THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

The circular is for information purpose only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities of the Company.

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

If you have sold or transferred all your shares in Universal Holdings Limited, you should at once hand this circular to the purchaser(s) or the transferee(s) or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s).

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.

UNIVERSAL HOLDINGS LIMITED 友利控股有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 419)

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTIONS

RELATING TO THE PROPOSED ACQUISITION OF ANGLO ALLIANCE WHICH INVOLVES THE ISSUE OF NEW SHARES AND CONVERTIBLE NOTES AND APPLICATION FOR WHITEWASH WAIVER

REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES

Financial adviser to the Company

Independent financial adviser to

the Independent Board Committee and the Independent Shareholders

SOMERLEY LIMITED

A letter from the board of directors of Universal Holdings Limited is set out on pages 8 to 38 of this circular. A letter from the independent board committee of Universal Holdings Limited containing its advice to the independent shareholders in connection with the transactions under the UHL SP Agreement, the Whitewash Waiver and the proposed grant of the New General Mandate is set out on pages 39 to 40 of this circular. A letter from Somerley Limited, the independent financial adviser to the independent board committee and the independent shareholders of Universal Holdings Limited, containing its advice to the independent board committee and the independent shareholders of Universal Holdings Limited in connection with the transactions under the UHL SP Agreement, the Whitewash Waiver and the proposed grant of the New General Mandate is set out on pages 41 to 84 of this circular.

A notice convening an extraordinary general meeting of Universal Holdings Limited to be held at 9:00 a.m. on Monday, 30 May 2005 at Unit 3203, Admiralty Centre I, 18 Harcourt Road, Admiralty, Hong Kong is set out on pages 257 to 261 of this circular. A form of proxy for use at the extraordinary general meeting is enclosed. Whether or not you intend to attend and vote at the extraordinary general meeting or any adjourned meeting in person, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Hong Kong branch share registrar and transfer office of the Company, Tengis Limited at G/F, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as possible, but in any event not less than 48 hours before the time appointed for holding such meeting or any adjourned meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the special general meeting or any adjourned meeting should you so wish.

13 May 2005

			Pages
Definitions . . .	. . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the	Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		8
Letter from the	Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		39
Letter from Somerley. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			41
Appendix I	—	Financial Information relating to the Group . . . . . . . . . . . . . .	85
Appendix II	—	Accountants’ Report on Orient Ventures . . . . . . . . . . . . . . . . .	122
Appendix III	—	Accountants’ Report on Anglo Alliance . . . . . . . . . . . . . . . . . .	132
Appendix IV	—	Accountants’ Report on Hao Ge . . . . . . . . . . . . . . . . . . . . . . . . .	137
Appendix V	—	Accountants’ Report on the Media Group . . . . . . . . . . . . . . . .	148
Appendix VI	—	Financial Information on the Enlarged Group . . . . . . . . . . . .	197
Appendix VII	—	Management Discussion and Analysis . . . . . . . . . . . . . . . . . . . .	208
Appendix VIII	—	Reports on the Target Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . .	225
Appendix IX	—	Property Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	241
Appendix X	—	General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	244
Notice of EGM. . . . .		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	257

— i —

DEFINITIONS

In this circular, unless the context requires otherwise, the following terms have the meanings as set out below:

“Anglo Alliance”	Anglo Alliance Co., Ltd., a company incorporated in the
	British Virgin Islands with limited liability
“Anglo Alliance Group”	the group of companies comprising Anglo Alliance and
	its subsidiary and associated companies upon completion
	of the Deed
“Announcement”	the announcement dated 2 February 2005 made by the
	Company regarding, among other things, the Deed, the
	UHL SP Agreement and the Whitewash Waiver
“associates”	has the meaning ascribed thereto under the Listing Rules
“Audited Profit”	the audited net profit of the Anglo Alliance Group for
	the 12-month period commencing from the date of
	completion of the Deed in accordance with accounting
	principles generally accepted in Hong Kong
“Basic Consideration”	approximately HK$366.7 million payable by the
	Company upon completion of the UHL SP Agreement
“Beijing Hua Yi Union”	北京華億聯盟文化傳媒投資有限公司(Beijing Hua Yi
	Union Cultural Media Investment Company Limited*),
	being an entity owned as to 50% by the Vendor and 50%
	by an independent third party who is not a connected
	person of the Company and is not a concert party of Mr.
	Ko
“Board”	the board of Directors
“Companies Law”	the Companies Law, Chapter 22 (Laws of 1961, as
	consolidated and revised) of the Cayman Islands
“Company”	Universal Holdings Limited, a company incorporated in
	the Cayman Islands with limited liability, the ordinary
	shares of which are listed on the main board of the Stock
	Exchange
“connected person(s)”	has the meaning ascribed thereto under the Listing Rules

— 1 —

DEFINITIONS

“Consideration Shares”	new Shares to be issued by the Company in settlement
	of part of the consideration payable under the UHL SP
	Agreement
“Consultant Accountants”	Eddie K. K. Lau CPA Limited, Certified Public
	Accountants
“Deed”	the deed dated 2 February 2005 in respect of the
	conditional sale and purchase of the entire issued share
	capital of Anglo Alliance and assignment of shareholder’s
	loan entered into between the Vendor, Orient Ventures,
	Mr. Ko and the Company (as amended by the
	Supplemental Deed)
“Directors”	the directors of the Company
“DVN”	DVN (Holdings) Limited, a company incorporated in
	Bermuda with limited liability, the ordinary shares of
	which are listed on the main board of the Stock Exchange
“DVN Group”	DVN and its subsidiaries
“EGM”	the extraordinary general meeting to be convened and
	held by the Company for seeking approvals from the
	Shareholders and the Independent Shareholders (as the
	case may be) for the various transactions contemplated
	under the UHL SP Agreement, the Whitewash Waiver,
	the grant of the New General Mandate and the proposed
	increase in the authorised share capital of the Company
“Enlarged Group”	the Company and its subsidiaries after completion of the
	UHL SP Agreement, including Orient Ventures and the
	relevant members of the Anglo Alliance Group
“Executive”	the Executive Director of the Corporate Finance Division
	of the SFC or any delegate of the Executive Director
“Existing General Mandate”	the general mandate granted to the Directors at the annual
	general meeting of the Company held on 30 June 2004
	to allot, issue and deal with not more than 654,858,631
	new Shares being 20% of the number of issued Shares
	as at the date of such annual general meeting

— 2 —

DEFINITIONS

“EYCFL”	Ernst & Young Corporate Finance Limited, a licensed
	corporation to carry out types 1 (dealing in securities)
	and 6 (advising on corporate finance) regulated activity
	for the purposes of the SFO and the financial adviser to
	the Company
“First Tranche Convertible Note”	the convertible note of a principal amount of
	approximately HK$104.0 million to be issued by the
	Company to Mr. Ko upon completion of the UHL SP
	Agreement, the terms of which are summarised in the
	paragraph headed “The convertible notes” in the Letter
	from the Board set out in this circular
“Further Consideration”	further consideration of up to approximately HK$183.3
	million which may be payable by the Company under
	the UHL SP Agreement depending on the Audited Profit
“Group”	the Company and its subsidiaries
“Hainan TV”	海南海視旅遊衛視傳媒有限責任公司(Hai Nan Haishi
	Tourist Satellite TV Media Co., Ltd.*)
“Hao Ge”	北京華億浩歌傳媒文化有限公司(Beijing Hua Yi Hao
	Ge Media Culture Co, Ltd.*), a sino-foreign joint venture
	established in the PRC (which was reorganised from a
	PRC incorporated company, namely北京浩歌盛世影
	視文化有限公司(Beijing Hao Ge Sheng Shi Film & TV
	Culture Co. Ltd.*))
“Hao Ge Remaining Shareholder”	趙越(Zhou Yue), the spouse of the Vendor who owns
	a 2% equity interest in Hao Ge
“Hong Kong”	the Hong Kong Special Administrative Region of the
	PRC
“Independent Board Committee”	the independent board committee formed by the
	independent non-executive Directors, namely Mr. Yuen
	Kin, Mr. Wilton Timothy Carr Ingram and Dr. Wong
	Yau Kar, David, who have no interest or involvement in
	the transactions under the UHL SP Agreement, to advise
	the Independent Shareholders on the transactions under
	the UHL SP Agreement, the Whitewash Waiver and the
	grant of the New General Mandate

— 3 —

DEFINITIONS

“Independent Shareholders”	(i) in respect of the transactions under the UHL SP
	Agreement and the Whitewash Waiver, Shareholders,
	other than Mr. Ko and his associates and concert parties,
	who are not involved or interested in the transactions
	contemplated under the Deed and the UHL SP
	Agreement; and (ii) in respect of the proposed grant of
	the New General Mandate, Shareholders other than the
	Directors, chief executive of the Company and their
	respective associates
“Investment Agreement”	the agreement entered into on 16 December 2004 by the
	Media Company with third parties, who are independent
	of the Company and any of its connected persons, and
	the Vendor and his associates and are not concert parties
	of Mr. Ko, in respect of the proposed investment in
	JiCheng (as amended by a supplemental agreement
	entered into on 1 February 2005) which agreement was
	terminated on 17 March 2005
“JiCheng”	北京北廣傳媒集成電視有限公司(Beijing BeiGuang
	Media JiCheng Television Co., Ltd.*), a company
	incorporated in the PRC
“Latest Practicable Date”	10 May 2005 being the latest practicable date prior to
	the printing of this circular for the purpose of ascertaining
	certain information contained in this circular
“Listing Rules”	the Rules Governing the Listing of Securities on the
	Stock Exchange
“Media Company”	北京保利華億傳媒文化有限公司(Asian Union Film
	and Media*), a company incorporated in the PRC
“Media Group”	Media Company and its subsidiaries
“Mobile Phone TV JV”	a joint venture proposed to be established in the PRC to
	engage in mobile phone television business
“Mr. Ko”	Mr. Ko Chun Shun, Johnson, being the Chairman of the
	Board and a substantial Shareholder, who together with
	his concert parties, holds a total of approximately 25.9%
	direct and indirect interests in the Company

— 4 —

DEFINITIONS

“New General Mandate”	the general mandate proposed to be granted to the
	Directors at the EGM to allot, issue and deal with
	additional new Shares not exceeding 20% of the nominal
	value of issued Shares as at the date of the EGM or in
	the event that completion of the UHL SP Agreement
	takes place not exceeding 20% of the nominal value of
	issued Shares as at the date of completion of the UHL
	SP Agreement
“Option”	an option to be granted by Hao Ge Remaining
	Shareholder to Anglo Alliance to acquire the remaining
	2% interest in Hao Ge
“Orient Ventures”	Orient Ventures Limited, a company wholly-owned by
	Mr. Ko
“Placing and	the placing of 654,850,000 existing Shares by Kwan
Top-up Subscription”	Wing Holdings Limited, Techral Holdings Limited,
	companies controlled by Mr. Ko, at a price of HK$0.12
	per Share and the subscription for 654,850,000 new
	Shares by Kwan Wing Holdings Limited and Techral
	Holdings Limited at an issue price of HK$0.12 per Share
	pursuant to a placing and subscription agreement dated
	22 February 2005, details of which are set out in the
	announcement of the Company dated 23 February 2005
“PRC”	The People’s Republic of China, excluding Hong Kong,
	the Macau Special Administrative Region of the People’s
	Republic of China and Taiwan for the purpose of this
	circular
“Reorganisation”	the proposed reorganisation of the Anglo Alliance Group
	pursuant to the Deed as summarised in the section headed
	“Information on the Anglo Alliance Group” in the Letter
	from the Board set out in this circular
“San Luen”	北京紫禁城三聯影視發行有限公司(Beijing Forbidden
	City San Luen Film & Television Company Limited*), a
	company incorporated in the PRC
“SARFT”	the State Administration of Radio, Film and Television
	of the PRC

— 5 —

DEFINITIONS

“Second Tranche Convertible Note” the convertible note of a principal amount of up to	“Second Tranche Convertible Note” the convertible note of a principal amount of up to
	approximately HK$183.3 million which may be issued
	by the Company to Mr. Ko depending on the Audited
	Profit, the terms of which are summarised in the
	paragraph headed “The convertible notes” in the Letter
	from the Board set out in this circular
“SFC”	the Securities and Futures Commission
“SFO”	the Securities and Futures Ordinance (Chapter 571 of
	the Laws of Hong Kong)
“Share(s)”	ordinary share(s) of HK$0.01 each in the share capital
	of the Company
“Share Option(s)”	option(s) granted, or which may be granted, pursuant to
	the terms of the share option scheme of the Company, to
	subscribe for new Shares
“Shareholders”	holders of Shares
“Somerley”	Somerley Limited, a licensed corporation to carry out
	type 1 (dealing in securities), type 4 (advising on
	securities), type 6 (advising on corporate finance) and
	type 9 (asset management) regulated activities under the
	SFO, the independent financial adviser to the Independent
	Board Committee and the Independent Shareholders
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Supplemental Agreement”	the supplemental agreement to the UHL SP Agreement
	entered into on 11 May 2005 by all the parties to the
	UHL SP Agreement to amend certain terms of the UHL
	SP Agreement
“Supplemental Deed”	the supplemental deed to the Deed entered into on 11
	May 2005 by all the parties to the Deed to amend certain
	terms and conditions of the Deed
“Takeovers Code”	the Code on Takeovers and Mergers

— 6 —

DEFINITIONS

“Target Profit” HK$60 million net profit of the Anglo Alliance Group for the 12-month period commencing from the completion date of the Deed in accordance with the accounting policies of the Company and accounting principles generally accepted in Hong Kong “Travel Channel” Hainan Satellite Television Travel Channel “UHL SP Agreement” the conditional sale and purchase agreement dated 2 February 2005 entered into between the Company and Mr. Ko, in relation to the acquisition of the entire issued share capital of Orient Ventures and assignment of shareholder’s loan (as amended by the Supplemental Agreement)

“Vendor” Mr. Dong Ping “Whitewash Waiver” the waiver from the Executive pursuant to Note 1 on dispensations from Rule 26 of the Takeovers Code in respect of any obligation of Mr. Ko and any parties acting in concert with him to make a general offer for all the issued shares in the capital of the Company not already owned by Mr. Ko and parties acting in concert with him which might otherwise arise as a result of Mr. Ko subscribing for the new Shares and/or exercising his conversion rights under the First Tranche Convertible Note and the Second Tranche Convertible Note under the terms of the UHL SP Agreement

“HK$” Hong Kong dollars, the lawful currency of Hong Kong “RMB” Renminbi, the lawful currency of the PRC (for the purpose of this circular, unless otherwise stated, HK$1.0 = RMB1.06) “US$” United States dollars, the lawful currency of the United States of America

For identification purposes only

— 7 —

LETTER FROM THE BOARD

UNIVERSAL HOLDINGS LIMITED 友利控股有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 419)

Executive Directors:

Mr. Ko Chun Shun, Johnson (Chairman) Mr. Shen Ka Yip, Timothy

Non-Executive Directors:

Mr. Tsoi Tong Hoo, Tony Mr. Cheong Chow Yin

Registered office:

Century Yard Cricket Square Hutchins Drive P.O. Box 2681 GT George Town Grand Cayman Cayman Islands

Independent Non-Executive Directors:

Mr. Yuen Kin Mr. Wilton Timothy Carr Ingram Dr. Wong Yau Kar, David

Principal Office in Hong Kong: Unit 4306-07

Far East Finance Center 16 Harcourt Road Admiralty Hong Kong

13 May 2005

To the Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTIONS RELATING TO THE PROPOSED ACQUISITION OF ANGLO ALLIANCE WHICH INVOLVES THE ISSUE OF NEW SHARES AND CONVERTIBLE NOTES AND APPLICATION FOR WHITEWASH WAIVER

REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES

INTRODUCTION

On 2 February 2005, Mr. Ko, the Chairman and a substantial Shareholder, Orient Ventures, a company wholly-owned by Mr. Ko, and the Company entered into the Deed with the Vendor pursuant to which Orient Ventures has conditionally agreed to acquire from the Vendor the entire issued share capital of Anglo Alliance for a maximum consideration of HK$550 million

— 8 —

LETTER FROM THE BOARD

(subject to adjustment). On the same date, the Company entered into the UHL SP Agreement with Mr. Ko pursuant to which the Company has conditionally agreed to acquire from Mr. Ko the entire issued share capital of Orient Ventures for a maximum consideration of HK$550 million (subject to adjustment).

On 11 May 2005, the Supplemental Agreement was entered into to amend the payment terms under the UHL SP Agreement. Pursuant to the Supplemental Agreement, the basic consideration payable by the Company for the acquisition of the entire issued share capital of Orient Ventures upon completion of the UHL SP Agreement is reduced from HK$550 million to approximately HK$366.7 million. Instead of issuing a convertible note of approximately HK$287.3 million as set out in the Announcement, the Company will issue the First Tranche Convertible Note of approximately HK$104.0 million to Mr. Ko (the number of Consideration Shares to be issued to Mr. Ko and the Vendor remains unchanged) upon completion of the Deed. Further Consideration of an amount of up to approximately HK$183.3 million in the form of the Second Tranche Convertible Note may be issued by the Company to Mr. Ko depending on the Audited Profit. As a result of the change in the payment terms, the terms of the First Tranche Convertible Note and the Second Tranche Convertible Note to be issued by the Company under the UHL SP Agreement have also been amended. Please refer to the section headed “UHL SP Agreement” below in this letter for details of the revised payment terms and the terms of the First Tranche Convertible Note and the Second Tranche Convertible Note.

On 11 May 2005, the Supplemental Deed was entered into for the purposes of, among other things, (i) replacing Beijing Hua Yi Union by Hao Ge Remaining Shareholder as the holder of the 2% interest in Hao Ge and as the grantor of the Option; and (ii) amending certain terms of the price adjustment mechanism under the Deed to the effect that (1) the right to any cash compensation payable by the Vendor pursuant to such price adjustment mechanism will be assigned by Orient Ventures to Mr. Ko, so that Mr. Ko may offset the cash compensation against the same amount payable by Mr. Ko to the Vendor under the promissory note to be issued by Mr. Ko to the Vendor upon completion of the Deed; and (2) the agreement to charge the promissory note of HK$183 million as security for the payment of compensation under the price adjustment mechanism has been cancelled.

The Directors propose to renew the Existing General Mandate granted to them to issue new Shares. Pursuant to Rule 13.36(4) of the Listing Rules, the proposed grant of the New General Mandate is subject to approval by Shareholders where the Directors, chief executive of the Company and their respective associates have to abstain from voting.

Mr. Ko is a party to the Deed and the UHL SP Agreement. Mr. Cheong Chow Yin is a salaried Director. Mr. Tsoi Tong Hoo, Tony was involved in the negotiations of the terms of the UHL SP Agreement and is a salaried Director. Mr. Cheong Chow Yin is a non-executive Director who has no interest or involvement in the transactions under the UHL SP Agreement. Under

— 9 —

LETTER FROM THE BOARD

Rule 13.39 (6)(a) of the Listing Rules, the independent board committee established in connection with connected transactions as required under the Listing Rules shall consist only of independent non-executive Directors. As Mr. Cheong Chow Yin is not an independent nonexecutive Director, he was not invited to be a member of the Independent Board Committee. The Independent Board Committee, comprising Mr. Yuen Kin, Mr. Wilton Timothy Carr Ingram and Dr. Wong Yau Kar, David, who are the independent non-executive Directors, has been formed to advise the Independent Shareholders with respect to the transactions under the UHL SP Agreement, the Whitewash Waiver and the proposed grant of the New General Mandate. Somerley has been appointed to advise the Independent Board Committee and the Independent Shareholders in respect of the transactions under the UHL SP Agreement, the Whitewash Waiver and the proposed grant of the New General Mandate.

The purpose of this circular is to give you further information regarding the Deed, the UHL SP Agreement, the Whitewash Waiver, the proposed increase in the authorised share capital of the Company and the proposed grant of the New General Mandate, the recommendation from the Independent Board Committee to the Independent Shareholders and the recommendation from Somerley to the Independent Board Committee and the Independent Shareholders in respect of the transactions under the UHL SP Agreement, the Whitewash Waiver, the proposed grant of the New General Mandate and information on the Group, the Anglo Alliance Group and the Enlarged Group as required under the Listing Rules and the Takeovers Code. Notice of the EGM is set out on pages 257 to 261 of this circular.

THE DEED

Date

2 February 2005

Parties

Vendor : Mr. Dong Ping, an individual who is independent of the Company and its connected persons (as defined under the Listing Rules) and is not a concert party of Mr. Ko for the purposes of the Takeovers Code.
Purchaser : Orient Ventures, a company wholly-owned by Mr. Ko.
Guarantor : Mr. Ko, the Chairman of the Board and a substantial Shareholder holding approximately 25.9% of the total issued share capital of the Company as at the Latest Practicable Date, who has agreed to guarantee the performance by Orient Ventures of its obligations under the Deed.

The Company is a party to the Deed in order that it may enjoy the benefit of certain provisions in the Deed including being afforded the right to gain access to the books and records of the Anglo Alliance Group in order that the Company may carry out due diligence on the Anglo Alliance Group and to satisfy itself as to the results of such due diligence.

— 10 —

LETTER FROM THE BOARD

Assets to be acquired by Orient Ventures

Orient Ventures has conditionally agreed to purchase from the Vendor and the Vendor has conditionally agreed to sell to Orient Ventures the entire issued share capital of Anglo Alliance held by the Vendor.

The loan due from Anglo Alliance to the Vendor outstanding as at the completion date of the Deed will also be assigned by the Vendor to Orient Ventures. Pursuant to the Deed, the Vendor has to make an advance of HK$100 million to Anglo Alliance as operational funding. Up to the Latest Practicable Date, an amount of approximately RMB99.2 million (equivalent to approximately HK$93.6 million) has been advanced by the Vendor to Anglo Alliance. The remaining HK$6.4 million will be advanced by the Vendor to Anglo Alliance on or before completion of the Deed. The Vendor has confirmed that currently save for the above advance and certain accrued administrative expenses, Anglo Alliance does not have other liabilities.

Anglo Alliance is an investment holding company. Anglo Alliance owns a 98% equity interest in Hao Ge. It was originally anticipated that the remaining 2% interest in Hao Ge was to be held by Beijing Hua Yi Union. The Company understands from the Vendor that he subsequently changed his plan and the remaining equity interest in Hao Ge is now held by the spouse of the Vendor, being Hao Ge Remaining Shareholder, as it is more convenient for Hao Ge Remaining Shareholder (being an individual), to execute the Option than Beijing Hua Yi Union (being a corporate entity). References to Beijing Hua Yi Union in the Deed have been replaced by Hao Ge Remaining Shareholder as the holder of the 2% interest in Hao Ge and the grantor of the Option pursuant to the Supplemental Deed. The Hao Ge Remaining Shareholder is not a concert party of Mr. Ko. The articles of association of Hao Ge state that certain rights and obligations (such as in respect of dividend, voting and upon winding up) of each of Anglo Alliance and Hao Ge Remaining Shareholder are proportional to their respective equity interests in Hao Ge.

It is the intention of the Company to acquire a 100% interest in Hao Ge. As advised by the PRC legal advisers to the Vendor, the Company, as a foreign investor, is restricted from holding a 100% interest in Hao Ge under the present PRC law. In view of the PRC law restriction as described above, the Vendor has agreed as one of the conditions precedent to the completion of the Deed, that Hao Ge Remaining Shareholder shall grant to Anglo Alliance the Option to acquire the remaining equity interest in Hao Ge at a nominal consideration of HK$1. The right to exercise the Option shall be subject to the applicable PRC law.

In addition, the Vendor has undertaken to Orient Ventures that he will use his best endeavours to enable Anglo Alliance to enjoy the economic benefits arising from the remaining equity interest in Hao Ge after completion of the Deed and before exercise of the Option. The Company, Mr. Ko and the Vendor are discussing about the mechanics of transferring the economic benefits from Hao Ge Remaining Shareholder in Hao Ge to Anglo Alliance, such as by way of assigning Hao Ge Remaining Shareholder’s right to receive dividend declared by Hao Ge to Anglo Alliance. As at the Latest Practicable Date, such mechanics had not been determined. The Company will issue an announcement after such mechanics have been determined.

— 11 —

LETTER FROM THE BOARD

The Company understands from the Vendor that Hao Ge Remaining Shareholder has agreed to the above arrangements.

Upon completion of the Deed, the issued shares of Anglo Alliance (which will be transferred to Orient Ventures pursuant to the Deed), the entire equity capital of Hao Ge and Hao Ge’s interest in the Media Company shall be free from any liens, encumbrances, security and charges. Please refer to the paragraph headed “Information on the Anglo Alliance Group” in this letter for further details of the Anglo Alliance Group’s assets and business activities.

Consideration

The maximum consideration payable by Orient Ventures to the Vendor for the acquisition of the entire issued share capital of Anglo Alliance and the assignment of the shareholder’s loan is HK$550 million, (subject to adjustment as described in the paragraph headed “Adjustment to the consideration” below) of which Orient Ventures has paid HK$110 million as deposit to the Vendor. The remaining consideration of HK$440 million will be satisfied as to HK$326.6 million upon completion of the Deed by the issue of a promissory note with a principal amount of HK$326.6 million by Mr. Ko to the Vendor, and with the balance of HK$113.4 million to be satisfied either (i) by Mr. Ko in cash on the long stop date of the UHL SP Agreement (being 31 May 2005 (as extended by the parties to the UHL SP Agreement from 30 April 2005) or such later date as Orient Ventures and the Vendor may agree), if the UHL SP Agreement does not proceed to completion; or (ii) by the issue of 2,700 million Consideration Shares at HK$0.042 each by the Company to the Vendor upon completion of the UHL SP Agreement (as described below).

The promissory note to be issued by Mr. Ko under the Deed will be unsecured, become due on the date falling on the end of 18 months immediately after the date of the issue of the promissory note and bear interest at a rate equal to the prime rate quoted by The Hongkong and Shanghai Banking Corporation Limited.

Conditions precedent for completion of the Deed

Completion of the Deed is subject to the satisfaction of the following conditions precedent:

the warranties given by the Vendor remaining true and accurate and not misleading in any material respect;
the assignment of the Investment Agreement by the Media Company to Hao Ge and a PRC lawyer confirming that such assignment is valid and enforceable under PRC laws, rules and regulations (as the Investment Agreement has been terminated, Orient Ventures has waived this condition pursuant to the Supplemental Deed as further explained in the sub-paragraph headed “Termination of the Investment Agreement” in the paragraph headed “Information on the Anglo Alliance Group” below);

— 12 —

LETTER FROM THE BOARD

Hao Ge Remaining Shareholder and Anglo Alliance duly executing an agreement granting the Option to Anglo Alliance on terms and conditions to the satisfaction of Orient Ventures and a PRC lawyer confirming that such agreement is legally valid, binding and enforceable under PRC laws and regulations;
the delivery of a PRC legal opinion to the satisfaction of Orient Ventures and the Company confirming, among other things, (i) the legality and validity of (a) the establishment and continuation of all the members of the Anglo Alliance Group established in the PRC, (b) the conversion of Hao Ge into a sino-foreign joint venture and its increase in registered capital and (c) the ownership and shareholding structure of the Anglo Alliance Group upon completion of the Deed; (ii) Anglo Alliance’s title in the equity interest in Hao Ge (being not less than 80% and not more than 98%); (iii) whether the PRC members of the Anglo Alliance Group have obtained all necessary approvals and licences for their existing operations and businesses; (iv) whether the relevant PRC members of the Anglo Alliance Group have valid and proper title to their owned and leased properties; (v) whether the PRC members of the Anglo Alliance Group have complied with all applicable laws, rules and regulations of the PRC; and (vi) the transactions contemplated under the Deed do not infringe any laws, rules and regulations of the PRC or result in any approvals or licences granted to any member of the Anglo Alliance Group becoming void or voidable;
Orient Ventures and the Company being satisfied with the results of the due diligence in respect of the Anglo Alliance Group which shall include, among other things, due diligence on the financial conditions of the Anglo Alliance Group and the ownership titles of each member of the Anglo Alliance Group;
the Vendor having complied with his obligations under the Deed;
all necessary consents being granted by third parties (including governmental or official authorities) and there being no statute, regulation or decision which would prohibit, restrict or materially delay the sale and purchase of the entire issued share capital of Anglo Alliance and the assignment of the loan of approximately HK$100,000,000 being the entire sum due from Anglo Alliance to the Vendor on completion of the Deed;
completion of the Reorganisation to the reasonable satisfaction of Orient Ventures; and
the amount due from Hao Ge to the Vendor outstanding as at the date of the Deed of not less than RMB70 million being assigned by the Vendor to Anglo Alliance or being capitalised into equity of Hao Ge and a PRC lawyer confirming the legality and validity of such assignment or capitalisation (please refer to the paragraph headed “Information on the Anglo Alliance Group” for details of the amount due from Hao Ge to the Vendor).

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LETTER FROM THE BOARD

Completion of the Deed shall take place on the second business day (or such later date as the Vendor and Orient Ventures may agree in writing) after all the conditions precedent to the Deed have been satisfied or waived (as the case may be). If any of the conditions precedent have not been satisfied or waived on or before 31 May 2005 (as extended from 30 April 2005 by the Vendor and Orient Ventures) or such later date as the Vendor and Orient Ventures may agree in writing, the Deed shall lapse and the deposit shall be repaid to Orient Ventures. The Investment Agreement was terminated on 17 March 2005. Orient Ventures has waived condition 2 above in its entirety and condition 8 above to the extent such is rendered impossible to fulfil as a result of the termination of the Investment Agreement (as the rights of the Media Company in the Investment Agreement will not be assigned to Hao Ge) pursuant to the Supplemental Deed.

Adjustment to the consideration

Under the Deed, the consideration in respect of the acquisition of the Anglo Alliance Group will be adjusted if the audited net profit of the Anglo Alliance Group for the 12-month period commencing from the completion date of the Deed is less than HK$60 million (being the Target Profit). Orient Ventures, as the purchaser, has assigned the right to receive any compensation from the Vendor to Mr. Ko pursuant to the Supplemental Deed. After such assignment, any adjustment will be made by way of offsetting equivalent amount payable by Mr. Ko to the Vendor pursuant to the promissory note to be issued by Mr. Ko to the Vendor upon completion of the Deed. The consideration adjustment under the Deed is calculated as follows:

Total consideration payable under Deed Y x

Target Profit

Y = the lesser of (i) the Target Profit minus the audited net profit of the Anglo Alliance Group for the 12-month period commencing from the completion date of the Deed or (ii) HK$20,000,000 (all figures denominated in RMB shall for these purposes be converted into HK$ based on an exchange rate of RMB1.06 = HK$1).

The maximum adjustment to the consideration is approximately HK$183.3 million.

The consideration adjustment arrangement (including the amount of Target Profit) was determined after arm’s length negotiations among the Company, Mr. Ko and the Vendor in order to protect the interests of Orient Ventures by adjusting to an extent whereby the consideration would be based upon the actual profits achieved by the Anglo Alliance Group.

The Target Profit is regarded as a profit forecast for the purposes of the Takeovers Code and the Listing Rules and therefore has to be reported on by the financial adviser and consultant accountants of the Company in accordance with Rule 10 of the Takeovers Code and Rule 14.62 of the Listing Rules. As the Target Profit was not determined based on any financial projection, the Vendor has produced financial projections in respect of the Anglo Alliance

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LETTER FROM THE BOARD

Group for the 12 months ending 31 May 2006 assuming that the Deed will be completed on 31 May 2005. The above financial projections support a profit forecast. The bases and assumptions used in the preparation of the financial projections together with the reports from EYCFL and the Consultant Accountants on the Target Profit are set out in Appendix VIII to this circular.

Shareholders and investors should note that the bases and assumptions used relate mostly to future events and may not be valid throughout the forecast period. The actual net profit of the Anglo Alliance Group for the 12 months following completion of the Deed may differ from the Target Profit and there is no assurance that the Target Profit will be met.

THE UHL SP AGREEMENT

Date

2 February 2005

Parties

Vendor : Mr. Ko Purchaser : the Company

Assets to be acquired by the Company

The Company has conditionally agreed to purchase from Mr. Ko and Mr. Ko has conditionally agreed to sell to the Company the entire issued share capital of Orient Ventures.

Any amount due from Orient Ventures to Mr. Ko outstanding as at the completion date of the UHL SP Agreement will be assigned by Mr. Ko to the Company. As at the Latest Practicable Date, Orient Ventures was indebted to Mr. Ko of HK$110 million, being the deposit paid to the Vendor under the Deed. It is anticipated that Orient Ventures will be indebted to Mr. Ko in the total amount of approximately HK$436.6 million as at the completion date of the UHL SP Agreement in connection with the payment of part of the consideration under the Deed.

Consideration

Upon completion of the UHL SP Agreement, the Company will pay the Basic Consideration of approximately HK$366.7 million. Further Consideration of an amount up to approximately HK$183.3 million may be payable by the Company to Mr. Ko depending on the Audited Profit.

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LETTER FROM THE BOARD

If the Audited Profit multiplied by 9.167 (which is the price-to-earnings ratio adopted under the price adjustment mechanism under the Deed) exceeds the Basic Consideration, the Company will pay the difference (subject to a cap of approximately HK$183.3 million) to Mr. Ko as the Further Consideration, which will be satisfied by the issuance of the Second Tranche Convertible Note by the Company. If the maximum amount of the Second Tranche Convertible Note is issued, it will carry rights to convert into approximately 3,741,496,591 new Shares based on the initial conversion price of HK$0.049 per Share. The Basic Consideration of HK$366,666,667 will be satisfied by the Company as to (i) HK$149,281,973 by way of issuing 3,046,570,871 Consideration Shares (at an issue price HK$0.049 per Share) to Mr. Ko (or his nominee); (ii) HK$103,984,694 by way of the issue of the First Tranche Convertible Note to Mr. Ko; and (iii) the balance of the consideration payable under the Deed of HK$113,400,000 by issuing 2,700,000,000 Consideration Shares (at an issue price of HK$0.042 per Share) to the Vendor.

The final total consideration payable by the Company to Mr. Ko under the UHL SP Agreement (after any consideration adjustment as described above) will be equal to the final total consideration payable by Mr. Ko to the Vendor under the Deed (after any clawback price adjustment) as described in the section headed “The Deed” above. The consideration (including the price adjustment mechanism) was based on a price-to-earnings ratio of approximately 9.167 times and was determined after arm’s length negotiations amongst the Company, Mr. Ko and the Vendor with reference, in particular, to the established market position of the Anglo Alliance Group (including the existing coverage of the Travel Channel which is an associated company of the Media Company and has a 30-year operating right), the possible growth of the businesses carried out by the Anglo Alliance Group and the relevant industry, the development trend of the businesses and the quality of the management of the Anglo Alliance Group, the terms of the Deed (including the agreed assignment and/or capitalisation of loans due from the Anglo Alliance Group to the Vendor of not less than approximately HK$166 million), and the business potential of the integrated media businesses carried out by the Anglo Alliance Group in the PRC.

The 5,746,570,871 Consideration Shares in aggregate to be issued by the Company upon completion of the UHL SP Agreement represent approximately 146.3% of the issued share capital of the Company as at the Latest Practicable Date, approximately 59.4% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares but before conversion of any of the First Tranche Convertible Note and the Second Tranche Convertible Note and approximately 37.0% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares and the conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note (assuming that the maximum amount of the Second Tranche Convertible Note is issued) in full at the initial conversion price.

Of the total Consideration Shares, the 2,700,000,000 Consideration Shares to be issued to the Vendor represent approximately 68.7% of the issued share capital of the Company as at the Latest Practicable Date, approximately 27.9% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares but before conversion of any of the First

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LETTER FROM THE BOARD

Tranche Convertible Note and the Second Tranche Convertible Note and approximately 17.4% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares and the conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note (assuming that the maximum amount of the Second Tranche Convertible Note is issued) in full at the initial conversion price.

Of the total Consideration Shares, the 3,046,570,871 Consideration Shares to be issued to Mr. Ko, together with the 5,863,633,203 new Shares which may fall to be issued upon conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note (assuming the maximum amount is issued) at the initial conversion price, represent approximately 226.8% of the issued share capital of the Company as at the Latest Practicable Date and approximately 57.3% of the issued share capital of the Company as enlarged by the issue of all the Consideration Shares and the conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note (assuming the maximum amount is issued) in full.

The existing shareholding structure of the Company and that upon completion of the UHL SP Agreement are set out below in the section headed “Shareholding structure of the Company”.

The issue price of the Consideration Shares to the Vendor of HK$0.042 per Share was determined after arm’s length negotiations between the Company and the Vendor with reference to the market prices of the Shares and represents a discount of approximately 10.6% to the closing price of the Shares of HK$0.047 each on 17 December 2004 (being the last trading day prior to the issue of the Announcement), a discount of approximately 14.3% to the average closing price of the Shares of HK$0.049 each for the five consecutive trading days on and prior to 17 December 2004, a discount of approximately 70.2% to the closing price of the Shares of HK$0.141 each as at the Latest Practicable Date, and a discount of approximately 68.4% to the average closing price of the Shares of HK$0.133 each for the five consecutive trading days on and prior to the Latest Practicable Date.

The issue price of the Consideration Shares to the Vendor represents a discount to the market price per Share prior to the issue of the Announcement and was determined following arm’s length negotiations between the Vendor, the Company and Mr. Ko. In facilitating the acquisition of the Anglo Alliance Group, Mr. Ko has agreed to subscribe for new Shares at the average closing price of the Shares of HK$0.049 per Share for the five consecutive trading days on and prior to 17 December 2004, which is a higher price per Share than the issue price of the Consideration Shares to be issued to the Vendor. Mr. Ko felt that it would be more appropriate and fair for him, as a connected person, to subscribe for Shares at the market price rather than at a discount even though the issue of Shares to an independent third party had agreed to be made at a discount. The issue price of the Consideration Shares to Mr. Ko of HK$0.049 per Share and conversion price of the First Tranche Convertible Note and the Second Tranche Convertible Note of HK$0.049 per Share was determined after arm’s length negotiations between the Company and Mr. Ko with reference to the market prices of the Shares during the days prior to the date of the UHL SP Agreement and represents a premium of approximately 4.3% over the closing price of the Shares of HK$0.047 each on 17 December 2004 (being the

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LETTER FROM THE BOARD

last trading day prior to the issue of the Announcement), the average closing price of the Shares of HK$0.049 each for the five consecutive trading days on and prior to 17 December 2004, a discount of approximately 65.2% to the closing price of the Shares of HK$0.141 each as at the Latest Practicable Date, and a discount of approximately 63.2% to the average closing price of the Shares of HK$0.133 each for the five consecutive trading days on and prior to the Latest Practicable Date.

The Directors are of the view that the terms of the UHL SP Agreement are fair and reasonable and in the interests of the Company and its shareholders as a whole in particular after considering the factors set out above in respect of the determination of the consideration and the price adjustment mechanism and the reasons for the transaction set out below in the section headed “Reasons for and benefits of the transactions”.

Conditions precedent for completion of the UHL SP Agreement

Completion of the UHL SP Agreement is subject to the satisfaction of the following conditions precedent:

the passing of a resolution by the Shareholders approving the increase in authorised share capital of the Company to an amount sufficient for the issue and allotment of the Consideration Shares and new Shares which may fall to be issued upon conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note;
the passing of a resolution by the Independent Shareholders pursuant to the requirements of the Listing Rules approving the transactions contemplated under the UHL SP Agreement in particular, the purchase of Orient Ventures, the issue of the Consideration Shares and the First Tranche Convertible Note and the Second Tranche Convertible Note and the exercise of the Option;
the Stock Exchange granting its approval for the listing of, and permission to deal in, the Consideration Shares and the new Shares which would fall to be issued upon conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note;
the warranties given by Mr. Ko remaining true and accurate and not misleading;
all other necessary consents from third parties (including governmental or official or regulatory authorities) and all other necessary consents and approvals required pursuant to any legal or regulatory requirement in respect of the sale and purchase of the entire issued share capital of Orient Ventures and the assignment from Mr. Ko to the Company of his rights in respect of any amount due from Orient Ventures to Mr. Ko as at the completion date of the UHL SP Agreement being obtained;

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LETTER FROM THE BOARD

no statute, regulation or decision which would prohibit, restrict or materially delay the sale and purchase of Orient Ventures;
the completion of the Deed;
the passing of a resolution by the Independent Shareholders by poll approving the Whitewash Waiver pursuant to the requirements of the Takeovers Code; and
the Executive granting the Whitewash Waiver to Mr. Ko and the parties acting in consent with him.

Apart from conditions 1, 2, 3, 7, 8 and 9 which may not be waived, all the conditions precedent may be waived by the Company. Completion of the UHL SP Agreement shall take place on the second business day (or such later date as Mr. Ko and the Company may agree in writing) after all the conditions precedent to the UHL SP Agreement have been satisfied or waived. If any of the conditions precedent have not been satisfied or waived on or before 31 May 2005 (as extended by the parties to the UHL SP Agreement from 30 April 2005) (or such later date as Mr. Ko and the Company may agree in writing), the UHL SP Agreement shall lapse.

The Company will issue an announcement upon completion of the UHL SP Agreement or on the long-stop date of the UHL SP Agreement in respect of the status of the transaction if the UHL SP Agreement has not been completed by then.

STATUS OF THE SHARES TO BE ISSUED

The Consideration Shares to be issued upon completion of the UHL SP Agreement and any new Shares which may be issued upon conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note shall rank pari passu with all the Shares then in issue.

THE CONVERTIBLE NOTES

The principal terms of the First Tranche Convertible Note and the Second Tranche Convertible Note are summarised below:

Aggregate principal the First Tranche Convertible Note of HK$103,984,694; and amount: the Second Tranche Convertible Note of up to HK$183,333,333

Maturity date: The First Tranche Convertible Note and the Second Tranche Convertible Note will mature on the same date, being the fifth anniversary of the date of completion of the UHL SP Agreement provided that the accumulated net profit after tax and extraordinary

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LETTER FROM THE BOARD

items of the Anglo Alliance Group from the date of completion of the UHL SP Agreement up to the fifth anniversary of the date of completion of the UHL SP Agreement shall not be less than the aggregate of the Basic Consideration and the Further Consideration.

In the event that the above proviso is not fulfilled, the maturity date shall be the date falling on the fifth business day after the issue of the financial statements for a financial year in which the accumulated net profit after tax and extraordinary items of the Anglo Alliance Group from the date of completion of the UHL SP Agreement up to that financial year shall be more than or equal to aggregate amount of the Basic Consideration and the Further Consideration.

Upon maturity, any outstanding portion of the First Tranche Convertible Note and the Second Tranche Convertible Note should be redeemed in cash.

Interest:

Transferability:

Conversion:

Both the First Tranche Convertible Note and the Second Tranche Convertible Note will be interest free up to the fifth anniversary of the date of completion of the UHL SP Agreement and thereafter bears interest at a rate equal to the prime rate quoted by The Hongkong and Shanghai Banking Corporation.

Both the First Tranche Convertible Note and the Second Tranche Convertible Note will not be listed on any stock exchange but will be freely transferable in whole or in part.

Both the First Tranche Convertible Note and the Second Tranche Convertible Note may be converted into new Shares at the conversion price of HK$0.049, subject to usual adjustment in respect of the occurrence of various adjusting events, like share consolidation, share sub-division, capitalisation issue, capital distribution, rights issue or other similar events, and issue of new securities, in whole or in part at any time after issue of the convertible note up to the fifth anniversary of the issue of the relevant convertible note.

Based on the initial conversion price of HK$0.049 per Share, 5,863,633,203 new Shares may fall to be issued upon conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note (assuming the maximum amount is issued) in full, representing approximately 149% of the issued share capital of the Company as at the Latest Practicable Date.

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LETTER FROM THE BOARD

The maturity date and conversion periods of the First Tranche Convertible Note and the Second Tranche Convertible Note depend on, among other things, the completion date of the UHL SP Agreement. The Company will issue further announcements setting out the relevant dates of the maturity date and conversion periods of the First Tranche Convertible Note and the Second Tranche Convertible Note.

LISTING APPLICATION

The Company has made an application to the Stock Exchange seeking approval from the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares and any new Shares which may fall to be issued upon conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note.

THE WHITEWASH WAIVER

Mr. Ko and his concert parties currently hold approximately 25.9% of the issued share capital of the Company.

Upon completion of the UHL SP Agreement, the percentage voting rights held by Mr. Ko and his concert parties in Company will increase from approximately 25.9% to (i) approximately 42.0% of the enlarged issue share capital of the Company before conversion of any of the First Tranche Convertible Note and the Second Tranche Convertible Note (which may be issued); and (ii) approximately 63.9% of the further enlarged issued share capital of the Company assuming immediate conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note (assuming the maximum amount is issued) in full. Mr. Ko has applied to the Executive for the Whitewash Waiver in respect of the obligation which would otherwise arise under Rule 26.1 of the Takeovers Code for Mr. Ko and his concert parties to make a mandatory general offer for all the issued Shares not already owned by Mr. Ko or the parties acting in concert with him. Mr. Ko has confirmed that neither he nor any of his concert parties has dealt in the Shares or any other securities carrying rights to convert into Shares since 2 August 2004 (being the date falling 6 months prior to the Announcement) save for the Placing and Top-up Subscription. Mr. Ko was the controlling Shareholder at the time of the Announcement. His interests in the Company fell below 30% as a result of the Placing and Top-up Subscription. Mr. Ko will become the controlling Shareholder again after completion of the UHL SP Agreement. Mr. Ko has applied to the Executive and the Executive has indicated that he will consent to the sale and subsequent subscription of 654,850,000 Shares under the Placing and Top-up Subscription in respect of the Whitewash Waiver under paragraph 3(b) of Appendix VI to the Takeovers Code. The Whitewash Waiver will, if granted, be subject to approval by the Independent Shareholders voting by poll at the EGM in accordance with Note 1 on dispensation from Rule 26 of the Takeovers Code. Mr. Ko and his concert parties will have to abstain from voting in respect of the resolution for approving the Whitewash Waiver.

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LETTER FROM THE BOARD

After completion of the UHL SP Agreement and assuming conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note in full, Mr. Ko and his concert parties would hold approximately 63.9% of the voting rights of the Company. Mr. Ko’s concert party group would be free to acquire further voting rights in the Company without triggering a mandatory general offer obligation under Rule 26 of the Takeovers Code.

SHAREHOLDING STRUCTURE OF THE COMPANY

The table below sets out for illustrative purposes the shareholding structure of the Company (a) as at the date of the Announcement, (b) as at the Latest Practicable Date, (c) immediately after completion of the UHL SP Agreement but before conversion of the First Tranche Convertible Note and Second Tranche Convertible Note, (d) immediately after completion of the UHL SP Agreement and assuming immediate conversion of the First Tranche Convertible Note in full and (e) after completion of the UHL SP Agreement and immediately after conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note (assuming the maximum amount is issued) in full.

									After completion
									of the UHL SP
									Agreement and immediately
						Immediately after			after conversion of the
						completion of the UHL	Immediately after		First Tranche Convertible
						SP Agreement but	completion of the		Note and the Second
						before conversion of	UHL SP Agreement		Tranche Convertible Note
						the First Tranche	and assuming immediate		(assuming that the maximum
						Convertible Note and	conversion of the First		amount of the Second
	As at the date of the		As at the			the Second Tranche	Tranche Convertible		Tranche Convertible Note
	Announcement		Latest Practicable	Date		Convertible Note	Note in full(Note)		is issued) in full(Note)
	Number		Number			Number	Number		Number
	of Shares	%	of Shares		%	of Shares %	of Shares	%	of Shares %
Mr. Ko and his
concert parties	1,019,077,150	31.1%	1,019,077,150	25.9%		4,065,648,021 42.0%	6,187,784,633	52.4%	9,929,281,224 63.9%
The Vendor	—	—	—	—		2,700,000,000 27.9%	2,700,000,000	22.9%	2,700,000,000 17.4%
Placees under the Placing
and Top-up Subscription
(who are public Shareholders)	—	—	654,850,000	16.7%		654,850,000 6.8%	654,850,000	5.6%	654,850,000 4.2%
Other public Shareholders	2,255,216,007	68.9%	2,255,216,007	57.4%		2,255,216,007 23.3%	2,255,216,007	19.1%	2,255,216,007 14.5%
Total	3,274,293,157	100%	3,929,143,157	100.0%		9,675,714,028 100.0%	11,797,850,640	100.0%	15,539,347,231 100.0%

Note: Based on the initial conversion price of HK$0.049 per Share.

Based on the shareholding structure of the Company as at the Latest Practicable Date and the terms of the Deed, the UHL SP Agreement and the First Tranche Convertible Note and the Second Tranche Convertible Note, the shareholding percentage held by public Shareholders would fall to approximately 18.7% of the enlarged issued share capital of the Company

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LETTER FROM THE BOARD

immediately upon conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note (assuming the maximum amount is issued) in full, which is less than the minimum 25% public float required under the Listing Rules. Mr. Ko has undertaken to the Company and the Stock Exchange that he will not exercise any of the First Tranche Convertible Note and/or the Second Tranche Convertible Note so as to cause the public float of the Company to fall below the required minimum level under the Listing Rules at any time.

The Stock Exchange has indicated that should the UHL SP Agreement be completed, it will closely monitor trading in the Shares if less than 25% of the issued Shares are held by the public. If the Stock Exchange believes that a false market exists or may exist in the Shares; or there are too few Shares in public hands to maintain an orderly market, then it will consider exercising its discretion to suspend trading in the Shares.

As a result of the transactions under the Deed and the UHL SP Agreement, the Vendor will hold approximately 27.9% of the issued share capital of the Company immediately upon completion of the UHL SP Agreement but before conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note and will become a substantial Shareholder for the purposes of the Listing Rules.

The Vendor has undertaken to the Board that he or his nominee(s) will not sell 2,000,000,000 Shares (out of the 2,700,000,000 Consideration Shares) to be issued to him (or his nominee(s)) upon completion of the UHL SP Agreement within 2 years from the date of issue of such Consideration Shares unless with the prior consent from the Board.

INFORMATION ON THE GROUP

The Group is principally engaged in the retail and distribution of home audio and video equipment, and the provision of IP telephony and related services. As of 31 December 2004 the audited net asset value of the Group was approximately HK$53.9 million. The audited net losses of the Group for each of the two years ended 31 December 2004 were as follows:

	Financial	year ended
	31 December
	2003	2004
	HK$ million	HK$ million
Loss before taxation and extraordinary items	(69.9)	(8.8)
Loss after taxation and extraordinary items	(70.0)	(9.9)
Loss after taxation, extraordinary items
and minority interests	(70.0)	(9.9)

The Group did not record any extraordinary items for each of the two years ended 31 December 2004.

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LETTER FROM THE BOARD

After completion of the UHL SP Agreement, whilst the Group will continue to carry out its existing businesses, the Group will also carry out the development of the media business through its investment in the Media Group. The Group will continue to look for other appropriate investment opportunities with a view to further strengthening the business of the Group.

INFORMATION ON THE ANGLO ALLIANCE GROUP

Anglo Alliance is an investment holding company. Members of the Anglo Alliance Group are engaged in various media related businesses in the PRC, including production of television dramas (including situation comedies), investment in movie production, advertising agency and advertisement production. The Anglo Alliance Group is also responsible for producing programmes (other than news) for the Travel Channel, a satellite television channel in Hainan province, the PRC.

Businesses carried out by the Anglo Alliance Group upon completion of the Reorganisation

As a condition precedent to the completion of the Deed, the Reorganisation has to be completed. Pursuant to the Reorganisation, (a) the Media Company has disposed of its entire interest in San Luen which is restricted from foreign investment (the remaining investments which will continue to be held by Anglo Alliance upon completion of the Reorganisation are those set out in the table below); (b) Hao Ge has been reorganised as a sino-foreign joint venture; and (c) Hao Ge has owned 50% of the registered capital in the Media Company. The principal assets of Anglo Alliance are its investments in Hao Ge and Hao Ge’s sole asset is its 50% equity interest in the Media Company.

The diagram below shows the structure of the Anglo Alliance Group after the Reorganisation and immediately before completion of the Deed.

Hao Ge Remaining Shareholder Hao Ge Poly Culture & Arts Co., Ltd. Anglo Alliance Media Company 49% 60% 50% 50% 50% 98% 2% 51% 55% (Note	Hao Ge Remaining Shareholder Hao Ge Poly Culture & Arts Co., Ltd. Anglo Alliance Media Company 49% 60% 50% 50% 50% 98% 2% 51% 55% (Note	Hao Ge Remaining Shareholder Hao Ge Poly Culture & Arts Co., Ltd. Anglo Alliance Media Company 49% 60% 50% 50% 50% 98% 2% 51% 55% (Note	Hao Ge Remaining Shareholder Hao Ge Poly Culture & Arts Co., Ltd. Anglo Alliance Media Company 49% 60% 50% 50% 50% 98% 2% 51% 55% (Note	Hao Ge Remaining Shareholder Hao Ge Poly Culture & Arts Co., Ltd. Anglo Alliance Media Company 49% 60% 50% 50% 50% 98% 2% 51% 55% (Note	Hao Ge Remaining Shareholder Hao Ge Poly Culture & Arts Co., Ltd. Anglo Alliance Media Company 49% 60% 50% 50% 50% 98% 2% 51% 55% (Note	Hao Ge Remaining Shareholder Hao Ge Poly Culture & Arts Co., Ltd. Anglo Alliance Media Company 49% 60% 50% 50% 50% 98% 2% 51% 55% (Note	Hao Ge Remaining Shareholder Hao Ge Poly Culture & Arts Co., Ltd. Anglo Alliance Media Company 49% 60% 50% 50% 50% 98% 2% 51% 55% (Note	Hao Ge Remaining Shareholder Hao Ge Poly Culture & Arts Co., Ltd. Anglo Alliance Media Company 49% 60% 50% 50% 50% 98% 2% 51% 55% (Note	Hao Ge Remaining Shareholder Hao Ge Poly Culture & Arts Co., Ltd. Anglo Alliance Media Company 49% 60% 50% 50% 50% 98% 2% 51% 55% (Note	1)
Hainan TV		Beijing Ying Shi Film & Television Art Limited Liability Company	Beijing Xin Bao Yuan Film & Television Investment Limited Liability Company		Beijing Hua Yi Shan He Shui Advertising Company Limited		Beijing Hua Yi Qian Si Advertising Company Limited		Mobile Phone TV JV

-------- Investment to be made which is subject to PRC regulatory approvals and formal agreement to be entered into and therefore may or may not be completed.

Note 1: Terms of the proposed establishment of the Mobile Phone TV JV are yet to be determined.

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LETTER FROM THE BOARD

The following table sets out the direct and indirect investments which are held by Anglo Alliance upon completion of the Reorganisation:

	Direct	Indirect
Name	interest	interest	Principal activities	Remaining shareholder(s)
Hao Ge_(Note)_	98%	N/A	Investment holding	2% held by Hao Ge Remaining
				Shareholder
Media Company	N/A	50%	Investment in television	50% held by保利文化藝術
		(held by	drama and film	有限公司(Poly Culture &
		Hao Ge)	production and	Arts Co., Ltd.)
			advertising production
Hainan TV	N/A	49% (held by	Production and editing of	50% held by海南廣播電視臺
		the Media	television programmes	(Hainan Broadcast
		Company)	for the Travel Channel	Television Station)
				1% held by海南廣播電視
				廣告有限公司
				(Hainan Broadcast
				Television Advertising
				Company Limited)
北京英氏影視藝術	N/A	60% (held by	Production of television	16% held by英達(Ying Da)
有限責任公司		the Media	dramas	8% held by英若誠(Ying Ruo Cheng)
(Beijing Ying Shi		Company)		8% held by英壯(Ying Zhuang)
Film & Television				4% held by英寧(Ying Ning)
Art Limited Liability				4% held by王小京(Wang
Company)				Xiao Jing)
北京鑫寶源影視	N/A	50% (held by	Production and sale of	25% held by丁芯(Ding Xin)
投資有限責任公司		the Media	television dramas	25% held by趙寶剛
(Beijing Xin Bao		Company)		(Zhao Bao Gang)
Yuan Film & Television
Investment Limited
Liability Company)
北京華億千思廣告	N/A	55% (held by	Advertisement	25% held by袁海波
有限公司		the Media	production (focused on	(Yuan Hai Bo)
(Beijing Hua Yi		Company)	advertising by utilising	20% held by鈕錚(Niu Zheng)
Qian Si Advertising			media contents of the
Company Limited)			Media Group or others)

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LETTER FROM THE BOARD

	Direct	Indirect
Name	interest	interest	Principal activities	Remaining shareholder(s)
北京華億山和水廣告	N/A	51% (held by	Advertisement	22.05% held by呂新利(Lu Xin Li)
有限公司		the Media	production (focused	22.05% held by丁晟
(Beijing Hua Yi Shan		Company)	on television	(Ding Cheng)
He Shui Advertising			advertisement	4.9% held by藍瑞海
Company Limited)			production)	(Lan Rui Hai)

The names of the above companies in English are for identification purposes only.

Note: Under the Deed, the Vendor has undertaken to Orient Ventures that he will use his best endeavours to enable Anglo Alliance to enjoy the economic benefits arising from the remaining equity interest in Hao Ge after completion of the Deed and before exercise of the Option.

To the best knowledge, information and belief of the Directors having made all reasonable enquiry, the remaining shareholders and their ultimate beneficial owners (if applicable) of the above companies, save for Hao Ge Remaining Shareholder who is the spouse of the Vendor, are parties independent of the Company, its subsidiaries and their connected persons, Mr. Ko and his concert parties and the Vendor.

Anglo Alliance and Hao Ge are only investment holding companies. Businesses of the Anglo Alliance Group have been carried out by the Media Group. The Media Group currently has three major lines of business, including (a) licensing and sub-licensing of programmes and film rights; (b) the sale of television programmes; and (c) advertising production and agency. The Company understands that the Media Group has invested in a number of movies before, such as the “Crouching Tiger, Hidden Dragon”, “Green Tea”, “Peacock” and “Letter from An Unknown Woman”, and has a film library of approximately 130 movies. The Media Company received licensing and sub-licensing income by disturbuting a total of 2 new movies and a number of old movies in the film library in 2003 and 2004. The Media Company expects to distribute 7 new movies in 2005 and the first half of 2006, of which, namely “Peacock” and “Letter from An Unknown Woman”, have already been shown in the PRC.

The Media Group also invests in the production and distribution of television dramas in the PRC. The Media Company plans that a total of 18 television dramas and situation comedies with a total of approximately 1,000 episodes invested or to be invested by the Media Group will be sold by the second quarter of 2006. In 2004, the Media Group sold a total of approximately 200 episodes of television dramas and situation comedies. Television dramas and situation comedies of the Media Group were sold to various television stations in the PRC and distributed overseas. Licences in respect of the distribution of the Media Group’s products through VCD/DVD and other media in the PRC and overseas were also sold to distributors.

The advertising business of the Media Group together with Hainan TV includes the sales of advertising timeslot of the Travel Channel as an advertising agent and the provision of packaged advertising services.

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LETTER FROM THE BOARD

Hainan TV is an associated company of the Media Company. Hainan TV has obtained from the Travel Channel the sole rights to manage and run its programming and advertising business and is entitled to participate in the profit of the Travel Channel for 30 years since August 2003. After the Media Company has acquired an interest in Hainan TV, the Media Group has nominated new management to Hainan TV. The existing new management of Hainan TV has redesigned the image the Travel Channel and the new Travel Channel was launched in July 2004. Since then the business of the Travel Channel saw significant improvement and its average rating in ten major cities in the PRC jumped to 29th in October 2005 from 40th in June 2004, among the 46 satellite television stations in the PRC.

The acquisition of Hainan TV improved the profitability of the Media Group.

Please refer to the paragraph headed “Financial information on the Anglo Alliance Group” below in this letter and the accountants’ reports on Anglo Alliance, Hao Ge and the Media Group set out in Appendices III, IV and V to this circular for details of the financial information on the members of the Anglo Alliance Group.

Shareholders should refer to the management discussions and analysis of the results of the Media Group for the three years ended 31 December 2004 set out in Appendix VII to this circular which also sets out the industrial factors affecting the various major businesses of the Media Group.

After completion of the UHL SP Agreement, Hao Ge will become a subsidiary of the Company and the Media Company will become an associated company of the Company.

As at 31 December 2004, the Vendor and his spouse had respectively provided approximately RMB75.3 million (equivalent to approximately HK$71.0 million) and approximately RMB19.0 million (equivalent to approximately HK$17.9 million) in the form of shareholder’s loans to Hao Ge. As agreed by the Vendor, he will and will procure his spouse to assign to Anglo Alliance all his and her rights under the aforesaid shareholder’s loans or capitalise such loans into equity of Hao Ge. Pursuant to the Deed, the Vendor is required to advance to Anglo Alliance a total of HK$100 million (in the form of shareholder’s loan) as operational funding. As at the Latest Practicable Date, approximately RMB99.2 million (equivalent to approximately HK$93.6 million) has been advanced by the Vendor to Anglo Alliance and the remaining balance of approximately HK$6.4 million will be advanced by the Vendor to Anglo Alliance on or before completion of the Deed. Pursuant to the Deed, such HK$100 million loan will be assigned by the Vendor to Orient Ventures upon completion of the Deed. The Company understands from Orient Ventures that it will have the HK$100 million loan due from Anglo Alliance waived after such assignment. The Vendor will, upon completion of the Deed, deliver a duly executed release to Orient Ventures releasing each member of the Anglo Alliance Group from any liability owed to him or if appropriate executing a deed assigning all rights in any such amount which may be owing to the Vendor by any member of the Anglo Alliance Group to the other appropriate member of the Anglo Alliance Group. Upon completion of the Deed, no members of the Anglo Alliance Group will be indebted to the Vendor.

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LETTER FROM THE BOARD

Business which may be carried out by the Anglo Alliance Group

(a) Letter of intent — Mobile Phone TV JV

The Media Company entered into a non-legally binding letter of intent on 16 December 2004 to establish the Mobile Phone TV JV in the PRC with 北京北廣傳媒集團有限公司 (Beijing Bei Guang Media Group Co., Ltd.), which is an independent third party and which, to the best knowledge, information and belief of the Directors having made all reasonable enquiry, is not a connected person of the Company and is not a concert party of Mr. Ko. It is expected that the registered capital of the Mobile Phone TV JV will not be less than RMB50 million (equivalent to approximately HK$47.2 million). It is proposed that the Mobile Phone TV JV will carry out business activities in relation to the possible upcoming television broadcasting via mobile phones. The Media Group believes that this may help enhance the distribution channel of its media contents. The terms of the proposed investment have yet to be determined. Further announcement will be made by the Company as and when necessary in compliance with the Listing Rules.

The above investment proposal is subject to approvals by the relevant PRC authorities and a formal agreement having been entered into in relation thereto. The letter of intent does not provide a deadline for the obtaining of approvals from the relevant PRC authorities and does not provide a long stop date for the completion of the possible investment proposal. The possible establishment of the Mobile Phone TV JV is subject to approvals of certain PRC authorities which may or may not be obtained. To the extent any such approvals may be obtained, it is uncertain when such approvals may be obtained. Accordingly, the possible investment may or may not proceed. Completion of the UHL SP Agreement is not subject to the obtaining of the relevant approvals in respect of the investment proposal under the said letter of intent.

The Vendor has undertaken to use his best endeavours to obtain the necessary approvals and to give effect to the above investment proposal. In the event that the requisite consents from the regulatory authorities are not obtained, the Vendor has agreed to use his best endeavours to explore other business opportunities with Orient Ventures in the areas of business contemplated under the above investment proposal. Should there arise any new business opportunities which may be undertaken by the Enlarged Group, the Company will comply with the relevant requirements under the Listing Rules and (if applicable) the Takeovers Code if and when necessary, including any announcement requirements. Whilst the necessary approvals for the investment proposal under the letter of intent may or may not be obtained and such investment proposal may or may not proceed, completion of the transactions under the Deed and the UHL SP Agreement is not subject to the obtaining of the necessary approvals for the said investment proposal or the completion of the investment proposal. Accordingly, the timing of the grant of the necessary approvals for the said investment proposal should not affect the timetable of the transactions under the Deed and the UHL SP Agreement.

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LETTER FROM THE BOARD

(b) Termination of the Investment Agreement

As set out in the Announcement, the Media Company entered into the Investment Agreement on 16 December 2004 with the shareholders of JiCheng, namely 北京北廣傳媒移動電視有限公司 (Beijing Bei Guang Media Mobile Phone Television Co., Ltd.) and 北京瑞特影音貿易公司 (Beijing RuiTe Audio Vision Trading Company) (as amended by a supplemental agreement entered into by the same parties on 1 February 2005). To the best knowledge, information and belief of the Directors having made all reasonable enquiry, the parties to the Investment Agreement are parties independent of the Company, its subsidiaries and their connected persons and are not concert parties of Mr. Ko for the purposes of the Takeovers Code.

Under the Investment Agreement, the Media Company would subscribe for a 30% equity interest in JiCheng at a total consideration of RMB30 million (equivalent to approximately HK$28.3 million). It was originally anticipated that the Media Company would assign its rights under the Investment Agreement to Hao Ge as one of the conditions of the Deed. The Investment Agreement was terminated on 17 March 2005 as the parties to the agreement failed to reach a consensus on the future operational structure of JiCheng. No payment has been made by the Media Company under the Investment Agreement. Orient Ventures has waived the condition of the Deed regarding the assignment of the rights under the Investment Agreement by the Media Company to Hao Ge. No terms of the UHL SP Agreement are affected by the termination of the Investment Agreement.

Financial information on the Anglo Alliance Group

Anglo Alliance is a dormant company. Its only asset is its investment in Hao Ge.

Hao Ge is an investment holding company which holds a 50% equity interest in the Media Company. Hao Ge acquired a 44% equity interest in the Media Company in October 2004. Apart from holding an investment in the Media Company, Hao Ge does not have any other business activities. The audited results of Hao Ge for the three years ended 31 December 2004 are summarised as follows:

	Year	ended 31 December	ended 31 December
	2002	2003	2004
	RMB’000	RMB’000	RMB’000
Turnover	—	—	—
Loss before taxation	(201)	(193)	(59)
Loss attributable to Shareholders	(201)	(193)	(59)

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LETTER FROM THE BOARD

The Media Company was established on 9 April 1997. The audited consolidated results of the Media Company for the three years ended 31 December 2004 are summarised as follows:

	Year	ended 31 December	ended 31 December
	2002	2003	2004
	RMB’000	RMB’000	RMB’000
Turnover	4,773	25,840	76,989
Operating (loss)/profit	(13,483)	(45,923)	18,401
(Loss)/profit before taxation	(13,979)	(48,758)	10,541
(Loss)/profit attributable to shareholders	(13,859)	(49,006)	4,113

As at 31 December 2004, the net asset value of Hao Ge and consolidated net asset value of the Media Group were approximately RMB29.5 million and RMB22.9 million respectively.

For further details, please refer to the accountants’ reports on Anglo Alliance, Hao Ge and the Media Group which are set out in Appendices III, IV and V to this circular respectively.

FINANCIAL EFFECTS OF THE TRANSACTIONS ON THE GROUP

Net assets

The Company recorded consolidated net assets as at 31 December 2004 of approximately HK$53.9 million or approximately HK$0.016 on a per Share basis (based on the number of Shares in issue as at that date). As shown in the section headed “Pro forma financial statements of the Enlarged Group” in Appendix VI to this circular, had completion of the UHL SP Agreement been taken place on 31 December 2004, the pro forma net assets of the Enlarged Group would have been approximately HK$416.6 million or approximately HK$0.046 on a per Share basis (based on the number of Shares in issue as at 31 December 2004 as enlarged by the new Shares which will be issued upon completion of the UHL SP Agreement and assuming that none of the First Tranche Convertible Note and the Second Tranche Convertible Note was converted), representing an increase of approximately 2.9 times.

Earnings

The Company recorded a consolidated net loss of approximately HK$9.9 million for the year ended 31 December 2004. Had completion of the UHL SP Agreement taken place on 1 January 2004, the pro forma net loss of the Enlarged Group for the year ended 31 December 2004 would have been approximately HK$30.9 million as shown in Appendix VI to this circular. The increase in the pro forma net loss is mainly a result of the amortization of goodwill of approximately HK$22.8 million arising as a result of the acquisition.

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LETTER FROM THE BOARD

Working capital

As stated in the paragraph headed “Working capital” in Appendix VI to this circular, the Directors are of the opinion that, taking into account the present internal resources, the Enlarged Group has sufficient working capital for its present requirements for at least the next 12 months following the date of this circular.

Gearing position

As at 31 December 2004, the Group had outstanding loans of approximately HK$29.7 million, representing a loan-to-equity ratio of approximately 55.1%. Gearing ratio, representing long term borrowings to equity, was approximately 9.3%.

The total outstanding borrowings of the Enlarged Group would increase to approximately HK$321 million had the UHL SP Agreement been completed on 31 December 2004 after the issue of the First Tranche Convertible Note and the Second Tranche Convertible Note (assuming that the maximum amount is issued), while the total assets of the Enlarged Group would increase to approximately HK$749.5 million. Based on the above pro forma financial information, the pro forma loan-to-equity ratio of the Enlarged Group would be approximately 77%. The gearing ratio, would be approximately 70%, mainly due to the issue of the First Tranche Convertible Note and the Second Tranche Convertible Note pursuant to the UHL SP Agreement. In view of the benefits of the transactions as explained in the section headed “Reasons for and benefits of the transaction” below, the Directors consider the pro forma gearing level of the Enlarged Group to be acceptable.

INTENTION OF MR. KO

Mr. Ko has no intention to make any material change to the existing management and will continue the employment of the employees of the Group after completion of the UHL SP Agreement. It is the intention of Mr. Ko for the Group to continue to carry on its existing businesses after completion of the UHL SP Agreement (including the media business) and to continue to carry out its investment strategy to look for new business opportunities. Mr. Ko does not intend to introduce any major changes to the business, including any redeployment of the fixed assets of the Company after completion of the UHL SP Agreement.

INCREASE IN THE AUTHORISED SHARE CAPITAL OF THE COMPANY

As at the Latest Practicable Date, the authorised share capital of the Company was HK$52,407,600 comprising 5,000,000,000 Shares of HK$0.01 each and 240,760,000 preference shares of HK$0.01 each. The issued share capital of the Company is approximately HK$35.15 million comprising 3,274,293,157 Shares and 240,760,000 preference shares. In order to facilitate the issue of the Consideration Shares under the UHL SP Agreement, the Board proposes to increase the authorised share capital of the Company from HK$52,407,600 to HK$302,407,600 by the creation of an additional 25,000,000,000 Shares. According to the

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LETTER FROM THE BOARD

memorandum and articles of association of the Company, the proposed increase in authorised share capital of the Company is subject to approval by the Shareholders by way of an ordinary resolution. As set out in the paragraph headed “Conditions precedent for completion of the UHL SP Agreement” above, completion of the UHL SP Agreement is subject to, among other things, the passing of an ordinary resolution by the Shareholders at the EGM approving the proposed increase in the authorised share capital of the Company. Save for issuing the Consideration Shares, the new Shares upon conversion of the First Tranche Convertible Note and the Second Tranche Convertible Note and new Shares which may be issued upon exercise of any outstanding share options, the Company does not have any intention to issue any new Shares.

INFORMATION ABOUT THE MANAGEMENT OF THE COMPANY

As at the Latest Practicable Date, the Board comprised Mr. Ko (Chairman and executive Director), Mr. Shen Ka Yip, Timothy (Acting Chief Executive Officer and executive Director), Mr. Tsoi Tong Hoo Tony, Mr. Cheong Chow Yin (non-executive Directors), Mr. Yuen Kin, Mr. Wilton Timothy Carr Ingram and Dr. Wong Yau Kar, David (each of whom is an independent non-executive Director). It is proposed that Mr. Dong Ping be appointed as an executive Director after completion of the UHL SP Agreement.

The following is a biography of Mr. Dong.

Dong Ping (the Vendor), aged 43, was the founder of the Media Company. Mr. Dong has been the producer or co-producer of various internationally acclaimed movies including (i) “Devils on the Doorstep”（鬼子來了）directed by Jiang Wen（姜文）which was awarded, among others, the “Grand Prize of the Jury” in the Cannes Film Festival in 2000; (ii) “Crouching Tiger, Hidden Dragon”（臥虎藏龍）directed by Ang Lee（李安）, which was awarded, among others, the “Best Foreign Language Film” in the 73rd Annual Academy Awards in 2001, and was awarded, among others, the “Best Foreign Language Film” and “Best Director - Motion Picture” in the 58th Golden Globe Awards in the same year; (iii) “Passages”（旅程）directed by Yang Chao（楊超）, which was awarded the “Camera d’Or-Mention-speciale” in the Cannes Film Festival in 2004; and (iv) “Peacock”（孔雀）directed by Gu Changwei（顧長衛）, which was awarded the “Jury Grand Prix - Silver Bear” of the Berlin International Film Festival in 2004 and was selected as one of the opening films in the Hong Kong Film Festival in 2005.

Mr. Dong currently does not hold any position within the Group and has not held any directorship in any other listed companies in the last three years. It is proposed that a service contract be entered into between the Company and Mr. Dong. Details of the terms of the service contract have not been determined yet. The Company will issue a further announcement after details of the service contract have been determined.

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LETTER FROM THE BOARD

INFORMATION ABOUT THE MANAGEMENT OF THE ANGLO ALLIANCE GROUP

The Vendor is the President of the Media Company. The biography of the Vendor is set out above. Below are the biographies of other members of the senior management of the Anglo Alliance Group.

Wang Yi （王毅）, aged 43. Mr. Wang is a director and the vice president of the Media Company. He was also the legal representative of Taihe Media Investment Ltd. Co.,（太合傳媒投資有限公司）.

Zhao Yi Jun （趙毅軍）, aged 52, studied movie directing at the Beijing Film Academy（北京電影學院）. Mr. Zhao is the production director of the Media Company. He was a movie director of August First Film Studio of the People’s Liberation Army（中國人民解放軍八一電影製片廠）. He has been involved in the production of various movies including “Devils on the Doorstep”（鬼子來了）and “Letter from an Unknown Woman”（一個陌生女人的來信）.

Guo Ying （郭）, aged 42, graduated from the faculty of television of the Beijing Broadcasting Institute（北京廣播學院）(now known as Communication University of China（中國傳媒大學）). Mr. Guo is the executive president and chief editor of Hainan TV.

REASONS FOR AND BENEFITS OF THE TRANSACTION

The Company originally proposed to acquire the Anglo Alliance Group directly from the Vendor and negotiated with the Vendor with this aim. However, the Vendor stated that he was not prepared to agree to sell the Anglo Alliance Group on the basis that such sale would be subject to the uncertainty of Shareholders’ approval. In order to overcome this impasse, Mr. Ko, through his wholly-owned company — Orient Ventures, entered into the Deed with the Vendor to acquire the Anglo Alliance Group from the Vendor on the basis that he would simultaneously agree, subject to Independent Shareholders’ approval, to sell the Anglo Alliance Group to the Company at the same consideration.

Further, the facilitation afforded by Mr. Ko means that the acquisition of the Anglo Alliance Group can be completed with no immediate cash payment by the Group.

The Group has been loss-making for a number of years. The acquisition of the Anglo Alliance Group will diversify the income stream of the Company. The Directors believe that the investment in the Anglo Alliance Group would offer the Company and the Shareholders a good opportunity to invest in the media industry in the PRC, in particular the business related to a PRC satellite television channel.

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LETTER FROM THE BOARD

The principal businesses of the Anglo Alliance Group have been summarised in the paragraph headed “Businesses carried out by the Anglo Alliance Group upon completion of the Reorganisation” above. Shareholders should refer to the management discussions and analysis of the results of the Media Group for the three years ended 31 December 2004 set out in Appendix VII to this circular which also sets out the industrial factors affecting the various major businesses of the Media Group.

Over the past three years, the turnover of the Media Group has grown by approximately 16 times as a result of the Media Group’s business expansion. The Media Group successfully recorded a net profit of approximately HK$4.1 million in 2004 from a loss of approximately HK$49.0 million in 2003. After considering a number of factors, including the scarce investment opportunities in the PRC media business, the growing business opportunities of the PRC media industry, the growing track record of the Media Group and the experienced management of the Anglo Alliance Group, the Directors consider that the acquisition of the Anglo Alliance Group is beneficial to the Group and is in the interests of the Company and its Shareholders as a whole.

Nevertheless, Shareholders should note the major risk factors associated with the businesses of the Media Group as set out below.

RISK FACTORS RELATING TO THE BUSINESS OF THE ANGLO ALLIANCE GROUP

(i) Governmental regulation of the media industry in the PRC

The media industry in the PRC is subject to the regulations and restrictions of SARFT. For example, there are foreign ownership limitations on holders of licences for movie and television drama production and distribution. Due to such regulations and restrictions, it is currently not legally possible for the Group to acquire a majority interest in a number of businesses carried out by the Anglo Alliance Group. There is no assurance that such legal and regulatory restrictions in the PRC will be lifted or that there will not be further restrictions and requirements imposed on foreign investors’ interests in such businesses. The prospects of the Anglo Alliance Group may be adversely affected by these limitations.

(ii) Volatility of income stream

A substantial portion of the income of the Anglo Alliance Group was and is expected to be derived from the production and distribution of movies. It is very difficult to predict the response of the market. The income which may be derived from a movie is relatively volatile.

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LETTER FROM THE BOARD

(iii) Reliance on key management personnel

The directors and senior management of the Anglo Alliance Group, particularly the Vendor, possess substantial experience in the media business in the PRC and have made a significant contribution to the development of the Anglo Alliance Group. The Anglo Alliance Group’s daily operation depends significantly on the performance of its key management personnel. It is proposed that the Company will enter into a service contract with the Vendor, the terms of which are yet to be determined. In the event that the Anglo Alliance Group loses the services of any of its key management personnel and fails to find suitable and competent replacements, the operation and profitability of the Anglo Alliance Group may be adversely affected.

(iv) Piracy

The film industry has been adversely affected by the rapid development of motion pictures piracy and illegal downloading of films available on the internet. This has adversely affected revenue generated from box office sales. If the sale of pirated films and the illegal downloading of films from the internet become more serious, the results of the Anglo Alliance Group may be adversely affected.

(v) Censorship of advertising content by the PRC Government

The advertising industry in the PRC is governed by the Advertising Law which came into effect on 1 February 1995. Advertisers, advertising operators and distributors that engage in advertising activities are required to comply with applicable procedures and provisions under the Advertising Law. If operations are determined to be in breach of the Advertising Law, penalties including fines, confiscation of advertising proceeds, orders to cease dissemination of the relevant advertisement and orders to publish an advertisement with corrective information may be imposed. The PRC Government may also revoke the licence of the advertising company. If the advertising activities of the Anglo Alliance Group are found to be in breach of any provisions under the Advertising Law, penalties may be imposed on the Anglo Alliance Group which may have material adverse impacts on the results of the Anglo Alliance Group.

(vi) Local competition

The Anglo Alliance Group faces competition from other domestic players. There are a number of entities seeking to enter into the market or to expand their presence in the PRC media business. The Anglo Alliance Group’s profitability may be adversely affected if there is downward pricing pressure arising from these competitors or if there are more competitors in the future.

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LETTER FROM THE BOARD

THE GENERAL MANDATE

The Existing General Mandate was granted to the Directors to allot and issue 654,858,631 new Shares at the annual general meeting of the Company held on 30 June 2004. 654,850,000 Shares have been issued pursuant to the Placing and Top-up Subscription under the Existing General Mandate and no refreshment of general mandate has been made since the last annual general meeting held on 30 June 2004. As at the Latest Practicable Date, the Directors were only given available mandate to allot and issue 8,631 new Shares, representing less than 0.001% of the issued ordinary share capital of the Company.

In view of the recent price performance of the Shares after the publication of the Announcement, the Directors consider it in the best interests of the Company and its Shareholders to grant the New General Mandate to the Directors with a view to capturing possible fund raising opportunities. At the EGM, an ordinary resolution will be proposed to the Independent Shareholders approving the grant of the New General Mandate to the Directors to allot, issue and otherwise deal with new Shares not exceeding in aggregate 20% of the aggregate nominal amount of the share capital of the Company in issue at the date of passing such resolution or in the event completion of the UHL SP Agreement takes place accordingly, 20% of the aggregate nominal amount of the share capital of the Company in issue at the completion date of the UHL SP Agreement.

As at the Latest Practicable Date, the Company had an aggregate of 3,929,143,157 Shares in issue. An additional 5,746,570,871 new Shares may fall to be issued upon completion of the UHL SP Agreement. Subject to the passing of the ordinary resolution for the approval of the New General Mandate and assuming that no Shares will be issued or repurchased by the Company between the Latest Practicable Date and the date of the EGM, the Company will be allowed under the Existing General Mandate to allot, issue and deal with up to 785,828,631 new Shares before completion of the UHL SP Agreement and a total of 1,935,142,805 new Shares after completion of the UHL SP Agreement.

The New General Mandate if granted will continue in force until (a) the conclusion of the next annual general meeting of the Company after the EGM; or (b) it is revoked or varied by an ordinary resolution passed in a general meeting of the Company.

Pursuant to Rule 13.36(4) of the Listing Rules, the proposed grant of the New General Mandate is subject to the approval of the Independent Shareholders. As the Company currently does not have a controlling Shareholder, the Directors, the chief executive of the Company and their respective associates will abstain from voting on the resolution to be proposed at the EGM to approve the proposed grant of the New General Mandate.

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LETTER FROM THE BOARD

GENERAL

The transactions contemplated under the UHL SP Agreement including the acquisition of the Anglo Alliance Group and the exercise of the Option, together constitute a very substantial acquisition and connected transaction for the Company under the Listing Rules and therefore are subject to approval by the Independent Shareholders at the EGM under Rules 14.49 and 14A.18 of the Listing Rules. Completion of the transactions contemplated under the UHL SP Agreement is subject to, among other things, the Whitewash Waiver being granted and approved by the Independent Shareholders in accordance with the Takeovers Code.

At the EGM, Mr. Ko and his associates and concert parties are required to abstain from voting on the resolutions to be proposed at the EGM to approve the transactions under the UHL SP Agreement and the Whitewash Waiver. The Independent Board Committee has been established to consider the transactions under the UHL SP Agreement and the Whitewash Waiver and to advise the Independent Shareholders. Somerley has been appointed to advise the Independent Board Committee and the Independent Shareholders in this regard.

Ordinary resolutions will be proposed to approve the transactions contemplated under the UHL SP Agreement and the Whitewash Waiver, as well as, the increase in authorised share capital and the proposed grant of the New General Mandate. Mr. Ko and his associates and concert parties will abstain from voting on the resolutions to be proposed at the EGM to approve the transactions contemplated under the UHL SP Agreement and the Whitewash Waiver. The Directors, chief executive of the Company and their respective associates will abstain from voting on the resolution to be proposed at the EGM to approve the proposed grant of the New General Mandate. No Shareholders are required to abstain from voting on the resolution to be proposed at the EGM to approve the increase in authorised share capital of the Company.

This circular contains further details of the Deed, the UHL SP Agreement, the Whitewash Waiver, the proposed increase in authorised share capital, the proposed grant of the New General Mandate, the recommendation from the Independent Board Committee to the Independent Shareholders, the recommendation from Somerley to the Independent Board Committee, the accountants’ reports on Orient Ventures, Anglo Alliance, Hao Ge and the Media Group, reports from EYCFL and the Consultant Accountants on the Target Profit in accordance with Rule 10 of the Takeovers Code and Rule 14.62 of the Listing Rules and a notice convening the EGM.

EGM

The EGM will be held at Unit 3203, Admiralty Centre I, 18 Harcourt Road, Admiralty, Hong Kong at 9:00 a.m. on Monday, 30 May 2005. A notice convening the EGM is set out on pages 257 to 261 of this circular.

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LETTER FROM THE BOARD

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

RECOMMENDATION

Somerley has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders with regard to the transactions contemplated under the UHL SP Agreement, the Whitewash Waiver and the proposed New General Mandate. Somerley considers the terms of the UHL SP Agreement are fair and reasonable to the Independent Shareholders and the entering into of the UHL SP Agreement is in the interests of the Company and the Shareholders as a whole. Somerley also considers the terms of the Whitewash Waiver are fair and reasonable to the Independent Shareholders and that the approval of New General Mandate is in the interests of the Company and Shareholders as a whole. The text of the letter of advice from Somerley containing its recommendation and the principal factors they have taken into account in arriving at their recommendation are set out on pages 41 to 84 of this circular.

The Independent Board Committee, having taken into account the advice of Somerley, considers the terms of the UHL SP Agreement and the Whitewash Waiver, as well as the proposed grant of the New General Mandate are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the resolutions set out in the notice of EGM to approve the transactions contemplated under the UHL SP Agreement, the Whitewash Waiver and the grant of the New General Mandate. The Directors also consider that the proposed increase in the authorised share capital of the Company is in the interests of the Company and therefore recommend the Shareholders to vote in favour of the relevant ordinary resolution. The full text of the letter from the Independent Board Committee is set out on pages 39 and 40 of this circular.

ADDITIONAL INFORMATION

Your attention is drawn to the letter from the Independent Board Committee, the letter of advice from Somerley, and the information set out in the Appendices to this circular.

By Order of the Board Johnson Ko Chun Shun

Chairman

— 38 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

UNIVERSAL HOLDINGS LIMITED 友利控股有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 419)

13 May 2005

To the Independent Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTIONS RELATING TO THE PROPOSED ACQUISITION OF ANGLO ALLIANCE WHICH INVOLVES THE ISSUE OF NEW SHARES AND CONVERTIBLE NOTES AND APPLICATION FOR WHITEWASH WAIVER

REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES

We have been appointed as members of the Independent Board Committee to advise you in connection with the transactions contemplated under the UHL SP Agreement and the Whitewash Waiver, details of which are set out in the letter from the Board in the Company’s circular dated 13 May 2005 to the Shareholders (the “Circular”), of which this letter forms a part. Terms used in this letter shall have the same meanings as defined in the Circular unless the context otherwise requires.

Your attention is drawn to the “Letter from Somerley”, containing their advice to us and the Independent Shareholders regarding the fairness and reasonableness of the terms and conditions of the transactions contemplated under the UHL SP Agreement and the Whitewash Waiver, as well as the proposed grant of the New General Mandate as set out on pages 41 to 84 of the Circular. Your attention is also drawn to the letter from the Board set out on pages 8 to 38 of the Circular and the additional information set out in the Appendices to the Circular.

Having considered the advice and recommendation of Somerley, we consider the terms of the UHL SP Agreement are fair and reasonable to the Independent Shareholders and the entering into of the UHL SP Agreement is in the interests of the Company and the Shareholders as a whole. We also consider the terms of the Whitewash Waiver are fair and reasonable to the Independent Shareholders and that the approval of New General Mandate is in the interests of

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

the Company and the Shareholders as a whole. We, therefore, recommend the Independent Shareholders to vote in favour of the relevant resolutions to be proposed at the EGM to approve the transactions contemplated under the UHL SP Agreement, the Whitewash Waiver and the proposed grant of the New General Mandate.

Yours faithfully

Yuen Kin Wilton Timothy Carr Ingram Wong Yau Kar, David Independent Board Committee of Universal Holdings Limited

— 40 —

LETTER FROM SOMERLEY

SOMERLEY LIMITED

Suite 2201, 22nd Floor Two International Finance Centre 8 Finance Street Central Hong Kong

13 May 2005

To: The Independent Board Committee and the Independent Shareholders

Dear Sirs,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTIONS RELATING TO PROPOSED ACQUISITION OF ANGLO ALLIANCE WHICH INVOLVES ISSUE OF NEW SHARES AND CONVERTIBLE NOTES, APPLICATION FOR WHITEWASH WAIVER, AND REFRESHMENT OF GENERAL MANDATE TO ISSUE NEW SHARES

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in connection with the acquisition of Anglo Alliance by Orient Ventures and the subsequent acquisition of Orient Ventures by the Company (collectively referred to as the “Acquisition”). Details of the Acquisition are contained in the circular to the Shareholders dated 13 May 2005 (the “Circular”), of which this letter forms a part. Unless otherwise defined, terms used in this letter shall have the same meanings as defined in the Circular.

On 2 February 2005, (i) Mr. Ko, the Chairman and currently 25.9% shareholder of the Company, (ii) Orient Ventures, a company wholly-owned by Mr. Ko, and (iii) the Company entered into the Deed (as amended by the Supplemental Deed) with the Vendor pursuant to which Orient Ventures has conditionally agreed to acquire from the Vendor the entire issued share capital of Anglo Alliance for a maximum consideration of HK$550 million (subject to adjustment). On the same date, the Company entered into the UHL SP Agreement (as amended by the Supplemental Agreement) with Mr. Ko pursuant to which the Company conditionally agreed to acquire from Mr. Ko the entire issued share capital of Orient Ventures for the Basic Consideration of HK$366.7 million. Depending on the audited net profit of the Anglo Alliance Group for the twelve month period following completion of the Deed, the Company may be required to pay the Further Consideration of up to HK$183.3 million (i.e. a total maximum consideration of HK$550 million).

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LETTER FROM SOMERLEY

As Orient Ventures is wholly-owned by Mr. Ko, who is a 25.9% shareholder of the Company, the UHL SP Agreement constitutes a connected transaction for the Company under the Listing Rules and requires the approval of the Independent Shareholders at the EGM by a vote to be taken by poll under Rules 14.49 and 14A.18 of the Listing Rules. The UHL SP Agreement is also conditional on the grant of the Whitewash Waiver, which under the provisions of the Takeovers Code also requires approval by the Independent Shareholders by a vote taken on a poll.

The Board currently consists of 7 Directors. Mr. Ko is the Chairman and an executive Director. Mr. Shen Ka Yip, Timothy is also an executive Director and Mr. Tsoi Tong Hoo, Tony and Mr. Cheong Chow Yin are non-executive Directors. Mr. Yuen Kin, Mr. Wilton Timothy Carr Ingram and Dr. Wong Yau Kar, David are independent non-executive Directors. As the approval of Independent Shareholders is required, the Independent Board Committee comprising the three independent non-executive Directors has been formed to make a recommendation to the Independent Shareholders on how they should vote. We, Somerley Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the terms of the Acquisition and the Whitewash Waiver, and also on the grant of the New General Mandate. However, the UHL SP Agreement is not conditional on the New General Mandate being granted.

We are not connected with the Company or Anglo Alliance or their respective substantial shareholders or associates and accordingly are considered suitable to give independent financial advice on the above matters. Apart from normal professional fees payable to us in connection with this appointment, no arrangement exists whereby we will receive any fees or benefits from the Company and/or Anglo Alliance or their respective substantial shareholders or associates.

In formulating our advice and recommendation, we have relied on the information and facts supplied, and the opinions expressed, by the executive Directors, which we have assumed to be true, accurate and complete. We have reviewed financial information on the Group, including the 2004 results, financial information on the Anglo Alliance Group, including material prepared during the review of the Target Profit subsequent to the Announcement, and the pro forma financial information on the Enlarged Group contained in Appendix VI to the Circular.

We have sought and received confirmation from the Directors that all material relevant information has been supplied to us and to the best knowledge of the Directors, no material facts have been omitted from the information supplied and opinions expressed by them. We consider that the information we have received is sufficient for us to reach our advice and recommendation as set out in this letter and to justify our relying on such information and we have no reason to doubt the truth and accuracy of the information provided to us or that any material information has been omitted or withheld. However, we have not conducted any

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LETTER FROM SOMERLEY

independent investigation into the business and affairs of the Group or the Anglo Alliance Group. We have assumed that all information and representations contained or referred to in the Circular are true at the date of the Circular and will continue to be true up to the date of the EGM.

MAIN FEATURES OF THE ACQUISITION

The Acquisition has certain unusual features. They are:

Mr. Ko will first use Orient Ventures as a vehicle to buy Anglo Alliance and then onsell Orient Ventures to the Company.
As a result of the first step, Mr. Ko will issue a promissory note of HK$326.6 million to the Vendor. This amount will remain owing to the Vendor even after Mr. Ko sells Orient Ventures to the Company.
Based on the UHL SP Agreement (as amended), the Company will pay the Basic Consideration of HK$366.7 million at completion. Depending on the Audited Profit of the Anglo Alliance Group which for this purpose is capped at HK$60 million, the Company will pay the Further Consideration of an amount equal to the difference between the Audited Profit multiplied by 9.167 (i.e. the price earnings ratio adopted by the Company in respect of this consideration adjustment mechanism) and the Basic Consideration soon after the Audited Profit figure is made available to the Company. The maximum Further Consideration and the maximum total consideration payable by the Company under the UHL SP Agreement will be approximately HK$183.3 million and HK$550 million respectively.
Convertible notes — no repayment of principal is due until the accumulated net profit after tax and extraordinary items of the Anglo Alliance Group shall be not less than the aggregate of the Basic Consideration of HK$366.7 million and the Further Consideration.

1. Deed and UHL SP Agreement

The Acquisition will be carried out in two stages:

(i) the Deed (as amended)

Orient Ventures, a company wholly owned by Mr. Ko, has agreed to acquire the entire equity of Anglo Alliance at a maximum consideration of HK$550 million (subject to adjustment). The Company is also a party to the Deed, but only so that it may enjoy the benefit of certain provisions, including the right of access to the books and records of the Anglo Alliance Group. The Company has no material obligations under the Deed.

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LETTER FROM SOMERLEY

(ii) the UHL SP Agreement (as amended)

On same date as the Deed, the Company conditionally agreed to acquire the entire equity interest of, and the benefit of any shareholder loans to, Orient Ventures from Mr. Ko at the Basic Consideration of HK$366.7 million, with a possible additional payment of up to HK$183.3 million. Completion of the Deed is a condition precedent to the completion of the UHL SP Agreement.

When the Company buys Orient Ventures, the total amount (expected to be approximately HK$436.6 million being the aggregate of the deposit of HK$110 million and an amount equivalent to the promissory note of HK$326.6 million) owed by Orient Ventures to Mr. Ko on completion will be assigned to the Company.

It would be simpler for the Company to acquire Anglo Alliance directly from the Vendor. However, we are informed by the Directors that the Vendor was not prepared to sell Anglo Alliance if the sale was subject to the uncertainty of conditions such as Independent Shareholders’ approval. In order to overcome this impasse, Mr. Ko (through his wholly owned company Orient Ventures) entered into the Deed with the Vendor to acquire Anglo Alliance from the Vendor. This was done on the basis that Mr. Ko would simultaneously agree, subject to Independent Shareholders’ approval, to sell Orient Ventures to the Company at the same consideration. If Independent Shareholders do not give their approval, but the conditions of the Deed are fulfilled, Mr. Ko, through Orient Ventures, will complete the purchase himself.

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LETTER FROM SOMERLEY

2. Payment structure

The payment structures under the Deed (as amended) and the UHL SP Agreement (as amended) are as follows:

			UHL SP
		Deed	Agreement
		(as amended)	(as amended)
	Notes	HK$’000	HK$’000
Deposit	1	110.0
Promissory note	2	326.6
2,700 million new Shares	3	113.4	113.4
		550.0
3,046.6 million new Shares	4		149.3
First Tranche Convertible Note	5		104.0
Basic Consideration			366.7
Further Consideration (maximum)*	6		183.3
Maximum total consideration			550.0

to be satisfied by the issue by the Company of the Second Tranche Convertible Note.

Notes:

Paid in February 2005 by Orient Ventures to the Vendor. From the proceeds of the deposit, the Vendor has agreed to make an advance of approximately HK$100 million to Anglo Alliance as operational funding. Up to the Latest Practicable Date, an amount of RMB99.22 million has been advanced by the Vendor to Anglo Alliance. The benefit of this loan will be assigned to Orient Ventures at completion of the Deed.
To be issued by Mr. Ko to the Vendor on completion of the Deed. The promissory note will be unsecured, be repayable 18 months after the date of issue and will bear interest at prime rate.
To be issued by the Company to the Vendor at HK$0.042 per Share assuming the UHL SP Agreement completes; if it does not, Mr. Ko will pay this amount in cash to the Vendor.
3,046,570,871 new Shares will be issued to Mr. Ko at HK$0.049 each.
The First Tranche Convertible Note with nominal value of approximately HK$104 million will be issued to Mr. Ko on completion, convertible at HK$0.049 per Share into approximately 2,122 million new Shares.

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LETTER FROM SOMERLEY

The Second Tranche Convertible Note of up to approximately HK$183.3 million will be issued by the Company to Mr. Ko depending on the Audited Profit. The Second Tranche Convertible Note will also be convertible at HK$0.049 per Share and if the maximum amount is issued would, on full conversion, be convertible into approximately 3,741 million new Shares.

If not converted, the First Tranche Convertible Note and the Second Tranche Convertible Note will be repayable 5 years after the date of issue of the First Tranche Convertible Note, provided that the accumulated net profit after tax and extraordinary items of the Anglo Alliance Group from the issue date of the First Tranche Convertible Note up to the fifth anniversary of the issue of the First Tranche Convertible Note has amounted to at least the aggregate of the Basic Consideration and the Further Consideration, or if not, after the issue of accounts of Anglo Alliance showing accumulated net profit after tax and extraordinary items of at least such amount.

3. The basic and maximum consideration

Under the UHL SP Agreement (as amended), the Basic Consideration for the Anglo Alliance Group is approximately HK$366.7 million, as set out above. Depending on the level of Audited Profit, additional consideration is payable. A special audit of the results of the Anglo Alliance Group for the 12-month period commencing from the completion date of the Deed will be carried out for the purpose of determining the Audited Profit.

Any such addition to the Basic Consideration will be satisfied by the issue of up to a maximum of HK$183.3 million Second Tranche Convertible Note.

4. Principal conditions

(i) Deed (as amended)

The Deed is subject to a number of conditions relating to the Reorganisation of the Anglo Alliance Group being validly completed and the receipt of PRC legal opinions to that effect. It is also conditional on due diligence in respect of the Anglo Alliance Group being satisfactory to Orient Ventures and the Company and on the members of the Anglo Alliance Group having all necessary licenses and approvals for their existing operations and business. It is further conditional on:

assignment to Orient Ventures of the loan of approximately HK$100 million, being the sum due from Anglo Alliance to the Vendor on completion of the Deed; and
the amount due from Hao Ge to the Vendor outstanding as at the date of the Deed of not less than RMB70 million being assigned by the Vendor to Anglo Alliance or being capitalised into the equity of Hao Ge and a PRC lawyer confirming the legality and validity of such assignment or capitalisation.

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LETTER FROM SOMERLEY

(ii) UHL SP Agreement (as amended)

The UHL SP Agreement is conditional on the completion of the Deed and other standard conditions, including:

the passing of a resolution by the Independent Shareholders pursuant to the requirements of the Listing Rules approving the transactions contemplated under the UHL SP Agreement and in particular, the purchase of Orient Ventures, the issue of the Consideration Shares, the First Tranche Convertible Note, the Second Tranche Convertible Note (together the “Convertible Notes”) and the exercise of the Option;
the Stock Exchange granting its approval for the listing of, and permission to deal in, the Consideration Shares and the new Shares which would fall to be issued upon conversion of the Convertible Notes; and
the passing of a resolution by the Independent Shareholders by poll approving the Whitewash Waiver pursuant to the requirement of the Takeovers Code and the Executive granting the Whitewash Waiver to Mr. Ko and parties acting in concert with him.

PRINCIPAL FACTORS AND REASONS TAKEN INTO ACCOUNT

In arriving our opinion on the terms of the Acquisition and on the Whitewash Waiver, we have taken into account the following principal factors and reasons:

1. Present position of the Group

(i) Business

The Group is principally engaged in the retail and distribution of home audio and video equipment, and the provision of IP telephony and related services. It also carries out trading in equity securities. Details of the performance of these segments are set out below. The Directors have commented that the Group’s audio and video distribution division and the communication division are suffering from strong competition. As a result, the Group has made heavy losses for the two financial years ended 31 December 2003 and a loss of approximately HK$9.9 million for the year ended 31 December 2004. Set out in Appendix I are details of the financial performance of the Group for the three years ended 31 December 2004.

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LETTER FROM SOMERLEY

In our opinion, the Group’s main asset is its holding in DVN (Holdings) Limited (“DVN”, together with its subsidiaries, the “DVN Group”), in which it has a 19.58% interest as at 31 March 2005. DVN is a listed company (stock code 500) principally engaged in the design, integration and installation of digital broadcasting equipment and trading of related products. For the year ended 31 December 2004, DVN made a loss of approximately HK$59.7 million on turnover of approximately HK$169.2 million. However, this represented a considerable improvement over 2003, when a loss of approximately HK$140.1 million was incurred on turnover of approximately HK$73.3 million.

During the second half of 2004, DVN attracted investment from the Motorola, Inc. group (“Motorola”), one of the leading global providers of wireless and broadband related electronic products. A subsidiary of Motorola, Inc. entered into a subscription agreement with DVN under which it will subscribe for up to US$33 million (equivalent to approximately HK$257.4 million) for new shares representing an expected 30% stake in DVN to fund the future development of DVN’s digital broadcasting systems. The first and second tranches of US$7.5 million (approximately HK$58.5 million) each were subscribed in July 2004 and January 2005 respectively, and Motorola currently holds a 20% stake in DVN.

At the Latest Practicable Date, the closing price of DVN’s shares was HK$1.89 and its market capitalisation was about HK$1.1 billion based on about 578.9 million shares in issue. On this basis, the market value of the Company’s stake in DVN was about HK$214.2 million, equivalent to approximately HK$0.05 per Share.

(ii) Placing and Top-up Subscription

After trading at depressed levels for some time (see chart under paragraph 7 headed “Issue price of Shares/conversion price of the Convertible Notes” below), the Share price increased to HK$0.10 after the Announcement and strengthened further subsequently. The Placing and Top-up Subscription of approximately 655 million Shares at HK$0.12 per Share was completed in February/March 2005 to raise net proceeds of about HK$76 million for the Company.

At the Latest Practicable Date, the closing price of the Shares was HK$0.141 and its market capitalisation was about HK$554 million.

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LETTER FROM SOMERLEY

(iii) Financial results and position

(a) Profit and loss

Set out below is a summary of the audited consolidated profit and loss of the Group for each of the three years ended 31 December 2004:

Turnover
Telecommunications
(IP telephony in PRC)
Audio and video distribution
Share trading
Digital broadcasting_(Note 1)
Financial information provision
(Note 1)
_Less:_Cost of sales
Gross profit margin
Other revenues(Note 2)
Marketing, selling and
distribution costs
Administration expenses(Note 3)_
Impairment loss on
investment securities
Net gain on dilution of interest
in an associated company
Net other operating
income/(expenses)
Operating profit/(loss)
Finance costs
Share of results of
Jointly controlled entities
Associated companies
Loss before taxation
Taxation
Loss after taxation
Minority interests
Loss attributable to Shareholders

For the year ended 31 December
2002
2003
2004
HK$’000
HK$’000
HK$’000
2,029
6,005
3,889
1,961
16,362
18,180
—
7,644
16,561
35,836
—
—
11,965
—
—
51,791
30,011
38,630
(35,714)
(24,567)
(31,091)
16,077
5,444
7,539
31.0%
18.1%
19.5%
2,702
7,837
6,280
(13,677)
(1,233)
(1,007)
(86,753)
(15,246)
(16,564)
(63,382)
(44,508)
—
23,684
11,503
14,289
(32,907)
8,497
(1,944)
(154,256)
(27,706)
8,593
(3,979)
(4,634)
(2,563)
(1,727)
—
—
(11,393)
(37,511)
(14,869)
(171,355)
(69,851)
(8,839)
—
(195)
(1,092)
(171,355)
(70,046)
(9,931)
76,252
—
—
(95,103)
(70,046)
(9,931)

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LETTER FROM SOMERLEY

Notes:

These activities are carried out by DVN, a subsidiary until December 2002, and now an associated company of the Company.
Mainly comprising dividend, interest and management income.
In 2002, a significant portion of the administration expenses were derived from the DVN Group. DVN was deconsolidated in the 2003 accounts.

Turnover in 2002 decreased to approximately HK$52 million, less than half of the level of 2001, principally due to intense competition in the telecommunication and audio/video businesses. Turnover fell further to approximately HK$30 million for 2003, although this was mainly due to the deconsolidation of DVN’s results with effect from December 2002. The increase in turnover in 2004 to approximately HK$38 million was mainly attributable to securities trading operation.

Due to competition in both the telecommunication sector and the audio and video distribution sector, the gross profit margin of the Group declined over the above period. The deconsolidation of DVN from 2003 onwards caused the major part of the drop in expenses in 2003. Administration expenses for 2004 increased by approximately 9% over 2003.

During 2004, overall operating expenses continued to be reduced but not sufficiently to restore the Group to profitability.

(b) Balance sheet

Set out below is the summary of the audited consolidated balance sheets of the Group as at 31 December 2002, 2003 and 2004:

Non-current assets Fixed assets Intangible assets Interests in associated companies (Note 1) Investment securities_(Note 2)_ Other assets	As at 31 December 2002 2003 2004 HK$’000 HK$’000 HK$’000 6,030 2,560 2,520 2,249 1,685 — 39,742 15,837 15,348 80,508 36,000 36,000 6,169 4,533 2,065 134,698 60,615 55,933	As at 31 December 2002 2003 2004 HK$’000 HK$’000 HK$’000 6,030 2,560 2,520 2,249 1,685 — 39,742 15,837 15,348 80,508 36,000 36,000 6,169 4,533 2,065 134,698 60,615 55,933
		55,933

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LETTER FROM SOMERLEY

Current assets Inventories Trade receivables Preference dividends receivable (Note 2) Prepayments, deposits and other receivables Short-term investments Cash and bank balances Current liabilities Trade payables Other payables and accrued liabilities Taxation payable Short-term loan — secured Net current assets Total assets less current liabilities Non-current liabilities Amount due to a fellow subsidiary Total net assets Financed by: Share capital Reserves	As at 31 December 2002 2003 2004 HK$’000 HK$’000 HK$’000 5,927 901 105 126 2,765 1,687 10,171 15,984 21,797 6,545 31,973 305 11,607 4,605 — 4,267 16,425 14,152 38,643 72,653 38,046 596 63 338 32,207 39,365 33,640 — — 1,092 — 20,000 — 32,803 59,428 35,070 5,840 13,225 2,976 140,538 73,840 58,909 21,216 10,000 5,000 119,322 63,840 53,909 30,151 35,151 35,151 89,171 28,689 18,758 119,322 63,840 53,909	As at 31 December 2002 2003 2004 HK$’000 HK$’000 HK$’000 5,927 901 105 126 2,765 1,687 10,171 15,984 21,797 6,545 31,973 305 11,607 4,605 — 4,267 16,425 14,152 38,643 72,653 38,046 596 63 338 32,207 39,365 33,640 — — 1,092 — 20,000 — 32,803 59,428 35,070 5,840 13,225 2,976 140,538 73,840 58,909 21,216 10,000 5,000 119,322 63,840 53,909 30,151 35,151 35,151 89,171 28,689 18,758 119,322 63,840 53,909
		38,046
		338 33,640 1,092 —
		35,070
		2,976
		58,909
		5,000
		53,909

		35,151 18,758
		53,909

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LETTER FROM SOMERLEY

Notes:

This is chiefly the book value of the Company’s shares in DVN. As at 31 December 2004, the market value of this holding was approximately HK$164 million. At the Latest Practicable Date, the market value was approximately HK$214.2 million.
This represents the Company’s holding of preference shares in DVN (Group) Limited, a subsidiary of DVN, which can be exchanged into approximately 28.1 million shares of DVN. The accrued dividends receivable on the preference shares at the value of 5% is shown under current assets.

As at 31 December 2004, the Group had outstanding loans of approximately HK$29.7 million due to several companies controlled by Kwan Wing Holdings Limited, which in turn was controlled by Mr. Ko, but no bank or similar borrowings and no material capital commitments. Taking into account cash and bank balances of approximately HK$14.2 million, we consider the liquidity position of the Group is satisfactory, bearing in mind the substantial recent losses the Group has suffered.

As set out above, the audited net assets of the Group as at 31 December 2004 were approximately HK$53.9 million. However, this takes the Group’s stake in DVN at book value and does not take into account the recent subscription of new shares by Motorola. Based on the audited consolidated balance sheet of the Group as at 31 December 2004, taking into account the factors set out below, the adjusted net assets of the Group and the adjusted net assets per Share would be as follows:

	HK$ million
Audited net assets at 31 December 2004	53.9
Add: net proceeds from the Placing and Top-up Subscription	76.0
market value of the Company’s share in DVN
at the Latest Practicable Date	214.2
Less: book value of the Company’s shares in DVN
as at 31 December 2004_(see Note 1 above)_	(15.3)
	328.8*
Adjusted net assets per Share based
on 3,929 million Shares in issue	HK$0.084*

This has not taken into account the possible conversion of the preference shares mentioned in Note 2 above, which we do not consider will have a material effect on net assets per Share.

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LETTER FROM SOMERLEY

2. The Anglo Alliance Group

(i) Business

Anglo Alliance is an investment holding company. Members of the Anglo Alliance Group are engaged in various media related businesses in the PRC, including production of television drama, investment in movie production, advertising agency and advertisement production. The Anglo Alliance Group is also responsible for producing programmes (other than news) for a satellite television channel in Hainan province.

(ii) Structure

The structure of the Anglo Alliance Group on completion of the UHL SP Agreement can be illustrated from the following group chart:

==> picture [343 x 260] intentionally omitted <==

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

Anglo
Alliance
98%
2% Spouse of
Poly Culture & Arts Co., Ltd. Hao Ge
Mr. Dong Ping
50% 50%
Media Company
Main activities:
Investment in television drama
and film production and
advertisment production
(see also activities of subsidiaries
and associated companies below)
49% 60% 50% 51% 55%
Hai Nan Haishi Beijing Xin Bao
Tourist Satellite Beijing Ying Yuan Film & Beijing Hua Yi Beijing Hua Yi
TV Media Shi Film & Television Shan He Shui Qian Si
Co., Ltd. Television Art Investment Advertising Advertising
Main activity: Limited Liability Limited Liability Company Company
Production and Company Company Limited Limited
editing of
television Main activity: Main activity: Main activity: Main activity:
Production of Production and Advertisement Advertisement
programmes for the television dramas sale of production production
Travel Channel television dramas
----- End of picture text -----

The Media Company is an operating company and a holding company, carrying out activities both in its own right and through its subsidiaries and associates.

Shareholders should note that Anglo Alliance will only have one principal asset, its 98% interest in Hao Ge. The remaining 2% interest in Hao Ge is held by the spouse of the Vendor. It is the intention of the Company to acquire 100% interest in Hao Ge in due course. An option to this effect will be granted to Anglo Alliance by the Vendor’s spouse (subject to the applicable PRC law) at nominal consideration of HK$1. In the meantime, the parties will consider means to transfer the economic benefit in Hao Ge to Anglo Alliance. Consequently, in this letter we assume that Anglo Alliance has a 100% interest in Hao Ge.

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LETTER FROM SOMERLEY

Hao Ge has been reorganised as a sino-foreign joint venture with effect from 23 March 2005. The registered capital of RMB30 million has been fully paid up. Upon completion of the Reorganisation, the principal asset of Hao Ge will be its 50% interest in the Media Company. The remaining 50% interest in the Media Company is owned by Poly Culture & Arts Co., Ltd. Consequently, the whole of the Company’s interest in the business of the Anglo Alliance Group will be held through a 50%-owned company (the Media Company), which will be accounted for as an associated company.

Poly Culture & Arts Co., Ltd., the other 50% owner of the Media Company, is a member of the China Poly Group Corporation (“China Poly Group”). China Poly Group is a state-run enterprise under the supervision and management of the State Property Supervision and Management Committee. The principal activities of the China Poly Group include trading of defense products, real estate development and cultural development. According to the official website of the China Poly Group, its total assets were approximately RMB15.5 billion at the end of 2004, with net assets of approximately RMB5.22 billion. For the year 2004, the China Poly Group made a profit of approximately RMB538 million.

(iii) Activities

The active business activities of the Anglo Alliance Group are carried on through the Media Company itself, and to a lesser extent through its subsidiaries and associates noted on the chart.

Media Company

The Media Company was established in April 1997, although significant levels of turnover have only been achieved in 2003 and 2004.

The Media Company, together with its subsidiaries, is principally engaged in the production of television drama, investment in films production, advertising agency services and advertisement production.

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LETTER FROM SOMERLEY

The table below sets out the breakdown of the turnover of the Media Group by major business activities for each of the three years ended 31 December 2004:

Sales of television programmes Advertising and commission income Licensing and sub-licensing of programmes and film rights Total	For the year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 481 4,100 4,808 203 1,673 10,094 4,089 20,067 62,087 4,773 25,840 76,989	For the year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 481 4,100 4,808 203 1,673 10,094 4,089 20,067 62,087 4,773 25,840 76,989
		76,989

Hai Nan Haishi Tourist Satellite TV Media Co., Ltd (“Hainan TV”) (49% owned by the Media Company and accounted for as an associated company)

This interest was acquired by the Media Company in January 2004 for RMB270 million. As set out in note 15 to the accountants’ report on the Media Group in Appendix V, RMB68.6 million was prepaid prior to January 2004 and RMB158.1 million remained unpaid at 31 December 2004. We understand that approximately RMB60 million of this outstanding amount has since been paid from a sum of RMB99.22 million advanced to Anglo Alliance by the Vendor out of the deposit paid by Mr. Ko.

Hainan TV has obtained from the Travel Channel the sole rights to manage and run its programming and advertising business and to share in benefits therefrom for a term of 30 years. The Travel Channel reaches nearly all major cities in the PRC.

Hainan TV’s major source of revenue is advertising income. The Travel Channel was re-launched in July 2004 following which its ranking among satellite channels in the PRC in terms of audience share in ten biggest PRC cities improved from 40th to 29th, based on a research performed by ChinaView Intelligence Co., Ltd., which is an independent firm engaged in, inter alia, media research and consulting in the PRC.

The acquisition of Hainan TV not only improved the profitability of the Media Company but also boosted its sales and licensing of programmes and film rights for broadcasting on the Travel Channel.

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The board of Hainan TV has a total of 7 directors, 3 of whom are appointed by the Media Company. The Media Company also appoints the financial controller and general manager in charge of daily operations.

Beijing Ying Shi Film & Television Art Limited Liability Company (60% owned by the Media Company)

Established in January 1995, this company has a registered capital of RMB500,000. It is principally engaged in the production of situation comedy (“sitcoms”) which were pioneered by Mr. Ying Da in the PRC. Reflecting daily life and current topics presented in a mild manner, sitcoms are widely watched by audiences and have attracted a strong following. This company is one of the first few private companies to receive approval for television program production issued by SARFT.

Beijing Xin Bao Yuan Film & Television Investment Limited Liability Company (50% owned by the Media Company)

This interest was acquired by the Media Company in November 2003. At 31 December 2004 its book value was RMB20 million. It is held as a longterm investment.

This company was set up by Mr. Zhao Bao Gang (“Mr. Zhao”) and his spouse Ms. Ding Xin in 1999 for the production and distribution of television dramas directed by Mr. Zhao, an experienced and well known television drama director in the PRC.

Beijing Hua Yi Qian Si Advertising Company Limited (55% owned by the Media Company)

Established in July 2001 and principally engaged in the provision of packaged advertising services, this company has a registered capital of RMB5 million. The company utilises various advertising media including movies, television programs, shows, posters, and press conferences and presents an integrated advertising/promotion plan to its clients. This type of advertising is still at an early stage of development in the PRC.

Beijing Hua Yi Shan He Shui Advertising Company Limited (51% owned by the Media Company)

Established in April 2002 and principally engaged in advertising agency services and advertisement production, this company has a registered capital of RMB1,020,000.

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This company mainly produces corporate videos and advertisements (mainly for motor vehicles). It has strong creative and production functions and its productions feature international movie stars.

The Media Company and its subsidiaries have obtained relevant movie/ television program production, publication and distribution licenses from SARFT.

(iv) Results

The consolidated results of the Media Company are set out with notes in the accountants’ report contained in Appendix V to the Circular. The consolidated results are:

Turnover
Cost of sales
Gross profit
Other revenues
Marketing, selling and distribution costs
Administration expenses
Provision of impairment for programmes
and film righs
Other operating expenses
Operating (loss)/profit
Finance costs
Share of profit/(loss) of:
associated companies
a cooperative joint venture
(Loss)/profit before taxation
Taxation
(Loss)/profit after taxation
Minority interests
(Loss)/profit attributable to shareholders

For the year ended 31 December
2002
2003
2004
RMB’000
RMB’000
RMB’000
4,773
25,840
76,989
(3,499)
(20,133)
(33,875)
1,274
5,707
43,114
40
22
600
(4,753)
(9,504)
(10,638)
(2,769)
(4,174)
(6,255)
(5,212)
(25,412)
—
(2,063)
(12,562)
(8,420)
(13,483)
(45,923)
18,401
(532)
(2,766)
(12,481)
36
(69)
2,621
—
—
2,000
(13,979)
(48,758)
10,541
(80)
(248)
(6,341)
(14,059)
(49,006)
4,200
200
—
(87)
(13,859)
(49,006)
4,113

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LETTER FROM SOMERLEY

Management’s discussion and analysis of the Media Group’s performance is set out in Appendix VII to the Circular. The main points include:

• Turnover

Turnover was mainly derived from sales of programmes and film products, licensing and sub-licensing of programmes and film rights and rendering of advertising services. Turnover for 2002 was less than RMB5 million. For the year ended 31 December 2004, turnover was approximately RMB77 million, a growth rate of approximately threefold over 2003 turnover of approximately RMB26 million. The growth was attributable primarily to the substantial increase in programme and film rights licensing and sublicensing activities.

• Gross profit

The following table sets out the gross profit margin for each of the Media Group’s major business activities for the two year ended 31 December 2004 (2002 being omitted because of small size of gross profit):

	2003	2004
	%	%
Sale of television programmes	6.2	13.0
Advertising and commission income	43.9	54.2
Licensing and sub-licensing of programmes
and film rights	23.5	59.6
Overall gross margin	22.1	56.0

The major reason for the increase in the gross profit margin in 2004 is because revenue from licensing and sub-licensing activities outpaced the increase in the charge for amortisation of the licensed products.

• Net other operating expenses

The net other operating expenses of the Media Group mainly comprised impairment losses in respect of programmes and film rights, provision for long-term investments and others. For the year ended 31 December 2003, the Media Company recorded a significant amount of other operating

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expenses due to a substantial impairment loss in respect of certain programmes and film rights amounting to approximately RMB25.4 million and a compensation expenses of approximately RMB11.0 million for failure to complete a subscription agreement with an investor.

Operating profit/loss

The Media Group recorded operating losses of approximately RMB13.5 million and approximately RMB45.9 million for the years ended 31 December 2002 and 2003 respectively but recorded an operating profit of approximately RMB18.4 million for the year ended 31 December 2004.

The improvement in the operating results of the Media Group was mainly due to increase in turnover of the Media Group and the enhancement of gross profit margin.

Share of profit/loss of associated companies and return of long term investments

The main reason for the significant increase in the year ended 31 December 2004 was a result of the acquisition of an interest in Hainan TV in 2004. For the year ended 31 December 2004, the Media Group obtained a fixed return of approximately RMB2 million from a long-term investment it made in 2003 in accordance with the terms of the joint venture agreement. Under this joint venture agreement with 北京鑫寶源影視投資有限公司 (Beijing Xin Bao Yuan Film & Television Investment Limited Liability Company), which is engaged in the production and sale of television dramas for a term of 20 years, the Media Group is entitled to fixed returns on its investments at the rate of RMB4 million every two years over the joint venture period.

Taxation

Members of the Media Group are subject to enterprise income tax in the PRC at a rate of 33% of the respective assessable profits prepared and calculated in accordance with the applicable PRC rules and regulations, whilst Hainan TV is subject to enterprise income tax at 15%. The increase in taxation for the three years ended 31 December 2004 was mainly due to improved operating results of the Media Group.

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(v) Consolidated balance sheet of the Media Group

	As at
	31 December
	2004
	RMB’000
Non-current assets
Fixed assets	14,295
Programmes and film rights_(Note 1)_	74,915
Programmes and film production in progress	11,955
Investments in associated companies_(Note 2)_	261,024
Long-term investments	20,000
Deferred tax assets	2,889
Goodwill	2,271
	387,349
Current assets
Trade receivables	23,457
Prepayments, deposits and other receivables	27,283
Programmes and film production in progress	16,911
Amounts due from related companies	24,586
Amount due from an associated company	351
Cash and bank balances	11,488
	104,076

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	As at
	31 December
	2004
	RMB’000
Current liabilities
Short-term bank loans_(Note 3)_	75,000
Other short-term loans_(Note 3)_	6,412
Trade payables	664
Other payables and accrued liabilities	12,426
Current portion of investment cost payable_(Note 4)_	135,000
Receipt in advance	15,936
Taxes payable	9,834
Amounts due to related companies	73
Amount due to an associated company	10,652
Amount due to a shareholder	1,606
Amount due to a minority shareholder	200
Amount due to immediate holding company	1,800
Current portion of finance lease payable	1,283
	270,886
Net current liabilities	(166,810)
Total assets less current liabilities	220,539
Financed by:
Share capital	120,000
Reserves	(97,053)
Shareholders’ funds	22,947
Minority interests	982
Non-current liabilities
Loan from immediate holding company_(Note 5)_	100,000
Amount due to a shareholder_(Note 6)_	70,787
Non-current portion of investment cost payable_(Note 4)_	23,099
Non-current portion of finance lease payable	2,724
	220,539

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Notes:

Programmes and film rights acquired from third parties are stated at acquisition costs plus film enhancement costs less amortisation and accumulated impairment losses, if any. Selfproduced programmes and film products are completed programmes and films produced by the Media Group and are stated at the lower of cost and net realisable value.

The cost of programmes and film rights is charged to the profit and loss account proportionately to the estimated projected revenues over their expected economic beneficial period ranging from 2 years to 10 years. Additional amortisation will be made if estimated projected revenues adversely differ from the previous estimation. Estimated projected revenues will be reviewed on a programme-by-programme or film-by-film basis at a regular interval.

When programmes and film rights are sold, carrying amount of those programmes and film rights is recognised as an expense in the year in which the related revenue is recognised. The amount of any write-down of programmes and film rights to net realisable value and all losses of programmes and film rights are recognised as an expense in the year the write-down or loss occurs. The amount of any reversal of any write-down of programmes and film rights, arising from an increase in net realisable value, is recognised as a reduction in the amount of write-down of programmes and film rights recognised an expense in the year in which the reversal occurs.

Principally representing Media Company’s interest in Hainan TV.

Short-term loans

	As at
	31 December 2004
	RMB’000
Short-term bank loans_(a)_	75,000
Other short-term loans_(b)_	6,412
	81,412

(a) A short-term bank loan of RMB5 million was guaranteed by 中財國企投資有限公司 (Chinese State-owned Enterprises Investment Co. Ltd.), a third party stateowned enterprise, with a guarantee term of three years commencing on 2 September 2003 at no cost. Another short-term bank loan of RMB70 million was guaranteed by 中國保利集團公司 (China Poly Group), a related company of the Media Company, with a guarantee term of three years commencing on 31 March 2004 at no cost.
(b) Other short-term loans of RMB6,412,000 were secured by a pledge of certain fixed assets and long-term investments of the Media Company.
These amounts relate to outstanding payments for the Media Company’s interest in Hainan TV.
This loan is due to the China Poly Group which at 31 December 2004 held a 56% interest in the Media Company. This interest is now reduced to 50% and the China Poly Group is no longer the holding company of the Media Company.
This amount is due to Hao Ge and remains outstanding.

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Liquidity and financial resources

Your attention is drawn to the consolidated cash flow statement of the Media Company contained in Appendix V to the Circular. During the year ended 31 December 2002, the Media Group recorded net cash inflow of approximately RMB16.8 million from operating activities. For each of the two years ended 31 December 2004, the Media Group recorded net cash outflows from operating activities of approximately RMB98.5 million and RMB11.1 million respectively. As at 31 December 2004, cash and cash equivalents of the Media Group amounted to approximately RMB11.5 million. The net cash outflow from operating activities for the year ended 31 December 2004 was mainly due to investments in a number of films. During the three years ended 31 December 2004, the Media Group had been operating under a net current liability position. The Media Group had a gearing ratio, representing total long-term borrowings (including noncurrent portion of finance lease payable, amount due to a shareholder and an immediate holding company) to shareholders’ funds, of approximately 7.56 times as at 31 December 2004.

In addition to the internal generated cash flows, the Media Group also made use of short-term borrowings from its shareholders and financial institutions in the PRC to finance its operations during the three years ended 31 December 2004. Save for certain finance lease arrangements, the Media Group had long-term loans of approximately RMB1.6 million, RMB127.6 million and RMB170.8 million respectively outstanding as at 31 December 2002, 2003 and 2004. Certain fixed assets, programmes and film rights and investments of the Media Group with an aggregate net book value amounting to approximately RMB58.9 million as at 31 December 2004 were pledged for certain loans amounting to approximately RMB6.4 million as at 31 December 2004.

• Net current liabilities

As shown in the consolidated balance sheets of the Media Company contained in Appendix V to the Circular, the net current liabilities of the Media Group amounted to approximately RMB129.3 million, RMB69.0 million, and RMB166.8 million as at 31 December 2002, 2003 and 2004 respectively. The substantial growth of the business of the Media Group in the past few years was partly financed by borrowings, which include borrowings from shareholders and related companies and bank loans. As at 31 December 2004, the Media Group had approximately RMB158.1 million of investment cost payable in respect of Hainan TV, of which approximately RMB135 million is payable within 2005. As mentioned in the letter from

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the Board, the Vendor will advance approximately HK$100 million to Anglo Alliance. As at the Latest Practicable Date, RMB99.22 million had been so advanced, approximately RMB60 million of which had been used to finance part of the payments for Hainan TV due in 2005. Out of the total amount of RMB75 million short-term bank loans outstanding as at 31 December 2004, a loan of RMB70 million was guaranteed by the China Poly Group, the existing 50% shareholder of the Media Company.

Capital structure

Funding from shareholders has been one of the major sources of finance for the growth of the business of the Media Group. During the three years ended 31 December 2004, the share capital of the Media Company increased from RMB20 million to RMB120 million. In addition, as explained in the paragraph headed “Net current liabilities” above, the Media Group also relied substantially on debt funding from its shareholders and related companies. As at 31 December 2004, the total amount due to its shareholder, immediate holding company, associated companies and other related companies amounted to approximately RMB184.9 million.

3. Target Profit

The Target Profit falls into the classification of “profit forecast” under Rule 10 of the Takeovers Code and Rule 14.62 of the Listing Rules. However, it was not based on any financial projections when it was first published in the Announcement on 2 February 2005. As stated in the letter from Eddie K.K. Lau CPA Limited set out in Appendix VIII to the Circular, the Anglo Alliance Group has not prepared any profit forecasts in the past. In preparing the Circular, the Vendor has, subsequent to the Announcement, produced financial projections in respect of the Anglo Alliance Group for the 12 months ending 31 May 2006 (assuming the Acquisition will be completed on 31 May 2005). However, their accuracy cannot be checked by performance against past forecasts or budgets and they call for very substantial growth over the audited results in the accountants’ report. In addition, the projections do not seem to have been prepared in the context of a formal business plan for the Anglo Alliance Group for the relevant period.

The main assumptions for the Target Profit are subject to wide variations, such as whether new films and television programmes (the major potential profit contributors) will be successful or not and also depend on subjective judgements. Of the projected turnover of the Media Company, approximately two thirds is not covered by firm orders, letters of intent or customer indications. Such assumptions may be necessary commercially to strike a deal between principals but are difficult, perhaps impossible, to verify to the standards required for a “profit forecast” in a public document. Consequently, the letter from EYCFL, the financial adviser to the Company, concerning

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the Target Profit is very heavily qualified and concludes that the Target Profit was not compiled with due care and consideration. Rather, it was agreed as a consideration adjustment mechanism after arm’s length negotiation between the parties to the Deed. The full text of the letter from EYCFL is set out in Appendix VIII to the Circular and Independent Shareholders are advised to read it carefully. In these circumstances, therefore, in our opinion, Independent Shareholders should not rely on the Target Profit as constituting a formal “profit forecast” as that term would normally be understood by investors. We have not so relied on it in deciding whether the terms of the Acquisition are fair and reasonable or not, although we have referred to materials prepared during the review of the Target Profit in assessing the overall growth potential of the Media Group.

4. Consideration payable by the Company

Under the terms of the UHL SP Agreement (as amended), the Company will pay the Basic Consideration of HK$366.7 million for Orient Ventures. Depending on the Audited Profit, the Company may pay up to an additional HK$183.3 million to Mr. Ko, as discussed in the section headed “Main features of the Acquisition” above.

In the letter from the Board, it is stated that the consideration was determined with reference in particular to:

(i) the established position of the Anglo Alliance Group (including Hainan TV);
(ii) the possible growth and development trend of the Anglo Alliance Group’s businesses and of the PRC media industry in general; and
(iii) the quality of the management of the Anglo Alliance Group.

We have assessed the consideration against these three factors, and with reference to net assets and earnings, taken as a whole. We comment as follows:

(i) Established position of the Anglo Alliance Group

The activities of the Media Group are set out in paragraph 2(iii) above. The Vendor, Mr. Dong, started buying up film copy rights in 1996 before establishing the Media Company in 1997. The Media Group is an experienced producer of television dramas and sitcoms sold to CCTV and 30 local television stations. It has co-produced two films. In 2004, the Media Group had turnover of approximately RMB77 million, a threefold increase over 2003, and made its first profit of approximately RMB4.1 million. The Media Company bought into Hainan TV in January 2004 and, following a relaunch in July 2004, Hainan TV’s audience share has improved sharply. Hainan TV made a profit of approximately RMB1,035,000 on turnover of approximately RMB80,062,000 for the year ended 31 December 2004.

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By the standards of private PRC media companies, this is a relatively long track record. The experience of the senior management is described in the letter from the Board. The team is considered to represent one of the most experienced among private companies in its field in the PRC. Based on our research, there is a scarcity of recent comparable transactions. We believe that the opportunity to buy a 50% stake in a media business of this type in the PRC, particularly without any immediate cash expenditure on the part of the Group, is a rare one.

(ii) Growth and development trend

In 2004, the Media Group’s revenue grew threefold over 2003 and the ratio of gross profit to revenue increased from 22% to 56%. According to the Vendor, the principal growth areas in revenue as compared to the financial year 2004 will be:

(a) Movies

The Media Company expects to receive box office revenue from the distribution of seven movies during 2005/2006. Two recent movies, “Peacock” and “Passages”, have received international film awards, attracting media attention. With such publicity, the Vendor is optimistic about receipts from the box office in the PRC and from overseas distribution. In 2004, the Media Company launched only one new movie.

(b) Television programmes — sitcoms and dramas

The Media Company plans to produce 720 sitcom episodes for sale to CCTV during 2005, of which 80 episodes are currently under production. In 2004, the Media Company sold 120 sitcom episodes to the Travel Channel and 40 episodes of another sitcom were sold to four local television stations.

The Media Company plans to produce or invest in 291 television drama episodes for sale to 30 television stations during 2005/2006. During 2004, it sold only 26 such episodes to television stations.

(c) Travel Channel

The Travel Channel is one of the most promising growth prospects of the Media Group. The book value of Media Group’s interest in Hainan TV at 31 December 2004 was approximately RMB226.7 million, making it the Media Group’s most substantial asset in terms of book value. Since relaunch in July 2004, the popularity of the Travel Channel has improved substantially, in turn increasing the attractiveness and revenue generation of its advertising time slots. As the relaunch could only benefit performance in the second half of 2004, it is reasonable to assume that a full year’s contribution will be greater.

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(d) Industry as a whole

Based on the management discussion and analysis set out in Appendix VII:

domestic PRC box office income increased by 65% in 2004 over 2003;
total income generated by television broadcasting in the PRC increased by 8.5% in 2004 over 2003; and
total income generated by television advertising in the PRC increased by 21% in 2004 over 2003.

In addition, the media reforms being promoted by the PRC Government since 2003 are considered likely to increase growth in the industry. On the above basis, we concur that there are encouraging growth prospects for the media industry as a whole in the PRC.

(iii) Quality of management

The Media Group is managed by an experienced and qualified team headed by Mr. Dong Ping.

Mr. Dong, aged 43, was the founder of the Media Company. Mr. Dong has been the producer or co-producer of various internationally acclaimed movies on behalf of the Media Company including (i) “Devils on the Doorstep” (鬼子來了) directed by Jiang Wen (姜文 ) which was awarded, among others, the “Grand Prize of the Jury” in the Cannes Film Festival in 2000; (ii) “Crouching Tiger, Hidden Dragon” (臥虎藏龍 ) directed by Ang Lee (李安 ), which was awarded, among others, the “Best Foreign Language Film” in the 73rd Annual Academy Awards in 2001, and was awarded, among others, the “Best Foreign Language Film” and “Best Director — Motion Picture” in the 58th Golden Globe Awards in the same year; (iii) “Passages” (旅程) directed by Yang Chao (楊超), which was awarded the “Camera d’Or-Mention-speciale” in the Cannes Film Festival in 2004; and (iv) “Peacock” (孔雀 ) directed by Gu Changwei(顧長衛 ), which was awarded the “Jury Grand Prix — Silver Bear” of the Berlin International Film Festival in 2004 and was selected as one of the opening films in the Hong Kong Film Festival in 2005.

Mr. Dong commenced investing in the PRC film market as a private entrepreneur in 1996 by acquiring the copyrights of some 150 PRC films. Members of his management team are media professionals with experience in the advertising, movie or television industry. Brief biographies of the three other members of

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senior management are set out in the section headed “Information about the management of Anglo Alliance Group” in the letter from the Board. As at 15 April 2005, the Media Group had 75 full-time staff and Hainan TV, its most important associated company (49% owned), had 205 full-time employees.

Upon completion of the Acquisition, Mr. Dong will enter into a service contract with the Company for a term of two years to act as an executive Director responsible for overseeing the media business of the Enlarged Group.

(iv) Net assets

Based on the accountants’ report of the Media Group set out in Appendix V, Hao Ge and Orient Ventures would have estimated shareholders’ funds as follows:

Audited share capital and reserves of the Media Group as at 31 December 2004 Of which: attributable to Hao Ge’s 50% interest in the Media Company Shareholder’s loan extended from Hao Ge to the Media Company as at 31 December 2004 Share capital and reserves plus shareholder’s loan from Hao Ge Hongkong dollars equivalent of RMB82,261,000 Advance to Anglo Alliance by Vendor (to be assigned to Orient Ventures) Total estimated shareholder’s funds of Orient Ventures Basic Consideration of HK$366.7 million as compared to total estimated shareholder’s funds of Orient Ventures	RMB’000 22,947

	11,474 70,787
	82,261

	HK$’000 76,879 100,000
	176,879

	2.1 times

Note: The above table assumes that HK$100 million advanced or to be advanced by the Vendor to Anglo Alliance is treated as an addition to shareholders’ funds of Orient Ventures.

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We consider that the reasons why media companies are commonly valued at a premium over net assets include certain intangibles, such as the holding of relevant licenses, employing key creative personnel and building up a library of past films and television programmes. As at 31 December 2004, the Media Group had a library of 143 Chinese feature movies and 12 television series. These are recorded at cost (see note 1 to the consolidated balance sheet of the Media Company set out in paragraph 2(v) above).

(v) Earnings

Based on the accountants’ report set out in Appendix V to the Circular, the Media Group made a net profit of approximately RMB4,113,000 for the year ended 31 December 2004. 50% of this amount is attributable to the Anglo Alliance Group.

Although this is a small profit, we consider it encouraging that the Media Company did break through to profitability in 2004 after previous losses. For the reasons discussed in paragraph 3 above headed “Target Profit”, we have not relied on the Target Profit of HK$60 million for the Anglo Alliance Group in assessing the consideration for the Acquisition. We have concluded that there are too many uncertainties (as summarised in the letters from Eddie K.K. Lau CPA Limited and EYCFL set out in Appendix VIII) concerning the assumptions for the Target Profit to support a valid mathematical analysis of the consideration compared to future earnings.

(vi) Comparable companies

We have identified the following listed companies which are engaged in media related businesses broadly comparable to that of the Media Group and the net assets value of which is up to HK$250 million (compared with the estimated shareholder’s funds of Orient Ventures of approximately HK$177 million as calculated under the sub-section (iv) “Net assets” above). Our main focus is on the ratio of market capitalisation to net assets (“price to book ratio”) set out in the last column.

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						Closing
						price as at
	Stock					the Latest		Market
	exchange/					Practicable	Market	capitalisation/
Company name	Code	Main business		Currency	Net assets	Date	capitalisation	net assets
					million	(Note 1)	million
							(Note 2)
Mei Ah Entertainment	Hong Kong	(i)	sales, distribution and	HK$	245	0.30	232	0.9
Group Limited	391		production of films and programs		(30/9/04)
		(ii)	film exhibition
		(iii)	film rights licensing and sub-licensing
		(iv)	television operations
Shaanxi Broadcast &	Shanghai	(i)	advertisement	RMB	176	5.80	780	4.4
TV Network	600831	(ii)	networking of cable TV		(31/12/04)
Intermediary Co., Ltd.		(iii)	software development
		(iv)	TV programme production
Riche Multi-Media	Hong Kong	(i)	distribution of films	HK$	71	0.405	1,925	27.1
Holdings Limited	764	(ii)	sub-licensing of film rights		(31/12/04)
(“Riche”)		(iii)	sale of advertising rights or otherwise
			related to the entertainment industry
Tidetime Sun Group	Hong Kong	Cultural and educational media related business		HK$	128	0.017	277	2.2
Limited	307	including multi media content production and			(30/9/04)
		distribution and advertising services
Mandarin Entertainment	Hong Kong	(i)	film distributors and licensing	HK$	70	0.86	284	4.1
(Holdings) Limited	9	(ii)	film processing		(31/12/04)
		(iii)	advertising and promotional services
China Star	Hong Kong	(i)	film production	HK$	512	0.335	122	0.2
Entertainment Limited	326	(ii)	distribution of film and television drama series		(31/12/04)
		(iii)	provision of post-production services
Average price to book ratio						—		6.5
Average price to book ratio	(without Riche)							2.4

Notes:

Information extracted from Bloomberg
Calculated based on the issued share capital as at the relevant half year/year end date.

The above table shows that the comparable media companies have price to book ratios ranging from 0.2 to 27.1 times. Excluding the exceptionally high price to book ratio of 27.1 times for Riche, the average price to book ratio is approximately 2.4 times. The ratio of Basic Consideration over the estimated shareholder’s funds of Orient Ventures of 2.1 times is lower than such average.

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5. Method of payment

The consideration payable by the Company will be satisfied entirely by the issue of new Shares and the Convertible Notes. No cash expenditure by the Company is required. 2,700 million Shares will be issued to the Vendor at HK$0.042 each and approximately 3,047 million Shares will be issued to Mr. Ko at HK$0.049 each. On full conversion of the Convertible Notes based on the maximum consideration of HK$550 million, a further approximately 5,864 million Shares would fall to be issued to Mr. Ko at HK$0.049 each. One unusual feature of the Convertible Notes, which is in our view favourable to the Company, is that they are not repayable (although they can be converted) until the accumulated profits of the Anglo Alliance Group equal the total consideration paid by the Company.

If the Anglo Alliance Group makes an Audited Profit of over HK$40 million, payment of the Further Consideration of up to HK$183.3 million is triggered, to be satisfied by the issue of the Second Tranche Convertible Note. For Anglo Alliance to achieve this level of profitability, the Media Group (50% owned) must make profits of over HK$80 million. Consequently, we have reviewed and identified three listed profitable media companies with audited profits in excess of HK$80 million to assess the price to earnings (“P/E”) multiple appropriate for a media company of proven significant profitability:

						Closing
						price as at
						the Latest
	Stock					Practicable	Market	P/E
Company name	exchange/Code	Main	business	Currency	Net profit	Date	capitalisation	multiple
					million	(Note 1)	million
							(Note 2)
Television	Hong Kong	(i)	terrestrial television broadcasting	HK$	719	39.10	17,126	23.8
Broadcasts Limited	511	(ii)	programme production		(year ended
(“TVB”)		(iii)	other broadcasting related activities		31/12/04)
Phoenix Satellite	Hong Kong	(i)	satellite TV broadcasting	HK$	150	1.46	7,210	48.1
Television Holdings	8002	(ii)	programme production		(year ended
Limited		(iii)	related services including magazines		31/12/04)
Shaw Brothers Limited	Hong Kong	(i)	Investment in TVB	HK$	101	9.00	3,586	35.5
	80	(ii)	Property rental		(year ended
		(iii)	Film production and distribution		31/3/04)
		(iv)	provision of studios and filming facilities
Average P/E								35.8

Notes:

Information extracted from Bloomberg.
Calculated based on the issued share capital as at the relevant year end date.

The above table shows that media companies which made significant profits have a high P/E, with average being approximately 36 times.

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LETTER FROM SOMERLEY

6. Shareholding structure

The first table below sets out the shareholding structure of the Company (i) as at the date of the Announcement; and (ii) as at the Latest Practicable Date (the Placing and Top-up Subscription of about 655 million Shares was completed in February/March 2005). The second table below sets out the shareholding structure of the Company (i) immediately after completion of the UHL SP Agreement; (ii) immediately after such completion and assuming full conversion of First Tranche Convertible Note; and (iii) after conversion of the Convertible Notes in full.

		As at the date of	As at the date of				As	the
		the Announcement					Latest Practicable			Date
		Number of					Number of
		Shares %					Shares			%
Mr. Ko and his concert parties		1,019,077,150 31.1%				1,019,077,150				25.9%
The Vendor			— —				—			—
Placees			— —			654,850,000				16.7%
Public		2,255,216,007 68.9%				2,255,216,007				57.4%
Total		3,274,293,157 100.00%				3,929,143,157			100.0%

			Immediately after				Immediately		after
			completion of the				completion of the
	Immediately		UHL SP Agreement				UHL SP Agreement
	after completion of the		and assuming full				and assuming
	UHL SP Agreement but		conversion of the	First			full conversion
	before conversion of		Tranche Convertible				of the Convertible
	the Convertible Notes		Note(Note)				Notes	(Note)
	Number of		Number of				Number of
	Shares	%	Shares			%	Shares			%
Mr. Ko and his concert parties	4,065,648,021	42.0%	6,187,784,633			52.4%	9,929,281,224			63.9%
The Vendor	2,700,000,000	27.9%	2,700,000,000			22.9%	2,700,000,000			17.4%
Placees	654,850,000	6.8%	654,850,000			5.6%	654,850,000			4.2%
Public	2,255,216,007	23.3%	2,255,216,007			19.1%	2,255,216,007			14.5%
Total	9,675,714,028	100.00%	11,797,850,640		100.0%		15,539,347,231			100.0%

Note: Based on the initial conversion price of HK$0.049 per Share.

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LETTER FROM SOMERLEY

The consideration will be fully satisfied by the Company by the issue of new Shares and the Convertible Notes. This will dilute Independent Shareholders’ holdings (including the placees) from approximately 74.1% as at the Latest Practicable Date to approximately 24.7% upon full conversion of the First Tranche Convertible Note. It would further dilute Independent Shareholders’ holdings from 24.7% to 18.7% assuming maximum issue and full conversion of the Second Tranche Convertible Note. This degree of dilution for Independent Shareholders is, in our opinion, significant; however, the impact on Independent Shareholders is mitigated by the fact that their smaller attributable percentage holding will be held in a greatly enlarged Group with an improved market standing. This has already produced, for example, a sharp rise in the market value of Independent Shareholders’ shareholdings with price of the Shares increased from HK$0.047 on 17 December 2004 (being the last trading day before the Announcement) to a range of HK$0.102 to HK$0.169 subsequent to the Announcement and up to the Latest Practicable Date.

Although the increase in share capital is very substantial, it would not in our opinion be possible for the Company to finance a significant acquisition without issuing new equity. The present balance sheet of the Group is too small, in our opinion, to fund such an acquisition in any other manner.

7. Issue price of Shares/conversion price of the Convertible Notes

The issue price of the Consideration Shares to the Vendor of HK$0.042 per Share represents a discount of approximately 10.6% to the closing price of the Shares of HK$0.047 on 17 December 2004 (being the last trading day prior to the issue of the Announcement), a discount of approximately 14.3% to the average closing price of the Shares of HK$0.049 for the five consecutive trading days ended on 17 December 2004, and a discount of approximately 70.2% to the closing price of the Shares of HK$0.141 as at the Latest Practicable Date.

In facilitating the acquisition of the Anglo Alliance Group, Mr. Ko has agreed to accept new Shares at the average closing price of the Shares of HK$0.049 for the five consecutive trading days ended on 17 December 2004. This is a higher price per Share than the issue price of the Consideration Shares to be issued to the Vendor. Mr. Ko felt that it would be appropriate for him, as a connected person, to accept Shares at the market price rather than at a discount. The issue price of the Consideration Shares to Mr. Ko of HK$0.049 per Share and conversion price of the Convertible Notes of HK$0.049 per Share represent a premium of approximately 4.3% over the closing price of the Shares of HK$0.047 on 17 December 2004 (being the last trading day prior to the issue of the Announcement) and is equal to the average closing price of the Shares of HK$0.049 for the five consecutive trading days ended on 17 December 2004. Such prices represent a discount of approximately 65.2% to the closing price of the Shares of HK$0.141 as at the Latest Practicable Date.

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LETTER FROM SOMERLEY

Set out below are charts of the closing prices of the Shares and the trading volume of the Company for the 12 months prior to the Latest Practicable Date.

(i) Share price

==> picture [356 x 188] intentionally omitted <==

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

(HK$)
0.18
0.16
0.14
0.12
0.10
Issue price to Mr. Ko
0.08 HK$0.049 per Share
0.06
0.04
0.02 Issue price to Vendor
HK$0.042 per Share
0.00
Date
10/5/2004 1/6/2004 2/7/2004 2/8/2004 1/9/2004 4/10/2004 1/11/2004 1/12/2004 3/1/2005 1/2/2005 1/3/2005 1/4/2005 3/5/2005
Share Price
----- End of picture text -----

(ii) Trading volume

==> picture [319 x 176] intentionally omitted <==

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

1000000000
900000000
800000000
700000000
600000000
500000000
400000000
300000000
200000000
100000000
0
Date
10/5/2004 1/6/2004 2/7/2004 2/8/2004 1/9/2004 4/10/2004 1/11/2004 1/12/2004 3/1/2005 1/2/2005 1/3/2005 1/4/2005 3/5/2005
Trading Volume (Shares)
----- End of picture text -----

During the last nine months of 2004, trading in the Shares was thin and the price of the Shares remained low, ranging between approximately HK$0.04 and HK$0.07. The closing price of the Shares on 17 December 2004 (being the last trading day before the Announcement) was HK$0.047, and the 90 days’ average closing price up to that date was approximately HK$0.045. On resumption of trading after the release of the Announcement, the price rose sharply to HK$0.10 and the trading volume increased substantially. In the days following the Announcement, the share price of the Company strengthened further and has subsequently remained within the range of HK$0.102 to HK$0.169.

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LETTER FROM SOMERLEY

In February/March 2005, the Placing and Top-up Subscription of approximately 655 million Shares was carried out at a price of HK$0.12 per Share. At the Latest Practicable Date, the closing market price of the Shares was HK$0.141.

The announcement of the Acquisition has, on the basis of the above charts, had a strong positive effect on both the price and the trading volume of the Shares.

Overall, the issue prices of the Consideration Shares (at HK$0.042 to the Vendor and HK$0.049 to Mr. Ko) and the conversion price of HK$0.049 for the Convertible Notes have been set close to average closing market prices of the Shares prior to the Announcement. We consider such issue prices should be viewed in conjunction with the other relevant factors summarised in the section headed “Discussion and Analysis” below.

8. Effect on pro forma earnings and net assets of the Enlarged Group

Financial information on the Enlarged Group is set out in Appendix VI to the Circular.

(i) Earnings

The Company recorded consolidated net loss of approximately HK$9.9 million for the year ended 31 December 2004. Had completion of the UHL SP Agreement been taken place on 1 January 2004, the pro forma net loss of the Enlarged Group for the year ended 31 December 2004 would have been approximately HK$30.9 million. This is mainly due to the amortisation of goodwill arising on the acquisition of the Anglo Alliance Group. On a straight line basis over 20 years, the assumed annual charge is approximately HK$22.8 million.

(ii) Net assets

The audited net assets of the Group as at 31 December 2004 were approximately HK$53.9 million (HK$0.016 per Share based on approximately 3,274 million Shares in issue at that date). Adjusting for the Placing and Top-up Subscription and taking the Group’s stake in DVN at market price, we estimate the Group’s adjusted net assets to be approximately HK$328.8 million (HK$0.084 per Share), as set out in paragraph 1(iii)(b) above and based on approximately 3,929 million Shares in issue.

The Media Company will be accounted for as an associated company of the Enlarged Group, the unaudited pro forma consolidated balance sheet of which is set out in Appendix VI. Hao Ge will be a holding company and its only material asset will be its interest in its 50%-owned associated company, the Media Company.

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LETTER FROM SOMERLEY

Based on the financial information set out in Appendix VI, the Enlarged Group would have shareholder’s funds of HK$416.6 million (equivalent to HK$0.043 per Share, based on an enlarged share capital of approximately 9,675.7 million Shares). After deducting goodwill of approximately HK$424.3 million, the Enlarged Group will have negative net tangible assets of approximately HK$7.7 million (a net deficit of approximately HK$0.001 per Share).

(iii) Working capital

As stated in the paragraph headed “Working capital” in Appendix VI to the Circular, the Directors are of the opinion that, taking into account the present internal resources, the Enlarged Group has sufficient working capital for its present requirements for at least the next 12 months from the date of this Circular.

We understand that the Directors’ view on working capital has been formed chiefly on the basis of projected cash flows of the Company and its subsidiaries, which do not include the Media Company. On this basis, we concur with the Directors’ view. We have been informed that the Media Group has no material capital commitments except to pay the outstanding amounts of approximately RMB98.1 million (being total outstanding investment cost of approximately RMB158.1 million as at 31 December 2004, less RMB60 million investment cost settled subsequent to the year ended 31 December 2004) in respect of its investment in Hainan TV. If the Media Company required funding for some or all of this outstanding payment, the Enlarged Group could draw on its surplus liquidity, including the net proceeds of approximately HK$76 million from the recent Placing and Top-up Subscription and its unpledged holding in DVN with a current market value in excess of HK$200 million.

(iv) Gearing

As at 28 February 2005, the Enlarged Group had outstanding loans of approximately HK$118.3 million. As the Media Company will be accounted for as an associate, its borrowings will not be shown on the Enlarged Group’s balance sheet. The total outstanding borrowings of the Enlarged Group would increase to approximately HK$222.3 million had the UHL SP Agreement been completed and after the issue of the First Tranche Convertible Note. The pro forma gearing ratio (calculated on the basis of total borrowings of approximately HK$222.3 million divided by pro forma total assets of approximately HK$566.2 million) of the Enlarged Group would be approximately 39%. Assuming the maximum amount of the Second Tranche Convertible Note is issued, total borrowings would be increased to HK$405.6 million and based on pro forma total assets of HK$749.5 million, the gearing would be approximately 54%. These levels of gearing seem

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to us to remain within prudent limits, particularly as the Convertible Notes cannot be redeemed for cash until the accumulated net profits of the Anglo Alliance Group have reached the aggregate of the Basic Consideration (HK$366.7 million) and any Further Consideration.

9. Risk factors

Independent Shareholders should be aware of the following risk factors affecting the Enlarged Group:

(i) Government regulation of the media industry in the PRC

The media industry in the PRC is subject to the regulations and restrictions of SARFT. For example, there are foreign ownership limitations on holders of licences for movie and television drama production and distribution. Due to such regulations and restrictions, it is currently not legally possible for the Group to acquire over 50% control of certain businesses and operate them. There is no assurance that such legal and regulatory restrictions in the PRC will be lifted soon or at all or that there will not be further restrictions and requirements imposed or that Anglo Alliance will be able to obtain special approvals or exemptions from such restrictions or requirements. These not only restrict Anglo Alliance’s present businesses, but also certain proposed future developments. Accordingly, the prospects and profitability of Anglo Alliance may be adversely affected by these limitations.

(ii) Censorship of advertising content by the PRC Government

The advertising industry in the PRC is governed by the Advertising Law which came into effect on 1 February 1995. Advertisers, advertising operators and distributors that engage in advertising activities are required to comply with applicable procedures and provisions under the Advertising Law. If operations are determined to be in breach of the Advertising Law, penalties may be imposed which include fines, confiscation of advertising fees, orders to cease dissemination of the relevant advertisement and orders to publish an advertisement with corrective information. The PRC Government may also revoke the licence pursuant to which Anglo Alliance’s advertising business operates.

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LETTER FROM SOMERLEY

(iii) Actual financial performance of the Anglo Alliance Group is likely to vary materially from the prospective financial information contained in this circular

The Target Profit contained in Appendix VIII to the Circular is included for the purpose of providing Independent Shareholders with further background information on the Anglo Alliance Group. The achievement of the Target Profit relies on very substantial growth and/or improvement on audited results during 2002-2004. The Target Profit is based upon a number of assumptions as set out in Appendix VIII, some of which are subjective and difficult to substantiate. The opinions of the Company’s consultant accountants and financial advisers as regards the Target Profit are qualified. As a result, Independent Shareholders are urged not to rely on the Target Profit and to base their decision as to voting on the factors summarised in the section headed “Discussion and Analysis” below.

(iv) Possible further equity issues

The Media Company has funded its growth partly by shareholders’ loans. The Company is funding the Acquisition in part by issue of the Convertible Notes. While the Directors consider the Enlarged Group will have sufficient working capital, there is no guarantee that an issue of further equity may not be needed in due course. In addition, the conversion of the Convertible Notes is likely to dilute Independent Shareholders’ interests in due course, as discussed under paragraph 6 “Shareholding structure” above.

(v) Reliance on key management personnel

The directors and senior management of the Media Company, particularly the Vendor, possess substantial experience in PRC media business and have made a significant contribution to the development of the Media Company. The Vendor has not yet signed a service contract with the Enlarged Group, although it is expected he will do so. The Media Company’s daily operation depends significantly on the performance of its key management personnel. In the event that the Media Company loses the services of any of its key management personnel and fails to find suitable and competent replacements, the operation and profitability of the Media Company may be adversely affected.

(vi) Local competition

The Anglo Alliance Group faces competition from domestic and international players. There are a number of groups seeking to expand their presence in the PRC media businesses or to enter the market. The Anglo Alliance Group’s profitability may be adversely affected if there is downward pricing pressure arising from these competitors or if there are more competitors in the future.

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LETTER FROM SOMERLEY

WHITEWASH WAIVER

As illustrated in the above shareholding chart, upon completion of the UHL SP Agreement, the percentage of voting rights held by Mr. Ko and his concert parties in the Company will increase from approximately 25.9% to:

(i) approximately 42.0% of the issue share capital of the Company as enlarged by the issue of the 3,046,570,871 and 2,700,000,000 Consideration Shares pursuant to the UHL SP Agreement and the Deed respectively but before conversion of the Convertible Notes; and
(ii) approximately 63.9% of the issue share capital of the Company as enlarged by the issue of 3,046,570,871 and 2,700,000,000 Consideration Shares pursuant to the UHL SP Agreement and the Deed respectively and assuming the maximum consideration is paid and full conversion of the Convertible Notes (which would involve the issue of a further 5,863,633,203 new Shares at a conversion price of HK$0.049).
Mr. Ko has been the Chairman and the largest shareholder of the Company since 1994.

Immediately after completion of the UHL SP Agreement, the interests of Mr. Ko and his concert parties would increase from 25.9% to 42.0% of the enlarged share capital of the Company. Following full conversion of the First Tranche Convertible Note, such interest would increase from 42.0% to 52.4%, significantly over the “creeper” limit of 2%. Under the provisions of Rule 26 of the Takeovers Code, Mr. Ko and his concert parties would be required to make a mandatory general offer for all the Shares not owned by him and his concert parties when their interests in the Company (i) exceed 30% upon the issue of the Consideration Shares; and (ii) increase by over the 2% creeper limit from 42.0% upon conversion of the Convertible Notes.

An application for the Whitewash Waiver has been made to the Executive on behalf of Mr. Ko and his concert parties. The Executive has indicated that, subject to the approval by the Independent Shareholders at the EGM by way of a vote taken by poll, it will waive the obligation of Mr. Ko and his concert parties to make a general offer which would result from the issuance of the Consideration Shares pursuant to the UHL SP Agreement and the Deed and from the conversion of the Convertible Notes.

Shareholders should note that if the resolution in respect of the Whitewash Waiver is rejected by the Independent Shareholders at the EGM, Mr. Ko will not proceed further with the UHL SP Agreement. In other words, a general offer obligation on the part of Mr. Ko and his concert parties will not arise if the Whitewash Waiver is rejected. Instead, the UHL SP Agreement will be terminated, since its completion is conditional upon granting of the Whitewash Waiver (such condition precedent cannot and will not be waived).

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LETTER FROM SOMERLEY

Shareholders should also note that, after completion of the UHL SP Agreement and assuming full conversion of the Convertible Notes, Mr. Ko and his concert parties would hold over 50% of the voting rights of the Company. In such circumstances, Mr. Ko and his concert parties would be free to acquire further voting rights in the Company without triggering any general offer obligation under Rule 26 of the Takeovers Code.

DISCUSSION AND ANALYSIS

For the year ended 31 December 2004, the turnover of the Group stabilised at the low level of approximately HK$39 million. Costs have been controlled but there seems little management can do to return the Group to significant profitability without some substantial new initiative. One bright spot in this lacklustre overall performance has been the DVN Group. Although DVN is still loss-making, the response from the stock market to DVN’s association with Motorola has been encouraging, making the Group’s stake in DVN substantially its most valuable asset.

In reviewing the Acquisition, we have taken the view that the Directors are following the same general strategy as in the case of DVN, which we consider to have been successful so far. Both transactions involve growth through associated company stakes, relying in part on co-operation with an independent third party. In the case of DVN and Motorola, DVN has obtained a substantial amount of capital and technical assistance from Motorola to improve DVN’s digital broadcasting business in the PRC. In the case of the Acquisition, the Company’s existing business, which has declined to a low level of activity and is encountering heavy competition, will benefit from the injection of the Media Group where, in sharp contrast to the Group, turnover tripled in 2004 compared to 2003.

The response of the stock market to the announcement of the Acquisition has been encouraging. Following the release of the Announcement, the share price of the Company rose from HK$0.047 to HK$0.10. This performance has been maintained, despite some delay in publishing the Circular, and the substantial conditions to which the Acquisition remains subject. The Placing and Top-up Subscription of 654,850,000 Shares was successfully completed in February/ March 2005 at a price of HK$0.12 per Share. At the Latest Practicable Date, the closing market price of the Shares was HK$0.141. We attribute this strong stock market response to investors’ renewed hope for the future of the Company following the announcement of its planned entry into the PRC media business.

The proposed purchase of Orient Ventures has a somewhat complex structure and constitutes a connected transaction. However, we consider the involvement of the Chairman, Mr. Ko, in purchasing Anglo Alliance (through Orient Ventures) facilitates the eventual control of Anglo Alliance by the Company. We understand from the Directors that the Vendor was not prepared to sell Anglo Alliance if the sale was subject to conditions such as Independent Shareholders’ approval.

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LETTER FROM SOMERLEY

The business and structure of the Anglo Alliance Group is set out in paragraph 2 above and in the letter from the Board. It is principally engaged in production in the PRC of movies, television programmes and advertising. As set out in paragraph 4(ii)(d) above, we consider this is a growth industry in the PRC. The opportunity to participate in such activities has been limited and the growth in turnover of the Media Company over the past three years has been rapid. There are also risk factors to consider as set out in paragraph 9 above, particularly as regards the strict regulatory environment and unproven future profitability. Independent Shareholders should bear in mind that restrictions on media activities in the PRC apply and the Group’s attributable interest in the Media Company will be, for the immediate future, a maximum of 50%.

The Basic Consideration to be paid on completion by the Company for Orient Ventures is now reduced to HK$366.7 million (from HK$550 million) under the amended UHL SP Agreement. Additional consideration of up to HK$183.3 million may be payable depending on the level of the Audited Profit.

The consideration has no cash element. It will be fully satisfied by the Company by the issue of new Shares and the Convertible Notes. This will dilute Independent Shareholders’ holdings from approximately 74.1% to approximately 24.7% (upon full conversion of the First Tranche Convertible Note). However, if the Company, now reduced to a small size, is to make a significant acquisition, considerable dilution for Independent Shareholders is, in our opinion, inevitable.

The issue price of the new Shares is HK$0.042 (to the Vendor) and HK$0.049 (to Mr. Ko), and the Convertible Notes are convertible at a price of HK$0.049 per Share. As an arm’s length party, the Vendor was able to negotiate a small discount to the market price of the Shares prevailing when the terms of the Acquisition were negotiated. Mr. Ko, on the other hand, as the Chairman and single largest Shareholder, was prepared to accept the market price. This market price was not, in our opinion, supported by recent past profits or cash flow but is at an approximately 50% discount to our estimate of adjusted net assets per Share, taking DVN at market price.

We have assessed the level of the Basic Consideration of HK$366.7 million in conjunction with the other factors summarised below. Entry into the PRC media business represents a fresh start and new concept for the Company. It is difficult to be precise on the correct price for such a strategic move, particularly as no cash is involved and the consideration consists entirely of new Shares and Convertible Notes of the Company, the future worth of which will in turn largely depend on the success of the Media Company. We are satisfied that there are encouraging growth prospects both for the PRC media industry in general and the Media Company itself, based on the Media Group’s additional production of films and television programmes and on the industry growth in 2004 over 2003, as referred to in paragraph 4(ii) above. However, we cannot determine at this stage whether growth will translate into recurrent

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profits, although we note the Media Company did break through to profits in 2004. As we have been unable to make an assessment on future earnings, from the financial standpoint, we have made reference to the price to book ratio, which at 2.1 times is lower (i.e. favourable to the Company as purchaser) than the average for the comparable companies we have identified in paragraph 4(vi) above.

Summary

As regards the Acquisition in general

We have taken the following principal factors into account when reviewing the terms of the Acquisition:

the unpromising recent performance and prospects of the Group in the absence of some new development such as the Acquisition;
the success the Group’s management has achieved with a similar expansion of DVN;
the strong response of the stock market to the announcement of the Acquisition, with the Shares trading at levels approximately three times the pre-Announcement market price;
the growth prospects of the Media Group particular as regards production of television dramas and sitcoms, films and the performance of Hainan TV;
the scarcity value of the opportunity to acquire interests in an established PRC media business with an experienced management team in place;
the ratio of the Basic Consideration to estimated shareholders’ funds of the Anglo Alliance Group of 2.1 times, which is lower than the average price to book ratio of 2.4 times as set in sub-paragraph 4(vi) above, and the fact that the Media Group broke through to profitability in 2004; and
the equity and equity linked form of the consideration, allowing the Company to make a major acquisition with no cash outlay or excessive gearing. In addition, the Convertible Notes, which form the majority of the consideration, are not repayable until the accumulated earnings of the Anglo Alliance Group reach the total consideration paid.

We have formed our opinion on the terms of the Acquisition taking these factors together as a whole.

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LETTER FROM SOMERLEY

As regards the Further Consideration

We consider that the provision for payment of the Further Consideration as contained in the UHL SP Agreement (as amended) is a fair principle. A level of profitability of over HK$40 million would have to be achieved for this payment to be triggered, making the use of a price earnings multiple to calculate the Further Consideration justified. The profitable listed media companies which we have reviewed in paragraph 5 above stand on average at a P/E ratio of approximately 36 times, substantially higher than the 9.2 times multiple on the basis of which the payment of any Further Consideration (up to a maximum of HK$183.3 million) is calculated. On this basis, we consider the amount of Further Consideration payable is reasonable to the Company bearing in mind (i) as stated above, Further Consideration will only be payable at all if substantial profitability of the Media Group is established; and (ii) the listed media groups we have reviewed which have achieved substantial profitability are rated more highly than the 9.2 times multiple on which the Further Consideration is calculated. The Company will fund any Further Consideration by the issue of the Second Tranche Convertible Note, so no cash payment would be involved.

As regards the Whitewash Waiver

The Acquisition is conditional on the grant of the Whitewash Waiver (among other things). Mr. Ko’s percentage holding will increase from 25.9% at the Latest Practicable Date to 42.0% immediately after completion of the Acquisition and to a maximum of 63.9% assuming full conversion of the Convertible Notes. Mr. Ko’s shareholding did exceed 30% before the recent Placing and Top-up Subscription and we note that Mr. Ko has been the Chairman and the largest Shareholder of the Company for over 10 years.

REFRESHMENT OF THE GENERAL MANDATE

The general mandate to allot and issue new Shares granted to the Directors at the annual general meeting of the Company held on 30 June 2004 was fully utilised for the issue of 654,850,000 Shares pursuant to the Placing and Top-up Subscription.

In order to provide flexibility to the Company and cater for equity fund raising exercises in the future, the Board proposes to renew the mandate at the EGM.

In accordance with Rule 13.36(4) of the Listing Rules, the Directors (including Mr. Ko) and their respective associates will abstain from voting on the resolution at the EGM to consider and approve the New General Mandate. If the Independent Shareholders approve the New General Mandate, the Directors will be entitled to exercise the powers of the Company to allot and issue Shares not exceeding 20% of the aggregate nominal amount of the issued share capital of the Company as at the date of the EGM or, in the event completion of the UHL SP Agreement takes place, 20% of the aggregate nominal amount of the share capital of the Company in issue at the completion date of the UHL SP Agreement.

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LETTER FROM SOMERLEY

The Directors have made a statement in the Circular that they are of the opinion that, taking into account the present internal resources, the Enlarged Group has sufficient working capital for its present requirements. Nevertheless, we agree with the Directors that the New General Mandate would allow the Group to take prompt advantage of favourable market conditions to raise new equity capital. In addition, equity can be an advantageous form of consideration for acquisitions or other investments. We consider the financial flexibility afforded by the New General Mandate is in the interests of the Company and the Shareholders as a whole.

RECOMMENDATION

Based on the above principal factors and reasons and taking these factors and reasons as a whole as summarised in the section above headed “Discussion and Analysis”, we consider the terms of the UHL SP Agreement are fair and reasonable to the Independent Shareholders and the entering into of the UHL SP Agreement is in the interests of the Company and the Shareholders as a whole. We also consider the terms of the Whitewash Waiver are fair and reasonable to the Independent Shareholders and that the approval of New General Mandate is in the interests of the Company and Shareholders as a whole. We therefore advise the Independent Board Committee to recommend the Independent Shareholders, and we ourselves advise the Independent Shareholders, to vote in favour of the resolutions in relation to the UHL SP Agreement, the Whitewash Waiver and the New General Mandate to be proposed at the EGM.

Yours faithfully, for and on behalf of SOMERLEY LIMITED M.N. Sabine Chairman

— 84 —

APPENDIX I FINANCIAL INFORMATION RELATING TO THE GROUP

1. SHARE CAPITAL

The authorised and issued capital of the Company as at the Latest Practicable Date were as follows:

Authorised Issued and fully paid As at 31 December 2004 New Shares issued under the Placing and Top-up Subscription As at the Latest Practicable Date	Ordinary shares of HK$0.01 each No. of shares 000 HK$’000 5,000,000 50,000 3,274,293 32,743 654,850 6,549 3,929,143 39,292	Preference shares of HK$0.01 each No. of shares 000 HK$’000 240,760 2,408 240,760 2,408 — — 240,760 2,408	Amount HK$’000 52,408

			35,151 6,549
			41,700

The Company intends to increase the authorised share capital to HK$302,407,600 by the creation of an additional 25,000,000,000 Shares.

All Shares rank pari passu in respect of capital, dividends and voting.

Preference Shares

Preference shareholders are entitled to convert a specific number of their preference shares into Shares on a one-for-one basis (subject to adjustments) during the specified periods. The preference shareholders are also entitled to receive a non-cumulative cash dividend which will be paid at the same rate and at the same time as any dividend declared by the Company in respect of the Shares.

Share Options

Pursuant to the 10-year term share option scheme adopted by the Company on 30 July 2002, the maximum number of Shares Options can be granted under the share option scheme shall not exceed 277,429,315 Shares, representing 10% of the total number of Shares in issue at the time the share option scheme was adopted.

On 1 December 2004, the Company has granted 277,400,000 Share Options at HK$0.054 exercisable from 1 January 2005 to 31 December 2009, and all of these Share Options were outstanding as at the Latest Practicable Date.

— 85 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

2. FINANCIAL SUMMARY FOR THE THREE YEARS ENDED 31 DECEMBER 2004

Set out below is a summary of the audited financial results of the Group for the three years ended 31 December 2002, 2003 and 2004.

Consolidated Profit and Loss Accounts

Turnover Cost of sales Gross profit Other revenues Marketing, selling and distribution costs Administration expenses Impairment loss on investment securities Net gain on dilution of interest in an associated company/subsidiaries Net other operating (expenses)/income Operating profit/(loss) Finance costs Share of losses of: Jointly controlled entities Associated companies Loss before taxation Taxation Loss after taxation Minority interests Loss attributable to shareholders Loss per share — basic	2004 HK$’000 38,630 (31,091) 7,539 6,280 (1,007) (16,564) — 14,289 (1,944) 8,593 (2,563) — (14,869) (8,839) (1,092) (9,931) — (9,931) HK cents (0.3)	2003 HK$’000 30,011 (24,567) 5,444 7,837 (1,233) (15,246) (44,508) 11,503 8,497 (27,706) (4,634) — (37,511) (69,851) (195) (70,046) — (70,046) HK cents (2.4)	2002 HK$’000 51,791 (35,714) 16,077 2,702 (13,677) (86,753) (63,382) 23,684 (32,907) (154,256) (3,979) (1,727) (11,393) (171,355) — (171,355) 76,252 (95,103) HK cents (3.4)

The Group did not record any exceptional item in the three years ended 31 December 2004 and did not declare any dividend in respect of the three years ended 31 December 2004.

For each of the three years ended 31 December 2004, the auditors of the Company have expressed opinions that the financial statements of the Group gave a true and fair view of the state of affairs of the Group for the relevant periods or as at the relevant year end dates.

— 86 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

3. AUDITED FINANCIAL SUMMARY FOR THE YEAR ENDED 31 DECEMBER 2004

Set out below is a summary of the audited financial results of the Group for the year ended 31 December 2004 (the date to which the latest audited financial statements were made up). Capitalised terms used in this sub-section shall have the same meanings as defined in the annual report of the Company for the year ended 31 December 2004.

Consolidated Profit And Loss Account

For the year ended 31 December 2004

Notes Turnover 3 Cost of sales Gross profit Other revenues 3 Marketing, selling and distribution costs Administration expenses Impairment loss on investment securities Net gain on dilution of interest in an associated company Net other operating (expenses)/income Operating profit/(loss) 5 Finance costs 6 Share of loss of associated companies Loss before taxation Taxation 7 Loss after taxation Minority interests Loss attributable to shareholders 8 & 26 Loss per share — basic 9	2004 HK$’000 38,630 (31,091) 7,539 6,280 (1,007) (16,564) — 14,289 (1,944) 8,593 (2,563) (14,869) (8,839) (1,092) (9,931) — (9,931) HK cents (0.30)	2003 HK$’000 30,011 (24,567) 5,444 7,837 (1,233) (15,246) (44,508) 11,503 8,497 (27,706) (4,634) (37,511) (69,851) (195) (70,046) — (70,046) HK cents (2.41)

— 87 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Consolidated Balance Sheet

As at 31 December 2004

Notes Non current assets Fixed assets 11 Intangible assets 12 Interests in associated companies 14 Investment securities 15 Other assets 16 Current assets Inventories 17 Trade receivables 18 Preference dividends receivable 15(b) Prepayments, deposits and other receivables 19 Short-term investments 20 Cash and bank balances Current liabilities Trade payables 21 Taxation payables Other payables and accrued liabilities 22 Short-term loan — secured 23 Net current assets Total assets less current liabilities Financed by: Share capital 25 Reserves 26 Shareholders’ funds Minority interests 24 Non-current liabilities Amount due to a fellow subsidiary 24	2004 HK$’000 2,520 — 15,348 36,000 2,065 55,933 105 1,687 21,797 305 — 14,152 38,046 338 1,092 33,640 — 35,070 2,976 58,909 35,151 18,758 53,909 — 53,909 5,000 58,909	2003 HK$’000 2,560 1,685 15,837 36,000 4,533
		60,615
		901 2,765 15,984 31,973 4,605 16,425
		72,653
		63 — 39,365 20,000
		59,428
		13,225
		73,840

		35,151 28,689
		63,840 —
		63,840 10,000
		73,840

— 88 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Balance Sheet

As at 31 December 2004

Notes Non current assets Investments in subsidiaries 13 Current assets Prepayments, deposits and other receivables Short-term investments 20 Cash and bank balances Current liabilities Other payables and accrued liabilities 22 Net current assets Total assets less current liabilities Financed by: Share capital 25 Reserves 26	2004 HK$’000 59,240 1 — 547 548 155 393 59,633 35,151 24,482 59,633	2003 HK$’000 51,317
		— 532 9,930
		10,462
		319
		10,143
		61,460

		35,151 26,309
		61,460

— 89 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

For the year ended 31 December 2004

Notes Net cash generated from/(used in) operations 27(a) Interest paid Net cash generated from/(used in) operating activities Investing activities Interest received Purchases of fixed assets Proceeds from disposal of fixed assets Net cash outflow from disposal of subsidiaries 27(b) Net cash (used in)/generated from investing activities Net cash inflow/(outflow) before financing activities Financing activities Proceeds on issue of shares, net of expenses Increase/(decrease) in amounts due to fellow subsidiary (Repayment)/advancement of short-term loan Net cash (outflow)/inflow from financing activities (Decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Analysis of balances of cash and cash equivalents Cash and bank balances	2004 HK$’000 17,573 (2,563) 15,010 ---------------- 36 (517) — (19) (500) ---------------- 14,510 ---------------- — 3,217 (20,000) (16,783) ---------------- (2,273) 16,425 14,152 14,152	2003 HK$’000 (3,114) (4,634) (7,748) ---------------- 31 (32) 71 — 70 ---------------- (7,678) ---------------- 14,564 (14,728) 20,000 19,836 ---------------- 12,158 4,267 16,425 16,425

— 90 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

For the year ended 31 December 2004

Notes Total equity as at 1 January Issue of shares 25 & 26 Share issue expenses 25 & 26 Net loss for the year 26 Total equity as at 31 December	2004 HK$’000 63,840 — — (9,931) 53,909	2003 HK$’000 119,322 15,000 (436) (70,046) 63,840

— 91 —

APPENDIX I FINANCIAL INFORMATION RELATING TO THE GROUP

Notes to the Accounts

1. Corporate information

The Company was incorporated in the Cayman Islands as an exempted company with limited liability on 27 May 2002 under the Company Law (2002 Revision) (Cap. 22) of the Cayman Islands.

2. Principal accounting policies

The principal accounting policies adopted in the preparation of these accounts are set out below:

(a) Basis of preparation

These accounts have been prepared in accordance with accounting principles generally accepted in Hong Kong and comply with accounting standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). They have been prepared under the historical cost convention, except for short-term investments, as further explained below.

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new HKFRSs in the financial statements for the year ended 31 December 2004. The Group has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position.

(b) Group accounting

(i) Consolidation

The consolidated accounts include the accounts of the Company and its subsidiaries made up to 31 December.

Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to govern the financial and operating policies; to appoint or remove the majority of the members of the board of directors; or to cast majority of votes at the meetings of the board of directors.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated profit and loss account from the effective date of acquisition 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 unamortised goodwill or negative goodwill and any related accumulated foreign currency translation reserve.

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

— 92 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

In the Company’s balance sheet the investments in subsidiaries are stated at cost less provision for impairment losses. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

(ii) Associated companies

An associated company is a company, not being a subsidiary or a joint venture, in which an equity interest is held for the long-term and significant influence is exercised in its management.

The consolidated profit and loss account includes the Group’s share of the results of associated companies for the year, and the consolidated balance sheet includes the Group’s share of the net assets of the associated companies and goodwill (net of accumulated amortisation) on acquisition.

Equity accounting is discontinued when the carrying amount of the investment in an associated company reaches zero, unless the Group has incurred obligations or guaranteed obligations in respect of the associated company.

(c) Fixed assets

(i) Fixed assets

Fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses.

Fixed assets are depreciated on the straight-line basis to write off their cost or accumulated impairment losses over their estimated useful lives as follows:

Long-term leasehold land and buildings	Shorter of 25 years
outside Hong Kong	or over the lease terms
Plant, equipment and other assets	3 to 10 years

Improvements are capitalised and depreciated over their expected useful lives to the Group.

(ii) Impairment and gain or loss on sale

At each balance sheet date, both internal and external sources of information are considered to assess whether there is any indication that assets included in fixed assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated and where relevant, an impairment loss is recognised to reduce the asset to its recoverable amount. Such impairment losses are recognised in the profit and loss account.

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

(d) 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 net of any incentives received from the leasing company are charged to the profit and loss account on a straight-line basis over the lease periods.

— 93 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

(e) Intangibles

(i) 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 subsidiary or associated company at the date of acquisition and is amortised on a straight-line basis over the useful live of 20 years.

(ii) Research and development costs

Research costs are expensed as incurred. Costs incurred on development projects are recognised as an intangible asset where the technical feasibility and intention of completing the product under development has been demonstrated and the resources are available to do so, costs are identifiable and there is an ability to sell or use the asset that will generate probable future economic benefits. Such development costs are recognised as an asset and amortised on a straight-line basis over a period of not more than 5 years to reflect the pattern in which the related economic benefits are recognised. Development costs that do not meet the above criteria are expected as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.

(f) Investments

(i) Investments securities

Investment securities, represent investments in listed and unlisted equity securities which are intended to be held for a continuing strategic or long-term purposes, are stated at cost less any provision for impairment losses.

The carrying amounts of individual investments are reviewed at each balance sheet date to assess whether the fair values have declined below the carrying amounts. When a decline other than temporary has occurred, the carrying amount of such securities will be reduced to the fair value. The impairment loss is recognised as an expense in the profit and loss account. This impairment loss is written back to the profit and loss account when the circumstances and events that led to the writedowns or write-offs cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future.

(ii) Short-term investments

Short-term investments are carried at their fair values as at the balance sheet date. Unrealised gains or losses arising from the changes in fair values of these investments are recognised in the profit and loss account. Profits or losses on disposal of shortterm investments, representing the difference between the net sales proceeds and the carrying amounts, are recognised in the profit and loss account as they arise.

(g) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost, calculated on the first-in, first-out basis, comprises materials. Net realisable value is determined on the basis of anticipated sales proceeds less estimated selling expenses.

— 94 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

(h) 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 rates of exchange ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in the profit and loss account.

The balance sheets of subsidiaries and associated companies expressed in foreign currencies are translated at the rates of exchange ruling at the balance sheet date whilst the profit and loss accounts are translated at an average rate for the year. Exchange differences are dealt with as a movement in reserves.

(i) Trade receivables

Provision is made against trade receivables to the extent they are considered to be doubtful. Trade receivables in the balance sheet are stated net of such provision.

(j) Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand and deposits held at call with banks.

(k) Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made.

(l) Contingent liabilities and contingent assets

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognised but is disclosed in the notes to the accounts. When a change in the probability of an outflow occurs so that the outflow becomes probable, it will then be recognised as a provision.

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group.

Contingent assets are not recognised but are disclosed in the notes to the accounts when an inflow of economic benefits is probable. When inflow is virtually certain, an asset is recognised.

— 95 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

(m) Deferred taxation

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the accounts. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred taxation is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

(n) 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 the goods are delivered to customers and title has passed.

Management fee income is recognised on an accrual basis.

Securities trading income is recognised when the title has passed.

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

Dividend income is recognised when the right to receive payment is established.

(o) Employee benefits

(i) Employee leave entitlements

Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by employees up to the balance sheet date.

Employee entitlements to sick leave, maternity and other non-accumulating compensated absences are not recognised until the time of leave.

(ii) Retirement benefit costs

The Group operates a defined contribution retirement benefits scheme (the “Scheme”) under the Mandatory Provident Fund Schemes Ordinance, for all those employees who are eligible to participate in the Scheme. The Scheme became effective on 1 December 2000. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the profit and loss account as they became payable in accordance with the rules of the Scheme. The assets of the Scheme are held separately from those of the Group in an independent administered fund. The Group’s employer contributions vest fully with the employees when contributed into the Scheme except for the Group’s employer voluntary contributions, which are refunded to the Group when the employee leaves employment prior to the contributions vesting fully, in accordance with the rules of the Scheme.

— 96 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

The Company’s subsidiaries in the People’s Republic of China (the “PRC”) except Hong Kong are members of a state-managed retirement benefits scheme operated by the government of the PRC except Hong Kong. The retirement scheme contributions, which are based on a certain percentage of the salaries of the subsidiaries’ employees, are charged to the profit and loss account in the period to which they relate and represent the amount of contributions payable by these subsidiaries to the scheme.

(iii) Equity compensation benefits

Share options are granted to directors and to employees at a price determined in accordance with the Company’s share option scheme on the date of the grant and are exercisable, at that price. No compensation expense is recognised. When the share option are exercised, the proceeds received net of any transaction costs are credited to share capital and share premium.

(p) 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.

(q) Segment reporting

In accordance with the Group’s internal financial reporting the Group has determined that business segments be presented as the primary reporting format and geographical segments as the secondary reporting format.

Unallocated costs represent corporate expenses. Segment assets consist primarily of intangible assets, fixed assets, inventories, receivables and operating cash, and mainly exclude investments in securities. Segment liabilities comprise operating liabilities. Capital expenditure comprises additions to fixed assets (note 11) and intangible assets (note 12) .

In respect of geographical segment reporting, sales are based on the country in which the customer is located. Total assets and capital expenditure are where the assets are located.

— 97 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

3. Turnover and revenues

The Group is principally engaged in the trading of home audio and video equipment and components, securities trading, and provision of computer telephony integration engineering and IP related services. Revenues recognised during the year are as follows:

Turnover Sales of goods Share trading Provision of computer telephony integration engineering and IP related services Other revenues: Preference dividend income from an associated company Commission income Interest income Management fee income from: Related companies Associated companies Others Miscellaneous Total revenues	Group 2004 2003 HK$’000 HK$’000 18,180 16,362 16,561 7,644 3,889 6,005 38,630 30,011 ---------------- ---------------- 5,813 5,813 65 671 36 31 — 900 144 200 212 160 10 62 6,280 7,837 ---------------- ---------------- 44,910 37,848	Group 2004 2003 HK$’000 HK$’000 18,180 16,362 16,561 7,644 3,889 6,005 38,630 30,011 ---------------- ---------------- 5,813 5,813 65 671 36 31 — 900 144 200 212 160 10 62 6,280 7,837 ---------------- ---------------- 44,910 37,848
		30,011 ---------------- 5,813 671 31 900 200 160 62
		7,837 ---------------- 37,848

4. Segment information

Primary reporting format — business segments

The Group is organised into three main business segments:

(i)	Home Audio	—	trading of home audio and video equipment and components;
(ii)	Telecommunications	—	provision of computer telephony integration engineering and
			IP related services; and
(iii)	Share Trading	—	securities trading.

There are no sales between the business segments.

— 98 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

2004 Home Tele- Audio communications HK$’000 HK$’000 Turnover 18,180 3,889 Segment results (3,092) (354) Write back unrealised loss of short-term investments Write-off of bad and doubtful debts Net gain on dilution of interest in an associated company Loss on sale of subsidiaries Provision for the deposit for investment in joint venture Unallocated costs Operating profit Finance costs Unallocated share of losses of an associated company Loss before taxation Taxation Loss after taxation Minority interests Loss attributable to shareholders Segment assets 21,168 5,229 Investment in associated companies Unallocated assets Total assets Segment liabilities 32,313 755 Unallocated liabilities Capital expenditure Allocated Unallocated Depreciation Allocated 262 29 Unallocated Amortisation	Share Trading HK$’000 16,561 1,249 535 1,534 —	Total HK$’000 38,630 (2,197) 3,946 (1,589) 14,289 (836) (2,468) (2,552) 8,593 (2,563) (14,869) (8,839) (1,092) (9,931) — (9,931) 26,932 15,348 51,699 93,979 34,602 5,468 40,070 — 517 291 134 52

— 99 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

2003 Home Tele- Audio communications HK$’000 HK$’000 Turnover 16,362 6,005 Segment results (790) (2,864) Net unrealised loss of short-term investments Write back of provision of bad and doubtful debt Impairment loss on investment securities Net gain on dilution of interest in an associated company Provision for bad debts Unallocated costs Operating loss Finance costs Unallocated share of losses of an associated company Loss before taxation Taxation Loss after taxation Minority interests Loss attributable to shareholders Segment assets 827 8,417 Investment in associated companies Unallocated assets Total assets Segment liabilities 20 2,251 Unallocated liabilities Capital expenditure Allocated 18 Unallocated Depreciation Allocated 8 2,778 Unallocated Amortisation 368 Write-off of development costs 92 Other non-cash expenses 124 50	Share Trading HK$’000 7,644 4,056 4,073	Total HK$’000 30,011 402 (3,946) 21,036 (44,508) 11,503 (298) (11,895) (27,706) (4,634) (37,511) (69,851) (195) (70,046) — (70,046) 13,317 15,837 104,114 133,268 2,271 67,157 69,428 18 14 2,786 671 368 92 174

— 100 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Secondary reporting format — geographical segments

The Group operates in two geographical areas:

(i) Hong Kong Trading of home audio and video equipment and components and securities trading; and
(ii) Mainland China — Provision of computer telephone integration engineering and IP related services.

There are no sales between the geographical segments.

Turnover HK$’000 Hong Kong 34,741 Mainland China 3,889 38,630 Impairment loss on investment securities Operating profit Interests in associated companies Turnover HK$’000 Hong Kong 24,006 Mainland China 6,005 30,011 Impairment loss on investment securities Operating loss Interests in associated companies Total assets	2004 Segment Total results assets HK$’000 HK$’000 8,947 71,766 (354) 6,865 8,593 78,631 — 8,593 15,348 93,979 2003 Segment Total results assets HK$’000 HK$’000 19,666 109,014 (2,864) 8,417 16,802 117,431 (44,508) (27,706) 15,837 133,268	Capital expenditure HK$’000 517 —
		517

		Capital expenditure HK$’000 14 18
		32

— 101 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

5. Operating profit/(loss)

Operating profit/(loss) is stated after crediting and charging the following:

		Group
	2004	2003
	HK$’000	HK$’000
Crediting
Net gain on disposal of fixed assets	—	26
Write-back of provision for inventory	116	—
Write-back of unrealised loss of short-term investments	3,946	—
Write-back of provision for bad and doubtful debts	—	21,036
VAT refund	323	—
Gain on redemption of preferred shares	—	5,793

Charging
Cost of inventories sold	18,049	17,013
Cost of services provided	2,407	3,966
Depreciation	425	3,457
Auditors’ remuneration	495	450
Loss on sale of subsidiaries	836	—
Staff costs (excluding directors’ remuneration, note 10(a)):
Wages and salaries	2,099	1,502
Unutilised annual leave	19	—
Termination benefits	58	—
Contributions to defined contribution Mandatory Provident Fund:
Current year	73	71
Underprovided in prior year	57	—
	2,306	1,573
Operating lease rentals:
Land and buildings	703	1,324
Equipment	—	416
	703	1,740
Amortisation of intangibles:
Goodwill	52	104
Development costs	—	368
Write-off of development costs	—	92
Write-off of inventories	112	—

— 102 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I


	2004	2003
	HK$’000	HK$’000
Charging
Provision for bad and doubtful debts	—	298
Write-off of bad and doubtful debts	1,589	870
Loss on disposal of fixed assets	47	—
Net unrealised loss of short-term investments	—	3,946
Provision for settlement of legal dispute	—	13,852
Provision for the deposit for investment in joint venture	2,468	—
Exchange losses, net	124	—

6. Finance costs

Interest expenses on: Short-term loan Amount due to a fellow subsidiary — wholly repayable within five years	Group 2004 2003 HK$’000 HK$’000 396 2,166 2,167 2,468 2,563 4,634	Group 2004 2003 HK$’000 HK$’000 396 2,166 2,167 2,468 2,563 4,634
		4,634

7. Taxation

Hong Kong profits tax has been provided at the rate of 17.5% on the estimated assessable profit for the year (2003: Nil). No overseas profits tax provision has been made in the accounts as the Group did not have any assessable profit for the year (2003: Nil).

The taxation on the Group’s loss before taxation differs from the theoretical amount that would arise using the taxation rate of Hong Kong as follows:

Loss before taxation Calculated at a taxation rate of 17.5% (2003: 17.5%) Effect of different rates in other countries Income not subject to taxation Expenses not deductible for taxation purposes Unrecognised tax losses Under-provision of taxation in prior years Taxation charge	2004 HK$’000 (8,839) (1,547) 1,342 (3,550) 4,490 357 — 1,092	2003 HK$’000 (69,851
		(12,224 568 (53,053 59,570 5,139 195
		195

No provision for deferred tax has been made in the accounts as the crystallisation of the net deferred tax asset in the foreseeable future is uncertain.

— 103 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Deferred income tax assets are not recognised for tax loss carry forwards to the extent that realisation of the related tax benefit through the future taxable profits is not probable. As at 31 December 2004, the Group had unrecognised tax losses of approximately HK$274,321,000 (2003: HK$294,276,000) to carry forward against future taxable income, of which approximately HK$16,452,000 of these tax losses will expire in 2009.

8. Loss attributable to ordinary shareholders

The loss attributable to ordinary shareholders is dealt with in the accounts of the Company to the extent of HK$1,827,000 (2003: loss of HK$71,937,000).

9. Loss per share

The calculation of the basic loss per share is based on the Group’s loss attributable to ordinary shareholders of HK$9,931,000 (2003: HK$70,046,000) and on the weighted average number of 3,274,293,157 (2003: 2,897,580,828) ordinary shares in issue during the year.

No diluted loss per share is shown for the two years ended 31 December 2004 and 2003 as the convertible preference shares outstanding had an anti-dilutive effect on the basic loss per share for both years.

10. Directors’ and senior management’s emoluments

(a) Directors’ emoluments

The aggregate amounts of emoluments payable to directors of the Company for the year are as follows:

Fees: Non-executive directors: Other emoluments: Executive directors: Basic salaries, housing benefits, other allowances and benefits in kind Contributions to defined contribution Mandatory Provident Fund	2004 HK$’000 471 2,305 15 2,791	2003 HK$’000 288 1,896 12
		2,196

The emoluments of the directors fell within the following bands:

Emolument bands Nil — HK$1,000,000 HK$1,500,001 — HK$2,000,000	2004 Number of directors 5 1 6	2003 Number of directors 3 1
		4

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FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

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

No emoluments were paid by the Group to the directors as an inducement to join or upon joining the Group, or as compensation for loss of office.

(b) Five highest paid individuals

The five individuals whose emoluments were the highest in the Group for the year include two (2003: one) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining three (2003: four) individuals for the year are as follows:

Basic salaries, housing benefits, other allowances and benefits in kind Contributions to defined contribution Mandatory Provident Fund The emoluments fell within the following bands: Emolument bands Nil — HK$1,500,000	Group 2004 2003 HK$’000 HK$’000 862 1,115 36 49 898 1,164 Group 2004 2003 3 4

— 105 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

11. Fixed assets

Long-term leasehold land and buildings outside Hong Kong HK$’000 Cost At 1 January 2004 2,907 Additions — Write-offs — Disposals — Disposal of subsidiaries_(note 27(b)) — At 31 December 2004 2,907 Accumulated depreciation At 1 January 2004 696 Charge for the year 114 Write-offs — Disposals — Disposal of subsidiaries(note 27(b))_ — At 31 December 2004 810 Net book value: At 31 December 2004 2,097 At 31 December 2003 2,211	Group Plant, equipment and other assets HK$’000 8,518 517 (367) (250) (100) 8,318 8,169 311 (367) (203) (15) 7,895 423 349	Total HK$’000 11,425 517 (367) (250) (100) 11,225 8,865 425 (367) (203) (15) 8,705 2,520 2,560

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FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

12. Intangible assets

Year ended 31 December 2004 At 1 January 2004 Amortisation charge_(note 5) Disposal of subsidiaries(note 27(b)) At 31 December 2004 At 31 December 2004 Cost Accumulated amortisation and write-offs Disposal of subsidiaries(note 27(b))_ Net book value At 31 December 2003 Cost Accumulated amortisation Net book value 13. Investments in subsidiaries Unlisted shares at cost Provision for impairment loss Amount due from subsidiaries Amounts due to subsidiaries	Goodwill HK$’000 1,685 (52) (1,633) — 2,075 (442) (1,633) — 2,075 (390) 1,685	Group Development costs Total HK$’000 HK$’000 — 1,685 — (52) — (1,633) — — — 2,075 — (442) — (1,633) — — 1,415 3,490 (1,415) (1,805) — 1,685 Company 2004 2003 HK$’000 HK$’000 193,018 193,018 (140,000) (140,000) 53,018 53,018 31,883 672 (25,661) (2,373) 59,240 51,317

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

Particulars of the principal operating subsidiaries are set out in note 34 to the accounts.

— 107 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

14. Interests in associated companies

		Group
	2004	2003
	HK$’000	HK$’000
Share of net assets	7,660	7,793
Goodwill on acquisition of associated companies less amortisation	8,023	8,470
Net amounts due to associated companies	(335)	(426)
	15,348	15,837

Market value of listed investments	164,312	126,917

Investments at cost:
Listed shares, in Hong Kong	276,514	276,514
Unlisted shares, in the PRC	1,636	1,636
	278,150	278,150

The balances with associated companies are unsecured, interest-free and have no fixed terms of repayment.

The principal associated companies at 31 December 2004 are as follows:

			Nominal
			value of issued
		Country/	ordinary share/	Interest		Principal activities
		place of	preference share/	held	indirectly	and place
Name		incorporation	registered capital	2004	2003	of operation
(i)	DVN GROUP
	DVN (Holdings)	Bermuda	HK$51,637,000	21.95%	25.09%	Investment holding
	Limited (“DVN”)		ordinary
	DVN (Group)	British Virgin	US$10 ordinary	21.95%	25.09%	Investment holding
	Limited	Islands	US$15,000,000
			preference
	DVN (Management)	Hong Kong	HK$2 ordinary	21.95%	25.09%	Provision of administrative
	Limited					services in Hong Kong
	Dynamic Network	British Virgin	US$1 ordinary	21.95%	25.09%	Investment holding
	Limited	Islands
	DVN Technology	Hong Kong	HK$2 ordinary	21.95%	25.09%	Design, integration and
	Limited					installation of digital
						broadcasting equipment
						and development of
						related software and
						products in Hong Kong
						and Southeast Asian
						countries

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FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

		Nominal
		value of issued
	Country/	ordinary share/	Interest		Principal activities
	place of	preference share/	held	indirectly	and place
Name	incorporation	registered capital	2004	2003	of operation
DVN Technology	People’s	HK$6,000,000	21.95%	25.09%	Development of hardware
(Shenzhen) Co.	Republic of	registered capital			and software in relation
Limited	China				to digital broadcasting
					in PRC
DVB Technology	People’s	RMB100,000,000	15.37%	17.56%	Trading of digital
(Suzhou) Company	Republic of	registered capital			broadcasting equipment
Limited	China				and related products
					in PRC
Digital Video	People’s	US$8,000,000	21.95%	25.09%	Design, integration and
Networks Company	Republic of	registered capital			installation of digital
Limited	China				broadcasting equipment
					and development of
					related software and
					products in the PRC
Digital Video	People’s	US$5,000,000	21.95%	25.09%	Design, integration and
Networks	Republic of	registered capital			installation of digital
(Shanghai)	China				broadcasting equipment
Company Limited					and development of
					related software and
					products in the PRC
Telequote Data	Hong Kong	HK$10,000	21.95%	25.09%	Provision of international
International		ordinary			financial market
Limited					information and
					selective consumer
					data in Hong Kong
Telequote Network	Singapore	SGD2	21.95%	25.09%	Provision of international
(Singapore) Pte.		ordinary			financial market
Limited					information and
					selective consumer
					data in Singapore
Show Case	British Virgin	US$1	21.95%	25.09%	Holding of film rights
International	Islands	ordinary			in the PRC
Limited
Victory Beat Limited	British Virgin	US$1	21.95%	25.09%	Investment holdings
	Islands	ordinary
(ii) 北京電發網博科技	People’s	RMB 5,000,000	35.00%	35.00%	Provision of IP telephone
有限公司	Republic of	registered capital			services
	China

— 109 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Information relating to of the operating results and financial position of the DVN Group, a significant associated company, which are based on their audited accounts for the year ended 31 December 2004, are as follows:

Operating results for the year

Turnover Loss for the year Summary of balance sheet as at 31 December Fixed assets Intangible assets Investment in a jointly controlled entity Current assets Current liabilities Non current liability Minority interests Shareholders’ equity	2004 HK$’000 169,236 59,734 2004 HK$’000 36,343 28,075 6,685 211,382 (135,754) (80) (117,761) 28,890	2003 HK$’000 73,252

		140,065

		2003 HK$’000 61,768 27,752 7,717 158,222 (109,692) (116) (118,263)
		27,388

There was no material contingent liability for the associated company as at 31 December 2004 and 2003.

15. Investment securities

Listed shares, at costs — outside Hong Kong_(note a) Unlisted shares, at costs — outside Hong Kong(note b) _Less:_Provision for impairment loss — listed shares — unlisted shares Market value of listed shares(note a)_	Group 2004 2003 HK$’000 HK$’000 23,414 23,414 143,508 143,508 166,922 166,922 23,414 23,414 107,508 107,508 130,922 130,922 36,000 36,000 1,287 —	Group 2004 2003 HK$’000 HK$’000 23,414 23,414 143,508 143,508 166,922 166,922 23,414 23,414 107,508 107,508 130,922 130,922 36,000 36,000 1,287 —
		166,922
		23,414 107,508
		130,922
		36,000

		—

Market value of listed shares (note a)

— 110 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Notes:

(a) The listed shares outside Hong Kong represent the holding of 1,500,000 shares (representing 6.8% of the common stock) in a company which was incorporated in the United States of America and was listed on the National Association of Securities Dealer Over-The-Counter Bulletin Board (“OTCBB”). The investee company was delisted since 3 October 1998 and was relisted for trading in 2004. The market value of this listed investment was based on the closing market price of US$0.11 quoted on the OTCBB as at 31 December 2004.
(b) At 31 December 2004, the Group held 15,000,000 non-voting exchangeable preference shares of DVN (Group) Limited, an associated company, at HK$143,508,000. These preference shares are exchangeable, after current year adjustment, to approximately 26,420,000 ordinary shares of DVN, a listed associated company, to an adjusted conversion price of HK$4.40 per share and are subject to adjustment. Fixed cumulative cash dividend on preference shares is receivable at a rate of 5% per annum on the nominal value amount of each preference share for each year. Dividend income receivable at 31 December 2004 amounted to HK$21,797,000.

The directors have made a provision for impairment loss of approximately HK$107,508,000 at 31 December 2004 (2003: HK$107,508,000) against this investment.

16. Other assets

Deposit for investment in joint venture Club debentures Inventories Finished goods	Group 2004 2003 HK$’000 HK$’000 — 2,468 2,065 2,065 2,065 4,533 Group 2004 2003 HK$’000 HK$’000 105 901

17. Inventories

At 31 December 2004, the carrying amount of inventories that are stated at net realised value amounted to HK$105,000 (2003: HK$901,000).

— 111 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

18. Trade receivables

At 31 December 2004, the aging analysis of trade receivables is as follows:

0 — 3 months 4 — 6 months Over 6 months	Group 2004 2003 HK$’000 HK$’000 1,125 750 85 1,716 477 299 1,687 2,765	Group 2004 2003 HK$’000 HK$’000 1,125 750 85 1,716 477 299 1,687 2,765
		2,765

The majority of the Group’s sales are on credit with credit terms of 30-90 days.

19. Prepayments, deposits and other receivables

The Group’s prepayments, deposits and other receivables as at 31 December 2003 included redeemable preference shares with a face value of HK$24,138,000, which was fully redeemed during the year.

20. Short-term investments

Equity securities: Listed in Hong Kong Listed outside Hong Kong Market value of listed equity securities	Group 2004 2003 HK$’000 HK$’000 — 4,073 — 532 — 4,605	Company 2004 2003 HK$’000 HK$’000 — — — 532 — 532	Company 2004 2003 HK$’000 HK$’000 — — — 532 — 532
			532

21. Trade payables

At 31 December 2004, the aging analysis of trade payables is as follows:

0 — 3 months Over 6 months	Group 2004 2003 HK$’000 HK$’000 18 30 320 33 338 63	Group 2004 2003 HK$’000 HK$’000 18 30 320 33 338 63
		63

— 112 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

22. Other payables and accrued liabilities

Deposits received, accrued charges and other payables Amount due to a fellow subsidiary (note (i)) Provision for legal fees and settlement of legal dispute_(note (ii))_	Group 2004 2003 HK$’000 HK$’000 2,178 5,669 24,705 16,488 6,757 17,208 33,640 39,365	Company 2004 2003 HK$’000 HK$’000 155 319 — — — — 155 319	Company 2004 2003 HK$’000 HK$’000 155 319 — — — — 155 319
			319

(i) The amount due to a fellow subsidiary at 31 December 2004 bears interest at Hong Kong dollar prime lending rate plus 2.5% (2003: prime lending rate plus 2.5%) per annum. The balance is unsecured and is repayable on demand.
(ii) The amount represents the remaining payments to be made to a customer for settlement on the legal claims arising between Universal Appliance Limited. Smoothline Limited, Greatsino Electronic Limited and the customer as agreed on 26th January 2004. An aggregate provision of US$2.1 million was made in prior year, payable as follows: (a) an initial payment of US$300,000, and (b) 18 subsequent monthly payments of US$100,000 thereafter until the total amount of US$2.1 million has been paid, which is expected to be in August 2005.

23. Short-term loan — secured

The short-term loan was secured against certain shares of the associated company of the Group, bears interest at 17% rate per annum, and was fully repaid in February 2004.

24. Amount due to a fellow subsidiary

The amount due to a fellow subsidiary bears interest at Hong Kong dollar prime lending rate plus 2.5% per annum (2003: prime lending rate plus 2.5%). The balance is unsecured and is not expected to be repaid within 1 year.

At 31 December 2004, there was an amount of HK$50,715,000 due to a fellow subsidiary which is also a minority shareholder of a subsidiary. The balance was presented as a net-off against a debit balance arising from the same minority shareholder of that subsidiary of the same amount. The balance is unsecured, interest-free and has no fixed terms of repayment.

25. Share capital

Authorised Preference shares Ordinary shares of HK$0.01 each of HK$0.01 each No. of shares No. of shares ’000 HK$’000 ’000 HK$’000 At 1 January 2003 and 31 December 2003 240,760 2,408 5,000,000 50,000 At 1 January 2004 and 31 December 2004 240,760 2,408 5,000,000 50,000	Total HK$’000 52,408 52,408

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FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Issued and fully paid Preference shares Ordinary shares of HK$0.01 each of HK$0.01 each No. of shares No. of shares ’000 HK$’000 ’000 HK$’000 At 1 January 2003 240,760 2,408 2,774,293 27,743 Issue of shares — — 500,000 5,000 At 31 December 2003 240,760 2,408 3,274,293 32,743 At 1 January 2004 and 31 December 2004 240,760 2,408 3,274,293 32,743	Total HK$’000 30,151 5,000
	35,151

	35,151

The following changes in the Company’s authorised and issued share capital took place during the period from 1 January 2003 to 31 December 2004:

(a) On 15 September 2003, Techral Holdings Limited (“Techral”), a substantial shareholder of the Company, and Kwan Wing Holdings Limited (“Kwan Wing”), a shareholder of the Company, entered into a private placement of 300,000,000 ordinary shares and 200,000,000 ordinary shares, respectively, in the Company of HK$0.01 each at a price of HK$0.03 per share to independent private investors. On the same date, the Company entered into an agreement with Techral and Kwan Wing for the subscription of 500,000,000 new ordinary shares of HK$0.01 each in the Company at a price of HK$0.03 per share raising net proceeds of approximately HK$14.5 million. The excess of the shares issue proceeds over the nominal value of the shares issued, net of share issue expenses of approximately HK$436,000, amounting to HK$9,564,000 was credited to the share premium account.

Preference shares

Preference shareholders are entitled to convert a specific number of their preference shares into ordinary shares of the Company on a one-for-one basis (subject to adjustments) during the specified periods. The preference shareholders are also entitled to receive a non-cumulative cash dividend which will be paid at the same rate and at the same time as any dividend declared by the Company in respect of the ordinary shares.

Share options

Pursuant to the 10-year term share option scheme (“Option Scheme”) adopted by the Company on 30 July 2002, the Company can grant options to Qualified Persons (as defined in the Option Scheme) for a consideration of HK$1.00 for each grant payable by the Qualified Persons to the Company. The total number of the shares issued and to be issued upon exercise options granted to each Qualified Person (including both exercised, cancelled and outstanding options) in any 12month period shall not exceed 1% of the shares then in issue. Unless with shareholders’ approval, the maximum number of shares options that can be granted under the Option Scheme shall not exceed 277,429,315 shares, representing 10% of the total number of shares in issue at the time the Option Scheme was adopted.

Subscription price in relation to each option pursuant to the Option Scheme shall not be less than the higher of (i) the closing price of the shares as stated in Stock Exchange’s daily quotation sheets on the date on which the option is offered to a Qualified Person; or (ii) the average of the closing prices of the shares as stated in the Stock Exchange’s daily quotation sheets for the 5 trading days immediately preceding the date of offer; or (iii) the nominal value of the shares of the Company. There shall be no minimum holding period for the vesting or exercise of the options and the options are exercisable within the option period as determined by the board of directors of the Company.

— 114 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Share options granted during the year are as follows:

Date of share options granted 1/12/2004	Number of share options outstanding as at 1 January 2004 — —	Number of share options granted during the year 277,400,000 277,400,000	Number of share options cancelled/ lapsed during the year — —	Number of share options outstanding as at Exercise 31 December price per 2004 Exercise period share HK$ 277,400,000 1/1/2005 to 0.054 31/12/2009 277,400,000

26. Reserves

Group

Share premium HK$’000 At 1 January 2003 162,789 Issue of shares 9,564 Net loss for the year — At 31 December 2003 172,353 At 1 January 2004 172,353 Net loss for the year — At 31 December 2004 172,353 Reserve retained by: Company and subsidiaries 172,353 Associated company — At 31 December 2004 172,353 Reserve retained by: Company and subsidiaries 172,353 Associated company — At 31 December 2003 172,353	Merger reserve (i) HK$’000 860,640 — — 860,640 860,640 — 860,640 860,640 — 860,640 860,640 — 860,640	Currency Accumulated translation losses HK$’000 HK$’000 (171) (934,087) — — — (70,046) (171) (1,004,133) (171) (1,004,133) — (9,931) (171) (1,014,064) (171) (950,291) — (63,773) (171) (1,014,064) (171) (955,229) — (48,904) (171) (1,004,133)	Total HK$’000 89,171 9,564 (70,046
			28,689

			28,689 (9,931
			18,758

			82,531 (63,773
			18,758

			77,593 (48,904
			28,689

— 115 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Company

At 1 January 2003 Issue of shares Loss for the year At 31 December 2003 At 1 January 2004 Loss for the year At 31 December 2004	Share premium (ii) HK$’000 162,789 9,564 — 172,353 172,353 — 172,353	Accumulated losses HK$’000 (74,107) — (71,937) (146,044) (146,044) (1,827) (147,871)	Total HK$’000 88,682 9,564 (71,937) 26,309 26,309 (1,827) 24,482

Notes:

(i) The merger reserve of the Group was derived from the difference between the nominal value of the Company’s shares issued to acquire the issued share capital of Universal Appliances Limited pursuant to the group reorganisation in 2002, and the consolidated net asset value of Universal Appliances Limited so acquired. Under the Companies Law (2003 Revision) (Cap. 22) of the Cayman Islands, the merger reserve is distributable to shareholders under certain prescribed circumstances.
(ii) The share premium of the Company represents the excess of the fair value of the shares of the subsidiaries acquired pursuant to the group reorganisation in 2002, over the nominal value of the Company’s shares issued in exchange therefor. Under the Companies Law (2003 Revision) (Cap. 22) of the Cayman Islands, a company may make distributions to its members out of the share premium under certain prescribed circumstances.

— 116 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

27. Notes to the consolidated cash flow statement

(a) Reconciliation of operating profit/(loss) from ordinary activities to net cash inflow/(outflow) from operations

Operating profit/(loss) before taxation Interest income Depreciation Provision for the deposit for investment in joint venture Amortisation of intangible assets Write-off of development costs Disposal of fixed assets Loss on disposal of subsidiaries Net gain on dilution of interest in an associated company Provision for impairment loss on investment securities Operating (loss)/profit before working capital changes Decrease in amounts due to associate companies Decrease in short-term investments Decrease in inventories Decrease/(increase) in trade receivables, preference dividends receivable, prepayments, deposits and other receivables (Decrease)/increase in trade payables, other payables and accrued liabilities Net cash inflow/(outflow) from operations *(b)* *Sale of subsidiaries* Details of disposal of subsidiaries: Net assets disposal of: Fixed assets Deposits, prepayments and other receivables Cash and bank balances Accrued liabilities and other payables Write-off of unamortised goodwill Loss on disposal Represented by: Cash consideration	2004 HK$’000 8,593 (36) 425 2,468 52 — 47 836 (14,289) — (1,904) (91) 4,605 796 26,772 (12,605) 17,573 2004 HK$’000 85 161 20 (1,062) (796) 1,633 (836) 1 1	2003 HK$’000 (27,706) (31) 3,457 — 472 92 (26) — (11,503) 44,508 9,263 (467) 7,002 5,026 (33,880) 9,942 (3,114) 2003 HK$’000 — — — — — — — —

— 117 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

Analysis of net cash outflow of cash and cash equivalents in respect of the disposal of subsidiaries:

Cash consideration received Cash and cash equivalents of disposed subsidiaries Net outflow of cash and cash equivalents	2004 HK$’000 1 (20) (19)	2003 HK$’000 — —
		—

28. Contingent liabilities

The Group and the Company had no material contingent liability as at 31 December 2004 (2003: Nil).

29. Commitments

(a) Commitments under operating leases

At 31 December 2004, the Group had future aggregate minimum lease payments under noncancellable operating leases as follows:

Not later than one year Later than one year and not later than five years Not later than one year Later than one year and not later than five years	Land and buildings 2004 2003 HK$’000 HK$’000 313 313 — 313 313 626 Equipment 2004 2003 HK$’000 HK$’000 — 416 — 340 — 756	Land and buildings 2004 2003 HK$’000 HK$’000 313 313 — 313 313 626 Equipment 2004 2003 HK$’000 HK$’000 — 416 — 340 — 756
		756

(b) The Group and the Company had no material capital commitment at 31 December 2004 (2003: Nil).

— 118 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

30. Related party transactions

During the year, the maximum amount of advances due to a wholly owned subsidiary of Kwan Wing was approximately HK$34 million (2003: HK$43 million) (notes 22 and 24) .

The balance due to the above-mentioned fellow subsidiary is unsecured, bears interest at Hong Kong dollar prime rate plus 2.5% per annum and has no fixed terms of repayment. The total interest paid on the advances for the year ended 31 December 2004 amounted to HK$2,167,000 (2003: HK$2,468,000).

31. Post balance sheet event

Subsequent to the balance sheet date, the following transactions were entered into by the Group:

(i) On 2 February 2005, the Company entered into a sale and purchase agreement to acquire 49% effective beneficial interest of the registered capital in Asia Union Film and Media (“Media Company”) at a maximum consideration of HK$550.0 million (subject to adjustments), through the acquisition of Orient Ventures Limited (“Orient Ventures”) (a wholly owned company of Mr. Johnson Ko) (“Mr. Ko”), which will acquire 100% equity interest in Anglo Alliance Co., Limited (“Anglo Alliance”) upon the completion of a deed on the same date. Upon completion of the acquisition, Beijing Hao Ge ShengShi Film & TV Culture Co, Limited (“Hao Ge”), a 98% owned subsidiary of Anglo Alliance, will become a sino-foreign joint venture and will hold 50% of the registered capital in Media Company.

The consideration of HK$550.0 million will be satisfied by the Company issuing 3,046,570,871 shares and 2,700,000,000 shares at an issue price of HK$0.049 and HK$0.042 per share respectively, and issuing a HK$287.3 million convertible note at a conversion price of HK$0.049 per share. After the completion of the acquisition, Orient Ventures Limited, Anglo Alliances Co., Limited and Beijing Hao Ge ShengShi Film & TV Culture Co, Limited will become subsidiaries of the Company. Media Company will become a 49% owned associated company of the Company. The acquisition is condition upon the approval from the shareholders of the Company in the extraordinary general meeting to be held after the despatch of the circular. Details of the transactions are disclosed in the Company’s announcement dated 2nd February 2005.

(ii) On 22 February 2005, the Company issued a total of 654,850,000 shares at an issue price of HK$0.12 per share raising net proceeds of HK$76 million, as a result of a Placing and Subscription Agreement (“Agreement”) entered into between the Company, Kwan Wing Holdings Limited (“Kwan Wing”), a company wholly owned by Mr. Ko, Techral Holdings Limited (“Techral”), a subsidiary of Kwan Wing which Mr. Ko has approximately 96% beneficial interest in Techral (Kwan Wing and Techral together referred as “Vendors”), and Goldbond Securities Limited (the “Placing Agent”). Pursuant to the Agreement, the Placing Agent placed 654,850,000 existing shares held by the Vendors at placing price of HK$0.12 per share, and the Vendors subscribed for the same number of new shares equal to the number of shares sold by them respectively under the placing at the subscription price of HK$0.12 per share. Details of the transactions are disclosed in the Company’s announcement dated 23 February 2005.

32. Ultimate holding company

The directors regard Kwan Wing, a company incorporated in the British Virgin Islands, as being the ultimate holding company.

33. Approval of accounts

The accounts were approved by the board of directors on 15 April 2005.

— 119 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

34. Particulars of principal subsidiaries

The table below lists out 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.

		Nominal
		value of issued
		preference share/
	Place of	ordinary share/	Interest	Principal activities
Name	incorporation	registered capital	held	and place of operation
Beijing E-Pay Net	PRC*	US$2,680,000	70%	Provision of communication
Technology Co. Ltd.		registered capital		Services in the PRC
Beijing Jiya	PRC*	RMB2,680,000	70%	Provision of computer telephony
Telecommunication		registered capital		integration engineering service
Engineering Co Ltd				in the PRC
Barnwell Enterprises	Hong Kong	HK$2 ordinary	#100%	Administrative services
Limited				in Hong Kong
Entertainment Soundview	Hong Kong	HK$10,000	100%	Marketing and sales of home
Limited		ordinary		audio/video products
				in Hong Kong
Global Assets Limited	Hong Kong	HK$5,000,000	100%	Group treasury and trading of
		ordinary		audio and video equipment
				and components in Hong Kong
Million Way Enterprises	British Virgin Islands	US$1 ordinary	100%	Investment holding
Limited
Netbroad Communication	British Virgin Islands	HK$1 ordinary	100%	Investment holding
Limited
Prime Pacific International	British Virgin Islands	US$50,000	67%	Investment holding
Limited		ordinary
Smoothline Limited	Hong Kong	HK$7,500,000	100%	Design, manufacturing and
		ordinary		marketing of
				telecommunication products
				— inactive
Super China Development	British Virgin Islands	US$1 ordinary	100%	Investment holding
Limited
Universal Appliances	Hong Kong	HK$499,373,000	#100%	Investment holding
Limited		ordinary
		HK$43,337,000
		preference

Co-operative joint venture

Shares held directly by the Company

Except for Barnwell Enterprises Limited and Global Assets Limited, all other statutory accounts for year ended 31 December 2004 are not audited by PricewaterhouseCoopers.

— 120 —

FINANCIAL INFORMATION RELATING TO THE GROUP

APPENDIX I

4. MATERIAL CHANGE

Save for the Placing and Top-up Subscription completed in February 2005 which provided the Group with a gross proceed of HK$78.6 million and the entering into of the UHL SP Agreement, the Directors are not aware of any material change in the financial or trading position or prospect of the Group since 31 December 2004, the date to which the latest published audited accounts of the Company were made up.

— 121 —

APPENDIX II ACCOUNTANTS’ REPORT ON ORIENT VENTURES

The following is the text of a report setting out the financial information of Orient Ventures for the period from 1 October 2003 to 31 December 2003 and the year ended 31 December 2004, prepared for the sole purpose of inclusion in this circular, received from PricewaterhouseCoopers, Certified Public Accountants, Hong Kong. As described in the section headed “Documents available for inspection” in Appendix X, a copy of the following accountants’ report is available for inspection.

PricewaterhouseCoopers 22/F, Prince's Building Central, Hong Kong

The Directors Universal Holdings Limited

13 May 2005

Dear Sirs,

We set out below our report on the financial information relating to Orient Ventures Limited (“Orient Ventures”) for the period from 1 October 2003 (date of incorporation) to 31 December 2003 and for the year ended 31 December 2004 (the “Relevant Periods”), for inclusion in the circular of Universal Holdings Limited (the “Company”) dated 13 May 2005 (the “Circular”) in connection with the proposed acquisition by the Company of a 49% effective beneficial interest in 北京保利華億傳媒文化有限公司 (Asian Union Film and Media) (“Media Company”) through a series of arrangements as set out in Note 9 of section V below.

Orient Ventures was incorporated in the British Virgin Islands on 1 October 2003 as a limited liability company and has been dormant since its incorporation.

Orient Ventures has adopted 31 December as its financial year end date. No statutory audited financial statements of Orient Ventures have been prepared since its date of incorporation as there is no statutory requirement for Orient Ventures to prepare audited financial statements.

For the purpose of this report, the director of Orient Ventures has prepared the financial statements of Orient Ventures for the Relevant Periods (“HK GAAP accounts”) in accordance with accounting principles generally accepted in Hong Kong and accounting standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). The director of Orient Ventures is responsible for preparing the HK GAAP accounts which give a true and fair view. In preparing these accounts, it is fundamental that appropriate accounting policies are selected and applied consistently. We have performed an independent audit on the HK GAAP accounts in accordance with Statements of Auditing Standards issued by the HKICPA.

— 122 —

ACCOUNTANTS’ REPORT ON ORIENT VENTURES

APPENDIX II

The financial information set out in sections I to VI below (the “Financial Information”) has been prepared by the director of Orient Ventures based on the HK GAAP accounts. We have examined the Financial Information in accordance with Statements of Auditing Standards issued by the HKICPA and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.

The director of Orient Ventures is responsible for the Financial Information. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion.

In our opinion the Financial Information, for the purpose of this report, gives a true and fair view of the state of affairs of Orient Ventures as at 31 December 2003 and 2004 and of the results and cash flows of Orient Ventures for the Relevant Periods.

I. PROFIT AND LOSS ACCOUNTS

		Period from
		1 October
		2003 (date of
		incorporation) to	Year ended
		31 December	31 December
		2003	2004
	Note	HK$	HK$
Turnover	2	—	—
Operating expenses		(4,290)	—
Loss before taxation		(4,290)	—
Taxation	3	—	—
Loss attributable to shareholder		(4,290)	—
Dividend	4	—	—
Basic loss per share	5	(4,290)	—

— 123 —

ACCOUNTANTS’ REPORT ON ORIENT VENTURES

APPENDIX II

II. BALANCE SHEETS

Note Current assets Cash and bank balances Current liabilities Amount due to shareholder 7 Net current liabilities Total assets less current liabilities Represented by: Share capital 8 Accumulated loss Shareholder’s deficit	As at 31 2003 HK$ 8 --------------- 4,290 --------------- (4,282) (4,282) 8 (4,290) (4,282)	December 2004 HK$ 8 --------------- 4,290 --------------- (4,282) (4,282) 8 (4,290) (4,282)

— 124 —

APPENDIX II ACCOUNTANTS’ REPORT ON ORIENT VENTURES

III. CASH FLOW STATEMENTS

		Period from
		1 October 2003
		(date of
		incorporation)	Year ended
		to 31 December	31 December
		2003	2004
	Note	HK$	HK$
Operating activities
Loss before taxation		(4,290)	—
Increase in amount due to shareholder		4,290	—
Net cash flow from operating activities		—	—
		---------------	---------------
Financing activities
Issuance of share	8	8	—
Net cash flow from financing activities		8	—
		---------------	---------------
Increase in cash and bank balances		8	—
Cash and bank balances, beginning of period/year		—	8
Cash and bank balances, end of period/year		8	8

— 125 —

ACCOUNTANTS’ REPORT ON ORIENT VENTURES

APPENDIX II

IV. STATEMENTS OF CHANGES IN EQUITY

		Period from
		1 October
		2003 (date of
		incorporation) to		Year ended
		31 December	31 December
		2003		2004
	Note	HK$		HK$
Total deficit at the beginning
of the period/year		—		(4,282)
Issuance of share	8	8		—
Loss attributable to shareholder		(4,290)		—
Total deficit at the end of period/year		(4,282)		(4,282)

V. NOTES TO THE FINANCIAL INFORMATION

1. PRINCIPAL ACCOUNTING POLICIES

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

(a) Basis of preparation

These financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong and comply with accounting standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). They have been prepared under the historical cost convention.

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005. Orient Ventures has not early adopted these new HKFRSs in the financial statements for the Relevant Periods. The director of Orient Ventures considered that the adoption of these new HKFRSs would not have a significant impact on its results of operations and financial position.

(b) Translation of foreign currencies

(c)

Deferred taxation

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

— 126 —

ACCOUNTANTS’ REPORT ON ORIENT VENTURES

APPENDIX II

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred taxation is provided on temporary differences, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

2. TURNOVER AND REVENUE

Orient Ventures has been dormant since its incorporation and therefore no revenue was generated during the Relevant Periods.

3. TAXATION

No Hong Kong profits tax was provided as Orient Ventures had no assessable profit arising in or derived from Hong Kong for the Relevant Periods

No provision for deferred tax assets or liabilities has been made in the financial statements as there are no significant temporary differences for the Relevant Periods.

4. DIVIDEND

No dividend had been paid or declared by Orient Ventures during the Relevant Periods.

5. LOSS PER SHARE

The calculation of the basic loss per share for the Relevant Periods is based on Orient Ventures’s loss attributable to the shareholder of HK$4,290 and HK$Nil, respectively, divided by 1 ordinary share in issue during the period from 1 October 2003 (date of incorporation) to 31 December 2003 and the year ended 31 December 2004.

Fully diluted loss per share has not been presented as there was no dilutive potential ordinary share outstanding as at 31 December 2003 and 2004, respectively.

6. DIRECTORS’ EMOLUMENTS

None of the director of Orient Ventures received or will receive any fees or emoluments in respect of his service to Orient Ventures during the Relevant Periods.

No emoluments were paid by Orient Ventures to its director as an inducement to join or upon joining Orient Ventures, or as compensation for loss of office.

7. AMOUNT DUE TO SHAREHOLDER

The amount due to shareholder is unsecured, interest-free and has no fixed repayment terms.

— 127 —

APPENDIX II ACCOUNTANTS’ REPORT ON ORIENT VENTURES

8. SHARE CAPITAL

Authorised: 50,000 ordinary shares of US$1 each Issued and fully paid: 1 ordinary share of US$1 each	As at 31 2003 US$ 50,000 As at 31 2003 HK$ 8	December 2004 US$ 50,000

		December 2004 HK$ 8

On the date of incorporation, 1 ordinary share of US$1 (equivalent to HK$8) was issued by Orient Ventures at par.

9. SUBSEQUENT EVENTS

Subsequent to 31 December 2004, the following series of transactions, involving the Company, Mr. Ko Chun Shun, Johnson (“Mr. Ko”), a director and a shareholder of the Company and the sole shareholder of Orient Ventures, Orient Ventures, Mr. Dong Ping, owner of Anglo Alliance Co., Ltd (“Anglo Alliance”), Anglo Alliance, 北京浩歌盛世影視文化有限公司(Beijing Hao Ge Sheng Shi Film & TV Culture Co, Ltd.) (“Hao Ge”) and Media Company, are being arranged in connection with the proposed acquisition by the Company of a 49% effective beneficial interest in Media Company:

—

The reorganisation

As at 31 December 2004, Media Company was 44% held by Hao Ge, which is an investment holding company. As part of the reorganisation, Hao Ge became a sino-foreign joint venture on 24 March 2005 and holds 50% of the registered capital in Media Company, and Anglo Alliance owns 98% equity interest in Hao Ge while the remaining 2% equity interest is held by the spouse of Mr. Dong Ping. Apart from holding the investment in Hao Ge and Media Company, respectively, by Anglo Alliance and Hao Ge, these two companies do not have any other business activities.

— 128 —

ACCOUNTANTS’ REPORT ON ORIENT VENTURES

APPENDIX II

—

A deed dated 2 February 2005 (the “Deed”)

On 2 February 2005, the Company, Orient Ventures and Mr. Ko entered into the Deed with Mr. Dong Ping pursuant to which Orient Ventures has conditionally agreed to acquire from Mr. Dong Ping the entire issued share capital of Anglo Alliance for a maximum consideration of HK$550 million upon the satisfaction of certain conditions precedent, including the completion of the reorganisation, to the reasonable satisfaction of Orient Ventures as set out in detail in the announcement dated 2 February 2005. Pursuant to the Deed, Mr. Ko has agreed to guarantee the performance by Orient Ventures of its obligations under the Deed and the loan due from Anglo Alliance to Mr. Dong Ping outstanding as at the completion of the Deed will also be assigned by Mr. Dong Ping to Orient Ventures.

The above consideration was determined based on the factors as described below and will be adjusted according to the audited net profit of the Anglo Alliance group for the 12 months period commencing from the completion date of the Deed. The consideration of HK$550 million will be settled through (1) cash of HK$110 million which has been paid as deposit by Mr. Ko on behalf of Orient Ventures; (2) issuance of promissory notes with an aggregate principal amount of HK$326.6 million by Mr. Ko to Mr. Dong Ping upon completion of the Deed; and (3) issuance of 2,700 million new shares of HK$0.01 each in the Company at HK$0.042 per share by the Company to Mr. Dong Ping upon completion of the UHL SP Agreement as described below or cash of HK$113.4 million to be paid by Mr. Ko on the long stop date if the UHL SP Agreement, as described below, did not proceed to completion.

In March and April 2005, Mr. Dong Ping has advanced to Anglo Alliance approximately RMB99.2 million as operational funding. Pursuant to the Deed, such advance will be assigned by Mr. Dong Ping to Orient Ventures upon the completion of the Deed.

On 11 May 2005, a supplemental deed was entered into to amend, among other things, certain terms of the price adjustment mechanism under the Deed (“Supplemental Deed”). Pursuant to the Supplemental Deed, the right to any cash compensation payable by Mr. Dong Ping according to the price adjustment mechanism under the Deed as set out in detail in the announcement dated 2 February 2005 will be assigned to Mr. Ko and Mr. Ko may offset such amount against the same amount payable by Mr. Ko to Mr. Dong Ping under the promissory notes to be issued by Mr. Ko to Mr. Dong Ping upon the completion of the Deed.

— Sale and purchase agreement dated 2 February 2005 (the “UHL SP Agreement”)

On 2 February 2005, the Company entered into the UHL SP Agreement with Mr. Ko, pursuant to which the Company has conditionally agreed to purchase from Mr. Ko and Mr. Ko has conditionally agreed to sell to the Company the entire issued share capital of Orient Ventures for a maximum consideration of HK$550 million, upon the satisfaction of certain conditions precedent, including the completion of the Deed and the passing of resolutions by shareholders of the Company as set out in detail in the announcement dated 2 February 2005. It is anticipated that Orient Ventures will be indebted to Mr. Ko as at the completion date of the UHL SP Agreement in connection with the payment of part of the consideration under the Deed. Any amount due from Orient Ventures to Mr. Ko outstanding as at the completion date of the UHL SP Agreement will be assigned by Mr. Ko to the Company.

— 129 —

ACCOUNTANTS’ REPORT ON ORIENT VENTURES

APPENDIX II

The consideration mentioned above was determined with reference to the value of the Anglo Alliance group based on the earning potential of the Anglo Alliance group pursuant to the reorganisation making reference to the established market position of the Anglo Alliance group, the possible growth of the businesses carried out by the Anglo Alliance group and the relevant industry, the development trend of the businesses and the quality of management of the Anglo Alliance group, the terms of the Deed and the business potential of the integrated media businesses carried out by the Anglo Alliance group in the PRC.

Upon completion of the UHL SP Agreement, the Company will pay the maximum consideration of HK$550 million, subject to the adjustment described in the Deed above, by means of (1) HK$149.3 million by way of issuing 3,047 million new shares in the Company of HK$0.01 each at an issue price of HK$0.049 per share to Mr. Ko or his nominee; (2) HK$287.3 million by way of the issue of a convertible note to Mr. Ko (“Convertible Note”); and (3) the balance of the consideration payable under the Deed of HK$113.4 million by the issuance of 2,700 million new shares in the Company of HK$0.01 each to Mr. Dong Ping at HK$0.042 per share. The Convertible Note is interest-free up to the fifth anniversary of the issuance of the Convertible Note and thereafter bears interest at a rate equal to the prime rate quoted by The Hongkong and Shanghai Banking Corporation.

On 11 May 2005, a supplemental agreement was entered into to amend, among other things, the payment terms of the UHL SP Agreement (“Supplemental Agreement”). Pursuant to the Supplemental Agreement, the consideration payable by the Company for the acquisition of the entire issued share capital of Orient Ventures upon the completion of the UHL SP Agreement reduced from HK$550 million to approximately HK$366.6 million. Instead of issuing Convertible Note of approximately HK$287.3 million to Mr. Ko as set out in the UHL SP Agreement , the Company will only issue the First Tranche Convertible Note of approximately HK$103.9 million to Mr. Ko. Further consideration of an amount of up to approximately HK$183.4 million in the form of Second Tranche Convertible Note may be issued to Mr. Ko depending on the audited profit of the Anglo Alliance group for the 12 months period commencing from the completion date of the Deed. The principal terms of the First and Second Tranche Convertible Notes are substantially the same as the Convertible Note.

— 130 —

APPENDIX II ACCOUNTANTS’ REPORT ON ORIENT VENTURES

VI. SUBSEQUENT ACCOUNTS

No audited accounts have been prepared for Orient Ventures in respect of any period subsequent to 31 December 2004 and no dividend or distribution has been declared by Orient Ventures in respect of any period subsequent to 31 December 2004.

Yours faithfully,

PricewaterhouseCoopers

Certified Public Accountants Hong Kong

— 131 —

APPENDIX III ACCOUNTANTS’ REPORT ON ANGLO ALLIANCE

The following is the text of a report setting out the financial information of Anglo Alliance for the three years ended 31 December 2004, prepared for the sole purpose of inclusion in this circular, received from PricewaterhouseCoopers, Certified Public Accountants, Hong Kong. As described in the section headed “Documents available for inspection” in Appendix X, a copy of the following accountants’ report is available for inspection.

PricewaterhouseCoopers 22/F, Prince's Building Central, Hong Kong

The Directors Universal Holdings Limited

13 May 2005

Dear Sirs,

We set out below our report on the financial information relating to Anglo Alliance Co., Ltd. (“Anglo Alliance”) for the years ended 31 December 2002, 2003 and 2004 (the “Relevant Periods”), for inclusion in the circular of Universal Holdings Limited (the “Company”) dated 13 May 2005 (the “Circular”) in connection with the proposed acquisition by the Company of a 49% effective beneficial interest in 北京保利華億傳媒文化有限公司 (Asian Union Film and Media) (“Media Company”) through a series of arrangements.

Anglo Alliance was incorporated in the British Virgin Islands on 10 March 2000 as a limited liability company and has been dormant since its incorporation.

Anglo Alliance has adopted 31 December as its financial year end date. No statutory audited financial statements of Anglo Alliance have been prepared since its date of incorporation as there is no statutory requirement for Anglo Alliance to prepare audited financial statements.

For the purpose of this report, the director of Anglo Alliance has prepared the financial statements of Anglo Alliance for the Relevant Periods (“HK GAAP accounts”) in accordance with accounting principles generally accepted in Hong Kong and accounting standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). The director of Anglo Alliance is responsible for preparing the HK GAAP accounts which give a true and fair view. In preparing these accounts, it is fundamental that appropriate accounting policies are selected and applied consistently. We have performed an independent audit on the HK GAAP accounts in accordance with Statements of Auditing Standards issued by the HKICPA.

— 132 —

ACCOUNTANTS’ REPORT ON ANGLO ALLIANCE

APPENDIX III

The financial information set out in sections I to VI below (the “Financial Information”) has been prepared by the director of Anglo Alliance based on the HK GAAP accounts. We have examined the Financial Information in accordance with Statements of Auditing Standards issued by the HKICPA and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.

The director of Anglo Alliance is responsible for the Financial Information. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion.

In our opinion the Financial Information, for the purpose of this report, gives a true and fair view of the state of affairs of Anglo Alliance as at 31 December 2002, 2003 and 2004 and of the results and cash flows of Anglo Alliance for the Relevant Periods.

I. PROFIT AND LOSS ACCOUNTS

No profit and loss accounts of Anglo Alliance for the Relevant Periods are presented as Anglo Alliance did not generate any revenue or incur any expenditure during the Relevant Periods.

II. BALANCE SHEETS

Note Current assets Cash and bank balances Represented by: Share capital 5 Retained earnings Shareholder’s funds	2002 RMB 17 17 — 17	As at 31 December 2003 2004 RMB RMB 17 17 17 17 — — 17 17	As at 31 December 2003 2004 RMB RMB 17 17 17 17 — — 17 17

			17 —
			17

III. CASH FLOW STATEMENTS

No cash flow statements of Anglo Alliance for the Relevant Periods have been presented as Anglo Alliance did not have any cash flow activity during the Relevant Periods.

— 133 —

ACCOUNTANTS’ REPORT ON ANGLO ALLIANCE

APPENDIX III

IV. STATEMENTS OF CHANGES IN EQUITY

Total equity as at 1 January Movement during the Relevant Periods Total equity as at 31 December	Year ended 31 December 2002 2003 2004 RMB RMB RMB 17 17 17 — — — 17 17 17	Year ended 31 December 2002 2003 2004 RMB RMB RMB 17 17 17 — — — 17 17 17
		17

V. NOTES TO THE FINANCIAL INFORMATION

1. PRINCIPAL ACCOUNTING POLICIES

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

(a) Basis of preparation

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005. Anglo Alliance has not early adopted these new HKFRSs in the financial statements for the Relevant Periods. The director of Anglo Alliance considered that the adoption of these new HKFRSs would not have a significant impact on its results of operations and financial position.

(b) Translation of foreign currencies

(c) Deferred taxation

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

— 134 —

ACCOUNTANTS’ REPORT ON ANGLO ALLIANCE

APPENDIX III

2. TURNOVER AND REVENUE

Anglo Alliance has been dormant since its incorporation and therefore no revenue was generated during the Relevant Periods.

3. DIVIDENDS

No dividend had been paid or declared by Anglo Alliance during the Relevant Periods.

4. DIRECTORS’ EMOLUMENTS

None of the director of Anglo Alliance received or will receive any fees or emoluments in respect of his service to Anglo Alliance during the Relevant Periods.

No emoluments were paid by Anglo Alliance to its director as an inducement to join or upon joining Anglo Alliance, or as compensation for loss of office.

5. SHARE CAPITAL

Authorised: 50,000 ordinary shares of US$1 each Issued and fully paid: 2 ordinary shares of US$1 each	2002 US$ 50,000 2002 RMB 17	31 December 2003 US$ 50,000 31 December 2003 RMB 17	2004 US$ 50,000

			2004 RMB 17

6. SUBSEQUENT EVENTS

Subsequent to 31 December 2004, a series of transactions, involving the Company, Mr. Ko Chun Shun, Johnson (“Mr. Ko”), director and a shareholder of the Company and the sole shareholder of Orient Ventures Limited (“Orient Ventures”), Orient Ventures, Mr. Dong Ping, owner of Anglo Alliance, Anglo Alliance, 北京浩歌盛世影視文化有限公司 (Beijing Hao Ge Sheng Shi Film & TV Culture Co, Ltd.) (“Hao Ge”) and Media Company, are being arranged in connection with the proposed acquisition by the Company of a 49% effective beneficial interest in Media Company.

— 135 —

ACCOUNTANTS’ REPORT ON ANGLO ALLIANCE

APPENDIX III

Ge pursuant to the reorganisation). As part of the reorganisation, pursuant to an approval obtained from the Commercial Bureau of Chao Yang District of Beijing of the PRC on 23 March 2005, Hao Ge was converted from a domestic company to a sino-foreign joint venture and accordingly, Mr. Dong Ping transferred all of his equity interest in Hao Ge and Ms. Zhao Yue, another shareholder of Hao Ge, transferred 18% of the equity interest she held in Hao Ge to Anglo Alliance at cost as determined based on registered capital of Hao Ge. Accordingly, Anglo Alliance owned 98% equity interest in Hao Ge thereafter. Apart from holding the investment in Media Company by Hao Ge, it does not have any other business activities.

In March and April 2005, Mr. Dong Ping has advanced to Anglo Alliance approximately RMB99.2 million as operational funding.

VI. SUBSEQUENT ACCOUNTS

No audited accounts have been prepared for Anglo Alliance in respect of any period subsequent to 31 December 2004 and no dividend or distribution has been declared by Anglo Alliance in respect of any period subsequent to 31 December 2004.

Yours faithfully,

PricewaterhouseCoopers Certified Public Accountants Hong Kong

— 136 —

ACCOUNTANTS’ REPORT ON HAO GE

APPENDIX IV

The following is the text of a report setting out the financial information of Hao Ge for the three years ended 31 December 2004, prepared for the sole purpose of inclusion in this circular, received from PricewaterhouseCoopers, Certified Public Accountants, Hong Kong. As described in the section headed “Documents available for inspection” in Appendix X, a copy of the following accountants’ report is available for inspection.

PricewaterhouseCoopers 22/F, Prince's Building Central, Hong Kong

The Directors Universal Holdings Limited

13 May 2005

Dear Sirs,

We set out below our report on the financial information relating to 北京浩歌盛世影視文化有限公司 (Beijing Hao Ge Sheng Shi Film & TV Culture Co, Ltd.) (“Hao Ge”) for the years ended 31 December 2002, 2003 and 2004 (the “Relevant Periods”), for inclusion in the circular of Universal Holdings Limited (the “Company”) dated 13 May 2005 (the “Circular”) in connection with the proposed acquisition by the Company of a 49% effective beneficial interest in 北京保利華億傳媒文化有限公司 (Asian Union Film and Media) (“Media Company”) through a series of arrangements.

Hao Ge was incorporated in the People’s Republic of China on 10 August 2001 as a limited liability company under the Companies Law of the People’s Republic of China. Hao Ge became a sino-foreign joint venture subsequent to 31 December 2004, more details about the operations of the conversion are set out in Note 11 of section V below. More details about the operations of Hao Ge are set out in Note 1 of section V below.

Hao Ge has adopted 31 December as its financial year end date. No statutory audited financial statements of Hao Ge have been prepared since its date of incorporation as there is no statutory requirement for Hao Ge to prepare audited financial statements.

For the purpose of this report, the directors of Hao Ge have prepared the financial statements of Hao Ge for the Relevant Periods (“HK GAAP accounts”) in accordance with accounting principles generally accepted in Hong Kong and accounting standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). The directors of Hao Ge are responsible for preparing the HK GAAP accounts which give a true and fair view. In preparing these accounts, it is fundamental that appropriate accounting policies are selected and applied consistently. We have performed an independent audit on the HK GAAP accounts in accordance with Statements of Auditing Standards issued by the HKICPA.

— 137 —

ACCOUNTANTS’ REPORT ON HAO GE

APPENDIX IV

The financial information set out in sections I to VI below (the “Financial Information”) has been prepared by the directors of Hao Ge based on the HK GAAP accounts. We have examined the Financial Information in accordance with Statements of Auditing Standards issued by the HKICPA and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.

The directors of Hao Ge are responsible for the Financial Information. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion.

In our opinion the Financial Information, for the purpose of this report, gives a true and fair view of the state of affairs of Hao Ge as at 31 December 2002, 2003 and 2004 and of the results and cash flows of Hao Ge for the Relevant Periods.

I. PROFIT AND LOSS ACCOUNTS

Note Turnover 1 Interest income Administrative expenses Loss before taxation 3 Taxation 4 Loss attributable to shareholders Dividend 5 Loss per share	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — — 23 1 2 (224) (194) (61) (201) (193) (59) — — — (201) (193) (59) — — — N/A N/A N/A

— 138 —

ACCOUNTANTS’ REPORT ON HAO GE

APPENDIX IV

II. BALANCE SHEETS

Note Non-current assets Interest in an associated company 7 Amount due from a related company 8 Current assets Amount due from a related party 8 Cash and bank balances Total assets less current liabilities Represented by: Share capital 9 Accumulated losses Shareholders’ funds Non-current liabilities Amounts due to related parties 8	As at 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — 123,587 1,578 47,619 — 1,578 47,619 123,587 -------------- -------------- -------------- 195 — — 26 87 243 221 87 243 -------------- -------------- -------------- 1,799 47,706 123,830 2,000 2,000 30,000 (201) (394) (453) 1,799 1,606 29,547 — 46,100 94,283 1,799 47,706 123,830

— 139 —

ACCOUNTANTS’ REPORT ON HAO GE

APPENDIX IV

III. CASH FLOW STATEMENTS

Note Operating activities Loss before taxation Interest income Operating loss before working capital changes (Increase)/decrease in amount due from a related party Net cash (used in)/from operations Interest received Net cash (used in)/from operating activities Investing activities Increase in amount due from a related company Acquisition of an associated company Increase in amount due from an associated company Net cash used in investing activities Net cash used before financing activities Financing activities Increase in amounts due to related parties Increase in paid-up capital 9 Net cash from financing activities (Decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December	Year 2002 RMB’000 (201) (23) (224) (195) (419) 23 (396) -------------- (1,578) — — (1,578) -------------- (1,974) -------------- — — — -------------- (1,974) 2,000 26	ended 31 December 2003 2004 RMB’000 RMB’000 (193) (59) (1) (2) (194) (61) 195 — 1 (61) 1 2 2 (59) -------------- -------------- (46,041) — — (52,800) — (23,168) (46,041) (75,968) -------------- -------------- (46,039) (76,027) -------------- -------------- 46,100 48,183 — 28,000 46,100 76,183 -------------- -------------- 61 156 26 87 87 243

— 140 —

ACCOUNTANTS’ REPORT ON HAO GE

APPENDIX IV

IV. STATEMENTS OF CHANGES IN EQUITY

Note Total equity as at 1 January Increase in paid-up capital 9 Loss attributable to shareholders Total equity as at 31 December	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 2,000 1,799 1,606 — — 28,000 (201) (193) (59) 1,799 1,606 29,547

V. NOTES TO THE FINANCIAL INFORMATION

1. ORGANISATION AND OPERATIONS

Hao Ge was incorporated in the People’s Republic of China (the “PRC”) on 10 August 2001 as a limited liability company with a registered capital of RMB2,000,000, which was owned as to 80% by Ms. Zhao Yue and 20% by Mr. Zhao Chao.

On 16 March 2004, Mr. Zhao Chao transferred all his equity interest in Hao Ge to Mr. Dong Ping, spouse of Ms. Zhao Yue, at cost. On the same date, Ms. Zhao Yue transferred 75% of her equity interest in Hao Ge (i.e. 60% of the equity of Hao Ge) to Mr. Dong Ping at cost. The Company became 80% and 20% owned by Mr. Dong Ping and Ms. Zhao Yue, respectively, immediately upon the completion of the share transfers.

On 19 October 2004, Hao Ge increased its registered capital from RMB2,000,000 to RMB29,800,000 and was fulfilled by a cash contribution from its current shareholders according to their respective share of equity interest in Hao Ge.

On 23 November 2004, Hao Ge further increased its registered capital from RMB29,800,000 to RMB30,000,000 and was fulfilled by the cash contribution from its shareholders according to their respective share of equity interest in Hao Ge.

The principal activity of Hao Ge is investment holding and there was no other operating activity carried out during the Relevant Periods. Hence Hao Ge derived no turnover for the Relevant Periods.

2. PRINCIPAL ACCOUNTING POLICIES

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

(a) Basis of preparation

— 141 —

ACCOUNTANTS’ REPORT ON HAO GE

APPENDIX IV

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005. Hao Ge has not early adopted these new HKFRSs in the financial statements for the Relevant Periods. Hao Ge has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position.

(b) Associated company

An associated company is a company, not being a subsidiary or a joint venture, in which an equity interest is held for the long-term and significant influence is exercised in its management.

Hao Ge does not present consolidated financial statements because it does not have subsidiaries. The aggregate amounts of its share of the net assets and results of the associated company accounted for and the net assets and profit attributable to shareholders of Hao Ge should the equity basis under the provisions of Statement of Standard Accounting Practice No.10 be applied are set out in Note 7.

In Hao Ge’s balance sheet the investments in associated company is stated at cost less provision for impairment losses, if any. The results of the associated company is accounted for by Hao Ge on the basis of dividends received and receivable.

(c) Translation of foreign currencies

(d) Provisions

Provisions are recognised when Hao Ge has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made.

(e) Contingent liabilities and contingent assets

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of Hao Ge. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognised but is disclosed in the notes to the financial statements. When a change in the probability of an outflow occurs so that the outflow becomes probable, it will then be recognised as a provision.

— 142 —

ACCOUNTANTS’ REPORT ON HAO GE

APPENDIX IV

Contingent assets are not recognised but are disclosed in the notes to the financial statements when an inflow of economic benefits is probable. When inflow is virtually certain, an asset is recognised.

(f) Deferred taxation

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

(g) Revenue recognition

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

3. LOSS BEFORE TAXATION

Loss before taxation is stated after charging the following:

	Year	ended 31 December
	2002	2003	2004
	RMB’000	RMB’000	RMB’000
Write-off of other receivables	200	—	—

4. TAXATION

(i) PRC Enterprise Income Tax

Hao Ge is subject to PRC Enterprise Income Tax at a rate of 33% on its assessable profit for the Relevant Periods. No PRC Enterprise Income Tax was provided as Hao Ge had no assessable profit for the Relevant Periods.

(ii) Hong Kong profits tax

No Hong Kong profits tax was provided as Hao Ge had no assessable profit arising in or derived from Hong Kong for the Relevant Periods.

— 143 —

ACCOUNTANTS’ REPORT ON HAO GE

APPENDIX IV

The taxation on Hao Ge’s loss before taxation differs from theoretical amount that would arise using the taxation rate of the home country of Hao Ge as follows:

Loss before taxation Calculated at a tax rate of 33% Unrecognised tax losses Tax charge	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 (201) (193) (59 (66) (64) (19 66 64 19 — — —	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 (201) (193) (59 (66) (64) (19 66 64 19 — — —
		(19 19
		—

No provision for deferred tax assets nor liabilities has been made in the financial statements as there are no significant temporary differences for the Relevant Periods.

5. DIVIDEND

No dividend had been paid or declared by Hao Ge during the Relevant Periods.

6. DIRECTORS’ EMOLUMENTS

None of the directors of Hao Ge received or will receive any fees or emoluments in respect of their services to Hao Ge during the Relevant Periods.

No emoluments were paid by Hao Ge to its directors as an inducement to join or upon joining Hao Ge, or as compensation for loss of office.

7. INTEREST IN AN ASSOCIATED COMPANY

Investment at cost: Unlisted investment in the PRC Amount due from an associated company_(Note 8)_	31 December 2002 2003 RMB’000 RMB’000 — — — — — —	2004 RMB’000 52,800 70,787
		123,587

The balance with the associated company is unsecured, interest-free and not repayable in the coming twelve months.

— 144 —

ACCOUNTANTS’ REPORT ON HAO GE

APPENDIX IV

Particulars of the associated company at 31 December 2004 are as follows:

	Place and
	date of		Equity
	incorporation		interest	Principal activities
	and kind of		held	and place
Name	legal entity	Registered capital	directly	of operation
北京保利華億傳媒文化	The PRC,	RMB120,000,000	44%	Production of television
有限公司(Asia Union	9 April 1997,			drama, investment in
Film and Media), acquired	limited liability			films production
on 29 October 2004	company			and advertisement
				production in the PRC

Extracts of the operating results and financial position of the associated company, which are based on its financial information for the year ended 31 December 2004 (the year of the acquisition), are as follows:

Summary of results

Turnover Profit for the year Summary of balance sheet Non-current assets Current assets Current liabilities Non-current liabilities Shareholders’ funds	2002 RMB’000 — — 2002 RMB’000 — — — — —	31 December 2003 RMB’000 — — 31 December 2003 RMB’000 — — — — —	2004 RMB’000 76,989 4,113 2004 RMB’000 387,349 104,076 (270,886) (197,592) 22,947

The associated company had no material contingent liabilities as at 31 December 2004.

For the year ended 31 December 2004, the share of net assets and results of the associated company should the equity method be applied amounted to approximately RMB31.5 million and RMB9.6 million, respectively, while the net assets and profit attributable to shareholders of Hao Ge would amount to RMB38.9 million and RMB9.5 million, respectively.

The directors of Hao Ge are of the opinion that the underlying value of the associated company is not less than its carrying value at 31 December 2004.

— 145 —

ACCOUNTANTS’ REPORT ON HAO GE

APPENDIX IV

8. BALANCES WITH RELATED PARTIES

The amount due from a related company is unsecured, interest-free and not repayable in the coming twelve months. As at 31 December 2004, it was classified to amount due from an associated company (see Note 7) as a result of the acquisition of the 44% equity interest in the associated company by Hao Ge in 2004.

The amount due from a related party is unsecured, interest-free and with no fixed repayment terms.

The amounts due to related parties included amount due to Mr. Dong Ping, who became a sharehloder of Hao Ge in 2004. This will be assigned to Anglo Alliance Co., Ltd. (“Anglo Alliance”), a company wholly-owned by Mr. Dong Ping or being capitalised into equity of Hao Ge upon completion of the Deed entered into between the Company, Orient Ventures Limited and Mr. Ko Chun Shun, Johnson (“Mr. Ko”), a director and a shareholder of the Company and Mr. Dong Ping. The remaining amount represented amount due to another shareholder of Hao Ge. All balances are unsecured, interest-free and not repayable in the coming twelve months.

9. SHARE CAPITAL

Registered: Registered capital, at the beginning of year Increase in registered capital_(i) Registered capital, at the end of year Paid-up: Paid-up capital, at the beginning of year Increase in paid-up capital(i)_ Paid-up capital, at the end of year	31 December 2002 2003 RMB’000 RMB’000 2,000 2,000 — — 2,000 2,000 2,000 2,000 — — 2,000 2,000	2004 RMB’000 2,000 28,000
		30,000

		2,000 28,000
		30,000

(i) On 19 October 2004, Hao Ge increased its registered capital from RMB2,000,000 to RMB29,800,000 and was fulfilled by the cash contribution from its shareholders according to their respective share of equity interest in Hao Ge.

10. RELATED PARTY TRANSACTIONS

Save as disclosed in Note 8, no other material related party transactions have been entered into by Hao Ge during the Relevant Periods.

11. SUBSEQUENT EVENTS

On 23 March 2005, Hao Ge obtained an approval (朝商覆字 [2005]2107號關於北京浩歌盛世影視文化有限公司由內資企業轉制為中外合資企業批覆 ) (the “Approval”) from the Commercial Bureau of Chao Yang District of Beijing of the PRC for the conversion from a domestic company to a sino-foreign joint venture.

— 146 —

ACCOUNTANTS’ REPORT ON HAO GE

APPENDIX IV

Upon receipt of the Approval, Mr. Dong Ping transferred all of his equity interest in Hao Ge and Ms. Zhao Yue transferred 18% of the equity interest in Hao Ge to a wholly-owned company of Mr. Dong Ping, Anglo Alliance, a company incorporated in the British Virgin Islands, at cost determined based on the registered capital of Hao Ge. Hao Ge then became a sino-foreign joint venture 98% owned by Anglo Alliance and 2% owned by Ms. Zhao Yue, immediately upon the completion of the share transfers. The registered capital of Hao Ge remained at RMB30,000,000. The name of Hao Ge was changed to 北京華億浩歌傳媒文化有限公司 (Beijing Hua Yi Hao Ge Media Culture Co, Ltd.).

Apart from holding the investment in Hao Ge, Anglo Alliance does not have any other business activities.

The registration of Hao Ge as a sino-foreign joint venture was completed on 24 March 2005.

Subsequent to 31 December 2004, a series of transactions, involving the Company, Mr. Ko, a director and a shareholder of the Company and the sole shareholder of Orient Ventures Limited (“Orient Ventures”), Orient Ventures, Mr. Dong Ping, owner of Anglo Alliance, Anglo Alliance, Hao Ge and Media Company, are being arranged in connection with the proposed acquisition by the Company of 49% of effective beneficial interest in Media Company.

Media Company and its subsidiaries are principally engaged in the production of television drama, investment in films production and advertisement production in the PRC. Media Company’s principal associated company, 海南海視旅遊衛視傳媒有限責任公司 (Hai Nan Haishi Tourist Statellite TV Media Co., Ltd.), is engaged in the production of television programmes (other than news) for a satellite television channel in Hainan province of the PRC. As at 31 December 2004, Media Company was 44% held by Hao Ge and as part of the reorganisation, Mr. Dong Ping and 保利文化藝術有限公司 (“Poly Culture”) has transferred their 5% and 1% equity interests, respectively in Media Company to Hao Ge at a consideration determined based on the registered capital of Media Company. Hao Ge therefore holds 50% of the registered capital in Media Company accordingly.

VI. SUBSEQUENT ACCOUNTS

No audited accounts have been prepared for Hao Ge in respect of any period subsequent to 31 December 2004 and no dividend or distribution has been declared by Hao Ge in respect of any period subsequent to 31 December 2004.

Yours faithfully, PricewaterhouseCoopers

Certified Public Accountants Hong Kong

— 147 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

The following is the text of a report setting out the financial information of Media Company for the three years ended 31 December 2004, prepared for the sole purpose of inclusion in this circular, received from PricewaterhouseCoopers, Certified Public Accountants, Hong Kong. As described in the section headed “Documents available for inspection” in Appendix X, a copy of the following accountants’ report is available for inspection.

PricewaterhouseCoopers 22/F, Prince's Building Central, Hong Kong

The Directors Universal Holdings Limited

13 May 2005

Dear Sirs,

We set out below our report on the financial information relating to 北京保利華億傳媒文化有限公司 (Asian Union Film and Media) (“Media Company”) and its subsidiaries (hereinafter collectively referred to as “Media Group”) for the years ended 31 December 2002, 2003 and 2004 (the “Relevant Periods”), for inclusion in the circular of Universal Holdings Limited (the “Company”) dated 13 May 2005 (the “Circular”) in connection with the proposed acquisition by the Company of a 49% effective beneficial interest in Media Company through a series of arrangements.

Media Company was incorporated in the People’s Republic of China on 9 April 1997 as a limited liability company.

As at the date of this report, Media Company has direct and indirect interests in the subsidiaries and associated companies set out in Notes 35 and 15 of section V, respectively, all of which are private companies.

All companies comprising Media Group and the associated companies have adopted 31 December as their financial year end date.

No statutory audited financial statements have been prepared for Media Company’s subsidiaries during the Relevant Periods as these companies are domestic companies and no such financial statements were required by the relevant authorities in their respective jurisdictions of establishment.

— 148 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

For the purpose of this report, the directors of Media Company have prepared the consolidated financial statements of the companies comprising Media Group and associated companies for the Relevant Periods (“HK GAAP accounts”) in accordance with accounting principles generally accepted in Hong Kong and accounting standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). The directors of Media Company are responsible for preparing the HK GAAP accounts which give a true and fair view. In preparing these accounts, it is fundamental that appropriate accounting policies are selected and applied consistently. We have performed an independent audit on the HK GAAP accounts in accordance with Statements of Auditing Standards issued by the HKICPA.

The financial information set out in sections I to VI below (the “Financial Information”) has been prepared by the directors of Media Company based on the HK GAAP accounts. We have examined the Financial Information in accordance with Statements of Auditing Standards issued by the HKICPA and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.

The directors of Media Company are responsible for the Financial Information. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion.

In our opinion the Financial Information, for the purpose of this report, gives a true and fair view of the state of affairs of Media Group and of Media Company as at 31 December 2002, 2003 and 2004 and of the results and cash flows of Media Group for the Relevant Periods.

— 149 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

I. CONSOLIDATED PROFIT AND LOSS ACCOUNTS

Note
Turnover
3, 4
Cost of sales
Gross profit
Other revenues
3
Marketing, selling and
distribution costs
Administrative expenses
Provision of impairment for
programmes and film rights
and production in progress
Other operating expenses
Operating (loss)/profit
5
Finance costs
9
Share of profit/(loss) of:
associated companies
a cooperative joint venture
16
(Loss)/profit before taxation
Taxation
10
(Loss)/profit after taxation
Minority interests
(Loss)/profit attributable to
shareholders
6
Dividend
7
Basic loss/(earnings) per share

Year ended 31 December
2002
2003
2004
RMB’000
RMB’000
RMB’000
4,773
25,840
76,989
(3,499)
(20,133)
(33,875)
1,274
5,707
43,114
40
22
600
(4,753)
(9,504)
(10,638)
(2,769)
(4,174)
(6,255)
(5,212)
(25,412)
—
(2,063)
(12,562)
(8,420)
(13,483)
(45,923)
18,401
(532)
(2,766)
(12,481)
36
(69)
2,621
—
—
2,000
(13,979)
(48,758)
10,541
(80)
(248)
(6,341)
(14,059)
(49,006)
4,200
200
—
(87)
(13,859)
(49,006)
4,113
—
—
—
N/A
N/A
N/A

— 150 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

II. (A) CONSOLIDATED BALANCE SHEETS

Note Non-current assets Fixed assets 12 Programmes and film rights 13 Programmes and film production in progress 20 Investments in associated companies 15 Long-term prepayments 15 Long-term investments 16 Deferred tax assets 28 Goodwill 17 Current assets Programmes and film production in progress 20 Amounts due from related companies 25 Amount due from an associated company 15 Amounts due from a shareholder 25 Prepayments, deposits and other receivables 19 Trade receivables 18 Cash and bank balances Current liabilities Trade payables 21 Other payables and accrued liabilities 22(a) Receipt in advance 22(b) Taxes payable Amounts due to related companies 25 Amount due to an associated company 15 Amount due to a shareholder 25 Amount due to a minority shareholder 25 Amount due to immediate holding company 25 Current portion of finance lease payable 23 Current portion of investment cost payable 15 Short-term bank loans 24 Other short-term loans 24 Net current liabilities Total assets less current liabilities	2002 RMB’000 9,264 48,119 20,780 699 10,000 — — 1,610 90,472 ------------------- 3,736 — — — 12,564 1,502 900 18,702 ------------------- 2,813 65,580 4,592 80 10,267 — 33,037 200 — 433 — — 31,000 148,002 ------------------- (129,300) ------------------- (38,828)	As at 31 December 2003 2004 RMB’000 RMB’000 13,416 14,295 43,068 74,915 22,517 11,955 570 261,024 68,610 — 20,000 20,000 955 2,889 1,524 2,271 170,660 387,349 ------------------- ------------------- 6,459 16,911 11,314 24,586 — 351 210 — 30,170 27,283 3,997 23,457 4,712 11,488 56,862 104,076 ------------------- ------------------- 936 664 15,996 12,426 10,916 15,936 1,838 9,834 100 73 — 10,652 36,443 1,606 200 200 1,800 1,800 1,232 1,283 — 135,000 50,000 75,000 6,412 6,412 125,873 270,886 ------------------- ------------------- (69,011) (166,810) ------------------- ------------------- 101,649 220,539

— 151 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Note Represented by: Share capital 26 Reserves 27 Shareholders’ (deficits)/funds Minority interests Non-current liabilities Loan from immediate holding company 25 Amount due to a related company 25 Amount due to a shareholder 25 Non-current portion of investment cost payable 15 Non-current portion of finance lease payable 23	As 2002 RMB’000 20,000 (62,195) (42,195) — — 1,578 — — 1,789 (38,828)	at 31 December 2003 RMB’000 40,820 (70,821) (30,001) — 80,000 47,619 — — 4,031 101,649	2004 RMB’000 120,000 (97,053) 22,947 982 100,000 — 70,787 23,099 2,724 220,539

— 152 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

II. (B) BALANCE SHEETS

Note Non-current assets Fixed assets 12 Programmes and film rights 13 Programmes and film production in progress 20 Investments in subsidiaries 14 Investments in associated companies 15 Long-term prepayments 15 Long-term investments 16 Deferred tax assets 28 Current assets Amounts due from related companies 25 Amount due from an associated company 15 Amounts due from subsidiaries 14 Amount due from a shareholder 25 Prepayments, deposits and other receivables 19 Trade receivables 18 Cash and bank balances Current liabilities Trade payables 21 Other payables and accrued liabilities 22(a) Receipt in advance 22(b) Taxes payable Amounts due to related companies 25 Amount due to an associated company 15 Amount due to a subsidiary 14 Amount due to a shareholder 25 Amount due to immediate holding company 25 Current portion of finance lease payable 23 Current portion of investment cost payable 15 Short-term bank loans 24 Other short-term loans 24 Net current liabilities Total assets less current liabilities	As at 31 December 2002 2003 RMB’000 RMB’000 8,001 12,125 48,119 43,458 20,780 22,517 2,000 2,000 690 690 10,000 68,610 — 20,000 — 955 89,590 170,355 ------------------- ------------------- — 11,314 — — 1,903 3,005 — 210 12,004 27,741 860 3,592 306 2,393 15,073 48,255 ------------------- ------------------- 2,813 936 64,679 15,386 372 1,358 15 1,740 10,267 — — — — — 33,037 36,443 — 1,800 335 1,101 — — — 50,000 31,000 6,412 142,518 115,176 ------------------- ------------------- (127,445) (66,921) ------------------- ------------------- (37,855) 103,434	2004 RMB’000 13,203 76,405 11,955 3,780 268,789 — 20,000 2,889 397,021 ------------------- 24,586 351 7,385 — 25,903 22,771 7,716 88,712 ------------------- 597 11,905 1,253 9,705 73 10,652 1,090 1,606 1,800 1,146 135,000 75,000 6,412 256,239 ------------------- (167,527) ------------------- 229,494

— 153 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Note Represented by: Share capital 26 Reserves 27 Shareholders’ (deficits)/funds Non-current liabilities Loan from immediate holding company 25 Amount due to a related company 25 Amount due to a shareholder 25 Non-current portion of investment cost payable 15 Non-current portion of finance lease payable 23	As 2002 RMB’000 20,000 (60,832) (40,832) — 1,578 — — 1,399 (37,855)	at 31 December 2003 RMB’000 40,820 (68,643) (27,823) 80,000 47,619 — — 3,638 103,434	2004 RMB’000 120,000 (86,884) 33,116 100,000 — 70,787 23,099 2,492 229,494

— 154 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

III. CONSOLIDATED CASH FLOW STATEMENTS

Note
Net cash from/(used in) operations
29(a)
Interest paid
Interest received
PRC Enterprise Income Tax paid
Net cash from/(used in) operating activities
Investing activities
Purchase of programmes and film rights
Purchase of fixed assets
Proceeds from disposal of fixed assets
Prepaid costs for other investments
Prepaid costs/payment for the acquisition
of an associated company
Net cash outflow from acquisition of
a subsidiary
29(d)
Net cash used in investing activities

Year ended 31 December
2002
2003
2004
RMB’000
RMB’000
RMB’000
17,350
(95,717)
2,429
(532)
(2,766)
(12,481)
14
22
177
—
(46)
(1,202)
16,832
(98,507)
(11,077)
----------------
----------------
----------------
(30,043)
(28,703)
(53,435)
(3,971)
(5,860)
(3,081)
80
57
52
(11,791)
(10,259)
—
—
(68,610)
(41,390)
—
—
(40)
(45,725)
(113,375)
(97,894)
----------------
----------------
----------------

— 155 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Note
Net cash used before financing activities
Financing activities
29(c)
Draw down of other short-term loans
Draw down of short-term bank loans
Contributions from shareholders
Repayment of other short-term loans
Repayment of short-term bank loans
Increase/(decrease) in finance
lease obligations
Increase in amount due to a related
company/shareholder
Long-term loan from immediate
holding company
Net cash from financing activities
(Decrease)/increase in cash and
cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Analysis of balances of cash and cash equivalents
Cash and bank balances

Year ended 31 December
2002
2003
2004
RMB’000
RMB’000
RMB’000
(28,893)
(211,882)
(108,971)
----------------
----------------
----------------
25,000
6,412
—
—
50,000
70,000
—
61,200
48,835
—
(31,000)
—
—
—
(45,000)
2,222
3,041
(1,256)
1,578
46,041
23,168
—
80,000
20,000
28,800
215,694
115,747
----------------
----------------
----------------
(93)
3,812
6,776
993
900
4,712
900
4,712
11,488
900
4,712
11,488

— 156 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

IV. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Note Total deficit as at 1 January Increase in paid-up capital 26 Increase/(decrease) in capital reserve 26, 27 Net (loss)/profit for the year Total (deficit)/equity as at 31 December	Year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 (28,336) (42,195) (30,001) — 20,820 79,180 — 40,380 (30,345) (13,859) (49,006) 4,113 (42,195) (30,001) 22,947

— 157 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

V. NOTES TO THE FINANCIAL INFORMATION

1. ORGANISATION AND OPERATIONS

Media Company was incorporated in the People’s Republic of China (the “PRC”) on 9 April 1997 as a limited liability company with a registered capital of RMB1,000,000 under the name of 北京華億亞聯影視文化有限責任公司 , which was owned as to 80% by Mr. Dong Ping and 20% by Mr. Gao Baohua.

On 16 August 1999, Mr. Gao Baohua transferred all his equity interest in Media Company to Mr. Zhao Chao at cost.

On 18 December 1999, Mr. Zhao Chao transferred all his equity interest in Media Company to Ms. Zhao Yue at a mutually agreed consideration of RMB471,000.

On 11 May 2001, the name of 北京華億亞聯影視文化有限責任公司 was changed to 北京北大華億影視文化有限責任公司.

On 3 September 2001, Media Company increased its registered capital from RMB1,000,000 to RMB20,000,000 and was fulfilled by the cash contribution from its shareholders according to their respective share of equity interest in Media Company. Media Company remained 80% owned by Mr. Dong Ping and 20% owned by Ms. Zhao Yue.

On 21 November 2003, Media Company increased its registered capital from RMB20,000,000 to RMB40,820,000 and was fulfilled solely by the cash contribution from 保利文化藝術有限公司 (Poly Culture & Arts Co., Ltd.) (“Poly Culture”). Media Company became 51% owned by Poly Culture, 39.2% owned by Mr. Dong Ping and 9.8% owned by Ms. Zhao Yue immediately after the completion of the increase in the registered capital.

On the same date, the name of 北京北大華億影視文化有限責任公司 was changed to 北京保利華億傳媒文化有限公司 (Asian Union Film and Media), the existing name of Media Company.

On 27 September 2004, Mr. Dong Ping and Ms. Zhao Yue transferred 34.2% and 9.8%, of the equity interests they held respectively in Media Company to 北京浩歌盛世影視文化有限公司 (Beijing Hao Ge Sheng Shi Film & TV Culture Co., Ltd.) (“Hao Ge”), which is 80% and 20% owned by Mr. Dong Ping and Ms. Zhao Yue, respectively, at cost. Media Company became 51% owned by Poly Culture, 44% owned by Hao Ge and 5% owned by Mr. Dong Ping immediately upon the completion of the equity transfers on 29 October 2004.

On the same date, Media Company increased its registered capital from RMB40,820,000 to RMB120,000,000 and was fulfilled by the realisation of the capital reserve and cash contribution from its shareholders (see Note 26) . As at 31 December 2004, Poly Culture, Hao Ge and Mr. Dong Ping held, 51%, 44% and 5% equity interests, respectively, in Media Company.

Subsequent to 31 December 2004, Poly Culture and Mr. Dong Ping transferred their 1% and 5% equity interests in Media Company, respectively, to Hao Ge at the consideration determined based on the registered capital of Media Company.

Media Company is principally engaged in the production of television drama and investment in films production. The principal activities of the subsidiaries are set out in Note 35.

— 158 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

2. PRINCIPAL ACCOUNTING POLICIES

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

(a) Basis of preparation

The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005. Media Group has not early adopted these new HKFRSs in the financial statements for Relevant Periods. Media Group has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a significant impact on its results of operations and financial position.

Notwithstanding that Media Group and Media Company had net current liabilities and significant outstanding commitments as at 31 December 2002, 2003 and 2004, and shareholders’ deficits as at 31 December 2002 and 2003, the directors of Media Company are of the opinion that Media Group is able to continue as a going concern and to meet its obligations as and when they fall due based on the following:

(i) the existing shareholders of Media Company have indicated their intentions to provide financial support to Media Group in order to enable it to meet its liabilities and commitments as they fall due for a twelve months period from the latest balance sheet date of 31 December 2004;
(ii) the existing loan facility line granted by a financial institution amounting to approximately RMB70 million was extended for an additional one year to 31 March 2006; and
(iii) Poly Culture will continue to provide banking loan guarantee to Media Company to the extent of RMB350 million should it extend the loan facility lines from financial institutions.

(b) Group accounting

(i) Consolidation

The consolidated financial statements include the financial statements of Media Company and its subsidiaries made up to 31 December.

Subsidiaries are those entities in which Media Company, directly or indirectly, controls more than one half of the voting power; has the power to govern the financial and operating policies; to appoint or remove the majority of the members of the board of directors; or to cast majority of votes at the meetings of the board of directors.

— 159 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

All significant intercompany transactions and balances within Media 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 Media Group’s share of its net assets together with any unamortised goodwill or negative goodwill.

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

In Media Company’s balance sheet the investments in subsidiaries are stated at cost less provision for impairment losses. The results of subsidiaries are accounted for by Media Company on the basis of dividends received and receivable.

(ii) Associated companies

An associated company is a company, not being a subsidiary or a joint venture, in which an equity interest is held for the long-term and significant influence is exercised in its management.

The consolidated profit and loss account includes Media Group’s share of the results of associated companies for the year, and the consolidated balance sheet includes Media Group’s share of the net assets of the associated companies and goodwill (net of accumulated amortisation and impairment losses) on acquisition.

Equity accounting is discontinued when the carrying amount of the investment in an associated company reaches zero, unless Media Group has incurred obligations or guaranteed obligations in respect of the associated company.

Unrealised gains on transactions between Media Group and its associates are eliminated to the extent of Media Group’s interest in the associates; unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred.

In Media Company’s balance sheet the investments in associated companies are stated at cost less provision for impairment losses. The results of the associated companies are accounted for by Media Company on the basis of dividends received and receivable.

(c) Fixed assets

(i) Fixed assets

Fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses.

— 160 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Fixed assets, net of residual values, are depreciated on the straight-line basis to write off their cost less accumulated impairment losses over their estimated useful lives as follows:

Leasehold improvements 33% or over the terms of the leases, whichever is shorter Properties 5% Motor vehicles 10% Furniture, fixtures and equipment 20% to 50%

(ii) Impairment and gain or loss on sale

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

(d) Long-term investments

Long-term investments consist of Media Group’s investments in a limited liability company and a cooperative joint venture company in the PRC.

Investments made by means of joint venture structure which do not result in Media Group having joint control with other venture partners nor significant influence over the joint venture are accounted for as long-term investments. The profits and losses from operations and any distribution of surplus assets upon the expiry of the joint venture terms shared by the joint venture partners are not in proportion to their respective capital contributions but in accordance with the terms of the joint venture agreement with a fixed amount of return recognised as income.

Media Group’s long-term investments are stated at cost less provision for impairment losses. The carrying amounts of long-term investment are reviewed at each balance sheet date to assess whether the fair values have declined below the carrying amounts. When a decline other than temporary has occurred, the carrying amount of such investment will be reduced to its fair value. The impairment loss is recognised as an expense in the profit and loss account.

(e) Operating leases

— 161 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

(f) Finance leases

Leases that substantially transfer to Media Group all the risks and rewards of ownership of assets are accounted for as finance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased assets or the present value of the minimum lease payments. Each lease payment is allocated between the capital and finance charges so as to achieve a constant rate on the capital balances outstanding. The corresponding rental obligations, net of finance charges, are included in current and long-term liabilities, as appropriate. The finance charges are charged to the profit and loss account over the lease periods.

Assets held under finance leases are depreciated over the shorter of their estimated useful lives or the lease periods.

(g) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of Media Group’s share of the net assets of the acquired subsidiary at the date of acquisition and is amortised on a straight-line basis over the useful live of 20 years.

The gain or loss on disposal of an entity includes the unamortised balance of goodwill relating to the entity disposed of.

(h) Programmes and film rights

Programmes and film rights acquired from outsiders are stated at acquisition costs plus film enhancement costs less amortisation and accumulated impairment losses, if any.

Self-produced programmes and film products are completed programmes and films produced by Media Group and are stated at the lower of cost and net realisable value. Cost of programmes and film products, accounted for on a programme-by-programme or a film-byfilm basis, includes production costs, cost of services, direct labour costs, facilities and raw materials consumed in the creation of a programme or a film.

The cost of programmes and film rights is charged to the profit and loss account proportionately to the estimated projected revenues over their expected economic beneficial period ranging from 2 years to 10 years. Additional amortisation will be charged if estimated projected revenues adversely differ from the previous estimation. Estimated projected revenues will be reviewed on a programme-by-programme or film-by-film basis at a regular interval.

When programmes and film rights are sold, carrying amount of those programmes and film rights is recognised as an expense in the year in which the related revenue is recognised. The amount of any write-down of programmes and film rights to net realisable value and all losses of programmes and film rights are recognised as an expense in the year the writedown or loss occurs. The amount of any reversal of any write-down of programmes and film rights, arising from an increase in net realisable value, is recognised as a reduction in the amount of write-down of programmes and film rights recognised as an expense in the year in which the reversal occurs.

At each balance sheet date, both internal and external market information is considered to assess whether there is any indication that assets included in programmes and film rights are impaired. If any such indication exists, the carrying amount of such assets is assessed and where relevant, an impairment loss is recognised to reduce the asset to its recoverable amount. Such impairment losses are recognised in the profit and loss account.

— 162 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

(i) Programmes and film production in progress

Programmes and film production in progress are accounted for on a programme-byprogramme or film-by-film basis and are stated at cost less any impairment in value. Cost of programmes or films under production includes production costs, costs of services, direct labour costs, facilities and raw materials consumed in the creation of a programme or a film. Upon completion, these programmes or films under production will be reclassified as programmes or film rights.

(j) Translation of foreign currencies

(k) Trade receivables

Provision is made against trade receivables to the extent they are considered to be doubtful. Trade receivable in the balance sheet is stated at net of such provision.

(l) Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand and deposits held at call with banks.

(m) Provisions

Provisions are recognised when Media Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made.

(n) Contingent liabilities and contingent assets

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of Media Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

— 163 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

(o) Deferred taxation

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

(p) Employee benefits

(i) Employee leave entitlements

Employee entitlements to sick leave, maternity and other non-accumulating compensated absences are not recognised until the time of leave.

(ii) Retirement benefit costs

Pursuant to the PRC laws and regulations, contributions to the basic old age insurance for Media Group’s employees are made monthly to a government agency based on certain formulae, of which the entire portion is borne by the Media Group. The government agency is responsible for the pension liabilities relating to these employees upon their retirement. Media Group accounts for these contributions on an accrual basis and the costs of the benefits are recognised as an expense in the year in which they are incurred.

(q) Borrowing costs

Borrowing costs are charged to the profit and loss account in the year in which they are incurred.

(r) Revenue recognition

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

Advertising and commission income are recognised when services are rendered and revenue can be reliably measured.

Income from licensing and sub-licensing of programmes and film rights is recognised upon the delivery of the pre-recorded audio visual products and the materials for video features to the customers, in accordance with the terms of the underlying contracts.

— 164 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

In cases where income from licensing and sub-licensing of film rights is contingent to the receipt of revenue from the box of offices, income is only recognised when it is probable that the licensing fee will be received, which is normally when the event has occurred.

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

(s) Segment reporting

In accordance with Media Group’s internal financial reporting, Media Group has determined that business segments be presented as the primary reporting format and geographical segments as the secondary reporting format.

Unallocated costs represent corporate expenses. Segment assets consist primarily of programmes and film rights, programmes and film production in progress and receivables. Segment liabilities comprise operating liabilities. Capital expenditure comprises additions to fixed assets.

No geographic segment reporting is presented as Media Group’s turnover and operating results are almost entirely generated from the PRC.

3. TURNOVER AND REVENUES

Media Group is principally engaged in the production of television drama, investment in films production and advertisement production. Revenues recognised during the Relevant Periods are as follows:

Turnover Licensing and sub-licensing of programmes and film rights Sale of television programmes Advertising and commission income Other revenues Interest income Others Total revenues	Year 2002 RMB’000 4,089 481 203 4,773 ----------------- 14 26 40 ----------------- 4,813	ended 31 December 2003 2004 RMB’000 RMB’000 20,067 62,087 4,100 4,808 1,673 10,094 25,840 76,989 ----------------- ----------------- 22 177 — 423 22 600 ----------------- ----------------- 25,862 77,589	ended 31 December 2003 2004 RMB’000 RMB’000 20,067 62,087 4,100 4,808 1,673 10,094 25,840 76,989 ----------------- ----------------- 22 177 — 423 22 600 ----------------- ----------------- 25,862 77,589
			76,989 ----------------- 177 423
			600 -----------------
			77,589

— 165 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

4. SEGMENT INFORMATION

Primary reporting format — business segments

Media Group is organised into three main business segments:

(i) Licensing and sub-licensing of programmes and film rights;
(ii) Sale of television programmes; and
(iii) Advertising and commission income.

There are no sales between the business segments.

— 166 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Year ended 31 December 2002
Licensing and
Advertising
sub-licensing
Sale
and
of programmes
of television
commission
and film rights
programmes
income
RMB’000
RMB’000
RMB’000
Turnover
4,089
481
203
Segment results
740
409
125
Other revenues
Unallocated costs
Operating loss
Finance costs
Share of profit of
an associated company
Loss before taxation
Taxation
Loss after taxation
Minority interests
Loss attributable to shareholders
Segment assets
69,759
6,746
78
Investments in an associated company
Unallocated assets
Total assets
Segment liabilities
(3,185)
(5,583)
(290)
Unallocated liabilities
Total liabilities
Capital expenditure
3,089
857
25
Depreciation
(662)
(118)
(1)
Amortisation of programmes
and film rights
(3,225)
—
—
Amortisation of goodwill
Unallocated
Impairment charges recognised on:
Programmes and film rights
(5,212)
—
—
A long-term investment

Total
RMB’000
4,773
1,274
40
(14,797)
(13,483)
(532)
36
(13,979)
(80)
(14,059)
200
(13,859)
76,583
699
31,892
109,174
(9,058)
(142,311)
(151,369)
3,971
(781)
(3,225)
(100)
(5,212)
(1,791)

— 167 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Year ended 31 December 2003
Licensing and
Advertising
sub-licensing
Sale
and
of programmes
of television
commission
and film rights
programmes
income
RMB’000
RMB’000
RMB’000
Turnover
20,067
4,100
1,673
Segment results
4,718
254
735
Other revenues
Unallocated costs
Operating loss
Finance costs
Share of loss of an
associated company
Loss before taxation
Taxation
Loss after taxation
Minority interests
Loss attributable to shareholders
Segment assets
69,567
12,221
293
Investments in an associated company
Unallocated assets
Total assets
Segment liabilities
(2,294)
(10,744)
(344)
Unallocated liabilities
Total liabilities
Capital expenditure
5,644
178
38
Depreciation
(1,158)
(181)
(7)
Amortisation of programmes
and film rights
(14,286)
—
—
Amortisation of goodwill
Unallocated
Impairment charges recognised on:
Programmes and film rights
(25,412)
—
—
A long-term investment

Total
RMB’000
25,840
5,707
22
(51,652)
(45,923)
(2,766)
(69)
(48,758)
(248)
(49,006)
—
(49,006)
82,081
570
144,871
227,522
(13,382)
(244,141)
(257,523)
5,860
(1,346)
(14,286)
(99)
(25,412)
(259)

— 168 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Year ended 31 December 2004
Licensing and
Advertising
sub-licensing
Sale
and
of programmes
of television
commission
and film rights
programmes
income
RMB’000
RMB’000
RMB’000
Turnover
62,087
4,808
10,094
Segment results
37,020
623
5,471
Other revenues
Unallocated costs
Operating profit
Finance costs
Share of profit of:
associated companies
a cooperative joint venture
Profit before taxation
Taxation
Profit after taxation
Minority interests
Profit attributable to shareholders
Segment assets
104,161
20,455
8,866
Investments in associated companies
Unallocated assets
Total assets
Segment liabilities
(1,850)
(15,280)
(11,339)
Unallocated liabilities
Total liabilities
Capital expenditure
3,001
71
9
Depreciation
(1,923)
(161)
(15)
Amortisation of programmes
and film rights
(21,588)
—
—
Amortisation of goodwill
Unallocated
Impairment charges recognised

Total
RMB’000
76,989
43,114
600
(25,313)
18,401
(12,481)
2,621
2,000
10,541
(6,341)
4,200
(87)
4,113
133,482
261,024
96,919
491,425
(28,469)
(440,009)
(468,478)
3,081
(2,099)
(21,588)
(8,350)
—

— 169 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

5. OPERATING (LOSS)/PROFIT

Operating (loss)/profit is stated after charging the following:

		Year ended 31 December
	2002	2003	2004
	RMB’000	RMB’000	RMB’000
Cost of services provided	63	4,632	8,133
Depreciation
— owned fixed assets	734	1,047	1,272
— leased fixed assets	47	299	827
Auditors’ remuneration_(Note 35(a))_	—	—	—
Staff costs (including directors’
remuneration,Note 8)	1,513	2,761	4,585
Operating lease rentals — land and buildings	1,663	2,123	2,296
Amortisation of programmes and film rights	3,225	14,286	21,588
Amortisation of goodwill	100	99	8,350
Provision for bad and doubtful debts	—	123	—
Write-off of programmes and film rights	80	—	—
Write-off of other receivables	—	600	—
Loss on disposal of fixed assets	91	305	51
Provision for impairment of programmes
and film rights	5,212	25,412	—
Provision for impairment of a long-term
investment	1,791	259	—

6. (LOSS)/PROFIT ATTRIBUTABLE TO SHAREHOLDERS

The (loss)/profit attributable to shareholders is dealt with in the financial statements of Media Company to the extent of approximately RMB(12,298,000), RMB(48,191,000) and RMB12,104,000, respectively, for each of the year ended 31 December 2002, 2003 and 2004.

7. DIVIDEND

No dividend had been paid or declared by Media Company for the Relevant Periods.

8. STAFF COSTS (INCLUDING DIRECTORS’ EMOLUMENTS)

Wages and salaries Staff welfares Social security costs Medical benefits Pension costs — state-sponsored retirement plan	Year 2002 RMB’000 1,230 125 43 41 74 1,513	ended 31 December 2003 2004 RMB’000 RMB’000 2,086 3,278 330 500 70 146 140 386 135 275 2,761 4,585	ended 31 December 2003 2004 RMB’000 RMB’000 2,086 3,278 330 500 70 146 140 386 135 275 2,761 4,585
			4,585

— 170 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

9. FINANCE COSTS

Interest expense on: Bank loans (see Note 24 for details of bank loans) Loan from immediate holding company not wholly repayable with five years Finance lease Other short-term loans wholly repayable within five year (see Note 24 for details of other short-term loans)	Year 2002 RMB’000 — — 33 499 532	ended 31 December 2003 2004 RMB’000 RMB’000 892 4,583 369 6,011 177 213 1,328 1,674 2,766 12,481	ended 31 December 2003 2004 RMB’000 RMB’000 892 4,583 369 6,011 177 213 1,328 1,674 2,766 12,481
			12,481

10. TAXATION

(a) Income tax

The amount of taxation charged to the consolidated profit and loss account represents:

PRC Enterprise Income Tax_(note i) — current taxation Deferred taxation(Note 28)_ Share of taxation attributable to: associated companies Taxation charge	Year 2002 RMB’000 62 — 62 18 80	ended 31 December 2003 2004 RMB’000 RMB’000 1,186 6,257 (955) (1,934 231 4,323 17 2,018 248 6,341	ended 31 December 2003 2004 RMB’000 RMB’000 1,186 6,257 (955) (1,934 231 4,323 17 2,018 248 6,341
			4,323 2,018
			6,341

(i) PRC Enterprise Income Tax

Media Group is subject to PRC Enterprise Income Tax at a rate of 33% on its assessable profit during the Relevant Periods.

(ii) Hong Kong profits tax

No Hong Kong profits tax was provided as Media Group had no assessable profit arising in or derived from Hong Kong for the Relevant Periods.

— 171 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

The taxation on Media Group’s (loss)/profit before taxation differs from the theoretical amount that would arise using the taxation rate of the home country of Media Company as follows:

Year 2002 RMB’000 (Loss)/profit before taxation (13,979) Calculated at a taxation rate of 33% (4,613) Income not subject to taxation (10) Expenses not deductible for taxation purposes 3,308 Utilisation of previously unrecognised tax losses — Unrecognised tax losses 1,380 Income not subject to taxation and/or expenses not deductible for taxation purposes for associated companies, net 5 Others 10 Taxation charge 80	ended 31 December 2003 2004 RMB’000 RMB’000 (48,758) 10,541 (16,090) 3,478 — — 11,510 8,195 — (6,220 4,840 — 40 1,154 (52) (266 248 6,341	ended 31 December 2003 2004 RMB’000 RMB’000 (48,758) 10,541 (16,090) 3,478 — — 11,510 8,195 — (6,220 4,840 — 40 1,154 (52) (266 248 6,341
		3,478 — 8,195 (6,220 — 1,154 (266
		6,341

(b) Other taxes

Other PRC taxes comprised non-income tax related charges, including Business Tax, Cultural Development Fee and surcharges based on Business Tax. Business Tax is charged at a rate of 5% on Media Group’s revenue over the Relevant Periods whereas Cultural Development Fee is charged at 3% on Media Group’s revenue during the Relevant Periods. Surcharges are charged at 10% on Business Tax for the Relevant Periods.

11. DIRECTORS’, SUPERVISORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS

(a) Directors’ emoluments

The aggregate amounts of emoluments payable to directors of Media Company for the Relevant Periods are as follows:

Fees Basic salaries, housing benefits, other allowances and benefits in kind Contributions to defined contribution plans	Year 2002 RMB’000 — 41 — 41	ended 31 December 2003 2004 RMB’000 RMB’000 — — 153 1,004 5 10 158 1,014	ended 31 December 2003 2004 RMB’000 RMB’000 — — 153 1,004 5 10 158 1,014
			1,014

— 172 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

The emoluments of the directors of Media Company fell within the following bands:

		Year ended 31 December
	2002	2003	2004
Emoluments bands
HK$Nil — HK$1,000,000
(equivalent to RMB Nil
— RMB1,060,000)	3	7	7

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

No emoluments were paid by Media Group to the directors as an inducement to join or upon joining Media Group, or as compensation for loss of office during the Relevant Periods.

(b) Supervisors’ emoluments

The aggregate amounts of emoluments payable to supervisors of Media Company for the Relevant Periods are as follows:

Basic salaries, housing benefits, other allowances and benefits in kind Contributions to defined contribution plans	Year 2002 RMB’000 — — —	ended 31 December 2003 2004 RMB’000 RMB’000 6 48 — — 6 48	ended 31 December 2003 2004 RMB’000 RMB’000 6 48 — — 6 48
			48

The emoluments of the supervisors of Media Company fell within the following bands:

		Year ended 31 December
	2002	2003	2004
Emoluments bands
HK$Nil — HK$1,000,000
(equivalent to RMB Nil
— RMB1,060,000)	—	1	1

There was no arrangement under which a supervisor of Media Company waived or agreed to waive any remuneration during the Relevant Periods.

No emoluments were paid by Media Group to the supervisors as an inducement to join or upon joining Media Group, or as compensation for loss of office during the Relevant Periods.

— 173 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

(c) Five highest paid individuals

The five individuals whose emoluments were the highest in Media Group for the Relevant Periods include 1, 1 and 2 directors of Media Company respectively whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining 4, 4 and 3 individuals for the Relevant Periods are as follows:

Basic salaries, housing benefits, other allowances and benefits in kind Contributions to defined contribution plans	Year 2002 RMB’000 142 3 145	ended 31 December 2003 2004 RMB’000 RMB’000 285 349 16 18 301 367	ended 31 December 2003 2004 RMB’000 RMB’000 285 349 16 18 301 367
			367

The emoluments fell within the following bands:

		Year ended 31 December
	2002	2003	2004
Emoluments bands
HK$Nil — HK$1,000,000
(equivalent to RMB Nil
— RMB1,060,000)	4	4	3

— 174 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

12. FIXED ASSETS

Leasehold improvements RMB’000 Cost At 1 January 2002 512 Additions — Disposals — At 31 December 2002 512 Additions 1,415 Disposals — At 31 December 2003 1,927 Additions — Disposals — At 31 December 2004 1,927 ---------------- Accumulated depreciation At 1 January 2002 410 Charge for the year 102 Disposals — At 31 December 2002 512 Charge for the year 167 Disposals — At 31 December 2003 679 Charge for the year 456 Disposals — At 31 December 2004 1,135 ---------------- Net book value At 31 December 2002 — At 31 December 2003 1,248 At 31 December 2004 792	Media Group Motor Properties vehicles RMB’000 RMB’000 4,172 2,384 — 3,702 — (225) 4,172 5,861 — 3,579 — (580) 4,172 8,860 — 1,824 — — 4,172 10,684 ---------------- ---------------- 435 436 209 343 — (54) 644 725 209 758 — (218) 853 1,265 156 995 — — 1,009 2,260 ---------------- ---------------- 3,528 5,136 3,319 7,595 3,163 8,424	Furniture, fixtures and equipment RMB’000 702 269 — 971 866 — 1,837 1,257 (171) 2,923 ---------------- 244 127 — 371 212 — 583 492 (68) 1,007 ---------------- 600 1,254 1,916	Total RMB’000 7,770 3,971 (225) 11,516 5,860 (580) 16,796 3,081 (171) 19,706 ---------------- 1,525 781 (54) 2,252 1,346 (218) 3,380 2,099 (68) 5,411 ---------------- 9,264 13,416 14,295

— 175 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Media Company

Leasehold improvements RMB’000 Cost At 1 January 2002 512 Additions — Disposals — At 31 December 2002 512 Additions 1,415 Disposals — At 31 December 2003 1,927 Additions — At 31 December 2004 1,927 ---------------- Accumulated depreciation At 1 January 2002 410 Charge for the year 102 Disposals — At 31 December 2002 512 Charge for the year 167 Disposals — At 31 December 2003 679 Charge for the year 456 At 31 December 2004 1,135 ---------------- Net book value At 31 December 2002 — At 31 December 2003 1,248 At 31 December 2004 792	Properties RMB’000 4,172 — — 4,172 — — 4,172 — 4,172 ---------------- 435 209 — 644 209 — 853 156 1,009 ---------------- 3,528 3,319 3,163	Motor vehicles RMB’000 2,012 2,876 (225) 4,663 3,411 (580) 7,494 1,824 9,318 ---------------- 430 259 (54) 635 616 (218) 1,033 871 1,904 ---------------- 4,028 6,461 7,414	Furniture, fixtures and equipment RMB’000 424 213 — 637 818 — 1,455 1,177 2,632 ---------------- 100 92 — 192 166 — 358 440 798 ---------------- 445 1,097 1,834	Total RMB’000 7,120 3,089 (225) 9,984 5,644 (580) 15,048 3,001 18,049 ---------------- 1,375 662 (54) 1,983 1,158 (218) 2,923 1,923 4,846 ---------------- 8,001 12,125 13,203

— 176 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Media Group’s and Media Company’s interests in properties outside Hong Kong at their net book values are analysed as follows:

					Meida Group	and Meida	Company
					31	December
					2002	2003	2004
					RMB’000	RMB’000	RMB’000
Leases of between	10	to	50	years	3,528	3,319	3,163

The net book values of fixed assets of Media Group held under finance leases were approximately RMB3,602,000, RMB6,393,000 and RMB7,200,000 as at 31 December 2002, 2003 and 2004, respectively.

The net book values of fixed assets of Media Company held under finance leases were approximately RMB2,803,000, RMB5,508,000 and RMB6,409,000 as at 31 December 2002, 2003 and 2004, respectively.

Certain fixed assets with cost of approximately RMB6,400,000, were pledged as security for certain loans of Media Company as at 31 December 2002, 2003 and 2004, respectively (see Note 24b) .

13. PROGRAMMES AND FILM RIGHTS

Carrying amount, net of accumulated amortisation and impairment: Balance, beginning of year Additions Amortisation Disposals Write-off Provision for impairment losses Balance, end of year Analysis of the carrying amount is as follows: At cost Accumulated amortisation and impairment losses	2002 RMB’000 26,593 30,043 (3,225) — (80) (5,212) 48,119 99,380 (51,261) 48,119	Media Group 31 December 2003 RMB’000 48,119 28,703 (14,286) — — (19,468) 43,068 128,083 (85,015) 43,068	2004 RMB’000 43,068 53,435 (21,588 — — —
			74,915

			181,518 (106,603
			74,915

— 177 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Carrying amount, net of accumulated amortisation and impairment losses: Balance, beginning of year Additions Amortisation Disposals Write-off Provision for impairment losses Balance, end of year Analysis of the carrying amount is as follows: At cost Accumulated amortisation and impairment losses INTERESTS IN SUBSIDIARIES Unlisted investments, at cost Amounts due from subsidiaries Amount due to a subsidiary	Media Company 31 December 2002 2003 RMB’000 RMB’000 26,593 48,119 30,043 29,093 (3,225) (14,286) — — (80) — (5,212) (19,468) 48,119 43,458 99,380 128,473 (51,261) (85,015) 48,119 43,458 Media Company 31 December 2002 2003 RMB’000 RMB’000 2,000 2,000 1,903 3,005 — — 3,903 5,005	2004 RMB’000 43,458 54,535 (21,588) — — — 76,405 183,008 (106,603) 76,405 2004 RMB’000 3,780 7,385 (1,090) 10,075

14. INTERESTS IN SUBSIDIARIES

The carrying value of the unlisted investments is based on Media Company’s directors’ assessment on the values of the underlying separable net assets of the subsidiaries when Media Company became the holding company of Media Group.

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

The directors of Media Company are of the opinion that the underlying values of these subsidiaries are not less than their carrying values at 31 December 2002, 2003 and 2004.

Particulars of the subsidiaries are set out in Note 35 to the financial statements.

— 178 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

15. INTERESTS IN ASSOCIATED COMPANIES

Share of net assets Goodwill on acquisition of associated companies less accumulated amortisation Net amount due to an associated company Investments at cost: Unlisted investments, in the PRC	Media Group 31 December 2002 2003 RMB’000 RMB’000 473 357 226 213 699 570 — — 699 570 Media Company 31 December 2002 2003 RMB’000 RMB’000 690 690	2004 RMB’000 104,362 156,662
		261,024 (10,301
		250,723

		2004 RMB’000 268,789

The balance with an associated company is unsecured, interest-free and has no fixed terms of repayment.

Included in the long-term prepayment balance as at 31 December 2003 is the prepaid investment costs of approximately RMB68,610,000 in relation to the acquisition of 海南海視旅遊衛視傳媒有限責任公司 (Hai Nan Haishi Tourist Satellite TV Media Co., Ltd.). As at 31 December 2004, the remaining consideration of approximately RMB158,099,000 remained unpaid and was included in current portion of investment cost payable (RMB135,000,000) and non-current portion of investment cost payable (RMB23,099,000) on the balance sheet as at the same date.

The associated companies at 31 December 2004 are as follows:

			Equity
	Place and date of		interest	Principal activities
	incorporation and		held	and place
Name	kind of legal entity	Registered capital	directly	of operation
海南海視旅遊衛視傳媒	The PRC, 3 June 2003,	RMB115,963,100	49%	Production of television
有限責任公司(Hai Nan	limited liability			programmes (other than
Haishi Tourist Satellite TV	company			news) for a satellite
Media Co., Ltd.), acquired on				television channel in
5 January 2004				Hainan province of
				the PRC
北京紫禁城三聯影視發行	The PRC, 4 November 1998,	RMB2,700,000	25.56%	Films distribution
有限公司(Beijing Forbidden	limited liability			in the PRC
City San Luen Film &	company
Television Company Limited),
acquired on 1 December 1999

— 179 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

The directors of Media Company are of the opinion that the underlying values of the associated companies are not less than their carrying values at 31 December 2002, 2003 and 2004.

Extracts of the operating results and financial position of the principal associated company, 海南海視旅遊衛視傳媒有限責任公司 (Hai Nan Haishi Tourist Satellite TV Media Co., Ltd.), which are based on its financial information for the year ended 31 December 2004 (the year of acquisition), are as follows:

Summary of results

Turnover Profit for the year Summary of balance sheet Non-current assets Current assets Current liabilities Non-current liabilities Shareholders’ funds	2002 RMB’000 — — 2002 RMB’000 — — — — —	31 December 2003 RMB’000 — — 31 December 2003 RMB’000 — — — — —	2004 RMB’000 80,062 1,035 2004 RMB’000 160,807 92,177 (21,286) (18,179) 213,519

The associated company had no material contingent liability as at 31 December 2004.

16. LONG-TERM INVESTMENTS

Unlisted investments, at cost _Less:_Provision for impairment losses Cost of investments, net	Media Group and Media Company 2002 2003 2004 RMB’000 RMB’000 RMB’000 3,791 24,050 24,050 (3,791) (4,050) (4,050) — 20,000 20,000

Included in the long-term prepayment balance as at 31 December 2002 is the prepaid investment cost of RMB10,000,000 in relation to the capital contribution to a cooperative joint venture.

The directors of Media Company are of the opinion that the underlying values of these long-term investments are not less than their carrying values at 31 December 2002, 2003 and 2004.

— 180 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Details of the long-term investment are as follows:

		Principal activities			Equity
	Country of	and place of	Total	Registered	interest held
Name	incorporation	operation	investment	capital	directly
北京鑫寶源影視投資	The PRC	Television drama	RMB20,000,000	RMB10,000,000	50%
有限公司(Beijing		production in the PRC		(note b)
Xin Bao Yuan Film &
Television Investment
Limited Liability
Company)(note a)
北京馨葉高爾夫俱樂部	The PRC	Golf club operation	RMB4,050,000	RMB30,000,000	13.5%
有限公司(Beijing		in the PRC
Xin Ye Golf Club
Limited Liability
Company)(note c)

note a:

Under the joint venture agreement of 北京鑫寶源影視投資有限公司 (Beijing Xin Bao Yuan Film & Television Investment Limited Liability Company), the joint venture period is 20 years. Media Group is entitled to fixed returns on its investments at RMB4,000,000 every two years over the joint venture period. Any excess of profit of this cooperative joint venture available for distribution over the fixed returns will not be shared by Media Group and is attributable to other joint venture partners. Upon expiration of the joint venture period, Media Group is entitled to share the remaining assets of this cooperative joint venture according to the joint venture agreement.

note b:

Up to 31 December 2004, total capital contribution made by the joint venture partners amounted to RMB40,000,000, of which each joint venture partner contributed RMB20,000,000 respectively. As at 31 December 2004, the capital verification procedures are still in-progress and thus the registered capital of this company remained at RMB10,000,000.

note c:

Media Group does not involve in the operations of this company nor it has business transactions with it during the Relevant Periods.

— 181 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

17. GOODWILL

Carrying amount, net of accumulated amortisation and impairment losses: Balance, beginning of year Acquisition of subsidiary Amortisation Balance, end of year Analysis of the carrying amount is as follows: At cost Accumulated amortisation and impairment losses	2002 RMB’000 1,697 — (87) 1,610 1,733 (123) 1,610	Media Group 31 December 2003 RMB’000 1,610 — (86) 1,524 1,733 (209) 1,524	2004 RMB’000 1,524 849 (102) 2,271 2,582 (311) 2,271

18. TRADE RECEIVABLES

The majority of Media Group’s and Media Company’s sales are on credit with credit terms of 30-90 days.

At 31 December 2002, 2003 and 2004, the aging analysis of the trade receivables is as follows:

0 — 3 months 4 — 6 months Over 6 months _Less:_provision for bad and doubtful debts	Media Group 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 507 1,782 19,397 360 264 3,159 635 2,074 1,024 1,502 4,120 23,580 — (123) (123) 1,502 3,997 23,457	Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 500 1,677 18,811 360 264 3,159 — 1,774 924 860 3,715 22,894 — (123) (123) 860 3,592 22,771

— 182 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

19. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Rental deposits Advances to employees (note a) Advances to third parties (note b) Others	Media Group 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 899 952 1,064 462 2,864 1,608 9,818 25,658 24,539 1,385 696 72 12,564 30,170 27,283	Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 899 952 1,016 15 686 679 9,818 25,549 24,164 1,272 554 44 12,004 27,741 25,903	Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 899 952 1,016 15 686 679 9,818 25,549 24,164 1,272 554 44 12,004 27,741 25,903
			25,903

Note (a): Included in advances to employees are advances to officers as follows:

Zhao Yue, director of Media Company Zhang Huaijie, senior management Wang Xiaojing, shareholder of a subsidiary Ying Da, shareholder of a subsidiary Wang Yi, director of Media Company	Maximum amount outstanding during the year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — 210 — 913 — 10 10 10 — 531 807 — 264 —	Amount outstanding at 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — 210 — 913 — 10 10 10 — 531 350 — 95 —	Amount outstanding at 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — 210 — 913 — 10 10 10 — 531 350 — 95 —

			—

			10

			350

			—

The advances to officers are unsecured, interest-free and have no fixed terms of repayment.

Note (b): The advances to third parties mainly represented loans to enterprises, which are interestfree and due within one year. Certain loans were pledged by the assets of these enterprises. Including in the loans to third party enterprises is also a loan to 中財國企投資有限公司 , the guarantor of the bank loan, amounting to RMB3,706,000 as at 31 December 2004.

— 183 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

20. PROGRAMMES AND FILM PRODUCTION IN PROGRESS

Balance, beginning of year Additions Transfer to programmes and film rights _Less:_Provision for impairment losses Balance, end of year _Less:_Portion classified as current assets Balance, beginning of year Additions Transfer to programmes and film rights _Less:_Provision for impairment losses Balance, end of year _Less:_Portion classified as current assets	Media Group 31 December 2002 2003 RMB’000 RMB’000 9,529 24,516 24,470 30,735 (9,483) (20,331) — (5,944) 24,516 28,976 (3,736) (6,459) 20,780 22,517 Media Company 31 December 2002 2003 RMB’000 RMB’000 8,629 20,780 20,735 24,277 (8,584) (16,596) — (5,944) 20,780 22,517 — — 20,780 22,517	2004 RMB’000 28,976 23,108 (23,218 —
		28,866 (16,911
		11,955

		2004 RMB’000 22,517 8,527 (19,089 —
		11,955 —
		11,955

21. TRADE PAYABLES

At 31 December 2002, 2003 and 2004, the aging analysis of trade payables is as follows:

0 — 3 months 4 — 6 months Over 6 months	Media Group 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 39 936 628 — — — 2,774 — 36 2,813 936 664	Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 39 936 597 — — — 2,774 — — 2,813 936 597	Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 39 936 597 — — — 2,774 — — 2,813 936 597
			597

— 184 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

22. OTHER PAYABLES, ACCRUED LIABILITIES AND RECEIPT IN ADVANCE

(a) Other payables and accrued liabilities as at 31 December 2002, 2003 and 2004:

Advances from third parties Salary and staff welfare payables Others	Media Group 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 63,841 12,141 9,691 306 465 859 1,433 3,390 1,876 65,580 15,996 12,426	Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 63,841 12,141 9,691 201 278 662 637 2,967 1,552 64,679 15,386 11,905	Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 63,841 12,141 9,691 201 278 662 637 2,967 1,552 64,679 15,386 11,905
			11,905

(b) Receipt in advance mainly represented receipt of payment for television programmes prior to production.

23. FINANCE LEASE PAYABLE

Non-cancellable commitments under finance leases at the balance sheet date are as set out below:

Amount payable: Within one year In the second to fifth year, inclusive Total minimum lease payments Future finance charges Total net finance lease payable _Less:_Portion classified as current liabilities Long-term portion of finance lease payable	2002 RMB’000 535 1,967 2,502 (280) 2,222 (433) 1,789	Media Group 31 December 2003 RMB’000 1,452 4,368 5,820 (557) 5,263 (1,232) 4,031	2004 RMB’000 1,455 2,888
			4,343 (336
			4,007 (1,283
			2,724

— 185 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Amount payable: Within one year In the second to fifth year, inclusive Total minimum lease payments Future finance charges Total net finance lease payable _Less:_Portion classified as current liabilities Long-term portion of finance lease payable	Media Company 31 December 2002 2003 RMB’000 RMB’000 414 1,298 1,540 3,943 1,954 5,241 (220) (502) 1,734 4,739 (335) (1,101) 1,399 3,638	2004 RMB’000 1,300 2,643
		3,943 (305
		3,638 (1,146
		2,492

24. SHORT-TERM LOANS

Short-term bank loans_(a) Other short-term loans(b)_	Media Group and Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — 50,000 75,000 31,000 6,412 6,412 31,000 56,412 81,412	Media Group and Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — 50,000 75,000 31,000 6,412 6,412 31,000 56,412 81,412
		81,412

(a) As at 31 December 2003 and 2004, short-term bank loans of RMB50 million and RMB5 million, respectively were guaranteed by 中財國企投資有限公司 , a third party state-owned enterprise, with a guarantee term of three years commencing on 2 September 2003 at no cost as an incentive to encourage the PRC enterprises to obtain financing through drawing banking facilities.

As at 31 December 2004, another short-term bank loan of RMB70 million was guaranteed by 中國保利集團公司, a related company with a guarantee term of three years commencing on 31 March 2004 at no cost.

(b) Certain fixed assets, programmes and film rights, investment cost in a subsidiary, investment cost in an associated company and long-term investment of Media Company with costs amounted to approximately RMB6,400,000, RMB47,800,000, RMB2,500,000, RMB400,000 and RMB1,800,000, respectively, were pledged against other short-term loans granted to Media Company by independent third parties of RMB25,000,000, RMB6,412,000, RMB6,412,000 as at 31 December 2002, 2003 and 2004, respectively.

Saved as disclosed, the rest of the loans are unsecured. All bank loans are interest-bearing at commercial rates.

— 186 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

25. BALANCES WITH RELATED PARTIES — MEDIA GROUP AND MEDIA COMPANY

The loan from immediate holding company amounted to approximately RMB80,000,000 and RMB100,000,000 as at 31 December 2003 and 31 December 2004, respectively, is secured by the interests of other two shareholders in Media Company, bear interest at 5.81% per annum and not repayable within the coming twelve months.

The amount due to a related company amounted to approximately RMB1,578,000 and RMB47,619,000 as at 31 December 2002 and 31 December 2003, respectively, and the amount due to a shareholder amounted to approximately RMB70,787,000 as at 31 December 2004 is unsecured, interest free and not repayable within the coming twelve months.

Included in the balances with related parties are trade receivables amounted to approximately RMB21,171,000 as at 31 December 2004, which aged less than three months. They are unsecured, interest-free and have no fixed terms of repayment.

Included in the balances with related parties are trade payables amounted to approximately RMB10,267,000 as at 31 December 2002, which aged less than one year. They are unsecured, interest-free and have no fixed terms of repayment.

Save as disclosed, the balances with related companies, immediate holding company, a minority shareholder and shareholders are unsecured, interest-free and have no fixed terms of repayment.

26. SHARE CAPITAL

At 1 January 2002 and 31 December 2002 Increase of registered and paid-up capital_(note i) As at 31 December 2003 Increase of registered and paid-up capital(note ii)_ As at 31 December 2004	Registered RMB’000 20,000 20,820 40,820 79,180 120,000	Paid-up capital RMB’000 20,000 20,820
		40,820 79,180
		120,000

(i) On 21 November 2003, Media Company increased its registered capital from RMB20,000,000 to RMB40,820,000 which increase was fulfilled solely by the cash contribution from Poly Culture. In addition, an amount of RMB40,380,000, being the excess of the total cash contribution from Poly Culture over the increase in paid-up capital, was credited to capital reserve account of Media Company. Media Company became 51% owned by Poly Culture, 39.2% owned by Mr. Dong Ping and 9.8% owned by Ms. Zhao Yue immediately pursuant to the completion of the increase in the registered share capital.
(ii) On 27 September 2004, Media Company further increased its registered capital from RMB40,820,000 to RMB120,000,000 which increase was fulfilled by the realisation of the capital reserve of RMB40,380,000 and cash contribution of RMB38,800,000 from its shareholders.

— 187 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

27. RESERVES

Media Group

Statutory surplus reserve RMB’000 At 1 January 2002 — Loss attributable to shareholders — At 31 December 2002 — Additions to capital reserve from existing shareholders (see Note 26 (i)) — Loss attributable to shareholders — At 31 December 2003 — Additions to capital reserve from existing shareholders — Transfers of capital reserve to paid-up capital (see Note 26 (ii)) — Profit attributable to shareholders — At 31 December 2004 — Reserves retained by/(deficit attributed to): Media Company and subsidiaries — Associated company — At 31 December 2002 — Reserves retained by/(deficit attributed to): Media Company and subsidiaries — Associated company — At 31 December 2003 — Reserves retained by/(deficit attributed to): Media Company and subsidiaries — Associated companies — At 31 December 2004 —	Statutory public welfare fund RMB’000 7 — 7 — — 7 — — — 7 7 — 7 7 — 7 7 — 7	Capital Accumulated reserve losses RMB’000 RMB’000 — (48,343) — (13,859) — (62,202) 40,380 — — (49,006) 40,380 (111,208) 10,035 — (40,380) — — 4,113 10,035 (107,095) — (62,251) — 49 — (62,202) 40,380 (111,141) — (67) 40,380 (111,208) 10,035 (107,631) — 536 10,035 (107,095)	Total RMB’000 (48,336) (13,859) (62,195) 40,380 (49,006) (70,821) 10,035 (40,380) 4,113 (97,053) (62,244) 49 (62,195) (70,754) (67) (70,821) (97,589) 536 (97,053)

— 188 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

Media Company

At 1 January 2002 Loss attributable to shareholders At 31 December 2002 Additions to capital reserve from existing shareholders (see note 26 (i)) Loss attributable to shareholders At 31 December 2003 Additions to capital reserve from existing shareholders Transfers of capital reserve to paid-up capital (see note 26 (ii)) Profit attributable to shareholders At 31 December 2004	Statutory surplus reserve RMB’000 — — — — — — — — — —	Statutory public welfare fund RMB’000 — — — — — — — — — —	Capital Accumulated reserve losses RMB’000 RMB’000 — (48,534) — (12,298) — (60,832) 40,380 — — (48,191) 40,380 (109,023) 10,035 — (40,380) — — 12,104 10,035 (96,919)	Total RMB’000 (48,534) (12,298) (60,832) 40,380 (48,191) (68,643) 10,035 (40,380) 12,104 (86,884)

According to the Company Law of the PRC, before distributing the profit attributable to shareholders of each year, Media Group shall set aside 10% of its profit attributable to shareholders for the statutory surplus reserve (except where the reserve balance has reached 50% of Media Company’s registered capital), and 5-10% of its profit attributable to shareholders for the statutory public welfare fund. These reserves cannot be used for purposes other than those for which they are created and are not distributable as cash dividends.

Appropriation to statutory surplus reserve and statutory public welfare fund should be made based on the amount of profits reflected in the financial statements prepared in accordance with the PRC accounting standards and regulations.

Profit attributable to shareholders of Media Company is appropriated in the following sequence:

(i) set off against prior years’ losses;
(ii) appropriation to statutory public welfare fund and statutory surplus reserve; and
(iii) distribution of dividends.

No appropriation to reserves was made during the Relevant Periods since Media Company and Media Group had accumulated deficits as at 31 December 2002, 2003 and 2004.

— 189 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

28. DEFERRED TAXATION

Deferred taxation is calculated in full on temporary differences under the liability method using a principal taxation rate of 33% for each of the year ended 31 December 2002, 2003 and 2004.

The movement on deferred tax assets is as follows:

At 1 January Deferred taxation credited to profit and loss account_(Note 10)_ At 31 December	Media Group and Media Company 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — 955 — 955 1,934 — 955 2,889	Media Group and Media Company 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — 955 — 955 1,934 — 955 2,889
		2,889

There was no offsetting of deferred tax assets and liabilities during the Relevant Periods. All deferred tax assets are recognised from temporary differences in amortisation of programmes and film rights arising between the tax bases and the carrying amounts in the consolidated balance sheet as at 31 December 2002, 2003 and 2004 and is probable that future taxable profit will be available against which the temporary differences can be utilised.

All deferred tax assets as at 31 December 2003 and 2004 are to be recovered after more than 12 months.

— 190 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

29. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENTS

(a) Reconciliation of (loss)/profit before taxation to net cash from (used in) operations

Year
2002
RMB’000
(Loss)/profit before taxation
(13,979)
Interest income
(14)
Interest expense
532
Depreciation
781
Amortisation of goodwill
100
Amortisation of programmes
and film rights
3,225
Provision for impairment loss and
write-off of programmes and
film rights
5,292
Loss on disposal of fixed assets
91
Provision for impairment loss on a
long-term investment
1,791
Share of (profit)/loss of associated
companies, net of tax
(18)
Operating (loss)/profit before
working capital changes
(2,199)
Decrease/(increase) in trade
receivables, prepayments,
deposits and other receivables
11,190
(Increase)/decrease in programmes
and film production in progress
(14,987)
Decrease/(increase) in amounts due
from related companies
4,641
Decrease/(increase) in amounts due
from associated companies
1,930
Increase/(decrease) in trade payables,
accrued liabilities, other payables
and other taxes payables
52,833
(Decrease)/increase in receipt in advance
(46,908)
Increase/(decrease) in amounts due
to related companies
10,267
Increase in amount due from/to
a shareholder
383
Increase in amount due to
a minority shareholder
200
Increase in amount due to immediate
holding company
—
Increase in amount due to an associated
company
—
Net cash from/(used in) operations
17,350

ended 31 December
2003
2004
RMB’000
RMB’000
(48,758)
10,541
(22)
(177)
2,766
12,481
1,346
2,099
99
8,350
14,286
21,588
25,412
—
305
51
259
—
116
(603)
(4,191)
54,330
(20,101)
(16,257)
(10,404)
110
(11,314)
(13,272)
—
(351)
(50,860)
(3,149)
6,324
5,020
(10,167)
(27)
3,196
(34,627)
—
—
1,800
—
—
10,652
(95,717)
2,429

— 191 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

(b) Major non-cash transaction

(i) During the year ended 31 December 2004, Media Company invested in an associated company. As at 31 December 2004, consideration of approximately RMB158,099,000 remained unpaid and was included in current portion of investment cost payable (RMB135,000,000) and non-current portion of investment cost payable (RMB23,099,000) on the balance sheet as at the same date.
(ii) During the year ended 31 December 2004, Media Company increased its paid-up capital by RMB79,180,000 which was partially fulfilled by the realisation of the capital reserve of RMB40,380,000.

(c) Analysis of changes in financing

Share capital RMB’000 At 1 January 2002 20,000 Cash inflow from financing — Share of net loss by minority shareholders — At 31 December 2002 20,000 Cash inflow from financing — Contribution by shareholders 20,820 At 31 December 2003 40,820 Transfers of capital reserve to share capital (see note b(ii)) 40,380 Cash inflow from financing — Non-cash transaction (see note b(i)) — Contribution by shareholders 38,800 Share of net profit by minority shareholders — Acquisition of a subsidiary (see note d) — At 31 December 2004 120,000	Capital reserves RMB’000 — — — — — 40,380 40,380 (40,380) — — 10,035 — — 10,035	Short-term loans RMB’000 6,000 25,000 — 31,000 25,412 — 56,412 — 25,000 — — — — 81,412	Long-term loans RMB’000 — 1,578 — 1,578 126,041 — 127,619 — 43,168 23,099 — — — 193,886	Minority interests RMB’000 200 — (200) — — — — — — — — 87 895 982

— 192 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

(d) Acquisition of a subsidiary

Net assets acquired Trade receivables Other receivables and prepayments Cash and bank balances Other payables and accruals Income tax payable Minority shareholders’ interests Goodwill Cash consideration, satisfied by cash	2004 RMB’000 246 70 1,740 (191 (39 (895
	931 849
	1,780

30. COMMITMENTS

(a) Commitments under operating leases:

At 31 December 2002, 2003 and 2004, Media Group and Media Company had future aggregate minimum lease payments under non-cancellable operating leases as follows:

Land and buildings: Not later than one year Later than one year and not later than five years	Media Group and Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 1,644 3,544 2,467 — 5,756 1,458 1,644 9,300 3,925	Media Group and Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 1,644 3,544 2,467 — 5,756 1,458 1,644 9,300 3,925
		3,925

(b) Capital commitments for property, plant and equipment:

Authorised but not contracted for Contracted but not provided for	Media Group and Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — — — 485 — — 485 —	Media Group and Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — — — 485 — — 485 —
		—

— 193 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

(c) Commitments for programme and film products:

Authorised but not contracted for Contracted but not provided for	Media Group and Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — — 1,699 19,958 52,217 1,699 19,958 52,217	Media Group and Media Company 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 — — — 1,699 19,958 52,217 1,699 19,958 52,217
		52,217

(d) Other commitments:

On 16 December 2004, Media Company entered into a non-legally binding letter of intent with 北京北廣傳媒集團有限公司 (Beijing Bei Guang Media Group Co., Ltd) in relation to the proposed establishment of a joint venture in the PRC. This joint venture proposed to be established in the PRC will be engaged in the mobile phone television business. It is expected that the registered capital of this joint venture will not be less than RMB50 million. The terms of the proposed investment have yet to be determined and this investment is subject to approvals by the relevant PRC authorities and formal agreement having been entered into in relation thereto.

(e) Save as disclosed, Media Group and Media Company had no other significant commitments at 31 December 2002, 2003 and 2004.

31. RELATED PARTY TRANSACTIONS

Related party transactions carried out during the Relevant Periods are as follows:

		Year ended 31 December
	2002	2003	2004
	RMB’000	RMB’000	RMB’000
Interest expense on loan from
immediate holding company_(Note 25)_	—	369	6,011
Licensing and sub-licensing of film
rights to related companies	227	59	16,171
Licensing and sub-licensing of
programmes to related companies	—	—	18,600
Rental income from an associated company	—	—	360
Purchase of film rights
from related companies	13,322	—	5,500

Save as disclosed above and in Notes 9, 14, 15, 19, 24 and 25, no other material related party transactions have been entered into by Media Group. The directors of Media Company are of the opinion that the above transactions were conducted on terms as agreed between the related parties and Media Group.

32. BANKING FACILITIES

Media Group and Media Company have aggregate banking facilities amounted to RMB50,000,000 and RMB75,000,000 as at 31 December 2003 and 2004, respectively. All facilities of Media Group and Media Company were fully utilised as at 31 December 2003 and 2004.

— 194 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

33. CONTINGENT LIABILITIES

Media Group and Media Company had no material contingent liabilities as at 31 December 2002, 2003 and 2004.

34. SUBSEQUENT EVENTS

Save as disclosed in the notes to the financial statements, Media Group and the Media Company have the following significant subsequent events:

(a) On 16 December 2004, Media Company entered into a subscription agreement with 北京傳媒移動電視有限公司 (Beijing Media Mobile Phone Television Co., Ltd.) and 北京瑞特影音貿易公司 (Beijing RuiTe Audio Vision Trading Company) in relation to the subscription of the registered capital of 北京北廣傳媒集成電視有限公司 (Beijing BeiGuang Media JiCheng Television Co., Ltd.) (“JiCheng”). Pursuant to the agreement, Media Company will subscribe for 30% equity interest in JiCheng at a total consideration of RMB30 million. The subscription agreement was terminated on 17 March 2005 as the parties to the agreement failed to reach a consensus on the future operational structure of JiCheng. No payment has been made by Media Company under the subscription agreement.
(b) On 18 April 2005, Media Company entered into a share transfer agreement with 北京華億聯盟文化傳媒投資有限公司 (Beijing Hua Yi Union Cultural Media Investment Company Limited), being an entity 50% owned by Mr. Dong Ping, a director and shareholder of Media Company, in relation to the disposal of its entire equity interest in 北京紫禁城三聯影視發行有限公司 (Beijing Forbidden City San Luen Film & Television Company Limited) (“San Luen”), an associated company of Media Company, for a consideration of RMB690,000.

35. PARTICULARS OF SUBSIDIARIES

The table below lists out the subsidiaries of Media Company:

				Equity
	Place and date of	Principal activities		interest
	incorporation and	and place	Registered	directly
Name	kind of legal entity	of operation	capital	held	Auditors
北京英氏影視藝術有限責任公司	The PRC, 18 January	Television drama	RMB500,000	60%	(a)
(Beijing Ying Shi Film &	1995, limited	production,
Television Art Limited Liability	liability company	the PRC
Company), acquired on 20 July 2001
北京華億千思廣告有限公司	The PRC, 16 July	Advertisement	RMB5,000,000	55%	(a)
(Beijing Hua Yi Qian Si Advertising	2001, limited	production,
Company Limited),	liability company	the PRC
acquired on 26 December 2001
北京華億山和水廣告有限公司	The PRC, 12 April	Advertisement	RMB1,020,000	51%	(a)
(Beijing Hua Yi Shan He Shui	2002, limited	production,
Advertising Company Limited),	liability company	the PRC
acquired on 3 September 2004

(a) No statutory audited financial statements were prepared for these companies since their respective dates of incorporation.

— 195 —

ACCOUNTANTS’ REPORT ON MEDIA GROUP

APPENDIX V

VI. SUBSEQUENT ACCOUNTS

No audited accounts have been prepared for Media Company and any of the companies comprising Media Group in respect of any period subsequent to 31 December 2004 and no dividend or distribution has been declared by Media Company in respect of any period subsequent to 31 December 2004.

Yours faithfully, PricewaterhouseCoopers Certified Public Accountants Hong Kong

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FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VI

1. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

A. Unaudited pro forma financial information

The following are the unaudited pro forma consolidated profit and loss account and cash flow statement of the Enlarged Group prepared based on the audited consolidated profit and loss account and cash flow statement of the Group for the year ended 31 December 2004 (being the most recently published consolidated profit and loss account and cash flow statement of the Group for a completed financial year) and the audited profit and loss account and cash flow statement of each of Orient Ventures, Anglo Alliance and Hao Ge for the year ended 31 December 2004, assuming that the transactions contemplated under the UHL SP Agreement had been completed on 1 January 2004.

An unaudited pro forma consolidated balance sheet of the Enlarged Group is also set out below which was prepared based on the audited consolidated balance sheet of the Group as at 31 December 2004 (being the latest published consolidated balance sheet of the Group) and the audited balance sheets of Orient Ventures, Anglo Alliance and Hao Ge as at 31 December 2004 assuming that the transactions contemplated under the UHL SP Agreement had been completed on 31 December 2004.

The unaudited pro forma consolidated balance sheet of the Enlarged Group and the unaudited pro forma statement of adjusted consolidated deficiency in net tangible assets and adjusted consolidated net assets of the Enlarged Group do not take into account any events or transactions which have occurred or taken place after 31 December 2004 including the Placing and Top-up Subscription of 654,850,000 Shares in February 2005 and any changes in the Company’s shareholding interest in DVN.

The unaudited pro forma financial information of the Enlarged Group was prepared in accordance with the requirements under Rule 4.29 of the Listing Rules and are for illustrative purposes only and because of its nature, it may not give a true picture of the financial performance and financial position of the Company or the Enlarged Group.

The information set out below does not form part of the historical consolidated financial information and is included here for reference purposes only. PricewaterhouseCoopers express no assurance on the following information.

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FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VI

Unaudited pro forma consolidated profit and loss account of the Enlarged Group

Turnover Cost of sales Gross profit Other revenues Marketing, selling and distribution costs Administration expenses Net gain on dilution of interest in an associated company Net other operating expenses Operating profit/(loss) Finance costs Share of results of associated companies Loss before taxation Taxation Loss after taxation Minority interests Loss attributable to shareholders	The Group HK$’000 38,630 (31,091) 7,539 6,280 (1,007) (16,564) 14,289 (1,944) 8,593 (2,563) (14,869) (8,839) (1,092) (9,931) — (9,931)	Orient Ventures HK$’000 — — — — — — — — — — — — — — — —	Year ended 31 December Anglo Alliance Hao Ge HK$’000 HK$’000 (Note 1) (Note 1) — — — — — — — 2 — — — (57) — — — — — (55) — — — — — (55) — — — (55) — — — (55)	2004 Sub-total HK$’000 38,630 (31,091) 7,539 6,282 (1,007) (16,621) 14,289 (1,944) 8,538 (2,563) (14,869) (8,894) (1,092) (9,986) — (9,986)	Pro forma adjustments HK$’000 Note — — — — — — — (22,772) 2 (22,772) — 4,830 3 (17,942) (2,953) 3 (20,895) — (20,895)	Pro forma Enlarged Group HK$’000 38,630 (31,091) 7,539 6,282 (1,007) (16,621) 14,289 (24,716) (14,234) (2,563) (10,039) (26,836) (4,045) (30,881) — (30,881)

Notes to unaudited pro forma consolidated profit and loss account:

For the purposes of the unaudited pro forma consolidated profit and loss account, the audited profit and loss accounts of Anglo Alliance and Hao Ge which are denominated in RMB have been translated into Hong Kong dollars at an exchange rate of RMB1.07 = HK$1.
Adjustment is made for the amortisation of estimated goodwill arising from the acquisition of the Anglo Alliance Group in accordance with Hong Kong Statement of Standard Accounting Practice No. 30 “Business Combinations” (“HK SSAP 30”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). For illustrative purposes, the estimated goodwill is amortised over 20 years on a straight-line basis.

For the purposes of the unaudited pro forma financial information of the Enlarged Group, the accounting treatment in respect of goodwill is in accordance with HK SSAP 30. Hong Kong Financial Reporting Standard No. 3 “Business Combinations” (“HKFRS 3”), which is issued by the HKICPA, will become effective for accounting period commencing on or after 1 January 2005 and will supersede HK SSAP 30. The acquisition of the Anglo Alliance Group will be accounted for by the Group using HKFRS 3, instead of HK SSAP 30, for the year ending 31 December 2005. Under HKFRS 3, amortisation of goodwill is prohibited, instead they are tested for impairment annually, or more frequently if events or changes in circumstances indicate a possible impairment. In addition, under HKFRS 3, certain new intangible assets in addition to the ones which are recognised under HK SSAP 30 will be identified and recognised.

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FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VI

Adjustment is made to include the share of results of the Media Group since 1 January 2004, but excluding an investment in San Luen held by the Media Company which has been disposed of by the Anglo Alliance Group as part of the Reorganisation, arising from the acquisition in accordance with HK SSAP No. 10 “Accounting for Investments in Associates” (“HK SSAP 10”) issued by the HKICPA.

Unaudited pro forma consolidated balance sheet of the Enlarged Group

Non-current assets Fixed assets Intangible assets Interests in associated companies Investment securities Other assets Current assets Inventories Trade receivables Preference dividend receivables Prepayments, deposits and other receivables Cash and bank balances Current liabilities Trade payables Other payables and accrued liabilities Taxation payable Amount due to a shareholder Net current assets/ (liabilities) Total assets less current liabilities Financed by: Share capital Reserves Shareholders’ funds Minority interest Non-current liabilities Note payable Amounts due to shareholders Amount due to a fellow subsidiary	The Group HK$’000 2,520 — 15,348 36,000 2,065 55,933 105 1,687 21,797 305 14,152 38,046 (338) (33,640) (1,092) — (35,070) 2,976 58,909 (35,151) (18,758) (53,909) — — — (5,000) (58,909)	Orient Ventures HK$’000 — — — — — — — — — — — — — — — (4) (4) (4) (4) — 4 4 — — — — 4	As at 31 Anglo Alliance HK$’000 (Note 1) — — — — — — — — — — — — — — — — — — — — — — — — — — —	December 2004 Hao Ge Sub-total HK$’000 HK$’000 (Note 1) — 2,520 — — 115,502 130,850 — 36,000 — 2,065 115,502 171,435 — 105 — 1,687 — 21,797 — 305 227 14,379 227 38,273 — (338) — (33,640) — (1,092) — (4) — (35,074) 227 3,199 115,729 174,634 (28,037) (63,188) 423 (18,331) (27,614) (81,519) — — — — (88,115) (88,115) — (5,000) (115,729) (174,634)	Pro forma adjustments HK$’000 Note — 424,297 2 15,474 3 — — 439,771 — — — — 100,000 4 100,000 — (5,500) 5 — — (5,500) 94,500 534,271 (29,429) 6 (305,639) 4, 7 (335,068) — (287,318) 8 88,115 9 — (534,271)	Pro forma Enlarged Group HK$’000 2,520 424,297 146,324 36,000 2,065 611,206 105 1,687 21,797 305 114,379 138,273 (338) (39,140) (1,092) (4) (40,574) 97,699 708,905 (92,617) (323,970) (416,587) — (287,318) — (5,000) (708,905)

— 199 —

FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VI

Notes to unaudited pro forma consolidated balance sheet:

For the purposes of the unaudited pro forma consolidated balance sheet, the audited balance sheets of Anglo Alliance and Hao Ge which are denominated in RMB have been translated into Hong Kong dollars at an exchange rate of RMB1.07 = HK$1.
In accordance with HK SSAP 30 issued by the HKICPA, the Company will apply the purchase method to account for the acquisition of the Anglo Alliance Group in the consolidated accounts of the Enlarged Group. In applying the purchase method, the identifiable assets and liabilities of the Anglo Alliance Group will be recorded in the balance sheet of the Enlarged Group at their fair values at the date of acquisition, and the original shareholder’s interests in the Anglo Alliance Group upon the acquisition will be eliminated as the pre-acquisition reserves of the Enlarged Group. Any goodwill arising on the acquisition will be determined as the excess of the purchase consideration deemed to be incurred by the Company over the Company’s interests in the net fair value of the identifiable assets and liabilities of the Anglo Alliance Group at the date of acquisition.

For the purposes of preparing the unaudited pro forma consolidated balance sheet of the Enlarged Group, the net fair value of the identifiable assets and liabilities of the Anglo Alliance Group as at 31 December 2004 and the maximum consideration of HK$550 million are applied in the calculation of the estimated goodwill arising from the acquisition (out of the maximum consideration of HK$550 million, the Second Tranche Convertible Note of HK$183.3 million is conditional upon the profits of the Anglo Alliance Group for the twelve months following the completion of Deed). Since the acquisition consideration may be substantially different from the fair values used in the preparation of the unaudited pro forma consolidated balance sheet presented above, the actual goodwill arising from the acquisition of the Anglo Alliance Group may be different from the estimated goodwill shown in this Appendix.

Adjustment is made to include the share of net assets and results of the Media Group since the date of acquisition, but excluding an investment in San Luen held by Media Company which has been disposed of by the Anglo Alliance Group as part of the Reorganisation, arising from the acquisition in accordance with HK SSAP 10 issued by the HKICPA.
Adjustment is made to include HK$100 million advanced or to be advanced by the Vendor to Anglo Alliance on or prior to completion of the Deed and such amount will be assigned to Orient Ventures by the Vendor upon completion of the Deed. It is the intention of Orient Ventures to waive the HK$100 million loan due from Anglo Alliance after the assignment.
Adjustment is made to reflect the accrued estimated direct costs incurred relating to the acquisition of the Anglo Alliance Group.
Adjustments are made to reflect the following:
(i) issuance of 5,746,570,871 Consideration Shares by the Company as part of the acquisition consideration; and
(ii) the elimination of the share capital of Hao Ge for the purpose of preparing the unaudited pro forma consolidated balance sheet of the Enlarged Group.
Adjustments are made to reflect the following:
(i) share premium recognised as a result of the issuance of 5,746,570,871 Consideration Shares by the Company as part of the acquisition consideration;
(ii) elimination of the former shareholder’s interests in the Anglo Alliance Group at the date of acquisition on consolidation;
(iii) amortisation of goodwill arising from the acquisition of the Anglo Alliance Group; and
(iv) share of results of the Media Group from the acquisition of the Anglo Alliance Group.
Adjustment is made to reflect the issuance of the First Tranche Convertible Note of HK$104.0 million and the Second Tranche Convertible Note of HK$183.3 million (assuming the maxmium consideration is paid), which will mature at the date falling on the fifth anniversary of the issuance of the First Tranche Convertible Note and the Second Tranche Convertible Note provided that the conditions set forth in the UHL SP Agreement are met, by the Company as part of the acquisition consideration. The First Tranche Convertible Note and the Second Tranche Convertible Note are interest-free up to the fifth anniversary of the issuance of the notes and thereafter bear interest at a rate equal to the prime rate quoted by the Hongkong and Shanghai Banking Corporation. For the purposes of the unaudited pro forma financial information, interest expense has not been reflected as a pro forma adjustment.
Adjustment is made to reflect the waiver on the amount due from Hao Ge to its shareholders upon completion of the Deed.

— 200 —

FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VI

Unaudited pro forma consolidated cash flow statement of the Enlarged Group

The Group HK$’000 Operating activities Operating profit/(loss) 8,593 Adjustment for: Interest income (36) Depreciation 425 Amortisation of intangible assets 52 Provision for the deposit for investment in joint venture 2,468 Loss on disposal of fixed assets 47 Loss on disposal of subsidiaries 836 Net gain on dilution of interest in an associated company (14,289) Operating loss before working capital changes (1,904) Decrease in amounts due to associated companies (91) Decrease in short-term investments 4,605 Decrease in inventories 796 Decrease in trade receivables, preference dividend receivables, prepayments, deposits and other receivables 26,772 Decrease in trade payables, other payables and accrued liabilities (12,605) Net cash from/(used in) operations 17,573 Interest paid (2,563) Net cash from/(used in) operating activities 15,010	Orient Ventures HK$’000 — — — — — — — — — — — — — — — — —	Year ended 31 December Anglo Alliance Hao Ge HK$’000 HK$’000 (Note 1) (Note 1) — (55) — (2) — — — — — — — — — — — — — (57) — — — — — — — — — — — (57) — — — (57)	2004 Sub-total HK$’000 8,538 (38) 425 52 2,468 47 836 (14,289) (1,961) (91) 4,605 796 26,772 (12,605) 17,516 (2,563) 14,953	Pro forma adjustments HK$’000 Note (22,772) 2, 3 — — 22,772 2 — — — — — — — — — — — — —	Pro forma Enlarged Group HK$’000 (14,234) (38) 425 22,824 2,468 47 836 (14,289) (1,961) (91) 4,605 796 26,772 (12,605) 17,516 (2,563) 14,953

— 201 —

FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VI

The Group HK$’000 Investing activities Investment in an associated company — Increase in amount due from an associated company — Interest received 36 Purchase of fixed assets (517) Net cash outflow from sale of subsidiaries (19) Net cash used in investing activities (500) Net cash inflow/(outflow) before financial activities 14,510 Financing activities Increase in paid-up capital — Increase in capital contribution — Increase in amount due to fellow subsidiary 3,217 Increase in amounts due to related parties — Repayment of short-term loans (20,000) Net cash (used in)/from financial activities (16,783) (Decrease)/increase in cash and cash equivalents (2,273) Cash and cash equivalents at 1 January 16,425 Cash and cash equivalents at 31 December 14,152 Analysis of balances of cash and cash equivalents Cash and bank balances 14,152	Orient Ventures HK$’000 — — — — — — — — — — — — — — — — —	Year ended 31 December Anglo Alliance Hao Ge HK$’000 HK$’000 (Note 1) (Note 1) — (49,346) — (21,652) — 2 — — — — — (70,996) — (71,053) — 26,168 — — — — — 45,031 — — — 71,199 — 146 — 81 — 227 — 227	2004 Sub-total HK$’000 (49,346) (21,652) 38 (517) (19) (71,496) (56,543) 26,168 — 3,217 45,031 (20,000) 54,416 (2,127) 16,506 14,379 14,379	Pro forma adjustments HK$’000 Note — — — — — — — — 100,000 4 — — — 100,000 100,000 — 100,000 100,000 4	Pro forma Enlarged Group HK$’000 (49,346) (21,652) 38 (517) (19) (71,496) (56,543) 26,168 100,000 3,217 45,031 (20,000) 154,416 97,873 16,506 114,379 114,379

Notes to unaudited pro forma consolidated cash flow statement:

For the purposes of the unaudited pro forma consolidated cash flow statement, the audited cash flow statements of Anglo Alliance and Hao Ge which are denominated in RMB have been translated into Hong Kong dollars at an exchange rate of RMB1.07 = HK$1.
Adjustment is made for the amortisation of estimated goodwill arising from the acquisition of the Anglo Alliance Group in accordance with HK SSAP 30 issued by the HKICPA. For illustrative purposes, the estimated goodwill is amortised over 20 years on a straight-line basis.

— 202 —

FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VI

Adjustment is made to include the share of results of the Media Group but excluding an investment in San Luen held by the Media Company which has been disposed of by the Anglo Alliance Group as part of the Reorganisation, arising from the acquisition in accordance with HK SSAP 10 issued by the HKICPA.
Adjustment is made to include HK$100 million advanced or to be advanced by Vendor to Anglo Alliance on or prior to completion of the Deed and such amount will be assigned to Orient Ventures by the Vendor upon completion of the Deed. It is the intention of Orient Ventures to waive the HK$100 million loan due from Anglo Alliance after the assignment.

Unaudited pro forma statement of (a) adjusted consolidated deficiency in net tangible assets and (b) adjusted consolidated net assets of the Enlarged Group

The following is the unaudited pro forma statement of adjusted consolidated deficiency in net tangible assets and adjusted consolidated net assets of the Enlarged Group which is prepared based on the audited consolidated net tangible assets of the Group as at 31 December 2004, adjusted to reflect the effect of the transactions contemplated under the UHL SP Agreement assuming that the UHL SP Agreement had been completed on 31 December 2004.

Add: Unaudited

		Add: Unaudited
		adjusted aggregate
		net tangible assets
		of Orient Ventures
		and the Anglo
		Alliance Group as at	Less: The issue of			Unaudited pro forma
		31 December 2004	the convertible			adjusted consolidated
	Audited	but after deduction	notes as part of	Unaudited pro forma		deficiency in net
consolidated net		of expenses payable by	the consideration	adjusted consolidated		tangible assets of the
tangible assets of		the Enlarged Group	payment for the	deficiency in net		Enlarged Group
the Group as at		in relation to the	acquisition under the	tangible assets of the		attributable to each
31 December 2004		UHL SP Agreement	UHL SP Agreement	Enlarged Group			Share
	HK$’000	HK$’000	HK$’000		HK$’000		HK cents
	(Note 1)	(Note 2)					(Note 3)
	45,886	225,699	(287,318)		(15,733)		(0.17)

						Unaudited pro
						forma adjusted
Unaudited pro forma			Add: Intangible	Unaudited pro			consolidated
adjusted consolidated		Add:	assets arising	forma adjusted		net assets of the
deficiency in net		Intangible assets of	as a result of the		consolidated	Enlarged Group
tangible assets of the		the Group as at	acquisition under the	net assets of the		attributable to each
Enlarged Group		31 December 2004	UHL SP Agreement	Enlarged Group			Share
	HK$’000	HK$’000	HK$’000		HK$’000		HK cents
		(Note 1)					(Note 3)
	(15,733) 8,023		424,297		416,587		4.62

Notes to the unaudited pro forma statement of adjusted consolidated deficiency in net tangible assets and adjusted consolidated net assets of the Enlarged Group:

The Group had intangible assets of approximately HK$8.0 million included in interests in associated companies as at 31 December 2004.

— 203 —

FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VI

Being the aggregate of the audited deficiency in net tangible assets of Orient Ventures of approximately HK$4,000 as at 31 December 2004 and the audited net tangible assets of Hao Ge of approximately HK$27.6 million as at 31 December 2004 and adjusted for the following items:
a. the share of net assets and results of the Media Group since the date Hao Ge acquired an interest in the Media Group but excluding an investment in San Luen held by the Media Company which has been disposed of by the Anglo Alliance Group as part of the Reorganisation amounting to approximately HK$15.5 million;
b. the advance of HK$100 million which has been or has to be made by the Vendor to Anglo Alliance on or prior to completion of the Deed where the rights of the Vendor as lender of such advance has to be assigned to Orient Ventures upon completion of the Deed; and
c. the waiver of loans due from Hao Ge to the Vendor and his spouse amounting to approximately HK$88.1 million as at 31 December 2004.
The number of Shares used for the calculation amounted to 9,020,864,028 Shares, which comprises the existing 3,274,293,157 Shares in issue as at 31 December 2004 and the 5,746,570,871 Shares to be issued by the Company as part of the consideration of the acquisition under the UHL SP Agreement.

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FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VI

B. Letter from PricewaterhouseCoopers

The following is the text of a letter received from PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular. As there is no specific guidance on the reporting on pro forma financial information under the auditing guidelines issued by the Hong Kong Institute of Certified Public Accountants, this letter is prepared with reference to the Statements of Investment Circular Reporting Standards and Bulletin 1998/8 “Reporting on pro forma financial information pursuant to the Listing Rules” issued by the Auditing Practices Board in the United Kingdom.

PricewaterhouseCoopers 22/F, Prince's Building Central, Hong Kong

The Directors Universal Holdings Limited

13 May 2005

Dear Sirs,

We report on the unaudited pro forma financial information of Universal Holdings Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) set out in section A under the headings of “Unaudited pro forma financial information” in Appendix VI of the Company’s circular dated 13 May 2005 in connection with a very substantial acquisition and connected transactions relating to the proposed acquisition of Anglo Alliance Co., Ltd. (“Very Substantial Acquisition”) by the Company. The unaudited pro forma financial information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Very Substantial Acquisition might have affected the relevant financial information of the Group as at 31 December 2004.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 13 of Appendix 1B and paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“the Listing Rules”).

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FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VI

It is our responsibility to form an opinion, as required by paragraph 4.29 of the Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

Basis of opinion

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

Our work does not constitute an audit or review in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants, and accordingly, we do not express any such assurance on the unaudited pro forma financial information.

The unaudited pro forma financial information has been prepared on the basis set out in section A of Appendix VI for illustrative purposes only and, because of its nature, it may not be indicative of:

the financial position of the Enlarged Group at any future date, or
the earnings per share of the Enlarged Group for any future periods.

Opinion

In our opinion:

(a) the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group, and
(c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29 of the Listing Rules.

Yours faithfully,

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong

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FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX VI

2. INDEBTEDNESS

Borrowings

As at the close of business on 28 February 2005, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group had total outstanding unsecured borrowings of approximately HK$118,283,000.

Pledge of assets

None of the assets of the Enlarged Group were pledged as at 28 February 2005.

Disclaimer

Save as disclosed herein and apart from intra-group liabilities and normal trade payables in the ordinary course of business of the Enlarged Group, the Enlarged Group did not have any outstanding mortgages, charges or bank overdrafts, loans and other similar indebtedness or acceptance of credit or hire purchase commitments or any guarantees or other material contingent liabilities as at the close of business on 28 February 2005.

Save as disclosed above, the Director have confirmed that there has not been any material adverse change in the indebtedness and contingent liabilities of the Enlarged Group since 28 February 2005.

For the purpose of the above indebtedness statement, foreign currency amounts have been translated into Hong Kong dollars at the rates of exchange prevailing at the close of business on 28 February 2005.

3. WORKING CAPITAL

The Directors are of the opinion that, taking into account the present internal resources, the Enlarged Group has sufficient working capital for its present requirements for at least the next twelve months from the date of this circular.

— 207 —

MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS AND FINANCIAL POSITION OF THE GROUP

Track record of the Group

The table below sets out the condensed profit and loss accounts of the Group for each of the three years ended 31 December 2004.

Turnover Cost of sales Gross profit Other revenues Marketing, selling and distribution costs Administration expenses Impairment loss on investment securities Net gain on dilution of interest in an associated company/subsidiaries Net other operating (expenses)/income Operating profit/(loss) Finance costs Share of loss of: Jointly controlled entities Associated companies Loss before taxation Taxation Loss after taxation Minority interests Loss attributable to shareholders	Year 2004 HK$’000 38,630 (31,091) 7,539 6,280 (1,007) (16,564) — 14,289 (1,944) 8,593 (2,563) — (14,869) (8,839) (1,092) (9,931) — (9,931)	ended 31 December 2003 2002 HK$’000 HK$’000 30,011 51,791 (24,567) (35,714) 5,444 16,077 7,837 2,702 (1,233) (13,677) (15,246) (86,753) (44,508) (63,382) 11,503 23,684 8,497 (32,907) (27,706) (154,256) (4,634) (3,979) — (1,727) (37,511) (11,393) (69,851) (171,355) (195) — (70,046) (171,355) — 76,252 (70,046) (95,103)

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

OVERVIEW

The Group is principally engaged in the retail and distribution of home audio and video equipment and components, and the provision of computer telephony integration engineering and IP related services. It also engages in the trading of equity securities, and the sale of software solutions for call contact centers.

The table below sets out the breakdown of the Group’s turnover by major business activities for the three years ended 31 December 2004.

Telecommunication division (computer telephony integration engineering and IP related services) Home audio division Share trading Digital broadcasting_(Note 1) Financial information provision(Note 1)_ Total	For the year ended 31 December 2004 2003 2002 HK$’000 HK$’000 HK$’000 3,889 6,005 2,029 18,180 16,362 1,961 16,561 7,644 — — — 35,836 — — 11,965 38,630 30,011 51,791	For the year ended 31 December 2004 2003 2002 HK$’000 HK$’000 HK$’000 3,889 6,005 2,029 18,180 16,362 1,961 16,561 7,644 — — — 35,836 — — 11,965 38,630 30,011 51,791
		51,791

Note:

These business activities were carried out by DVN which was previously a subsidiary of the Company until 13 December 2002. DVN is currently an associated company of the Company.

Telecommunication division

The telecommunication business of the Group is mainly related to the provision of computer telephony integration engineering and IP related services in the PRC.

Management is reviewing the business operation to determine the long term strategy, and refocusing this business to be aligned with our new core media business.

Home audio division

The home audio and video products distributed by the Group includes DVD players and components.

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APPENDIX VII

There was a marginal increase in the trading in the audio and video division in 2004. However due to competition in the market place, the profit margin was further squeezed. The Group will continue to seek new business products with higher profit margins.

Digital broadcasting investment

DVN was a subsidiary of the Company until December 2002 at which time it became and remains as an associated company of the Group. In 2001 and 2002, the digital broadcasting and financial information provision business segments of the Group were carried out by the DVN Group. The DVN Group is principally engaged in the design, integration and installation of digital broadcasting equipment and trading of related products, and the provision of international financial market information and selective consumer data.

The business landscape of DVN in China has improved with the Chinese government’s continued push towards digitalisation.

During 2004, Motorola-Dragon Investment, Inc. (“Motorola”), a wholly-owned subsidiary of Motorola, Inc., conditionally agreed to invest up to a maximum of US$33 million (equivalent to approximately HK$257.4 million) in up to four tranches over a period of two years. On 15 July 2004, the first tranche of US$7.5 million (equivalent to approximately HK$58.5 million) was invested into DVN by Motorola. Subsequent to this, DVN entered into a series of strategic agreements with Motorola and its subsidiaries that are designed to accelerate the successful deployment of digital broadcasting solutions to cable operators in China.

DVN is now working with Motorola with the goal of becoming China’s leading supplier of digital equipment and services. As mentioned above, to date, Motorola has invested US$15 million (equivalent to approximately HK$117 million) for an approximately 20% equity stake. With this investment, DVN has gained a strategic partner which is one of the world’s leading providers of digital cable technology. Motorola is involved in all aspects of digital broadband technology, from head-end system solutions to consumer terminal products, and is a market leader for set-top terminals in the United States. With Motorola, DVN now has a strategic partner with the requisite experience and expertise to help ensure that its digital cable deployments are successful.

According to SARFT, switching to digital has become the paramount opportunity for the radio and television industry in the PRC. Many cable operators compete with telecom operators which offer interactivity through their fibre telecom network and could someday launch internet protocol (IP) TV services. Therefore, SARFT realizes that it must make the transition to digital as quickly as possible and has set 2015 as the date when the analog service in the PRC is to be completely cut off. DVN expects cable operators to become increasingly more aggressive in promoting digital cable.

Despite the potential competition from IP TV, DVN believes that digital cable will remain the most cost effective means to reach most viewers for the near future.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

Analysis on the results of operation of the Group during the three years ended 31 December 2004

Turnover

For the year ended 31 December 2002, the turnover of the Group amounted to approximately HK$51.8 million, which was mainly derived from sales of goods, installation of digital broadcasting equipment and provision of financial market information. The drop in turnover of the Group for the year ended 31 December 2002 was mainly due to the downturn of the sales in the audio and video and the telecommunication segments.

Turnover of the Group for the year ended 31 December 2003 amounted to approximately HK$30.0 million, representing a decrease of approximately 42.1% as compared with the year ended 31 December 2002. The decrease in 2003 was mainly a result of the deconsolidation of the DVN Group’s results which took place in December 2002.

The Group’s turnover for the year ended 31 December 2004 amounted to approximately HK$38.6 million, representing an increase of approximately 28.7% from that of 2003. The increase in the turnover of the Group was mainly due to the increase in the Group’s securities trading activities.

Gross profit

For the year ended 31 December 2002, the gross profit of the Group amounted to approximately HK$16.1 million, representing a gross profit margin of approximately 31.1%. The gross profit margin of the Group decreased from approximately 31.1% for the year ended 31 December 2002 to approximately 18.1% for the year ended 31 December 2003. This was mainly a result of the deconsolidation of the DVN Group’s results which enjoys a higher gross profit margin than the remaining businesses of the Group. The Group’s gross profit margin for the year ended 31 December 2004 has been maintained with a slight increase to approximately 19.5%.

Other revenues

Other revenues of the Group usually comprised dividend income received, interest income, management fee income, repair and maintenance service fees and other miscellaneous income.

Other revenues for the year ended 31 December 2002 amounted to approximately HK$2.7 million, which were mainly repair and maintenance service fees and interest income.

For the years ended 31 December 2003 and 2004, other revenues amounted to approximately HK$7.8 million and approximately HK$6.3 million, respectively, and were mainly derived from dividend income which amounted to approximately HK$5.8 million in each year.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

Operating profit/loss

For the year ended 31 December 2002, a significant portion of the marketing, selling and distribution costs and administrative expenses of the Group were derived from the DVN Group. After the deconsolidation of the results of the DVN Group from the financial statements of the Group in December 2002, the said expenses of the Group for the year ended 31 December 2003 decreased significantly from the amounts recorded in 2002. The Group recorded a loss from operations of approximately HK$27.7 million for the year ended 31 December 2003, representing a decrease of approximately 82.0% as compared with the year ended 31 December 2002.

The operating results of the Group were also affected by the dilution of the Group’s investment in DVN. For the years ended 31 December 2002, 2003 and 2004, the Group recorded a gain on dilution of interest in the DVN Group amounting to approximately HK$23.7 million, approximately HK$11.5 million and approximately HK$14.3 million respectively.

Apart from the gain on deemed disposal, the Group also recorded a gain on writing back of certain bad-debt provisions amounting to approximately HK$21.0 million for the year ended 31 December 2003 and recorded an impairment loss on investment securities of approximately HK$63.4 million for the year ended 31 December 2002.

For the year ended 31 December 2004, the Group recorded an operating profit of approximately HK$8.6 million. The improvement in the operating results of the Group was mainly due to that fact that the Group did not record any material impairment loss on investment in securities in 2004 while the Group recorded such an impairment loss of approximately HK$44.5 million in 2003.

Finance costs

The Group’s telecommunication business and audio and video product distribution business are mainly financed by the Group’s internal resources and short-term borrowings. For the years ended 31 December 2002, 2003 and 2004, the finance costs of the Group amounted to approximately HK$4.0 million, approximately HK$4.6 million and approximately HK$2.6 million respectively.

Share of loss of jointly controlled entities and associated companies

In December 2002, DVN became an associated company of the Company. The share of loss of associated companies in the income statement of the Group for the year ended 31 December 2002 was the share of loss of the DVN Group for the period from 14 December 2002 to 31 December 2002.

For the years ended 31 December 2003 and 2004, the share of loss of the DVN Group amounted to approximately HK$37.5 million and approximately HK$14.9 million respectively.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

Taxation

The Group did not make any taxation provision for the year 31 December 2002 as the Group did not record any taxable profit for the year. The taxation provision of HK$195,000 made in 2003 was related to an under-provision of taxation in respect of the financial years prior to 2002. The Group recorded a slight taxable profit for the year ended 31 December 2004 and a provision of HK$1.1 million is provided.

Minority interests

The minority interests credited to the profit and loss account of the Group for the years ended 31 December 2002 amounted to approximately HK$76.3 million which mainly represented the share of losses shared by minority shareholders of the DVN Group for the relevant year.

Loss attributable to shareholders

The net loss attributable to shareholders for the year ended 31 December 2003 amounted to approximately HK$70.0 million, representing a decrease of approximately 26.4% as compared against a net loss of approximately HK$95.1 million for the year ended 31 December 2002.

The net loss attributable to shareholders for the year ended 31 December 2004 amounted to approximately HK$9.9 million. The decrease in the net loss of the Group is mainly due to the improvement in the Group’s operating profit and the decrease in the net loss of the DVN Group as explained above.

Analysis on the financial position of the Group during the three years ended 31 December 2004

Liquidity and financial resources

For each of the years ended 31 December 2002 and 31 December 2003 the Group recorded net cash outflow from its operations of approximately HK$49.9 million and HK$3.1 million respectively. For the year ended 31 December 2004, the Group recorded net cash inflow from its operations of approximately HK$17.6 million. As at 31 December 2004, the cash and cash equivalents balance of the Group amounted to approximately HK$14.2 million. The Group had a current ratio of approximately 1.1 times and a gearing ratio, being the ratio of long-term borrowings to equity, of approximately 9.3% as at 31 December 2004.

The Group has been maintaining a healthy level of cash and cash equivalents, which represented approximately 11.1%, 22.6% and 37.2% of the total current assets of the Group as at 31 December 2002, 31 December 2003 and 31 December 2004 respectively.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

In addition to the internally generated cash flows, the Group also made use of short-term borrowings to finance its operations during the period. All borrowings during the period were based on market interest rates. The Group had no long-term bank loans and bank overdrafts outstanding as at 31 December 2004. The Group did not have any assets pledged or charged as at 31 December 2004.

Net current assets

The net current assets of the Group amounted to approximately HK$5.8 million, HK$13.2 million, and HK$3.0 million as at 31 December 2002, 31 December 2003, and 31 December 2004 respectively.

The current ratios of the Group as at 31 December 2002, 31 December 2003, and 31 December 2004 were approximately 1.2 times, 1.2 times, and 1.1 times respectively.

Capital and other commitments

The Group had no significant capital commitments as at 31 December 2004.

Contingent liabilities

The Group did not have any material contingent liabilities as at 31 December 2004.

Capital structure

Save for the issue of 500 million new Shares in September 2003, which raised net proceeds of approximately HK$14.5 million, the fluctuations of certain exchange reserves and the movements in relation to the profit and loss account of the Group, there were no other material changes in the equity capital structure of the Company for the three years ended 31 December 2004.

Currency exchange risk

The Group’s operations have been mainly conducted and funded in Hong Kong dollars, with a minority portion in Renminbi. The Directors consider that the Group is not exposed to any significant foreign currency risk.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

Staff, remuneration policies, stock option scheme, retirement benefits and training

As at 31 December 2004, the Group employed a total of 6 full-time employees in Hong Kong and a work force of about 21 in the PRC. The Group operates different remuneration schemes for sales and non-sales employees. Sales personnel are remunerated on the basis of on-targetearning packages comprising salary and sales commission. Non-sales personnel including engineering and product development staff are remunerated by monthly salaries which are reviewed by the Group from time to time and adjusted based on performance. In addition to salaries, the Group provides staff benefits including medical insurance, contribution to staff provident fund and discretionary training subsidies. Share options and bonuses are also available at the discretion of the Group and depending on the performance of the Group.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS AND FINANCIAL POSITION OF THE MEDIA GROUP

Track record of the Media Group

The table below sets out the consolidated profit and loss accounts of the Media Group for each of the three years ended 31 December 2004.

Note
Turnover
3, 4
Cost of sales
Gross profit
Other revenues
3
Marketing, selling and distribution costs
Administrative expenses
Provision of impairment for programmes
and film rights and production in progress
Other operating expenses
Operating (loss)/profit
5
Finance costs
9
Share of profit/(loss) of:
associated companies
a cooperative joint venture
16
(Loss)/profit before taxation
Taxation
10
(Loss)/profit after taxation
Minority interests
(Loss)/profit attributable to shareholders
6
Dividends
7

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

OVERVIEW

The Media Group is principally engaged in investment in and production of films, licensing and sub-licensing of programmes and film rights, production and sales of television programmes, advertising agency services and advertisement production.

The table below sets out the breakdown of the turnover of the Media Group by major business activities for the three years ended 31 December 2004.

Licensing and sub-licensing of programmes and film rights Sales of television programmes Advertising and commission income Total	For the year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 4,089 20,067 62,087 481 4,100 4,808 203 1,673 10,094 4,773 25,840 76,989	For the year ended 31 December 2002 2003 2004 RMB’000 RMB’000 RMB’000 4,089 20,067 62,087 481 4,100 4,808 203 1,673 10,094 4,773 25,840 76,989
		76,989

Major factors affecting the results of the Media Group

Industry environment

The Media Group has been growing rapidly in the past few years. The total turnover of the Media Group grew by about 16 times from approximately RMB4.8 million in 2002 to approximately RMB77.0 million in 2004. During the period, licensing and sub-licensing of programmes and film rights grew by approximately 15 times, sales of television programmes grew by approximately 10 times and advertising and commission income grew by approximately 50 times.

The PRC film industry

According to the statistics issued by SARFT, total income generated by PRC movies in 2004 amounted to approximately RMB3.6 billion (excluding revenue from the sale of movie audio-visual products, boardcasting income via television and the internet and other sublicensing income). Local box office income was approximately RMB1.5 billion and overseas box office income was approximately RMB1.1 billion. Domestic box office income increased by approximately RMB600 million in 2004 as compared with that in 2003 (an increase of approximately 65%). In 2004, the number of drama movies produced in the PRC reached 212, representing an increase of approximately 2.9 times over the number of drama movies produced in the PRC in 2003.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

The PRC television industry

Television reached an audience in the PRC of around 300 million families or 1.1 billion people in 2003. According to the statistics issued by SARFT, the total income generated by television broadcasting in the PRC increased to approximately RMB76.5 billion in 2004 from approximately RMB70.5 billion in 2003, representing an increase of approximately 8.5%.

The PRC advertising industry

The advertising market in the PRC grew from approximately RMB118 million in 1981 to approximately RMB90 billion in 2002, representing a growth of over 760 times. It is projected that the market will further grow to about RMB289 billion by 2010. Advertising expenditure in the PRC accounted for only approximately 0.54% of the PRC’s gross domestic product (“GDP”) in 2003. Proportionately this is small compared with some developed economies, for example advertising expenditure as a percentage of GDP for 2003 amounted to 1.16% in Hong Kong and 1.37% in the United States of America. According to the statistics issued by SARFT, the total income generated by television advertising in the PRC increased to approximately RMB39.4 billion in 2004 from approximately RMB32.6 billion in 2003, representing an increase of approximately 21%.

The regulatory change in the PRC

The PRC Government has been promoting market-oriented media reform since 2003. The reform focuses on separating the production of television programmes, radio programmes and films from broadcasting and distribution. The PRC Government is gradually opening up broadcasting and other business segments for private and foreign investment.

As part of its commitment to the World Trade Organisation, the PRC will open the advertising industry to wholly foreign owned investment entities in 2005. The PRC has even exceeded its commitment to the World Trade Organisation by also opening up its television and animation programme production industry to foreign investment. Foreign investors are allowed to hold an interest in a number of different types of media business up to a maximum of a 49% interest. The market reform provides media companies in the PRC, like the Media Group, with opportunities to cooperate with international investors with a view to promoting further growth.

The management of the Media Group will continue to observe closely market developments in the media and advertising industry in the PRC and will formulate appropriate business plans to capture the available market opportunities. Since January 2005, 2 movies of the Media Group have been shown in cinemas in the PRC and the Media Group proposes to launch another 5 movies by the second quarter of 2006. The Media Company also plans to produce and sell 720 episodes of situation comedy and around 290 episodes of television drama in 2005. The Vendor believes that the continuing growth of the media industry in the PRC will provide an environment favourable to the rapid development of the Media Group.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

Business acquisitions

During the three years ended 31 December 2004, the Media Group diversified and enhanced its income stream through a number of strategic acquisitions. In November 2003, the Media Group acquired a 50% interest in Beijing Xin Bao Yuan File & Television Investment Limited Liability Company which is principally engaged in the production of television dramas.

In January 2004, the Media Group acquired a 49% interest in Hainan TV, which is accounted for as an associated company of the Media Group. Hainan TV is principally engaged in the production and editing of television programmes for the Travel Channel. The Travel Channel is a nationwide broadcast satellite television channel reaching nearly all major cities in the PRC. In order to revitalize the business of the Travel Channel, Hainan TV assisted the Travel Channel to reschedule its programmes and build up a new and young image. The existing new Travel Channel was launched in July 2004. As a result, the Travel Channel has attracted new customers and increased the sales of advertising time. Hainan TV has acquired an operating right in respect of the Travel Channel for a term of 30 years commencing from 15 August 2003. Pursuant to the operating arrangement income of Hainan TV is directly related to sales of the Travel Channel’s advertising air time. The Media Group shared a total profit before taxation from the profit of Hainan TV of approximately RMB2.5 million for the year ended 31 December 2004 representing approximately 23.8% of the consolidated profit before taxation of the Media Group for the year ended 31 December 2004. It is expected that Hainan TV will become a major recurring source of profit for the Media Group.

Discontinued investment

Prior to its disposal made on 18 April 2005, the Media Group together with two other then existing shareholders of San Luen (who held such interests on behalf of the Media Company and one of whom was the Vendor) held a 25.56% equity interest in San Luen which principally operates as a film distribution agent in the PRC. San Luen was accounted for as an associated company of the Media Group. As advised by the PRC legal advisers to the Vendor, the business of San Luen is restricted from foreign investment under the PRC law. For the year ended 31 December 2004, the Media Group shared approximately RMB0.1 million of the profit before taxation of San Luen. As part of the Reorganisation, the Media Group has entered into a sale and purchase agreement for the disposal of its 25.56% equity interest in San Luen at a consideration of approximately RMB0.7 million.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

Analysis on the consolidated results of the Media Group during the three years ended 31 December 2004

Turnover

For the three years ended 31 December 2002, 2003 and 2004, the consolidated turnover of the Media Group amounted to approximately RMB4.8 million, approximately RMB25.8 million and approximately RMB77.0 million respectively, and mainly derived from sales of programmes and film products, licensing and sub-licensing of programmes and film rights and rendering of advertising services (including advertisement production). Turnover of this period recorded an annual compound growth rate of approximately 301%. The growth in the Media Group’s consolidated turnover is attributable primarily to the growth in the revenues from the licensing and sub-licensing of programmes and film rights.

Gross profit

For the three years ended 31 December 2002, 2003 and 2004, the consolidated gross profit of the Media Group amounted to approximately RMB1.3 million, approximately RMB5.7 million and approximately RMB43.1 million respectively, representing a gross profit margin of approximately 26.7%, approximately 22.1% and approximately 56.0% respectively.

One of the major reasons for the increase in the gross profit margin in 2004 is due to the percentage increase in amortisation of programmes and film rights is lower than the percentage increase in the revenue from licensing and sub-licensing of programmes and film rights.

Other revenues

Other revenues of the Media Group recorded during the three years ended 31 December 2004 mainly comprised interest income from bank deposits. For the two years ended 31 December 2003, other revenues of the Media Group amounted to approximately RMB40,000 and approximately RMB22,000 respectively.

Other revenues of the Media Group for the year ended 31 December 2004 amounted to approximately RMB600,000. The significant increase in other revenue in 2004 as compared with 2003 was mainly due to the non-recuring motor car rental income earned by the Media Group in 2004 and increased bank deposit interest income.

Marketing, selling and distribution costs

For the three years ended 31 December 2004, the consolidated marketing, selling and distribution costs of the Media Group comprised expense items such as advertising and promotion, depreciation, rent, salaries and welfare, motor vehicle expenses, etc. and amounted to approximately RMB4.8 million, approximately RMB9.5 million and approximately RMB10.6 million respectively, representing approximately 99.6%, approximately 36.8% and

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

approximately 13.8% of the consolidated turnover of the Media Group for each of the three years ended 31 December 2002, 2003 and 2004 respectively. The increase in the amount of marketing, selling and distribution costs was mainly a result of the increase in the turnover.

Administrative expenses

The consolidated administrative expenses of the Media Group for the three years ended 31 December 2004 were approximately RMB2.8 million, approximately RMB4.2 million and approximately RMB6.3 million respectively, representing approximately 58.0%, approximately 16.2% and approximately 8.1% of the turnover in 31 December 2002, 2003 and 2004 respectively. Administrative expenses mainly comprised salaries and staff welfare expenses, office expenses and depreciation of fixed assets. The increase in the amount of the said expenses was mainly due to the growth in the size of operation of the Media Group. The size of the work force grew to support the rapid growth of the Media Group and the Media Group’s office expansion led to higher building management fees and other office expenses. Despite the increase in the amount of such expenses, the percentage of such increase over the previous year is lower than the percentage increase in turnover.

Provision of impairment for programmes and film rights and production in progress and other operating expenses

Provision of impairment for programmes and film rights and production in progress and other operating expenses of the Media Group mainly comprised impairment losses in respect of programmes and film rights, provision for long-term investments and others. The Media Group recorded a total of the provision of impairment for programmes and film rights and production in progress and other operating expenses of approximately RMB7.3 million, approximately RMB38.0 million and approximately RMB8.4 million for the three years ended 31 December 2004 respectively. The results of the Media Group for the year ended 31 December 2003 was affected by a substantial impairment loss in respect of certain programmes and film rights amounting to approximately RMB25.4 million and a compensation expense of approximately RMB11.0 million.

Operating profit/loss

The improvement in the operating results of the Media Group was mainly due to an increase in turnover of the Media Group and the enhancement of gross profit margin.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

Finance costs

The operations of the Media Group were mainly financed by shareholders’ funding, shortterm borrowings and cash generated from the business activities of the Media Group. For the three years ended 31 December 2004, the finance costs of the Media Group amounted to approximately RMB0.5 million, approximately RMB2.8 million and approximately RMB12.5 million respectively. The main reason for the significant increases in finance costs was increases in the amount of borrowings.

Share of profit/loss of associated companies and a cooperative joint venture

For the year ended 31 December 2002, the share of profit of an associated company amounted to approximately RMB36,000. For the year ended 31 December 2003, the Media Group recorded a share of loss of an associated company of approximately RMB69,000. For the year ended 31 December 2004, the Media Group shared a total profit of approximately RMB2.6 million from its associated companies. The main reason for the significant increase in the year ended 31 December 2004 was a result of the acquisition of an interest in Hainan TV in 2004 as explained above in the paragraph headed “Major factors affecting the results of the Media Group”. For the year ended 31 December 2004, the Media Group obtained a fixed return of approximately RMB2 million from a long-term investment it made in 2003 in accordance with the terms of the joint venture agreement (as disclosed in Note 16(a) to the Accountants’ Report of the Media Company set out in Appendix V to this circular).

Taxation

The taxation expenses of the Media Group for the three years ended 31 December 2004 amounted to approximately RMB80,000, approximately RMB0.2 million and approximately RMB6.3 million respectively. The members of the Media Group are subject to enterprise income tax in the PRC at a rate of 33% of the respective assessable profits prepared and calculated in accordance with the applicable PRC rules and regulations; whilst Hainan TV is subject to enterprise income tax rate of 15%. The increase in taxation for the three years ended 31 December 2004 was mainly due to the improvement of the operating results of the Media Group.

Minority interests

None of the subsidiaries of the Media Company are wholly-owned by the Media Company. Minority interests charged or credited to the consolidated profit and loss account of the Media Group represented the share of the profits or losses of the relevant subsidiary companies by their respective minority shareholders.

The minority interests credited to the consolidated profit and loss account of the Media Group for the year ended 31 December 2002 amounted to approximately RMB200,000. No minority interests were recorded for the year ended 31 December 2003.

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MANAGEMENT DISCUSSION AND ANALYSIS

APPENDIX VII

The minority interests charged to the consolidated profit and loss account of the Media Group for the year ended 31 December 2004 amounted to approximately RMB87,000.

Loss/profit attributable to shareholders

The consolidated net profit of the Media Group attributable to its shareholders for the year ended 31 December 2004 amounted to approximately RMB4.1 million. The Media Group recorded net losses of approximately RMB13.9 million and approximately RMB49.0 million for the two years ended 31 December 2002 and 2003 respectively.

Analysis on the financial position of the Media Group during the three years ended 31 December 2004

Liquidity and financial resources

During the year ended 31 December 2002, the Media Group recorded net cash inflow from operations of approximately RMB17.4 million. For the year ended 31 December 2003, the Media Group recorded net cash outflow from operations of approximately RMB95.7 million. For the year ended 31 December 2004, the Media Group recorded net cash inflow from operations of approximately RMB2.4 million. As at 31 December 2004, the cash and cash equivalents balance of the Media Group amounted to approximately RMB11.5 million. During the three years ended 31 December 2004, the Media Group had been operating under a net current liability position. The Media Group had a gearing ratio, representing total long-term borrowings (including non-current portion of finance lease payable, amounts due to a shareholder and an immediate holding company) to shareholders’ fund, of approximately 7.56 times as at 31 December 2004.

In addition to internally generated cash flows, the Media Group also made use of short-term borrowings from its shareholders and financial institutions in the PRC to finance its operations during the three years ended 31 December 2004. Save for certain finance lease arrangements, the Media Group had long-term loans of approximately RMB1.6 million, RMB127.6 million and RMB170.8 million respectively outstanding as at each of 31 December 2002, 2003 and 2004. Certain fixed assets, programmes and film rights and investments of the Media Group with an aggregate net book value amounting to approximately RMB58.9 million as at 31 December 2004 were pledged for certain loans amounting to approximately RMB6.4 million as at 31 December 2004.

Net current liabilities

The net current liabilities of the Media Group amounted to approximately RMB129.3 million, approximately RMB69.0 million, and approximately RMB166.8 million as at 31 December 2002, 31 December 2003 and 31 December 2004. The substantial growth of the business of the Media Group in recent years was partly financed by borrowings, which include borrowings from shareholders and related companies and bank loans. As at 31 December 2004, the Media

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APPENDIX VII

MANAGEMENT DISCUSSION AND ANALYSIS

Group had approximately RMB158.1 million of investment cost payable in respect of Hainan TV, of which approximately RMB135 million is payable within 2005. Such investment will be substantially financed by shareholder’s funding. As mentioned in the letter from the Board the Vendor will advance HK$100 million to Hao Ge. Out of the total amount of RMB75 million short-term bank loans outstanding as at 31 December 2004, a loan of RMB70 million was guaranteed by the shareholder of the existing 50% shareholder of the Media Company. It is the understanding that the guarantor will continue to provide such guarantee.

Capital commitments

None of the Media Company or any of its subsidiaries had any significant capital commitment as at 31 December 2004.

Contingent liabilities

None of the Media Company or any of its subsidiaries had any material contingent liabilities as at 31 December 2004.

Capital structure

Funding from shareholders has been one of the major sources of funding for the growth of the business of the Media Group. During the three years ended 31 December 2004, the share capital of the Media Company increased from RMB20 million to approximately RMB120 million. In addition, as explained in the paragraph headed “Net current liabilities” above, the Media Group also relied substantially on debt funding from its shareholders and related companies. As at 31 December 2004, the total amount due to the shareholder, immediate holding company, an associated company and other related companies of the Media Company amounted to approximately RMB184.9 million.

Currency exchange risk

The operations of the Media Group are mainly conducted and funded in Renminbi. The Directors consider that the Media Group is not exposed to any significant foreign currency risk.

Staff, remuneration policies and retirement benefits

As at 15 April 2005, the Media Group had a total of 75 full-time staff in the PRC. Hainan TV, being a major associated company of the Media Company, also had 205 full-time employees as at 15 April 2005. The Media Group maintains a minimum essential work force and engages part-time and contract staff when necessary. According to the relevant PRC regulations, the members of the Media Group are required to participate in employee retirement and insurance schemes for their eligible staff.

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REPORTS ON THE TARGET PROFIT

APPENDIX VIII

As described in the paragraph headed “Adjustments to the consideration” in the letter from the Board contained in this circular, the consideration for the acquisition of the entire issued capital of Anglo Alliance under the Deed is subject to a price adjustment mechanism depending on the actual net profit made by the Anglo Alliance Group in the 12 months after completion of the Deed (“Profit Forecast Period”). The Target Profit under the price adjustment mechanism is regarded as a profit forecast under Rule 14.62 of the Listing Rules and Rule 10 of the Takeovers Code in that the net profit of the Anglo Alliance Group for such period shall not be less than HK$60 million. As the Target Profit was not determined based on any profit projections the Vendor has produced financial projections in respect of the Anglo Alliance Group for the 12 months ending 31 May 2006 assuming that the Deed will be completed on 31 May 2005. The above financial projections support such a profit forecast.

The following section summarises the major bases and assumptions used in the preparation of the financial projections which have been prepared in connection with the requirement that the Target Profit be reported upon, which bases and assumptions have been adopted by the Vendor and the directors of Anglo Alliance, Hao Ge and the Media Company.

1. BASES AND ASSUMPTIONS

Eddie K. K. Lau CPA Limited, the firm of consultant accountants retained by the Company to report upon the Target Profit has confirmed that the financial projections have been prepared on the basis of the accounting policies consistent in all material respects with those normally adopted by the Group as summarized in Appendix I to this circular and those used to prepare the accountants’ reports on Anglo Alliance, Hao Ge and the Media Company as set out in Appendices III, IV and V respectively to this circular.

Set out below are the principal bases and assumptions adopted by the Vendor and the directors of Anglo Alliance, Hao Ge and the Media Company in the preparation of the financial projections.

a. There will be no change in the group structure of the Anglo Alliance Group during the Profit Forecast Period.
b. The Media Group will continue to carry out its existing businesses and no new lines of business or new projects which are not currently planned by the management of the Media Group will be carried out during the Profit Forecast Period.
c. Save for those formal sales contracts which have been entered into, projections of the box office receipts for the Media Group’s movies and the projected sales of the distribution rights of the movies were made based on the box office receipts and sales of comparable movies produced or invested in by others in the market or by the Media Group shown between 1998 and 2004 as selected by the

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management of the Media Group as they consider to be similar to the movies distributed or planned to be distributed by the Media Group and as adjusted in proportion to the relative production cost with a general risk discount factor ranging from 20% to 40% of the relevant projected income being applied (in view of the general unpredictable nature of the movie industry) which the management of the Media Company considers appropriate based on the type of relative business activities, including box office receipts and the distribution of overseas licences.

d. In 2004, the Media Company sold a situation comedy with 120 episodes to the Travel Channel and a PRC distribution agent and sold another situation comedy with 40 episodes to 4 local television stations. The Media Company plans to produce a total of 720 situation comedy episodes in 2005. In November 2004 and March 2005, the Media Group entered into co-investment agreements with an affiliated company of the China Central Television Station (“CCTV”) to produce 80 episodes of situation comedies. The 80 episodes are currently under production. The 720 situation comedy episodes produced and to be produced by the Media Group are planned to be sold first to CCTV during the Profit Forecast Period with the intention that they will subsequently be sold to other local television stations in the PRC, on the basis that such other local television stations will show the situation comedies only after the China Central Television Station has finished broadcasting the situation comedies. Previously, the Media Group’s situation comedies were not sold to CCTV but were sold to various local television stations. For the purposes of preparing the financial projections in respect of the Anglo Alliance Group, no income from the possible sale of the Media Group’s situation comedies to television stations other than CCTV has been taken into account.
e. It is planned that a total of 291 episodes of television dramas (other than situation comedies which are planned to be sold to CCTV as described in paragraph a above) invested in or produced and to be invested in or produced by the Media Group will be sold during the Profit Forecast Period to each and every of the 30 television stations in the PRC, which previously purchased any television drama from the Media Group. Historically, not all television dramas invested in or produced by the Media Group were sold to each of the 30 television station customers. During 2004, the Media Group sold a television drama series (other than situation comedies) comprising 26 episodes to 8 television stations in the PRC. In projecting the selling price per episode to each television station (which purchased some, but not each and every, television dramas including situation comedies produced or invested in by the Media Group), the management of the Media Company used the selling price of the most recent television drama (including situation comedies as situation comedies were historically also sold to the television stations as television dramas) sold to such television station invested in or produced by the Media Group as the base and as adjusted in proportion to the relative production cost with a general risk factor of 40% of the relevant projected income being applied which the management of the Media Company considers appropriate.

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f. Hainan TV is an associated company of the Media Company. The Media Company acquired a 49% interest in Hainan TV in January 2004 following which the management of Hainan TV has been significantly restructured. In July 2004, the Travel Channel (which Hainan TV has the right to operate) was relaunched. Since then the advertising sales of Hainan TV has improved. It is assumed that the advertising sales of Hainan TV will continue to grow during the Profit Forecast Period based on the growth in its advertising sales during July and December 2004 and the advertising contracts which have been entered into by Hainan TV so far.
g. The Media Company, its subsidiaries and associated company have entered into a number of contracts and letters of intent in respect of their various business activities and have received a number of written non-binding indications from customers and potential customers about the possible sales and/or license of the Media Group’s movies, television dramas or situation comedies. It has been assumed that such contracts will be honoured and that the letters of intent and non-binding written indications received from customers and potential customers will result in contracts on the terms indicated in the letters of intent and nonbinding written indications.
h. There will be no material change in the existing government policies or political, legal (including changes in legislation, regulations or rules), fiscal, economic, market conditions, or macro-economic measures in the PRC, Hong Kong or which is otherwise material to the revenue of the member companies of the Anglo Alliance Group.
i. There will be no material changes in exchange rates between RMB and HK$, and RMB and US$ and interest rates in the PRC from those presently prevailing during the Profit Forecast Period.
j. There will be no change in the bases or rates of taxation, including the preferential tax treatment enjoyed by the member companies of the Anglo Alliance Group in the PRC during the Profit Forecast Period.
k. There will be no material change in the rate of inflation in the PRC during the Profit Forecast Period.
l. The operations and business of the Anglo Alliance Group will not be severely interrupted by any force majeure events or unforeseen factors of any unforeseen reasons that are beyond the control of the Anglo Alliance Group, including but not limited to, the occurrence of natural disasters or catastrophes, epidemics or series accidents.

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m. The accounting policies used for the preparation of the Profit Projections will continue to be adopted by the Group and the Anglo Alliance Group and be applied consistently during the Profit Forecast Period.
n. Members of the Anglo Alliance Group will continue to retain all the certificates and licences necessary for running their existing businesses.
o. No significant new items or operating and administrative expenses which have not previously been incurred by the Anglo Alliance Group will be incurred during the Profit Forecast Period.
p. There will be no extraordinary or exceptional items which will be incurred by the Anglo Alliance Group during the Profit Forecast Period.
q. The possible investment in the Mobile Phone TV JV will have no material impact on the profitability of the Anglo Alliance Group during the Profit Forecast Period.

The financial projections support the profit forecast embodied by the Target Profit that the consolidated profit after taxation of the Anglo Alliance Group (prepared in accordance with the Generally Accepted Accounting Principles in Hong Kong) for the 12 months ending 31 May 2006 will not be less than HK$60 million. The Media Group’s turnover grew by approximately 16 times over the past three years and it recorded a net profit of approximately RMB4.1 million in 2004 as compared with a net loss of approximately RMB49.0 million in 2003. The Media Group plans that it will receive box office revenue from the distribution of 7 movies during the Profit Forecast Period. 2 of the 7 movies are now showing in the PRC. However, the precise figures of the relevant box office receipts are still not available. Distribution work in respect of the other 5 new movies is expected to commence during the Profit Forecast Period. In 2004, the Media Group launched 1 new movie. The revenue generated by the Media Group in 2004 from the movie launched in 2004 together with the 2004 box office receipts of another movie launched in 2003 and the licensing and sub-licensing income derived in 2004 from other movies in the film library of the Media Group amounted to approximately RMB40 million. In 2004, the Media Group sold broadcasting rights in respect of a total of about 200 episodes of television dramas and situation comedies which generated a total revenue of approximately RMB22 million. The Media Group plans to sell more than 1,000 episodes of television dramas and situation comedies during the Profit Forecast Period. Based on the proposed expansion in the business activities, the management of the Media Group expects that the revenue which may be derived from the above business activities during the Profit Forecast Period will be higher than that in 2004. The advertising income of the Media Group during the Profit Forecast Period of approximately RMB34.4 million which is supported by contracts which have already been entered into is already approximately 3.4 times higher than the total advertising income (of approximately RMB10.1 million) generated by the Media Group in 2004. Based on the

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above major factors, the Vendor and the management of the Anglo Alliance Group believe that the above financial projections in respect of the Anglo Alliance Group for the 12 months ending 31 May 2006 are reasonable.

Shareholders’ attention is drawn to the report of EYCFL on the Target Profit. Whilst the Vendor and the director of Anglo Alliance consider that the financial projections have been compiled with due care and consideration and due and careful enquiry based on their experience in the industry, given EYCFL’s reservations about the assumptions underlying the financial projections and the lack of objective information and data which has been provided to EYCFL to support the financial projections, EYCFL is unable to opine that the financial projections which support the Target Profit have been compiled with due care and consideration and/or after due and careful enquiry. EYCFL advises that Shareholders and investors should not rely upon the Target Profit as a profit forecast.

The Directors would also like to emphasize that the actual results of the Anglo Alliance Group for the period of 12 months after completion of the Deed may differ from the Target Profit of HK$60 million since anticipated events frequently do not occur as expected and the variation may be material. The assumptions adopted in the preparation of the financial projections may not necessarily remain valid for part of or the whole of the Profit Forecast Period. Investors and Shareholders should note that there is no assurance that the Target Profit can be met by the Anglo Alliance Group and should not rely upon the Target Profit being met. Shareholders should also carefully study the reports from EYCFL, as the financial adviser to the Company, and Eddie K. K. Lau CPA Limited, as the consultant accountants engaged by the Company to report on the Target Profit as set out below.

Prior to the changes in the payment terms pursuant to the Supplemental Deed and the Supplemental Agreement, the Directors in negotiating the original terms of the UHL SP Agreement considered that it would be to the Company’s benefit to have a price adjustment mechanism whereby the Vendor will pay compensation in cash to Orient Ventures if the actual audited net profit of the Anglo Alliance Group for the 12 months following the completion of the Deed falls below the Target Profit. Shareholders should also note that the payment terms have been changed pursuant to the Supplemental Agreement whereby the Company is only required to pay the Basic Consideration upon completion of the UHL SP Agreement. Further Consideration is only payable if the product of the Audited Profit and 9.167 exceeds the Basic Consideration. Shareholders should refer to the details of the payment terms and the consideration adjustment mechanism as set out in the paragraph headed “Consideration” under the section headed “The UHL SP Agreement” of the Letter from the Board set out in this circular.

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2. LETTER FROM EDDIE K. K. LAU CPA LIMITED

Set out below is the text of the letter prepared by the firm of consultant accountants engaged by the Company to report on the Target Profit as required under Rule 14.62 of the Listing Rules and Rule 10 of the Takeovers Code.

Units C-E, 23rd Floor, CNT Tower, EDDIE K.K. LAU CPA LIMITED Certified Public Accountants 338 Hennessy Road, Wanchai, Hong Kong Tel : (852) 2576 2038 Fax : (852) 2576 2102

13 May 2005

The Directors

Universal Holdings Limited

Suite 4306, 43rd Floor, Far East Finance Centre 16 Harcourt Road, Admiralty Hong Kong

Dear Sirs,

We have reviewed the accounting policies adopted and calculations made in arriving at the forecast of the consolidated profit after taxation of Anglo Alliance Co., Ltd. (the “Anglo Alliance”), Beijing Hua Yi Hao Ge Media Culture Co., Ltd. (the “Hao Ge”), Asian Union Film and Media (the “Media Company”) and its subsidiaries (hereinafter collectively referred to as the “Anglo Alliance Group”) as defined in the accountants’ reports set out in Appendices III, IV and V of the circular issued by Universal Holdings Limited (the “UHL”) dated 13 May 2005 (the “Circular”) for a period of twelve months commencing from the date of completion of the acquisition of the Anglo Alliance Group (the “Financial Projections”) in accordance with the Deed dated 2 February 2005 in connection with, inter alia, UHL’s proposed acquisition of the entire issued share capital of, and shareholder’s loan to, Anglo Alliance.

The Financial Projections tend to support the achievability of the consolidated profit after taxation of the Anglo Alliance Group for the twelve months after completion of the Deed of not less than HK$60 million (the “Target Profit”), which was actually agreed after arm’s length negotiations between UHL, Mr. Ko and the Vendor, and was not supported by any financial projections of the Anglo Alliance Group at the time when it was arrived at. The Financial Projections were subsequently prepared for the purpose of fulfilling the requirement of Rule 14.62 of the Listing Rules and Rule 10 of the Takeovers Code. The Target Profit under the price adjustment mechanism is regarded as a profit forecast under the rules.

The Financial Projections, for which the directors of the Anglo Alliance Group are solely responsible, have been prepared by them based on a forecast of the results for the 12 months ending 31 May 2006 (the “Profit Forecast Period”).

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In 2005, the Media Company and its subsidiaries (the “Media Group”) plans to distribute 7 new movies which were produced or purchased by the Media Group. It is planned that 5 out of the 7 movies would be distributed in the Profit Forecast Period which, together with the projected licensing and sub-licensing income on other movies in the film library, would increase the income on licensing and sub-licensing of film rights to RMB184.3 million (as compared with 1 new movie distributed in 2004 which, together with the licensing and sub-licensing income on other movies in the film library, generated income on licensing and sub-licensing of film rights of RMB40 million in 2004).

The Media Group also plans to sell more than 1,000 episodes of TV programmes in the Profit Forecast Period (as compared with about 200 episodes in 2004), which would increase the income from licensing and sub-licensing of TV programmes rights to RMB216.6 million (as compared with RMB22 million in 2004).

The income from licensing and sub-licensing of film and TV programmes rights are projected based on the box office receipts and sales of comparable movies, television dramas and situation comedies produced by others in the market or by the Media Group in the past as selected by the management of the Media Group based on their business experience and as adjusted in proportion to the relative production cost with a general risk discount factor ranging from 20% to 40% on the projected income being applied which the management of the Media Company considers appropriate in view of the general unpredictable nature of the industry.

The projected net advertising and commission income of the Media Group in the Profit Forecast Period, based on the contracts already entered into, would be increased to RMB42.3 million (as compared with RMB10.1 million in 2004).

Due to the significant increase in income from licensing and sub-licensing of film rights and TV programmes rights and advertising, the consolidated profit after taxation of the Media Group in the Profit Forecast Period would be increased to about RMB103.5 million (as compared with RMB11.8 million in 2004). Out of the total projected turnover of RMB449.4 million (including income from licensing and sub-licensing of film and TV programmes rights, net advertising and commission income and other income), approximately 10.9% of the total income is supported by signed contracts, while approximately 89.1% is unsupported by signed contracts.

After the acquisition of Hainan TV, an associated company of the Media Company, in 2004, the new management has brought significant change to the business of the Travel Channel, and thus leading to significant improvement in results over 2003. The financial projections in respect of Hainan TV assume that the sales of the Travel Channel’s advertising timeslot will continue to grow based on the growth in advertising sales of Hainan TV during July 2004 (when the Travel Channel was relaunched) and December 2004 and the advertising contracts which have been entered into by Hainan TV so far, and the advertising income in the Profit Forecast Period would be increased to RMB240.2

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million (as compared with RMB80.1 million in 2004). The income from the sales of advertising timeslot, after netting off all the relevant expenses, taxation, amortisation of goodwill and allowing for the percentage of equity shares held by the Media Company, would contribute RMB37 million (as compared with negative RMB7.7 million in 2004) to the consolidated profit after taxation of the Media Group.

The contribution from Hainan TV together with the consolidated profit after taxation of RMB103.5 million of the Media Group as stated above, add up to a total consolidated profit after taxation of RMB140.5 million (as compared with RMB4.1 million in 2004) for the Profit Forecast Period.

The above projected/actual figures of the Media Group can be summarised as follows:

12 months ending	12 months ending	Year ended
	31 May	31 December
	2006	2004
	RMB million	RMB million
Income from licensing and sub-licensing of
film rights	184.3	40.0
Income from licensing and sub-licensing of
TV programmes rights	216.6	22.0
Net advertising and commission income	42.3	10.1
Total turnover	449.4	77.0
Consolidated profit of the Media Group
excluding share of profit/(loss)
after taxation less amortisation of
goodwill of Hainan TV	103.5	11.8
Hainan TV advertising timeslot income	240.2	80.1
Profit/(loss) after taxation less amortisation of
goodwill contributed from Hainan TV
to the Media Group	37.0	(7.7)
Consolidated profit after taxation of the Media Group	140.5	4.1

Anglo Alliance holds 98% of the equity shares of Hao Ge, which in turn holds 50% of the equity shares of the Media Company. In other words, Anglo Alliance indirectly holds 49% of the equity shares of the Media Company. After allowing for 49% effective equity shares of the Media Group held by Anglo Alliance and translating RMB into HK Dollar at the exchange rate of RMB1.07 = HK$1, the consolidated profit after taxation of the Media Group attributable to the Anglo Alliance Group will not be less than HK$60 million.

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In order to meet the requirement of funding due to the increased activities level, an additional amount of approximately HK$100 million in the form of shareholder’s loan has been advanced by the Vendor to the Anglo Alliance Group as operational funding of the Media Group. The Anglo Alliance Group will also finance its funding requirement by internally generated cash flow. The directors of the Anglo Alliance Group are of a view that they would have sufficient working capital in the Profit Forecast Period.

We would like to draw your attention to the report of the financial advisor of the Group (“EYCFL”) on the Target Profit. According to the report, the formation of the Target Profit was not based upon any financial projections of the Anglo Alliance Group. To this extent, the profit forecast as embodied in the Target Profit was not compiled with due care and consideration and/or after due and careful enquiry. Rather, the Target Profit was agreed as a consideration adjustment mechanism after arm’s length negotiations between the parties to the Deed. Qualifications have been made in respect of certain principal assumptions underlying the Financial Projections which support the profit forecast embodied in the Target Profit. EYCFL is not in a position to opine that the bases and assumptions underlying the Target Profit are realistic and/or reasonable. Given EYCFL’s reservations about the assumptions underlying the Financial Projections which support the Target Profit and the lack of objective information and data which has been provided to EYCFL to support the Financial Projections, EYCFL is unable to opine that the Financial Projections have been compiled with due care and consideration and/or after due and careful enquiry. EYCFL advises that shareholders and investors should not rely upon the Target Profit as a profit forecast.

Due to the nature of the industry and the uniqueness of each movie, drama or situation comedy, we lack any objective information nor sufficient data to form a view as to the reasonableness of certain fundamental assumptions, in particular the comparability of the movies, television dramas and situation comedies selected by the management of the Media Group based on their business experience, whether there is any correlation between the production cost and income, or the reasonableness of the risk discount factor applied. We are not in a position to form a view that these assumptions are reasonable or realistic. Regarding the financial projections of Hainan TV, shareholders and investors should note that the operational history of Hainan TV and the Travel Channel under the present management of Hainan TV is relatively short and the existing business trend of Hainan TV and the Travel Channel may or may not be capable of being maintained in the future.

We emphasize that the Financial Projections necessarily depend on subjective judgements of the directors of the Anglo Alliance Group and, according to the nature of the business and the period covered, are subject to numerous and substantial inherent uncertainties. Consequently, it cannot be relied upon to the same extent as information derived from the audited accounts for completed accounting periods.

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The Anglo Alliance Group has not prepared any financial projections in the past and we are unable to review any previous financial projections in order to assess the historic accuracy of the forecasting records.

Except for the failure of the Anglo Alliance Group to provide any past financial projections for our review, in our opinion the Financial Projections, so far as the accounting policies and calculations are concerned, have been properly compiled on the basis of the assumptions made by the directors of Anglo Alliance, Hao Ge and the Media Company as set out in Section 1 of Appendix VIII to the Circular. We, however, due to the reasons set out above, are unable to form a view that the bases and assumptions underlying the Financial Projections are reasonable or realistic and apart from the accounting policies and calculations are concerned, we are also unable to form a view that the Financial Projections have been properly compiled. In our opinion the Financial Projections are presented on a basis consistent in all material respects with the accounting policies normally adopted by the Group, Anglo Alliance, Hao Ge, and the Media Company and its subsidiaries, as set out in the accountants’ reports dated 13 May 2005, the text of which are set out in Appendices I, III, IV and V to this Circular respectively.

Yours faithfully, Eddie K.K.Lau CPA Limited Certified Public Accountants Hong Kong

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3. LETTER FROM EYCFL

Set out below is the text of the letter prepared by EYCFL, the financial adviser to the Company, reporting on the Target Profit as required under Rule 14.62 of the Listing Rules and Rule 10 of the Takeovers Code.

Ernst & Young 安永企業融資顧問有限公司

Corporate Finance Limited 香港中環金融街8號

12th Floor 國際金融中心2期12樓

Two International Finance Centre 電話：(852) 2846 9888

8 Finance Street, Central 傳真：(852) 2501 0343 Hong Kong Phone: (852) 2846 9888 Fax: (852) 2501 0343

13 May 2005

The Directors Universal Holdings Limited Suite 4306, 43rd Floor Far East Finance Centre 16 Harcourt Road Admiralty, Hong Kong

Dear Sirs,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTIONS RELATING TO THE PROPOSED ACQUISITION OF ANGLO ALLIANCE WHICH INVOLVES THE ISSUE OF NEW SHARES AND CONVERTIBLE NOTES AND APPLICATION FOR WHITEWASH WAIVER

We understand that that the Target Profit of not less than HK$60 million consolidated net profit of the Anglo Alliance Group for the 12 months following completion of the Deed which is a component of the price adjustment mechanism under the Deed is regarded as a profit forecast under Rule 14.62 of the Listing Rules and Rule 10 of the Takeovers Code. Details of the price adjustment mechanism as well as the historical financial information in respect of Anglo Alliance, Hao Ge and the Media Company have been set out in the circular of the Company dated 13 May 2005 (the “Circular”). Capitalised terms used in this letter have the same meanings as defined in the Circular unless otherwise defined herein.

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Financial projections in respect of the Anglo Alliance Group for the 12 months ending 31 May 2006 (the “Financial Projections”) have been prepared by the Vendor and the directors of Anglo Alliance, Hao Ge and the Media Company in connection with the requirement that the Target Profit be reported upon as a profit forecast. The Financial Projections support the Target Profit assuming that the Deed will be completed on 31 May 2005 (the Deed may be completed at any time before 31 May 2005 upon satisfaction or waiver of all the conditions precedent of the Deed). We have discussed the bases and assumptions for the Financial Projections with the Vendor, who is also a director of each of Anglo Alliance, Hao Ge and the Media Company, and with Eddie K.K. Lau CPA Limited, being the firm of consultant accountants engaged by the Company to review the preparation of the Financial Projections. Shareholders’ attention is drawn to the summary of the principal bases and assumptions of the Financial Projections and the letter from the Consultant Accountants reporting on the Target Profit set out above in Appendix VIII to the Circular.

The Consultant Accountants have confirmed that the Financial Projections have been prepared on a basis consistent with the accounting policies adopted by the Group and those adopted for the preparation of the accountants’ reports on Anglo Alliance, Hao Ge and the Media Company as set out in the Circular and that the Financial Projections have been properly compiled based on the bases and assumptions so far as the accounting policies and calculations are concerned.

As set out in the Announcement, the formulation of the Target Profit was not based on any financial projections of the Anglo Alliance Group. The Target Profit was agreed after arm’s length negotiations between the Company, Mr. Ko and the Vendor. Based on our discussions with the Vendor and the Consultant Accountants, we understand that the members of the Anglo Alliance Group have not prepared any financial budgets or projections in the past. We are therefore unable to review any previous financial budgets or projections with a view to assessing the historic accuracy of the forecasting and budgeting records of the members of the Anglo Alliance Group. In addition, we have not been provided with any business plan in respect of the businesses of the Anglo Alliance Group (including the Media Group) covering the Profit Forecast Period.

Anglo Alliance and Hao Ge are investment holding companies and do not have any business activities save for the holding of their interests in the Media Group. The Media Group is principally engaged in various media related businesses in the PRC, including the production of television dramas (including situation comedies), investment in movie production, advertising agency and advertising production. Hainan TV is an associated company of the Media Company. It is principally engaged in the production and editing of television programmes for the Travel Channel.

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Based on the Financial Projections covering the Profit Forecast Period, approximately 38.3% of the turnover of the Media Company for such period is forecast to be derived from the box office receipts and other licensing and sub-licensing income of the Media Company’s movies. We understand that a substantial portion of the projected box office receipts for the Media Group’s movies and projected sales of the distribution rights of the movies were made based on the box office receipts and sales of licensing rights of movies considered by the directors of the Media Company to be comparable (some of which movies were produced by others in the market and some of which were produced by the Media Group in the past) and as adjusted in proportion to the relative production cost with a general risk discount factor ranging from 20% to 40% of the relevant projected income. We are informed that the Vendor and the directors of Anglo Alliance, Hao Ge and the Media Company consider that it is a reasonable assumption that such movies selected as comparable by the directors of the Media Company are in fact comparable. We have not been provided with sufficient information and analysis in respect of the selection of the comparables. As a result, we are unable to form any view as to whether this assumption is realistic and/or reasonable. We have also not been given detailed justification and analysis on the discount factors applied. As such we are also unable to form a view as to the reasonableness of the discount factors.

We understand from the directors of the Media Company that there is no official information available on the box office receipts and licensing income generated by PRC movies. We are informed that the management of the Media Group obtained the information it has relied upon as to the box office receipts and licensing income of the chosen comparable movies from various articles posted on the internet. We understand that this information has not been verified and hence we are unable to form a view as to whether it is reasonable to reply upon such information as accurate.

The Vendor and the directors of Anglo Alliance, Hao Ge and the Media Company also consider that it is reasonable to assume that there is a correlation between the production cost of a film and the box office receipts and licensing rights sales based on their business experience. However, we find that we are not in a position to form a view as to the reasonableness of the assumption made that the income generated from a movie will be in direct proportion to the production cost of such movie, in particular in view of the nature of the industry. Neither are we in a position to form a view as to whether the risk discount factor applied is realistic and/or reasonable. It is in the nature of the film industry that each movie is a unique product and because of this it is extremely difficult to accurately or scientifically forecast how much income any particular movie will generate. We believe that there are inherent significant uncertainties in any attempt to forecast the income which may be derived in respect of any particular film being produced. Furthermore, whilst we note that the Media Group has invested in a number of movies in the past, its investments in most of such movies were made together with other movie producers. The Media Group recently invested in a number of movies

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where it was the sole investor and producer; two of such movies are now showing in cinemas in the PRC. However, we were informed that information on the relevant box office receipts of the two movies are not available up to the date of this letter. Given the Media Group’s relatively short history in producing movies itself, we lack historic information by reference to which we can assess the Media Group’s assumptions with regard to the income to be derived from those movies which it has produced by itself.

The financial projections prepared in respect of the Anglo Alliance Group estimate that the sales of television dramas (other than situation comedies) would represent approximately 33.3% of the turnover of the Media Company for the Profit Forecast Period. The Vendor and the directors of Anglo Alliance, Hao Ge and the Media Company assume that in future every new television drama (other than situation comedies) produced by the Media Group will be sold to each and every of the 30 television station which previously purchased any television drama from the Media Group. Historically, not all television dramas invested in or produced by the Media Group were sold to each of the 30 television stations which are customers of the Media Group. This assumption is not supported by the historical purchasing pattern of the Media Group’s television dramas by television stations. We are unable to opine as to whether this assumption is realistic and/or reasonable. We are informed that the projections of the sales income in respect of the television dramas were based on the income generated by the various respective series of television dramas (including situation comedies) invested in or produced by the Media Group most recently sold to each of the said 30 television stations in the PRC (which took place during 2003 and 2004) and as adjusted in proportion to the relative production cost with a general risk discount factor of 40% of the relevant projected income. As mentioned above, we have not been provided with information and analysis on the discount factor which has been applied and we are not in a position to form any view as to its reasonableness. Whilst the Vendor and the directors of Anglo Alliance, Hao Ge and the Media Company consider this assumption reasonable from their commercial point of view, we are not in a position to express an opinion on the appropriateness or reasonableness of using the last series of television drama sold to each television station as the base (which comparables include sales in 2003 and 2004 and which assumption does not take into account differences in story type, casting, target audience and so forth which may be different from the various series of television dramas planned to be sold during the Profit Forecast Period) or upon the assumption made that there is a proportionate correlation between the production cost of a television drama and the income which will be generated by it or upon the risk discount factor applied.

The financial projections prepared in respect of the Anglo Alliance Group estimate that the sale of situation comedies would represent approximately 15.2% of the turnover of the Media Company for the Profit Forecast Period. We understand that the Media Group entered into co-investment agreements with an affiliated company of China Central Television Station (“CCTV”) in November 2004 and March 2005 in respect of the

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APPENDIX VIII

production of a total of 80 episodes of situation comedies. After the production of these 80 episodes, the Media Group intends to sell them to CCTV. The Media Group expects that such situation comedies may also subsequently be sold to other local television stations on the basis that those other television stations may only broadcast such situation comedies after CCTV has finished broadcasting the relevant whole series of such situation comedies. No income from the possible sales of such situation comedies to other PRC local television stations has been factored into the financial projections. We are informed that the Media Company plans to produce a further 640 situation comedy episodes by itself in 2005 and that it further plans first to sell all such 720 episodes with preferential broadcasting rights to CCTV. The Media Group also assumes that CCTV will purchase all 720 episodes of the situation comedies one month after production of each series is completed. We understand that pursuant to the co-investment agreements entered into between the Media Group and an affiliated company of CCTV in respect of the production of 80 situation comedy episodes, such affiliated company of CCTV will responsible for the sale of the situation comedies to CCTV. We understand from the management of the Media Company that CCTV has verbally indicated that it will acquire the 80 situation comedy episodes to be produced under the co-investment arrangements. We have not been provided with any written evidence indicating that CCTV will purchase any of the 720 episodes planned to be produced. We understand that in the past the Media Group’s situation comedies were sold to various local television stations in the PRC for broadcasting but have not previously been sold to CCTV. In our opinion there has been a lack of objective evidence provided to us to support the reasonableness of such plans and assumptions and we are unable to express any opinion as to whether such are realistic and/or reasonable.

We understand from the Vendor that the Media Group only enters into business contracts shortly before the actual sales of television programmes and licensing of movie titles. We understand that out of the total turnover of the Media Group, only approximately 10.9% is supported by signed contracts, approximately 23.5% is supported by nonbinding letters of intent and approximately 0.9% is supported by written indications from customers. Shareholders should note that approximately 89.1% of the total projected turnover of the Media Group for the Profit Forecast Period is unsupported by contracts and approximately 64.7% is unsupported by contracts, letters of intent or written indications of demand. Given the large proportion of the forecast turnover which is unsupported as aforesaid, we are unable to form any view as to the reasonableness of the forecast in this regard.

It is projected that Hainan TV, an associated company of the Media Company, will be a significant source of profit for the Media Group. Hainan TV is principally engaged in the production and editing of television programmes for the Travel Channel. Shareholders should note that the management of Hainan TV changed significantly after the Media Company acquired a 49% interest in Hainan TV in January 2004. The new management of Hainan TV then brought significant changes to the image and the programmes of the

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REPORTS ON THE TARGET PROFIT

APPENDIX VIII

Travel Channel in mid 2004 and the financial performance and business of the Travel Channel during 2004 saw significant improvement over that for 2003. The financial projections in respect of Hainan TV during the Profit Forecast Period assumes that that the sales of the Travel Channel’s advertising timeslot will continue to grow based on the growth in advertising sales of Hainan TV during July 2004 (when the Travel Channel was relaunched) and December 2004 and the advertising contracts which have been entered into by Hainan TV so far. Shareholders should note that the operational history of Hainan TV and the Travel Channel under the present management of Hainan TV is relatively short and the existing business trend of Hainan TV and the Travel Channel may or may not be capable of being maintained in the future.

As stated above, the formulation of the Target Profit was not based upon any financial projections of the Anglo Alliance Group. To this extent, the profit forecast as embodied in the Target Profit was not compiled with due care and consideration and/or after due and careful enquiry. Rather, the Target Profit was agreed as a consideration adjustment mechanism after arm’s length negotiations between the parties to the Deed. Taking into account the qualifications which we have stated above in respect of certain principal assumptions underlying the Financial Projections which support the profit forecast embodied in the Target Profit, we are not in a position to opine that the bases and assumptions underlying the Target Profit are realistic and/or reasonable. Whilst the Vendor and the directors of Anglo Alliance consider that the Financial Projections have been compiled with due care and consideration and due and careful enquiry based on their experience in the industry, given our reservations about the assumptions underlying the Financial Projections which support the Target Profit (as explained above in this letter, we are unable to form a view as to whether a number of fundamental assumptions are realistic and/or reasonable) and the lack of objective information and data which has been provided to us to support the Financial Projections, we are unable to opine that the Financial Projections have been compiled with due care and consideration and/or after due and careful enquiry. We advise that Shareholders and investors should not rely upon the Target Profit as a profit forecast.

For and on behalf of

Ernst & Young Corporate Finance Limited John Maguire Managing Director

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PROPERTY VALUATION

APPENDIX IX

The following is the text of the letter and valuation certificate received from Vigers Appraisal & Consulting Ltd., an independent property valuer, prepared for the purpose of incorporation in this circular, in connection with their valuation of the property interests of the Enlarged Group as at 28 February 2005.

Vigers Appraisal & Consulting Ltd.

International Assets Appraisal Consultants 10/F The Grade Building, 398 Kwun Tong Road, Kowloon, Hong Kong

==> picture [76 x 76] intentionally omitted <==

13 May 2005

The Board of Directors Universal Holdings Limited Unit 4306-07 Far East Finance Center 16 Harcourt Road Admiralty Hong Kong

Dear Sirs,

In accordance with your instructions for us to value of the property interests of Beijing Jiya Telecommunication Engineering Co., Ltd. (“Jiya Telecommunication”) in the People’s Republic of China (“the PRC”), we confirm that we have carried out inspection, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market value of such property interests as at 28 February 2005.

Our valuation is our opinion of the market value which we would define as intended to mean “the estimated amount for which a Property should exchange on the date of Valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

The property has no commercial value due to the short term nature of the tenancy or lack of substantial profit rent.

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.

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We have been provided with extracts from title documents relating to such property interest. We have not, however, searched the original documents to verify ownership or to verify existence of any lease amendment which do not appear on the copies handed to us. All documents and leases have been used for reference only. All dimensions measurements and areas are approximations.

In undertaking our valuation of the property, we have relied on the legal opinion provided by the Group’s PRC legal adviser (“the PRC Legal Opinion”).

We have inspected the exterior and, where possible, the interior of the property. However, we have not carried out a structural survey nor have we inspected woodwork or other parts of the structures which are covered, unexposed or inaccessible and we are therefore unable to report that any such parts of the property interests are free from defect.

We are relied to a considerable extent on information provided by you and have accepted advise given to us by you on such matters as planning approvals or statutory notices, easements, tenure, occupation, lettings, site and floor areas and in the identification of those property interests in which the Group has a valid interest.

No allowance has been made in our valuation for any charges, mortgages or amounts 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 interests are free from encumbrances restrictions and outgoings of an onerous nature which could affect its value.

Unless otherwise stated, all money amounts stated are in Renminbi. The exchange rate used in valuing the property interests in the PRC on at 28 February 2005 was HK$1=RMB1.06. There has been no significant fluctuation in exchange rate between that date and the date of this letter.

We enclose herewith our valuation certificate.

Yours faithfully, For and on behalf of

VIGERS APPRAISAL & CONSULTING LTD.

Raymond Ho Kai Kwong, Registered Professional Surveyor MRICS, MHKIS, MSc(e-com) Executive Director

Note: Raymond K.K. Ho, Chartered Surveyor, MRICS, MHKIS, MSc (e-com) has over eighteen years’ experience in undertaking valuations of properties in Hong Kong and Macau and has over eleven years’ experience in the valuation of properties in the PRC.

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PROPERTY VALUATION

APPENDIX IX

VALUATION CERTIFICATE

Property

Description

Particulars of occupancy

Market value in existing state as at 28 February 2005

A portion of ground floor, Northern District, DeShi Building, No.9 Shangdidonglu, Haidian District, Beijing City, the PRC.

The property comprises a portion on the ground floor of a 6-storey office building completed in or about 2000.

The property has a gross floor area of approximately 316 sq.m.

The property is leased to No commercial Jiya Telecommunication value for a term from 7 January 2003 to 6 January 2006 at a monthly rent of RMB27,874 exclusive of management fee.

The property is occupied by Jiya Telecommunication as office.

Notes:

The PRC Legal Opinion states that:
(i) The tenancy agreement is legal and effective.
(ii) The landlord is the registered owner of the property and legally and effectively obtained the building ownership of the property. The landlord has the right to lease out the property.
(iii) As the tenancy agreement has not been registered at the Building Administrative Bureau, therefore there is a risk that the tenancy agreement will not be enforceable against any third party who has registered another tenancy agreement of the subject property. However, it would not affect the legality of the subject tenancy agreement and no penalty will be imposed on Jiya Telecommunication.

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GENERAL INFORMATION

APPENDIX X

1. RESPONSIBILITY STATEMENTS

This circular includes particulars given in compliance with the Takeovers Code and the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually, and jointly and severally, accept full responsibility for the accuracy of the information (other than those relating to the Anglo Alliance Group, JiCheng and the Mobile Phone TV JV) contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions (other than those relating to the Anglo Alliance Group, JiCheng and the Mobile Phone TV JV) expressed in this circular have been arrived at after due and careful consideration and there are no other facts (other than those relating to the Anglo Alliance Group, JiCheng and the Mobile Phone TV JV) not contained in this circular, the omission of which would make any statement herein misleading.

This circular also includes particulars given in compliance with the Takeovers Code and the Listing Rules for the purpose of giving information with regard to the Anglo Alliance Group, JiCheng and the Mobile Phone TV JV. The Vendor accepts full responsibility for the accuracy of the information relating to the Anglo Alliance Group, JiCheng and the Mobile Phone TV JV contained in this circular and confirm, having made all reasonable enquiries, that to the best of his knowledge, opinions expressed in this circular relating to the Anglo Alliance Group, JiCheng and the Mobile Phone TV JV have been arrived at after due and careful consideration and there are no other facts relating to the Anglo Alliance Group, JiCheng and the Mobile Phone TV JV not contained in this circular, the omission of which would make any statement herein misleading.

2. DISCLOSURE OF DIRECTORS’ INTERESTS

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executives of the Company in the shares, underlying shares and debentures of the Company or any of its associated corporation(s) (within the meaning of Part XV of the SFO) which were required, (i) pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO), or (ii) pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or (iii), pursuant to the Model Code for Securities Transactions by Directors of Listed Companies (“Model Code”) of the Listing Rules, to be notified to the Company and the Stock Exchange, or (iv) to be disclosed in this circular pursuant to the requirements of the Takeovers Code, as follows:

(a) Long position in shares in the Company

		Nature of	Number of	Percentage
Name of Director	Note	interest	Shares held	holdings
Mr. Ko	(i)	Personal	8,928,844,074	227.25%
	(ii)	Corporate	1,000,437,150	25.46%

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GENERAL INFORMATION

APPENDIX X

(b) Long position in shares in DVN (Holdings) Limited (“DVN”)

		Nature of	Number of	Percentage
Name of Director	Note	interest	Shares held	holdings
Mr. Ko	(iii)	Personal	343,000	0.06%
		Family	2,040,816	0.35%
		Corporate	158,357,940	27.36%

Notes:

(i) Mr. Ko owns 18,640,000 (representing 0.47%) ordinary shares in the Company. Mr. Ko is also deemed to have interest in 8,910,204,074 ordinary shares of the Company pursuant to the UHL SP Agreement.
(ii) Kwan Wing Holdings Limited (“Kwan Wing”) and Techral Holdings Limited (“Techral”), a subsidiary of Kwan Wing, beneficially owns 360,399,000 and 640,038,150 ordinary shares in the Company, respectively. Mr. Ko has 100% direct interest in Kwan Wing and approximately 96% beneficial interest in Techral.
(iii) 118,403,418 ordinary shares in DVN are directly held by Prime Pacific International Limited (“Prime Pacific”), which is owned as to 67% and 33% by Gold Pagoda Incorporated (“Gold Pagoda”) and Prime Gold International Limited (“Prime Gold”), respectively.

Prime Gold is owned as to 82.45% by Kwan Wing.

Gold Pagoda is an indirect wholly-owned subsidiary of the Company.

31,032,522 ordinary shares in DVN are held directly by Universal Appliances Limited, which is wholly-owned subsidiary of the Company.

2,956,000 ordinary shares in DVN are held by All Mark Limited, which is an indirect wholly-owned subsidiary of the Company.

2,822,000 ordinary shares in DVN are held by First Gain International Limited, which is wholly owned by Mr. Ko.

3,144,000 ordinary shares in DVN are held by Kwan Wing.

2,040,816 ordinary shares in DVN are held by the spouse of Mr. Ko.

(iv) Million Way Enterprises Limited, an indirect wholly-owned subsidiary of the Company, also holds US$15,000,000 preference shares issued by DVN (Group) Limited, a wholly owned subsidiary of DVN. At the Latest Practicable Date, these preference shares are exchangeable to approximately 28,147,700 ordinary shares of DVN upon exchange and are subject to adjustments.

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GENERAL INFORMATION

APPENDIX X

(c) Rights to acquire ordinary shares of DVN

		Number
		of share options
		outstanding
	Date of share	as at the Latest		Exercise
Directors	options granted	Practicable Date	Exercise period	price per share
				HK$
Mr. Ko	23/7/2002	3,000,000	24/7/2002 —	1.470
			23/7/2005
	10/12/2003	450,000	1/1/2004 —	0.824
			31/12/2006
		3,450,000

Save as disclosed above and other than certain nominee shares in subsidiaries held by Mr. Ko in trust for the Company, as at the Latest Practicable Date, none of the directors, the chief executive (including their spouse and children under 18 years of age) or their associates had any other beneficial interests in the shares of the Company and its associated corporation (within the meaning of the SFO).

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or chief executive of the Company had any interests or short positions in the shares, underlying shares and debentures of the Company or any of its associated corporation(s) (within the meaning of Part XV of the SFO) which were required, (i) pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO), or (ii) pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or (iii) pursuant to the Model Code of the Listing Rules to be notified to the Company and the Stock Exchange, or (iv) to be disclosed in this circular pursuant to the requirements of the Takeovers Code.

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GENERAL INFORMATION

APPENDIX X

(d) Competing interests

None of the Directors or any of their respective associates have any interests in any business which may compete with the business of the Group (as would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them was a controlling shareholder of the Company).

3. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as known to any Directors or chief executive of the Company, the following persons (other than a Director or chief executive of the Company) had, or were deemed or taken to have interests or short positions in the shares or underlying shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO or, who were, directly or indirectly, interested in 10% 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 Enlarged Group or had any option in respect of such capital:

		Number of Shares
		interested or
	Capacity/	deemed to
	Nature of	be interested	Percentage
Name of Shareholder	interest	(long position)		holding
Blue World Investments Limited	Direct	82,654,000		2.10%
		240,760,000 (note 3)		6.13%
Leung Chi Yan_(note 1)_	Indirect	82,654,000		2.10%
		240,760,000 (note 3)		6.13%
Vendor	Personal	2,700,000,000		68.71%
Zhao Yue_(note 2)_	Family	2,700,000,000		68.71%

Notes:

The interests were held by Blue World Investments Limited.
Zhao Yue is the spouse of the Vendor. Therefore she is deemed to be interested in the 2,700,000,000 Shares deemed to be interested by the Vendor.
Being convertible preference shares of HK$0.01 each in the Company. These shares are convertible to 240,760,000 Shares, subject to adjustments.

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GENERAL INFORMATION

APPENDIX X

Save as disclosed above, so far as known to the Directors or chief executive of the Company, no other person (not being a Director or chief executive of the Company) had any interests or short positions in shares or underlying shares of the Company which would fall to be disclosed to the Company and the Stock Exchange, under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was, directly or indirectly, interested in 10% 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 Enlarged Group or held any option in respect of such capital.

4. DIRECTORS’ INTERESTS IN ASSETS/CONTRACTS AND OTHER INTERESTS

Save as to the Deed, the Supplemental Deed, the UHL SP Agreement and the Supplemental Agreement, none of the Directors was materially interested in any contract or arrangement entered into by any member of the Enlarged Group subsisting at the Latest Practicable Date which was significant in relation to the business of the Enlarged Group.

Save as to the transaction contemplated under the Deed and the UHL SP Agreement, none of the Directors has any direct or indirect interests in any assets which have been 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 since 31 December 2004, being the date to which the latest published audited consolidated accounts of the Group were made up.

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GENERAL INFORMATION

APPENDIX X

5. PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

Pursuant to the articles of association of the Company, at any general meeting, resolution put to the vote of a meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:

(a) by the chairman of such meeting; or
(b) by at least three members present in person or in the case of a member being a corporation by its duly authorised representative or by proxy for the time being entitled to vote at the meeting; or
(c) by a member or members present in person or in the case of a member being a corporation by its duly authorised representative or by proxy and representing not less than one-tenth of the total voting rights of all members having the right to vote at the meeting; or
(d) by a member or members present in person or in the case of a member being a corporation by its duly authorised representative or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

A demand by a person as proxy for a member or in the case of a member being a corporation by its duly authorised representative shall be deemed to be the same as a demand by a member.

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GENERAL INFORMATION

APPENDIX X

6. MATERIAL CONTRACTS

The following contracts, not being contracts in the ordinary course of business, were entered into by the Company or its subsidiaries within the two years preceding the date of this circular and are or may be material:

a. the placing agreement dated 15 September 2003 entered into between Kwan Wing Holdings Limited, Techral Holdings Limited and an independent placing agent for placing 500,000,000 placing shares at an issue price of HK$0.03 each and the conditional top-up subscription agreement dated 15 September 2003 entered into between Kwan Wing Holdings Limited, Techral Holdings Limited and the Company;
b. the subscription agreement dated 8 October 2003 entered into amongst L-Tek Holdings Limited, Mogul Enterprises Limited (“Mogul”), Leaptek Limited (“Leaptek”), Mr. Chan Kam Kwan, Jason and Mr. Ho Te Hwai, Cecil in relation to, amongst other things, the subscription of 173,100,000 new ordinary shares and 676,900,000 preference shares in L-Tek Holdings Limited (the “L-Tek Subscription Agreement”) for a total cash consideration of HK$85 million;
c. the deed of termination dated 17 January 2004 entered into by the same parties to the L-Tek Subscription Agreement terminating the rights and obligations under the L-Tek Subscription Agreement;
d. the subscription agreement dated 17 January 2004 (the “Leaptek Subscription Agreement”) entered into between Leaptek, Mogul, the Company, Mr. Ko, Mr. Ho Te Hwai, Cecil and Mr. Chan Kam Kwan, Jason, in relation to, among other things, the subscription of the Leaptek ordinary shares and the Leaptek preference shares (with the warrants attached) by Mogul (as supplemented by a supplemental agreement entered into by the same parties on 3 February 2004) with a consideration of approximately HK$70 million;
e. the shareholders’ deed dated 18 May 2004 entered into between the Company, Mr. Ko and Motorola-Dragon Investment, Inc., in relation to the subscription agreement dated 18 May 2004 entered into between DVN (Holdings) Limited and Motorola-Dragon Investment, Inc. with a consideration of up to approximately US$33 million;
f. the Deed and the Supplemental Deed;
g. the UHL SP Agreement and the Supplemental Agreement; and
h. the placing and subscription agreement dated 22 February 2005 entered into between the Company, Kwan Wing Holdings Limited, Techral Holdings Limited and the placing agent in relation to the Placing and Top-up Subscription with the gross proceeds of approximately HK$78.6 million.

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GENERAL INFORMATION

APPENDIX X

7. LITIGATION

As at the Latest Practicable Date, no member of the Enlarged Group was engaged in any litigation or arbitration of material importance and no litigation or claim of material importance had known to the Directors to be pending or threatened by or against any member of the Enlarged Group.

8. EXPERTS AND CONSENTS

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

Name Qualification

EYCFL a licensed corporation to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities for the purposes of the SFO Somerley a licensed corporation to carry out type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities for the purposes of the SFO PricewaterhouseCoopers Certified Public Accountants Eddie K.K. Lau CPA Limited Certified Public Accountants Vigers Appraisal & Consulting Ltd. Property valuer, Chartered Surveyor

EYCFL, Somerley, PricewaterhouseCoopers, Eddie K.K. Lau CPA Limited and Vigers Appraisal & Consulting Ltd. have given and have not withdrawn their written consents to the issue of this circular with the inclusion herein of their letters or references to their names in the form and context in which they respectively appear.

None of EYCFL, Somerley, PricewaterhouseCoopers, Eddie K.K. Lau CPA Limited and Vigers Appraisal & Consulting Ltd. have any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

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GENERAL INFORMATION

APPENDIX X

None of EYCFL, Somerley, PricewaterhouseCoopers, Eddie K.K. Lau CPA Limited and Vigers Appraisal & Consulting Ltd. have any direct or indirect interests in any assets which have been, since 31 December 2004 (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 which are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.

9. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contracts with the Company or any member of the Group or associated companies which has more than 12 months to run and does not expire or is not determinable by the Group within one year without payment of compensation (other than statutory compensation) and no service contract has been entered into or amended within 6 months before the date of the Announcement.

10. SECRETARY AND QUALIFIED ACCOUNTANT OF THE COMPANY

The secretary of the Company is Mr. Chan Kam Kwan, Jason.

The qualified accountant of the Company is Mr. Ho Te Hwai, Cecil, who is a member of the Canadian Institute of Chartered Accountants and an associate member of the Hong Kong Institute of Certified Public Accountants.

11. SHAREHOLDINGS AND DEALINGS

(a) Save for the 1,019,077,150 Shares held by Mr. Ko and his concert parties as at the Latest Practicable Date as disclosed in the section headed “Shareholding structure of the Company” in the Letter from the Board of this circular, none of Mr. Ko and his concert parties (including any directors of any concert parties which are entities) owned or controlled any Shares, convertible securities, warrants, options or derivatives of the Company as at the Latest Practicable Date, none of them had dealt for value in any such Shares during the period starting six months prior to 2 February 2005 (being the date of the Announcement) and ending on the Latest Practicable Date, save for the Placing and Top-up Subscription. Save for Mr. Ko, no other Director held any Shares as at the Latest Practicable Date and none of them have dealt in any securities in the Company for value during the period commencing six months prior to 2 February 2005.

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GENERAL INFORMATION

APPENDIX X

(b) No person with whom Mr. Ko and his concert parties had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code owned or controlled any Shares, convertible securities, warrants, options or derivatives of the Company as at the Latest Practicable Date, and none of them had dealt for value in any such securities during the period starting six months prior to 2 February 2005 (being the date of the Announcement) and ending on the Latest Practicable Date.
(c) Neither EYCFL, Somerley, PricewaterhouseCoopers, Eddie K.K. Lau CPA Limited and Vigers Appraisal & Consulting Ltd. nor any other advisers to the Company as specified in class (2) of the definition of associate (excluding exempt principal traders) in the Takeovers Code, their respective ultimate holding companies, nor any of their respective subsidiaries or fellow subsidiaries owned or controlled any Shares, convertible securities, warrants, options or derivatives of the Company as at the Latest Practicable Date.
(d) No subsidiary of the Company or a pension fund of the Company or of its subsidiaries owned or controlled any Shares, convertible securities, warrants, options or derivatives of the Company as at the Latest Practicable Date.
(e) No fund manager (other than exempt fund manager) connected with the Company owned or controlled any Shares, convertible securities, warrants, options or derivatives of the Company as at the Latest Practicable Date.
(f) At no time during the period commencing six months prior to 2 February 2005 (being the date of the Announcement), and ending on the Latest Practicable Date, was any member of the Group a party to any arrangement to enable the Directors and their associates to acquire benefits by means of the acquisition of the Shares or any other body corporate.
(g) As at the Latest Practicable Date, there was no agreement, arrangement or understanding (including any compensation arrangement) between Mr. Ko or any of his concert parties and other persons in relation to the transfer of the Shares to be issued to Mr. Ko or any of his concert parties under the UHL SP Agreement and the Deed.
(h) As at the Latest Practicable Date, no person had any arrangement of the kind referred to in the third paragraph of Note 8 to Rule 22 the Takeovers Code with the Company or with any person who is an associate of the Company by virtue of classes (1), (2), (3) and (4) of the definition of associate in the Takeovers Code.

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GENERAL INFORMATION

APPENDIX X

12. MARKET PRICES

The table below shows the closing prices on the Stock Exchange of the Shares (i) at the end of each of the six calendar months preceding the date of the Announcement; (ii) on the last trading day immediately preceding the date of the Announcement being 17 December 2004; (iii) the end of the calendar months following the date of the Announcement and (iv) on the Latest Practicable Date:

Date	Closing Price
	HK$
2004
31 August	0.049
30 September	0.046
29 October	0.036
30 November	0.049
17 December	0.047
31 December	suspended
2005
31 January	suspended
28 February	0.137
31 March	0.147
29 April	0.133
Latest Practicable Date	0.141

The highest and lowest closing prices of the Shares as recorded on the Stock Exchange during the period commencing from the start of the six months preceding the date of the Announcement and the Latest Practicable Date were respectively HK$0.169 on 11 March 2005 and HK$0.035 on 21 October 2004.

13. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours from 9:00 a.m. to 5:00 p.m. (except Saturdays and public holidays) at the principal office of the Company at Unit 4306-07, Far East Finance Center, 16 Harcourt Road, Admiralty, Hong Kong up to and including 30 May 2005.

the Company’s memorandum and articles of association;
the material contracts referred to in the section headed “Material Contracts” in this Appendix;
the accountants’ report on Orient Ventures included in Appendix II to this circular;

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GENERAL INFORMATION

APPENDIX X

the accountants’ report on Anglo Alliance included in Appendix III to this circular;
the accountants’ report on Hao Ge included in Appendix IV to this circular;
the accountants’ report on the Media Group in Appendix V to this circular;
the written consents referred to under the section headed “Experts and Consents” in this appendix;
the annual reports of the Company for the three years ended 31 December 2004;
the letter from the Independent Board Committee set out on pages 39 to 40 of this circular;
the letter from Somerley set out on pages 41 to 84 of this circular;
a letter signed by PricewaterhouseCoopers setting out their opinion on the adjustments made on the pro forma financial information of the Enlarged Group as set out in Appendix VI to this circular;
the reports from EYCFL and Eddie K.K. Lau CPA Limited relating to the Target Profit, the texts of which are set out in Appendix VIII to this circular; and
the letter, summary of values and valuation certificate relating to the property interests of the Group, prepared by Vigers Appraisal & Consulting Ltd., the texts of which are set out in Appendix IX to this circular.

14. MISCELLANEOUS

The correspondence address of the Directors is at Unit 4306-07, Far East Finance Center, 16 Harcourt Road, Admiralty, Hong Kong;
The correspondence address of the Company is at Unit 4306-07, Far East Finance Center, 16 Harcourt Road, Admiralty, Hong Kong;
The registered office of the Company is at Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681 GT, George Town, Grand Cayman, Cayman Islands;
The Hong Kong branch share registrar and transfer office of the Company is Tengis Limited at G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong;

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GENERAL INFORMATION

APPENDIX X

The correspondence address of Mr. Ko is at Unit 4306-07, Far East Finance Center, 16 Harcourt Road, Admiralty, Hong Kong;
As at the Latest Practicable Date, there was no agreement, arrangement or understanding (including any compensation arrangement) existing (a) between Mr. Ko or his concert parties and any of the Directors, recent Directors, Shareholders or recent Shareholders and (b) between any Directors and any other person having any connection with or dependence upon the transactions contemplated under the UHL SP Agreement and the Whitewash Waiver;
As at the Latest Practicable Date, no Independent Shareholders had irrevocably committed themselves to vote for the transactions contemplated under the UHL SP Agreement or the Whitewash Waiver; and
The English text of this circular shall prevail over the Chinese text.

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NOTICE OF EGM

UNIVERSAL HOLDINGS LIMITED 友利控股有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 419)

NOTICE IS HEREBY GIVEN that a extraordinary general meeting (“ EGM ”) of Universal Holdings Limited (“ Company ”) will be held at 9:00 a.m. on Monday, 30 May 2005 at Unit 3203, Admiralty Centre I, 18 Harcourt Road, Admiralty, Hong Kong for the purposes of considering and, if thought fit, passing, with or without modification, the following resolutions:

ORDINARY RESOLUTIONS

(1) “ THAT the authorized share capital of the Company be hereby increased from HK$52,407,600 comprising 5,000,000,000 ordinary shares of HK$0.01 (“ Shares ”) each and 240,760,000 preference shares of HK$0.01 each to HK$302,407,600 by the creation of an additional 25,000,000,000 Shares.”
(2) “ THAT conditional upon the Listing Committee of The Hong Kong Stock Exchange Limited (the “ Stock Exchange ”) approving the listing of and granting permission to deal in, (i) 5,746,570,871 ordinary shares of HK$0.01 each (“ Shares ”) in the share capital of the Company to be issued to Mr. Ko Chun Shun, Johnson (“ Mr. Ko ”) and Mr. Dong Ping (such Shares, the “ Consideration Shares ”) under the sale and purchase agreement entered into between the Company and Mr. Ko on 2 February 2005 in relation to the entire issued share capital of Orient Ventures Limited (the “ Agreement ”) (as amended by a supplemental agreement entered into between the Company and Mr. Ko on 11 May 2005 (the “ Supplemental Agreement ”)) (a copy of the Agreement (as amended by the Supplemental Agreement) has been submitted to this meeting marked “A” and signed by the Chairman of this meeting for the purpose of identification); (ii) the Shares to be issued and allotted by the Company upon the conversion rights attaching to the first tranche convertible note of a principal amount of HK$103,984,694 (the “ First Tranche Convertible Note ”) to be issued by the Company to Mr. Ko under the Agreement (as amended by the Supplemental Agreement) being exercised; and (iii) the Shares to be issued and allotted by the Company upon the conversion rights attaching to the second tranche convertible note of a principal amount of up to HK$183,333,333 (the “ Second Tranche Convertible Note ”) to be issued by the Company under the Agreement (as amended by the Supplemental Agreement) being exercised, the transactions contemplated under the Agreement, including but not limited to,
(a) the purchase of the entire issued share capital of Orient Ventures Limited by the Company from Mr. Ko;

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NOTICE OF EGM

(b) the assignment of the loan in a sum of HK$436,600,000 owed by Orient Ventures Limited to Mr. Ko to the Company at completion of the Agreement (as amended by the Supplemental Agreement);
(c) the issue and allotment of the Consideration Shares;
(d) the issue of the First Tranche Convertible Note and the Second Tranche Convertible Note; and
(e) the acceptance and the exercise of an option to be granted by Ms Zhou Yue（趙越）to Anglo Alliance Co., Limited in respect of the 2% interests in the registered capital of 北京浩歌盛世影視文化有限公司 (Beijing Hao Ge Sheng Shi Film & TV Culture Co. Ltd.),

be hereby approved, ratified and confirmed and any directors of the Company be hereby authorized to do all such further acts and things and sign, execute and deliver all such documents and take all such actions which in his opinion may be necessary, desirable or expedient to implement and/or give effect to and/or in connection with the Agreement (as amended by the Supplemental Agreement) and the transactions contemplated thereunder.”

(3) “ THAT the waiver pursuant to Note 1 to the Notes on dispensations of Rule 26 of the Code on Takeovers and Mergers (the “ Takeovers Code ”) waiving any obligation on the part of Mr. Ko Chun Shun, Johnson (“ Mr. Ko ”) to make a mandatory general offer for all the issued shares in the capital of the Company and all other securities in the Company which carry rights to subscribe for or convert into new ordinary shares of the Company not already owned by him or parties acting in concert with him which would otherwise arise under Rule 26.1 of the Takeovers Code as a result of (i) the issuance of 3,046,570,871 ordinary shares of HK$0.01 each (“ Shares ”) in the issued share capital of the Company to Mr. Ko as part of the consideration under the sale and purchase agreement entered into between the Company and Mr. Ko on 2 February 2005 in relation to the entire issued share capital of Orient Ventures Limited (the “ Agreement ”) (as amended by a supplemental agreement entered into between the Company and Mr. Ko on 11 May 2005 (the “ Supplemental Agreement ”)) (a copy of the Agreement (as amended by the Supplemental Agreement) has been submitted to this meeting marked “A” and signed by the Chairman of this meeting for the purpose of identification); (ii) the issuance of 2,122,136,612 Shares to Mr. Ko upon his exercise of the conversion rights attaching to the first tranche convertible note of a principal amount of HK$103,984,694 to be issued by the Company to Mr. Ko as part of consideration under the Agreement (as amended by the Supplemental Agreement); and (iii) the issuance of 3,741,496,591 Shares to Mr. Ko upon his exercise of the conversion rights attaching to the second tranche convertible note of a principal amount of HK$183,333,333 (assuming the maximum amount is issued) to be issued by the Company to Mr. Ko as the balance of the consideration under the Agreement (as amended by the Supplemental Agreement), be and is hereby approved.”

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NOTICE OF EGM

(4) “ THAT :

(a) subject to paragraphs (b) and (c) of this resolution, the directors of the Company be and are hereby granted an unconditional general mandate to allot, issue and deal with additional shares in the capital of the Company and to allot, issue or grant securities convertible into such shares, options, warrants or similar rights to subscribe for any shares in the Company or such convertible securities and to make or grant offers, agreements and options in respect thereof;
(b) such mandate shall not extend beyond the Relevant Period save that the Directors may during the Relevant Period make or grant offers, agreements and options which might require the exercise of such power after the end of the Relevant Period;
(c) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) by the Directors pursuant to paragraph (a) above, otherwise than pursuant to:
(i) a Rights Issue;
(ii) the exercise of rights of subscription or conversion under the terms of any warrants issued by the Company or any securities which are convertible into shares of the Company;
(iii) the exercise of the subscription rights under any option scheme or similar arrangement for the time being adopted for the grant or issue to officers and/or employees of the Company and/or any of its subsidiaries of shares or rights to acquire shares of the Company; or
(iv) any scrip dividend or similar arrangement providing for the allotment of shares in lieu of the whole or part of a dividend on shares of the Company in accordance with the articles of association of the Company;

shall not exceed 20 percent. of the aggregate nominal amount of the share capital of the Company in issue as at the date of the passing of this Resolution or in the event completion of the sale and purchase agreement entered into between the Company and to Mr. Ko Chun Shun, Johnson on 2 February 2005 in relation to the entire issued share capital of Orient Ventures Limited (the “Agreement”) (as amended by a supplemental agreement entered into between the Company and Mr. Ko on 11 May 2005 (the “Supplemental Agreement”)) (a copy of the Agreement (as amended by the Supplemental Agreement) has been submitted to this meeting marked “A” and signed by the Chairman of this meeting for the purpose of identification) takes place accordingly, 20 percent of the aggregate nominal amount of the share capital of the Company in issue as at the date of completion of the Agreement.

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NOTICE OF EGM

(d) for the purpose of this Resolution:
“ Relevant Period ” means the period from the passing of this Resolution up to:
(i) the conclusion of the next annual general meeting of the Company;
(ii) the expiration of the period within which the next annual general meeting of the Company is required by any applicable law or the articles of association of the Company to be held; or
(iii) the revocation or variation of the authority given under this Resolution by an ordinary resolution of the shareholders of the Company in general meeting;
(iv) whichever is the earliest; and

“Rights Issue” means an offer of shares open for a period fixed by the Directors to holders of shares on the register of members on a fixed record date in proportion to their then holdings of such shares (subject to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of any recognised regulatory body or any stock exchange in any territory outside Hong Kong).”

By order of the Board Chan Kam Kwan, Jason Company Secretary

Hong Kong, 13 May 2005

Principal place of business in Hong Kong:

Unit 4306-7, Far East Finance Centre 16, Harcourt Road Admiralty Hong Kong

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NOTICE OF EGM

Notes:

A member entitled to attend and vote at the EGM is entitled to appoint a proxy or proxies to attend and vote on his behalf. A proxy need not be a member of the Company. A form of proxy is enclosed herewith. Completion and return of a form of proxy will not preclude a member from attending and voting in person at the meeting.
In order to be valid, a form of proxy together with a power of attorney or other authority (if any) under which it is signed, or a notarially certified copy thereof, must be deposited at the Hong Kong branch share registrar and transfer office of the Company, Tengis Limited at G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, not less than 48 hours before the time appointed for holding the meeting or adjourned meeting or poll (as the case may be).
In the case of joint holders, the vote of the senior who tenders a vote shall be accepted to the exclusion of the votes of the other joint holders and for this purpose seniority shall be determined by the order in which the names stand in the register.

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AI assistant

CHINA STATE CONSTRUCTION DEVELOPMENT HOLDINGS LIMITED — Proxy Solicitation & Information Statement 2005

49495_rns_2005-05-17_fc14808c-6909-4f50-844b-53a99e57653a.pdf

UNIVERSAL HOLDINGS LIMITED 友利控股有限公司

Financial adviser to the Company

Independent financial adviser to

SOMERLEY LIMITED

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

UNIVERSAL HOLDINGS LIMITED 友利控股有限公司

INTRODUCTION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

THE DEED

Date

Parties

Assets to be acquired by Orient Ventures

LETTER FROM THE BOARD

Consideration

Conditions precedent for completion of the Deed

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Adjustment to the consideration

LETTER FROM THE BOARD

THE UHL SP AGREEMENT

Date

Parties

Assets to be acquired by the Company

Consideration

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Conditions precedent for completion of the UHL SP Agreement

STATUS OF THE SHARES TO BE ISSUED

THE CONVERTIBLE NOTES

LETTER FROM THE BOARD

LISTING APPLICATION

THE WHITEWASH WAIVER

SHAREHOLDING STRUCTURE OF THE COMPANY

LETTER FROM THE BOARD

INFORMATION ON THE GROUP

INFORMATION ON THE ANGLO ALLIANCE GROUP

Businesses carried out by the Anglo Alliance Group upon completion of the Reorganisation

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Business which may be carried out by the Anglo Alliance Group

(a) Letter of intent — Mobile Phone TV JV

(b) Termination of the Investment Agreement

Financial information on the Anglo Alliance Group

FINANCIAL EFFECTS OF THE TRANSACTIONS ON THE GROUP

Net assets

Earnings

Working capital

Gearing position

INTENTION OF MR. KO

INCREASE IN THE AUTHORISED SHARE CAPITAL OF THE COMPANY

LETTER FROM THE BOARD

INFORMATION ABOUT THE MANAGEMENT OF THE COMPANY

The following is a biography of Mr. Dong.

INFORMATION ABOUT THE MANAGEMENT OF THE ANGLO ALLIANCE GROUP

REASONS FOR AND BENEFITS OF THE TRANSACTION

LETTER FROM THE BOARD

RISK FACTORS RELATING TO THE BUSINESS OF THE ANGLO ALLIANCE GROUP

(i) Governmental regulation of the media industry in the PRC

(ii) Volatility of income stream

(iii) Reliance on key management personnel

(iv) Piracy

(v) Censorship of advertising content by the PRC Government

(vi) Local competition

THE GENERAL MANDATE

GENERAL

EGM

LETTER FROM THE BOARD

RECOMMENDATION

ADDITIONAL INFORMATION

CHINA STATE CONSTRUCTION DEVELOPMENT HOLDINGS LIMITED Proxy Solicitation & Information Statement 2005