducting incidental charges for the Group’s general working capital. The book value immediately before the disposal of the 2nd Property was HK$11,500,000. The loss on disposal of the Property was HK$1,500,000 and the loss will be recognised in the Group’s results for the year ending 31st March 2003.

– 80 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

(c) On 3rd July 2002, an indirect wholly-owned subsidiary of the Company entered into an agreement for the sale of Car Park Space Nos.11, 12, 34, 40, 41, 42, 43, 44 & 45 on Basement Floor, Peninsula Centre, 67 Mody Road, Tsimshatsui East, Kowloon, Hong Kong (the “3rd Property”) at a consideration of HK$2,430,000. Completion took place on 29th July 2002. The Group applied the whole amount of sale proceeds after deducting incidental charges for the Group’s general working capital. The book value immediately before the disposal of the 3rd Property was HK$2,600,000. The loss on disposal of the Property was HK$170,000, which would be included in the Group’s results for the year ending 31st March 2003.
(d) The Group has been notified, on 15th May 2002, by PUMA AG Rudolf Dassler Sport that it intends to terminate the trade mark license agreement dated 21st October 1998 and a supplemental agreement dated 10th February 2002. The termination was disputed by the Group and on 18th September 2002, a termination and settlement agreement regarding the PUMA licenses was entered into by the Group to settle the dispute.
(e) The Company commenced legal proceedings on 10th August 2002 against Mr. Chung Ho and Mr. Wu Yuehua and three other directors purportedly appointed at a board meeting held on 4th August 2002 (“Purported Board Meeting”) seeking to, inter alia, invalidate the resolutions passed at that meeting. On 13th August 2002, the three directors purportedly appointed at the Purported Board Meeting on 4th August 2002 tendered their resignations as directors. The Company maintains that the directors appointed at the Purported Board Meeting had not been validly appointed and intends to pursue Mr. Chung Ho and Mr. Wu Yuehua in relation to damages caused to the Company arising from the Purported Board Meeting.
(f) The Company has on 7th September 2002 commenced legal action against Sharp Class and Mr. Lo Chu Kong, former chief executive officer and one of the authorised bank signatories of ChinaeDN.com Limited, a 70% subsidiary of the Company, which made the total payments of HK$308,445,000 to Sharp Class.
(g) The Company has on 4th November 2002 commenced legal actions against Sharp Class, Mr. Yuen Wai and Mr. Chung Ho for the recovery of HK$50,000,000 due from Sharp Class.
(h) A Share Sale Agreement was entered into between ABN AMRO and World Gain Holdings Limited (“WGH”) on 30th September 2002. Pursuant to the Share Sale Agreement, ABN AMRO has agreed to sell and the Offeror has agreed to purchase 608,201,500 shares at a consideration of HK$54,738,135, subject to the terms and conditions as provided in the Share Sale Agreement. The Sale Share represent approximately 41.5% of the existing issued share capital of the Company.
(i) Certain regulatory authorities are investigating the Company in respect of the irregular transactions, namely, Heat Supply Project, CNCC Acquisition and Accounts Receivables as disclosed in notes 13, 20(b) and 20(c) to the financial statements.
(j) Trading in the Company’s shares has been suspended since 28th May 2002.

35. LISTING RULES OF THE STOCK EXCHANGE OF HONG KONG LIMITED

The Rules Governing the Listing of Securities issued by the Stock Exchange of Hong Kong Limited (“Stock Exchange”) require, inter alia, that companies whose shares are listed on the Stock Exchange submit audited financial statements to shareholders within 4 months of the balance sheet date. The Company has not issued the audited financial statements for the year ended 31st March 2002 on or before 31st July 2002 and accordingly, has breached the requirements of the Stock Exchange in that respect.

36. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the Board of directors on 21st November 2002.

– 81 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

(d) Interim results for the six months ended 30th September 2002

The following information is extracted from the interim financial report of the Group for the six months ended 30th September 2002, together with the comparative figures for the corresponding period in the previous year.

CONDENSED CONSOLIDATED PROFIT & LOSS ACCOUNT

For the six months ended 30th September 2002

Note
Turnover
3
Cost of sales
Gross profit
Other revenues
Distribution costs
Administrative expenses
Other operating expenses, net
Impairment loss of intangible assets
Provision for CNCC Acquisition
Provision for doubtful debts
Operating loss
4
Finance costs
5
Share of losses of associates
Loss before taxation
Taxation
6
Loss before minority interests
Minority interests
Loss attributable to shareholders
Loss per share
Basic
7
Diluted
7

Six months ended
30th September
2002
2001
(Unaudited)
(Audited)
HK$’000
HK$’000
66,287
101,900
(54,925)
(82,169)
11,362
19,731
286
263
(1,163)
(2,250)
(18,336)
(26,614)
(6,538)
(58,074)
–
(428,999)
–
(232,620)
–
(375,238)
(14,389)
(1,103,801)
(2,251)
(8,955)
–
(5,552)
(16,640)
(1,118,308)
(40)
(1)
(16,680)
(1,118,309)
(387)
(4,639)
(17,067)
(1,122,948)
HK cent
HK cents
(1.17)
(76.98)
N/A
N/A

– 82 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

CONDENSED CONSOLIDATED BALANCE SHEET

As at 30th September 2002

30th Note Non-current assets Intangible assets 8 Investment properties 9 Properties, plant and equipment Interest in associate 10 Current assets Inventories Trade and other receivables 11 Cash and bank balances Current liabilities Trade and other payables 12 Trust receipt loans, secured Tax payable Bank loans, secured Other loans Net current liabilities Total assets less current liabilities Non-current liabilities Other loans Loans from minority shareholders of subsidiaries Minority interests Capital and reserves Share capital 13 Reserves 14 Mandatory convertible note 15	September 2002 (Unaudited) HK$’000 – 140,921 76,504 195,744 2,333 34,100 4,404 40,837 97,750 1,664 4,416 65,798 20,941 190,569 (149,732) 263,437 (63,236) (100,807) (164,043) (64,958) (229,001) 34,436 146,540 (418,704) (272,164) 306,600 34,436	31st March 2002 (Audited) HK$’000 – 230,521 80,627 197,967 3,000 40,923 2,625 46,548 113,228 3,192 4,161 136,323 18,896 275,800 (229,252) 279,863 (51,111) (112,932) (164,043) (64,571) (228,614) 51,249 146,370 (401,721) (255,351) 306,600 51,249

– 83 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30th September 2002

			Six months ended 30th September 2002 (Unaudited)	Six months ended 30th September 2002 (Unaudited)	Six months ended 30th September 2002 (Unaudited)	Six months ended 30th September 2002 (Unaudited)
		Investment				Retained
		properties			Capital	profits/
	Share	revaluation	Exchange	General	redemption (accumulated		Share
	capital	reserve	reserve	reserve	reserve	losses)	premium	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
1st April 2002	146,370	–	410	–	402	(1,056,920 )	654,387	(255,351)
Loss attributable to shareholders	–	–	–	–	–	(17,067 )	–	(17,067)
Issue of new shares upon exercise of options	170	–	–	–	–	–	84	254
30th September 2002	146,540	–	410	–	402	(1,073,987 )	654,471	(272,164)
			Six months ended 30th Se ptember 2001 (Audited)
		Investment				Retained
		properties			Capital	profits/
	Share	revaluation	Exchange	General	redemption (accumulated		Share
	capital	reserve	reserve	reserve	reserve	losses)	premium	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
1st April 2001	145,685	2,934	743	44,942	402	293,176	654,052	1,141,934
Deficit on revaluation	–	(2,934 )	–	–	–	–	–	(2,934)
Loss attributable to shareholders	–	–	–	–	–	(1,122,948 )	–	(1,122,948)
Issue of new shares upon exercise of options	650	–	–	–	–	–	319	969
30th September 2001	146,335	–	743	44,942	402	(829,772 )	654,371	17,021

– 84 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 30th September 2002

Net cash outflow from operating activities
Investing activities
Purchase of properties, plant and equipment
Investment in property under development
Net advance from associates
Net advance to investee companies
Proceeds on disposal of:
Investment properties
Properties, plant and equipment
Net cash inflow from investing activities
Net cash inflow/(outflow) before financing activities
Financing activities
Proceeds from issue of share capital
Draw down of bank loans
Repayment of bank loans
Pledged bank deposits
Repayment of other loans
Loans from minority shareholders of subsidiaries
Net cash (outflow)/inflow from financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Analysis of the balances of cash and cash equivalents
Cash and bank balances
Trust receipt loans with maturity within three months
from the date of advance

Six months ended
30th September
2002
2001
(Unaudited)
(Audited)
HK$’000
HK$’000
(15,049)
(49,502)
(134)
(289)
–
(37)
2,187
32,507
–
(507)
87,579
–
400
–
90,032
31,674
74,983
(17,828)
254
969
–
6,753
(70,525)
(8,600)
–
3,500
(1,405)
31,600
–
2,340
(71,676)
36,562
3,307
18,734
(567)
(20,337)
2,740
(1,603)
4,404
5,580
(1,664)
(7,183)
2,740
(1,603)

– 85 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. PRINCIPAL ACCOUNTING POLICIES AND BASIS OF PREPARATION

The condensed consolidated interim financial statements (“interim financial statements”) have been prepared in accordance with Hong Kong Statement of Standard Accounting Practice (“SSAP”) 25, “Interim Financial Reporting” issued by the Hong Kong Society of Accountants (“HKSA”).

The principal accounting policies and methods of computation used in the preparation of the interim financial statements are consistent with those adopted in the annual report for the year ended 31st March 2002, except that the Group has changed certain of its accounting policies following its adoption of the following SSAPs issued by the Hong Kong Society of Accountants which are effective for accounting periods commencing on or after 1st January 2002:

SSAP 1 (revised): Presentation of financial statements SSAP 11 (revised): Foreign currency translation SSAP 15 (revised): Cash flow statements SSAP 34: Employee benefits

The adoption of the above standards had no material effect on amounts reported in the prior period, except that certain presentational changes have been made upon the adoption of SSAP 1 (revised) “Presentation of financial statements” and SSAP 15 (revised) “Cash flow statements”.

2. GOING CONCERN BASIS OF PREPARATION

Since 1st April 2001, the Group has experienced serious financial difficulties, which inter alia led to a winding up petition in November 2001, the withdrawal of banking facilities and the termination of the PUMA distribution agreement. Substantial provisions have been made for the year ended 31st March 2002 for various transactions, which the present Board of Directors considers that they may not have been in the best interests of the Group. Legal action is in process for possible recovery in connection therewith. To minimise the adverse effects of the above, the Group has taken active steps to streamline the operations, dispose of non-core assets and reduce overheads so as to minimise losses and restore the Group to profitability.

Additionally, the Board has been assured by China Chengtong Holdings Company, a state-owned pillar enterprise in the PRC and the ultimate holding company of World Gain Holdings Limited (the new controlling shareholder in the Company) that it will provide continuing financial support to the Company and the Group.

The Board has taken and will continue to take additional measures to improve its cash flows by increasing the productivity of its cement factory in Suzhou, utilising leasing areas both in Hong Kong and in China for additional rental income, procuring further realisation of non-core assets, streamlining the operations and reducing operating expenses.

– 86 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

3. SEGMENT INFORMATION

An analysis of the Group’s turnover and results for the period by principal activities is as follows:

		Six months	ended
		30th September
	Turnover		Segment	results
	2002	2001	2002	2001
	(Unaudited)	(Audited)	(Unaudited)	(Audited)
	HK$’000	HK$’000	HK$’000	HK$’000
By principal activities
Sales of goods	62,821	93,210	(1,455)	(1,737)
Property investment	3,463	8,557	(392)	(25,901)
Heating supply technical services	–	–	(2)	(11)
Investment holding	3	133	(253)	(17,886)
E-commerce – internet services	–	–	–	(6,438)
Unallocated expenses	–	–	(12,287)	(14,971)
	66,287	101,900	(14,389)	(66,944)
Impairment loss of intangible assets			–	(428,999)
Provision for CNCC Acquisition			–	(232,620)
Provision for doubtful debts			–	(375,238)
Operating loss			(14,389)	(1,103,801)
Finance costs			(2,251)	(8,955)
Share of losses of associates			–	(5,552)
Loss before taxation			(16,640)	(1,118,308)
Taxation			(40)	(1)
Minority interests			(387)	(4,639)
Loss attributable to shareholders			(17,067)	(1,122,948)

– 87 –

APPENDIX II

FINANCIAL INFORMATION RELATING TO THE GROUP

An analysis of the Group’s turnover and results for the period by geographical segments is as follows:

		Six months	ended
		30th September
	Turnover		Segment	results
	2002	2001	2002	2001
	(Unaudited)	(Audited)	(Unaudited)	(Audited)
	HK$’000	HK$’000	HK$’000	HK$’000
By geographical segments
Hong Kong	10,763	25,184	5,253	(5,678)
Mainland China	41,227	53,982	(2,718)	(46,387)
Taiwan	14,297	22,734	(4,637)	92
Unallocated expenses	–	–	(12,287)	(14,971)
	66,287	101,900	(14,389)	(66,944)
Impairment loss of intangible assets			–	(428,999)
Provision for CNCC Acquisition			–	(232,620)
Provision for doubtful debts			–	(375,238)
Operating loss			(14,389)	(1,103,801)
Finance costs			(2,251)	(8,955)
Share of losses of associates			–	(5,552)
Loss before taxation			(16,640)	(1,118,308)
Taxation			(40)	(1)
Minority interests			(387)	(4,639)
Loss attributable to shareholders			(17,067)	(1,122,948)

4. OPERATING LOSS

The operating loss is arrived at after charging/(crediting) the following:

	Six months ended	Six months ended
	30th September
	2002	2001
	(Unaudited)	(Audited)
	HK$’000	HK$’000
Amortisation of intangible assets	–	13,000
Deficit on revaluation of investment properties	–	27,236
Depreciation	4,110	1,701
Interest income	(3)	(133)
Loss on disposal of investment properties, including expenses	2,021	–

– 88 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

5. FINANCE COSTS

	Six months ended	Six months ended
	30th September
	2002	2001
	(Unaudited)	(Audited)
	HK$’000	HK$’000
Interest and similar charges on:
Bank loans and overdrafts wholly repayable
within five years	1,222	4,504
Other loans	1,029	4,451
	2,251	8,955

6. TAXATION

Hong Kong profits tax has been provided at the rate of 16% (2001: 16%) on the estimated assessable profit for the period in Hong Kong. Taxation on overseas profits has been calculated on the estimated assessable profit for the period at the rates of taxation prevailing in the countries in which the Group operates.

Company and subsidiaries – Hong Kong profits tax – Overseas profits tax Share of taxation attributable to associates – Hong Kong profits tax – Overseas profits tax	Six months ended 30th September 2002 2001 (Unaudited) (Audited) HK$’000 HK$’000 40 – – – – 1 – – 40 1	Six months ended 30th September 2002 2001 (Unaudited) (Audited) HK$’000 HK$’000 40 – – – – 1 – – 40 1
		1

7. LOSS PER SHARE

The calculation of basic loss per share is based on the Group’s loss attributable to shareholders of HK$17,067,000 (2001: loss of HK$1,122,948,000) and on the weighted average number of 1,464,736,116 (2001: 1,458,773,001) ordinary shares in issue during the period.

No diluted loss per share for the periods ended 30th September 2002 and 2001 have been shown as the exercise of options and the conversion of the mandatory convertible note would have no dilutive effect on the basic loss per share.

8. INTANGIBLE ASSETS

Cost Accumulated amortisation Net book value	Six months ended 30th September 2002 2001 (Unaudited) (Audited) HK$’000 HK$’000 519,999 519,999 (519,999) (519,999 – –	Six months ended 30th September 2002 2001 (Unaudited) (Audited) HK$’000 HK$’000 519,999 519,999 (519,999) (519,999 – –
		–

Intangible assets represent the fair value of future distributions in relation to the Heat Supply Project, for which full provision has been made up to 31st March 2002 (For more details, please refer to the 2002 annual report).

– 89 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

9. INVESTMENT PROPERTIES

The investment properties were revalued on the basis of their open market value at 15 and 31st March 2002 by David C. Lee Surveyors Ltd, a firm of independent professional valuers. Investment properties in Hong Kong and overseas with an aggregate carrying value of HK$80,000,000 and HK$3,929,000 respectively (31st March 2002: HK$169,600,000 and HK$3,929,000 respectively) have been pledged as securities for the Group’s borrowings and bank loans. During the period, investment properties in Hong Kong with an aggregate carrying value of HK$89,600,000 were disposed of and the sales proceeds were used in part to settle the Group’s secured bank loans and the remaining portion to provide for additional working capital of the Group.

10. INTEREST IN ASSOCIATE

The interest in associate held by the Group is a 32% interest in Goodwill (Overseas) Limited (“Goodwill”), incorporated in the British Virgin Islands. Goodwill has lent HK$606,000,000 to a company called Kingdom Land Investment & Development Co. Limited (“Kingdom Land”), which is incorporated in the Macau Special Administrative Region. Kingdom Land has a 95% interest in Shanghai Xing Tai Real Estate Development Incorporation Limited (“Xing Tai”), which is incorporated in the PRC. Xing Tai holds a 100% interest in Shanghai East Ocean Centre Phase II.

The proforma balance sheet of associate according to its management accounts is as follows:

30th September 2002 (Unaudited) HK$’000 Long term investments 606,467 Current assets Other receivables 726 Current liabilities Other payables (961) Net current (liabilities)/assets (235) Non-current liabilities Shareholders’ loans (608,705) Net liabilities (2,473) Group’s share of net liabilities (791)	31st March 2002 (Unaudited) HK$’000 614,265 726 (561
	165 (616,505
	(2,075
	(664

A doubtful debt provision of HK$127,000 (included in other operating expenses in the condensed consolidated profit and loss account) was made against the loan to the associate as at 30th September 2002, based on the Group’s share of its net liabilities.

11. TRADE AND OTHER RECEIVABLES

30th September 2002 (Unaudited) Note HK$’000 Trade receivables (a) 11,642 Prepayments and deposits – net (b) 2,055 Other receivables – net (c) 20,403 34,100	31st March 2002 (Unaudited) HK$’000 18,123 6,343 16,457
	40,923

– 90 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

(a) Trade receivables

The Group conducts its business by accepting letters of credit from customers and allowing certain credit period to its customers. The Group allows an average credit period of 60 days to its trade customers on open account credit terms. The ageing analysis of the trade receivables at 30th September 2002 is as follows:

30th September 2002 (Unaudited) HK$’000 Current 7,599 One to three months 2,665 Over three months 1,378 11,642	31st March 2002 (Unaudited) HK$’000 15,651 1,696 776
	18,123

(b) Prepayments and deposits – net

A provision of HK$232,657,000 (31st March 2002: HK$232,657,000) has been made against payments of HK$200,000,000 made to Sharp Class International Limited and interest receivable, temporary advance and deferred expenses in the total amount of HK$32,657,000 (For more details, please refer to the 2002 annual report).

(c) Other receivables – net

A provision of HK$391,248,000 (31st March 2002: HK$391,248,000) has been made against receivables, of which HK$358,445,000 (31st March 2002: HK$358,445,000) was made against payments to Sharp Class International Limited (For more details, please refer to the 2002 annual report).

12. TRADE AND OTHER PAYABLES

30th September 2002 (Unaudited) HK$’000 Trade payables 29,759 Deposits received, other payables and accruals 67,991 97,750 The ageing analysis of the trade payables at 30th September 2002 is as follows: 30th September 2002 (Unaudited) HK$’000 Current 5,027 One to three months 455 Over three months 24,277 29,759	31st March 2002 (Unaudited) HK$’000 26,557 86,671
	113,228
	31st March 2002 (Unaudited) HK$’000 6,114 517 19,926
	26,557

– 91 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

13. SHARE CAPITAL

Authorised 31st March 2001 and 31st March 2002 Issued and fully paid 1st April 2001 Exercise of options 31st March 2002 Authorised 31st March 2002 and 30th September 2002 Issued and fully paid 1st April 2002 Exercise of options 30th September 2002	Ordinary shares of HK$0.10 each 31st March 2002 (Audited) Number of shares Amount ’000 HK$’000 5,000,000 500,000 1,456,855 145,685 6,850 685 1,463,705 146,370 Ordinary shares of HK$0.10 each 30th September 2002 (Unaudited) Number of shares Amount ’000 HK$’000 5,000,000 500,000 1,463,705 146,370 1,700 170 1,465,405 146,540	Ordinary shares of HK$0.10 each 31st March 2002 (Audited) Number of shares Amount ’000 HK$’000 5,000,000 500,000 1,456,855 145,685 6,850 685 1,463,705 146,370 Ordinary shares of HK$0.10 each 30th September 2002 (Unaudited) Number of shares Amount ’000 HK$’000 5,000,000 500,000 1,463,705 146,370 1,700 170 1,465,405 146,540
		146,370 170
		146,540

– 92 –

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX II

14. RESERVES

	Investment				Retained
	properties			Capital	profits/
	revaluation	Exchange	General	redemption	(accumulated	Share
	reserve	reserve	reserve	reserve	losses)	premium	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
1st April 2001	2,934	743	44,942	402	293,176	654,052	996,249
Loss attributable to shareholders	–	–	–	–	(1,395,038 )	–	(1,395,038)
Issue of new shares upon exercise
of options	–	–	–	–	–	336	336
Share issue expenses	–	–	–	–	–	(1)	(1)
Disposal of associates	–	(333 )	–	–	–	–	(333)
Transfer	–	–	(44,942 )	–	44,942	–	–
Deficit on revaluation	(2,934)	–	–	–	–	–	(2,934)
31st March 2002	–	410	–	402	(1,056,920 )	654,387	(401,721)
Loss attributable to shareholders	–	–	–	–	(17,067 )	–	(17,067)
Issue of new shares upon exercise
of options	–	–	–	–	–	84	84
30th September 2002	–	410	–	402	(1,073,987 )	654,471	(418,704)

15. MANDATORY CONVERTIBLE NOTE

The mandatory convertible note (“Note”) is redeemable at the Company’s option at par value before its maturity. Any principal amount of the Note outstanding on maturity will be mandatorily converted into shares of the Company at a conversion rate of HK$1.40 per share. The Note dated 27th April 2001 was issued to United City Trading Limited (“United City”). The maturity date of the Note was extended from 27th April 2001 to 27th April 2002 by an ordinary resolution passed at the extraordinary general meeting of the Company held on 5th June 2001. At the time of the extension of the maturity date, the Company was advised that United City was wholly owned b y Huatong Group Holdings Limited (“Huatong”). On 23rd April 2002, Huatong brought to the notice of the Company that the ownership of United City is subject to dispute and demanded in writing on 26th April 2002 that the Company withheld allotting and issuing the conversion shares to United City, failing which the Company would be held responsible for Huatong’s losses and damages. On 29th April 2002, however, United City instructed the Company to allot and issue the conversion shares to a third party. The Company has withheld the allotment and issuance of the conversion shares pending resolution of such dispute. On 18th December 2002, the Company was advised that the dispute has been settled.

16. CONTINGENT LIABILITIES

	30th September	31st March
	2002	2002
	(Unaudited)	(Unaudited)
	HK$’000	HK$’000
Litigation	4,844	4,844

The litigation re presents the maximum contingent liability of the Group estimated by the Directors in respect of a claim lodged against a subsidiary of the Company. The Directors, based on the advice of the Group’s legal advisors, considered that the Group has a good defence against the alleged claim and accordingly did not make any provision for liabilities in respect of the claim for the period.

– 93 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

17. COMMITMENTS

(a) Capital commitments

At 30th September 2002, the Group did not have any significant capital commitments (31st March 2002: nil).

(b) Commitments under operating leases

At 30th September 2002, the Group had future minimum lease payments payable under noncancellable operating leases in respect of land and buildings as follows:

30th September 2002 (Unaudited) HK$’000 Operating leases which fall due: Within one year 3,349 In the second to fifth years inclusive 104 3,453	31st March 2002 (Unaudited) HK$’000 3,886 1,768
	5,654

(c) Operating leases arrangements

At 30th September 2002, the Group had contracted with tenants for future minimum lease payments under non-cancellable operating leases in respect of land and buildings owned by the Group as lessor as follows:

30th September 2002 (Unaudited) HK$’000 Operating leases which fall due: Within one year 3,281 In the second to fifth years inclusive 2,819 6,100	31st March 2002 (Unaudited) HK$’000 4,255 6,012
	10,267

18. SIGNIFICANT POST BALANCE SHEET EVENTS

(a) The Company has on 4th November 2002 commenced legal actions against Sharp Class International Limited (“Sharp Class”), Mr. Yuen Wai and Mr. Chung Ho for the recovery of HK$50,000,000 due from Sharp Class.
(b) Trading in the shares of the Company has been resumed with effect from 9:30 a.m. on 9th December 2002.
(c) Completion of the Share Sale Agreement took place on 11th December 2002, upon which World Gain Holdings Limited (“WGH”) acquired from ABN AMRO Bank N.V. Hong Kong Branch (“ABN AMRO”) a total of 608,201,500 shares, at a consideration of HK$0.09 each for a cash of HK$54,738,135, representing approximately 41.50% of the existing issued share capital of the Company. The consideration for the Sale Shares had been fully paid on the date of the completion.
(d) On 18th December 2002, the Company received a letter from the solicitors acting for Huatong Group Holdings Limited (“Huatong”) informing the Company that the dispute over the beneficial ownership of United City Trading Limited (“United City”) has been settled and Huatong now holds the beneficial interest in United City. Following the settlement of the dispute, the Company is obliged to issue 219,000,000 shares in the Company to United City as soon as possible pursuant to the Mandatory Convertible Note dated 27th April 2001.

– 94 –

APPENDIX II FINANCIAL INFORMATION RELATING TO THE GROUP

3. INDEBTEDNESS

Indebtedness statement as at 31 March 2003

At the close of business on 31 March 2003, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had total loans of approximately HK$269.7 million comprising of long-term loans of approximately HK$164 million, short-term secured borrowings of approximately HK$79.4 million and other short-term loans of approximately HK$26.3 million.

Save as disclosed above and apart from intra-group liabilities, the Group did not at the close of 31 March 2003, have any material outstanding mortgage, charges, debentures, bank overdraft, liabilities under acceptances (other than normal trade bills), acceptance credits loans, borrowings, or other similar indebtedness, or any hire purchase or finance lease commitments or any guarantee or other material contingent liabilities.

4. MATERIAL ADVERSE CHANGES

Save as disclosed in the Company’s 2002 results announcement dated 21 November 2002, the Company’s resumption of trading announcement dated 5 December 2002, the announcement of the Company dated 6 December 2002, the Composite Document, the annual report of the Company for 2002, the unaudited results for the six months ended 30 September 2002 and the changes as shown in the unaudited pro forma adjusted consolidated net tangible assets statement of the Group set out in Appendix III to this circular, the Directors are not aware of any material adverse changes in the financial or trading position or prospects of the Group since 31 March 2002, being the date to which the latest published audited financial statements of the Group were made up.

– 95 –

APPENDIX III FINANCIAL INFORMATION RELATING TO THE ENLARGED GROUP

Set out below is the statement of unaudited pro forma adjusted consolidated net tangible assets of the Group and the Enlarged Group, based on the audited consolidated financial statements of the Group as at 31 March 2002 adjusted to take into account the net effect of unaudited results and other adjustments of the eleven months ended 28 February 2003 and the net effect of acquisition of Merry World as follows:

Audited consolidated net tangible deficit as at 31 March 2002
Unaudited net loss attributable to shareholders for
the six months ended 30 September 2002
Unaudited net loss attributable to shareholders for
the five months ended 28 February 2003 based
on the management account of the Group
Reduction of share premium upon set-off of expenses
on allotment of new shares
Subscription monies received from the exercise of
1,700,000 options granted under the Existing Scheme
from 1 April 2002 to 28 February 2003
Revaluation deficit of investment properties for the period up to
31 October 2002
Net proceeds from the subscription of 219,000,000 Conversion Shares
by United City Trading Limited on 30 January 2003
Unaudited pro forma adjusted consolidated net tangible deficit
of the Group as at 28 February 2003 before adjusting for
the net effect of acquisition of Merry World
The net effect of acquisition of Merry World_(Note 1)_
Unaudited pro forma adjusted consolidated net tangible assets
of the Enlarged Group as at 28 February 2003 after adjusting
the net effect of acquisition of Merry World

HK$’000
(255,351)
(17,067)
(5,402)
(30)
253
(36,227)
306,600
(7,224)
79,460
----------------
72,236

– 96 –

APPENDIX III FINANCIAL INFORMATION RELATING TO THE ENLARGED GROUP

Pro forma adjusted unaudited net tangible assets/(deficit) per Share (based on 1,684,404,968 Shares in issue as at 28 February 2003):

HK$ Before the acquisition of Merry World (0.00429) After the acquisition of Merry World 0.04289

Notes:

The net effect of acquisition of Merry World in an amount of HK$79,459,721 is the aggregate of the net liabilities of Merry World as at 28 February 2003 in amount of HK$14,163,141 and the gain in net tangible assets due to assignment of the Merry World Debt as at 28 February 2003 in amount of HK$93,622,862 to the Group.
The exercise of the option to repurchase shares in and shareholder’s loan to Success Project Investments Limited, particulars of which are set out in the Repurchase Option Announcement and in the circular of the Company dated 15 May 2003, has no effect on the net tangible assets of the Group as the increase in the net tangible assets of the Group of about HK$16,866,000 arising from the acquisition of the shares in and shareholder’s loan to Success Project Investments Limited was offset by the payment of the consideration therefor of about HK$16,866,000 made by the Group upon the exercise of such option.

– 97 –

VALUATION REPORT

APPENDIX IV

The following is the text of the letter together with a summary of valuation of the Property from S.H. Ng & Co., Ltd., an independent property valuer, in connection with their opinion of the value of the Property as at 20 March 2003, prepared for the purpose of incorporation in this circular.

The Directors China Logistics Group Limited Room 1302, 13th Floor MassMutual Tower 38 Gloucester Road Wanchai, Hong Kong

30 May 2003

Dear Sir or Madam,

Re: Zone A and Zone C on Level 3 of Li Wan Plaza,
9 Dexing Lu, Li Wan District, Guangzhou, The People’s Republic of China

We refer to your instructions for us to provide you with our opinion of the open market value of the property interests in its existing state. We understand that the valuation will be used for sale and purchase purpose and will also be used for inclusion in a circular of China Logistics Group Limited (the “Company”) dated 30 May 2003. We confirm that we have carried out inspection, made relevant enquiries and obtained such other further information as we consider necessary for the purpose of providing you with our opinion of the open market value of this property.

Our valuation of the property interests is our opinion of the open market value which we would define as intended to mean “the best price at which the sale of an interest in a property might reasonably be expected to have been completed unconditionally for cash consideration on the date of valuation assuming:

a willing seller;
that, prior to the date of valuation, there had been a reasonable period, having regard to the nature of the property and the state of the market, for the proper marketing of the interest, for the arrangement of price and terms and for the completion of sale;
that the state if the market, level if values and other circumstances were, on any earlier assumed date of exchange of contracts, the same as on the date of valuation;
that no account is taken of any additional bid by a prospective purchaser with a special interest; and
that both parties to the transaction had acted knowledgeably, prudently and without compulsion”.

Our valuation has been made on the assumption that the owner sells the property interests on the open market in its existing state without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any similar arrangement which would serve to increase the value of the property interests.

– 98 –

VALUATION REPORT

APPENDIX IV

In valuing the property interests, we have assumed that the grantee or the user of the property has free and uninterrupted rights to use or to assign the property interests for the whole of the unexpired term of the lease.

According to the information provided by the Company, the status of title, the grant of major approvals and licenses are as follows:

1.	Pre-sale Contract re: Zone A	Yes
2.	Pre-sale Contract re: Zone C	Yes
3.	Realty Title Certificate re: Zone A	Yes
4.	Realty Title Certificate re: Zone C	Yes
5.	Legal Opinion dated 18th March 2003	Yes
6.	Valuation Reports prepared by Chinese valuation firms	Yes
7.	Realty Title information up-date	Yes

We have valued the property on an open market basis by reference to comparable market transactions.

We have assumed that all consents, approvals and licences from the relevant Government authorities for the legal use of the property has been granted which might otherwise affect value. According to our standard practice, we must state that we have not taken into account of any tax liabilities, which might affect the net profit of the property.

We have relied to a very considerable extent on the information given by the Company and have accepted advice given to us on such matters as statutory notices, easements, tenure, lettings, site and floor areas and all other relevant matters.

We have been supplied with the title documents relating to the property. However, we have not searched the original documents to verify ownership or to verify any lease amendments, which may not appear on the copies handed to us. All documents and leases have been used for reference only and all dimensions measurements and areas are approximate only. No on site measurements have been taken.

No allowance has been made in our report for any charges, mortgages or amount owing on the property nor for any expenses or taxation, which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the property is free from encumbrances, restrictions and out-goings of an onerous nature which could affect value.

We have no reason to doubt the truth and accuracy of the information provided to us by the Company. We have also read the legal opinion regarding the ownership and related documents of the property interests. Legal opinion regarding the legality and ownership details of the property interests were also formed by the AllBright Law Offices, legal adviser of the Company dated 18th March 2003. We consider that we have been provided with sufficient information to reach an informed view, and have no reason to suspect that any material information has been withheld.

– 99 –

VALUATION REPORT

APPENDIX IV

LOCATION OF THE DEVELOPMENT

Li Wan Plaza occupies a large island site surround by Changshou Lu to its north, Shiji Nan Lu to its west, Shangjiu Lu to its south and Dexing Lu to its east. This part of Li Wan District is an established commercial/retail area with a number of larger scale commercial and residential developments in the vicinity.

Shangjiu Lu, located at the south of the development, is a pedestrian walkway destined as a traffic free shopping street. Changshou Lu, located at the north of the development, is a public traffic route. The Mass Transit Railway Station at the junction of Changshou Lu and Baohua Lu is approximately 10 minutes walk to the west of Li Wan Plaza. The development is also conveniently served by various modes of public transports.

TITLE PARTICULARS

Pre-sale Contracts - Nos. 93019577 and 93019578 dated 25th April 2001 refer the Sale and Purchase Agreements on Zone A of Level 3 and Zone C of Level 3 of Li Wan Plaza respectively. The salient points of these contracts are:

Registered Purchaser: Merry World Associates Limited

Zone A Level 3 Zone C Level 3 Total:	Gross Floor Area 5,491.53 sq.m. 5,366.34 sq.m. 10,857.87 sq.m.	Consideration RMB32,949,180 RMB32,198,040
		RMB65,147,220

The Realty Title Certificate No. 0837801 dated 29th April 2001 issued by the Building Control Department of the Land Bureau of Guangzhou City refers to Merry World Associates Limited as the registered owner of Zone A of Level 3 of Li Wan Plaza. The registered gross floor area of the property is 5,491.53 sq.m. The term of use is 50 years from 30th July 1994.

The Realty Title Certificate No. 0837802 dated 29th April 2001 issued by the Building Control Department of the Land Bureau of Guangzhou City refers to Merry World Associates Limited as the registered owner of Zone C of Level 3 of Li Wan Plaza. The registered gross floor area of the property is 5,366.34 sq.m. The term of use is 50 years from 30th July 1994.

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VALUATION REPORT

APPENDIX IV

Pursuant to two Realty Title information certificates No. 33040 and 33041 carried out on 16th July 2002, the salient points are as follows:

The properties: Zone A and Zone C of Level 3 of Li Wan Plaza.
Registered under the name: Merry World Associates Limited.
The term of use: 50 years from 30th July 1994.
State-owned Land Use Premium: paid.
Common Areas: to be used in common by registered owners of the entire development.

LEGAL OPINION

Legal opinion on the subject property interests (Zone A and Zone C on Level 3 of Li Wan Plaza) was formed by the AllBright Law Offices, a registered law firm in The People’s Republic of China, on 18th March 2003. The purpose of the opinion is to confirm the legality and ownership of the property interests. They have confirmed the followings:

Registered Owner: Merry World Associates Limited.
Source of Ownership – the purchase was carried out and confirmed to be purchased from the Guangzhou Shi Nan Building Development Limited in 2001.
Ownership Details – Realty Title Certificate Nos. 0837801 and 0837802 dated 29th April 2001.
Land Use Rights – held for a term of 50 years from 30th July 1994 with land premium fully paid.
Permitted Use: for commercial purposes.
Encumbrance: there were no registered records (mortgage, legal charge or restrictive rights) against the subject property interests.
Consideration: official receipts showed full payment for the total amount of RMB65,147,220 by the registered owner on 25th April 2001.
Merry World Associates Limited is an off-shore company registered in British Virgin Islands on 15th October 1997 with right to purchase and hold property interests in The People’s Republic of China.

– 101 –

VALUATION REPORT

APPENDIX IV

THE DEVELOPMENT

Li Wan Plaza is a large-scale commercial/residential development with 8 high-rise residential towers built over a 6-storey commercial/retail podium. The development was built in 1997. It stands on a site with an area of approximately 35,000 sq.m.. Construction is of reinforced concrete framework, the podium portion is finished with granite tiled and partly curtain walled external facade.

The retail podium has a total gross area of approximately 140,000 sq.m.. It comprises two connected towers (North Tower and South Tower) of 6-levels, that is Level-B to Level 5. It is approximately elongated in shape and is mainly divided into 4 zones (A, B, C and D). Zone A and Zone B that is the North Tower, are close to the side of Changshou Lu. Zone C and Zone D that is the South Tower, are close to the side of Shangjiu Lu. The central part of the development is a large round shaped open court with a fountain, which distinctly divides the North Tower from the South Tower on each level. Car parking is provided in the basement of the development entered from the side of Shiji Nan Lu.

The retail podium is mainly of open design and central air-conditioned. We were informed that the current management fee is at RMB29 per sq.m.. The central part on both sides of the podium, between Level 1 to Level 5 is an atrium with natural roof-light. The interior is quite nicely and lively finished with mainly marble tiled floor and walls and good proportion common passage along the periphery of the atrium. The podium floors are served by 4-bubble lifts, 48 units of escalators and 8 staircases.

THE PROPERTY

The subject of our valuation comprises the entire Zone A and Zone C on Level 3 of the 6-storey commercial/retail podium. At the time of our inspection made on 14th March 2003, a substantial part of Zone C (to the side of Shangjiu Lu) was occupied by a mobile phone company and used for retail and showroom purposes, the remaining parts of this Zone C were vacant. This part of the podium, which fronts onto Shangjiu Lu, has good shoppers’ flow.

Zone A is located within the North Tower and is connected to Zone C by a glassed passage around the open court at the centre of the development. It was vacant at the time of our inspection. There were still some partitions within the unit. We were informed that previously it was part of a department store. This part of the podium, which fronts onto Changshou Lu has less shoppers’ flow. The gross floor area of these 2 zones are as follows (as shown on the Reality Title Certificates):

Zone A (North Tower) 5,491.53 sq.m. Zone C (South Tower) 5,366.34 sq.m. Total: 10,857.87 sq.m.

– 102 –

VALUATION REPORT

APPENDIX IV

THE PROPERTY MARKET

Guangzhou and the Gunagdong Province together with some other larger cities in China had experienced continuous economic growth in the past 10 years. The average gross domestic product increase was at 13% per annum between 1996 up to 2002. The current average household income within Guangzhou City is RMB13,380 per annum, which is an increase of 4.9% as compared with 2001. The above figures demonstrated the strength of the local economy in Guangzhou and the support for the retail and consumers’ markets.

Li Wan District is a well-established commercial/retail area, which is popular and well known to both local and tourists. The Shangjiu Lu and Xiajiu Lu, where the subject property lies, are destined pedestrian streets. There are a lot of local as well as brand name shops and large scale shopping arcades built along these two streets. Pedestrian flows are quite heavy during most business hours of the day.

THE COMPARABLES

In the course of our valuation we have been able to gather some information from our enquiry with the local agents and from the newspapers regarding the actual and asking sales and rentals for retail business in Li Wan District. Such information are listed as follows:

Location	Gross Area	Rental/Value	Unit Rate
		(RMB)	RMB/sq.m.
Shibafu Lu	166 sq.m.	10,000 per month	60.24
Shibafu Lu	11 sq.m.	2,500 per month	227.27
Dishifu	850 sq.m.	135,000 per month	158.82
Dishifu	40 sq.m.	16,000 per month	400.00
Dishifu	100 sq.m.	60,000 per month	600.00
Dishifu	170 sq.m.	70,000 per month	411.76
Dishifu	400 sq.m.	64,000 per month	160.00
Dishifu	10 sq.m.	8,000 per month	800.00
Dishifu	300 sq.m.	12,000,000	40,000
Enning Lu	80 sq.m.	7,000 per month	87.50
Shang Xi Jiu Lu	100 sq.m.	65,000 per month	650.00
Shang Xi Jiu Lu	10 sq.m.	18,000 per month	1,800.00
Shang Xi Jiu Lu	470 sq.m.	9,500,000	20,212
Shang Xi Jiu Lu	250 sq.m.	5,000,000	20,000
Li Wan South Tower	107 sq.m.	4,800,000	44,859
Baohua Lu	10 sq.m.	5,200 per month	520.00

– 103 –

VALUATION REPORT

APPENDIX IV

From our previous enquiry carried out in late 2001, the information we have gathered within the Li Wan Plaza for individual lettings with retail floor space between 45 sq.m. to 131.34 sq.m. were as follows:

Highest/Average Monthly Rental

Level 1: RMB350 per sq.m./RMB150 per sq.m. Level 2: RMB190 per sq.m./RMB100 per sq.m. Level 3: RMB108 per sq.m.

The quoted sale prices for Minhui Commercial Building (Shang Xi Jui Lu) were as follows (in late 2001):

Average Sale Price

Level B: RMB34,800 per sq.m. Level 1: RMB91,435 per sq.m. Level 2: RMB51,527 per sq.m. Level 3: RMB30,655 per sq.m.

The above comparables in the Li Wan District and information from the two retail centres, even though appear to be a bit raw, do form a good indicator as to the possible sale and rental value within the Li Wan District.

We understand that some parts of Level 1 and Level 2 in Li Wan Plaza, which involved a gross floor area of 14,000 sq.m., which is the subject of a distress sale, were put up for auction around January 2003. The property was withdrawn due to lack of interest. The same property, which was separated into 6 parcels, with 3 larger parcels with floor area between 3,000 sq.m. and 6,000 sq.m. were put up for auction again in February 2003. We were informed by an international real estate consultant with operation in Guangzhou, that the average strike price in the auction was about RMB20,000 per sq.m. A 48 sq.m. shop fronting Dexing Lu was sold for RMB1,150,000 or at RMB23,000 per sq.m.. Up to the date of this report, we still have not been able to confirm the exact details of the sale of this lot of retail shops.

– 104 –

VALUATION REPORT

APPENDIX IV

GENERAL COMMENTS

We are quite optimistic about the subject property (that is Zone A and Zone C on Level 3) from a user’s point of view. Li Wan Plaza is one of the better-equipped and sizable commercial/retail complexes capable of surviving on its own. The subject property, which comprises 2 zones on the Level 3 of the 6- level complex, even though not the best is certainly not the worst part of the development. At the time of our inspection, we noted that Level 4 and Level 5 comprises users such as restaurants, sauna parlors and entertainment business. These users are some of the attractions for shoppers to the shopping centre. Since shoppers have to go to Level 3 first before reaching Levels 4 and 5, we are therefore of the opinion that Level 3 must have a better if not higher use value than the other two levels.

At the time of our inspection, we noted that a substantial part of Zone C of the property was occupied for the sale of mobile phones. However, we were informed that there is no available record regarding the tenant or the tenancy of this portion of the property. As we were advised to be cautious during our inspection and not to reveal our purpose of inspection, we have therefore not carried out enquiry when inside the plaza.

We would like to mention that for the purpose of this exercise and as agreed with you, due to the complication in getting some of the information, we have assumed that full vacant possession of the property can be acquired in the event of a sale. We would like to remind the Company of the importance of this assumption, since the existence of an unclarified tenant or tenancy could affect the possible sale and the eventual value of the property. We would also like to remind the Company that we have also assumed that the property can be sold free from encumbrances and liabilities (such as out-going, management fees and Government tax) which would otherwise reduce the value of the property.

We believe that the valuation of the Property on the basis of “vacant possession” is reasonable for the following reasons:

(a) we are instructed by the Company to conduct the valuation. However, as the property is not under control by the Company, we are not in position to obtain precise and relevant information in respect of the Property (other than information which was in public domain); and
(b) unless and until we can have accurate information regarding the details of the occupier as referred to above (such as term of lease and rental etc), it would be meaningless to make any assumption on the occupier’s right.

VALUATION

In the course of our valuation, we have particularly made reference to the average rental achievable on the Level 1 and Level 2 in Li Wan Plaza, quoted at RMB150 and RMB100 per sq.m., respectively. On a pro-rata basis, the possible average rental for Level 3 is RMB66.66 per sq.m..

By reference to the strike price at RMB20,000 per sq.m. for the recent auction in Li Wan Plaza and assuming the average rental for Level 1 and Level 2 in Li Wan Plaza is 1/2 of RMB(150 + 100) = RMB125 per sq.m., the possible investment yield for retail space in Li Wan Plaza is 7.5% approximately.

– 105 –

VALUATION REPORT

APPENDIX IV

From our enquiry we understand that possible investment yields for shopping centres in Li Wan District varies between 6% to 12%, dependent upon the location, the scale, the standard of management and facilities provided in the centre. Our opinion of value on these property interests is as follows:

Zone C Level 3 – 5,366.36 sq.m. x RMB11,000 per sq.m. = RMB59,029,960 Zone A Level 3 – 5,491.50 sq.m. x RMB9,500 per sq.m. = RMB52,169,250 Total = RMB111,199,210

Exchange Rate taken at HK$1 = RMB1.058 approximately.

OPINION OF VALUE

Bearing in mind the above, our opinion of the open market value of the property assuming available for sale with the benefit of full vacant possession and free from encumbrances as at 20th March 2003 is in the sum of HK$105,000,000 (Hong Kong Dollars One Hundred and Five Million Only) or RMB111,200,000 (Remminbi One Hundred and Eleven Million and Twenty Thousand Only).

Finally and in accordance with our standard practice, we must state that this report is for the use of the party to whom it is addressed. No responsibility is accepted to any third party for the whole or any part of its contents without our prior written approval.

Yours faithfully; For and on behalf of

S.H. NG & CO., LTD.

NG SAI HEE

FHKIS, FRICS, RPS (GP)

NG SAI HEE is a Chartered Surveyor who has 18 years experience in the valuation of properties in the PRC.

– 106 –

PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX V

Set out below is a summary of the principal terms and conditions of the New Scheme to provide sufficient information to the Shareholders for their consideration of the New Scheme proposed to be adopted at the EGM.

(i) Purpose of the scheme

The purpose of the New Scheme is to enable the Group to grant options to selected participants as incentives or rewards for their contribution to the Group. The Directors consider the New Scheme, with its broadened basis of participation, will enable the Group to reward the employees, the Directors and other selected participants for their contributions to the Group. Given that the Directors are entitled to determine any performance targets to be achieved as well as the minimum period that an option must be held before an option can be exercised on a case by case basis, and that the exercise price of an option cannot in any event fall below the price stipulated in the Listing Rules or such higher price as may be fixed by the Directors, it is expected that grantees of an option will make an effort to contribute to the development of the Group so as to bring about an increased market price of the Shares in order to capitalise on the benefits of the options granted.

(ii) Who may join

The Directors may, at its absolute discretion, invite any person belonging to any of the following classes of participants, to take up options to subscribe for Shares:

(a) any employee (whether full-time or part-time including any executive director but excluding any non-executive director) of, or any individual for the time being seconded to for, the Company, any of its subsidiaries or any entity (“Invested Entity”) in which the Group holds an equity interest or any employee or officer of any person (“Controlling Shareholder”) who has the power, directly or indirectly, to secure (1) by means of the holding of shares entitling him to exercise or control the exercise of 30 per cent. (or such lower amount as may from time to time be specified in the Code on Takeovers and Mergers (as amended from time to time) as being the level for triggering a mandatory general offer or more of the voting power at general meetings of the Company; or (2) by means of controlling the composition of a majority of the Directors; or (3) by virtue of any powers conferred by the constitutional document of the Company or any other corporation, that the affairs of the Company are conducted in accordance with the wishes of such person (the persons are collecting referred to as “Eligible Employees”);
(b) any non-executive directors (including independent non-executive directors) of the Company, any of its subsidiaries or any Invested Entity;
(c) any supplier of goods or services to any member of the Group or any Invested Entity;
(d) any customer of the Group or any Invested Entity;
(e) any person or entity that provides research, development or other technological support to the Group or any Invested Entity;

– 107 –

PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX V

(f) any shareholder of any member of the Group or any Invested Entity or any holder of any securities issued by any member of the Group or any Invested Entity;
(g) any adviser or consultant to the Group relating to business development of the Group or any member of the Group or any Invested Entity;
(h) any joint venture or business partner of the Group who have contributed or may contribute to the development and growth of the Group,

and, for the purposes of the New Scheme, the options may be granted to any company wholly owned by one or more persons belonging to any of the above classes of participants. For avoidance of doubt, the grant of any options by the Company for the subscription of Shares or other securities of the Group to any person who fall within any of the above classes of participants shall not, by itself, unless the Directors otherwise determined, be construed as a grant of option under the New Scheme.

The basis of eligibility of any of the above class of participants to the grant of any option shall be determined by the Directors from time to time on the basis of the Directors’ opinion as to his contribution to the development and growth of the Group.

(iii) Maximum number of Shares

(a) The maximum number of Shares to be allotted and issued upon the exercise of all outstanding options granted and yet to be exercised under the New Scheme and any other share option scheme of the Group must not in aggregate exceed 30 per cent. of the issued share capital of the Company from time to time.
(b) The total number of Shares which may be allotted and issued upon exercise of all options (excluding, for this purpose, options which have lapsed in accordance with the terms of the New Scheme and any other share option scheme of the Group) to be granted under the New Scheme and any other share option scheme of the Group must not in aggregate exceed 10 per cent. of the Shares in issue as at the date of passing the relevant resolution adopting the New Scheme (“General Scheme Limit”).
(c) Subject to sub-paragraph (a) of this paragraph (iii) above but without prejudice to subparagraph (d) of this paragraph (iii) below, the Company may issue a circular to the Shareholders and seek approval of the Shareholders in general meeting to refresh the General Scheme Limit provided that the total number of Shares which may be allotted and issued upon exercise of all options to be granted under the New Scheme and any other share options scheme of the Group must not exceed 10 per cent. of the Shares in issue as at the date of approval of the limit and for the purpose of calculating the limit, options (including those outstanding, cancelled, lapsed or exercised in accordance with the New Scheme and any other share option scheme of the Group) previously granted under the New Scheme and any other share option scheme of the Group will not be counted. The circular sent by the Company to the Shareholders shall contain, among other information, the information required under Rule 17.02(2)(d) of the Listing Rules and the disclaimer required under Rule 17.02(4) of the Listing Rules.

– 108 –

PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX V

(d) Subject to sub-paragraph (a) of this paragraph (iii) above and without prejudice to subparagraph (c) of this paragraph (iii) above, the Company may seek separate Shareholders’ approval in general meeting to grant options beyond the General Scheme Limit or, if applicable, the limit referred to in (c) above to participants specifically identified by the Company before such approval is sought. In such event, the Company must send a circular to the Shareholders containing a general description of the specified participants, the number and terms of options to be granted, the purpose of granting options to the specified participants with an explanation as to how the terms of the options serve such purpose and such other information required under Rule 17.02(2)(d) of the Listing Rules and the disclaimer required under Rule 17.02(4) of the Listing Rules.

(iv) Maximum entitlement of each participant

The total number of Shares issued and which may fall to be issued upon exercise of the options granted under the New Scheme and any other share option scheme of the Group (including both exercised or outstanding options) to each participant in any 12-month period shall not exceed 1 per cent. of the issued share capital of the Company for the time being (“Individual Limit”). Any further grant of options, which would result in the Shares issued and to be issued upon exercise of all options granted and to be granted to such person (including exercised, cancelled and outstanding options), in any 12-month period up to and including the date of such further grant in excess of the Individual Limit shall be subject to the issue of a circular to the Shareholders and the shareholders’ approval in general meeting of the Company with such participant and his associates (as defined under the Listing Rules) abstaining from voting. The number and terms (including the exercise price) of options to be granted to such participant must be fixed before Shareholders’ approval and the date of board meeting for proposing such further grant should be taken as the date of grant for the purpose of calculating the exercise price under note (1) to Rule 17.03(9) of the Listing Rules.

(v) Grant of options to certain connected persons

(a) Any grant of options under the New Scheme to a director, chief executive or substantial shareholder of the Company or any of their respective associates must be approved by independent non-executive directors of the Company (excluding any independent nonexecutive director who is the grantee of the options).
(b) Where any grant of options to a substantial shareholder or an independent non-executive director of the Company or any of their respective associates, would result in the Shares issued and to be issued upon exercise of all options already granted and to be granted (including options exercised, cancelled and outstanding) to such person in the 12-month period up to and including the date of such grant:
(1) representing in aggregate over 0.1 per cent. of the Shares in issue; and
(2) having an aggregate value, based on the closing price of the Shares at the date of each grant, in excess of HK$5 million;

such further grant of options must be approved by the Shareholders in general meeting. The Company must send a circular to the Shareholders. All connected persons of the Company

– 109 –

PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX V

must abstain from voting at such general meeting, except that any connected person may vote against the relevant resolution at the general meeting provided that his intention to do so has been stated in the circular. Any vote taken at the meeting to approve the grant of such options must be taken on a poll.

(vi) Time of acceptance and exercise of option

An option may be accepted by a participant within 21 days from the date of the offer of grant of the option.

An option may be exercised in accordance with the terms of the New Scheme at any time during a period to be determined and notified by the Directors to each grantee, which period may commence on a day after the date upon which the offer for the grant of options is made but shall end in any event not later than 10 years from the date of grant of the option subject to the provisions for early termination thereof. Unless otherwise determined by the Directors and stated in the offer of the grant of options to grantee, there is no minimum period required under the New Scheme for the holding of an option before it can be exercised.

(vii) Performance targets

Unless the Directors otherwise determined and stated in the offer of the grant of options to a grantee, a grantee is not required to achieve any performance targets before any options granted under the New Scheme can be exercised.

(viii) Subscription price for Shares and consideration for the option

The subscription price for Shares under the New Scheme will be a price determined by the Directors, but shall not be less than the higher of (a) the closing price of Shares as stated in the Stock Exchange’s daily quotations sheet on the date of the offer of grant, which must be a business day; (b) the average closing price of Shares as stated in the Stock Exchange’s daily quotations for the five trading days immediately preceding the date of the offer of grant; and (c) the nominal value of the Shares.

A nominal consideration of HK$1 is payable on acceptance of the grant of an option.

(ix) Ranking of Shares

(a) Shares allotted upon the exercise of an option will be subject to all the provisions of the articles of association of the Company and will rank pari passu in all respects with the fully paid Shares in issue on the date on which the option is duly exercised or, if that date falls on a day when the register of members of the Company is closed, the first day of the reopening of the register of members (the “Exercise Date”) and accordingly will entitle the holders thereof to participate in all dividends or other distributions paid or made on or after the Exercise Date other than any dividend or other distribution previously declared or recommended or resolved to be paid or made if the record date therefor shall be before the Exercise Date. A Share allotted upon the exercise of an option shall not carry voting rights until the completion of the registration of the grantee on the register of members of the Company as the holder thereof.

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PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX V

(b) Unless the context otherwise requires, references to “Shares” in this paragraph include references to shares in the ordinary equity share capital of the Company of such nominal amount as shall result from a sub-division, consolidation, re-classification or reduction of the share capital of the Company from time to time.

(x) Restrictions on the time of grant of options

No offer for grant of options shall be made after a price sensitive event has occurred or a price sensitive matter has been the subject of a decision until such price sensitive information has been published in the newspapers. In particular, during the period commencing one month immediately preceding the earlier of (a) the date of the meeting of the Directors for the approval of the Company’s interim or annual results, and (b) the last date on which the Company must publish its interim or annual results announcement under its listing agreement, and ending on the date of the announcement of the results, no option may be granted.

The Directors may not grant any option to a participant who is a Director during the periods or times in which Directors are prohibited from dealing in shares pursuant to the Model Code for Securities Transactions by Directors of Listed Companies prescribed by the Listing Rules or any corresponding code or securities dealing restrictions adopted by the Company.

(xi) Period of the New Scheme

The New Scheme will remain in force for a period of 10 years commencing on the date on which the New Scheme is adopted.

(xii) Rights on ceasing employment

If the grantee of an option is an Eligible Employee and ceases to be an Eligible Employee for any reason other than death, ill-health or retirement in accordance with his contract of employment or for serious misconduct or other grounds referred to in paragraph (xiv) below before exercising his option in full, the option (to the extent not already exercised) will lapse on the date of cessation and will not be exercisable unless the Directors otherwise determine in which event the grantee may exercise the option (to the extent not already exercised) in whole or in part within such period as the Directors may determine following the date of such cessation, which will be taken to be the last day on which the grantee was at work with the Group or the Invested Entity or the Controlling Shareholder whether salary is paid in lieu of notice or not.

(xiii) Rights on death, ill-health or retirement

If the grantee of an option is an Eligible Employee and ceases to be an Eligible Employee by reason of his death, ill-health or retirement in accordance with his contract of employment before exercising the option in full, his personal representative(s), or, as appropriate, the grantee may exercise the option (to the extent not already exercised) in whole or in part within a period of 12 months following the date of cessation which date shall be the last day on which the grantee was at work with the Group or the Invested Entity or the Controlling Shareholder whether salary is paid in lieu of notice or not or such longer period as the Directors may determine.

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APPENDIX V

(xiv) Rights on dismissal

If the grantee of an option is an Eligible Employee and ceases to be an Eligible Employee by reason that he has been guilty of serious misconduct or has committed any act of bankruptcy or has become insolvent or has made any arrangements or composition with his creditors generally, or has been convicted of any criminal offence (other than an offence which in the opinion of the Directors does not bring the grantee or the Group or the Invested Entity or the Controlling Shareholder into disrepute), his option will lapse automatically and will not in any event be exercisable on or after the date of cessation to be an Eligible Employee.

(xv) Rights on breach of contract

If the Directors shall at their absolute discretion determine that (a) (1) the grantee of any option (other than an Eligible Employee) or his associate has committed any breach of any contract entered into between the grantee or his associate on the one part and the Group or the Invested Entity on the other part; or (2) that the grantee has committed any act of bankruptcy or has become insolvent or is subject to any winding-up, liquidation or analogous proceedings or has made any arrangement or composition with his creditors generally; or (3) the grantee could no longer make any contribution to the growth and development of the Group by reason of the cessation of its relations with the Group or by other reason whatsoever; and (b) the option granted to the grantee under the New Scheme shall lapse as a result of any event specified in sub-paragraph (a) of this paragraph (xv) above his option will lapse automatically and will not in any event be exercisable on or after the date on which the Directors have so determined.

(xvi) Rights on a general offer, a compromise or arrangement

If a general or partial offer, whether by way of take-over offer, share re-purchase offer, or scheme of arrangement or otherwise in like manner is made to all the holders of Shares, or all such holders other than the offeror and/or any person controlled by the offeror and/or any person acting in association or concert with the offeror, the Company shall use all reasonable endeavours to procure that such offer is extended to all the grantees on the same terms, mutatis mutandis, and assuming that they will become, by the exercise in full of the options granted to them, the Shareholders. If such offer becomes or is declared unconditional, a grantee shall be entitled to exercise his option (to the extent not already exercised) to its full extent or to the extent specified in the grantee’s notice to the Company in exercise of his option at any time before the close of such offer (or any revised offer) or the record date for entitlements under such scheme of arrangement, as the case may be. Subject to the above, an option will lapse automatically (to the extent not exercised) on the date on which such offer (or, as the case may be, revised offer) closes.

(xvii) Rights on winding up

In the event of a resolution being proposed for the voluntary winding-up of the Company during the option period, the grantee may, subject to the provisions of all applicable laws, by notice in writing to the Company at any time not less than two (2) business days before the date on which such resolution is to be considered and/or passed, exercise his option (to the extent not already exercised) either to its full extent or to the extent specified in such notice in accordance with the provisions of the New Scheme and the Company shall allot and issue to the grantee the Shares in respect of which such grantee has exercised his option not less than one (1) business day before the date on which such resolution is to be

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PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX V

considered and/or passed whereupon he shall accordingly be entitled, in respect of the Shares allotted and issued to him in the aforesaid manner, to participate in the distribution of the assets of the Company available in liquidation pari passu with the Shares in issue on the day prior to the date of such resolution. Subject thereto, all options then outstanding shall lapse and determine on the commencement of the winding-up.

(xviii)Grantee being a company wholly owned by eligible participants

If the grantee is a company wholly owned by one or more eligible participants:

(a) paragraphs (xii), (xiii), (xiv) and (xv) shall apply to the grantee and to the options to such grantee, mutatis mutandis, as if such options had been granted to the relevant eligible participant, and such options shall accordingly lapse or fall to be exercisable after the event(s) referred to in paragraphs (xii), (xiii), (xiv) and (xv) shall occur with respect to the relevant eligible participant; and
(b) the options granted to the grantee shall lapse and determine on the date the grantee ceases to be wholly owned by the relevant eligible participant provided that the Directors may in their absolute discretion decide that such options or any part thereof shall not so lapse or determine subject to such conditions or limitations as they may impose.

(xix) Adjustments to the subscription price

In the event of a capitalisation issue, rights issue, sub-division or consolidation of the Shares or reduction of the share capital of the Company whilst an option remains exercisable, such corresponding alterations (if any) certified by the auditors for the time being of or an independent financial adviser to the Company as fair and reasonable will be made to the number or nominal amount of Shares, the subject matter of the New Scheme and the option so far as unexercised and/or the option price of the option concerned, provided that (a) any adjustments shall give a grantee the same proportion of the issued share capital to which he was entitled prior to such alteration; (b) the issue of Shares or other securities of the Group as consideration in a transaction may not be regarded as a circumstance requiring adjustment; and (c) no alteration shall be made the effect of which would be to enable a Share to be issued at less than its nominal value. In addition, in respect of any such adjustments, other than any made on a capitalisation issue, such auditors or independent financial adviser must confirm to the Directors in writing that the adjustments satisfy the requirements of the relevant provision of the Listing Rules.

(xx) Cancellation of options

Any cancellation of options granted but not exercised must be subject to the consent of the relevant grantee and the approval of the Directors. Where the Company cancels any option granted to a grantee but not exercised and issues new option(s) to the same grantee, the issue of such new option(s) may only be made with available unissued options (excluding, for this purpose, the options so cancelled) within the General Scheme Limit or the limits approved by the Shareholders in general meeting pursuant to sub-paragraph (c) or (d) of paragraph (iii) above.

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PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX V

(xxi) Termination of the New Scheme

The Company may by resolution in general meeting at any time terminate the New Scheme and in such event no further options shall be offered but in all other respects the provisions of the New Scheme shall remain in force to the extent necessary to give effect to the exercise of any options (to the extent not already exercised) granted prior to the termination or otherwise as may be required in accordance with the provisions of the New Scheme. Options (to the extent not already exercised) granted prior to such termination shall continue to be valid and exercisable in accordance with the New Scheme.

(xxii) Rights are personal to the grantee

An option is personal to the grantee and shall not be transferable or assignable.

(xxiii)Lapse of option

An option shall lapse automatically (to the extent not already exercised) on the earliest of:

(a) the expiry of the period referred to in paragraph (vi); and
(b) the expiry of the periods or dates referred to in paragraphs (xii), (xiii), (xiv), (xv), (xvi), (xvii) and (xviii).

(xxiv) Others

(a) The New Scheme is conditional on (1) the Shareholders approving its adoption at the EGM; and (2) the Listing Committee of the Stock Exchange granting the listing of and permission to deal in, such number of Shares representing the General Scheme Limit, which may fall to be allotted and issued by the Company pursuant to the exercise of the options which may be granted under the New Scheme.
(b) The terms and conditions of the New Scheme relating to the matters set out in Rule 17.03 of the Listing Rules shall not be altered to the advantage of grantees of the options except with the approval of the Shareholders in general meeting.
(c) Any alterations to the terms and conditions of the New Scheme which are of a material nature or any change to the terms of options granted must be approved by the Shareholders in general meeting, except where the alterations take effect automatically under the existing terms of the New Scheme.
(d) The amended terms of the New Scheme or the options shall comply with the relevant requirements of Chapter 17 of the Listing Rules.
(e) Any change to the authority of the Directors or the scheme administrators in relation to any alteration to the terms of the New Scheme shall be approved by the Shareholders in general meeting.

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PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX V

(xxv) Present status of the New Scheme

Application will be made to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, such number of Shares, representing the General Scheme Limit, which may fall to be allotted and issued by the Company pursuant to the exercise of the options which may be granted under the New Scheme.

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GENERAL INFORMATION

APPENDIX VI

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquires, that to the best of their knowledge and belief, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular the omission of which would make any statement in this circular misleading.

2. DISCLOSURE OF INTERESTS

(a) Disclosure of interests under the SFO

As at the Latest Practicable Date, none of the Directors has any interest or short position in the shares, underlying shares and debenture of the Company or its associated corporation (within the meaning of Part XV of the SFO) which are 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 he is taken or deemed to have under such provisions of the SFO), or which are required, pursuant to section 352 of the SFO, to be entered in the register maintained by the Company referred to therein, or which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to be notified to the Company and the Stock Exchange.

(b) Executive Directors’ service contract

None of the Directors has or is proposed to have a service contract with any member of the Enlarged Group (other than contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

(c) Other interests of the Directors

(i) None of the Directors have any interest, direct or indirect, in any assets which have been, since 31 March 2002 (being the date to which the latest published audited accounts of the Company were made up), acquired or disposed of by or leased to any member of the Enlarged Group or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.
(ii) There is no contract or arrangement subsisting at the date of this circular in which any Director is materially interested and which is significant in relation to the business of the Enlarged Group.
(iii) A Director is not required to hold any Share by way of qualification.

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GENERAL INFORMATION

APPENDIX VI

3. SUBSTANTIAL SHAREHOLDERS

(a) So far as is known to the Directors, the following shareholders have an interest or a short position in the shares and underlying shares in the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO as at the Latest Practicable Date:

			Approximate
			percentage
Name of shareholder	Number of Shares	Nature of interest	of interest
	(Note 1)
World Gain Holdings Limited	608,201,500(L)	beneficial owner	36.10%
China Chengtong Hong Kong	608,201,500(L)	interest of a	36.10%
Company Limited		controlled corporation
		(Note 2)
China Chengtong Holdings Company	608,201,500(L)	interest of a	36.10%
		controlled corporation
		(Note 2)

Notes:

The letter “L” represents the entity’s long position in the Shares.
The entire issued share capital of World Gain Holdings Limited is beneficially owned by China Chengtong Hong Kong Company Limited, the entire issued share capital of which is beneficially owned by China Chengtong Holdings Company.

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GENERAL INFORMATION

APPENDIX VI

(b) So far as is known to the Directors, the following entities are, 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 meetings of the subsidiaries of the Company as at the Latest Practicable Date:

			Approximate
			percentage
Name of subsidiary	Name of shareholder	Number of shares	of interest
Caesar Assets Limited	Skywalk Group Limited	30 shares of US$1 each	30%
China-eDN.com Limited	Diagonal Trading Limited	2,000,000 shares of HK$1 each	20%
Galawell Development Limited	White Snow Management Limited	2,352 shares of HK$1 each	11.76%
Galaxy Gain Limited	Everlasting Value Securities Limited	17 shares of US$1 each	17%
Nardu Company Limited	Filey Investment Corporation	120,000 shares of HK$10 each	12%
Nardu Company Limited	Excellence Star Limited	180,000 shares of HK$10 each	18%
Suzhou Nanda Cement Co. Ltd.	�� !"#$%&'	Registered capital of US$5,069,600	28.97%
	(transliteration being Suzhou City
	Wu Xian Wang Ting Cement Plant)

(c) Save as disclosed above, so far as is known to the Directors, there is no other person who has an interest or a short position in the shares and underlying shares (including interests in options, if any) in the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, is, 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 meetings of any other member of the Group.

4. LITIGATION

As at the Latest Practicable Date, save as disclosed below, none of the members of the Group is engaged in any litigation or arbitration or claim of material importance and there is no litigation or arbitration or claim of material importance is known to the Directors to be pending or threatened against the Group:

(a) The Company commenced legal proceedings in Hong Kong on 10 August 2002 against two former non-executive Directors, Mr. Chung Ho and Mr. Wu Yuehua and three other directors (“New Directors”), namely Wong Sun Keung, Lai Yau Hong Thomson and Ip Wing Chuen, appointed at a purported board meeting held on 4 August 2002 (“Purported Board Meeting”) seeking to, amongst others, invalidate the resolutions in relation to the appointment of the New Directors passed at the Purported Board Meeting. The Group has discontinued the action on the New Directors who tendered their respective resignations as directors on 13 August 2002. The management of the Group is now considering the appropriate action to pursue against Mr. Chung Ho and Mr. Wu Yuehua for breach of directors’ duties.

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GENERAL INFORMATION

APPENDIX VI

(b) The Group commenced a legal action in Hong Kong in September 2002 against (i) Sharp Class International Limited (“Sharp Class”) to recover HK$308 million paid to Sharp Class and (ii) Mr. Lo Chu Kong, a former executive of China-eDN.com Limited, a subsidiary of the Company, who approved the payment of HK$308 million to Sharp Class. The Directors have no knowledge as to the exact purpose and nature of this payment for the lack of satisfactory records and the Company has reported this transaction to the relevant government authorities. Default judgment for the amount claimed of approximately HK$308 million plus interest and cost has been entered against Sharp Class. The management of the Group is now considering the appropriate action to pursue further against the other defendant under this legal action.
(c) The Group commenced a legal action in Hong Kong in November 2002 against (i) Sharp Class to recover HK$50 million paid to Sharp Class and (ii) Mr. Yuen Wai (the former chairman) and Mr. Chung Ho (a former non-executive Director) who approved the payment of HK$ 50 million to Sharp Class. The Directors have no knowledge as to the exact purpose and nature of this payment for the lack of satisfactory records and the Company has reported this transaction to the relevant government authorities. Default judgment for the amount claimed of HK$50 million plus interest and cost has been entered against Sharp Class. The management of the Group is now considering the appropriate action to pursue further against the other defendants under this legal action.

5. CONSENTS AND EXPERTS

(a) The following are the qualifications of the experts who have given their opinion or advice which is contained in this circular:

Name Qualification Moore Stephens certified public accountants Poon & Tong C.P.A. Limited certified public accountants S.H. Ng & Co., Ltd. chartered surveyors VC CEF Capital a company, which is deemed under the provision of the SFO to be licensed for regulated activities of dealing in securities, advising on securities, corporate finance and asset management AllBright Law Offices PRC legal advisers

(b) Moore Stephens, Poon & Tong C.P.A. Limited, S.H. Ng & Co., Ltd., VC CEF Capital and AllBright Law Offices have given and have not withdrawn their respective written consent to the issue of this circular with the inclusion of their letters, reports, opinions or summary thereof (as the case may be) and/or references to their names in the form and context in which they respectively appear.
(c) Each of Moore Stephens, Poon & Tong C.P.A. Limited, S.H. Ng & Co., Ltd., VC CEF Capital and AllBright Law Offices does not have any shareholding in any member of the Group nor any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

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GENERAL INFORMATION

APPENDIX VI

(d) None of Moore Stephens, Poon & Tong C.P.A. Limited, S.H. Ng & Co., Ltd., VC CEF Capital and AllBright Law Offices has any interest, direct or indirect, in any assets which have been, since 31 March 2002, the date to which the latest published audited accounts of the Company were made up, acquired or disposed of by, or leased to any member of the Enlarged Group, or which are proposed to be acquired or disposed of by, or leased to any member of the Enlarged Group.

6. SUMMARY OF MATERIAL CONTRACTS

Save as disclosed below, no material contracts (not being contracts entered into in the ordinary course of business carried out by the Enlarged Group) have been entered into by any member of the Enlarged Group within the two years preceding the date of this circular:

(a) A deed of settlement dated 31 January 2002 made between New Era Foundation (China) Limited (“New Era”), Price Sales Limited (a wholly owned subsidiaries the Company) and the Company pursuant to which New Era agreed to dismiss the winding-up petition against the Company and to waive all claims in the total amount of HK$25,000,000 plus interest against Price Sales Limited and the Company by the payment of HK$29,066,465.73 by the Group. The Company has paid HK$29,066,465.73 on 31 January 2002. Details of the deed of settlement and the payment made by the Company have been announced by the Company on 31 January 2002.
(b) An agreement for sale and purchase of shares in and shareholder’s loan of US$2,727,444.16 (equivalent to approximately HK$21,274,064) to Success Project Investments Limited dated 28 January 2002 and made between Boxhill Limited and Mr. Chow Chung Kai, pursuant to which, the Group sold its entire 35% interest in Success Project Investments Limited (“Success Project Interest”) which holds 52% interest in an investment company holding Shilu International Shopping Centre in Suzhou, China for a total consideration of HK$15 million and the Group was granted an option to repurchase the Success Project Interest at HK$15 million plus interest on or before 28 October 2002.
(c) A settlement agreement dated 18 September 2002 made between (1) PUMA AG Rudolf Dassler Sport; (2) World Cat Ltd.; (3) PUMA Far East Ltd.; (4) Ocean-Land Sports Holding Limited and (5) the Company, pursuant to which, the Group agreed, inter alia, to pay a sum of US$310,000 (equivalent to approximately HK$2,418,000) in full and final settlement of all disputes arising from the licensing agreement and the outstanding royalty payments thereof. Such sum was paid in full by the Group in two equal instalments on 17 September 2002 and 19 November 2002 respectively;
(d) the Settlement Agreement;
(e) the First Supplemental Settlement Deed;
(f) the Second Supplemental Settlement Deed; and

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GENERAL INFORMATION

APPENDIX VI

(g) the letter dated 17 April 2003 from Boxhill Limited to, and agreed by Mr. Chow Chung Kai pursuant to which, Boxhill Limited exercised the option (as referred to in sub-paragraph (b) above) to repurchase 1,836 shares of US$1 each in the capital of Success Project Investments Limited and the shareholder’s loan of about US$2,329,300 outstanding and owing by Success Project Investments Limited as at the date thereof at an aggregate consideration of about HK$16,866,000 as disclosed in the Repurchase Option Announcement.

7. MISCELLANEOUS

(a) The company secretary of the Company is Lai Ka Fai Albert, who is a solicitor of the High Court of Hong Kong.
(b) The Company’s share registrar is Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
(c) The registered office of the Company is at Room 1302, 13th Floor, MassMutual Tower, 38 Gloucester Road, Wanchai, Hong Kong.
(d) The English text of this circular and the accompanying form of proxy shall prevail over the Chinese text in the case of any inconsistency.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the office of Chiu & Partners at 41st Floor, Jardine House, 1 Connaught Place, Hong Kong up to and including 13 June 2003:

(a) the memorandum and articles of association of the Company;
(b) the annual reports of the Company for the two financial years ended 31 March 2002;
(c) the rules of the Existing Scheme;
(d) the draft rules of the New Scheme;
(e) the letter from the Independent Board Committee, the full text of which is set out on page 20 of this circular;
(f) the letter from VC CEF Capital, the full text of which is set out on pages 21 to 29 of this circular;
(g) copies of the material contracts referred to in the paragraph headed “Summary of material contracts” of this appendix;

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GENERAL INFORMATION

APPENDIX VI

(h) the valuation report from S.H. Ng & Co., Ltd., the text of which is set out on pages 98 to 106 of this circular;
(i) the accountants’ report on Merry World, the text of which is set out on pages 30 to 39 of this circular;
(j) the written consents referred to in the paragraph headed “Consents and experts” of this appendix;
(k) the Composite Document;
(l) the Technical Support Agreement;
(m) the Acquisition Agreement; and
(n) a circular dated 15 May 2003 in relation to the exercise of the option to repurchase shares in and shareholder’s loan to Success Project Investments Limited as disclosed in the Repurchase Option Announcement.

– 122 –

NOTICE OF THE EGM

CHINA LOGISTICS GROUP LIMITED �� !"#$%&'

(incorporated in Hong Kong with limited liability)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of China Logistics Group Limited (“Company”) will be held at 11:00 a.m. on Tuesday, 24 June 2003 at Room 1302, 13th Floor, MassMutual Tower, 38 Gloucester Road, Wanchai, Hong Kong to consider and, if thought fit, passing the following resolutions as special and, as the case may be, ordinary resolutions:

SPECIAL RESOLUTION

“ THAT subject to the approval of the Registrar of Companies in Hong Kong being obtained, the name of the Company be changed to “China Chengtong Development Group Limited � �� !"#$%&'( ” and the directors (“Directors”) of the Company be and are hereby authorised generally to do such acts and things and execute all documents or make such arrangements as they may consider necessary or expedient to effect the change of company name.”

ORDINARY RESOLUTIONS

“ THAT
(A) each of the following documents entered into between the Company, Shine Ocean Limited, Ocean-Land Heat Supply Limited, China Huatong Distribution and Industry Development Corporation, Trade Sense International Limited, Huatong Group Holdings Limited, Everlasting Value Securities Limited and Merry World Associates Limited, in relation to, among other matters, the Settlement and Mutual Release (as defined in the circular (“Circular”) of the Company to its shareholders dated 30 May 2003) (a copy of the Circular is produced to the meeting marked “A” and signed by the chairman of the meeting for the purposes of identification) be and it is hereby approved in all respects and all the transactions contemplated thereby be and they are hereby approved:
- (i) the settlement agreement (“Settlement Agreement”) dated 21 March 2003, a copy of which is produced to the meeting marked “B” and signed by the chairman of the meeting for the purposes of identification;
- (ii) the supplemental settlement deed (“First Supplemental Settlement Deed”) dated as of 31 March 2003, a copy of which is produced to the meeting marked “C” and signed by the chairman of the meeting for the purposes of identification;
- (iii) the second supplemental settlement deed (“Second Supplemental Settlement Deed”) dated 15 May 2003, a copy of which is produced to the meeting marked “D” and signed by the chairman of the meeting for the purposes of identification; and

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NOTICE OF THE EGM

(B) the Directors be and they are hereby authorised to take all actions which are in their opinion necessary, appropriate, desirable or expedient for the implementation and completion of the Settlement Agreement (as amended by the First Supplemental Settlement Deed and the Second Supplemental Settlement Deed) and the transactions contemplated thereby and all other matters incidental thereto or in connection therewith and to agree to the variation and waiver of any of the matters relating thereto that are, in the opinion of the Directors, not material to transactions contemplated thereby and are in the best interests of the Company.”
“ THAT with effect from the close of business of the day on which this resolution is passed, the existing share option scheme (“Existing Scheme”) adopted by the Company on 22 September 1998 (a copy of the Existing Scheme is produced to the meeting marked “E” and signed by the chairman of the meeting for the purposes of identification) be and it is hereby terminated and cease to have any further effect save and except that the Existing Scheme will remain in force to the extent necessary to give effect to the options granted thereunder prior to the termination thereof.”
“ THAT subject to the passing of resolution numbered 3 and subject also to and conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited (“Stock Exchange”) granting the listing of, and permission to deal in, such number of shares of the Company which may fall to be allotted and issued pursuant to the exercise of the options which may be granted under the rules of the new share option scheme (“New Scheme”), a draft of which is produced to the meeting marked “F” and signed by the chairman of the meeting for the purposes of identification, representing an amount (“General Scheme Limit”) not being less than 10 per cent. of the issued shares of the Company as at the day on which this resolution is passed, with effect from the close of business of the day on which this resolution is passed, the rules of the New Scheme be approved and adopted and the Directors be and they are hereby authorised: (a) to approve any amendments to the rules of the New Scheme as may be acceptable or not objected to by the Stock Exchange; (b) at their absolute discretion to grant options to subscribe for shares of the Company in accordance with the rules of the New Scheme; (c) to allot, issue and deal with shares of the Company pursuant to the exercise of options granted under the New Scheme provided that the aggregate nominal amount of shares which fall to be allotted and issued pursuant to this authority, together with any issue of shares of the Company upon the exercise of any options (excluding the exercise of those options granted under the Existing Scheme (as defined in resolution numbered 3 above)) granted under any other share option scheme as may from time to time adopted by the Company or its subsidiaries, shall not exceed the General Scheme Limit; and (d) to take all such steps as may be necessary, desirable or expedient to carry into effect the New Scheme.”

By order of the Board

China Logistics Group Limited Li Tiefeng Managing Director

Hong Kong, 30 May 2003

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NOTICE OF THE EGM

Registered office: Room 1302, 13th Floor MassMutual Tower 38 Gloucester Road Wanchai, Hong Kong

Notes:

A member of the Company entitled to attend and vote at the meeting is entitled to appoint a proxy or proxies to attend and vote in his stead. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is appointed. A proxy need not be a member of the Company. A form of proxy for use at the meeting is enclosed herewith. In case of a joint holding, the form of proxy may be signed by any joint holder, but if more than one joint holder is present at the meeting, whether in person or by proxy, that one of the joint holders whose name stands first on the register of members in respect of the relevant joint holding shall alone be entitled to vote in respect thereof.
To be valid, the form of proxy together with any power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power of attorney or authority must be deposited with the Company’s share registrar of the Company, Computershare Hong Kong Investor Services Limited at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong not later than 48 hours before the time appointed for holding the meeting or any adjournment thereof.
Completion and return of the accompanying form of proxy will not preclude members of the Company from attending and voting in person at the meeting or any adjournment thereof should they so wish.
Members of the Huatong Group (as defined in the Circular) and any of their respective associates (as defined in the Rules Governing the Listing of Securities on the Stock Exchange) are not permitted to vote in relation to ordinary resolution numbered 2.

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AI assistant

Beijing Enterprises Holdings Limited — Proxy Solicitation & Information Statement 2003

49187_rns_2003-05-30_6e996542-f5ab-4c37-af62-4e5b159f1e9d.pdf

CHINA LOGISTICS GROUP LIMITED �� !"#$%&'

PROPOSED SETTLEMENT AND MUTUAL RELEASE AS A VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION, PROPOSED CHANGE OF COMPANY NAME, PROPOSED TERMINATION OF THE EXISTING SHARE OPTION SCHEME AND ADOPTION OF A NEW SHARE OPTION SCHEME

Independent Financial Adviser to the Independent Board Committee

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

CHINA LOGISTICS GROUP LIMITED �� !"#$%&'

PROPOSED SETTLEMENT AND MUTUAL RELEASE AS A VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION, PROPOSED CHANGE OF COMPANY NAME, PROPOSED TERMINATION OF THE EXISTING SHARE OPTION SCHEME AND ADOPTION OF A NEW SHARE OPTION SCHEME

INTRODUCTION

THE SETTLEMENT AGREEMENT, THE FIRST SUPPLEMENTAL SETTLEMENT DEED AND THE SECOND SUPPLEMENTAL SETTLEMENT DEED

Background

Date

Parties

Settlement and Mutual Release

Conditions

LETTER FROM THE BOARD

Completion of the Settlement and Mutual Release

Reservation of rights and release of rights

MERRY WORLD AND THE PROPERTY

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

Very substantial acquisition

Relationships between the parties and connected transaction

PROPOSED CHANGE OF COMPANY NAME

Free exchange of the existing share certificate

Status of the existing share certificates

PROPOSED TERMINATION OF THE EXISTING SCHEME AND ADOPTION OF THE NEW SCHEME

Reasons for the proposed termination of the Existing Scheme and adoption of the New Scheme

The New Scheme

Conditions of the adoption of the New Scheme

Values of all options that can be granted under the New Scheme

INFORMATION ON THE ENLARGED GROUP

Principal activities

Business review and prospect

Indebtedness

Borrowings

Disclaimer

Working capital

Material acquisition

EGM

RECOMMENDATION

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

CHINA LOGISTICS GROUP LIMITED �� !"#$%&'

Independent Board Committee

PROPOSED SETTLEMENT AND MUTUAL RELEASE AS

A VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

INTRODUCTION

BASIS OF OUR OPINION

PRINCIPAL FACTORS CONSIDERED

Historical fact pattern

Conditions of the Settlement and Mutual Release

Connected transaction

Solution to the Disputed Claims

Description and tenure

Basis of determining the consideration

Financial effects of the Settlement and Mutual Release on the Group

ii. Profit and loss account

iii. Gearing

iv. Working capital and cash flow

BUSINESS OUTLOOK

RECOMMENDATION

The Directors

China Logistics Group Limited

Dear Sirs,

1 PRINCIPAL ACCOUNTING POLICIES

(a) Basis of preparation

(b) Going concern

(c) Revenue recognition

(d) Investment properties

(e) Loan receivable

(f) Deferred taxation

(g) Foreign currencies

(h) Cash and cash equivalents

2 RESULTS

APPENDIX I

Beijing Enterprises Holdings Limited Proxy Solicitation & Information Statement 2003