Design Capital Limited — Proxy Solicitation & Information Statement 2003

Sep 30, 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Swank International Manufacturing Company Limited, you should at once hand this circular, together with the enclosed form of proxy, to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

This circular is addressed to the shareholders of Swank International Manufacturing Company Limited in connection with an extraordinary general meeting of Swank International Manufacturing Company Limited to be held on 17th October, 2003. This circular does not constitute an offer of, and it is not calculated to invite offers for, shares or other securities of Swank International Manufacturing Company Limited.

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

Swank International Manufacturing Company Limited 囱光行實業有限公司

(Incorporated in Hong Kong with limited liability)

MAJOR AND CONNECTED TRANSACTIONS OPEN OFFER TO QUALIFYING SHAREHOLDERS OF NOT LESS THAN 2,901,658,253 OFFER SHARES ON THE BASIS OF 13 OFFER SHARES FOR EVERY EXISTING SHARE HELD AT A SUBSCRIPTION PRICE OF HK$0.013 PER OFFER SHARE PAYABLE IN FULL ON ACCEPTANCE GENERAL MANDATES TO ISSUE AND REPURCHASE SHARES

Financial Adviser to Swank International Manufacturing Company Limited

(proposed to be renamed to Goldbond Capital (Asia) Limited)

Independent financial adviser to the Independent Board Committee

==> picture [110 x 32] intentionally omitted <==

A letter from the Independent Board Committee of Swank International Manufacturing Company Limited containing its recommendation in respect of the Transactions (as defined in this circular) is set out on page 27 of this circular. A letter from Chateron Corporate Finance Limited containing its advice to the Independent Board Committee of Swank International Manufacturing Company Limited in respect of the Transactions is set out on pages 28 to 64 of this circular.

A notice convening an extraordinary general meeting of the shareholders of Swank International Manufacturing Company Limited to be held at 10:00 a.m. on 17th October, 2003 at Unit 3301, Level 33, Metroplaza Tower I, 223 Hing Fong Road, Kwai Fong, New Territories, Hong Kong is set out on pages 126 to 132 of this circular. There is a form of proxy for use at the extraordinary general meeting of Swank International Manufacturing Company Limited accompanying this circular. Whether or not you are able to attend the meeting, you are requested to complete and return the accompanying form of proxy to the share registrar and transfer office of Swank International Manufacturing Company Limited, Secretaries Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the meeting should you so wish.

It should be noted that the Underwriting Agreement contains certain provision granting the Underwriter the right to terminate the Underwriting Agreement by notice in writing by the Underwriter at any time prior to 4:00 p.m. on 4th November, 2003 if Swank International Manufacturing Company Limited commits any material breach of any of the obligations, undertakings, representations and warranties contained in the Underwriting Agreement. If the Underwriter exercises such right, the obligations of the Underwriter under the Underwriting Agreement shall cease and the Open Offer will not proceed.

The Open Offer is expected to become unconditional on or before 4th November, 2003 (or such later date as Swank International Manufacturing Company Limited may agree with the Underwriter and the Stock Exchange). It should be noted that the Shares will be dealt on an ex-entitlement basis from 9th October, 2003. Any person dealing in the Shares from 9th October, 2003 up to the date on which all the conditions as set out on page 20 of this circular are fulfilled will accordingly bear the risk that the Open Offer may not become unconditional.

30th September, 2003

CONTENTS

	Page
Expected timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	ii
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
The Share Sale Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
The Loan Settlement Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Shareholding and group structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Reasons for the Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Details of the Open Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Maintaining the listing status of Swank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Business review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Financial and trading prospects of Swank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Closure of register of members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Listing and dealings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
General mandates to issue and repurchase Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Extraordinary general meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
Further information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
Letter from Chateron. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
Appendix I – Financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	65
Appendix II – Explanatory Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	115
Appendix III – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	118
Notice of EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	126

– i –

2003

EXPECTED TIMETABLE

Despatch of circular to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 30th September Last day of dealing in the Shares on a cum-entitlement basis . . . . . . . . Wednesday, 8th October

First day of dealing in the Shares on an ex-entitlement basis . . . . . . . . . . .Thursday, 9th October

Latest time for lodging transfers of the Shares

accompanied by the relevant title documents in order

to qualify for the Open Offer . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Monday, 13th October

Book closure period to determine eligibility for the Tuesday, 14th October to Open Offer (both days inclusive) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 17th October

Latest time for return of proxy form for EGM . . . . . . . . 10:00 a.m. on Wednesday, 15th October

Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 17th October

EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10:00 a.m. on Friday, 17th October

Prospectus and application forms expected to be

despatched . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 17th October Latest time for application and payment for the

Offer Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Friday, 31st October

Underwriting Agreement becoming unconditional . . . . . . . . . . . . . . . . . .Tuesday, 4th November

Announcement of results of the Open Offer to be

published on or before . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wednesday, 5th November

Share certificates for the Offer Shares to be posted

on or before . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Thursday, 6th November

Commencement of trading in the Offer Shares on

the Stock Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Monday, 10th November

– ii –

DEFINITIONS

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

• “associate(s)”

has the meaning ascribed to it in the Listing Rules

• “Board”

board of Directors

• “CCASS”

the Central Clearing and Settlement System established and operated by HKSCC

• “Chateron”

• Chateron Corporate Finance Limited, a licensed corporation under the transitional arrangements to carry out Type 6 regulated activity for the purposes of the SFO and the independent financial adviser to the Independent Board Committee

• “Completion” completion of the Share Sale Agreement

• “Completion Date” date of Completion

• “Directors” Directors of Swank

• “EGM”

• an extraordinary general meeting of Swank to be convened to consider and, if thought fit, approve by Independent Shareholders the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer, and by the Shareholders, the General Mandate and the Repurchase Mandate

• ‘‘General Mandate’’

• the proposed general mandate to be sought at the EGM to authorise the Directors to allot and issue new Shares in the manner set out in resolution no. 4 in the notice of the EGM included in this circular

• “HKSCC”

Hong Kong Securities Clearing Company Limited

• “Independent Shareholders”

• Shareholders other than Probest and its associates

• “Latest Practicable Date”

• 26th September, 2003, being the latest practicable date prior to the printing of this circular for ascertaining certain information in this circular

“Listing Rules”

Rules Governing the Listing of Securities on the Stock Exchange

– 1 –

DEFINITIONS

• “Loan”

• the unsecured loan with an aggregate principal amount of HK$250 million owing by Swank to Probest as at the date of the Share Sale Agreement and the Loan Settlement Agreement

• “Loan Settlement Agreement”

• the conditional agreement dated 3rd September, 2003 entered into between Swank and Probest for the settlement of the Loan as detailed in the section headed “The Loan Settlement Agreement” in this circular

• “Long Stop Date”

• 5:00 p.m. on 18th November, 2003 or such later date as Probest may agree in writing

• “Offer Shares”

• 2,901,658,253 Shares proposed to be offered to Qualifying Shareholders to subscribe for pursuant to the Open Offer

• “Open Offer” proposed issue of the Offer Shares to Qualifying Shareholders on the terms set out in the Underwriting Agreement

• “Overseas Shareholder(s)” Shareholder(s) whose name(s) appear(s) on the register of members of Swank as at the Record Date and whose address(es) as shown in the register of members of Swank on that date is(are) outside Hong Kong

• “PRC”

• the People’s Republic of China

• “Probest” or “Underwriter”

• Probest Holdings Inc., a company incorporated in the British Virgin Islands which is interested in approximately 57.9% of the existing issued share capital of Swank and a wholly-owned subsidiary of Tomorrow, also the underwriter of the Open Offer

• “Profitown”

• Profitown Investment Corporation, a company formed in the British Virgin Islands with limited liability and a wholly-owned subsidiary of Swank

• “Profitown Loan”

• the entire amount of shareholder’s loan due from Profitown to Swank at the time of Completion

– 2 –

DEFINITIONS

• “Promissory Note”

• “Prospectus Documents”

• “Prospectus”

• “Qualifying Shareholder(s)”

• “Record Date”

• ‘‘Repurchase Mandate’’

• ‘‘SFO’’

• “SGM”

• “Share(s)”

• “Shareholder(s)”

• “Share Sale Agreement”

• “Stock Exchange”

• “Subscription Price”

• the promissory note in the sum of HK$163 million to be issued by Swank pursuant to the Loan Settlement Agreement

• the Prospectus and the application form for the Offer Shares

• the prospectus to be issued by Swank in relation to the Open Offer

• Shareholder(s) who, on the Record Date, has(ve) addresses in Hong Kong on the register of members of Swank

• 17th October, 2003, being the date by reference to which entitlements under the Open Offer will be determined

• the proposed general mandate to be sought at the EGM to authorise the Directors to repurchase Shares in the manner set out in resolution no. 5 in the notice of the EGM included in this circular

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

• a special general meeting of Tomorrow to be convened, to consider and, if thought fit, approve by the shareholders of Tomorrow, amongst other matters, the Share Sale Agreement and the Loan Settlement Agreement

• share(s) of HK$0.01 each in the issued capital of Swank

• holders of Shares

• the conditional sale and purchase agreement dated 3rd September, 2003 entered into between Probest, Swank, and Tomorrow relating to the sale of 30% of the entire issued share capital of Profitown and 30% of the Profitown Loan by Swank to Probest

The Stock Exchange of Hong Kong Limited

the subscription price of HK$0.013 per Offer Share pursuant to the Open Offer

– 3 –

DEFINITIONS

• “Swank”

• Swank International Manufacturing Company Limited, a company incorporated in Hong Kong with limited liability, the shares of which are listed on the Stock Exchange and is owned as to approximately 57.9% by Probest

• “Swank Group” Swank and its subsidiaries

• “Transactions”

• together, (i) the sale by Swank to Probest of 30% of the entire issued share capital of Profitown and 30% of the Profitown Loan under the Share Sale Agreement; and (ii) the debt settlement pursuant to the Loan Settlement Agreement and the issue of the Promissory Note

• “Tomorrow” Tomorrow International Holdings Limited, a company incorporated in Bermuda with limited liability, the shares of which are listed on the Stock Exchange

• “Tomorrow Group” Tomorrow and its subsidiaries other than the Swank Group

• “Underwriting Agreement” the conditional agreement entered into between the Underwriter, Swank and Tomorrow dated 3rd September, 2003 in relation to the underwriting of the Open Offer

• “Winspark” Winspark Venture Limited, a company incorporated in British Virgin Islands with limited liability

• “HK$” Hong Kong Dollars, the lawful currency of Hong Kong

• “%”

• per cent.

– 4 –

LETTER FROM THE BOARD

Swank International Manufacturing Company Limited 囱光行實業有限公司

(Incorporated in Hong Kong with limited liability)

Executive Directors: Mr. Yau Tak Wah, Paul Ms. Louie Mei Po Ms. Wong Shin Ling, Irene Mr. Tam Wing Kin Mr. Tam Ping Wah Mr. Lau Tai Ming, Eddy Mr. Cheung Wah Hing

Independent Non-executive Directors: Mr. Hahn Ka Fai, Mark Ms. Shum Wai Ting, Rebecca

Registered Office: 27th Floor Henley Building 5 Queen’s Road Central Hong Kong

Principal Office: Unit 3301 Level 33 Metroplaza Tower I 223 Hing Fong Road Kwai Fong New Territories Hong Kong

30th September, 2003

To the Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTIONS AND OPEN OFFER TO

QUALIFYING SHAREHOLDERS OF NOT LESS THAN 2,901,658,253 OFFER SHARES ON THE BASIS OF 13 OFFER SHARES FOR EVERY EXISTING SHARE HELD AT A SUBSCRIPTION PRICE OF HK$0.013 PER OFFER SHARE PAYABLE IN FULL ON ACCEPTANCE GENERAL MANDATES TO ISSUE AND REPURCHASE SHARES

INTRODUCTION

As disclosed in the joint announcement of Tomorrow and Swank dated 31st January, 2002, pursuant to a sale and purchase agreement dated 31st January, 2002, Tomorrow acquired (i) approximately 71.9% of the then total issued share capital of Swank, at a consideration of

– 5 –

LETTER FROM THE BOARD

HK$10.0 million; and (ii) bank debt of an aggregate principal amount of HK$250.0 million then owed by Swank Group to 26 banks and financial creditors, at a consideration of HK$58.0 million. Following the acquisition of the controlling stake in Swank by Tomorrow, the Swank Group has been under tight cashflow position and has defaulted in the principal repayments and interest payments for the Loan since 1st March, 2002.

Reference is made to the joint announcements of Tomorrow and Swank dated 4th March, 2003 and 27th August, 2003 and the circulars of Tomorrow and Swank dated 7th April, 2003. On 4th March, 2003, Probest, Swank and Tomorrow entered into a conditional asset disposal agreement and a conditional loan restructuring agreement in relation to the proposed sale by Swank to Probest of its 30% equity interest in Profitown and 30% of the Profitown Loan and the proposed restructuring of the Loan including, among others, the issue of a convertible note and the execution of a share mortgage by Swank in favour of Probest (collectively, the “Previous Transactions”). The Previous Transactions were subsequently terminated on 27th August, 2003 as the Directors were in discussion with Probest on other possible settlement agreements in relation to the Loan.

The Directors have been considering various means to raise funds to repay the Loan, including borrowings from financial institutions, issue of convertible notes and share placing. On 9th September, 2003, Tomorrow and Swank jointly announced that on 3rd September, 2003, Probest, Tomorrow and Swank entered into the Share Sale Agreement and the Underwriting Agreement in relation to the Open Offer and Probest and Swank entered into the Loan Settlement Agreement with the intention to partly repay the Loan.

The purpose of this circular is to provide you with further information regarding the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer, and to set out the advice of the Independent Board Committee on the terms of the Transactions.

THE SHARE SALE AGREEMENT

Date:

3rd September, 2003

Parties:

Vendor: Swank Purchaser: Probest, a wholly-owned subsidiary of Tomorrow holding approximately 57.9% interest in Swank Guarantor for the obligations of Probest as purchaser: Tomorrow, which indirectly holds approximately 57.9% interest in Swank through its wholly-owned subsidiary, Probest

– 6 –

LETTER FROM THE BOARD

Principal terms of the Share Sale Agreement

Pursuant to the Share Sale Agreement, Swank conditionally agreed to sell to Probest 30% of the entire issued share capital of Profitown and 30% of the Profitown Loan at an aggregate consideration of HK$3 million. Such consideration shall be satisfied by Probest upon Completion by offsetting an equivalent amount of HK$3 million outstanding principal of the Loan due from Swank to Probest.

Profitown is a wholly-owned subsidiary of Swank and is the intermediate holding company of all the operating subsidiaries and associated companies of Swank.

The consideration payable by Probest to Swank pursuant to the Share Sale Agreement of HK$3 million as referred to above was determined and agreed between the parties having regard to the following basis:–

	HK$ million
Proforma unaudited consolidated net tangible assets
of Profitown (including the Profitown Loan)
as at 30th June, 2003	32.5
Add: Profitown Loan as at 30th June, 2003	138.8
Aggregate sum of the proforma unaudited consolidated net
tangible assets of Profitown and the Profitown Loan
as at 30th June, 2003	171.3
30% thereof, which shall be acquired by Probest from
Swank under the Share Sale Agreement	51.4
Less: Waiver of part of the Loan principal by
Probest under the Loan Settlement Agreement
(upon which completion of the Share Sale
Agreement is conditional)	(47.0)
Net aggregate consideration which would otherwise be payable
by Probest to Swank under the Share Sale Agreement
(excluding the interest waived under the Loan Settlement Agreement)	4.4
Value of the consideration	3.0
Discount of the value of the consideration to the net aggregate
consideration which would otherwise be payable by
Probest to Swank under the Share Sale Agreement
(excluding the interest waived under the Loan Settlement Agreement)	31.8%

– 7 –

LETTER FROM THE BOARD

Conditions of the Share Sale Agreement

The Share Sale Agreement is conditional upon, inter alia:

• a. the passing at the EGM by the Independent Shareholders of ordinary resolutions approving (i) the Share Sale Agreement; (ii) the Open Offer; and (iii) the Loan Settlement Agreement and the issue of the Promissory Note;

• b. all other consents and acts required of Swank in connection with the Share Sale Agreement under the Listing Rules having been obtained and completed or, as the case may be, the relevant waiver from compliance with any of such rules having been obtained from the Stock Exchange;

• c. the approval by the shareholders of Tomorrow of the Share Sale Agreement by way of an ordinary resolution to be passed at the SGM;

• d. the Loan Settlement Agreement becoming unconditional, save for any condition therein requiring the Share Sale Agreement to become unconditional or having been completed;

• e. the Stock Exchange granting or agreeing to grant (subject to allotment) the listing of, and permission to deal in, the Offer Shares; and

• f. the Open Offer becoming unconditional.

None of these conditions can be waived by any of the parties. If any of these conditions are not fulfilled on or before the Long Stop Date (unless extended by agreement with Probest), the Share Sale Agreement shall lapse and be of no further effect, and no party to the Share Sale Agreement shall have any claim against or liability to the other parties thereunder, save in respect of any antecedent breaches thereof.

Information on Profitown

Profitown was incorporated with limited liability in the British Virgin Islands on 19th November, 2002. Profitown is a wholly-owned subsidiary of Swank. Pursuant to a group reorganisation of the Swank Group in August 2003, all the interests of Swank in its operating subsidiaries and associated companies and all intra-company indebtedness between Swank and its subsidiaries and associated companies were transferred to Profitown. As a result, Profitown became the intermediate holding company of all the operating subsidiaries and associated companies of Swank engaging in the design, manufacture and marketing of frames, sunglasses and lenses. All the businesses previously carried out by the Swank Group, namely, the design, manufacture and marketing of frames, sunglasses and lenses, have since then been conducted

– 8 –

LETTER FROM THE BOARD

by Profitown’s subsidiaries and associated companies. Such group reorganisation was disclosed in the circular of Swank dated 7th April, 2003 in relation to the Previous Transactions. Such group reorganisation, which became effective on 29th August, 2003, was not conditional on the completion of the Previous Transactions and continued to proceed despite the termination of the Previous Transactions on 27th August, 2003.

The composition of the board of directors of Profitown currently comprises seven members, five of whom are also existing directors of both Tomorrow and Swank and the remaining two are directors of Swank. There is no intention to change the board of directors of Profitown upon Completion. Profitown has also undertaken in writing to Swank on 3rd September, 2003 that any surplus cash generated from the businesses carried out by its subsidiaries and associated companies shall, after appropriating a sum for operating expenses, be applied to repay the Profitown Loan or to make advances to Swank on the same terms as the Profitown Loan for the purposes of facilitating Swank to repay the amounts due under the Promissory Note.

The proforma unaudited consolidated net profits and losses before and after taxation of Profitown for the two years ended 31st December, 2002 and for the six months ended 30th June, 2003 are summarised as follows:

			Six months
	Year ended		ended
	31st December,		30th June,
	2001	2002	2003
	HK$ million	HK$ million	HK$ million
	(unaudited)	(unaudited)	(unaudited)
Profit/(Loss) before taxation
and minority interests	(58.8)	10.8	(10.0)
Profit/(Loss) after taxation but before
minority interests	(59.1)	9.8	(10.0)
Profit/(Loss) attributable
to shareholders	(58.9)	10.1	(9.8)

The proforma unaudited consolidated net tangible assets of Profitown (including the Profitown Loan) and the Profitown Loan as at 31st December, 2002 were approximately HK$42.5 million and HK$130.9 million respectively. The proforma unaudited consolidated net tangible assets of Profitown (including the Profitown Loan) and the Profitown Loan as at 30th June, 2003 was approximately HK$32.5 million and HK$138.8 million respectively.

– 9 –

LETTER FROM THE BOARD

THE LOAN SETTLEMENT AGREEMENT

Date:

3rd September, 2003

Parties:

Lender: Probest Borrower: Swank

Principal terms of the Loan Settlement Agreement

Pursuant to the Loan Settlement Agreement, Probest conditionally agreed that the remaining principal of the Loan of HK$247 million due from Swank to Probest after Completion will be settled in the following manner:

• a. Probest agrees to waive the repayment of the outstanding principal of HK$47 million of the Loan and the normal and default interest accrued on the entire Loan since 1st March, 2002 up to the date of the Loan Settlement Agreement taking effect (which amounted to approximately HK$23.7 million as at the date of the Loan Settlement Agreement);

• b. Swank agrees to apply the net proceeds from the Open Offer to repay HK$37 million of the Loan; and

• c. the remaining outstanding principal sum of the Loan of HK$163 million shall be repaid by Swank to Probest by instalments in accordance with the terms of the Promissory Note.

Principal terms of the Promissory Note

• Principal amount : HK$163 million, which shall be payable by Swank to Probest by the following instalments, subject as hereinafter provided:

Principal amount	Repayment date
HK$25,500,000	1st June, 2004
HK$62,500,000	1st June, 2005
HK$75,000,000	1st June, 2006
HK$163,000,000

Maturity Date : 1st June, 2006

– 10 –

LETTER FROM THE BOARD

• Interest : 1% above the prime rate for Hong Kong dollar quoted from time to time by The Hongkong and Shanghai Banking Corporation Limited per annum, which is based on the prevailing market rate and is equal to the existing interest rate of the Loan

The Promissory Note is unsecured. If any event of default has occurred Probest may, by written notice to Swank, demand immediate payment of all outstanding principal and accrued interest. At any time after the Promissory Note has become immediately due and payable, Probest may, without further notice, institute such proceedings as it may think fit to enforce payment due.

Pursuant to the Loan Settlement Agreement, the Promissory Note shall replace the existing loan agreement governing the Loan and Probest shall have no further claim under the existing loan agreement. The effect of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer on Swank’s indebtedness to Probest is as follows:

Outstanding principal of the Loan Set off against the consideration under the Share Sale Agreement Waived by Probest pursuant to the Loan Settlement Agreement Repaid by the net proceeds from the Open Offer Principal balance due under the Promissory Note	HK$’million 250.0 (3.0) (47.0) (37.0) 163.0

The Promissory Note, after issuance, has no particular conditions to be fulfilled by both Probest and Swank before becoming effective. However, the Promissory Note will only be issued upon the Loan Settlement Agreement becoming effective, which is conditional upon the fulfilment of all the conditions as stated in the “Conditions of the Loan Settlement Agreement” section below.

The Directors expect that the financial obligations of Swank pursuant to the Promissory Note shall be settled by the internal resources of Profitown generated from the operating activities of its subsidiaries and associates and distributed to Swank by way of repayment of the Profitown Loan or advances by Profitown to Swank. Swank may, prior to the two due dates of the Promissory Notes in 2005 and 2006, formulate business plans and strategies to capitalise on any improvement in the economy and hence the optical product market to enhance the Swank Group’s cashflow positions. Alternatively, Swank may also formulate appropriate fund raising exercises in order to meet the repayment requirements under the Promissory Note. No such plans have been formulated yet. Further announcement(s) regarding such plans, if formulated, will be made in compliance with the Listing Rules.

– 11 –

LETTER FROM THE BOARD

Conditions of the Loan Settlement Agreement

The Loan Settlement Agreement shall take effect on the date when the last of the following conditions shall have been satisfied:

• a. the passing at the EGM by the Independent Shareholders of ordinary resolutions approving (i) the Loan Settlement Agreement and the issuance of the Promissory Note; (ii) the Share Sale Agreement and the transactions contemplated thereunder; and (iii) the Open Offer;

• b. the approval by the shareholders of Tomorrow of the Loan Settlement Agreement (including the Promissory Note) having been obtained by way of an ordinary resolution to be passed at the SGM;

• c. all other consents and acts required of Swank/Tomorrow in connection with the Loan Settlement Agreement and the Promissory Note under the Listing Rules having been obtained and completed or, as the case may be, the relevant waiver from compliance with any of such rules having been obtained from the Stock Exchange;

• d. the Share Sale Agreement becoming unconditional, save for any condition therein requiring the Loan Settlement Agreement to become unconditional or having taken effect, and having been completed;

• e. the Stock Exchange granting or agreeing to grant (subject to allotment) the listing of, and permission to deal in, the Offer Shares;

• f. the Open Offer becoming unconditional;

• g. the net proceeds of the Open Offer having been paid to Probest in partial reduction of the Loan principal; and

• h. the due execution by Swank of the Promissory Note contemplated under the Loan Settlement Agreement and their proper delivery to Probest (including the certified true copies of resolutions of the Board of Swank approving the aforesaid documents).

None of the above conditions can be waived by any of Probest or Swank. If any of these conditions are not fulfilled on or before the Long Stop Date (unless extended by agreement with Probest), the Loan Settlement Agreement shall lapse and be of no further effect, and no party to the Loan Settlement Agreement shall have any claim against or liability to the other party thereunder, save in respect of any antecedent breaches thereof.

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LETTER FROM THE BOARD

COMPLETION

Completion of the Share Sale Agreement and Loan Settlement Agreement is to take place on the first business day after the satisfaction of the conditions (and in any event no later than the Long Stop Date) referred to in the sections headed “Conditions of the Share Sale Agreement” and “Conditions of the Loan Settlement Agreement” above.

SHAREHOLDING AND GROUP STRUCTURES

Set out below are the group structures of the Tomorrow Group and Swank Group before and after Completion and the Loan Settlement Agreement becoming effective (not taking into account any increase in the shareholdings of Probest in Swank as a result of its underwriting the Open Offer):

Before Completion and the Loan Settlement Agreement becoming effective:

==> picture [212 x 279] intentionally omitted <==

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

Tomorrow
100.0%
Probest
The Loan of
57.9%
HK$250 million
Swank
The Profitown
100.0%
Loan
Profitown
Inter-company
balances
Subsidiaries and
associated companies
engaged in the
spectacle business
----- End of picture text -----

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LETTER FROM THE BOARD

After Completion and the Loan Settlement Agreement becoming effective (not taking into account any increase in the shareholdings of Probest in Swank as a result of its underwriting the Open Offer):

==> picture [378 x 341] intentionally omitted <==

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

Tomorrow
100.0%
Probest
Promissory Note
57.9%
HK$163 million 30%
30%
of the
Swank Profitown
Loan
70% of
70% the Profitown
Loan
Profitown
Inter-
company
balances
Subsidiaries and
associated companies
engaged in the
spectacle business
----- End of picture text -----

REASONS FOR THE TRANSACTIONS

The Swank Group’s financial results have improved following Tomorrow’s acquisition of a controlling interest in Swank in early 2002. For the year ended 31st December, 2002, the Swank Group recorded an audited consolidated profit attributable to shareholders of approximately HK$10.1 million, as opposed to the audited consolidated loss attributable to shareholders of approximately HK$58.9 million for the year ended 31st December, 2001. Audited consolidated net liabilities of the Swank Group as at 31st December, 2002 were approximately HK$89.9 million. Notwithstanding the improvement in its financial results, the Swank Group has been under a tight cashflow position to make principal repayments and interest payments for the Loan. As set out in the notes to the financial statements in the annual report of Swank for the year ended 31st December, 2002, the Loan would be repayable by five instalments commencing 1st June, 2002. Swank has not been able to fulfil its legal obligation to make repayment of the first instalment of the Loan due on 1st June, 2002 of HK$25 million,

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LETTER FROM THE BOARD

the second instalment of the Loan due on 1st June, 2003 of HK$37.5 million and payment of accrued interests from 1st March, 2002 up to the date of the Share Sale Agreement and the Loan Settlement Agreement of approximately HK$23.7 million. Swank’s aggregate overdue indebtedness in respect of the Loan as at the date of the Share Sale Agreement was approximately HK$86.2 million. Tomorrow has indicated in writing on 29th September, 2003 that no legal action will be taken by Probest nor Tomorrow against Swank in respect of these defaulted payments until the Share Sale Agreement and the Settlement Loan Agreement become effective or terminated.

The entering into of the Share Sale Agreement and the Loan Settlement Agreement by Swank is intended to partly repay the Loan to Probest in kind and not in cash. Having considered that (i) Swank have defaulted several interest and principal payments since 1st June, 2002; (ii) the Tomorrow Group will waive interest accrued on the entire Loan from 1st March 2002 up to the date the Loan Settlement Agreement becomes effective; and (iii) the outstanding principal of the Loan will be offset by approximately HK$50.0 million by the sale of 30% of the entire issued share capital of Profitown and 30% of the Profitown Loan by Probest, the directors of Swank are of the view that the terms of the Share Sale Agreement and the Loan Settlement Agreement are fair and reasonable and are in the interests of Swank and its shareholders as a whole.

Upon Completion and the Loan Settlement Agreement taking effect, the principal assets of Swank would be its 70% interest in Profitown and 70% of the Profitown Loan, and the principal liabilities of Swank would be the Promissory Note of HK$163 million owed to Probest. Swank has not formulated any particular business plans or strategies in respect of its remaining 70% interest in Profitown and 70% of the Profitown Loan. Subject to confirmation by the auditors of Swank , the Swank Group is expected to record a net gain as a result of the write-back of interest expense previously accrued (which amounted to approximately HK$23.7 million up to the date of the Loan Settlement Agreement). A loss of HK$47 million recorded as a result of the sale of the 30% of Profitown and 30% of the Profitown Loan is expected to be offset by the HK$47 million principal waived under the Loan. Overall, the financial position of the Swank Group will be enhanced as the Swank Group’s total indebtedness will be decreased by HK$87 million in principal and by approximately HK$23.7 million in accrued interest (up to 3rd September, 2003, being the date of the Share Sale Agreement and the Loan Agreement) while at the same time its cashflow position will also be improved as there will be no immediate need to repay any loan instalment until 1st June, 2004.

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LETTER FROM THE BOARD

DETAILS OF THE OPEN OFFER

On 3rd September, 2003, Swank, Probest and Tomorrow (as guarantor of Probest) entered into the Underwriting Agreement in respect of the Open Offer. Details of the Open Offer are set out below:

Issue statistics:

Basis of Open Offer 13 Offer Shares for every Share held on the Record Date Number of Shares in issue 223,204,481 Shares (as at the Latest Practicable Date) Number of Offer Shares not less than 2,901,658,253 Offer Shares

The Directors confirm that Swank has sufficient authorised share capital to effect the Open Offer.

Qualifying Shareholders:

Swank will send the forms of application for the Offer Shares to the Qualifying Shareholders only. To qualify for the Open Offer, Shareholders must on the Record Date:

• a. be registered members of Swank; and

• b. have addresses in Hong Kong on the register of members of Swank.

In order to be registered as members on the Record Date, shareholders of Swank must lodge any transfers of the Shares (with the relevant share certificates) with the share registrar and transfer office of Swank, Secretaries Limited at Ground Floor, Bank of East Asia Harbour View Tower, 56 Gloucester Road, Wanchai, Hong Kong by 4:00 p.m. on 13th October, 2003.

The register of members of Swank will be closed from 14th October, 2003 to 17th October, 2003, both dates inclusive. No transfer of Shares will be registered during this period.

The invitation to apply for the Offer Shares is not transferable or capable of renunciation and there will not be any trading in nil-paid entitlements on the Stock Exchange.

Subscription Price:

HK$0.013 per Offer Share, payable in full when a Qualifying Shareholder applies for any Offer Shares offered to him/her. The Subscription Price represents:

• a. a discount of approximately 93.5% to the closing price of HK$0.20 per Share quoted on the Stock Exchange on 3rd September, 2003, being the last trading day immediately preceding the joint announcement of Tomorrow and Swank dated 9th September, 2003;

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LETTER FROM THE BOARD

• b. a discount of approximately 50.0% to the theoretical ex-entitlement price of approximately HK$0.026 per Share based on the aforesaid closing price per Share;

• c. a discount of approximately 92.1% to the average closing price of approximately HK$0.165 per Share for the 10 trading days as quoted on the Stock Exchange up to and including 3rd September 2003, being the last trading day immediately preceding the joint announcement of Tomorrow and Swank dated 9th September, 2003;

• d. a discount of approximately 45.8% to the theoretical ex-entitlement price of approximately HK$0.024 per Share based on the average closing price of approximately HK$0.165 per Share for the 10 trading days as quoted on the Stock Exchange up to and including 3rd September 2003;

• e. a discount of approximately 92.8% to the closing price of HK$0.18 per Share based on the Latest Practicable Date as quoted on the Stock Exchange; and

• f. a discount of approximately 48.0% to theoretical ex-entitlement price of approximately HK$0.025 per Share based on the Latest Practicable Date as quoted on the Stock Exchange.

The Subscription Price has been determined based on arm’s length negotiations between Swank and Probest with reference to other factors such as the liquidity of the Shares and the net liability of Swank of approximately HK$0.403 per Share (based on the latest audited net liabilities of the Swank Group of approximately HK$89,941,000 and 223,204,481 Shares in issue as at the date of the joint announcement dated 9th September, 2003). The directors of Swank consider that since the Swank Group has a negative net asset value, the fact that the minimum price for subscription of new Shares should be not less than the par value of the Shares, which is HK$0.01 and there is no force majeure clause in the Underwriting Agreement, the Subscription Price is fair and reasonable so far as the Shareholders and Swank as a whole are concerned.

Status of the Offer Shares:

The Offer Shares (when fully paid) will rank pari passu in all respect with the Shares in issue on the Record Date. Holders of the Offer Shares will be entitled to receive all future dividends and distributions which are declared, made or paid after such date.

Application for excess Offer Shares:

Under the Open Offer, Qualifying Shareholders are not entitled to apply for any Offer Shares which are in excess of their entitlements.

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LETTER FROM THE BOARD

Fractions of Offer Shares:

There will be no assured allotment of fractions of Offer Shares and the fractions of Offer Shares which would otherwise form part of assured allotments (if any) will be taken up by the Underwriter or disregarded.

Share Certificates for Offer Shares:

Subject to the fulfilment of the conditions of the Open Offer, share certificates for all fully-paid Offer Shares are expected to be posted on or before 6th November, 2003 to those who have accepted and paid for the Offer Shares.

Rights of Overseas Shareholders:

If on the Record Date a Shareholder’s address on Swank’s register of members is in a place outside Hong Kong, that Shareholder cannot take part in the Open Offer as documents to be issued in connection with the Open Offer will not be registered under the applicable securities legislation of any jurisdiction other than Hong Kong. The issue of the Offer Shares to an Overseas Shareholder may therefore contravene the applicable securities legislation of the place of residence of such Overseas Shareholders. Accordingly, Overseas Shareholders will not be qualified for the Open Offer. Swank will send the Prospectus to Overseas Shareholders for their information only. Swank will not send forms of application for the Offer Shares to Overseas Shareholders. Overseas Shareholders, however, are entitled to vote at the EGM.

Application for listing:

Swank will apply to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Offer Shares. Dealing in the Offer Shares will be subject to the payment of stamp duty in Hong Kong.

Underwriting Arrangement:

The Underwriting Agreement

Date:	3rd September, 2003
Number of Offer Shares underwritten:	not less than 1,222,528,008 Offer Shares
Underwriter:	Probest
Commission:	Nil

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LETTER FROM THE BOARD

The ordinary course of business of Probest is investment holding and does not include underwriting of securities. The Directors are satisfied that Probest has the financial ability to fulfil its underwriting commitment in full under the Underwriting Agreement. Assuming Probest is required to take up all of the Offer Shares underwritten by it, total consideration required would be approximately HK$15.9 million based on 1,222,528,008 Offer Shares.

Undertakings by Probest:

Probest has irrevocably undertaken to Swank that the Shares beneficially owned by it will remain beneficially owned by it from the date of the joint announcement of Tomorrow and Swank, being 9th September, 2003, up to the Record Date. Probest has also undertaken to subscribe or procure subscribers for its provisional entitlement in full, amounting to 1,679,130,245 Offer Shares.

Guarantee by Tomorrow:

Tomorrow was joined as a party to the Underwriting Agreement to guarantee to Swank the full and punctual performance of all obligations or undertakings of the Underwriter under the Underwriting Agreement, including the prompt payment of all monies which shall at any time or times be due or owing or payable to Swank by the Underwriter under the Underwriting Agreement provided that the liability of Tomorrow shall not exceed the liability of the Underwriter under the Underwriting Agreement. No guarantee fee will be charged by Tomorrow under the Underwriting Agreement.

Termination of the Underwriting Agreement:

There will not be any force majeure clauses under the Underwriting Agreement, however, the Underwriter may terminate the arrangements set out in the Underwriting Agreement by notice in writing given by the Underwriter to Swank at any time prior to 4:00 p.m. on 4th November, 2003 if Swank commits any material breach of any of the obligations, undertakings, representations and warranties contained in the Underwriting Agreement.

Upon the giving of notice of termination, all obligations of the Underwriter under the Underwriting Agreement shall cease and no party shall have any claim against any other parties in respect of any matter or thing arising out of or in connection with the Underwriting Agreement. If the Underwriter exercises such right, the Open Offer will not proceed.

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LETTER FROM THE BOARD

Effect of the Open Offer on the shareholding of Swank:

Shareholders Probest Public Total	Existing shareholding Shares % 129,163,865 57.9 94,040,616 42.1 223,204,481 100.0	Immediately after completion of the Open Offer (assuming only Probest takes up its entitlements pursuant to the Open Offer and the Offer Shares were fully underwritten by Probest) Shares % 3,030,882,118 97.0 94,040,616 3.0 3,124,862,734 100.0	Immediately after completion of the Open Offer (assuming only Probest takes up its entitlements pursuant to the Open Offer and the Offer Shares were fully underwritten by Probest) Shares % 3,030,882,118 97.0 94,040,616 3.0 3,124,862,734 100.0
			100.0

Conditions of the Open Offer:

The Open Offer is conditional on, inter alia, the following conditions being fulfilled:

• a. the Independent Shareholders approving the Share Sale Agreement and the Loan Settlement Agreement;

• b. the Independent Shareholders approving the Open Offer;

• c. the Listing Committee of the Stock Exchange granting or agreeing to grant (subject to allotment) the listing of, and permission to deal in the Offer Shares;

• d. the obligations of the Underwriter under the Underwriting Agreement not being terminated and the Underwriting Agreement becoming unconditional in accordance with its terms;

• e. the filing and registration of all relevant documents with the Registrar of Companies in Hong Kong; and

• f. compliance with all legal and regulatory requirements (including but not limited to approval of shareholders of Swank) (if any) in respect of the Open Offer.

Neither Swank, Tomorrow nor the Underwriter may waive the conditions of paragraphs (a), (b), (c), (e) and (f) above. If these conditions are not fulfilled, the Open Offer will not proceed. Should the Underwriter terminate the Underwriting Agreement and therefore condition (d) cannot be fulfilled, the Open Offer also will not proceed.

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LETTER FROM THE BOARD

Warning of the risks of dealing in the Shares:

The Shares will be dealt with on an ex-entitlement basis from 9th October, 2003. If the Underwriter terminates the Underwriting Agreement, or the conditions of the Open Offer are not fulfilled, the Open Offer will not proceed. Any person dealing in the exentitlement Shares will accordingly bear the risk that the Open Offer may not become unconditional and/or may not proceed.

Any Shareholder or other person contemplating selling or purchasing the Shares during such period who is in any doubt about his/her position is recommended to consult his/her own professional adviser.

Reasons for the Open Offer and use of proceeds:

The Swank Group’s financial results have improved following Tomorrow’s acquisition of a controlling interest in Swank in early 2002. Notwithstanding the improvement in its financial results, the Swank Group has been under a tight cashflow position to make principal repayments and interest payments under the Loan and has defaulted on several occasions. The Open Offer is intended to raise funds of approximately HK$37.7 million (before expenses) to repay partly the indebtedness of Swank owing to Probest. Net proceeds of the Open Offer of approximately HK$37 million will be used to repay the Loan in part. The Open Offer is interconditional with the Share Sale Agreement and the Loan Settlement Agreement, therefore on completion of the Open Offer and taking into account of the effect of the Share Sale Agreement and the Loan Settlement Agreement, total indebtedness of the Swank Group owed to Probest will be reduced by HK$87 million in principal together with waiver of the interest accrued since 1st March, 2002 up to the day of the Loan Settlement Agreement becoming effective (which amounted to approximately HK$23.7 million from 1st March, 2002 up to the date of the Share Sale Agreement and the Loan Settlement Agreement). The Swank Group’s financial position will therefore be enhanced.

The net proceeds from the Open Offer will be used to partly repay the Loan only and will not be used by Probest for the purpose of underwriting the Open Offer. A relevant amount of fixed deposits of Probest have been set aside for underwriting the Open Offer and hence the net proceeds from the Open Offer will not constitute financial assistance to Probest for the purpose of acquisition of the Shares.

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LETTER FROM THE BOARD

As the Open Offer allows Qualifying Shareholders to maintain their respective pro rata shareholdings in Swank and participate in the future growth and development of Swank, the Directors consider that it is in the interests of Swank and the Shareholders as a whole to raise capital through the Open Offer.

MAINTAINING THE LISTING STATUS OF SWANK

It is the intention of Probest and Swank that the listing of the Shares on the Stock Exchange should be maintained. Accordingly, Probest and Swank have undertaken to the Stock Exchange, in terms to be agreed with the Stock Exchange, to take appropriate steps as soon as practicable following the close of the Open Offer to ensure that such number of the Shares as may be required by the Stock Exchange are held by the public. The Stock Exchange has stated that, in the event that less than 25 per cent. of the Shares are in public hands following the closing of the Open Offer, or if the Stock Exchange believes that a false market exists or may exist in the Shares or that there are insufficient Shares in public hands to maintain an orderly market, then it will consider exercising its discretion to suspend trading in the Shares.

BUSINESS REVIEW

The Swank Group is primarily engaged in the design, manufacture and marketing of frames, sunglasses and lenses. Its production facilities are located in Dongguan and Shenzhen of the PRC. Products of the Swank Group are mainly exported to the United States, Europe and Australia.

During the year of 2002, the Swank Group has basically met the operational objectives set out for 2002. This included decreasing the fixed costs significantly to lower breakeven point, by trimming down the organisation through eliminating non-mission critical job positions and restructuring the organisation to become more lean and mean. As a result of the above mentioned streamlining measures, which took place primarily in the first half of 2002, approximately HK$15.7 million of payroll and staff benefits were saved.

On the revenue side, the Swank Group has enjoyed an approximately 14% growth in orders from 2001. However, due to the sudden slow-down in customer delivery schedule towards the end of 2002, the Swank Group could only finish 2002 at the same level of revenue as 2001. Furthermore, due to pressure on price in the market, the Swank Group experienced a significant squeeze in gross margin in the fourth quarter, which resulted in a year-to-year decrease in gross margin.

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LETTER FROM THE BOARD

The Swank Group recorded a net loss of approximately HK$9.8 million for the six months ended 30th June, 2003, compared to a net profit of approximately HK$9.2 million recorded for the same period last year. Such decline in net profit was mostly attributable to the drop in revenue of approximately 20% from that for the six months ended 30th June, 2002, while gross margin had also dropped from approximately 24% for the six months ended 30th June, 2002 to approximately 16% for the six months ended 30th June, 2003. Orders for the six months ended 30th June, 2003 were approximately HK$86.5 million, versus approximately HK$116.6 million for the same time last year. This adverse impact on profit was partially offset by the reduction in expenses resulting from staff organisation being downsized as well as tight expense control. As a result of these efforts, the breakeven point was further brought down from last year’s level.

Like many companies in Hong Kong, during the first six months of 2003, the Swank Group was hit by the Severe Acute Respiratory Syndrome epidemic, which has caused Swank’s sales and marketing staff to defer many of the product programmes as well as customer visit plans to Europe and the United States. Besides, the economies in both the United States and Germany have gone through months of lacklustre demand due to focus being drawn to the Gulf War. During this same period, many of the eyewear companies in the United States and Europe were either very cautious on reordering products, or had accumulated too many inventories in the pipeline. In short, even though the worst period appears to be over, it has taken additional time for the demand in the retail market to pick up.

FINANCIAL AND TRADING PROSPECTS OF SWANK

The Swank Group has regained its reputation as a key player in the optical industry. Many of the business fundamentals have been significantly improved, which included: better product quality, reliable shipment schedules, and well-controlled product development programmes.

In the first quarter of 2003, the Swank Group began to focus on a number of new initiatives:

• reviewing all the Swank Group’s Equipment, Process, Technology (EPT) as part of the Swank Group’s competitive manufacturing strategy to ensure that they are in line with the Swank Group’s target market segment while remaining competitive;

• establishing a more aggressive outsourcing programme to lower cost of procurement and to make better make-versus-buy economic decisions, both of which will help to improve gross margin;

• establishing a target segmentation programme whereby design department can take the lead with sales to develop product programmes directed at specific target market segments, by giving more value to customers through product concept management and better component integration; and

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LETTER FROM THE BOARD

• further reducing the Swank Group’s overhead through elimination of cost structures that do not result in immediate revenue generation.

CLOSURE OF REGISTER OF MEMBERS

The register of members of Swank will be closed from 14th October, 2003 to 17th October, 2003 (both days inclusive), for the purpose of determining the entitlement of the Shareholders under the Open Offer. No transfers of Shares may be registered during this period.

In order to qualify for the Open Offer, Swank Shareholders must lodge any transfers of Shares (with the relevant share certificates) with the share registrar and transfer office of Swank, Secretaries Limited, at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, by not later than 4:00 p.m. on 13th October, 2003.

LISTING AND DEALINGS

Application will be made to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Offer Shares which may be issued pursuant to the Open Offer. Dealings in the Offer Shares are expected to commence on 10th November, 2003. No part of the securities of the Swank Group are listed or dealt in on any stock exchanges other than the Stock Exchange, nor is the listing of, or permission to deal in, Swank’s securities on any other stock exchanges being or proposed to be sought.

Subject to the granting of listing of, and permission to deal in, the Offer Shares on the Stock Exchange, the Offer Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the Offer Shares on the Stock Exchange or such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading date is required to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

All necessary arrangements will be made to enable the Offer Shares be admitted into CCASS.

Dealings in the Offer Shares will be subject to payment of stamp duty in Hong Kong.

GENERAL MANDATES TO ISSUE AND REPURCHASE SHARES

At the annual general meeting of Swank held on 30th May, 2003, general mandates were given to the directors of Swank to exercise the powers of Swank to allot, issue and deal with shares of Swank of HK$0.20 each (“Old Shares”) and upon the share capital reduction and

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LETTER FROM THE BOARD

share consolidation becoming effective shares of Swank of HK$0.01 each not exceeding 20% of the then issued share capital of Swank of 2,232,044,805 Old Shares or 223,204,481 Shares and to repurchase Shares not exceeding 10% of the then issued share capital of Swank of 2,232,044,805 Old Shares or 223,204,481 Shares. In view of the expected increase of the issued share capital of Swank following the Open Offer, the Directors propose to renew the general mandates to issue and repurchase of the Shares.

A resolution will be put to the Shareholders at the EGM to approve the granting of the general mandate to the Directors to allot, issue and deal with additional Shares equal to a maximum of 20% of the issued share capital of Swank at the date of passing such resolution and as enlarged by the issue of the new Shares pursuant to the Open Offer.

The General Mandate will remain effective until the conclusion of Swank’s next annual general meeting or the expiration of the period within which the next annual general meeting of Swank is required by any applicable law or the articles of association of Swank to be held or until revoked by an ordinary resolution of the Shareholders, whichever occurs first.

It is also intended that a resolution will be put to the Shareholders of Swank at the EGM granting the Directors the Repurchase Mandate authorising the repurchase by Swank on the Stock Exchange of up to 10% of the aggregate amount of the issued Shares as enlarged by the issue of new Shares pursuant to the Open Offer. This Repurchase Mandate will remain effective until the conclusion of Swank’s next annual general meeting or the expiration of the period within which the next annual general meeting of Swank is required by any applicable law or the articles of association of Swank to be held or until revoked or varied by an ordinary resolution of the Shareholders of Swank, whichever occurs first.

An explanatory statement as required by the relevant provisions of the Listing Rules concerning the regulation of repurchases by companies of their own securities on the Stock Exchange is set out in Appendix II to this circular.

EXTRAORDINARY GENERAL MEETING

A notice convening the EGM to be held at 10:00 a.m. on 17th October, 2003 is set out on page 126 to 132 of this circular. At the EGM, ordinary resolutions will be proposed to approve (i) the Shares Sale Agreement; (ii) the Loan Settlement Agreement; (iii) the Open Offer; and (iv) the General Mandate and the Repurchase Mandate.

There is a form of proxy for use at the EGM accompanying this circular. Whether or not you are able to attend the EGM, you are requested to complete and return the form of proxy accompanying this circular to Swank’s share registrar and transfer office, Secretaries Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong as soon as possible and in any event not later than 48 hours before the time appointed for the holding of the EGM. Completion and return of the form of proxy will not preclude you from attending and voting at the meeting should you wish to do so.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, Probest held 129,163,865 Shares representing approximately 57.9% of the existing issued share capital of Swank. Probest and its associates will abstain from voting on the resolutions to approve the Transactions and the Open Offer.

RECOMMENDATION

The text of a letter to the Shareholders from the Independent Board Committee, containing its recommendation in relation to the Transactions and the Open Offer, is set out in this circular. Having considered the advice from Chateron, the independent financial adviser to the independent board committee in relation to the Transactions and the Open Offer, which is set out in this circular, the Independent Board Committee is of the opinion that the Transactions and the Open Offer are in the interests of Swank and the Shareholders and the terms of the Transactions and the Open Offer are fair and reasonable so far as the Shareholders as a whole are concerned.

FURTHER INFORMATION

Subject to, among other matters, the Shareholders’ approval of the Open Offer at the EGM, it is expected that the Prospectus Documents will be despatched to the Qualifying Shareholders on 17th October, 2003.

Your attention is also drawn to the additional information set out in the appendices to this circular.

Yours faithfully By Order of the Board Swank International Manufacturing Company Limited Yau Tak Wah, Paul Executive Director

– 26 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Swank International Manufacturing Company Limited 囱光行實業有限公司

(Incorporated in Hong Kong with limited liability)

30th September, 2003

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTIONS AND THE OPEN OFFER

We refer to the circular of Swank dated 30th September, 2003 (the “Circular”), of which this letter forms part. Terms used in this letter shall have the same meanings as defined in the Circular unless the context otherwise requires.

We have been appointed as the Independent Board Committee to advise you on whether or not the terms of the Transactions and the Open Offer are fair and reasonable so far as the Independent Shareholders are concerned. Chateron has been appointed to advise the Independent Board Committee in relation to the Transactions and the Open Offer.

We wish to draw your attention to the letter from the Board set out on pages 5 to 26 of the Circular and to the letter of advice from Chateron to the Independent Board Committee as set out on pages 28 to 64 of the Circular.

Having considered the terms and conditions of the Transactions and the Open Offer, the advice of Chateron and the other principal factors contained in the letter from the Board, we are of the opinion that the terms and conditions of the Transactions and the Open Offer are fair and reasonable and are in the overall interests of Swank and the Independent Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the resolutions approving the Transactions and the Open Offer as set out in the notice convening the EGM on pages 126 to 132 of the Circular.

Yours faithfully,

Hahn Ka Fai, Mark

and

Shum Wai Ting, Rebecea

Independent Board Committee

– 27 –

LETTER FROM CHATERON

SUITE 20B, 20TH FLOOR, 9 QUEEN’S ROAD CENTRAL, HONG KONG TEL: (852) 2868 2828 FAX: (852) 2868 0390

30th September, 2003

The Independent Board Committee Swank International Manufacturing Company Limited 27th Floor Henley Building 5 Queen’s Road Central Hong Kong

Dear Sirs,

Major and connected transaction

Proposed open offer on the basis of 13 offer shares for every existing share held

INTRODUCTION

We refer to the joint announcement (the “ Announcement ”) issued by Tomorrow International Holdings Limited and Swank International Manufacturing Company Limited (the “ Company ”) dated 9th September, 2003 in respect of, inter alia, the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer (as such capitalised terms are defined in the Announcement). Details of, inter alia, the terms and conditions of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer are set out in a circular issued by the Company to its shareholders dated 30th September, 2003 (the “ Circular ”), of which this letter forms part. Capitalized terms used in this letter shall have the same meanings ascribed to them in the Circular unless the context herein otherwise requires.

The Share Sale Agreement, the Loan Settlement Agreement and the Open Offer are conditional upon, inter alia, the approval of the Independent Shareholders at the EGM. The Independent Board Committee comprising Messrs Hahn Ka Fai, Mark and Shum Wai Ting, Rebecca, being independent non-executive Directors, has been established by the Company to advise the Independent Shareholders in relation to the terms and conditions of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer. We, Chateron, have been appointed by the Company to advise the Independent Board Committee in relation to the terms and conditions of the Share Sale Agreement, the Loan Settlement Agreement and the Open

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LETTER FROM CHATERON

Offer. This letter contains our advice to the Independent Board Committee as to whether or not (i) the terms and conditions of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer are in the interests of the Company and the Independent Shareholders; and (ii) the Independent Board Committee should recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM in relation to the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer.

In formulating our opinion and recommendation to the Independent Board Committee in relation to the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer, we have relied on the accuracy of the information and representations contained in the Circular which have been provided to us by the Directors and which the Directors consider to be complete and relevant. We have assumed that all statements, information and representations made or referred to in the Circular, for which the Directors are solely responsible, were true and correct in all respects at the time they were made and continued to be so as at the date of despatch of the Circular. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due and careful enquiry and are based on honestly-held opinions. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and we have been advised by the Directors that no material facts have been omitted from the information and representations provided in and referred to in the Circular. We consider that we have received sufficient information to enable us to reach an informed view and to justify our reliance on the accuracy of the information and representations contained in the Circular and to provide a reasonable basis for our opinion and recommendation. We have no reason to suspect that any material information has been withheld by the Company or by the Directors. We have not, however, carried out any independent verification of the information provided to us by the Directors, nor have we conducted an independent in-depth investigation into the affairs of the Company and its subsidiaries.

In formulating our opinion and recommendation, we have not considered the tax consequences on the Shareholders as a result of the approval (or otherwise) of any of the Share Sale Agreement, the Loan Settlement Agreement or the Open Offer by the Independent Shareholders, since these are particular to the individual circumstances of any Shareholder. It is emphasized that we will not accept responsibility for any tax effects on or liabilities of any person resulting from the approval (or otherwise) of any of the Share Sale Agreement, the Loan Settlement Agreement or the Open Offer by the Independent Shareholders. In particular, any Shareholder who is in any doubt about his/her own tax position in connection with the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer should consult his/her own professional adviser(s).

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LETTER FROM CHATERON

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation to the Independent Board Committee in relation to the terms and conditions of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer, we have considered the principal factors and reasons set out below:–

The Share Sale Agreement

1. Reasons for entering into the Share Sale Agreement

As referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, the Company recorded an audited consolidated net profit attributable to Shareholders of approximately HK$10.1 million for the financial year ended 31st December, 2002, which showed an improvement from the Company’s audited consolidated net loss attributable to Shareholders of approximately HK$58.9 million for the corresponding financial year ended 31st December, 2001. Notwithstanding the improvement in the Swank Group’s financial results performance, the Swank Group has been operating under a tight cashflow position in making principal repayments and interest payments for the Loan. As referred to in the Company’s annual report and accounts for the financial year ended 31st December, 2002, the Company was unable to fulfill its legal obligations under the Loan in making repayments of (i) the first instalment due under the Loan on 1st June, 2002 of HK$25 million; (ii) the second instalment due under the Loan on 1st June, 2003 of HK$37.5 million; and (iii) the normal and default accrued interests on the entire Loan (in the principal amount of HK$250 million) since 1st March, 2002 up to the date of the Share Sale Agreement (which is also the date of the Loan Settlement Agreement) of approximately HK$23.7 million.

In other words, the Swank Group had an aggregate overdue indebtedness of approximately HK$86.2 million in respect of the Loan as at the date of the Share Sale Agreement (which is also the date of the Loan Settlement Agreement), which amount represents approximately 3.6 times the aggregate amount of cash and time deposits of approximately HK$24.1 million held by the Swank Group as at 31st December, 2002 or approximately 3.9 times the aggregate amount of cash and time deposits of approximately HK$22.3 million held by the Swank Group as at 30th June, 2003 (being the latest accounts reporting date to which the Company’s unaudited consolidated interim results were prepared and published).

Furthermore, in view of the fact that the Company had (i) audited consolidated net current liabilities (i.e. excess current liabilities over current assets) of approximately HK$7.5 million and audited consolidated Shareholders’ deficit of approximately HK$89.9 million as at 31st December, 2002; and (ii) unaudited consolidated net current liabilities of approximately HK$64.1 million and unaudited Shareholders’ deficit of approximately HK$100.0 million as at 30th June, 2003, we consider that the Swank Group is unlikely to have sufficient financial

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LETTER FROM CHATERON

resources to be able to service its obligations in repaying the first and second overdue instalments of the Loan and the related accrued interest on the Loan, in the aggregate amount of approximately HK$86.2 million as at the date of the Share Sale Agreement, as referred to above.

Pursuant to the Share Sale Agreement, the Company conditionally agreed to sell to Probest its 30% interest in the issued share capital of Profitown and 30% of the Profitown Loan for an aggregate consideration of HK$3 million (the “ Consideration ”), which amount will be offset against an equivalent amount of the outstanding principal of the Loan of HK$3 million. Furthermore, as referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, the Share Sale Agreement is conditional upon (inter alia) the Loan Settlement Agreement becoming unconditional pursuant to which Probest agrees to waive, inter alia, the repayment of an outstanding principal of the Loan of HK$47 million. Therefore, based on the foregoing, we were informed by the Directors that the Company entered into the Share Sale Agreement for the purpose of enabling the Company to repay part of the Loan, to the extent of an aggregate amount of HK$50 million (which comprises an offsetting of HK$3 million of the outstanding principal of the Loan under the Share Sale Agreement and the waiver of HK$47 million of the outstanding principal of the Loan under the Loan Settlement Agreement), in kind and not in cash.

We noted that since the Company (as the borrower of the Loan) is a subsidiary of Probest (as the lender of the Loan), the Share Sale Agreement constitutes a restructuring plan for part of the Loan based on terms and conditions mutually agreed between the Company and Probest and which effectively helps alleviate the Swank Group’s financial pressures in meeting its continuing obligations in servicing the Loan. Therefore, we consider that the Share Sale Agreement is in the interests of the Company and the Shareholders (including the Independent Shareholders) as a whole.

2. Determination of the value of the Consideration pursuant to the Share Sale Agreement

As referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, pursuant to the Share Sale Agreement, the Company conditionally agreed to sell to Probest 30% of the entire issued share capital in Profitown and 30% of the Profitown Loan for the Consideration of HK$3 million, which amount shall be satisfied by Probest by offsetting an equivalent amount of HK$3 million of the outstanding principal of the Loan due from the Company to Probest upon completion of the Share Sale Agreement. Profitown is a wholly owned subsidiary of the Company and is the intermediate holding company of all of the Company’s operating subsidiaries and associated companies engaged in the design, manufacture and marketing of frames, sunglasses and lenses.

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LETTER FROM CHATERON

The Consideration payable by Probest to the Company pursuant to the Share Sale Agreement of HK$3 million as referred to above was determined and agreed between the parties having regard to the following basis (“ Basis ”):–

	HK$ million
Proforma unaudited consolidated net tangible assets
of Profitown (including the Profitown Loan)
as at 30th June, 2003	32.5
Add: Profitown Loan as at 30th June, 2003	138.8
Aggregate sum of the proforma unaudited consolidated net
tangible assets of Profitown and the Profitown Loan
as at 30th June, 2003	171.3
30% thereof, which shall be acquired by Probest from
the Company under the Share Sale Agreement	51.4
Less: Waiver of part of the Loan principal by
Probest under the Loan Settlement Agreement
(upon which completion of the Share Sale
Agreement is conditional)	(47.0)
Net aggregate consideration which would otherwise be payable
by Probest to the Company under the Share Sale Agreement	4.4
Value of the Consideration	3.0
Discount of the value of the Consideration to the net aggregate
consideration which would otherwise be payable by
Probest to the Company under the Share Sale Agreement	31.8%

Profitown is a wholly owned subsidiary of the Company which holds all the Swank Group’s existing business operations in the design, manufacture and marketing of frames, sunglasses and lenses, and that Profitown has only the Company’s existing business operations but not any other business activities. Therefore, the Swank Group’s proforma results have consolidated Profitown’s financial results for any particular financial year. Profitown recorded a proforma unaudited consolidated net loss of approximately HK$102.3 million for the financial year ended 31st December, 2000 (as referred to in the Company’s circular dated 7th April, 2003) which was, as referred to in the letter from the Board as set out on pages 5 to 26

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LETTER FROM CHATERON

of the Circular, narrowed down to a proforma unaudited consolidated net loss of approximately HK$58.9 million for the financial year ended 31st December, 2001 and rebounded to a proforma unaudited consolidated net profit attributable to shareholders of approximately HK$10.1 million for the financial year ended 31st December, 2002. However, Profitown reported a proforma unaudited consolidated net loss attributable to shareholders of approximately HK$9.8 million during the six months ended 30th June, 2003. By comparison, the Company (whose entire business operation was grouped under Profitown since the reorganization in August 2003) reported unaudited consolidated net profit attributable to Shareholders of approximately HK$9.2 million during the corresponding six months ended 30th June, 2002 and therefore it would be appropriate to compare Profitown’s proforma unaudited consolidated results during the six months ended 30th June, 2003 against the Company’s unaudited consolidated results during the corresponding six months ended 30th June, 2002. Therefore, in view of the lack of a proven and steady earnings record for Profitown during the period comprising the last three financial years ended 31st December, 2002 and the six months ended 30th June, 2003, we consider that it would not be appropriate to evaluate the business value of Profitown, and hence to determine the amount of the Consideration, by adopting a price/earnings multiple basis and that the adoption of a net asset-based approach for this purpose would be appropriate.

We noted that upon completion of the Share Sale Agreement, the Company shall receive the Consideration in the amount of HK$3 million. Nevertheless, having regard to the Basis upon which the Consideration is being determined as referred to above (which adopts a net asset-based approach and under which 100% of the proforma unaudited consolidated net tangible assets of Profitown and 100% of the Profitown Loan amounted in aggregate to approximately HK$171.3 million as at 30th June, 2003 and therefore 30% thereof (which is the subject matter of the Share Sale Agreement) amounts to approximately HK$51.4 million as at 30th June, 2003, as referred to above), we consider that the net aggregate consideration which would otherwise be payable by Probest to the Company under the Share Sale Agreement should have been valued at approximately HK$4.4 million. The value of the Consideration of HK$3 million represents a discount of approximately 31.8% to the abovementioned figure of HK$4.4 million which means that, in other words, the Company shall receive the amount of the Consideration from Probest which is approximately 32% less than the amount which the Company would otherwise have been entitled to receive from Probest as computed in accordance with the Basis. Nevertheless, based on the Consideration of HK$3 million and the 30% attributable value of the aggregate sum of the proforma unaudited consolidated net tangible assets of Profitown and the Profitown Loan of approximately HK$51.4 million as at 30th June, 2003, the Swank Group will record a loss of approximately HK$48.4 million arising from the completion of the Share Sale Agreement in accordance with its terms.

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LETTER FROM CHATERON

In this regard, we noted that as referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, completion of the Share Sale Agreement is conditional upon, inter alia, the Loan Settlement Agreement and the Open Offer becoming unconditional, without which the Company will not be able to restructure the terms of the Loan and therefore the Swank Group will not be able to alleviate its financial pressures attributable to its repayment obligations under the Loan. Furthermore, after completion of the Share Sale Agreement, the Company’s principal assets will be its 70% equity interest in Profitown and 70% of the Profitown Loan as a result of which the Company will continue to have a controlling interest in Profitown and, in accordance with generally accepted accounting principles prescribed by the Hong Kong Society of Accountants, the Swank Group shall continue to be able to consolidate the financial results contributions to be generated from Profitown’s business operations in the design, manufacture and marketing of frames, sunglasses and lenses.

Therefore, based on the foregoing from which we noted that the amount of the Consideration of HK$3 million was arrived at on the basis of:–

• (i) 30% attributable value of the aggregate sum of the proforma unaudited consolidated net tangible assets of Profitown (which holds the Swank Group’s entire business operations) and 30% of the Profitown Loan, in the amount of approximately HK$51.4 million as at 30th June, 2003 (being the latest accounts reporting date to which the Company’s unaudited consolidated interim results were prepared and published) which constitutes the value of the assets being sold by the Company to Probest under the Share Sale Agreement;

• (ii) the waiver of part of the Loan principal of HK$47 million by Probest in favour of the Company under the Loan Settlement Agreement (which is inter-conditional upon completion of the Share Sale Agreement);

• (iii) the Company continuing to have a controlling interest in Profitown and that the Swank Group shall continue to be able to consolidate the financial results contributions to be generated from Profitown’s business operations; and

• (iv) a loss of approximately HK$48.4 million arising from the completion of the Share Sale Agreement in accordance with its terms,

we are of the view that, although the amount of the Consideration represents a discount of approximately 31.8% to the net aggregate consideration which would otherwise be payable by Probest to the Company under the Share Sale Agreement as determined in accordance with the Basis, the amount of the Consideration of HK$3 million under the Share Sale Agreement has been determined on a fair and reasonable basis.

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LETTER FROM CHATERON

3. Effects of the Share Sale Agreement

As referred to in the letter from the Board as set out on pages 5 to 26 of the Circular:–

• (i) there is no intention to change the board of directors of Profitown upon completion of the Share Sale Agreement; and

• (ii) Profitown has also undertaken to the Company that any surplus cash generated from the businesses carried out by Profitown’s subsidiaries and associated companies shall, after appropriating a sum for the operating expenses, be applied to repay the Profitown Loan or make advances to the Company on the same terms as the Profitown Loan for the purposes of facilitating the Company to repay the amounts due by the Company under the Promissory Note which will fall to be issued in respect of the remaining balance of the outstanding principal of the Loan of HK$163 million upon completion of, inter alia, the Loan Settlement Agreement and the Open Offer.

We consider the abovementioned arrangement to be fair and reasonable and are in the interests of the Company and the Independent Shareholders, for reason that such an arrangement would (i) enable Profitown to reduce and settle its outstanding obligations to the Company under the Profitown Loan; or (ii) facilitate the Company to reduce and settle its outstanding obligations to Probest under the Promissory Note, as quickly as possible under such terms which are no worse off than those prevailing under the Profitown Loan. In this regard, we have enquired with the Directors and were informed by them that the Company shall constantly review the financial position and working capital requirements of Proftown to ensure that Profitown’s financial resources are appropriately allocated and are applied for working capital requirements or for repayment of the Profitown Loan or for making advances to the Company in repaying the Promissory Note. We consider such an arrangement to be fair and reasonable, for reason that it would enable the Company to reach an optimal use of its financial resources in order to (i) sustain the Swank Group’s working capital requirements for its business operations; and (ii) reduce its repayment obligations under the Profitown Loan and/ or the Promissory Note as far as practicable.

4. Recommendation

Having considered the principal factors and reasons as referred to above, we consider that the terms and conditions of the Share Sale Agreement are fair and reasonable and are in the interests of the Company and the Independent Shareholders. Therefore, we would advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the EGM to consider and, if thought fit, approve the Share Sale Agreement.

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LETTER FROM CHATERON

The Loan Settlement Agreement

1. Reasons for entering into the Loan Settlement Agreement

As referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, the Swank Group has been operating under a tight cashflow position in making principal repayments and interest payments for the Loan notwithstanding the turnaround of its financial results performance during the financial year ended 31st December, 2002. The Company was unable to fulfil its obligations under the loan agreement governing the Loan to make repayments of the first instalment due under the Loan of HK$25 million on 1st June, 2002 and the second instalment due under the Loan of HK$37.5 million on 1st June, 2003, and payment of accrued interests on the entire Loan (in the principal amount of HK$250 million) from 1st March, 2002 up to the date of the Loan Settlement Agreement of approximately HK$23.7 million. We concur with the above, based on our review of the Company’s annual report and accounts for the financial year ended 31st December, 2002 from which we noted that the Swank Group recorded (i) audited net liabilities (i.e. excess current liabilities over current assets) of approximately HK$7.5 million as at 31st December, 2002; and (ii) audited Shareholders’ deficit of approximately HK$89.9 million as at 31st December, 2002, as well as our review of the Company’s interim report for the six months ended 30th June, 2003 from which we noted that the Swank Group recorded (i) unaudited net liabilities (i.e. excess current liabilities over current assets) of approximately HK$64.1 million as at 30th June, 2003; and (ii) unaudited Shareholders’ deficit of approximately HK$100.0 million as at 30th June, 2003. Our observation above suggests that the Swank Group was operating under a tight financial position as at 31st December, 2002, although the Swank Group reported an audited consolidated net profit attributable to Shareholders of approximately HK$10.1 million for the financial year ended 31st December, 2002 which was largely attributable to an exceptional gain relating to a waiver of accrued bank loan and overdraft interests (in relation to bank loans in the aggregate amount of HK$250 million which were transferred from the Company to Probest on 1st March, 2002 and that certain of the related accrued interests were agreed to be waived by the Company’s bank creditors) of approximately HK$17.3 million during the financial year then ended. Our observation in the section headed “The Share Sale Agreement” above also suggests that the Swank Group’s financial position had not improved from that as at 31st December, 2002 and the Swank Group demonstrated a worsened financial results performance during the six months ended 30th June, 2003 when compared with that during the corresponding six months ended 30th June, 2002 which, according to the Directors, was largely attributable to the weakened market demand for the Swank Group’s optical products due to the outbreak of the Severe Acute Respiratory Syndrome (SARS) in March 2003 as well as intensive competition in the optical products market. We concur with the Directors’ view about the adverse effect which the outbreak of SARS has had on the economy in Hong Kong, particularly on the retail sector in Hong Kong as demonstrated by the statistics published by the Census and Statistics Department of the Hong Kong Government where the total retail sales value in Hong Kong from March to May 2003 (during which period SARS prevailed) amounted to approximately

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LETTER FROM CHATERON

HK$40.7 billion, which registered a decrease by about 11% when compared with the total retail sales value in Hong Kong during the corresponding period from March to May 2002 (during which period there was no outbreak of SARS) which amounted to approximately HK$45.6 billion.

Pursuant to the Loan Settlement Agreement, Probest conditionally agreed that the remaining principal of the Loan of HK$247 million (after setting off HK$3 million of the Loan principal against the value of the Consideration payable by Probest to the Company under the Share Sale Agreement, as referred to in our discussions in the section headed “The Share Sale Agreement” above) which is due from the Company to Probest will be settled in the following manner:–

• (i) Probest agrees to waive the repayment of the outstanding principal of HK$47 million of the Loan, and the normal and default interests accrued on the entire Loan (in the principal amount of HK$250 million) since 1st March, 2002 up to the date of the Loan Settlement Agreement taking effect;

• (ii) the Company agrees to apply the net proceeds from the Open Offer to repay HK$37 million of the outstanding principal of the Loan; and

• (iii) the remaining balance of the outstanding principal of the Loan of HK$163 million shall be repaid by the Company to Swank in accordance with the terms of the Promissory Note.

Completion of the Loan Settlement Agreement is conditional upon, inter alia, the Share Sale Agreement and the Open Offer becoming unconditional. Therefore, we consider that upon completion of the Loan Settlement Agreement, the Swank Group’s aggregate indebtedness under the outstanding principal of the Loan will be reduced from HK$250 million to HK$163 million, i.e. a decrease by approximately 35%, and that the Swank Group will be relieved from its obligations to pay accrued interests on the Loan (which, as we were informed by the Directors, amounted to approximately HK$24.8 million during the period from 1st March, 2002 up to and including the Latest Practicable Date). We consider that the reduction in the Swank Group’s aggregate indebtedness by about 35% as well as the waiver of payment obligations on accrued interests under the Loan of approximately HK$24.8 million from 1st March, 2002 up to and including the Latest Practicable Date (for illustration purpose), as referred to above, will altogether result in an alleviation in the Swank Group’s financial pressures. We therefore consider that the arrangements under the Loan Settlement Agreement are in the interests of the Company and the Independent Shareholders.

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LETTER FROM CHATERON

2. Terms of the Promissory Note

As referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, upon completion of the Loan Settlement Agreement, the Promissory Note will be for an amount of HK$163 million and will be repayable by the Company to Probest in three instalments as to (i) HK$25.5 million due on 1st June, 2004; (ii) HK$62.5 million due on 1st June, 2005; and (iii) HK$75 million due on 1st June, 2006, with a maturity date on 1st June, 2006. The Promissory Note is unsecured and is interest-bearing at 1% over and above the prime rate for Hong Kong dollars quoted from time to time by The Hongkong and Shanghai Banking Corporation Limited, which is based on the prevailing market rate and is equal to the existing interest rate of the Loan. The Promissory Note, when issued by the Company to Probest upon completion of the Loan Settlement Agreement, shall replace the existing loan agreement governing the Loan. The Directors expect that the financial obligations of the Company pursuant to the Promissory Note shall be settled by Profitown’s internal resources generated from the operating activities of its subsidiaries and associated companies and distributed to the Company by way of repayment of the Profitown Loan or advances by Profitown to the Company.

As regards repayment

We were informed by the Directors that, under the current terms of the Loan, the principal amount of the Loan of HK$250 million shall be repayable by the Company in five instalments as to (i) HK$25 million due on 1st June, 2002 (which the Company had defaulted); (ii) HK$37.5 million due on 1st June, 2003 (which the Company had defaulted); (iii) HK$50 million due on 1st June, 2004; (iv) HK$62.5 million due on 1st June, 2005; and (v) HK$75 million due on 1st June, 2006.

Therefore, under the repayment terms of the Promissory Note, the Company would be required to repay HK$25.5 million (instead of HK$50 million under the current terms of the Loan) on 1st June, 2004, which means a reduction of HK$24.5 million or 49% of the amount which the Company would otherwise be required to repay under the Loan on 1st June, 2004. The Company’s repayment obligations under the Promissory Note on 1st June, 2005 and 1st June, 2006 remain the same as those under the Loan. In summary, the Company’s repayment arrangements under the Loan (before completion of the Loan

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LETTER FROM CHATERON

Settlement Agreement) and under the Promissory Note (after completion of the Loan Settlement Agreement) are set out as follows:–

Repayment obligations of the Company to Probest

		Under the
	Under the Loan	Promissory Note
	(before completion	(after completion
	of the Loan	of the Loan
Due date	Settlement Agreement)	Settlement Agreement)
	HK$ million	HK$ million
1st June, 2002	25	–
	(in default)
1st June, 2003	37.5	–
	(in default)
1st June, 2004	50	25.5
1st June, 2005	62.5	62.5
1st June, 2006	75	75
Total	250	163

The Company’s defaulted repayment obligations in respect of the Loan, being HK$25 million due on 1st June, 2002 and HK$37.5 million due on 1st June, 2003 as well as the reduction in the repayment instalment due on 1st June, 2004 by HK$24.5 million, which amounts altogether add up to HK$87 million, will be satisfied by way of (i) the offset of the Consideration of HK$3 million against part of the Loan principal under the Share Sale Agreement; (ii) the waiver of part of the Loan principal of HK$47 million under the Loan Settlement Agreement; and (iii) the repayment in cash of HK$37 million of the Loan principal from the net proceeds of the Open Offer.

We consider the reduced repayment obligation for the Company under the Promissory Note on 1st June, 2004 to be in the interests of the Company and the Independent Shareholders, for reason that such an arrangement offers the Swank Group with enhanced financial flexibility in planning its own working capital requirements in order to reap the benefits of the Swank Group’s recent turnaround in financial results performance during the financial year ended 31st December, 2002 as well as any possible improvement in the market sentiment and operating conditions of the Swank Group.

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LETTER FROM CHATERON

As regards maturity

The Promissory Note has the same maturity date as the Loan, being 1st June, 2006. We consider that such an arrangement has not put the Company and the Independent Shareholders in any position which is worse-off than that under the Loan as far as the maturity date is concerned.

As regards interest cost

The Promissory Note is interest-bearing at 1% over and above the prime rate for Hong Kong dollars quoted from time to time by The Hongkong and Shanghai Banking Corporation Limited, i.e. 6% per annum as at the Latest Practicable Date (based on the prime rate of 5% for Hong Kong dollars quoted from time to time by The Hongkong and Shanghai Banking Corporation Limited as at the Latest Practicable Date) and is equal to the existing interest rate of the Loan. We consider that such an arrangement has not put the Company and the Independent Shareholders in any position which is worse-off than that under the Loan as far as the interest cost is concerned.

No conversion features

We noted that the Promissory Note is essentially a form of loan between the Company (as the borrower) and Probest (as the lender) which replaces the Loan and has no features which enable the conversion of any part of the Promissory Note into new Shares of the Company in favour of Probest, and hence would not result in any possible dilution in the Shareholders’ interests in the Company.

As regards security

The Promissory Note is essentially an unsecured lending from Probest to the Company and is not charged on / pledged against any of the Swank Group’s assets and/or earnings. Therefore, we consider that the Promissory Note would not generate any further obligations or liabilities to the Company (as the borrower), which we consider to be in the interests of the Company and the Independent Shareholders.

Comparison against other fixed-rate loan instruments

We have compared the terms of the Promissory Note against convertible loan note issues which were announced by listed companies on the Stock Exchange, which is essentially another form of fixed-rate loan instrument, during the period from 1st

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LETTER FROM CHATERON

September, 2002 (being the date falling on 12 months prior to the Announcement) up to and including the Latest Practicable Date. The major terms of these convertible loan note issues are set out as follows:–

										Premium/
										(discount) of the
										conversion price
										to the market
										price of the
									Closing price	underlying
									per share	shares prior to
									prior to the	announcement
									issue of	of the
Date of				Principal	Coupon rate			Conversion	convertible	convertible loan
announcement	Company	Security		amount	(per annum)	Term	Conversion period	price	loan note	note issue
				HK$ million	%			HK$	HK$	%
September 2002	Regal Hotels International		None	50	5%	1.5 years	Any time during its term	0.1	0.08	25.00%
	Holdings Limited
September 2002	ITC Corporation Limited		None	580	8%	3 years	At any time during.	0.3	0.262	14.50%
							the period from 3
							months after the
							issue date up to
							maturity
November 2002	Term Fat Hing Fung (Holdings)		None	20	2%	3 years	Any time during its term	0.05	2.6	(98.08%)
	Limited
December 2002	Simen International Corporation		None	150	4.25%	3 years	Any time during its term	0.25	0.18	38.89%
	Limited
March 2003	Asia Standard Hotel Group		None	50	Hong Kong	1.5 years	Any time during its term	0.25	0.208	20.19%
	Limited				dollar prime
					rate, being 5%
					as at the Latest
					Practicable
					Date
April 2003	Cosmopolitan International		None	8.7	0%	1 year	Any time during its term	0.25	0.23	8.70%
	Holdings Limited
April 2003	CCT Tech International Limited		None	21	2%	2 years	At any time from the	0.01	0.012	(16.67%)
							issue date up to 5
							business days prior
							to maturity

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LETTER FROM CHATERON

									Premium/
									(discount) of the
									conversion price
									to the market
									price of the
								Closing price	underlying
								per share	shares prior to
								prior to the	announcement
								issue of	of the
Date of			Principal	Coupon rate			Conversion	convertible	convertible loan
announcement	Company	Security	amount	(per annum)	Term	Conversion period	price	loan note	note issue
			HK$ million	%			HK$	HK$	%
May 2003	Massive Resources International None		15	5%	1 year	Any time during its term	0.02	0.01	100.00%
	Corporation Limited
May 2003	CCT Tech International Limited None		768	Best lending	5 years	At any time from the	0.014	0.018	(22.22%)
				rate plus 2%		issue date up to 5
				(i.e. 7%,		business days prior
				as at the		to maturity
			Latest Practicable
				Date)
June 2003	Credit Card DNA Security	None	10	Prime lending	1.5 years	Any time during its	0.012	0.017	(29.41%)
	System (Holdings) Limited			Rate plus 3%		term
				(i.e. 8%,
				as at the
			Latest Practicable
				Date)
June 2003	Stone Electronic	None	Between 50	3%	5 years	At any time after 90	0.52	0.52	–
	Technology Limited		and 400			calendar days from
						the issue date up to
						14 business days
						prior to maturity
June 2003	China Gas	None	46.8	2%	2 years	At any time after 12	2.00	0.74	170.27%
	Holdings Limited					months from the
						issue date up to
						maturity.
July 2003	Gorient (Holdings) Limited	None	10	8%	1 year	Any time during its	0.016	0.023	(30.43%)
						term
July 2003	China Silver Dragon	None	7.5	6%	2 years	Any time from the	0.25	0.2	25.00%
	Group Limited					date of the capital
						reorganization (to
						which the issue of
						the convertible bond
						is subject) becoming
						effective up to
						maturity

– 42 –

LETTER FROM CHATERON

											Premium/
											(discount) of the
											conversion price
											to the market
											price of the
										Closing price	underlying
										per share	shares prior to
										prior to the	announcement
										issue of	of the
Date of			Principal	Coupon rate				Conversion		convertible	convertible loan
announcement	Company	Security	amount	(per annum)	Term	Conversion period			price	loan note	note issue
			HK$ million	%					HK$	HK$	%
July 2003	Hua Han Bio-Pharmaceutical	None	Between 27.3	2.5%	3 years	Any time up to one			1.4879	1.19	25.00%
	Holdings Limited		(US$3.5 million)			week prior to
			and 66.3			maturity
			(US$8.5 million)
July 2003	Gorient (Holdings) Limited	None	5	8%	1 year	Any time during its			0.016	0.024	(33.33%)
						term
August 2003	Dickson Group	None	10	2% over the	2 years	Any time during its			0.075	0.06	25.00%
	Holdings Limited			prime lending		term	(fixed conversion
				rate				price) or 110%
				(i.e. 7%, as				of the average
				at the Latest				of	the last 10
				Practicable				dealing days,
				Date)					or the par
								value of the
								shares, which
								ever is highest
August 2003	Terabit Access Technology	None	16	8%	1 year	Any time during its			0.018	0.014	28.57%
	International Limited					term
August 2003	renren Holdings Limited	None	3	12%	1 year	Any time after three			0.032	0.042	(23.81%)
						months until
						maturity
September 2003	China Travel International	None	1,170	0%	5 years	Any time from 40			1.900	1.65	15.15%
	Investment Hong Kong		(US$150			days after closing
	limited		million)			day until 10
						business days prior
						to maturity
September 2003	Capital Estate Limited	None	8	2%	2 years	Any time during its			0.020	0.022	(9.09%)
						term
Average				5.0%	2.3 years

– 43 –

LETTER FROM CHATERON

For the purpose of identifying other fixed-rate loan instruments as comparison with the Promissory Note, we consider that it would be appropriate for us to refer to convertible loan note issues announced by listed companies on the Stock Exchange for reason that (i) it is a common feature for listed companies in Hong Kong to issue fixedrate loan instruments in form of convertible loan notes rather than in form of promissory notes; and (ii) the terms of these convertible loan note issues constitute publicly available information for our comparison.

Similar to the Promissory Note, all the convertible loan notes as referred to above are unsecured. However, convertible loan notes are convertible by the holders thereof into the underlying shares of the issuers, whilst the Promissory Note has no conversion features. Based on the statistics above, we noted that the convertible loan notes have (i) an average coupon rate of about 5% per annum, which is slightly lower than the interest rate of 6% per annum as at the Latest Practicable Date under the Promissory Note; and (ii) an average term to maturity of about 2.3 years from date of issue, which is generally comparable with the term to maturity of about 2.54 years (commencing from the earliest Long Stop Date of 18th November, 2003 when the Promissory Note is expected to be issued up to and including 1st June, 2006) under the Promissory Note. We consider that it would be fair and reasonable for the Promissory Note to offer a higher interest rate than the average coupon rate of the convertible loan notes under study, in view of the absence in the Promissory Note of any conversion features (and hence the lack of any potential capital gains in the underlying securities so converted) which may otherwise be entitled by the holders of convertible loan notes.

General

Based on the foregoing analyses, we consider that the terms of the Promissory Note are fair and reasonable and are in the interests of the Company and the Independent Shareholders.

3. The Group’s business plans and financial resources

We have enquired with and were informed by the Directors that the Swank Group continues to be engaged in the design, manufacture and marketing of frames, sunglasses and lenses, which are carried out by the subsidiaries and associated companies of Profitown. The Directors expect that upon completion of the Share Sale Agreement, the Company will continue to beneficially own 70% of Profitown’s issued share capital and 70% of the remaining balance of the Profitown Loan. We were informed by the Directors that the Swank Group has not, as at the Latest Practicable Date, formulated any particular business plans or strategies, in respect of the Company’s remaining 70% interest in Profitown. In this regard, we understand that the Company’s position regarding its business plans and strategies remain unchanged from those when the Company announced the Asset Disposal Agreement, the Loan Restructuring Agreement and the Share Mortgage in March 2003 (as such capitalized terms were defined and referred to in the Company’s announcement dated 4th March, 2003).

– 44 –

LETTER FROM CHATERON

As referred to in the paragraph headed “Terms of the Promissory Note” above, the Directors expect that the financial obligations of the Company pursuant to the Promissory Note shall be settled by Profitown’s internal resources generated from the operating activities of its subsidiaries and associated companies and distributed to the Company by way of repayment of the Profitown Loan or advances by Profitown to the Company. We have reviewed the Swank Group’s cashflow projections from 1st September, 2003 up to and including 31st July, 2004, from which we noted the Directors’ estimate that barring unforeseen circumstances, the Swank Group would have sufficient financial resources (after meeting the Swank Group’s administrative and operating costs during such period) for the purpose of satisfying the Company’s repayment obligations of the first instalment of HK$25.5 million of the Promissory Note due on 1st June, 2004.

Nevertheless, we consider that the Swank Group’s cashflow projections up to 31st July, 2004 do not represent a long enough period to enable us to evaluate the Swank Group’s cashflow positions for the purpose of servicing its two remaining (and largest) repayment obligations under the Promissory Note in 2005 and 2006. Furthermore, we consider that the Swank Group’s historical financial results performances during the past three financial years ended 31st December, 2002 and during the six months ended 30th June, 2003 were unable to demonstrate a proven and steady earnings record and therefore we are unable to opine whether or not the Swank Group would be able to fully discharge its repayment obligations under the Promissory Note based solely on the financial resources generated from the Swank Group’s existing business operations.

However, we have not been made available from the Directors any further cashflow projections of the Swank Group after 31st July, 2004 in order to enable us to evaluate the Swank Group’s repayment capabilities (after meeting the Swank Group’s administrative and operating costs) of the two remaining instalments of the Promissory Note, in the amounts of HK$62.5 million due on 1st June, 2005 and HK$75 million due on 1st June, 2006, respectively (which amounts collectively represent approximately 84% of the entire principal amount of the Promissory Note of HK$163 million), plus accrued interests. In this regard, we are of the view that (i) the second instalment of the Promissory Note, being HK$62.5 million, is due on 1st June, 2005 which is about 20 months from the Latest Practicable Date; (ii) the final instalment of the Promissory Note, being HK$75 million, is due on 1st June, 2006 which is about 32 months from the Latest Practicable Date; (iii) the Company may, prior to the two due dates of the Promissory Note in 2005 and 2006, formulate such business plans and strategies which are able to capitalize on any improvement in the economy and hence the retail market sentiment of the optical products sold by the Swank Group as a result of which the Swank Group may benefit from enhanced cashflow positions; and (iv) the Company may, prior to the two due dates of the Promissory Note in 2005 and 2006, formulate appropriate fund raising exercises to enable it to procure the necessary funding for the purpose of meeting the repayment obligations of the Promissory Note on the two due dates in 2005 and 2006.

– 45 –

LETTER FROM CHATERON

4. Recommendation

Having considered the principal factors and reasons as referred to above, we consider that the terms and conditions of the Loan Settlement Agreement are fair and reasonable and are in the interests of the Company and the Independent Shareholders. Therefore, we would advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the EGM to consider and, if thought fit, approve the Loan Settlement Agreement.

The Open Offer

1. Alternative methods of fund raising other than the Open Offer

As alternatives to fund raising by way of the Open Offer, the Company may consider raising the requisite net proceeds of approximately HK$37 million (which will be used to repay part of the Loan principal under the Loan Settlement Agreement) by way of (i) a share placement; or (ii) external bank borrowings.

We noted that based on the closing price of the Shares of HK$0.18 as at the Latest Practicable Date, the market capitalization of the entire Company as at the Latest Practicable Date was approximately HK$40 million. Therefore, it would inevitably result in a very significant dilution in the Independent Shareholders’ existing interests in the Company if the Company were to raise funds in the magnitude of approximately HK$37 million solely by way of a share placement instead of the Open Offer. On the other hand, as discussed in the section headed “The Share Sale Agreement” above, the Swank Group is unable to demonstrate a proven and stable earnings record during the past three financial years ended 31st December, 2002 and for the six months ended 30th June, 2003 (although the Swank Group recorded a turnaround in its financial results performance for the first time during the financial year ended 31st December, 2002). Furthermore, the Swank Group recorded audited Shareholders’ net deficit of approximately HK$89.9 million as at 31st December, 2002 and unaudited Shareholders’ net deficit of approximately HK$100.0 million as at 30th June, 2003, whereas the Swank Group has in existence aggregate outstanding principal under the Loan of approximately HK$250 million owing to Probest which puts the Swank Group in an excessively over-geared financial position. Therefore, we consider that it would be extremely difficult for the Swank Group to be able to procure external bank borrowings, instead of the Open Offer, for the purpose of raising the requisite funds of HK$37 million under the Loan Settlement Agreement for reason that external bank borrowings would only add onto the Swank Group’s existing gearing and further deteriorate the Swank Group’s financial position.

We consider that the Open Offer, if proceeded with, would result in an enlargement in the capital base of the Company. Under the terms of the Open Offer, all the existing Qualifying Shareholders of the Company (including the Independent Shareholders) will be offered the

– 46 –

LETTER FROM CHATERON

opportunity to participate in the Open Offer and subscribe for their pro-rata entitlements of the Offer Shares, and would therefore not be subject to any dilution of their interests in the Company unless any Qualifying Shareholder would elect not to participate in the Open Offer. Therefore, we are of the view that the Open Offer is an appropriate method of fund raising given the Company’s small market capitalization (which means that fund raising solely by share placements would result in a very significant dilution effect on Shareholders’ existing interests in the Company and is therefore inappropriate) as well as the Swank Group’s unfavourable financial position (which makes it extremely difficult for the Company to raise funds from external bank borrowings), and that the Open Offer is in the interests of the Company and the Shareholders (including the Independent Shareholders).

2. Reasons for and use of proceeds from the Open Offer

As referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, the Company proposes the Open Offer pursuant to which the Company shall raise net proceeds of approximately HK$37 million, the entire amount of which will be used to repay part of the Loan owing by the Company to Probest. In this regard, we noted that (i) completion of the Loan Settlement Agreement is subject to, inter alia, the Open Offer becoming unconditional; and (ii) completion of the Open Offer is subject to the approval by the Independent Shareholders of, inter alia, the Loan Settlement Agreement. Therefore, the Loan Settlement Agreement and the Open Offer are inter-conditional upon one another.

As we have discussed in the section headed “The Loan Settlement Agreement” above, upon completion of the Loan Settlement Agreement, the Swank Group’s aggregate indebtedness under the outstanding principal of the Loan will be significantly reduced by approximately 35% and that the Swank Group will be relieved from its obligations to pay normal and default accrued interests on the Loan since 1st March, 2002 up to the date when the Loan Settlement Agreement becomes effective, which will altogether result in an alleviation in the Swank Group’s financial pressures. Therefore, we are of the view that it is of paramount importance for the Open Offer to be proceeded with in order to enable completion of the Loan Settlement Agreement to take place, which we consider to be in the interests of the Company and the Independent Shareholders.

3. Terms of the Open Offer

As referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, under the terms of the Open Offer, 13 Offer Shares will be provisionally allotted for every existing Share held by the Qualifying Shareholders on the Record Date. Qualifying Shareholders are not entitled to apply for any Offer Shares which are in excess of their entitlements under the Open Offer. The Offer Shares, when fully paid, will rank pari passu in all respects with the Shares in issue on the Record Date and holders of the Offer Shares will be entitled to receive all future dividends and distributions which are declared, made or paid on or after the date of issue and allotment of the Offer Shares.

– 47 –

LETTER FROM CHATERON

Based on the foregoing as well as an aggregate of 223,204,481 Shares in issue as at the Latest Practicable Date, an aggregate of 2,901,658,253 Offer Shares shall fall to be issued by the Company under the Open Offer. Based on the Subscription Price of HK$0.013 per Offer Share, the proceeds to be derived by the Company from the Open Offer (before expenses) amount to approximately HK$37.7 million. Probest, who is beneficially interested in 129,163,865 Shares representing approximately 57.9% of the Company’s issued share capital as at the Latest Practicable Date, has irrevocably undertaken to the Company that it will subscribe or procure subscribers for its provisional entitlement under the Open Offer in full which amounts to an aggregate of 1,679,130,245 Offer Shares.

The Subscription Price of HK$0.013 per Offer Share represents:–

• (i) a discount of approximately 93.5% to the closing price of the Shares of HK$0.20 on the Stock Exchange on 3rd September, 2003 (the “ Last Trading Day ”, being the last trading day of the Shares on the Stock Exchange pending the release of the Announcement);

• (ii) a discount of approximately 92.1% to the average closing price of HK$0.165 per Share for the period of 10 trading days up to and including the Last Trading Day;

• (iii) a discount of approximately 92.8% to the closing price of the Shares of HK$0.18 on the Stock Exchange on the Latest Practicable Date;

• (iv) a discount of 50.0% to the theoretical ex-entitlement price of HK$0.026 per Share based on the closing price of the Shares of HK$0.20 on the Last Trading Day as referred to in (i) above;

• (v) a discount of approximately 45.8% to the theoretical ex-entitlement price of HK$0.024 per Share based on the average closing price of HK$0.165 per Share for the period of 10 trading days up to and including the Last Trading Day as referred to in (ii) above; and

• (vi) a discount of approximately 48% to the theoretical ex-entitlement price of HK$0.025 per Share based on the closing price of the Shares of HK$0.18 on the Latest Practicable Date as referred to in (iii) above.

– 48 –

LETTER FROM CHATERON

In relation to the above, we have made reference to the pricing statistics of the rights issues and open offers which were announced by companies listed on the Stock Exchange (the “ Issuers ”) during the period of the last 12 months prior to the Latest Practicable Date (excluding the Open Offer), a summary of whose terms are set out below:–

									(Discount)/
									premium to
							Theoretical		theoretical
				Rights			ex-rights	(Discount)/	ex-rights
				issue/open			price/	premium to	price/
Date of			Size	offer price		**Closing **	ex-entitlement	**closing **	ex-entitlement
announcement	Company	Category	of issue	per share	Terms	share price	price	share price	price	Underwriter
			HK$ million	HK$		HK$	HK$	%	%
4th October, 2002	UDL Holdings Limited	Rights issue	6.6	0.025	1 rights share for every 2	0.050	0.042	(50.0%)	(40.5%)	Commercial
					existing shares					underwriter
7th October, 2002	e-Kong Group Limited	Rights issue	28.25	0.120	1 rights share for every	0.200	0.160	(40.0%)	(25.0%)	Controlling
					share held					shareholder
9th October, 2002	Can Do Holdings Limited	Open offer	18.4	0.01	1 offer share for every 20	0.025	0.024	(60.0%)	(58.3%)	Commercial
					existing shares held					underwriter
12th October, 2002	iAsia Technology Limited	Rights issue	102	0.100	3 rights shares for every 2	0.095	0.07	5.3%	42.9%	Commercial
					shares held plus 2 bonus	shares				underwriter
					for every 3 rights shares taken up
16th October, 2002	Star Cruises Limited	Rights issue	1,172	1.950	7 rights shares for every 50	2.700	2.610	(27.8%)	(25.3%)	Commercial
					shares held					underwriter
17th October, 2002	New Century Group	Rights issue	83.1	0.300	1 rights share for every 2	0.520	0.447	(42.3%)	(32.9%)	Commercial
	Hong Kong Limited				existing shares held					underwriter and
										controlling
										shareholder
11th November, 2002	Harmony Asset Limited	Rights issue	29.0	0.020	3 rights shares for every 2	0.054	0.034	(63.0%)	(41.2%)	Commercial
					existing shares held					underwriter
25th November, 2002	Styland Holdings Limited	Rights issue	40.8	0.100	2 rights shares for every	0.480	0.227	(79.2%)	(55.9%)	Commercial
					one existing share held					underwriters
19th December, 2002	Enerchina Holdings Limited	Rights issue	109.0	0.020	3 rights shares for every 2	0.05	0.032	(60.0%)	(37.5%)	Controlling
					existing shares held					shareholders
12th February, 2003	Hon Kwok Land Investment	Rights issue	200.0	1.000	3 rights shares for every 2	1.48	1.192	(32.4%)	(16.1%)	Substantial
	Company Limited				existing shares held					shareholder

– 49 –

LETTER FROM CHATERON

									(Discount)/
									premium to
							Theoretical		theoretical
				Rights			ex-rights	(Discount)/	ex-rights
				issue/open			price/	premium to	price/
Date of			Size	offer price		**Closing **	ex-entitlement	**closing **	ex-entitlement
announcement	Company	Category	of issue	per share	Terms	share price	price	share price	price	Underwriter
			HK$ million	HK$		HK$	HK$	%	%
14th February, 2003	Wing Lee Holdings Ltd	Rights issue	21.0	1.500	1 rights share for every 2	2.88	2.42	(47.9%)	(38.0%)	Controlling
					reorganised shares held					shareholder
3rd March, 2003	rentren Holdings Ltd	Rights issue	between 11.2	0.018	1 rights share for every 1	0.032	0.025	(43.8%)	(28.0%)	Commercial
			million and		existing share held					underwriters
			12.1 million
11th March, 2003	Lai Fung Holdings Limited	Rights issue	76.8	0.100	1 rights share for every 5	0.13	0.125	(23.1%)	(20.0%)	Commercial
					existing shares held					underwriters
19th March, 2003	Pacific Challenge Holdings	Rights issue	between 43.3	0.300	1 rights share for every 2	0.37	0.347	(18.9%)	(13.5%)	Commercial
	Limited		million and		existing shares held					underwriter
			47.7 million
24th March, 2003	Bossini International	Rights issue	56.6	0.220	1 rights share for every 2	0.232	0.228	(5.2%)	(3.5%)	Major
	Holdings Limited				existing shares held					shareholder
5th May, 2003	Yoshiya International	Rights issue	13.9	0.010	2 rights shares for every 1	0.035	0.0183	(71.4%)	(45.4%)	Controlling
	Corporation, Limited				existing share held					shareholder and
										commercial
										underwriter
6th May, 2003	GR Investment International	Open offer	32.4	0.100	3 offer shares for every 1	0.27	0.1425	(63.0%)	(29.8%)	Controlling
	Limited				consolidated share held					shareholder and
										commercial
										underwriters
9th May, 2003	Start Technology Company	Rights issue	198.0	0.1125	3 rights shares for every 1	0.32	0.132	(64.8%)	(14.8%)	Substantial
	Limited				existing share held plus 1 bonus					shareholder and
					share for every 3 rights shares					commercial
					subscribed					underwriter
13th May, 2003	Leaptek Limited	Rights issue	7.4	0.010	1 rights share for every 1	0.07	0.04	(85.7%)	(75.0%)	Substantial
					existing share held					shareholder
27th May, 2003	LifeTec Group Limited	Rights issue	81.3	0.100	1 rights share for every 2	0.135	0.1233	(25.9%)	(18.9%)	Commercial
					existing shares held					underwriter

– 50 –

LETTER FROM CHATERON

									(Discount)/
									premium to
							Theoretical		theoretical
				Rights			ex-rights	(Discount)/	ex-rights
				issue/open			price/	premium to	price/
Date of			Size	offer price		**Closing **	ex-entitlement	**closing **	ex-entitlement
announcement	Company	Category	of issue	per share	Terms	share price	price	share price	price	Underwriter
			HK$ million	HK$		HK$	HK$	%	%
29th May, 2003	Oriental Union Holdings	Rights issue	between 46	0.300	1 rights share for every 1	0.64	0.47	(53.1%)	(36.2%)	Commercial
	Limited		million and		existing share held					underwriters
			53 million
3rd June, 2003	MediaNation Inc.	Open offer	120.0	0.100	2 offer shares for every 1	0.075	0.0917	33.3%	9.1%	Controlling
					existing share held					shareholders
7th July, 2003	Comapss Pacific Holdings	Open offer	67.0	0.106	1 offer share for every 2	0.28	0.222	(62.1%)	(52.3%)	Commercial
	Limited				existing shares held					underwriter
15th July, 2003	Xin Corporation Limited	Open offer	51.7	0.060	4 offer shares for every	0.158	0.0796	(62.0%)	(24.6%)	Commercial
					existing share held					underwriter
24th July, 2003	Wo Kee Hong (Holdings)	Rights issue	37.2	0.025	2 rights shares for every 5	0.067	0.0296	(62.7%)	(15.5%)	Substantial
	Limited				existing shares and 3 bonus					shareholder and
					shares for every fully-paid					commercial
					rights share taken up					underwriter
1st August, 2003	i100 Limited	Rights issue	14.1	1.000	1 rights share for every 2	0.88	0.92	13.6%	8.7%	Commercial
					consolidated shares held					underwriter
1st August, 2003	Matsunichi Communication	Rights issue	339.4	1.000	2 rights shares for every	1.5	1.167	(33.3%)	(14.3%)	Commercial
	Holdings Limited				consolidated share held					underwriter
11th August, 2003	Melco International	Rights issue	105.0	1.450	1 rights share for every 2	1.79	1.68	(19.0%)	(13.7%)	Commercial
	Development Limited				shares in issue					underwriter
18th August, 2003	MRC Holdings Limited	Rights issue	20.3	0.050	1 rights share for every 1	0.052	0.051	(3.8%)	(2.0%)	Substantial
					existing share held					shareholder
1st September, 2003	China Nan Feng Group	Open offer	23.7	0.045	5 offer shares for every	0.36	0.0975	(87.5%)	(53.8%)	Substantial
	Limited				consolidated share held					shareholder
Average (excluding those whose rights issue/open		offer price represents a premium		to the underlying market price
and the theoretical ex-rights/ex-entitlement price of shares)								(47.7%)	(30.8%)

– 51 –

LETTER FROM CHATERON

We noted that (i) the discounts of the rights issue price/open offer price to underlying market price of the shares of the Issuers (prior to the announcements of the relevant rights issues/open offers) ranged between 3.8% and 87.5%, with an average discount of approximately 47.7%; and (ii) the discounts of the rights issue price/open offer price to the theoretical exrights price (determined based on the underlying market price of the shares of the Issuers prior to the announcements of the relevant rights issues/open offers) ranged between 2% and 75%, with an average discount of approximately 30.8%. Based on the foregoing, we consider that (i) the approximately 93.5% discount between the Subscription Price and the closing price of the Shares as at the Last Trading Day prior to the release of the Announcement; (ii) the 50% discount between the Subscription Price and the theoretical ex-entitlement price per Share determined based on the closing Share price as at the Last Trading Day; (iii) the approximately 92.8% discount between the Subscription Price and the closing price of the Shares as at the Latest Practicable Date; and (iv) the approximately 48% discount between the Subscription Price and the theoretical ex-entitlement price per Share determined based on the closing Share price as at the Latest Practicable Date, altogether render the terms of the Open Offer to be more attractive to the Qualifying Shareholders from the viewpoint that the Subscription Price was determined at deeper discounts to the closing prices of the Shares as at the Last Trading Day and the Latest Practicable Date as well as to the theoretical ex-entitlement prices based thereon, when compared with the corresponding average discounts demonstrated by the Issuers who announced right issues and open offers during the period of 12 months prior to the Latest Practicable Date (excluding the Open Offer) .

Furthermore, we noted the merits of the Open Offer and the fact that completion of the Loan Settlement Agreement is conditional upon, inter alia, the completion of the Open Offer. Accordingly, we consider that the Open Offer is in the interests of the Company and the Independent Shareholders notwithstanding the significant discounts as represented by the Subscription Price of HK$0.013 per Offer Share to the underlying prices and theoretical exentitlement prices of the Shares as referred to above.

Those Qualifying Shareholders who do not take up their entitlements under the Open Offer will have their beneficial interests in the Company diluted up to a maximum of approximately 93%. Under the mechanics of the Open Offer, the assured allotments of the Offer Shares will not be transferable or capable of renunciation and there will be no trading in the assured allotments of the Offer Shares on the Stock Exchange. In other words, we consider that those Qualifying Shareholders who do not wish to participate in the Open Offer will have their assured allotments taken up by Probest (as the Underwriter for the Open Offer) or investors who may be procured by Probest (as the Underwriter) pursuant to the underwriting arrangements, and hence inevitably result in a dilution of such Qualifying Shareholders’ beneficial interests in the Company.

– 52 –

LETTER FROM CHATERON

4. Share price and trading volume performances

4.1 Share price performances

The average of the daily closing prices, the monthly highest recorded price and the monthly lowest recorded price of the Shares traded on the Stock Exchange during the period from 1st September, 2002 (being the date falling on one year prior to the Last Trading Day) up to and including the Last Trading Day and from 10th September, 2003 (being the day on which trading in the Shares resumed on the Stock Exchange after the publication of the Announcement) up to and including the Latest Practicable Date are set out as follows:–

			Average
			daily closing
Month	Highest	Lowest	price
	HK$	HK$	HK$
	(Note)	(Note)	(Note)
2002
September	0.88	0.68	0.78
October	0.78	0.30	0.55
November	0.70	0.35	0.59
December	0.59	0.46	0.46
2003
January	0.46	0.30	0.38
February	0.38	0.25	0.31
March	0.31	0.10	0.10
April	0.10	0.10	0.10
May	0.10	0.10	0.10
June	0.11	0.10	0.10
July	0.19	0.10	0.16
August	0.168	0.15	0.16
1st September to 3rd September
(both dates inclusive)	0.20	0.165	0.185
10th September to and including
the Latest Practicable Date
(both dates inclusive)	0.2	0.154	0.180

Note: After adjusting for the effect of the Company’s capital reorganisation pursuant to which, inter alia, 10 shares then in issue by the Company were consolidated into one Share, which became effective after 4:00 p.m. on 29th July, 2003.

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LETTER FROM CHATERON

The Subscription Price of HK$0.013 per Offer Share represents a discount of between 87% (based on lowest recorded Share price of HK$0.10) and 99% (based on highest recorded Share price of HK$0.88) to each of the abovementioned traded prices of the Shares during the period from 1st September, 2002 up to and including the Last Trading Day and from 10th September, 2003 up to and including the Latest Practicable Date.

Based on the discounts as represented by the Subscription Price of HK$0.013 per Offer Share to the traded prices of the Shares as referred to above and given our evaluation of the merits of the Open Offer which, if proceeded with, would enable the completion of the Loan Settlement Agreement to take place and hence to reduce the Swank Group’s indebtedness in respect of the Loan of HK$250 million by about HK$87 million (or approximately 35%) and hence alleviate the Swank Group’s immediate financial pressures, we are of the opinion that the Open Offer provides the Shareholders with the opportunity to participate in the Open Offer at an attractive price as represented by the Subscription Price of HK$0.013 per Offer Share.

4.2 Share trading volume performances

The number of Shares traded on the Stock Exchange during the period of 12 months from 1st September, 2002 up to and including the Last Trading Day and from 10th September, 2003 (being the day on which trading in the Shares resumed on the Stock Exchange after the publication of the Announcement) up to and including the Latest Practicable Date are set out as follows:–

		As a percentage of the	As a percentage of the	As a percentage of the
		Company’s issued share		Company’s public float
	Number of	capital as at the Latest		as at the Latest
Month	Shares traded		Practicable Date	Practicable Date
	(Note)		%	%
2002
September	7,020		0.00	0.01
October	37,788		0.02	0.04
November	45,215		0.02	0.05
December	–		0.00	0.00

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LETTER FROM CHATERON

		As a percentage of the	As a percentage of the	As a percentage of the
		Company’s issued share		Company’s public float
	Number of	capital as at the Latest		as at the Latest
Month	Shares traded	Practicable Date		Practicable Date
	(Note)		%	%
2003
January	104,000		0.05	0.11
February	25,055		0.01	0.03
March	124,000		0.06	0.13
April	79,146		0.04	0.08
May	199,000		0.09	0.21
June	170,000		0.08	0.18
July	140,000		0.06	0.15
August	331,800		0.15	0.35
1st September to 3rd September
(both dates inclusive)	798,276		0.36	0.85
10th September up to and including
the Latest Practicable Date
(both dates inclusive)	5,461,000		2.45	5.81

Note: After adjusting for the effect of the Company’s capital reorganisation pursuant to which, inter alia, 10 shares then in issue by the Company were consolidated into one Share, which became effective after 4:00 p.m. on 29th July, 2003.

Based on the above statistics, it can be noted that the Shares had historically traded at extremely low levels of liquidity on the Stock Exchange given that during the period from 1st September, 2002 up to and including the Latest Practicable Date as referred to above, the traded volumes of the Shares represented a maximum of only approximately 2.45% of the Company’s issued share capital or approximately 5.81% of the Company’s public float as at the Latest Practicable Date, whilst in December 2002 no turnover in the trading of the Shares were recorded in the market. Therefore, we consider that the Subscription Price of HK$0.013 per Offer Share has been determined on a fair and reasonable basis as it also reflects the expected price levels at which Shares may be purchased in the market in view of the extremely low levels of liquidity in the trading of the Shares during the period from 1st September, 2002 up to and including the Latest Practicable Date as referred to above.

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LETTER FROM CHATERON

5. Underwriting arrangement

As referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, Probest has undertaken to subscribe or procure subscribers for its provisional entitlement under the Open Offer in full, which amounts to 1,679,130,245 Offer Shares. This leaves an aggregate of 1,222,528,008 Offer Shares which will be fully underwritten by Probest as the Underwriter. We consider that such an underwriting arrangement complies with the requirement of Rule 7.24(1) of the Listing Rules which stipulates that in normal circumstances, all open offers must be fully underwritten. Furthermore, we noted that Probest is a wholly owned subsidiary of Tomorrow, whose interim report for the six months ended 30th June, 2003 stated that Tomorrow had unaudited consolidated net assets of approximately HK$689 million as at 30th June, 2003 which comprised aggregate cash and time deposit balances of approximately HK$335 million as at 30th June, 2003. Therefore, we are of the view that Probest, as the Company’s controlling shareholder who has agreed to underwrite an aggregate amount of approximately HK$15.8 million (being 1,222.5 million Offer Shares agreed to be underwritten by Probest at the Subscription Price of HK$0.013 per Offer Share) under the Open Offer, has sufficient financial resources to honour its obligations under the Underwriting Agreement and hence Probest is financially suitable to act as the Underwriter pursuant to the requirements of Rule 8.22 of the Listing Rules.

Nevertheless, we noted that the Open Offer is effectively underwritten by Probest as the Company’s controlling Shareholder, instead of being underwritten by a commercial underwriter such as a securities brokerage firm. In this regard, we have reviewed a list of the 30 rights issues and open offers which were announced by companies listed on the Stock Exchange during the period of the last 12 months prior to the Latest Practicable Date (excluding the Open Offer), from which we noted that 14 rights issues and open offers (representing approximately 47% in terms of number of cases out of the entire population under review) were underwritten by the substantial shareholder, the major shareholder or the controlling shareholder of the company concerned and out of which a total of 7 rights issues and open offers (representing 50% of such population of 14 rights issues and open offers) were underwritten by the controlling shareholder of the company concerned. Therefore, we consider that it is not an uncommon feature for the Open Offer to be underwritten by Probest in its capacity as the controlling Shareholder of the Company. Furthermore, we consider that in view of the unfavourable financial position of the Swank Group which are demonstrated by:–

• (i) the Swank Group’s unaudited Shareholders’ net deficit of approximately HK$100.0 million as at 30th June, 2003;

• (ii) the Swank Group reported a turnaround in its audited financial results performance for the first time during the financial year ended 31st December, 2002, after the Swank Group’s reported net losses attributable to Shareholders during a consecutive period of four financial years ended 31st December, 2001, but yet the Swank Group reported unaudited net loss attributable to Shareholders of approximately HK$9.8 million for the six months ended 30th June, 2003; and

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LETTER FROM CHATERON

• (iii) the Swank Group’s outstanding indebtedness in respect of the Loan which amounted to HK$250 million and in respect of which the Swank Group had defaulted on the first two instalments on principal repayments as well as accrued interest from 1st March, 2002 up to the date of the Loan Settlement Agreement, which altogether amounted to approximately HK$86.2 million (representing approximately 34% of the entire principal of the Loan),

it would be difficult for the Swank Group to be able to procure commercial underwriting interests in order for the Open Offer to be proceeded with on a fully underwritten basis in accordance with the requirements of Rule 7.24(1) of the Listing Rules.

Therefore, based on our discussion above, we noted that (i) the Open Offer is underwritten by Probest who, as we have evaluated, is financially suitable to act as the Underwriter pursuant to Rule 8.22 of the Listing Rules; and (ii) the underwriting arrangement for Probest, in its capacity as the Company’s controlling shareholder, to act as the Underwriter is not uncommon as we noted that about 50% in number of the announced rights issues and open offers during the period of the last 12 months prior to the Latest Practicable Date (excluding the Open Offer) which were underwritten by the substantial shareholder, the major shareholder or the controlling shareholder of the company concerned were in fact underwritten by the company’s controlling shareholder. Furthermore, as major terms of the Underwriting Agreement, (a) Probest (as the Company’s controlling shareholder) has undertaken to subscribe or procure subscribers for its provisional entitlement in full (amounting to 1,679,130,245 Offer Shares) under the Open Offer; (b) there is no force majeure clause under the Underwriting Agreement (and hence Probest is unable to terminate its underwriting obligations in the event of, inter alia, adverse market sentiment); and (c) Probest may exercise its right to terminate the arrangements set out in the Underwriting Agreement by notice in writing to the Company if the Company commits any material breach of any obligations, undertakings, representations and warranties contained in the Underwriting Agreement, in which case the Open Offer will not proceed. With the exception of (b) above which increases the chances of success of the Open Offer for the Company (which we consider to be favourable to the Company), we consider that the abovementioned major terms of the Underwriting Agreement are generally comparable with the terms of the underwriting arrangements applicable to the vast majority of rights issues/open offers announced by listed companies on the Stock Exchange. In addition, we noted that the Company is not required to pay any underwriting commission to Probest in underwriting the Open Offer, which gives added advantage to the Company as it would mean savings to the Company’s overall costs in relation to the Open Offer.

Therefore, based on the foregoing, we consider that the terms of the underwriting arrangement are fair and reasonable so far as the Company and the Independent Shareholders are concerned.

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LETTER FROM CHATERON

6. Financial effects of the completion of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer on the Swank Group

As referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer are interconditional on one another. Therefore, in evaluating the financial effects of the Open Offer on the Swank Group, regard has been made for the coterminous completion of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer.

6.1 On the Swank Group’s net deficit position

As referred to in Appendix I to the Circular, taking into the account of the Swank Group’s reported unaudited interim results for the six months ended 30th June, 2003 (which were announced by the Company on 18th September, 2003) and the effects of the completion of the Share Sale Agreement, Loan Settlement Agreement and the Open Offer, there would be an improvement in the Company’s audited consolidated net tangible deficit from approximately HK$89.9 million as at 31st December, 2002 before completion of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer to a proforma adjusted unaudited consolidated net tangible deficit of approximately HK$39.5 million after completion of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer. We consider that such an improvement in the Swank Group’s net deficit position to be in the interests of the Company and the Independent Shareholders.

• 6.2 On the Swank Group’s financial results performance

As referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, upon completion of the Loan Settlement Agreement and subject to annual audit by the Company’s auditors (whereupon the Company’s audited consolidated results for the financial year ending 31st December, 2003 are expected to be published in April 2004 or thereabouts), the Swank Group is expected to record a gain as a result of the write back of normal and default accrued interest expenses on the entire amount of the Loan, which amounted to approximately HK$24.8 million between 1st March, 2002 up to and including the Latest Practicable Date as we were advised by the Directors for illustration purpose.

On the other hand, the Swank Group shall record a loss arising from the Share Sale Agreement of approximately HK$48.4 million, based on the value of the Consideration of HK$3 million and the 30% attributable value of the aggregate sum of the proforma unaudited consolidated net tangible assets of Profitown and the Profitown Loan as at 30th June, 2003 of approximately HK$51.4 million as referred to in the section headed “The Share Sale Agreement” above. After setting off the amount of the Loan principal due from the Company to Probest of HK$47 million which shall be waived by Probest under the

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LETTER FROM CHATERON

Loan Settlement Agreement, the Swank Group shall record a net loss of approximately HK$1.4 million in relation to the Share Sale Agreement and the Loan Settlement Agreement.

Based on the foregoing, the net effect of the completion of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer on the Swank Group’s financial results performance is summarized as follows:–

	HK$ million
(Loss) arising from the Share Sale Agreement	(48.4)
Gain arising from the waiver by Probest of part
of the Loan principal under the
Loan Settlement Agreement	47.0
Gain arising from the write back of normal and
default accrued interest expenses on the entire
amount of the Loan from 1st March, 2002
up to and including the Latest Practicable Date
(for illustration purpose) under the Loan Settlement
Agreement_(Note)_	24.8
Gain on completion of the Share Sale Agreement and
the Loan Settlement Agreement (before taking into
account the Group’s annual interest cost on the Promissory Note)	23.4
Annual interest cost on the Promissory Note	(9.8)
Effect of the Open Offer on the Company’s profit
and loss account	–
Overall gain by the Company after completion of the
Share Sale Agreement, the Loan Settlement
Agreement and the Open Offer (after taking into
account the Group’s annual interest cost on the Promissory Note)	13.6

Note: The figure of HK$24.8 million is stated above for illustration purpose for reason that under the terms of the Loan Settlement Agreement, normal and default interest expenses on the entire amount of the Loan shall be waived during the period from 1st March, 2002 up to and including the date on which the Loan Settlement Agreement becomes effective. However, such amount cannot be determined for the purpose of the above computation as the exact completion date of the Loan Settlement Agreement cannot be established with reasonable certainty as at the Latest Practicable Date. Therefore, for illustration purpose, we have quantified the amount of waiver on normal and default interest expenses on the entire amount of the Loan during the period from 1st March, 2002 up to and including the Latest Practicable Date.

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LETTER FROM CHATERON

Therefore, based on the foregoing and on a net overall basis, the Swank Group would recognize a gain of approximately HK$23.4 million after taking into the account of (i) loss arising from the Share Sale Agreement of approximately HK$48.4 million; (ii) gain of approximately HK$47 million arising from the waiver by Probest of part of the Loan principal under the Loan Settlement Agreement; and (iii) gain of approximately HK$24.8 million arising from the write back of normal and default accrued interest expenses on the entire amount of the Loan from 1st March, 2002 up to and including the Latest Practicable Date (for illustration purpose) under the Loan Settlement Agreement. Furthermore, after taking into the account of the Group’s annual interest cost on the Promissory Note of approximately HK$9.8 million, the Swank Group would recognize an overall gain in the amount of approximately HK$13.6 million or thereabouts ( subject to annual audit by the Company’s auditors whereupon the Company’s audited consolidated results for the financial year ending 31st December, 2003 are expected to be published in April 2004 or thereabouts) upon completion of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer and after taking into account the Group’s annual interest cost on the Promissory Note. We consider that such an overall gain to have a favourable impact on the Swank Group’s financial results performance and therefore would be in the interests of the Company and the Independent Shareholders.

• 6.3 On the Group’s overall indebtedness in relation to the Loan

As discussed in the section headed “The Loan Settlement Agreement” above, upon completion of the Loan Settlement Agreement, the Swank Group’s aggregate indebtedness under the outstanding principal of the Loan will be reduced from HK$250 million to HK$163 million, i.e. a decrease by approximately 35%. Furthermore, under the terms of the Loan Settlement Agreement, Probest agrees to waive the normal and default accrued interests on the entire Loan of HK$250 million which, based on the ongoing interest rate of 6% per annum for the Loan (as referred to in our discussions in the section headed “The Loan Settlement Agreement” above), would result in an annual interest savings for the Company of approximately HK$15 million per annum. Under the terms of the Promissory Note, the Company is liable to pay an annual interest cost of approximately HK$9.8 million on the entire principal amount of the Promissory Note of HK$163 million based on the interest rate of 6% per annum as at the Latest Practicable Date (as referred to in our discussions in the section headed “The Loan Settlement Agreement” above). Therefore, on balance, the Company’s net annual savings on interest costs regarding its indebtedness in respect of the Loan and the Promissory Note is estimated to amount to approximately HK$5.2 million or thereabouts.

Therefore, based on the foregoing, we consider the Swank Group’s debt restructuring of the Loan as well as the Company’s net annual interest savings regarding its indebtedness in respect of the Loan and the Promissory Note would be in the interests of the Company and the Independent Shareholders.

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LETTER FROM CHATERON

7. Resultant shareholding structure of the Company after the Open Offer

As referred to in the letter from the Board as set out on pages 5 to 26 of the Circular, after completion of the Open Offer and assuming that none of the Independent Shareholders would subscribe for their pro-rata entitlements of the Offer Shares as a result of which Probest, as the Underwriter, would be required to take up all the Offer Shares which are fully underwritten by it under the Open Offer, Probest shall have a beneficial interest of approximately 97% in the resultant issued share capital of the Company as enlarged by the issue of the Offer Shares.

In such circumstances, the Independent Shareholders’ aggregate interests in the Company would be reduced from approximately 42.1% before the Open Offer to approximately 3.0% after the Open Offer, or a dilution in Independent Shareholders’ interests by a significant magnitude of approximately 93%.

We wish to draw the attention of the Independent Shareholders that the Company is required to comply with the requirement of Rule 8.08 of the Listing Rules, pursuant to which the Company is required to maintain a minimum public float representing not less than 25% of the Company’s issued share capital at all times. We consider that, if the Company is unable to take appropriate action to maintain its minimum public float such as, for instance, a placing down by Probest of a minimum of 687,175,068 Shares representing approximately 22% of the Company’s enlarged issued share capital after the Open Offer, then the Company may be required to suspend trading of the Shares on the Stock Exchange until such time when the Company’s 25% minimum public float requirement is restored in accordance with Rule 8.08 of the Listing Rules.

We consider that any unnecessarily prolonged suspension in the trading of Shares on the Stock Exchange, until a restoration of the Company’s minimum public float, would not be in the interests of the Company and the Independent Shareholders.

8. Recommendation

Having considered the principal factors and reasons as referred to above, we consider that the terms and conditions of the Open Offer are fair and reasonable and are in the interests of the Company and the Independent Shareholders. Therefore, we would advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the EGM to consider and, if thought fit, approve the Open Offer.

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LETTER FROM CHATERON

OVERALL RECOMMENDATION

Based on our evaluation in the sections headed “The Share Sale Agreement”, “The Loan Settlement Agreement” and “The Open Offer” above, we wish to summarize our view that :–

1. The Share Sale Agreement constitutes a restructuring plan for part of the Loan based on terms and conditions mutually agreed between the Company and Probest and which effectively helps alleviate the Swank Group’s financial pressures. The amount of the Consideration, which was determined and agreed between Probest and the Company under a net asset-based approach with reference to 30% attributable value of the aggregate amount of Profitown’s consolidated net tangible assets and the Profitown Loan as at 30th June, 2003 and takes into account the waiver of HK$47 million of the Loan principal under the Loan Settlement Agreement, has been determined on a fair and reasonable basis. After completion of the Share Sale Agreement, the Company continues to have a 70% controlling interest in Profitown and the Swank Group continues to consolidate the financial results contributions to be generated from Profitown which holds the entire business operations of the Company. We also noted that upon completion of the Share Sale Agreement, the Directors would constantly review the financial position and working capital requirements of Profitown so as to enable the Company to reach an optimal use of its financial resources in order to (i) sustain the Swank Group’s working capital requirements for its business operations; and (ii) reduce its repayment obligations under the Profitown Loan and/or the Promissory Note as far as practicable.

Therefore, we consider that the terms and conditions of the Share Sale Agreement are in the interests of the Company and the Independent Shareholders, and we would advise the Independent Board Committee to recommend the Independent Shareholders to approve the Share Sale Agreement at the EGM.

1. Under the Loan Settlement Agreement, the Swank Group’s aggregate indebtedness under the outstanding principal of the Loan will be reduced from HK$250 million to HK$163 million, i.e. a reduction of HK$87 million or by approximately 35%. Furthermore, the Swank Group will be relieved from its obligations to pay accrued interests on the Loan during the period from 1st March, 2002 up to and including the date when the Loan Settlement Agreement becomes effective (and which, for illustration purpose, amounts to approximately HK$24.8 million during the period from 1st March, 2002 up to and including the Latest Practicable Date). We also consider that the remaining balance of the Loan principal after completion of the Loan Settlement Agreement, being HK$163 million, will be restructured to become the Promissory Note whose terms and conditions are evaluated by us to be fair and reasonable. We also consider that based on the Company’s cashflow projections up to 31st July, 2004, the Company will have sufficient financial resources to repay the

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LETTER FROM CHATERON

first instalment of HK$25.5 million under the Promissory Note which is due on 1st June, 2004, whilst the Company may formulate such appropriate business plans and strategies and/or appropriate fund raising exercises to enable it to have the requisite cashflows and/or funding to repay the two remaining instalments in the aggregate amount of HK$137.5 million which are not due until between 20 months (on 1st June, 2005) and 32 months (on 1st June, 2006) from the Latest Practicable Date, respectively.

Therefore, we consider that the terms and conditions of the Loan Settlement Agreement are in the interests of the Company and the Independent Shareholders, and we would advise the Independent Board Committee to recommend the Independent Shareholders to approve the Loan Settlement Agreement at the EGM.

1. We noted that the Open Offer which, if proceeded with, shall raise net proceeds of approximately HK$37 million which will be used to repay part of the Loan principal pursuant to the Loan Settlement Agreement. We consider that in view of the Company’s small market capitalization and unfavourable financial position, the Open Offer is the most appropriate fund raising method when compared with alternatives such as share placements or external bank borrowings. We also consider that the Subscription Price of HK$0.013 per Offer Share (i) was determined at deeper discounts to the closing prices of the Shares as at the Last Trading Day and the Latest Practicable Date as well as to the theoretical ex-entitlement prices based thereon, when compared with the corresponding average discounts demonstrated by the Issuers who announced rights issues and open offers during the period of 12 months prior to the Latest Practicable Date (excluding the Open Offer); (ii) represents a discount of between 87% and 99% to the traded prices of the Shares during the period from 1st September, 2002 up to and including the Latest Practicable Date; and (iii) reflects the expected price levels at which Shares may be purchased in the market in view of the extremely low levels of liquidity in the trading of the Shares during the period from 1st September, 2002 up to and including the Latest Practicable Date, which factors altogether render the terms of the Open Offer to be attractive to the Qualifying Shareholders. We also consider that the underwriting arrangements of the Open Offer are in compliance with the requirements of the Listing Rules, and the fact that the Open Offer is underwritten by Probest (as the Company’s controlling shareholder) to be comparable with market examples. In particular, the absence of a force majeure clause under the Underwriting Agreement would increase the chances of success of the Open Offer for the Company, which we consider to be favourable to the Company. We also noted that after completion of the Open Offer (as well as completion of the Share Sale Agreement and the Loan Settlement Agreement upon which the Open Offer is inter-conditional), there would be improvements in the Swank Group’s net deficit position, financial results performance and overall indebtedness in relation to the Loan. We also wish to advise

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LETTER FROM CHATERON

that any Qualifying Shareholder who does not participate in the Open Offer will have his/her beneficial interest in the Company diluted up to a maximum of approximately 93%, and that the Independent Shareholders may face the risk where the Company may be required to suspend trading of the Shares on the Stock Exchange until the Company’s minimum public float is restored in accordance with Rule 8.08 of the Listing Rules in the event Probest as the Underwriter would be required to take up all the Offer Shares under the Open Offer.

Therefore, we consider that the terms and conditions of the Open Offer are in the interests of the Company and the Independent Shareholders, and we would advise the Independent Board Committee to recommend the Independent Shareholders to approve the Open Offer at the EGM.

Independent Shareholders should note that the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer are inter-conditional on each other. Furthermore, the Share Sale Agreement and the Loan Settlement Agreement are also subject to the approval of the shareholders of Tomorrow, who wholly and beneficially owns Probest, in view of the fact that the transactions contemplated under the Share Sale Agreement and the Loan Settlement Agreement constitute connected transactions for the Company under Chapter 14 of the Listing Rules. Therefore, in the event where (i) any of the resolutions in relation to the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer is not approved by the Independent Shareholders at the EGM; and/or (ii) any of the Share Sale Agreement and the Loan Settlement Agreement is not approved by the shareholders of Tomorrow, then none of the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer will be completed and be proceeded with. In such circumstances, the Company would retain its current indebtedness of HK$250 million in relation to the Loan and the Company would continue to operate under severe financial pressures, in view of the Company’s unfavourable financial position and the lack of a proven and stable earnings record based on the Company’s financial results performances during the past three financial years ended 31st December, 2002 and for the six months ended 30th June, 2003. Accordingly, we would advise the Independent Shareholders to vote in favour of all the resolutions to be proposed at the EGM to consider and, if thought fit, approve the Share Sale Agreement, the Loan Settlement Agreement and the Open Offer.

Yours faithfully, For and on behalf of

Chateron Corporate Finance Limited Christopher Wong

Director

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FINANCIAL INFORMATION

APPENDIX I

A. SHARE CAPITAL

The authorised and issued share capital of Swank immediately following the completion of the Open Offer (assuming the Open Offer becoming unconditional) will be as follows:

Authorised 300,000,000,000 Shares Issued, to be issued and fully paid: 223,204,481 Shares in issue 2,901,658,253 Shares to be issued pursuant to the Open Offer 3,124,862,734	HK$ 3,000,000,000
	HK$ 2,232,045 29,016,583
	31,248,627

All of the Shares in issue rank pari passu in all respects with each other, including in particular, rights as to dividends, voting and capital.

The Offer Shares will, when allotted, issued and fully-paid, rank pari passu in all respects with the Shares then in issue on the Record Date including the right to receive all dividends and other distributions which may be declared , made or paid after the date in which the Offer Shares are allotted.

The Shares in issue are listed on the Stock Exchange. No part of the share capital or any other securities of Swank is listed or dealt in on any stock exchange other than the Stock Exchange and no application is being made or is currently proposed or sought for the Shares or any other securities of Swank to be listed or dealt in on any other stock exchanges.

There were no other options, warrants or conversion rights affecting the Shares outstanding as at the Latest Practicable Date.

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FINANCIAL INFORMATION

APPENDIX I

B. SUMMARY OF FINANCIAL INFORMATION

The following is a summary of the audited consolidated results of the Swank Group for each of the three years ended 31st December, 2002. It should be noted that the auditors of the Swank Group issued qualified opinions in its report for each of the abovementioned financial years. Please refer to the annual report for the Swank Group for each of the respective years for further details.

CONSOLIDATED PROFIT AND LOSS ACCOUNT

Years ended 31 December

Notes TURNOVER 5 Cost of sales Gross profit Other revenue Selling and distribution costs Administrative expenses Other operating expenses PROFIT/(LOSS) FROM OPERATING ACTIVITIES 6 Finance costs 7 Share of profits less losses of associates Waive of accrued interest on bank loans and overdrafts Waive of bank overdrafts Surplus/(deficit) on revaluation of leasehold land and buildings Restructuring cost Impairment losses on interests in associates Impairment losses on fixed assets Provision for other receivables Provision for closure of an overseas subsidiary Loss on disposal of interests in subsidiaries Reversal of impairment loss on interest in an associate PROFIT/(LOSS) BEFORE TAX Tax 10 PROFIT/(LOSS) BEFORE MINORITY INTERESTS Minority interests NET PROFIT/(LOSS) FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS 11 EARNING/(LOSS) PER SHARE 12 Basic Diluted	2002 HK$’000 242,097 (193,189) 48,908 4,098 (13,554) (27,875) (4,360) 7,217 (15,611) 9,426 1,032 16,917 349 487 (8,022) – – – – – – 10,763 (1,000) 9,763 378 10,141 0.5 cent N/A	2001 HK$’000 241,671 (181,065) 60,606 5,257 (24,753) (39,330) (12,775) (10,995) (21,452) 5,353 (27,094) – – (1,887) – (24,068) (4,777) (1,760) (1,025) (303) 2,099 (58,815) (295) (59,110) 221 (58,889) (8.0 cents) N/A	2000 HK$’000 267,953 (200,707) 67,246 6,691 (36,130) (42,377) (9,705) (14,275) (25,526) 241 (39,560) – – – – (2,431) (11,342) (34,959) – (13,997) – (102,288) (176) (102,464) 145 (102,319) (14.0 cents) N/A

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FINANCIAL INFORMATION

APPENDIX I

C. AUDITED FINANCIAL INFORMATION OF THE GROUP

The following is a summary of the audited consolidated profit and loss account of the Swank Group for each of the two years ending 31st December, 2002, the audited consolidated balance sheet of the Swank Group as at 31st December, 2001 and 31st December, 2002 and the audited cash flow statement for the years ended 31st December, 2001 and 31st December, 2002 together with the relevant notes thereto as extracted from the annual report of Swank for the year ended 31st December, 2002.

CONSOLIDATED PROFIT AND LOSS ACCOUNT

Year ended 31 December 2002

Notes TURNOVER 5 Cost of sales Gross profit Other revenue Selling and distribution costs Administrative expenses Other operating expenses PROFIT/(LOSS) FROM OPERATING ACTIVITIES 6 Finance costs 7 Share of profits less losses of associates Waive of accrued interest on bank loans and overdrafts Waive of bank overdrafts Surplus/(deficit) on revaluation of leasehold land and buildings Restructuring cost Impairment losses on interests in associates Impairment losses on fixed assets Provision for other receivables Provision for closure of an overseas subsidiary Loss on disposal of interests in subsidiaries Reversal of impairment loss on interest in an associate PROFIT/(LOSS) BEFORE TAX Tax 10 PROFIT/(LOSS) BEFORE MINORITY INTERESTS Minority interests NET PROFIT/(LOSS) FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS 11 EARNING/(LOSS) PER SHARE 12 Basic Diluted	2002 HK$’000 242,097 (193,189) 48,908 4,098 (13,554) (27,875) (4,360) 7,217 (15,611) 9,426 1,032 16,917 349 487 (8,022) – – – – – – 10,763 (1,000) 9,763 378 10,141 0.5 cent N/A	2001 HK$’000 241,671 (181,065) 60,606 5,257 (24,753) (39,330) (12,775) (10,995) (21,452) 5,353 (27,094) – – (1,887) – (24,068) (4,777) (1,760) (1,025) (303) 2,099 (58,815) (295) (59,110) 221 (58,889) (8.0 cents) N/A

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APPENDIX I

CONSOLIDATED BALANCE SHEET

31 December 2002

Notes NON-CURRENT ASSETS Fixed assets 13 Interests in associates 15 Rental deposits Other receivables 16 CURRENT ASSETS Cash and bank balances Time deposits Accounts receivable 17 Bills receivable Prepayments, deposits and other receivables Inventories 18 CURRENT LIABILITIES Bank borrowings 19 Due to a shareholder, Probest 20 Due to associates 15 Accounts payable 21 Accrued liabilities and other payables Tax payable NET CURRENT ASSETS/(LIABILITIES) TOTAL ASSETS LESS CURRENT LIABILITIES	2002 HK$’000 120,360 30,894 455 – 151,709 23,715 368 53,864 903 4,047 32,011 114,908 – 75,457 8,848 20,958 16,313 839 122,415 (7,507) 144,202	2001 HK$’000 133,164 31,530 – –
		164,694
		9,112 1,016 51,335 1,329 4,206 31,076
		98,074
		25,440 – 14,199 17,623 30,969 834
		89,065
		9,009
		173,703

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Notes TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Bank borrowings 19 Due to a shareholder, Probest 20 Convertible notes 22 Provision for long service payments 23 MINORITY INTERESTS CAPITAL AND RESERVES Share capital 25 Reserves 27(a)	2002 HK$’000 144,202 – 187,500 – 712 188,212 45,932 (89,942) 446,409 (536,351) (89,942)	2001 HK$’000 173,703 225,000 – 300,000 1,000 526,000 46,310 (398,607) 146,409 (545,016) (398,607)

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APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

Year ended 31 December 2002

Note CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) before tax Adjustments for: Finance costs Share of profits less losses of associates Interest income Waive of accrued interest on bank loans and overdrafts Loss on disposal of fixed assets Depreciation Realisation of exchange fluctuation reserve upon the deregistration of subsidiaries Deficit/(surplus) on revaluation of leasehold land and buildings Loss on disposal of interests in subsidiaries Impairment losses on interests in associates Impairment losses on fixed assets Provision for doubtful accounts receivable Provision against inventories Provision for other receivables Provision for closure of an overseas subsidiary Reversal of impairment loss on interest in an associate Exchange differences Operating profit before working capital changes Decrease/(increase) in accounts receivable Decrease/(increase) in bills receivable Decrease in prepayments, deposits and other receivables Decrease/(increase) in inventories Increase/(decrease) in balances with associates, net Increase/(decrease) in accounts payable Decrease in accrued liabilities and other payables Decrease in bills payable Decrease in provision for long service payments Cash generated from operations Interest paid on bank and other borrowings Interest element on finance lease rental payments Net cash inflow/(outflow) from operating activities	2002 HK$’000 10,763 15,611 (9,426) (38) (16,917) 1,532 14,900 (1,001) (487) – – – 373 1,612 – – – (408) 16,514 (2,902) 426 159 (2,547) 3,711 3,335 (393) – (288) 18,015 – – 18,015	2001 HK$’000 (58,815) 21,452 (5,353) (117) – 936 15,293 – 1,887 303 24,068 4,777 1,427 8,660 1,760 1,025 (2,099) (664) 14,540 658 (1,329) 516 906 (85) (8,811) (1,783) (49) – 4,563 (9,472) (2) (4,911)

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Note CASH FLOWS FROM INVESTING ACTIVITIES Interest received Dividends received from associates Distribution from an associate Purchase of fixed assets Proceeds from disposal of fixed assets Payment of rental deposits Net cash outflow from disposal of subsidiaries 28(b) Net cash inflow/(outflow) from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Capital element of finance lease rentals payments Net cash outflow from financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Time deposits with original maturity of less than three months when acquired Bank overdrafts	2002 HK$’000 38 – – (3,209) 6 (455) – (3,620) – – 14,395 9,688 24,083 23,715 368 – 24,083	2001 HK$’000 117 2,300 5,851 (2,613) 87 – (253) 5,489 (227) (227) 351 9,337 9,688 9,112 1,016 (440) 9,688

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APPENDIX I

NOTES TO THE FINANCIAL STATEMENT

31st December, 2002

1. BASIS OF PRESENTATION

The financial statements have been prepared on a going concern basis, notwithstanding that the Group had net current liabilities of HK$7,507,000 and a deficiency in assets of HK$89,942,000 as at 31 December 2002. In the opinion of the directors, the liquidity of the Group can be maintained in the forthcoming year, after taking into consideration of several financing and operating measures completed during the year and subsequent thereto together with other measures in progress at the date of this report, which include, but are not limited to, the following:

• (i) The Group successfully completed a reduction of the Group’s indebtedness of approximately HK$300 million through the conversion of convertible note liabilities into equity (see notes 22 and 25) which helped to lessen the liquidity pressure of the Group.

• (ii) The Group is currently negotiating with its shareholder, Probest Holdings Inc. (“Probest”), a wholly-owned subsidiary of Tomorrow International Holdings Limited (“TIHL”), a company incorporated in Bermuda with limited liability and listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”), to re-schedule the repayment terms of the loan from Probest and to waive a certain amount of the loans and interest payable to Probest. On 4 March 2003, the Company entered into a conditional asset disposal agreement (the “Asset Disposal Agreement”) and a conditional loan restructuring agreement (the “Loan Restructuring Agreement”) with Probest. The directors believe that the agreements will get the necessary approvals which, consequently, will significantly improve the liquidity position of the Group and of the Company. Further details of the Asset Disposal Agreement and the Loan Restructuring Agreement, and its impact are disclosed in note 32 to the financial statements.

The directors are of the opinion that, in light of the measures taken to date, together with the expected approval of the Asset Disposal Agreement and the Loan Restructuring Agreement by the relevant parties, the Group will have sufficient cash resources to satisfy its future working capital and other financing requirements. Accordingly, the financial statements have been prepared on a going concern basis.

If the going concern basis were not to be appropriate, adjustments would have to be made to restate the value of the assets to their break up values, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities, respectively.

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APPENDIX I

2. IMPACT OF NEW AND REVISED STATEMENTS OF STANDARD ACCOUNTING PRACTICE

The following new and revised Statements of Standard Accounting Practice (“SSAPs”) are effective for the first time for the current year’s financial statements:

• SSAP 1 (Revised): “Presentation of financial statements” • SSAP 11 (Revised): “Foreign currency translation” • SSAP 15 (Revised): “Cash flow statements” • SSAP 34: “Employee benefits”

These SSAPs prescribe new accounting measurement and disclosure practices. The major effects on the Group’s accounting policies and on the amounts disclosed in these financial statements of adopting these SSAPs, are summarised as follows:

SSAP 1 prescribes the basis for the presentation of financial statements and sets out guidelines for their structure and minimum requirements for the content thereof. The principal impact of the revision to this SSAP is that a consolidated statement of changes in equity is now presented in the financial statements in place of the consolidated statement of recognised gains and losses that was previously required and in place of the Group’s reserves note.

SSAP 11 prescribes the basis for the translation of foreign currency transactions and financial statements. The principal impact of the revision of this SSAP on the consolidated financial statements is that the profit and loss accounts of overseas subsidiaries and associates are now translated to Hong Kong dollars at the weighted average exchange rates for the year, whereas previously they were translated at the exchange rates ruling at the balance sheet date. The adoption of the revised SSAP 11 has had no material effect on the financial statements.

SSAP 15 prescribes the revised format for the cash flow statement. The principal impact of the revision of this SSAP is that the consolidated cash flow statement now presents cash flows under three headings, cash flows from operating, investing and financing activities, rather than the five headings previously required. In addition, cash flows from overseas subsidiaries arising during the year are now translated to Hong Kong dollars at the exchange rates at the dates of the transactions, or at an approximation thereto, whereas previously they were translated at the exchange rates at the balance sheet date, and the definition of cash equivalents for the purpose of the cash flow statement has been revised.

SSAP 34 prescribes the recognition and measurement criteria to apply to employee benefits, together with the required disclosures in respect thereof. The adoption of this SSAP has resulted in no change to the previously adopted accounting treatments for employee benefits. In addition, disclosures are now required in respect of the Company’s share option scheme, as detailed in note 26 to the financial statements. These share option scheme disclosures are similar to the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”) disclosures previously included in the Report of the Directors, which are now required to be included in the notes to the financial statements as a consequence of the SSAP.

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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

These financial statements have been prepared in accordance with SSAPs, accounting principles generally accepted in Hong Kong and the Companies Ordinance. They have been prepared under the historical cost convention, except for the periodic remeasurement of fixed assets, as further explained below.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 December 2002. The results of subsidiaries acquired or disposed of during the year are consolidated from or to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries.

Subsidiaries

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

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

Joint venture companies

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

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

A joint venture company is treated as:

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

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

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

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

Associates

An associate is a company, not being a subsidiary or a jointly-controlled entity, in which the Group has a long term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence.

The Group’s share of the post-acquisition results and reserves of associates is included in the consolidated profit and loss account and consolidated reserves, respectively. The Group’s interests in associates are stated in the consolidated balance sheet at the Group’s share of net assets under the equity method of accounting, less any impairment losses. Goodwill or negative goodwill arising from the acquisition of associates, which was not previously eliminated or recognised in the consolidated reserves, is included as part of the Group’s interests in associates.

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

Negative goodwill

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

To the extent that negative goodwill relates to expectations of future losses and expenses that are identified in the acquisition plan and that can be measured reliably, but which do not represent identifiable liabilities as at the date of acquisition, that portion of negative goodwill is recognised as income in the consolidated profit and loss account when the future losses and expenses are recognised.

To the extent that negative goodwill does not relate to identifiable expected future losses and expenses as at the date of acquisition, negative goodwill is recognised in the consolidated profit and loss account on a systematic basis over the remaining average useful life of the acquired depreciable/amortisable assets. The amount of any negative goodwill in excess of the fair values of the acquired non-monetary assets is recognised as income immediately.

In the case of associates, any negative goodwill not yet recognised in the consolidated profit and loss account is included in the carrying amount thereof, rather than as a separately identified item on the consolidated balance sheet.

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SSAP 30 “Business combinations” was adopted as at 1 January 2001. Prior to that date, negative goodwill arising on acquisitions was credited to the capital reserve in the year of acquisition. On the adoption of SSAP 30, the Group applied the transitional provision of SSAP 30 that permitted such negative goodwill to remain credited to the capital reserve. Negative goodwill on acquisitions subsequent to 1 January 2001 is treated according to the SSAP 30 negative goodwill accounting policy above.

On disposal of subsidiaries or associates, the gain or loss on disposal is calculated by reference to the net assets at the date of disposal, including the attributable amount of negative goodwill which has not been recognised in the consolidated profit and loss account and any relevant reserves as appropriate. Any attributable negative goodwill previously credited to the capital reserve at the time of acquisition is written back and included in the calculation of the gain or loss on disposal.

Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.

Impairment of assets

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

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the profit and loss account in the period in which it arises, unless the asset is carried at a revalued amount, when the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

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

Fixed assets and depreciation

Fixed assets are stated at cost or valuation less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the fixed assets have been put into operation, such as repairs and maintenance, is normally

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APPENDIX I

charged to the profit and loss account in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the fixed asset, the expenditure is capitalised as an additional cost of the fixed asset.

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

Leasehold land	Over the remaining lease terms
Buildings	Over the remaining lease terms
Plant and machinery	6.67%-10%
Furniture, fixtures and equipment	10%
Motor vehicles	20%

Changes in the values of fixed assets resulting from revaluations are dealt with, on an individual asset basis, as movements in the property revaluation reserve. Deficits arising from revaluation, to the extent they cannot be offset against the revaluation surplus in respect of the same asset, are charged to the profit and loss account. Any subsequent revaluation surplus is credited to profit and loss account to the extent of the deficit previously charged.

The gain or loss on disposal or retirement of a fixed asset recognised in the profit and loss account is the difference between the net sales proceeds and the carrying amount of the relevant asset. On disposal or retirement, the attributable revaluation surplus not previously dealt with in retained profits is transferred directly to retained profits.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Rentals applicable to such operating leases are credited or charged to the profit and loss account on the straight-line basis over the lease terms.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on a weighted average basis and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.

In the prior years, the inventory cost was determined on the standard cost method, which is approximated to the actual cost. In the opinion of the directors, the change in accounting policy did not have a material impact on both the Group’s inventories and accumulated losses as at 1 January 2001 and the Group’s results for the year.

Cash and cash equivalents

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

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APPENDIX I

overdrafts which are repayable on demand and form an integral part of the Group’s cash management. For the purpose of the balance sheet, cash and bank balances and time deposits represent assets which are not restricted as to use.

Provisions

A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the profit and loss account.

Deferred tax

Deferred tax is provided, using the liability method, on all significant timing differences to the extent it is probable that the liability will crystallise in the foreseeable future. A deferred tax asset is not recognised until its realisation is assured beyond reasonable doubt.

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases:

• a. from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;

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

• c. management fee, when the services are rendered; and

• d. dividend income, when the shareholders’ right to receive payment has been established.

Foreign currencies

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

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

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APPENDIX I

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

Prior to the adoption of the revised SSAPs 11 and 15 during the year, as explained in note 2 to the financial statements, the profit and loss accounts of overseas subsidiaries and associates and the cash flows of overseas subsidiaries were translated into Hong Kong dollars at the exchange rates ruling at the balance sheet date. The adoption of the revised SSAP 11 has had no material effect on the financial statements. The adoption of the revised SSAP 15 has had no material effect on the amounts of the previously-reported cash flows of the prior year.

Employee benefits

Paid leave carried forward

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

Employment Ordinance long service payments

Certain of the Group’s employees have completed the required number of years of service to the Group in order to be eligible for long service payments under the Employment Ordinance in the event of the termination of their employment. The Group is liable to make such payments in the event that such a termination of employment meets the circumstances specified in the Employment Ordinance.

A provision is recognised in respect of the probable future long service payments expected to be made. The provision is based on the best estimate of the probable future payments which have been earned by the employees from their service to the Group to the balance sheet date.

Pension scheme

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

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APPENDIX I

The employees of the Group’s subsidiaries in the People’s Republic of China (the “PRC”) are members of the state-sponsored retirement scheme operated by the government of the PRC.

Share option scheme

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

4. SEGMENT INFORMATION

In accordance with the requirements of SSAP 26 “Segment reporting”, the Group has determined that business segments are its primary reporting format and geographical segments are its secondary reporting format.

The Group is principally engaged in the manufacture and sale of optical products. The directors of the Company regard these segments as the primary source of the Group’s risks and returns. The secondary segment format, representing the principal markets of the Group’s products, is mainly divided into five geographical areas, namely the United States of America, Europe, Hong Kong, Mainland PRC and others.

(i) Business segments

The Group has only one business segment and is the manufacture and sale of optical products. Therefore, no separate analysis of business segment information is prepared as all the information has been disclosed in the consolidated financial statements.

(ii) Geographical segments

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

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APPENDIX I

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

Geographical segments

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

==> picture [382 x 255] intentionally omitted <==

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

Group
United States
of America Europe Hong Kong Mainland PRC Others Eliminations Consolidated
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Segment revenue:
Sales to external
customers 129,005 122,898 72,742 64,640 3,357 13,032 20,877 18,761 16,116 22,340 – – 242,097 241,671
Other segment
information:
– –
Segment assets 35,842 30,516 11,838 16,393 25,802 15,806 157,068 162,618 5,173 5,905 235,723 231,238
Interests in
associates 161 161 – – (7,050) (6,531) 37,788 37,905 (5) (5) – – 30,894 31,530
266,617 262,768
Capital
expenditure – – – – 583 530 2,626 2,056 – 27 – – 3,209 2,613
----- End of picture text -----

5. TURNOVER

Turnover represents the net invoiced value of goods sold, net of returns and allowances.

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6. PROFIT/(LOSS) FROM OPERATING ACTIVITIES

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

Cost of inventories* Depreciation Minimum lease payments under operating leases in respect of land and buildings Staff costs (including directors’ remuneration – note 8): Wages and salaries Pension contributions Less: Forfeited contributions Net pension contributions Auditors’ remuneration Current year provision Prior year under/(over)provision Provision against inventories Provision for doubtful accounts receivable Loss on disposal of fixed assets Interest income Exchange gains, net Realisation of exchange reserve upon the deregistration of subsidiaries	2002 HK$’000 194,801 14,900 3,093 63,197 1,192 (641) 551 63,748 1,300 (100) 1,612 373 1,532 (38) (699) (1,001)	2001 HK$’000 189,725 15,293 4,368 78,161 1,667 (421
		1,246 79,407 1,543 150 8,660 1,427 936 (117 (2,540 –

• The cost of inventories includes HK$50,800,000 (2001: HK$64,076,000) relating to staff costs, provision against inventories and depreciation, which are also included in the respective total amounts disclosed above for each of these types of expenses.

At 31 December 2002, the Group had no forfeited contributions available to reduce its contributions to the pension scheme in future years (2001: Nil).

7. FINANCE COSTS

Interest on bank loans, overdrafts and other loans wholly repayable within five years Interest on loan from a shareholder Interest on finance leases	Group 2002 2001 HK$’000 HK$’000 2,654 21,450 12,957 – – 2 15,611 21,452	Group 2002 2001 HK$’000 HK$’000 2,654 21,450 12,957 – – 2 15,611 21,452
		21,452

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8. DIRECTORS’ REMUNERATION

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

Directors’ fees: Executive Independent non-executive Other emoluments: Executive: Salaries and other benefits Bonuses Compensation for loss of office Pension contributions Independent non-executive The remuneration of the directors fell within the following bands: Nil – HK$1,000,000 HK$1,000,001 – HK$1,500,000 HK$1,500,001 – HK$2,000,000 HK$2,000,001 – HK$2,500,000	Group 2002 2001 HK$’000 HK$’000 – – 888 720 888 720 3,819 7,286 300 355 900 – 172 238 – – 5,191 7,879 6,079 8,599 Number of directors 2002 2001 10 4 2 – 1 1 – 2 13 7	Group 2002 2001 HK$’000 HK$’000 – – 888 720 888 720 3,819 7,286 300 355 900 – 172 238 – – 5,191 7,879 6,079 8,599 Number of directors 2002 2001 10 4 2 – 1 1 – 2 13 7
		720
		7,286 355 – 238 –
		7,879
		8,599
		directors 2001 4 – 1 2
		7

There was no arrangement under which a director waived or agreed to waive any remuneration during the year (2001: Nil).

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9. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees during the year included three (2001: three) directors, details of whose remuneration are set out in note 8 above. Details of the remuneration of the remaining two (2001: two) non-director, highest paid employees are as follows:

Salaries, allowances and benefits in kind Bonuses Compensation for loss of office Pension contributions	Group 2002 2001 HK$’000 HK$’000 1,437 1,656 69 199 489 – 27 41 2,022 1,896	Group 2002 2001 HK$’000 HK$’000 1,437 1,656 69 199 489 – 27 41 2,022 1,896
		1,896

The remuneration of the above two non-director, highest paid employees fell within the following bands:

Nil – HK$1,000,000 HK$1,000,001 – HK$1,500,000	Number of employees 2002 2001 1 2 1 – 2 2	Number of employees 2002 2001 1 2 1 – 2 2
		2

10. TAX

No provision for Hong Kong profits tax and overseas tax has been provided for both the current and prior years as the Group has either available tax losses brought forward from prior years to offset the assessable profits generated during the year, or has sustained losses for tax purposes.

The tax charge for the year represents the share of tax of associates located outside Hong Kong of HK$1,000,000 (2001: HK$295,000).

11. NET PROFIT/(LOSS) FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS

The net loss from ordinary activities attributable to shareholders for the year ended 31 December 2002 dealt with in the financial statements of the Company was HK$60,530,000 (2001: HK$349,981,000).

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FINANCIAL INFORMATION

APPENDIX I

12. EARNING/(LOSS) PER SHARE

The calculation of basic earning/(loss) per share is based on the net profit from ordinary activities attributable to shareholders for the year of HK$10,141,000 (2001: net loss of HK$58,889,000) and the weighted average of 1,989,579,052 (2001: 732,044,805) ordinary shares in issue during the year.

Diluted earning/(loss) per share for the years ended 31 December 2002 and 2001 have not been disclosed as no dilutive events existed during these years.

13. FIXED ASSETS

Group

Cost or valuation: At beginning of year Additions Disposals Deficit on revaluation At 31 December 2002 Accumulated depreciation and impairment: At beginning of year Provided during the year Disposals Write-back on revaluation At 31 December 2002 Net book value: At 31 December 2002 At 31 December 2001 An analysis of cost or valuation: At cost At 1998 valuation At 2002 valuation	Leasehold land and buildings HK$’000 70,800 – – (1,900) 68,900 14,800 2,325 – (2,325) 14,800 54,100 56,000 – 14,800 54,100 68,900	Plant and machinery HK$’000 167,320 1,399 (3,117) – 165,602 122,335 5,683 (3,117) – 124,901 40,701 44,985 165,602 – – 165,602	Furniture, fixtures and equipment HK$’000 68,943 1,810 (7,803) – 62,950 37,139 6,692 (6,265) – 37,566 25,384 31,804 62,950 – – 62,950	Motor vehicles HK$’000 2,890 – – – 2,890 2,515 200 – – 2,715 175 375 2,890 – – 2,890	Total HK$’000 309,953 3,209 (10,920) (1,900) 300,342 176,789 14,900 (9,382) (2,325) 179,982 120,360 133,164 231,442 14,800 54,100 300,342

– 85 –

FINANCIAL INFORMATION

APPENDIX I

Company

Cost: At beginning of year Disposals Transfer to subsidiaries At 31 December 2002 Accumulated depreciation: At beginning of year Provided during the year Disposals Transfer to subsidiaries At 31 December 2002 Net book value: At 31 December 2002 At 31 December 2001	Plant and machinery HK$’000 503 (383) (120) – 479 24 (383) (120) – – 24	Furniture, fixtures and equipment HK$’000 15,097 (7,589) (7,508) – 10,359 1,149 (6,651) (4,857) – – 4,738	Motor vehicles HK$’000 910 – (910) – 535 200 – (735) – – 375	Total HK$’000 16,510 (7,972 (8,538
				–
				11,373 1,373 (7,034 (5,712
				–
				–
				5,137

The analysis of the Group’s leasehold land and buildings at 31 December 2002 is as follows:

At valuation: Medium term leasehold land and buildings situated in Mainland PRC	2002 HK$’000 54,100

Certain of the Group’s leasehold land and buildings, which are held for own use in Dongguan and Shenzhen in the PRC, have been valued on an open market value basis, based on their existing use by B.I. Appraisals Limited, an independent firm of professional valuers, on 31 December 2002 at HK$54,100,000. A revaluation surplus of HK$487,000 and revaluation deficit of HK$62,000 resulting from these valuations, have been credited to profit and loss account and charged to the property revaluation reserve, respectively.

– 86 –

FINANCIAL INFORMATION

APPENDIX I

Had the Group’s land and buildings stated at valuation been carried at historical cost less accumulated depreciation and impairment losses, their carrying amounts would have been approximately HK$69,830,000 (2001: HK$72,556,000).

The Group has not obtained land use right certificates or building ownership certificates for leasehold land and buildings situated in the Mainland PRC with a net book value of HK$54,100,000 at 31 December 2002 (2001: HK$56,000,000).

14. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Due from subsidiaries Provision for impairment	Company 2002 2001 HK$’000 HK$’000 69,488 74,258 – 113,443 69,488 187,701 (69,488) (74,258) – 113,443

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

In the prior year, amounts due from subsidiaries of HK$113,443,000 were not repayable within the next twelve months from that balance sheet date.

Particulars of the principal subsidiaries are as follows:

	Place of	Nominal value of	Percentage of	Percentage of
	incorporation/	issued ordinary/	equity attributable
	registration	registered	to the Company
Name	and operations	share capital	Direct	Indirect	Principal activities
Dongguan De Bao Optical	The PRC	HK$58,550,910		50	Manufacture of
Co., Ltd. (“De Bao”)		(Note i)		(Note iii)	multi-coating
					lenses
Dongguan Hamwell	The PRC	HK$62,504,800		83	Manufacture of
Glasses Co., Ltd.		(Note ii)			optical products
(“Dongguan Hamwell”)
Global Origin Limited	Hong Kong	HK$75,000,000		90	Investment holding
Profit Trend International	Hong Kong	HK$1,000,000		50	Investment holding
Limited				(Note iii)

– 87 –

APPENDIX I

FINANCIAL INFORMATION

	Place of	Nominal value of	Percentage of	Percentage of
	incorporation/	issued ordinary/	equity attributable
	registration	registered	to the Company
Name	and operations	share capital	Direct	Indirect	Principal activities
Prowin Commercial &	Hong Kong	HK$2		100	Property holding in
Industrial Limited					the PRC
Shenzhen Henggang	The PRC	US$30,000,000		81	Manufacture of
Swank Optical					optical products
Industrial Co., Ltd.
(“Henggang”)
(Note iv)
Swank International	Hong Kong	HK$100,000	100		Trading of optical
Optical Company					products
Limited

Notes:

• (i) De Bao is registered as a wholly foreign owned enterprise under the PRC law. The registered capital of De Bao is HK$118,100,000. At the balance sheet date, plant and machinery amounting to HK$58,550,910 has been contributed by the Group towards meeting the registered capital requirement. The outstanding amount of approximately HK$59,549,000 was due for contribution on 18 March 1999 in accordance with De Bao’s articles of association. The Group has been in discussion with the relevant authorities to modify the original terms of De Bao’s articles of association, including the amount of total registered capital. Up to the date of this Annual Report, the Group has not yet obtained the approval from the relevant authorities.

• (ii) Dongguan Hamwell is a Sino-foreign owned joint venture enterprise under the PRC law. The registered capital of Dongguan Hamwell is HK$67,940,000. At the balance sheet date, plant and machinery amounting to approximately HK$62,505,000 has been contributed by the Group to Dongguan Hamwell, towards meeting the registered capital requirement. The remaining registered capital of HK$5,435,000 has not yet been contributed by the minority shareholder of Dongguan Hamwell as at 31 December 2002.

• (iii) The Company has the power to cast the majority of votes at meetings of the board of directors of these entities and therefore they are regarded as subsidiaries of the Company.

• (iv) Henggang is a Sino-foreign owned joint venture enterprise under the PRC law. Subject to the payment of an annual amount of approximately HK$3,134,000 (2001: HK$3,132,000) to the joint venture party, the Group is entitled to all of the profits and bears all of the losses of Henggang.

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

– 88 –

FINANCIAL INFORMATION

APPENDIX I

15. INTERESTS IN ASSOCIATES

Unlisted shares, at cost Share of net assets Due from associates Provision for impairment	Group 2002 2001 HK$’000 HK$’000 – – 142,016 133,590 142,016 133,590 1,894 10,956 143,910 144,546 (113,016) (113,016) 30,894 31,530	Company 2002 2001 HK$’000 HK$’000 181,119 181,119 – – 181,119 181,119 40 3,651 181,159 184,770 (151,328) (158,334) 29,831 26,436

The amounts due from associates are unsecured, interest-free and are not repayable within the next twelve months from the balance sheet date.

The amounts due to associates are unsecured, interest-free and have no fixed terms of repayment.

Particulars of the principal associates are as follows:

			Percentage of	Percentage of
		Place of	ownership interest
		incorporation/	attributable
	Business	registration and	to the Group
Name	structure	operations	Direct	Indirect	Principal activities
Dongguan Yueheng Optical	Corporate	The PRC	50		Manufacture of
Co., Ltd.					optical lenses
Dongguan Yueheng Optical	Corporate	Hong Kong		50	Trading of optical
(HK) Co Limited					products
Dongguan Yueheng Optical	Corporate	The British Virgin		50	Financial servicing
(BVI) Company Limited		Islands			and marketing of
					optical products

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

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FINANCIAL INFORMATION

APPENDIX I

16. OTHER RECEIVABLES

Other receivables Provision for impairment	Group 2002 2001 HK$’000 HK$’000 96,339 96,339 (96,339) (96,339) – –	Company 2002 2001 HK$’000 HK$’000 68,286 68,286 (68,286) (68,286 – –	Company 2002 2001 HK$’000 HK$’000 68,286 68,286 (68,286) (68,286 – –
			–

Other receivables represent the amounts owed by Hanmy (Holding) Limited and its related companies (collectively “Hanmy”) to the Group. The Group continues its legal proceedings against Hanmy for recovery of the amounts due. The Group has fully provided for these debts as the directors consider it is uncertain whether the debts will be recovered following the conclusion of the legal proceedings.

17. ACCOUNTS RECEIVABLE

The aged analysis of the Group’s accounts receivable, based on payment due date and net of provisions, is as follows:

Current to 30 days overdue 31 to 60 days overdue 61 to 90 days overdue More than 90 days overdue	Group 2002 2001 HK$’000 HK$’000 47,650 45,536 2,595 3,148 2,238 1,369 1,381 1,282 53,864 51,335	Group 2002 2001 HK$’000 HK$’000 47,650 45,536 2,595 3,148 2,238 1,369 1,381 1,282 53,864 51,335
		51,335

The normal credit period granted by the Group to customers ranges from 30 days to 120 days.

18. INVENTORIES

Raw materials Work in progress Finished goods	Group 2002 2001 HK$’000 HK$’000 20,764 21,000 6,856 3,447 4,391 6,629 32,011 31,076	Group 2002 2001 HK$’000 HK$’000 20,764 21,000 6,856 3,447 4,391 6,629 32,011 31,076
		31,076

– 90 –

FINANCIAL INFORMATION

APPENDIX I

19. BANK BORROWINGS

Bank overdrafts, unsecured and repayable on demand Bank loans, secured and repayable: Within one year In the second year In the third to fifth years, inclusive Total bank borrowings Portion classified as current liabilities Non-current portion	Group 2002 2001 HK$’000 HK$’000 – 440 – 25,000 – 37,500 – 187,500 – 250,000 – 250,440 – (25,440) – 225,000	Company 2002 2001 HK$’000 HK$’000 – – – 25,000 – 37,500 – 187,500 – 250,000 – 250,000 – (25,000 – 225,000	Company 2002 2001 HK$’000 HK$’000 – – – 25,000 – 37,500 – 187,500 – 250,000 – 250,000 – (25,000 – 225,000
			25,000 37,500 187,500
			250,000
			250,000 (25,000
			225,000

During the year, on 1 March 2002, the rights, title to and interest in the above bank loans brought forward from the prior year of HK$250,000,000 have been transferred to a shareholder of the Company, Probest (note 20).

20. DUE TO A SHAREHOLDER, PROBEST

The amount due to a shareholder, Probest of HK$262,957,000 comprises the loan principal of HK$250,000,000, which represents the bank loans of the Company brought forward from the prior year and acquired by Probest on 1 March 2002 (note 19), and interest payable of HK$12,957,000. The amount due to Probest is repayable as follows:

Loan interest repayable on demand Loan principal repayable: Within one year In the second year In the third to fifth years, inclusive Amount due to Probest Portion classified as current liabilities Non-current portion	Group and 2002 HK$’000 12,957 62,500 50,000 137,500 250,000 262,957 (75,457) 187,500	Company 2001 HK$’000 –
		– – –
		–
		– –
		–

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FINANCIAL INFORMATION

APPENDIX I

The amount due to Probest is unsecured and interest-bearing at 1% per annum over the Hong Kong prime rate on the loan principal.

At 31 December 2002, the loan principal of HK$25,000,000 and the accrued loan interest of HK$12,957,000 were overdue. Subsequent to the balance sheet date, the amount due to Probest is proposed to be restructured but subject to the approval of the Asset Disposal Agreement and the Loan Restructuring Agreement by the shareholders of the Company and the shareholders of TIHL, the ultimate holding company of Probest. Details of which are set out in note 32 to the financial statements.

21. ACCOUNTS PAYABLE

The aged analysis of the Group’s accounts payable, based on payment due date, is as follows:

Current to 30 days overdue 31 to 60 days overdue 61 to 90 days overdue More than 90 days overdue	2002 HK$’000 17,746 1,497 242 1,473 20,958	2001 HK$’000 14,480 693 439 2,011
		17,623

22. CONVERTIBLE NOTES

Balance represented the convertible notes issued to Optiset Limited (“Optiset”) in prior years. Optiset was a special purpose company established, on behalf of the banks and financial institution creditors of the Company, to hold the convertible notes and 51% equity interest in the Company prior to the Company’s change in substantial shareholder to Probest on 1 March 2002. During the year, Optiset converted the convertible notes into 1,500,000,000 ordinary shares of the Company (note 25).

23. PROVISION FOR LONG SERVICE PAYMENTS

	Long service
Group	payments
	HK$’000
At beginning of year	1,000
Amount utilised during the year	(288)
At 31 December 2002	712
Portion classified as current liabilities	–
Non-current portion	712

– 92 –

FINANCIAL INFORMATION

APPENDIX I

The Group provides for the probable future long service payments expected to be made to employees under the Employment Ordinance, as further explained under the heading “Employee benefits” in note 3 to the financial statements. The provision is based on the best estimate of the probable future payments which have been earned by the employees from their service to the Group to the balance sheet date.

24. DEFERRED TAX

The principal component of the Group’s and the Company’s net deferred tax asset position not recognised in the financial statements is as follows:

Tax losses	Group 2002 2001 HK$’000 HK$’000 126,000 134,000	Company 2002 2001 HK$’000 HK$’000 36,000 44,000

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

The Group and the Company have no significant potential deferred tax liabilities for which provision has not been made.

25. SHARE CAPITAL

Shares

Authorised: 15,000,000,000 (2001: 2,500,000,000) ordinary shares of HK$0.20 each Issued and fully paid: 2,232,044,805 (2001: 732,044,805) ordinary shares of HK$0.20 each	2002 HK$’000 3,000,000 446,409	2001 HK$’000 500,000
		146,409

There was no repurchase of any shares during the year.

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

• (a) Pursuant to an ordinary resolution passed on 28 May 2002, the authorised share capital of the Company was increased from HK$500,000,000 to HK$3,000,000,000 by the creation of 12,500,000,000 additional shares of HK$0.20 each, ranking pari passu in all respects with the existing share capital of the Company.

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FINANCIAL INFORMATION

APPENDIX I

• (b) On 1 March 2002, 1,500,000,000 ordinary shares of HK$0.20 each of the Company were issued at a nominal value of HK$0.20 each upon the conversion of the convertible notes by Optiset (note 22).

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

At 1 January 2002 Convertible notes exercised (b) At 31 December 2002	Number of shares in issue Share capital HK$’000 732,044,805 146,409 1,500,000,000 300,000 2,232,044,805 446,409	Number of shares in issue Share capital HK$’000 732,044,805 146,409 1,500,000,000 300,000 2,232,044,805 446,409
		446,409

Share options

Details of the Company’s share option scheme are included in note 26 to the financial statements.

26. SHARE OPTION SCHEME

SSAP 34 was adopted during the year, as explained in note 2 and under the heading “Employee benefits” in note 3 to the financial statements. As a result, the following detailed disclosures relating to the Company’s share option scheme are now included in the notes to the financial statements. In the prior year, these disclosures were included in the Report of Directors, as their disclosure is also a requirement of the Listing Rules.

On 28 May 2002, the share option scheme of the Company adopted on 28 June 1996 ceased to operate and a new share option scheme (the “Scheme”) was adopted on the same date to comply with the new requirements of Chapter 17 of the Listing Rules regarding share option schemes of a company.

The Company operates the Scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Eligible participants of the Scheme include the Company’s directors, including independent non-executive directors, other employees of the Group, suppliers of goods or services to the Group, customers of the Group, and any minority shareholder of the Company’s subsidiaries. The Scheme became effective on 28 May 2002 and, unless otherwise cancelled or amended, will remain in force for 10 years from that date.

The maximum number of unexercised share options currently permitted to be granted under the Scheme is an amount equivalent, upon their exercise, up to 10% of the shares of the Company in issue at any time. The maximum number of shares issuable under share options to each eligible participant in the Scheme within any 12-month period is limited to 1% of the shares of the Company in issue at any time. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.

– 94 –

FINANCIAL INFORMATION

APPENDIX I

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

The offer of a grant of share options may be accepted within 21 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The share option may be exercised under the Scheme at any time during a period not exceeding 5 years after the date when the scheme option is granted and expiring on the last date of such period.

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

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

No share options were granted since the adoption of the Scheme and the Company has no share options outstanding as at the balance sheet date.

27. RESERVES

(a) Group

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

(b) Company

At 1 January 2001 Net loss for the year At 31 December 2001 and at 1 January 2002 Net loss for the year At 31 December 2002	Share premium Accumulated account losses HK$’000 HK$’000 715,132 (889,002) – (349,981) 715,132 (1,238,983) – (60,530) 715,132 (1,299,513)	Total HK$’000 (173,870) (349,981) (523,851) (60,530) (584,381)

– 95 –

FINANCIAL INFORMATION

APPENDIX I

28. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a) Major non-cash transactions

• (i) During the year, the accrued bank interest in respect of the bank loans and bank overdrafts of HK$16,917,000 was waived by the banks, out of which HK$14,263,000 was included in accrued liabilities and other payables brought forward from the prior year.

• (ii) During the year, 1,500,000,000 ordinary shares of HK$0.20 each of the Company were issued at a nominal value of HK$0.20 each upon the conversion of convertible notes amounting to HK$300,000,000 by Optiset (note 25(b)).

• (iii) During the year, Probest acquired the Company’s bank loans brought forward from the prior year of HK$250,000,000 from the banks. The balance was included as an amount due to a shareholder, Probest, as at the balance sheet date (notes 19 and 20).

(b) Disposal of subsidiaries

Net assets disposed of: Fixed assets Inventories Prepayments, deposits and other receivables Cash and bank balances Accrued liabilities and other payables Due to associates of the Group Loss on disposal of interests in subsidiaries Exchange fluctuation reserve realised Satisfied by: Cash received in 2001 Cash receivable in 2002 Professional fees paid	2002 HK$’000 – – – – – – – – – – – – – – –	2001 HK$’000 133 1,770 2,085 640 (2,992) (10) 1,626 (303) (518) 805 1,500 418 1,918 (1,113) 805

– 96 –

FINANCIAL INFORMATION

APPENDIX I

An analysis of the net outflow of cash and cash equivalents in respect of the disposal of subsidiaries is as follows:

Cash consideration Cash and cash equivalents disposed of Professional fees paid Net outflow of cash and cash equivalents in respect of the disposal of subsidiaries	2002 HK$’000 – – – –	2001 HK$’000 1,500 (640 (1,113
		(253

The results of the subsidiaries disposed of in the year ended 31 December 2001 had no significant impact on the Group’s consolidated turnover or loss before tax for that year.

29. OPERATING LEASE COMMITMENTS

The Group leases certain of its office properties and warehouses under operating lease arrangements. Leases for office properties and warehouses are negotiated for terms ranging from 2 to 3 years.

At 31 December 2002, the Group and the Company had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive	Group 2002 2001 HK$’000 HK$’000 1,414 2,629 958 – 2,372 2,629	Company 2002 2001 HK$’000 HK$’000 1,254 2,197 912 – 2,166 2,197	Company 2002 2001 HK$’000 HK$’000 1,254 2,197 912 – 2,166 2,197
			2,197

30. COMMITMENTS

Apart from the operating lease commitments detailed in note 29 above, the Group and the Company had no significant capital commitments as at the balance sheet date (2001: Nil).

– 97 –

FINANCIAL INFORMATION

APPENDIX I

31. RELATED AND CONNECTED PARTY TRANSACTIONS

In addition to the transactions and balances detailed elsewhere in these financial statements, the Group had the following material transactions with related and connected parties during the year:

Notes Sales of finished goods to associates (i) Purchases of raw materials and finished goods from associates (ii) Management fee income from associates (iii) Loan from a shareholder, Probest (iv) Interest expense charged by a shareholder, Probest (iv)	Group 2002 2001 HK$’000 HK$’000 19,373 14,205 24,248 25,145 3,200 4,241 250,000 – 12,957 –

Notes:

• (i) The sales to associates were made according to the published prices, terms and conditions offered to the major customers of the Group.

• (ii) The purchases from associates were made according to the published prices, terms and conditions offered by the associates to their major customers.

• (iii) The management fee income was charged according to the management’s estimation on costs of office premises and utilities used by the associates.

• (iv) On 1 March 2002, Probest acquired bank loans of the Company amounting to HK$250,000,000 from the banks. The loan principal is unsecured and interest bearing at 1% per annum over the Hong Kong prime rate and is repayable in accordance with the repayment term set out in note 20 to the financial statements. As at 31 December 2002, the Group and the Company had an outstanding loan due to Probest of HK$262,957,000 (2001: Nil).

The transaction included in note (iv) above constituted a connected party transaction as defined in the Listing Rules.

32. POST BALANCE SHEET EVENTS

• (i) On 4 March 2003, the Company entered into a conditional Asset Disposal Agreement, pursuant to which the Company conditionally agreed to sell to Probest a 30% equity interest in Profitown Investment Corporation (“BVI Holdco”), a company incorporated in the British Virgin Islands with limited liability on 19 November 2002 and a wholly-owned subsidiary of the Company, and 30% of the loan owing by BVI Holdco to the Company for an aggregate consideration of HK$3 million. Such consideration will be satisfied by Probest upon completion of the Asset Disposal Agreement by offsetting an equivalent amount of HK$3 million outstanding loan due to Probest by the Company, which amounted to HK$250 million as at 31 December 2002.

– 98 –

FINANCIAL INFORMATION

APPENDIX I

• (ii) On 4 March 2003, the Company entered into a conditional Loan Restructuring Agreement, pursuant to which Probest agreed to waive the repayment of the outstanding principal of HK$47 million due by the Company and the loan interest accruing thereon since 1 March 2002 up to the effective date of the Loan Restructuring Agreement. As at 31 December 2002, the accrued loan interest amounted to approximately HK$13 million.

• (iii) Pursuant to the Loan Restructuring Agreement, the remaining principal balance of HK$200 million due by the Company to Probest will be restructured on terms to be governed by a convertible note with face value of HK$200 million to be issued by the Company (the “Convertible Note”). The Convertible Note is secured by a 70% equity interest in BVI Holdco and 70% of the loan owing by BVI Holdco to the Company. The Convertible Note will bear interest at 3% per annum and the interest thereon is payable in full on maturity. The principal amount of the Convertible Note is repayable by the Company to Probest in five instalments with a maturity date on 30 June 2006. In addition, under the terms of the Convertible Note, the holders of the Convertible Note may redeem the whole or part of the Convertible Note during the period from the date of issue of the Convertible Note to its final maturity date.

Further details of the Asset Disposal Agreement, the Loan Restructuring Agreement and the issuance of the Convertible Note are set out in a circular to shareholders dated 7 April 2003 (the “Circular”).

• (iv) Pursuant to the Circular, the board of directors proposed to reorganise the capital structure of the Company. The implementation of the proposed capital restructuring would involve the following procedures:

• (a) A reduction in the issued share capital in the amount of HK$0.199 for every issued share at a nominal value of HK$0.20 each of the Company. The credit will be set off, to the extent permitted and subject to such conditions as may be imposed by the High Court of Hong Kong, against the accumulated losses of the Company;

• (b) A reduction in the nominal value of the issued and unissued shares of the Company from HK$0.20 each to HK$0.001 each;

• (c) The authorised share capital of the Company will be restored to the original amount of HK$3,000,000,000 by the creation of an additional 2,985,000,000,000 shares of HK$0.001 each; and

• (d) A consolidation of every ten shares of the Company of HK$0.001 each created by the capital reduction in (a) and (b) above into one share of HK$0.01 each.

Further details of the capital restructuring are also set out in the Circular.

All of the above transactions are conditional upon, but not limited to, the passing of resolutions at the extraordinary general meeting of the Company convened to be held on 2 May 2003.

– 99 –

FINANCIAL INFORMATION

APPENDIX I

33. CORPORATE INFORMATION

The principal activity of the Company is investment holding. During the year, the Group’s principal activities consisted of the design, manufacture and sale of optical products. There were no changes in the nature of the Group’s principal activities during the year.

On 1 March 2002, Probest acquired from Optiset a 71.9% equity interest in the Company. At the balance sheet date, Probest held a 57.9% equity interest in the Company. In the opinion of the directors, the ultimate holding company of the Company is TIHL.

34. COMPARATIVE AMOUNTS

As further explained in note 2 to the financial statements, due to the adoption of certain new and revised SSAPs during the current year, the accounting treatment and presentation of certain items in the financial statements have been revised to comply with the new requirements. Accordingly, certain comparative amounts have been reclassified to conform with the current year’s presentation.

35. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 28 April 2003.

– 100 –

FINANCIAL INFORMATION

APPENDIX I

C. UNAUDITED INTERIM RESULTS

The following is an extract from the unaudited consolidated interim report of Swank Group for the six months ended 30th June, 2003:

CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNT

		Six months	Six months	Six months
		ended 30 June
		2003			2002
	Notes	HK$’000		HK$’000
		(unaudited)	(unaudited)
Turnover	3	102,242		128,507
Cost of sales		(86,088)		(98,151)
Gross profit		16,154			30,356
Other revenue		1,691			2,065
Selling and distribution costs		(6,615)			(8,122)
Administrative expenses		(10,529)		(16,862)
Other operating expenses		(3,024)			(3,010)
Profit/(loss) from operating activities	5	(2,323)			4,427
Finance costs	6	(7,895)			(8,425)
Share of profits less losses of associates		1,333			3,972
		(8,885)			(26)
Waive of accrued interest on bank
loans and overdrafts		–			16,917
Waive of bank overdrafts		–			349
Restructuring cost		(1,152)			(8,022)
Profit/(loss) before tax		(10,037)			9,218
Tax	7	–			–
Profit/(loss) before minority interests		(10,037)			9,218
Minority interests		207			12
Net profit/(loss) from ordinary activities
attributable to shareholders		(9,830)			9,230
Earning/(loss) per share	8
Basic		(0.4 cent)		0.5 cent
Diluted		N/A			N/A

– 101 –

FINANCIAL INFORMATION

APPENDIX I

CONDENSED CONSOLIDATED BALANCE SHEET

			As at	As at
		30 June		31 December
		2003		2002
	Notes	HK$’000		HK$’000
		(unaudited)		(audited)
NON-CURRENT ASSETS
Fixed assets		113,929		120,360
Interests in associates		33,709		30,894
Rental deposits		455		455
Other receivables		–		–
		148,093		151,709
CURRENT ASSETS
Cash and bank balances		21,960		23,715
Time deposits		378		368
Accounts receivable	9	59,055		53,864
Bills receivable		4,842		903
Prepayments, deposits and other receivables		2,758		4,047
Inventories		29,683		32,011
		118,676		114,908
CURRENT LIABILITIES
Due to a shareholder, Probest	10	133,352		75,457
Due to associates		8,271		8,848
Accounts payable	11	24,091		20,958
Accrued liabilities and other payables		16,266		16,313
Tax payable		842		839
		182,822		122,415
NET CURRENT LIABILITIES		(64,146)		(7,507)
TOTAL ASSETS LESS CURRENT LIABILITIES		83,947		144,202

– 102 –

FINANCIAL INFORMATION

APPENDIX I

			As at	As at
		30 June	31	December
		2003		2002
	Notes	HK$’000		HK$’000
		(unaudited)		(audited)
TOTAL ASSETS LESS CURRENT LIABILITIES		83,947		144,202
NON-CURRENT LIABILITIES
Due to a shareholder, Probest	10	137,500		187,500
Provision for long service payments		712		712
		138,212		188,212
MINORITY INTERESTS		45,725		45,932
		(99,990)		(89,942)
CAPITAL AND RESERVES
Share capital	12	446,409		446,409
Reserves		(546,399)		(536,351)
		(99,990)		(89,942)

– 103 –

FINANCIAL INFORMATION

APPENDIX I

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2003

Reserves

At 1 January 2003 Exchange adjustments on translation of foreign subsidiaries Net gains and losses not recognised in the profit and loss account Net loss for the period At 30 June 2003	Share capital HK$’000 (unaudited) 446,409 — — — 446,409	Share premium account HK$’000 (unaudited) 715,132 — — — 715,132	Property revaluation reserve HK$’000 (unaudited) 21,169 — — — 21,169	Exchange fluctuation reserve HK$’000 (unaudited) 10,354 (218) (218) — 10,136	Capital Accumulated reserve losses HK$’000 HK$’000 (unaudited) (unaudited) 8 (1,283,014) — — — — — (9,830) 8 (1,292,844)	Total reserves HK$’000 (unaudited) (536,351) (218) (218) (9,830) (546,399)	Total HK$’000 (unaudited) (89,942) (218)
							(218)
							(9,830)
							(99,990)

For the six months ended 30 June 2002

Reserves

At 1 January 2002 Issue of shares Exchange adjustments on translation of foreign subsidiaries Net gains and losses not recognised in the profit and loss account Net profit for the period At 30 June 2002	Share capital HK$’000 (unaudited) 146,409 300,000 — — — 446,409	Share premium account HK$’000 (unaudited) 715,132 — — — — 715,132	Property revaluation reserve HK$’000 (unaudited) 21,231 — — — — 21,231	Exchange fluctuation reserve HK$’000 (unaudited) 11,768 — (54) (54) — 11,714	Capital Accumulated reserve losses HK$’000 HK$’000 (unaudited) (unaudited) 8 (1,293,155) — — — — — — — 9,230 8 (1,283,925)	Total reserves HK$’000 (unaudited) (545,016) — (54) (54) 9,230 (535,840)	Total HK$’000 (unaudited) (398,607) 300,000 (54)
							(54)
							9,230
							(89,431)

– 104 –

FINANCIAL INFORMATION

APPENDIX I

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

Six months ended 30 June

	2003		2002
	HK$’000		HK$’000
	(unaudited)	(unaudited)
Net cash inflow/(outflow) from operating activities	(1,156)		3,480
Net cash outflow from investing activities	(589)		(1,128)
Net cash inflow/(outflow) before financing activities	(1,745)		2,352
Net cash outflow from financing activities	–		–
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS	(1,745)		2,352
Cash and cash equivalents at beginning
of period	24,083		9,688
CASH AND CASH EQUIVALENTS AT END OF PERIOD	22,338		12,040
ANALYSIS OF BALANCES OF CASH AND
CASH EQUIVALENTS
Cash and bank balances	21,960		12,110
Time deposits with original maturity of less
than three months when acquired	378		30
Bank overdrafts	–		(100)
	22,338		12,040

– 105 –

FINANCIAL INFORMATION

APPENDIX I

NOTES :

1 BASIS OF PRESENTATION

The condensed consolidated interim financial statements have been prepared on a going concern basis, notwithstanding that the Group had net current liabilities of HK$64,146,000 and a deficiency in assets of HK$99,990,000 as at 30 June 2003. The asset disposal agreement and the loan restructuring agreement entered into between the Company, Probest Holdings Inc. (“Probest”), a wholly-owned subsidiary of the Company’s ultimate holding company, Tomorrow International Holdings Limited (“Tomorrow”), and Tomorrow on 4 March 2003 were terminated on 27 August 2003. On 3 September 2003, the Company, Probest and Tomorrow entered into a conditional share sale agreement (the “Share Sale Agreement”). The Company and Probest also entered into a conditional loan settlement agreement (the “Loan Settlement Agreement”). The Share Sale Agreement and the Loan Settlement Agreement are proposed to restructure the principal loan of HK$250 million and the accrued loan interest thereon since 1 March 2002 up to the effective date of the Loan Settlement Agreement due to Probest. Moreover, the Company also proposes to raise not less than HK$37.7 million before expenses by way of the open offer on the basis of 13 offer shares at HK$0.013 each for every existing share of HK$0.01 each in the issued share capital of the Company held by the shareholders, who have addresses in Hong Kong on the register of members of the Company (the “Qualifying Shareholders”), as at 16 October 2003, being the date to which entitlements under the open offer will be determined (the “Record Date”). Net proceeds from the open offer of approximately HK$37.0 million will be used to repay partly the loan due to Probest. The Board is of the opinion that, in light of the measures taken today, together with ongoing negotiation with Probest, the Group will have sufficient cash resources to finance its future capital requirement and other financing requirements. Accordingly, the financial statements have been prepared on a going concern basis.

Should going concern basis be not applicable, adjustments would have to be made to restate the value of assets to their break up values, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities, respectively.

2. BASIS OF PREPARATION

The interim financial statements are unaudited, but have been reviewed by the Audit Committee.

The condensed consolidated interim financial statements have been prepared in accordance with Hong Kong Statements of Standard Accounting Practice (“SSAP”) No. 25 “Interim Financial Reporting” issued by the Hong Kong Society of Accountants. The same accounting policies as adopted in the 2002 annual report have been applied to these interim financial statements.

In addition, the Group has adopted SSAP 12 (Revised) “Income Taxes”. SSAP12 (Revised) principally prescribes the accounting treatment and disclosures for deferred tax. In prior periods, deferred tax is provided using the income statement liability method on all significant timing differences to the extent it is probable that the liability will crystallise in the foreseeable future. A deferred tax asset is not recognized until its realization is assured beyond reasonable doubt. SSAP12 (Revised) requires the adoption of the balance sheet liability method, whereby deferred tax is recognised in respect of all temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, with limited exceptions. In the absence of any specific transitional requirements in SSAP 12 (Revised), the new accounting policy has been applied retrospectively.

– 106 –

FINANCIAL INFORMATION

APPENDIX I

The retrospective adoption of this new standard has not resulted in any significant effect on the financial statements in the prior periods and, accordingly, no prior periods adjustment has been made.

3. TURNOVER

The principal activity of the Group remained unchanged during the period and is the design, manufacture and sale of optical products. Turnover represents the net invoiced value of goods sold, net of returns and allowances.

4. SEGMENT INFORMATION

Business segment information is chosen as the primary reporting format because the business segment is considered as the primary source of the Group’s risks and returns.

Business segments

The Group has only one business segment and is the manufacture and sale of optical products. Therefore, no separate analysis of business segment information is prepared as all the information has been disclosed in the unaudited condensed consolidated interim financial statements.

5. PROFIT/(LOSS) FROM OPERATING ACTIVITIES

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

Depreciation Provision against inventories Provision for doubtful accounts receivable Interest income Exchange gains, net FINANCE COSTS Interest on bank loans, overdrafts and other loans wholly repayable within five years Interest on loan from a shareholder, Probest	Six months ended 30 June 2003 2002 HK$’000 HK$’000 (unaudited) (unaudited) 7,052 7,056 1,462 2,035 24 173 (31) (15) (91) (612) Six months ended 30 June 2003 2002 HK$’000 HK$’000 (unaudited) (unaudited) – 2,654 7,895 5,771 7,895 8,425

6. FINANCE COSTS

– 107 –

FINANCIAL INFORMATION

APPENDIX I

7. TAX

No provision for Hong Kong profits tax and overseas tax has been provided for both the current and prior periods as the Group has either available tax losses brought forward from prior years to offset the assessable profits generated during the period, or has sustained losses for tax purposes.

8. EARNING/(LOSS) PER SHARE

The calculation of basis earning/(loss) per share is based on the net loss from ordinary activities attributable to shareholders for the period of HK$9,830,000 (2002: net profit of HK$9,230,000) and the weighted average of 2,232,044,805 (2002: 1,743,094,529) ordinary shares in issue during the period.

The capital reorganisation was completed on 29 July 2003. As adjusted for the capital reorganisation completed subsequent to the balance sheet date, the basic loss per share for the six months ended 30 June 2003 is adjusted to HK4.4 cents. Accordingly, the basic earning per share in the prior period is adjusted to HK5.3 cents. The adjusted weighted average of the ordinary shares in issue during the period, after taking into account the retrospective impact of the capital reorganisation, was 223,204,480 shares (2002 : 174,309,452).

There were no potential dilutive shares in issue during the period ended 30 June 2003 and 30 June 2002 and, accordingly, the diluted earning/(loss) per share is not shown.

9. ACCOUNTS RECEIVABLE

The aged analysis of the Group’s accounts receivable, based on payment due date and net of provisions, is as follows:

Current to 30 days overdue 31 to 60 days overdue 61 to 90 days overdue More than 90 days overdue	As at 30 June 31 December 2003 2002 HK$’000 HK$’000 (unaudited) (audited) 50,377 47,650 4,265 2,595 2,198 2,238 2,215 1,381 59,055 53,864	As at 30 June 31 December 2003 2002 HK$’000 HK$’000 (unaudited) (audited) 50,377 47,650 4,265 2,595 2,198 2,238 2,215 1,381 59,055 53,864
		53,864

The normal credit period granted by the Group to customers ranges from 30 days to 120 days.

– 108 –

FINANCIAL INFORMATION

APPENDIX I

10. DUE TO A SHAREHOLDER, PROBEST

The amount due to a shareholder, Probest, of HK$270,852,000 comprises the loan principal of HK$250,000,000 and interest payable of HK$20,852,000. The amount due to Probest is repayable as follows:

Loan interest repayable on demand Loan principal repayable: Within one year In the second year In the third to fifth years, inclusive Amount due to Probest Portion classified as current liabilities Non-current portion	As at 30 June 31 December 2003 2002 HK$’000 HK$’000 (unaudited) (audited) 20,852 12,957 112,500 62,500 62,500 50,000 75,000 137,500 250,000 250,000 270,852 262,957 (133,352) (75,457 137,500 187,500	As at 30 June 31 December 2003 2002 HK$’000 HK$’000 (unaudited) (audited) 20,852 12,957 112,500 62,500 62,500 50,000 75,000 137,500 250,000 250,000 270,852 262,957 (133,352) (75,457 137,500 187,500
		62,500 50,000 137,500
		250,000
		262,957 (75,457
		187,500

The amount due to Probest is unsecured and interest-bearing at 1% per annum over the Hong Kong prime rate on the loan principal.

At 30 June 2003, the loan principal amounting to HK$62,500,000 and the accrued loan interest of HK$20,852,000 were overdue.

11. ACCOUNTS PAYABLE

The aged analysis of the Group’s accounts payable, based on payment due date, is as follows:

Current to 30 days overdue 31 to 60 days overdue 61 to 90 days overdue More than 90 days overdue	As at 30 June 31 December 2003 2002 HK$’000 HK$’000 (unaudited) (audited) 17,378 17,746 4,512 1,497 287 242 1,914 1,473 24,091 20,958	As at 30 June 31 December 2003 2002 HK$’000 HK$’000 (unaudited) (audited) 17,378 17,746 4,512 1,497 287 242 1,914 1,473 24,091 20,958
		20,958

– 109 –

FINANCIAL INFORMATION

APPENDIX I

12. SHARE CAPITAL

Authorised: Ordinary shares of HK$0.20 each Issued and fully paid: At beginning of period Issued of shares upon exercise of share options At end of period	As at 30 June 2003 No. of shares HK$’000 15,000,000,000 3,000,000 2,232,044,805 446,409 5 0 2,232,044,810 446,409	As at 30 June 2003 No. of shares HK$’000 15,000,000,000 3,000,000 2,232,044,805 446,409 5 0 2,232,044,810 446,409
		446,409 0
		446,409

During the period, 5 shares were issued upon exercise of share options at an exercise price of HK$0.20 per share.

13. SHARE OPTION SCHEME

Pursuant to the Company’s share option scheme (the “Scheme”) adopted on 28 May 2002 for a period of 10 years, on 12 June 2003, the Company granted 5 share options to an employee with an exercise period ranging from 12 June 2003 to 11 July 2003. These 5 share options were exercised at an exercise price of HK$0.20 per share on 12 June 2003. The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) closing price of the Company’s shares on the trading day immediately prior to the date of the grant of the share options was HK$0.01. The Stock Exchange closing price of the Company’s shares at the date of the exercise of the share options was HK$0.01.

The Board considers that it is not appropriate to state the theoretical value of the options granted during the period under the Scheme. The Board believes that any calculation of the value of share options may not be meaningful as the exercise price is greater than the Stock Exchange closing price on the trading day immediately prior to the date of the grant of the options and also the share options were exercised at the same day of the grant of the options.

Apart from the above, no other options were granted by the Company during the period. The Company has no share options outstanding as at the balance sheet date.

– 110 –

FINANCIAL INFORMATION

APPENDIX I

14. RELATED PARTY AND CONNECTED TRANSACTIONS

As at 30 June 2003, the Group has the following material transactions with related and connected parties during the period:

		Six months	ended 30 June
		2003	2002
	Note	HK$’000	HK$’000
		(unaudited)	(unaudited)
Sales of finished goods to associates		4,087	10,790
Purchases of raw materials and
finished goods from associates		6,207	14,147
Management fee income from associates		1,559	1,793
Loan from a shareholder, Probest	(i)	250,000	250,000
Interest expense charged by
a shareholder, Probest	(i)	7,895	5,771

The transaction included in note (i) above constituted a connected party transaction as defined in the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”). The loan from a shareholder, Probest, is unsecured and interest bearing at 1% per annum over the Hong Kong prime rate and is repayable in accordance with the repayment term set out in note 10 to the interim financial statements. As at 30 June 2003, the Group and the Company had an outstanding loan, including accrued interest, due to Probest of HK$270,852,000 (31 December 2002: HK$262,957,000).

Amounts due to associates are disclosed in the unaudited condensed consolidated balance sheet. Amounts due from associates at 30 June 2003 amounted to HK$3,376,000 (31 December 2002: HK$1,894,000). These balances are non-interest bearing and have no fixed terms of repayment.

15. CONTINGENT LIABILITIES

At 30 June 2003, the Company and the Group had no material contingent liabilities.

16. POST BALANCE SHEET EVENTS

• (i) On 4 March 2003, the Company, Probest and Tomorrow entered into a conditional asset disposal agreement and a conditional loan restructuring agreement to restructure the principal loan of HK$250 million and the accrued loan interest due to Probest. Subsequently, the above two mentioned agreements were terminated on 27 August 2003.

• (ii) On 4 March 2003, the directors also proposed a capital reorganisation including share capital reduction, capital increase and share consolidation (the “Capital Reorganisation”). The Capital Reorganisation was completed on 29 July 2003. The authorized share capital of the Company after the Capital Reorganisation will be HK$3,000,000,000 comprising 300,000,000,000 shares of HK$0.01 each, of which 223,204,481 shares of HK$0.01 each will be in issue and fully paid or credited as fully paid.

• (iii) On 3 September 2003, the Company, Probest and Tomorrow entered into the Share Sale Agreement pursuant to which Probest would acquire a 30% equity interest in a wholly-owned subsidiary of the Company and 30% of loan owing by that subsidiary to the Company for a consideration of HK$3 million.

– 111 –

FINANCIAL INFORMATION

APPENDIX I

• (iv) In addition, the Company and Probest entered into the Loan Settlement Agreement pursuant to which Probest agreed to waive the repayment of the outstanding principal loan of HK$47 million due by the Company and the accrued loan interest thereon since 1 March 2002 up to the effective date of the Loan Settlement Agreement.

• (v) Moreover, the Company also proposes to raise not less than HK$37.7 million before expenses by way of the open offer on the basis of 13 offer shares at HK$0.013 each for every existing share of HK$0.01 each in the issued share capital of the Company held by the Qualifying Shareholders on the Record Date (the “Open Offer”). Net proceeds from the Open Offer of approximately HK$37.0 million will be used to repay partly the loan due to Probest. On 3 September 2003, the Company, Probest and Tomorrow also entered into an underwriting agreement in relation to the underwriting of the Open Offer.

• (vi) The outstanding principal loan of HK$163 million due to Probest shall be repaid by three instalments in accordance with the terms of the promissory note with maturity date on 1 June 2006. The promissory note is unsecured and bears interest at a rate per annum equivalent to 1% over Hong Kong prime rate.

The Share Sale Agreement and the Loan Settlement Agreement are subject to the approval by the independent shareholders of the Company at the extraordinary general meeting of the Company and the shareholders of Tomorrow at a special general meeting of Tomorrow. The Open Offer is subject to the approval by the independent shareholders of the Company at the extraordinary general meeting of the Company. Further details are also set out in the announcement dated 9 September 2003.

17. IMMEDIATE AND ULTIMATE HOLDING COMPANY

The Company considers Probest to be its immediate holding company and Tomorrow, a public listed company in Hong Kong which Probest is its wholly-owned subsidiary, to be its ultimate holding company.

D. INDEBTEDNESS

At the close of business on 31st August, 2003, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Swank Group had amount due to Probest of approximately HK$274 million, which comprised the loan principal of HK$250 million and interest payable of approximately HK$24 million.

Save as referred to above or as otherwise disclosed herein and apart from intra-group liabilities, the Swank Group did not have, as at the close of business on 31st August, 2003, any mortgages, charges, debentures or other loan capital or bank overdraft, loans or other similar indebtedness or hire purchase commitments or any guarantees or other material contingent liabilities.

Save as referred to above, the Directors have confirmed that there have been no material changes in the indebtedness and contingent liabilities of the Swank Group since 31st August, 2003.

– 112 –

FINANCIAL INFORMATION

APPENDIX I

E. STATEMENT OF UNAUDITED ADJUSTED PRO-FORMA CONSOLIDATED NET TANGIBLE ASSET VALUE OF THE SWANK GROUP

The following is a summary of the statement of the adjusted pro-forma consolidated net tangible asset value of the Swank Group based on the audited net tangible asset value of the Swank Group as at 31st December, 2002 and as adjusted to take into account of transactions since that date:

	HK$ million	HK$ million
Audited consolidated net tangible deficit
as at 31st December, 2002		(89.9)
Add: Unaudited net loss for the period ended 30th June, 2003		(9.8)
Less: exchange adjustments as at 30th June, 2003		(0.2)
Unaudited net tangible deficits as at 30th June, 2003		(99.9)
Add: the net proceeds from the Open Offer, net of expenses		37.0
Add: Consideration under the Share Sale Agreement	3.0
Less: 30% of equity interest in Profitown and
30% of Profitown Loan sold	(51.4)
Loss arising from the Share Sale Agreement		(48.4)
Add: Waiver of part of the Loan principal by Probest under
the Loan Settlement Agreement		47.0
Add: Waiver of the interest accrued loan interest from
1st March, 2002 to the Latest Practicable Date
(for illustration purpose)(Note)		24.8
Proforma adjusted net tangible deficits after the
Transactions and the Open Offer		(39.5)

Note: Pursuant to the Loan Settlement Agreement, Probest will waive all the interest accrued on the Loan since 1st March, 2002 up to the date of the Loan Settlement Agreement taking into effect.

– 113 –

FINANCIAL INFORMATION

APPENDIX I

F. WORKING CAPITAL

Taking into account the Swank Group’s internal resources and present available banking facilities, the Directors are of the opinion that upon Completion and the Loan Settlement Agreement becoming effective, taking into account the estimated net proceeds from the Open Offer taking effect and barring unforeseen circumstances, the Swank Group will have sufficient working capital for its present requirement.

– 114 –

EXPLANATORY STATEMENT

APPENDIX II

This appendix serves as an explanatory statement, as required by the Listing Rules, to provide information to Shareholders of Swank regarding the new repurchase mandate as referred to in the section headed ‘‘General mandates to issue and repurchase Shares’’ on page 24 of this circular. For the purpose of this appendix, the term ‘‘shares’’ (unless otherwise stated) shall be as defined in the Hong Kong Code on Share Repurchases which mean all classes which carry a right to subscribe for or repurchase shares.

SHARE CAPITAL

As at the Latest Practicable Date, the issued share capital of Swank consisted of 223,204,481 Shares. Subject to the passing of the relevant ordinary resolution and on the basis that (i) no further securities will be issued or repurchased between the Latest Practicable Date and the date of the EGM; (ii) the Open Offer is approved at the EGM; and (iii) 2,901,658,253 Offer Shares are duly issued, Swank will be allowed under the Repurchase Mandate to repurchase a maximum of 312,486,273 Shares during the period ending on the earlier of the conclusion of the next annual general meeting of Swank as required to be held by law or the date upon which such authority is revoked or varied by an ordinary resolution of the Shareholders of Swank in a general meeting.

REASON FOR THE REPURCHASE

Although Swank has no present intention of repurchasing any Shares, the Directors believe that the flexibility afforded by the Repurchase Mandate would be beneficial to Swank and its Shareholders. Repurchases may, depending on the circumstances, result in an increase of net assets and/or earnings per Share. Furthermore, the exercise of the Repurchase Mandate by the Directors may lead to an increased volume of trading and therefore enhanced liquidity in the Shares on the Stock Exchange.

FUNDING OF REPURCHASES

Repurchase of the Shares will be funded entirely from Swank’s available cash flow or working capital facilities legally available for the repurchase in accordance with the memorandum and articles of association of Swank and the applicable laws of Hong Kong.

– 115 –

EXPLANATORY STATEMENT

APPENDIX II

SHARE PRICES

The highest and lowest prices of the Shares traded in the Stock Exchange in each of the past twelve months were as follows:

	Highest	Lowest
	$	$
2002
September	0.880A	0.680A
October	0.780A	0.300A
November	0.700A	0.350A
December	0.590A	0.460A
2003
January	0.460A	0.300A
February	0.380A	0.250A
March	0.310A	0.100A
April	0.100A	0.100A
May	0.100A	0.100A
June	0.110A	0.100A
July	0.190A	0.100A
August	0.168	0.150
September *	0.200	0.154

A: adjusted pursuant to the capital reorganisation of Swank which became effective after 4:00 p.m. on 29th July, 2003

*: up to the Latest Practicable Date

GENERAL

The Directors have undertaken to the Stock Exchange that they will exercise the Repurchase Mandate in accordance with the applicable laws of Hong Kong and the Listing Rules.

The Directors anticipate that there might be a material adverse impact to the working capital or gearing position of Swank in the event that the mandate to repurchase its securities is exercised in full during the proposed repurchase period. However, the Directors do not propose to exercise the Repurchase Mandate to such extent as would, in the circumstances, have a material adverse effect on the working capital requirements of Swank or the gearing levels which, in the opinion of the Directors, are from time to time appropriate for Swank.

– 116 –

EXPLANATORY STATEMENT

APPENDIX II

If on the exercise of the power to repurchase Shares pursuant to the Repurchase Mandate, a Shareholder’s proportionate interest in the voting rights of Swank increases, such increase will be treated as an acquisition for the purpose of Rule 32 of the Code on Takeovers and Mergers (the “Code”). As a result, a Shareholder or group of Shareholders acting in concert could obtain or consolidate control of Swank and, depending on the level of increase of the Shareholder’s interest, may become obliged to make a mandatory offer in accordance with Rules 26 and 32 of the Code. Accordingly, during the exercise of the power to repurchase Shares pursuant to the Repurchase Mandate, the Directors and the Shareholders will act in compliance with the Code as and when necessary.

As at the Latest Practicable Date, Probest and its associates were beneficially interested in 129,163,865 Shares representing approximately 57.9% of the issued share capital of Swank. Based on such shareholdings and assuming that all Shareholders take up their respective entitlements under the Open Offer and in the event that the Directors exercise in full the power to repurchase Shares under the Repurchase Mandate, the shareholdings of Probest would be increased to 64.3% of the issued share capital of Swank.

The Directors are not aware of any consequences which may arise under the Code as a result of any repurchases made under the Repurchase Mandate. In the event that the Repurchase Mandate is exercised in full and assuming that all Shareholders take up their respective entitlements under the Open Offer, the number of Shares held by the public would not fall below 25%.

None of the Directors, to the best of their knowledge having made all reasonable enquiries, nor their associates have any intention to sell any Shares to Swank or its subsidiaries if the Repurchase Mandate is exercised by the Directors.

No connected persons (as defined in the Listing Rules) of Swank have notified Swank that they have any intention to sell any Shares to Swank and no such persons have undertaken not to sell any of the Shares to Swank in the event the Repurchase Mandate is approved by the Shareholders of Swank.

No securities have been repurchased by Swank or any of its subsidiaries during the six months preceding the date of this circular.

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1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to Swank. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in the circular have been arrived at after due and careful consideration and that there are no other facts the omission of which would make any statement herein misleading.

2. PARTICULARS OF DIRECTORS

Executive Directors

Mr. Yau Tak Wah, Paul, aged 47, is the Chairman and the founder of the Tomorrow Group and is primarily responsible for corporate strategic planning. He holds a Bachelor of Science Degree in Mechanical Engineering and has more than 20 years of experience in the electronics industry. Before he established the Tomorrow group, Mr. Yau worked as design engineer in a renowned US electronics company operating in Hong Kong where he gained invaluable experience in production design and established close business relationship with various electronics manufacturers in Hong Kong. He joined the Swank Group in March 2002.

Ms. Louie Mei Po, aged 35, is a director of Tomorrow and is responsible for business investment and development of the Tomorrow Group. Ms. Louie holds a Master’s Degree in Business Administration and a Bachelor’s Degree in Social Science from the Chinese University of Hong Kong. Prior to joining the Tomorrow Group, Ms. Louie was an executive director of two listed companies in Hong Kong specialising in mortgage loan financing, property investment and development. She has over ten years of experience in business investment and development. She joined the Swank Group in March 2002.

Ms. Wong Shin Ling, Irene, aged 42, is a director of Tomorrow and is responsible for management and administration of the Tomorrow Group. Ms. Wong has over 12 years of experience in the field of property development and management. Prior to joining the Tomorrow Group, she was an executive director of two listed companies in Hong Kong specialising in mortgage loan financing, property investment and development. She joined the Swank Group in March 2002.

Mr. Tam Wing Kin, aged 37, is a director of Tomorrow and is responsible for finance of the Tomorrow Group. He is a member of The Chartered Institute of Management Accountants, The Association of Chartered Certified Accountants and The Hong Kong Society of Accountants. He is also a Certified Public Accountant. Prior to joining the

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Tomorrow Group, he worked for an international accountancy firm and two listed companies in Hong Kong. He has over 14 years of experience in the accounting field. He joined the Swank Group and was appointed as Company Secretary of Swank in March 2002.

Mr. Tam Ping Wah, aged 47, is a director of Tomorrow and has more than 20 years of experience in electronics business. Being a graduate from Simon Fraser University in Canada in 1979, Mr. Tam first worked at a leading electronics company operating in Hong Kong as regional marketing manager and obtained extensive exposure to the North American and European markets. He joined the Swank Group in March 2002.

Mr. Lau Tai Ming, Eddy, aged 46, was appointed on 28th August, 1998 as Finance Director and Company Secretary of Swank and has assumed full supervision of all the financial functions and company secretarial matters of the Swank Group. Mr. Lau holds a Master’s Degree in Business Administration from Santa Clara University, the United States and is also a Fellow of the Association of Chartered Certified Accountants and an Associate of the Hong Kong Society of Accountants. Mr. Lau has held financial controller and finance director positions at Hewlett Packard and General Motors respectively in the Asia Pacific region. He was appointed as Chief Operating Officer of Swank and resigned as Company Secretary in March 2002.

Mr. Cheung Wah Hing, aged 51, graduated from the Chinese University of Hong Kong in 1975 with a Bachelor’s Degree in Business Administration and obtained a Master’s Degree in Business Administration from the Australian Graduate School of Management, University of New South Wales, Australia in 1982. He joined the Swank Group in June 1990 and is responsible for the manufacture, sales and marketing of ophthalmic lenses and appointed as an executive Director in June 2003.

Independent Non-executive Directors

Mr. Hahn Ka Fai, Mark, aged 39, is a Deputy General Manager (Sale) of Sales Department of Sino Land Company Limited. Mr. Hahn has over 16 years of experience in international real estate and specialises in institutional investments, and has previously held senior positions with DTZ Debenhan Tie Leung Limited, Jones Lang Wootton, Richard Ellis and Chestertons in both Hong Kong and Taiwan. He is a graduate in Land Management (London) and is a Chartered Surveyor and Registered Professional Surveyor in Hong Kong. He joined the Swank Group in March 2002.

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Ms. Shum Wai Ting, Rebecca, aged 36, is a director of CB Richard Ellis, an international real estate advisor. Ms. Shum has over 15 years of experience in valuation, project marketing and investment sales, and has previously held a senior position with Jones Lang LaSalle specialising in project leasing of commercial properties and investments. She joined the Swank Group in August 2003.

3. PARTIES INVOLVED IN THE OPEN OFFER AND CORPORATE INFORMATION

Registered office 27th Floor Henley Building 5 Queen’s Road Central Hong Kong Head Office and principal place of Unit 3301, Level 33 business Metroplaza Tower 1 223 Hing Fong Road Kwai Fong, N.T. Hong Kong Authorised representatives Ms. Louie Mei Po Mr. Tam Wing Kin Company secretary Mr. Tam Wing Kin Auditors Ernst & Young Certified Public Accountant 15th Floor Hutchison House 10 Harcourt Road Central Hong Kong Underwriter Probest Holdings Inc. c/o 27th Floor Henley Building 5 Queen’s Road Central Hong Kong Legal advisers As to Hong Kong Law: Vincent T.K. Cheung, Yap & Co 15th Floor, Alexandra House 16-20 Chater Road Hong Kong

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Share registrar Secretaries Limited Ground Floor, Bank of East Asia Harbour View Centre 56 Gloucester Road Wanchai Hong Kong Principal bankers The Hongkong and Shanghai Banking Corporation Limited 1 Queen’s Road Central Hong Kong DBS Bank (Hong Kong) Limited Central Branch 16th Floor, The Centre, 99 Queen’s Road Central Hong Kong

4. DISCLOSURE OF INTERESTS

(i) Directors

As at the Latest Practicable Date, the interests or short positions of each Director and Swank’s chief executive in the shares, underlying shares or debentures of Swank or any associated corporation (within the meaning of Part XV of the SFO) which (a) were required to be notified to Swank and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provision of the SFO); or (b) were required to pursuant to Section 352 of the SFO to be entered in the register referred to therein; or (c) were required to pursuant to the Model Code for Securities Transactions by Directors of Listed Companies (the “Model Code”) to be notified to Swank and the Stock Exchange were as follows:

	Nature of	Number of	Approximate
Directors	interest	Shares	Percentage
Mr. Cheung Wah Hing	Personal	25,600	0.01%

Save as disclosed in this circular, as at the Latest Practicable Date, none of the Directors and chief executive of Swank were interested, or were deemed to be interested in the long and short positions in the shares, underlying shares and debentures of Swank or any associated corporation (within the meaning of the SFO) which (a) were required to be notified to Swank and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO; or (b) were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) were required, pursuant to the Code for Securities Transactions by Directors adopted by Swank to be notified to Swank and the Stock Exchange.

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(ii) Substantial Shareholders

As at the Latest Practicable Date, so far as is known to the Directors, the following parties, other than Mr. Cheung Wah Hing (as referred to in paragraph 4(i) of this appendix above), had an interest or short position in the Shares and underlying Shares which would fall to be disclosed to Swank under the provision of the Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly, interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of Swank:

		Number of	Approximate
Name		ordinary Shares	Percentage
(i)	Winspark Venture Limited
	(“Winspark Venture”)	129,163,865	57.9%
(ii)	Tomorrow	129,163,865	57.9%
(iii)	Fortune Dynamic Group Corp.
	(“Fortune Dynamic”)	129,163,865	57.9%
(iv)	Probest Holdings Inc.	129,163,865	57.9%

Winspark Venture was (or was deemed to be) interested in 129,163,865 ordinary shares in Swank by virtue of its approximately 58% shareholding in Tomorrow, which in turn, held 100% shareholding in Fortune Dynamic. Fortune Dynamic held 100% shareholding in Probest, which in turn held 129,163,865 shares of Swank. The entire issued share capital of Winspark Venture is beneficially owned by Mr. Chan Yuen Ming. Accordingly, the interests disclosed by parties (i), (ii) (iii) and (iv) above are in respect of the same shareholding.

As far as the Directors are aware, save as disclosed herein, no other person was directly or indirectly beneficially interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of Swank as at the Latest Practicable Date.

None of the Directors has any direct or indirect interest in any assets which have been, since the date to which the latest published audited accounts of Swank were made up, acquired or disposed of by, or leased to Swank or any of its subsidiaries, or are proposed to be acquired or disposed of by, or leased to Swank or any of its subsidiaries.

5. SERVICE CONTRACT

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Swank Group (other than contracts expiring or determinable by any member of the Swank Group within one year without payment of compensation, other than statutory compensation).

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6. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the members of the Swank Group within two years preceding the date of this circular and which are or may be material:

• a) the sale and purchase agreement dated 31st January, 2002 made between Optiset Limited, Probest, Tomorrow, Swank and certain members of the Swank Group, the Hong Kong and Shanghai Banking Corporation Limited and 26 banks and financial creditors of Swank Group (together, the “Creditor Banks”), pursuant to which Probest agreed to acquire from Optiset Limited a total of 1,605,000,000 Shares at a consideration of HK$10,000,000 and the Creditor Banks agreed to transfer to Probest the bank debts with an aggregate principal of HK$250,000,000 owed by the Swank Group to the Creditor Banks at a sum of HK$58,000,000;

• b) the Share Sale Agreement;

• c) the Loan Settlement Agreement (with the draft Promissory Note attached); and

• d) the Underwriting Agreement.

7. LITIGATION

Save as disclosed below, no member of the Swank Group is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against any member of the Swank Group:

a) Hanmy (Holding) Limited and its related companies (collectively “Hanmy”)

The Swank Group commenced legal proceedings against Hanmy in February 1999 to recover the amounts owed by Hanmy to Swank Group of approximately HK$96 million in relation to certain loans and other advances by the Swank Group to Hanmy, which included issuance of writ and petitions for winding-up. The Swank Group has not yet obtained a judgement due to Hanmy’s defence. Legal proceedings are still in progress and the Swank Group is currently seeking legal opinion regarding the merits of continuing the case.

b) Litigation against Mr. Lam Yin Sang and Ms. Chan Hoi Wo

The Swank Group instigated legal proceedings in October 1999 against Mr. Lam Yin Sang and Ms. Chan Hoi Wo for the losses of HK$385,800,000 sustained as a result of various alleged breaches of fiduciary and other duties while acting formerly as directors of the Swank Group. Legal proceedings are still in progress and the Swank Group is currently seeking legal opinion regarding the merits of continuing the case.

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8. QUALIFICATION

The following is the qualification of the expert who has given opinion or advice which is contained in this circular:

Name Qualification Chateron Corporate Finance Limited Licensed corporation under the transitional arrangements to carry out Type 6 regulated activity for the purposes of the SFO

Chateron is not beneficially interested in the share capital of any member of the Swank Group nor has any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Swank Group and does not have any interest, either directly or indirectly, in any assets which have been, since the date to which the latest published audited financial statements of Swank were made up, acquired or disposed or by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Swank Group.

9. CONSENT

Chateron has given and has not withdrawn its written consent to the issue of this circular with inclusion of its letter, report or certificate or summary of its opinion (as the case may be) and references to its names in the form and context in which they appear herein.

10. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31st December, 2002, the date to which the latest published audited financial statements of Swank were made up.

11. GENERAL

• a) The secretary of Swank is Mr. Tam Wing Kin, FCCA .

• b) The English text of this circular shall prevail over the Chinese text.

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12. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours at the registered office of Swank up to and including 17th October, 2003;

• a) the memorandum and articles of association of Swank;

• b) the annual report of Swank Group for each of the three years ended 31st December, 2000, 2001 and 2002;

• c) the letter of advice from Chateron to the Independent Board Committee, the text of which is set out on pages 28 to 64 of this circular;

• d) the letter of consent from Chateron referred to in paragraph 9 of this appendix;

• e) the letter addressed to the Independent Shareholders from the independent board committee, the text of which is set out on page 27 of this circular;

• f) The Share Sale Agreement, the Loan Settlement Agreement and the Underwriting Agreement; and

• g) the contracts referred to in the section headed “Material Contracts” in paragraph 6 of this Appendix.

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NOTICE OF EGM

Swank International Manufacturing Company Limited 囱光行實業有限公司

(Incorporated in Hong Kong with limited liability)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Swank International Manufacturing Company Limited (the “Company”) will be held at Unit 3301, Level 33, Metroplaza Tower I, 223 Hing Fong Road, Kwai Fong, New Territories, Hong Kong at 10:00 a.m. on 17th October, 2003 for the purpose of considering and, if thought fit, passing the following resolutions, which will be proposed as ordinary resolutions of the Company:

ORDINARY RESOLUTION

1. “ THAT :

• (a) the Share Sale Agreement dated 3rd September, 2003 (the “ Share Sale Agreement ”), a copy of which, signed by the Chairman of the meeting for the purposes of identification, has been produced to the meeting marked “A”) made between Probest Holdings Inc. (“ Probest ”), Swank International Manufacturing Company Limited (“ Swank ”) and Tomorrow International Holdings Limited whereby Swank conditionally agreed to sell to Probest 30% of the entire issued share capital in Profitown Investment Corporation (“ Profitown ”) and 30% of the loan due by Profitown to Swank on completion of the Share Sale Agreement at an aggregate consideration of HK$3 million, and the transactions contemplated thereunder, be and are hereby approved; and

• (b) the directors of Swank (the “ Director ”) be and are hereby authorised for and on behalf of Swank to execute any documents and instruments as may be necessary or incidental to completion of the Share Sale Agreement and to do all such acts and things as they consider necessary or expedient or desirable in connection with or to give effect to the Share Sale Agreement.”

ORDINARY RESOLUTION

1. “ THAT :

2. (a) the Loan Settlement Agreement dated 3rd September, 2003 (the “ Loan Settlement Agreement ”, a copy of which, signed by the Chairman of the meeting for the purposes of identification, has been produced to the meeting marked “B”) made between Swank International Manufacturing Company Limited (“ Swank ”) and Probest Holdings Inc. (“ Probest ”) in respect of the settlement of the loan in the principal sum of HK$247 million due from Swank

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to Probest, including the issue of a HK$163 million promissory note (the “ Promissory Note ”) by Swank pursuant to the Loan Settlement Agreement, the form of which is annexed as Schedule 3 to the Loan Settlement Agreement, and the transactions contemplated thereunder, be and are hereby approved;

• (b) the proposed issue by Swank of the Promissory Note be and are hereby approved; and

• (c) the Directors be and are hereby authorised (i) to execute the Promissory Note pursuant to the Loan Settlement Agreement; (ii) to execute any documents and instruments and to do all such acts and things as they may consider necessary or expedient or desirable in order to give effect to the issue of the Promissory Note; and (iii) to execute any other documents and instruments as may be required or incidental to the Loan Settlement Agreement and to do all such acts and things as they consider necessary or expedient or desirable in connection with or to give effect to the Loan Settlement Agreement and the transactions contemplated thereunder.”

ORDINARY RESOLUTION

1. “ THAT conditional upon (i) the Listing Committee of The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) granting or agreeing to grant (subject to allotment) and not having revoked the listing of, and permission to deal in, the Offer Shares (as defined below) in their fully-paid forms to be allotted and issued to the shareholders of Swank International Manufacturing Company Limited (“ Swank ”) pursuant to the terms and conditions of the Open Offer (as defined below); (ii) the registration of all documents relating to the Open Offer required by law to be registered with the Registrar of Companies in Hong Kong; and (iii) the obligations of Probest Holdings Inc. (“ Probest ”) under the underwriting agreement (the “ Underwriting Agreement ” a copy of which has been produced to the meeting marked “C” and signed by the chairman of the meeting for the purpose of identification) dated 3rd September, 2003 becoming unconditional and the Underwriting Agreement not being terminated in accordance with the terms thereof on or before 4:00 p.m. on 4th November, 2003:

2. (a) the issue by way of an open offer (the “ Open Offer ”) of not less than 2,901,658,253 new ordinary shares (the “ Offer Shares ”) of HK$0.01 each in the capital of Swank to the shareholders of Swank whose names appear on the register of members of Swank on 17th October, 2003 (excluding those shareholders whose registered addresses as shown in the register of members of Swank on that date is outside of Hong Kong) on the basis of 13 Offer Shares for every one ordinary share of HK$0.01 each in the capital of Swank then held and otherwise pursuant to and in accordance with the terms and conditions set out in the circular dated 30th September, 2003 despatched to the shareholders of

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Swank (the “ Circular ” a copy of which has been produced to the meeting marked “D” and signed by the chairman of the meeting for the purpose of identification) be and it is hereby approved;

• (b) the directors (the “ Directors ”) of Swank be and they are hereby authorised to allot and issue the Offer Shares pursuant to or in connection with the Open Offer notwithstanding that the same may be offered, allotted or issued otherwise than pro rata to the existing shareholders of Swank and, in particular, the Directors be and they are hereby authorised to make such exclusions or other arrangements in relation to fractional entitlements and overseas shareholders as they deem necessary or expedient having regard to any restrictions or obligations under the laws of, or determining the extent of any such restrictions, obligations or requirements of any recognised regulatory body or any stock exchange in, any territory applicable to Swank;

• (c) the Underwriting Agreement and the transactions contemplated thereby be and the same are hereby approved, confirmed and ratified; and

• (d) the Directors be and they are hereby authorised to sign and execute such documents and do all such acts and things incidental to the Open Offer or as they consider necessary or expedient in connection with the implementation of or giving effect to the Open Offer, the Underwriting Agreement and the transactions contemplated thereunder, including the satisfaction or fulfillment of any conditions to which the Underwriting Agreement is subject (subject to such variations which the Directors may consider necessary or desirable and in the best interests of Swank).”

ORDINARY RESOLUTION

1. ‘‘ THAT:

2. (A) subject to paragraph (C) below, pursuant to the Rules (the ‘‘ Listing Rules ’’) Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, the exercise by the directors (the ‘‘ Directors ’’) of Swank International Manufacturing Company Limited (“ Swank ”) during the Relevant Period (as defined below) of all the powers of Swank to allot, issue and otherwise deal with unissued shares (the ‘‘ Shares ’’) of HK$0.01 each in the capital of Swank or securities convertible into Shares and to make or grant offers, agreements and options which might require the exercise of such powers be and the same is hereby generally and unconditionally approved;

3. (B) the approval in paragraph (A) above shall authorise the Directors during the Relevant Period to make or grant offers, agreements and options which might require the exercise of such powers after the end of the Relevant Period;

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• (C) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to options or otherwise) by the Directors pursuant to the approval in paragraph (A) above, otherwise than pursuant to (i) a Rights Issue (as defined below); or (ii) the exercise of any options granted under the share option scheme of Swank; or (iii) any scrip dividend or similar arrangements providing for the allotment and issue of Shares in lieu of the whole or part of a dividend on Shares in accordance with the articles of association of Swank in force from time to time; or (iv) the exercise of rights of subscription or conversion under the terms of any warrants of Swank or any securities which are convertible into Shares, shall not exceed the aggregate of:

• (aa) 20 per cent. of the aggregate nominal amount of the share capital of Swank in issue on the date of the passing of this resolution as enlarged (subject to the completion of the Open Offer (as defined below)) by the allotment and issue of the Offer Shares (as defined below); and

• (bb) (if the Directors are so authorised by a separate ordinary resolution of the shareholders of Swank) the nominal amount of any share capital of Swank repurchased by Swank subsequent to the passing of this resolution as enlarged (subject to the completion of the Open Offer) by the allotment and issue of the Offer Shares (up to a maximum equivalent to 10 per cent. of the aggregate nominal amount of the share capital of Swank in issue on the date of the passing of this resolution as enlarged by the allotment and issue of the Offer Shares),

and the authority pursuant to paragraph (A) of this resolution shall be limited accordingly;

• (D) the general mandate granted to the Directors to exercise the powers of Swank to allot, issue and otherwise deal with Shares as approved by the shareholders of Swank in the annual general meeting held on 30th May, 2003 to the extent not already exercised be and is hereby revoked (without prejudice to any valid exercise of such general mandate prior to the passing of this resolution); and

• (E) for the purposes of this resolution:

‘‘ Open Offer ’’ and “ Offer Shares ’’ have the meanings ascribed to them in the circular of Swank to its shareholders dated 30th September, 2003;

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NOTICE OF EGM

‘‘ Relevant Period ’’ means the period from the date of the passing of this resolution until whichever is the earliest of:

• (i) the conclusion of the next annual general meeting of Swank;

• (ii) the expiration of the period within which the next annual general meeting of Swank is required by any applicable law or the articles of association of Swank to be held; and

• (iii) the passing of an ordinary resolution by the shareholders of Swank in general meeting revoking or varying the authority given to the Directors by this resolution;

‘‘ Rights Issue ’’ means an offer of Shares, or offer or issue of warrants, options or other securities giving rights to subscribe for Shares open for a period fixed by the Directors to holders of Shares on the register on a fixed record date in proportion to their then holdings of Shares (subject to such exclusion 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 applicable to Swank).’’

ORDINARY RESOLUTION

5. ‘‘ THAT:

• (A) subject to paragraph (B) below, the exercise by the directors (the ‘‘ Directors ’’) of Swank International Manufacturing Company Limited (“ Swank ”) during the Relevant Period (as defined below) of all powers of Swank to purchase shares (the ‘‘ Shares ’’) of HK$0.01 each in the capital of Swank on The Stock Exchange of Hong Kong Limited (the ‘‘ Stock Exchange ’’) or any other stock exchange on which the Shares may be listed and recognised by the Securities and Futures Commission of Hong Kong (the ‘‘ SFC ’’) and the Stock Exchange for such purpose, and otherwise in accordance with the rules and regulations of the SFC, the Stock Exchange, and all other applicable laws in this regard, be and the same is hereby generally and unconditionally approved;

• (B) the aggregate nominal amount of Shares which may be purchased by Swank pursuant to the approval in paragraph (A) during the Relevant Period shall not exceed 10 per cent. of the aggregate nominal amount of the issued share capital of Swank as at the date of the passing of this resolution as enlarged (subject to the completion of the Open Offer (as defined below)) by the allotment and issue

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• of the Offer Shares (as defined below) and the authority pursuant to paragraph (A) of this resolution shall be limited accordingly;

• (C) the general mandate granted to the Directors to exercise the powers of Swank to purchase the securities of Swank as approved by the shareholders of Swank in the annual general meeting held on 30th May, 2003 be and it is hereby revoked (without prejudice to any valid exercise of such general mandate prior to the passing of this resolution);

• (D) for the purposes of this resolution:

‘‘ Open Offer ’’ and ‘‘ Offer Shares ’’ have the meanings ascribed to them in the circular of Swank to its shareholders dated 30th September, 2003;

‘‘ Relevant Period ’’ means the period from the date of the passing of this resolution until whichever is the earliest of:

• (i) the conclusion of the next annual general meeting of Swank;

• (ii) the expiration of the period within which the next annual general meeting of Swank is required by the applicable law or the articles of association of Swank to be held; and

• (iii) the passing of an ordinary resolution by the shareholders of Swank in general meeting revoking or varying the authority given to the Directors by this resolution.’’

ORDINARY RESOLUTION

1. ‘‘ THAT , the directors of Swank International Manufacturing Company Limited (“ Swank ”) be and they are hereby authorised to exercise the authority referred to in paragraph (A) of resolution numbered 4 above in respect of the share capital of Swank referred to in sub-paragraph (bb) of paragraph (C) of such resolution.’’

By Order of the Board

Swank International Manufacturing Company Limited Yau Tak Wah, Paul

Executive Director

Hong Kong, 30th September 2003

Registered Office:

27th Floor Henley Building 5 Queen’s Road Central

Hong Kong

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Notes:

1. A form of proxy for use at the extraordinary general meeting is enclosed herewith.

2. Any member entitled to attend and vote at the meeting convened by the above notice is entitled to appoint one or more proxies to attend and, on a poll, vote instead of him/her. A proxy need not be a member of Swank.

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