GoFintech Quantum Innovation Limited — M&A Activity 2002

Jun 6, 2002

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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 Pacific Challenge Holdings Limited, 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.

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 document.

PACIFIC CHALLENGE Pacific Challenge Holdings Limited

(Incorporated in Bermuda with limited liability)

Voluntary conditional cash offers by

TingKong – RexCapital Securities International Limited on behalf of Kandy Profits Limited to acquire all the issued shares and outstanding options to subscribe for shares in Pacific Challenge Holdings Limited

Independent financial adviser to the independent board committee of Pacific Challenge Holdings Limited

A letter from Anglo Chinese containing its advice to the independent board committee is set out on pages 9 to 24 of this document. A letter from the independent board committee containing its recommendation on the offers is set out on page 8 of this document.

6th June, 2002

CONTENTS

	Page
Expected timetable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	ii
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
The offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Information on the offeror . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Offeror’s intention in relation to the Pacific Challenge group . . . . . . . . . . . . . . . .	7
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Letter from the independent board committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Letter from Anglo Chinese. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Appendix I – Financial information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Appendix II – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	63

– i –

EXPECTED TIMETABLE

Commencement of the offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thursday, 23rd May, 2002

First closing date (Note 1) . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Thursday, 20th June, 2002

Latest time by which the share offer could be declared

unconditional as to acceptances (Note 2) . . . . . . . . . . . . . . . . . . . . Monday, 22nd July, 2002

Latest time by which the share offer could be declared

• unconditional in all respects (Note 3) . . . . . . . . . . . . . . . . . . . . . Monday, 12th August, 2002

Latest time for posting of remittance (Note 4)

Notes:

1. The offers, which are conditional, will be closed at 4:00 p.m. on Thursday, 20th June, 2002 unless the offeror revises or extends the offers in accordance with the Takeovers Code. The offeror reserves the right to extend the share offer until such date as it may determine in accordance with the Takeovers Code (or as permitted by the executive in accordance with the Takeovers Code). The offeror will issue a press announcement in relation to any extension of the share offer, which announcement will state either the next closing date or that the share offer will remain open until further notice. In the latter case, at least 14 days’ notice in writing will be given before the share offer is closed to those shareholders who have not accepted the share offer.

2. In the event that the share offer has not been declared or has not become unconditional as to acceptances on or before 22nd July, 2002, being 60 days after posting of the offer document, the offers will lapse unless the executive consents to a later date. As stated in note 1 above, the offeror reserves its right to extend the share offer until such date as it may determine in accordance with the Takeovers Code (or as permitted by the executive in accordance with the Takeovers Code), but there is no certainty that the share offer will be extended beyond the first closing date.

3. In the event that the share offer has not been declared or has not become unconditional in all respects on or before 12th August, 2002, being 81 days after posting of the offer document, the offers will lapse unless the executive consents to a later date. As stated in note 1 above, the offeror reserves its right to extend the share offer until such date as it may determine in accordance with the Takeovers Code (or as permitted by the executive in accordance with the Takeovers Code), but there is no certainty that the share offer will be extended beyond the first closing date.

4. Remittances in respect of the consideration payable for the shares and the options tendered under the offers will be posted as soon as possible but in any event within 10 days of the later of the date of receipt by the Registrar of all the relevant documents to render the acceptance under the offers complete and valid, and the date when the share offer becomes or is declared unconditional.

– ii –

DEFINITIONS

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

• “Anglo Chinese”

Anglo Chinese Corporate Finance, Limited, an investment adviser and dealer registered under the Securities Ordinance

• “board” the board of the directors

• “directors” directors of the company

• “executive”

• the executive director of the corporate finance division of the SFC or any delegate of the executive director

• “first announcement”

• the announcement dated 25th April, 2002 made by TKR Securities, that the offeror intends to make the offers

• “first closing date”

• 20th June, 2002, being the 28th day after the posting of the offer document

• “Hong Kong”

• the Hong Kong Special Administrative Region of the PRC

• “independent board committee”

• the independent board committee consisting of Messrs. Tzang Hing Chung, Alexander, Woo Ping Tao, Pedro and Mitsuo Mitsuishi established for the purpose of advising the shareholders in relation to the offers

• “Kandy Profits” or “offeror”

• Kandy Profits Limited, an investment holding company incorporated in the British Virgin Islands with limited liability which is wholly-owned by Mr. Cheong

• “Kistefos”

• Kistefos Investment A.S., a substantial shareholder of the company which is beneficially interested in 62,400,000 shares of the company, representing approximately 21.60% of the issued share capital of the company

• “latest practicable date”

• 3rd June, 2002, being the latest practicable date for ascertaining certain information contained herein

• “listing rules”

• The Rules Governing the Listing of Securities on the Stock Exchange

– 1 –

DEFINITIONS

• “long stop date” 12th August, 2002, being the latest date on which the offeror may declare the offer unconditional in all respects under the Takeovers Code or such later date as the executive may consent to

• “Mr. Cheong” Mr. Cheong Tin Yau

• “offer document” the document dated 23rd May, 2002 containing the offers and the accompanying form of acceptance and transfer despatched by the offeror on the same date

• “offers” the share offer and the option offer

• “option(s)” share option(s) granted under the share option scheme of the company adopted by the company on 11th September, 1998 with an exercise price of HK$0.32 per share

• “option offer” the conditional cash offer being made by TKR Securities on behalf of the offeror to the optionholders for acquiring all the outstanding options at HK$0.35 per option on the terms and subject to the conditions set out in the offer document and the form of renunciation

• “optionholders” holders of options

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

• “Pacific Challenge group” or the company and its subsidiaries “group”

• “PRC”

the People’s Republic of China

• “RexCapital” REXCAPITAL (Hong Kong) Limited, an investment adviser registered under the Securities Ordinance (Chapter 333 of the laws of Hong Kong)

“SDI Ordinance” The Securities (Disclosure of Interests) Ordinance (Chapter 396 of the Laws of Hong Kong)

– 2 –

DEFINITIONS

• “second announcement”

the announcement dated 30th April, 2002 made by TKR Securities, that the offeror revised the share offer price and the share option offer price

• “SFC” Securities and Futures Commission of Hong Kong

• “SFC Ordinance” Securities and Futures Commission Ordinance (Chapter 24 of the laws of Hong Kong)

• “share(s)” ordinary share(s) of HK$0.10 each in the issued share capital of the company

• “share offer” the voluntary conditional cash offer by TKR Securities on behalf of the offeror to acquire all the offer shares at the offer price, on and subject to the terms and conditions set out in the offer document and the accompanying form of acceptance and transfer

• “share offer price” HK$0.67 per share payable in cash

• “shareholders” shareholders of the company

• “share option offer price”

HK$0.35 per share option

• “share option scheme”

• a share option scheme adopted by the company on 11th September, 1998

• “Stock Exchange”

The Stock Exchange of Hong Kong Limited

• “Super Drive”

• Super Drive Inc., a company wholly owned by E1 Media Technology Limited which in turn is a 60% owned subsidiary of Peace City Development Limited, of which Dr. Lily Chiang has a 100% beneficial interest

• “Takeovers Code”

The Hong Kong Code on Takeovers and Mergers

• “TKR Securities”

• TingKong-RexCapital Securities International Limited, a securities dealer registered under the Securities Ordinance (Chapter 333 of the laws of Hong Kong)

“HK$” and “HK cents” Hong Kong dollars and cents respectively, the lawful currency of Hong Kong

– 3 –

LETTER FROM THE BOARD

PACIFIC CHALLENGE

Pacific Challenge Holdings Limited

(Incorporated in Bermuda with limited liability)

Directors: Dr. Lily Chiang (Chairman) Chan Yim Fong, Teli Shah Tahir Hussain

Independent non-executive directors Woo Ping Tao, Pedro Tzang Hing Chung, Alexander Mitsuo Mitsuishi

Registered Office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Head office and principal place of business: Suite 20B 20th Floor 9 Queen’s Road Central Hong Kong 6th June, 2002

To the shareholders

Dear Sir or Madam,

Voluntary conditional cash offers by TingKong – RexCapital Securities International Limited on behalf of Kandy Profits Limited to acquire all the issued shares and outstanding options to subscribe for shares in Pacific Challenge Holdings Limited

INTRODUCTION

It was first announced on 25th April, 2002 that Kandy Profits intended to make a voluntary conditional cash offer for the whole of the issued share capital of Pacific Challenge at HK$0.65 per share and the offeror also undertook to acquire all outstanding options at a price of HK$0.33 per option on the condition that the share offer becomes unconditional. Subsequently, the offeror announced on 30th April, 2002 that the offer price had been revised to HK$0.67 per share and subject to the offer becoming unconditional, the offeror would acquire all outstanding options at the revised price of HK$0.35 per option. The making of the offers is subject to and conditional upon all necessary approvals having been obtained from the relevant regulatory authorities in Hong Kong and overseas and valid acceptances being received (and not, when permitted, withdrawn) no later than the first closing date in respect of more than 50% of the issued share capital of the company.

– 4 –

LETTER FROM THE BOARD

You should now have received the offer document, which was despatched to the shareholders on 23rd May, 2002. You should read the offer document carefully and in particular the sections relating to the offeror’s intention for the company.

Dr. Lily Chiang, Ms. Chan Yim Fong, Teli and Mr. Shah Tahir Hussain are executive directors and salaried employees of the company, therefore they are not considered to be sufficiently independent under the Takeovers Code for the purpose of advising shareholders in respect of the offers. Accordingly, an independent board committee comprising Messrs Tzang Hing Chung, Alexander, Woo Ping Tao, Pedro and Mitsuo Mitsuishi, who are all independent non-executive directors, has been formed to advise the shareholders in relation to the terms of the offers. Anglo Chinese has been appointed as the independent financial adviser to advise the independent board committee on whether the terms of the offers are fair and reasonable so far as the shareholders and optionholders are concerned and the action recommended to be taken by the shareholders and optionholders.

The board notes the intention of Kandy Profits to invite the existing directors of the company to remain if the offers become or are declared unconditional. However Dr. Lily Chiang has indicated to the board that if the offers become or are declared unconditional, she intends to resign as a director of the company as soon as practicable thereafter. In addition, Mr. Tzang Hing Chung, Alexander, an independent non-executive director of the company, has notified the board that, due to other extensive work commitments, he intends to resign as a director as soon practicable after he is able to do so under the Takeovers Code.

The purpose of this document is to give you further information about the offers and the company. In addition there are set out in this document separate letters from the independent board committee and Anglo Chinese setting out their recommendations in respect of the offers.

THE OFFERS

The share offer

TKR Securities, on behalf of the offeror, has made the share offer, on the terms and conditions set out in the offer document and the accompanying form of acceptance and transfer, for all the issued shares.

The share offer is made by TKR Securities, on behalf of the offeror, on the following basis:

For each offer share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HK$0.67 payable in cash

– 5 –

LETTER FROM THE BOARD

The option offer

For each option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HK$0.35 payable in cash

As at the latest practicable date, there were 21,492,000 outstanding options granted to certain employees of the company to subscribe for 21,492,000 shares at an exercise price of HK$0.32 per share. The offeror offers to pay such optionholders in cash on the basis set out above in respect of every option held by them in consideration of the surrender to the offeror by the relevant optionholders of all their rights in respect of such options, following which such options will be cancelled and extinguished.

Subject to the share offer becoming unconditional, settlement of the relevant consideration regarding the options will be made within ten days of the later of:

• the date on which the share offer becomes unconditional; and

• the date on which all the relevant documents are received by the offeror before the close of the option offer to render the acceptance of the option offer complete and valid.

As at the latest practicable date, the company has an issued share capital of 288,868,000 shares of HK$0.10 each. At the share offer price of HK$0.67 per share and assuming that there will not be any change in the issued share capital of the company, the share offer values the entire issued share capital of the company at about HK$193,541,560. In addition, assuming all the 21,492,000 outstanding options as described above are tendered, the aggregate amount payable by the offeror to the optionholders under the option offer will be about HK$7,522,200.

Other than the options, the company has no outstanding convertible securities, warrants, options or subscription rights in respect of any class of its equity share capital as at the latest practicable date.

The share offer is subject to and conditional upon all necessary approvals having been obtained from the relevant regulatory authorities in Hong Kong and overseas and valid acceptances being received (and not, where permitted, withdrawn) no later than the first closing date in respect of more than 50% of the issued share capital of the company.

As at the latest practicable date, the offeror has received an irrevocable commitment to accept the share offer from Super Drive with respect to 93,544,000 shares, representing 32.38% of the issued share capital of the company. Ms. Chan Yim Fong, Teli, a director of the company, intends to accept the share offer in respect of her 432,000 shares, which represent 0.15% of the issued share capital of the company. Dr. Lily Chiang, a director of the company, also intends to accept the share offer in respect of her 2,500,000 shares, representing 0.87% of the issued share capital of the company.

– 6 –

LETTER FROM THE BOARD

INFORMATION ON THE OFFEROR

The offeror is a private company incorporated in the British Virgin Islands with limited liability and is wholly-owned by Mr. Cheong. It is an investment holding company which, as at the latest practicable date, has not conducted any activities other than the making of the offers.

Mr. Cheong, aged 41, is a Hong Kong permanent resident. He has extensive experience in China trade and real estate investment in the PRC.

As at the latest practicable date, the offeror and/or parties acting in concert with it has no interest or options in or rights to acquire any shares of the company. The offeror is independent from, not connected with and not acting in concert with any of the substantial shareholders, chief executive or directors of the company and any of its subsidiaries or their respective associates. Neither the offeror nor parties acting in concert with it has had any dealings in the shares during the period of six months prior to the commencement of the offer period.

OFFEROR’S INTENTION IN RELATION TO THE PACIFIC CHALLENGE GROUP

We have noted the statements of the intention of the offeror in relation to the company as set out in detail in the offer document.

GENERAL

Your attention is drawn to the separate letters from the independent board committee and Anglo Chinese on page 8 and pages 9 to 24 of this document respectively, containing their recommendations and advice in respect of the offers, and the additional information contained in the appendices to this document.

Yours faithfully,

For and on behalf of the Board of

Pacific Challenge Holdings Limited Chan Yim Fong, Teli

Executive Director

– 7 –

LETTER FROM INDEPENDENT BOARD COMMITTEE

PACIFIC CHALLENGE

Pacific Challenge Holdings Limited

(Incorporated in Bermuda with limited liability)

6th June, 2002

To the shareholders

Dear shareholder,

We have been appointed by the board to advise you in connection with the offers. Details of the offers are contained in the letter from the board dated 6th June, 2002 set out on pages 4 to 7 of this document of which this letter forms a part.

We wish to draw your attention to the letter from the board and the letter of advice from Anglo Chinese set out on pages 4 to 7 and pages 9 to 24 of this document respectively. We have considered and discussed with Anglo Chinese their letter and the matters, factors and their recommendation and concur with Anglo Chinese’s advice and recommend the shareholders to take the action in respect of the share offer set out in the letter from Anglo Chinese.

We consider the option offer to be an appropriate offer and advise the optionholders to take the action in respect of the option offer set out in the letter from Anglo Chinese.

Notwithstanding our recommendations, the shareholders and the optionholders should consider carefully the terms and conditions of the offers.

Yours faithfully,

Woo Ping Tao, Pedro

Independent non-executive director

Tzang Hing Chung, Alexander

Independent non-executive director

Mitsuo Mitsuishi

Independent non-executive director

– 8 –

LETTER FROM ANGLO CHINESE

40th Floor, Two Exchange Square, 8 Connaught Place, Central, Hong Kong

The independent board committee Pacific Challenge Holdings Limited Suite 20B 20th Floor 9 Queen’s Road Central Hong Kong

6th June, 2002

Dear Sir or Madam,

Voluntary conditional cash offers by TingKong – RexCapital Securities International Limited on behalf of Kandy Profits Limited to acquire all the issued shares and outstanding options to subscribe for shares in Pacific Challenge Holdings Limited

INTRODUCTION

We refer to our appointment by the company to advise the independent board committee on the terms of the offers under which the shareholders are being offered HK$0.67 in cash for each share held by them. Anglo Chinese is independent of Kandy Profits, its associates as defined by the Listing Rules, and parties stated or presumed to be acting in concert with any of them and, accordingly, is considered suitable to give independent advice to you. The terms and conditions of the offers are set out in the offer document despatched to the shareholders on 23rd May, 2002. We recommend that you advise the shareholders and optionholders to whom the offers are made to read the offer document and this document carefully before they decide what action to take in response to the offers.

The terms defined in this document, of which this letter forms part, shall have the same meanings in this letter, unless the context otherwise requires.

As Dr. Lily Chiang, Ms. Chan Yim Fong, Teli and Mr. Shah Tahir Hussain, are executive directors and salaried employees of the company, therefore they are not considered to be sufficiently independent under the Takeovers Code for the purpose of advising the shareholders

– 9 –

LETTER FROM ANGLO CHINESE

of the company in respect of the offers. Accordingly, an independent board committee comprising Messrs Woo Ping Tao, Pedro, Tzang Hing Chung, Alexander and Mitsuo Mitsuishi, who are all independent non-executive directors, has been formed to advise the shareholders in connection with the offers.

In formulating our opinion we have reviewed the audited financial statements of the group for the three financial years ended 31st March, 2001; the unaudited interim report of the group for the six months ended 30th September, 2001; and unaudited consolidated results of the group for the year ended 31st March, 2002 and have discussed the performance of the operations of the group and their prospects with the management of the company as well as the outstanding litigation brought against the company by Kistefos. We have also taken into account the statements of intention made by the directors of Kandy Profits in connection with the offers. We have reviewed the past performance of the shares on the Stock Exchange and compared their performance in relation to the Hong Kong All Ordinaries Index. We have also made comparisons with other general offers made in Hong Kong for the period from January 2001 to April 2002.

We consider that the information we have reviewed is sufficient for us to reach the conclusions set out in this letter and we have no reason to doubt the truth, accuracy or completeness of the information provided and the opinions expressed to us by the directors. The directors have confirmed to us that no material facts have been omitted from the information given or opinions expressed to us.

We have relied on the information so provided to us and we have not verified it or conducted a comprehensive review of the businesses and operations of the group or of the current and future prospects of its businesses or the business sector in which it operates. We have also relied on the information contained in the document and have assumed that the statements made in it are, and will continue to be, true until the offers become unconditional or lapse.

We have not considered the consequences for the taxation of profits made by the shareholders to whom the offers are made or any other aspect of the position of such shareholders with regard to taxation arising from the acceptance of the offers, since this is particular to each such shareholder’s individual circumstances. Shareholders to whom the offers are being made who are resident overseas, subject to overseas taxes or Hong Kong taxation on dealing in securities should consider their own taxation position and, if they are in any doubt, they should consult their own professional advisers.

– 10 –

LETTER FROM ANGLO CHINESE

BACKGROUND

Set out below is some background information on events which may have led to the current offers being made.

On 18th February, 2002, the company announced that Super Drive, which owns 93,544,000 shares entered into a sale and purchase agreement with Mega Land Investments Limited, in which Super Drive agreed to sell or procure to sell a total of 84,511,600 shares, including 2,500,000 shares and 432,000 shares held by Dr. Lily Chiang and Ms. Chan Yim Fong, Teli, respectively, representing an aggregate of approximately 29.50% of the issued share capital of the company as at the date of the sale and purchase agreement for a consideration of HK$153,000,000 in aggregate, representing approximately HK$1.81 per share. The date for completion of the sale and purchase agreement was extended on a number of occasions with the final completion date being on or before 2nd July, 2002.

On 28th March, 2002 the company received a proposal under which Yu Ming Investment Management Limited proposed to make a voluntary conditional offer on behalf of Ontime Capital Investment Limited for all the shares in the company at a price of HK$0.01 per share. The offer price represented a discount of approximately 97.6% to the average closing price of HK$0.418 per share as quoted on the Stock Exchange for the period of ten trading days ended on 28th March 2002. Dealings in the shares were suspended and an announcement was made by the company that it had been advised by Anglo Chinese that such offer made by Ontime Capital Investment Limited would have no prospect of success. Anglo Chinese also submitted to the Takeovers and Mergers Panel that the proposed voluntary offer was not a genuine offer to acquire shares in Pacific Challenge, and was not made on a bona fide basis and constituted an abuse of the process under the Takeovers Code. Accordingly it was submitted that the proposed offer made by Ontime Capital Investment Limited should not be permitted to proceed and the matter was to be determined at a meeting of the Takeovers and Mergers Panel scheduled for 18th April, 2002. Trading in the shares resumed on 15th April, 2002.

On 16th April, 2002 Yu Ming Investment Management Limited submitted a revised proposal in which it was stated that Ontime Capital Investment Limited’s intention had always been to return most of the cash in Pacific Challenge to all shareholders after completion of its offer and would make a further announcement that it would undertake to pay shareholders 90% of the legally distributable cash balances of Pacific Challenge as soon as possible after Ontime Capital Investment Limited obtained control of the board of Pacific Challenge. In view of revision to the proposals which was announced on 18th April, 2002 the meeting of the Takeovers and Mergers Panel was cancelled. Ontime Capital Investment Limited estimated that the value of the revised proposals was equivalent to HK$0.65 per share. The board, having been advised by Anglo Chinese, strongly advised the shareholders to take no action until they had been advised on the mechanics and contractual arrangements to effect the offer made by Ontime Capital Investment Limited and distribution and had considered the views of the board and Anglo Chinese. Dealings in the shares which had been suspended again on 17th April, 2002, resumed on 23rd April, 2002.

– 11 –

LETTER FROM ANGLO CHINESE

By a letter dated 20th April, 2002, Yu Ming Investment Management Limited stated that in order to improve the return to shareholders it was proposed to widen the scope of the cash distribution to include 90% of the cash proceeds from the realisation of all non-cash assets of the group to the extent that it would not affect the corporate finance business of the group and the continued listing of the company.

On 24th April, 2002 the board received an offer by TKR Securities on behalf of Kandy Profits to acquire all the issued share capital of the company at a price of HK$0.65 per share and an undertaking to acquire all outstanding options at a price of HK$0.33 per option on the condition that the share offer became unconditional.

The board noted an announcement dated 26th April, 2002 made on behalf of Ontime Capital Investment Limited regarding the withdrawal of its offer for all the issued shares in the company. It was also announced by the company that the sale and purchase agreement dated 6th February, 2002 entered into by Super Drive and Mega Land Investments Limited in respect of the 84,511,600 shares had been terminated by a subsequent agreement. The board also received notice of the revision of the share offer from HK$0.65 to HK$0.67 and the option offer from HK$0.33 to HK$0.35 made by TKR Securities on behalf of Kandy Profits. Super Drive entered into an irrevocable undertaking to accept the share offer. The acceptance by Super Drive will only however become effective if the share offer becomes unconditional.

FACTORS AND CONSIDERATION

In giving our opinion as to the fairness and reasonableness of the offers and giving our advice to the independent board committee we have taken into account the following principal factors.

– 12 –

LETTER FROM ANGLO CHINESE

ADJUSTED NET TANGIBLE ASSET VALUE

The computation of the net tangible asset value of the company is set out in appendix I to this document. On this basis, we compared the pro forma unaudited net tangible assets of the group and assuming no conversion of the outstanding share options to the offer price.

		Per share
	HK$’000	HK$
Value of the share offer	193,542	0.67
Unaudited pro forma consolidated net tangible
assets value before net of bank and cash balances	220,780	0.76
Bank and cash balances as at 31st March, 2002	203,191	0.70
Discount of the offer price to the unaudited
pro forma consolidated net tangible assets
value before net of bank and cash balances	27,238	0.09
Discount of the offer price to
the bank and cash balances	9,649	0.03

Based on the above basis, the share offer values the company at a discount of HK$27.2 million representing approximately 12.3% to its underlying pro forma unaudited net tangible asset value. As the pro forma unaudited net tangible asset value of the group is substantially composed of cash, we would have expected that the share offer price would not be at a discount to the cash balance of the company.

TAKEOVER VALUE FOR A LISTING STATUS IN HONG KONG

We have reviewed the terms of 14 general offers paid for small and mid cap listed companies in Hong Kong for the period from January 2001 to April 2002 and the offer size ranged from approximately HK$44 million up to approximately HK$1,732 million.

– 13 –

LETTER FROM ANGLO CHINESE

Based on their respective offeree documents, we set out below details of the 14 general offers that we have identified:

that we have identified:
				Premium/
				(discount)
			NAV	to NAV
Name of issuer	**Offer size **	Offer price	per share	per share
	(HK$ million)	(HK$)	(HK$)	%
Huey Tai International Limited	344	0.220	0.133(1)	65
Sing Pao Media Group Limited	344	1.100	0.675(2)	63
renren Media Limited	101	0.013	0.009(2)	44
Ying Wing Holdings Limited	83	0.418	0.331(2)	26
Multi-Asia International Holdings Limited	215	0.455	0.397(2)	15
Hing Kong Holdings Limited	1,667	1.000	1.050(1)	(5)
Symphony Holdings Limited	364	1.750	1.960(1)	(11)
Wong’s International (Holdings) Limited	1,588	3.400	4.670(1)	(27)
Sing Tao Holdings Limited	692	1.650	2.460(1)	(33)
Kowloon Development Company Limited	1,732	3.580	6.340(1)	(44)
Quality Food International Limited	68	0.049	0.087(1)	(44)
Wong’s Kong King International (Holdings) Limited	208	0.300	0.620(1)	(52)
Asia Resources Transportation Holdings Limited	44	0.025	0.056(1)	(55)
Cheong Ming Investments Limited	100	0.240	0.730(1)	(67)

Notes:

(1) based on respective unaudited pro forma NAV.

(2) based on respective audited accounts.

As illustrated in the table above, the premium or discount to net asset backing, in percentage terms, for these transactions varied from a premium of approximately 65% to a discount of approximately 67%. Of the 14 general offers, 5 offers were made at a premium of approximately 15% to 65% to the issuers’ respective net asset values, while 9 offers were made at discounts of approximately 5% to 67%. However, we identified that in the case of the 9 offers the composition of the underlying assets, which mainly comprised properties, plant and machinery may have accounted for the discount. We understand that the level of premium paid, in monetary terms, is usually dependent upon, amongst other things, the listing status and the opportunity cost in acquiring that status; the nature of the business and whether the value of such assets is easily ascertainable. Where the business or assets are subject to uncertainties, this would tend to reduce the premium; whether there is a buyer with a special interest; demand and supply conditions and stock market conditions. However, we consider that by taking a number of cases the impact of these different factors, which are in any case a matter of judgment, will largely be averaged out. Nevertheless, we consider that the range and average premium/discount to net asset value at which offers were made following the obtaining of control of such companies provide a reasonable basis for comparison with the terms of the

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LETTER FROM ANGLO CHINESE

offers. Given the differences in conditions, shareholders should however treat the comparison as a general indication only. Given the 5 offers which were made at a premium of approximately 15% to 65% to the issuers’ respective net asset value, we consider the discount of 12.3% to the pro forma unaudited net tangible asset value of the company based on the offer price is not within the range of premiums paid as stated above. In addition, as the net tangible asset value of the group is substantially comprised cash, we consider that the offer price does not reflect the net tangible asset value of the company, which is substantially represented by cash.

EARNINGS

The following has been extracted from the audited accounts of the company for the three financial years ended 31st March, 2001 and the unaudited consolidated accounts of the company based on its interim report for the six months ended 30th September, 2001 and shows the turnover and contribution of the group’s corporate finance advisory and other related fees, manufacturing and trading and interest income and others to total pre tax profits, excluding of exceptional loss or profits:

(a) Turnover

Continuing operations Corporate finance advisory and other related fees Manufacturing and trading Interest income and others Discontinued operations Stock brokerage Futures brokerage Margin financing Loan arranging and debt financing Turnover	Six months Year ended 31st March, 30th September, 1999 2000 2001 2001 HK$’000 HK$’000 HK$’000 HK$’000 26,400 20,355 14,065 4,370 – – – 4,482 20,526 5,422 12,027 5,351 46,926 25,777 26,092 14,203 30,941 94,691 18,351 – 312 1,122 389 – 4,206 6,339 3,646 – – 4,677 – – 35,459 106,829 22,386 – 82,385 132,606 48,478 14,203	Six months Year ended 31st March, 30th September, 1999 2000 2001 2001 HK$’000 HK$’000 HK$’000 HK$’000 26,400 20,355 14,065 4,370 – – – 4,482 20,526 5,422 12,027 5,351 46,926 25,777 26,092 14,203 30,941 94,691 18,351 – 312 1,122 389 – 4,206 6,339 3,646 – – 4,677 – – 35,459 106,829 22,386 – 82,385 132,606 48,478 14,203
		14,203
		– – – –
		–
		14,203

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LETTER FROM ANGLO CHINESE

(b) Profit and loss

Continuing operations Corporate finance advisory and other related fees Manufacturing and trading Interest income and others Discontinued operations Stock brokerage Futures brokerage Margin financing Loan arranging and debt financing Profit(loss) before taxation from operations	Six months Year ended 31st March, 30th September, 1999 2000 2001 2001 HK$’000 HK$’000 HK$’000 HK$’000 8,841 10,903 3,169 699 – – – 560 6,462 1,601 717 (20,492) 15,303 12,504 3,886 (19,233) 3,334 19,364 6,040 – 284 291 (17) – 1,873 4,754 2,884 – 10,417 4,671 – – 15,908 29,080 8,907 – 31,211 41,584 12,793 (19,233)

According to the annual report and interim report of the company for the year ended 31st March, 2001 and the six months ended 30th September, 2001, respectively, they stated that the company has changed the corporate strategy of the group by focusing on a fee-based business and direct investment business. As a result, the group had disposed of the securities and futures brokerage and margin financing businesses. However, the group operated in a difficult economic environment and experienced a decline in profit in the financial year ended 31st March, 2001 and made a loss before taxation of approximately HK$19.2 million for the six months ended 30th September, 2001 but it was mainly attributable to the litigation costs in relation to a petition filed against the company by Kistefos.

According to the unaudited consolidated results for the year ended 31st March, 2002, the group made a loss before taxation of approximately HK$39.8 million on turnover of HK$46.9 million, respectively which was mainly due to a decline in sales in corporate financial advisory services of approximately HK$7.0 million, or approximately 50% as compared to the previous financial year, a significant provision for legal fees of approximately HK$14.5 million in relation to a legal proceeding brought against the company by Kistefos, further details of

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LETTER FROM ANGLO CHINESE

which are set out below, and a provision for loss of investment of approximately HK$17.0 million. The group has invested approximately HK$25.0 million in two new businesses engaged in the trading and manufacturing of precision components processing equipment, in which the group has a 100% and 79% interest, respectively. It is estimated that these investments contributed approximately HK$31.8 million and HK$0.4 million for the group’s turnover and profit, respectively during the financial year ended 31st March, 2002. We have discussed with the management of the company the prospects of the trading and manufacturing of precision components processing equipment and they consider that the precision components and the precision components processing equipment are operating in a very competitive market and it is not expected that there will be any significant improvement in the market in the short term. In assessing the likely prospects of recovery in profitability of the group’s corporate financial advisory services, account should be taken of the current state of the equity capital market in Hong Kong. We noted that from the unaudited management account of the company for the financial year ended 31st March, 2002, the revenue generated from the corporate finance business was approximately HK$7.1 million as compared to last year’s performance of approximately HK$14.1 million it decreased by approximately HK$7.0 million, or 50%.

As stated above, we consider the past results are of little relevance in assessing the share offer following the company changing the corporate stategy of the group by disposing of the securities and futures brokerage and margin financing businesses. We also consider that the group is currently loss making and the prospects of recovery in profitability of the group are uncertain. Consequently, the valuation of the shares is not supported by current or future earnings. For these reasons, we are not able to formulate any worthwhile comparison between the share offer price and the earnings of the group.

DIVIDENDS

The directors did not declare a dividend in respect of the six months ended 30th September, 2001 owing to the loss incurred during the period. The following table shows the dividend per share for the three years ended 31st March, 2001 and the six months ended 30th September, 2001.

				Six months
				30th
		Year ended		September,
	1999	2000	2001	2001
Dividend per share_(HK$)_	0.08	0.03	0.015	Nil

No decision has been made by the board in respect of the recommendation of a final dividend for the year. Kandy Profits has not indicated what dividend policy would be adopted if the share offer becomes unconditional.

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LETTER FROM ANGLO CHINESE

MARKET PRICE

The following charts show the performance of the closing price of the shares and the Hong Kong All Ordinaries Index (“HKAOI”) and its relative performance as compared with the performance of the HKAOI for the three years ended on the latest practicable date.

Chart A: Relative share price performance of Pacific Challenge measured against the HKAOI since 3rd June, 1999 up to the latest practicable date

==> picture [392 x 252] intentionally omitted <==

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

6.0
5.0
4.0
3.0
2.0
1.0
Date
Relative performance (x)
6/3/1999 7/2/1999 7/29/1999 8/25/1999 9/22/1999 10/21/1999 11/17/1999 12/14/1999 1/12/2000 2/10/2000 3/8/2000 4/5/2000 5/5/2000 6/2/2000 6/30/2000 7/27/2000 8/23/2000 9/20/2000 10/19/2000 11/15/2000 12/12/2000 1/11/2001 2/12/2001 3/9/2001 4/6/2001 5/9/2001 6/5/2001 7/4/2001 8/2/2001 8/29/2001 9/25/2001 10/24/2001 11/21/2001 12/18/2001 1/17/2002 2/18/2002 3/15/2002 4/16/2002 5/14/2002 6/3/2002
----- End of picture text -----

Source: Bloomberg

As illustrated in chart A above, during the period from 3rd June, 1999 up to the latest practicable date, the shares consistently underperformed the HKAOI as represented by a straight line in chart A, and was most apparent for the period commencing from about July 2000 to March 2002. The price of the shares started to increase around the date of the first announcement and reached about HK$0.57 on 24th April, 2002 and then reached about HK$0.60 on 2nd May, 2001 after the date of the second announcement that was believed to be driven mainly by the offers.

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LETTER FROM ANGLO CHINESE

Chart B: Share price performance of Pacific Challenge since 3rd June, 1999 up to the latest practicable date

==> picture [384 x 255] intentionally omitted <==

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

6.00
5.00
4.00
3.00
2.00
Share offer price
1.00
–
Date
Share price (HK$)
6/3/1999 7/2/1999 7/29/1999 8/25/1999 9/22/1999 10/21/1999 11/17/1999 12/14/1999 1/12/2000 2/10/2000 3/8/2000 4/5/2000 5/5/2000 6/2/2000 6/30/2000 7/27/2000 8/23/2000 9/20/2000 10/19/2000 11/15/2000 12/12/2000 1/11/2001 2/12/2001 3/9/2001 4/6/2001 5/9/2001 6/5/2001 10/24/2001 7/4/2001 8/2/2001 11/21/2001 8/29/2001 9/25/2001 12/18/2001 1/17/2002 2/18/2002 3/15/2002 4/16/2002 5/14/2002 6/3/2002
----- End of picture text -----

Source: Bloomberg

As illustrated in chart B above, the shares have consistently traded below the share offer price in the last three years up to the latest practicable date except during the period from February to August, 2000 and on 21st February, 2002. The share price rose from HK$2.025 to HK$2.40 on 14th February, 2000 and trading in the shares was suspended pending explanation from the company of the increase in share price. Subsequent to the release of an announcement made by the company on 18th February, 2000 in relation to a change in substantial shareholders of the company, upon resumption in trading of the shares on 21st February, 2000, the share price reached its historical high and closed at HK$5.45, representing an increase of approximately 127% from its previous closing price of HK$2.40. However, the share price gradually declined back to the level prior to the announcement in around August that same year. Since then, the share price traded within a narrow range on an overall downward trend. The share price rose from HK$0.325 per share on 6th February, 2002 to HK$0.79 per share on 21st February, 2002 after the announcement that Super Drive had entered into a sale and purchase agreement with Mega Land Investments Limited. However, the sale and purchase agreement was terminated according to an announcement issued by the company on 26th April, 2002.

The share offer price of HK$0.67 per share represents:

• a premium of 67.5% over the closing price of the shares as quoted on the Stock Exchange on 28th March, 2002, being the last trading day before the announcement of an offer made by Ontime Capital Investment Limited referred to above;

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LETTER FROM ANGLO CHINESE

• a premium of 60.3% to the average of the closing price of share as quoted on the Stock Exchange for the period of ten trading days ended 28th March, 2002, being the last trading day before an announcement of an offer made by Ontime Capital Investment Limited;

• a premium of approximately 17.5% over the closing price of HK$0.57 per share as quoted on the Stock Exchange on 24th April, 2002, being the last trading day before the date of the first announcement;

• a premium of approximately 45.7% over the average closing price of HK$0.46 per share as quoted on the Stock Exchange for the period of 10 trading days up to and including 24th April, 2002, being the last trading day before the date of the first announcement; and

• a premium of approximately 3.1% over the closing price of HK$0.65 per share as quoted on the Stock Exchange on the latest practicable date.

The share offer price therefore represents an attractive premium to the share price at which the shares were trading shortly before the offers on behalf of Ontime Capital Investment Limited were made. However over the last six months prior to the announcement the shares have been trading at prices significantly below the share offer price. The highest closing price was HK$0.79 per share on 21st February, 2002, being two days after the resumption of trading on 19th February, 2002 following an announcement dated 18th February, 2002 regarding the proposed change of a substantial shareholder under the sale and purchase agreement whereby Super Drive was to sell and Mega Land was to purchase 29.5% of the issued share capital of the company.

In our opinion, the price of the shares is supported at its present level by the offers and, on closing of the offers, the market price of the shares in the absence of the share offer becoming unconditional is likely to decline to a level closer to that which prevailed on or before 28th March, 2002 being the date of an announcement initially made by Ontime Capital Investment Limited.

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LETTER FROM ANGLO CHINESE

LIQUIDITY

We have also considered the average daily trading volume of the shares since 26th April, 1999, as set out below:

Chart C: Trading volume of the shares on the Stock Exchange since 26th April, 1999 up to the latest practicable date

==> picture [417 x 298] intentionally omitted <==

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

30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0
Date
Source: Bloomberg
Share traded
4/26/1999 5/25/1999 6/24/1999 7/26/1999 8/24/1999 9/23/1999 10/26/1999 11/24/1999 12/23/1999 1/25/2000 2/25/2000 3/27/2000 4/28/2000 5/31/2000 6/30/2000 7/31/2000 8/29/2000 9/28/2000 10/31/2000 11/29/2000 1/2/2001 2/5/2001 3/6/2001 4/4/2001 5/10/2001 6/8/2001 7/12/2001 8/13/2001 9/11/2001 10/12/2001 11/13/2001 12/12/2001 1/15/2002 2/18/2002 3/19/2002 4/22/2002 5/23/2002 6/3/2002
----- End of picture text -----

As illustrated in chart C above, the shares have been inactively traded on the Stock Exchange throughout the last three years except for 21st February, 2000 and the period following 24th April, 2002, the trading date immediately before the first announcement of the offers. We believe that the surge in the trading volume of shares on 21st February, 2000 was prompted by an announcement in relation to a change in a substantial shareholder of the company. Subsequent to this, trading volume had gradually declined back to the previous level and had remained thin until the date of the announcement. Given such low liquidity in the shares, it would be difficult for the shareholders to dispose of any significant shareholding in the market except through an offer. In the event that the offers do not become effective, it is not expected that the liquidity of the shares would materially improve.

OUTSTANDING LITIGATION

On 8th March, 2001, Kistefos, presented a petition against the company and a director of the company, Dr. Lily Chiang, before The Supreme Court of Bermuda alleging that the affairs of the company had been conducted in a manner, which is oppressive or unfairly

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LETTER FROM ANGLO CHINESE

prejudicial to the interests of certain shareholders of the company including, Kistefos in the petition, seeks an order that the company and, or Dr. Lily Chiang purchases Kistefos’ shares in the company at a fair value to be determined by the Bermuda Court or, alternatively, an order that the company be wound up by the Supreme Court of Bermuda (“the Bermuda Court”). The hearing of the petition before the Bermuda Court had been fixed to commence on 17th September, 2001.

At the hearing in September 2001, the company was successful in obtaining an order to strike out the claim by Kistefos to wind up the company, although the request for relief by the repurchase of the petitioner’s shares was lifted for consideration at a subsequent hearing. The company appealed against this decision not to strike out the claim by Kistefos for the purchase of its share and the Kistefos cross-appealed against the decision to strike out its claim for the winding up of the company. The hearing of these appeals has been set down to commence on 17th June, 2002.

Up to 31st March, 2002, the directors have also made an aggregate provision of approximately HK$19.5 million in the accounts of the company for legal fees in respect of this litigation.

Based on the legal advice received from its legal advisers in Bermuda, the board believes that the company has a reasonable prospect of successfully defending the petition presented by Kistefos. Nevertheless the litigation does distract the management from the business of managing the company and diverts financial resources from the normal operations of the company which may affect its trading performance.

FUTURE INTENTIONS OF THE OFFEROR REGARDING THE GROUP

Kandy Profits has given no indication on any future disposals or acquisitions to be made by the group following the closing of the offers as this will follow a detailed review of the group’s business. It is, therefore, not possible to give any assessment of likely composition of the group’s assets and investments following Kandy Profits’ acquisition of control.

CONTINUED LISTING OF THE SHARES ON THE STOCK EXCHANGE

It is the intention of Kandy Profits to maintain the listing of the shares on the Stock Exchange. The Listing Rules require that not less than the prescribed percentage of any class of listed securities, being generally 25% of the listed securities of a issuer, are held by the public and should the percentage of the listed securities held by the public fall below 25%, the Stock Exchange has the discretion to suspend trading in such securities. In order to maintain the listing of the shares, Kandy Profits and parties acting in concert with it will undertake to the Stock Exchange to place shares so that there will be a sufficient public float in the shares as soon as practicable. As far as we are aware no arrangements have yet been made to place out shares to meet the Stock Exchange’s public float requirements so that it is likely that the shares will be suspended if the public float falls below 25% when the offers close until such time as sufficient shares are held by the public. Given present stock market conditions, we

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LETTER FROM ANGLO CHINESE

would anticipate that any placement of new or existing shares made to meet the public float requirements would be effected at a price lower than the offer price.

OFFER FOR THE OPTIONS

As at the latest practicable date, a total of 21,492,000 options had been granted and remain outstanding. The options are personal to the optionholders and are not transferable. The options are exercisable at a price of HK$0.32 per share, subject to adjustment, during the period from 7th May, 2002 to 31st December, 2007.

For cancellation of each option and renunciation of all rights thereunder, the optionholders will receive HK$0.35 in cash for each option. The option exercise price of HK$0.32 compared with the market price of each share of HK$0.65 on the latest practicable date, the market price of each share is at a premium of 103.1% over the option exercise price.

The offeror has stated that it does not intend to extend the offers which expire at 4:00 p.m. on 20th June, 2002 but has reserved the right to do so. However, if the offers become unconditional, it will remain open for acceptance for not less than 14 days from the date on which it would otherwise have expired, except in the event that the offers become unconditional on or before that date and the offeror makes or has made an announcement at least 14 days prior to that date that the offers will not remain open beyond that date. Accordingly, shareholders should have ample opportunity to assess their individual positions and to react accordingly.

The offers will not be capable of becoming unconditional in all respects on or before 12th August, 2002 or of being kept open after that time, unless they have previously become unconditional, although the offeror has reserved the rights with the permission of the Executive to extend the offers to a later date.

IRREVOCABLE UNDERTAKING TO ACCEPT THE SHARE OFFER

Super Drive, the share capital of which is 60% indirectly owned by Dr. Lily Chiang, owns 32.38% of the issued share capital of the company, has irrevocably undertaken to accept the share offer. The existence of this undertaking significantly increases the likelihood of the success of the offers and is likely to discourage other potential bidders during the existence of the offers.

RECOMMENDATION

Although the offer price of HK$0.67 represents a premium of 67.5% to the market price of the shares before the suspension in trading of the shares on 28th March, 2002, we considered that the share offer price does not adequately reflect the underlying consolidated net tangible asset value per share of the group. Furthermore we would expect control in a listed company the assets of which comprise principally of cash to pass at a premium to net tangible asset value reflecting the listing and existing shareholder base of the company.

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LETTER FROM ANGLO CHINESE

We believe that there exist parties who are interested in acquiring listed companies with significant cash resources and have considered the likelihood of an offer for the company at a higher price from another source. We have concluded that this would be unlikely while the offers were open and the irrevocable undertaking by Super Drive to accept still effective. We also recognise that the outstanding litigation against the company, the outcome and effect of which is uncertain, is likely to discourage other bidders from making an offer for the company at a price higher than the share offer price even if the offers lapse. Should the offers lapse we expect that the share price and trading liquidity might fall closer to levels prevailing before the offers on behalf of Ontime Capital Investment Limited were announced.

Shareholders who concur with our view that the share offer price does not adequately reflect the net tangible asset value of the company and its listed status can decline the share offer. However, if the share offer becomes unconditional, the shareholders will have 14 days in which to accept the share offer if they do not wish to remain as a shareholder following the acquisition of more than 50% of the issued share capital of the company by the offeror. If the share offer should lapse there may be a possibility of another potential offeror for the company emerging, particularly in the light of the fact that Super Drive has already signaled its intention to dispose of its shareholding.

However, in the circumstances and on balance we consider that the share offer is fair and reasonable to the shareholders of the company and we advise the independent board committee to recommend the shareholders to accept the share offer unless another higher offer is forthcoming before the closing of the offers. In the case of such other offer they should not accept the offers so that the offers do not become unconditional and lapse with the result that the Super Drive’s irrevocable undertaking would cease to be effective. Further advice from the independent board committee would be made available in the event of a higher offer. We emphasise however that the company has confirmed that no other approaches have been made since the first announcement of the offers.

Shareholders who wish to realize their investment at or near the share offer price can consider selling their shares in the market, if the price obtainable remains at current levels.

The proposals in respect of the options are appropriate as required by the Takeovers Code and are conditional upon the share offer becoming unconditional. In the event the share offer becomes unconditional we advise the board to recommend to the optionholders to accept the option offer, unless they consider the description of the intentions of the offeror in respect of the group to be sufficiently attractive for them to retain their interest in the company in whole or in part.

Yours faithfully, For and on behalf of

Anglo Chinese Corporate Finance, Limited

Dennis Cassidy

Director

– 24 –

FINANCIAL INFORMATION

APPENDIX I

SHARE CAPITAL AND SHARE OPTIONS

(a) Share Capital

As at the latest practicable date, the authorized and issued share capital of the company was as follows:

Authorised:

HK$

900,000,000 ordinary shares of HK$0.10 each 90,000,000 Issued and fully paid:

288,868,000 ordinary shares of HK$0.10 each 28,886,800

All the shares in issue rank pari passu in all respects as regards to voting, dividends and return of capital on a winding up.

The shares are listed and traded on the Stock Exchange. No part of the issued share capital of the company is listed or dealt in, nor is any listing of or permission to deal in the shares being or proposed to be sought on any other stock exchange.

The company had issued 2,388,000 shares since 31st March, 2001 and up to and including the latest practicable date.

(b) Share options

As at the latest practicable date, options to subscribe for 21,492,000 shares remained outstanding, details of which are set out below:

Exercise price No. of Shares Option exercisable Operative Date per share under options left period 4th February, 2002 HK$0.32 21,492,000 7th May, 2002 to 31st December, 2007

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FINANCIAL INFORMATION

APPENDIX I

SUMMARY OF FINANCIAL RESULTS FOR THE THREE YEARS ENDED 31ST MARCH, 2001

The following is a summary of the audited consolidated income statement of the group for the three years ended 31st March, 2001.

	2001	2000	1999
	HK$’000	HK$’000	HK$’000
Turnover	48,478	132,606	82,385
Profit/(loss) before taxation	12,793	41,584	31,211
Taxation	(1,988)	(6,060)	(175)
Profit/(loss) after taxation	12,793	41,584	31,036
Profit/(loss) attributable to shareholders	10,805	35,524	31,036
Profit retained at beginning of year	150,522	114,998	93,072
Dividend	(4,297)	–	(9,110)
Retained profit at end of year	157,030	150,522	114,998
Earnings/(loss) per share – Basic	4 cents	15 cents	15 cents
Dividend per share	1.5 cents	3 cents	8 cents

– 26 –

FINANCIAL INFORMATION

APPENDIX I

AUDITED CONSOLIDATED ACCOUNTS

Set out below are the audited consolidated results for each of the two years ended 31st March, 2001 and 2000, together with the relevant notes, including the principal accounting policies as extracted from the annual report of Pacific Challenge for the year ended 31st March, 2001:

Consolidated profit and loss account

for the year ended 31st March, 2001

Note TURNOVER – Continuing operations – Discontinued operations 5 GENERAL AND ADMINISTRATIVE EXPENSES – Continuing operations – Discontinued operations Unrealised loss on revaluation of investment in marketable securities, net – continuing operations Gain on disposal of investment in marketable securities – continuing operations 5 Other revenue – continuing operations 5 PROFIT FROM OPERATIONS Gain on disposal of subsidiaries-continuing operations 5 INTEREST EXPENSE – Continuing operations – Discontinued operations PROFIT BEFORE TAXATION 5&6 TAXATION 8 PROFIT ATTRIBUTABLE TO SHAREHOLDERS 9 Retained profit, beginning of year DIVIDEND 10 Retained profit, end of year EARNINGS PER SHARE-BASIC(HK$) 11	2001 HK$’000 26,092 22,386 48,478 (22,718) (13,479) (36,197) (4,027) 923 1,310 10,487 3,800 (603) (891) (1,494) 12,793 (1,988) 10,805 150,522 (4,297) 157,030 4 cents	2000 HK$’000 25,777 106,829 132,606 (10,912) (77,749) (88,661) – 27 – 43,972 – (1) (2,387) (2,388) 41,584 (6,060) 35,524 114,998 – 150,522 15 cents

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FINANCIAL INFORMATION

APPENDIX I

Consolidated statement of recognised gains and losses

for the year ended 31st March, 2001

Surplus on revaluation of shares of Hong Kong Exchanges and Clearing Limited Write-back of revaluation reserve upon disposal of subsidiaries Profit attributable to shareholders Total recognised gains	2001 HK$’000 – (3,319) 10,805 7,486	2000 HK$’000 3,319 – 35,524
		38,843

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FINANCIAL INFORMATION

APPENDIX I

Consolidated balance sheet

31st March, 2001

Note NON-CURRENT ASSETS Fixed assets 12 Investment in subsidiaries 13 Investment in an associate 14 Shares of Hong Kong Exchanges and Clearing Limited Trading rights of The Stock Exchange of Hong Kong Limited and Hong Kong Futures Exchange Limited Other non-current assets Total non-current assets CURRENT ASSETS Loans receivable 15 Accounts receivable 16 Deposits, prepayments and other receivables Investment in marketable securities 17 Margin client receivables Cash and bank balances 18 Total current assets CURRENT LIABILITIES Short-term bank loan, secured Accounts payable 19 Accruals and other payables Taxation payable Dividend payable Margin client payables Total current liabilities NET CURRENT ASSETS Total assets less current liabilities NON-CURRENT LIABILITIES Deferred taxation 20 NET ASSETS Representing – SHARE CAPITAL 21 RESERVES 23 RETAINED PROFIT SHAREHOLDERS’ EQUITY	2001 HK$’000 1,153 – 1,014 – – – 2,167 5,696 6,605 2,636 6,409 – 265,624 286,970 – (4,514) (18,014) (1,015) (4,297) – (27,840) 259,130 261,297 (106) 261,191 28,648 75,513 157,030 261,191	2000 HK$’000 3,154 – 1,014 11,654 7,171 2,130 25,123 – 187,452 1,978 – 66,127 184,336 439,893 (20,000) (144,474) (48,056) (4,882) – (20,915) (238,327) 201,566 226,689 (239) 226,450 23,888 52,040 150,522 226,450

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FINANCIAL INFORMATION

APPENDIX I

Consolidated cash flow statement

for the year ended 31st March, 2001

Note NET CASH INFLOW (OUTFLOW) FROM OPERATING ACTIVITIES 24.a RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received Interest paid Dividends paid TAXATION Hong Kong profits tax paid INVESTING ACTIVITIES Net cash outflow in respect of disposal of subsidiaries 24.b Purchase of fixed assets Purchase of investment in marketable securities Increase in loans receivable Proceeds from disposal of investment in marketable securities Increase in investment in an associate Others NET CASH INFLOW (OUTFLOW) BEFORE FINANCING FINANCING Proceeds from issuance of ordinary shares Shares issuance expenses Repayment of short-term bank loan INCREASE (DECREASE) IN CASH AND BANK BALANCES CASH AND BANK BALANCES, beginning of year CASH AND BANK BALANCES, end of year	2001 HK$’000 92,573 19,759 (1,494) – 18,265 (2,742) (22,872) (279) (13,279) (5,696) 3,766 – – (38,360) 69,736 31,892 (340) (20,000) 11,552 81,288 184,336 265,624	2000 HK$’000 (4,581) 17,948 (2,388) (26,276) (10,716) (3,337) – (2,784) – – 2,000 (1,014) 60 (1,738) (20,372) – – – – (20,372) 204,708 184,336

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FINANCIAL INFORMATION

APPENDIX I

Notes to the financial statements

for the year ended 31st March, 2001

1. PRINCIPAL ACTIVITIES

The Company is an investment holding company. Its subsidiaries are principally engaged in the provision of corporate finance advisory and other related services, and investment holding. In addition, during the year, the Group disposed of three subsidiaries which were principally engaged in the provision of stock brokerage, futures brokerage, and margin financing services.

2. BASIS OF PRESENTATION

On 8th March, 2001, Kistefos Investment A.S. (“Kistefos”), a 21.78% shareholder of the Company filed a petition against the Company and one of its directors to the Supreme Court of Bermuda (“the Court”) under Section 111(1) of the Companies Act 1981 of Bermuda. The petition was based on an alleged claim that certain affairs of the Company had been conducted in a manner which is oppressive or unfairly prejudicial to the interests of certain shareholders of the Company, including Kistefos itself. Pursuant to the petition, Kistefos intends to seek an order from the Court to either (i) enforce the Company or the respondent director to purchase all shares of the Company held by Kistefos, at a fair value to be determined by the Court or alternatively, (ii) an order that the Company be wound up.

As the petition is still in its preliminary stage, the Directors consider that the future outcome of such petition is still uncertain at the moment. Nevertheless, the Directors, after considering advice from its Bermuda legal advisors, believe that the Company has a reasonably good defence to the case. On that basis, the accompanying financial statements have been prepared on a going concern basis, and have not included any adjustments that might be required should the outcome of the petition be unfavourable to the Company. In connection with such petition, provision for legal expenses amounting to $5,000,000 (2000-Nil) has been recorded in the accompanying financial statements.

3. PRINCIPAL ACCOUNTING POLICIES

The financial statements have been prepared in accordance with Statements of Standard Accounting Practice issued by the Hong Kong Society of Accountants, accounting principles generally accepted in Hong Kong, the disclosure requirements of the Hong Kong Companies Ordinance and the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“the Stock Exchange”). Principal accounting policies are summarised below:

(a) Basis of measurement

The financial statements have been prepared on the historical cost basis, as modified by investment in marketable securities which is stated at fair value.

(b) Basis of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries (the “Group”), together with the Group’s share of post-acquisition results and reserves of its associate under the equity method of accounting. The results of subsidiaries acquired or disposed of during the year are recorded from or to their effective dates of acquisition or disposal. Significant intra-group transactions and balances have been eliminated on consolidation.

(c) Subsidiaries

A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of its issued voting share capital as a long-term investment. In the Company’s financial statements, investment in subsidiaries are stated at cost less provision for any impairment in value, while income from subsidiaries are recorded to the extent of dividends received and receivable.

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FINANCIAL INFORMATION

APPENDIX I

(d) Associates

An associate is a company, not being a subsidiary, in which the Group holds 20% or more of its issued voting share capital as a long-term investment and has significant influence over its financial and operating policies. In the consolidated financial statements, investment in associates is stated at the Group’s share of the fair value of the identifiable net assets of the associates at the time of acquisition, and adjusted for the Group’s share of undistributed post-acquisition profits or losses and reserves of the associates, distributions received from the associates and other necessary alterations in the Group’s proportionate interest in the associates arising from changes in the equity of the associates that have not been included in the income statement.

(e) Turnover and revenue recognition

Turnover comprises (i) corporate finance and investment advisory fees, (ii) underwriting and sub-underwriting fees, (iii) interest income from bank deposits and margin financing, (iv) dividend income, and (v) commission on securities and futures dealing.

Revenue is recognised when the outcome of a transaction can be measured reliably and when it is probable that the economic benefits associated with the transaction will flow to the Group. Revenues are recognised on the following bases:

• (i) Corporate finance and investment advisory fees are recognised when services are rendered;

• (ii) Underwriting and sub-underwriting fees are recognised on an accrual basis in accordance with the terms of the underlying agreements and mandates;

• (iii) Interest income from bank deposits and margin financing is recognised on a time proportion basis on the principal outstanding and at the rate applicable;

• (iv) Dividend income is recognised when the right to receive payment is established;

• (v) Commission on securities and futures dealing is recognised on the trade date basis;

• (vi) Gain on sale of investments is recognised when the relevant transaction is completed; and

• (vii) Rental income is recognised when rental become due and receivable.

(f) Taxation

Individual companies within the Group provide for income tax on the basis of their profit for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for profits tax purposes.

Deferred taxation is provided under the liability method, at the current tax rate, in respect of significant timing differences between profit as computed for taxation purposes and profit as stated in the financial statements, except when it is considered that no liability will arise in the foreseeable future. Deferred tax assets are not recognised unless the related benefits are expected to crystallise in the foreseeable future.

(g) Investment in marketable securities

Investment in marketable securities is carried at fair value in the balance sheet. Any unrealised holding gain or loss for investment in marketable securities is recognised in the income statement in the period when it arises.

Upon disposal or transfer of investment in marketable securities, any profit and loss arising thereon is accounted for in the income statement.

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FINANCIAL INFORMATION

APPENDIX I

(h) Fixed assets and depreciation

Fixed assets are stated at cost less accumulated depreciation. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the fixed assets have been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the fixed assets, the expenditure is capitalised as additional cost of the fixed asset.

Depreciation is calculated on the straight-line basis at annual rates estimated to write off the cost of each asset over its expected useful life. The annual rates are as follows:

Leasehold improvements 25%–33% (Over the unexpired period of the leases) Furniture and office equipment 20% Computer equipment 33% Motor vehicles 33%

The carrying value of fixed assets is assessed periodically or when factors indicating an impairment are present. Individual items of fixed assets carried at cost less accumulated depreciation are reduced to their recoverable amount if this is lower than net book value, with the difference charged to the income statement. In determining the recoverable amount of individual items of fixed assets, expected future cash flows are not discounted to their present value.

When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposals is included in the income statement.

(i) Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that takes a substantial period of time to prepare for its intended use or sale are capitalised as part of the cost of that asset. All other borrowing costs are recognised as an expense in the period in which they are incurred.

(j) Foreign currency translation

The Group maintains its books and records in Hong Kong dollars. Transactions in other currencies during the year are translated into Hong Kong dollars at the exchange rates in effect at the time of transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are translated into Hong Kong dollars at rates of exchange in effect at the balance sheet date. Exchange gain or loss is dealt with in the income statement.

(k) Employee retirement benefits

The costs of employee retirement benefits are recognised as an expense in the period in which they are incurred.

(l) Operating leases

Operating leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets remain with the lessors. Rental payments under operating leases are charged to the income statement on a straight-line basis over the period of the relevant leases.

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FINANCIAL INFORMATION

APPENDIX I

4. DISCONTINUED OPERATIONS

In March 2000, the Group disposed of its entire equity interest in Pacific Challenge Securities Limited, Pacific Challenge Futures Hong Kong Limited and Pacific Challenge Nominees Limited, all being wholly owned subsidiaries of the Group, to an independent third party at an aggregate consideration of $29,300,000. The transaction was completed on 29th June, 2000 and thereafter, the Group ceased its stock brokerage, futures brokerage and margin financing businesses. The results of these operations are presented as discontinued operations in the consolidated income statement for the year ended 31st March, 2001. The consolidated income statement for the year ended 31st March, 2000 has been restated to this effect.

5. TURNOVER AND SEGMENTAL INFORMATION

Analysis of turnover by principal activities together with their respective contributions to profit before taxation in the consolidated income statement is as follows:

Turnover 2001 2000 $’000 $’000 Continuing operations Corporate finance advisory and other related fees 14,065 20,355 Interest income from bank deposits, corporate finance operations and others 12,027 5,422 26,092 25,777 Discontinued operations Stock brokerage income 18,351 94,691 Futures brokerage income 389 1,122 Margin financing operations and others 3,646 6,339 Loan arranging and debt financing – 4,677 22,386 106,829 48,478 132,606 Unrealised loss on revaluation of investment in marketable securities, net Gain on disposal of investment in marketable securities Other revenue Gain on disposal of subsidiaries_(Note 4)_ Interest expense – Continuing operations – Discontinued operations

Profit before taxation 2001 2000 $’000 $’000 3,169 10,903 205 3,962 3,374 14,865 6,040 19,364 (17) 291 2,884 4,754 – 4,671 8,907 29,080 12,281 43,945 (4,027) – 923 27 1,310 – 3,800 – (603) (1) (891) (2,387) 12,793 41,584

Substantially all of the Group’s turnover is derived from Hong Kong.

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FINANCIAL INFORMATION

APPENDIX I

6. PROFIT BEFORE TAXATION

Profit before taxation in the consolidated income statement is arrived at after charging and crediting the following:

After charging – Interest expense on – bank loans wholly repayable within five years – other loans and payables wholly repayable within five years Depreciation of fixed assets Provision for doubtful debts Loss on disposal of fixed assets Provision for legal expenses Staff cost (including directors’ emoluments) Operating lease rentals for rented premises Auditors’ remuneration After crediting – Interest income from – bank deposits – other loans – margin loans Rental income less outgoings Write-back of provision for doubtful debts Exchange gain, net	2001 $’000 485 1,009 1,012 – – 5,000 14,937 2,184 330 15,221 940 3,598 1,310 819 76	2000 $’000 2,214 174 1,163 1,140 30 – 34,657 2,821 335
		8,716 2,224 7,008 – – 219

7. DIRECTORS’ AND SENIOR EXECUTIVES’ EMOLUMENTS

(a) Directors’ emoluments

Fees for executive directors Fees for non-executive directors Other emoluments for executive directors – Basic salaries, housing and other allowances – Discretionary bonuses – Contribution to mandatory provident fund	2001 $’000 – – 4,198 1,000 12 5,210	2000 $’000 1,000 150 4,534 3,204 –
		8,888

Analysis of directors’ emoluments by number of individuals within the following bands:

Executive directors Nil–$1,000,000 $1,000,001–$1,500,000 $3,000,001–$3,500,000 $3,500,001–$4,000,000 Non-executive directors Nil–$1,000,000	2001 1 1 1 – 4 7	2000 4 – – 2 3
		9

No directors waived any emoluments during the year.

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FINANCIAL INFORMATION

APPENDIX I

(b) Senior executives’ emoluments

Details of emoluments paid to the five highest paid individuals (including directors and employees) are:

Fees Basic salaries, housing and other allowances Bonuses Contribution to mandatory provident fund Number of directors included Number of employees included	2001 $’000 – 6,467 1,000 20 7,487 2001 2 3 5	2000 $’000 1,000 6,508 4,466 –
		11,974
		2000 3 2
		5

Analysis of emoluments paid to the aforementioned directors and employees by number of individuals within the following bands:

Nil–$1,000,000 $1,000,001–$1,500,000 $1,500,001–$2,000,000 $3,000,001–$3,500,000 $3,500,001–$4,000,000	2001 2 2 – 1 – 5	2000 2 – 1 – 2
		5

During the year, no emolument of the five highest paid individuals was incurred as inducement to join or upon joining the Group or as compensation for loss of office.

8. TAXATION

Taxation in the consolidated income statement consists of:

Current tax-provision for Hong Kong profits tax Write-back of deferred taxation	2001 $’000 1,988 – 1,988	2000 $’000 6,321 (261)
		6,060

The Company is exempted from taxation in Bermuda until 2016. Hong Kong profits tax was provided at the rate of 16% (2000-16%) on the estimated assessable profit arising in or derived from Hong Kong.

9. PROFIT ATTRIBUTABLE TO SHAREHOLDERS

The consolidated profit attributable to shareholders included a profit of approximately $290,000 (2000-$3,790,000) dealt with in the financial statements of the Company.

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FINANCIAL INFORMATION

APPENDIX I

10. DIVIDEND

2001 $’000 Interim dividend – Nil (2000 – $0.03) per ordinary share – Proposed final dividend – $0.015 (2000 – Nil) per ordinary share 4,297 4,297	2000 $’000 7,166 –
	7,166

11. EARNINGS PER SHARE

The calculation of earnings per share was based on the consolidated profit attributable to shareholders for the year of approximately $10,805,000 (2000 – $35,524,000) and on the weighted average number of approximately 266,788,000 (2000 – 238,880,000) shares in issue during the year.

Diluted earnings per share is not shown as there are no share options, warrants or any other convertible instruments outstanding during the year which would result in dilution.

12. FIXED ASSETS

Movements in fixed assets (consolidated) are:

Leasehold improvements $’000 Cost Beginning of year 2,307 Addition – Disposals – Attributable to disposal of subsidiaries (253) End of year 2,054 Accumulated depreciation Beginning of year 1,271 Provision for the year 584 Disposals – Attributable to disposal of subsidiaries (253) End of year 1,602 Net book value End of year 452 Beginning of year 1,036	Furniture and office equipment $’000 2,014 113 (8) (852) 1,267 647 253 (8) (204) 688 579 1,367	2001 Computer equipment $’000 1,659 166 – (1,549) 276 987 96 – (929) 154 122 672	Motor vehicles $’000 715 – – – 715 636 79 – – 715 – 79	Total $’000 6,695 279 (8) (2,654) 4,312 3,541 1,012 (8) (1,386) 3,159 1,153 3,154	2000 Total $’000 4,020 2,784 (109) –
					6,695
					2,457 1,163 (79) –
					3,541
					3,154
					1,563

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FINANCIAL INFORMATION

APPENDIX I

13. INVESTMENT IN SUBSIDIARIES

In the Company’s balance sheet, investment in subsidiaries consists of:

Unlisted shares, at cost Due from subsidiaries Due to a subsidiary	2001 $’000 131,899 8,946 (14,988) 125,857	2000 $’000 131,899 23,674 –
		155,573

The amounts due from/to subsidiaries are unsecured, non-interest bearing and without pre-determined repayment terms.

The underlying value of investment in subsidiaries was, in the opinion of the Company’s Directors, not less than its carrying value as at 31st March, 2001.

Details of subsidiaries as at 31st March, 2001 are as follows:

		Proportion of nominal	Proportion of nominal	Proportion of nominal
	Place of	value of	issued
	incorporation	capital held			Issued and fully
Name of subsidiary	and operations	by the Company			paid capital	Principal activities
		Directly	Indirectly
Pacific Challenge	The British Virgin	100%		–	$1,000	Investment holding
Incorporated	Islands
Optima Worldwide	The British	100%		–	$1,493	Inactive
Investment Limited	Virgin Islands
Pacific Challenge	Hong Kong	–		100%	$10,000,000	Provision of corporate
Capital Limited						finance advisory and
						underwriting services
Pacific Challenge	Hong Kong	–		100%	$20	Inactive
Finance Limited
Pacific Challenge	The British	–		100%	US$1	Investment holding
Investments Limited	Virgin Islands
E1 Corporate Finance	Hong Kong	–		100%	$500,000	Investment advisory
Limited (formerly
known as Pacific
Challenge Asset
Management Limited)
Key Foundation	The British Virgin	–		100%	US$1	Investment holding
Limited	Islands
E1 On-line Limited	Hong Kong	–		100%	$2	Provision of
(formerly known as						management services
Pacific Challenge
On-line Limited)

None of the subsidiaries had any loan capital in issue at any time during the year ended 31st March,

– 38 –

FINANCIAL INFORMATION

APPENDIX I

14. INVESTMENT IN AN ASSOCIATE

Investment in an associate (consolidated) consists of:

	2001	2000
	$’000	$’000
Share of net asset value of an associate	1,014	1,014

The details of the associate are as follows:

		Proportion of nominal
	Place of	value of issued
	incorporation	capital held	Issued and fully
Name of subsidiary	and operations	by the Company	paid capital	Principal activities
		Directly Indirectly
Pacific Challenge	The British Virgin	– 26%	US$50	Investment holding
Technology Capital	Islands
Limited

The associate holds approximately 2% shareholding interest in E1 Media Technology Limited, a company beneficially owned by a director of the Company.

In the opinion of the Directors, the underlying value of the investment in an associate is not less than its carrying value as at 31st March, 2001.

15. LOANS RECEIVABLE

Loans receivable (consolidated) consists of:

Convertible loan receivable (a) Loans to an independent third party (b)	2001 $’000 3,902 1,794 5,696	2000 $’000 – –
		–

• (a) During the year, the Group granted a one-year term loan amounting to US$500,000 to Muse Corporation (“MC”), a company incorporated in the British Virgin Islands which is principally engaged in the provision of information technology solution services. The loan is unsecured, bears interest at 10% per annum and is repayable on 31st January, 2002. Under the loan agreement, such loan receivable is convertible into ordinary shares of MC at MC’s discretion on or before 31st January, 2002, on condition that MC be able to consummate financing in the form of equity shares from other investors by an amount of not less than US$1,000,000. As at 31st March, 2001, MC has not exercised its conversion right.

• (b) The amounts represent advances to an independent third party in the United States of America. Such advances are unsecured, non-interest bearing and have no pre-determined repayment date.

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FINANCIAL INFORMATION

APPENDIX I

16. ACCOUNTS RECEIVABLE

The credit terms of the Group range from 0 days to 30 days. An ageing analysis of accounts receivable is as follows:

Accounts receivable 0–1 month 2–3 months 4–6 months Less: Provision for doubtful debts	Consolidated 2001 2000 $’000 $’000 4,792 152,996 – 911 1,813 34,881 – (1,336) 6,605 187,452	Company 2001 2000 $’000 $’000 – 151 – – 114 – – – 114 151	Company 2001 2000 $’000 $’000 – 151 – – 114 – – – 114 151
			151

17. INVESTMENT IN MARKETABLE SECURITIES

Investment in marketable securities (consolidated) consists of:

Listed shares, at quoted market value – Listed on The Stock Exchange of Hong Kong Limited – Listed on Nasdaq, The United States of America	2001 $’000 5,130 1,279 6,409	2000 $’000 – –
		–

18. CASH AND BANK BALANCES

Cash and bank balances – general accounts – trust accounts	Consolidated 2001 2000 $’000 $’000 265,624 162,341 – 21,995 265,624 184,336	Company 2001 2000 $’000 $’000 100,208 38,916 – – 100,208 38,916	Company 2001 2000 $’000 $’000 100,208 38,916 – – 100,208 38,916
			38,916

19. ACCOUNTS PAYABLE

An ageing analysis of accounts payable is as follows:

Accounts payable 0–1 month 2–3 months 4–6 months	Consolidated 2001 2000 $’000 $’000 – 143,746 – – 4,514 728 4,514 144,474	Company 2001 2000 $’000 $’000 – – – – 703 – 703 –	Company 2001 2000 $’000 $’000 – – – – 703 – 703 –
			–

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FINANCIAL INFORMATION

APPENDIX I

20. DEFERRED TAXATION

Movement in deferred taxation (consolidated) is:

Beginning of year Write-back of deferred taxation Disposal of subsidiaries End of year	2001 $’000 239 – (133) 106	2000 $’000 500 (261) –
		239

Deferred taxation represents the taxation effect of the timing differences relating to accelerated depreciation for taxation purposes.

21. SHARE CAPITAL

Authorised-shares of $0.10 each Issued and fully paid-shares of $0.10 each Beginning of year Issuance of ordinary shares End of year	2001 Number of Nominal shares value ’000 $’000 900,000 90,000 238,880 23,888 47,600 4,760 286,480 28,648	2000 Number of Nominal shares value ’000 $’000 900,000 90,000 238,880 23,888 – – 238,880 23,888	2000 Number of Nominal shares value ’000 $’000 900,000 90,000 238,880 23,888 – – 238,880 23,888
			23,888 –
			23,888

On 29th August, 2000, the Company issued an aggregate of 47,600,000 ordinary shares of $0.10 each at $0.67 per share to certain independent third parties. Net proceeds amounting to approximately $31,552,000 are intended for use as working capital of the Company.

22. SHARE OPTIONS

The Company has a share option scheme under which it may grant options to employees of the Group (including executive directors of the Company) to subscribe for shares in the Company, subject to a maximum of 10% of the nominal value of the issued share capital of the Company from time to time, excluding for this purpose shares issued on exercise of options. The subscription price will be determined by the Company’s board of directors, and will not be less than the higher of the nominal value of the shares and 80% of the average of the closing prices of the shares quoted on The Stock Exchange of Hong Kong Limited on the five trading days immediately preceding the date of offer of the options. As at 31st March, 2001, no option was granted under the share option scheme.

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FINANCIAL INFORMATION

APPENDIX I

23. RESERVES

Consolidated

Beginning of year Surplus on revaluation of shares of Hong Kong Exchanges and Clearing Limited Write-back of revaluation reserve upon disposal of subsidiaries Issuance of ordinary shares (Note 21) Shares issuance expenses Dividend End of year	Share premium $’000 39,136 – – 27,132 (340) – 65,928	2001 Other Revaluation reserves reserve $’000 $’000 9,585 3,319 – – – (3,319) – – – – – – 9,585 –	Total $’000 52,040 – (3,319) 27,132 (340) – 75,513	2000 Total $’000 55,887 3,319 – – – (7,166) 52,040

Company

Beginning of year Issuance of ordinary shares (Note 21) Share issuance expenses Dividend End of year	2001 Share Contributed premium surplus* $’000 $’000 39,136 122,864 27,132 – (340) – – – 65,928 122,864	Total $’000 162,000 27,132 (340) – 188,792	2000 Total $’000 169,166 – – (7,166) 162,000

• Contributed surplus represents the difference between the aggregate net asset value of subsidiaries acquired as a result of the reorganisation in preparation for the listing the Company’s shares on The Stock Exchange of Hong Kong Limited and the nominal amount of the Company’s shares issued for the acquisition. Under Section 54 of the Companies Act 1981 of Bermuda, contributed surplus is available for distribution as dividends to shareholders subject to the provisions of the Company’s Bye-laws and provided that immediately following the distribution, the Company is able to pay its liabilities as they fall due or the realisable value of the Company’s assets would not be less than the aggregate of its liabilities and its issued share capital and share premium accounts.

As at 31st March, 2001, the Company’s reserves available for distribution to shareholders represented contributed surplus of approximately $122,864,000 (2000 – $122,864,000) and retained profit of approximately $1,502,000 (2000 – $5,509,000).

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FINANCIAL INFORMATION

APPENDIX I

24. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

• (a) Reconciliation of profit before taxation to net cash inflow (outflow) from operating activities:

Profit before taxation Depreciation of fixed assets Interest income Interest expense Loss on disposal of fixed assets Gain on disposal of investment in marketable securities Unrealised loss on revaluation of investment in marketable securities, net Gain on disposal of subsidiaries Decrease (Increase) in accounts receivable (Increase) Decrease in deposits, prepayments and other receivables Increase in margin client receivables Increase in other non-current assets Increase in accounts payable, accruals and other payables (Decrease) Increase in margin client payables Decrease in due to directors Net cash inflow (outflow) from operating activities	2001 $’000 12,793 1,012 (19,759) 1,494 – (923) 4,027 (3,800) 80,840 (1,155) (11,406) (146) 43,622 (14,026) – 92,573	2000 $’000 41,584 1,163 (17,948) 2,388 30 (27) – – (86,103) 1,635 (51,531) – 107,538 16,064 (19,374) (4,581)

(b) Details of the combined net assets of the subsidiaries disposed of on 29th June, 2000 are as follows:

Fixed assets Shares of Hong Kong Exchanges and Clearing Limited Trading rights of the Stock Exchange and the Hong Kong Futures Exchange Limited Other non-current assets Cash and bank balances Accounts receivable Deposits, prepayments and other receivables Margin client receivables Accounts payable, accruals and other payables Margin client payables Taxation payable Deferred taxation Net assets disposed of Reversal of revaluation reserve upon disposal of subsidiaries Gain on disposal Consideration Analysis of net cash outflow in respect of the disposal of subsidiaries: Cash consideration Cash and bank balances of subsidiaries disposed of Net cash outflow in respect of disposal of subsidiaries

$’000 1,268 11,654 7,171 2,276 52,172 100,007 991 77,533 (213,624) (6,889) (3,607) (133) 28,819 (3,319) 3,800 29,300 29,300 (52,172) (22,872)

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FINANCIAL INFORMATION

APPENDIX I

25. BANKING FACILITIES

The Group had available credit facilities of approximately $25 million (2000-$155 million) as at 31st March, 2001 of which approximately $25 million (2000-$131 million) were unutilised at that date. The facilities were secured by a corporate guarantee given by a subsidiary of the Company.

26. COMMITMENTS

(a) Operating lease commitments

The Group had aggregate outstanding operating lease commitments in respect of office premises and staff quarter under various non-cancellable operating lease agreements. The total commitments payable under these agreements are analysed as follows:

Amounts payable – within one year – within one year to two years	2001 $’000 2,527 141 2,668	2000 $’000 1,698 2,287
		3,985

The commitments payable within the next twelve months are analysed as follows:

Leases expiring within a period – not exceeding one year – within two years to five years	2001 $’000 831 1,696 2,527	2000 $’000 2 1,696
		1,698

(b) Other commitment

On 18th March, 2001, the Group entered into a provisional joint venture agreement with an independent third party (“the joint venture partner”) under which the Group will set up a company to be incorporated in the British Virgin Islands jointly with the joint venture partner. The Group’s share of total investment in the joint venture amounts to approximately $19,734,000 (equivalent to NT$82,915,000). The transaction is expected to be completed in late July 2001.

27. PENSION SCHEME

Since 1st December, 2000, the Group has arranged for its Hong Kong employees to join the Mandatory Provident Fund Scheme (“the MPF Scheme”), a defined contribution scheme managed by an independent trustee. Under the MPF Scheme, each of the Group (the employer) and its employees make monthly contributions to the scheme at 5% of the employees’ earnings as defined under the Mandatory Provident Fund legislation. The annual contributions of each of the employer and employees are subject to a cap of $12,000 and thereafter contributions are voluntary. During the year ended 31st March, 2001, the aggregate amount of the Group’s employer contributions amounted to approximately $50,000.

28. SUBSEQUENT EVENT

On 25th April, 2001, the Group entered into a shareholders’ agreement with an independent third party (“co-shareholder”) under which the Group has committed to make a capital contribution of $50 million to a 50% owned joint venture, to be set up as a direct investment company. The transaction was completed on 31st May, 2001.

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FINANCIAL INFORMATION

APPENDIX I

UNAUDITED CONSOLIDATED RESULTS OF THE GROUP FOR THE SIX MONTHS ENDED 30TH SEPTEMBER, 2001

The following is the unaudited results of the group extracted from the respective interim report of the company for the six months ended 30th September, 2001:

Consolidated income statement – unaudited

For the six months ended 30 September 2001

30 Notes Turnover – Continuing operations (3), (14) – Discontinued operations (3) Cost of sales General and administrative expenses – Continuing operations – Discontinued operations Provision for impairment on investment and loss on revaluation of marketable securities Provision for legal fees Gain on disposal of marketable securities Gain on disposal of subsidiaries Other revenue (Loss) Profit from operations (3) Interest expense – Continuing operations – Discontinued operations (Loss) Profit before taxation (4) Taxation (5) (Loss) Profit after taxation and before minority interest Minority interest (Loss) Profit attributable to shareholders Final dividend of $0.015 (2000 – Nil) per ordinary share (Loss) Earnings per share – basic_(HK$) (6)_	Six months ended September 30 2001 HK$’000 14,203 – 14,203 (3,175) 11,028 (12,425) – (1,397) (6,724) (12,000) 460 – 428 (19,233) – – – (19,233) – (19,233) (37) (19,270) 4,297 (6.7)cents	Six months ended September 2000 HK$’000 16,226 22,285 38,511 – 38,511 (9,727) (14,269) 14,515 – – – 3,800 – 18,315 (265) (891) (1,156) 17,159 (1,782) 15,377 – 15,377 – 6.2 cents

– 45 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated statement of recognised gains and losses – unaudited

For the six months ended 30 September 2001

30 Note (Loss) Profit attributable to shareholders Write back of revaluation reserve upon disposal of subsidiaries (13) Translation adjustments (13) Net recognised (losses) gains	Six months ended September 30 2001 HK$’000 (19,270) – (590) (19,860)	Six months ended September 2000 HK$’000 15,377 (3,319) – 12,058

– 46 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated balance sheet

As at 30 September 2001

			As at		31 March
		30	September		2001
			2001	(Restated –
		(Unaudited)			Note 1.a)
	Notes		HK$’000		HK$’000
NON-CURRENT ASSETS
Machinery and equipment	(7),(14)		3,488		1,153
Investment in associates	(8)		51,014		1,014
Total non-current assets			54,502		2,167
CURRENT ASSETS
Inventories	(14)		23,727		–
Loan receivable			3,902		5,696
Deposits, prepayments and
other receivables			2,126		2,636
Accounts receivable	(9)		9,686		6,605
Prepaid taxation			1,530		–
Investment in marketable securities			4,953		6,409
Cash and bank balances			184,111		265,624
Total current assets			230,035		286,970
CURRENT LIABILITIES
Accounts payable	(10)		(7,373)		(4,514)
Accruals and other payables			(24,757)		(18,014)
Due to a minority shareholder
of a subsidiary	(14)		(5,587)		–
Taxation payable			(931)		(1,015)
Dividend payable			(4,297)		–
Total current liabilities			(42,945)		(23,543)
Net current assets			187,090		263,427
Total assets less current liabilities			241,592		265,594
NON-CURRENT LIABILITIES
Deferred taxation	(11)		(106)		(106)
MINORITY INTEREST			(155)		–
Net assets			241,331		265,488
Represented by –
SHARE CAPITAL	(12)		28,648		28,648
RESERVES	(13)		212,683		232,543
PROPOSED DIVIDEND	(13)		–		4,297
Shareholders’ equity			241,331		265,488

– 47 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated cash flow statement – unaudited

For the six months ended 30 September 2001

30 Net cash (outflow) inflow from operating activities Returns on investments and servicing of finance Interest received Interest paid Taxation Hong Kong profits tax paid Investing activities Net cash outflow in respect of disposal of subsidiaries Net cash outflow in respect of acquisition of a subsidiary Purchase of machinery and equipment Purchase of marketable securities Proceeds from disposal of marketable securities Increase in investment in an associate Net cash (outflow) inflow before financing Financing Proceeds from issuance of ordinary shares Receipt of short-term loan receivable Repayment of short-term bank loan (Decrease) Increase in cash and bank balances Effect of foreign exchange rate changes Cash and bank balances, beginning of period Cash and bank balances, end of period	Six months ended September 30 2001 HK$’000 (33,588) 6,241 – 6,241 (1,614) – (483) (1,507) (1,434) 1,462 (50,000) (51,962) (80,923) – – – – (80,923) (590) 265,624 184,111	Six months ended September 2000 HK$’000 81,601 10,797 (1,156) 9,641 (1,191) (22,872) – – (5,953) – – (28,825) 61,226 31,552 20,000 (20,000) 31,552 92,778 – 184,336 277,114

– 48 –

FINANCIAL INFORMATION

APPENDIX I

NOTES TO THE INTERIM FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION AND PREPARATION

This interim financial report has been prepared in accordance with the principal accounting policies set out in the Company’s audited financial statements as at and for the year ended 31 March 2001 except for changes set out below, and complies with Statement of Standard Accounting Practice (“SSAP”) Number 25 issued by the Hong Kong Society of Accountants (“HKSA”) and the disclosure requirements set out in Appendix 16 of the Listing Rules of The Stock Exchange of Hong Kong Limited. The information included in the interim financial report is unaudited, other than the consolidated balance sheet as at 31 March 2001, which has been extracted from the audited financial statements as at that date.

Effective 1 April 2001, the following SSAPs issued by the HKSA were adopted by the Company and its subsidiaries (collectively “the Group”):

SSAP 9 (revised): Events after the balance sheet date SSAP 14 (revised): Leases SSAP 26: Segment reporting SSAP 28: Provisions, contingent liabilities and contingent assets SSAP 29: Intangibles assets SSAP 30: Business combinations SSAP 31: Impairment of assets SSAP 32: Consolidated financial statements and accounting for investments in subsidiaries

The changes to the Group’s accounting policies and the effect of adopting these new policies are set out below:

• a. SSAP 9 (revised): Events after the balance sheet date

In the prior year, dividends proposed or declared after the balance sheet date in respect of an accounting period prior to the balance sheet date were recognised as a liability at the balance sheet date. In order to comply with SSAP 9 (revised) “Events after the balance sheet date”, the Group recognises a liability for dividends in the accounting period in which they are declared or proposed by the directors. The new accounting policy has been adopted retrospectively, with the opening balance of reserves and the comparative information adjusted for the amounts relating to prior periods.

• b. SSAP 26: Segment reporting

In Note 3 to the interim financial report, the Group has disclosed segment revenue and results. The primary segment is defined by business category, while the secondary segment is defined by geographical location of customers.

c. SSAP 28: Provisions, contingent liabilities and contingent assets

A provision is recognised when there is a present obligation, legal or constructive, as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed regularly and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation.

Contingent liabilities are not recognised in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements but disclosed when an inflow of economic benefits is probable.

– 49 –

FINANCIAL INFORMATION

APPENDIX I

d. SSAP 31: Impairment of assets

Machinery and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of one of these assets may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss, representing the difference between the carrying amount and the recoverable amount, is recognised in the income statement. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the disposal of an asset in an arm’s length transaction less the costs of the disposal, while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

Reversal of an impairment loss of an asset recognised in prior years is recorded when there is an indication that the impairment loss recognised for the asset no longer exists or has decreased. The reversal is recorded in the income statement.

Except for the restatement of the opening balance of reserves and the reclassification of comparative figures in the balance sheet in relation to the adoption of SSAP Number 9 (revised), the adoption of the above standards had no material effect on amounts reported in the prior period.

(2) LEGAL PROCEEDING BROUGHT BY A SHAREHOLDER

On 8 March, 2001, Kistefos Investment, A.S. (“Kistefos”), a shareholder of the Company, filed a petition (the “Petition”) against the Company and one of its directors to The Supreme Court of Bermuda (the “Court”) under Section 111(1) of the Companies Act 1981 of Bermuda. The Petition was based on an alleged claim that certain affairs of the Company had been conducted in a manner which is oppressive or unfairly prejudicial to the interests of certain shareholders of the Company, including Kistefos itself. Pursuant to the Petition, Kistefos intends to seek an order from the Court to either (i) enforce the Company or the director to purchase all shares in the Company held by Kistefos, at a fair value to be determined by the Court, or (ii) wind up the Company by the Court.

After taking legal advice from its legal advisors in Bermuda, the Company has made a strike out application in relation to the Petition, the court hearing of which was completed in September 2001. The Company has been advised by its legal advisors in Bermuda that the Acting Judge of the Court has, in his judgement made in October 2001, struck out the relief of winding up the Company claimed by Kistefos, while the remaining relief claimed by Kistefos in the Petition remains to be dealt with by the Court in subsequent hearings. The Directors, after considering advice from its Bermuda legal advisors, believe that the Company has a reasonably good defense to the remaining claimed relief in the Petition. In connection with the Petition, a provision for legal fees amounting to HK$12,000,000 has been recorded during the six months ended 30 September 2001 (note – HK$5,000,000 was provided during the year ended 31 March 2001).

– 50 –

FINANCIAL INFORMATION

APPENDIX I

(3) PRINCIPAL ACTIVITIES AND SEGMENT INFORMATION

An analysis of the Group’s consolidated turnover and contribution to (loss) profit from operations by business segment and geographical location is as follows:

			Contribution to	Contribution to	(loss)
	Turnover		profit from operations
	Six months ended		Six months ended
	30 September		30 September
	2001	2000	2001		2000
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)
	HK$’000	HK$’000	HK$’000		HK$’000
By business segment –
Continuing operations
Corporate finance advisory
and other related fees	4,370	10,838	699		6,056
Manufacturing and trading	4,482	–	560		–
Interest income and others	5,351	5,388	5,351		5,388
	14,203	16,226	6,610		11,444
Discontinued operations
Stock brokerage	–	18,351	–		5,149
Futures brokerage	–	389	–		(17)
Margin financing and others	–	3,545	–		2,884
	–	22,285	–		8,016
	14,203	38,511	6,610		19,460
Provision for impairment on
investment and loss on
revaluation of marketable
securities			(6,724)		–
Provision for legal fees			(12,000)		–
Gain on disposal of marketable
securities			460		–
Gain on disposal of subsidiaries			–		3,800
Other revenue			428		–
Other general and administrative
expenses			(8,007)		(4,945)
			(19,233)		18,315
By geographical location –
Continuing operations
Hong Kong	9,721	16,226	(19,793)		10,299
Taiwan	4,482	–	560		–
	14,203	16,226	(19,233)		10,299
Discontinued operations
Hong Kong	–	22,285	–		8,016
	14,203	38,511	(19,233)		18,315

– 51 –

FINANCIAL INFORMATION

APPENDIX I

(4) (LOSS) PROFIT BEFORE TAXATION

(Loss) Profit before taxation is arrived at after charging and crediting the following:

		Six months ended	Six months ended
		30 September	30 September
		2001	2000
		(Unaudited)	(Unaudited)
		HK$’000	HK$’000
	After charging –
	Interest expense on
	– bank loans and overdrafts wholly
	repayable within five years	–	485
	– other loans wholly
	repayable within five years	–	671
	Depreciation of machinery and equipment	453	601
	Staff cost (including directors’ emoluments)	7,341	9,378
	Operating lease rental for rented premises	1,229	1,085
	After crediting –
	Interest income from
	– bank deposits	6,095	6,771
	– other loans	146	547
	– margin loans	–	3,479
(5)	TAXATION
	Taxation consists of:
		Six months ended	Six months ended
		30 September	30 September
		2001	2000
		(Unaudited)	(Unaudited)
		HK$’000	HK$’000
	Hong Kong profits tax	–	1,782

No taxation was provided during the period ended 30 September 2001 (2000 – provided at 16%) as the Company had no assessable profit during the period.

The Company is exempted from taxation in Bermuda until 2016.

(6) (LOSS) EARNINGS PER SHARE

The calculation of basic (loss) earnings per share was based on the consolidated loss attributable to shareholders of HK$19,270,000 (2000 – profit of HK$15,377,000) and on the weighted average number of approximately 286,480,000 (2000 – 247,464,000) shares in issue during the period.

Diluted (loss) earnings per share for the six months ended 30 September 2001 and 2000 have not been calculated because no potential dilutive ordinary shares existed during such periods.

– 52 –

FINANCIAL INFORMATION

APPENDIX I

(7) MACHINERY AND EQUIPMENT

Movements of machinery and equipment were:

Leasehold Improvement HK$’000 Cost Beginning of period/year 2,054 Additions – Disposal – Attributable to the acquisition (disposal) of a subsidiary 323 End of period/year 2,377 Accumulated depreciation Beginning of period/year 1,602 Charge for the period/year 291 Disposal – Attributable to the disposal of a subsidiary – End of period/year 1,893 Net book value End of period/year 484 Beginning of period/year 452	Six months ended 30 September 2001 (Unaudited) Furniture & Computer Motor Fixtures Equipment Vehicle Machinery HK$’000 HK$’000 HK$’000 HK$’000 1,267 276 715 – 325 13 323 846 – – – – 50 81 – 827 1,642 370 1,038 1,673 688 154 715 – 110 27 25 – – – – – – – – – 798 181 740 – 844 189 298 1,673 579 122 – –	Total HK$’000 4,312 1,507 – 1,281 7,100 3,159 453 – – 3,612 3,488 1,153	Year ended 31 March 2001 (Audited) HK$’000 6,695 279 (8) (2,654)
			4,312
			3,541 1,012 (8) (1,386)
			3,159
			1,153
			3,154

(8) INVESTMENT IN ASSOCIATES

Investment in associates consists of:

	As at	As at
	30 September	31 March
	2001	2001
	(Unaudited)	(Audited)
	HK$’000	HK$’000
Unlisted shares, at cost	51,014	1,014

In the opinion of the Directors, the underlying value of the investment in associates is not less than the carrying value as at 30 September 2001.

– 53 –

APPENDIX I

FINANCIAL INFORMATION

Details of associates, held indirectly by the Company as at 30 September 2001 are as follows:

		Percentage
		of nominal
	Place of	value of	Issued
	incorporation/	issued	share	Principal
Name	operations	capital held	capital	activities
E1–SkyTech Investment	Cayman Islands/	50%	HK$350,000	Operating of a
Company Limited	Hong Kong			direct investment
				fund
Pacific Challenge	British Virgin	26%	US$50	Investment
Technology Capital	Islands/			holding
Limited	Hong Kong

(9) ACCOUNTS RECEIVABLE

The Group has granted credit periods ranging from 0 to 180 days.

The ageing analysis for accounts receivable is as follows:

Accounts receivable 0–1 month 1–2 months 2–3 months 4–6 months Over 6 months	As at 30 September 2001 (Unaudited) HK$’000 8,886 333 421 – 46 9,686	As at 31 March 2001 (Audited) HK$’000 4,792 – – 1,813 –
		6,605

(10) ACCOUNTS PAYABLE

The ageing analysis for accounts payable is as follows:

Accounts payable 0–1 month 1–2 months 2–3 months 4–6 months Over 6 months	As at 30 September 2001 (Unaudited) HK$’000 755 2,505 775 – 3,338 7,373	As at 31 March 2001 (Audited) HK$’000 – – – 4,514 –
		4,514

– 54 –

FINANCIAL INFORMATION

APPENDIX I

(11) DEFERRED TAXATION

Deferred taxation represents the taxation effect of the timing differences relating to accelerated depreciation for taxation purposes.

As at 30 September 2001, the Group has an unprovided deferred taxation asset, primarily representing the tax effect of cumulative tax losses (subject to the approval of the relevant tax authority), amounting to approximately HK$2,024,000.

(12) SHARE CAPITAL

Authorised – shares of HK$0.10 each Issued and fully paid – shares of HK$0.10 each	As at 30 September 2001 (Unaudited) Number Nominal of shares value ’000 HK$’000 900,000 90,000 286,480 28,648	As at 31 March 2001 (Audited) Number Nominal of shares value ’000 HK$’000 900,000 90,000 286,480 28,648	As at 31 March 2001 (Audited) Number Nominal of shares value ’000 HK$’000 900,000 90,000 286,480 28,648
			28,648

(13) RESERVES AND PROPOSED DIVIDEND

										Six months
										ended
		Six months ended 30 September 2001							30	September
	Share	Retained		Other				Proposed		2000
	premium	profit		reserves		Total		dividend*		Total
**(Unaudited) **		**(Unaudited) **	**(Unaudited) **		**(Unaudited) **		**(Unaudited) **		(Unaudited)
	HK$’000	HK$’000		HK$’000		HK$’000		HK$’000		HK$’000
Beginning of period
– as originally stated	65,928	157,030		9,585		232,543		–		202,562
– prior year
adjustment
(Note 1.a)	–	–		–		–		4,297		–
– as restated	65,928	157,030		9,585		232,543		4,297		202,562
Issuance of ordinary
shares	–	–		–		–		–		26,792
Write–back of investment
revaluation reserve
upon disposal of
subsidiary companies	–	–		–		–		–		(3,319)
Translation adjustments	–	–		(590)		(590)		–		–
(Loss) Profit attributable
to shareholders	–	(19,270)		–		(19,270)		–		15,377
Final dividend for the
year ended
31 March 2001	–	–		–		–		(4,297)		–
End of period	65,928	137,760		8,995		212,683		–		241,412

* There was no proposed dividend in shareholders’ equity for the six months ended 30 September 2000.

– 55 –

FINANCIAL INFORMATION

APPENDIX I

(14) RELATED PARTY TRANSACTIONS

The Group had the following transactions with related parties during the period:

	Six months ended	Six months ended
	30 September	30 September
	2001	2000
	(Unaudited)	(Unaudited)
	HK$’000	HK$’000
Purchase of machinery and equipment and
inventories from a related company, in which
Mr. L. Yen, a minority shareholder of
a subsidiary, has beneficial interest	15,970	–
Purchase of inventories from a related company,
in which Mr. S. C. Kwan,
a director of a subsidiary,
has beneficial interest	7,488	–
Receipt of investment management fee from
E1–SkyTech Investment Company Limited,
an associate	667	–
Receipt of fee income from
E1–SkyTech Investment Company Limited,
an associate	500	–

An amount due to a minority shareholder of a subsidiary is unsecured, non-interest bearing and with no fixed repayment terms.

– 56 –

FINANCIAL INFORMATION

APPENDIX I

STATEMENT OF THE UNAUDITED ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS OF THE GROUP

The following is a statement of the unaudited adjusted consolidated net tangible assets of the group, based on the audited consolidated financial statements of the group as at 31st March, 2001 and adjusted as follows:

Restated audited consolidated net tangible assets of the group as at 31st March, 2001_(note 1)_ Final dividend for the year ended 31st March, 2001 paid on 26th October, 2001 Unaudited consolidated loss for the period from 1st April, 2001 to 30th September, 2001 Unaudited consolidated loss for the period from 1st October, 2001 to 31st March, 2002 Cumulative reserve movement on translation adjustments Adjusted consolidated net tangible assets of the group Adjusted consolidated net tangible asset value per share based on 288,868,000 shares in issue as at the latest practicable date

HK$’000 265,488 (4,297) (19,270) (20,178) (963) 220,780 HK$0.76

Note:

1. The restated audited consolidated net tangible assets of the group as at 31st March, 2001 is based on the audited consolidated accounts of the group for the year ended 31st March, 2001, and adjusted to conform with SSAP 9 (revised) as detailed in the company’s interim report for the six months ended 30th September, 2001.

– 57 –

FINANCIAL INFORMATION

APPENDIX I

STATEMENT OF INDEBTEDNESS

As at 31 March, 2002, the group had no outstanding borrowings from financial institutions.

As at the same date, the group had outstanding lease commitments in respect of office and factory premises under various non-cancellable operating lease agreements, details of which are analysed as follows:

HK$’000

Total commitments payable under these agreements Amounts payable – within one year – within one year to five years	1,356 1,926
	3,282

Commitments payable within the next twelve months

Leases expiring within a period – not exceeding one year – within two to five years	439 917
	1,356

Save as aforesaid or as otherwise disclosed herein, and apart from intra group liabilities, none of the companies in the group had outstanding at the close of business on 31st March, 2002 any mortgages, charges, commitments, guarantees or other material contingent liabilities.

Save as disclosed herein, the directors of the company are not aware of any material adverse change in the indebtedness of the group since 31st March, 2002.

MATERIAL CHANGE

Prior to 1st April, 2002, dividends proposed or declared after the balance sheet date in respect of an accounting period prior to the balance sheet date were recognised as a liability at the balance sheet date. In order to comply with Statement of Standard Accounting Practice Number 9 (revised) “Events after the balance sheet date” issued by the Hong Kong Society of Accountants, the group recognises a liability for dividends in the accounting period in which they are declared or proposed by the directors of the company. The new accounting policy has been adopted retrospectively as a prior year adjustment, resulting in an increase of approximately HK$4,297,000 in the consolidated net tangible assets of the group as at 31st March, 2001.

– 58 –

FINANCIAL INFORMATION

APPENDIX I

Save as disclosed herein, the directors of the company are not aware of any material change in the financial and trading position or prospects of the group since 31st March, 2001, the date to which the latest audited consolidated financial statements of the company were made up.

UNAUDITED CONSOLIDATED RESULTS OF THE GROUP

The following is a summary of the unaudited consolidated results of the group for the year ended 31st March, 2002:

	(Unaudited)	(Audited)
	For the year ended	For the year ended
	31st March, 2002	31st March, 2001
	HK$’000	HK$’000
Turnover	46,947	48,478
Operating (loss)/profit	(39,618)	10,487
(Loss)/profit before taxation	(39,840)	12,793
(Loss)/profit attributable to shareholders	(39,448)	10,805

(1) BASES

The directors have prepared the unaudited consolidated results of the group for the financial year ended 31st March, 2002 based on the unaudited consolidated results of the group extracted from the interim report of the company for the six months ended 30th September, 2001 and the unaudited management accounts of the group for the six months ended 31st March, 2002. The directors are not aware of, nor do they expect, any extraordinary items which have arisen or are likely to arise in respect of the year ended 31st March, 2002. The unaudited consolidated results have been prepared on the basis of accounting policies consistent in all material aspects with those currently adopted by the group, as summarised in the company’s audited consolidated financial statements for the year ended 31st March, 2001 and in the company’s interim report for the six months ended 30th September, 2001, extracts of which are set out in appendix I to this document.

– 59 –

FINANCIAL INFORMATION

APPENDIX I

(2) LETTERS

Set out below are the text of the letter received by the directors from Arthur Andersen & Co, the auditors and reporting accountants of the company, in connection with the unaudited consolidated results of the group for the year ended 31st March, 2002, for the purpose of incorporation in this document.

==> picture [23 x 22] intentionally omitted <==

==> picture [117 x 13] intentionally omitted <==

Arthur Andersen & Co

21st Floor Edinburgh Tower The Landmark 15 Queen’s Road Central Hong Kong

The Directors Pacific Challenge Holdings Limited

6th June, 2002

Dear Sirs,

Unaudited consolidated results of Pacific Challenge Holdings Limited (“the Company”) and its subsidiaries (collectively referred to as “the Group”) for the year ended 31st March, 2002 and material change

(a) Unaudited consolidated results of the Group for the year ended 31st March, 2002

We have compared the accounting policies applied by the Group in preparing its unaudited consolidated results for the year ended 31st March, 2002 with those applied by the Group in preparing its audited financial statements as at and for the year ended 31st March, 2001, as included in the statement of the unaudited adjusted consolidated net tangible assets of the Group (“the Statement”) set out in Appendix I of the circular to the shareholders of the Company dated 6th June, 2002 (“the Circular”) in connection with the voluntary conditional cash offers by TingKong - RexCapital Securities International Limited on behalf of Kandy Profits Limited to acquire all the issued shares and outstanding options to subscribe for shares in the Company. We have also checked the calculations performed in arriving at the unaudited adjusted consolidated net tangible assets of the Group as at 31st March, 2002. The Directors of the Company

– 60 –

FINANCIAL INFORMATION

APPENDIX I

are solely responsible for the preparation of the Statement. Our responsibility is to report on the results of our procedures performed. The Statement has been prepared by the Directors of the Company based on the audited consolidated financial statements of the Group for the year ended 31st March, 2001 extracted from the Group’s annual report dated 10th July, 2001, the unaudited consolidated financial statements of the Group for the six months ended 30th September, 2001 extracted from the Group’s interim report dated 17th December, 2001, and the unaudited consolidated financial statements of the Group for the six months ended 31st March, 2002 as provided by management of the Group.

Our procedures consisted primarily of making inquiries of the Directors of the Company and officials of the Group on financial and accounting matters for the purpose of considering whether the accounting policies of the Group have been consistently applied in preparing the financial information contained in the Statement, and checking the clerical accuracy on the calculations of the Statement. Our procedures were substantially less in scope than an audit or a review performed in accordance with the Statements of Auditing Standards issued by the Hong Kong Society of Accountants. Accordingly we do not express an opinion on the unaudited consolidated results of the Group for the year ended 31st March, 2002 and the unaudited consolidated net tangible assets of the Group as at 31st March, 2002.

Based on the procedures performed, so far as the accounting policies and calculations are concerned, the unaudited consolidated results of the Group for the year ended 31st March, 2002 included in the Statement have been prepared in conformity with the accounting policies normally adopted by the Group, and have been properly compiled.

(b) Material change

We have read and recomputed the information in the section of “Material Change” included in Appendix I to the Circular in relation to the adoption of the new accounting policy by the Group. Based on our procedures performed, the information in the section of “Material Change”, so far as the above-mentioned matter is concerned, has been properly compiled based on the information set out in the audited consolidated financial statements of the Group for the year ended 31st March, 2001, the unaudited consolidated financial statements of the Group for the six months ended 30th September, 2001 and the unaudited consolidated financial statements of the Group for the six months ended 31st March, 2002.

Yours faithfully,

ARTHUR ANDERSEN & CO

Certified Public Accountants

– 61 –

FINANCIAL INFORMATION

APPENDIX I

40th Floor, Two Exchange Square, 8 Connaught Place, Central, Hong Kong

The Directors Pacific Challenge Holdings Limited Hong Kong

6th June, 2002

Dear Sirs,

We refer to the unaudited consolidated results of Pacific Challenge Holdings Limited (the “company”) and its subsidiaries (together with the company, the “group”) for the year ended 31st March, 2002 contained in the section headed “Statement of the Unaudited Adjusted Consolidated Net Tangible Assets of the Group” and “Unaudited Consolidated Results of the Group” set out on page 57 and page 59 respectively for this document dated 6th June, 2002 of which this letter forms part.

We have discussed with you the bases upon which the Unaudited Consolidated Results have been made. We have also considered the letter dated 6th June, 2002 addressed to the directors of the company from Arthur Andersen & Co relating to the accounting policies and calculations upon which the Unaudited Consolidated Results have been made.

On the bases adopted by you and the accounting policies and calculations reviewed by Arthur Andersen & Co, we are of the opinion that the Unaudited Consolidated Results for which the directors of the company are solely responsible, has been prepared after due and careful consideration.

Yours faithfully, For and on behalf of

Anglo Chinese Corporate Finance, Limited Dennis Cassidy

Director

– 62 –

GENERAL INFORMATION

APPENDIX II

RESPONSIBILITY STATEMENT

This document gives particulars in compliance with the Takeovers Code for the purpose of giving information with regard to Pacific Challenge group. The information contained in this document, other than that relating to the offeror, has been supplied by the directors who jointly and severally 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, opinions expressed herein have been arrived at after due and careful consideration and there are no other facts not contained in this document, the omission of which would make any statement in this document misleading.

DISCLOSURE OF INTERESTS

Interests in Pacific Challenge

Directors

As at the latest practicable date, the interests of the directors in the securities of the company and its associated corporations, within the meaning of the SDI Ordinance, notified to the company and the stock exchange pursuant to section 28 of the SDI Ordinance, including interests which the directors are taken or deemed to have under section 31 of, or part I of the schedule to, the SDI Ordinance, or, pursuant to the Model Code for Securities Transactions by directors of listed companies in the listing rules or which are required, pursuant to section 29 of the SDI Ordinance, were as follows:

Name of director	Number of shares	Percentage
Dr. Lily Chiang_(Note)_	96,044,000	33.25%
Chan Yim Fong, Teli	432,000	0.15%

Note: 93,544,000 shares are held by Super Drive Inc., a company wholly owned by E1 Media Technology Limited which in turn is a 60% owned subsidiary of Peace City Development Limited. Dr. Lily Chiang has a 100% beneficial interest in Peace City Development Limited.

As at the latest practicable date, so far as the directors were aware, none of the directors were interested in the options.

Save as disclosed above, none of the directors hold any shares or interest in shares as at the latest practicable date.

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GENERAL INFORMATION

APPENDIX II

93,544,000 shares representing 32.38% of the issued share capital of the company are held by Super Drive, a company wholly owned by E1 Media Technology Limited which in turn is a 60% owned subsidiary of Peace City Development Limited. Dr. Lily Chiang has a 100% beneficial interest in Peace City Development Limited. Super Drive has given an irrevocable commitment to accept the share offer.

Substantial shareholders

As at the latest practicable date, so far as the directors were aware, the following person not being a director or chief executive of the company, was directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the company as recorded in the register required to be under the SDI Ordinance for the purpose of section 3 to 7 of the SDI Ordinance:

Name of shareholder	Number of shares	Percentage
Kistefos Investment A.S.(Note)	62,400,000	21.60%

Note: Kistefos Investment A.S. is wholly owned by A.S. Kistefos Traesliberi, in which Christen Sveaas has a 85% beneficial interest.

Save as disclosed above, the directors are not aware of any other persons who were directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstance at general meetings of this company or any member of the group as at the latest practicable date.

Others

As at the latest practicable date, no subsidiary of the company, pension fund of the company or a subsidiary of the company, or adviser to the company owned or controlled any shares.

INTERESTS IN THE OFFEROR

As at the latest practicable date, the company had no interest in the share capital of the offeror.

As at the latest practicable date, none of the directors had an interest in the share capital of the offeror.

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GENERAL INFORMATION

APPENDIX II

DEALING IN SECURITIES OF THE COMPANY

As at the latest practicable date, none of the company or any of its subsidiaries, or any adviser to the company had dealt for value in any shares during the period commencing 6 months prior to the beginning of the offer period, which began on 25th April, 2002, and ending on the latest practicable date.

None of the directors had dealt for value in any shares during the period commencing 6 months prior to the beginning of the offer period, which began on 25th April, 2002, and ending on the latest practicable date.

As at the latest practicable date, no subsidiary of the company, pension fund of the company or a subsidiary of the company, or adviser to the company had dealt for value in any shares during the period commencing 6 months prior to the beginning of the offer period, which began on 25th April, 2002, and ending with the latest practicable date.

DEALING IN SECURITIES OF THE OFFEROR

The company had not dealt for value in the shares of the offeror during the period commencing 6 months prior to the beginning of the offer period, which began on 25th April, 2002, and ending on the latest practicable date.

None of the directors had dealt for value in the shares of the offeror during the period commencing 6 months prior to the beginning of the offer period, which began on 25th April, 2002, and ending on the latest practicable date.

DIRECTORS’ SERVICE CONTRACTS

None of the directors have entered into a service contract with the company which does not expire or is not determinable by the company within one year and no service contracts between any company in the group and any of the directors have been entered into or amended within the six months prior to 25th April, 2002 being the date of the announcement.

ARRANGEMENTS AFFECTING DIRECTORS

There are no benefits to be given to any directors as compensation for loss of office or otherwise in connection with the offers, save that any director resigning from office is entitled to receive payment in accordance with the terms of the relevant service or employment contract.

There are no agreements or arrangements between any director and any other person which are conditional upon the outcome of the offers or otherwise connected with the offers.

There are no material contracts entered into by Kandy Profits in which any director has a material personal interest.

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GENERAL INFORMATION

APPENDIX II

MATERIAL CONTRACTS

On 27th July, 2000, the company entered into a placing agreement with Get Nice Investment Limited (“Get Nice”), an independent third party, pursuant to which Get Nice agreed to subscribe or procure subscribers for and the company agreed to issue and allot 23,800,000 ordinary shares of HK$0.10 each in the company at a placing price of HK$0.67 per placing share.

On 27th July, 2000, the company also entered into a subscription agreement with Mr. Pau Kwok Ping (“Mr. Pau”), an independent third party, pursuant to which Mr. Pau agreed to subscribe for and the company agreed to allot and issue 23,800,000 ordinary shares of HK$0.10 shares in the company at a subscription price of HK$0.67 per subscription share.

On 25th April, 2001 Key Foundation Limited (a subsidiary of the company) and SkyTech Investment Limited entered into a shareholders agreement to promote and form a private company limited by shares in the Cayman Islands under the name E1-SkyTech Investment Company Limited (“E1-SkyTech”) for the purpose of carrying on business as an investment company. The parties agreed to each subscribe for 1,750 shares in E1-SkyTech at a subscription price of HK$50,000,000.

Save as disclosed above, no material contracts (other than contracts entered into in the ordinary course of business) have been entered into by the company and its subsidiaries in the two years preceding the commencement of the offer period.

LITIGATION

As at the latest practicable date, save as disclosed below, neither the company nor any of its subsidiaries were engaged in any litigation or arbitration of material importance and no litigation or arbitration of material importance is known to the directors to be pending or threatened against the company or any of its subsidiaries.

On 8th March, 2001, Kistefos, a 21.78% shareholder of the company on that day, filed a petition (the “Petition”) against the company and one of its directors in The Supreme Court of Bermuda (the “Court”) under Section 111(1) of the Companies Act 1981 of Bermuda. The Petition was based on an alleged claim that certain affairs of the company had been conducted in a manner which is oppressive or unfairly prejudicial to the interests of certain shareholders of the company, including Kistefos itself. By the Petition, Kistefos sought an order from the Court to either (i) force the company or the director to purchase all the shares in the company held by Kistefos, at a fair value to be determined by the Court, or alternatively (ii) an order that the company be wound up.

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APPENDIX II

GENERAL INFORMATION

The company sought to strike out the petition against it, as did Dr. Lily Chiang. The Hearing of the strike out application took place before the Supreme Court of Bermuda commencing on 17th September, 2001. Judgment was given by Assistant Justice Storr on 18th October, 2001 when it was ordered that the claim of Kistefos to wind up the company should be struck out; but that the remaining claims (including the claim that the company should purchase all the shares of the company held by Kistefos at a fair value) should go forward to trial.

The company, and Dr. Lily Chiang, appealed against the refusal of the learned Judge to strike out the balance of the claim against it. Kistefos cross-appealed against the striking out by the learned Judge of the claim to wind up the company.

The hearing of the appeal, before the Court of Appeal of Bermuda, is fixed to commence on 17th June, 2002.

The petition is still at a preliminary stage and the future outcome of the petition is still uncertain. Much will depend upon the performance of witnesses in the witness box if the matter comes on to trial. However, on the bases of the instructions given by the company and the affidavit evidence filed on behalf of the company, the company has been advised that it has a reasonably good defence to the claims made against it.

CONSENTS AND EXPERTS

The followings are the qualifications of the experts who have given opinions or advice which are contained in this document:

Name	Qualification
Anglo Chinese	an investment adviser and dealer registered under the Securities
	Ordinance
Arthur Andersen	Certified Public Accountants

The above mentioned persons have given and have not withdrawn their respective written consents to the issue of this document with the inclusion herein of their letters of advice and the references to their names, in the form and context in which they respectively appear.

GENERAL

As at the latest practicable date, there are no arrangements of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the company or with any person who is an associate of the company.

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GENERAL INFORMATION

APPENDIX II

The English text of this circular shall prevail over the Chinese text for the purpose of interpretation.

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the offices of the company at Suite 20B, 20th Floor, 9 Queen’s Road Central, Hong Kong, while the offer remains open for acceptance:

• memorandum of association and bye-laws of the company;

• the annual reports of the company for the two financial years ended 31st March, 2001 and the interim report of the company for the six months ended 30th September, 2001;

• the letter of advice from Anglo Chinese to the independent board committee;

• the material contracts referred to the paragraph headed “Material Contracts” of this appendix II;

• the written consent referred to the paragraph headed “Consents and Experts” of this appendix II;

• the irrevocable undertaking made by Super Drive to accept the share offer; and

• the comfort letters dated 6th June, 2002 from each of Arthur Andersen & Co and Anglo Chinese relating to the statement of the unaudited adjusted consolidated net tangible assets of the group and unaudited consolidated results of the group.

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