Dongfeng Motor Group Company Limited — Proxy Solicitation & Information Statement 2006

May 24, 2006

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

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.

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INNER MONGOLIA DEVELOPMENT (HOLDINGS) LIMITED

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 279)

MAJOR TRANSACTION — ACQUISITION AND CONVERSION OF CONVERTIBLE NOTE

A notice convening the EGM (as defined herein) to be held on Friday, 9 June 2006 at 9:00 a.m. at 30th Floor China United Centre, 28 Marble Road, North Point, Hong Kong is set out on pages 106 and 107 of this circular. If you are not able to attend the EGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the branch share registrar of the Company, Secretaries Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for holding the EGM. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment of it should Shareholders so wish.

24 May 2006

CONTENTS

			Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			1
LETTER FROM THE BOARD.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			3
APPENDIX I	—	FINANCIAL INFORMATION OF THE GROUP . . . . . . . . . . . . . . . . .	11
APPENDIX II	—	ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION
		OF HMIL GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	44
**APPENDIX III **	—	UNAUDITED PROFORMA STATEMENT OF ASSETS AND
		LIABILITIES OF THE ENLARGED GROUP . . . . . . . . . . . . . . . . .	94
APPENDIX IV	—	GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	100
NOTICE OF EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			106

— i —

DEFINITIONS

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

“Agreement”	the conditional agreement dated 21 April 2006 and a
	supplemental agreement dated 2 May 2006 entered into
	between Yearwise and Equity Spin relating to the Transaction;
“Associates”	has the meaning ascribed thereto in the Listing Rules;
“Board”	the board of directors of the Company;
“Company”	Inner Mongolia Development (Holdings) Limited, a company
	incorporated in the Cayman Islands, the shares of which are
	listed on the Stock Exchange;
“Completion”	completion of the Transaction under the Agreement;
“Connected Person(s)”	the meaning ascribed thereto in the Listing Rules;
“Conversion”	the proposed exercise of conversion rights under the
	Convertible Note by Equity Spin to convert into shares in
	HMIL;
“Conversion Price”	the conversion price of the Convertible Note of HK$0.15 per
	HMIL Share;
“Convertible Note”	a 8% convertible note issued by HMIL in the outstanding
	principal amount of HK$131 million due on 20 September
	2015, which is the subject of the sale under the Agreement;
“EGM”	the extraordinary general meeting of the Company to be held
	on Friday, 9 June 2006 at 9:00 a.m. at 30th Floor, China
	United Centre, 28 Marble Road, North Point, Hong Kong to
	approve matters related to the Transaction and the
	Conversion;
”Enlarged Group”	the Group as enlarged by the inclusion of the HMIL Group on
	Completion of the Conversion;
“Equity Spin”	Equity Spin Investments Limited, a wholly-owned subsidiary
	of the Company;
“Group”	the Company and its subsidiaries;
“HMIL”	Hennabun Management International Limited, a company
	incorporated in the British Virgin Islands;
“HMIL Group”	HMIL and its subsidiaries;
“HMIL Shares”	shares of par value of US$0.01 each in HMIL;

— 1 —

DEFINITIONS

“Latest Practicable Date”	19 May 2006;
“Listing Rules”	the Rules Governing the Listing of Securities	on	the Stock
	Exchange;
“SFO”	the Securities and Futures Ordinance (Cap. 571 of the Laws of
	Hong Kong);
“Shareholders”	shareholders of the Company;
“Stock Exchange”	the Stock Exchange of Hong Kong Limited;
“Transaction”	the proposed acquisition of the Convertible Note pursuant to
	the Agreement;
“Willie International”	Willie International Holdings Limited,	a	company
	incorporated in Hong Kong, the shares of which are listed on
	the Stock Exchange of Hong Kong; and
“Yearwise”	Yearwise Finance Limited, a wholly-owned subsidiary of
	Willie International.

— 2 —

LETTER FROM THE BOARD

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INNER MONGOLIA DEVELOPMENT (HOLDINGS) LIMITED

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 279)

Executive Directors

Ms Yau Shum Tek, Cindy (Chairman) Mr Kwong Wai Tim, William (Managing Director) Mr Lai Ming Wai Ms Kwok Wai Ming

Registered Office P.O. Box 309 George Town Grand Cayman Cayman Islands

Independent Non-executive Directors

Mr Lam Ping Cheung Mr Lo Ming Chi, Charles Mr Chiu Siu Po Ms Hui Wai Man, Shirley Mr Gary Drew Douglas

Principal place of business in Hong Kong 31st Floor, China United Centre, 28 Marble Road, North Point, Hong Kong

24 May 2006

To the Shareholders

Dear Sir/Madam,

MAJOR TRANSACTION — ACQUISITION AND CONVERSION OF CONVERTIBLE NOTE

INTRODUCTION

On 21 April 2006, Equity Spin (a wholly-owned subsidiary of the Company) and Yearwise (a wholly-owned subsidiary of Willie International) entered into the Agreement whereby Equity Spin agreed to purchase and Yearwise agreed to sell its rights, title and interest in the Convertible Note. Equity Spin will exercise its conversion rights under the Convertible Note to convert into shares in HMIL as soon as practicable after Completion, subject to obtaining the necessary regulatory approvals, to the extent required.

The Transaction and the Converison contemplated under the Agreement constitutes a major transaction of the Company under the Listing Rules and is subject to the approval of Shareholders at the EGM. This circular sets out the details of the Transaction and the Conversion required pursuant to Chapter 14 of the Listing Rules.

— 3 —

LETTER FROM THE BOARD

Terms of the Agreement

Date:

Parties:

21 April 2006 and 2 May 2006

(i) Vendor: Yearwise (ii) Purchaser: Equity Spin

(iii) Guarantor of Vendor: Willie International. To the best of the directors’ knowledge, information and belief having made all reasonable enquiries, Willie International and the ultimate beneficial owners of Willie International are third parties independent of the Company.

• (iv) Guarantor of Purchaser: The Company

Terms:

Subject to satisfaction of the Conditions described below:

• (i) Yearwise agreed to sell to Equity Spin all Yearwise’s rights, title and interests in the Convertible Note for a consideration of HK$100,000,000; and

• (ii) the consideration shall be satisfied wholly by cash in the following manner:

• (a) a refundable deposit of HK$25,000,000, representing 25% of the total consideration has been paid by Equity Spin upon execution of the Agreement; and

• (b) the balance of HK$75,000,000 shall be paid by cash upon Completion.

The Consideration payable by Equity Spin was fixed after arm’s length negotiation by Yearwise and Equity Spin having taken into account of the development of HMIL and the consolidated net asset value of HMIL after Completion.

Inner Mongolia and its subsidiaries would fund the Transaction by their internal resources.

— 4 —

LETTER FROM THE BOARD

Conditions:

Completion of the Agreement is conditional upon the following conditions (the “Conditions”):

• (i) the Company, the ultimate holding company of Equity Spin having obtained the approval of its shareholders (as required by the Listing Rules) for the purchase of the Convertible Note as contemplated under the Agreement and the subsequent exercise of conversion rights under the Convertible Note in full by Equity Spin to convert into shares of HMIL;

• (ii) Willie International, the ultimate holding company of Yearwise having obtained the approval of its shareholders (as required by the Listing Rules) for the sale of the Convertible Note as contemplated under the Agreement;

• (iii) Equity Spin having completed and being satisfied with the results of the legal and financial due diligence on HMIL and its subsidiaries and as to status of compliance by HMIL with the terms of the Convertible Note; and

• (iv) all necessary approvals being obtained from the Securities and Futures Commission, the Stock Exchange, the Hong Kong Futures Exchange Limited and any other relevant authorities to the extent required under the relevant laws and regulations for the change in shareholding structure of Radland International Limited, CU Corporate Finance Limited, Chung Nam Commodities Limited and Chung Nam Securities Limited as a result of the purchase and conversion of the Convertible Note by Equity Spin.

If the conditions are not satisfied or waived (in the case of (iii) and (iv) above) on or before 5:00 p.m. on 17 July 2006 (or such later date as Equity Spin and Yearwise may agree) then the deposit shall be refunded without interest to Equity Spin and the Agreement shall terminate and the parties shall have no further claims against each other save for claims in respect of antecedent breaches.

Radland International Limited, CU Corporate Finance Limited, Chung Nam Commodities Limited and Chung Nam Securities Limited are all indirect wholly-owned subsidiaries of HMIL.

— 5 —

LETTER FROM THE BOARD

Completion:

Completion shall take place on the third business day after the satisfaction or waiver of the Conditions (in the case of (iii) and (iv) above), or such other date as the parties may agree. If Completion does not take place in accordance with the Agreement, the deposit shall be refunded without interest to Equity Spin.

If Inner Mongolia waives the satisfaction of the condition set out in (iv) above and proceeds to Completion, it intends to hold the Convertible Note and exercise conversion rights thereunder after all necessary approvals from the regulatory authorities are obtained.

Terms of the Convertible Note

The terms of the Convertible Note are set out as follows:

Issuer

HMIL, currently held approximately 35.55% by Willie International as at the Latest Practicable Date.

Outstanding Principal amount of the Convertible Note

HK$131 million

Issue Date

21 September 2005

Maturity

The Convertible Note will mature on the day immediately preceding the tenth anniversary from the date of issue. On maturity, to the extent that the Convertible Note is not redeemed or converted, HMIL will repay the Convertible Note.

Interest

The Convertible Note bears interest at 8% per annum, payable monthly.

Conversion

The outstanding principal amount of the Convertible Note may be converted into HMIL Shares by the holder of the Convertible Note in amounts or integral multiples of HK$500,000 at any time from the date of issue up to seven days before (and excluding) the maturity date of the Convertible Note. There is no automatic conversion on maturity of the Convertible Note.

— 6 —

LETTER FROM THE BOARD

Conversion Price

The initial conversion price of the Convertible Note was HK$0.25 per HMIL Share. In January 2006, the Conversion Price was adjusted to HK$0.15 per HMIL Share as a result of an issue of HMIL Shares to third parties.

Early Redemption

The Convertible Note is redeemable at 100% of its outstanding principal amount together with accrued interest at any time from the date of issue up to seven days before (and excluding) the maturity date of the Convertible Note at the option of HMIL. To the extent that the Convertible Note is not redeemed or converted on maturity, HMIL will repay the Convertible Note.

Shares to be issued upon conversion

The HMIL Shares to be issued upon conversion of the Convertible Note will when issued rank equally in all respects among themselves and with the HMIL Shares in issue on the relevant date of conversion.

If the Convertible Note is converted in full at the Conversion Price of HK$0.15 per HMIL Share, a total of 873,333,333 HMIL Shares will be issued. These HMIL Shares represent approximately 100.27% of the existing issued share capital of HMIL, and approximately 50.07% of the issued share capital of HMIL as enlarged by the new HMIL Shares to be issued upon conversion of the Convertible Note (assuming no further shares are issued by HMIL from the Latest Practicable Date till the date of conversion).

HMIL is indirectly held as to approximately 35.55% by Willie International and approximately 1.15% by the Company as at the Latest Practicable Date. The balance of the shareholdings in HMIL are indirectly held by eight other companies, the shares of each of which are listed on the main board of the Stock Exchange, one independent financial institution and two independent third parties.

Voting rights of holders of the Convertible Note

The holder of the Convertible Note does not have any right to attend or vote at any meetings of HMIL by virtue of it being the holder of the Convertible Note.

Transferability

The Convertible Note is transferable in authorised denominations of HK$500,000.

— 7 —

LETTER FROM THE BOARD

CONVERSION OF CONVERTIBLE NOTE

Equity Spin will exercise its conversion rights in full under the Convertible Note to convert into shares in HMIL as soon as practicable after Completion subject to all necessary approvals from the regulatory authorities being obtained, to the extent required. Assuming no further shares are issued by HMIL from the Latest Practicable Date till the date of conversion and using the conversion price of HK$0.15 per HMIL Share, the indirect shareholding of the Company in HMIL will be approximately in aggregate 50.64% of the issued share capital of HMIL as enlarged by the new HMIL shares to be issued upon conversion of the Convertible Note and HMIL will become a subsidiary of the Company. There is no restriction on the subsequent disposal of HMIL Shares by Equity Spin.

GENERAL INFORMATION

HMIL is the financial services group which the Company is considering to invest in as stated in its previous announcement dated 2 February 2006. HMIL through its subsidiaries is engaged in investment holding, provision of financial services including brokerage, commodity trading, money lending, margin financing and corporate finance advisory as well as proprietary trading and direct investment.

The shares of HMIL are not listed on any stock exchange.

The audited consolidated net losses of HMIL for the two financial years ended 31 December 2004 and 31 December 2005 were approximately HK$421.2 million and HK$222.6 million respectively. The net asset value of HMIL based on the unaudited management account for the period ended 28 February 2006 was approximately HK$108.6 million. The audited net asset value of HMIL as at 31 December 2005 was approximately HK$62.7 million.

Willie International, through various subsidiaries, is engaged in the businesses of property investments, investment in trading securities, provision of brokerage and financial services and investments in coke and related gas chemical business. Yearwise is a wholly-owned subsidiary of Willie International and an investment holding company.

The Company, through various subsidiaries, is engaged in trading of goods, provision of finance, trading of securities, property holding and investment activities. Equity Spin is a wholly-owned subsidiary of the Company and an investment holding company.

The consideration of HK$100 million for the acquisition of the HK$131 million Convertible Note was arrived at after arms length negotiation between Yearwise and Equity Spin and represents an effective conversion price of HK$0.1145 per HMIL Share which represents (i) 13.37% premium to the audited net asset value per HMIL share of HK$0.101 as at 31 December 2005; (ii) 8.4% discount to the unaudited net asset value per HMIL share of HK$0.125 as at 28 February 2006; and (iii) 16.42% discount to the pro-forma net asset value per HMIL share of HK$0.137 after Equity Spin fully converts the Convertible Note.

— 8 —

LETTER FROM THE BOARD

Based on the unaudited financial statements for the period ended 28 February 2006 of HMIL and upon the Conversion, HMIL will become a non wholly-owned subsidiary of the Company, the tangible assets of the Group will be increased by in HK$496,823,000 the liabilities of the Group will be increased by HK$257,191,000, and the minority interests of the Group will be increased by HK$118,282,000.

REASONS OF AND BENEFITS FOR THE TRANSACTION

The Company is endeavouring to further develop the businesses of provision of finance, trading of securities and investment activities. The Transaction and the Conversion will enable the Company to integrate and strengthen its resources and enlarge its client base, with a view to the Company becoming a leading and sophisticated investment service advisor and finance provider in the market.

LISTING RULES IMPLICATION

The Transaction and the Conversion contemplated under the Agreement constitutes a major transaction of the Company under the Listing Rules and is therefore subject to the approval of Shareholders at the EGM.

PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

Article 76 of the Articles of the Company sets out the following procedure by which Shareholders may demand a poll.

At any general meeting a resolution put to the vote at 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) demanded:

• (i) by the Chairman; 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 any 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.

— 9 —

LETTER FROM THE BOARD

RECOMMENDATION

The Board is of the opinion that the terms of the Agreement are fair, reasonable and in the best interest of the Company and the Shareholders as a whole, and recommends you to vote in favour of the resolution to be proposed at the EGM to approve the Transaction and the Conversion.

Whether or not Shareholders are able to attend the EGM, Shareholders are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the branch share registrar of the Company, Secretaries Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for holding the EGM. Completion and return of the form of proxy will not preclude Shareholders from attending and voting in person at the EGM should Shareholders so wish.

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

By order of the Board Yau Shum Tek, Cindy Chairman

— 10 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1(a). Summary of Consolidated Financial Information For The Three Years Ended 31 March 2005

The following is a summary of the audited consolidated financial information of the Company for each of the three years ended 31 March 2003, 2004 and 2005 as extracted from the respective audited annual accounts of the Company.

RESULTS

		**Year ended 31 **	March
	2005	2004	2003
	HK$’000	HK$’000	HK$’000
Turnover	72,238	23,305	51,493
Profit (loss) before taxation	18,823	(17,054)	(43,684)
Taxation	(2,504)	—	—
Profit (loss) for the year	16,319	(17,054)	(43,684)
Attributable to
Shareholders of the Company	16,319	(17,054)	(43,684)
Minority interests	—	4,316	—
	16,319	(12,738)	(43,684)

ASSETS AND LIABILITIES

		At 31 March
	2005	2004	2003
	HK$’000	HK$’000	HK$’000
Total assets	509,986	469,230	503,438
Total liabilities	(3,266)	(2,547)	(5,270)
	506,720	466,683	498,168
Minority interests	—	—	(37,736)
Shareholders’ funds	506,720	466,683	460,432

— 11 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1(b). Audited Consolidated Financial Statements For The Year Ended 31 March 2005

The following audited financial statements of the Group are extracted from the Company’s annual report for the year ended 31 March 2005.

CONSOLIDATED INCOME STATEMENT

For the year ended 31 March 2005

Notes Turnover 4 Cost of sales Gross profit Other operating income Investment income 6 Administrative expenses Other operating expenses 7 Profit (loss) from operations 8 Interest on bank overdrafts Gain on disposal of subsidiaries Share of results of an associate Profit (loss) before taxation Taxation 10 Profit (loss) before minority interests Minority interests Net profit (loss) for the year Dividend 11 Earnings (loss) per share — basic 12	2005 HK$’000 72,238 (41,618)	2004 HK$’000 23,305 (2,423) 20,882 839 833 (16,718) (22,907) (17,071) (78) 95 — (17,054) — (17,054) 4,316 (12,738) — (HK0.40 cent)
	30,620 244 — (12,522) (63) 18,279 — 50 494 18,823 (2,504) 16,319 —	20,882 839 833 (16,718 (22,907
		(17,071 (78 95 —
		(17,054 —
		(17,054 4,316
	16,319 — HK0.44 cent

— 12 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

At 31 March 2005

2005 2004 Notes HK$’000 HK$’000 Non-current assets Investment properties 13 5,700 5,700 Property, plant and equipment 14 606 412 Interest in an associate 16 3,614 — Investments in securities 17 42,000 42,000 Long-term loans receivable 18 212,000 165,616 263,920 213,728 Current assets Trade and other receivables 19 28,462 44,971 Short-term loans receivable 18 213,651 179,699 Deposit made on acquisition of a subsidiary 20 — 2,342 Investments in securities 17 209 272 Bank balances and cash 3,744 28,218 246,066 255,502 Current liabilities Other payables 1,720 2,489 Tax payable 1,546 — Bank overdrafts — 58 3,266 2,547 Net current assets 242,800 252,955 506,720 466,683 Capital and reserves Share capital 23 40,211 34,811 Reserves 466,509 431,872 506,720 466,683	2005 2004 Notes HK$’000 HK$’000 Non-current assets Investment properties 13 5,700 5,700 Property, plant and equipment 14 606 412 Interest in an associate 16 3,614 — Investments in securities 17 42,000 42,000 Long-term loans receivable 18 212,000 165,616 263,920 213,728 Current assets Trade and other receivables 19 28,462 44,971 Short-term loans receivable 18 213,651 179,699 Deposit made on acquisition of a subsidiary 20 — 2,342 Investments in securities 17 209 272 Bank balances and cash 3,744 28,218 246,066 255,502 Current liabilities Other payables 1,720 2,489 Tax payable 1,546 — Bank overdrafts — 58 3,266 2,547 Net current assets 242,800 252,955 506,720 466,683 Capital and reserves Share capital 23 40,211 34,811 Reserves 466,509 431,872 506,720 466,683	2005 2004 Notes HK$’000 HK$’000 Non-current assets Investment properties 13 5,700 5,700 Property, plant and equipment 14 606 412 Interest in an associate 16 3,614 — Investments in securities 17 42,000 42,000 Long-term loans receivable 18 212,000 165,616 263,920 213,728 Current assets Trade and other receivables 19 28,462 44,971 Short-term loans receivable 18 213,651 179,699 Deposit made on acquisition of a subsidiary 20 — 2,342 Investments in securities 17 209 272 Bank balances and cash 3,744 28,218 246,066 255,502 Current liabilities Other payables 1,720 2,489 Tax payable 1,546 — Bank overdrafts — 58 3,266 2,547 Net current assets 242,800 252,955 506,720 466,683 Capital and reserves Share capital 23 40,211 34,811 Reserves 466,509 431,872 506,720 466,683
	263,920 28,462 213,651 — 209 3,744 246,066 1,720 1,546 — 3,266 242,800	213,728
		44,971 179,699 2,342 272 28,218
		255,502
		2,489 — 58
		2,547
		252,955
	506,720	466,683
	40,211 466,509	34,811 431,872
	506,720	466,683

— 13 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

BALANCE SHEET

At 31 March 2005

2005 2004 Notes HK$’000 HK$’000 Non-current assets Property, plant and equipment 14 — — Interests in subsidiaries 15 502,145 461,517 502,145 461,517 Current assets Other receivables 72 69 Bank balances and cash 3,644 3,576 3,716 3,645 Current liabilities Other payables 1,168 1,108 Tax payable 1,495 — Bank overdrafts — 58 2,663 1,166 Net current assets 1,053 2,479 Total assets less current liabilities 503,198 463,996 Non-current liability Amount due to a subsidiary 21 903 904 502,295 463,092 Capital and reserves Share capital 23 40,211 34,811 Reserves 25 462,084 428,281 502,295 463,092	2005 2004 Notes HK$’000 HK$’000 Non-current assets Property, plant and equipment 14 — — Interests in subsidiaries 15 502,145 461,517 502,145 461,517 Current assets Other receivables 72 69 Bank balances and cash 3,644 3,576 3,716 3,645 Current liabilities Other payables 1,168 1,108 Tax payable 1,495 — Bank overdrafts — 58 2,663 1,166 Net current assets 1,053 2,479 Total assets less current liabilities 503,198 463,996 Non-current liability Amount due to a subsidiary 21 903 904 502,295 463,092 Capital and reserves Share capital 23 40,211 34,811 Reserves 25 462,084 428,281 502,295 463,092	2005 2004 Notes HK$’000 HK$’000 Non-current assets Property, plant and equipment 14 — — Interests in subsidiaries 15 502,145 461,517 502,145 461,517 Current assets Other receivables 72 69 Bank balances and cash 3,644 3,576 3,716 3,645 Current liabilities Other payables 1,168 1,108 Tax payable 1,495 — Bank overdrafts — 58 2,663 1,166 Net current assets 1,053 2,479 Total assets less current liabilities 503,198 463,996 Non-current liability Amount due to a subsidiary 21 903 904 502,295 463,092 Capital and reserves Share capital 23 40,211 34,811 Reserves 25 462,084 428,281 502,295 463,092
	502,145 72 3,644 3,716 1,168 1,495 — 2,663 1,053 503,198 903	461,517
		69 3,576
		3,645
		1,108 — 58
		1,166
		2,479
		463,996 904
	502,295	463,092
	40,211 462,084	34,811 428,281
	502,295	463,092

— 14 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 March 2005

			Capital
	Share	Share	redemption	Special	Distributable	Accumulated
	capital	premium	reserve	reserve	reserve	losses	Total
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
				(note 25(a))	(note 25(c))
THE GROUP
At 1 April 2003	31,161	287,456	485	35,131	595,191	(488,992)	460,432
Issue of shares	3,650	15,995	—	—	—	—	19,645
Expenses incurred in
connection with the
issue of shares	—	(656)	—	—	—	—	(656)
Net loss for the year	—	—	—	—	—	(12,738)	(12,738)
At 31 March 2004	34,811	302,795	485	35,131	595,191	(501,730)	466,683
Issue of shares	5,400	19,080	—	—	—	—	24,480
Expenses incurred in
connection with the
issue of shares	—	(762)	—	—	—	—	(762)
Net profit for the year	—	—	—	—	—	16,319	16,319
At 31 March 2005	40,211	321,113	485	35,131	595,191	(485,411)	506,720

— 15 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 March 2005

2005 HK$’000 OPERATING ACTIVITIES Profit (loss) before taxation 18,823 Adjustments for: Investment income — Interest on bank overdrafts — Depreciation 186 Impairment loss recognised in respect of investment securities — Impairment loss recognised in respect of intangible asset — Allowance for other receivables — Allowance for amount due from an associate — Deficit arising on valuation of investment properties — (Gain) loss on disposal of property, plant and equipment (12) Unrealised loss (gain) on other investments 63 Gain on disposal of subsidiaries (50) Share of results of an associate (494) Operating cash flows before movements in working capital 18,516 (Increase) decrease in trade and other receivables (26,491) Increase in loans receivable (80,336) Decrease in investments in securities — (Decrease) increase in other payables (769) Cash used in operations (89,080) Interest paid on bank overdrafts — Interest received — Hong Kong Profits Tax paid (958) NET CASH USED IN OPERATING ACTIVITIES (90,038)	2005 HK$’000 OPERATING ACTIVITIES Profit (loss) before taxation 18,823 Adjustments for: Investment income — Interest on bank overdrafts — Depreciation 186 Impairment loss recognised in respect of investment securities — Impairment loss recognised in respect of intangible asset — Allowance for other receivables — Allowance for amount due from an associate — Deficit arising on valuation of investment properties — (Gain) loss on disposal of property, plant and equipment (12) Unrealised loss (gain) on other investments 63 Gain on disposal of subsidiaries (50) Share of results of an associate (494) Operating cash flows before movements in working capital 18,516 (Increase) decrease in trade and other receivables (26,491) Increase in loans receivable (80,336) Decrease in investments in securities — (Decrease) increase in other payables (769) Cash used in operations (89,080) Interest paid on bank overdrafts — Interest received — Hong Kong Profits Tax paid (958) NET CASH USED IN OPERATING ACTIVITIES (90,038)	2004 HK$’000 (17,054) (833) 78 638 11,000 11,321 415 2 100 69 (43) (95) — 5,598 61,291 (122,416) 2,290 1,516 (51,721) (78) 833 — (50,966)
	18,516 (26,491) (80,336) — (769) (89,080) — — (958) (90,038)	5,598 61,291 (122,416 2,290 1,516
		(51,721 (78 833 —
		(50,966

— 16 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

		2005	2004
	Note	HK$’000	HK$’000
INVESTING ACTIVITIES
Settlement of proceeds from disposal of subsidiaries
in prior year		43,000	—
Refund (place) of deposit made on acquisition of
a subsidiary		2,342	(2,342)
Proceeds from disposal of property, plant and equipment		111	23
Proceeds from disposal of subsidiaries (net of cash and
cash equivalents disposed of)	26	50	(32,222)
Amount advanced to an associate		(3,120)	(2)
Purchase of property, plant and equipment		(479)	(131)
NET CASH FROM (USED IN) INVESTING ACTIVITIES		41,904	(34,674)
FINANCING ACTIVITIES
Issue of shares, net of expenses		23,718	18,989
Repayment of other borrowings		—	(1,101)
NET CASH FROM FINANCING ACTIVITIES		23,718	17,888
NET DECREASE IN CASH AND CASH EQUIVALENTS		(24,416)	(67,752)
CASH AND CASH EQUIVALENTS AT 1 APRIL		28,160	95,912
CASH AND CASH EQUIVALENTS AT 31 MARCH		3,744	28,160
Represented by:
Bank balances and cash		3,744	28,218
Bank overdrafts		—	(58)
		3,744	28,160

— 17 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 March 2005

1. GENERAL

The Company is an exempted company incorporated in the Cayman Islands with limited liability. The shares of the Company are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

The Company is an investment holding company and provides corporate management services.

The activities of the Company’s principal subsidiaries are set out in note 31.

2. POTENTIAL IMPACT ARISING FROM THE RECENTLY ISSUED ACCOUNTING STANDARDS

In 2004, the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) issued a number of new or revised Hong Kong Accounting Standards (“HKAS(s)”) and Hong Kong Financial Reporting Standards (“HKFRS(s)”) (hereinafter collectively referred to as “new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005 except for HKFRS 3 “Business Combinations”. The Group has not early adopted these new HKFRSs in the financial statements for the year ended 31 March 2005.

HKFRS 3 is applicable to business combinations for which the agreement date is on or after 1 January 2005. The Group has not entered into any business combination for which the agreement date is on or after 1 January 2005. Therefore HKFRS 3 did not have any impact on the Group for the year ended 31 March 2005.

The Group has considered the potential impact of these new HKFRSs and the effect on how the results of operations and financial positions of the Group are prepared and presented as described below:

HKFRS 2 “Share-based Payment”

HKFRS 2 Share-based Payment which requires an expense to be recognised where the Group buys goods or obtains services in exchange for shares or rights over shares, or in exchange for other assets equivalent in value to a given number of shares or rights over shares. The principal impact of HKFRS 2 on the Group is in relation to the expensing of the fair value of directors’ and employees’ share options of the Company determined at the date of grant of the share options over the vesting period. Prior to the application of HKFRS 2, the Group did not recognise the financial effect of these share options until they were exercised.

HKAS 32 “Financial Instruments: Disclosure and Presentation”

HKAS 39 “Financial Instruments: Recognition and Measurement”

HKAS 39 requires all financial assets to be reclassified into held-to-maturity financial assets, available-for-sale financial assets, financial assets at fair value through profit or loss and loans and receivables. Available-for-sale financial assets and financial assets at fair value through profit or loss are carried at fair value, with changes in fair values recognised in equity and profit or loss respectively. Held-to-maturity financial assets and loans and receivables are measured at amortised cost using the effective interest method. Currently, the Group’s investments in securities are classified as investment securities or other investments which are measured at cost less impairment loss or at fair value respectively. The Group’s long-term and short-term loans receivables are carried at cost less impairment loss. An adjustment to the carrying amounts of these assets at 1 April 2004 is required to be made to the Group’s accumulated losses.

— 18 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

HKAS 40 “Investment Properties”

HKAS 40 requires all revaluation gains or losses of investment properties to be taken directly to the income statement. Investment property revaluation reserve brought forward should be transferred to retained earnings.

Currently, investment properties are measured at open market values, with revaluation surplus or deficits credited or charged to investment property revaluation reserve unless the balance on this reserve was insufficient to cover a revaluation decrease, in which case the excess of the revaluation decrease over the balance on the investment property revaluation reserve was charged to the income statement. Where a decrease had previously been charged to the income statement and revaluation subsequently arose, that increase was credited to the income statement to the extent of the decrease previously charged. As the Group does not maintain any revaluation surplus at both 1 April 2004 and 2003, the adoption of HKAS 40 will not have any impact on the Group’s results and financial position.

In relation to other new HKFRSs, the Group does not expect that the adoption will have a material effect on how the results of operations and financial position of the Group are prepared and presented.

3. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost convention, as modified for the revaluation of investment properties and certain investments in securities, and in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies adopted are as follows:

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 March each year.

The results of subsidiaries and associate acquired or disposed of during the year are included in the consolidated income statement from the effective dates of acquisition or up to the effective date of disposal, as appropriate.

All significant inter-company transactions and balances within the Group are eliminated on consolidation.

Investments in subsidiaries

Investments in subsidiaries are included in the Company’s balance sheet at cost less any identified impairment losses.

Interests in associates

The consolidated income statement includes the Group’s share of the post-acquisition results of its associates for the year. In the consolidated balance sheet, interests in associates are stated at the Group’s share of the net assets of the associates.

Investment properties

Investment properties are completed properties which are held for their investment potential, any rental income being negotiated at arm’s length.

Investment properties are stated at their open market value based on independent professional valuation at the balance sheet date. Any revaluation surplus or deficit arising on the revaluation of investment properties is credited or charged to the investment property revaluation reserve unless the balance on this reserve is insufficient to cover a

— 19 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

revaluation deficit on a portfolio basis, in which case the excess of the revaluation deficit over the balance on the investment property revaluation reserve is charged to the income statement. Where a deficit has previously been charged to the income statement and a revaluation surplus subsequently arises, this surplus is credited to the income statement to the extent of the deficit previously charged.

On disposal of an investment property, the balance on the investment property revaluation reserve attributable to that property is transferred to the income statement.

No depreciation is provided on investment properties except where the unexpired term of the relevant lease is twenty years or less.

Property, plant and equipment

Property, plant and equipment are stated at cost less depreciation and any accumulated impairment losses.

Depreciation is provided to write off the cost of items of property, plant and equipment over their estimated useful lives and after taking into account their estimated residual values, using the straight line method, at the following rates per annum:

Fixtures	15% or over the terms of the relevant lease, whichever is shorter
Computer equipment	331⁄3%
Motor vehicles	30%
Others	15%

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in the income statement.

Investments in securities

Investments in securities are recognised on a trade date basis and are initially measured at cost.

Investments other than held-to-maturity debt securities are classified as investment securities and other investments.

Investment securities, which are securities held for an identified long-term strategic purpose, are measured at subsequent reporting dates at cost, as reduced by any impairment loss that is other than temporary.

Other investments are measured at fair value, with unrealised gains and losses included in net profit or loss for the period.

Revenue recognition

Sales of goods are recognised when goods are delivered and title has passed.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable.

Sales of investments in securities are recognised on a trade date basis.

Dividend income from investments is recognised when the Group’s rights to receive payment have been established.

— 20 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Impairment

At each balance sheet date, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Operating leases

Rentals payable under operating leases are charged to the income statement on a straight line basis over the terms of the relevant leases.

Retirement benefit costs

The retirement benefit costs charged in the income statement represent the contributions payable in respect of the year to the Group’s Mandatory Provident Fund (“MPF”) scheme.

Foreign currencies

Transactions in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Profits and losses arising on exchange are included in the income statement.

On consolidation, the assets and liabilities of the Group’s operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the year in which the operation is disposed of.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years, and it further excludes items that are never taxable or deductible.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

— 21 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

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

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

4. TURNOVER

Turnover represents the net amounts received and receivable from sales of goods, sales of securities, interest income from provision of finance and dividend income during the year, and is analysed as follows:

Sales of goods Sales of securities Interest income from provision of finance Dividend income from investments in securities — Hong Kong listed shares	2005 HK$’000 40,018 — 32,219 1 72,238	2004 HK$’000 — 801 22,475 29
		23,305

5. BUSINESS AND GEOGRAPHICAL SEGMENT INFORMATION

During the year, the Group was organised into five (2004: four) main operating segments: sale of goods, provision of finance, trading of securities, property holding and investment and investment activities.

During the year, a wholly-owned subsidiary of the Company, Hansom Eastern International Trading (Group) Limited, is engaged in sale of electronic products and results in a new business segment for the year.

These divisions are the basis on which the Group reports its primary segment information.

— 22 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Segment information about these businesses is presented below:

Business segments

For the year ended 31 March 2005

Sale of goods Provision of finance Trading of securities Property holding and investment Investment activities Consolidated HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 SEGMENT REVENUE 40,018 32,219 1 — — 72,238 SEGMENT RESULTS 358 29,996 (75) (133) (274) 29,872 Unallocated corporate expenses (11,593) Profit from operations 18,279 Gain on disposal of subsidiaries 50 Share of results of an associate — — — — 494 494 Profit before taxation 18,823 Taxation (2,504) Net profit for the year 16,319	Sale of goods Provision of finance Trading of securities Property holding and investment Investment activities Consolidated HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 SEGMENT REVENUE 40,018 32,219 1 — — 72,238 SEGMENT RESULTS 358 29,996 (75) (133) (274) 29,872 Unallocated corporate expenses (11,593) Profit from operations 18,279 Gain on disposal of subsidiaries 50 Share of results of an associate — — — — 494 494 Profit before taxation 18,823 Taxation (2,504) Net profit for the year 16,319	Sale of goods Provision of finance Trading of securities Property holding and investment Investment activities Consolidated HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 SEGMENT REVENUE 40,018 32,219 1 — — 72,238 SEGMENT RESULTS 358 29,996 (75) (133) (274) 29,872 Unallocated corporate expenses (11,593) Profit from operations 18,279 Gain on disposal of subsidiaries 50 Share of results of an associate — — — — 494 494 Profit before taxation 18,823 Taxation (2,504) Net profit for the year 16,319
		29,872
	494	(11,593)
		18,279 50 494
		18,823 (2,504)
		16,319

— 23 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

ASSETS Segment assets Interest in an associate Unallocated corporate assets Consolidated total assets LIABILITIES Segment liabilities Unallocated corporate liabilities Consolidated total liabilities OTHER INFORMATION Unrealised loss on other investments	At 31 March 2005	At 31 March 2005
	Sale of goods Provision of finance Trading of securities Property holding and investment Investment activities Consolidated HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 27,951 425,658 211 5,777 42,141 501,738 — — — — 3,614 3,614 4,634
	76 30 5 329 5 For the year ended 31 March 2005	509,986
		445 2,821
		3,266
	Sale of goods Provision of finance Trading of securities Property holding and investment Investment activities Consolidated HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 — — 63 — — 63

— 24 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

SEGMENT REVENUE SEGMENT RESULTS Unallocated corporate expenses Loss from operations Interest on bank overdrafts Gain on disposal of subsidiaries Loss before taxation Taxation Loss before minority interests Minority interests Net loss for the year ASSETS Segment assets Unallocated corporate assets Consolidated total assets LIABILITIES Segment liabilities Unallocated corporate liabilities Consolidated total liabilities	For the year ended 31 March 2004	For the year ended 31 March 2004	For the year ended 31 March 2004
	Provision of finance Trading of securities Property holding and investment Investment activities Consolidated HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 22,475 830 — — 23,305 21,898 (1,563) (1,823) (23,931) (5,419 (11,652 (17,071 (78 95 (17,054 — (17,054 4,316 (12,738 At 31 March 2004
			(5,419
			(11,652
			(17,071 (78 95
			(17,054 —
			(17,054 4,316
			(12,738
	Provision of finance Trading of securities Property holding and investment Investment activities Consolidated HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 369,443 426 6,827 87,624 464,320 4,910
	30 5 1,223 25		469,230
			1,283 1,264
			2,547

— 25 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

OTHER INFORMATION Allowance for other receivables Capital additions Depreciation Deficit arising on valuation of investment properties Impairment loss recognised in respect of intangible asset Impairment loss recognised in respect of investment securities	For the year ended 31 March 2004
	Provision of finance Trading of securities Property holding and investment Investment activities Consolidated HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 — — 415 — 415 — — — 131 131 — — 55 583 638 — — 100 — 100 — — — 11,321 11,321 — — — 11,000 11,000

Geographical segments

The Group’s operations are mainly located in Hong Kong and the People’s Republic of China, other than Hong Kong (the “PRC”). Over 90% of the Group’s sales are in Hong Kong. Accordingly, no geographical analysis of sales is presented.

The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment, analysed by the geographical area in which the assets are located:

Hong Kong The PRC	Carrying amount of segment assets 2005 2004 HK$’000 HK$’000 460,595 422,404 45,777 46,826 506,372 469,230	Additions to property, plant and equipment 2005 2004 HK$’000 HK$’000 479 131 — — 479 131	Additions to property, plant and equipment 2005 2004 HK$’000 HK$’000 479 131 — — 479 131
			131

6. INVESTMENT INCOME

Interest income from: Banks Others	2005 HK$’000 — — —	2004 HK$’000 634 199
		833

— 26 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. OTHER OPERATING EXPENSES

Included in other operating expenses are: Impairment loss recognised in respect of intangible asset Impairment loss recognised in respect of investment securities Unrealised loss on other investments Deficit arising on valuation of investment properties Allowance for amount due from an associate Allowance for other receivables 8. PROFIT (LOSS) FROM OPERATIONS Profit (loss) from operations has been arrived at after charging: Staff costs, including directors’ emoluments (note 9(a)): Salaries and other benefits MPF contributions, net of forfeited contributions HK$10,000 (2004: HK$134,000) Auditors’ remuneration: Current year Underprovision in prior year Depreciation Loss on disposal of property, plant and equipment and after crediting: Gain on disposal of property, plant and equipment Unrealised gain on other investments	2005 HK$’000 — — 63 — — — 2005 HK$’000 6,342 220	2004 HK$’000 11,321 11,000 — 100 2 415
		2004 HK$’000 6,491 100
	6,562 1,080 120 1,200	6,591
		901 —
		901
	186 — 12 —	638 69 — 43

— 27 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

9. EMOLUMENTS OF DIRECTORS AND FIVE HIGHEST PAID INDIVIDUALS

Particulars of the emoluments of the directors and the five highest paid individuals are as follows:

(a) Directors’ emoluments Fees: Executive directors Independent non-executive directors Other emoluments: Executive directors Salaries and other benefits MPF contributions Independent non-executive directors	2005 HK$’000 — 303	2004 HK$’000 — 240
	303 3,500 136 — 3,636	240
		4,273 137 —
		4,410
	3,939	4,650

The emoluments of the directors are within the following bands:

	Number of directors	Number of directors
	2005	2004
Nil to HK$1,000,000	4		4
HK$1,000,001 to HK$1,500,000	1		1
HK$1,500,001 to HK$2,000,000	—		1
HK$2,000,001 to HK$2,500,000	1		—

— 28 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Emoluments of the five highest paid individuals

The emoluments of the five highest paid individuals of the Group for the year included three (2004: four) directors of the Company, whose emoluments are included in (a) above. The aggregate emoluments of the remaining two individuals (2004: one) are as follows:

Salaries and other benefits MPF contributions	2005 HK$’000 722 16 738	2004 HK$’000 300 15
		315

During the year, no emoluments were paid by the Group to the five highest paid individuals, including directors, as an inducement to join or upon joining the Group or as compensation for loss of office. In addition, none of the directors has waived any emoluments during the year.

10. TAXATION

	2005	2004
	HK$’000	HK$’000
The charge comprises:
Hong Kong Profits Tax of the Company and its subsidiaries	2,504	—

Hong Kong Profits Tax is calculated at 17.5% of the estimated assessable profit for the year.

No provision for Hong Kong Profits Tax has been made for the year ended 31 March 2004, as neither the Company nor its subsidiaries has any assessable profits for that year.

Details of deferred taxation are set out in note 22.

— 29 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The tax charge for the year can be reconciled to the profit (loss) per the income statement as follows:

Profit (loss) before taxation Tax at domestic income tax rate of 17.5% Tax effect of expenses not deductible for tax purposes Tax effect of income not taxable for tax purposes Tax effect of results of an associate Tax effect of tax losses not recognised Tax effect of deferred tax assets not recognised Utilisation of tax losses previously not recognised Tax charge for the year	2005 HK$’000 18,823	2004 HK$’000 (17,054
	3,294 17 (41) (87) 105 9 (793)	(2,984 4,524 (183 — — 562 (1,919
	2,504	—

11. DIVIDEND

No dividend was proposed or paid by the Company for both years.

12. EARNINGS (LOSS) PER SHARE

The calculation of the basic earnings (loss) per share for the year is based on the net profit for the year of HK$16,319,000 (2004: loss of HK$12,738,000) and on the weighted average of 3,741,014,456 (2004: 3,186,028,417) ordinary shares in issue.

Diluted earnings per share for the year ended 31 March 2005 has not been presented as the exercise price of the Company’s outstanding share options was higher than the average market price for shares.

Diluted loss per share for the year ended 31 March 2004 has not been presented as the exercise of the Company’s outstanding share options would result in a reduction in loss per share.

13. INVESTMENT PROPERTIES

	THE GROUP
	HK$’000
VALUATION
At 31 March 2004 and 31 March 2005	5,700

The Group’s investment properties, which are to be rented out under operating leases, are held under long-term land use rights in the PRC.

The Group’s investment properties were revalued at 31 March 2005 by RHL Appraisal Ltd., an independent firm of professional property valuers, on an open market value basis at HK$5,700,000.

— 30 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14. PROPERTY, PLANT AND EQUIPMENT

					THE
		THE GROUP			COMPANY
	Furniture,
	fixtures and	Computer	Motor		Motor
	equipment	equipment	vehicles	Total	vehicles
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
COST
At 1 April 2004	1,203	467	837	2,507	668
Additions	388	91	—	479	—
Disposals	(728)	(111)	(169)	(1,008)	—
At 31 March 2005	863	447	668	1,978	668
DEPRECIATION
At 1 April 2004	860	445	790	2,095	668
Provided for the year	126	30	30	186	—
Eliminated on disposals	(649)	(108)	(152)	(909)	—
At 31 March 2005	337	367	668	1,372	668
NET BOOK VALUES
At 31 March 2005	526	80	—	606	—
At 31 March 2004	343	22	47	412	—

15. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Amounts due from subsidiaries, less allowances	2005 HK$’000 — 502,145 502,145	2004 HK$’000 — 461,517
		461,517

The amounts due from subsidiaries are unsecured and have no fixed terms of repayment. Out of the balance at 31 March 2005, an amount of HK$426,336,000 (2004: HK$369,413,000) bears interest at prevailing market rate and the remaining balance is interest-free. In the opinion of the directors, the amounts will not be repayable within twelve months from the balance sheet date and are therefore shown as non-current.

Details of the Company’s principal subsidiaries at 31 March 2005 are set out in note 31.

— 31 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. INTEREST IN AN ASSOCIATE

Share of net assets Amount due from associate, less allowances	THE GROUP 2005 2004 HK$’000 HK$’000 494 — 3,120 — 3,614 —	THE GROUP 2005 2004 HK$’000 HK$’000 494 — 3,120 — 3,614 —
		—

Details of the Group’s associate at 31 March 2005, which is held indirectly by the Company, are as follows:

	Form of
	business	Place of	Attributable
Name of associate	structure	incorporation	equity interest		Principal activity
			%
Equity Concept Investments Limited	Incorporated	British Virgin Islands	40		Securities
		(“BVI”)			investment
INVESTMENTS IN SECURITIES
				THE GROUP
			2005			2004
			HK$’000			HK$’000
Non-current investments:
Investment securities, at cost
Overseas unlisted shares (notes)			90,000			135,000
Less: Impairment losses recognised			(48,000)			(93,000)
			42,000			42,000
Current investments:
Other investments, at market value
Hong Kong listed shares			209			272

17. INVESTMENTS IN SECURITIES

Notes:

The directors of the Company consider that the investment securities are held for long-term strategic purposes. Out of the cost of HK$90,000,000 at 31 March 2005:

• (a) an amount of HK$50,000,000 represents the Group’s investment in an investee company, Hennabun Management International Limited (“HMI”) (formerly known as Hennabun Management Inc.). HMI acts as an investment holding company of companies engaged in the brokerage, commodity trading, margin financing, money lending, corporate finance advisory services and proprietary trading activities.

— 32 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

At 31 March 2005, an impairment loss of HK$48,000,000 (2004: HK$48,000,000) had been recognised in the Group’s investment in HMI to restate the carrying value of the investment to its estimated recoverable amount.

• (b) the other amount of HK$40,000,000 represents the Group’s investment in Xi’an Yizhiliu Pharmaceutical Co., Ltd. ( ) (“Xi’an Yizhiliu”), a company established in the PRC. The investment is a 22.5% holding of the registered capital of Xi’an Yizhiliu. Xi’an Yizhiliu is not regarded as an associate of the Group as the Group is not in a position to exercise significant influence over its affairs.

18. LOANS RECEIVABLE

The loans receivable comprise: Unsecured long-term loans receivable Unsecured short-term loans receivable Less: Amount due within one year shown under current assets Amount due over one year	THE GROUP 2005 2004 HK$’000 HK$’000 212,000 165,616 213,651 179,699	THE GROUP 2005 2004 HK$’000 HK$’000 212,000 165,616 213,651 179,699
	425,651 (213,651)	345,315 (179,699
	212,000	165,616

The loans receivable bear interest at prevailing market rate.

The Group negotiates credit period with borrowers according to the credit of individual borrower.

19. TRADE AND OTHER RECEIVABLES

Trade receivables (note i) Deposit paid Proceeds from disposal of subsidiaries (note ii) Other receivables	THE GROUP 2005 2004 HK$’000 HK$’000 21,907 — 6,000 — — 43,000 555 1,971 28,462 44,971	THE GROUP 2005 2004 HK$’000 HK$’000 21,907 — 6,000 — — 43,000 555 1,971 28,462 44,971
		44,971

Notes:

• i. The Group allows an average credit period of 30 days to its trade customers. At 31 March 2005, all trade receivables of the Group are aged within 30 days.

• ii. The amount was fully settled during the year.

— 33 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

20. DEPOSIT MADE ON ACQUISITION OF A SUBSIDIARY

In March 2004, the Group entered into an agreement to acquire the entire equity interest in from two independent third parties, for an aggregate consideration of RMB3,500,000 (equivalent to approximately HK$3,285,000). A deposit of RMB2,500,000 (equivalent to approximately HK$2,342,000) had been paid by the Group at 31st March, 2004.

During the year, the agreement was terminated and the deposit was fully refunded.

21. AMOUNT DUE TO A SUBSIDIARY

The amount due to a subsidiary of the Company is unsecured, interest-free and has no fixed terms of repayment. Having agreed with the subsidiary, the amount will not be repayable within twelve months from the balance sheet date and is therefore shown as non-current.

22. DEFERRED TAX

At 31 March 2005, the Group has unused tax losses of HK$44,002,000 (2004: HK$51,729,000) available for offset against future profits. At 31 March 2004, the Company had unused tax losses of HK$3,563,000 available for offset against future profits and has been applied to set off against assessable profit for the current year. No deferred tax asset has been recognised in respect of the tax losses due to the unpredictability of future profit streams. The tax losses may be carried forward indefinitely.

23. SHARE CAPITAL

Ordinary shares of HK$0.01 each Authorised: Balance at 1 April 2003, 31 March 2004 and 31 March 2005 Issued and fully paid: Balance at 1 April 2003 Issue of shares Balance at 31 March 2004 Issue of shares Balance at 31 March 2005	Number of ordinary shares 200,000,000,000	Amount HK$’000 2,000,000
	3,116,124,045 365,000,000 3,481,124,045 540,000,000	31,161 3,650
		34,811 5,400
	4,021,124,045	40,211

During both years, the following changes in the share capital of the Company took place:

• (i) Pursuant to a placing agreement entered into on 18 December 2003, the Company issued 215,000,000 ordinary shares of HK$0.01 each at HK$0.053 per share which represents a discount of approximately 7.02% to the closing price of HK$0.057 per share on 18 December 2003 as quoted on the Stock Exchange. The net proceeds of the placement of HK$11,034,000 was used for additional working capital of the Group.

— 34 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

• (ii) Pursuant to a placing agreement entered into on 30 January 2004, the Company issued 150,000,000 ordinary shares of HK$0.01 each at HK$0.055 per share which represents a discount of approximately 5.17% to the closing price of HK$0.058 per share on 30 January 2004 as quoted on the Stock Exchange. The net proceeds of the placement of HK$7,955,000 was used for additional working capital of the Group.

• (iii) Pursuant to a placing agreement entered into on 5 May 2004, the Company issued 240,000,000 ordinary shares of HK$0.01 each at HK$0.052 per share which represents a discount of approximately 1.89% to the closing price of HK$0.053 per share on 5 May 2004 as quoted on the Stock Exchange. The net proceeds of the placement of HK$12,093,000 was used for additional working capital of the Group.

• (iv) Pursuant to a placing agreement entered into on 7 January 2005, the Company issued 300,000,000 ordinary shares of HK$0.01 each at HK$0.040 per share which represents a discount of approximately 11.11% to the closing price of HK$0.045 per share on 6 January 2005 as quoted on the Stock Exchange. The net proceeds of the placement of HK$11,625,000 was used for additional working capital of the Group.

These new ordinary shares issued during the year rank pari passu with the then existing ordinary shares of the Company in all respects.

The new ordinary shares issued during the year were under the general mandates granted to the directors of the Company at the extraordinary general meeting held on 5 September 2003 and the annual general meeting held on 9 September 2004.

24. SHARE OPTION SCHEME

The share option scheme of the Company was approved and adopted by the shareholders at the extraordinary general meeting held on 23 August 2002 (the “2002 Scheme”). The 2002 Scheme shall be valid and effective for a period of 10 years commencing from 23 August 2002 (“the Adoption Date”). The primary purpose of the 2002 Scheme is to provide participants with the opportunity to acquire proprietary interests in the Company and to encourage participants to work towards enhancing the value of the Company and its shares for the benefit of the Company and its shareholders as a whole.

The categories of the participants under the 2002 Scheme are any directors (including executive directors, non-executive directors and independent non-executive directors) of the Company and its subsidiaries and employees of the Group and any advisors, consultants, distributors, contractors, suppliers, agents, customers, business partners, joint venture business partners, promoters, service providers to the Group who the Board of Directors of the Company (the “Board”) considers, in its sole discretion have contributed or will contribute to the Group.

The Board may, at its absolute discretion, made an offer to any participant to take up share options. An offer is deemed to have been accepted and a share option is deemed to have been granted and accepted and shall take effect when the duplicate of the offer letter comprising acceptance of the offer duly signed by the grantee and the remittance of HK$1 by way of consideration for the grant thereof is received by the Company. Share options granted may be exercised during the period as notified by the Board to each grantee at the time of making the offer and shall be at any time from the date of grant to the tenth anniversary thereof.

The total number of shares which may be issued upon exercise of all share options granted under the 2002 Scheme and other share option scheme(s) of the Company (excluding share options lapsed) must not exceed 311,612,404 shares, being approximately 10% of the total number of the Company’s shares in issue on the Adoption Date, except with prior approvals from the Company’s shareholders. The maximum number of shares in respect of which share options may be granted to a specifically identified single grantee under the 2002 Scheme shall not (when aggregated with any shares subject to any other share option scheme(s) of the Company) in any 12-month period exceed 1% of the Company’s shares in issue. Any further grant of share options in excess of this limit is subject to shareholders’ approval in advance in a general meeting.

— 35 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The subscription price for shares on the exercise of share options under the 2002 Scheme shall be determined by the Board in its absolute discretion but in any event shall not be less than the greatest of: (i) the closing price of the Company’s shares as stated in the daily quotations sheets issued by the Stock Exchange on the date on which a share option is granted; (ii) the average closing price of the Company’s shares as stated in the daily quotations sheets issued by the Stock Exchange for the five business days immediately preceding the date on which a share option is granted; and (iii) the nominal value of the Company’s share.

The 2002 Scheme will expire on 22 August 2012.

At 31 March 2005, share options in respect of a total of 60,000,000 shares had been granted to the directors of the Company under the 2002 Scheme, representing approximately 1.49% of the issued share capital of the Company at that date and 22 July 2005, respectively. There were no share options granted to employees of the Group.

There were 60,000,000 outstanding share options as at 31 March 2004 and 31 March 2005 and all of them were granted to directors of the Company.

A summary of movements of share options held by the directors of the Company is as follows:

				Number of share options	Number of share options
				Granted		Granted
	Exercisable	Subscription	Outstanding	during	Outstanding	during	Outstanding
Date of grant	period	price per share	at 1.4.2003	the year	at 31.3.2004	the year	at 31.3.2005
		HK$
	16.1.2004
16.1.2004	to 15.1.2009	0.06*	—	60,000,000	60,000,000*	—	60,000,000*

• These share options were held by the relevant directors as beneficial owners.

During both years, no share options were exercised, cancelled or lapsed under the 2002 Scheme.

No charge was recognised in the income statement of the Company in respect of share options granted. Share options granted are not recognised in the financial statements until such options are exercised. Upon exercise of share options, the shares issued by the Company will be recorded as additional share capital at the nominal value of such shares and the excess of the subscription price over the nominal value of the shares issued is recorded in the Company’s share premium account.

The total consideration received during the year ended 31 March 2004 for the share options granted was HK$2.

— 36 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25. RESERVES

Share premium Capital redemption reserve Contributed surplus Distributable reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note b) (note c) 287,456 485 39,521 595,191 (493,421) 15,995 — — — — (656) — — — — — — — — (16,290)	Share premium Capital redemption reserve Contributed surplus Distributable reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note b) (note c) 287,456 485 39,521 595,191 (493,421) 15,995 — — — — (656) — — — — — — — — (16,290)	Share premium Capital redemption reserve Contributed surplus Distributable reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note b) (note c) 287,456 485 39,521 595,191 (493,421) 15,995 — — — — (656) — — — — — — — — (16,290)	Share premium Capital redemption reserve Contributed surplus Distributable reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note b) (note c) 287,456 485 39,521 595,191 (493,421) 15,995 — — — — (656) — — — — — — — — (16,290)	Share premium Capital redemption reserve Contributed surplus Distributable reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note b) (note c) 287,456 485 39,521 595,191 (493,421) 15,995 — — — — (656) — — — — — — — — (16,290)	Total HK$’000 429,232 15,995 (656 (16,290
302,795 19,080 (762) —	485 — — —	39,521 — — —	595,191 — — —	(509,711) — — 15,485	428,281 19,080 (762 15,485
321,113	485	39,521	595,191	(494,226)	462,084

Notes:

• (a) The special reserve of the Group represents the difference between the aggregate amount of the share capital and share premium account of a company which was the former holding company of the Group and the nominal value of the Company’s shares issued pursuant to the group reorganisation in 1992.

• (b) The contributed surplus of the Company represents the difference between the nominal value of the share capital issued by the Company and the underlying net tangible asset value net of pre-acquisition dividends and realised pre-acquisition investment property revaluation reserve of subsidiaries which were acquired by the Company pursuant to the group reorganisation in 1992.

• (c) The distributable reserve of the Group and the Company represents the aggregate of the credit arising from the following:

• (i) the reduction of nominal value of the shares from HK$0.10 each to HK$0.002 each by cancelling HK$0.098 paid up on each issued share and the cancellation of share premium account as at 31 October 1998, after a transfer of HK$607,193,000 towards the elimination of the accumulated losses of the Company at 31 October 1998; and

• (ii) Capital reduction during the year ended 31 March 2002.

— 37 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

26. DISPOSAL OF SUBSIDIARIES

Net assets disposed of: Property, plant and equipment Intangible asset Short-term loans receivable Bank balances and cash Other payables Minority interests Net assets Gain on disposal of subsidiaries Satisfied by: Cash consideration received Other receivables Analysis of net inflow (outflow) of cash and cash equivalents in connection with the disposal of subsidiaries: Cash consideration received Bank balances and cash disposed of Net inflow (outflow) of cash and cash equivalents in connection with the disposal of subsidiaries	2005 HK$’000 — — — — — —	2004 HK$’000 230 22,641 23,949 82,452 (2,717 (33,420
	— 50	93,135 95
	50	93,230
	50 —	50,230 43,000
	50	93,230
	50 —	50,230 (82,452
	50	(32,222

During the year, the Group’s profit (loss) from operations included a loss of HK$4,000 (2004: loss of HK$12,655,000) in respect of the disposed subsidiaries up to their disposal date.

— 38 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

27. OPERATING LEASE COMMITMENTS

The Group as lessee

		2005	2004
		HK$’000	HK$’000
Minimum	lease payments paid by the Group under operating leases in
respect	of rented premises during the year	692	818

At the balance sheet date, the Group had commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows:

Within one year In the second to fifth year inclusive	2005 HK$’000 256 404 660	2004 HK$’000 612 —
		612

Operating lease payments represent rentals payable by the Group for its office premises, a staff quarter and warehouse. Leases are negotiated for an average term of three years and rentals are fixed for an average of three years.

The Company did not have any significant operating lease commitments at the balance sheet date.

28. CAPITAL COMMITMENTS

	**THE **	GROUP
	2005	2004
	HK$’000	HK$’000
Capital expenditure contracted for but not provided in the financial
statements in respect of acquisition of a subsidiary	—	943

The Company did not have any significant capital commitments at the balance sheet date.

29. PENSION SCHEME

The Group has operated a MPF scheme for all employees. 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 scheme. The assets of the scheme are held separately from those of the Group in independently-administered funds. The Group’s contributions are contributed into the scheme in accordance with the rules of the scheme.

— 39 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

30. POST BALANCE SHEET EVENTS

Subsequent to the balance sheet date, the following significant events took place:

• (i) On 13 June 2005, the Company put forward a share consolidation proposal pursuant to which every twenty existing shares in the issued and unissued ordinary share capital of the Company of HK$0.01 each (the “Existing Share”) will be consolidated into one consolidated share of HK$0.20 each (the “Consolidated Share”);

• (ii) On 13 June 2005, the Company entered into a first placing agreement with a placing agent (the “Placing Agent”) on a fully underwritten basis for the placing of 20,000,000 Consolidated Shares at a price of HK$0.54 per share. The placing price per share represents a discount of approximately 6.9% to the closing price of HK$0.029 per Existing Share on 3 June 2005 as quoted on the Stock Exchange (on the basis that every twenty Existing Shares is equivalent to one Consolidated Share);

• (iii) On 13 June 2005, the Company entered into a second placing agreement with the Placing Agent on a best efforts basis for the placing of 40,000,000 Consolidated Shares at a price of HK$0.54 per share. The placing price per share represents a discount of approximately 6.9% to the closing price of HK$0.029 per Existing Share on 3 June 2005 as quoted on the Stock Exchange (on the basis that every twenty Existing Shares is equivalent to one Consolidated Share);

• (iv) On 13 June 2005, the Company entered into a convertible notes placing agreement with the Placing Agent on a best efforts basis for the placing of convertibles notes of aggregate principal amount of up to HK$48,000,000 at a conversion price of HK$0.60 per Consolidated Share. The conversion price per share represents a premium of approximately 3.45% to the closing price of HK$0.029 per Existing Share on 3 June 2005 as quoted on the Stock Exchange (on the basis that every twenty Existing Shares is equivalent to one Consolidated Share);

• (v) On 13 June 2005, the Company entered in to a conditional subscription agreement for the issue of 35,000,000 Consolidated Shares at a price of HK$0.58 per share to Goodnews Resources Limited which is wholly-owned by Ms. Yau Shum Tek, Cindy, a director and a substantial shareholder of the Company. The subscription price per share is equal to the closing price of HK$0.029 per Existing Share on 3 June 2005 as quoted on the Stock Exchange (on the basis that every twenty Existing Shares is equivalent to one Consolidated Share); and

• (vi) On 20 June 2005, the Company put forward a proposal to change its name from “HANSOM EASTERN (HOLDINGS) LIMITED ” to “INNER MONGOLIA DEVELOPMENT (HOLDINGS) LIMITED ”.

The estimated maximum net proceeds from (ii) to (v) above is approximately HK$98,100,000 (assuming that all 40,000,000 Consolidated Shares in (iii) above and convertible notes of aggregate principal amount of HK$48,000,000 in (iv) above are fully placed), the Company intends to utilize about half of the maximum net proceeds of approximately HK$49,050,000 for investments and the remaining half for working capital.

All of the above events are subject to the passing of the relevant resolutions by the shareholders of the Company at the extraordinary general meeting of the Company to be held on 4 August 2005.

— 40 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

31. PRINCIPAL SUBSIDIARIES

Details of the Company’s principal subsidiaries at 31 March 2005 are as follows:

		Nominal value	Proportion of	Proportion of
		of issued and	nominal value
	Place of	fully paid	of issued share
	incorporation/	ordinary	capital held by
Name of subsidiary	registration	share capital	the Company		Principal activities
			Directly	Indirectly
			%	%
Asia Hunter Global Limited	BVI	US$1	100	—	Investment holding
Eastern Sunny Limited	Hong Kong	HK$2	—	100	Provision of
					management services
Equity Spin Investments	BVI	US$1	100	—	Investment holding
Limited
Far Hero Limited	Hong Kong	HK$2	—	100	Property investment
Hansom Finance Limited	Hong Kong	HK$2	—	100	Provision of finance
Longsun Ltd.	BVI	US$1	100	—	Investment holding
Peking Bay Assets Limited	BVI	US$1	—	100	Investment holding
Hansom Eastern International	Hong Kong	HK$1,000	—	100	Sale of goods
Trading (Group) Limited
(formerly known as
Progressive Company
Limited)
Smart Jump Corporation	BVI	US$1	—	100	Trading in securities
Win Advance Development	Hong Kong	HK$2	—	100	Property investment
Limited

None of the subsidiaries had any debt securities subsisting at the end of the year or at any time during the year.

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

— 41 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. STATEMENT OF INDEBTEDNESS

Borrowings

At the close of business on 30 April 2006, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group had aggregate outstanding borrowings of approximately HK$114,453,000, comprising the following:

• (i) unsecured bank overdraft of approximately HK$776,000;

• (ii) secured bank overdraft of approximately HK$22,967,000 (note 1);

• (iii) mortgage loan of approximately HK$36,229,000 (note 2);

• (iv) secured margin financing provided by a financial institution of approximately HK$1,918,000 (note 3); and

• (v) unsecured other loans of approximately HK$52,563,000 (note 4).

Note:

1. The secured bank overdraft was secured by HMIL’s margin clients stock.

2. The mortgage loan was secured by HMIL’s properties.

3. The margin financing was secured by the Group’s investment securities.

4. Unsecured other loans comprise of HK$12,000,000 bearing an interest of prime rate minus 2% per annum and will mature in June 2006. HK$40,000,000 bearing an interest of 12% per annum and will mature within twelve months from 24 March 2006 and the remaining amount of HK$563,000 representing interest portion of the above two loans.

As at 30 April 2006, the outstanding principal amount and interest accrued on the accounts of HMIL in respect of the Convertible Note were HK$131,000,000 and HK$861,000 respectively. Such balance has not been separately set out above on the basis that a pro forma combined approach is adopted in the preparation of this indebtedness statement and taking into the fact that the Convertible Note will be fully converted into ordinary shares of HMIL upon Completion.

Save as aforesaid or otherwise disclosed herein, and apart from intra-group liabilities and normal trade payables, the Enlarged Group did not have any outstanding mortgages, charges, debentures or other loan capital, bank overdrafts, loans, debt securities or other similar indebtedness, liabilities under acceptances or acceptance credits, finance leases or hire purchase commitments, guarantees or other material contingent liabilities at the close of business on 30 April 2006.

Contingent liabilities

At the close of business on 30 April 2006, being the latest practicable date for the purpose of this indebtedness statement, the Enlarged Group had no material contingent liabilities.

— 42 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

No material changes

The directors have confirmed that there has not been any material change in the indebtedness and contingent liabilities of the Group since 30 April 2006.

3. FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

The Company, through various subsidiaries, is engaged in trading of goods, provision of finance, trading of securities, property holding and investment activities.

The Group’s unaudited consolidated loss for the six months ended 30 September 2005 was HK$546,000 and the unaudited net assets value of the Group as at 30 September 2005 was HK$520,646,000.

As stated in the circular of the Company dated 16 February 2006, the Company is constantly reviewing its existing businesses and possible new business opportunities and has since the end of December 2005 been investigating a new investment opportunity in a financial service group which is in fact HMIL. The Company is endeavouring to further develop the businesses of provision of finance, trading of securities and investment activities. The Transaction and the Conversion will enable the Company to integrate and strengthen its resources and enlarge the client base, with a view to the Company becoming a leading and sophisticated investment service advisor and finance provider in the market.

HMIL through its subsidiaries is engaged in investment holding, provision of financial services including brokerage, commodity trading, money lending, margin financing and corporate finance advisory as well as proprietary trading and direct investment.

The audited consolidated net losses of HMIL for the two financial years ended 31 December 2004 and 31 December 2005 were approximately HK$421.2 million and HK$222.6 million respectively. The net asset value of HMIL based on the unaudited management account for the period ended 28 February 2006 was approximately HK$108.6 million. The audited net asset value of HMIL as at 31 December 2005 was approximately HK$62.7 million.

4. WORKING CAPITAL

The Directors are of the opinion that, taking into account the cash flows generated from the operating activities, the financial resources available to the Enlarged Group, including internally generated funds, the available credit facilities and the estimated net proceeds from the placings, the Enlarged Group has sufficient working capital for its present requirements, that is for at least the next 12 months from the date of this circular.

5. NO MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 March 2005, the date to which the latest audited financial statements of the Company were made up.

— 43 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

The following sets out the text of a report received from Moores Rowland Mazars, certified public accountants, prepared for the sole purpose of inclusion in this circular.

==> picture [209 x 45] intentionally omitted <==

24 May 2006

The Directors

Inner Mongolia Development (Holdings) Limited

Dear Sirs/ Madam,

We set out below our report on the financial information regarding Hennabun Management International Limited (“HMIL”) and its subsidiaries (hereinafter collectively referred to as the “HMIL Group”) for each of the three years ended 31 December 2003, 2004 and 2005 (the “Relevant Periods”) for inclusion in the circular of Inner Mongolia Development (Holdings) Limited (the “Company”) dated 24 May 2006 (the “Circular”) in connection with a major transaction for the proposed acquisition by the Company of a 8% convertible note issued by HMIL in the outstanding principal amount of HK$131 million (the “Transaction”) from Willie International Holdings Limited (“Willie International”), and the Company’s intention to exercise the conversion rights of the convertible note in full to convert into shares in HMIL as soon as practicable after the completion of the Transaction.

HMIL was incorporated in the British Virgin Islands on 6 March 1996 under the name of Hennabun Management Inc. as a limited liability company. The current name of Hennabun Management International Limited was adopted on 5 January 2005 pursuant to directors’ resolution. HMIL was formerly a subsidiary of Willie International. Pursuant to various share issues to third parties during the year ended 31 December 2003, Willie International’s interests in HMIL were diluted from 93.04% to 47.6% and HMIL then became an associate of Willie International. The principal activities of HMIL Group include investment holding, the provision of brokerage and financial services.

We have audited in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), the consolidated financial statements of the HMIL Group for the Relevant Periods, which have been prepared in accordance with the Hong Kong Financial Reporting Standard issued by HKICPA.

For the purpose of this report, we have carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.

The directors of HMIL are responsible for the preparation of the financial information as set out in Section A to B below (“the Financial Information”). The Financial Information as set out in this report has been prepared by the directors of HMIL based on the audited financial statements of the

— 44 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

HMIL Group and on the basis set out in Section A to B below, after making such adjustments as are appropriate. In preparing the Financial Information and the financial statements that intends to give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion on the Financial Information.

The audit opinions issued by us on the audited financial statements of the HMIL Group for the years ended 31 December 2003, 2004 and 2005 contained qualifications concerning limitation of audit scope. The audit qualifications that remain unresolved are summarised below.

Limitation of audit scope — financial statements for the year ended 31 December 2003

• (1) Included in current assets as at 31 December 2003 were loans receivable amounting to HK$46,556,000. These loans receivable were unsecured and some of them were covered by personal guarantees provided by third parties. Of the total amount, HK$41,206,000 were not yet due for repayment at 31 December 2003 and had not been settled up to the date of the issue of the audit report for that year. We were unable to obtain adequate external evidence to our satisfaction about the financial strength of the borrowers and the guarantors to enable us to form a view on the recoverability of the loans receivable and hence the adequacy of the provision as of 31 December 2003. These loans receivable were not repaid subsequently and were fully provided for in the year 2004.

• (2) Included in non-current assets was interest in an associate and in income statement profit on deemed disposal of interest in an associate of HK$401,888,000 and HK$2,500,000 respectively in respect of an associate of the HMIL Group. Audited financial information of this associate was not available.

Because of the abovementioned matter, we were unable to form a view as to whether the HMIL Group’s share of the associate’s net assets at 31 December 2003 was fairly stated. Any adjustments relating to the above matter that might have been found to be necessary would have a significant consequential impact on the result of the HMIL Group for the year ended 31 December 2003, including the profit on deemed disposal of interest in the associate amounting to HK$2,500,000, and on the HMIL Group’s interest in the associate at 31 December 2003.

Any adjustments in respect of the matters mentioned in (1) and (2) above would have consequential effect on the carrying amounts of HMIL’s interests in subsidiaries as recorded in the HMIL’s own balance sheet as at 31 December 2003.

Limitation of audit scope — financial statements for the year ended 31 December 2004

• (1) As mentioned in (1) above, we had not been able to form a view in the previous year on the recoverability of loans receivable of HK$41,206,000 as at 31 December 2003 because of scope limitation. The amount concerned has been fully provided for during the year 2004. Any adjustments to the loans receivable balance as at 31 December 2003 would have consequential effect on the loss of the HMIL Group for the year ended 31 December 2004.

— 45 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

• (2) As mentioned in (2) above, we had not been able to form a view in the previous year on the underlying value of an interest in an associate of HK$401,888,000 as at 31 December 2003. The HMIL Group disposed of its interest in the associate during the year 2004 and recorded a loss of HK$21,598,000 on disposal and a bad debt provision of HK$97,389,000 on the amount due from it. Any adjustments to the underlying value of an interest in the associate as at 31 December 2003 would have consequential effect on the loss of the HMIL Group for the year ended 31 December 2004.

• (3) Included in current assets as at 31 December 2004 were loan receivables amounting to HK$291,620,000. Of the amount, HK$200,000,000 was unsecured and had not been settled up to the date of the issue of the audit report for that year. A director of HMIL provided to the HMIL Group a personal guarantee of HK$200,000,000 in respect of the recoverability of such loans receivable. However, we were unable to assess the financial strength of the director to enable us to form a view on the value of his personal guarantee.

Any adjustments in respect of the matters mentioned in (1) to (3) above would have consequential effect on the carrying amounts of HMIL’s interests in subsidiaries as recorded in HMIL’s own balance sheet as at 31 December 2004.

Limitation of audit scope — financial statements for the year ended 31 December 2005

As mentioned in (3) above, we were not able to form a view in the previous year on the financial strength of a director of HMIL who had provided a personal guarantee of HK$200,000,000 to the HMIL Group in respect of the recoverability of loans receivable amounting to HK$291,620,000 held by two subsidiaries (the “Subsidiaries”) as at 31 December 2004.

During the year, the HMIL Group disposed of the Subsidiaries at a loss. Had we been able to form a view on the recoverability of the loans receivable held by the Subsidiaries as at 31 December 2004 as mentioned in (3) above, impairment loss might have been recorded in 2004. Any adjustments to loans receivable as at 31 December 2004 would have consequential effect on the loss of the HMIL Group for the year ended 31 December 2005.

In our opinion, the Financial Information gives a true and fair view of the state of affairs of the HMIL Group as at 31 December 2005.

Because of the significance of the possible effects of the limitations in audit scope in respect of the foregoing matters during the audits of the financial statements for the year ended 31 December 2003 and 2004 and we have not been able to obtain further information during our review for the purpose of this report to determine the adjustments required with respect to the limitations, for the purpose of this report, we are unable to form an opinion as to whether the Financial Information gives a true and fair view of the state of affairs of the HMIL Group as at 31 December 2003 and 2004 and of the consolidated results and cash flows of the HMIL Group for the Relevant Periods.

— 46 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

ACCOUNTANTS’ REPORT ON HMIL GROUP

A. FINANCIAL INFORMATION

CONSOLIDATED INCOME STATEMENTS

		**Year **	ended 31 December	ended 31 December
		2003	2004	2005
	Note	HK$’000	HK$’000	HK$’000
		(As restated
		— note 19A)
Turnover	3	54,946	35,870	33,606
Other revenue	4	6,463	82	991
Other net income (loss)	5	20,969	16,519	(6,780)
Net provision for bad and doubtful debts		(174,199)	(364,549)	(22,168)
Employee benefits expenses		(12,092)	(63,182)	(6,450)
Depreciation and amortisation expenses		(1,691)	(1,650)	(1,985)
Finance costs for provision of financial services	8	(7,028)	(4,890)	(6,433)
Other expenses		(19,559)	(13,354)	(11,930)
Other finance costs	8	(13,494)	(7,746)	(5,936)
Profit (Loss) on disposal of interests in subsidiaries		6,014	3,299	(195,482)
Profit on deemed disposal of interest in an
associate		2,500	—	—
Loss on disposal of interest in an associate		—	(21,598)	—
Loss before taxation	7	(137,171)	(421,199)	(222,567)
Taxation	10	(4,200)	—	—
Loss for the year	11	(141,371)	(421,199)	(222,567)
Loss per share - Basic	12	(80 cents)	(98 cents)	(38 cents)

— 47 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

CONSOLIDATED BALANCE SHEETS

At 31 December 2003 2004 2005 Note HK$’000 HK$’000 HK$’000 ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 14 2,595 1,273 87,979 Intangible assets 15 3,203 2,743 2,283 Other assets 16 2,053 1,976 2,140 Interest in an associate 18 401,888 — — 409,739 5,992 92,402 Current assets Investments held for trading 19 22,621 278 68 Loans receivable 20 46,556 291,620 45,534 Trade and other receivables 21 193,686 164,438 228,076 Pledged bank deposits 18,002 18,000 3,000 Bank balances and cash 22 25,552 48,009 71,589 306,417 522,345 348,267 Current liabilities Trade and other payables 45,572 59,906 59,786 Due to shareholders 23 406 — — Due to a director 24 — — 14,000 Due to related companies 25 148,121 8,020 998 Bank overdrafts 26 61,109 32,084 21,425 Interest-bearing borrowings 27 — — 146,000 Taxation 4,720 4,798 4,798 259,928 104,808 247,007 Net current assets 46,489 417,537 101,260 Total assets less current liabilities 456,228 423,529 193,662 Non-current liabilities Convertible notes 28 46,500 120,300 131,000 NET ASSETS 409,728 303,229 62,662 CAPITAL AND RESERVES Issued capital 30 241,124 463,268 48,433 Reserves 31 168,604 (160,039) 14,229 TOTAL EQUITY 409,728 303,229 62,662	At 31 December 2003 2004 2005 Note HK$’000 HK$’000 HK$’000 ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 14 2,595 1,273 87,979 Intangible assets 15 3,203 2,743 2,283 Other assets 16 2,053 1,976 2,140 Interest in an associate 18 401,888 — — 409,739 5,992 92,402 Current assets Investments held for trading 19 22,621 278 68 Loans receivable 20 46,556 291,620 45,534 Trade and other receivables 21 193,686 164,438 228,076 Pledged bank deposits 18,002 18,000 3,000 Bank balances and cash 22 25,552 48,009 71,589 306,417 522,345 348,267 Current liabilities Trade and other payables 45,572 59,906 59,786 Due to shareholders 23 406 — — Due to a director 24 — — 14,000 Due to related companies 25 148,121 8,020 998 Bank overdrafts 26 61,109 32,084 21,425 Interest-bearing borrowings 27 — — 146,000 Taxation 4,720 4,798 4,798 259,928 104,808 247,007 Net current assets 46,489 417,537 101,260 Total assets less current liabilities 456,228 423,529 193,662 Non-current liabilities Convertible notes 28 46,500 120,300 131,000 NET ASSETS 409,728 303,229 62,662 CAPITAL AND RESERVES Issued capital 30 241,124 463,268 48,433 Reserves 31 168,604 (160,039) 14,229 TOTAL EQUITY 409,728 303,229 62,662	At 31 December 2003 2004 2005 Note HK$’000 HK$’000 HK$’000 ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 14 2,595 1,273 87,979 Intangible assets 15 3,203 2,743 2,283 Other assets 16 2,053 1,976 2,140 Interest in an associate 18 401,888 — — 409,739 5,992 92,402 Current assets Investments held for trading 19 22,621 278 68 Loans receivable 20 46,556 291,620 45,534 Trade and other receivables 21 193,686 164,438 228,076 Pledged bank deposits 18,002 18,000 3,000 Bank balances and cash 22 25,552 48,009 71,589 306,417 522,345 348,267 Current liabilities Trade and other payables 45,572 59,906 59,786 Due to shareholders 23 406 — — Due to a director 24 — — 14,000 Due to related companies 25 148,121 8,020 998 Bank overdrafts 26 61,109 32,084 21,425 Interest-bearing borrowings 27 — — 146,000 Taxation 4,720 4,798 4,798 259,928 104,808 247,007 Net current assets 46,489 417,537 101,260 Total assets less current liabilities 456,228 423,529 193,662 Non-current liabilities Convertible notes 28 46,500 120,300 131,000 NET ASSETS 409,728 303,229 62,662 CAPITAL AND RESERVES Issued capital 30 241,124 463,268 48,433 Reserves 31 168,604 (160,039) 14,229 TOTAL EQUITY 409,728 303,229 62,662	At 31 December 2003 2004 2005 Note HK$’000 HK$’000 HK$’000 ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 14 2,595 1,273 87,979 Intangible assets 15 3,203 2,743 2,283 Other assets 16 2,053 1,976 2,140 Interest in an associate 18 401,888 — — 409,739 5,992 92,402 Current assets Investments held for trading 19 22,621 278 68 Loans receivable 20 46,556 291,620 45,534 Trade and other receivables 21 193,686 164,438 228,076 Pledged bank deposits 18,002 18,000 3,000 Bank balances and cash 22 25,552 48,009 71,589 306,417 522,345 348,267 Current liabilities Trade and other payables 45,572 59,906 59,786 Due to shareholders 23 406 — — Due to a director 24 — — 14,000 Due to related companies 25 148,121 8,020 998 Bank overdrafts 26 61,109 32,084 21,425 Interest-bearing borrowings 27 — — 146,000 Taxation 4,720 4,798 4,798 259,928 104,808 247,007 Net current assets 46,489 417,537 101,260 Total assets less current liabilities 456,228 423,529 193,662 Non-current liabilities Convertible notes 28 46,500 120,300 131,000 NET ASSETS 409,728 303,229 62,662 CAPITAL AND RESERVES Issued capital 30 241,124 463,268 48,433 Reserves 31 168,604 (160,039) 14,229 TOTAL EQUITY 409,728 303,229 62,662
	409,739 22,621 46,556 193,686 18,002 25,552 306,417 45,572 406 — 148,121 61,109 — 4,720 259,928 46,489 456,228 46,500	5,992 278 291,620 164,438 18,000 48,009 522,345 59,906 — — 8,020 32,084 — 4,798 104,808 417,537 423,529 120,300	92,402
			68 45,534 228,076 3,000 71,589
			348,267
			59,786 — 14,000 998 21,425 146,000 4,798
			247,007
			101,260
			193,662
			131,000
	409,728	303,229	62,662
	241,124 168,604	463,268 (160,039)	48,433 14,229
	409,728	303,229	62,662

— 48 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

BALANCE SHEET

Note ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 14 Interests in subsidiaries 17 Current assets Loans receivables 20 Other receivables Investments held for trading 19 Bank balances and cash Current liabilities Other payables Due to shareholders 23 Due to related companies 25 Taxation Net current (liabilities) assets Total assets less current liabilities Non-current liabilities Convertible notes 28 NET ASSETS CAPITAL AND RESERVES Issued capital 30 Reserves 31 TOTAL EQUITY	At 2003 HK$’000 65 771,981	31 December 2004 2005 HK$’000 HK$’000 42 21 394,705 191,790 394,747 191,811 — 5,424 13,713 14 — — 125 31 13,838 5,469 549 592 — — 8,020 998 4,200 4,200 12,769 5,790 1,069 (321) 395,816 191,490 120,300 131,000 275,516 60,490 463,268 48,433 (187,752) 12,057 275,516 60,490	31 December 2004 2005 HK$’000 HK$’000 42 21 394,705 191,790 394,747 191,811 — 5,424 13,713 14 — — 125 31 13,838 5,469 549 592 — — 8,020 998 4,200 4,200 12,769 5,790 1,069 (321) 395,816 191,490 120,300 131,000 275,516 60,490 463,268 48,433 (187,752) 12,057 275,516 60,490
	772,046 — 16 15,950 35 16,001 27,351 407 148,019 4,200 179,977 (163,976) 608,070 46,500	394,747 — 13,713 — 125 13,838 549 — 8,020 4,200 12,769 1,069 395,816 120,300	191,811
			5,424 14 — 31
			5,469
			592 — 998 4,200
			5,790
			(321
			191,490
			131,000
	561,570	275,516
	241,124 320,446	463,268 (187,752)	48,433 12,057
	561,570	275,516

— 49 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Opening balance — Total equity Prior year adjustment (note 19A) As restated Investment revaluation deficit realised on disposal of other securities included in non-current assets Net gains not recognised in the income statement Issue of share capital Repurchases of shares Conversion of convertible note Loss for the year Closing balance — Total equity	Year ended 31 December 2003 2004 2005 HK$’000 HK$’000 HK$’000 346,144 409,728 303,229 (64,240) — — 281,904 409,728 303,229 4,295 — — (900) — — 3,395 — — 265,800 314,700 17,320 — — (40,000) — — 4,680 (141,371) (421,199) (222,567) 409,728 303,229 62,662	Year ended 31 December 2003 2004 2005 HK$’000 HK$’000 HK$’000 346,144 409,728 303,229 (64,240) — — 281,904 409,728 303,229 4,295 — — (900) — — 3,395 — — 265,800 314,700 17,320 — — (40,000) — — 4,680 (141,371) (421,199) (222,567) 409,728 303,229 62,662	Year ended 31 December 2003 2004 2005 HK$’000 HK$’000 HK$’000 346,144 409,728 303,229 (64,240) — — 281,904 409,728 303,229 4,295 — — (900) — — 3,395 — — 265,800 314,700 17,320 — — (40,000) — — 4,680 (141,371) (421,199) (222,567) 409,728 303,229 62,662
	281,904 4,295 (900) 3,395 265,800 — — (141,371)	409,728 — — — 314,700 — — (421,199)	303,229 — —
			—
			17,320 (40,000 4,680 (222,567
	409,728	303,229

— 50 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

CONSOLIDATED CASH FLOW STATEMENT

	**Year **	ended 31 December	ended 31 December
	2003	2004		2005
	HK$’000	HK$’000	HK$’000
	(As restated —
	note 19A)
OPERATING ACTIVITIES
Loss before taxation	(137,171)	(421,199)	(222,567)
Depreciation and amortisation expenses	1,691	1,650		1,985
Interest expenses	20,522	12,636		12,369
Directors’ emoluments settled by issue of shares	—	55,000		—
Net gain on disposal of property, plant and
equipment	—	(577)		—
Net provision for bad and doubtful debts	174,199	364,549		22,168
Net unrealised loss on investments held for trading	19,017	—		—
Loss on disposal of other securities	4,295	—		—
Gain on disposal of investments held for trading	—	(12,470)		—
(Profit) Loss on disposal of interests in subsidiaries	(6,014)	(3,299)		195,482
(Gain) Loss on disposal of interest in an associate	(2,500)	21,598		—
Changes in working capital:
Due from the substantial shareholder	1,280	—		—
Loans, trade and other receivables	(400,732)	(173,415)	(169,725)
Investments held for trading	2,477	4,441		209
Trade and other payables	33,397	14,376		(2,687)
Due to related companies	(18,818)	67,877		—
Due to shareholders	406	(406)		—
Due to directors	—	—		14,000
Cash used in operations	(307,951)	(69,239)	(148,766)
Interest paid	(20,115)	(5,614)		(6,855)
Hong Kong Profits Tax refunded	121	78		—
Hong Kong Profits Tax paid	(58)	—		—
Net cash used in operating activities	(328,003)	(74,775)	(155,621)

— 51 —

APPENDIX II ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

CONSOLIDATED CASH FLOW STATEMENT (CONTINUED)

		**Year **	ended 31 December	ended 31 December
		2003	2004	2005
	Note	HK$’000	HK$’000	HK$’000
INVESTING ACTIVITIES
Acquisition of subsidiaries	33	—	2	(49,871)
Disposal of subsidiaries	34	34,074	3,594	156,280
Proceeds from disposal of investments held for
trading		19,103	28,420	—
Proceeds from disposal of property, plant and
equipment		—	1,058	—
Deposit with SEHK		—	(3)	—
Proceeds from disposal of an associate		—	900	—
Purchase of property, plant and equipment		(285)	(1,296)	(3,085)
Contribution in cash to clearing house and
exchange		—	(20)	(170)
Refund of deposit from clearing house and
exchange		—	100	6
Increase in pledged bank deposit		18,174	—	—
Net advances from an associate		40,000	—	—
Net cash from investing activities		111,066	32,755	103,160
FINANCING ACTIVITIES
Issue of shares for cash		178,300	140,000	7,000
Repayment to related companies		(14,124)	—	—
New other loans raised		—	—	175,000
Repayment of other loans		(12,615)	—	(65,000)
Issue of convertible notes		163,000	—	—
Repurchase of shares		—	—	(20,000)
Redemption of convertible notes		(29,000)	(46,500)	(25,300)
Net cash from financing activities		285,561	93,500	71,700
Net increase in cash and cash equivalents		68,624	51,480	19,239
Cash and cash equivalents at beginning of
the year		(86,179)	(17,555)	33,925
Cash and cash equivalents at end of the year	22	(17,555)	33,925	53,164

— 52 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

B. NOTES TO THE FINANCIAL STATEMENTS

1. GENERAL INFORMATION

HMIL is a limited liability company incorporated in the British Virgin Islands. HMIL’s registered office is located at Sea Meadow House, Blackburne Highway, PO Box 116, Road Town, Tortola, British Virgin Islands. The principal activities of HMIL and its subsidiaries (the “HMIL Group”) are described in note 3.

2. PRINCIPAL ACCOUNTING POLICIES

The Financial Information have been prepared in accordance with Hong Kong Financial Reporting Standards issued by the HKICPA as applicable to the last financial year included in the Relevant Periods.

Basis of preparation

The Financial Information has been based on consolidated financial statements that have been prepared on the historical cost basis, except for investments held for trading, which are measured at fair value as explained in the principal accounting policies set out below.

Basis of consolidation

The consolidated financial statements include the financial statements of HMIL and its subsidiaries made up to 31 December each year.

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 inter-company transactions and balances within the HMIL Group are eliminated on consolidation.

Subsidiaries

A subsidiary is an entity in which HMIL, directly or indirectly, has the power to govern the financial and operating policies so as to obtain benefits from its activities.

In HMIL’s balance sheet, investments in subsidiaries are stated at cost less accumulated impairment losses. The carrying amount of the investment is reduced to its recoverable amount on an individual basis. The results of subsidiaries are accounted for by HMIL on the basis of dividends received and receivable.

Goodwill

Goodwill on acquisition is initially measured at cost, being the excess of the cost of the acquisition over HMIL’s share of the fair value of the identifiable assets, liabilities and contingent liabilities. Goodwill on acquisition of subsidiaries is recognised as a separate asset. Goodwill is carried at cost less accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

An excess of HMIL’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in the income statement.

— 53 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Intangible assets

Intangible assets, representing eligibility rights to trade on or through the Stock Exchange of Hong Kong Limited (“SEHK”) and the Hong Kong Futures Exchange Limited (“HKFE”). They are stated at cost less accumulated amortisation and any accumulated impairment losses.

Amortisation is provided to write off the cost of intangible assets on the straight-line basis over their estimated useful lives.

Property, plant and equipment

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

The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, only when it is probable that future economic benefits associated with the item will flow to the HMIL Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the year in which they are incurred.

The gain or loss arising from the retirement or disposal of property, plant and equipment is determined as the difference between the estimated net sales proceeds and the carrying amount of the assets and is recognised as income or expense in the income statement.

Depreciation is provided to write off the cost less accumulated impairment losses of property, plant and equipment over their estimated useful lives from the date on which they become fully operational and after taking into account of their estimated residual values, using the straight-line method, at the following rates per annum:

Leasehold land	Over the unexpired term of lease
Buildings	2%
Leasehold improvements	20%
Furniture and fixtures	20%
Office equipment	20%
Motor vehicles	20%

Financial instruments

Financial assets and financial liabilities are recognised in the balance sheet when the HMIL Group becomes a party to the contractual provisions of the instruments, and on a trade date basis.

Investments held for trading

Investments held for trading are measured at fair value at each reporting dates. Gains and losses arising from changes in fair value are included in income statement for the period.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are not held for trading. They are measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any discount or premium on acquisition, over the year to maturity. Any gains and losses arising when the loans and receivables are derecognised or impaired, as well as through the amortisation process are recognised in the income statement.

— 54 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Trade receivables and payables

Trade receivables and payables are recognised at fair values, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the HMIL Group will not be able to collect all the amounts due according to the original terms of receivables. The amount of the provision is the difference between the assets’ carrying amount and the present value of estimated future cash flow, discounted at the effective interest rate. The amount of provision is recognised in the income statement.

Convertible loan notes

On the issue of convertible notes, the proceeds are split into liability and equity components. The fair value of the liability component is determined using a market rate for an equivalent non-convertible notes; and this amount, net of transaction costs, is carried as a non-current liability on the amortised cost basis until extinguished on conversion or redemption.

The reminder of the proceeds is allocated to the conversion option and is recognised and included in shareholders’ equity, net of transaction costs. The carrying amount of the conversion option is not remeasured in subsequent years.

Payables and short-term borrowings

Payables and short-term borrowings are initially recognised at cost, being the fair value of the consideration received, net of transaction costs incurred and are subsequently measured at amortised cost, using effective interest method.

Revenue recognition

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

Brokerage fees and commission income is recognised in the period when services are rendered.

Interest income is accrued on a time proportion basis on the principal outstanding and at the interest rate applicable.

Dividend income from investments is recognised when the HMIL Group’s rights to receive payment have been established.

Consultancy services, administration services and securities handling income are recognised in the period when services are rendered

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.

— 55 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Impairment

At each balance sheet date, the HMIL Group reviews internal and external sources of information to determine whether the carrying amounts of its tangible and intangible assets have suffered an impairment loss or impairment loss previously recognised no longer exists or may be reduced. If any such indication exists, the recoverable amount of the asset is estimated, based on the higher of its fair value less costs to sell and value in use. Where it is not possible to estimate the recoverable amount of an individual asset, the HMIL Group estimates the recoverable amount of the smallest group of assets that generates cash flows independently (i.e. a cash-generating unit).

If the recoverable amount of an asset or a cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately.

A reversal of impairment loss is limited to the carrying amount of the asset or cash-generating unit that would have been determined had no impairment loss been recognised in prior years. Reversal of impairment losses is recognised as income immediately.

Employee benefits

Defined contribution plans

The obligations for contributions to defined contribution retirement scheme are recognised as an expense in the income statement as incurred. The assets of the scheme are held separately from those of the HMIL Group in an independently administered fund.

Long service payment

The HMIL Group’s net obligation in respect of long service payment under the Employment Ordinance is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using the projected unit credit method and is discounted to its present value and the fair value of any related assets, including retirement scheme benefit, is deducted.

Related parties

A party is related to the HMIL Group if (a) directly, or indirectly through one or more intermediaries, the party controls, is controlled by, or is under common control with, the HMIL Group; or has an interest in the HMIL Group that gives it significant influence over the HMIL Group; or has joint control over the HMIL Group; (b) the party is an associate of the HMIL Group; (c) the party is a joint venture in which the HMIL Group is a venturer; (d) the party is a member of the key management personnel of the HMIL Group or its parent; (e) the party is a close member of the family of any individual referred to in (a) or (d); (f) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or (g) the party is a post-employment benefit plan for the benefit of employees of the HMIL Group, or of any entity that is a related party of the HMIL Group.

Taxation

The charge for current income tax is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

— 56 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Deferred tax is provided using the liability method, on all temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax liabilities or assets are measured at the tax rates that are expected to apply to the period when the asset is recovered or liability is settled, based on the tax rates and the tax laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences, tax losses and credits can be utilised.

Cash equivalents

For the purpose of cash flow statement, cash equivalents represent short-term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of change in value, net of bank overdrafts.

Critical accounting estimates and judgements

Allowance for bad and doubtful debts

The provisioning policy for bad and doubtful debts of the HMIL Group is based on management’s judgment of collectability and ageing analysis of the loans and accounts receivables. At the balance sheet date, the loans and accounts receivables, net of provision, amounted to HK$273,610,000 (2004: HK$456,058,000; 2003: HK$240,242,000) . A considerable amount of judgment is required in assessing the ultimate realisation of these receivables, including the creditworthiness and the past collection history of each debtor. If the financial conditions of these debtors were to deteriorate, resulting in an impairment of their ability to make payments, additional allowance will be required.

Financial risk management objective and policies

The HMIL Group’s major financial instruments include trade and other receivables and payables, loans receivable, short-term borrowings and convertible bonds. Details of these financial instruments are disclosed in the respective notes. The risks associated with these financial instruments and the policies applied by the HMIL Group to mitigate these risks are set out below. Management monitors these exposures to ensure appropriate measures are implemented in a timely and effective manner.

Interest rate risk

The HMIL Group’s interest rates on its bank and other borrowings included in current liabilities are mainly based on at prime rate. The interest rates and terms of repayment have been disclosed in note 27.

Credit risk

The HMIL Group has no significant concentration of credit risk, with exposure spread over a number of customers.

Liquidity risk

The HMIL Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.

— 57 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Future changes in HKFRS

At the date of authorisation of these financial statements, the HKICPA has issued a number of new or revised accounting standards and interpretations that are not yet effective and the HMIL Group has not early adopted. The directors anticipate that the adoption of these new/revised HKFRS in the future accounting periods will have no material impact on the results of the HMIL Group.

3. TURNOVER

Turnover recognised from the principal activities of the HMIL Group during the year including investment holding, the provision of brokerage and financial services.

Commission and brokerage for securities Underwriting and placing commission Interest income on: Loans receivable Deposits in authorised institutions Consultancy fee income Dividend income from listed investments Securities handling fees	Year ended 31 December 2003 2004 HK$’000 HK$’000 8,364 9,336 738 1,384 39,261 16,836 121 369 2,958 2,105 30 1 3,474 5,839 54,946 35,870	2005 HK$’000 9,289 4,544 16,228 240 350 — 2,955
		33,606

4. OTHER REVENUE

		Year ended 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
Administration fee	841	10	—
Commission fee	4,291	—	—
Sundry income	1,331	72	991
	6,463	82	991

— 58 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

5. OTHER NET INCOME (LOSS)

Year ended 31 December 2003 2004 HK$’000 HK$’000 (As restated — note 19A) Waiver of loan interest payable — 2,706 Gain on disposal of property, plant and equipment — 583 Net realised gain (loss) on investments held for trading 41,176 13,403 Net realised (loss) gain on trading in futures contracts (1,190) (173) Net unrealised loss on investment held for trading (19,017) — 20,969 16,519	2005 HK$’000 — — (7,182) 402 —
	(6,780)

6. SEGMENT INFORMATION

In accordance with the HMIL Group’s internal financial reporting, the HMIL Group determined that business segments are its primary reporting format which mainly comprised of provision of financial services and investment holdings and no geographical segments have been presented as the HMIL Group’s operations and assets are located in Hong Kong for the years ended 31 December 2005, 2004 and 2003.

Business segments

Business segments of the HMIL Group comprise the following:

Provision of financial services : Provide securities brokerage services, financial advisory services and loan financing Investment holding : Holding investments for dividend income and capital appreciation

— 59 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

The following tables show segment information for the Relevant Periods.

Year ended 31 December 2005

Provision of financial services Investment holding Unallocated Segment revenue HK$’000 HK$’000 HK$’000 Turnover 33,606 — — Other revenue — — 991 Total revenue 33,606 — 991 Segment results 1,519 (15,767) (468) Loss on disposal of interests in subsidiaries (195,482) Finance cost (6,433) (5,936) Loss for the year Year ended 31 December 2004 Provision of financial services Investment holding Unallocated Segment revenue HK$’000 HK$’000 HK$’000 Turnover 35,869 1 — Other revenue — — 82 Total revenue 35,869 1 82 Segment results (324,991) (17,554) (47,719) Profit on disposal of interests in subsidiaries 3,299 Loss on disposal of interests in an associate (21,598) Finance cost (4,890) (7,746) Loss for the year	Total HK$’000 33,606 991
	34,597
	(14,716 (195,482 (12,369
	(222,567
	Total HK$’000 35,870 82
	35,952
	(390,264 3,299 (21,598 (12,636
	(421,199

— 60 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Year ended 31 December 2003

Provision of financial services Investment holding Unallocated HK$’000 HK$’000 HK$’000 Segment revenue Turnover 54,916 30 — Other revenue — — 6,463 Total revenue 54,916 30 6,463 Segment results (185,914) 60,447 304 Profit on disposal of interests in subsidiaries 6,014 Profit on deemed disposal of interests in an associate 2,500 Finance costs (7,028) (13,494) Taxation Loss for the year	Total HK$’000 54,946 6,463
	61,409
	(125,163 6,014 2,500 (20,522 (4,200
	(141,371

Assets and liabilities as at 31 December 2005

		Provision
	of financial		Investment
		services	holding	Unallocated	Total
		HK$’000	HK$’000	HK$’000	HK$’000
Assets
Total assets		342,008	11,176	87,485	440,669
Liabilities
Total liabilities		165,928	175,879	36,200	378,007

— 61 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Assets and liabilities as at 31 December 2004

Provision of financial services Investment holding Unallocated HK$’000 HK$’000 HK$’000 Assets Total assets 513,321 14,140 876 Liabilities Total liabilities 80,681 138,927 5,500 Assets and liabilities as at 31 December 2003 Provision of financial services Investment holding Unallocated HK$’000 HK$’000 HK$’000 Assets Segment assets 314,103 165 — Interest in associates — 401,888 — Total assets Liabilities Total liabilities 82,209 223,558 661	Total HK$’000 528,337
	225,108
	Total HK$’000 314,268 401,888
	716,156
	306,428

7. LOSS BEFORE TAXATION

		Year ended 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
This is stated after charging:
Contributions to MPF Scheme	406	147	389
Auditors’ remuneration	361	525	510
Operating lease charges in respect of office premises	3,506	1,445	1,232
Net realised loss on disposal of other securities	4,295	—	—

— 62 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

8. FINANCE COSTS

Bank loans, overdrafts and other loans wholly repayable within five years Convertible notes Less: Amount attributable to provision of financial services Other finance costs	Year ended 31 December 2003 2004 HK$’000 HK$’000 17,755 5,614 2,767 7,022	Year ended 31 December 2003 2004 HK$’000 HK$’000 17,755 5,614 2,767 7,022	2005 HK$’000 6,433 5,936
	20,522 (7,028)	12,636 (4,890)	12,369 (6,433
	13,494	7,746	5,936

9. DIRECTORS’ EMOLUMENTS

The aggregate amount of emoluments received by HMIL’s directors are as follows:

Chuang Eugene Yue-chien Chan Shek Wah Tong So Yuet Chuang Eugene Yue-chien Chan Shek Wah Tong So Yuet	Year ended 31 December 2005 Directors’ fees Salaries, allowances and benefits in kind Total HK$’000 HK$’000 HK$’000 — — — — 150 150 — 227 227 — 377 377 Year ended 31 December 2004 Directors’ fees Salaries, allowances and benefits in kind Total HK$’000 HK$’000 HK$’000 — 55,000 55,000 — 228 228 — 57 57 — 55,285 55,285	Year ended 31 December 2005 Directors’ fees Salaries, allowances and benefits in kind Total HK$’000 HK$’000 HK$’000 — — — — 150 150 — 227 227 — 377 377 Year ended 31 December 2004 Directors’ fees Salaries, allowances and benefits in kind Total HK$’000 HK$’000 HK$’000 — 55,000 55,000 — 228 228 — 57 57 — 55,285 55,285
		55,285

— 63 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

			**Year **	ended 31 December 2003
				Salaries,
				allowances
			Directors’	and benefits
			fees	in kind	Total
			HK$’000	HK$’000	HK$’000
Chuang	Eugene	Yue-chien	—	—	—

Employees’ emoluments

The five highest paid employees of the HMIL Group during the Relevant Periods are as follows:

			**Year **	ended 31 December
		2003		2004	2005
		HK$’000		HK$’000	HK$’000
Other	emoluments	3,250		2,265	1,997

The emoluments fell within the following bands:

Nil to HK$1,000,000 HK$1,000,001 to HK$1,500,000	Year ended 31 December 2003 2004 HK$’000 HK$’000 4 5 1 — 5 5	2005 HK$’000 5 —
		5

10. TAXATION

Hong Kong Profits Tax has not been provided as the HMIL Group incurred losses for taxation purposes for the years ended 31 December 2005 and 2004. Hong Kong Profits Tax has been provided at the rate of 17.5% on the HMIL Group’s estimated assessable profits for the year ended 31 December 2003.

		Year ended 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
	(As restated
	— note 19A)
The charge comprises:
Hong Kong Profits Tax	4,200	—	—

— 64 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Details of unrecognised deferred taxation are set out in note 29 to the financial statements.

Reconciliation of tax expense

Year ended 31 December 2003 2004 HK$’000 (As restated — note 19A) HK$’000 Loss before taxation (137,171) (421,199) Income tax at applicable tax rate of 17.5% (24,005) (73,710) Non-deductible expenses 24,181 62,709 Tax exempt revenue (7,561) (10,347) Unrecognised tax losses 2,579 21,443 Utilisation of previously unrecognised tax losses (239) (270) Unrecognised temporary differences 9,259 175 Tax loss not allowed — — Others (14) — Tax expense for the year 4,200 —	Year ended 31 December 2003 2004 HK$’000 (As restated — note 19A) HK$’000 Loss before taxation (137,171) (421,199) Income tax at applicable tax rate of 17.5% (24,005) (73,710) Non-deductible expenses 24,181 62,709 Tax exempt revenue (7,561) (10,347) Unrecognised tax losses 2,579 21,443 Utilisation of previously unrecognised tax losses (239) (270) Unrecognised temporary differences 9,259 175 Tax loss not allowed — — Others (14) — Tax expense for the year 4,200 —	Year ended 31 December 2003 2004 HK$’000 (As restated — note 19A) HK$’000 Loss before taxation (137,171) (421,199) Income tax at applicable tax rate of 17.5% (24,005) (73,710) Non-deductible expenses 24,181 62,709 Tax exempt revenue (7,561) (10,347) Unrecognised tax losses 2,579 21,443 Utilisation of previously unrecognised tax losses (239) (270) Unrecognised temporary differences 9,259 175 Tax loss not allowed — — Others (14) — Tax expense for the year 4,200 —	2005 HK$’000 (222,567)
	(24,005) 24,181 (7,561) 2,579 (239) 9,259 — (14)	(73,710) 62,709 (10,347) 21,443 (270) 175 — —	(38,949) 16,082 (26,482) 49,635 (36) (8) (242) —
	4,200	—	—

The applicable tax rate is the Hong Kong Profits Tax rate of 17.5% for the Relevant Periods.

11. LOSS FOR THE YEAR

Of the HMIL Group’s loss for the year of HK$222,567,000 (2004: loss of HK$421,199,000; 2003: HK$141,371,000 (restated)) , a loss of HK$197,026,000 (2004: loss of HK$600,754,000; 2003: profit of HK$6,934,000 (restated)) has been dealt with in the financial statements of HMIL.

12. LOSS PER SHARE

The calculation of the loss per share is based on the loss for the year of HK$222,567,000 (2004: HK$421,199,000; 2003: HK$141,371,000 (restated)) and on the weighted average number of 580,459,360 shares (2004: 428,098,360 shares; 2003: 177,319,634 shares) in issue during the year.

No diluted loss per share is presented for the Relevant Periods as conversion of HMIL’s outstanding convertible notes had an anti-dilutive effect.

— 65 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

13. INVESTMENT PROPERTIES — HMIL GROUP

	Kong and wer Leasehold land and building HK$’000 1,300 — (1,277) (23) —	At 31 December 2003 2004 HK$’000 HK$’000 5,900 — (5,900) — — — e held on long leases. Furniture and fixtures Office equipment Motor vehicles HK$’000 HK$’000 HK$’000 977 1,313 1,195 68 184 — (3) (5) — (335) (474) (394) 707 1,018 801	At 31 December 2003 2004 HK$’000 HK$’000 5,900 — (5,900) — — — e held on long leases. Furniture and fixtures Office equipment Motor vehicles HK$’000 HK$’000 HK$’000 977 1,313 1,195 68 184 — (3) (5) — (335) (474) (394) 707 1,018 801	At 31 December 2003 2004 HK$’000 HK$’000 5,900 — (5,900) — — — e held on long leases. Furniture and fixtures Office equipment Motor vehicles HK$’000 HK$’000 HK$’000 977 1,313 1,195 68 184 — (3) (5) — (335) (474) (394) 707 1,018 801	2005 HK$’000 — —
					—
					Total HK$’000 4,852 285 (1,285 (1,257
					2,595
69 361 (361) (32)	— — — —	707 92 (50) (343)	1,018 401 (100) (540)	801 442 (917) (275)	2,595 1,296 (1,428 (1,190
37	—	406	779	51	1,273
37 — 4,926 (23)	— — 80,220 —	406 1,786 — (695)	779 691 — (647)	51 608 — (160)	1,273 3,085 85,146 (1,525

14. PROPERTY, PLANT AND EQUIPMENT

— 66 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

	Leasehold land and building HK$’000 — — — — — —	Furniture and fixtures Office equipment HK$’000 HK$’000 1,919 4,347 (1,212) (3,329) 707 1,018 1,961 4,628 (1,555) (3,849) 406 779	Furniture and fixtures Office equipment HK$’000 HK$’000 1,919 4,347 (1,212) (3,329) 707 1,018 1,961 4,628 (1,555) (3,849) 406 779	Motor vehicles HK$’000 1,970 (1,169) 801 190 (139) 51	Total HK$’000 8,397 (5,802)
					2,595
					6,940 (5,667)
					1,273
5,087 (147)	80,220 —	3,747 (2,250)	5,319 (4,496)	798 (299)	95,171 (7,192)

The leasehold improvements and leasehold land and buildings were acquired through business combination in December 2005, no depreciation charge was recognised for the year ended 31 December 2005 as the amount is immaterial to the HMIL Group.

The leasehold land and buildings with a net book value of HK$80,220,000 as at 31 December 2005 (2004 and 2003: HK$ Nil) are held by the HMIL Group under medium-term lease in Hong Kong.

— 67 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

	Office equipment
	HK$’000
HMIL
Reconciliation of carrying amount
— year ended 31 December 2003
At beginning of year	52
Additions	36
Depreciation	(23)
At balance sheet date	65
Reconciliation of carrying amount
— year ended 31 December 2004
At beginning of year	65
Depreciation	(23)
At balance sheet date	42
Reconciliation of carrying amount
— year ended 31 December 2005
At beginning of year	42
Depreciation	(21)
At balance sheet date	21
At 1 January 2004
Cost	167
Accumulated depreciation	(102)
	65
At 1 January 2005
Cost	167
Accumulated depreciation	(125)
	42
At 31 December 2005
Cost	167
Accumulated depreciation	(146)
	21

— 68 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

15. INTANGIBLE ASSETS — HMIL GROUP

Reconciliation of carrying amount — year ended 31 December 2003 At beginning of year Amortisation At balance sheet date Reconciliation of carrying amount — year ended 31 December 2004 At beginning of year Amortisation At balance sheet date Reconciliation of carrying amount — year ended 31 December 2005 At beginning of year Amortisation At balance sheet date At 1 January 2004 Cost Accumulated amortisation and impairment losses At 1 January 2005 Cost Accumulated amortisation and impairment losses At 31 December 2005 Cost Accumulated amortisation and impairment losses	Trading rights of SEHK HK$’000 2,250 (300) 1,950	Trading right of HKFE HK$’000 1,387 (134) 1,253	Total HK$’000 3,637 (434
			3,203
	1,950 (300)	1,253 (160)	3,203 (460
	1,650	1,093	2,743
	1,650 (300)	1,093 (160)	2,743 (460
	1,350	933	2,283
	3,000 (1,050)	1,600 (347)	4,600 (1,397
	1,950	1,253	3,203
	3,000 (1,350)	1,600 (507)	4,600 (1,857
	1,650	1,093	2,743
	3,000 (1,650)	1,600 (667)	4,600 (2,317
	1,350	933	2,283

— 69 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

16. OTHER ASSETS — HMIL GROUP

Deposits with HKFE Clearing Corporation Limited Admission fee paid to Hong Kong Securities Clearing Company Limited Contributions in cash to Central Clearing and Settlement System Guarantee Fund Deposits with the SEHK Statutory deposits	At 31 December 2003 2004 HK$’000 HK$’000 1,500 1,500 100 100 100 120 253 156 100 100 2,053 1,976	2005 HK$’000 1,500 100 290 150 100
		2,140

17. INTERESTS IN SUBSIDIARIES — HMIL

Unlisted shares, at cost Impairment loss Due from subsidiaries Provision for doubtful debts Due to subsidiaries	At 31 December 2003 2004 HK$’000 HK$’000 21,000 50,000 (10,332) (50,000)	At 31 December 2003 2004 HK$’000 HK$’000 21,000 50,000 (10,332) (50,000)	2005 HK$’000 50,000 (50,000
	10,668 945,845 (183,402) 762,443 (1,130)	— 1,179,279 (681,752) 497,527 (102,822)	—
			1,023,970 (803,286
			220,684
			(28,894
	771,981	394,705	191,790

The amounts due from (to) subsidiaries are unsecured, interest-free and have no fixed repayments terms for the year ended 31 December 2005 and 2004.

The amounts due from subsidiaries for the year ended 31 December 2003 were unsecured, interest-free and had no fixed repayment terms, except that amounts due from subsidiaries of HK$184,084,000 were interest-bearing at 8% to 8.5% per annum.

— 70 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Details of the principal subsidiaries at the date of this report are as follows:

		Particulars of	**Proportion **	**Proportion **	of
	Place of	issued ordinary	nominal value of
	incorporation/	and paid up	**issued capital **		held	Principal
Name of subsidiary	operation	capital	by HMIL			activities
			Directly	Indirectly
Apex Novel Limited	British Virgin	1 share of	—		100%	Investment
	Islands	US$1 each				holding
Chung Nam Commodities	Hong Kong	150,000 shares	—		100%	Commodities
Limited		of HK$100 each				dealer
Chung Nam Finance Limited	Hong Kong	410,000,000 shares	—		100%	Securities
		of HK$1 each				financing and
						money lending
Chung Nam Holdings Limited	Hong Kong	17,200,000 shares	—		100%	Investment
		of HK$1 each				holding
Chung Nam Nominees	Hong Kong	10,000 shares	—		100%	Nominees
Limited		of HK$1 each
Chung Nam Securities	Hong Kong	302,000,000 shares	—		100%	Securities
Limited		of HK$1 each				brokerage and
						financial
						services
CU Corporate Finance	Hong Kong	10,000,000 shares	—		100%	Investment
Limited		of HK$1 each				advisor
CU Investment (Holdings)	Hong Kong	2 shares of	100%		—	Investment
Limited		HK$1 each and				holding
		2 non-voting
		deferred shares of
		HK$1 each
Moonlightt Capital	British Virgin	101 shares of	100%		—	Investment
Management Limited	Islands	US$1 each				holding and
						securities
						investment
Hennabun Investments	British Virgin	1 share of	100%		—	Investment
Limited	Islands	US$1 each				holding
Radland International Limited	Hong Kong	23,400,000 shares	—		100%	Securities
		of HK$1 each				brokerage and
						financial
						services

— 71 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Details of the principal subsidiaries at the date of this report are as follows:

		Particulars of	**Proportion **	**Proportion **	of
	Place of	issued ordinary	nominal value of
	incorporation/	and paid up	**issued capital **		held	Principal
Name of subsidiary	operation	capital	**by **	HMIL		activities
			Directly	Indirectly
Kam Kwong Investments Limited	Hong Kong	10,000 shares	—		100%	Investment
		of HK$1 each				holding
Quail-Trade Investments Limited	British Virgin	4,980,000 shares	100%		—	Investment
	Islands	of US$1 each				holding
Sun Chung Nam Finance Limited	Hong Kong	1,000,000 shares	—		100%	Money
		of HK$1 each				lending
INTEREST IN AN ASSOCIATE — HMIL GROUP
			**At **	31 December
			2003	2004		2005
		Note	HK$’000	HK$’000		HK$’000
Share of net assets		18(a)	22,499		—	—
Due from an associate		18(b)	379,389		—	—
			401,888		—	—

18. INTEREST IN AN ASSOCIATE — HMIL GROUP

• (a) Investment in an associate represented 45% of the issued ordinary share capital of the associate, Parco Development Limited, which was disposed of during the year ended 31 December 2004 at a cash consideration of HK$900,000 resulting in a loss on disposal of HK$21,598,000.

• (b) The amount due was unsecured, interest-free and had no fixed repayment term. During the year ended 31 December 2004, on disposal of the associate an amount of HK$282,000,000 due from the associate was assigned to the purchaser. The remaining balance of HK$97,389,000 was fully provided for.

19. INVESTMENTS HELD FOR TRADING

		At 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
HMIL GROUP
Equity securities:
— Listed investments in Hong Kong (Note 19A)	21,765	278	68
— Listed investments outside Hong Kong	856	—	—
	22,621	278	68

— 72 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

		At 31 December
	2003	2004	2005
	HK$’000	HK$’000	HK$’000
HMIL
Equity securities:
— Listed investments in Hong Kong (Note 19A)	15,950	—	—

19A. PRIOR YEAR ADJUSTMENT

At 31 December 2002, the HMIL Group held 290,000,000 shares in Radford Capital Investment Limited (“Radford Capital”), a company incorporated in the Cayman Islands with limited liability. Radford Capital is principally engaged in investments in listed and unlisted enterprises established and/or conducting business in Hong Kong and/or the People’s Republic of China and is an investment company listed under Chapter 21 of the Listing Rules of the SEHK. Although the HMIL Group’s investment in Radford Capital accounted for 23.44% issued ordinary shares of Radford Capital, the HMIL Group did not regard Radford Capital as an associate because it intended to hold the investment in Radford Capital for trading purpose. The shares of Radford Capital were thinly traded and the percentage of issued shares of Radford Capital held by the HMIL Group was substantial.

The shares were previously carried at HK$114,000,000, which represented a discount of 20% on the quoted market price of Radford Capital as at 31 December 2002. The previous auditors qualified their report with regard to this valuation method. After taking further advice, it is considered that the net asset value of Radford Capital at 31 December 2002 is a better reflection of the fair value of the shares. Accordingly, a prior year adjustment has been effected to restate the previous carrying value to reflect the net asset value of Radford Capital. This has resulted in an increase of the accumulated loss at 1 January 2003 by HK$64,240,000 and a reduction of the loss for the year ended 31 December 2003 by the same amount.

At 31 December 2003, the quoted market price of Radford Capital was lower than the net asset value. The sole director of HMIL considered the quoted market price at 31 December 2003, without any discount, was the fair value of Radford Capital at that date because the quoted market price which was lower than the net asset value and that the quoted market price better reflected the realisable value of the shares of Radford Capital, which were held with the intention of an orderly disposal in the stock market. Realised gain on partial disposal and unrealised holding loss of Radford Capital shares recognised during the year ended 31 December 2003 amounted to HK$15,928,000 and HK$58,312,000 respectively.

— 73 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

20. LOANS RECEIVABLE

At 31 December HMIL GROUP 2003 2004 Note HK$’000 HK$’000 Third parties 68,992 514,004 Related companies 20(a) 8,214 31,990 A director of HMIL 20(b) — 3,067 A director of subsidiaries 244 — A director of the investor of HMIL 106 — 77,556 549,061 Provision for bad and doubtful debts (31,000) (257,441) Balance due within one year included in current assets 46,556 291,620 At 31 December HMIL 2003 2004 HK$’000 HK$’000 Third parties — —	At 2003 HK$’000 68,992 8,214 — 244 106	31 December 2004 HK$’000 514,004 31,990 3,067 — —	2005 HK$’000 52,990 — — — —
	77,556 (31,000)	549,061 (257,441)	52,990 (7,456
			45,534
			2005 HK$’000 5,424

An aging analysis of loans receivable (before provision for bad and doubtful debts) as at the balance sheet date is set out below:

HMIL GROUP Within maturity dates Balances overdue for repayment: 1-3 months 4-6 months 7-12 months Over 12 months HMIL Within maturity dates	At 2003 HK$’000 65,524 250 7,922 — 3,860 77,556 At 2003 HK$’000 —	31 December 2004 HK$’000 479,683 30,561 106 27,427 11,284 549,061 31 December 2004 HK$’000 —	2005 HK$’000 49,140 169 — — 3,681
			52,990
			2005 HK$’000 5,424

— 74 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

20(a) LOANS RECEIVABLE FROM RELATED COMPANIES

		Balance at	Balance at	Balance at
Name of related company	Connected director	31.12.2003	31.12.2004	31.12.2005
		HK$’000	HK$’000	HK$’000
Sunderland Properties Limited	Chuang Eugene Yue-chien	—	23,776	—
Bo Wai Limited	Chuang Eugene Yue-chien	8,214	8,214	—
		8,214	31,990	—
		**Maximum **	debit amount outstanding
			during the year
Name of related company	Connected director	2003	2004	2005
		HK$’000	HK$’000	HK$’000
Sunderland Properties Limited	Chuang Eugene Yue-chien	—	23,776	—
Bo Wai Limited	Chuang Eugene Yue-chien	20,440	8,214	8,214

The above loans were unsecured and interest-bearing at 7% per annum or at prime rate plus 2% per annum. The amounts due from Sunderland Properties Limited and Bo Wai Limited had been fully provided in the years 2004 and 2003 respectively and they were disposed upon the disposal of subsidiaries during the year ended 31 December 2005.

20(b) LOANS RECEIVABLE FROM A DIRECTOR OF HMIL

	Balance at	Balance at	Balance at
Name of the director	31.12.2003	31.12.2004	31.12.2005
	HK$’000	HK$’000	HK$’000
Chuang Eugene Yue-chien	—	3,067	—
	**Maximum **	debit amount outstanding
		during the year
Name of the director	2003	2004	2005
	HK$’000	HK$’000	HK$’000
Chuang Eugene Yue-chien	—	3,067	3,067

The above loan was unsecured, interest-bearing at 7% per annum and it was disposed of upon the disposal of subsidiaries during the year ended 31 December 2005.

— 75 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

21. TRADE AND OTHER RECEIVABLES — HMIL GROUP

Note Trade receivables Third parties A director of HMIL 21(a) A related company 21(b) Other related parties 21(c) Provision for bad and doubtful debts Trade receivables, net Other receivables 21(d)	At 2003 HK$’000 230,487 — 1,466 628	31 December 2004 HK$’000 177,761 — 120 203	2005 HK$’000 225,776 1,004 1,701 6,335
	232,581 (40,000) 192,581 1,105	178,084 (30,000) 148,084 16,354	234,816 (9,100
			225,716 2,360
	193,686	164,438	228,076

An aging analysis of trade receivables (after provision for bad and doubtful debts) as at the balance sheet date is as follows:

		**At **	31 December
	2003		2004	2005
	HK$’000		HK$’000	HK$’000
Current	192,581		148,084	225,716

Current age represents the amounts due are within the settlement date. For securities margin loans, it represents those margin loans not yet called and securities not yet seized for settlement.

21(a) TRADE RECEIVABLES FROM A DIRECTOR OF HMIL

The amount due represents securities margin loans secured by marketable securities. Details of the amount due are as follows:

	Interest rate	Balance at	Balance at	Balance at
Name of the director	per annum	31.12.2003	31.12.2004	31.12.2005
		HK$’000	HK$’000	HK$’000
Chuang Eugene Yue-chien	5%-7.5%	—	—	1,004
		**Maximum **	debit amount outstanding
			during the year
Name of the director		2003	2004	2005
		HK$’000	HK$’000	HK$’000
Chuang Eugene Yue-chien		6,159	—	1,004

— 76 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

At the balance sheet date, there was no interest due but unpaid and no provision had been made for non-repayment of the advance or interest.

21(b) TRADE RECEIVABLE FROM A RELATED COMPANY

The amount due represents securities margin loans secured by marketable securities. Details of the amount due are as follows:

		Interest rate	Balance at	Balance at	Balance at
Name	Connected director	per annum	31.12.2003	31.12.2004	31.12.2005
			HK$’000	HK$’000	HK$’000
Capital Union Inc.	Chuang Eugene Yue-chien	5% - 7.5%	1,466	120	1,701
			**Maximum **	debit amount outstanding
				during the year
Name of related company	Connected director		2003	2004	2005
			HK$’000	HK$’000	HK$’000
Capital Union Inc.	Chuang Eugene Yue-chien		20,440	8,214	8,214

,As at 31 December 2005, 2004 and 2003, there was no interest due but unpaid and no provision had been made for non-repayment of the advances or interest.

21(c) TRADE RECEIVABLES FROM OTHER RELATED PARTIES

The amount due represents securities margin loans secured by marketable securities. Details of amounts due are as follows:

	Interest rate	Balance at	Balance at	Balance at
Name	per annum	31.12.2003	31.12.2004	31.12.2005
		HK$’000	HK$’000	HK$’000
Director of the substantial shareholder
Lo Kan Sun	5%-7.5%	19	—	—
Wong Ying Seung, Asiong	5%-7.5%	442	—	6,011
King, Phillip	5%-7.5%	—	—	264
Directors of HMIL’s subsidiaries	5%-7.5%	167	203	60
		628	203	6,335

— 77 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

	**Maximum **	debit amount outstanding	debit amount outstanding
		during the year
Name of directors of a substantial shareholder	2003	2004	2005
	HK$’000	HK$’000	HK$’000
Director of the substantial shareholder
Lo Kan Sun	411	136	—
Wong Ying Seung, Asiong	482	4,646	6,011
King, Phillip	—	—	561
Directors of HMIL’s subsidiaries	167	203	204

21(d) OTHER RECEIVABLES

Included in other receivables as at 31 December 2004 was an amount of HK$13,700,000 being the balance of consideration paid for the acquisition of two wholly-owned subsidiaries of a related company, a director of which was also a director of HMIL.

In April 2005, the related company re-acquired these two companies at a cash consideration of HK$5,000,000. A loss on disposal of HK$8,700,000 was recognised in the income statement during the year ended 31 December 2005.

22. CASH AND CASH EQUIVALENTS — HMIL GROUP

Bank balances and cash Pledged bank deposits Bank overdrafts As stated in the cash flow statement	At 2003 HK$’000 25,552 18,002 (61,109) (17,555)	31 December 2004 HK$’000 48,009 18,000 (32,084) 33,925	2005 HK$’000 71,589 3,000 (21,425)
			53,164

23. DUE TO SHAREHOLDERS — HMIL GROUP & HMIL

The amount due represented interest payable on the outstanding principal amount of the convertible notes prior to the exercise of the conversion.

24. DUE TO A DIRECTOR — HMIL GROUP

The amount due was unsecured, interest-free and had no fixed repayment term.

— 78 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

25. DUE TO RELATED COMPANIES

			At 31 December	At 31 December	At 31 December
		2003			2004	2005
HMIL GROUP	Note	HK$’000		HK$’000		HK$’000
Due to a related company with common director	(i)	1,101			998	998
Due to other related company	(ii)	147,020			7,022	—
		148,121			8,020	998
			At 31 December
		2003			2004	2005
HMIL	Note	HK$’000		HK$’000		HK$’000
Due to a related company with common director	(i)	998			998	998
Due to other related company	(ii)	147,021			7,022	—
		148,019			8,020	998

Notes:

(i) Related company with a common director

The amount due was unsecured, interest-free and had no fixed repayment term.

• (ii) Other related company

The other related company was Willie International Holdings Limited (“Willie International”), the substantial shareholder of HMIL, and the amount due as at 31 December 2004 represented interest payable on the convertible notes and such amount of interest payable was cancelled pursuant to an agreement dated 3 August 2005, details of which are provided in note 28(ii) below.

The amounts due as at 31 December 2003 represented loan advances which were unsecured, interest-bearing at prime rate plus 1% per annum and had no fixed repayment terms. The amounts were due to wholly-owned subsidiaries of the substantial shareholder and the loan advanced together with interest accrued were converted into convertible notes and ordinary shares of HMIL during the year ended 31 December 2004 as detailed in note 28(v) and 30(iv).

— 79 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

26. BANK OVERDRAFTS — HMIL GROUP

At 2003 HK$’000 Bank overdrafts: Secured 60,915 Unsecured 194 61,109	31 December 2004 HK$’000 31,590 494 32,084	2005 HK$’000 21,425 —
		21,425

27. INTEREST-BEARING BORROWINGS — HMIL GROUP

Secured bank loan Unsecured other loans	At 2003 HK$’000 — — —	31 December 2004 HK$’000 — — —	2005 HK$’000 36,000 110,000
			146,000

Notes:

(i) The maturities of the above borrowings are all within one year.

• (ii) Bank loan carried interest on prime rate minus 0.5% for the year of 2005. Other unsecured loans carried interest ranging from prime rate plus 1% to 2% and 7.5% per month for the year of 2005.

28. CONVERTIBLE NOTES — HMIL GROUP & HMIL

Note At beginning of year Issuance during the year (viii) Cancellation Redemption (ix) Conversion At balance sheet date	At 2003 HK$’000 Note — 163,000 (v) — (29,000) (vi) (87,500) (vii) 46,500	31 December 2004 HK$’000 Note 46,500 150,000 (i)(a)&(b) — (i)(b) (46,500) (ii) (29,700) (iii) 120,300	2005 HK$’000 120,300 146,000 (95,000) (25,300) (15,000)
			131,000

— 80 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

2005

Notes:

• (i) During the year, HMIL entered into an agreement dated 3 August 2005 with its substantial shareholder, Willie International Holdings Limited (“Willie”), whereby:

• (a) HMIL acquired 100% of the equity shares in a wholly-owned subsidiary from Willie which principal assets were loans receivable of HK$41 million. The acquisition was satisfied by the issue of a convertible note by HMIL in the principal amount of HK$41 million (“First New Note”);

• (b) the 6% convertible note issued by HMIL on January 2004 together with the outstanding principal amount of HK$95 million and accrued interest of approximately HK$10 million were cancelled in exchange for new convertible note issued by HMIL in the principal amount of HK$105 million (“Second New Note”);

• (c) the New Convertible Notes (the First New Note and Second New Note) bear interest at 8% per annum, payable monthly and will mature in ten years from the date of issue. They can be converted into shares of HMIL at a conversion price of HK$0.25 per ordinary share at any time after the date of issue of the convertible note and before its maturity date; and

• (d) HMIL, or its subsidiaries or independent parties, provides an unsecured standby credit facility in the amount of HK$50 million to Willie at prime rate and any drawdown of the facility is repayable on demand. Willie had not utilised such standby credit facility during the year ended 31 December 2005.

• (ii) Convertible note with principal sum of HK$25,300,000 was redeemed by HMIL during the year.

• (iii) Of the New Convertible Notes with principal sum of HK$146,000,000, principal amount of HK$15,000,000 was converted into 60,000,000 ordinary shares of US$0.01 each of HMIL at a conversion price of HK$0.25 per share.

• (iv) The fair value of the liability component and the equity conversion component were determined at issuance of the New Convertible Notes. The fair value of the liability component, included in interest-bearing borrowings, was calculated using a market interest rate for an equivalent non-convertible note. The residual amount, representing the value of the equity conversion component was determined to be immaterial.

2004

Notes:

• (v) As mentioned in note 25(ii), for the year ended 31 December 2004, HMIL issued convertible notes with principal sum of HK$150,000,000 to a wholly-owned subsidiary of Willie International. Details of the notes issued are as follows:

Interest	Maturity date	Conversion price per share
6% per annum	28 January 2007	HK$1.5 per share

The note holders could convert the whole or part of the outstanding principal amount of the notes at any time after the date of issue and before the maturity date, in such number of conversion shares of the HMIL to be determined by dividing the principal amount of the notes or such part thereof to be converted by the conversion price.

— 81 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

HMIL might, at any time after the issue of the notes up to the date immediately prior to the maturity date, redeem the entirety or any part of the notes by payment to the note holders in cash of an amount equal to that part of the principal amount of the notes.

• (vi) The whole amount of the convertible note with principal sum of HK$46,500,000 was redeemed by the HMIL for the year ended 31 December 2004.

• (vii) Of the convertible note with principal sum of HK$150,000,000, principal amounting to HK$29,700,000 was converted into 19,800,000 ordinary shares of US$0.1 each of HMIL at a conversion price of HK$1.50 per share.

2003

Notes:

(viii) During the year ended 31 December 2003, HMIL issued convertible notes with principal sum of HK$163,000,000 to third parties. Details of the notes issued are as follows:

Principal of notes	Interest	Maturity date	Conversion price per share
HK$88,000,000	5% per annum	14 April 2005	HK$2.00 and HK$1.50
HK$60,000,000	7.5% per annum	29 November 2006	HK$1.50
HK$15,000,000	7.5% per annum	1 December 2006	HK$1.50

The note holders could convert the whole or part of the outstanding principal amount of the notes at any time after the date of issue and before the maturity date, in such number of conversion shares of HMIL to be determined by dividing the principal amount of the notes or such part thereof to be converted by the conversion price.

HMIL might, at any time after the issue of the notes up to the date immediately prior to the maturity date, redeem the entirety or any part of the notes by payment to the note holders in cash of an amount equal to that part of the principal amount of the notes.

Of the convertible note with principal sum of HK$88,000,000, principal amounting to HK$29,000,000 was redeemed by HMIL, and principals amounting to HK$44,000,000 and HK$15,000,000 were converted into 22,000,000 ordinary shares and 10,000,000 ordinary shares of US$0.1 each of HMIL at a conversion price of HK$2.00 and HK$1.50 per share respectively. According to the terms of the convertible note with principal sum of HK$88,000,000, the conversion price was HK$2.00 per share but the note holder and HMIL mutually agreed that principal of HK$15,000,000 was to be converted to HMIL’s shares at HK$1.50 per share. Of the convertible note with principal sum of HK$60,000,000, principal amounting to HK$28,500,000 was converted into 19,000,000 ordinary shares of US$0.1 each of HMIL.

— 82 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

29. DEFERRED TAXATION

Unrecognised deferred tax assets arising from

HMIL GROUP Deductible temporary differences Tax losses At balance sheet date HMIL Deductible temporary differences Tax losses At balance sheet date	At 2003 HK$’000 80,141 59,356 139,497 At 2003 HK$’000 14,689 — 14,689	31 December 2004 HK$’000 21,551 134,976 156,527 31 December 2004 HK$’000 — 48,360 48,360	2005 HK$’000 6,568 142,973
			149,541
			2005 HK$’000 — 54,234
			54,234

Both the tax losses and the deductible temporary differences have no expiry date under current tax legislation.

— 83 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

30. ISSUED CAPITAL

		Number of	Number of
		ordinary	ordinary
		shares of	shares of
	Notes	US$0.1 each	**US$0.01 each **	Nominal value
				HK$’000
Authorised:
At 1 January 2003		300,000,000	—	234,000
Increase during the year	(vi)	450,000,000	—	351,000
At 31 December 2003, 1 January 2004,
31 December 2004 and 1 January 2005		750,000,000	—	585,000
Subdivision of shares	(iii)	(750,000,000)	7,500,000,000	—
At 31 December 2005		—	7,500,000,000	585,000
Issued and fully paid:
At 1 January 2003		158,133,333	—	123,344
New shares issued	(v)(vii)	100,000,000	—	78,000
Conversion of convertible notes	(viii)	51,000,000	—	39,780
At 31 December 2003 and 1 January 2004		309,133,333	—	241,124
New shares issued	(iv)	265,000,000	—	206,700
Conversion of convertible notes	27(vi) (vii)	19,800,000	—	15,444
At 31 December 2004 and 1 January 2005		593,933,333	—	463,268
New shares issued	(i)	7,000,000	—	5,460
Share repurchase	(ii)	(40,000,000)	—	(31,200)
Capital reduction	(iii)	(560,933,333)	560,933,333	(393,775)
		—	560,933,333	43,753
Conversion of convertible notes (Note 28 iii)		—	60,000,000	4,680
At 31 December 2005		—	620,933,333	48,433

2005

Notes

(i) By an ordinary resolution of the board of directors passed on 4 January 2005, 3,000,000 ordinary shares of US$0.1 each were issued for total cash consideration of HK$3,000,000. These shares rank pari passu with the existing shares in all respects.

By an ordinary resolution of the board of directors passed on 7 January 2005, 4,000,000 ordinary shares of US$0.1 each were issued for total cash consideration of HK$4,000,000. These shares rank pari passu with the existing shares in all respects.

— 84 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

• (ii) By an ordinary resolution of the board of directors passed on 29 June 2005, 40,000,000 ordinary shares of US$0.1 each were repurchased at a consideration of HK$40,000,000 which was satisfied by a cash consideration of HK$20,000,000 and loan payable amounted to HK$20,000,000 due to such shareholder.

• (iii) By ordinary resolutions of the board of directors passed on 15 July 2005, the authorised capital was made up of one class and one series of shares divided into 7,500,000,000 shares of US$0.01 par value with one vote for each share. It was further resolved that the par value of all of the share capital of HMIL both issued and unissued were reduced from US$0.1 to US$0.01 and accordingly a capital reduction of HK$393,775,000 was recognised and transferred to the contributed surplus subject to the provisions in the Memorandum and Articles of Association of HMIL.

2004

Notes

• (iv) Pursuant to a share subscription agreement dated 4 March 2004, 80,000,000 ordinary shares of US$0.1 each were issued for total cash consideration of HK$100,000,000. These shares rank pari passu with the existing shares in all respects.

By an ordinary resolution of the sole director passed on 9 July 2004, 10,000,000 ordinary shares of US$0.1 each were issued for total cash consideration of HK$10,000,000. These shares rank pari passu with the existing shares in all respects.

By an ordinary resolution of the sole director passed on 7 September 2004, 17,000,000 ordinary shares of US$0.1 each were issued for total cash consideration of HK$17,000,000. These shares rank pari passu with the existing shares in all respects.

By an ordinary resolution of the sole director passed on 4 October 2004, 65,000,000 ordinary shares of US$0.1 each were issued for total cash consideration of HK$65,000,000 which was used to settle part of the amount due to a related company as mentioned in note 21(d). These shares rank pari passu with the existing shares in all respects.

By an ordinary resolution of the board of directors passed on 11 October 2004, 55,000,000 ordinary shares of US$0.1 each were issued for total consideration of HK$55,000,000. These shares rank pari passu with the existing shares in all respects. The consideration of HK$55,000,000 was the emoluments of the services rendered since 1996 by a director of HMIL and thus it was included in income statement as staff costs for the year ended 31 December 2004.

By an ordinary resolution written resolution of the board of directors passed on 27 October 2004, 25,000,000 ordinary shares of US$0.1 each were issued as consideration to acquire the interests in two subsidiaries. These shares rank pari passu with the existing shares in all respects.

By an ordinary resolution of the directors passed on 20 December 2004, 10,000,000 ordinary shares of US$0.1 each were issued for total cash consideration of HK$10,000,000. These shares rank pari passu with the existing shares in all respects.

By an ordinary resolution of the directors passed on 23 December 2004, 3,000,000 ordinary shares of US$0.1 each were issued for total cash consideration of HK$3,000,000. These shares rank pari passu with the existing shares in all respects.

— 85 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

2003

• (v) Pursuant to a share subscription agreement dated 26 June 2003, 10,000,000 ordinary shares of US$0.1 each were issued for total cash consideration of HK$20,000,000. These shares rank pari passu with the existing shares in all respects.

Pursuant to a share subscription agreement dated 10 October 2003 entered between HMIL and a third party, a total of 40,000,000 ordinary shares of US$0.1 each were issued for total cash consideration of HK$83,300,000. These shares rank pari passu with the existing shares in all respects.

• (vi) By a written resolution of the sole director passed on 12 December 2003, the authorised share capital of HMIL was increased to HK$585,000,000 by the creation of an additional 450,000,000 shares of US$0.1 each.

• (vii) By a written resolution of the sole director passed on 15 December 2003, 50,000,000 ordinary shares of US$0.1 each were issued for total cash consideration of HK$75,000,000. These shares rank pari passu with the existing shares in all respects.

• (viii) During the year ended 31 December 2003, an aggregate of 51,000,000 ordinary shares of US$0.1 each of HMIL were issued to certain convertible note holders upon the conversion of convertible notes at cash subscription prices as detailed in note 28(viii).

— 86 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

31. RESERVES

HMIL GROUP At 1 January 2003 Prior year adjustment (note 19A) Derecognition of negative goodwill upon adoption of HKFRS 3 As restated Premium on issue of shares Released upon disposal Loss for the year At 31 December 2003 and 1 January 2004 Premium on issue of shares Loss for the year At 31 December 2004 and 1 January 2005 Premium on issue of shares Share repurchase Capital reduction Loss for the year At 31 December 2005	Share premium HK$’000 242,923 — —	Capital reserve Investment revaluation reserve Contributed surplus Investment properties revaluation reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 2,553 (4,295) 98,619 900 (117,900) — — — — (64,240) (2,553) — — — 2,553	Capital reserve Investment revaluation reserve Contributed surplus Investment properties revaluation reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 2,553 (4,295) 98,619 900 (117,900) — — — — (64,240) (2,553) — — — 2,553	Capital reserve Investment revaluation reserve Contributed surplus Investment properties revaluation reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 2,553 (4,295) 98,619 900 (117,900) — — — — (64,240) (2,553) — — — 2,553	Capital reserve Investment revaluation reserve Contributed surplus Investment properties revaluation reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 2,553 (4,295) 98,619 900 (117,900) — — — — (64,240) (2,553) — — — 2,553	Capital reserve Investment revaluation reserve Contributed surplus Investment properties revaluation reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 2,553 (4,295) 98,619 900 (117,900) — — — — (64,240) (2,553) — — — 2,553	Total HK$’000 222,800 (64,240) —
	242,923 148,020 — — 390,943 92,556 — 483,499 11,860 (8,800) — —	— — — — — — — — — — — —	(4,295) — 4,295 — — — — — — — — —	98,619 — — — 98,619 — — 98,619 — — 393,775 —	900 — (900) — — — — — — — — —	(179,587) — — (141,371) (320,958) — (421,199) (742,157) — — — (222,567)	158,560 148,020 3,395 (141,371)
							168,604 92,556 (421,199)
							(160,039) 11,860 (8,800) 393,775 (222,567)
	486,559	—	—	492,394	—	(964,724)	14,229

— 87 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

HMIL At 1 January 2003 Prior year adjustment (note 19A) As restated Premium on issue of shares Profit for the year At 31 December 2003 and 1 January 2004 Premium on issue of shares Loss for the year At 31 December 2004 and 1 January 2005 Premium on issue of shares Share repurchase Capital reduction Loss for the year At 31 December 2005	Share premium HK$’000 242,923 —	Capital reserve Investment revaluation reserve Contributed surplus Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 — — 98,619 (111,810) — — — (64,240)	Capital reserve Investment revaluation reserve Contributed surplus Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 — — 98,619 (111,810) — — — (64,240)	Capital reserve Investment revaluation reserve Contributed surplus Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 — — 98,619 (111,810) — — — (64,240)	Capital reserve Investment revaluation reserve Contributed surplus Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 — — 98,619 (111,810) — — — (64,240)	Total HK$’000 229,732 (64,240)
	242,923 148,020 — 390,943 92,556 — 483,499 11,860 (8,800) — —	— — — — — — — — — — —	— — — — — — — — — — —	98,619 — — 98,619 — — 98,619 — — 393,775 —	(176,050) — 6,934 (169,116) — (600,754) (769,870) — — — (197,026)	165,492 148,020 6,934
						320,446 92,556 (600,754)
						(187,752) 11,860 (8,800) 393,775 (197,026)
	486,559	—	—	492,394	(966,896)	12,057

Share premium represents the excess of consideration received over the par value of shares issued.

Contributed surplus represents amount transferred from share capital pursuant to capital reduction made in current and prior years.

32. MAJOR NON-CASH TRANSACTIONS

Major non-cash transactions during the year ended 31 December 2005 have been disclosed in notes 25(ii), 28(i) and (iii), 30(ii) and (iii).

33. ACQUISITION OF SUBSIDIARIES

On 19 January 2005, the HMIL Group acquired the entire share capital of Total Capital Limited for a consideration of HK$0.6 million. The amount of goodwill as a result of the acquisition was HK$0.9 million.

On 21 September 2005, the HMIL Group acquired the entire share capital of Supercapital Investment Limited which principal assets were loans receivable with fair value that approximated their carrying amount of HK$41 million.

— 88 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

On 21 December 2005, the HMIL Group acquired the 100% equity interest of Apex Novel Limited through the acquisition of the entire share capital of Collier Assets Limited at the aggregate consideration of approximately HK$49 million, which was based on the fair values of the leasehold property and bank loan of approximately HK$85 million and HK$36 million respectively at the date of acquisition.

The fair values of the identifiable assets and liabilities of the subsidiaries acquired during the year have no significant differences from their respective carrying amounts. The net assets acquired in the transactions, and the goodwill arising, are as follows:

Net assets acquired: Property, plant and equipment Loan receivable Other receivable Bank balances and cash Creditors and accrued charges Bank loan Due to parent company Goodwill arising on acquisition Total consideration Satisfied by: Cash consideration Issue of First New Note (note 28(i)) Cash consideration	Year ended 2003 HK$’000 — — — — — — —	31 December 2004 HK$’000 — — — 2 — — (3,945)	2005 HK$’000 85,146 41,000 77 6 (297 (36,000 —
	— —	(3,943) 3,943	89,932 945
	—	—	90,877
	— —	— —	49,877 41,000
	—	—	90,877

The acquired subsidiaries did not contribute any turnover or revenue to the HMIL Group for the year between the date of acquisition and the balance sheet date. There would have been no significant impacts to the HMIL Group’s turnover and revenue had the acquisitions been completed on 1 January 2005.

The subsidiaries acquired during the year ended 31 December 2004 did not contribute significantly to the HMIL Group’s cash flows or operating results for that year.

— 89 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Analysis of outflow of cash and cash equivalents in respect of acquisition of subsidiaries

Cash paid Bank balances and cash acquired Net inflow (outflow) of cash and cash equivalents	Year ended 31 December 2003 2004 HK$’000 HK$’000 — — — 2 — 2	2005 HK$’000 (49,877) 6
		(49,871)

34.

DISPOSAL OF SUBSIDIARIES

Net assets disposed of: Investment properties Property, plant and equipment Investment in securities Trade and other receivables Loans receivable Trading securities Deposit Bank balances and cash Creditors and accrued charges Due to a related company Due to the sole director Due to group companies Dividends payable to the HMIL Group Goodwill on acquisition realised (note 33) Investment properties revaluation reserve realised upon disposal of subsidiaries Gain (Loss) on disposal of subsidiaries Total consideration Satisfied by: Cash received Other receivable Reclassification to interest in an associate	Year ended 31 December 2003 2004 HK$’000 HK$’000 5,900 — 1,285 948 — 717 35,311 469 464,389 — — 1,233 — 350 118 406 (5,515) (5,365) (2,722) — (300) — (419,389) — (30,000) —	Year ended 31 December 2003 2004 HK$’000 HK$’000 5,900 — 1,285 948 — 717 35,311 469 464,389 — — 1,233 — 350 118 406 (5,515) (5,365) (2,722) — (300) — (419,389) — (30,000) —	2005 HK$’000 — — — — 351,082 — — — (266) — — — —
	49,077 — (900) 6,014	(1,242) 3,943 — 3,299	350,816 945 — (195,481)
	54,191	6,000	156,280
	34,192 — 19,999	4,000 2,000 —	156,280 — —
	54,191	6,000	156,280

— 90 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

Analysis of inflow of cash and cash equivalents in respect of disposal of subsidiaries:

Cash received Bank balances and cash disposed of Net inflow of cash and cash equivalents	Year ended 31 December 2003 2004 HK$’000 HK$’000 34,192 4,000 (118) (406) 34,074 3,594	2005 HK$’000 156,280 —
		156,280

The subsidiaries disposed of during the year had no contribution to turnover during the year ended 31 December 2005 (2004: loss of HK$792,000; 2003: profit of HK$43,236,000) for the period between the last balance sheet date and the date of disposal.

35. COMMITMENTS UNDER OPERATING LEASES

As at 31 December 2005, 2004 and 2003, the HMIL Group had total future minimum lease payments under non-cancellable operating leases in respect of office premises and equipment, which are payable as follows:

Within one year In the second to fifth year inclusive	At 2003 HK$’000 1,577 2,853 4,430	31 December 2004 HK$’000 479 368 847	2005 HK$’000 2,150 92
			2,242

36. GENERAL BANKING FACILITIES

As at 31 December 2005, the HMIL did not have any contingent liabilities not provided for in the financial statements in respect of guarantee (2004: HK$45,000,000; 2003: HK$75,000,000) for banking facilities granted to subsidiaries, which were utilised by subsidiaries to the extent of approximately HK$21,093,000 and HK$60,915,000 in the years of 2004 and 2003 respectively.

— 91 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

37. PLEDGE OF ASSETS

As at 31 December 2005, 2004 and 2003, certain assets of the HMIL Group with the following carrying values have been pledged to secure general banking facilities granted to the HMIL Group:

Investments held for trading Bank deposits Leasehold land and buildings	At 2003 HK$’000 15,950 18,002 — 33,952	31 December 2004 HK$’000 228 18,000 — 18,228	2005 HK$’000 — 3,000 80,220
			83,220

38. RELATED PARTY TRANSACTIONS

During the Relevant Periods, the following related party transactions were carried out:-

• (a) The HMIL Group granted unsecured loans to certain related companies in which the sole director of HMIL is also a director. During the year ended 31 December 2003, these loans were assigned from subsidiaries granting the loans to another subsidiary which became associate of the HMIL Group. As at 31 December 2003, the outstanding loans amounted to HK$193,272,000 carried interest at a range of 6%-7% per annum or at prime rate plus 1%-3% per annum. Provision of HK$38,311,000 had been made for non-repayment of the loans and related interest.

• (b) HMIL entered into an agreement with Willie International on 2 December 2003 to dispose 200,000,000 shares of Radford Capital to Willie International at a total consideration of HK$24,000,000. At 31 December 2003, an amount of HK$24,000,000 had been received from Willie International as deposit and included in creditors and accrued charges. The disposal was completed in January 2004.

• (c) The HMIL Group paid office rental amounting to HK$2,078,000 to the wholly-owned subsidiaries of the then ultimate holding company, China United Holdings Limited (“CU Bermuda”)/ Willie International, during the year ended 31 December 2003.

• (d) On 30 June 2003, HMIL, Willie International and CU Bermuda entered into an agreement under which approximately 18.68% of interest in HMIL and 48.53% interest in another company were transferred from CU Bermuda to Willie International in consideration of nominal cash and perpetual entitlement as detailed below. Under the agreement, Willie International made covenant that it and/or its subsidiaries would remain as the controlling shareholder of HMIL. In addition, under the agreement, CU Bermuda enjoyed a perpetual entitlement of 22% in the distribution of dividends, capital and assets by HMIL. HMIL was obliged to pay such distribution to CU Bermuda from the relevant portion of the distribution attributable to Willie International. Willie International made guarantee to CU Bermuda that if HMIL, for whatever reasons, failed to pay 22% of any distribution declared by HMIL to CU Bermuda, Willie International would compensate CU Bermuda with the equivalent amount. The covenants made by Willie International were perpetual in nature and binding on Willie International, whether or not Willie International or its subsidiaries held any interest in HMIL. During the year ended 31 December 2004, CU Bermuda confirmed in writing that the agreement had been cancelled and the guarantee made by Willie International as mentioned above was released accordingly.

• (e) As at 31 December 2005, 2004 and 2003 , the HMIL Group’s credit facilities to the extent of HK$30,000,000 (2004: HK$75,000,000; 2003: HK$125,000,000) and HK$66,000,000 (2004: HK$30,000,000; 2003: HK$50,000,000) were guaranteed by the substantial shareholder and a director of HMIL respectively.

— 92 —

ACCOUNTANTS’ REPORT ON FINANCIAL INFORMATION OF HMIL GROUP

APPENDIX II

• (f) During the year ended 31 December 2005 HMIL incurred interest expenses amounted to HK$5,936,000 (2004: HK$7,022,000; 2003: HK$13,346,000) for convertible notes paid to the wholly-owned subsidiaries of the major shareholder.

• (g) During the year ended 31 December 2005, the HMIL Group received placing commission of HK$690,000 (2004: HK$825,000; 2003: HK$ Nil) and financial advisory fee of HK$38,000 (2004: HK$400,000; 2003: HK$ Nil) from the substantial shareholder.

• (h) The HMIL Group had granted securities margin loans to the directors of subsidiaries and the directors of the substantial shareholders as detailed in note 21 to the financial statements. The loans carried interest at 5% to 7.5% per annum and were repayable on demand.

• (i) During the year ended 31 December 2005 the Group paid short-term employee benefits of HK$3,652,000 (2004: HK$4,377,000; 2003: HK$3,928,000) to key management personnel including directors.

39. POST BALANCE SHEET EVENTS

Other than disclosed elsewhere in the Financial Information, the HMIL Group entered into the following significant post balance sheet events:

• a) Subsequent to 31 December 2005, HMIL issued 250,000,000 ordinary shares at a price of HK$0.2 per share to third parties and received total cash consideration of HK$50,000,000. All shares ranked pari passu in all respects with the existing ordinary shares of HMIL.

• b) Subsequent to 31 December 2005, two staff members of a wholly-owned subsidiary of HMIL, which is a securities dealer, surrendered themselves to the police admitting that they had misappropriated clients’ securities. An investigation is currently being conducted on this matter. The loss is covered by insurance and having taken appropriate legal advice, the directors estimate that the maximum loss, based on information unveiled to date, the Group is expected to bear under the insurance policy would be immaterial.

Moores Rowland Mazars Chartered Accountants Certified Public Accountants Hong Kong

— 93 —

APPENDIX III UNAUDITED PROFORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

For illustrative purpose only, set out below is the unaudited pro forma statement of assets and liabilities of the Group after the completion of Transaction (the “Enlarged Group”). The pro forma statement of assets and liabilities is prepared in accordance with paragraph 4.29 of the Listing Rules for the purpose of providing investors with information to illustrate the effect of the Transaction on the financial position of the Group.

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

The following is a summary of the unaudited pro forma statement of assets and liabilities of the Enlarged Group. It is based on the unaudited consolidated balance sheet of the Group as at 30 September 2005 extracted from the interim report of the Group for the six months ended 30 September 2005 and that of the HMIL as at 31 December 2005 extracted from the Accountants’ Report of HMIL Group set out in Appendix II and after making certain proforma adjustments resulting from the Transaction, assuming that the Transaction and the subsequent conversion of the Convertible Note into shares of HMIL have been completed as at 30 September 2005 for the purpose of illustrating how the Transaction might have affected the financial position of the Group as at 30 September 2005. As it is prepared for illustrative purpose only, and because of its nature, it may not give a true picture of the financial position of the Group as at 30 September 2005 or any future date.

The Hong Kong Institute of Certified Public Accountants has recently issued a number of new and revised Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards, and Interpretation (herein-after collectively referred to as the “new HKFRSs”), which are effective for accounting periods beginning on or after 1 January 2005. The Group has adopted these new HKFRSs in the interim financial statements for the six months ended 30 September 2005. Accordingly, the unaudited pro forma statement of assets and liabilities is prepared in accordance with the new HKFRSs and using accounting policies which are consistent with those adopted by the Group during the six months ended 30 September 2005.

The unaudited pro forma statement of assets and liabilities of the Enlarged Group should be read in conjunction with the audited financial information of the Group for the year ended 31 March 2005, the unaudited financial information of the Group for the six months ended 30 September 2005, and other financial information as set out in Appendix I to this circular.

— 94 —

APPENDIX III UNAUDITED PROFORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES

					Unaudited
					Pro forma
					assets and
					liabilities of
	The Group	HMIL	Pro forma		the Enlarged
	as at	as at	Adjustments		Group
	30 September	31 December	for the		after the
	2005	2005	Transaction		Transaction
	HK$’000	HK$’000	HK$’000	Notes	HK$’000
Non-current assets
Investment properties	5,700	—			5,700
Property, plant and
equipment	977	87,979			88,956
Goodwill	—	—	3,034	4	3,034
Intangible assets	—	2,283			2,283
Other assets	—	2,140			2,140
Interest in an associate	14	—			14
Available-for-sale
investments	36,000	—	(2,000)	3	34,000
Long-term loans
receivable	205,000	—			205,000
Total non-current assets	247,691	92,402			341,127
Current assets
Trade and other
receivables	235,064	228,076			463,140
Short-term loans
receivable	42,926	45,534			88,460
Investments held for
trading	289	68			357
Pledged bank deposits	—	3,000			3,000
Bank balances and cash	5,839	71,589	(100,000)	1	(22,572)
Total current assets	284,118	348,267			532,385

— 95 —

UNAUDITED PROFORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

APPENDIX III

The Group as at 30 September 2005 HMIL as at 31 December 2005 Pro forma Adjustments for the Transaction Unaudited Pro forma assets and liabilities of the Enlarged Group after the Transaction HK$’000 HK$’000 HK$’000 Notes HK$’000 Current liabilities Trade and other payables 8,708 59,786 68,494 Due to a director — 14,000 14,000 Due to related companies — 998 998 Bank overdrafts — 21,425 21,425 Interest-bearing borrowings — 146,000 146,000 Tax payable 2,455 4,798 7,253 Total current liabilities 11,163 247,007 258,170 Net current assets 272,955 101,260 274,215 Total assets less current liabilities 520,646 193,662 615,342 Non-current liabilities Convertible notes — 131,000 (131,000) 2 — NET ASSETS 520,646 62,662 615,342	The Group as at 30 September 2005 HMIL as at 31 December 2005 Pro forma Adjustments for the Transaction Unaudited Pro forma assets and liabilities of the Enlarged Group after the Transaction HK$’000 HK$’000 HK$’000 Notes HK$’000 Current liabilities Trade and other payables 8,708 59,786 68,494 Due to a director — 14,000 14,000 Due to related companies — 998 998 Bank overdrafts — 21,425 21,425 Interest-bearing borrowings — 146,000 146,000 Tax payable 2,455 4,798 7,253 Total current liabilities 11,163 247,007 258,170 Net current assets 272,955 101,260 274,215 Total assets less current liabilities 520,646 193,662 615,342 Non-current liabilities Convertible notes — 131,000 (131,000) 2 — NET ASSETS 520,646 62,662 615,342	The Group as at 30 September 2005 HMIL as at 31 December 2005 Pro forma Adjustments for the Transaction Unaudited Pro forma assets and liabilities of the Enlarged Group after the Transaction HK$’000 HK$’000 HK$’000 Notes HK$’000 Current liabilities Trade and other payables 8,708 59,786 68,494 Due to a director — 14,000 14,000 Due to related companies — 998 998 Bank overdrafts — 21,425 21,425 Interest-bearing borrowings — 146,000 146,000 Tax payable 2,455 4,798 7,253 Total current liabilities 11,163 247,007 258,170 Net current assets 272,955 101,260 274,215 Total assets less current liabilities 520,646 193,662 615,342 Non-current liabilities Convertible notes — 131,000 (131,000) 2 — NET ASSETS 520,646 62,662 615,342	The Group as at 30 September 2005 HMIL as at 31 December 2005 Pro forma Adjustments for the Transaction Unaudited Pro forma assets and liabilities of the Enlarged Group after the Transaction HK$’000 HK$’000 HK$’000 Notes HK$’000 Current liabilities Trade and other payables 8,708 59,786 68,494 Due to a director — 14,000 14,000 Due to related companies — 998 998 Bank overdrafts — 21,425 21,425 Interest-bearing borrowings — 146,000 146,000 Tax payable 2,455 4,798 7,253 Total current liabilities 11,163 247,007 258,170 Net current assets 272,955 101,260 274,215 Total assets less current liabilities 520,646 193,662 615,342 Non-current liabilities Convertible notes — 131,000 (131,000) 2 — NET ASSETS 520,646 62,662 615,342
	11,163 272,955 520,646 —	247,007 101,260 193,662 131,000 (131,000) 2	258,170
			274,215
			615,342
			—
	520,646	62,662	615,342

Notes:

• (1) This represents the adjustment in relation to the total consideration of HK$100 million for the acquisition of HK$131 million convertible note issued by HMIL which will be satisfied by cash. Since the cash and bank balances of the Group as at 30 September 2005 were HK$5,839,000 and the consideration payable under the Transaction is HK$100 million, the adjustment results in a negative cash and bank balances position for the Enlarged Group. It should be noted that this is merely a pro forma statement and does not represent the actual financial position of the Enlarged Group after completion of the Transaction. The balance of the consideration will be settled by the Group upon completion using the then available internal resources of the Group, including but not limited to proceeds from the placings completed on 24 April 2006 and 22 May 2006 respectively.

• (2) This represents the conversion of the convertible note into approximately 50.07% HMIL’s shares.

— 96 —

UNAUDITED PROFORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

APPENDIX III

• (3) This represents of the Company’s existing investment in HMIL in the sum of HK$2 million being reclassified from Available-for-sale investments to Interest in subsidiaries.

• (4) HMIL will become subsidiaries of the Group upon conversion of Convertible Note into shares of HMIL. The pro forma adjustments reflect the recognition of estimated goodwill of approximately HK$3,034,000 arising from completion of the Transaction and the subsequent conversion of the Convertible Note into shares of HMIL (see Note (5) below) on the basis that no impairment charges concerning the above estimated goodwill is considered necessary.

• (5) Under Generally Accepted Accounting Principles in Hong Kong, the Group will apply the purchase method to account for the conversion of the Convertible Note into the shares of HMIL (“the Conversion”). In applying the purchase method, the identifiable assets and liabilities of HMIL would be recorded in the unaudited pro forma statement of assets and liabilities of the Enlarged Group at their fair values at the date of completion. Any goodwill or fair value adjustment arising on the Conversion will be determined as the excess or deficit of the purchase consideration deemed to be incurred by the Group over the Group’s interests in the net fair value of the identifiable assets and liabilities of HMIL at the date of completion of the Conversion.

For the purpose of preparing the unaudited pro forma statement of assets and liabilities of the Enlarged Group after the Conversion, the net book value of the identifiable assets and liabilities of HMIL, as extracted from the accountants report on HMIL set forth in Appendix II to this Circular, is applied in the calculation of the estimated fair value adjustment arising from the Conversion. The actual fair value adjustment arising at the date of completion of the Conversion may be different from the estimated fair value adjustment as shown in Note (4) above because the fair value of the assets and liabilities of HMIL at the date of completion of the Conversion may be substantially different from those used in the preparation of the unaudited pro forma statement of assets and liabilities of the Enlarged Group contained herein.

— 97 —

UNAUDITED PROFORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

APPENDIX III

2. REPORT ON THE UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

Set forth below is the text of the report, prepared for the sole purpose of incorporation in this circular received by the Directors from K.S. Liu & Company, CPA Limited, Certified Public Accountants, Hong Kong, in connection with the unaudited pro forma statement of assets and liabilities of the Enlarged Group set out in Appendix III to this circular:

==> picture [173 x 46] intentionally omitted <==

Unit 1003, 10/F., Rightful Centre, 12 Tak Hing Street, Tsim Sha Tsui,Kowloon, Hong Kong

24 May 2006

The Directors Inner Mongolia Development (Holdings) Limited 31/F., China United Centre, 28 Marble Road, North Point, Hong Kong.

Dear Sirs

Inner Mongolia Development (Holdings) Limited (the “Company”) and its subsidiaries (collectively the “Group”) and Hennabun Management International Limited and its subsidiaries (collectively the “Enlarged Group”)

We report on the unaudited pro forma statement of assets and liabilities of the Enlarged Group (the “Pro Forma Statement”) set out on pages 94 and 99 under the heading of “Unaudited pro forma statement of assets and liabilities of the Enlarged Group” in Appendix III of the Company’s circular dated 24 May 2006 (the “Circular”) in connection with the Company’s proposed purchase of the Convertible Note pursuant to the Conditional Agreement dated 21 April 2006 for the sale and purchase of a convertible note issued by Hennabun Management International Limited (the “Transaction”), which has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Transaction might have affected the relevant financial information presented.

Respective Responsibilities of Directors of the Company and Reporting Accountants

It is the responsibility solely of the directors of the Company to prepare the Pro Forma Statement in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

— 98 —

UNAUDITED PROFORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

APPENDIX III

It is our responsibility to form an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the Pro Forma Statement and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Pro Forma Statement beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

Basis of opinion

We conducted our engagement in accordance with the Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports” on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the Pro Forma Statement with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Pro Forma Statement has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the Pro Forma Statement as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

The Pro Forma Statement is for illustrative purposes only, based on the adjustments and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Group as at 30 September 2005 or any future date.

Opinion

In our opinion:

• a. the Pro Forma Statement has been properly compiled by the directors of the Company on the basis stated;

• b. such basis is consistent with the accounting policies of the Group; and

• c. the adjustments are appropriate for the purposes of the Pro Forma Statement as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Yours faithfully

K.S. Liu & Company, CPA Limited

Certified Public Accountants

Hong Kong

Liu Kwong Sang FCPA (Practising) P01586

— 99 —

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts not contained herein the omission of which would make any statement contained in this circular misleading.

2. DISCLOSURE OF INTERESTS

(a) Interests of Directors

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executives of the Company in the Shares, underlying Shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO), the Model Code for Securities Transactions by Directors of Listed Issuers contained in Appendix 10 of the Listing Rules and which were required to be entered into the register required to be kept under section 352 of the SFO were as follows:

Long positions in Shares

		Number of	Approximate %
Name of director	Capacity	Shares	of shareholding
Yau Shum Tek, Cindy	Interest of controlled	26,730,000	2.73%
	corporation	(Note)

Note: As at the Latest Practicable Date, Ms Yau Shum Tek, Cindy, the Chairman of the Company, wholly-owns and controls Red China Holdings Limited and Capital Sun Industries Limited. Capital Sun Industries Limited whollyowns Future Star Group Limited. Each of Red China Holdings Limited and Future Star Group Limited holds 50% of the issued share capital of Mainland Talent Developments Limited. Mainland Talent Developments Limited wholly owns Hastings Gold Limited which in turn wholly owns Pacific Rim Investment Management Enterprises Limited. Pacific Rim Investment Management Enterprises Limited holds 26,730,000 shares of the Company.

Interests in equity derivatives of the Company

					Percentage of
				Number of share	the Company’s
			Subscription	options and	issued share
			price per	underlying	capital at Latest
Name of director	Date of grant	Exercisable period	share	shares	Practicable Date
			HK$
Kwong Wai Tim, William	16.1.2004	16.1.2004 to 15.1.2009	1.2	1,500,000	0.15%
Lai Ming Wai	16.1.2004	16.1.2004 to 15.1.2009	1.2	1,500,000	0.15%
				3,000,000	0.30%

Note: These share options were held by the relevant directors as beneficial owners.

— 100 —

APPENDIX IV

GENERAL INFORMATION

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

(b) Interests of Shareholders

As at the Latest Practicable Date, so far as is known to the Directors and the chief executives of the Company, there are no Shareholders (other than a Director or chief executive of the Company) who had an interest or short position in the Shares and underlying Shares which fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who are, directly or indirectly interested in 10 per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at a general meeting of any member of the Enlarged Group.

(i) The Group

			Approximate
		Number of	% of
Name of Shareholder	Capacity	Shares	shareholding
Chuang Eugene Yue-chien	Beneficiary of a trust	87,300,000	8.94%
Moon Light Investments Group	Interest of controlled	87,300,000	8.94%
Limited	corporation
Sunderland Properties Limited	Beneficial owner	87,300,000	8.94%
Heritage International Holdings	Interest of controlled	65,500,000	6.70%
Limited	corporation
Coupeville Limited	Interest of controlled	65,500,000	6.70%
	corporation
Dollar Group Limited	Beneficial owner	65,500,000	6.70%

(ii) HMIL Group

			Approximate
		Number of	% of
(a)	Name of Shareholder	Shares	shareholding
	Grand Wishes Limited (Note 1)	309,633,334	35.55
	Bloom Glory Limited	150,000,000	17.22
	Au Shuk Yee, Sue	100,000,000	11.48

Note 1: A wholly-owned subsidiary of Willie International Holdings Limited

• (b) Chung Nam Nominees Limited, an indirect wholly-owned subsidiary of HMIL, holds 40% of Chung Nam Commodities Limited (an indirect 60% held subsidiary of HMIL).

— 101 —

GENERAL INFORMATION

APPENDIX IV

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

As at the Latest Practicable Date:-

• (i) none of the Directors had any direct or indirect interests in any assets which have since 31 March 2005 (being the date to which the latest published audited accounts of the Group were made up) been acquired or disposed of by or leased to any members of the Enlarged Group, or are proposed to be acquired or disposed of by or leased to any members of the Enlarged Group;

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

3. EXPERTS AND CONSENTS

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

Name

Qualification

• K.S. Liu & Company, CPA certified public accountants in Hong Kong Limited (“K.S. Liu”)

• Moores Rowland Mazars certified public accountants in Hong Kong (“Moores”)

As at the Latest Practicable Date, K.S. Liu and Moores did not have:-

• (a) any direct or indirect interest in any assets which have since 31 March 2005 (being the date to which the latest published audited accounts of the Company were made up) been acquired or disposed of by or leased to any member of the Enlarged Group, or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group; and

• (b) any shareholding in any member of the Enlarged Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Enlarged Group.

— 102 —

GENERAL INFORMATION

APPENDIX IV

K.S. Liu and Moores have given and have not withdrawn their consent to the issue of this circular with the inclusion of their reports or letters, as the case may be, and reference to their names in the form and context in which they respectively appear.

4. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered into any service agreement with any members of the Group.

5. LITIGATION

As at the Latest Practicable Date, no member of the Enlarged Group was engaged in any litigation or arbitration proceedings of material importance and there was no litigation or claim of material importance known to the Directors to be pending or threatened against any member of the Enlarged Group.

6. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors and his/her respective associates was considered to have an interest in a business which competes or is likely to compete, either directly or indirectly, with the business of the Group other than those businesses to which the Directors and his/her associates were appointed to represent the interests of the Company and/or the Group.

7. MATERIAL CONTRACTS

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

• (i) a placing agreement dated 7 January 2005 entered into between the Company and Uni-Alpha Securities Limited relating to the placing of 300,000,000 shares of the Company;

• (ii) a placing agreement dated 13 June 2005 and termination deed dated 6 January 2006 entered into between the Company and Uni-Alpha Securities Limited relating to the placing of convertible notes by the Company;

• (iii) an agreement dated 13 June 2005 and supplemental agreement dated 24 August 2005 and termination deed dated 1 February 2006 entered into between Goodnews Resources Limited and the Company relating to the subscription of 35,000,000 shares in the capital of the Company;

— 103 —

GENERAL INFORMATION

APPENDIX IV

• (iv) a placing agreement dated 13 June 2005 and supplemental agreement dated 17 October 2005 and termination deed dated 6 January 2006 entered into between the Company and Uni-Alpha Securities Limited relating to a placing of 40,000,000 new shares in the capital of the Company;

• (v) an underwriting agreement dated 13 June 2005 entered into between the Company and Uni-Alpha Securities Limited relating to 20,000,000 new shares in the capital of the Company;

• (vi) an underwritten agreement dated 1 December 2005 entered into between the Company and Chung Nam Securities Limited relating to 44,000,000 new shares in the capital of the Company;

• (vii) an underwritten agreement dated 30 December 2005 entered into between the Company, Get Nice Investment Limited and Kingston Securities Limited relating to 250,000,000 new shares in the Company;

• (viii)a placing agreement dated 30 December 2005 entered into between the Company and Get Nice Investment Limited relating to 750,000,000 new shares in the capital of the Company;

• (ix) a conditional agreement dated 10 April 2006 entered into between Willie International Holdings Limited and Freeman China Limited, a wholly-owned subsidiary of the Company, relating to the sale and purchase of the entire issued share capital of Leapfly Limited; and

• (x) the Agreement; and

• (xi) the Convertible Note.

8. GENERAL

• (i) The secretary of the Company is Mr Ken Chan, who is a member of the Hong Kong Institute of Chartered Secretaries.

• (ii) The qualified accountant of the Company is Mr Wong Kwok Tai, who is a fellow member of the Hong Kong Institute of Certified Public Accountants.

• (iii) The share registrar and transfer office of the Company in Hong Kong is Secretaries Limited, of 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.

• (iv) The English version of this circular shall prevail over the Chinese text.

— 104 —

GENERAL INFORMATION

APPENDIX IV

9. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business of the Company in Hong Kong at 31st Floor, China United Centre, 28 Marble Road, North Point, Hong Kong up to and including the date of the EGM:

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

• (ii) the material contracts as disclosed in paragraph 7 of this Appendix II;

• (iii) the Annual Reports of the Company for the years ended 31 March 2004 and 31 March 2005;

• (iv) (a) circular dated 4 July 2005 in relation to the placing of new consolidated shares, placing of convertible notes, subscription of new consolidated shares, proposed share consolidation and proposed change of company name;

• (b) circular dated 13 September 2005 in relation to the connected transaction and extension of the completion date in relation to the subscription of new shares;

• (c) circular dated 16 February 2006 in relation to the placing of new shares and refreshment of the issue mandate;

• (d) circular dated 18 April 2006 in relation to the proposed change of name, proposed capital reorganisation and discloseable transaction; and

• (e) circular dated 24 April 2006 in relation to discloseable transactions.

• (v) the accountants’ report from Moores dated 24 May 2006, the text of which is set out in Appendix II to this circular;

• (vi) the report from K.S. Liu on the unaudited pro forma statement of assets and liabilities of the enlarged Group dated 24 May 2006, the text of which is set out in Appendix III to this circular; and

• (vii) the letters of consent referred to in the paragraph headed “Experts and consents” in this Appendix.

— 105 —

NOTICE OF EXTRAORDINARY GENERAL MEETING

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INNER MONGOLIA DEVELOPMENT (HOLDINGS) LIMITED

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 279)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Inner Mongolia Development (Holdings) Limited (the “Company”) will be held at 30th Floor, China United Centre, 28 Marble Road, North Point, Hong Kong at 9:00 a.m. on Friday, 9 June 2006 for the purpose of considering and, if thought fit, passing the following resolution which will be proposed as an ordinary resolution:-

ORDINARY RESOLUTION

1. “ THAT :

2. (a) the entering into of the conditional agreement (“Agreement”) dated 21 April 2006 and supplemental agreement dated 2 May 2006 between Yearwise Finance Limited (“Yearwise”) and Equity Spin Investments Limited (“Equity Spin”), a wholly-owned subsidiary of the Company pursuant to which Equity Spin agreed to purchase from Yearwise all Yearwise’s rights, title and interests in the convertible note (“Convertible Note”) issued by Hennabun Management International Limited in the principal amount of HK$131,000,000 due on 20 September 2015 for a consideration of HK$100,000,000 (a copy of the Agreement has been produced to this meeting marked “A” and initialled by the chairman of the meeting for identification purpose) be and is hereby approved, ratified and confirmed and the transactions contemplated thereunder be and are hereby approved and the directors of the Company be and are hereby authorised to implement the transactions referred to in the Agreement and to do all such acts and things and sign such documents as they shall in the absolute discretion and consider necessary or desirable to give effect to the Agreement and the arrangements contemplated thereunder; and

3. (b) the exercise of conversion rights under the Convertible Note in full by Equity Spin as soon as practicable after completion of the Agreement, subject to all necessary approvals from the regulatory authorities to the extent required being obtained, be and is hereby approved and the directors of the Company be and are hereby authorised to do all such acts and things and sign such documents as they shall in the absolute discretion and consider necessary or desirable to give effect to the conversion of the Convertible Note and the arrangements contemplated thereunder.”

By order of the Board Yau Shum Tek, Cindy Chairman

Dated 24 May 2006

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

1. To be valid, the instrument appointing a proxy must be in writing under the hand of the appointor or of his attorney authorised in writing or if the appointor is a corporation, either under seal or under the hand of an officer or attorney duly authorised.

2. Any member of the Company entitled to attend and vote at the meeting shall be entitled to appoint another person as his proxy to attend and vote instead of him. A proxy duly appointed pursuant to the articles of association of the Company is entitled to vote on a show of hands at the meeting. On a poll votes may be given either personally or by proxy. A proxy need not be a member of the Company. A member may appoint more than one proxy to attend on the same occasion.

3. The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority must be deposited at the Company’s share registrar in Hong Kong, Secretaries Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong not less than 48 hours before the time for holding the meeting or the adjourned meeting or poll (as the case may be) at which the person named in such instrument proposes to vote, and in default the instrument of proxy shall not be treated as valid.

4. Where there are joint registered holders of any share, any one of such persons may vote at the meeting, either personally or by proxy, in respect of such share as if he were solely entitled thereto; but if more than one of such joint holders be present at the meeting personally or by proxy, that one of the said persons so present whose name stands first on the register of members in respect of such share shall alone be entitled to vote in respect thereof.

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