Design Capital Limited - Proxy Solicitation & Information Statement 2005

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Swank International Manufacturing Company Limited, you should at once hand this circular to the purchaser or the transferee or to the bank, licensed securities dealers or other agent through whom the sale was effected for transmission to the purchaser or the transferee.

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

Swank International Manufacturing Company Limited

(incorporated in Hong Kong with limited liability) (Stock code: 663)

SPECIAL DEALS AND CONNECTED TRANSACTIONS CONTINUING CONNECTED TRANSACTION

Independent Financial Adviser to the Independent Board Committee and Independent Shareholders

Barits Securities (Hong Kong) Limited

A letter from the board of directors of Swank International Manufacturing Company Limited is set out on pages 7 to 20 of this circular. A letter from the independent board committee of Swank International Manufacturing Company Limited is set out on page 21 of this circular. A letter from Barits Securities (Hong Kong) Limited containing its advice to the independent board committee and the independent shareholders of Swank International Manufacturing Company Limited is set out on pages 22 to 39.

A notice convening the Extraordinary General Meeting of Swank International Manufacturing Company Limited to be held at 12:30 p.m. on Monday, 30 May 2005 at Unit 903-906, 9th Floor, Tower I, Harbour Centre, 1 Hok Cheung Street, Hung Hom, Kowloon, Hong Kong, is set out on pages 69 to 72 of this circular. Whether or not you are able to attend the Extraordinary General Meeting, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible to the Company’s registered office at 27/F, Henley Building, 5 Queen’s Road Central, Hong Kong in any event not less than 48 hours before the time appointed for holding the Extraordinary General Meeting. Completion and return of the form of proxy will not preclude you from attending and voting at the Extraordinary General Meeting or any adjournment thereof should you so wish.

10 May 2005

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
Letter from Barits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Appendix I – Accountants’ Report on the Profitown Group. . . . . . . . . . . . . . . . . . . .	40
Appendix II – General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	62
Notice of the Extraordinary General Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	69

– i –

DEFINITIONS

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

“acting in concert”

the meaning ascribed to it in the Takeovers Code

“Agency Agreement”

the agency agreement to be entered into between the Nominee and the Trading Company upon Completion pursuant to which the Trading Company will be engaged by the Nominee to provide agency services for the sale of the Products to the Territory

“associate”

the meaning ascribed to it in the Listing Rules

“Barits”
Barits Securities (Hong Kong) Limited, a deemed licensed corporation under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) to carry out types 1 (dealing in securities) and 6 (advising on corporate finance) regulated activities, and the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Connected Transactions and the Continuing Connected Transaction
“Board”

the board of Directors

“Business Day”
a day (other than Saturday or Sunday) on which commercial banks are generally open in Hong Kong for normal business
“Company”
Swank International Manufacturing Company Limited, a company incorporated in Hong Kong whose securities are listed on the Main Board of the Stock Exchange
“Completion”
completion of the Sale and Purchase Agreement, upon the transfer of the Sale Shares to the Offeror
“Completion Date”
date of Completion
“Connected Transactions”
the transactions contemplated under the Loan Restructuring Agreement (including the issue of the Promissory Note and the Guarantee) and the Shareholders Agreement

– 1 –

DEFINITIONS

“Continuing Connected Transaction”

the transaction contemplated under the Agency Agreement

“DBS Asia”
DBS Asia Capital Limited, a licensed corporation under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) for type 1 (dealing in securities), type 4 (advising on securities) and type 6 (advising on corporate finance) of the regulated activities and the financial adviser to the Offeror
“Debt”
the loan in the principal amount of HK$163,000,000 due and owing by the Company to Probest under the Existing Promissory Note
“Director(s)” director(s) of the Company
“Effective Date”
the date on which all the conditions to the Loan Restructuring Agreement shall have been fulfilled
“EGM”
the extraordinary general meeting of the Company to be convened for approving the Shareholders Agreement, the Loan Restructuring Agreement (including the Promissory Note and the Guarantee), the Agency Agreement and the transactions contemplated thereunder
“Executive”
the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director
“Existing Promissory Note”
the promissory note dated 3 November 2003 issued by the Company in favour of Probest in the principal sum of HK$163,000,000 which is repayable by instalments, that is, as to HK$25,500,000 repayable on or before 1 June 2004, as to HK$62,500,000 repayable on or before 1 June 2005 and as to HK$75,000,000 repayable on or before 1 June 2006 (the instalment due on 1 June 2004 being in default)
“First Sale Shares”
1,437,396,440 Shares, representing approximately 46% of the issued share capital of the Company as at the date of the Joint Announcement and as at the Latest Practicable Date
“Fortune Dynamic”
Fortune Dynamic Group Corp., a wholly-owned subsidiary of TIHL

– 2 –

DEFINITIONS

“Group”
“Guarantee”
“HK$”
“Hong Kong”
“Independent Board Committee”
“Independent Shareholders”
“Joint Announcement”
“Kingsway Group”
“Kingsway Lion”
“Latest Practicable Date”
“Listing Rules”

the Company and its subsidiaries

the guarantee to be executed by the Company in favour of Probest pursuant to the Loan Restructuring Agreement in respect of certain liabilities of Profitown under the Promissory Note

Hong Kong dollar, the lawful currency of Hong Kong

the Hong Kong Special Administrative Region of the PRC
the independent board committee appointed by the Company to advise the Independent Shareholders on the transactions contemplated under the Connected Transactions and the Continuing Connected Transaction comprising Mr. Hahn Ka Fai, Mark and Ms. Shum Wai Ting, Rebecca, both independent non-executive Directors
shareholders of the Company other than Probest, Rich Global, Kingsway Lion, their respective associates and parties acting in concert with any of them
the joint announcement dated 18 April 2005 of the Company, TIHL and the Offeror

SW Kingsway and its subsidiaries

Kingsway Lion Spur Technology Limited, a company incorporated in the British Virgin Islands and a whollyowned subsidiary of SW Kingsway
6 May 2005, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained herein
the Rules Governing the Listing of Securities on the Stock Exchange

– 3 –

DEFINITIONS

“Loan Restructuring Agreement”
“Long Stop Date”
“Mr. Wang”
“Nominee”
“Offer”
“Offeror”
“Offer Document”

the conditional loan restructuring agreement dated 20 January 2005 as varied and supplemented by the supplemental loan restructuring agreement dated 13 April 2005 entered into between Probest, the Company and Profitown in relation to, inter alia, the restructuring of the Debt

the day falling on the numerically corresponding day in the sixth calendar month after the date of the Sale and Purchase Agreement, where such day is not a Business Day, it shall fall on the next succeeding Business Day or if there is no numerically corresponding day in the sixth calendar month after the date thereof, the first following Business Day
Mr. Wang An Kang (王安康 ), being the ultimate beneficial owner of the entire issued share capital of the Offeror
a company wholly owned by Mr. Wang to be nominated by the Offeror to enter into the Agency Agreement with the Trading Company
the possible mandatory unconditional cash offer to be made by DBS Asia, on behalf of the Offeror, on the terms and subject to the conditions referred to in the Joint Announcement and to be set out in the Offer Document to acquire all the issued Shares (other than those already owned or agreed to be acquired by the Offeror and parties acting in concert with it) following and subject to Completion
China Time Investment Holdings Limited, a company incorporated in the British Virgin Islands with limited liability

the document to be issued by or on behalf of the Offeror to the shareholders of the Company in accordance with the Takeovers Code containing, among other things, details of the Offer and the related acceptance and transfer forms

– 4 –

DEFINITIONS

“PRC”
the People’s Republic of China
“Probest”
Probest Holdings Inc., a company incorporated in the British Virgin Islands and a wholly-owned subsidiary of TIHL
“Products” chemical products including red phosphorus, yellow phosphorus, phosphorus acid and related products
“Profitown” Prof itown Investment Corporation, a company incorporated in the British Virgin Islands and held as to 70% by the Company and as to 30% by Probest
“Profitown/Swank Loan” the shareholder’s loans and any other monies (including interest) due and owing by Profitown to the Company on completion of the Sale and Purchase Agreement, which amounted to the principal sum of approximately HK$112,480,000 as at the Latest Practicable Date
“Profitown Group” Profitown and its subsidiaries
“Promissory Note”
the promissory note to be issued by Profitown in favour of Probest pursuant to the Loan Restructuring Agreement
“Remaining Debt” the balance of the Debt in such principal sum as is equivalent to the Profitown/Swank Loan
“Rich Global”
Rich Global Investments Limited, a company incorporated in the British Virgin Islands and a wholly-owned subsidiary of SW Kingsway
“Sale and Purchase Agreement”
the conditional agreement for the sale and purchase of the Sale Shares dated 20 January 2005 entered into between the Offeror, Probest, Rich Global, Kingsway Lion, TIHL and SW Kingsway
“Sale Shares”
the First Sale Shares, the Second Sale Shares and the Third Sale Shares
“Second Sale Shares”
156,283,205 Shares, representing approximately 5% of the issued share capital of the Company as at the date of the Joint Announcement and as at the Latest Practicable Date

– 5 –

DEFINITIONS

“SFC”
the Securities and Futures Commission of Hong Kong
“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“Shareholders Agreement” the shareholders agreement to be entered into between the Company, Probest, TIHL and Profitown in respect of Profitown on Completion
“Share(s)” share(s) of HK$0.01 each in the issued share capital of the Company
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“Supplemental Agreement”
the supplemental agreement in relation to the Sale and Purchase Agreement dated 13 April 2005 entered into between the Offeror, Probest, Rich Global, Kingsway Lion, TIHL and SW Kingsway
“SW Kingsway” SW Kingsway Capital Holdings Limited, a company incorporated in Bermuda and whose securities are listed on the Main Board of the Stock Exchange
“Takeovers Code” the Hong Kong Code on Takeovers and Mergers
“Territory”
Italy, Japan and Korea
“Third Sale Shares”
281,238,000 Shares, representing approximately 9% of the issued share capital of the Company as at the date of the Joint Announcement and as at the Latest Practicable Date
“TIHL”
Tomorrow International Holdings Limited, a company incorporated in Bermuda and whose securities are listed on the Main Board of the Stock Exchange
“TIHL Group”

TIHL and its subsidiaries other than the Group

“Trading Company”
a company to be established as a wholly-owned subsidiary of the Company
“Vendors”

collectively, Probest, Kingsway Lion and Rich Global

“Warrantors”

collectively, TIHL and SW Kingsway

– 6 –

LETTER FROM THE BOARD

Swank International Manufacturing Company Limited

(incorporated in Hong Kong with limited liability)

(Stock code: 663)

Executive Directors

Yau Tak Wah, Paul Louie Mei Po Wong Shin Ling, Irene Tam Wing Kin Cheung Wah Hing

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

Head Office and Principal

Independent Non-executive Directors Hahn Ka Fai, Mark Shum Wai Ting, Rebecca Wu Wang Li

To the shareholders of the Company

Place of Business Unit 3301, Level 33 Metroplaza Tower I 223 Hing Fong Road Kwai Fong, N.T. Hong Kong 10 May 2005

Dear Sir or Madam,

SPECIAL DEALS AND CONNECTED TRANSACTIONS CONTINUING CONNECTED TRANSACTION

INTRODUCTION

The Sale and Purchase Agreement

The Company announced in the Joint Announcement that, on 20 January 2005, the Offeror entered into the Sale and Purchase Agreement (as amended by the Supplemental Agreement) with Probest, Rich Global, Kingsway Lion and SW Kingsway, pursuant to which the Offeror conditionally agreed to acquire from Probest, Rich Global and Kingsway Lion 1,437,396,440, 156,283,205 and 281,238,000 Shares respectively, representing approximately 46%, 5% and 9% of the issued share capital of the Company as at the date of the Joint Announcement and as at the Latest Practicable Date for HK$43,121,893.20, HK$4,688,496.15 and HK$8,437,140 respectively (i.e. equivalent to HK$0.03 per Share). The purchase price for the relevant Sale Shares was determined by each of Probest, Rich Global and Kingsway Lion and the Offeror after arm’s length negotiations. Completion is conditional upon the fulfillment or waiver of certain conditions.

– 7 –

LETTER FROM THE BOARD

Upon Completion, the Offeror will be obliged under Rule 26 of the Takeovers Code to make a mandatory cash offer to acquire all the issued Shares (other than those already owned by the Offeror and parties acting in concert with it). Following and subject to Completion, DBS Asia will, on behalf of the Offeror, make a mandatory cash offer on the terms and subject to the conditions referred to in the Joint Announcement and to be set out in the Offer Document to acquire all the issued Shares (other than those already owned by the Offeror and parties acting in concert with it) at HK$0.03 per Share.

Loan Restructuring Agreement

The Company announced in the Joint Announcement that, on 20 January 2005, the Company, Probest and Profitown entered into the Loan Restructuring Agreement. Pursuant to the terms of the Loan Restructuring Agreement, subject to Completion taking place, Profitown will issue the Promissory Note in favour of Probest, in consideration of Probest waiving portion of the outstanding loan due and owing by the Company to Probest under the Existing Promissory Note and releasing the Company from all future obligations and liabilities under the Existing Promissory Note. Pursuant to the terms of the Loan Restructuring Agreement, the Company will also execute the Guarantee to guarantee Profitown’s obligations in respect of interest payment under the Promissory Note.

Shareholders Agreement

On Completion, the Company, Probest, TIHL and Profitown will enter into the Shareholders Agreement, the principal terms of which will include unanimous board approval on material issues regarding Profitown, a put option exercisable by the Company in respect of its shares in Profitown and an indemnity by Probest in favour of Profitown in the event of certain deficit in the net tangible asset value of Profitown as set out in the sub-section headed “Shareholders Agreement” below.

The Shareholders Agreement and the Loan Restructuring Agreement constitute special deals under the Takeovers Code. As Probest is a substantial shareholder of each of the Company and Profitown and thus a connected person of the Company under the Listing Rules, the transactions contemplated under the Shareholders Agreement and the Loan Restructuring Agreement (including the issue of the Promissory Note and the Guarantee) constitute connected transactions of the Company under the Listing Rules.

– 8 –

LETTER FROM THE BOARD

Agency Agreement

The Agency Agreement will be entered into between the Trading Company and the Nominee upon Completion and will commence from the date of Completion and expire on 31 December 2007. Pursuant to the terms of the Agency Agreement, the Trading Company will provide agency services to the Nominee in relation to the sale of the Products to the Territory at an agency fee of 3% of the invoiced amount of the Products sold by the Trading Company on behalf of the Nominee.

As the Trading Company will be wholly-owned by the Company and upon Completion, the Nominee, being a company wholly owned by Mr. Wang who is expected to be appointed a director of the Company, will become a connected person of the Company under the Listing Rules upon Completion. Transactions between the Nominee and the Group will constitute continuing connected transactions for the Company under the Listing Rules.

The purpose of this circular is to provide you with (i) further information relating to the Connected Transactions and the Continuing Connected Transaction and its cap amounts; (ii) the recommendation of the Independent Board Committee; a letter of advice from Barits to the Independent Board Committee and Independent Shareholders in respect of the transactions and (iii) a notice of the EGM at which ordinary resolutions will be proposed to seek the Independent Shareholder’s approval for the transactions.

CONNECTED TRANSACTIONS

Loan Restructuring Agreement

On 20 January 2005, Probest, the Company and Profitown entered into the Loan Restructuring Agreement. The Loan Restructuring Agreement constitutes a special deal under Rule 25 of the Takeovers Code.

Principal terms of the Loan Restructuring Agreement

Pursuant to the Loan Restructuring Agreement:

Probest conditionally agreed to waive an outstanding principal of the Debt over and above the Remaining Debt, the interest and the default interest on the Debt for the period from 5 November 2003 up to and inclusive of the date of the Sale and Purchase Agreement in the amount of approximately HK$12,669,995 and any further interest which may accrue on the Debt up to and inclusive of the Effective Date. Based on the amount of the Debt and the Profitown/Swank Loan of approximately HK$112,480,000 as at the Latest Practicable Date, the principal amount, interests and default interests of the Debt to be waived amounts to approximately HK$66,490,000 as at the Latest Practicable Date;

– 9 –

LETTER FROM THE BOARD

the Existing Promissory Note will be cancelled as from the Effective Date;
Profitown will issue and deliver the Promissory Note to Probest, in consideration of which the Company undertakes to waive a sum equivalent to the Remaining Debt (amounting to approximately HK$112,480,000 as at the Latest Practicable Date) from the Profitown/Swank Loan on the Effective Date. Accordingly, after such waiver on the Effective Date, there will not be any Profitown/Swank Loan outstanding;
the Company will execute the Guarantee in favour of Probest.

Below is a chart showing the relationship between the Debt, the Remaining Debt and the Profitown/Swank Loan:

==> picture [288 x 258] intentionally omitted <==

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

TIHL
100%
Probest
the Debt under
the Existing 51% before
Promissory Note
Completion and
5% upon
Completion
30% the Remaining Debt
under the Promissory Note
The Company
70%
the Profitown/
Swank Loan
Profitown
----- End of picture text -----

Principal terms of the Promissory Note

Principal amount:

an amount equivalent to the Remaining Debt, which, based on the outstanding amount of the Profitown/Swank Loan as at the Latest Practicable Date, would be approximately HK$112,480,000

Maturity Date:

bullet payment on a date falling 30 months of the date of issue of the Promissory Note

– 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, which is based on prevailing market rate and is the same as the interest rate under the Existing Promissory Note, payable quarterly in arrears

Security:

the Promissory Note will be unsecured and not guaranteed by the Offeror or any of its concert parties or any other person except for the Guarantee to be given by the Company

Other terms:

all amounts payable under the Promissory Note will become immediately due and payable if at any time after issue of the Promissory Note, inter alia:

(a) the aggregate shareholding of the Offeror in the Company falls below 51%;
(b) there is any change to the majority of the board of directors of the Offeror, which comprises Mr. Wang, Mr. Zhao Jun（趙俊）and Mr. Li Wei （李偉）, as disclosed in the Sale and Purchase Agreement;
(c) if Mr. Wang ceases to be the legal and beneficial owner of at least 75% of and in the Offeror; or
(d) the Company ceases to be listed on the Stock Exchange.

As is the same for the Debt under the Existing Promissory Note as stated in the circular of the Company dated 30 September 2003, the directors of TIHL and the Company expect the Promissory Note will be settled by the internal resources of Profitown generated from the operating activities of its subsidiaries and associates. If such internal resources of Profitown are not sufficient to repay the interest and the principal due under the Promissory Note, the board of directors of Profitown will consider other fund raising methods.

The entering into of the Loan Restructuring Agreement will enable the Group to reduce its financial burden relating to the ongoing obligation to repay the Debt as a result of the waiver of part of the principal amount, interests and default interests of the Debt amounting to HK$66,490,000 as at the Latest Practicable Date.

– 11 –

LETTER FROM THE BOARD

Conditions of the Loan Restructuring Agreement

The Loan Restructuring Agreement will take effect on the Effective Date when all of the following conditions have been satisfied:

(a) the passing at the EGM by Independent Shareholders (if required by the Stock Exchange and the Takeovers Code, other than Probest, its associates, and/or parties acting in concert with it) of ordinary resolutions approving the Loan Restructuring Agreement and the transactions contemplated thereunder, including the issue of the Promissory Note and the Guarantee;
(b) if required, the approval by the shareholders of TIHL of the Loan Restructuring Agreement and the transactions contemplated thereunder by way of an ordinary resolution to be passed at a special general meeting of TIHL;
(c) all other consents and acts required of the Company in connection with the Loan Restructuring Agreement and the transactions contemplated thereunder 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) all other consents and acts, if any, required of TIHL in connection with the Loan Restructuring Agreement and the transactions contemplated thereunder 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;
(e) the Sale and Purchase Agreement becoming unconditional and having been completed in accordance with the terms thereof, save for any condition therein requiring the Loan Restructuring Agreement to become unconditional; and
(f) Probest having received the Promissory Note duly executed by Profitown under its common seal and the Guarantee duly executed by the Company under its common seal.

If any of the above conditions are not wholly fulfilled on or before 31 July 2005, unless an extension of time has been granted by Probest, the Loan Restructuring Agreement will cease to have any further force and effect except for antecedent breach.

– 12 –

LETTER FROM THE BOARD

Guarantee

Under the Guarantee, the Company will undertake to Probest that if and whenever Profitown defaults for any reason in payment of the principal sum due under the Promissory Note, the Company will upon demand by Probest unconditionally pay and satisfy all interest which Profitown is liable to pay under the Promissory Note on and after such default. The obligations of the Company under the Guarantee are unsecured and not guaranteed by the Offeror or any of its concert parties or any other person. The Guarantee will cease to be effective if the put option referred to in the section headed “Shareholders Agreement” below is exercised and the transaction contemplated under the Put Option is completed.

Shareholders Agreement

The Shareholders Agreement constitutes a special deal under Rule 25 of the Takeovers Code. Both before and immediately after Completion, Profitown will be held as to 30% by Probest and as to 70% by the Company and the shareholding chart is set out below. On Completion, the Company, Probest, TIHL and Profitown will enter into the Shareholders Agreement to regulate the management of the Profitown Group.

Pre-Completion

==> picture [341 x 232] intentionally omitted <==

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

TIHL SW Kingsway
(Warrantor) (Warrantor)
100% 100%
100%
Probest Rich Global Kingsway Lion Public Mr. Cheung Wah
Hing
51% 10% 9% 29.99% 0.01%
30%
The Company
70%
The Profitown Group
Design, manufacture and
marketing of frames
----- End of picture text -----*

TIHL holds 100% of Fortune Dynamic, which in turn holds 100% of Probest.
** Mr. Cheung Wah Hing is a director of the Company.

– 13 –

LETTER FROM THE BOARD

Post-Completion

==> picture [341 x 231] intentionally omitted <==

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

TIHL SW Kingsway
100% 100%
Probest Rich Global Offeror Public Mr. Cheung WahHing
5% 5% 60% 29.99% 0.01%
30%
The Company
70%
The Profitown Group
Design, manufacture and
marketing of frames
----- End of picture text -----*

TIHL holds 100% of Fortune Dynamic, which in turn holds 100% of Probest.
** Mr. Cheung Wah Hing is a director of the Company.

The principal terms of the Shareholders Agreement are as follows:

(1) Within the period of 30 months from Completion, unanimous approval by the board of directors, which directors shall be nominated by Probest and the Company respectively (the Company being entitled to appoint four directors of Profitown and Probest being entitled to appoint two directors of Profitown, with a maximum of six directors holding office at any time, and the chairman of the board shall be a director appointed by Probest but shall not have a casting vote in the event of an equality of votes), of Profitown is required on material issues regarding Profitown, an investment holding company which holds the major operating subsidiaries of the Company, such as:
(a) approval of accounts;
(b) reduction or alteration of share capital;
(c) issue of shares or debentures;
(d) provision of any guarantee or indemnity other than for the benefit of the Profitown Group;

– 14 –

LETTER FROM THE BOARD

(2) the Company will have the right to require Probest or an independent third party procured by Probest to purchase (the “Put Option”) all (but not part only) of its shares, being approximately 70% of all issued shares of Profitown, in Profitown exercisable at any time before the expiry of 30 months from the Completion Date at a price equal to the net tangible asset value of Profitown as at the date of exercise of the Put Option attributable to such shares and such purchaser will assume all the liabilities due from the Company to any member of the Profitown Group incurred prior to the date of the Shareholders Agreement at nil consideration; and
(3) if the net tangible asset value of Profitown as determined on the same basis and accounting policies and principles adopted by Profitown in its latest audited accounts shall fall below zero during the 30-month period from the Completion Date, Probest will indemnify Profitown on demand for the deficit.

The Put Option and indemnity referred to in paragraphs (2) and (3) above will cease and Probest shall have no further obligation in respect thereof if:

(a) the aggregate shareholding of the Offeror in the Company falls below 51%;
(b) there is any change to the majority of the board of directors of the Offeror since the date of and as disclosed in the Sale and Purchase Agreement; or
(c) Mr. Wang ceases to be the legal and beneficial owner of at least 75% of and in the Offeror.

Subject as aforesaid, there is no pre-condition under the Shareholders Agreement for the exercise of the Put Option by the Company. The Put Option and the exercise price thereof were negotiated between Probest and the Company on an arms-length basis as part of the terms of the Shareholders Agreement. The Directors have not, as at the Latest Practicable Date, decided under what circumstances the Put Option will be exercised. At present, the Company has no intention to exercise the Put Option.

The main purpose of the Shareholders Agreement is to ensure that material issues would be approved only after compromise has been obtained from all directors of Profitown to help rationalise the operation of the Profitown Group, to provide the Company an opportunity to realise its investment in the Profitown Group and to safeguard the Company’s interest in the Profitown Group from future deterioration after Completion.

Information on Profitown Group

The Profitown Group is principally engaged in the design, manufacture and marketing of frames, sunglasses and lenses. Profitown is owned as to 70% by the Company and 30% by Probest and is one of the principal subsidiaries of the Company. An accountants’ report on the financial information of the Profitown Group for the two financial years ended 31 December 2004 is set out on pages 40 to 61 of this circular.

– 15 –

LETTER FROM THE BOARD

Listing Rules and Takeovers Code implications

As Probest is a substantial shareholder of each of the Company and Profitown, TIHL and Probest are connected persons of the Company under the Listing Rules. The entering into each of the Shareholders Agreement and the Loan Restructuring Agreement (including the Promissory Note and the Guarantee) constitutes connected transactions for the Company under Chapter 14A of the Listing Rules. The Shareholders Agreement and the Loan Restructuring Agreement constitute special deals under Rule 25 of the Takeovers Code. Each of the Shareholders Agreement and the Loan Restructuring Agreement (including the Promissory Note and the Guarantee) is subject to the approval of the Independent Shareholders at the EGM by way of poll. TIHL, SW Kingsway and their respective associates and concert parties will abstain from voting on such resolutions at the EGM. Application has been made to the SFC for the grant of the consent and, if granted, shall be granted subject to approval having been obtained from the Independent Shareholders at the EGM.

CONTINUING CONNECTED TRANSACTION

Agency Agreement

Upon Completion, the Trading Company and the Nominee will enter into the Agency Agreement pursuant to which the Trading Company will provide agency services to the Nominee in relation to the sale of the Products to the Territory. The Products are expected to be marketed in Italy, Japan and Korea and will be sourced from the Nominee. It is expected that the business of the Trading Company will be subject to risks such as market competition and price fluctuation. With the establishment of the Trading Company engaging in the new agency business upon Completion, the Directors believe that the Group is able to leverage on Mr. Wang’s considerable experience in international trade in relation to the Products and such new agency business to be conducted by the Trading Company will supplement the Group’s existing businesses.

Pursuant to the terms of the Agency Agreement, the fees payable by the Nominee to the Trading Company will be 3% of the invoiced amount of the Products sold by the Trading Company on behalf of the Nominee. The Agency Agreement will commence from the date of Completion and expire on 31 December 2007.

As the Trading Company will be wholly owned by the Company and, upon Completion, the Nominee, being a company wholly owned by Mr. Wang who is expected to be appointed a director of the Company, will become a connected person of the Company under the Listing Rules upon Completion. Transactions contemplated under the Agency Agreement between the Nominee and the Group therefore constitute continuing connected transactions for the Company under the Listing Rules and will be subject to reporting, announcement and independent shareholders’ approval requirements under the Listing Rules.

– 16 –

LETTER FROM THE BOARD

The Directors (including the independent non-executive Directors) consider that the Continuing Connected Transaction will be entered into in the usual and ordinary course of businesses of the Group, as the Group seeks to leverage Mr. Wang’s considerable experience in international trade in relation to the Products through the new agency business. They also consider the terms of the Continuing Connected Transaction have been negotiated and will be conducted on an arm’s length basis between the Group and the Nominee and the Continuing Connected Transaction is on normal commercial terms.

The Directors (including the independent non-executive Directors) are of the view that so far as the Independent Shareholders are concerned, the Continuing Connected Transaction and the terms of the Agency Agreement are fair and reasonable and in the best interests of the Group and the shareholders of the Company as a whole.

The Directors propose that the annual cap amounts of the agency fee to be received by the Trading Company under the Continuing Connected Transaction will be HK$10 million for the year ending 31 December 2005, HK$15 million for the year ending 31 December 2006 and HK$20 million for the year ending 31 December 2007.

The Trading Company is to be headquartered in Hong Kong and will likely recruit several experienced staff. Mr. Li Wei, one of the directors of the Offeror with extensive international business experience, is expected to spend considerable amount of time in Hong Kong as one of the directors of the Trading Company.

Basis for the cap amounts

The annual cap amounts have been determined with reference to the sales target, based on Mr. Wang’s considerable international trading experience and the Offeror’s goal of doubling the turnover of the new agency business in two years to further supplement the Company’s existing businesses, to be generated by the Trading Company.

Reasons for the Continuing Connected Transaction

The purpose of the transaction is to enable the Group to leverage on Mr. Wang’s considerable experience in international trade in relation to the Products and such new agency business to be conducted by the Trading Company will supplement the Group’s existing businesses.

Information on Trading Company

The Trading Company will engage in the provision of agency services to promote the sale of the Products to customers in the Territory and to other territories as the Nominee and the Trading Company may agree from time to time as and when appropriate.

– 17 –

LETTER FROM THE BOARD

The Nominee does not currently use any agency services. The Directors are of the opinion that the agency service to be provided by the Trading Company will help to improve the Nominee’s sale of the Products from China to customers in the Territory. There are also advantages for conducting such a business in Hong Kong due to the well established business and legal environment and availability of suitable sales and marketing employees.

Information on the Group

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

FINANCIAL AND TRADING PROSPECTS

In 2004, the results of the Group were disappointing in revenue perspective. The turnover was HK$174.9 million, representing a decrease of 9% over last year. Despite the decrease in sales orders and turnover, the net loss decreased from HK$7.1 million in 2003 to HK$5.8 million this year due to the cost saving program. The decrease in gross profit margin was mainly due to lower capacity utilization which was partly offset by the savings in selling and administrative expenses.

Despite the loss from operation, the Group continued to deliver a positive cash flow and the Group’s cash balance remained maintained at a healthy level. The Group’s shared profit before tax from the Group’s 50 percent-owned associate grew 64% to HK$2.8 million due to the increase in the demand for lenses.

In the coming year, the Group will benefit from the improved production flow to increase the operational efficiency and thus capture the growing optical market. To counteract the increase in costs of oil, raw materials and components, the Group will continue to increase the operational efficiency and implement other cost savings programs in the manufacturing plants and sampling department to reduce the operational cost. The Group is still optimistic about the future and will continue to be a good player in the optical industry.

– 18 –

LETTER FROM THE BOARD

POSSIBLE UNCONDITIONAL CASH OFFER

Following and subject to Completion, the Offeror and parties acting in concert with it will own approximately 60% of the entire issued share capital of the Company (assuming that the Company’s issued share capital remains unchanged from that as at the Latest Practicable Date). As a result, the Offeror will be obliged under Rule 26 of the Takeovers Code to make mandatory unconditional cash offer for all the issued Shares (other than those already owned by the Offeror and parties acting in concert with it). The Company had no outstanding convertible securities, warrants or options as at the Latest Practicable Date.

The terms of the Offer will be set out in the Offer Document.

PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

Pursuant to the articles of association of the Company, at any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) demanded:–

(i) by the Chairman of the meeting; or
(ii) by at least three members present in person or by proxy for the time being entitled to vote at the meeting; or
(iii) by any member or members present in person or by proxy and representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting; or
(iv) by a member or members present in person or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.

GENERAL

Mr. Yau Tak Wah, Paul, Ms. Louie Mei Po, Ms. Wong Shin Ling, Irene and Mr. Tam Wing Kin are executive directors of both TIHL and the Company. Mr. Cheung Wah Hing is an executive Director and had interest in 358,400 Shares. Therefore, none of them are considered to be independent so far as the Connected Transactions and the Continuing Connected Transaction are concerned and therefore they shall not participate in formulating a recommendation to the Independent Shareholders to avoid any conflict of interest that may arise. Mr. Wu Wang Li is the independent non-executive director of both TIHL and the Company and is therefore considered to be not sufficiently independent to advise the Independent Shareholders on the terms of the Connected Transactions and the Continuing Connected Transaction. Accordingly, the Independent Board Committee, comprising Mr. Hahn Ka Fai, Mark (who is an independent non-executive Director) and Ms. Shum Wai Ting, Rebecca (who is an independent non-executive Director), has been appointed to advise the Independent Shareholders in respect of the Loan Restructuring Agreement, the Shareholders Agreement and the Agency Agreement.

– 19 –

LETTER FROM THE BOARD

EGM

A notice convening the EGM is set out on pages 69 to 72 of this circular. Ordinary resolutions will be proposed at the EGM for the Independent Shareholders to approve the Connected Transactions (including the grant of consent by the Executive of the same as special deals under the Takeovers Code) and the Continuing Connected Transaction and the cap amounts. Votes of the Independent Shareholders will be taken by way of a poll in accordance with the Listing Rules, and the poll results of the EGM will be published after the EGM.

A form of proxy is enclosed for use at the EGM. If you are unable to attend and vote at the EGM in person, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon and return it to the Company’s registered office at 27/F, Henley Building, 5 Queen’s Road Central, Hong Kong as soon as possible, but in any event not less than 48 hours before the time appointed for holding such meeting or any adjourned meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.

RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee set out on page 21 of this circular which contains the recommendation of the Independent Board Committee to the Independent Shareholders concerning the Connected Transactions, Continuing Connected Transaction and the respective caps; (ii) the letter from Barits set out on pages 22 to 39 of this circular which contains its recommendation to the Independent Board Committee and the Independent Shareholders on the Connected Transactions (including the grant of consent by the Executive of the same as special deals under the Takeovers Code), Continuing Connected Transaction and the respective caps and the principal factors and reasons considered by Barits in arriving at its recommendations.

Having considered the above principal factors and reasons, the Board is of the opinion that the terms of the Connected Transactions (including the grant of consent by the Executive of the same as special deals under the Takeovers Code), the Continuing Connected Transaction and the respective caps are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, the Board recommends the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Connected Transactions (and the grant of consent by the Executive of the same as special deals under the Takeovers Code), Continuing Connected Transaction and the respective caps.

ADDITIONAL INFORMATION

Your attention is drawn to Appendix II of this circular setting out the general information of the Company.

Yours faithfully

By order of the Board

Swank International Manufacturing Company Limited Yau Tak Wah, Paul Executive Director

– 20 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Swank International Manufacturing Company Limited

(incorporated in Hong Kong with limited liability) (Stock code: 663)

10 May 2005

To the Independent Shareholders

Dear Sir or Madam,

SPECIAL DEALS AND CONNECTED TRANSACTIONS CONTINUING CONNECTED TRANSACTION

We have been appointed as the Independent Board Committee to advise you in connection with the Connected Transactions, Continuing Connected Transaction and the respective caps, details of which are set out in the Letter from the Board set out in the circular to the Shareholders dated 10 May 2005 (the “Circular”), of which this letter forms part. Terms defined in the Circular shall have the same meanings when used herein unless the context otherwise requires.

Having taken into account the terms of the Connected Transactions, Continuing Connected Transaction and the respective caps, the principal factors and reasons considered by Barits and its advice in relation hereto as set out on pages 22 to 39 of the Circular, we are of the opinion that the terms of the Connected Transactions (including the grant of consent by the Executive of the same as special deals under the Takeovers Code), the Continuing Connected Transaction and the respective caps are in the interest of the Company and the shareholders of the Company as a whole and are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we recommend you to vote in favour of the ordinary resolutions to be proposed at the EGM for approving the Connected Transactions (including the grant of consent by the Executive of the same as special deals under the Takeovers Code), Continuing Connected Transaction and the respective caps.

Yours faithfully,

The Independent Board Committee of

Swank International Manufacturing Company Limited Hahn Ka Fai, Mark Shum Wai Ting, Rebecca

– 21 –

LETTER FROM BARITS

The following is the text of the letter of advice from Barits to the Independent Board Committee and the Independent Shareholders dated 10 May 2005 for incorporation in this circular.

BARITS SECURITIES (HONG KONG) LIMITED

Room 3406, 34/F Edinburgh Tower, The Landmark 15 Queen’s Road Central Hong Kong

10 May 2005

To the Independent Board Committee and the Independent Shareholders

Dear Sir,

SPECIAL DEALS AND CONNECTED TRANSACTIONS CONTINUING CONNECTED TRANSACTION

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the Loan Restructuring Agreement, the Shareholders Agreement and the Agency Agreement, details of which are set out in the Joint Announcement and the circular (the “Circular”) of the Company dated 10 May 2005 of which this letter forms part. Capitalised terms used in this letter shall have the same meanings ascribed to them in the Circular unless the context otherwise requires.

The Sale and Purchase Agreement

On 20 January 2005, the Offeror entered into the Sale and Purchase Agreement (as amended by the Supplemental Agreement) with Probest, Rich Global, Kingsway Lion, TIHL and SW Kingsway, pursuant to which the Offeror conditionally agreed to acquire from Probest, Rich Global and Kingsway Lion 1,437,396,440 Shares, 156,283,205 Shares and 281,238,000 Shares respectively, representing approximately 46%, 5% and 9% of the issued share capital of Swank as at the date of the Joint Announcement for HK$43,121,893.20, HK$4,688,496.15 and HK$8,437,140 respectively (i.e. equivalent to HK$0.03 per Share).

– 22 –

LETTER FROM BARITS

The Loan Restructuring Agreement

On 20 January 2005, the Company, Probest and Profitown also entered into the Loan Restructuring Agreement. Pursuant to the terms of the Loan Restructuring Agreement, subject to Completion taking place, Profitown will issue the Promissory Note in favour of Probest, in consideration of Probest waiving portion of the outstanding loan due and owing by the Company to Probest under the Existing Promissory Note and releasing the Company from all future obligations and liabilities under the Existing Promissory Note. Pursuant to the terms of the Loan Restructuring Agreement, the Company will also execute the Guarantee to guarantee Profitown’s obligations in respect of interest payment under the Promissory Note.

The Shareholders Agreement

On Completion, the Company, Probest, TIHL and Profitown will enter into the Shareholders Agreement, the principal terms of which will include unanimous board approval on material issues on Profitown, a put option exercisable by the Company in respect of its shares in Profitown and an indemnity by Probest in favour of Profitown in the event of certain deficit in the net tangible asset value of Profitown as detailed in the Letter from the Board.

The Loan Restructuring Agreement and the Shareholders Agreement constitute special deals under the Takeovers Code and require consents from the Executive. As Probest is a substantial shareholder of each of the Company and Profitown and thus a connected person of the Company under the Listing Rules, the transactions contemplated under the Loan Restructuring Agreement and the Shareholders Agreement constitute connected transactions of the Company under the Listing Rules.

The Agency Agreement

Upon Completion, the Trading Company and the Nominee will enter into the Agency Agreement which will commence from the date of Completion and expire on 31 December 2007. Pursuant to the terms of the Agency Agreement, the Trading Company will provide agency services to the Nominee in relation to the sale of chemical products including phosphorus and related products to Italy, Japan and Korea at an agency fee of 3% of the invoiced amount of such products sold by the Trading Company on behalf of the Nominee.

As the Trading Company will be wholly-owned by the Company and upon Completion, the Nominee, being a company wholly owned by Mr. Wang who is expected to be appointed as a director of the Company, will become a connected person of the Company under the Listing Rules upon Completion. Transactions between the Nominee and the Group will constitute continuing connected transactions for the Company under the Listing Rules.

– 23 –

LETTER FROM BARITS

Composition of the Independent Board Committee

Basis of our opinion

In formulating our opinion and advice, we have relied on the accuracy of the information and representations contained in the Circular and information and facts provided to us by the Company, the Directors and the management of the Company. We have also assumed that all statements of belief and intention made by the Directors in the Circular were reasonably made after due enquiry. We have assumed that all statements and representations made or referred to in the Circular were true at the time they were made and continue to be true at the date of the EGM. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Company, the Directors and the management of the Company and have no reason to doubt that any relevant material facts have been withheld or omitted.

We have reviewed the published information of the Group, amongst others, the Group’s audited financial statements for the three years ended 31 December 2004. We have also reviewed the accountants’ report on the Profitown Group as set out in Appendix I to the Circular. We consider that we have reviewed sufficient information to reach an informed view and to justify reliance on the accuracy of the information contained in this letter and to provide a reasonable basis for our opinion. We have not, however, conducted an independent investigation into the business affairs, financial position or future prospects of the Group nor have we carried out any independent verification of the information supplied.

– 24 –

LETTER FROM BARITS

THE SALE AND PURCHASE AGREEMENT

The TIHL Group (excluding the Group) is principally engaged in the design, development, manufacture and sale of electronic products, the manufacture and sale of printed circuit boards, the trading and distribution of electronic components and parts, the trading of listed equity investments and provision of loan financing. The Group is principally engaged in the design, manufacture and marketing of frames, sunglasses and lenses.

Further to the disposal of TIHL Group’s 19% interest in the Company as announced in the joint announcement of TIHL and the Company dated 29 December 2003, on 20 January 2005, the Offeror entered into the Sale and Purchase Agreement (as amended by the Supplemental Agreement) with Probest, Rich Global, Kingsway Lion, TIHL and SW Kingsway, pursuant to which the Offeror conditionally agreed to acquire from Probest, Rich Global and Kingsway Lion 1,437,396,440 Shares, 156,283,205 Shares and 281,238,000 Shares respectively, representing approximately 46%, 5% and 9% of the issued share capital of the Company as at both the date of the Joint Announcement and the Latest Practicable Date for HK$43,121,893.20, HK$4,688,496.15 and HK$8,437,140 respectively (i.e. equivalent to HK$0.03 per Share). Upon Completion, the Offeror will be obliged under Rule 26 of the Takeovers Code to make the Offer.

As set out in the Joint Announcement, Completion is conditional upon the satisfaction of a number of conditions, amongst others, the passing by the Independent Shareholders in the EGM of ordinary resolutions approving (i) the Agency Agreement and the cap amounts (the “Caps”) as set out in the section headed “Continuing Connected Transaction” in the Letter from the Board; (ii) the Shareholders Agreement and the transactions contemplated thereunder; (iii) the Loan Restructuring Agreement and the transactions contemplated thereunder; and (iv) the Guarantee, in each case, in accordance with the requirements of the Listing Rules, the Takeovers Code, the Company’s memorandum and articles of association and as required by law. In the event that any of the above resolutions cannot be passed at the EGM, the Sale and Purchase Agreement will not become unconditional and Completion will not take place and the Offer will not proceed accordingly.

THE LOAN RESTRUCTURING AGREEMENT

In arriving at our opinion regarding the terms of the Loan Restructuring Agreement, we have considered the following principal factors and reasons.

Rationale for entering into the Loan Restructuring Agreement

As set out in the 2003 annual report of the Company, in order to reduce the financial burden of the Group, the Company entered into a conditional share sale agreement and a conditional loan settlement agreement on 3 September 2003 to restructure the principal of the loan of HK$250 million and the accrued loan interest due to Probest, pursuant to which the Company disposed of its 30% interest in Profitown and 30% of loan due from Profitown to the

– 25 –

LETTER FROM BARITS

Company to Probest at an aggregate consideration of HK$3 million and Probest also agreed to waive the repayment of the outstanding principal of the loan of HK$47 million and the accrued loan interest thereon since 1 March 2002 up to the effective date of the loan settlement agreement. In addition, the Group raised approximately HK$37 million (after deduction of related expenses) through an open offer to repay the loan due to Probest and the outstanding principal of the loan was reduced to approximately HK$163 million (being the Debt as defined in the Circular). The Debt was restructured to be repaid by three instalments in accordance with the terms of the Existing Promissory Note with maturity date on 1 June 2006.

According to the 2003 annual report of the Company, the Group recorded a net loss of approximately HK$7.1 million for the year ended 31 December 2003 (in comparison to a net profit of approximately HK$10.1 million for the year ended 31 December 2002) notwithstanding that a gain arising from group reorganisation was recorded. The Group recorded a net operating loss of approximately HK$22.5 million for the same financial year in tandem with the decline in turnover and gross margin. As at 31 December 2003, the Group had net liabilities of approximately HK$60.0 million.

According to the 2004 annual report of the Company, the Group recorded a net loss of approximately HK$5.8 million for the year ended 31 December 2004, compared to a net loss of approximately HK$7.1 million for the year ended 31 December 2003. Although the Group managed to lower its net loss in 2003 and record a net operating profit of approximately HK$2.5 million, the Group experienced a squeeze in gross margin due to the increasing prices in oil, raw materials and components. Excluding the non-recurring income of (i) HK$4.7 million relating to the reversal of impairment loss upon disposal of interests in associates; and (ii) HK$6.2 million relating to the waiver of amounts due to associates upon disposal of interests in associates, the Group recorded a net operating loss of approximately HK$8.4 million for the year ended 31 December 2004. As at 31 December 2004, the Group had net liabilities of approximately HK$65.4 million and cash balance of approximately HK$38.4 million.

To fully comprehend the financial performance of the Group, we would like to further draw the attention of Independent Shareholders to the opinion of the auditors of the Company regarding the ongoing concern basis. We note from the 2004 annual report of the Company that the auditors of the Company had issued an opinion of fundamental uncertainty relating to the going concern basis of the Group. Based on the opinion of the auditors of the Company, the validity of the going concern basis for the preparation of the financial statements depends upon the generation of sufficient cash flows from the Group’s operations so as to meet its debts as and when they fall due in the foreseeable future. We note that the Group is under financial pressure in repaying the principal amount of the Debt and paying the interest accrued under the Existing Promissory Note which was evidenced by the default by the Company of the first instalment of the principal amount of the Debt in the sum of HK$25,500,000 due on 1 June

– 26 –

LETTER FROM BARITS

2004 and of interest and default interest accrued on the Debt in the aggregate sum of approximately HK$12,669,995 from 5 November 2003 up to and inclusive of the date of the Sale and Purchase Agreement in accordance with the applicable terms of the Existing Promissory Note. The second instalment of the principal amount of the Debt in the sum of HK$62,500,000 will be due on 1 June 2005. It is expected that the Company will not be demanded to repay the outstanding principal and pay the accrued interests under the Existing Promissory Note prior to the Long Stop Date. Further arrangement will be negotiated subject to whether the Loan Restructuring Agreement will become unconditional.

On 20 January 2005, the Company, Probest and Profitown entered into the Loan Restructuring Agreement. Pursuant to the Loan Restructuring Agreement,

Probest conditionally agreed to waive an outstanding principal of the Debt over and above the Remaining Debt, the interest and the default interest on the Debt for the period from 5 November 2003 up to and inclusive of the date of the Sale and Purchase Agreement in the amount of approximately HK$12,669,995 and any further interest which may accrue on the Debt up to and inclusive of the Effective Date. Based on the amount of the Debt and the Profitown/Swank Loan of approximately HK$112,480,000 as at the Latest Practicable Date, the principal amount, interests and default interests of the Debt to be waived amounts to approximately HK$66,490,000 as at the Latest Practicable Date;
the Existing Promissory Note will be cancelled as from the Effective Date;
Profitown will issue and deliver the Promissory Note to Probest, in consideration of which the Company undertakes to waive a sum equivalent to the Remaining Debt from the Profitown/Swank Loan on the Effective Date. Accordingly, after such waiver on the Effective Date, there will not be any Profitown/Swank Loan outstanding;
the Company will execute the Guarantee in favour of Probest.

In effect, Profitown will issue the Promissory Note (with the provision of the Guarantee by the Company) in favour of Probest, in consideration of Probest waiving portion of the outstanding loan due and owing by the Company to Probest under the Existing Promissory Note and releasing the Company from all future obligations and liabilities under the Existing Promissory Note.

Having regard to the tight financial position of the Group, we consider that the Loan Restructuring Agreement represents a viable means to reduce the financial burden of the Group relating to the ongoing obligation to repay the Debt as a result of the waiver of part of the principal amount, interests and default interests of the Debt amounting to HK$66,490,000 as at the Latest Practicable Date.

– 27 –

LETTER FROM BARITS

Principal terms of the Promissory Note

(i) Borrowing cost

The principal amount outstanding under the Promissory Note equivalent to the Remaining Debt (amounting to approximately HK$112,480,000 as at the Latest Practicable Date) will bear interest at the rate of 1 per cent. above the prime rate for Hong Kong dollar quoted from time to time by The Hong Kong and Shanghai Banking Corporation Limited, which is based on the prevailing market rate and is the same as the interest rate under the Existing Promissory Note. Given that the interest rate and default interest rate under the Promissory Note is identical to those under the Existing Promissory Note, we consider that the Group will not be required to bear higher interest rate and default interest rate under the Promissory Note when compared to the arrangement under the Existing Promissory Note.

During the course of identifying fixed-rate loan instruments for comparison with the Promissory Note, we have to our best effort identified 17 cases of issuance of convertible notes or convertible bonds (the “Comparable Notes”) with maturity of two to three years as publicly announced by companies listed on the main board of the Stock Exchange for fund raising purposes during the period from 1 October 2004 (being the first day of the six full months immediately prior to the release of the Joint Announcement) to the Latest Practicable Date. Notwithstanding that the Comparable Notes have the conversion feature which entitles the holders to convert the Comparable Notes into shares whereas the Promissory Note does not have such feature, we consider that it is appropriate for us to refer to the Comparable Notes for the reason that it is more common for listed companies in Hong Kong to issue fixed-rate loan instruments in form of convertible notes or convertible bonds than promissory notes. Principal terms of the Comparable Notes are set out below for comparison purpose.

Company name	Principal	Coupon rate	Maturity
	(million)	(per annum)
Cheung Tai Hong Holdings Limited	HK$100	2%	3 years
China Sci-tech Holdings Limited	(i) HK$49.95	3%	3 years
	(ii) HK$60	3%	3 years
E-Life International Limited	Up to US$10	1%	2 years
Get Nice Holdings Limited	Up to HK$200	3%	3 years
Guo Xin Group Limited	HK$88.5	3%	3 years
Kantone Holdings Limited	Up to US$24	1%	3 years
Minglun Group (Hong Kong) Limited	HK$26.8128	1%	2 years
Norstar Founders Group Limited	US$40	Zero	3 years
Orient Industries Holdings Limited	HK$33	Zero	2 years
Sinotronics Holdings Limited	Up to US$15	2%	3 years
South Sea Petroleum Holdings Limited	(i) Up to HK$63.84	1%	3 years
	(ii) HK$80_(Note 1)_	1%	3 years
Spread Prospects Holdings Limited	HK$30	4%	2 years
Wanji Pharmaceutical Holdings Limited	HK$8.15	P+3% (equivalent
		to 8.25%)(Notes 2 & 3)	2 years
Wang On Group Limited	(i) HK$68.64	1%	3 years
	(ii) HK$37.18	1%	2.5 years

– 28 –

LETTER FROM BARITS

Notes:

On 4 April 2005, South Sea Petroleum Holdings Limited (“South Sea”) and the subscriber has agreed to terminate the subscription agreement dated 22 November 2004 in relation to the subscription of HK$80,000,000 convertible debentures of South Sea by the subscriber.
The letter “P” stands for the prime rate for Hong Kong dollars, presently at 5.25%, as quoted by the Hongkong and Shanghai Banking Corporation Limited.
The higher coupon rate offered by Wanji Pharmaceutical Holdings Limited (“Wanji”) is mainly attributable to the higher premium represented by the conversion price per share over the then prevailing market price than other Comparable Notes (ranging from a discount of approximately 52% to a premium of approximately 49% (excluding the case for the issue of convertible debentures by South Sea in the principal of HK$80,000,000 since the relevant subscription agreement was terminated by South Sea as referred to in Note 1)).
Information is sourced from the published announcements of companies listed on the main board of the Stock Exchange as extracted from the website of the Stock Exchange.

As illustrated in the above table, the coupon rate of the Comparable Notes ranged from zero coupon to 8.25% per annum. Upon comparison, we noted the interest rate of 6.25% per annum (based on the prime rate for Hong Kong dollars of 5.25% as quoted by the Hongkong and Shanghai Banking Corporation Limited as at the Latest Practicable Date) under the Promissory Note lies at the high end of the range of the coupon rates of the Comparable Notes. Given the absence of conversion feature for the Promissory Note and accordingly the absence of chance for any potential capital gain in the underlying securities if so converted by holders of convertible notes or bonds, we consider that it is justifiable for the generally higher interest rate offered by the Promissory Note than the Comparable Notes. Nevertheless, Independent Shareholders should note that the business nature, fundamentals and operational scale of the underlying companies issuing the Comparable Notes are different from those of the Company and that the respective principal amounts of the Comparable Notes and the respective tenors of the Comparable Notes are different from those of the Company.

(ii) Maturity

The maturity date of the Promissory Note will be on a date falling 30 months of the date of issue of the Promissory Note, which will fall beyond the maturity date (i.e. 1 June 2006) of the Existing Promissory Note. As far as the maturity date is concerned, we consider that the arrangement under the Promissory Note will not put the Company and the Independent Shareholders in a position worse than that under the Existing Promissory Note.

– 29 –

LETTER FROM BARITS

(iii) Repayment arrangement and repayment obligation of the Company

Under the Existing Promissory Note, the principal amount of the Debt shall be repayable by the Company to Probest in three instalments in accordance with the following arrangement:

(a) as to HK$25.5 million due on 1 June 2004 (in default);
(b) as to HK$62.5 million due on 1 June 2005;
(c) as to HK$75 million due on 1 June 2006.

Upon the Loan Restructuring Agreement becoming unconditional, bullet payment shall be required to be made by Profitown (with the provision of the Guarantee by the Company) on a date falling 30 months of the date of issue of the Promissory Note, which will fall beyond the maturity date (i.e. 1 June 2006) of the Existing Promissory Note.

On the other hand, we understand that the Promissory Note will be issued by Profitown in favour of Probest and the Company will execute the Guarantee in favour of Probest whilst the Existing Promissory Note will be cancelled as from the Effective Date and the Profitown/ Swank Loan outstanding will be extinguished. Accordingly, the Company will be released from all future obligations and liabilities under the Existing Promissory Note.

Taking into consideration that (i) the repayment of the principal amount (together with interest) of the Debt will be deferred to a later date as agreed under the Promissory Note when compared against the due dates of the instalments as agreed under the Existing Promissory Note; (ii) the repayment obligation of the Group can be reduced; (iii) the Company (being the guarantor of Profitown in favour of Probest in respect of all interest payment only under the Promissory Note instead of being the borrower under the Existing Promissory Note) will not have the direct repayment obligation under the Promissory Note, we consider that the repayment arrangement under the Loan Restructuring Agreement will enhance the financial flexibility of the Group for its working capital requirement.

(iv) Security

Same as the Existing Promissory Note, the Promissory Note will be unsecured except for the Guarantee to be given by the Company in favour of Probest.

– 30 –

LETTER FROM BARITS

As set out in the Letter from the Board, the Guarantee will cease to be effective if the put option (“the Put Option”) referred to in the section headed “Shareholders Agreement” in the Letter from the Board is exercised and the transaction contemplated under the Put Option is completed. We consider that this represents a protective mechanism for the Company to release its obligations under the Guarantee when its controlling stake in Profitown is disposed of.

On the basis that the Guarantee represents an essential part of the Loan Restructuring Agreement and it is not rare for a parent company to provide guarantee for a subsidiary in securing loans free of other forms of security, we consider that the Guarantee as part of the Loan Restructuring Agreement is acceptable to the Company and the Independent Shareholders.

Financial effect brought about by the Loan Restructuring Agreement on the Group

(i) Profit and loss and cash flow

Upon the Loan Restructuring Agreement becoming unconditional, it is anticipated that interest expenses of the Group can be reduced to the extent equivalent to an amount being computed based on (i) the principal amount, interests and default interests of the Debt amounting to approximately HK$66,490,000 (as at the Latest Practicable Date) to be waived under the Loan Restructuring Agreement; and (ii) the prime rate for Hong Kong dollar of 5.25% per annum as at the Latest Practicable Date. Meanwhile, cash outflow pertaining to the repayment of the Debt can also be reduced. On such basis, we consider that the Loan Restructuring Agreement would have positive impact on both the profit and loss accounts as well as the cash flow of the Group.

(ii) Gearing

According to the 2004 annual report of the Company, the Group had audited consolidated net liabilities of approximately HK$65.4 million as at 31 December 2004. Based on the audited consolidated total liabilities of the Group of approximately HK$263.0 million and the audited consolidated total assets of the Group of approximately HK$243.0 million as at 31 December 2004, the gearing ratio (being defined as total liabilities/total assets) of the Group as at 31 December 2004 was approximately 1.1. Based on the principal amount, interests and default interests of the Debt as at the Latest Practicable Date amounting to approximately HK$66,490,000 (as at the Latest Practicable Date) to be waived under the Loan Restructuring Agreement, it is anticipated that the gearing ratio will be improved to approximately 0.8 as a result of the reduction of liabilities of the Group of approximately HK$66,490,000. On such basis, we consider that the Loan Restructuring Agreement would have a positive impact on the gearing ratio of the Group.

(iii) Net tangible assets

As mentioned above, the Group had audited consolidated net liabilities of approximately HK$65.4 million as at 31 December 2004. It is anticipated that the net liability position of the Group will be improved by an amount equivalent to the principal amount, interests and default

– 31 –

LETTER FROM BARITS

interests of the Debt amounting to approximately HK$66,490,000 (as at the Latest Practicable Date) to be waived under the Loan Restructuring Agreement. On such basis, we consider that the Loan Restructuring Agreement would have a positive impact on the net liability position of the Group.

Recommendation

Having regard to the factors mentioned above, in particular, (i) the repayment obligation of the Group to be reduced as a result of the Loan Restructuring Agreement; and (ii) the positive impact on the financial position of the Company upon the Loan Restructuring Agreement becoming unconditional, we consider that the terms of the Loan Restructuring Agreement are fair and reasonable and are in the interest of the Company and the Independent Shareholders.

Independent Shareholders should note that Completion is conditional upon the satisfaction of a number of conditions, amongst others, the passing by the Independent Shareholders at the EGM of the ordinary resolution approving the Loan Restructuring Agreement and the transactions contemplated thereunder. In the event that the Loan Restructuring Agreement is not approved by the Independent Shareholders at the EGM, Completion will not take place and the Offer will not proceed accordingly.

THE SHAREHOLDERS AGREEMENT

As set out in the Letter from the Board, on Completion, the Company, Probest, TIHL and Profitown will enter into the Shareholders Agreement to regulate the management of the Profitown Group. In arriving at our opinion regarding the terms of the Shareholders Agreement, we have considered the following principal factors and reasons.

Board composition of Profitown and unanimous approval of directors on material issues

At present, the Company has 5 executive Directors and 3 independent non-executive Directors. Following and subject to Completion, the Offeror and its parties acting in concert with it will own approximately 60% of the entire issued share capital of the Company (assuming that the Company’s issued share capital remains unchanged from that as at the date of the Joint Announcement). It is intended that with effect from the earliest time permitted under (or pursuant to any dispensation from) the Takeovers Code or by the Executive, all of the Directors will resign.

– 32 –

LETTER FROM BARITS

The board (the “Profitown Board”) of Profitown currently comprises five directors. Four of them are directors of both TIHL and the Company and one of them is a director of the Company. Pursuant to the Shareholders Agreement, the Profitown Board shall comprise a maximum of six directors (the Company shall be entitled to appoint four directors and Probest shall be entitled to appoint two directors) upon Completion. Notwithstanding that the controlling stake in the Company will be vested in the Offeror and an additional director may be appointed to the Profitown Board upon Completion, it is considered that the Company’s control in Profitown will not be altered on the basis of the proposed composition of the Profitown Board. We consider that the proposed composition of the Profitown Board can better embody the respective shareholding of the Company and TIHL (by virtue of its interest in Probest) in Profitown.

Pursuant to the Shareholders Agreement, the chairman of the Profitown Board shall be a director appointed by Probest but shall not have a casting vote in the event of an equality of votes. We were advised by the management of the Company that such arrangements were proposed and agreed by both TIHL and the Company with a view to taking advantage of the experience and expertise of the directors appointed by Probest, who have been managing the operation of the optical business of the Profitown Group. As such, we consider that the proposed arrangement for the appointment of the chairman of Profitown is acceptable to the Company and the Independent Shareholders.

The Directors consider that the unanimous approval by the Profitown Board on material issues under the Shareholders Agreement can serve to ensure that every material issue referred to in the Shareholders Agreement would be approved only after compromise has been obtained from all the directors of Profitown. On such basis, we consider that the unanimous approval by the full Profitown Board can help rationalise the operation of Profitown and is in the interest of the Company which owns the controlling stake in Profitown.

The Put Option

Under the Shareholders Agreement, the Company will have the right to require Probest or an independent third party procured by Probest to purchase all (but not part only) of its shares, being 70% of all issued shares of Profitown, in Profitown exercisable at any time before the expiry of 30 months from the Completion Date at a price equal to the net tangible asset value of Profitown as at the date of exercise of such put option attributable to such shares and such purchaser will assume the liabilities due from the Company to any member of Profitown Group incurred prior to the date of the Shareholders Agreement at nil consideration.

– 33 –

LETTER FROM BARITS

As set out in the Joint Announcement, subsequent to Completion, the Offeror will initiate a detailed strategic review of the Group’s businesses. The Offeror will formulate business plans and strategies for the Group with a view to consolidating the Company’s overall group operations and enhancing the shareholders value of the Company. The Offeror also plans to set up the Trading Company to enter into a new business providing agency services to the Nominee in relation to the sale of the Products to the Territory. At present, the Company has no intention to exercise the Put Option.

(i) Information on the Profitown Group and rationale for the Put Option

The Profitown Group is principally engaged in the design, manufacture and marketing of frames, sunglasses and lenses. Profitown is owned as to 70% by the Company and 30% by Probest and is the principal subsidiary of the Company. According to the accountant’s report on the Profitown Group as set out in Appendix I to the Circular, Profitown recorded an audited consolidated net loss attributable to shareholders of approximately HK$38.9 million for the year ended 31 December 2003 and an audited consolidated net loss attributable to shareholders of approximately HK$8.5 million for the year ended 31 December 2004. Given such financial performance of the Profitown Group, the Directors consider that the Put Option can serve to secure a channel for the Company to exit from the existing business of the Profitown Group when the Company considers appropriate during the 30-month period.

On the other hand, we noted that the Group has been finding it difficult to make principal repayments and interest payments for the Debt which is demonstrated by the Company’s default in the first principal instalment of HK$25,500,000 repayable and due on 1 June 2004 under the Existing Promissory Note.

Having regard to the general loss making record of the Profitown Group and the difficulty of the Company in repaying the principal instalments of the Debt and paying the interest accrued under the Existing Promissory Note, we consider that the Put Option will offer the Company an opportunity to realise its investments in the Profitown Group which in turn may enhance the financial flexibility of the Group for the purpose of future working capital requirement.

(ii) Determination of the exercise price

As advised by the management of the Company, the Company has determined the exercise price of the Put Option by making reference only to the net tangible asset value of Profitown without regard to the price-to-earnings multiple. In view that the Profitown Group has been reporting net losses for the two years ended 31 December 2004, we consider that the price-toearnings multiple basis is not applicable for determining the exercise price of the Put Option and it is acceptable to set the exercise price at a price equal to the consolidated net tangible asset value of Profitown as at the date of exercise of the Put Option.

– 34 –

LETTER FROM BARITS

(iii) Remaining business of the Group

The Profitown Group is currently the only operating vehicle of the Company. Save as the optical business conducted by the Profitown Group, the Company at present does not carry out other business. Upon Completion, the Trading Company and the Nominee will enter into the Agency Agreement pursuant to which the Trading Company will provide agency services to the Nominee in relation to the sale of chemical products including phosphorus and related products to Italy, Japan and Korea for an agency fee as referred to in the section headed “Continuing Connected Transaction” in the Letter from the Board.

Notwithstanding that the introduction of the new agency business of the Group is expected to broaden the income base of the Group, Independent Shareholders should note that Profitown will cease to be a subsidiary of the Company and revenue of the Group may be reduced in the event that the Put Option is exercised by the Company. Nevertheless, the exercise of the Put Option is discretionary and the Company has the discretion to decide whether the Put Option is to be exercised. At present, the Company has no intention to exercise the Put Option.

Probest’s indemnity

Pursuant to the Shareholders Agreement, if the net tangible asset value of Profitown as determined on the same basis and accounting policies and principles adopted by Profitown in its latest audited accounts shall fall below zero during the 30-month period from the Completion Date, Probest will indemnify Profitown on demand for the deficit. As advised by the management of the Company, such arrangement was negotiated and agreed among the parties to the Shareholders Agreement with a view to safeguarding the Company’s interest in the assets and liabilities portfolio of the Profitown Group from future deterioration after Completion. On such basis, we consider that the indemnity from Probest to Profitown can serve as a protective measure to safeguard the interest of the Group during the 30-month period.

Recommendation

Have regard to the above factors, we consider that the terms of the Shareholders Agreement are acceptable to the Company and the Independent Shareholders and are fair and reasonable so far as the Independent Shareholders are concerned.

Independent Shareholders should note that Completion is conditional upon the satisfaction of a number of conditions, amongst others, the passing by the Independent Shareholders at the EGM of the ordinary resolution approving the Shareholders Agreement and the transactions contemplated thereunder. In the event that the Shareholders Agreement is not approved by the Independent Shareholders at the EGM, Completion will not take place and the Offer will not proceed accordingly.

– 35 –

LETTER FROM BARITS

THE AGENCY AGREEMENT

In arriving at our opinion regarding the terms of the Agency Agreement, we have considered the following principal factors and reasons:

Rationale for entering into the Agency Agreement

Upon Completion, the Trading Company and the Nominee will enter into the Agency Agreement pursuant to which the Trading Company will provide agency services to the Nominee in relation to the sale of Products to the Territory. Under the Listing Rules, the transactions to be carried out between the Trading Company and the Nominee under the Agency Agreement constitute continuing connected transaction for the Company and will be subject to the approval by the Independent Shareholders at the EGM.

As set out in the Letter from the Board, with the establishment of the Trading Company engaging in the new agency business upon Completion, the Directors believe that the Group is able to leverage on Mr. Wang’s considerable experience in international trade in relation to the Products and such new agency business to be conducted by the Trading Company will supplement the Group’s existing businesses.

The Directors consider that the Continuing Connected Transaction will be entered into in the usual and ordinary course of businesses of the Group, as the Group seeks to leverage on Mr. Wang’s considerable experience in international trade in relation to the Products through the new agency business. They also consider that the terms of the Continuing Connected Transaction have been negotiated and will be conducted on an arm’s length basis between the Group and the Nominee and the Continuing Connected Transaction is on normal commercial terms.

As set out in the Joint Announcement, Mr. Wang has been engaged in the phosphorus industry through the import and export of the Products since 1990. In 1999, he restructured several state-owned enterprises on the verge of bankruptcy into Yunnan Phosphorous Group Co., Ltd. (“Yunphos”) and is currently the controlling shareholder holding over 51% equity interest in Yunphos. As further set out in the Joint Announcement, over the 13 years, Yunphos (including its predecessors) has evolved into a vertically integrated company engaged in the development, manufacturing, import and export of the Products and with Mr. Wang’s continuous efforts in exploring the international market, Yunphos has built strong relationships with numerous long-term international customers in Europe, America, Australia, Japan and South East Asia. With the establishment of the Trading Company engaging in the new agency business upon Completion, the Directors believe that the Group is able to take advantage of Mr. Wang’s considerable experience in international trade in relation to the Products and the extensive customer base across various geographical areas maintained by Mr. Wang.

– 36 –

LETTER FROM BARITS

In view of the general loss making record of the Group’s optical business, the Directors expect that such new agency business to be conducted by the Trading Company will supplement the Group’s existing businesses and represents a revitalising opportunity for the Group to broaden its income base. In addition, the Directors also consider that there are also advantages for conducting such a business in Hong Kong due to the well established business and legal environment and availability of suitable sales and marketing employees.

Taking into account (i) the considerable experience of Mr. Wang in international trade in relation to the Products; and (ii) the potential for broadening the income base of the Group, we consider that the establishment of the Trading Company to engage in the new agency business would be in the interest of the Company and the shareholders of the Company as a whole.

Principal terms of the Agency Agreement

Pursuant to the terms of the Agency Agreement, the fees payable by the Nominee will be 3% of the invoiced amount of the Products sold by the Trading Company on behalf of the Nominee. The Agency Agreement will commence from the date of Completion and expire on 31 December 2007.

As the Trading Company is to be newly established upon Completion, no precedent transactions are available for justification purpose. In arriving at our opinion regarding the terms of the Continuing Connected Transaction, we have been provided by the Company with an agency agreement (the “Comparable Agreement”) entered into between a company controlled by Mr. Wang and an independent agent in relation to the provision of similar agency services in consideration for an agency fee determined on the basis of a fixed rate on the invoiced amount of the products sold by such agent. It demonstrated that the agency fee chargeable under the Agency Agreement is identical to that chargeable under the Comparable Agreement.

On such basis, we consider that the Continuing Connected Transaction is to be carried out on normal commercial terms.

Cap amounts of agency fee

As set out in the Letter from the Board, the Directors propose that the cap amounts of the agency fee to be received by the Trading Company under the Continuing Connected Transaction will be HK$10 million for the year ending 31 December 2005, HK$15 million for the year ending 31 December 2006 and HK$20 million for the year ending 31 December 2007. The Caps have been determined with reference to the sales target, based on Mr. Wang’s considerable international trading experience and the Offeror’s goal of doubling the turnover of the new agency business in two years to further supplement the Company’s existing businesses, to be generated by the Trading Company.

– 37 –

LETTER FROM BARITS

Given that the Trading Company is a newly established trading company with no trading record, it is not possible to determine the Caps based on historical turnover record of the Trading Company. As advised by the management of the Company, it is the Offeror’s target that the fees to be generated under the Agency Agreement will amount to not more than HK$10 million for the year ending 31 December 2005. In this connection, we have obtained and reviewed the historical turnover record of a company controlled by Mr. Wang as principally generated from the sale of the Products for the year ended 31 December 2003. Based on the historical capability of such controlled company to generate revenue from the sale of the Products and the fee rate to be chargeable by the Trading Company for the provision of agency services, it is considered that the Offeror’s target that the amount of agency fees to be generated under the Agency Agreement (i.e. HK$10 million) for year ending 31 December 2005 is possible to achieve. On such basis and based on the Offeror’s goal of doubling the turnover of the new agency business in two years (with annual growth in agency fees generated of HK$5 million), the Caps for each of the two years ending 31 December 2007 are estimated to be HK$15 million and HK$20 million respectively.

Recommendation

Having regard to (i) the lack of historical trading record of the Trading Company; (ii) Mr. Wang’s considerable experience in international trade in relation to the Products, we consider that determining the Caps based on the Offeror’s goal in turnover growth is commercially justifiable and generally acceptable.

Independent Shareholders should note that Completion is conditional upon the satisfaction of a number of conditions, amongst others, the passing by the Independent Shareholders at the EGM of the ordinary resolution approving the Agency Agreement and the Caps. In the event that the Agency Agreement is not approved by the Independent Shareholders at the EGM, Completion will not take place and the Offer will not proceed accordingly.

OVERALL RECOMMENDATION

Having considered the above factors, in particular,

Regarding the Loan Restructuring Agreement

the potential reduction in repayment obligation of the Group;
the potential positive impact on the financial position of the Company;

Regarding the Shareholders Agreement

that the proposed composition of the Profitown Board can better embody the respective shareholding of the Company and TIHL (by virtue of its interest in Probest) in Profitown after Completion;

– 38 –

LETTER FROM BARITS

that the Put Option will offer the Company an opportunity to realise its investments in the Profitown Group which in turn may enhance the financial flexibility of the Group for the purpose of future working capital requirement in view of the general loss making record of the Profitown Group for the past two years ended 31 December 2004;
the indemnity provided by Probest to Profitown which can serve as a protective measure to safeguard the interest of the Group;

Regarding the Agency Agreement

that the transactions contemplated under the Agency Agreement are to be carried out on normal commercial terms;
the basis of determining the Caps considered to be acceptable given (i) the lack of historical trading record of the Trading Company; (ii) Mr. Wang’s considerable experience in international trade in relation to the Products,

we are of the view that the Loan Restructuring Agreement, the Shareholders Agreement and the Agency Agreement as a whole are fair and reasonable and in the interest of the Company and the Independent Shareholders. As such, we recommend the Independent Board Committee to advise the Shareholders to vote in favour of the resolutions to be proposed at the EGM approving the Loan Restructuring Agreement (also the grant of consent by the Executive of the Loan Restructuring Agreement as a special deal under the Takeovers Code), the Shareholders Agreement (also the grant of consent by the Executive of the Shareholders Agreement as a special deal under the Takeovers Code) and the Agency Agreement and the Caps.

Independent Shareholders should note that Completion is conditional upon the satisfaction of a number of conditions, amongst others, the passing by the Independent Shareholders at the EGM of the ordinary resolutions approving (i) the Loan Restructuring Agreement and the transactions contemplated thereunder; (ii) the Shareholders Agreement and transactions contemplated thereunder; and (iii) the Agency Agreement and the Caps. In the event that any of the Loan Restructuring Agreement, the Shareholders Agreement or the Agency Agreement is not approved by the Independent Shareholders at the EGM, Completion will not take place and the Offer will not proceed accordingly.

Yours faithfully, For and on behalf of

Barits Securities (Hong Kong) Limited Terence Hong Alfred Wong Managing Director Executive Director

– 39 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

Set out below is the text of a report, prepared for the purpose of incorporation in this document, received from CCIF in connection with the Profitown Group: –

CCIF CPA LIMITED 37/F Hennessy Centre 500 Hennessy Road Causeway Bay Hong Kong

The directors

Swank International Manufacturing Company Limited

We have audited the financial statements of Profitown Investment Corporation (the “Company”) and its subsidiaries (collectively called the “Group”) on pages 42 to 61 (as set out in this Circular) which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

BASIS OF OPINION

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certified Public Accountants except that the scope of our work was limited as explained below.

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

We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us was limited with respect to the beneficial title of the Group to certain land and buildings as at 31 December 2004, because the Group have not obtained land use right certificates or building ownership certificates for certain land and buildings located

– 40 –

ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

APPENDIX I

in the People’s Republic of China, with a net book value of approximately HK$48 million. Accordingly, we were unable to satisfy ourselves that the Group had beneficial title to such land and buildings as at 31 December 2004.

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

Fundamental uncertainty relating to the going concern basis

In forming our opinion, we have considered the adequacy of the disclosures made in note 1(b) to the financial statements concerning the basis of preparation in view of the net loss for the year and net liabilities of the Group as at 31 December 2004. The financial statements have been prepared on a going concern basis, the validity of which depends upon the generation of sufficient cash flows from the Group’s operations and the continuing financial support from the intermediate parent enterprise so as to meet its debts as and when they fall due in the foreseeable future. The financial statements do not include any adjustments that would result should the Group fail to generate such funding from profitable operations and the financial support from the intermediate parent enterprise. Details of the circumstances relating to this fundamental uncertainty are described in note 1(b). We consider that appropriate estimates and disclosures have been made and our opinion is not qualified in this respect.

QUALIFIED OPINION ARISING FROM LIMITATION OF AUDIT SCOPE

Except for any adjustments that might have been found to be necessary had we been able to obtain sufficient evidence relating to the beneficial title matters relating to the land and buildings discussed above, in our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2004 and of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Ordinance.

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

(i) We have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and
(ii) We are unable to determine whether proper books of account have been kept.

CCIF CPA Limited

Certified Public Accountants

Hong Kong, 22 April 2005

Chan Wai Dune, Charles

Practising Certificate Number P00712

– 41 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2004

Note TURNOVER 3 Cost of sales Gross profit Other revenue 4 Selling and distribution costs Administrative Expenses Reversal of impairment loss upon disposal of interests in associates 5(a) Waiver of amounts due to associates upon disposal of interests in associates 5(b) Other operating expenses Profit/(loss) from operating activities 6 Finance costs Share of profits less losses of associates LOSS BEFORE TAXATION TAXATION 7 LOSS AFTER TAXATION Minority interests LOSS ATTRIBUTABLE TO SHAREHOLDERS 8	2004 HK$’000 174,890 (156,632) 18,258 2,442 (14,304) (16,130) 4,700 6,200 (710) 456 (11,744) 2,791 (8,497) – (8,497) (11) (8,508)	2003 HK$’000 192,236 (168,484) 23,752 3,232 (18,516) (19,918) – – (19,340) (30,790) (10,566) 1,727 (39,629) (151) (39,780) 858 (38,922)

– 42 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

CONSOLIDATED BALANCE SHEET

At 31 December 2004

Note ASSETS Non-current assets Property, plant and equipment 10 Investments in associates 12 Current asset Trade receivables Prepayments, deposits and other receivables Inventories 14 Fixed deposits Cash and bank balances LIABILITIES Current liabilities Amounts due to associates 12 Trade payables Other payables and accruals Amount due to intermediate parent enterprise 13 Tax payable Net current liabilities Total assets less current liabilities Non-current liabilities Amount due to a shareholder, Probest 15 Provision for long service payments 16 MINORITY INTERESTS NET ASSETS CAPITAL AND RESERVES Issued capital 17 Reserves	2004 HK$’000 96,464 37,220 133,684	2003 HK$’000 107,291 35,581 142,872
	44,529 2,282 23,321 378 37,650	48,285 3,302 21,659 378 35,857
	108,160	109,481
	12,647 17,061 10,377 108,058 850	12,781 25,992 14,180 100,774 847
	148,993 (40,833) 92,851	154,574 (45,093) 97,779
	46,594 379	43,558 490
	46,973 45,084 794 8 786 794	44,048 45,073 8,658 8 8,650 8,658

– 43 –

ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2004

At 1 January 2004 Exchange adjustments o translation of foreign subsidiaries Net loss for the year At 31 December 2004	Issued capital HK$’000 8 n – – 8	Exchange reserve HK$’000 9,896 644 – 10,540	Capital reserve HK$’000 8 – – 8	Property revaluation Accumulated reserve losses HK$’000 HK$’000 21,169 (22,423) – – – (8,508) 21,169 (30,931)	Total HK$’000 8,658 644 (8,508) 794

– 44 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

CONSOLIDATED CASH FLOW STATEMENT

For the period ended 31 December 2004

CASH FLOWS FROM OPERATING ACTIVITIES Loss before taxation Adjustments for: Finance costs Share of profits less losses of associates Gains arising from disposal of interests in associates Interest income Gain on disposal of property, plant and equipment Depreciation Provision for doubtful debts Provision against inventories Exchange differences Operating profit/(loss) before working capital changes Decrease in trade receivables Decrease in prepayment, deposits and other receivables (Increase)/decrease in inventories Increase in net amounts due to associates (Decrease)/increase in trade payables (Decrease)/increase in amount due to intermediate parent enterprise (Decrease)/increase in other payables and accruals Decrease in provision for long service payments CASH (USED IN)/GENERATED FROM OPERATIONS CASH FLOWS FROM INVESTING ACTIVITIES Interest received Dividends received from associates Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Proceeds from disposal of interests in associates Payment of rental deposits NET CASH INFLOW/(OUTFLOW) FROM INVESTING 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	2004 HK$’000 (8,497) 11,744 (2,791) (10,900) (64) (29) 13,645 – 238 (143) 3,203 3,756 380 (1,900) 3,648 (8,931) (1,424) (3,803) (111) (5,182) 64 5,000 (3,000) 211 4,700 – 6,975 1,793 36,235 38,028 37,650 378 38,028	2004 HK$’000 (8,497) 11,744 (2,791) (10,900) (64) (29) 13,645 – 238 (143) 3,203 3,756 380 (1,900) 3,648 (8,931) (1,424) (3,803) (111) (5,182) 64 5,000 (3,000) 211 4,700 – 6,975 1,793 36,235 38,028 37,650 378 38,028	2003 HK$’000 (39,629) 10,566 (1,727) – (65) (81) 14,068 5,074 7,168 (453) (5,079) 1,408 654 3,184 783 5,034 7,016 583 (62) 13,521
		64 5,000 (3,000) 211 4,700 –	65 – (1,053) 135 – (455)
			(1,308) 12,213 24,022 36,235 35,857 378 36,235

– 45 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

NOTES TO THE FINANCIAL STATEMENTS

31 December 2004

1. BASIS OF PREPARATION

a) Principal activity

The principal activity of the Company is investment holding. The group’s principal activities consisted of the manufacture and sale of optical products.

b) Going concern concept

The financial statements have been prepared by the directors with due care on a going concern basis. The validity of which depends upon future profitable operation of the Group and continuing financial support from the intermediate parent enterprise which has confirmed that it would not demand repayment of the debts due to it unless the Company has sufficient working capital to do so.

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 recoverable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities, respectively. The effects of these adjustments have not been reflected in the financial statements.

c) Group financial statements

The group financial statements include the financial statements of the Company and its subsidiaries made up to 31 December. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

All significant intercompany transactions and balances within the Group are eliminated on consolidation.

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

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

2. PRINCIPAL ACCOUNTING POLICIES

The financial statements have been prepared in accordance with generally accepted accounting principles in Hong Kong and comply with Statements of Standard Accounting Practice (“SSAP”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Companies Ordinance. The financial statements are prepared under the historical cost convention. A summary of the significant accounting policies adopted by the Company is set out below.

– 46 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

a) Revenue recognition

i) Revenue from sale of goods is recognised on the transfer of risks and rewards of ownership which generally coincides with the time when the goods are delivered to customers and title has passed.
ii) Interest income from bank deposits is accrued on a time apportioned basis by reference to the principal amounts outstanding and the interest rates applicable.
iii) Management fee income is recognised when the services are rendered.
iv) Dividend income is recognised when the shareholders’ rights to receive payment is established.

b) 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. Subsidiaries are considered to be controlled if the Company has the power, directly or indirectly, to govern the financial and operating policies, so as to obtain benefits from their activities.

Investments in subsidiaries in the balance sheet are stated at cost less provision and impairment losses, if necessary, for any permanent diminution in value. The results of subsidiaries are accounted to the extent of dividends received and receivable.

Intra-group balances and transactions, and any unrealised profits arising from intra-group transactions, are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

c) Joint venture company

The Group’s joint venture company is an independent business entity established and operating in mainland China. The joint venture agreement and related constitution stipulated 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 operations and any distribution of surplus assets are shared in accordance with the terms of the joint venture agreement.

The Group’s joint venture company is accounted for a subsidiary as the Group has unilateral control over the joint venture company.

d) Property, plant and equipment

Property, plant and equipment other than other properties are stated at cost less accumulated depreciation and accumulated impairment losses.

Land and building held for own use are stated in the balance sheet at their revalued amount, being their open market value at the date of revaluation less any subsequent accumulated depreciation. Revaluations are performed by qualified valuers with sufficient regularity to ensure that the carrying amount of these assets does not differ materially from that which would be determined using fair values at the balance sheet date.

– 47 –

ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

APPENDIX I

Changes arising on the revaluation of land and buildings held for own use are generally dealt with in reserves. The only exceptions are as follows:

when a deficit arises on revaluation, it will be charged to the income statement, if and to the extent that it exceeds the amount held in the reserve in respect of that same assets; and
when a surplus arises on revaluation, it will be credited to the income statement, if and to the extent that a deficit on revaluation in respect of that same asset, had previously been charged to the income statement.

Major costs incurred in restoring property, plant and equipment to their normal working condition are charged to the income statement. Improvements are capitalised and depreciated over their expected useful lives to the Group.

The gain or loss on disposal of property, plant and equipment other than other properties is the difference between the net sale proceeds and the carrying amount of the relevant asset, and is recognised in the income statement. Any revaluation reserve balance remaining attributable to the relevant asset is transferred to retained profits and is shown as a movement in reserves.

e) Depreciation

Depreciation is not provided for freehold land. Property, plant and equipment are depreciated at rates sufficient to write off their cost/valuation less accumulated impairment losses over their estimated useful lives on a straight-line basis. The principal annual rates 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%

f) Operating leases

Leases where substantially all the rewards of ownership of assets remain with the leasing company are accounted for as operating leases. Rental payables under operating leases are accounted for in the income statement on a straight-line basis over the years of the relevant leases.

g) Impairment of assets

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

property, plant and equipment (other than properties carried at revalued amounts); and
investments in subsidiaries, associates and joint ventures (except for those accounted for at fair value).

– 48 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

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

i) Calculation of recoverable amount

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

ii) Reversals of impairment losses

An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

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

h) Deferred taxation

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

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

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

i) Provisions and contingent liabilities

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

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

– 49 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

j) Translation of foreign currencies

Transactions in foreign currencies during the year are translated at exchange rates ruling at the transaction dates. Monetary assets and liabilities expressed in foreign currencies at the balance sheet date are translated at rates of exchange ruling at the balance sheet date. Exchange differences arising in these cases are dealt with in the income statement.

The financial statements of subsidiaries and associates expressed in foreign currencies are translated at the rates of exchange ruling at the balance sheet date whilst the income statement is translated at an average rate. Exchange differences arising are dealt with as movement in exchange fluctuation reserve.

k) Related parties

Two 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, or vice versa. Parties are also considered to be related if they are subject to common control or common significant influence.

l) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost, calculated on a weighted average basis, comprises all costs of purchases, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

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

m) Cash equivalents

Cash equivalents are short-term, highly liquid investments which are readily convertible into known amounts of cash without notice and which were within three months of maturity when acquired. Cash equivalents include investments and advances denominated in foreign currencies provided that they fulfil the above criteria.

For the purposes of the cash flow statement, cash equivalents would also include bank overdrafts and advances from banks repayable within three months from the date of the advance.

– 50 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

n) 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 income statement 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.

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.

3. TURNOVER

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

– 51 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

4. OTHER REVENUE

Gain on disposal of property, plant and equipment Bank interest income Management fee received from an associate Sales of obsolete inventories Rental income Others	2004 HK$’000 29 64 585 698 556 510 2,442	2003 HK$’000 81 65 2,346 350 – 390
		3,232

5 (a). REVERSAL OF IMPAIRMENT LOSS UPON DISPOSAL OF INTERESTS IN ASSOCIATES

On 30 April 2004, the Group agreed to dispose all of its 49% equity in Hanson International Industrial Company Limited (“Zhuhai Hanson”), a private company established in the PRC, and Hanson International Optical Co., Ltd. (“Hong Kong Hanson”), a private company incorporated in Hong Kong, at the aggregate consideration of HK$4,700,000. Full provision for impairment loss against the Group’s interests in these associates had been made in the previous years.

5 (b).WAIVER OF AMOUNTS DUE TO ASSOCIATES UPON DISPOSAL OF INTERESTS IN ASSOCIATES

As the precondition of the said disposals, on the same date, a supplemental agreement was also made between the Group, Zhuhai Hanson, Hong Kong Hanson, and all the other shareholders of Zhuhai Hanson and Hong Kong Hanson, under which Zhuhai Hanson and Hong Kong Hanson agreed to waive all the debts due by the Group amounted to approximately HK$6,200,000.

As a result, a net gain of approximately HK$10,900,000 arising from the disposal of the interests in the two associates, which represented the write back of the previous impairment loss provision for the interests in the associates of HK$4,700,000 and the write off of current accounts payable to these two associates of approximately HK$6,200,000, has been recorded in the current year’s consolidated income statement.

– 52 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

6. PROFIT/(LOSS) FROM OPERATING ACTIVITIES

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

Cost of inventories * Depreciation Minimum lease payments under operating leases in respect of land and buildings Staff costs (including directors’ remuneration): Wages and salaries Pension contributions Less: Forfeited contributions Net pension contributions Exchange loss, net Interest on loan from a shareholder Provision against inventories Provision for doubtful debts	2004 HK$’000 156,870 13,645 1,569 42,264	2004 HK$’000 156,870 13,645 1,569 42,264	2003 HK$’000 175,652 14,068 1,514 48,645
	532 (22)		711 (393)
	510 42,774 437 11,744 238 –		318 48,963 192 10,566 7,168 5,074

The cost of inventories includes HK$42,934,000 (2003: HK$51,775,000) 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 2004, the Group had no forfeited contributions available to reduce its contributions to the pension scheme in future years (2003: Nil).

7. TAXATION

No Hong Kong profits tax and overseas tax has been provided in the financial statements as the companies within the Group have neither accumulated tax losses brought forward, which exceed the estimated assessable profits for the year, nor assessable profits for the year.

– 53 –

ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

APPENDIX I

The charge for the year can be reconciled to the loss per the consolidated income statement as follows:

Loss before taxation Calculated at a taxation rate of 17.5% (2003: 17.5%) Effect of different taxation rates in other countries Income not subject to taxation Expenses not deductible for taxation purposes Unrecognised tax losses Utilisation of previously unrecognised tax losses Taxation charge	2004 HK$’000 (8,497) (1,487) 634 (200) 338 4,305 (3,590) –	2003 HK$’000 (39,629

		(6,935 (1,156 2,125 5,793 (16 340
		151

The tax charge for the year represents the share of tax of associates located outside Hong Kong of HK$nil (2003: HK$151,000).

8. LOSS ATTRIBUTABLE TO SHAREHOLDERS

The consolidated loss attributable to shareholders includes a loss of approximately HK$2,118,000 (2003: HK$7,000) which has been dealt with in the financial statements of the Company.

9. DIRECTORS’ REMUNERATION

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

Fees Other emoluments	2004 HK$’000 – 483 483	2003 HK$’000 – 1,355
		1,355

– 54 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

10. PROPERTY, PLANT AND EQUIPMENT

Group

Leasehold land and buildings HK$’000 Cost or valuation At 1/1/2004 68,900 Addition – Disposals – At 31/12/2004 68,900 Accumulated depreciation At 1/1/2004 17,889 Charge for the year 3,088 Disposals – At 31/12/2004 20,977 Net book value At 31/12/2004 47,923 At 31/12/2003 51,011 An analysis of cost or valuation: At cost – At valuation 68,900 68,900	Plant and machinery HK$’000 166,365 2,467 (576) 168,256 130,245 5,396 (437) 135,204 33,052 36,120 168,256 – 168,256	Furniture, fixtures and equipment HK$’000 63,029 533 (5) 63,557 42,957 5,111 – 48,068 15,489 20,072 63,557 – 63,557	Motor vehicles HK$’000 2,521 – (332) 2,189 2,433 50 (294) 2,189 – 88 2,189 – 2,189	Total HK$’000 300,815 3,000 (913) 302,902 193,524 13,645 (731) 206,438 96,464 107,291 234,002 68,900 302,902

As at 31 December 2004, the Company had no property, plant and equipment.

11. INVESTMENTS IN SUBSIDIARIES

Unlisted shares, at cost Less: Impairment loss	2004 HK$’000 52,912 (52,912) –	2003 HK$’000 52,912 (52,912) –

– 55 –

ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

APPENDIX I

The following is a list of the principal subsidiaries at 31 December 2004:

			Nominal
			value of
	Country/place		issued
	of incorporation/		ordinary/
	establishment	Principal	registered
Name	and operation	activities	share capital	Interest	held
				Directly	Indirectly
				%	%
Dongguan De Bao	The PRC	Manufacture	HK$58,550,910	–	50%
Optical Co., Ltd.		of multi-coating	(Note i)		(Note iii)
(“De Bao”)		lenses
Dongguan Hamwell	The PRC	Manufacture	HK$62,504,800	–	83%
Glasses Co., Ltd.		of optical	(Note ii)
(“Dongguan		products
Hamwll”)
Global Origin Limited	Hong Kong	Investment	HK$75,000,000	–	90%
		holding
Profit Trend	Hong Kong	Investment	HK$1,000,000	–	50%
International		holding			(Note iii)
Limited
Prowin Commercial	Hong Kong	Property	HK$2	–	100%
& Industrial		holding in
Limited		the PRC
Shenzhen Henggang	The PRC	Manufacture	US$30,000,000	–	81%
Swank Optical		of optical
Industrial Co., Ltd.		products
(“Henggang”)
(Note iv)
Swank International	Hong Kong	Trading	HK$100,000	–	100%
Optical Company		optical
Limited		products
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 the articles of association, including the amount of total registered capital. Up to the date of this annual report, the Group has not obtained the approval from the relevant authorities.

– 56 –

APPENDIX I

ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

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 2004.
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) Heggang is a sino-foreign owned joint venture enterprise under the PRC law. Subject to the payment of an annual amount of approximately HK$2,830,000 (2003: HK$2,830,000) 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 of the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

12. INTERESTS IN ASSOCIATES

Unlisted shares, at cost Share of net assets Less: Impairment loss Amounts due from associates	Group 2004 2003 HK$’000 HK$’000 – – 128,876 143,592 (100,029) (113,016) 28,847 30,576 8,373 5,005 37,220 35,581	Company 2004 2003 HK$’000 HK$’000 151,725 181,119 – – (121,934) (151,328) 29,791 29,791 53 53 29,844 29,844

a) The amounts due from associates are unsecured, interest free and are not repayable within the next twelve months from the balance sheet date.
b) The amounts due to associates are unsecured, interest free and repayable on demand.

– 57 –

APPENDIX I

ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

c) The following is a list of the principal associates at 31 December 2004:

				Percentage of
		Country/place		interest in
		of incorporation/		ownership/
	Business	establishment	Principal	voting power
Name	structure	and operation	activities	held indirectly
Dongguan Yueheng	Corporate	The PRC	Manufacture	50%
Optical Co., Ltd.			of optical
			lenses
Dongguan Yueheng	Corporate	Hong Kong	Trading of	50%
Optical (HK) Co.			optical
Limited			products
Dongguan Yueheng	Corporate	The British	Financial	50%
Optical (BVI)		Virgin	servicing and
Company Limited		Islands	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 as 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.

13. AMOUNTS DUE FROM/(TO) SUBSIDIARIES AND INTERMEDIATE PARENT ENTERPRISE

The amounts are unsecured, interest free and repayable on demand.

14. INVENTORIES

Group

Group
Raw materials Work in progress Finished goods	2004 HK$’000 15,139 5,094 3,088 23,321	2003 HK$’000 13,014 7,202 1,443
		21,659

As at 31 December 2004, all inventories are stated at cost.

15. AMOUNT DUE TO A SHAREHOLDER, PROBEST

The amount due to Probest is unsecured, interest bearing at a rate per annum equivalent to 1% over Hong Kong prime rate and has no fixed repayment terms.

– 58 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

16. PROVISION FOR LONG SERVICE PAYMENTS

Group At 1 January 2004 Amount provided during the year At 31 December 2004 Portion classified as current liabilities Non-current portion	2004 HK$’000 490 (111) 379 – 379	2003 HK$’000 552 (62
		490 –
		490

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 2 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.

17. ISSUED CAPITAL

	2004	2003
	HK$’000	HK$’000
Authorised, issued and fully paid:
1,000 shares of US$1 each	8	8

18. DEFERRED TAXATION

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:

	Group		Company	Company
	2004	2003	2004	2003
	HK$’000	HK$’000	HK$’000	HK$’000
Tax losses	93,111	96,029	–	–

The revaluation arising from the revaluation of the Group’s leasehold land and buildings does not constitute a temporary 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.

– 59 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

19. RELATED PARTY TRANSACTIONS

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

	Note	2004	2003
		HK$’000	HK$’000
Sales of finished goods to associates	(i)	10,224	8,390
Purchases of raw materials and finished
goods from associates	(ii)	14,807	12,755
Management fee income from an associate	(iii)	585	2,346
Annual rental to a joint venture partner	(iv)	2,830	2,830

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 raw materials from associates were made according to the published prices, terms and conditions offered by the Group 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) The annual rental paid to a joint venture partner in the PRC and accordingly the Group is entitled to all of the profits and bears all of the losses of Henggang.

20. POST BALANCE SHEET EVENTS

(a) On 20 January 2005, Probest Holdings Inc (“Probest”), Swank International Manufacturing Company Limited (“Swank”) and the Company entered into a conditional loan restructuring agreement (“Loan Restructuring Agreement”), pursuant to which Probest conditionally agreed to waive an outstanding balance owing by Swank to Probest, the interest and the default interest in the amount of approximately HK$12,669,995 and any further interest which may be accrued on the Debt up to and inclusive of the effective date when the conditions of the Loan Restructuring Agreement are fulfilled.
(b) As part of the Loan Restructuring Agreement and on its effective date when all the stipulated conditions are fulfilled, the Company will issue and deliver a new promissory note to Probest, in consideration of which the Swank undertakes to waive a sum equivalent to the remaining debt (which amounts to HK$112,167,732 as of 18 April 2005) due from Profitown to Swank. In addition, Swank will execute a guarantee in favour of Probest (“Swank Guarantee”) that if and whenever the Company defaults for any reason in payment of the principal sum due under the new promissory note to be issued to Probest, Swank will upon demand by Probest unconditionally pay and satisfy all the interest which the Company is liable to pay under the new promissory note on and after such default.

– 60 –

APPENDIX I ACCOUNTANTS’ REPORT ON THE PROFITOWN GROUP

(c) Both before and immediately after completion of the conditional sale and purchase agreement between China Time Investment Holdings Limited, amongst others, with Probest and subsidiaries of SW Kingsway Capital Holdings Limited to acquire 1,874,917,645 Swank’s shares (the “Share Disposal Agreement”), the Company will be held as to 30% by Probest and as to 70% by Swank. On completion, Swank, Probest, Tomorrow International Holdings Limited, and the Company will enter into a shareholder agreement to regulate the management of the Company (“Profitown Shareholders Agreement”). Pursuant to principal terms of the Proftown Shareholders Agreement, Swank will have the right to request Probest or an independent third party procured by Probest to purchase (the “Put Option”) all (but not part of only) of its shares, being 70% of all the existing issued shares of the Company exercisable at any time before the expiry of 30 months from the completion date of the Share Disposal Agreement (the “Completion Date”) at a price equal to the net tangible asset value of the Company as at the date of exercise of such put option attributable to such shares and such purchaser will assume all the liabilities due from Swank to any member of the Group incurred prior to the date of Profitown Shareholders Agreement at nil consideration. If the net tangible asset value of the Company as determined on the same basis and accounting policies adopted by the Company in its latest audited accounts shall fall below zero during the 30month period from the Completion Date, Probest will indemnify the Company on demand for the deficit.

The further details and conditions for completion, where appropriate, of the said Loan Restructuring Agreement and Profitown Shareholders Agreement are set out in the Circular of Swank to which this report was incorporated.

21. PARENT ENTERPRISE

The directors consider Winspark Venture Limited, a company incorporated in the British Virgin Islands, to be its ultimate parent enterprise.

– 61 –

GENERAL INFORMATION

APPENDIX II

1. RESPONSIBILITY STATEMENT

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

2. DIRECTORS INTERESTS

As at the Latest Practicable Date, the interests or short positions of each Director and the Company’s chief executive in the shares, underlying shares or debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such 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 the Company and the Stock Exchange were as follows:

	Nature of	Number of	Approximate
Directors	interest	Shares	Percentage
Mr. Cheung Wah Hing	Personal	358,400	0.01%

Save as disclosed above, as at the Latest Practicable Date, none of the Directors and chief executive of the Company were interested, or were deemed to be interested in the long and short positions in the shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of the SFO) which (a) were required to be notified to the Company 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 the Company to be notified to the Company and the Stock Exchange.

– 62 –

GENERAL INFORMATION

APPENDIX II

3. SUBSTANTIAL SHAREHOLDERS

(a) Interests in Shares of the Company

As at the Latest Practicable Date, so far as was known to any Director or chief executive of the Company, the following persons, other than the Directors or chief executive of the Company, have interest or short position in the Shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Division 2 and 3 of Part XV of the SFO, or who was directly or indirectly, interested in 10% of or more of the nominal value of any class of shares capital carrying rights to vote in all circumstances at general meeting of any member of the Group:

				Approximate %
				of the existing
			No. of shares of	share capital
Name	Note	Capacity	the Company held	of the Company
Chan Yuen Ming (Mr. Chan)	1	Interest of controlled corporation	1,593,599,230	51%
Winspark Venture Limited	1	Interest of controlled corporation	1,593,599,230	51%
(Winspark)
Tomorrow International	1	Interest of controlled corporation	1,593,599,230	51%
Holdings Limited (TIHL)
Fortune Dynamic Group	1,2	Interest of controlled corporation	1,593,599,230	51%
Corp (Fortune Dynamic)
Probest Holdings Inc.	1,2	Beneficial owner	1,593,599,230	51%
(Probest)
Rich Global Investments	2,4	Beneficial owner	312,486,000	10%
Limited (Rich Global)
Kingsway Lion Spur	4	Beneficial owner	281,238,000	9%
Technology Limited
(Kingsway Lion)
Kingsway Financial	3,5	Interest of controlled corporation	1,874,917,645	60%
Services Group Limited
SW Kingsway Capital	2,3,4,5	Interest of controlled corporation	4,062,240,875	130%
Holdings Limited
Kingsway International	2,3,4,5	Interest of controlled corporation	4,062,240,875	130%
Holdings Limited
(Kingsway International)
Lam Ka Chung William	2,3,4,5,6	Interest of controlled corporation/	4,062,240,875	130%
(Mr. Lam)		Interest of spouse
Lam Wong Yuk Sin Mary	2,3,4,5,6	Interest of controlled corporation/	4,062,240,875	130%
(Mrs Lam)		Interest of spouse
Choi Koon Shum Jonathan	2,3,4,5,7	Interest of controlled corporation	4,062,240,875	130%
(Mr Choi)
Kwan Wing Kum Janice	2,3,4,5,7	Interest of spouse	4,062,240,875	130%

– 63 –

GENERAL INFORMATION

APPENDIX II

Notes:

Winspark, a company wholly owned by Mr. Chan, holds 58% equity interest of TIHL, which throught its wholly owned subsidiary Fortune Dynamic holds 100% of Probest.
In addition to the Shares held by Rich Global as beneficial owner, pursuant to the Option Agreement, Fortune Dynamic agreed to grant to Rich Global an option to purchase 50% of the entire issued shares of Probest.
Upon Completion, the Sale Shares will be pledged to Kingsway Financial Services Group Limited by the Offeror as security for loan facilities granted to Mr. Wang.
SW Kingsway Capital Holdings Limited holds 100% of Festival Development Limited, which in turn holds 100% of both Rich Global and Kingsway Lion Spur.
SW Kingsway Capital Holdings Limited holds 100% of SW Kingsway Capital Group Limited which in turn holds 100% of Kingsway Financial Service Group Limited.
Mr. Lam and his spouse, Mrs. Lam, holds 32,432,317 common shares (approximately 40%) of Kingsway International, which through its wholly owned subsidiary (Innovation Assets Limited) holds 100% of World Development Limited. World Development Limited holds 74% of SW Kingsway Capital Holdings Limited.

Of the above 32,432,317 common shares, 9,726,750 common shares are held directly by Mr. Lam , 10,515,060 common shares are held by Dynasty International Holdings Limited (“Dynasty”), 9,790,507 common shares are held directly by Mrs. Lam and 2,400,000 common shares are held by Abundant World Limited.

Dynasty is a wholly owned subsidiary of Global Fame Limited, which is wholly owned by The WKC Lam Family Trust, which is a discretionary trust with Mr. Lam and his two children as the beneficiaries. On 29 June 2004, Mrs Lam was appointed as a trustee of The WKC Lam Family Trust.

Abundant World Limited is wholly owned by The Mary Lam Family Trust which is a discretionary trust with Mrs. Lam and her children as the beneficiaries. Mr. Lam is a trustee of The Mary Lam Family Trust.

Mr. Choi beneficially owns or control 36,929,651 shares (approximately 46%) of the issued share capital of Kingsway International, which through its wholly owned subsidiary (Innovation Assets Limited) holds 100% of World Development Limited. World Development Limited holds 74% of SW Kingsway Capital Holdings Limited.

Of the above 36,929,651 shares, 10,101,596 common shares of Kingsway International are held by Mr. Choi as personnal interest and 12,750,000 and 14,078,055 common shares are held by Sun Wah Capital Limited and Scarlet Red Limited respectively as corporate interest. In other words, Mr. Choi personally hold approximately 13% of Kingsway International and has corporate interest of approximately 16% and 17% of Kingsway International through Sun Wah Capital Limited and Scarlet Red Limited respectively.

– 64 –

GENERAL INFORMATION

APPENDIX II

(b) substantial shareholders of other members of the Group

As at the Latest Practicable Date, so far as is known to the directors of the Company, the following are parties, other than a director of the Company, who is, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group:

		% of existing
	Name of Substantial	issued share
Name of Subsidiary	Shareholders	capital
Profitown Investment Corporation	Probest Holdings Inc.	30%
Global Origin Limited	Trade Bargain Limited	10%
Profit Trend International Limited	Wischance Investments Limited	50%
Shenzhen Henggang Swank Optical	Henggang Zheng Stock	19%
Industries Co. Ltd.	Investment Co. Ltd.

4. MATERIAL LITIGATIONS

Save as disclosed below, no member of the 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 Group:

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

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

– 65 –

GENERAL INFORMATION

APPENDIX II

5. SERVICE CONTRACTS

Service contact was entered between the Company and Mr. Wu Wang Li, an independent non-executive director of the Company, for a term of 1 year commencing from 27 September 2004 with a director fee of HK$120,000 per annum.

Save as disclosed, there is no existing or proposed service contract between any of the Directors and the Company or any of its subsidiaries which is not terminable within one year without payment of compensation (other than statutory compensation) and no service contract with any Director has been entered into or amended within six months before the Latest Practicable Date.

6. DIRECTORS’ INTERESTS IN COMPETING BUSINESS

As at the Latest Practicable Date, none of the Directors or any of their respective associates had any interest in any business which causes or may cause any significant competition with the business of the Group or any significant conflicts with the interests of the Group.

7. EXPERT AND CONSENT

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

Name Qualification Barits Securities a deemed licensed corporation under the SFO to conduct (Hong Kong) Limited types 1 (dealing in securities) and 6 (advising on corporate finance) regulated activities CCIF CPA Limited Certified Public Accountants

As at the Latest Practicable Date, Barits was not beneficially interested in the share capital of any member of the Group nor did it have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group nor did it have any interest, either director or indirect, in any assets which have been, since 31 December 2004 (the date to which the latest published audited financial statements of the Group were made up), acquired by or disposed of or leased to or are proposed to be acquired by or disposed of or leased to any member of the Group.

Barits has given and not withdrawn its written consent to the issue of this circular with the inclusion of its opinion and references to its name and opinion in the form and context in which it appears.

– 66 –

GENERAL INFORMATION

APPENDIX II

8. MATERIAL CONTRACTS

Save as disclosed below, as of the Latest Practicable Date, the Company has not entered into any material contracts (not being contracts entered into in the ordinary course of business) within the two years immediately preceding the Latest Practicable Date:–

Underwriting Agreement entered into between Probest, the Company and TIHL dated 3 September 2003 in relation to the underwriting of an open offer of 2,901,658,253 shares in the Company;
Loan Settlement Agreement dated 3 September 2003 entered into between the Company and Probest for the settlement of an unsecured loan in the principal sum of HK$250,000,000 owing by the Company to Probest;
Sale and Purchase Agreement dated 3 September 2003 entered into between Probest, the Company and TIHL relating to the sale by the Company to Probest of 30% of the entire issued share capital in Profitown and 30% of the loan due from Profitown to the Company;
Loan Restructuring Agreement dated 20 January 2005 as varied and supplemented by the supplemental loan restructuring agreement dated 13 April 2005 entered into between Probest, the Company and Profitown in relation to, inter alia , the restructuring of the Debt.

9. MATERIAL ADVERSE CHANGE

Up to the Latest Practicable Date, the board of Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2004, the date to which the latest audited consolidated financial statements of the Group were made up.

10. MISCELLANEOUS

As at the Latest Practicable Date, there is no contract or arrangement subsisting at the date of this circular in which a Director is materially interested and which is significant in relation to the business of the Group.

Each of the Directors has confirmed that he/she and their respective associates (as defined under the Listing Rules) do not have any interests in a business which competes or is likely to compete, either directly or indirectly, with the business of the Group.

– 67 –

GENERAL INFORMATION

APPENDIX II

11. GENERAL

(a) As at the Latest Practicable Date, none of the Directors has any direct or indirect interest in any assets which had been acquired or disposed of by or leased to the Company or any subsidiary of the Company since 31 December 2004 (the date to which the latest published audited accounts of the Company were made up) or proposed to be so acquired, disposed of or leased.
(b) The registered office of the Company is situate at 27th Floor, Henley Building, 5 Queen’s Road Central, Hong Kong.
(c) The company secretary and qualified accountant of the Company in Hong Kong is Tam Wing Kin, FCCA.
(d) The Company’s share registrar is Secretaries Limited at G/F, Bank of East Asia, Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.
(e) The English text of this circular shall prevail over the Chinese text in the case of any inconsistency.

12. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at Company’s registered office at 27/F Henley Building, 5 Queen’s Road Central, Hong Kong up to and including 30 May 2005:

(a) the Memorandum and Article of Associates of the Company;
(b) the written consent referred to under the section headed “Expert and Consent” in this appendix;
(c) the documents referred to in the paragraph headed “Material contracts” in this Appendix II;
(d) the form of the Shareholders Agreement;
(e) the form of the Agency Agreement; and
(f) the service contract dated 27 September 2004 entered into between the Company and Mr. Wu Wang Li, an independent non-executive Director.

– 68 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

Swank International Manufacturing Company Limited

(incorporated in Hong Kong with limited liability) (Stock code: 663)

NOTICE IS HEREBY GIVEN THAT an extraordinary general meeting (the “EGM”) of Swank International Manufacting Company Limited (the “Company”) will be held on at Unit 903 – 906, 9th Floor, Tower 1, Harbour Centre, 1 Hok Cheung Street, Hung Hom, Kowloon, Hong Kong on Monday, 30 May 2005 at 12:30 p.m. for the purpose of considering and, if thought fit, passing the following resolutions, with or without modifications, as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

“ THAT conditional upon (i) the grant of the First Consent (as defined in Resolution numbered 3 of this notice) by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission (or any delegate of the Executive Director) and (ii) the First Consent being approved by the shareholders of the Company other than Probest Holdings Inc., Rich Global Investments Limited, Kingsway Lion Spur Technology Limited and their respective associates (as such term is defined in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited) and parties acting in concert with any of them (“Independent Shareholders”) by way of poll:
(a) the Loan Restructuring Agreement dated 20 January 2005 (as varied and supplemented by the supplemental loan restructuring agreement dated 13th April, 2005) (collectively hereinafter referred to as the “Loan Restructuring Agreement”, a copy of which has been produced to the meeting marked “A” and signed by the Chairman of the meeting for the purpose of identification) made between the Company, Probest Holdings Inc. (“Probest”) and Profitown Investment Corporation (“Profitown”) in respect of the settlement of the loan in the principal sum of HK$163 million due from the Company to Probest, and all the transactions contemplated thereunder and all other matters thereof and incidental thereto or in connection therewith, including (without limitation) the issue of the Promissory Note (the “Promissory Note”) by Profitown to Probest and the execution of the Guarantee (the “Guarantee”) by the Company in favour of Probest, the respective form of which is annexed as Schedule 2 and Schedule 1 to the Loan Restructuring Agreement, pursuant to the terms of the Loan Restructuring Agreement, be and are hereby approved;
(b) the proposed issue by Profitown of the Promissory Note be and is hereby approved;

– 69 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

(c) the proposed execution of the Guarantee by the Company in favour of Probest be and is hereby approved;
(d) the directors of the Company (the “Directors”) be and are hereby authorised to do all such acts and things and to sign and execute all such other or further documents and to take all such steps which in the opinion of the Directors may be necessary, appropriate, desirable or expedient to implement and/or give effect to the terms of, or the transactions contemplated by, the Loan Restructuring Agreement and to agree to such variation, amendments or waiver of matters relating thereto as are, in the opinion of the Directors, in the interest of the Company.”
“ THAT conditional upon (i) the grant of the Second Consent (as defined in Resolution numbered 4 of this notice) by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission (or any delegate of the Executive Director) and (ii) the Second Consent being approved by the Independent Shareholders by way of poll:
(a) the Shareholders Agreement (the “Shareholders Agreement”, a copy of which has been produced to the meeting and marked “B” and signed by the Chairman of the meeting for the purpose of identification) to be entered into between the Company, Probest, Profitown and Tomorrow International Holdings Limited (“TIHL”) in respect of Profitown upon completion of the sale and purchase agreement dated 20 January 2005 (as varied and supplemented by a supplemental agreement dated 13 April 2005) (together hereinafter referred to as the “Sale and Purchase Agreement”) of certain shares in the Company and made between China Time Investment Holdings Limited (the “Offeror”), Probest, Rich Global Investments Limited, Kingsway Lion Spur Technology Limited, TIHL and SW Kingsway Capital Holdings Limited (“Completion”) and all the matters contemplated thereunder be and are hereby approved;
(b) the Directors be and are hereby authorised to do all such acts and things and to sign and execute all such other or further documents and to take all such steps which in the opinion of the Directors may be necessary, appropriate, desirable or expedient to implement and/or give effect to the terms of the Shareholders Agreement and to agree to such variation, amendments or waiver of matters relating thereto as are, in the opinion of the Directors, in the interest of the Company.”
“ THAT the consent by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission (or any delegate of the Executive Director) of the Loan Restructuring Agreement as a special deal under Rule 25 of the Hong Kong Code on Takeovers and Mergers (the “First Consent”) be and is hereby approved.”

– 70 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

“ THAT the consent by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission (or any delegate of the Executive Director) of the Shareholders Agreement as a special deal under Rule 25 of the Hong Kong Code on Takeovers and Mergers (the “Second Consent”) be and is hereby approved.”
“ THAT :
(a) the Agency Agreement (the “Agency Agreement”, a copy of which has been produced to the meeting and marked “C” and signed by the Chairman of the meeting for the purpose of identification) to be entered into by Rightlink Trading Ltd., a company wholly-owned by Mr. Wang An Kang, being the ultimate beneficial shareholder of the Offeror as at the date of this notice or such other company wholly-owned by Mr. Wang An Kang and to be nominated by the Offeror (the “Nominee”), and Anchorage Trading Limited, or such other wholly-owned subsidiary of the Company (the “Trading Company”) upon Completion pursuant to which the Trading Company will provide agency services to the Nominee, which agreement shall be for a term commencing from Completion up to 31 December 2007, and all the transactions contemplated thereunder and all other matters thereof and incidental thereto or in connection therewith including all subsidiary transactions contemplated thereunder, be and are hereby approved provided that the amount of agency fee to be received by the Trading Company under the Agency Agreement shall not exceed HK$10 million, HK$15 million and HK$20 million for the years ending 31 December 2005, 31 December 2006 and 31 December 2007 respectively;
(b) the Directors be and are hereby authorised to do all such acts and things and to sign and execute all such other or further documents and to take all such steps which in the opinion of the Directors may be necessary, appropriate, desirable or expedient to implement and/or give effect to the terms of, or the transactions contemplated by, the Agency Agreement and to agree to such variation, amendments or waiver of matters relating thereto as are, in the opinion of the Directors, in the interest of the Company.”

By order of the Board

Swank International Manufacturing Company Limited Yau Tak Wah, Paul Executive Director

Hong Kong, 10 May 2005

– 71 –

NOTICE OF THE EXTRAORDINARY GENERAL MEETING

Registered Office:–

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

Notes:

Each Shareholder entitled to attend and vote at the EGM is entitled to appoint one or more proxies, whether a member of the Company or not, to attend and vote on his/her behalf.
To be valid, a form of proxy and the power of attorney or other authority, if any, under which it is signed, or a certified copy of such power or authority, must be lodged with the registered office of the Company at 27th Floor, Henley Building, 5 Queen’s Road Central, Hong Kong not less than 48 hours before the time appointed for holding the meeting or any adjournment thereof.

– 72 –

AI assistant

Design Capital Limited — Proxy Solicitation & Information Statement 2005

49990_rns_2005-05-11_73dd2974-846e-41a5-b9d0-d1ebf87c643e.pdf

Swank International Manufacturing Company Limited

SPECIAL DEALS AND CONNECTED TRANSACTIONS CONTINUING CONNECTED TRANSACTION

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

Swank International Manufacturing Company Limited

Executive Directors

SPECIAL DEALS AND CONNECTED TRANSACTIONS CONTINUING CONNECTED TRANSACTION

INTRODUCTION

The Sale and Purchase Agreement

LETTER FROM THE BOARD

Loan Restructuring Agreement

Shareholders Agreement

LETTER FROM THE BOARD

Agency Agreement

CONNECTED TRANSACTIONS

Loan Restructuring Agreement

Principal terms of the Loan Restructuring Agreement

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Guarantee

Shareholders Agreement

Pre-Completion

Post-Completion

Information on Profitown Group

Listing Rules and Takeovers Code implications

CONTINUING CONNECTED TRANSACTION

Agency Agreement

LETTER FROM THE BOARD

Basis for the cap amounts

Reasons for the Continuing Connected Transaction

Information on Trading Company

LETTER FROM THE BOARD

Information on the Group

FINANCIAL AND TRADING PROSPECTS

POSSIBLE UNCONDITIONAL CASH OFFER

PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

GENERAL

LETTER FROM THE BOARD

EGM

RECOMMENDATION

ADDITIONAL INFORMATION

Swank International Manufacturing Company Limited

SPECIAL DEALS AND CONNECTED TRANSACTIONS CONTINUING CONNECTED TRANSACTION

BARITS SECURITIES (HONG KONG) LIMITED

SPECIAL DEALS AND CONNECTED TRANSACTIONS CONTINUING CONNECTED TRANSACTION

INTRODUCTION

The Sale and Purchase Agreement

LETTER FROM BARITS

The Loan Restructuring Agreement

The Shareholders Agreement

The Agency Agreement

Composition of the Independent Board Committee

Basis of our opinion

THE SALE AND PURCHASE AGREEMENT

THE LOAN RESTRUCTURING AGREEMENT

Rationale for entering into the Loan Restructuring Agreement

LETTER FROM BARITS

LETTER FROM BARITS

LETTER FROM BARITS

Principal terms of the Promissory Note

(i) Borrowing cost

LETTER FROM BARITS

(ii) Maturity

(iv) Security

LETTER FROM BARITS

Financial effect brought about by the Loan Restructuring Agreement on the Group

(i) Profit and loss and cash flow

(ii) Gearing

(iii) Net tangible assets

LETTER FROM BARITS

Recommendation

THE SHAREHOLDERS AGREEMENT

Design Capital Limited Proxy Solicitation & Information Statement 2005