Dongyue Group Limited — Proxy Solicitation & Information Statement 2003

Jul 28, 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

If you have sold all your shares in Herald Holdings Limited (the “Company”), you should at once hand this circular to the purchaser or to the banker or stockbroker or other agent through whom the sale was effected for transmission to the purchaser or transferee.

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors of the Company 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 the omission of which would make any statement in this circular misleading.

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HERALD HOLDINGS LIMITED

(incorporated in Bermuda with limited liability)

PROPOSED ADOPTION OF NEW SHARE OPTION SCHEME, GENERAL MANDATES TO REPURCHASE SHARES AND TO ISSUE SHARES

AND

PROPOSED AMENDMENT TO BYE-LAWS

A notice convening a Special General Meeting of the Company to be held at the Chater Room II, Function Room Level (B1), The Ritz-Carlton Hotel Hong Kong, 3 Connaught Road Central, Hong Kong on Thursday, 18 September, 2003 at 3:50 p.m. (or so soon thereafter as the Annual General Meeting of Herald Holdings Limited convened for the same place and date shall have been concluded or adjourned) is set out on pages 22 to 25 of this circular.

Whether or not you intend to attend the meeting, you are requested to complete and return to the principal place of business of the Company in Hong Kong at 3110, 31st Floor, Tower Two, Lippo Centre, 89 Queensway, Hong Kong the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible and in any event not later than forty-eight hours before the time of the meeting or any adjournment thereof. Completion and return of the relevant forms of proxy will not preclude you from attending and voting at the meeting should you wish.

22 July, 2003

CONTENTS

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Proposed Adoption of a New Share Option Scheme . . . . . . . . . . . . . . . . . . . . . . . . .	5
Valuation of New Share Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
General Mandates to Repurchase Shares and to Issue Shares . . . . . . . . . . . . . . . . .	6
Amendment to the Bye-laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Document for inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
APPENDIX I – SUMMARY OF THE PRINCIPAL TERMS OF
THE NEW SHARE OPTION SCHEME. . . . . . . . . . . . . . . . . . . . . .	9
APPENDIX II – EXPLANATORY STATEMENT OF THE
REPURCHASE MANDATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
NOTICE OF THE SPECIAL GENERAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . .	22

– i –

DEFINITIONS

In this circular (other than in the notice of the Special General Meeting), the following expressions have the meanings respectively set opposite them unless the context otherwise requires:

“Adoption Date”	the date on which the resolution relating to the new share
	option scheme of the Company is adopted;
“Associate(s)”	has the meaning ascribed to it under the Listing Rules;
“Board”	board of directors of the Company;
“Business Day”	any day on which the Stock Exchange is open for the
	business of dealing in securities;
“Bye-laws”	the bye-laws of the Company;
“Code”	Hong Kong Code on Takeovers and Mergers and Share
	Repurchases;
“Companies Act”	the Companies Act 1981 of Bermuda, as amended;
“Companies Ordinance”	the Companies Ordinance, Chapter 32, Laws of Hong
	Kong, as amended;
“Company”	Herald Holdings Limited, an exempted company
	incorporated in Bermuda with limited liability, the shares
	of which are listed on the Stock Exchange;
“Directors”	director(s) of the Company;
“Eligible Participant(s)”	any person(s) who satisfies the eligibility criteria under
	the New Share Option Scheme;
“Issue Mandate”	The general and unconditional mandate proposed under
	ordinary resolution numbered (3) in the notice of the
	Special General Meeting set out on pages 22 to 25 of
	this circular to be granted to the Directors to allot and
	issue securities of the Company up to an aggregate
	nominal amount not exceeding 20% of the aggregate
	nominal value of the issued share capital of the Company
	on the date of the passing of the said ordinary resolution;

– 1 –

DEFINITIONS

“Grantee(s)”	any Eligible Participant(s) who accepts an Offer in
	accordance with the terms of the New Share Option
	Scheme or, where the context so permits, a legal personal
	representative entitled to any such Options in
	consequence of the death of the original Grantee(s);
“Group”	the Company and its Subsidiaries from time to time;
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong;
“Hong Kong”	the Hong Kong Special Administrative Region of the
	People’s Republic of China;
“Latest Practicable Date”	22 July, 2003 being the latest practicable date prior to
	the printing of this circular for the purpose of ascertaining
	certain information for inclusion in this circular;
“Listing Rules”	the Rules Governing the Listing of Securities on the
	Stock Exchange;
“New Share Option Scheme”	the share option scheme to be adopted by the Company
	as referred to in the notice of Special General Meeting
	as set out on pages 22 to 25 of this circular;
“Offer”	the offer of the grant of an Option made in accordance
	with the New Share Option Scheme;
“Offer Date”	The date on which an Offer is made to an Eligible
	Participant;
“Old Share Option Scheme”	the employee share option scheme as adopted by the
	Company on 30 September, 1992 and expired on 29
	September, 2002;
“Option(s)”	share option(s) to subscribe for Shares granted pursuant
	to the New Share Option Scheme;
“Option Period”	in respect of any particular Option, a period to be notified
	by the Board to each Grantee during which an Option
	may be exercised, such period not exceeding a period of
	ten years commencing on the Offer Date and expiring
	on the last day of such period;

– 2 –

DEFINITIONS

“Repurchase Mandate” The general and unconditional mandate proposed under ordinary resolution numbered (2) in the notice of the Special General Meeting set out on pages 22 to 25 of this circular to be granted to the Directors to repurchase the Company’s securities up to an aggregate nominal amount not exceeding 10% of the aggregate nominal value of the issued share capital of the Company immediately after the passing the said ordinary resolution; “Share(s)” share(s) of US$0.01 each in the share capital of the Company; “shareholder(s)” holder(s) for the time being of the Share(s); “Special General Meeting” the Special General Meeting of the Company to be convened and held on 18 September, 2003, notice of which is set out on pages 22 to 25 of this circular;

• “Stock Exchange” The Stock Exchange of Hong Kong Limited; “Subscription Price” The price per Share at which a Grantee may subscribe for Shares on the exercise of an Option as described in the New Share Option Scheme;

• “Subsidiary” a company which is for the time being and from time to time a subsidiary (within the meaning of Section 2 of the Companies Ordinance or Section 86 of the Companies Act) of the Company;

• “US$” United States Dollars; “%” per cent.

– 3 –

LETTER FROM THE BOARD

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HERALD HOLDINGS LIMITED

(incorporated in Bermuda with limited liability)

Executive directors: George Bloch (Chairman) Cheung Tsang-Kay, Stan PhD, Hon LLD, Hon DBA, JP (Managing Director) Chang Dong-Song Robert Dorfman Thong Yeung-Sum, Michael FCCA, AHKSA

Independent non-executive directors: Denis Campbell Bray CMG, CVO, JP Tsao Kwang-Yung, Peter CBE, CPM

Registered Office: Clarendon House Church Street Hamilton HM 11 Bermuda

Principal place of business in Hong Kong: 3110, 31st Floor Tower Two, Lippo Centre 89 Queensway Hong Kong

22 July, 2003

To the shareholders

PROPOSED ADOPTION OF NEW SHARE OPTION SCHEME, GENERAL MANDATES TO REPURCHASE SHARES AND TO ISSUE SHARES

AND PROPOSED AMENDMENT TO BYE-LAWS

Dear Sir or Madam,

INTRODUCTION

The Old Share Option Scheme adopted by the Company on 30 September, 1992 expired on 29 September, 2002. All share options granted under the Old Share Option Scheme have either been exercised, lapsed or cancelled and there are no outstanding share options granted under the Old Share Option Scheme.

The Company would like to propose to shareholders for consideration and approval at the Special General Meeting to adopt the New Share Option Scheme.

– 4 –

LETTER FROM THE BOARD

The Directors would also take the opportunity to put forward to the shareholders at the Special General Meeting ordinary resolutions to approve the granting of the Issue Mandate and Repurchase Mandate and a special resolution to amend the Bye-laws.

The purpose of this circular is to provide you with information on such proposals.

PROPOSED ADOPTION OF A NEW SHARE OPTION SCHEME

Adoption of the New Share Option Scheme is subject to:

• (a) the approval of shareholders, by ordinary resolution, at the Special General Meeting, and

• (b) the Listing Committee of the Stock Exchange approving the listing of, and permission to deal in, the new Shares upon exercise of the Options to be granted under the New Share Option Scheme.

Application will be made to the Listing Committee of the Stock Exchange for approvals of the listing of, and permission to deal in, the Shares which may fall to be issued upon the exercise of the Options granted under the New Share Option Scheme.

In compliance with Rule 17.03(3) of the Listing Rules, the total number of new Shares in respect of which share options may be granted under the New Share Option Scheme and any other schemes shall not in aggregate exceed 10% of the Shares in issue as the date of approval of the New Share Option Scheme, unless the Company obtains approval from its shareholders to refresh the 10% limit and on the basis that the maximum number of new Shares which may be issued upon exercise of all outstanding Options granted and yet to be exercised under the New Share Option Scheme and any other schemes shall not exceed 30% of the Shares in issue from time to time. Assuming that there is no change in the share capital of the Company from the Latest Practicable Date to the date the New Share Option Scheme is adopted, the maximum number of new Shares in the Company that may be issued under the New Share Option Scheme on the date of its adoption will be 61,522,576 new Shares (i.e. 10% of the Shares in issue as at the date of Special General Meeting).

The New Share Option Scheme does not specify a minimum period for which an Option must be held nor a performance target which must be achieved before an Option can be exercised. However, the rules of the New Share Option Scheme provide that the Directors may determine, at their sole discretion, such terms on the grant of an Option. This determination may vary on a case by case basis but no such terms shall be imposed the result of which will be to the advantage of the Eligible Participants without the prior approval of shareholders in general meeting. The basis for determination of the Subscription Price is also specified precisely in the rules of the New Share Option Scheme. The Directors consider that these criteria and rules will serve to preserve the value of the Company and encourage the Eligible Participants to acquire proprietary interests in the Company.

– 5 –

LETTER FROM THE BOARD

None of the Directors are appointed as trustees of the New Share Option Scheme or have a direct or indirect interest in the trustees of the New Share Option Scheme.

A summary of the principal terms of the New Share Option Scheme is set out in Appendix I to this circular.

VALUATION OF NEW SHARE OPTIONS

The Board considers that it is inappropriate to state the value of all Options that can be granted pursuant to the New Share Option Scheme as if they had been granted on the Latest Practicable Date given that the variables which are critical for the calculation of the value of such Options, including the Subscription Price, the timing of the grant of such Options, the period during which the Options may be exercised and any other condition that the Board may impose on the Options and whether or not such Options if granted will be exercised by the Grantees, have not been determined. With a scheme life of 10 years it is too premature to state whether or not Options will be granted. On these premises, the Board is of the view that the value of the Options can only be ascertained subject to a number of theoretical bases and speculative assumptions. Accordingly, the Board believes that any calculation of the value of the Options will not be meaningful and may be misleading to shareholders in the circumstances.

GENERAL MANDATES TO REPURCHASE SHARES AND TO ISSUE SHARES

At the Special General Meeting, ordinary resolutions will be proposed that the Directors be given general and unconditional mandates to exercise all the powers of the Company to (i) repurchase issued shares of US$0.01 each in the capital of the Company (“Issued Shares”), the aggregate nominal amount of which does not exceed 10% of the aggregate nominal amount of the issued share capital of the Company in issue on the date of passing of the resolution; and (ii) allot, issue and otherwise deal with Shares not exceeding the sum of 20% of the aggregate nominal amount of the share capital of the Company in issue on the date of passing of the resolution.

The Directors have no immediate plans to repurchase any Issued Shares or to issue any new Shares pursuant to the above mandates.

An explanatory statement required by the Listing Rules to be sent to shareholders in connection with the proposed Repurchase Mandate is set out in the Appendix II to this document and contains all information reasonably necessary to enable shareholders to make an informed decision on whether to vote for or against the resolutions.

– 6 –

LETTER FROM THE BOARD

AMENDMENT TO THE BYE-LAWS

With the introduction of the Securities and Futures Ordinance (“SFO”), the Securities and Futures (Clearing Houses) Ordinance (the “repealed Ordinance”) was repealed on 1 April, 2003.

The existing Bye-laws of the Company have been reviewed and it has been found that the Bye-law 84(A) has reference to the repealed Ordinance. Under the circumstance, the Directors propose to recommend to the shareholders of the Company at the Special General Meeting to amend the Bye-laws by substituting the words “Part 1 of Schedule 1 to the Securities and Futures Ordinance” for “section 2 of the Securities and Futures (Clearing Houses) Ordinance” in the Bye-law 84(A)”. The amended Bye-law 84(A) is set out in Resolution No. 4 of the Notice of Special General Meeting.

SPECIAL GENERAL MEETING

Set out on pages 22 to 25 is a notice convening the Special General Meeting to be held at the Chater Room II, Function Room Level (B1), The Ritz-Carlton Hotel Hong Kong, 3 Connaught Road Central, Hong Kong on Thursday, 18 September, 2003 at 3:50 p.m. (or so soon thereafter as the Annual General Meeting of the Company convened for the same place and date shall have been concluded or adjourned).

At the Special General Meeting, Ordinary Resolutions to approve the adoption of the New Share Option Scheme, the granting of the Repurchase Mandate and Issue Mandate will be proposed .

A Special Resolution will also be proposed at the Special General Meeting to approve the amendment to the Bye-laws.

A form of proxy for use at the Special General Meeting is enclosed. Whether or not you are able to attend the Special General Meeting in person, you are requested to complete and return the form of proxy to the principal place of business of the Company in Hong Kong at 3110, 31st Floor, Tower Two, Lippo Centre, 89 Queensway, Hong Kong as soon as possible and in any event not later than forty-eight hours before the time appointed for the holding of the Special General Meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting at the Special General Meeting or any adjourned meeting should you so wish.

The Company will publish an announcement on the results of the Special General Meeting on the Business Day following the Special General Meeting with respect to whether or not the resolution for the adoption of the New Share Option Scheme has been passed by the shareholders.

– 7 –

LETTER FROM THE BOARD

RECOMMENDATION

The Board considers that in order to attract, retain and motivate employees, including directors of the Group to strive for the future development of the Group, it is important that the Group should continue to provide them with an additional incentive and encouragement by offering them an opportunity to obtain an ownership interest in the Company and to enjoy the results of the Company attained through their efforts and contributions.

The Board further considers that in order to enable the Group to motivate Eligible Participants other than employees or directors to utilise their performance and efficiency for the benefit of the Group and to attract and retain or otherwise maintain an on-going business relationship with such Eligible Participants whose contributions are or will be beneficial to the long term growth of the Group, it is important that the Group should be permitted to provide them, where appropriate, with an additional incentive by also offering them an opportunity to obtain an ownership interest in the Company and to reward them for contributing to the success of the business of the Group.

In view of the above, the Board considers that the adoption of the New Share Option Scheme is in the best interests of the Company and its shareholders as a whole. Accordingly, the Board recommends the shareholders at the Special General Meeting to vote in favour of the ordinary resolution approving the adoption of the New Share Option Scheme.

The Board also believes that the Repurchase Mandate, Issue Mandate and the proposed amendment to the Bye-laws are in the best interests of the Company and its shareholders and accordingly recommends the shareholders to vote in favour of the relevant resolutions to be proposed at the Special General Meeting.

DOCUMENT FOR INSPECTION

A copy of the rules of the New Share Option Scheme is available for inspection at the principal place of business of the Company at 3110, 31st Floor, Tower Two, Lippo Centre, 89 Queensway, Hong Kong during normal business hours from the date of this circular up to and including 17 September, 2003.

Yours faithfully For and on behalf of the Board George Bloch Chairman

– 8 –

SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SHARE OPTION SCHEME

APPENDIX I

The following is a summary of the principal terms of the New Share Option Scheme:

1. PURPOSE OF THE NEW SHARE OPTION SCHEME

• (a) The New Share Option Scheme is a share incentive scheme and is established to recognise and acknowledge the contributions which the Eligible Participants (as defined in paragraph 2) have made or may make to the Group.

• (b) The New Share Option Scheme will provide the Eligible Participants with an opportunity to have a personal stake in the Company with a view to motivating the Eligible Participants to utilise their performance and efficiency for the benefit of the Group and attracting and retaining or otherwise maintaining an on-going relationship with the Eligible Participants whose contributions are or will be beneficial to the long term growth of the Group.

2. WHO MAY JOIN

The Board may at its discretion grant Options to the following persons or companies (the “Eligible Participants”) :

• (a) any director (whether executive or independent non-executive director), employee (whether full time or part time employee), consultant, customer, supplier, agent, partner or advisers of or contractor to the Group or any entity in which any member of the Group holds any interest (the “Invested Entity”);

• (b) any discretionary trust whose discretionary objects include any director (whether executive or independent non-executive director), employee (whether full time or part time employee), consultant, customer, supplier, agent, partner or adviser of or contractor to the Group or any Invested Entity; and

• (c) a company beneficially owned by any director (whether executive or independent non-executive director), employee (whether full time or part time employee), consultant, customer, supplier, agent, partner or adviser of or contractor to the Group or any Invested Entity.

3. MAXIMUM NUMBER OF SHARES AVAILABLE FOR SUBSCRIPTION UNDER THE NEW SHARE OPTION SCHEME

(a) 30% limit

The overall limit on the number of Shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the New Share Option Scheme and any other share option schemes of the Company must not exceed 30% of the Shares in issue from time to time (the “Scheme Limit”).

– 9 –

SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SHARE OPTION SCHEME

APPENDIX I

(b) 10% limit

In addition to the Scheme Limit, and subject to the following paragraph, the total number of Shares which may be issued upon exercise of all options to be granted under the New Share Option Scheme and any other share option schemes of the Company must not in aggregate exceed 10% of the Shares in issue as at the date of approval of the New Share Option Scheme (excluding any options which have lapsed in accordance with the terms of the New Share Option Scheme or any other share option schemes of the Company) (the “Scheme Mandate Limit”).

The Company may, from time to time, refresh the Scheme Mandate Limit by obtaining the approval of the shareholders in Special General Meeting. Once refreshed, the total number of securities which may be issued upon exercise of all options to be granted under the New Share Option Scheme and all other share option schemes of the Company under the limit, as refreshed, must not exceed 10% of the Shares in issue as at the date of approval of the refreshed limit. Options previously granted under the New Share Option Scheme and/or any other share option schemes, including without limitation any options which are outstanding, cancelled, lapsed or exercised, will not be counted for the purpose of calculating the refreshed Scheme Mandate Limit.

The Company may seek separate approval of the shareholders in general meeting for granting Options beyond the Scheme Mandate Limit or the refreshed Scheme Mandate Limit provided the Options in excess of such limit are granted only to the Eligible Participants specifically identified before such approval is sought. A circular containing a generic description of the specified Eligible Participants who may be granted such Options, the number and terms of the Options to be granted, the purpose of granting Options to the specified Eligible Participants with an explanation as to how the terms of the Options serve such purpose and other information required under the Listing Rules must be sent to the shareholders.

4. MAXIMUM ENTITLEMENT OF EACH ELIGIBLE PARTICIPANT

Unless approved by the shareholders, the total number of securities issued and to be issued upon exercise of the Options granted to each Eligible Participant (including both exercised and outstanding Options) in any 12 month period must not exceed 1% of the Shares in issue. Where any further grant of Options to an Eligible Participant would result in the Shares issued and to be issued upon exercise of all Options granted and to be granted to such Eligible Participant (including exercised, cancelled and outstanding Options) in the 12 month

– 10 –

SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SHARE OPTION SCHEME

APPENDIX I

period up to and including the date of such further grant representing in aggregate over 1% of the relevant class of securities in issue, such further grant must be separately approved by the shareholders in general meeting with such Eligible Participant and his Associates abstaining from voting. The Company must send a circular to the shareholders and the circular must disclose the identity of the Eligible Participant, the number and terms of the Options to be granted (and Options previously granted to such Participant).

5. PERFORMANCE TARGET

Unless otherwise determined by the Directors at their sole discretion, there is no performance target which must be satisfied or achieved before the Options can be exercised.

6. MINIMUM PERIOD FOR WHICH AN OPTION MUST BE HELD

Unless otherwise determined by the Directors at their sole discretion, there is no requirement of a minimum period for which an Option must be held before such an Option can be exercised under the terms of the New Share Option Scheme.

7. SUBSCRIPTION PRICE OF SHARES

The Subscription Price must be at least the highest of: (a) the closing price of a Share as stated in the daily quotations sheet of the Stock Exchange on the date of grant which must be a Business Day; and (b) the average of the closing prices of the Shares as shown on the daily quotations sheets of the Stock Exchange for the five Business Days immediately preceding the date of grant; and (c) the nominal value of a Share.

8. AMOUNT PAYABLE UPON ACCEPTANCE OF OPTION

HK$1.00 is payable by each Eligible Participant to the Company on acceptance of an Offer of an Option, which shall be paid within 21 days from the Offer Date.

9. TERM OF THE NEW SHARE OPTION SCHEME

The New Share Option Scheme shall commence on the date it becomes unconditional and shall continue in force until the tenth anniversary of such date.

10. RIGHTS PERSONAL TO THE OPTION HOLDER

An Option shall be personal to the Grantee and shall not be assignable and no Grantee shall in any way sell, transfer, charge, mortgage, encumber or create any interest in favour of any third party over or in relation to any Option.

– 11 –

SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SHARE OPTION SCHEME

APPENDIX I

11. TIME OF EXERCISE OF OPTION

An Option shall be exercisable at any time during an Option Period to be notified by the Board to each Grantee, provided that no Option shall be exercisable later than ten years after its date of grant.

12. GRANT OF AN OPTION TO CONNECTED PERSONS

• (a) Any grant of Options to a connected person (as defined in the Listing Rules) (the “connected person”) of the Company or its Associates (including a discretionary trust whose discretionary objects include a Director, chief executive or substantial shareholder and a company beneficially owned by any Director, chief executive or substantial shareholder) must be approved by the independent non-executive directors (excluding any independent non-executive director who is a Grantee).

• (b) Where Options are proposed to be granted to a substantial shareholder (as defined in the Listing Rules) (the “substantial shareholder”) of the Company or an independent non-executive director or any of their respective Associates (including a discretionary trust whose discretionary objects include a Director, chief executive or substantial shareholder and a company beneficially owned by any Director, chief executive or substantial shareholder), and where the total number of Shares issued and to be issued upon exercise of all Options granted or to be granted to such person under the New Share Option Scheme (including Options exercised, cancelled and outstanding) in the 12-month period up to and including the date of such grant to such person:

• (i) represents in aggregate over 0.1% of the Shares in issue, and

• (ii) at the date of such grant has an aggregate value in excess of HK$5,000,000, based on the closing price of the Shares at the date of each grant,

then the proposed grant must be subject to the approval by the shareholders at a general meeting taken on a poll. All connected persons of the Company must abstain from voting in such Special General Meeting (except where any connected person intends to vote against the proposed grant and that his intention to do so has been stated in the circular mentioned in this paragraph below). The Company shall issue a circular to the shareholders explaining the proposed grant, disclosing the number and terms (including the Subscription Price) of the Options to be granted to each Grantee and containing a recommendation from the independent non-executive directors (excluding any independent non-executive director who is a Grantee) on whether or not to vote in favour of the proposed grant and including all the information required under the Listing Rules.

– 12 –

SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SHARE OPTION SCHEME

APPENDIX I

13. RIGHTS ON CEASING TO BE AN ELIGIBLE PARTICIPANT

• (a) In the event of the Grantee (being an individual) ceasing to be an Eligible Participant by reason of his death before exercising his Option in full and where the termination of employment or engagement is not made as a result of the Grantee being guilty of persistent or serious misconduct, unable to pay his debts, having committed an act of bankruptcy or having been convicted of a criminal offence, his personal representative(s) may exercise such Option (to the extent not already exercised) in whole or in part within a period of 6 months (or such other period as the Board may determine) from the date of his death and any Option not so exercised shall lapse and determine at the expiry of such period.

• (b) In the event of the employing company of a Grantee who is a director (whether executive or independent non-executive director) or an employee (whether full time or part time employee) ceasing to be a member of the Group or an Invested Entity or in the event of the termination of employment of the grantee by reason of resignation whether on notice in accordance with the provisions of his contract of employment or with pay in lieu of such notice, then the Grantee may exercise any of his Option in whole or in part at any time within a period of 3 months (or such other period as the Board may determine) commencing on the date of the cessation and any Option not so exercised shall lapse and determine at the end of such period.

• (c) In the event of the Grantee who is a director (whether executive or independent non-executive director) or an employee (whether full time or part time employee) of the Group or an Invested Entity ceasing to be such a director or employee of the Group or an Invested Entity (and therefore ceasing to be an Eligible Participant) as a result of the Grantee being guilty of persistent or serious misconduct, unable to pay his debts, having committed an act of bankruptcy or having been convicted of a criminal offence, before exercising his Option in full, such Option (to the extent not already exercised) shall lapse on the date of cessation and not be exercisable. The Board may within one month from the date of such cessation otherwise determine that such Option shall become exercisable within such period as the Board may determine following the date of such cessation.

• (d) In the event of the Grantee ceasing to be an Eligible Participant for any reason other than as described in sub-paragraphs (a) to (c) of this paragraph 13, then all his Options shall lapse and determine on the date he so ceases (to the extent not already exercised).

– 13 –

SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SHARE OPTION SCHEME

APPENDIX I

14. EFFECT ON TAKEOVER

If, in consequence of any general offer made to all the shareholders (or all such shareholders other than the offeror, any person controlled by the offeror and any person acting in association or concert with the offeror) (including an offer made in the first instance on a condition such that, if it is satisfied, the offeror will have control of the Company ) or otherwise, and such offer becomes or is declared unconditional, then the Directors shall as soon as practicable thereafter notify every Grantee accordingly and each Grantee shall be entitled at any time within the period of 21 days of the notice given by the offeror to exercise all of his outstanding Options, and such Options shall, to the extent not having been exercised, lapse and determine upon the expiry of such period.

15. EFFECT ON WINDING UP

In the event a notice is given by the Company to the shareholders to convene a general meeting for the purpose of considering and, if thought fit, approving a resolution for the voluntary winding up of the Company, the Company shall forthwith give notice thereof to every Grantee and the Grantee shall be entitled by notice in writing to the Company (such notice to be received by the Company not later than four Business Days prior to the proposed general meeting) exercise his Option (to the extent not already exercised) either to its full extent or to the extent specified in such notice and the Company shall as soon as possible and in any event not later than the day immediately prior to the date of the proposed general meeting, allot and issue such number of Shares to the Grantee which falls to be issued on such exercise and all Options shall, to the extent not having been exercised, lapse and determine.

16. EFFECT ON RECONSTRUCTION

If a compromise or arrangement between the Company and the shareholders or creditors is proposed for the purposes of or in connection with a scheme for the reconstruction of the Company or its amalgamation with any other company or companies, the Company shall give notice thereof to every Grantee on the same day as it despatches to each shareholder or creditor of the Company a notice summoning the meeting to consider such a compromise or arrangement, and thereupon each Grantee shall be entitled by notice in writing to the Company accompanied by the remittance for the Subscription Price in respect of his Option (such notice to be received by the Company not later than two Business Days prior to the proposed meeting) to exercise his Option (to the extent not already exercised) to its full extent. With effect from the date of such meeting, the rights of all Grantees to exercise their respective Options shall forthwith be suspended. Upon such compromise or arrangement becoming effective, all Options shall, to the extent not having been exercised, thereupon lapse and determine. The Directors shall endeavour to procure that the Shares issued as a result of the exercise of Options under this paragraph shall for the purposes of such compromise or arrangement form part of the issued share capital of the Company on the effective date thereof

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SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SHARE OPTION SCHEME

APPENDIX I

and that such Shares shall in all respects be subject to such compromise or arrangement. If for any reason such compromise or arrangement is not approved by the relevant court having jurisdiction (the “Court”) (whether upon the terms presented to the Court or upon any other terms as may be approved by such Court), the rights of the Grantees to exercise their respective Options shall with effect from the date of the making of the order by the Court be restored in full and shall thereupon become exercisable (but subject to the other terms of the New Share Option Scheme) as if such compromise or arrangement had not been proposed by the Company and no claim shall lie against the Company or any of its officers for any loss or damage sustained by any grantee as a result of the aforesaid suspension.

17. RANKING OF SHARES

Shares to be allotted upon the exercise of an Option will be subject to all the provisions of the Bye-laws of the Company for the time being in force and will rank pari passu in all respects with the existing fully paid Shares in issue on the date on which the Option is duly exercised or, if that date falls on a day when the register of members of the Company is closed, the first day of the re-opening of the register of members (the “exercise date”) and accordingly will entitle the holders thereof to participate in all dividends or other distributions (including distributions made upon the liquidation of the Company ) paid or made on or after the exercise date other than any dividend or other distribution previously declared or recommended or resolved to be paid or made if the record date thereof shall be before the exercise date. A Share allotted and issued upon the exercise of an Option shall not carry voting rights until the name of the Grantee has been duly entered onto the register of members of the Company as the holder thereof.

18. EFFECT OF ALTERATION TO CAPITAL

• (a) In the event of any alteration in the capital structure of the Company whilst any Option remains exercisable or the New Share Option Scheme remains in effect, and such event arises from a capitalisation issue, rights issue or consolidation or sub-division of Shares or reduction of share capital of the Company, then, in any such case, (other than in the case of capitalisation issue) the Board shall instruct the auditors of the Company (the “auditors”) or an independent financial adviser to certify in writing:

• (i) the adjustment, if any, that ought in their opinion fairly and reasonably to be made either generally or as regards any particular Grantee, to:

  • (1) the number or nominal amount of Shares to which the New Share Option Scheme or any Option(s) relates (insofar as it is/they are unexercised); and/or

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SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SHARE OPTION SCHEME

APPENDIX I

(2) the Subscription Price,

and an adjustment as so certified by the auditors or the independent financial adviser shall be made, provided that:

  - (1) any such adjustment shall be made on the basis that the proportion of the issued share capital of the Company for which any Grantee would have been entitled had he exercised all the Options held by him immediately prior to such adjustment shall equal to the proportion of the issued share capital of the Company for which he would have been entitled had he exercised all the Options held by him immediately after such adjustment;

  - (2) any such adjustment shall be made on the basis that the aggregate Subscription Price payable by a Grantee on the full exercise of any Option shall remain as nearly as possible the same (but shall not be greater than) as it was before such event;

  - (3) no such adjustment shall be made the effect of which would be to enable a Share to be issued at less than its nominal value; and

  - (4) the issue of Shares as consideration in a transaction shall not be regarded as a circumstance requiring any such adjustment; and

• (ii) the adjustment (other than an adjustment made in the event of a capitalisation issue) so made satisfy the requirements set out in the sub-paragraphs (1), (2), (3) and (4) above.

• (b) In giving any certificate under this paragraph 18, the auditors and the independent financial adviser shall be deemed to be acting as experts and not as arbitrators and their certificate shall, in the absence of manifest error, be final, conclusive and binding on the Company and all persons who may be affected thereby.

19. CANCELLATION OF OPTION

Any Option granted but not exercised may not be cancelled except with the prior sanction of the Board or by an ordinary resolution of the shareholders. Cancelled Options may be re-issued after such cancellation has been approved, provided that re-issued Options shall only be granted in compliance with the terms of the New Share Option Scheme . For the avoidance of doubt, new Options may be issued to the same Option holder in place of its cancelled Options only if there are available unissued Options (excluding the cancelled Option) within the scheme mandate limit.

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SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SHARE OPTION SCHEME

APPENDIX I

20. TIME OF GRANT OF OPTIONS

A grant of Option may not be made after a price sensitive matter has been the subject of a decision until such price sensitive information has been announced pursuant to the requirements of the Listing Rules. In particular, no Option may be granted during the period commencing one month immediately preceding the earlier of (a) the date of the Board meeting for the approval of the Company’s interim or annual results, and (b) the deadline for the Company to publish its interim or annual results announcement under the Listing Rules and ending on the date of the results announcement.

21. TERMINATION AND ALTERATION OF SCHEME

• (a) The Company by an ordinary resolution in a general meeting or of the Board may at any time terminate the operation of the New Share Option Scheme and in such event no further Options will be offered but in all other respects the provisions of the New Share Option Scheme shall remain in force to the extent necessary to give effect to the exercise of any Options granted prior thereto or otherwise as may be required in accordance with the provisions of the New Share Option Scheme and any Options granted prior to such termination shall continue to be valid and exercisable in accordance with the New Share Option Scheme.

• (b) Any alteration to the terms and conditions of the New Share Option Scheme which are of a material nature or any change to the terms of Options granted must be approved by the shareholders, except where the alterations take effect automatically under the existing terms of the New Option Scheme. The amended terms of the New Share Option Scheme and all Options shall continue to comply with the relevant requirements of the Listing Rules.

• (c) The New Share Option Scheme may be altered in any respect by a resolution of the Board save that the matters set out in Rule 17.03 of the Listing Rules cannot be altered to the advantage of the Eligible Participants without the prior approval of the shareholders in general meeting with the Eligible Participants and their Associates abstaining from voting.

• (d) The Board shall be entitled to amend the terms of the New Share Option Scheme so as to comply with any future changes in the Listing Rules applicable to the New Share Option Scheme, provided that such amendments by the Board are allowed by the Listing Rules from time to time applicable.

• (e) Any change to the authority of the Board in relation to any alteration to the terms of the New Share Option Scheme must be approved by the shareholders in a general meeting.

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EXPLANATORY STATEMENT OF THE REPURCHASE MANDATE

APPENDIX II

The following is an explanatory statement as required by the Stock Exchange concerning the proposed Repurchase Mandate to be granted to the Directors as set out in resolution 2 of the notice of the Special General Meeting:

1. NUMBER OF SHARES FOR REPURCHASES

Based on 615,225,763 Issued Shares in issue as at the Latest Practicable Date, a total of 61,522,576 shares could be repurchased by the Company under this general mandate.

2. REASON FOR REPURCHASES

The Directors believe that it is in the best interests of the Company and its shareholders to have a general authority from shareholders to enable them to repurchase Shares in the market. Such repurchases may, depending on market conditions and funding arrangements at the time, lead to an enhancement of the net assets and/or its earnings per Share and will only be made when the Directors believe that such repurchases will benefit the Company and its shareholders.

3. SOURCE OF FUNDS

Repurchases must be financed out of the funds legally available for the purpose in accordance with the provisions of the Company’s bye-laws and the laws of Bermuda. Under Bermuda law, the amount of capital repaid in connection with a share repurchase may only be paid out of the capital paid up on the relevant purchased Shares, or out of the funds of the Company otherwise available for dividend or distribution or the proceeds of a fresh issue of shares made for the purpose. The amount of premium payable on repurchase may only be paid out of funds of the Company otherwise available for dividend or distribution or out of the share premium account of the Company.

There might be an adverse impact on the working capital or gearing position of the Company (as compared with the position disclosed in the audited accounts contained in the annual report of the Company for the year ended 31 March, 2003) in the event that share repurchases were to be carried out to the fullest extent permitted by the general mandate to repurchase shares at any time during the proposed repurchase period. However, the Directors do not propose to exercise the repurchase mandate to such an extent as would, in the circumstances, have a material adverse effect on the working capital or the gearing level of the Company which in the opinion of the Directors are from time to time appropriate for the Company.

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EXPLANATORY STATEMENT OF THE REPURCHASE MANDATE

APPENDIX II

4. DIRECTORS’ DEALINGS

None of the Directors nor, to the best of their knowledge having made all reasonable enquiries, any of their respective associates currently intend to sell Shares to the Company, in the event that the repurchase mandate is approved.

5. EFFECT OF THE CODE

If as a result of shares repurchase by the Company, a shareholder’s proportionate interest in the voting rights of the Company increase, such increase will be treated as an acquisition for the purpose of the Code. Accordingly, a shareholder, or group of shareholders acting in concert, could obtain or consolidate control of the Company or become obliged to make a mandatory offer in accordance with Rule 26 of the Code. However, the Directors have no present intention of exercising the repurchase mandate to such an extent as to trigger the mandatory offer requirement under the Code.

6. GENERAL

The Directors have undertaken to the Stock Exchange that they will exercise the repurchase mandate in accordance with the Listing Rules and the laws of the Bermuda so far as the same may be applicable.

No connected person of the Company (as defined in the Listing Rules) has notified the Company that he has a present intention to sell any Shares to the Company nor has he undertaken not to do so, in the event the repurchase mandate is approved.

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EXPLANATORY STATEMENT OF THE REPURCHASE MANDATE

APPENDIX II

7. REPURCHASES AND SHARE PRICES

Purchases of 3,875,000 Shares have been made by the Company on the Stock Exchange in the six months prior to the Latest Practicable Date.

Details of the shares purchased are as follows:

Date of repurchase 7 February, 2003 10 February, 2003 18 February, 2003 14 March, 2003 20 March, 2003 24 March, 2003 28 March, 2003 15 April, 2003 23 April, 2003 24 April, 2003 28 April, 2003 29 April, 2003 30 April, 2003 6 May, 2003 12 May, 2003 22 May, 2003 26 May, 2003 11 June, 2003 13 June, 2003	Number of Price per Shares share HK$ 500,000 0.244 50,000 0.243 60,000 0.280 710,000 0.260 – 0.270 300,000 0.270 465,000 0.290 345,000 0.290 65,000 0.255 50,000 0.245 80,000 0.248 290,000 0.250 50,000 0.260 40,000 0.260 200,000 0.260 20,000 0.260 215,000 0.270 35,000 0.290 200,000 0.385 200,000 0.385 3,875,000	Aggregate price HK$ 122,500 12,300 17,000 189,400 81,300 135,400 100,500 17,000 12,400 20,000 73,000 13,100 10,500 52,200 5,400 58,300 10,300 77,300 77,300
		1,085,200

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EXPLANATORY STATEMENT OF THE REPURCHASE MANDATE

APPENDIX II

The highest and lowest prices at which Shares were traded on the Stock Exchange during each of the 12 months from 1 July, 2002 to 30 June, 2003 are set out below:

Share Price

Month	Highest	Lowest
	HK$	HK$
2002
July	0.215	0.166
August	0.171	0.166
September	0.175	0.155
October	0.160	0.152
November	0.165	0.150
December	0.206	0.157
2003
January	0.242	0.200
February	0.340	0.230
March	0.305	0.248
April	0.285	0.242
May	0.305	0.250
June	0.400	0.295

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NOTICE OF SPECIAL GENERAL MEETING

==> picture [69 x 44] intentionally omitted <==

HERALD HOLDINGS LIMITED

(incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a Special General Meeting of Herald Holdings Limited (the “Company”) will be held at the Chater Room II, Function Room Level (B1), The Ritz-Carlton Hotel Hong Kong, 3 Connaught Road Central, Hong Kong on Thursday, 18 September, 2003 at 3:50 p.m. (or so soon thereafter as the Annual General Meeting of Herald Holdings Limited convened for the same place and date shall have been concluded or adjourned) for the purposes of considering and, if thought fit, passing the following resolutions of which Resolution Nos. 1 to 3 will be proposed as Ordinary Resolutions and Resolution No. 4 will be proposed as a Special Resolution:

ORDINARY RESOLUTIONS

• (1) “ THAT

• (a) conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) granting the approval for the listing of and permission to deal in the new shares of the Company which may be issued upon the exercise of share options to be granted under the new share option scheme of the Company (the “Scheme”), the terms of which are set out in the printed document marked “A” now produced to this Meeting and for the purpose of identification signed by the Chairman hereof and subject to such amendments to the Scheme as the Stock Exchange may request, the Scheme be approved and adopted to be the new share option scheme of the Company; and

• (b) the Board of Directors of the Company be and is hereby authorised to do all such acts and to enter into all such transactions and arrangements as may be necessary or expedient in order to give full effect to the Scheme including but not limited to the offer or grant of options and the issue and allotment of shares in the Company upon the exercise of any options under the Scheme, notwithstanding that they or any of them may be interested in the same.”

• (2) “ THAT

• (a) subject to paragraph (c) below, the exercise by the directors of the Company during the Relevant Period of all the powers of the Company to purchase shares of US$0.01 each in the capital of the Company, and to make or grant offers, agreements and options which might require the exercise of

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NOTICE OF SPECIAL GENERAL MEETING

such power, subject to and in accordance with all applicable laws and the requirements of the Rules Governing the Listing of Securities on the Stock Exchange, as amended from time to time, be and the same is hereby generally and unconditionally approved;

• (b) the approval in paragraph (a) of this resolution shall authorise the directors of the Company on behalf of the Company to purchase shares in the capital of the Company at such price and on such terms as the directors of the Company may in their absolute discretion determine;

• (c) the aggregate nominal amount of the share capital of the Company to be purchased or agreed conditionally or unconditionally to be purchased by the directors of the Company on the Stock Exchange or on any other stock exchange recognised for this purpose by the Securities and Futures Commission of Hong Kong and the Stock Exchange pursuant to the approval in paragraph (a) of this resolution shall not exceed 10% of the aggregate nominal amount of the share capital of the Company in issue on the date of the passing of this resolution respectively, and such approval be limited accordingly; and

• (d) for the purpose of this resolution:

“Relevant Period” means the period from the passing of this resolution until whichever is the earlier of:

  - (i) the conclusion of the next Annual General Meeting of the Company;

  - (ii) the expiration of the period within which the next Annual General Meeting of the Company is required by the Bye-Laws of the Company or any applicable law to be held; and

  - (iii) the revocation or variation of the authority given under this resolution by an ordinary resolution of the shareholders in general meeting.”

• (3) “ THAT

• (a) subject to paragraph (b) below, the exercise by the directors of the Company during the Relevant Period of all the powers of the Company to allot and issue or otherwise deal with shares in the capital of the Company or securities convertible into such shares, or options, warrants or similar rights to subscribe for any shares or such convertible securities, and to make or grant offers, agreements and options which might require the exercise of such powers either during or after the Relevant Period be and the same is hereby generally and unconditionally approved;

– 23 –

NOTICE OF SPECIAL GENERAL MEETING

• (b) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) by the directors of the Company pursuant to the approval in paragraph (a) of this resolution, otherwise than pursuant to (i) a Rights Issue, (ii) the exercise of the subscription rights under the warrants to subscribe for shares of the Company or any share option scheme as may be adopted by the Company or (iii) any scrip dividend scheme or similar arrangement providing for the allotment of shares in lieu of the whole or part of a dividend on the shares of the Company in accordance with the Bye-laws of the Company from time to time, shall not exceed 20% of the aggregate nominal amount of the share capital of the Company in issue at the date of passing this resolution, and such approval be limited accordingly; and

• (c) for the purpose of this resolution:

“Relevant Period” means the period from the passing of this resolution until whichever is the earlier of:

• (i) the conclusion of the next Annual General Meeting of the Company;

• (ii) the expiration of the period within which the next Annual General Meeting of the Company is required by the Bye-Laws of the Company or any applicable law to be held; and

• (iii) the revocation or variation of the authority given under this resolution by an ordinary resolution of the shareholders in general meeting.

“Rights Issue” means an offer of shares open for a period fixed by the directors of the Company to holders of shares or any class thereof on the register on a fixed record date in proportion to their then holdings of such shares or class thereof (subject to such exclusions or other arrangements as the directors of the Company may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of any recognised regulatory body or any stock exchange).”

– 24 –

NOTICE OF SPECIAL GENERAL MEETING

SPECIAL RESOLUTION

(4) “ THAT

the Bye-laws of the Company be amended by substituting the words “Part 1 of Schedule 1 to the Securities and Futures Ordinance” for “section 2 of the Securities and Futures (Clearing Houses) Ordinance” in the Bye-law 84(A).

The amended Bye-law 84(A) will read as:

If a recognized clearing house with the meaning of Part 1 of Schedule 1 to the Securities and Futures Ordinance of Hong Kong is a member of the Company it may authorize such person or persons as it thinks fit to act as its representative or representatives at any meeting of the Company or at any meeting of any class of members of the Company provided that, if more than one person is so authorized, the authorization shall specify the number and class of shares in respect of which each such person is so authorized. A person authorized pursuant to this provision shall be entitled to exercise the same powers on behalf of the recognized clearing house (or its nominee) which he represents as that clearing house (or its nominee) could exercise if it were an individual shareholder of the Company.”

By order of the board Thong Yeung-Sum, Michael FCCA, AHKSA Company Secretary

Hong Kong, 22 July, 2003

Principal place of business in Hong Kong

3110, 31st Floor, Tower Two Lippo Centre 89 Queensway Hong Kong

Notes:

• (1) Every member entitled to attend and vote at the above meeting is entitled to appoint one or more proxies to attend and, on a poll, vote instead of him. A proxy need not be a member of the Company.

• (2) A form of proxy for use at the above meeting is enclosed herewith.

• (3) Where there are joint holders of any shares, any one of such persons may vote at the meeting, either personally or by proxy, in respect of such shares as if they are solely entitled thereto, provided that if more than one of such joint holders be present at the meeting personally or by proxy, the person whose name stands first on the register of members in respect of such shares shall alone be entitled to vote in respect thereof.

• (4) To be valid, a form of proxy, together with the power of attorney or other authority, if any, under which it is signed or a notarially certified copy or office copy of such power of attorney must be deposited at the principal place of business of the Company in Hong Kong at 3110, 31st Floor, Tower Two, Lippo Centre, 89 Queensway, Hong Kong not later than forty-eight hours before the time appointed for holding the meeting or any adjournment thereof.

– 25 –