Dream International Limited — Proxy Solicitation & Information Statement 2003

May 13, 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt 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 or transferred all your Shares, you should at once hand this circular to the purchaser(s) or transferee(s) or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or transferee(s).

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

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DREAM INTERNATIONAL LIMITED 德林國際有限公司

(Incorporated in Hong Kong with limited liability)

WAIVER APPLICATION FOR ON-GOING CONNECTED TRANSACTIONS

Independent financial adviser to the Independent Board Committee

FIRST SHANGHAI CAPITAL LIMITED

A letter from First Shanghai, the independent financial adviser, containing its advice to the Independent Board Committee dated 30 April 2003 is set out on pages 16 to 24 of this circular.

A notice convening the Extraordinary General Meeting to be held at 11:00 a.m. (or immediately after the conclusion or adjournment of the annual general meeting of the Company to be held on the same day) on Thursday, 22 May 2003 at Ballroom B, Great Eagle Hotel, 8 Peking Road, Tsimshatsui, Kowloon, Hong Kong is set out in pages 29 to 30 of this circular. Whether you are able to attend such meeting in person, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon as soon as practicable and in any event by no later than 48 hours before the time appointed for holding such meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at such meeting should you so wish.

30 April 2003

CONTENTS

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
On-going Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Connected Transactions Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Benefits of the On-going Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Compliance with the New Connected Transactions Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
New Connected Transactions Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Information on C & H Korea Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . .	15
LETTER FROM FIRST SHANGHAI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
APPENDIX – GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
NOTICE OF EXTRAORDINARY GENERAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	29

• i -

DEFINITIONS

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

• “associate(s)”

has the meaning ascribed to it in the Listing Rules

• “Board”

the board of Directors

• “C & H Korea”

• C & H Co., Ltd., a company incorporated in the Republic of Korea and the substantial shareholder of the Company

• “C & H Korea Group”

• C & H Korea and its subsidiaries (other than the Group)

• “Cap”

the annual cap on the aggregate value of the Group’s total purchase from C & H Korea Group being 10 per cent. of the Group’s total cost of sales for that financial year

• “Company”

Dream International Limited, a company incorporated in Hong Kong and the issued shares of which are listed on the main board of the Stock Exchange

• “Connected Transactions”

• the transactions between the Group and C & H Korea Group as described under the paragraph headed “On-going connected transactions” in the section headed “Letter from the Board” in this circular

• “Connected Transactions Waiver”

• the waiver granted by the Stock Exchange on 25 January 2002 to the Company waiving the Company’s obligations from strict compliance with provisions of Chapter 14 of the Listing Rules subject to certain conditions in respect of the Connected Transactions

• “Directors”

the directors of the Company

• “Extraordinary General Meeting”

• the extraordinary general meeting to be held by the Company at 11:00 a.m. (or immediately after the conclusion or adjournment of the annual general meeting of the Company to be held on the same day) on Thursday, 22 May 2003 at Ballroom B, Great Eagle Hotel, 8 Peking Road, Tsimshatsui, Kowloon, Hong Kong

• “First Shanghai”

First Shanghai Capital Limited, a deemed licensed corporation to carry on a business in type 6 regulated activity (advising on corporate finance) under the SFO

• “Group”

the Company and its subsidiaries

• 1 -

DEFINITIONS

“Hong Kong”	The Hong Kong Special Administrative Region of the People’s
	Republic of China
“Independent Board Committee”	a committee of the Board comprising of Mr David, Kwai Che Tse
	and Mr Valiant, Kin Piu Cheung, the independent non-executive
	Directors appointed to advise the Independent Shareholders as to
	the fairness and reasonableness of the application of the New
	Connected Transactions Waiver
“Independent Shareholders”	Shareholders other than C & H Korea and Uni-Link and their
	respective associates
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange
“ODM”	original design manufacturing, under which the manufacturer
	creates and owns both the circuitry pattern and cosmetic design
	of the products which are sold under the brandname of the
	customer or the Group
“OEM”	original equipment manufacturing, under which products are
	designed and manufactured in whole or in part in accordance with
	customer’s specifications and are marketed under the customer’s
	brandname using the customer’s character licensed products
“New Connected Transactions	the new waiver to be applied by the Company for waiving the
Waiver”	Company’s obligations from strict compliance with provisions of
	Chapter 14 of the Listing Rules subject to certain conditions in
	respect of the Connected Transactions for the three years ending
	31 December 2005
“SFO”	the Securities and Futures Ordinance (Cap. 571 of the Laws of
	Hong Kong)
“Shares”	shares of US$0.01 each in the share capital of the Company
“Shareholder(s)”	shareholder(s) of the Company
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Uni-Link”	Uni-Link Technology Limited, a company incorporated in Hong
	Kong and its issued share capital is beneficially owned as to
	approximately 76% by Mr Kyoo Yoon Choi and the remaining of
	its shares are beneficially owned by various senior management
	staff of C & H Korea Group and the Group

• 2 -

DEFINITIONS

“2002 Financial Year”	the year ended 31 December 2002
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“US$”	United States of America dollars, the lawful currency of the
	United States of America
“%”	per cent.

• 3 -

LETTER FROM THE BOARD

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DREAM INTERNATIONAL LIMITED 德林國際有限公司

(Incorporated in Hong Kong with limited liability)

Executive Directors: Chul Hong Min Young M. Lee Tae Sub Choi

Non-executive Director: Kyoo Yoon Choi

Independent non-executive Directors: David, Kwai Che Tse Valiant, Kin Piu Cheung

Registered office and principal place of business in Hong Kong: Suites 803-804 8th Floor Tower 5, China HK City 33 Canton Road Tsimshatsui Kowloon Hong Kong

30 April 2003

To the Shareholders and for information only, the holders of options of the Company

Dear Sir or Madam,

WAIVER APPLICATION FOR ON-GOING CONNECTED TRANSACTIONS

INTRODUCTION

On 11 April 2003, the Company announced that the Company had breached the Connected Transactions Waiver as the total purchases of the Group from C & H Korea Group during the 2002 Financial Year exceeded the Cap. The breach of the Cap had resulted in the Connected Transactions Wavier being revoked by the Stock Exchange. The Stock Exchange reserves its right to take further action against the Company in relation to the breach of the Connected Transactions Waiver condition.

Given the on-going nature of the Connected Transactions, the Directors consider that disclosure and approval of the Connected Transactions on a recurring basis to be impractical, unduly onerous and not of benefit to the Shareholders. As such, the Extraordinary General Meeting will be held and the Independent Shareholders will consider, and if thought fit, approve the application for the New Connected Transactions Wavier. The purpose of this circular is to provide information on the application of the New Connected Transactions Waiver and to set out the recommendation of the Independent Board Committee to the Independent Shareholders in relation to the application of the New Connected Transactions Waiver, the letter of advice from First Shanghai, an independent financial adviser to the Independent Board Committee in relation to application of the New Connected Transactions Waiver and the notice of the Extraordinary General Meeting.

• 4 -

LETTER FROM THE BOARD

ON-GOING CONNECTED TRANSACTIONS

(a) Sales to C & H Korea Group

The Group, in its normal course of business, has been selling plush stuffed toys and steel and plastic toys to C & H Korea Group, who in turn sold those products to the ultimate customers of C & H Korea Group. The Group also sourced raw materials such as fabrics for C & H Korea Group.

For the three years ended 31 December 2002, the amount of sales to C & H Korea Group amounted to approximately HK$439,405,000, HK$407,209,000 and HK$440,239,000, respectively, which accounted for approximately 50.3%, 49.0% and 48.4% of the total turnover of the Group for the respective periods.

Under the Connected Transactions Waiver, the cap for sales of raw material, plush stuffed toys and steel and plastic toys by the Group to C & H Korea Group is 50% of the Group’s total turnover for one financial year. The Directors expect that the sales of raw material, plush stuffed toys and steel and plastic toys by the Group to C & H Korea Group for each financial year for the three years ending 31 December 2005 will amount to not more than 50% of the Group’s total turnover, as such the Directors do not consider necessary to make any change to the cap.

The table below illustrates the total sales by the Group to C & H Korea Group for the three years ended 31 December 2002 and the proposed cap for the three years ending 31 December 2005:

	Year ended 31	Year ended 31	Year ended 31	Proposed cap for the
	December 2000	December 2001	December 2002	three years ending
	(approximately)	(approximately)	(approximately)	31 December 2005
Total sales to
C & H Korea Group	HK$439,405,000	HK$407,209,000	HK$440,239,000
Turnover of the Group	HK$874,401,000	HK$830,893,000	HK$910,370,000
Total sales to C & H
Korea Group as a
percentage of the
Group’s total turnover	50.3%	49.0%	48.4%	50%

(b) Referral of sales orders to the Group for production of products

Pursuant to a commission agreement entered into between the Company and C & H Korea dated 28 January 2002, C & H Korea refers sales orders for plush stuffed toys and steel and plastic toys to the Group for production and the Group pays C & H Korea a commission for the referral of such sales orders.

For the three years ended 31 December 2002, the amount of commission paid by the Group to C & H Korea amounted to approximately HK$8,576,000, HK$3,020,000 and HK$1,822,000, respectively, representing approximately 1.0%, 0.4% and 0.2% of the total turnover of the Group in the respective periods.

• 5 -

LETTER FROM THE BOARD

Under the Connected Transactions Waiver, the cap for the commission payable by the Group to C & H Korea is 2.5% of the Group’s total turnover for one financial year. The Directors expect that the total commission payable by the Group to C & H Korea Group for each financial year for the three years ending 31 December 2005 will amount to not more than 2.0% of the Group’s total turnover for one financial year.

The table below illustrates the amount of commission paid by the Group to C & H Korea for the three years ended 31 December 2002 and the proposed cap for the three years ending 31 December 2005:

	Year ended 31	Year ended 31	Year ended 31	Proposed cap for the
	December 2000	December 2001	December 2002	three years ending
	(approximately)	(approximately)	(approximately)	31 December 2005
Commission paid by
the Group to
C & H Korea Group	HK$8,576,000	HK$3,020,000	HK$1,822,000
Turnover of
the Group	HK$874,401,000	HK$830,893,000	HK$910,370,000
Commission paid
by the Group to
C & H Korea Group
as a percentage of
the Group’s total
turnover	1.0%	0.4%	0.2%	2.0%

Based on the revenue forecast of C & H Korea for the year 2003 to the year 2005, C & H Korea anticipates that commissions payable by the Group will be between approximately US$1.35 million to approximately US$1.8 million (equivalent to approximately HK$10.5 million to approximately HK$14 million) for 2003 to 2005. Based on the turnover of the Group for the year ended 31 December 2002 of approximately HK$910 million, the anticipated commissions paid to C & H Korea for 2003 to 2005 would equal to approximately 1.15% to 1.53% of the Group’s turnover for the year ended 31 December 2002. As such, the Directors consider that after taking into account the fluctuations of the Group’s business, commission payable by the Group to C & H Korea for each financial year in the three years ending 31 December 2005 will not be more than 2% of the Group’s total turnover.

(c) Referral of sales orders to C & H Korea Group for production of products

The Group, in its normal course of business, refers sales orders to C & H Korea Group for the production of certain toy products and the Group charges C & H Korea Group a commission for the referral of such sales orders.

For the three years ended 31 December 2002, the amount of commission paid to the Group by C & H Korea Group amounted to approximately HK$8,735,000, HK$9,812,000 and HK$4,838,000, which

• 6 -

LETTER FROM THE BOARD

represented approximately 3.3%, 3.4% and 0.9% of the Group’s net asset value as at the end of the relevant financial year, respectively. The Directors confirm that the commission rate payable by C & H Korea Group to the Group is comparable to the commission rate received by the Group from independent third parties and are on terms comparable to the prevailing market rate or practice.

Under the Connected Transactions Waiver, the cap for commission received by the Group from C & H Korea Group for any one financial year is 3% of the Group’s net asset value. The Directors consider that the fall in the amount of commission paid to the Group by C & H Korea Group for the year ended 31 December 2002 was an exceptional case caused by a decrease in the demand for the type of products which required production by C & H Korea Group. However as the net asset value of the Group had increased after the listing of the Shares on the Stock Exchange, the Directors anticipate that for the three years ending 31 December 2005, total commission paid to the Group by C & H Korea Group for each financial year will amount to approximately 2% of the Group’s net asset value as at the end of the relevant financial year.

The table below illustrates the amount of commission received by the Group from C & H Korea Group for the three years ended 31 December 2002 and the proposed cap for the three years ending 31 December 2005:

	Year ended 31	Year ended 31	Year ended 31	Proposed cap for the
	December 2000	December 2001	December 2002	three years ending
	(approximately)	(approximately)	(approximately)	31 December 2005
Commission paid to the
Group by C & H
Korea Group	HK$8,735,000	HK$9,812,000	HK$4,838,000
Net asset value of the
Group as at the end
of that financial year	HK$261,325,000	HK$292,662,000	HK$521,425,000
Commission paid by
C & H Korea Group
as a percentage of
the Group’s net
asset value	3.3%	3.4%	0.9%	2.0%

(d) Purchases from C & H Korea Group

The Group sources certain raw materials and components necessary for the production of plush stuffed toys and steel and plastic toys from C & H Korea Group in its normal course of business. The Group also, in its normal course of business, sub-contracts orders to C & H Korea Group for the production of certain toy products in the event that orders for toy products received by the Group exceeds its production capacity or are unable to be handled by the Group.

• 7 -

LETTER FROM THE BOARD

For the three years ended 31 December 2002, the aggregate amount of raw materials and finished products purchased by the Group from C & H Korea Group amounted to approximately HK$69,006,000, HK$69,426,000 and HK$113,363,000, which accounted for approximately 10.1%, 10.9% and 16.2% of the Group’s total costs of sales, respectively and as one of the conditions to the New Connected Transactions Wavier, the Company proposed that the aggregate of the Group’s total purchases from C & H Korea Group shall not exceed 10% of the Group’s total cost of sales in any one financial year.

The table below illustrates the aggregate amount of raw materials and finished products purchased by the Group from C & H Korea Group for the three years ended 31 December 2002 and the proposed cap for the three years ending 31 December 2005:

	Year ended 31	Year ended 31	Year ended 31	Proposed cap for the
	December 2000	December 2001	December 2002	three years ending
	(approximately)	(approximately)	(approximately)	31 December 2005
Total purchases from
C & H Korea Group	HK$69,006,000	HK$69,426,000	HK$113,363,000
Total costs of sales of
the Group	HK$683,744,000	HK$638,075,000	HK$698,074,000
Total purchases from
C & H Korea Group
as a percentage of
the Group’s total
costs of sales	10.1%	10.9%	16.2%	10%

(e) Provision of research and development and product design services by C & H Korea

C & H Korea provides research and development and product design services to the Group for certain toy products on an as required basis. In the three years ended 31 December 2002, C & H Korea did not charge any fee for the provision of research and development and product design services to the Group.

Under the Connected Transactions Waiver, the cap for the amount payable by the Group to C & H Korea Group for the provision of research and development and product design services for any one financial year is 3% of the Group’s net asset value as at the end of the relevant financial year. The Directors expect that the total amount payable by the Group to C & H Korea Group for the provision of such services for each of the three years ending 31 December 2005 will amount to not more than 3% of the Group’s net asset value. As such, the Directors do not consider necessary to make any change to the cap for the New Connected Transactions Waiver. Prior to the listing of the Shares on the Stock Exchange, C & H Korea did not charge the Group any fee for the provision of such services. In the three years ended 31 December 2002, the Group has not made any payment in relation to the provision of design and product development services by C & H Korea Group. After the listing of the Shares on the Stock Exchange, the Directors considered that there is a need to properly account for the provision of design and product development services by C & H Korea Group. As such, the Company agreed to pay C & H Korea Group a fee for the provision of design and product development services after the listing of the

• 8 -

LETTER FROM THE BOARD

Shares on the Stock Exchange. The Directors consider that the Company may engage C & H Korea Group for the provision of design and product development services in the future an accordingly, a new waiver from strict compliance with Chapter 14 of the Listing Rules would be in the interests of the Shareholders as a whole.

The Directors consider that certain orders from the Group’s customers will involve a high level of design and product development skills which, at the present moment, exceeds the design and product development capabilities of the Group. The Group will engage C & H Korea Group to provide these services and the basis of the cap for this type of Connected Transactions is based on the Directors’ estimated number of models/products which may require the provision of design and product development services by C & H Korea Group in one financial year and the fee estimated by C & H Korea Group for the design and development of one model/product.

The financial information in respect of each type of transactions for the two years ended 31 December 2001 disclosed above has been prepared as if the Group structure at the date of the listing of the Shares on the Stock Exchange had been in existence and remained unchanged throughout the above periods.

CONNECTED TRANSACTIONS WAIVER

After the listing of the Shares on the Stock Exchange, transactions between the Group and C & H Korea Group became connected transactions by virtue of C & H Korea’s shareholdings in the Company. C & H Korea is a substantial shareholder of the Company holding approximately 58.9% of the issued share capital of the Company upon the listing of the Shares on the Stock Exchange. On 25 January 2002, the Stock Exchange granted the Connected Transactions Waiver in relation to the Connected Transactions subject to certain conditions for the three financial years ending 31 December 2004.

Reasons for the breach of the Cap

In the course of conducting its internal audit procedures in preparation for the audit of its financial statements for the year ended 31 December 2002, it was brought to the attention of the Directors that the Group’s total purchases from C & H Korea Group for the 2002 Financial Year exceeded the Cap.

The breach of the Cap was due to some exceptionally large urgent orders placed by some customers of the Group in the latter half of the 2002 Financial Year which required certain newly developed fabrics as raw materials. Such newly developed fabrics were only available through C & H Korea Group within a short period of the time for the production of such urgent order. The Company made enquiries with approximately 14 regular suppliers of the Group in relation to the supply of these newly developed fabrics and none of those suppliers was able to supply the requisite fabric to the Group in time for production. In order to fulfil those exceptional orders, the Group had to purchase substantial amounts of those newly developed fabrics through C & H Korea Group. As a result, the total purchases by the Group from C & H Korea Group in the 2002 Financial Year exceeded the Cap.

The Directors consider that there were special circumstances relating to the breach. The Cap is based on the yearly total cost of sales, which may only be accurately computed at the end of the 2002 Financial Year. The exceptionally large orders have caused an unexpected surge in the purchases from C & H Korea Group towards the end of the 2002 Financial Year. Due to time constraint, the Company could

• 9 -

LETTER FROM THE BOARD

not negotiate with the customers for alternative raw materials or search for another supplier who could supply the newly developed fabrics and supply them on a timely manner. The Directors consider that the breach of the Cap on this occasion was an isolated event caused by some exceptionally large orders of the Group’s customers placed near the end of the 2002 Financial Year, which was beyond the control of the Directors. The Directors were aware of the Cap and the breach of the Cap was an isolated event caused by an inadvertent error on their part.

The Company immediately reported to the Stock Exchange about the breach of the Cap as soon as it became aware of such breach.

The Directors confirmed that there is no breach of the other conditions of the Connected Transactions Waiver.

The Stock Exchange reserves its right to take further action against the Company in relation to the breach of the Connected Transactions Waiver condition.

BENEFITS OF THE ON-GOING CONNECTED TRANSACTIONS

The Directors consider that the Connected Transactions have been or will be entered into in the ordinary course of business of the Group and on normal commercial terms or on terms that are fair and reasonable so far as the Shareholders taken as a whole are concerned and are in the interests of the Group. The Directors consider it to be in the interests of the Group to engage in the Connected Transactions as these transactions are beneficial to the business and profitability of the Group.

COMPLIANCE WITH THE NEW CONNECTED TRANSACTIONS WAIVER

In order to safeguard against recurrence of any breach of the Connected Transactions Waiver conditions, the Company will adopt the following measures:

• (a) a compliance committee chaired by Mr Young M. Lee, an executive Director, will be appointed by the Board with specific responsibility of advising on and assisting the Board in implementing the procedures adopted by the Company since the listing of the Shares on the Stock Exchange to ensure the Company complies with the Listing Rules and other relevant laws and regulations applicable to the Company and to meet and report to the Board on matters related to compliance issues at quarterly intervals; and

• (b) the internal control procedures of the Group will be reviewed and improved in order to better monitor and ensure compliance with the conditions of the New Connected Transactions Waiver, e.g. enhancing the computer programme of the Group so that specific and up-to-date purchase reports may be generated.

After the integration of the enhanced computer programme for the Group, the Directors would be able to track the relevant percentages on a quarterly basis and immediate actions may be taken by the Directors to ensure compliance with the New Connected Transactions Waiver conditions. The Directors are expecting the integration of the enhanced computer programme to be completed in or around November 2003.

• 10 -

LETTER FROM THE BOARD

NEW CONNECTED TRANSACTIONS WAIVER

Application for the New Connected Transactions Waiver

The breach of the Cap constituted a breach of one of the Connected Transactions Waiver conditions and the Stock Exchange has revoked the Connected Transactions Waiver. Pursuant to the Listing Rules, each of the Connected Transactions would normally require disclosure and subject to the nature and value of the transactions, approved by the Independent Shareholders. Given the on-going nature of the Connected Transactions the Directors consider that disclosure and approval of the Connected Transactions on a recurring basis to be impractical, unduly onerous and not of benefit to the Shareholders. The Extraordinary General Meeting will therefore be held and the Independent Shareholders will consider, and if thought fit, approve the application for the New Connected Transactions Wavier.

New Connected Transactions Waiver conditions

The Directors consider that large orders placed by those customers in the latter half of 2002 Financial Year were very exceptional and did not follow the usual pattern of business. The Directors therefore do not consider that such exceptionally large sales order to recur in the three financial years ending 31 December 2005 which will require the Group to purchase an exceptionally large amount of raw materials from C & H Korea Group and consider that the respective annual caps for each of the other Connected Transactions under the Connected Transactions Waiver would be sufficient for each of the three financial years ending 31 December 2005. The Directors will use their best endeavours to ensure that the annual caps for each of the Connected Transactions will not be exceeded in the future. As such, the Company proposes that the New Connected Transactions Waiver be granted under the same conditions as the Connected Transactions Waiver save as to certain annual caps and the conditions are as follows:

• (i) the Connected Transactions are and will be:

• (a) entered into by the Group in its ordinary and usual course of business;

• (b) entered into by the Group on normal commercial terms (to the extent that there are comparable transactions) or, where there is no available or if there are not sufficient comparable transactions to judge whether they are on normal commercial terms, on terms not less favourable to the Group than those available to or from (where appropriate) independent third parties; and

• (c) on terms that are fair and reasonable and in the interest of the Independent Shareholders as a whole;

• 11 -

LETTER FROM THE BOARD

• (ii) in any financial year, the respective consideration for each type of Connected Transactions entered into between the Group and C & H Korea Group does not exceed the respective caps set out below:

Connected Transactions Cap Sale of raw materials, plush stuffed toys 50% of the Group’s total turnover for one and steel and plastic toys by the Group financial year to the C & H Korea Group Commission paid on referral of sales 2% of the Group’s total turnover for one orders by C & H Korea to the Group financial year for production of plush stuffed toys and steel and plastic toys Commission received on referral of sales 2% of the Group’s net asset value as at the orders by the Group to the C & H Korea end of the financial year Group for production of toy products Purchases by the Group from C & H 10% of the Group’s total cost of sales in Korea Group one financial year Research and development and product 3% of the Group’s net asset value as at the design services to be provided by end of the financial year C & H Korea to the Group

• (iii) details of the Connected Transactions shall be disclosed in the Company’s annual report and accounts in accordance with Rule 14.25(1)(A) to (D) of the Listing Rules;

• (iv) the independent non-executive Directors shall review the Connected Transactions annually and confirm in the Company’s annual report and accounts of the relevant years that the Connected Transactions have been entered into in the manner as stated in paragraph (i) above;

• (v) the auditors of the Company shall carry out review procedures annually on the Connected Transactions and shall provide a letter to the Board (with a copy to the listing division of the Stock Exchange) stating that the Connected Transactions:

• (a) have received the approval of the Board;

• (b) have been entered into in accordance with the relevant agreements governing the Connected Transactions;

• (c) are in accordance with the pricing policies of the Group, if any; and

• 12 -

LETTER FROM THE BOARD

• (d) the respective consideration in respect of each category of the Connected Transactions has not exceeded their respective caps as mentioned in paragraph (ii) above; and

• (vi) the Company shall promptly notify the Stock Exchange if it knows or has reason to believe that the independent non-executive Directors and/or the auditors of the Company will not be able to confirm the matters set out in paragraphs (iv) and/or (v) above, and in such circumstances, the Company may have to re-comply with the reporting, announcement and shareholders’ approval requirements set out in Chapter 14 of the Listing Rules and any other conditions the Stock Exchange considers appropriate.

The Directors also noted that in the Announcement, it was stated that under condition (v), above, details of the review procedures conducted by the auditors of the Company annually on the Connected Transactions will be stated in the annual reports of the Company. However, the review of Connected Transactions is a separate engagement from the audit of the Company’s financial statements and the auditors’ letter is provided to the Board, therefore the results of the review procedures will not be stated in the annual reports of the Company and amendments have been made to this circular accordingly.

In the event that there is any amendments to the Listing Rules imposing more stringent compliance requirements in respect of the Connected Transactions set out in this circular, the Company will comply with the applicable requirements.

INFORMATION ON THE GROUP

The Group is principally engaged in the design, development, manufacturing and sales of a wide range of plush stuffed toys as well as steel and plastic toys on an OEM and ODM basis. The Board is of the view that the Connected Transactions had been conducted in the ordinary and usual course of business of the Group and on normal commercial terms. The Board (including the independent nonexecutive Directors) also considers that the terms of the Connected Transactions were fair and reasonable and in the interests of the Company and the Shareholders as a whole.

INFORMATION ON C & H KOREA GROUP

C & H Korea is a company incorporated in the Republic of Korea and is owned as to approximately 84.57% by Mr Kyoo Yoon Choi and his family members and the remaining shares in C & H Korea are held by various management staff of C & H Korea Group and two Directors, Mr Chul Hong Min and Mr Tae Sub Choi. C & H Korea Group is principally engaged in the manufacture, marketing and distribution of, among others, plush stuffed toys and acrylic knitted fabric. Under the Listing Rules, C & H Korea Group is a connected person with the Company.

• 13 -

LETTER FROM THE BOARD

EXTRAORDINARY GENERAL MEETING

A notice convening the Extraordinary General Meeting to be held at 11:00 a.m. (or immediately after the conclusion or adjournment of the annual general meeting of the Company held on the same day) on Thursday, 22 May 2003 at Ballroom B, Great Eagle Hotel, 8 Peking Road, Tsimshatsui, Kowloon, Hong Kong for the purpose of considering and, if thought fit, passing the ordinary resolution in relation to the application of the New Connected Transactions Waiver is set out on pages 29 to 30 of this circular.

There is a form of proxy for use at the Extraordinary General Meeting accompanying this circular. Whether or not you intend to be present at the Extraordinary General Meeting, you are requested to complete the form of proxy and return it to the registered office and principal place of business of the Company in Hong Kong in accordance with the instructions printed thereon by no later than 48 hours prior to the time of the Extraordinary General Meeting. The completion and return of the form of proxy will not preclude you from attending and voting in person should you so wish.

C & H Korea and Uni-Link and their respective associates will abstain from voting in the Extraordinary General Meeting.

RECOMMENDATION

The Independent Board Committee will advise the Independent Shareholders in respect of the application of the New Connected Transactions Waiver. First Shanghai, an independent financial adviser has been appointed to advise the Independent Board Committee in respect of the application of the New Connected Transactions Waiver. The letter to the Independent Shareholders from the Independent Board Committee containing their recommendation is set out on page 15 of this circular. Having regard to the opinion of First Shanghai which is set out on pages 16 to 24 of this circular, the Independent Board Committee is of the opinion that the Connected Transactions are in the interest of the Company and the Shareholders as a whole and the application of the New Connected Transaction Waiver are fair and reasonable so far as the Independent Shareholders are concerned. The Independent Board Committee recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the Extraordinary General Meeting for the approval of the application of the New Connected Transactions Waiver.

ADDITIONAL INFORMATION

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

Yours faithfully By order of the Board

Young M. Lee Director

• 14 -

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [121 x 65] intentionally omitted <==

DREAM INTERNATIONAL LIMITED 德林國際有限公司

(Incorporated in Hong Kong with limited liability)

30 April 2003

To the Independent Shareholders

Dear Sir or Madam,

WAIVER APPLICATION FOR ON-GOING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to the circular dated 30 April 2003 (the “ Circular ”) of the Company of which this letter forms part. Terms defined in the Circular shall have the same meanings when used herein unless the context requires otherwise.

We, being the members of the Independent Board Committee, are writing to you to set out our opinion in respect of the application for the New Connected Transactions Waivers. We have been appointed to advise you as a Shareholder whether in our view the Connected Transactions and in the interests of the Company and the Shareholders as a whole and the application for the New Connected Transactions Waiver are fair and reasonable so far as the Independent Shareholders are concerned.

We wish to draw your attention to the letter from the Board as set out on pages 4 to 14 of the Circular and the letter from First Shanghai as set out on pages 16 to 24 of the Circular which contains, among other matters, its advice and recommendation to us regarding the Connected Transactions and the application for the New Connected Transactions Waiver with the principal factors and reasons for its advice and recommendation.

RECOMMENDATION

Having taken into account the advice and recommendation of First Shanghai, we consider that the Connected Transactions are in the interest of the Company and the Shareholders as a whole and the application of the New Connected Transactions Waiver are fair and reasonable so far as the interests of the Independent Shareholders are concerned. Accordingly, we recommend that the Independent Shareholders should vote in favour of the ordinary resolutions to be proposed at the Extraordinary General Meeting to approve the application of the New Connected Transactions Waiver.

Yours faithfully For and on behalf of

the Independent Board Committee David, Kwai Che Tse Valiant, Kin Piu Cheung

Independent non-executive Directors

• 15 -

LETTER FROM FIRST SHANGHAI

The following is the text of a letter received from First Shanghai in respect of the application of the New Connected Transactions Waiver prepared for the purpose of incorporation in this circular.

FIRST SHANGHAI CAPITAL LIMITED

19th Floor, Wing On House 71 Des Voeux Road Central

Hong Kong

30 April 2003

To the Independent Board Committee

Dear Sir or Madam,

WAIVER APPLICATION FOR ON-GOING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our engagement as the independent financial adviser to advise the Independent Board Committee in respect of the application for the New Connected Transactions Waiver, details of which are set out in the circular dated 30 April 2003 (the “Circular”) to the Shareholders, of which this letter forms a part. Unless the context otherwise requires, terms used in this letter shall have the same meanings as those defined in the Circular.

Given C & H Korea is a substantial shareholder of the Company holding approximately 58.9% of the issued share capital of the Company, the transactions between the Group and C & H Korea Group constitute connected transactions for the Company under the Listing Rules and are subject to the approval of the Independent Shareholders at the Extraordinary General Meeting. C & H Korea and UniLink and their respective associates will abstain from voting in the Extraordinary General Meeting.

Our role, as the independent financial adviser to the Independent Board Committee, is to give an independent opinion as to whether the application of the New Connected Transactions Waiver is fair and reasonable so far as the interests of the Independent Shareholders are concerned.

In putting forth our opinion and recommendations, we have relied on the accuracy of the information and representations included in the Circular and provided to us by the Directors and the Company, and have assumed that all such information and representations made or referred to in the Circular and provided to us by the Directors and the Company were true at the time they were made and continued to be true as at the date hereof. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due enquiry. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and have been advised by the Directors that no material facts have been withheld or

• 16 -

LETTER FROM FIRST SHANGHAI

omitted from the information provided and referred to in the Circular. We consider that we have reviewed sufficient information to reach an informed view and to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have not, however, conducted any independent verification of the information included in the Circular and provided to us by the Directors nor have we conducted any form of investigation into the business, affairs or future prospects of the Group.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion and recommendations as to the fairness and reasonableness of the application of the New Connected Transactions Waiver, we have taken into account the following principal factors and reasons:

1. Background

The Group is principally engaged in the design, development, manufacturing and sales of a wide range of plush stuffed toys as well as steel and plastic toys on an OEM and ODM basis.

Since the listing of the Shares on the Stock Exchange on 7 February 2002, the continuing transactions between the Group and C & H Korea Group have constituted connected transactions for the Company under the Listing Rules. The Company has applied to the Stock Exchange for a waiver from compliance with the requirements of Chapter 14 of the Listing Rules. Pursuant to an approval letter issued by the Stock Exchange on 25 January 2002, the Company has been granted the Connected Transactions Waiver until 31 December 2004 in relation to (i) sales to C & H Korea Group; (ii) referral of sales orders to the Group for production of products; (iii) referral of sales orders to C & H Korea Group for production of products; (iv) purchases from C & H Korea Group and (v) provision of research and development and product design services by C & H Korea.

In the course of conducting its internal audit procedures in preparation of the audit of the Company’s financial statements for the year ended 31 December 2002, it was brought to the attention of the Directors that the Group’s total purchases from C & H Korea Group for the 2002 Financial Year exceeded the Cap. The breach of the Cap constituted a breach of the Connected Transactions Waiver conditions and as a consequence the Stock Exchange revoked the Connected Transactions Waiver. As such, the Company is seeking for the approval by the Independent Shareholders in respect of the application for the New Connected Transactions Waiver.

Given the on-going nature of the Connected Transactions, the Directors consider that disclosure and approval of the Connected Transactions on a recurring basis to be impractical, unduly onerous and not of benefit to the Shareholders. Having considered the above, we are of the view that the New Connected Transactions Waiver would facilitate smooth ongoing business operation of the Group, minimise any disruptions to the Group’s existing business and operations and minimise the practical difficulties of the Company in the fulfillment of the relevant disclosure and approval requirements for the Connected Transactions under Chapter 14 of the Listing Rules every time it occurs.

• 17 -

LETTER FROM FIRST SHANGHAI

2. Reasons for entering into the Connected Transactions and the basis of determination of the proposed caps

Particulars of and reasons for each type of the Connected Transactions and the basis of determination of the proposed caps:–

• (a) Sales to C & H Korea Group

The Group has been selling plush stuffed toys and steel and plastic toys (“Products”) to C & H Korea Group, who in turn sold the Products to the ultimate customers of the C & H Korea Group. We have noted that according to the deed of undertaking dated 28 January 2002 entered into between C & H Korea and the Company (“Deed of Undertaking”), C & H Korea has agreed to first offer all customers’ order for the production of the Products received directly or indirectly by it save as certain branded customers to the Group. In addition, C & H Korea Group has been the Group’s largest customer for the three years ended 31 December 2002. For each of the three years ended 31 December 2002, the amount of sales to C & H Korea Group amounted to approximately HK$439,405,000, HK$407,209,000 and HK$440,239,000 respectively, which accounted for approximately 50.3%, 49% and 48.4% of the total turnover of the Group for the respective period.

Under the New Connected Transactions Waiver, the cap for sales of raw material, plush stuffed toys and steel and plastic toys by the Group to C & H Korea Group is 50% of the Group’s total turnover for one financial year. The Directors expect that the sales of the Products by the Group to C & H Korea Group for each financial year for the three years ending 31 December 2005 will amount to not more than 50% of the Group’s total turnover, as such the Directors do not consider necessary to make any change to the cap.

• (b) Referral of sales orders to the Group for the production of products

Pursuant to a commission agreement entered into between the Company and C & H Korea dated 28 January 2002, C & H Korea refers sales orders for the Products to the Group for production and the Group pays C & H Korea a commission for the referral of such sales orders.

For each of the three years ended 31 December 2002, the amount of commission paid by the Group to C & H Korea amounted to approximately HK$8,576,000, HK$3,020,000 and HK$1,822,000 respectively, representing 1%, 0.4% and 0.2% of the total turnover of the Group in the respective period.

Under the Connected Transactions Waiver, the cap for the commission payable by the Group to C & H Korea is 2.5% of the Group’s total turnover for one financial year. The Directors expect that the total commission payable by the Group to C & H Korea Group for each financial year for the three years ending 31 December 2005 will amount to not more than 2% of the Group’s total turnover for one financial year. As such, the proposed cap under the New Connected Transactions Waiver is set at 2% of the Group’s total turnover for the three years ending 31 December 2005.

• 18 -

LETTER FROM FIRST SHANGHAI

As stated in the sub-paragraph headed “Referral of sales orders to the Group for production of products” in the letter from the Board, based on the revenue forecast of C & H Korea for the year 2003 to the year 2005, C & H Korea anticipates that commissions payable by the Group to C & H Korea will be between approximately US$1.35 million to approximately US$1.8 million (equivalent to approximately HK$10.5 million to HK$14 million) for 2003 to 2005. Based on the turnover of the Group for the year ended 31 December 2002 of approximately HK$910 million, the anticipated commissions paid to C & H Korea for 2003 to 2005 would equal to approximately 1.15% to 1.53% of the Group’s turnover for the year ended 31 December 2002. As such, the Directors consider that after taking into account the fluctuations to the Group’s business, commission payable by the Group to C & H Korea for each financial year in the three years ending 31 December 2005 will not be more than 2% of the Group’s total turnover.

(c) Referral of sales orders to C & H Korea Group for production of products

The Group refers sales orders to C & H Korea Group for the production of certain toy products and the Group charges C & H Korea Group a commission for the referral of such sales orders.

For each of the three years ended 31 December 2002, the amount of commission paid to the Group by C & H Korea Group amounted to approximately HK$8,735,000, HK$9,812,000 and HK$4,838,000, which represented approximately 3.3%, 3.4% and 0.9% of the Group’s net asset value (“NAV”) respectively.

According to the prospectus of the Company dated 29 January 2002, the NAV of the Group was enlarged from HK$292,904,000 as at 30 June 2001 to HK$485,538,000 immediately after the listing of the Company on 7 February 2002 (“Enlarged NAV”). Based on the Enlarged NAV, the amount of commission paid to the Group by C & H Korea Group for the year ended 31 December 2000 and the year ended 31 December 2001 represented approximately 1.8% and approximately 2% of the Group’s Enlarged NAV respectively. Based on the NAV of the Group of HK$521,425,000 as at 31 December 2002, the amount of commission paid to the Group by C & H Korea Group represented approximately 0.9% of the Group’s NAV.

Under the Connected Transactions Waiver, the cap for commission received by the Group from C & H Korea Group for any one financial year is 3% of the Group’s NAV. The Directors consider that the fall in the amount of commission paid to the Group by C & H Korea Group for the year ended 31 December 2002 was an exceptional case caused by a decrease in the demand for the type of products which required production by C & H Korea Group. However as the NAV of the Group had increased after the listing of the Shares on the Stock Exchange, the Directors anticipate that for the three years ending 31 December 2005, total commission paid to the Group by C & H Korea Group for each financial year will amount to approximately 2% of the Group’s NAV as at the end of that financial year.

The Directors have confirmed that the commission rates payable by C & H Korea Group to the Group are comparable to the Commission Rates to C & H Korea and are on terms comparable to the prevailing market rate or practice.

• 19 -

LETTER FROM FIRST SHANGHAI

• (d) Purchases from C & H Korea Group

The Group sources certain raw materials and components necessary for the production of the Products from C & H Korea Group in its normal course of business. The Group also, in its normal course of business, sub-contracts orders to C & H Korea Group for the production of certain toy products in the event that orders for toy products received by the Group exceeds its production capacity or are unable to be handled by the Group.

For each of the three years ended 31 December 2002, the aggregate amount of raw materials and finished products purchased by the Group from the C & H Korea Group amounted to approximately HK$69,006,000, HK$69,426,000 and HK$113,363,000 respectively, which accounted for approximately 10.1%, 10.9% and 16.2% of the Group’s total costs of sales respectively. The large amount of purchase in 2002 Financial Year were due to the fact that there were some exceptionally large urgent orders placed by some customers of the Group in the latter half of the 2002 Financial Year which required certain newly developed fabrics as raw materials (“Raw Materials”), which were only available through C & H Korea Group within a short period of time for the production of such urgent orders. The Directors have confirmed that only a small amount of the large urgent orders mentioned above were placed by customers referred to the Group by C & H Korea Group.

We have noted that the proposed cap in relation to the purchase from C & H Korea Group is set at 10% of the Group’s total costs of sales in any one financial year, which is below the historical purchases from C & H Korea Group as a percentage of the Group’s total costs of sales in the past three financial years. We have understood from the Directors that the Group intends to purchase certain amount of raw materials from various suppliers in the market and reduce the reliance on the supply from the C & H Korea Group. Accordingly, the total purchases from C & H Korea Group would decrease and the Directors consider that the aggregate amount of such purchases for each financial year in the three years ending 31 December 2005 will not be more than 10% of the Group’s total costs of sales.

As one of the conditions to the New Connected Transactions Wavier, the Company proposed that the aggregate of the Group’s total purchases from C & H Korea Group shall not exceed 10% of the Group’s total costs of sales in any one financial year.

• (e) Provision of research and development and product design services (“R & D Services”) by C & H Korea Group

The Directors consider that certain orders from the Group’s customers will involve a high level of design and product development skills which, at the present moment, exceeds the design and product development capabilities of the Group. As such, the Group will engage C & H Korea Group to provide the R & D Services.

We have noted that C & H Korea Group did not charge the Group any fee for the provision of R & D Services prior to the listing of the Shares on the Stock Exchange. After the listing of the Shares on the Stock Exchange, the Directors consider that there is a need to properly account for the provision of R & D Services by C & H Korea Group.

• 20 -

LETTER FROM FIRST SHANGHAI

Having discussed with the management of the Group, we have also noted that the Group has not made any payment in relation to the provision of R & D Services by C & H Korea Group in the three years ended 31 December 2002. As advised by the Directors, the proposed cap for the amount payable by the Group to C & H Korea Group for the provision of R & D Services, which is set at 3% of the Group’s NAV for any one financial year, is based on the Directors’ estimated number of models/products which may require the provision of design and product development services by C & H Korea Group in one financial year and the fee estimated by C & H Korea Group for the design and development of one model/product.

Summary of the proposed caps:

As a condition for the New Connected Transactions Waiver, each type of Connected Transactions will be subject to, among other things, the relevant proposed cap for three years ending 31 December 2005. We set out the proposed cap for each type of the Connected Transactions with respective historical transaction value as follows:

					Proposed cap
					for the three
		Year ended 31	Year ended 31	Year ended 31	years ended 31
		December 2000	December 2001	December 2002	December 2005
Turnover of the Group (HK$’000)		874,401	830,893	910,370
NAV of the	Group (HK$’000)	261,325	292,662	521,425
Total costs of sales of the Group		683,744	638,075	698,074
(a)	Sales to C & H Korea Group
	Total sales to C & H Korea Group (HK$’000)	439,405	407,209	440,239
	Total sales to C & H Korea Group as a % of the
	Group’s total turnover	50.3%	49%	48.4%	50%
(b)	Referral of sales orders to the Group for production of products
	Commission paid by the Group to C & H Korea Group (HK$’000)	8,576	3,020	1,822
	Commission paid by the Group to C & H Korea Group as a % of the
	Group’s total turnover	1%	0.4%	0.2%	2%
(c)	Referral of sales orders to C & H Korea Group for production of products
	Commission paid to the Group by C & H Korea Group (HK$’000)	8,735	9,812	4,838
	Commission paid to the Group by C & H Korea Group as a % of the
	Group’s NAV	3.3%	3.4%	0.9%	2%
(d)	Purchases from C & H Korea Group
	Total purchases from C & H Korea Group (HK$’000)	69,006	69,426	113,363
	Total purchases from C & H Korea Group as a % of the Group’s total
	costs of sales	10.1%	10.9%	16.2%	10%
(e)	Provision of R & D Services by C & H Korea
	Total R & D Services costs payable to C & H Korea Group as a % of the
	Group’s NAV	Not applicable	Not applicable	Not applicable	3%

• 21 -

LETTER FROM FIRST SHANGHAI

The financial information in respect of each type of transactions for the two years ended 31 December 2001 disclosed above has been prepared as if the Group structure at the date of the listing of the Shares on the Stock Exchange had been in existence and remained unchanged throughout the above periods.

The Directors have advised that in determining the proposed caps, they have considered (i) the amount of the Connected Transactions for the three years ended 31 December 2002 (if applicable); (ii) the amount of such Connected Transactions as a percentage of turnover or NAV or costs of sales of the Group for the three years ended 31 December 2002 (as the case maybe); and (iii) a sufficient buffer for future business development and growth of the Group’s business.

Having considered the above, we consider that the above-mentioned basis in determining the proposed caps is acceptable. Therefore, we are of the view that the proposed caps set for the New Connected Transactions Waiver are fair and reasonable.

3. BREACH OF THE CAP SET IN THE CONNECTED TRANSACTIONS WAIVER

One of the conditions of the Connected Transaction Waiver is that the aggregate annual amount of the Group’s purchase from the C & H Korea Group should not exceed 10% of the Group’s total costs of sales in one financial year for the three years ending 31 December 2004. The Company breached the Cap as the Group’s purchase from the C & H Korea Group for the 2002 Financial Year accounted for approximately 16.2% of the Group’s total costs of sales.

The Directors have advised that the breach of the Cap was due to some exceptionally large urgent orders placed by some customers of the Group in the latter half of the 2002 Financial Year which required the Raw Materials, which were only available through C & H Korea Group within a short period of time for the production of such urgent orders. The Directors have confirmed that the Company made inquiries with approximately 14 regular suppliers of the Group in relation to the supply of the Raw Materials and none of those suppliers was able to supply the requisite fabric to the Group in time for production. As such, the Group had to purchase the Raw Materials through C & H Korea Group, which caused the aggregate amount of purchase from C & H Korea Group exceeding the Cap.

4. NEW CONNECTED TRANSACTIONS WAIVER CONDITIONS

The Directors have advised that they will use their best endeavours to ensure that the annual caps for each of the Connected Transactions will not be exceeded in the future. As such, the Company proposes that the New Connected Transactions Waiver be granted under the same conditions as the Connected Transactions Waiver save as to certain annual caps and the conditions are as follows:

• (i) the Connected Transactions are and will be:

• (a) entered into by the Group in its ordinary and usual course of business;

• (b) entered into by the Group on normal commercial terms (to the extent that there are comparable transactions) or, where there is no available or if there are not sufficient

• 22 -

LETTER FROM FIRST SHANGHAI

  - comparable transactions to judge whether they are on normal commercial terms, on terms not less favourable to the Group than those available to or from (where appropriate) independent third parties; and

• (c) on terms that are fair and reasonable and in the interest of the Independent Shareholders as a whole;

• (ii) in any financial year, the respective consideration for each type of Connected Transactions entered into between the Group and C & H Korea Group does not exceed the respective caps set out in the sub-paragraph headed “Summary of the proposed caps” above;

• (iii) details of the Connected Transactions shall be disclosed in the Company’s annual report and accounts in accordance with Rule 14.25(1)(A) to (D) of the Listing Rules;

• (iv) the independent non-executive Directors shall review the Connected Transactions annually and confirm in the Company’s annual report and accounts of the relevant years that the Connected Transactions have been entered into in the manner as stated in paragraph (i) above;

• (v) the auditors of the Company shall carry out review procedures annually on the Connected Transactions and shall provide a letter to the Board (with a copy to the listing division of the Stock Exchange) stating that the Connected Transactions:

• (a) have received the approval of the Board;

• (b) have been entered into in accordance with the relevant agreements governing the Connected Transactions;

• (c) are in accordance with the pricing policies of the Group, if any; and

• (d) the respective consideration in respect of each category of the Connected Transactions has not exceeded their respective caps as mentioned in paragraph (ii) above; and

• (vi) the Company shall promptly notify the Stock Exchange if it knows or has reason to believe that the independent non-executive Directors and/or the auditors of the Company will not be able to confirm the matters set out in paragraphs (iv) and/or (v) above, and in such circumstances, the Company may have to re-comply with the reporting, announcement and shareholders’ approval requirements set out in Chapter 14 of the Listing Rules and any other conditions the Stock Exchange considers appropriate.

In the event that there is any amendments to the Listing Rules imposing more stringent compliance requirements in respect of the Connected Transactions set out in this circular, the Company will comply with the applicable requirements.

• 23 -

LETTER FROM FIRST SHANGHAI

5. MEASURES TO BE ADOPTED IN ORDER TO SAFEGUARD AGAINST RECURRENCE OF ANY BREACH OF WAIVER

In order to safeguard against recurrence of any breach of the New Connected Transactions Waiver conditions, the Company will adopt the following measures:

• (a) a compliance committee chaired by Mr. Young M. Lee, an executive Director, will be appointed by the Board with specific responsibility of advising on and assisting the Board in implementing the procedures adopted by the Company since the listing of the Shares on the Stock Exchange to ensure the Company complies with the Listing Rules and other relevant laws and regulations applicable to the Company and to meet and report to the Board on matters related to compliance issues at quarterly intervals; and

• (b) the internal control procedures of the Group will be reviewed and improved in order to better monitor and ensure compliance with the conditions of the New Connected Transactions Waiver, e.g. enhancing the computer programme of the Group so that specific and up-to-date purchase reports may be generated.

After the integration of the enhanced computer programme for the Group, the Directors would be able to track the relevant percentages on a quarterly basis and immediate actions may be taken by the Directors to ensure compliance with the New Connected Transactions Waiver conditions. The Directors are expecting the integration of the enhanced computer programme to be completed in or around November 2003.

On the basis of above, and the consideration that the Company will comply with the relevant requirements under Chapter 14 of the Listing Rules, we believe that the interests of the Independent Shareholders will be properly safeguarded so far as the Company and the Independent Shareholders are concerned.

RECOMMENDATION

Having considered the above principal factors and reasons, we are of the opinion that the Connected Transactions are in the interests of the Company and the Shareholders as a whole and that the application of the New Connected Transactions Waiver are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we advise the Independent Board Committee to vote in favour of the ordinary resolutions to be proposed at the Extraordinary General Meeting to approve the application of the New Connected Transactions Waiver.

Yours faithfully, For and on behalf of

First Shanghai Capital Limited

Helen Zee Byron Tan Managing Director Director

• 24 -

GENERAL INFORMATION

APPENDIX

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 document 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 herein misleading.

2. DISCLOSURE OF INTERESTS

2.1 Interests in securities

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

• (a) Interests in Shares

Number of Shares held

	Personal	Family	Corporate	Other
Name of Director	interests	interests	interests	interests	Total
Mr Kyoo YoonChoi	–	–	487,500,000	–	487,500,000
			(Note 1)		(Note 1)
Mr Chul HongMin				(Note 2)	(Note 2)
Mr Tae SubChoi				(Note 2)	(Note 2)

Notes:

1. 382,850,000 Shares, representing approximately 58.9% of the issued share capital of the Company are held by C & H Korea and 104,650,000 Shares, representing approximately 16.1% of the issued share capital of the Company are held by Uni-Link. Mr Kyoo Yoon Choi together with his wife, Ms Woul Hee Cha and his three children, Mr Woo Jin Choi, Ms You Jin Choi and Ms Soo Jin Choi, hold approximately 84.57% of the issued share capital of C & H Korea and Mr Kyoo Yoon Choi beneficially owns approximately 76% of the issued share capital of Uni-Link.

2. 382,850,000 Shares, representing approximately 58.9% of the issued share capital of the Company are held by C & H Korea and 104,650,000 Shares, representing approximately 16.1% of the issued share capital of the Company are held by Uni-Link. Mr Chul Hong Min and Mr Tae Sub Choi hold approximately 2.69% and 1.06 % of the issued share capital of C & H Korea, respectively. Further, Mr Chul Hong Min and Mr Tae Sub Choi hold approximately 6% and 1% of the issued share capital of Uni-Link, respectively.

3. 25 -

GENERAL INFORMATION

APPENDIX

• (b) Interests in underlying Shares

					Number of
	Date of			Number of	total
Name of	grant of	Exercise	Exercise	share option	underlying	Approximate
Director	share options	period	price	outstanding	Shares	percentage
Chul Hong	7 February	7 February	HK$1.18	6,500,000	6,500,000	1.00%
Mon	2002	2003 to 7
		February
		2012
Tae Sub	15 April	15 April 2004	HK$1.43	1,950,000	1,950,000	0.3%
Choi	2003	to 15 April
		2013
Young M.	7 February	7 February	HK$1.18	3,900,000	3,900,000	0.6%
Lee	2002	2003 to 7
		February
		2012

Save as disclosed in this circular, as at the Latest Practicable Date, none of Director and chief executive of the Company has any interest or short position in the Shares, underlying Shares and debentures of the Company or any associated corporations (within the meaning of the SFO) which (a) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which the Director is taken or deemed to have under such provisions of the SFO; or (b) were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange.

2.2 Interests in services contracts

Each of Mr Chul Hong Min and Mr Young M. Lee, being executive Directors and Mr Kyoo Yoon Choi, being a non-executive Director has entered into a service contract with the Company dated 23 November 2001 with effect from 1 December 2001. Mr Tae Sub Choi, an executive Director has entered into a service contract with the Company dated 1 March 2003 with effect from 8 April 2003. All of these service contracts shall continue until terminated by either party giving three months prior written notice. Save as disclosed in this circular, none of the Directors (including the non-executive Directors) has entered into any service agreements with any member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation other than statutory compensation).

2.3 Interests in contracts

Save as disclosed in the annual report of the Company in respect of the year ended 31 December 2002 and this circular, none of the Directors was materially interested in any contracts or arrangements which were subsisting at the Latest Practicable Date and were significant in relation to the business of the Group.

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GENERAL INFORMATION

APPENDIX

2.4 Interests in assets

As at the Latest Practicable Date, none of the Directors had any direct or indirect interests in any assets which had been acquired or disposed of by or leased to, any member of the Group or which were proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2002, the date to which the latest published audited financial statements were made up.

3. SUBSTANTIAL SHAREHOLDERS

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

			Approximate
	Name of	Number of	percentage of
Name of Shareholder	Group member	Shares held	shareholding
C & H Korea	Company	382,850,000	58.9%
		(Note)
Uni-Link	Company	104,650,000	16.1%
		(Note)
Mr Kyoo Yoon Choi	Company	487,500,000	75%
		(Note)

Note: 84.57% of the issued share capital of C & H Korea is held by Mr Kyoo Yoon Choi, his wife Ms Woul Hee Cha and his three children Mr Woo Jin Choi, Ms You Jin Choi and Ms Soo Jin Choi. Further, 76% of the issued share capital of Uni-Link is beneficially owned by Mr Kyoo Yoon Choi. Pursuant to Part XV of the SFO, Mr Kyoo Yoon Choi is deemed to be interested in the entire shareholding of C & H Korea and UniLink in the Company.

Save as disclosed in this circular, the Directors are not aware of any person as at the Latest Practicable Date was interested, directly or indirectly, in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group.

4. MATERIAL CHANGE

The Directors confirm that there has been no material adverse change in the financial or trading position of the Group since 31 December 2002 (being the date to which the latest audited combined financial statements of the Group were made up).

5. LITIGATION

So far as the Directors are aware, as at the Latest Practicable Date, no member of the Group was engaged in any litigation or arbitration or material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened against any member of the Group.

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GENERAL INFORMATION

APPENDIX

6. CONSENT

First Shanghai has given and has not withdrawn its consent to the issue of this circular with the inclusion of its letter and of references to its name in the form and context in which they are included.

7. MISCELLANEOUS

• (a) As at the Latest Practicable Date, First Shanghai did not have any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

• (b) As at the Latest Practicable Date, First Shanghai did not have any direct or indirect interests in any assets which had been acquired or disposed of by or leased to, any member of the Group or which were proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2002, the date to which the latest published audited financial statements were made up.

• (c) The registered office and principal place of business of the Company is at Suites 803-804, 8th Floor, Tower 5, China HK City, 33 Canton Road, Tsimshatsui, Kowloon, Hong Kong.

• (d) The share registrar and transfer office of the Company in Hong Kong is Abacus Share Registrars Limited at G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.

• (f) The company secretary of the Company is Mr Wong Wai Sing, Wilson. He is a member of the Hong Kong Society of Accountants.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the head office and principal place of business of the Company in Hong Kong at Suites 803-804, 8th Floor, Tower 5, China HK City, 33 Canton Road, Tsimshatsui, Kowloon, Hong Kong up to and including 14 May 2003 and at the Extraordinary General Meeting:

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

• (b) the draft application for the New Connected Transactions Waiver;

• (c) the letter of advice from First Shanghai, the text of which is set out on pages 16 to 24 of this circular;

• (d) the letter of consent referred to in the section headed “Consent” in this appendix;

• (e) the letter from the Independent Board Committee, the text of which is set out on page 15 of this circular; and

• (f) the service contracts of the executive Directors referred to in paragraph 2.2 above.

• 28 -

NOTICE OF EXTRAORDINARY GENERAL MEETING

==> picture [121 x 65] intentionally omitted <==

DREAM INTERNATIONAL LIMITED 德林國際有限公司

(Incorporated in Hong Kong with limited liability)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVE THAT an extraordinary general meeting (the “EGM” ) of Dream International Limited (the “Company” , which together with its subsidiaries, the “Group” ) will be held at 11:00 a.m. (or immediately after the conclusion or adjournment of the annual general meeting of the Company to be held on the same day) on Thursday, 22 May 2003 at Ballroom B, Great Eagle Hotel, 8 Peking Road, Tsimshatsui, Kowloon, Hong Kong for the purpose of considering and, if thought fit, passing the following resolution as an ordinary resolution:

Ordinary Resolution

“THAT

• (a) the application of a waiver (the “Waiver” ), marked “A”, by the Company to The Stock Exchange of Hong Kong Limited (the “Stock Exchange” ) from strict compliance with Chapter 14 of the Rules Governing the Listing of Securities on the Stock Exchange in relation to (i) the sale of plush stuffed toys and steel and plastic toys and raw material by the Company and its subsidiaries (together, the “Group” ) to C & H Co. Limited and its subsidiaries (together, the “C & H Korea Group” ); (ii) the referral of sales orders by the Group to C & H Korea Group; (iii) the referral of sales orders by C & H Korea Group to the Group; (iv) the purchase of raw materials and components by the Group from C & H Korea Group and the sub-contracting of production processes by the Group to C & H Korea Group; and (v) the provision of research and development and product design services to be provided by C & H Korea to the Group, be and are hereby approved; and

• (b) the directors of the Company be and are hereby authorised to do all other acts and things and execute all documents which they consider necessary or expedient for the implementation of and giving effect to the application of the Waiver.”

By order of the Board Dream International Limited Young M. Lee

Director

Hong Kong, 30 April 2003

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NOTICE OF EXTRAORDINARY GENERAL MEETING

Registered office and principal place of business in Hong Kong: Suites 803-804, 8th Floor Tower 5, China HK City 33 Canton Road, Tsimshatsui

Kowloon Hong Kong

Notes:

1. A member of the Company entitled to attend and vote at the meeting convened by the above notice is entitled to appoint one or more proxy to attend and, subject to the provisions of the articles of association of the Company, vote in his stead. A proxy need not be a member of the Company.

2. In order to be valid, the form of proxy and the power of attorney (if any), under which it is signed or a notarially certified copy of that power of attorney or authority, must be returned to the registered office and principal place of business of the Company in Hong Kong at Suites 803-804, 8th Floor, Tower 5, China HK City, 33 Canton Road, Tsimshatsui, Kowloon, Hong Kong, and in any event no less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof.

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

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