THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in China Nan Feng Group Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, licensed dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

This circular is not an offer of, nor is it calculated to invite offers for, securities of China Nan Feng Group Limited.

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

(incorporated in Bermuda with limited liability)

PROPOSED RESTRUCTURING INVOLVING SHARE CONSOLIDATION, CAPITAL REORGANISATION, CREDITORS’ SCHEME OF ARRANGEMENT UNDER SECTION 99 OF THE COMPANIES ACT 1981 OF BERMUDA AND SECTION 166 OF THE COMPANIES ORDINANCE (CHAPTER 32 OF THE LAWS OF HONG KONG), CONNECTED TRANSACTION, OPEN OFFER ON THE BASIS OF FIVE OFFER SHARES FOR EVERY ADJUSTED SHARE, APPLICATION FOR WHITEWASH WAIVER, AMENDMENTS TO THE BYE-LAWS AND GENERAL MANDATES TO ISSUE AND REPURCHASE SHARES

Financial adviser to China Nan Feng Group Limited

SOMERLEY LIMITED

Independent financial adviser to the Independent Board Committee

==> picture [122 x 34] intentionally omitted <==

Shareholders should note that the Underwriting Agreement contains provisions granting the Underwriter the rights, which may be exercised at any time on or before 4:00 p.m. on the second business day after the latest time for applications for the Offer Shares, to terminate its obligations thereunder on the occurrence of force majeure events on or before 4:00 p.m. on the second business day after the latest time for applications for the Offer Shares. For this purpose, force majeure refers to: (i) the introduction of any new law or regulation or any change in existing law or regulation (or the judicial interpretation thereof) or other occurrence of any nature whatsoever which may in the reasonable opinion of the Underwriter materially and adversely affect the business or the financial or trading position or prospects of the Group as a whole or is materially adverse in the context of the Open Offer; or (ii) the occurrence of the local, national or international event or change (whether or not forming part of a series of events or changes occurring or continuing before, and/or after the date of the Underwriting Agreement) of a political, military, financial, economic or other nature (whether or not ejusdem generis with any of the foregoing), or in the nature of any local, national and international outbreak or escalation of hostilities or armed conflict, or affecting local securities markets which may in the reasonable opinion of the Underwriter materially and adversely affect the business or the financial or trading position or prospects of the Group as a whole or materially and adversely prejudice the success of the Open Offer or otherwise makes it inexpedient or inadvisable to proceed with the Open Offer; or (iii) any material adverse change in the business or in the financial or trading position of the Group as a whole; (iv) any material adverse change in market conditions (including without limitation, a change in fiscal or monetary policy, or foreign exchange or currency markets, suspension or restriction of trading in securities) occurs which in the reasonable opinion of the Underwriter is likely to materially and adversely affect the success of the Open Offer or otherwise makes it inexpedient or inadvisable to proceed with the Open Offer; or (v) this circular or the Prospectus referred to herein when published contain information (either as to business prospects or the condition of the Group or as to its compliance with any laws or the Listing Rules or any applicable regulations) which has not prior to the date of the Underwriting Agreement been publicly announced or published by the Company and which may in the reasonable opinion of the Underwriter be material to the Group as a whole and is likely to affect the success of the Open Offer or might cause a prudent investor not to apply in full for its assured allotments of the Offer Shares under the Open Offer. If the Underwriter exercises such right to terminate its obligation under the Underwriting Agreement, the Open Offer will not proceed.

It should be noted that the Shares will be dealt in on an ex-entitlements basis as from Tuesday, 20th January, 2004, and that dealings in such Shares will take place whilst the conditions to which the Open Offer is subject to remain unfulfilled. Any Shareholder or other person who deals in the Shares up to the date on which all conditions to which the Open Offer is subject to are supposed to be fulfilled (which is expected to be on Monday, 16th February, 2004), will accordingly bear the risk that the Open Offer may not become unconditional or may not proceed. Any Shareholder or other person contemplating selling or purchasing Shares during such period who is in any doubt about his or her position is advised to consult his or her professional adviser.

A letter of advice from Chateron Corporate Finance Limited containing its opinion regarding the Creditors’ Scheme, the Open Offer and the Whitewash Waiver is set out on pages 33 to 72 of this circular.

A notice convening the SGM to be held at 9:15 a.m. on Monday, 1st December, 2003 at Ward Room, Royal Hong Kong Yacht Club, Kellett Island, Causeway Bay, Hong Kong is set out on pages 156 to 161 of this circular. A form of proxy for use at the SGM is enclosed. Whether or not you intend to attend the meeting, you are requested to complete the accompanying form of proxy and return it in accordance with the instructions printed thereon as soon as possible to the Company’s branch share registrars in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong and in any event not less than 48 hours before the time appointed for the holding of the meeting. Completion and return of the form of proxy will not preclude you from attending and voting at the meeting or any adjourned meeting should you so desire.

6th November, 2003

* for identification purpose only

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Expected timetable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Restructuring Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Share Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Capital Reorganisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Change of board lot size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Trading arrangements and free exchange of new share certificates . . . . . . . . . . . . . . . . . . .	15
Creditors’ Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Open Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Underwriting arrangements for the Open Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Listing and dealings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
Effects of the Restructuring Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
Application for Whitewash Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
Information on Mr. Tam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
Reasons for the Restructuring Proposal and use of proceeds . . . . . . . . . . . . . . . . . . . . . . . . . .	29
Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	29
Amendments of Bye-laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	29
Renewal of General Mandates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31
Further information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	32
Letter of advice from Chateron. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33
Appendix I – Creditors’ Scheme. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	73
Appendix II – Financial information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	84
Appendix III – Explanatory statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	141
Appendix IV – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	144
Notice of SGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	156

DEFINITIONS

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

“Adjusted Share(s)”

share(s) of HK$0.01 each in the share capital of the Company immediately after the Capital Reduction and Subdivision become effective

“Announcement”

the announcement dated 1st September, 2003 made by the Company regarding the Restructuring Proposal

“associates” the meaning ascribed thereto in the Listing Rules
“Bermuda Court”

the Supreme Court of Bermuda

“Board” the board of Directors
“Bye-laws” the bye-laws of the Company
“Capital Reduction”

the proposed reduction of capital of the Company by way of the cancellation of the paid-up capital to the extent of HK$1.99 on each then issued Consolidated Share such that the nominal value of all the then issued Consolidated Shares will be reduced from HK$2.0 each to HK$0.01 each

“Capital Reorganisation”

the proposed capital reorganisation of the Company involving the Capital Reduction, the Share Premium Cancellation and the Subdivision. For the avoidance of doubt, the Capital Reorganisation does not involve the Share Consolidation

“CCASS”
the Central Clearing and Settlement System established and operated by HKSCC
“Chateron”

Chateron Corporate Finance Limited, a corporation licensed under the transitional arrangements to carry out Type 6 (advising on corporate finance) regulated activity for the purposes of the SFO and the independent financial adviser to the Independent Board Committee in relation to the Creditors’ Scheme, the Open Offer and the Whitewash Waiver

“Code” the Hong Kong Code on Takeovers and Mergers
“Companies Act”

the Companies Act 1981 of Bermuda

“Companies Ordinance”

the Companies Ordinance (Chapter 32 of the Laws of Hong Kong)

– 1 –

DEFINITIONS

“Company” China Nan Feng Group Limited (formerly named as “Prosper eVision Limited”), an exempted company incorporated in Bermuda with limited liability, the shares of which are listed on the Stock Exchange
“connected person(s)” the meaning ascribed thereto in the Listing Rules
“Consolidated Share(s)” share(s) of HK$2.0 each in the share capital of the Company upon the Share Consolidation taking effect
“Convertible Notes” outstanding convertible notes of the Company in the amount of HK$17,000,000 held by Happy Valley which conversion rights were waived and extinguished pursuant to an agreement between the Company and Happy Valley dated 29th October, 2003
“Creditors’ Scheme” the scheme of arrangement under section 99 of the Companies Act and under section 166 of the Companies Ordinance proposed between the Company and the Scheme Creditors, details of which are set out in Appendix I to this circular
“Creditors Shares” the Adjusted Shares to be issued to the Scheme Creditors pursuant to the Creditors’ Scheme
“Directors”
the directors of the Company appointed from time to time
“Effective Date” the date on which the Creditors’ Scheme becomes effective
“Euro Concord”
Euro Concord Assets Limited, a substantial Shareholder holding approximately 10.5% of the issued share capital of the Company as at the Latest Practicable Date. Euro Concord Assets Limited is wholly and beneficially owned by Mr. Tam
“Executive” the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director
“General Mandates”
the New Issue Mandate and the Repurchase Mandate
“Group”
the Company and its subsidiaries
“Happy Valley”
Happy Valley Overseas Limited, the holder of the Convertible Notes, the ultimate beneficial owner of which is Mr. Sow Eng Son, a party not acting in concert with, the directors, chief executive and substantial shareholders of the Company and its subsidiaries or any of their respective associates and is not a connected person of the Company

“HKSCC”

Hong Kong Securities Clearing Company Limited – 2 –

DEFINITIONS

“Hong Kong”
“Hong Kong Court”
“Independent Board Committee”
“Independent Creditors”
“Independent Shareholders”
“Latest Practicable Date”
“Listing Rules”
“Main Faith” or “Underwriter”
“Mr. Siu”
“Mr. Tam”
“New Issue Mandate”
“Offer Shares”
“Open Offer”

the Hong Kong Special Administrative Region of the PRC

Court of First Instance of the High Court of Hong Kong

an independent committee of the Board, comprising Mr. Choy Sai Man, the independent non-executive Director

Scheme Creditors other than connected persons of the Company

Shareholders other than Mr. Tam, Euro Concord, their associates and parties acting in concert with it. In the case of Whitewash Waiver, Independent Shareholders shall exclude Scheme Creditors (if they are also Shareholders) and any other parties involved in or interested in the Open Offer (other than by virtue only of their interests in assured allotments of the Offer Shares) or the Whitewash Waiver
3rd November, 2003, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information for inclusion in this circular
the Rules Governing the Listing of Securities on the Stock Exchange
Main Faith Limited, a company incorporated in the British Virgin Islands and is wholly and beneficially owned by Mr. Tam
Mr. Alfred Siu Wing Fung, a former Director and a former Shareholder
Mr. Tam Jin Rong, the sole director and sole shareholder of both Euro Concord and Main Faith and a director of the Company
the proposed general mandate to be sought at the SGM to authorise the Directors to allot and issue new shares of the Company in the manner as set out in the notice of the SGM
512,308,705 new Adjusted Shares to be issued under the Open Offer
the issue of the Offer Shares on the basis of five Offer Shares for the equivalent of every Adjusted Share held on the Record Date at the Subscription Price

– 3 –

DEFINITIONS

“Overseas Shareholder(s)”

Shareholder(s) whose name(s) appear(s) on the register of members of the Company on the Record Date and whose registered address(es) on that date is/are in (a) place(s) outside Hong Kong where, in the Directors’ opinion, Offer Shares may not be offered without compliance with registration and/or the legal or regulatory requirements

“PRC” the People’s Republic of China
“Preferential Claims”
all claims against the Company which would, if the Company had commenced to be wound up on the Effective Date, have been payable out of the assets of the Company pursuant to the Companies Ordinance and/or the Companies Act in priority to the claims of the general unsecured creditors of the Company, which amounted to approximately HK$134,000 as at the Latest Practicable Date
“Preferential Creditors”
creditors to the extent to which may have Preferential Claims against the Company
“Prospectus”
a prospectus containing details of the Open Offer to be issued by the Company
“Prospectus Documents”
the Prospectus and the application form for the Offer Shares
“Prospectus Posting Date”
such date as the Underwriter may agree in writing with the Company
“Qualifying Shareholder(s)” Shareholder(s), other than the Overseas Shareholder(s), whose name(s) appear(s) on the register of members of the Company on the Record Date
“Record Date”
the date to be fixed by the Directors by reference to which entitlements under the Open Offer will be determined, currently expected to be on Thursday, 29th January, 2004
“Registrars”
Computershare Hong Kong Investor Services Limited, the branch share registrars of the Company in Hong Kong
“Repurchase Mandate”
the general mandate proposed at the SGM to authorise the Directors to repurchase shares of the Company in the manner as set out in the notice of the SGM
“Restructuring Proposal”
the Share Consolidation, the Capital Reorganisation, the Creditors’ Scheme and the Open Offer involving the Whitewash Waiver

– 4 –

DEFINITIONS

“Scheme Creditors”

creditors of the Company who are subject to the Creditors’ Scheme, which for the avoidance of doubt exclude the Preferential Creditors to the extent of their Preferential Claims

“Scheme Document” the document to be issued by the Company to the Scheme Creditors in relation to the Creditors’ Scheme
“Scheme Indebtedness” the indebtedness and liabilities owing to the Scheme Creditors by the Company and are subject to the Creditors’ Scheme, which for the avoidance of doubt exclude the Preferential Claims

“Scheme Record Date” the date for the determination of entitlements of the Scheme Creditors under the Creditors’ Scheme

“SFC” Securities and Futures Commission
“SFO” Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“SGM”
the special general meeting of the Company to be held at 9:15 a.m. on Monday, 1st December, 2003, for the purpose of considering and, if thought fit, approving among other things, the Share Consolidation, the Capital Reorganisation, the issue of the Creditors Shares, the Open Offer, the grant of the Whitewash Waiver, amendments to the Bye-laws and grant of General Mandates, notice of which is set out in pages 156 to 161 of this circular, or any adjournment thereof
“Share(s)”
share(s) of HK$0.10 each in the share capital of the Company
“Share Consolidation”
the proposed consolidation of every 20 Shares into one Consolidated Share
“Shareholder(s)” holder(s) of the Share(s) or of Consolidated Share(s) or of Adjusted Share(s), where appropriate
“Share Option Scheme” the share option scheme of the Company adopted on 11th June, 1997
“Share Premium Cancellation”
the cancellation of the entire amount standing to the credit of the share premium account of the Company as at the effective date of the Capital Reduction

“Somerley”

Somerley Limited, a corporation licensed under the transitional arrangements to carry out, among other things, Type 6 (advising on corporate finance) regulated activity for the purposes of the SFO and the financial adviser to the Company

– 5 –

DEFINITIONS

“Stock Exchange”
“Subdivision”
“Subscription Price”
“subsidiary”
“Underwriter” or “Main Faith”
“Underwriting Agreement”
“Underwritten Shares”
“Whitewash Waiver”
“HK$”
“sq. m.”

The Stock Exchange of Hong Kong Limited

the subdivision of each authorised but unissued Consolidated Share into 200 Adjusted Shares

the subscription price of HK$0.045 per Offer Share pursuant to the Open Offer
the meaning ascribed to that term under Section 2 of the Companies Ordinance
Main Faith Limited, a company incorporated in the British Virgin Islands and the sole beneficial owner of which is Mr. Tam
the agreement dated 15th August, 2003 between the Company, the Underwriter, Euro Concord and Mr. Tam relating to the underwriting and other arrangements in respect of the Open Offer, as supplemented by an agreement dated 4th November, 2003 entered into by the parties to the Underwriting Agreement
based on the number of Shares in issue and as at the Latest Practicable Date, 458,558,705 Offer Shares (being all the Offer Shares less those Offer Shares which will be offered to Euro Concord and which it has undertaken to apply for)
the waiver from the Executive pursuant to Note 1 of the Notes on Dispensations from Rule 26 of the Code in relation to the obligation to make a mandatory general offer of Shares not already held or agreed to be subscribed by Euro Concord and its concert parties as a result of the Open Offer

Hong Kong dollars, the lawful currency of Hong Kong

square metres

– 6 –

EXPECTED TIMETABLE

Set out below is an indicative timetable for the implementation of the Share Consideration, the Capital Reorganisation, the Creditors’ Scheme and the Open Offer. The timetable may change due to, among other things, the availability of the Hong Kong Court and Bermuda Court for the purpose of the hearing of the petitions to sanction the Creditors’ Scheme. Shareholders will be informed of any significant changes to the expected timetable by press notice.

2003

Latest time for lodging form of proxy for the SGM . . . . . . . . . . . . 9:15 a.m. on Saturday, 29th November SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9:15 a.m. on Monday, 1st December Share Consolidation becomes effective and

dealings in Consolidated Shares commence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 2nd December

Closure of original counter for trading in Shares (represented by existing pink share certificates) in board lot of 2,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9:30 a.m. on Tuesday, 2nd December Establishment of temporary counter for trading in Consolidated Shares (represented by existing pink share certificates) in board lot of 100 . . . . . . . . . . . . . . . . . . . . . . . 9:30 a.m. on Tuesday, 2nd December First day of free exchange of existing pink share

certificates for new purple share certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 2nd December Original counter for trading in Consolidated Shares (represented by new purple share certificates) in board lot of 20,000 re-opens . . . . . . . . . . . . . . . . . . . . . . . . . . . 9:30 a.m. on Tuesday, 16th December Parallel trading commences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9:30 a.m. on Tuesday, 16th December First day of operation of odd lot trading facility . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 16th December 2004 Last day of dealings in the Shares on a cum-entitlements basis . . . . . . . . . . . . . . . . Monday, 19th January Commencement of dealings in the Shares on an ex-entitlements basis . . . . . . . . . . Tuesday, 20th January Latest time for lodging transfers of Shares to be entitled for the Open Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Monday, 26th January Book closure period (both days inclusive) . . . . . . . . . . . Tuesday, 27th January to Thursday, 29th January

– 7 –

EXPECTED TIMETABLE

2004

Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thursday, 29th January Prospectus Documents posted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thursday, 29th January

Closure of temporary counter for trading in Consolidated Shares (represented by existing pink share certificates) in board lot of 100 . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Tuesday, 10th February Parallel trading ends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Tuesday, 10th February Last day of operation of odd lot trading facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 10th February Latest time for application for Offer Shares

and payment thereof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Thursday, 12th February Open Offer becomes unconditional, Capital Reorganisation becomes effective and completion of Creditors’ Scheme . . . . . . . 4:00 p.m. on Monday, 16th February Announcement on completion of Restructuring Proposal and results of the Open Offer appears on newspaper . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 17th February Share certificates for Offer Shares posted on or before . . . . . . . . . . . . . . . . . . . . . . Tuesday, 17th February Last day of free exchange of existing pink share certificates for new purple share certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 27th February

– 8 –

LETTER FROM THE BOARD

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

(incorporated in Bermuda with limited liability)

Directors:

Mr. Tam Jin Rong Mr. Tao Ke Wei Mr. Tam Kai On Mr. Ko Chung Ting, Peter Mr. Lau Kwok Wah Mr. Choy Sai Man

** independent non-executive Directors

Registered office: Canon’s Court 22 Victoria Street Hamilton HM 12 Bermuda

Head office and principal place of business: Room 2806 West Tower Shun Tak Centre 168-200 Connaught Road Central Hong Kong

6th November, 2003

To the Shareholders

Dear Sir or Madam,

PROPOSED SHARE CONSOLIDATION, CAPITAL REORGANISATION, CREDITORS’ SCHEME OF ARRANGEMENT UNDER SECTION 99 OF THE COMPANIES ACT 1981 OF BERMUDA AND SECTION 166 OF THE COMPANIES ORDINANCE (CHAPTER 32 OF THE LAWS OF HONG KONG),

CONNECTED TRANSACTION, OPEN OFFER ON THE BASIS OF FIVE OFFER SHARES FOR EVERY ADJUSTED SHARE,

APPLICATION FOR WHITEWASH WAIVER, AMENDMENTS TO THE BYE-LAWS AND GENERAL MANDATES TO ISSUE AND REPURCHASE SHARES

INTRODUCTION

On 1st September, 2003, the Company announced the Restructuring Proposal which involves, among other things, (i) the capital reorganisation including the capital reduction, the share premium cancellation, the subdivision and the share consolidation; (ii) the Creditors’ Scheme involving the connected transaction, (iii) the Open Offer and (iv) the Whitewash Waiver; all of which are inter-conditional upon each other. The Board now proposes to revise the Restructuring Proposal to the effect that the Share

* for identification purpose only

– 9 –

LETTER FROM THE BOARD

Consolidation will not be conditional on the Capital Reduction, the Share Premium Cancellation, the Subdivision, the Creditors’ Scheme, the Open Offer and the Whitewash Waiver becoming unconditional. Such change is proposed so that the ex-rights price of the Shares will remain at above HK$0.01 each to satisfy the requirement of the Listing Rules.

The revised Restructuring Proposal involves the following:

(i) Share Consolidation

The Share Consolidation will involve the consolidation of every 20 existing Shares of HK$0.10 each into 1 Consolidated Share of HK$2.0 each. The Share Consolidation will be conditional upon:

(i) approval by the Shareholders at the SGM; and
(ii) the Listing Committee of the Stock Exchange granting listing of, and permission to deal in, the Consolidated Shares.

(ii) Capital Reorganisation

The Capital Reorganisation will involve, among other things, (a) a reduction in the nominal value of each then issued Consolidated Share from HK$2.0 to HK$0.01; (b) a subdivision of each authorised and unissued Consolidated Share into 200 Adjusted Shares of HK$0.01 each; and (c) cancellation of the entire amount standing to the credit of the share premium account of the Company as at the effective date of the Capital Reduction.

(iii) Creditors’ Scheme

The Creditors’ Scheme will result, among other things, in the Scheme Indebtedness and the Preferential Claims as at the Scheme Record Date being discharged in full by a combination of a cash payment and the issuance of Creditors Shares. Pursuant to the Creditors’ Scheme, for every HK$1 of valid claim, the Scheme Creditors will receive (a) cash payment of not more than HK$0.1; and (b) not more than 1.5 Creditors Shares which will be issued credited as fully paid at HK$0.1 per Creditors Share (the exact amount of cash payment and number of Creditors Shares will depend on the amount of Scheme Indebtedness as at the Scheme Record Date); and

(iv) Open Offer

The Company will raise approximately HK$23.0 million (before expenses) by way of the Open Offer on the basis of an assured allotment of five Offer Shares for the equivalent of every Adjusted Share held by the Qualifying Shareholders on the Record Date at the Subscription Price of HK$0.045 per Offer Share. The Open Offer will not be available to Overseas Shareholders. Qualifying Shareholders will not be allotted any Offer Shares in excess of their assured allotments.

The implementation of the Capital Reorganisation (which for the avoidance of doubt excludes the Share Consolidation), the Creditors’ Scheme and the Open Offer are inter-conditional on each other.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, Euro Concord held 215,000,000 Shares (equivalent to 10,750,000 Adjusted Shares), representing approximately 10.5% of the existing issued share capital of the Company. Euro Concord has irrevocably undertaken to the Company to apply for its full assured allotment under the Open Offer, amounting to 53,750,000 Offer Shares.

Main Faith has agreed to underwrite the Open Offer. In the event that Main Faith is required to subscribe in full the Underwritten Shares pursuant to the Underwriting Agreement, the shareholding of Mr. Tam and his associates in the Company would increase from approximately 10.5% to approximately 67.4% of the issued share capital of the Company as enlarged by the Creditors Shares and the Offer Shares. Pursuant to the Code, the issue of the Creditors Shares to Mr. Tam and the underwriting by Main Faith of the Open Offer may give rise to an obligation on the part of Mr. Tam to make an offer for all the issued shares of the Company unless the Whitewash Waiver is granted by the Executive. An application has been made to the Executive for the granting of the Whitewash Waiver. The Executive has agreed, subject to the approval of the Whitewash Waiver by the Independent Shareholders, to waive any obligation of Mr. Tam and parties acting in concert with him to make a general offer which may otherwise arise as a result of the completion of the Creditors’ Scheme and the Open Offer. Mr. Tam, Euro Concord, their associates and concert parties, the Scheme Creditors (if they are also Shareholders) and any other parties involved in or interested in the Open Offer (other than by virtue only of their interests in assured allotments of the Offer Shares) or the Whitewash Waiver shall abstain from voting on the Whitewash Waiver as required under the Code. Under the Listing Rules, the Creditors’ Scheme, which involves the issue of Creditors Shares to a substantial Shareholder and certain Directors who are also Scheme Creditors, constitutes a connected transaction of the Company and such issue therefore requires the approval of the Shareholders other than Mr. Tam, Euro Concord and their associates.

The Open Offer is subject to the satisfaction of certain conditions as described under the section headed “Conditions of the Underwriting Agreement” below . In particular, it is subject to, among other things, the Capital Reorganisation (which for the avoidance of doubt excludes the Share Consolidation) and the Creditors’ Scheme becoming unconditional, the Whitewash Waiver being granted by the Executive and the Underwriter not terminating the Underwriting Agreement in accordance with its terms or otherwise.

The Board will propose a special resolution to add a new Bye-law no. 8A to allow the Company to issue fractional shares pursuant to the Capital Reorganisation. The Board will also propose a further special resolution at the SGM to amend Bye-law no. 140 of the Bye-laws concerning the capitalisation of any part of the Company’s reserves, including the share premium account of the Company, to the extent in compliance with Bermuda laws.

Somerley has been appointed as the financial adviser to the Company in connection with the Restructuring Proposal.

Messrs. Tam, Tao Ke Wei, Tam Kai On and Ko Chung Ting, Peter are all executive Directors and salaried employees of the Group. Mr. Lau Kwok Wah is the independent non-executive Director, who had once provided legal advice on a transaction undertaken by a company of which Mr. Tam is the sole shareholder and director. Accordingly, none of them are considered to be independent under the Code insofar as the Creditors’ Scheme, the Open Offer and the Whitewash Waiver are concerned and it is therefore considered inappropriate for any of them to give any advice or recommendation to the Independent

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LETTER FROM THE BOARD

Shareholders in this regard. Accordingly, the Independent Board Committee, comprising Mr. Choy Sai Man, has been appointed to consider the terms of the Restructuring Proposal including the Whitewash Waiver and to advise the Independent Shareholders thereon. Chateron has been appointed as the independent financial adviser to advise the Independent Board Committee on the terms of the Creditors’ Scheme, the Open Offer and the Whitewash Waiver.

The Directors also intend that resolutions will be proposed at the SGM to renew the General Mandates so that the number of shares of the Company which are permitted to be issued or repurchased by the Company under the General Mandates are calculated by reference to the Company’s issued share capital following completion of the Restructuring Proposal.

The purpose of this circular is to provide you with further information on the Restructuring Proposal, the amendment to the Bye-laws and the renewal of the General Mandates, to set out the advice of Chateron to the Independent Board Committee and the recommendation of the Independent Board Committee to the Independent Shareholders in respect of the Creditors’ Scheme, the Open Offer and the Whitewash Waiver and to give you notice of the SGM at which resolutions will be proposed to seek your approval of the Restructuring Proposal and the transactions contemplated thereunder, including the Share Consolidation, the Capital Reorganisation, the Creditors’ Scheme involving the connected transaction, the Open Offer, the Whitewash Waiver, the amendments to the Bye-laws and the General Mandates.

RESTRUCTURING PROPOSAL

— SHARE CONSOLIDATION

The Share Consolidation will be implemented to consolidate every 20 Shares of HK$0.10 each into one Consolidated Share.

The authorised share capital of the Company is HK$400,000,000 divided into 4,000,000,000 Shares of HK$0.10 each. Immediately after the Share Consolidation, the authorised share capital of the Company will be HK$400,000,000 and will comprise 200,000,000 Consolidated Shares of HK$2.0 each. As at the Latest Practicable Date, there were 2,049,234,824 Shares in issue. On the basis of such issued share capital, there will be 102,461,741.2 Consolidated Shares of HK$2.0 each in issue immediately following the Share Consolidation becoming effective.

The Consolidated Shares will rank pari passu in all respects with each other.

Conditions

The Share Consolidation is conditional upon:

(i) the passing by the Shareholders of an ordinary resolution approving the Share Consolidation at the SGM; and

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LETTER FROM THE BOARD

(ii) the Listing Committee of the Stock Exchange granting the listing of, and permission to deal in, the Consolidated Shares.

The Share Consolidation will not, on its own, result in any change in the relative rights of the Shareholders.

— CAPITAL REORGANISATION

The Capital Reorganisation involves the Capital Reduction, the Share Premium Cancellation and the Subdivision.

Capital Reduction, Share Premium Cancellation and Subdivision

The Capital Reduction involves a reduction in the nominal value of the then issued Consolidated Shares from HK$2.0 to HK$0.01 each by cancelling paid up capital to the extent of HK$1.99 on each then issued Consolidated Share. The Share Premium Cancellation will involve the cancellation of the entire amount standing to the credit of the share premium account of the Company as at the effective date of the Capital Reduction. The Subdivision will involve the sub-division of each authorised and unissued Consolidated Share into 200 Adjusted Shares of HK$0.01 each.

As at the Latest Practicable Date, the authorised share capital of the Company was HK$400,000,000 divided into 4,000,000,000 Shares, of which 2,049,234,824 Shares were in issue and fully paid or credited as fully paid. The credit arising from the Capital Reduction and the Share Premium Cancellation will be credited to the contributed surplus account of the Company. Based on the audited accounts of the Company as at 31st December, 2002 and on the assumption that no further Shares will be issued between the Latest Practicable Date and the effective date of the Capital Reorganisation, credits in an aggregate amount of approximately HK$662,911,000 will arise in the books of the Company as a result of the Share Premium Cancellation and the Capital Reduction, which amount will be transferred to the contributed surplus account of the Company. The Board proposes to apply part of such contributed surplus to set off against the accumulated deficit of the Company of approximately HK$606,012,000 as at 30th June, 2003. On the above basis, the balance of the sum standing to the credit of the contributed surplus account is expected to be approximately HK$56,899,000 after setting off in full the said accumulated deficit of the Company and may be applied in such manner as is permitted by the laws of Bermuda and the Bye-laws, including for capitalisation issues, distribution to Shareholders or set off against accumulated losses of the Company.

Effect of the Capital Reorganisation

Based on the Company’s authorised share capital of HK$400,000,000, represented by 4,000,000,000 Shares, and issued share capital of HK$204,923,482.4, represented by 2,049,234,824 Shares, upon completion of the Share Consolidation and the Capital Reorganisation, the authorised share capital of the Company will remain at HK$400,000,000 represented by 40,000,000,000 Adjusted Shares, and the issued share capital will be HK$1,024,617.412 represented by 102,461,741.2 Adjusted Shares, before taking into account the new Adjusted Shares to be issued under the Creditors’ Scheme and the Open Offer.

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LETTER FROM THE BOARD

The Adjusted Shares will rank pari passu in all respects with each other. Other than as a result of the expenses incurred in relation to the Capital Reorganisation, the implementation thereof will not alter the underlying assets, business operations, management or financial position of the Company or the relative interests or rights of the Shareholders. Save as disclosed herein, the Capital Reorganisation itself will not have any effect on the financial position of the Group.

Conditions of the Capital Reorganisation

The Capital Reorganisation will be conditional upon:

(i) the passing of the necessary resolution(s) by the Shareholders to approve the Capital Reorganisation at a general meeting of the Company;
(ii) compliance with the relevant legal procedures and requirements under Bermuda laws to effect the Capital Reorganisation;
(iii) the Listing Committee of the Stock Exchange granting listing of, and permission to deal in, the Adjusted Shares to be issued pursuant to the Restructuring Proposal;
(iv) the obtaining of all necessary approvals from the regulatory authorities or otherwise as may be required in respect of the Capital Reorganisation; and
(v) the Open Offer and the Creditors’ Scheme becoming unconditional and effective (save as to the conditions requiring the Open Offer and/or the Capital Reorganisation and/or the Creditors’ Scheme to have become unconditional).

Reasons for the Capital Reorganisation

The nominal value of the existing Shares is HK$0.10 and the Company is prohibited under the Bye-laws from allotting and issuing new Shares below their par value. Since 15th April, 2003, the Shares have been trading below their nominal value of HK$0.10. The closing price of the Shares on the Stock Exchange immediately before suspension of trading before the release of the Announcement on 31st July 2003 was HK$0.018 per Share. In the circumstances, the Directors consider it appropriate to propose the Capital Reorganisation and reduce the par value of the Shares so as to facilitate issue of new shares of the Company pursuant to the Creditors’ Scheme and the Open Offer. Upon the Capital Reorganisation becoming unconditional and effective, the accumulated losses of the Company of approximately HK$606,012,000 as at 30th June, 2003 will be cancelled. This will improve the Company’s balance sheet and give the Company greater flexibility in the utilisation of any reserves in future.

— CHANGE OF BOARD LOT SIZE

At present, the Shares are traded in board lot of 2,000 Shares. The Directors have resolved to change the board lot for trading to 20,000 Consolidated Shares upon the Share Consolidation becoming effective (which is equivalent to 20,000 Adjusted Shares following completion of the Capital Reorganisation). The change in board lot size will result in the Consolidated Shares or Adjusted Shares being traded in a more reasonable board lot size and value.

The change of board lot size is intended to reduce the transaction costs for dealing in the Consolidated Shares or Adjusted Shares (as the case may be).

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LETTER FROM THE BOARD

—

TRADING ARRANGEMENTS AND FREE EXCHANGE OF NEW SHARE CERTIFICATES

The Share Consolidation is expected to become effective at 9:30 a.m. on Tuesday, 2nd December, 2003. Upon the Share Consolidation becoming effective, all existing pink share certificates for any number of Shares in issue immediately before the Share Consolidation becoming effective will be deemed to be certificates, and will be effective as documents of title, for one twentieth of that number of the existing Shares. Dealings in the Consolidated Shares are expected to commence on Tuesday, 2nd December, 2003. Parallel trading arrangements for the Consolidated Shares with par value of HK$2.0 each in the form of new share certificates (which will be in purple) and the existing pink shares certificates for the Shares will be established with the Stock Exchange and parallel trading will be permitted from Tuesday, 16th December, 2003, to Tuesday, 10th February, 2004, both days inclusive, at the counters mentioned in (a) and (b) below:

(a) with effect from 9:30 a.m. on Tuesday, 2nd December, 2003, a temporary counter for trading in the Consolidated Shares in board lots of 100 Consolidated Shares will be established and only the existing pink share certificates for the Consolidated Shares can be traded at this counter. All pink share certificates for the Shares will be valid for settlement and delivery for trading transacted at this counter on the basis of every 20 Shares representing one Consolidated Share. The original counter for trading in the Shares in board lots of 2,000 Shares will be temporarily closed with effect from 9:30 a.m. on Tuesday, 2nd December, 2003; and
(b) with effect from 9:30 a.m. on Tuesday, 16th December, 2003, the original counter will be re-opened and will become a counter for trading in the Consolidated Shares in board lots of 20,000 Consolidated Shares. Only new purple share certificates for the Consolidated Shares can be traded at this counter.

The temporary counter for trading in the Consolidated Shares in board lots of 100 Consolidated Shares (represented by the existing pink share certificates) will be removed after 4:00 p.m. on Tuesday, 10th February, 2004. Thereafter, trading will only be in new purple share certificates in board lots of 20,000 Consolidated Shares or Adjusted Shares (as the case may be). The existing pink share certificates for the Shares will then cease to be acceptable for delivery and settlement purposes but will remain effective as documents of title on the basis of every 20 Shares for one Consolidated Share or Adjusted Share (as the case may be).

Upon the Share Consolidation becoming effective (which is expected to be on Tuesday, 2nd December, 2003), share certificates for the Consolidated Shares with par value of HK$2.0 each will be issued in purple colour. Subject to the Share Consolidation becoming effective, Shareholders may from Tuesday, 2nd December, 2003 to Friday, 27th February, 2004 submit their pink certificates for the existing Shares to the Registrars, Computershare Hong Kong Investor Services Limited, at 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong, in exchange, at the expense of the Company, for the new share certificates for the Consolidated Shares of HK$2.0 each or Adjusted Shares of HK$0.01 each (as the case may be) which will be in purple colour. It is expected that the new purple share certificates for the Consolidated Shares or Adjusted Share will be available for collection within ten business days after the submission of the existing share certificates to the Registrars.

Upon the Capital Reduction becoming effective (which is expected to be immediately after 4:00 p.m. on 16th February, 2004), share certificates for the Adjusted Shares with par value of HK$0.01 each will be issued in purple colour. Shareholders who submit their share certificates for free exchange as from the Capital Reduction becoming effective will receive new share certificates in purple colour for the Adjusted Shares with reduced par value of HK$0.01 each. The last date for free exchange of pink share

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certificates for the new purple share certificates is Friday, 27th February, 2004. Thereafter, existing share certificates will be accepted for exchange only on payment of a fee of HK$2.50 (or such higher amount as may from time to time be allowed by the Stock Exchange) for each existing share certificate cancelled or each new share certificate issued for the Adjusted Shares, whichever number of share certificates cancelled/issued is higher. Nevertheless, existing share certificates will continue to be good evidence of legal title and may be exchanged for purple share certificates for the Adjusted Shares at any time.

For the avoidance of doubt, upon the Restructuring Proposal becoming effective, the new purple share certificates, whether issued for the Consolidated Shares with par value of HK$2.0 each or for the Adjusted Shares with reduced par value of HK$0.01 each, will be valid documents of title and good for settlement and trading purpose on the Stock Exchange. Shareholders who are in possession of purple share certificates for the Consolidated Shares with par value of HK$2.0 each need not submit them for exchange into share certificates for the Adjusted Shares with the reduced par value of HK$0.01 each even after the Capital Reduction has become effective, as one purple share certificate for whatever number of Consolidated Shares with par value of HK$2.0 each is equivalent to one purple share certificate for the same number of Adjusted Shares with par value of HK$0.01 each.

In order to facilitate the trading of odd lots of the Consolidated Shares as a result of the Share Consolidation, the Company has appointed Kingston Securities Limited, as an agent to match, on a “best effort” basis, the sale and purchase of odd lots of the Consolidated Shares arising from the Share Consolidation. Such arrangement is to facilitate Shareholders who wish to dispose of or top up their odd lots of Consolidated Shares. Shareholders who wish to take advantage of this facility should contact Ms. Rosita Kiu of Kingston Securities Limited at Suite 2801, 28th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong (Tel: 2298 6215) during the period commencing from Tuesday, 16th December, 2003 up to and including Tuesday, 10th February, 2004. Shareholders are reminded that in order to effect the transaction, they will have to lodge with Kingston Securities Limited the relevant share certificate(s) and duly signed and completed transfer form(s) and, if any, other documents of title. Shareholders should note that the matching of the sale and purchase of odd lots of Consolidated Shares are not guaranteed.

Shareholders are recommended to consult their licensed dealer, bank manager, solicitor, professional accountant or other professional advisers if they are in any doubt about the facility described above.

— CREDITORS’ SCHEME

According to the unaudited financial statements of the Company as at 30th June, 2003, the Company had accumulated losses of approximately HK$606,012,000. As at 31st August, 2003, the Scheme Indebtedness (all of which were unsecured indebtedness) amounted to approximately HK$143.2 million, which included contingent liabilities of approximately HK$11.8 million arising from claims under corporate guarantees and counter-indemnity given by the Company. In view of the Company’s current financial circumstances, the Board proposes to implement the Creditors’ Scheme to restructure the indebtedness position of the Company and improve its financial position.

In August 2002, the Company received a writ from Mr. Siu, making a claim for the sum of HK$18,787,500 plus interest and costs relating to purported share options alleged by Mr. Siu to have been exercised by him in 1999. Mr. Siu resigned as a Director with effect from 18th December, 1999. On 4th July, 2003, summary judgement was awarded against the Company in the amount of HK$18,787,500 plus interest and costs. Appeal by the Company against the summary judgement was made. On 8th August, 2003, the Company received a statutory demand from Mr. Siu demanding immediate payment of HK$25,840,802.66, representing the amount awarded by the court (including interest calculated up to 8th

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LETTER FROM THE BOARD

August, 2003). The appeal against the summary judgement was heard on 6th October, 2003 and dismissed by the Hong Kong Court. The Company had on 8th October, 2003 received a winding up petition filed by Mr. Siu (“Petition”) against the Company to the Hong Kong Court. The Petition is scheduled to be heard at the Hong Kong Court on 3rd December, 2003. The Company is seeking legal advice in response to the Petition. In the meantime, the Company will continue to proceed with the Restructuring Proposal. The approximately HK$25.8 million forms part of the Scheme Indebtedness. Further announcement will be made by the Company on the progress of the Petition.

A former employee of the Group, Mr. Chan Yiu Ming (“Mr. Chan”), has filed a claim in June 2000 against the Company in respect of its failure to allot and issue to Mr. Chan certain shares pursuant to the Share Option Scheme. The Company received in October 2003 a Notice of Intention to Proceed After One Year and a subsequent letter from Mr. Chan whereby Mr. Chan informed that he will amend the claim to seek for HK$9.5 million as compensation for the alleged suffer of loss and damages relating to the purported share options alleged to have been exercised in years 1999 and 2000. The Company is seeking legal advice and is considering to dismiss the action. Mr. Chan may prove his debt in accordance with the Creditors’ Scheme and the admissibility of his claim is subject to validation by the scheme administrator/and adjudicators.

Scheme Indebtedness includes shareholder’s loan and related interest owing to Euro Concord and salary due to Mr. Tam (which balance was approximately HK$8.0 million and HK$1.3 million respectively as at 31st August, 2003), amount due to certain Directors (which balance was HK$960,000 as at 31st August, 2003). To the knowledge of the Directors, the remaining Scheme Creditors have no shareholding in the Company and are independent third parties not connected with the directors, chief executives or substantial shareholders of the Company, its subsidiaries or any of their respective associates. Details of the amounts owing to the connected persons of the Company are set out in the paragraph headed “Effects of the Creditors’ Scheme” below.

Terms

Pursuant to the Creditors’ Scheme, the Scheme Indebtedness and the Preferential Claims as at the Scheme Record Date will be discharged in full by a combination of a cash payment and the issuance of Creditors Shares. The Scheme Indebtedness amounted to approximately HK$143.2 million as at 31st August, 2003, which included approximately HK$11.8 million contingent liabilities. For every HK$1 of valid claims, the Scheme Creditors will receive cash payment and Creditors Shares on a pro-rata basis based on the ratio of HK$12 million from the Open Offer and 180 million Creditors Shares credited as fully paid divided by the Scheme Indebtedness as at the Scheme Record Date, subject to a cap of HK$0.1 and 1.5 Creditors Shares which will be issued at HK$0.1 each. The Creditors Shares will rank pari passu in all respects with the other Adjusted Shares then in issue, including as to the right to receive all dividends and distributions which may be declared made or paid thereafter. Nevertheless, holders of Creditors Shares will not be entitled to participate in the Open Offer as detailed below.

The Scheme Indebtedness (all of which were unsecured) as at 31st August, 2003 amounted to approximately HK$143.2 million, which included contingent liabilities of approximately HK$11.8 millions. The Scheme Creditors as a whole would receive in total HK$12 million in cash and 180 million Creditors Shares, credited as fully paid up, to be issued at HK$0.1 each pursuant to the Creditors’ Scheme. Fractional Creditors Shares will not be issued to Scheme Creditors but will be aggregated and sold if a premium, net of expense, can be obtained. The net proceeds thereof (if any) will be kept by the Company.

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LETTER FROM THE BOARD

Conditions of the Creditors’ Scheme

The Creditors’ Scheme will become effective and binding on the Company and the Scheme Creditors

on:

(a) the approval of the Creditors’ Scheme by a majority in number representing three-fourths in value of the Scheme Creditors who, being so entitled, are present in person or by proxy and vote at the Hong Kong court meeting, the sanction by the Hong Kong Court of the Creditors’ Scheme and the delivery of a copy of the order sanctioning the Creditors’ Scheme to the Registrar of Companies in Hong Kong for registration;
(b) the approval of the Creditors’ Scheme by a majority in number representing three-fourths in value of the Scheme Creditors who, being so entitled, are present in person or by proxy and vote at the Bermuda court meeting, the sanction by the Bermuda Court of the Creditors’ Scheme and the delivery of a copy of the order sanctioning the Creditors’ Scheme to the Registrar of Companies in Bermuda for registration;
(c) the passing at the SGM of the resolution(s) necessary for approving the issue of Creditors Shares to the Scheme Creditors pursuant to the Creditors’ Scheme;
(d) all necessary consents or approvals of all other relevant government or regulatory authorities in relation to the Creditors’ Scheme being obtained;
(e) the approval by the Listing Committee of the Stock Exchange for the granting of listing of and permission to deal in the Creditors Shares to be issued pursuant to the Creditors’ Scheme;
(f) the Share Consolidation becoming unconditional and effective; and
(g) the Capital Reorganisation (which for the avoidance of doubt excludes the Share Consolidation) and the Open Offer becoming unconditional and effective (save as to the conditions requiring the Capital Reorganisation and/or the Open Offer and/or the Creditors’ Scheme to have become unconditional).

The net proceeds from the Open Offer will be the sole source of funds of the Creditors’ Scheme. If for any reason the Offer Shares are not issued, the Company will be unable to proceed with the Creditors’ Scheme. The existing assets of the Company will not be depleted by payment of funds to Scheme Creditors under the Creditors’ Scheme. Any funds paid to the Scheme Creditors will be provided out of the net proceeds of the Open Offer.

At the SGM, Mr. Tam, Euro Concord and parties acting in concert with each of them and their respective associates will abstain from voting on the resolution to approve the Creditors’ Scheme. Main Faith does not hold any Shares and therefore will not be entitled to vote at the SGM. Best Fortune Capital Ltd. and Gold Chief Investment Ltd. who together hold approximately 12.4% of the Shares, are companies controlled by Mr. Zhang Daxiang, a former Director who does not have a special interest in the Restructuring Proposal. The Directors are not aware of the intentions of the aforesaid parties as to voting at the SGM. Save for the aforesaid, there are no other connected persons of the Company who are interested in the Shares.

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LETTER FROM THE BOARD

Effects of the Creditors’ Scheme

The Scheme Indebtedness amounted to approximately HK$143.2 million as at 31st August, 2003, which included contingent liabilities of approximately HK$11.8 million. The Creditors’ Scheme will have the principal effect of substantially reducing the liabilities of the Company, thereby improving its financial status. In addition, upon completion of the Creditors’ Scheme, the discharge of the Scheme Indebtedness will significantly reduce the interest burden on the Company, which will result in a positive effect on the profitability of the Company. On the basis of the Scheme Indebtedness as at 31st August 2003 of approximately HK$143.2 million (including the contingent liabilities of approximately HK$11.8 million), without taking into account other features of the Creditors’ Scheme (i.e. the issue of the Creditors’ Shares) and expenses for the Creditors’ Scheme, an amount of approximately HK$101.4 million (in the event that the contingent liabilities are not admitted) or HK$113.2 million (in the event that the contingent liabilities are admitted) will be credited to the profit and loss account, thereby enhancing the net assets of the Group to the same extent. Shareholders should note that the aforesaid effect calculated on the basis of the amount of Scheme Indebtedness as at 31st August, 2003 is for illustration only and cannot be finalised until the Scheme Record Date when the total amount of the Scheme Indebtedness to be extinguished pursuant to the Creditors’ Scheme can be ascertained. In addition to the waiver of the Scheme Indebtedness, the Creditors’ Scheme will further enhance the Group’s net assets by HK$18 million as a result of the issue of 180 million Creditors Shares at HK$0.10 each, credited as fully paid.

As at 31st August, 2003, the Company had outstanding liabilities due to, amongst other creditors, certain connected persons of the Company. Pursuant to the Creditors’ Scheme, such liabilities will be treated in a manner consistent with those owed to the other Scheme Creditors. The following is a summary of the amounts owing to the connected persons of the Company, the cash compensation and the Creditors Shares to be issued to such connected persons of the Company pursuant to the Creditors’ Scheme, calculated on the assumption that the full amount of the contingent liabilities are not admitted and the Scheme Indebtedness as at the Scheme Record Date remains at approximately HK$131.4 million:

Creditor’s name Euro Concord_(a) Mr. Tam(b) Mr. Tam and concert parties in aggregate Mr. Tao Ke Wei(b) Mr. Tam Kai On(b) Mr. Ko Chung Ting, Peter(b)_ Other connected parties in aggregate	Outstanding amount as at 31/8/03 HK$ 7,941,834 1,328,580 9,270,414 360,000 330,000 270,000 960,000	Cash compensation HK$ 725,058.93 121,294.25 846,353.18 32,866.62 30,127.73 24,649.96 87,644.31	As a % of Share enlarged issued compensation capital(c) No. of % Adjusted Shares 10,875,884 1.37 1,819,414 0.23 12,695,298 1.60 492,999 0.06 451,916 0.06 369,750 0.05 1,314,665 0.17	As a % of Share enlarged issued compensation capital(c) No. of % Adjusted Shares 10,875,884 1.37 1,819,414 0.23 12,695,298 1.60 492,999 0.06 451,916 0.06 369,750 0.05 1,314,665 0.17
				1.60
				0.06 0.06 0.05
				0.17

(a) The amount represented the shareholder’s loan and the loan interest arising therefrom, owing by the Company to Euro Concord.

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LETTER FROM THE BOARD

(b) Mr. Tam, Mr. Tao Ke Wei, Mr. Tam Kai On and Mr. Ko Chung Ting, Peter are executive Directors and the amounts owing to them represent outstanding salaries.
(c) Based on the issued share capital of the Company as enlarged upon completion of the Restructuring Proposal.

Pursuant to Rule 14.26 of the Listing Rules, the issue of the Creditors Shares to Mr. Tam, Euro Concord and the above-mentioned Directors will constitute a connected transaction of the Company and is subject to the approval of the Shareholders other than Mr. Tam, Euro Concord and their associates at the SGM.

Upon implementation of the Creditors’ Scheme, the Scheme Indebtedness and the Preferential Claims will be discharged.

If the Creditors’ Scheme does not become effective, the Company would not have sufficient funds to pay all its debts. Based on the Company’s accounts for the six months ended 30th June, 2003, the Directors estimate that the liquidation value of the Company is approximately HK$5 million, which includes a cash balance of approximately HK$1 million as at 30th June, 2003. The Company’s cash balance has been reduced to approximately HK$30,000 as at 31st August, 2003.

For the avoidance of doubt, any of the Scheme Indebtedness that is not proved in accordance with the Creditors’ Scheme or which is rejected, in whole or in part, shall be treated (and, if rejected in part, as to that part only) for all purposes as wholly and irrevocably released and no Scheme Creditor shall be entitled to payment thereof or to make any claim or initiate any proceedings in relation thereto.

— OPEN OFFER

In connection with the Capital Reorganisation and the Creditors’ Scheme, the Board also proposes the Open Offer.

Issue statistics:

Basis of Open Offer:

five Offer Shares for an equivalent of every Adjusted Share held by the Qualifying Shareholders on the Record Date. Holders of the Creditors Shares will not be entitled to participate in the Open Offer

Number of Shares in issue: 2,049,234,824 Shares as at the Latest Practicable Date

Number of Adjusted Shares expected to be in issue upon completion of the Capital Reorganisation:

102,461,741.2 Adjusted Shares

Number of Offer Shares: 512,308,705 Offer Shares Subscription Price: HK$0.045 per Offer Share

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LETTER FROM THE BOARD

The Scheme Indebtedness, including the contingent liabilities, as at 31st August, 2003 amounted to approximately HK$143.2 million. Such amount includes the Convertible Notes, the outstanding principal of which as at the Latest Practicable Date was HK$17,000,000. The Convertible Notes are convertible into Shares at the conversion price of HK$0.1268 per Share (subject to adjustment) at any time up to 25th March, 2005. The Conversion Price is substantially above the prevailing market price of the Shares which closed at HK$0.014 on 29th October, 2003. As announced by the Company on 29th October, 2003, Happy Valley has confirmed to the Company that it has no intention to convert the Convertible Notes into Shares prior to the date when the Creditors’ Scheme becomes effective. In order to enable the Company to communicate to its creditors the estimated cash and share entitlements that each creditor may receive under the Creditors’ Scheme if it is implemented, the Company and Happy Valley mutually agree to enter into the waiver agreement on 29th October, 2003, whereby the conversion rights attaching to the Convertible Notes will be waived and extinguished with effect from 29th October, 2003 at nil consideration. Save for this, other terms and conditions of the Convertible Notes shall continue to be in full force and effect. There is no existing or proposed agreement, arrangement or understanding between Happy Valley and the Company having any connection with or dependence upon the outcome of the Restructuring Proposal.

Qualifying Shareholders will receive their assured allotments of Offer Shares applied for if application is made by them for a number of Offer Shares that is equal to or less than the number in their assured allotments of Offer Shares. No applications for Offer Shares in excess of assured allotments will be considered (to the extent of the excess of the assured allotments).

Qualifying Shareholders and Overseas Shareholders

The Company will send the Prospectus Documents to Qualifying Shareholders only. To qualify for the Open Offer, a Shareholder must:

(i) be registered as a member of the Company at the close of business on the Record Date; and
(ii) have an address in Hong Kong on the register of members of the Company on the Record Date.

The Prospectus Documents will not be registered under the applicable securities legislation of any jurisdiction other than Hong Kong and Bermuda. The offer of Offer Shares pursuant to the Prospectus Documents to Overseas Shareholders may be unlawful or impracticable. The Directors therefore exercise the discretion granted to them under the Bye-laws that the Overseas Shareholders will not be entitled to take part in the Open Offer. The Company will send copies of the Prospectus to the Overseas Shareholders for their information only, but will not send them any application forms for Offer Shares.

Fractions of Offer Shares

There will be no assured allotment of fractions of Offer Shares and the fractions of Offer Shares which would otherwise form part of assured allotments (if any) will be taken up by the Underwriter.

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LETTER FROM THE BOARD

Subscription price for the Offer Shares

HK$0.045 per Offer Share, payable in full when a Qualifying Shareholder applies for Offer Shares, which price represents:

(i) a discount of approximately 87.5% (adjusted for the Share Consolidation) to the closing price of HK$0.018 per Share on 31st July, 2003, being the last day on which the Shares were traded immediately preceding suspension of trading of Shares pending release of the Announcement;
(ii) a discount of approximately 86.4% (adjusted for the Share Consolidation) to the average closing price of HK$0.0165 per Share for the last ten trading days up to and including 31st July, 2003;
(iii) a discount of approximately 53.8% (adjusted for the Share Consolidation) to the theoretical ex-rights price of HK$0.0975 per Consolidated Share based on the closing price of the Share on 31st July, 2003;
(iv) a discount of approximately 83.6% (adjusted for the Share Consolidation) to the average closing price of HK$0.0137 per Share for the last ten trading days up to and including the Latest Practicable Date; and
(v) a discount of approximately 83.9% (adjusted for the Share Consolidation) to the closing price of HK$0.014 per Share on the Latest Practicable Date.

The Subscription Price was agreed based on arm’s length negotiations between the Company and the Underwriter. The Directors consider the terms of the Open Offer to be fair and reasonable so far as the interests of the Shareholders are concerned. The Directors consider that the significant discount represented by the Subscription Price as compared to the recent market prices of the Shares will serve to encourage Shareholders to participate in the Open Offer and the recapitalisation of the Company.

The assured allotments of the Offer Shares will not be transferable or capable of renunciation. Under the Open Offer, there will not be trading in assured allotments of Offer Shares and Shareholders will not be offered an opportunity to apply for excess Offer Shares. In view of the relatively thin trading volume of the Shares recently, the Directors do not expect there would be any strong or active market for trading in nil-paid Shares which would have been provisionally allotted to Shareholders had the present exercise been a rights issue. In the circumstances and given that fund raising by way of the Open Offer enables the existing Shareholders to maintain their relative percentage interests in the Company in the same way as would a rights issue, the Directors have decided to proceed with the Open Offer and dispense with the additional administrative burden of providing for trading in nil-paid rights.

Given the financial performance of the Company in recent years and the financial position of the Group, the Directors consider that it would be unlikely that the Group can secure independent underwriting for an issue of similar size to the Open Offer. In negotiating with the Underwriter on the terms of the Open Offer, given the significant financial commitment in underwriting the Open Offer, the Underwriter has requested that a significant discount to market price of the Shares be offered to the Shareholders. Given that the Open Offer already includes an opportunity for Shareholders to maintain their proportionate shareholding in the Company, after arm’s length negotiation between the Underwriter and the Company, no facility is included to enable excess applications. The Directors consider that the underwriting commission payable to the Underwriter at the rate of 2.5% of the aggregate Subscription Price for the actual number of the Offer Shares underwritten by the Underwriter represents the market rate for independent underwriters in underwriting open offers and rights issues.

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LETTER FROM THE BOARD

Share certificates

Subject to fulfillment of the conditions of the Open Offer, share certificates for all fully-paid Offer Shares with par value of HK$0.01 each will be issued in purple colour and are expected to be posted at the own risk of the Shareholders on or before Tuesday, 17th February, 2004.

Status of the Offer Shares

When fully paid, issued and allotted, the Offer Shares will rank pari passu in all respects with the then issued Adjusted Shares of HK$0.01 each. Holders of the fully paid Offer Shares will be entitled to receive all future dividends and distributions which are declared, made or paid on or after the date of issue and allotment of the Offer Shares.

— UNDERWRITING ARRANGEMENTS FOR THE OPEN OFFER

Mr. Tam is the sole beneficial owner of Euro Concord. Euro Concord is interested in 215,000,000 Shares (equivalent to a total of 10,750,000 Adjusted Shares), representing approximately 10.5% of the issued share capital of the Company as at the Latest Practicable Date. Euro Concord has undertaken to take up 53,750,000 Offer Shares in which it is entitled to subscribe on an assured basis under the Open Offer.

The Underwriter, being Main Faith, will underwrite the remaining Offer Shares in accordance with the Underwriting Agreement which main terms are summarised as described below:

Underwriting Agreement

Date:	15th August, 2003 and as supplemented on 4th November,	15th August, 2003 and as supplemented on 4th November,
	2003
Underwriter and number of Offer	Offer Shares undertaken
Shares underwritten or	to be applied for by Euro Concord	53,750,000
undertaken to be applied for:
	Maximum number of Offer Shares
	underwritten by Main Faith	458,558,705
	Total	512,308,705

Commission:	2.5% of the aggregate Subscription Price in respect of the
	actual number of the Offer Shares underwritten by the
	Underwriter. Save for the underwriting commission, no other
	fees are payable to the Underwriter under	the Restructuring
	Proposal.

Termination of the Underwriting Agreement and force majeure

The Underwriting Agreement contains provisions entitling the Underwriter, by notice in writing, to terminate its obligations thereunder on the occurrence of certain events at any time on or before

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LETTER FROM THE BOARD

4:00 p.m. on the second business day after the latest time for applications for the Offer Shares. If in the reasonable opinion of the Underwriter:

(a) the success of the Open Offer would be affected by:
(i) the introduction of any new law or regulation or any change in existing law or regulation (or the judicial interpretation thereof) or other occurrence of any nature whatsoever which may in the reasonable opinion of the Underwriter materially and adversely affect the business or the financial or trading position or prospects of the Group as a whole or is materially adverse in the context of the Open Offer; or
(ii) the occurrence of any local, national or international event or change (whether or not forming part of a series of events or changes occurring or continuing before, and/or after the date of the Underwriting Agreement) of a political, military, financial, economic or other nature (whether or not ejusdem generis with any of the foregoing), or in the nature of any local, national and international outbreak or escalation of hostilities or armed conflict, or affecting local securities markets which may in the reasonable opinion of the Underwriter materially and adversely affect the business or the financial or trading position or prospects of the Group as a whole or materially and adversely prejudice the success of the Open Offer or otherwise makes it inexpedient or inadvisable to proceed with the Open Offer; or
(iii) any material adverse change in the business or in the financial or trading position of the Group as a whole; or
(b) any material adverse change in market conditions (including without limitation, a change in fiscal or monetary policy, or foreign exchange or currency markets, suspension or restriction of trading in securities) occurs which in the reasonable opinion of the Underwriter is likely to materially and adversely affect the success of the Open Offer or otherwise makes it inexpedient or inadvisable to proceed with the Open Offer; or
(c) this circular or Prospectus when published contain information (either as to business prospects or the condition of the Group or as to its compliance with any laws or the Listing Rules or any applicable regulations) which has not prior to the date of the Underwriting Agreement been publicly announced or published by the Company and which may in the reasonable opinion of the Underwriter be material to the Group as a whole and is likely to affect the success of the Open Offer or might cause a prudent investor not to apply in full for its assured allotments of the Offer Shares under the Open Offer;

the Underwriter shall be entitled by notice in writing to the Company, served prior to 4:00 p.m. on the second business day after the latest time for application for the Offer Shares, to terminate the Underwriting Agreement and thereby the Open Offer will not proceed.

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LETTER FROM THE BOARD

Conditions of the Underwriting Agreement

The Underwriting Agreement is conditional on, inter alia, the following:

(i) the approval of the Open Offer by the Shareholders other than Mr. Tam, Euro Concord and their associates at the SGM;
(ii) the Whitewash Waiver being approved by the Independent Shareholders by way of a poll at the SGM;
(iii) the Whitewash Waiver being granted by the Executive;
(iv) the Listing Committee of the Stock Exchange (a) agreeing to grant listing of, and permission to deal in, the Offer Shares either unconditionally or subject to conditions which the Company accepts and the satisfaction of such conditions (if any) by no later than a date falling on the third business day from the Record Date and (b) not having withdrawn or revoked such listings and permission on or before 4:00 p.m. on the date of settlement of the Offer Shares in accordance with the terms of the Underwriting Agreement;
(v) the Share Consolidation becoming unconditional and effective;
(vi) the Capital Reorganisation and the Creditors’ Scheme becoming unconditional (save as to the condition requiring the Open Offer and/or the Capital Reorganisation and/or the Creditors’ Scheme becoming unconditional);
(vii) compliance with the requirements under the applicable laws and regulations of Hong Kong and Bermuda; and
(viii) the obligations of the Underwriter under the Underwriting Agreement relating to the Open Offer becoming unconditional and not being terminated in accordance with the terms thereof or otherwise.

The parties to the Underwriting Agreement have on 4th November, 2003 agreed to extend the long-stop date of the Underwriting Agreement to 30th June, 2004. If the above conditions are not satisfied and/or waived in whole or in part by the Underwriter by 4:00 p.m. on 30th June, 2004 or such later date as the Underwriter may agree with the Company in writing, the Underwriting Agreement shall terminate and no party will have any claim against any other party for costs, damages, compensation or otherwise (save for any antecedent breaches of the Underwriting Agreement), and the Open Offer will not proceed. In the event that the conditions numbered (ii) and (iii) above cannot be fulfilled, and the Underwriter has stated that it does not intend to waive such conditions. Under such circumstances, the Underwriting Agreement could not become unconditional and the Open Offer and the Restructuring Proposal will not complete.

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LETTER FROM THE BOARD

By virtue of the interests of Mr. Tam and Euro Concord as creditors of the Company in the Creditors’ Scheme, the interest of the Underwriter (which is solely owned by Mr. Tam) in the Underwriting Agreement and the application for the Whitewash Waiver by Mr. Tam, which is part and parcel of the Restructuring Proposal, Mr. Tam, Euro Concord and parties acting in concert with each of them and their respective associates, who together held 215,000,000 Shares (equivalent to 10,750,000 Adjusted Shares), representing approximately 10.5% of the issued share capital of the Company as at the Latest Practicable Date will abstain from voting on the resolutions to approve the Creditors’ Scheme and the Open Offer at the SGM.

As Mr. Tam, Euro Concord and their associates or concert parties and the Scheme Creditors (if they are also Shareholders) are interested in the Open Offer both as Shareholders and creditors, they shall abstain from voting on the Whitewash Waiver at the SGM as required under the Code.

Any person contemplating buying or selling of the Shares from now up to the date on which all conditions of the Open Offer are fulfilled will bear the risk that the Open Offer may not become unconditional and may not complete. Investors should seek professional advice regarding dealings in Shares during this period if they are in any doubt.

Dealings in Offer Shares that are on the branch register of the Company in Hong Kong will be subject to the payment of stamp duty in Hong Kong.

LISTING AND DEALINGS

Applications will be made to the Listing Committee of the Stock Exchange for the granting of the listing of, and permission to deal in, the Consolidated Shares and the then Adjusted Shares to be issued pursuant to the Restructuring Proposal. All necessary arrangements have been made for the Consolidated Shares and the then Adjusted Shares to be issued pursuant to the Restructuring Proposal to be admitted into CCASS established and operated by HKSCC.

Subject to the granting of the listing of, and permission to deal in, the Consolidated Shares and the then Adjusted Shares on the Stock Exchange, the Consolidated Shares and the then Adjusted Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the relevant Shares on the Stock Exchange or such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading day is required to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

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LETTER FROM THE BOARD

EFFECTS OF THE RESTRUCTURING PROPOSAL

Shareholding Structure

The following table sets out the shareholding structure of the Company as at the Latest Practicable Date, the shareholding structures upon the completion of the Share Consolidation, the Capital Reorganisation, the Creditors’ Scheme (assuming the full amount of the contingent liabilities are not admitted and the Scheme Indebtedness as at the Scheme Record Date remains at approximately HK$131.4 million) and the Open Offer assuming different levels of subscription of the Offer Shares by the Independent Shareholders:

Mr. Tam and his concert parties Best Fortune Capital Ltd. Gold Chief Investment Ltd.(Note 1) Public Independent Creditors (Note 2) Other Directors_(Note 6)_ Total	Effect of the As Share Consolidation Shareholding upon completion of at the Latest and the Capital the Restructuring Proposal assuming subscription by Practicable Date Reorganisation Independent Shareholders of Offer Shares at different levels 0%(Note 3) 50%(Note 4) 100%(Note 5) Adjusted Adjusted Adjusted Adjusted Shares (%) Shares Shares (%) Shares (%) Shares (%) 215,000,000 10.5 10,750,000 535,754,003 67.4 306,474,651 38.5 77,195,298 9.7 12,600,000 0.6 630,000 630,000 0.1 2,205,000 0.3 3,780,000 0.5 241,169,585 11.8 12,058,479 12,058,479 1.5 42,204,677 5.3 72,350,874 9.1 1,580,465,239 77.1 79,023,262 79,023,262 9.9 276,581,416 34.8 474,139,572 59.6 – – – 165,990,037 20.9 165,990,037 20.9 165,990,037 20.9 – – – 1,314,665 0.2 1,314,665 0.2 1,314,665 0.2 2,049,234,824 100.0 102,461,741 794,770,446 100.0 794,770,446 100.0 794,770,446 100.0	Effect of the As Share Consolidation Shareholding upon completion of at the Latest and the Capital the Restructuring Proposal assuming subscription by Practicable Date Reorganisation Independent Shareholders of Offer Shares at different levels 0%(Note 3) 50%(Note 4) 100%(Note 5) Adjusted Adjusted Adjusted Adjusted Shares (%) Shares Shares (%) Shares (%) Shares (%) 215,000,000 10.5 10,750,000 535,754,003 67.4 306,474,651 38.5 77,195,298 9.7 12,600,000 0.6 630,000 630,000 0.1 2,205,000 0.3 3,780,000 0.5 241,169,585 11.8 12,058,479 12,058,479 1.5 42,204,677 5.3 72,350,874 9.1 1,580,465,239 77.1 79,023,262 79,023,262 9.9 276,581,416 34.8 474,139,572 59.6 – – – 165,990,037 20.9 165,990,037 20.9 165,990,037 20.9 – – – 1,314,665 0.2 1,314,665 0.2 1,314,665 0.2 2,049,234,824 100.0 102,461,741 794,770,446 100.0 794,770,446 100.0 794,770,446 100.0
		100.0

Notes:

Gold Chief Investment Ltd. is wholly owned by China Convergent Corporation Limited which in turn is owned as to approximately 50% by Best Fortune Capital Ltd. China Convergent Corporation Limited is a company listed on the Australian Stock Exchange and the remainder of its shareholders are not connected with the Company. Best Fortune Capital Ltd. is a company solely owned by Mr. Zhang Daxiang, a former Director. The Company is unaware, as at the Latest Practicable Date, whether Best Fortune Capital Ltd. or Gold Chief Investment Ltd. intends to take up their respective assured allotment of Offer Shares under the Open Offer.
These represent Scheme Creditors other than Mr. Tam, Euro Concord and all executive Directors who are connected persons of the Company.
This assumes none of the Offer Shares are taken up by Independent Shareholders and the Underwritten Shares are entirely taken up by the Underwriter.
This assumes 50% of the Underwritten Shares are taken up by Independent Shareholders and the remainder of the Offer Shares are to be taken up by the Underwriter.

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LETTER FROM THE BOARD

This assumes all Underwritten Shares are taken up by the Independent Shareholders.
These represent Creditors Shares to be issued to those executive Directors who are Scheme Creditors pursuant to the Creditors’ Scheme. Details are set out in the table under the sub-paragraph headed “Effects of the Creditors’ Scheme” above.

As at the Latest Practicable Date, Euro Concord was interested in 215,000,000 Shares (equivalent to 10,750,000 Adjusted Shares), representing approximately 10.5% of the issued Shares. As one of the terms of the Underwriting Agreement, Euro Concord has undertaken to apply in full for its assured allotment of Offer Shares. In the event Main Faith is required to take up all the 458,558,705 Offer Shares underwritten by it, the shareholding of Mr. Tam and his concert parties in the Company will increase to 535,754,003 Adjusted Shares, representing approximately 67.4% of the enlarged issued share capital of the Company of 794,770,446 Adjusted Shares (based on the issued capital of the Company as at the Latest Practicable Date and assuming the Scheme Indebtedness as at the Scheme Record Date amounts to HK$131.4 million).

APPLICATION FOR WHITEWASH WAIVER

If Main Faith is required to take up the Underwritten Shares in full, Mr. Tam and his concert parties would hold a maximum of 535,754,003 Adjusted Shares (based on the issued capital of the Company as at the Latest Practicable Date and assuming the Scheme Indebtedness as at the Scheme Record Date amounts to HK$131.4 million), representing approximately 67.4% of the issued share capital of the Company as enlarged by the issue of the Offer Shares and the Creditors Shares. Consequently, Mr. Tam will trigger a general offer obligation for the securities of the Company not owned by him or parties acting in concert with him pursuant to Rule 26 of the Code. Application has been made by Mr. Tam to the Executive for the Whitewash Waiver. The Executive has agreed, subject to the approval of the Independent Shareholders, to waive any obligation of Mr. Tam and his concert parties to make a general offer for the Shares otherwise owned or agreed to be subscribed by Mr. Tam or his concert parties. Mr. Tam, Euro Concord, their associates and concert parties, the Scheme Creditors (if they are also Shareholders) and any other parties involved in or interested in the Open Offer (other than by virtue only of their interests in assured allotments of the Offer Shares) or the Whitewash Waiver shall abstain from voting on the Whitewash Waiver as required under the Code. The Underwriting Agreement is conditional, upon among others, the grant of the Whitewash Waiver. If the Underwriting Agreement fails to become unconditional, the Restructuring Proposal will not proceed. Mr. Tam may be interested in more than 50% of the entire issued share capital of the Company after completion of the Restructuring Proposal. In the event that Mr. Tam’s interest after completion of the Restructuring Proposal passes 50%, Mr. Tam may acquire further shares of the Company without incurring any obligation to make a general offer to acquire all the shares of the Company (other than those already owned or to be acquired by Mr. Tam or parties acting in concert with him) under Rule 26 of the Code.

Mr. Tam, his associates and parties acting in concert with him have confirmed that they have not dealt in Shares during the six months prior to the date of the Underwriting Agreement or since that date and have undertaken to the Company that they will not deal in the Shares until the SGM has been held.

INFORMATION ON MR. TAM

Mr. Tam is the sole director and sole shareholder of both Euro Concord and Main Faith. Mr. Tam is an executive Director. He is the founder of the Southpeak Group in Dongguan, the PRC, which is engaged in property development, construction, supermarket, transportation and manufacturing industries. Mr. Tam intends to continue the operations of the Group in the construction and property sectors and will

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LETTER FROM THE BOARD

continue to explore investment opportunities which will bring attractive returns and cashflow to the Group so as to strengthen the Group’s revenue base and overall performance. Mr. Tam does not have any plan to inject any assets into the Company nor implement major changes to the deployment of fixed assets of the Group. Mr. Tam has no intention to make significant changes to the continued employment of the employees of the Group. There is currently no agreement, arrangement, understanding, or intention that Mr. Tam will transfer the Adjusted Shares acquired pursuant to the Restructuring Proposal. Mr. Tam intends to nominate such number of additional members to the Board so as to constitute a majority of the Board. Further announcements will be made by the Company when new Directors are appointed.

REASONS FOR THE RESTRUCTURING PROPOSAL AND USE OF PROCEEDS

The Company and its subsidiaries are principally engaged in investment holding which involves money lending services, network systems services and hotel operation services and provision of construction services. The Group was loss making in the past five financial years and is currently operating under a tight financial position. The professional fees for the Restructuring Proposal is estimated to be approximately HK$2.0 million, and will be financed by the proceeds from the Open Offer. The net proceeds from the Open Offer will be used (i) as to approximately HK$0.1 million for repayment in full of the Preferential Claims; (ii) as to as to approximately HK$12.0 million for payment to the Scheme Creditors pursuant to the Creditors’ Scheme and (iii) as to the balance of approximately HK$8.9 million as additional working capital of the Group. The Open Offer will improve the liquidity position of the Group as well as enhance its equity base, whilst allowing the Qualifying Shareholders to participate in the equity fund raising exercise of the Company. Although the Restructuring Proposal as a whole is expected to significantly improve the financial position of the Group, further efforts such as looking for other business opportunities both in Hong Kong and the PRC for investments which would generate positive cashflow and revenue will be required to improve the long term performance of the Group and there is no certainty that the Group can be restored to making operating profit in the near future.

LISTING

The Stock Exchange has stated that, if the Company remains a listed company, any future injections into or disposals by the Company will be subject to the provisions of the Listing Rules. Pursuant to the Listing Rules, the Stock Exchange has the discretion to require the Company to issue a circular to the Shareholders irrespective of the size of the proposed transaction, particularly when such proposed transaction represents a departure from the principal activities of the Group following completion of the Restructuring Proposal. The Stock Exchange also has the power, pursuant to the Listing Rules, to aggregate a series of acquisitions, or disposals by the Company and any such acquisitions or disposals may, in any event, result in the Company being treated as a new applicant for listing and subject to the requirement for new applicants as set out in the Listing Rules.

AMENDMENTS OF BYE-LAWS

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LETTER FROM THE BOARD

in compliance with Bermuda laws. If the special resolution at the SGM is passed by Shareholders at the SGM, the existing Bye-law no. 140 will be deleted and replaced by the following new Bye-law no. 140:

“The Company may, upon the recommendation of the Board, resolve to capitalise any part of the Company’s reserves (including any contributed surplus account and also including any share premium account or other undistributable reserve, but subject to the provisions of the law with regard to unrealised profits) or undivided profits not required for the payment or provision of the dividend on any shares with a preferential right to dividend, and accordingly that such part be sub-divided amongst the shareholders who would have been entitled thereto if distributed by way of dividend and in the same proportions, on condition that the same be not paid in cash but be applied either in or towards paying up any amounts for the time being unpaid on any shares held by such shareholders respectively or paying up in full unissued shares or debentures or other securities of the Company to be allotted, distributed and credited as fully paid to and amongst such shareholders in the proportion aforesaid, or partly in one way and partly in the other provided that for the purpose of this Bye-law, any amount standing to the credit of any share premium account may only be applied in the paying up unissued shares to be issued to shareholders of the Company as fully paid.”

RENEWAL OF GENERAL MANDATES

The share capital of the Company will be enlarged as a result of the Restructuring Proposal. The New Issue Mandate and the Repurchase Mandate will expand and replace the existing general mandates to issue and repurchase shares to ensure that the Adjusted Shares issued in connection with the Restructuring Proposal will be included in calculating the number of shares which are permitted to be allotted, issued or otherwise dealt with or repurchased by the Company under the general mandates to issue and repurchase shares.

The New Issue Mandate will grant to the Directors the authority to allot and issue shares up to an aggregate nominal value not exceeding 20% of the share capital of the Company in issue immediately after completion of the Restructuring Proposal or if the Restructuring Proposal is not completed, on the date of the passing of the relevant resolutions. The Repurchase Mandate will grant to the Directors the authority to repurchase shares up to 10% of the aggregate nominal amount of the issued share capital of the Company immediately after completion of the Restructuring Proposal or if the Restructuring Proposal is not completed, on the date of the passing of the relevant resolutions. The Directors have no immediate plan to use the New Issue Mandate and the Repurchase Mandate to issue or repurchase securities of the Company, but consider both mandates to be in the interests of the Company in order to provide itself flexibility. An explanatory statement containing the relevant information on the repurchase of securities of the Company as required by the Listing Rules is contained in Appendix III to this circular.

SGM

Set out on pages 156 to 161 in this circular is a notice convening the SGM which will be held at 9:15 a.m. on Monday, 1st December, 2003 at Ward Room, Royal Hong Kong Yacht Club, Kellett Island, Causeway Bay, Hong Kong at which resolutions will be proposed to approve, among other things, the Restructuring Proposal and the transactions contemplated thereunder, the Whitewash Waiver, the amendments to the Bye-laws and the General Mandates.

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LETTER FROM THE BOARD

The form of proxy for use at the SGM is enclosed with this circular. Whether or not you intend to attend the meeting, you are requested to complete the accompanying form of proxy and return in accordance with the instructions printed thereon and return it as soon as possible to the Registrar, Computershare Hong Kong Investor Services Limited at 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong, and in any event not less than 48 hours before the time appointed for the holding of the SGM. Delivery of a form of proxy will not preclude you from attending and voting in person at the SGM or any adjourned meeting should you so desire.

Mr. Tam, Euro Concord and parties acting in concert with each of them and their respective associates, who together held 215,000,000 Shares (equivalent to 10,750,000 Adjusted Shares), representing approximately 10.5% of the issued share capital of the Company as at the Latest Practicable Date will abstain from voting on the resolutions to approve the Creditors’ Scheme, the Open Offer and the Whitewash Waiver at the SGM. Scheme Creditors (if they are also Shareholders) shall also abstain from voting on the resolution to approve the Whitewash Waiver as required under the Code.

RECOMMENDATIONS

Your attention is drawn to the letter from the Independent Board Committee set out on page 32 of this circular. The Independent Board Committee, having taken into account the advice of Chateron, the text of which is set out on pages 33 to 72 of this circular, considers that the terms of the Creditors’ Scheme involving the connected transactions, the Open Offer and the Whitewash Waiver are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the resolutions numbered 4 to 6 set out in the notice of the SGM to approve the Creditors’ Scheme, the Open Offer and the Whitewash Waiver.

The Directors also consider that the Share Consolidation, Capital Reorganisation, the amendments to the Bye-laws and the renewal of the General Mandates are all in the interest of the Company, in particular the Capital Reorganisation which is inter-conditional with the whole Restructuring Proposal, and recommend the Shareholders to vote in favour of the relevant resolutions to approve each of these matters.

FURTHER INFORMATION

Your attention is drawn to the letter of advice from Chateron and the additional information set out in the appendices in this circular.

Yours faithfully, For and on behalf of the Board

Tao Ke Wei

Executive Director

– 31 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

(incorporated in Bermuda with limited liability)

6th November, 2003

To the Independent Shareholders

Dear Sir or Madam,

As the Independent Board Committee, we have been appointed to advise you in connection with the Creditors’ Scheme, the Open Offer and the Whitewash Waiver, details of which are set out in the letter from the Board contained in the circular to the Shareholders dated 6th November, 2003 (the “Circular”), of which this letter forms part. Terms defined in the Circular shall have the same meanings when used herein unless the context otherwise requires.

Having considered the terms of the Creditors’ Scheme, the Open Offer and the Whitewash Waiver and the advice of Chateron in relation thereto as set out on pages 33 to 72 of the Circular, we are of the opinion that the terms of the Creditors’ Scheme, the Open Offer and the Whitewash Waiver are fair and reasonable so far as the Independent Shareholders are concerned. We therefore recommend that you vote in favour of the resolutions to be proposed at the SGM to approve the Creditors’ Scheme, the Open Offer the Whitewash Waiver.

Yours faithfully, Independent Board Committee Choy Sai Man

– 32 –

* for identification purpose only

LETTER OF ADVICE FROM CHATERON

The following is the text of a letter of advice received from Chateron in respect of the Creditors’ Scheme, the Open Offer and the Whitewash Waiver, and is prepared for the purpose of inclusion in this circular:

==> picture [175 x 66] intentionally omitted <==

6th November, 2003

The Independent Board Committee China Nan Feng Group Limited 1801-1803 Hutchison House 10 Harcourt Road Central Hong Kong

Dear Sirs,

Creditors’ Scheme of Arrangement under section 99 of the Companies Act 1981 of Bermuda and section 166 of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong), Open Offer, Application for Whitewash Waiver

INTRODUCTION

We refer to the circular dated 6th November, 2003 (the “ Circular ”) issued by China Nan Feng Group Limited (the “ Company ”) and of which this letter forms part. Capitalized terms used in this letter shall have the meanings ascribed to them in the Circular unless the context herein otherwise requires. The Circular relates to, inter alia, the following:

(i) the implementation of the Creditors’ Scheme under section 99 of the Companies Act and section 166 of the Companies Ordinance between the Company and the Scheme Creditors. Details of the terms and conditions of the Creditors’ Scheme are referred to in the letter from the Board as set out on pages 9 to 31 of the Circular;
(ii) the Open Offer of new shares by the Company which, if proceeded with, will raise minimum estimated net proceeds of approximately HK$21 million. Details and the terms and conditions of the Open Offer are set out in the letter from the Board as set out on pages 9 to 31 of the Circular; and

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(iii) in the event where upon completion of the Open Offer, Mr. Tam (being a Director who, through his wholly owned subsidiary Euro Concord, is beneficially interested in approximately 10.5% of the Company’s issued share capital as at the Latest Practicable Date) and his concert parties are required to fully honour their obligations under the underwriting arrangements relating to the Open Offer as a result of which Mr. Tam and his concert parties would have a resultant beneficial interest in approximately 67.4% of the Company’s enlarged issued share capital after completion of the Creditors’ Scheme and the Open Offer, pursuant to Note 1 to the Notes on dispensations from Rule 26 of the Code, Mr. Tam will make an application to the Executive for the grant of the Whitewash Waiver from the obligation to make a mandatory offer for all the issued shares of the Company other than those already owned or agreed to be acquired by Mr. Tam and his concert parties under Rule 26 of the Code. In this regard, the Open Offer as referred to in (ii) above will not become unconditional if the Whitewash Waiver is not granted by the Executive. Details of Mr. Tam’s application for the Whitewash Waiver are referred to in the letter from the Board as set out on pages 9 to 31 of the Circular.

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, the Creditors’ Scheme, the Open Offer and the Whitewash Waiver are conditional upon, inter alia, the approval of the Independent Shareholders at the SGM. Accordingly, the Independent Board Committee comprising Mr. Choy Sai Man, being an independent non-executive Director, has been constituted by the Company to advise the Independent Shareholders in relation to the Creditors’ Scheme, the Open Offer and the Whitewash Waiver. In evaluating the eligibility of Mr. Choy Sai Man in being appointed by Company to constitute the Independent Board Committee, we noted that:

(i) Mr. Tam, an executive Director, carries out executive functions in the Group and is also the beneficial owner of Euro Concord, a substantial shareholder of the Company, and Main Faith, the Underwriter for the Open Offer. Therefore, Mr. Tam is considered to be interested in the Creditors’ Scheme, the Open Offer and the application for the Whitewash Waiver. Therefore, he is not eligible for appointment as a member of the Independent Board Committee;
(ii) Mr. Tao Ke Wei, an executive Director, carries out executive functions in the Group and is therefore considered to be interested in the Creditors’ Scheme, the Open Offer and the application for the Whitewash Waiver. Therefore, he is not eligible for appointment as a member of the Independent Board Committee;
(iii) Mr. Tam Kai On, an executive Director, carries out executive functions in the Group and is therefore considered to be interested in the Creditors’ Scheme, the Open Offer and the application for the Whitewash Waiver. Therefore, he is not eligible for appointment as a member of the Independent Board Committee;
(iv) Mr. Ko Chung Ting, Peter, an executive Director, carries out executive functions in the Group and is therefore considered to be interested in the Creditors’ Scheme, the Open Offer and the application for the Whitewash Waiver. Therefore, he is not eligible for appointment as a member of the Independent Board Committee;

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(v) Mr. Choy Sai Man, an independent non-executive Director, declared that he has no conflict of interest in the Creditors’ Scheme, the Open Offer and the application for the Whitewash Waiver in respect of his service as an independent non-executive Director. He does not have any connection or relationship with, or any direct or indirect shareholding and equity related interests in, the Group or any of its substantial or controlling shareholders, the Underwriter or any party acting or presumed to be acting in concert with any of the foregoing as at the Latest Practicable Date. Therefore, he is considered not to be interested in the Creditors’ Scheme, the Open Offer and the application for the Whitewash Waiver as at the Latest Practicable Date and is eligible for appointment as a member of the Independent Board Committee; and
(vi) Mr. Lau Kwok Wah, an independent non-executive Director, is a solicitor of a law firm which, within the past two years, rendered legal advice on a transaction undertaken by Great China Field Limited of which Mr. Tam is the sole shareholder and director. Therefore, by virtue of his business relationship with Mr. Tam, an executive Director, Mr. Lau Kwok Wah is not considered eligible for appointment as a member of the Independent Board Committee,

and accordingly Mr. Choy Sai Man is eligible in being appointed by the Company to constitute the Independent Board Committee to advise the Independent Shareholders in relation to the Creditors’ Scheme, the Open Offer and the Whitewash Waiver.

We, Chateron, have been appointed by Company to advise the Independent Board Committee in relation to the terms and conditions of the Creditors’ Scheme, the Open Offer and the Whitewash Waiver. This letter contains our advice to the Independent Board Committee as to whether or not the terms and conditions of the Creditors’ Scheme, the Open Offer and the Whitewash Waiver are fair and reasonable and are in the interests of the Independent Shareholders, and our advice to the Independent Board Committee as to whether or not it should recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the SGM to be convened to consider and, if thought fit, approve the Creditors’ Scheme, the Open Offer and the grant of the Whitewash Waiver.

In formulating our opinion and recommendation to the Independent Board Committee in relation to the Creditors’ Scheme, the Open Offer and the Whitewash Waiver, we have relied on the accuracy of the information and representations contained in the Circular which have been provided to us by the Directors and in respect of which the Directors consider to be complete and relevant. We have assumed that all statements, information and representations made or referred to in the Circular, for which the Directors are solely responsible, were true and correct in all respects at the time they were made and continued to be so as at the Latest Practicable Date. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due and careful enquiry and are based on honestly-held opinions. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors in the Circular, and we have been advised by the Directors that no material facts have been omitted from the information and representations provided in and referred to in the Circular. We consider that we have received sufficient information to enable us to reach an informed view and to justify our reliance on the accuracy of the information and representations contained in the Circular and to provide a reasonable basis for our opinion and recommendation. We have no reason to suspect that any material information has been withheld by the Company or any of its subsidiaries in formulating our advice to the Independent Board Committee in relation to the Creditors’ Scheme, the Open Offer and the Whitewash Waiver. We have not,

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however, carried out any independent verification of the information provided to us by the Directors, nor have we conducted an independent in-depth investigation into the affairs (including the management and business operations) of the Company or any of its subsidiaries.

In formulating our opinion and recommendation, we have not considered the tax consequences on any Shareholder as a result of the approval (or otherwise) by the Independent Shareholders or implementation of any of the Creditors’ Scheme, the Open Offer or the Whitewash Waiver, since these are particular to the individual circumstances of any Shareholder. It is emphasized that we will not accept any responsibility or liability for any tax effects on or liabilities of any person resulting from the approval or implementation of any or all of the Creditors’ Scheme, the Open Offer and the Whitewash Waiver by the Independent Shareholders. In particular, any Shareholder who is in any doubt about his/her own tax position in connection with the transactions contemplated under the Creditors’ Scheme, the Open Offer and the Whitewash Waiver should consult his/her own professional adviser(s).

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation to the Independent Board Committee in relation to the terms and conditions of the Creditors’ Scheme, the Open Offer and the Whitewash Waiver, we have considered the principal factors and reasons set out below:

THE CREDITORS’ SCHEME

1. Reasons for the Creditors’ Scheme

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, we noted that the Scheme Indebtedness, which is subject to the Creditors’ Scheme, amounts to between approximately HK$131.4 million (assuming that none of the Company’s contingent liabilities as referred to above were to crystallize as at the Scheme Record Date) and HK$143.2 million (assuming that all of the Company’s contingent liabilities as referred to above would crystallize in full as at the Scheme Record Date), based on the claims received by the Company from the Scheme Creditors (subject to adjudication) as at 31st August, 2003.

In this regard, we have reviewed the Company’s annual report and accounts for the financial year ended 31st December, 2002 from which we noted that as at 31st December, 2002, the Group had aggregate cash balances of only approximately HK$1.8 million and audited consolidated net assets of approximately HK$74.5 million as at 31st December, 2002. The Company’s identified Scheme Indebtedness of approximately HK$131.4 million, or approximately HK$143.2 million if the Company’s contingent liabilities were to crystallize in full, represents:

(i) a significant gearing ratio of approximately 176% (based on Scheme Indebtedness of HK$131.4 million) and 192% (based on Scheme Indebtedness of HK$143.2 million), respectively, based on the Company’s audited consolidated net assets of approximately HK$74.5 million as at 31st December, 2002 as referred to above; and
(ii) a multiple of approximately 73 times (based on Scheme Indebtedness of HK$131.4 million) and 80 times (based on Scheme Indebtedness of HK$143.2 million), respectively, of the Group’s available cash balances of approximately HK$1.8 million as at 31st December, 2002 as referred to above.

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Furthermore, based on our review of the Company’s unaudited interim report for the six months ended 30th June, 2003, we noted that the Group had aggregate cash balances of only approximately HK$1.1 million as at 30th June, 2003 which suggests that the Group is unlikely to have a sufficient level of liquid funds for the purpose of repaying the Scheme Indebtedness, unless there are arrangements for the Group to (i) procure additional funding from external financing sources; and/or (ii) enter into agreements with its creditors to compromise on the Scheme Indebtedness.

We consider that implementation of the Creditors’ Scheme enables the Scheme Indebtedness as at the Scheme Record Date to be discharged in full and final settlement, by way of a combination of cash repayment (which proceeds will be derived from the Open Offer) and the issuance of Creditors Shares by the Company. To the extent where any part of the Scheme Indebtedness will not be settled by way of cash repayment and the issuance of Creditors Shares by the Company, such remaining part of the Scheme Indebtedness will be discharged with the result that the entire amount of the Scheme Indebtedness shall be fully extinguished after the Creditors’ Scheme becomes effective. Therefore, we consider that the Creditors’ Scheme, if implemented, would extinguish the Company’s entire Scheme Indebtedness which is identified to amount to between HK$131.4 million and HK$143.2 million as at 31st August, 2003. As discussed in the paragraph headed “Financial effects of the Creditors’ Scheme on the Group” below, the extinguishment of the Company’s entire Scheme Indebtedness would result in an improvement in the Group’s overall financial results performance and an a turnaround in the Group’s net asset position, and hence an improvement in the Group’s overall financial position which we consider to be in the overall interests of the Company and the Shareholders (including the Independent Shareholders).

2. Terms of the Creditors’ Scheme

Details and the terms of the Creditors’ Scheme are referred to in the section headed “Creditors’ Scheme” in the letter from the Board as set out on pages 9 to 31 of the Circular.

As discussed in the paragraph headed “Reasons for the Creditors’ Scheme” above, the Group had aggregate cash balances of only approximately HK$1.1 million as at 30th June, 2003 which are considered by us to be inadequate for the purpose of settling the Scheme Indebtedness in full. We consider that, in view of the Group’s historical audited net losses consecutively for the past five financial years ended 31st December, 2002 and the Group’s significant gearing ratio (based on the Scheme Indebtedness) of between approximately 176% and 192% as at 31st December, 2002, it would be difficult for the Group to procure any bank financing for the purpose of settling the Scheme Indebtedness. Nevertheless, as alternative mechanisms to the Creditors’ Scheme, the Company may consider settling the Scheme Indebtedness in full (which amounted to between HK$131.4 million and HK$143.2 million as at 31st August, 2003) under any of the following bases:

(a) Settlement of the Scheme Indebtedness in full, only by way of cash repayment. In order to enable the Company to raise an amount of proceeds which is significant enough to fully settle the Scheme Indebtedness, the Company may propose:
(i) a rights issue or an open offer of a significant share offer ratio, whose magnitude may even significantly exceed the share offer ratio of five Offer Shares for every Adjusted Share under the terms of the Open Offer, so that the Company shall raise an amount of proceeds which is significant enough to fully settle the Scheme Indebtedness;

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or

(ii) a placement of new Shares to independent shareholders, so that the Company shall raise an amount of proceeds which is significant enough to settle the Scheme Indebtedness; or
(b) Settlement of the Scheme Indebtedness in full, only by way of an issue of new Shares to the Scheme Creditors.

With regard to the abovementioned possible alternative mechanisms for settling the Scheme Indebtedness other than the Creditors’ Scheme, we noted that these alternative mechanisms have the following dilution effects on the Independent Shareholders’ interests in the Company:

(a) As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, assuming that none of the Underwritten Shares are taken up by the Independent Shareholders (and are entirely taken up by the Underwriter), then the Independent Shareholders’ aggregate beneficial interests in the Company would be reduced from approximately 89.5% before the Creditors’ Scheme and the Open Offer to approximately 11.5% after the Creditors’ Scheme and the Open Offer, representing a maximum dilution effect on the Independent Shareholders’ interests in the Company by approximately 87%. Therefore, in the event where the Company were to fully settle the Scheme Indebtedness (which amounted to between HK$131.4 million and HK$143.2 million as at 31st August, 2003) only by way of cash repayment through launching a rights issue/an open offer of a significant share offer ratio (whose magnitude may even exceed the one-for-five share offer ratio under the Open Offer), then we consider that the dilution effect of such a rights issue/an open offer on the Independent Shareholders’ interests in the Company (to the extent where any Independent Shareholder elects not to participate in such a rights issue/an open offer) would exceed 87%.
(b) Based on the closing price of the Shares of HK$0.014 as at the Latest Practicable Date, the Company has a market capitalization of approximately HK$29 million as at the Latest Practicable Date. In the event where the Company were to fully settle the Scheme Indebtedness (which amounted to between HK$131.4 million and HK$143.2 million as at 31st August, 2003) only by way of cash repayment through a placement of new Shares by the Company to independent shareholders and assuming new Shares were to be placed to investors at a price equal to the closing price of the Shares as at the Latest Practicable Date, then (i) based on the Scheme Indebtedness of approximately HK$131.4 million, there would be a dilution effect on the Independent Shareholders’ interests in the Company of approximately 82%; and (ii) based on the Scheme Indebtedness of approximately HK$143.2 million, there would be a dilution effect on the Independent Shareholders’ interests in the Company of approximately 83%.

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(c) As explained above, in the event where the Company were to fully settle the Scheme Indebtedness (which amounted to between HK$131.4 million and HK$143.2 million as at 31st August, 2003) only by way of an issue of new Shares to the Scheme Creditors, then based on the issue price of HK$0.10 per Share (which is equal to the nominal value per Share given that new Shares cannot be issued at a price below nominal value), an aggregate of between approximately 1,314 million and 1,432 million new Shares will fall to be issued to the Scheme Creditors. Based on the Company’s existing issued capital comprising an aggregate of approximately 2,049.2 million Shares in issue as at the Latest Practicable Date, such an issue of new Shares by the Company would result in a dilution effect of between approximately 39% and 41% on the Independent Shareholders’ interests in the Company.

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, assuming that (i) none of the Underwritten Shares are taken up by the Independent Shareholders under the Open Offer (and are entirely taken up by the Underwriter), then the Independent Shareholders’ aggregate beneficial interests in the Company would be reduced from approximately 89.5% before the Creditors’ Scheme and the Open Offer to approximately 11.5% after the Creditors’ Scheme and the Open Offer, representing a maximum dilution effect on the Independent Shareholders’ interests in the Company by about 87%; (ii) 50% of the Underwritten Shares are taken up by the Independent Shareholders and the remainder are taken up by the Underwriter under the Open Offer, then the Independent Shareholders’ aggregate beneficial interests in the Company would be reduced from approximately 89.5% before the Creditors’ Scheme and the Open Offer to approximately 40.4% after the Creditors’ Scheme and the Open Offer, representing a maximum dilution effect on the Independent Shareholders’ interests in the Company by about 55%; and (iii) the entire Underwritten Shares are taken up by the Independent Shareholders under the Open Offer, then the Independent Shareholders’ aggregate beneficial interests in the Company would be reduced from approximately 89.5% before the Creditors’ Scheme and the Open Offer to approximately 69.2% after the Creditors’ Scheme and the Open Offer, representing a maximum dilution effect on the Independent Shareholders’ interests in the Company by about 23%. Therefore, we noted that the actual dilution effect of the Creditors’ Scheme and the Open Offer on the Independent Shareholders’ interests in the Company essentially depends on the actual subscription level of the Offer Shares by the Independent Shareholders under the Open Offer, which ranges between 23% and 87%.

Nevertheless, with regard to the alternative mechanisms for settling the Scheme Indebtedness as referred to above (other than the Creditors’ Scheme), we noted that (a) there will be a dilution effect on the Independent Shareholders’ interests in the Company of between 82% and 83% if the Company were to fully settle the Scheme Indebtedness only by way of cash repayment through a placement of new Shares to independent shareholders; and (b) there will be a dilution effect on the Independent Shareholders’ interests in the Company of between 39% and 41% if the Company were to fully settle the Scheme Indebtedness only by way of an issue of new Shares to the Scheme Creditors based on the issue price of HK$0.10 per Share (which is equal to the nominal value of the Shares).

In respect of the foregoing, we noted that the dilution effect on Independent Shareholders’ interests in the Company assuming full settlement of the Scheme Indebtedness only by way of an issue of new Shares to the Scheme Creditors, being between 39% and 41%, would be smaller than the corresponding dilution effects under certain scenarios of the Creditors’ Scheme and the Open Offer (for instance, a dilution effect of 55% under the scenario where 50% of the Underwritten Shares are taken up by the

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Independent Shareholders under the Open Offer, or a dilution effect of 87% under the scenario where none of the Underwritten Shares are taken up by the Independent Shareholders under the Open Offer). However, it should be noted that under such an alternative mechanism for the Company to fully settle the Scheme Indebtedness only by way of an issue of new Shares to the Scheme Creditors, the existing Shareholders will not have the opportunity to subscribe for new Shares in the Company in order to maintain their beneficial interests in the Company whereas, in the case of the Open Offer (upon which the Creditors’ Scheme is inter-conditional), the existing Shareholders have the opportunity to subscribe for new Shares in the Company to maintain their beneficial interests in the Company. In other words, the existing Shareholders’ beneficial interests in the Company are bound to be diluted by the abovementioned magnitude of between 39% and 41% if the Company adopts the alternative mechanism for the Company to fully settle the Scheme Indebtedness only by way of an issue of new Shares to the Scheme Creditors. Furthermore, we consider that in the event the Company elects to have the Scheme Indebtedness fully settled only by way of an issue of new Shares to the Scheme Creditors, then each Scheme Creditor is likely to have a reasonable concentration in its holding of Shares which, upon disposal in the market, would create a significant downward pressure on the Share market prices which we consider would not be in the interests of the Company and the Shareholders (including the Independent Shareholders).

On the other hand, we noted that the dilution effect on Independent Shareholders’ interests in the Company assuming full settlement of the Scheme Indebtedness only by way of cash repayment through a placement of new Shares to independent shareholders, being between 82% and 83%, would (i) exceed the corresponding dilution effects under certain scenarios of the Creditors’ Scheme and the Open Offer (for instance, a dilution effect of 23% under the scenario where the entire Underwritten Shares are taken up by the Independent Shareholders under the Open Offer, or a dilution effect of 55% under the scenario where 50% of the Underwritten Shares are taken up by the Independent Shareholders under the Open Offer); and (ii) be only marginally smaller than the corresponding dilution effect of 87% under the scenario where none of the Underwritten Shares are taken up by the Independent Shareholders under the Open Offer. Therefore, we consider that it is not in the interests of the Company and the Shareholders (including the Independent Shareholders) for the Scheme Indebtedness to be fully settled only by way of cash repayment through a placement of Shares by the Company to independent shareholders.

Therefore, on balance, we consider that the terms of the Creditors Scheme, under which the Scheme Indebtedness will be settled both in cash and by way of an issue of Creditors’ Shares, would be in the overall interests of the Company and the Shareholders (including the Independent Shareholders) for reasons that, in addition to our evaluation of the abovementioned mechanisms which do not involve any creditors’ scheme of arrangement, (i) implementation of the Creditors’ Scheme would result in full and final settlement of the Scheme Indebtedness; and (ii) implementation of the Creditors’ Scheme, which is conditional upon the Open Offer becoming unconditional, would enable the Group to derive an additional funding of approximately HK$8.9 million for its working capital purposes, as referred to in the letter from the Board as set out on pages 9 to 31 of the Circular.

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For the purpose of evaluating the dilution effect of the Creditors’ Scheme and the Open Offer on the existing Shareholders’ interests in the Company, we have also reviewed the terms of debt restructuring proposals involving issuance of new shares by listed issuers for the purpose of settlement of their outstanding indebtedness, as announced by listed companies on the Stock Exchange during the period from 1st January, 2002 up to and including the Latest Practicable Date. Set out below is a list of the companies concerned, as well as the dilution effects on shareholders’ interests in those companies after completion of the debt restructuring proposals:

als:
						Change in
						shareholding of
		Shareholding of existing			Shareholding of existing	existing shareholders
			shareholders before		shareholders after	before and after
Date of	Name of		completion of the		completion of the	completion of the
announcement	company	restructuring proposal			restructuring proposal	restructuring proposal
				%	%	%
22nd February, 2002	Hung Fung Group			100	42.2	57.8%
	Holdings Limited
6th May, 2002	Skynet (International			100	2.4	97.6%
	Group) Holdings
	Limited
21st May, 2002	Tem Fat Hing			100	5.0	95.0%
	Fung (Holdings)
	Limited
12th June, 2003	Baker Group			100	5.8	94.2%
	International Holdings
	Limited
18th June, 2003	Seapower Resources			100	3.9	96.1%
	International Limited
1st August, 2003	Central China Enterprises Limited			100	47.8	52.2%
16th October, 2003	Oriental Metals (Holdings)			100	21.7	78.3%
	Company Limited
Average						81.6%

In the case of Hung Fung Group Holdings Limited, we noted that it involved an issue of new shares by that company by way of an open offer which was underwritten by a new investor (and who therefore acquired control of that company by exercising his rights under the underwriting arrangement). In the cases of Skynet (International Group) Holdings Limited, Tem Fat Hing Fung (Holdings) Limited, Baker Group International Holdings Limited, Seapower Resources International Limited, Central China Enterprises Limited and Oriental Metals (Holdings) Company Limited, it involved an issue of new shares

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by these companies for subscription by new investors who then acquired controls of the respective companies. We noted that the proceeds derived from the open offer and the new share subscriptions in the abovementioned companies were used to repay these companies’ indebtedness as part of their debt restructuring programmes.

Based on the foregoing, we noted that the corresponding dilution effect on shareholders’ interests in the companies concerned after completion of the debt restructuring proposals ranged between approximately 52% and 98%, or represents an average dilution effect of approximately 82%. By comparison, we noted that in the case of the Open Offer, Mr. Tam (as the Company’s substantial Shareholder) underwrites the Open Offer. Therefore, when evaluating the dilution effect of the Creditors’ Scheme and the Open Offer on the existing Shareholders’ interests in the Company, we have excluded Mr. Tam and his concert parties for reason that Mr. Tam underwrites the Open Offer whereas the open offer of Hung Fung Group Holdings Limited (being one of our reference cases of debt restructuring proposals as referred to in the table above) was underwritten by the new investor.

As referred to above, we noted that depending on the actual subscription level of the Offer Shares by the Independent Shareholders under the Open Offer, the dilution effect on the interests of the existing Shareholders (other than Mr. Tam and his concert parties) ranges between 23% and 87%. We consider that the abovementioned range of dilution effect on the existing Shareholders’ interests (other than those of Mr. Tam and his concert parties) in the Company are favourable when compared with the corresponding range of between 52% and 98%, or the average dilution effect of 82%, as we noted from the abovementioned debt restructuring proposals during the period from 1st January, 2002 up to and including the Latest Practicable Date.

3. The Creditors’ Scheme is conditional upon completion of the Open Offer

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, the Creditors’ Scheme will become effective and binding on the Company and the Scheme Creditors upon, inter alia, the Open Offer becoming unconditional. We consider this to be a fair and reasonable condition precedent for the completion of the Creditors’ Scheme, in view of the fact that HK$12 million, which amount represents approximately 57% of the estimated net proceeds of approximately HK$21 million to be derived from the Open Offer, shall be designated for cash repayment for part of the Scheme Indebtedness under the terms of the Creditors’ Scheme.

4. Issue price of the Creditors Shares under the Creditors’ Scheme

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, under the terms of the Creditors’ Scheme, each Creditors Share will be issued at a price of HK$0.10 per Creditors Share. The implementation of the Creditors’ Scheme, and hence the issuance of the Creditors Shares thereunder, is conditional upon (inter alia) the Open Offer becoming unconditional pursuant to which Offer Shares will be issued by the Company at the Subscription Price of HK$0.045 per Offer Share. Therefore, by comparison, the issue price of HK$0.10 per Creditors Share represents a premium of approximately 122% over and above the Subscription Price of HK$0.045 per Offer Share. Furthermore, we noted that although the issue price of HK$0.10 per Creditors Share represents a discount of approximately 64.3% to the closing price of the Adjusted Shares of HK$0.28 as at the Latest Practicable Date (which is determined based on the closing Share price of HK$0.014 as at the Latest Practicable

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Date and assuming the Capital Reorganization becomes effective), such an issue price of HK$0.10 per Creditors Share represents a premium of approximately 18.8% to the theoretical ex-entitlement price per Adjusted Share of approximately HK$0.0842 (which is determined based on the closing Share price of HK$0.014 as at the Latest Practicable Date and assuming the Capital Reorganization becomes effective). In this regard, we consider that given the Creditors’ Scheme and the Open Offer are inter-conditional on one another, the Scheme Creditors will be issued with the Creditors Shares when (inter alia) the Open Offer shall have become unconditional and therefore it is reasonable to evaluate the issue price per Creditors Share against the Adjusted Shares on an ex-entitlement basis. On the contrary, if the Independent Shareholders would subscribe for the Offer Shares under the Open Offer, the Subscription Price of HK$0.045 per Offer Share represents a discount of approximately 46.6% to the theoretical ex-entitlement price per Adjusted Share of approximately HK$0.0842 as referred to above. Therefore, we consider that the issue price of HK$0.10 per Creditors Share has been determined on basis which is fair and reasonable to the Independent Shareholders.

5. Financial effects of the Creditors’ Scheme on the Group

On profit and loss account

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, based on the Scheme Indebtedness of approximately HK$131.4 million as at 31st August, 2003 (and that none of the Company’s contingent liabilities were to crystallize as at the Scheme Record Date), the remaining amount of the Scheme Indebtedness which is not settled by cash repayment of HK$12 million and the issuance of 180 million Creditors Shares for an amount of HK$18 million under the terms of the Creditors’ Scheme, being HK$101.4 million, will be discharged and shall be recognized by the Group as an exceptional profit. On the other hand, based on the Scheme Indebtedness of approximately HK$143.2 million as at 31st August, 2003 (whereupon all of the Company’s contingent liabilities were to crystallize as at the Scheme Record Date), the remaining amount of the Scheme Indebtedness which is not settled by cash repayment of HK$12 million and the issuance of 180 million Creditors Shares for an amount of HK$18 million under the terms of the Creditors’ Scheme, being HK$113.2 million, will similarly be discharged and shall similarly be recognized by the Group as an exceptional profit. In view of the Group’s historical audited net losses for the past five financial years ended 31st December, 2002, we consider that such an exceptional profit in the magnitude as referred to above would have the effect of improving the Group’s overall financial results performance.

On net tangible asset position

As referred to in Appendix II to the Circular, as a result of the Creditors’ Scheme and the Open Offer, (i) assuming that the Group would recognize an exceptional profit of approximately HK$101.4 million as a result of the Creditors’ Scheme as referred to above, there would be a turnaround in the Group’s net asset position from an unaudited adjusted consolidated net tangible shareholders’ deficit of approximately HK$81.7 million as at 30th June, 2003 before the Creditors’ Scheme and the Open Offer to a proforma adjusted unaudited consolidated net tangible asset value of approximately HK$13.1 million after implementation of the Creditors’ Scheme and completion of the Open Offer (which is inter-conditional upon the implementation of the Creditors’ Scheme); and (ii) the Company’s issued share capital would be increased from 102,461,741 Adjusted Shares

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in issue as at the Latest Practicable Date (based on 2,049,234,824 Shares in issue as at the Latest Practicable Date and assuming the Capital Reorganization becomes effective but before the Open Offer and the implementation of the Creditors’ Scheme) to 794,770,446 Adjusted Shares after implementation of the Creditors’ Scheme and completion of the Open Offer (which is interconditional upon the implementation of the Creditors’ Scheme), representing an increase of approximately 676%.

Therefore, on a per Adjusted Share basis, there would be a turnaround in the Group’s net asset position from an unaudited adjusted consolidated net tangible deficit of approximately HK$0.80 per Adjusted Share (assuming the Capital Reorganisation becoming effective) as at 30th June, 2003 before the Creditors’ Scheme and the Open Offer to a proforma adjusted unaudited consolidated net tangible asset value of approximately HK$0.016 per Adjusted Share following the implementation of the Creditors’ Scheme and completion of the Open Offer (which is interconditional upon the implementation of the Creditors’ Scheme). We consider such a turnaround in the Group’s net asset position, on a per Adjusted Share basis, to be in the overall interests of the Company and the Shareholders (including the Independent Shareholders) as a whole.

6. Effect of the winding-up petition against the Company on the Creditors’ Scheme

As referred to in the Company’s announcement dated 9th October, 2003, the Company received on 8th October, 2003 a winding-up petition filed by Mr. Siu against the Company to the Hong Kong Court, which is scheduled to be heard at the Hong Kong Court on 3rd December, 2003. Notwithstanding the foregoing, the Company will continue to proceed with the Restructuring Proposal as referred to in the Company’s announcement dated 1st September, 2003 which includes, inter alia, the Creditors’ Scheme. Therefore, we consider that the winding-up petition by Mr. Siu against the Company will have no effect on the proposed Creditors’ Scheme.

7. Issue of Creditors Shares to connected persons

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, the Company owed an aggregate amount of HK$10.2 million as at 31st August, 2003 (being the latest practicable date on which the Company’s indebtedness under the Creditors’ Scheme can be ascertained for the purpose of the Circular) to Mr. Tam, chairman of the Company and a Director, Euro Concord (being a company wholly owned by Mr. Tam) and Messrs Tao Ke Wei, Tam Kai On and Ko Chung Ting, Peter, all being Directors. Mr. Tam, Euro Concord and Messrs Tao Ke Wei, Tam Kai On and Peter Ko are therefore connected persons of the Company under Chapter 14 of the Listing Rules, and the issue of Creditors Shares by the Company to Mr. Tam, Euro Concord and Messrs Tao Ke Wei, Tam Kai On and Ko Chung Ting, Peter constitute connected transactions for the Company under Chapter 14 of the Listing Rules.

We were informed by the Directors that the abovementioned amount of approximately HK$10.2 million are unsecured debts owed by the Company to the abovementioned connected persons. Pursuant to the Creditors’ Scheme, the amounts owed by the Company to the abovementioned connected persons will be treated in a consistent manner with those owed by the Company to the other Scheme Creditors, and are subject to compensation in cash and an issue of Creditors Shares by the Company under the same terms as the other Scheme Creditors. We consider this to be a fair and reasonable arrangement and that the terms of such connected transactions are fair and reasonable.

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8. Recommendation

Having taken into consideration the principal factors and reasons referred to above, in particular

that:

the Creditors’ Scheme essentially provides an arrangement for a full and final settlement of the Scheme Indebtedness between the Company and the Scheme Creditors;

– the implementation of the Creditors’ Scheme is conditional upon, inter alia, completion of the Open Offer which raises an estimated net proceeds of approximately HK$21 million out of which approximately HK$12 million will be used to repay part of the Scheme Indebtedness under the terms of the Creditors’ Scheme whilst the remaining approximately HK$8.9 million will be used as additional funding for the Group’s working capital purposes;

– under the terms of the Creditors’ Scheme (which is inter-conditional with the Open Offer), the actual dilution effect of the Creditors’ Scheme and the Open Offer on the Independent Shareholders’ interests in the Company essentially depends on the actual subscription level of the Offer Shares by the Independent Shareholders under the Open Offer, which ranges between 23% and 87%. Although such a dilution effect exceeds the corresponding dilution effect of between 39% and 41% assuming full settlement of the Scheme Indebtedness only by way of an issue of new Shares to the Scheme Creditors (unless under the scenario where the entire Underwritten Shares are taken up by the Independent Shareholders under the Open Offer as a result of which the corresponding dilution effect is 23%), we consider that under the Open Offer (upon which the Creditors’ Scheme is inter-conditional), the existing Shareholders have the opportunity to subscribe for new Shares in the Company to maintain their proportional beneficial interests in the Company and which feature is not otherwise available under the alternative mechanism for the Company to fully settle the Scheme Indebtedness only by way of an issue of new Shares to the Scheme Creditors. In other words, the existing Shareholders’ beneficial interests in the Company are bound to be diluted by the abovementioned magnitude of between 39% and 41% if the Company adopts the alternative mechanism for the Company to fully settle the Scheme Indebtedness only by way of an issue of new Shares to the Scheme Creditors. Furthermore, we consider that in the event the Company elects to have the Scheme Indebtedness fully settled only by way of an issue of new Shares to the Scheme Creditors, then each Scheme Creditor is likely to have a reasonable concentration in its holding of Shares which, upon disposal in the market, would create a significant downward pressure on the market prices of the Share which we consider would not be in the interests of the Company and the Shareholders (including the Independent Shareholders);

the dilution effect of the Creditors’ Scheme and the Open Offer on the Independent Shareholders’ interests in the Company of between 23% and 87% is generally smaller than that assuming full settlement of the Scheme Indebtedness only by way of cash repayment through a placement of new Shares by the Company to independent shareholders, which ranges between 82% and 83% and which is only marginally smaller than the maximum dilution effect of 87% under the Creditors’ Scheme and the Open Offer;

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the dilution effect of the Creditors’ Scheme and the Open Offer on the existing Shareholders’ interests (other than those of Mr. Tam and his concert parties) in the Company ranges between 23% and 87% (which depends on the actual subscription level of the Offer Shares by the Independent Shareholders under the Open Offer), which compares favourably against the corresponding dilution effects of between approximately 52% and 98%, or an average dilution effect of approximately 82%, on existing shareholders’ interests based on the terms of the recent debt restructuring proposals involving issuance of new shares by listed issuers (by way of open offer and new share subscriptions by new investors) for the purpose of settlement of their outstanding indebtedness, as announced by listed companies on the Stock Exchange during the period from 1st January, 2002 up to and including the Latest Practicable Date;
although the issue price of HK$0.10 per Creditors Share represents a discount of approximately 64.3% to the closing price of the Adjusted Shares of HK$0.28 as at the Latest Practicable Date (which is determined based on the closing Share price of HK$0.014 as at the Latest Practicable Date and assuming the Capital Reorganization becomes effective), such an issue price of HK$0.10 per Creditors Share represents a premium of approximately 18.8% to the theoretical ex-entitlement price per Adjusted Share of approximately HK$0.0842 (which is determined based on the closing Share price of HK$0.014 as at the Latest Practicable Date and assuming the Capital Reorganization becomes effective), after the completion of the Open Offer at which time the Creditors’ Scheme will also become effective and that Creditors Shares will be issued by the Company to the Scheme Creditors. On the contrary, if the Independent Shareholders would subscribe for the Offer Shares under the Open Offer, the Subscription Price of HK$0.045 per Offer Share represents a discount of approximately 46.6% to the theoretical ex-entitlement price per Adjusted Share of approximately HK$0.0842 as referred to above. Therefore, we consider that the issue price of HK$0.10 per Creditors Share has been determined on basis which is fair and reasonable to the Independent Shareholders;
after implementation of the Creditors’ Scheme and completion of the Open Offer (which is inter-conditional upon the implementation of the Creditors’ Scheme), the Group would recognize an exceptional profit of between approximately HK$101.4 million (based on Scheme Indebtedness of approximately HK$131.4 million) and approximately HK$113.2 million (based on Scheme Indebtedness of approximately HK$143.2 million), and there would be a turnaround in the Group’s net asset position from an unaudited adjusted consolidated net tangible deficit of approximately HK$0.80 per Adjusted Share (assuming the Capital Reorganization becoming effective) as at 30th June, 2003 before the Creditors’ Scheme and the Open Offer to a proforma adjusted unaudited consolidated net tangible asset value of approximately HK$0.016 per Adjusted Share following the implementation of the Creditors’ Scheme and completion of the Open Offer;
the winding-up petition by Mr. Siu against the Company on 8th October, 2003 will have no effect on the proposed Creditors’ Scheme; and

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the Company’s connected transactions which involved cash compensation and the issue of Creditors Shares to Mr. Tam, Euro Concord and Messrs Tao Ke Wei, Tam Kai On and Ko Chung Ting, Peter, being connected persons of the Company to whom the Company was indebted for unsecured debts in the aggregate amount of approximately HK$10.2 million as at 31st August, 2003, are conducted on the same basis as that for the other Scheme Creditors pursuant to the terms of the Creditors’ Scheme which we consider to be a fair and reasonable arrangement,

we are of the view that the terms and conditions of the Creditors’ Scheme are fair and reasonable and are in the interests of the Company and the Shareholders (including the Independent Shareholders). Therefore, we would advise the Independent Board Committee to recommend the Independent Shareholders to approve the resolution in relation to the Creditors’ Scheme at the SGM.

THE OPEN OFFER

1. Business review of the Group

Set out below is a summary of the Company’s audited consolidated profit and loss accounts for the past five financial years ended 31st December, 2002 and the Company’s unaudited consolidated profit and loss account for the period of six months ended 30th June, 2003 (with comparison against the Company’s unaudited consolidated results for the corresponding period of six months ended 30th June, 2002):

	Six months ended	Six months ended
	30th	June,		Year	ended 31st December,
	2003	2002	2002	2001	2000	1999	1998
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Turnover	12,602	11,336	24,645	46,870	83,926	85,364	288,050
Operating (loss)	(85,374)	(33,663)	(234,736)	(103,363)	(101,980)	(141,210)	(74,990)
(Loss) before taxation	(91,948)	(36,396)	(273,766)	(199,505)	(82,035)	(141,267)	(74,884)
(Loss) after taxation	(72,200)	(36,056)	(273,766)	(199,587)	(82,260)	(140,008)	(76,223)
(Loss) attributable to Shareholders	(72,200)	(36,056)	(213,004)	(199,588)	(82,260)	(138,589)	(76,223)

The Group is principally engaged in the provision of interior decoration contracting services. Furthermore, the Group has (i) strategic investments in enterprises engaged in the provision of network security services, systems integration and information technology training services; and (ii) management rights over the operation of a hotel in Guangdong, the PRC.

We noted that the Group recorded losses attributable to Shareholders consecutively during the last five financial years ended 31st December, 2002. We have enquired with and were informed by the Directors that the Group’s losses attributable to Shareholders during the past five financial years ended

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31st December, 2002 were attributable to, inter alia, (i) the persistently weak property market of Hong Kong following the Asian economic turmoil in 1998 which consequently led to the decrease of turnover contribution generated by the Group’s interior decoration contracting business during the five years then ended; (ii) losses incurred in the Group’s sale of television programmes and film rights during the two financial years ended 31st December, 2001 which amounted to approximately HK$41 million and HK$27 million, respectively; (iii) the losses incurred by the Group’s money lending business during the two financial years ended 31st December, 2001 which amounted to approximately HK$11 million and HK$48 million, respectively; and (iv) the Group’s amortization of patents and trademarks in respect of the information technology products owned by it in the amount of approximately HK$139 million during the financial year ended 31st December, 2002.

We further noted that (i) during the financial year ended 31st December, 2001, the Group invested in an enterprise engaged in the development, production and sale of computer security products in consideration for, inter alia, the Company’s issuance of a redeemable debenture for an amount of HK$202 million; and (ii) during the financial year ended 31st December, 2002, the Group invested in an enterprise engaged in the development, production and sale of computer hardware and software and software systems integration in consideration for the Company’s issuance of a convertible loan note in the amount of approximately HK$35 million. According to the Company’s annual report and accounts for the year ended 31st December, 2002, the outstanding balances of the abovementioned redeemable debenture and convertible loan note amounted to approximately HK$53 and HK$17 million, respectively, as at 31st December, 2002 as a result of which the Group had an overall gearing ratio of approximately 94% based on the Company’s audited consolidated net assets of approximately HK$74.5 million as at 31st December, 2002. Furthermore, in view of the Group’s significant loss attributable to Shareholders and the constraints on the Group’s liquidity during the financial year ended 31st December, 2002, we noted that the Company’s auditors had expressed its concern in respect of a fundamental uncertainty relating to the going concern operations of the Group during the financial year then ended.

Based on the Company’s unaudited consolidated interim results for the six months ended 30th June, 2003 which were announced by the Company on 26th September, 2003, we noted that the Company recorded unaudited consolidated net loss attributable to Shareholders of approximately HK$72.2 million during the six months ended 30th June, 2003, which demonstrated a deterioration by about 100% when compared with the Company’s reported unaudited consolidated net loss of approximately HK$36.1 million during the corresponding period of six months ended 30th June, 2002. The deterioration in the Group’s results for the first six months of 2003 when compared with the first six months of 2002 was attributable to the followings:

(i) an approximately 1.6 times increase in the operating loss arising from the Group’s contracting business which reported an unaudited operating loss of approximately HK$25.3 million during the six months ended 30th June, 2003 when compared with the operating loss of approximately HK$9.9 million during the corresponding six months ended 30th June, 2002. We concur with the Directors’ view that such an approximately 1.6 times increase in the operating loss of the Group’s contracting business from the first six months of 2002 to the first six months of 2003 was attributable to the difficult construction market sentiment in Hong Kong in view of the poor property market conditions in Hong Kong as well as the adverse effect of the outbreak of the Severe Acute Respiratory Syndrome (SARS) on the Hong Kong economy during the first six months ended 30th June, 2003; and

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(ii) an approximately 1.6 times increase in the operating loss arising from the Group’s network security servicing business which reported an unaudited operating loss of approximately HK$51.5 million during the six months ended 30th June, 2003 when compared with the operating loss of approximately HK$19.5 million during the corresponding six months ended 30th June, 2002. We understand from the Directors that the Group’s network security servicing business involves the development and manufacture of internet-secured personal computers and network security devices in the PRC, which recorded a decrease in turnover by approximately 38% from HK$1.2 million during the first six months of 2002 to approximately HK$0.75 million during the first six months of 2003. Furthermore, the Group incurred an amortization charge in respect of an impairment loss in the carrying value of the Group’s investment in network security servicing business for an amount of approximately HK$49.1 million during the six months ended 30th June, 2003. We concur with the abovementioned amortization charge made by the Directors, in view of the negative impact of the burst of the technology bubble in 2001 worldwide as well as the intensive competition in the internet network security business which was nevertheless also affected by the weakened economic conditions due to the outbreak of SARS during the first six months of 2003.

Therefore, based on the Group’s unaudited interim results for the six months ended 30th June, 2003 (being the latest accounts reporting date to which the Company’s unaudited consolidated accounts were prepared and published), we consider that the Group continues to operate under difficult business conditions. Furthermore, we were informed by the Directors that as at 30th June, 2003, the Group had available free cash resources of only approximately HK$1.1 million whilst the aggregate outstanding balance of the Group’s redeemable debenture and convertible loan note amounted to approximately HK$69 million, representing a net overall gearing ratio (being the Group’s total amount of redeemable debenture and convertible loan note less free cash resources) of approximately 520% based on the Group’s unaudited consolidated net assets of approximately HK$13.1 million as at 30th June, 2003. Accordingly, based on the foregoing, we consider that the Group continues to operate under severe financial pressures and that the Group does not have sufficient funding resources to finance its business operations and to settle the Scheme Indebtedness which amounts to between approximately HK$131.4 million and HK$143.2 million as at 31st August, 2003 as referred to in our discussions in the section headed “The Creditors’ Scheme” above.

2. Reasons for and use of proceeds from the Open Offer

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, the net proceeds from the Open Offer is estimated to be approximately HK$21 million, out of which (i) an aggregate amount of HK$12 million shall be designated towards cash repayment for part of the Scheme Indebtedness under the Creditors’ Scheme, as such arrangement is discussed in the section headed “The Creditors’ Scheme” above; and (ii) the remaining balance of approximately HK$8.9 million will be used as additional working capital of the Group.

As discussed in the paragraph headed “Business review of the Group” above, we noted that the Group has been operating in an unfavourable financial position by reason of the Group’s audited net losses attributable to Shareholders consecutively during the past five financial years ended 31st December, 2002 and for the six month period ended 30th June, 2003 as well as the Group’s overall significant gearing ratio as at 31st December, 2002, and that the Group does not have sufficient funding resources to

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LETTER OF ADVICE FROM CHATERON

settle the Scheme Indebtedness or to finance its business operations. Therefore, we consider that the Open Offer, if proceeded with, would enable the Group to procure funding (i) in the amount of HK$12 million for the purpose of settling part of the Scheme Indebtedness in accordance with the terms of the Creditors’ Scheme; and (ii) in the amount of HK$8.9 million for the purpose of financing the Group’s additional working capital for its core business operations in the interim, which we consider would help relieve the Group’s severe financial pressures. Nevertheless, as referred to in the paragraph headed “Business review of the Group” above, we noted that the Group reported net losses attributable to Shareholders consecutively during the past five financial years ended 31st December, 2002 and during the period of six months ended 30th June, 2003. Such losses were mainly attributable to (i) the difficult market conditions of the construction and contracting business in Hong Kong; (ii) the intensive competition within the distribution market of television programmes and film rights in Hong Kong; (iii) the intensive competition in the money lending industry in Hong Kong; and (iv) the impairment in value of the Group’s information technology investments in the PRC following the burst of the technology bubble in 2001 worldwide and the intensive market conditions under which the Group’s information technology investments operate. Therefore, we are of the view that although the Directors have designated an amount of HK$8.9 million from the net proceeds of the Open Offer to finance the Group’s additional working capital, it would only be in the interests of the Company and the Shareholders (including the Independent Shareholders) if the Group continues to operate under favourable market conditions so that such additional working capital of HK$8.9 million will be able to generate profits for the Group. In this regard, we were informed by the Directors that they will regularly review the market environment under which the Group operates, and will allocate the detailed usage of such additional working capital of HK$8.9 million with a view to maximize the efficiency in the Group’s usage of such additional working capital. We consider the Directors’ plans over the usage of the Group’s additional working capital of HK$8.9 million to be in the overall interests of the Company and the Shareholders (including the Independent Shareholders).

Nevertheless, in relation to the Group’s working capital requirement, we wish to draw the Independent Shareholders’ attention to the working capital statement of the Group as referred to in Appendix II to the Circular, where it is stated that:

(i) taking into account (inter alia) the Group’s additional working capital of HK$8.9 million to be raised from the Open Offer, the Directors have estimated that the Group may require further funding of not more than HK$5 million to finance its working capital requirement; and
(ii) Mr. Tam has undertaken to the Company that subject to completion of the Restructuring Proposal (which comprises, inter alia, the Creditors’ Scheme and the Open Offer) and so long as he together with his associates shall remain as the Company’s single largest shareholder, he will provide additional funding of up to HK$5 million to finance the Group’s normal business operations. In this regard, Mr. Tam has confirmed to the Company that as at the Latest Practicable Date, he has no intention to reduce his beneficial shareholding in the Company upon completion of the Restructuring Proposal to the extent that he and his associates as a whole will cease to be the single largest shareholder of the Company.

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Therefore, we consider that provided Mr. Tam and his associates shall remain as the Company’s single largest shareholder, the Group is expected to have aggregate proceeds in the amount of HK$14 million which will be earmarked for use as the Group’s additional working capital purposes. Such an amount represents approximately 13 times the amount of the Group’s cash balances of approximately HK$1.1 million as at 30th June, 2003. As referred to in the section headed “Expected timetable” of the Circular, the Restructuring Proposal is expected to be completed on 16th February, 2004 which means that the Company will have the benefit of receiving the abovementioned proceeds of HK$14 million by mid February 2004 or thereabouts. Based on the Group’s unaudited net cash outflow from operating activities of approximately HK$8.1 million during the period of six months ended 30th June, 2003, we consider that such additional working capital of approximately HK$14 million is able to provide a reasonable coverage over the Group’s net cash outflows during a period of six months in the year 2004.

3. Terms of the Open Offer

Details and the terms of the Open Offer are referred to in the section headed “Open Offer” in the letter from the Board as set out on pages 9 to 31 of the Circular. The attention of the Independent Shareholders is drawn to the magnitudes of discounts as represented by the Subscription Price of HK$0.045 per Offer Share to (i) the closing prices of the Shares on 31st July, 2003 (being the last trading day of the Shares on the Stock Exchange prior to the Announcement) (the “ Last Trading Day ”) and the average closing price of the Shares for the period of 10 trading days up to and including the Last Trading Day; as well as (ii) the theoretical ex-entitlement price per Share based on the closing Share price as at the Last Trading Day, in either case on an Adjusted Share basis assuming the Capital Reorganization becomes effective.

Furthermore, the Subscription Price of HK$0.045 per Offer Share represents:

(i) a discount of approximately 83.9% to the closing price of the Adjusted Shares of HK$0.28, which was determined based on the closing price of the Shares of HK$0.014 on the Stock Exchange on the Latest Practicable Date and assuming the Capital Reorganization becomes effective; and
(ii) a discount of approximately 46.6% to the theoretical ex-entitlement price of HK$0.0842 per Adjusted Share based on the closing price of the Adjusted Shares of HK$0.28 on the Latest Practicable Date (assuming the Capital Reorganization becomes effective) as referred to above.

In relation to the foregoing statistics, we have made reference to the pricing statistics of the rights issues and open offers (excluding the Open Offer) which were announced by companies listed on the Stock Exchange (the “ Issuers ”) during the period of the last 12 months up to and including the Latest Practicable Date. Set out below are the summary terms of the rights issues and open offers (excluding the

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Open Offer), which were announced by the Issuers during the period of the last 12 months up to and including the Latest Practicable Date:

									(Discount)/
									premium to
							Theoretical		theoretical
				Rights			ex-rights	(Discount)/	ex-rights
				issue/open			price/	premium to	price/		Underwriting
Date of			Size	offer price		Closing	ex-entitlement	closing	ex-entitlement		commission
announcement	Company	Category	of issue	per share	Terms	share price	price	share price	price	Underwriter	rate
			HK$’million	HK$		HK$	HK$	%	%		%
4th October, 2002	UDL Holdings Limited	Rights issue	6.6	0.025	1 rights share for every 2	0.050	0.042	(50.0%)	(40.5%)	Commercial	2%
					existing shares					underwriter
7th October, 2002	e-Kong Group Limited	Rights issue	28.25	0.120	1 rights share for every	0.200	0.160	(40.0%)	(25.0%)	Controlling	2%
					share held					shareholder
9th October, 2002	Can Do Holdings Limited	Open offer	18.4	0.01	1 offer share for every 20	0.025	0.024	(60.0%)	(58.3%)	Commercial	2%
					existing shares held					underwriter
12th October, 2002	iAsia Technology Limited	Rights issue	102	0.100	3 rights shares for every 2	0.095	0.07	5.3%	42.9%	Commercial	2%
					shares held plus 2 bonus shares					underwriter
					for every 3 rights shares taken up
16th October, 2002	Star Cruises Limited	Rights issue	1,172	1.95	7 rights shares for every 50	2.700	2.610	(27.8%)	(25.3%)	Commercial	2%
					shares held					underwriter
17th October, 2002	New Century Group	Rights issue	83.1	0.300	1 rights share for every 2	0.520	0.447	(42.3%)	(32.9%)	Commercial	2%
	Hong Kong Limited				existing shares held					underwriter and
										controlling
										shareholder
11th November, 2002	Harmony Asset Limited	Rights issue	29.0	0.020	3 rights shares for every 2	0.054	0.034	(63.0%)	(41.2%)	Commercial	2%
					existing shares held					underwriter
19th November, 2002	Enerchina Holdings Limited	Rights issue	109.0	0.020	3 rights shares for every 2	0.05	0.032	(60.0%)	(37.5%)	Controlling	2%
					existing shares held					shareholders
25th November, 2002	Styland Holdings Limited	Rights issue	40.8	0.100	2 rights shares for every	0.480	0.227	(79.2%)	(56.0%)	Commercial	2.5%
					one existing share held					underwriters
12th February, 2003	Hon Kwok Land Investment	Rights issue	200.0	1.000	3 rights shares for every 2	1.48	1.192	(32.4%)	(16.1%)	Substantial	2%
	Company Limited				existing shares held					shareholder
14th February, 2003	Wing Lee Holdings Ltd	Rights issue	21.0	1.500	1 rights share for every 2	2.88	2.42	(47.9%)	(38.0%)	Controlling	2%
					reorganised shares held					shareholder
3rd March, 2003	renren Holdings Ltd	Rights issue	between 11.2	0.018	1 rights share for every 1	0.032	0.025	(43.8%)	(28.0%)	Commercial	2%
			million and		existing share held					underwriters
			12.1 million
11th March, 2003	Lai Fung Holdings Limited	Rights issue	76.8	0.100	1 rights share for every 5	0.13	0.125	(23.1%)	(20.0%)	Commercial	2.5%
					existing shares held					underwriters
19th March, 2003	Pacific Challenge Holdings	Rights issue	between 43.3	0.300	1 rights share for every 2	0.37	0.347	(18.9%)	(13.5%)	Commercial	3%
	Limited		million and		existing shares held					underwriter
			47.7 million
24th March, 2003	Bossini International	Rights issue	56.6	0.220	1 rights share for every 2	0.232	0.228	(5.2%)	(3.5%)	Major	–
	Holdings Limited				existing shares held					shareholder
5th May, 2003	Yoshiya International	Rights issue	13.9	0.010	2 rights shares for every 1	0.035	0.0183	(71.4%)	(45.4%)	Controlling	2%
	Corporation, Limited				existing share held					shareholder and
										commercial
										underwriter
6th May, 2003	GR Investment International	Open offer	32.4	0.100	3 offer shares for every 1	0.27	0.1425	(63.0%)	(29.8%)	Controlling	1%
	Limited				consolidated share held					shareholder and
										commercial
										underwriters
9th May, 2003	Start Technology Company	Rights issue	198.0	0.1125	3 rights shares for every 1	0.32	0.132	(64.8%)	(14.8%)	Substantial	2%
	Limited				existing share held plus 1 bonus					shareholder and
					share for every 3 rights shares					commercial
					subscribed					underwriter

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LETTER OF ADVICE FROM CHATERON

									(Discount)/
									premium to
							Theoretical		theoretical
				Rights			ex-rights	(Discount)/	ex-rights
				issue/open			price/	premium to	price/		Underwriting
Date of			Size	offer price		Closing	ex-entitlement	closing	ex-entitlement		commission
announcement	Company	Category	of issue	per share	Terms	share price	price	share price	price	Underwriter	rate
			HK$’million	HK$		HK$	HK$	%	%		%
13th May, 2003	Leaptek Limited	Rights issue	7.4	0.010	1 rights share for every 1	0.07	0.04	(85.7%)	(75.0%)	Substantial	–
					existing share held					shareholder
27th May, 2003	LifeTec Group Limited	Rights issue	81.3	0.100	1 rights share for every 2	0.135	0.1233	(25.9%)	(18.9%)	Commercial	2%
					existing shares held					underwriter
29th May, 2003	Oriental Union Holdings	Rights issue	between 46	0.300	1 rights share for every 1	0.64	0.47	(53.1%)	(36.2%)	Commercial	2%
	Limited		million and		existing share held					underwriters
			53 million
3rd June, 2003	MediaNation Inc.	Open offer	120.0	0.100	2 offer shares for every 1	0.075	0.0917	33.3%	9.1%	Controlling	–
					existing share held					shareholders
7th July, 2003	Compass Pacific Holdings	Open offer	67.0	0.106	1 offer share for every 2	0.28	0.222	(62.1%)	(52.3%)	Commercial	2%
	Limited				existing shares held					underwriter
15th July, 2003	Xin Corporation Limited	Open offer	51.7	0.060	4 offer shares for every	0.158	0.0796	(62.0%)	(24.6%)	Commercial	2.5%
					existing share held					underwriter
24th July, 2003	Wo Kee Hong (Holdings)	Rights issue	37.2	0.025	2 rights shares for every 5	0.067	0.0296	(62.7%)	(15.5%)	Substantial	2.5%
	Limited				existing shares and 3 bonus					shareholder and
					shares for every fully-paid					commercial
					rights share taken up					underwriter
1st August, 2003	i100 Limited	Rights issue	14.1	1.000	1 rights share for every 2	0.88	0.92	13.6%	8.7%	Commercial	1%
					consolidated shares held					underwriter
1st August, 2003	Matsunichi Communication	Rights issue	339.4	1.000	2 rights shares for every 1	1.5	1.167	(33.3%)	(14.3%)	Commercial	2.5%
	Holdings Limited				consolidated share held					underwriter
11th August, 2003	Melco International	Rights issue	105.0	1.450	1 rights share for every 2	1.79	1.68	(19.0%)	(13.7%)	Commercial	2.5%
	Development Limited				shares in issue					underwriter
18th August, 2003	MRC Holdings Limited	Rights issue	20.3	0.050	1 rights share for every 1	0.052	0.051	(3.8%)	(2.0%)	Substantial	1.25%
					existing share held					shareholder
1st September, 2003	Swank International	Open offer	37.7	0.013	13 offer shares for every	0.2	0.026	(93.5%)	(50%)	Controlling	–
	Manufacturing Company				share held					shareholder
	Limited
29th September, 2003	CASH Financial	Rights issue	62.9	0.25	2 rights shares for every	1.07	0.52	(76.6%)	(51.9%)	Controlling	–
	Services Group				share held					shareholder
	Limited
17th October, 2003	Star Cruises	Rights issue	between 779	2.25	7 rights shares for every	2.50	2.484	(10.0%)	(9.4%)	Commercial	2%
	Limited		million and		100 shares held					underwriter
			783 million
22nd October, 2003	Goldbond Group	Open offer	132.6	0.1	4 offer shares for every	0.305	0.141	(67.2%)	(29.1%)	Substantial	–
	Holdings Limited				1 existing share held					shareholder
23rd October, 2003	FT Holdings	Open offer	between 86	0.04	5 offer shares for every	0.064	0.044	(37.5%)	(9.1%)	Commercial	6%
	International Limited		million and		1 share held					underwriter
			88 million
29th October, 2003	Fortuna International	Rights issue	40	0.01	1 rights share for every	0.014	0.012	(28.6%)	(16.7%)	Commercial	2%
	Holdings Limited				1 share held					underwriters
31st October, 2003	Enerchina Holdings	Rights issue	between 196.1	0.4	9 rights shares for every	0.73	0.52	(45.2%)	(23.1%)	Controlling	2%
	Limited		million and		5 existing shares held					shareholder
			198.5 million
Average (excluding those whose rights issue/open		offer price represents a premium to the			underlying market price
and the theoretical ex-rights/ex-entitlement pri		ce of shares)						(47.2%)	(29.3%)

Average (excluding those whose rights issue/open offer price represents a premium to the underlying market price and the theoretical ex-rights/ex-entitlement price of shares)

Average underwriting commission rate

2.2%

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LETTER OF ADVICE FROM CHATERON

Based on the foregoing statistics, we noted that:

(a) the discounts of the rights issue price/open offer price to underlying market price of the shares of the Issuers (immediately prior to the announcements of the relevant rights issues/ open offers) ranged between approximately 3.8% and 93.5%, with an average discount of approximately 47.2%. Therefore, based on the foregoing statistics, we consider that the abovementioned discounts of (i) approximately 87.5% as represented by the Subscription Price of HK$0.045 per Offer Share to the closing price of the Adjusted Shares of HK$0.36 on the Last Trading Day; and (ii) approximately 83.9% as represented by the Subscription Price of HK$0.045 per Offer Share to the closing price of the Adjusted Shares of HK$0.28 on the Latest Practicable Date, to be attractive to the Independent Shareholders;
(b) the discounts of the rights issue price/open offer price to the theoretical ex-rights price per share of the Issuers (based on the underlying market prices of the shares of the Issuers immediately prior to the announcements of the relevant rights issues/open offers) ranged between approximately 2% and 75%, with an average discount of approximately 29.3%. Therefore, based on the foregoing statistics, we consider that the abovementioned discounts of (i) approximately 53.8% as represented by the Subscription Price of HK$0.045 per Offer Share to the theoretical ex-entitlement price of HK$0.0925 per Adjusted Share on the Last Trading Day; and (ii) approximately 46.6% as represented by the Subscription Price of HK$0.045 per Offer Share to the theoretical ex-entitlement price of HK$0.0842 per Adjusted Share on the Latest Practicable Date, to be attractive to the Independent Shareholders; and
(c) the underwriting commission rate of 2.5% under the terms of the Open Offer is generally comparable with (i) the average underwriting commission rate of 2.2% as we noted from the above statistics; and (ii) as referred to in the paragraph headed “Share price and trading volume performances, and ‘costs’ of the Open offer” below, the average underwriting commission rate of 2.3% as demonstrated by the list of rights issues and open offers in Hong Kong during the past 12 months prior to the Latest Practicable Date and whose share offer prices represent a significant discount in excess of 70% to the underlying share prices prior to the announcements of the rights issues/open offers (which we consider to be a comparable parameter given the approximately 87.5% discount between the Subscription Price of HK$0.045 per Offer Share and the closing price of the Shares (on a Consolidated Share basis) as at the Last Trading Day). Furthermore, we consider that the underwriting commission rate of 2.5% under the terms of the Open Offer reflects a compensation for the Underwriter, being Main Faith (which is a company controlled by Mr. Tam), for agreeing to underwrite the Open Offer where it is difficult for the Company to procure commercial underwriting interests due to the Company’s unfavourable financial results performances and financial position and in the event where the Underwriter is required to employ its own funding to take up any unsubscribed Underwritten Shares upon the close of the Open Offer. We also consider that in view of the Company’s unfavourable financial results performances and financial position, we do not expect an active volume of excess applications for the Offer Shares which mechanism would otherwise be available if the Company were to raise funds by way of a rights issue instead of the Open Offer. Therefore, we do not consider that there exists a strong likelihood for any untaken Offer Shares to be subscribed for by way of excess applications, and thereby in relieving the underwriting obligation of Main Faith as the Underwriter for the Open Offer.

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LETTER OF ADVICE FROM CHATERON

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, Mr. Tam and his concert parties were beneficially interested in approximately 10.5% of the Company’s issued share capital as at the Latest Practicable Date. We noted that (i) in the event where none of the Underwritten Shares are taken up by the Independent Shareholders and are therefore entirely taken up by the Underwriter, Mr. Tam and his concert parties would become beneficially interested in approximately 67.4% of the Company’s enlarged issued share capital after the Open Offer and implementation of the Creditors’ Scheme; and (ii) in the event where 50% of the Underwritten Shares are taken up by the Independent Shareholders and that the remaining 50% of the Underwritten Shares are therefore taken up by the Underwriter, Mr. Tam and his concert parties would become beneficially interested in approximately 38.5% of the Company’s enlarged issued share capital after the Open Offer and implementation of the Creditors’ Scheme. In either of the scenarios above, Mr. Tam and his concert parties may become the single largest shareholder of the Company and hence may acquire control of the Company. We also noted that Mr. Tam and his concert parties will apply for the grant of the Whitewash Waiver, upon which the completion of the Open Offer is conditional and which, if granted, would enable Mr. Tam and his concert parties to acquire a controlling interest in the Company without having to make a general offer pursuant to Rule 26 of the Code.

In respect of the Whitewash Waiver, we wish to draw the attention of the Independent Shareholders that as referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, the Underwriting Agreement for the Open Offer is conditional upon, inter alia, (i) the Whitewash Waiver being approved by the Independent Shareholders by way of a poll at the SGM; and (ii) the Whitewash Waiver being granted by the Executive (with the aforementioned conditions (i) and (ii) being referred to as the “ Specific Conditions ”). The Underwriter, being Mr. Tam (through his wholly owned subsidiary Main Faith), has stated that he does not intend for Main Faith to waive any or all of the Specific Conditions and in the event where any of the Specific Conditions cannot be satisfied, the Underwriting Agreement will not become unconditional as a result of which the Open Offer and the Creditors’ Scheme will not be completed. Therefore, from the viewpoint of enabling the Company to proceed and expedite with the Open Offer as a result of which the Group will (i) benefit from a full and final settlement of the Scheme Indebtedness by way of implementing the Creditors’ Scheme; and (ii) derive additional working capital of HK$8.9 million which would help relieve the Group’s severe financial pressures in the interim, we consider that it is fair and reasonable to the Independent Shareholders for the grant of the Whitewash Waiver to Mr. Tam and his concert parties.

We also noted that if Mr. Tam and his concert parties shall obtain the Whitewash Waiver, there exists the possibility for Mr. Tam and his concert parties to acquire control of the Company at the Subscription Price of HK$0.045 per Offer Share through underwriting the Open Offer, in the event where Mr. Tam and his concert parties are required to honour their underwriting obligations in subscribing for any untaken Offer Shares and hence become beneficially interested in aggregate in 30% or more of the Company’s enlarged issued share capital after the Open Offer and the Creditors’ Scheme. Nevertheless, we wish to emphasize that the grant of the Whitewash Waiver to Mr. Tam and his concert parties is conditional upon, inter alia, the approval by the Independent Shareholders by way of a poll at the SGM. In other words, if the Independent Shareholders do not approve the grant of the Whitewash Waiver at the SGM, then Mr. Tam will be required to make a general offer for all the remaining issued shares of the Company, other than those already owned or agreed to be acquired by him and his concert parties, pursuant to Rule 26 of the Code at an offer price of not less than HK$0.045 per share of the Company which is otherwise subject to the general offer. Therefore, we consider that

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LETTER OF ADVICE FROM CHATERON

the requirement for the Whitewash Waiver to be approved by the Independent Shareholders essentially safeguards the Independent Shareholders’ interests regarding the possibility for Mr. Tam and his concert parties to acquire control of the Company, at the Subscription Price of HK$0.045 per Offer Share, through Mr. Tam’s underwriting of the Open Offer without having to make a general offer pursuant to Rule 26 of the Code.

Furthermore, we wish to draw the attention of the Shareholders to our evaluation in the paragraph headed “Reasons for and use of proceeds from the Open Offer” above that , the Open Offer, if proceeded with, would enable the Group to procure funding (i) in the amount of HK$12 million for the purpose of settling part of the Scheme Indebtedness in accordance with the terms of the Creditors’ Scheme; and (ii) in the amount of HK$8.9 million for the purpose of financing the Group’s additional working capital for its core business operations in the interim, which we consider would help relieve the Group’s severe financial pressures. Nevertheless, based on our evaluation in the section headed “The Creditors’ Scheme” above, we are of the view that it would be difficult for the Group to procure any bank financing for the purpose of settling the Scheme Indebtedness given the Group’s historical audited net losses consecutively for the past five financial years ended 31st December, 2002 and for the period of six months ended 30th June, 2003 as well as the Group’s significant gearing ratio in excess of 100% as at 31st December, 2002 (based on the amount of the Scheme Indebtedness).

In addition, we noted that under the Open Offer, there will not be any period available for the trading of nil-paid rights shares in the market (as would otherwise be noted in the case of a rights issue) which means that completion of the Open Offer would take a shorter period of time (by an estimated 7 to 10 days) when compared with the timetable for the completion of a rights issue. Also, there does not exist any mechanism for the application of excess Offer Shares under the terms of the Open Offer (as would otherwise be noted in the case of a rights issue) which means that the Underwriter, in this case being Main Faith, will either itself subscribe for or procure independent investors to subscribe for any untaken Offer Shares, instead of the possibility under a rights issue where market investors may subscribe for any untaken rights shares through the purchases of nil-paid rights shares in the market. With regard to the foregoing, we consider that given the Company’s unfavourable financial results performances and financial position, we do not consider that there would exist an active trading in the nil-paid rights shares in the market or an active volume of excess applications for the Offer Shares if the Company were to raise funds by way of a rights issue rather than by way of the Open Offer. Therefore, although we agree that a rights issue would have added flexibilities by enabling shareholders to realize their nil-paid rights shares in the market and by diversifying a shareholder base by way of application for excess rights shares (where none of such added flexibilities are seen in the case of the Open Offer), we consider that the Open Offer is a practicable fund raising mechanism for the Company for reasons that (i) the Open Offer requires a shorter time period to complete when compared with a rights issue; and (ii) given the Company’s unfavourable financial results performances and financial position, we do not expect an active trading in the nil-paid rights shares in the market or an active volume of excess applications for the Offer Shares if the Company were to raise funds by way of a rights issue rather than by way of the Open Offer. We consider that since Main Faith is underwriting the Open Offer, Main Faith as the Underwriter will take up all unsubscribed Offer Shares which are underwritten by it in the event Main Faith is required to fully exercise its underwriting obligations pursuant to the Underwriting Agreement, with the result that completion of the Open Offer may be expedited accordingly. Based on the foregoing, we consider that the Open Offer is more favourable than a rights issue given the circumstances of the Company and is in the overall interests of the Company and the Shareholders (including the Independent Shareholders).

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LETTER OF ADVICE FROM CHATERON

Overall, we noted the merits of the Open Offer and its importance to the Group’s continuing operation as a going concern, and accordingly we consider that the Open Offer is in the interests of the Company and the Shareholders (including the Independent Shareholders) notwithstanding the significant discounts as represented by the Subscription Price of HK$0.045 per Offer Share to (i) the underlying closing prices of the Adjusted Shares (assuming the Capital Reorganization becomes effective) on the Last Trading Day and the Latest Practicable Date; and (ii) the theoretical ex-entitlement prices per Adjusted Share determined thereon as referred to above.

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, assuming that none of the Underwritten Shares are taken up by the Independent Shareholders (and are entirely taken up by the Underwriter), the Independent Shareholders’ aggregate beneficial interests in the Company would be reduced from approximately 89.5% before the Creditors’ Scheme and the Open Offer to approximately 11.5% after the Creditors’ Scheme and the Open Offer, representing a maximum dilution effect on the Independent Shareholders’ interests in the Company by approximately 87%. In this regard, as referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, the assured allotments of the Offer Shares will not be transferable or capable of renunciation and there will be no trading in the assured allotments of the Offer Shares on the Stock Exchange. In other words, we consider that those Qualifying Shareholders (other than Euro Concord, being a substantial Shareholder of the Company who has undertaken to subscribe for the 53,750,000 Offer Shares for which it is entitled to apply on an assured basis under the Open Offer) who do not wish to participate in the Open Offer will have their assured allotments taken up by the Underwriter or investors who may be procured by the Underwriter pursuant to the underwriting arrangements of the Open Offer, and hence inevitably results in a dilution of such Qualifying Shareholders’ beneficial interests in the Company.

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LETTER OF ADVICE FROM CHATERON

4. Share price and trading volume performances, and ‘costs’ of the Open Offer

Share price performances

The average of the daily closing prices, the monthly highest recorded prices and the monthly lowest recorded prices of the Shares traded on the Stock Exchange during the period from 1st August, 2002 (being the date falling on one year prior to the Last Trading Day) up to and including the Last Trading Day and from 2nd September, 2003 (being the day on which trading in the Shares resumed on the Stock Exchange after the publication of the Announcement) up to and including the Latest Practicable Date are set out as follows:

	Highest	Lowest	Average daily
	price	price	closing price
	(Note 1)	(Note 1)	(Note 1)
	HK$	HK$	HK$
Month
2002
August	2.40	1.28	1.58
September	1.82	1.60	1.76
October	2.18	1.64	1.92
November	3.30	1.98	2.60
December	3.04	2.02	2.68
2003
January	2.40	1.92	2.24
February	2.44	2.12	2.28
March	2.34	1.74	1.90
April	2.38	0.72	1.42
May	1.06	0.68	0.80
June	0.74	0.36	0.46
July_(Note 2)_	0.44	0.28	0.38
August	–	–	–
2nd September, 2003 up to and
including the Latest Practicable Date	0.94	0.24	0.37

Notes:

1. As adjusted for the effect of the Share Consolidation, i.e. after taking into account the proposed consolidation of 20 issued Shares into 1 Consolidated Share which will become 1 Adjusted Share after the Capital Reorganization becomes effective.

2. With 31st July, 2003 being the Last Trading Day.

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LETTER OF ADVICE FROM CHATERON

Based on the above statistics, we noted that the Subscription Price of HK$0.045 per Offer Share represents a discount to each of the (i) monthly highest recorded prices; (ii) the monthly lowest recorded prices; and (iii) the average daily closing prices of the Shares (as adjusted for the effect of the Share Consolidation) during the period from 1st August, 2002 up to and including the Last Trading Day and from 2nd September, 2003 up to and including the Latest Practicable Date.

Furthermore, based on the discounts represented by the Subscription Price of HK$0.045 per Offer Share to the traded prices of the Shares (as adjusted for the effect of the Share Consolidation) as referred to above and given our evaluation of the merits of the Open Offer which is intended to raise the relevant funding for the Group to implement the Creditors’ Scheme and to finance the Group’s additional working capital for its core business operations in the interim as discussed in the paragraph headed “Terms of the Open Offer” above, we are of the opinion that the Open Offer will provide Shareholders with the opportunity to participate in the Group’s future growth and development (and the Group’s financial pressures would be relieved after implementation of the Creditors’ Scheme which is conditional upon, inter alia, completion of the Open Offer) at an attractive price as represented by the subscription price of HK$0.045 per Offer Share.

In relation to our opinion regarding the fairness and reasonableness upon which the Subscription Price of HK$0.045 per Offer Share has been determined, we noted that in the event where none of the Offer Shares are being taken up by the Independent Shareholders and are therefore entirely taken up by the Underwriter, being Main Faith, at the Subscription Price of HK$0.045 per Offer Share (which represents a significant discount of about 83.9% to the closing price of the Shares of HK$0.28 (on an Adjusted Share basis) as at the Latest Practicable Date) after completion of the Open Offer (and implementation of the Creditors’ Scheme which is interconditional with the Open Offer), Mr. Tam and his concert parties would then become a controlling shareholder of the Company having an approximately 67.4% beneficial interest in the Company’s resultant issued share capital as enlarged by the issue of the Creditors Shares and the Offer Shares. However, we would like to draw the attention of the Independent Shareholders to the merits of the Open Offer and its importance to the Group, without which the Group would not be able to implement the Creditors’ Scheme and thereby in discharging the Company’s Scheme Indebtedness and in providing additional working capital for the Group as an interim measure. Given that, as required by Rule 7.24(1) of the Listing Rules, the Open Offer must be fully underwritten and in view of (i) the Group’s unfavourable financial results performances during the past five financial years ended 31st December, 2002 and the period of six months ended 30th June, 2003; and (ii) the Group’s unfavourable financial positions as at 31st December, 2002 and 30th June, 2003 which altogether make it difficult for the Company to procure a commercial underwriter, the success of the Open Offer is highly reliant on the Company’s ability to procure an underwriter for the Open Offer, in this case Main Faith. Accordingly, we consider that the Subscription Price of HK$0.045 per Offer Share has been determined on a fair and reasonable basis notwithstanding (i) its significant discount to the closing prices of the Shares (on an Adjusted Share basis) as at the Last Trading Day and the Latest Practicable Date; and (ii) that it is possible for Mr. Tam to acquire its control in the Company through underwriting the Open Offer at the Subscription Price of HK$0.045 per Offer Share.

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LETTER OF ADVICE FROM CHATERON

Share trading volume performances

The average daily number of Shares traded on the Stock Exchange during the period from 1st August, 2002 up to and including the Last Trading Day and from 2nd September, 2003 (being the day on which trading in the Shares resumed on the Stock Exchange after the publication of the Announcement) up to and including the Latest Practicable Date are set out as follows:

		As a percentage of
	Average daily	the Company’s issued
	number of	share capital as at the
	Shares traded	Latest Practicable Date
		(%)
Month
2002
August	40,826,381	1.99
September	42,013,000	2.05
October	24,248,667	1.18
November	25,274,571	1.23
December	28,163,100	1.37
2003
January	7,564,095	0.37
February	10,482,250	0.51
March	15,309,556	0.75
April	25,508,250	1.24
May	25,925,405	1.27
June	20,065,215	0.98
July_(Note 3)_	6,901,619	0.34
August	–	–
2nd September, 2003 up to and
including the Latest Practicable Date	43,710,263	2.13

Note 3: With 31st July, 2003 being the Last Trading Day.

Based on the above statistics, it can be noted that the Shares had historically traded at very low levels of liquidity on the Stock Exchange during the period from 1st August, 2002 up to and including the Last Trading Day of 31st July, 2003, given that their average daily traded volumes in the market represented only between approximately 0.34% and 2.05% of the Company’s issued share capital as at the Latest Practicable Date. However, since the Shares resumed trading on the Stock Exchange on 2nd September, 2003 up to and including the Latest Practicable Date, the Shares traded at a larger volume in the market as represented by an average daily traded volume of approximately 43.7 million Shares, or equivalent to approximately 2.13% of the Company’s issued share capital as at the Latest Practicable Date, during the aforementioned period from 2nd September, 2003 up to and including the Latest Practicable Date. Nevertheless, we consider that such an increase in the traded volume of the Shares in the market during the aforementioned period from 2nd September, 2003 up to and including the Latest Practicable Date is probably attributable to market reaction in response to the Company’s announcement on 1st September, 2003 regarding,

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LETTER OF ADVICE FROM CHATERON

inter alia, the Capital Reorganization, the Creditors’ Scheme, the Open Offer and the Whitewash Waiver. Furthermore, we consider that in view of the very low levels of trading liquidity of the Shares in the market as discussed above, the Company may only be able to issue such number of new Shares which is equal to the number of Offer Shares to which Independent Shareholders are entitled to subscribe for under the one-for-five share offer ratio pursuant to the terms of the Open Offer, but at prices which represent significant discounts to the prevailing market prices of the Shares. Therefore, based on the foregoing, we consider that the Subscription Price of HK$0.045 per Offer Share has been determined on a fair and reasonable basis.

‘Costs’ of the Open Offer

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, we also noted that the net proceeds of the Open Offer is estimated to amount to approximately HK$21 million. Such amount of net proceeds is determined after deducting, inter alia, (i) the underwriting commission at the rate of 2.5% of the amount of Underwritten Shares at the Subscription Price, which amounts to approximately HK$0.5 million based on 458,558,705 Offer Shares being underwritten by Main Faith pursuant to the Underwriting Agreement; and (ii) expenses in relation to the Open Offer in the estimated aggregate amount of HK$1.5 million, from the gross proceeds of the Open Offer of approximately HK$23.0 million. Therefore, we noted that the aggregate ‘cost’ of the Open Offer to the Company, being approximately HK$2 million, represents approximately 8.7% of the gross proceeds of the Open Offer. In this regard, we have reviewed the list of the rights issues and open offers announced by the Issuers during the past 12 months prior to the Latest Practicable Date, in particular the corresponding aggregate ‘cost’ to the Issuers of those rights issues/open offers whose share offer prices represent a significant discount in excess of 70% to the underlying share prices prior to the announcement of the rights issues/open offers (which we consider to be an appropriate parameter for comparison in view of the approximately 87.5% discount between the Subscription Price of HK$0.045 per Offer Share and the closing price of the Shares (on a Consolidated Share basis) as at the Last Trading Day). The relevant statistics are as follows:

									Aggregate costs
									expressed as
				Closing price	(Discount)				a percentage
				per share	of rights			Aggregate	of the gross
			Rights	prior to	issue/open			costs of	proceeds of
			issue/open	announcement	offer price			the rights	the rights	Underwriting
Date of	Name of		offer price	of the rights	to closing	Gross proceeds	Net proceeds	issue/open	issue/open	commission
announcement	company	Category	per share	issue/open offer	share price	raised	raised	offer	offer	rate
			HK$	HK$	%	HK$’ million	HK$’ million	HK$’ million	%	%
25th November, 2002	Styland Holdings	Rights issue	0.1	0.48	(79.2)	40.8	38.7	2.1	5.1%	2.5%
	Limited
5th May, 2003	Yoshiya International	Rights issue	0.01	0.035	(71.4)	13.9	12.7	1.2	8.6%	2%
	Corporation, Limited
13th May, 2003	Leaptek Limited	Rights issue	0.01	0.07	(85.7)	7.4	6	1.4	18.9%	–
9th September, 2003	Swank International	Open offer	0.013	0.2	(93.5)	37.7	37	0.7	1.9%	–
	Manufacturing
	Company Limited
29th September, 2003	CASH Financial	Rights issue	0.25	1.07	(76.6)	62.9	62	0.9	1.4%	–
	Services Group
	Limited
Average									7.2%	2.3%

Average

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LETTER OF ADVICE FROM CHATERON

Therefore, we consider that the aggregate ‘cost’ of the Open Offer to the Company, which represents approximately 8.7% of the gross proceeds of the Open Offer, is generally comparable to the corresponding aggregate ‘cost’ to the Issuers of the rights issues/open offers as referred to above, which ranges between 1.4% and 18.9% with an average aggregate ‘cost’ of approximately 7.2%. We further noted from the above statistics that the rights issues/open offers were underwritten at an average underwriting commission rate of approximately 2.3% of the monetary value of the underwritten shares, with which the 2.5% underwriting commission payable by the Company to Main Faith as the Underwriter for the Open Offer is generally consistent.

5. Underwriting arrangement

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, subject to the fulfillment of the conditions of the Underwriting Agreement, Main Faith (being a company wholly and beneficially owned by Mr. Tam, a Director and who is deemed to be beneficially interested in approximately 10.5% of the Company’s issued share capital through Euro Concord, which is another company wholly and beneficially owned by Mr. Tam and is a substantial Shareholder of the Company) as the Underwriter will underwrite 458,558,705 Offer Shares. We consider that such an underwriting arrangement complies with the requirement of Rule 7.24(1) of the Listing Rules which stipulates that in normal circumstances, all open offers must be fully underwritten.

Nevertheless, we noted that the Open Offer is effectively underwritten by a substantial Shareholder, being Mr. Tam (through Main Faith which is a company wholly and beneficially owned by him) who is deemed to be beneficially interested in approximately 10.5% of the Company’s issued share capital as discussed above, instead of being underwritten by a commercial underwriter such as a securities brokerage firm. In this regard, based on our review of a list of the 36 rights issues and open offers (excluding the Open Offer) which were announced by companies listed on the Stock Exchange during the period of the last 12 months prior to the Latest Practicable Date as referred to in the paragraph headed “Terms of the Open Offer” above, from which we noted that 17 rights issues and open offers (representing approximately 47% in terms of number of cases out of the entire population under review) were underwritten by the substantial shareholder or the major shareholder or the controlling shareholder of the company concerned. Therefore, we consider that it is not an uncommon feature for the Open Offer to be underwritten by Mr. Tam in his capacity as a substantial Shareholder of the Company. Furthermore, we consider that in view of (i) the unfavourable financial position of the Group which are demonstrated by the Group’s historical audited net losses consecutively for the past five financial years ended 31st December, 2002 and for the period of six months ended 30th June, 2003; (ii) the Group’s significant gearing ratio in excess of 100% as at 31st December, 2002 (based on the amount of the Scheme Indebtedness) and of approximately 520% as at 30th June, 2003; and (iii) the size of the Scheme Indebtedness, it would be difficult for the Group to be able to procure commercial underwriting interests in order for the Open Offer to be proceeded with on a fully underwritten basis in accordance with the requirements of Rule 7.24(1) of the Listing Rules.

Therefore, based on our discussion above, we consider the terms of the underwriting arrangement to be fair and reasonable so far as the Company and the Shareholders (including the Independent Shareholders) are concerned. Furthermore, we noted that pursuant to the terms of the Underwriting Agreement, the Company is liable to pay to Main Faith (as the Underwriter) an underwriting commission at a rate of 2.5% on the number of Underwritten Shares at the Subscription Price of HK$0.045 per Offer Share. As discussed in the sub-paragraph headed “‘Costs’ of the Open Offer” of the paragraph headed “Share price and trading volume performances, and ‘costs’ of the Open Offer” above, we consider that the underwriting commission rate of 2.5% has been determined on a fair and reasonable basis.

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6. Financial effects of the Open Offer on the Group

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, the Open Offer is conditional upon, inter alia, the Creditors’ Scheme becoming effective. The effectiveness of Creditors’ Scheme is conditional upon, inter alia, the Open Offer becoming unconditional. In other words, the Open Offer and the Creditors’ Scheme are inter-conditional upon one another. Therefore, we consider that completion of the Open Offer would have the same financial effects on the Group as the implementation of the Creditors’ Scheme, as referred to our evaluation in the paragraph headed “Financial effects of the Creditors’ Scheme on the Group” of the section headed “The Creditors’ Scheme” above.

7. Resultant shareholding structure of the Company after the Open Offer

The resultant shareholding structures of the Company after the Open Offer, assuming scenarios for Independent Shareholders’ take-up percentages of 0%, 50% and 100% of the entire size of the Open Offer, are set out in the letter from the Board as set out on pages 9 to 31 of the Circular.

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, holders of the Creditors Shares will not be entitled to participate in the Open Offer. Furthermore, Euro Concord, being a substantial Shareholder of the Company, has undertaken to subscribe for the 53,750,000 Offer Shares to which it is entitled on an assured basis under the Open Offer. Therefore, any changes in the Independent Shareholders’ interests in the Company would essentially arise from (i) the intentions of Best Fortune Capital Ltd. and Gold Chief Investment Ltd., who are beneficially interested in approximately 0.6% and 11.8% respectively of the Company’s issued share capital as at the Latest Practicable Date, in making applications for their full assured allotments of the Offer Shares under the Open Offer; and (ii) the actual take-up levels of the Independent Shareholders (other than Best Fortune Capital Ltd. and Gold Chief Investment Ltd.), who are collectively beneficially interested in approximately 77.1% of the Company’s issued share capital as at the Latest Practicable Date, for the Offer Shares under the Open Offer.

As referred to above, the Independent Shareholders comprise Best Fortune Capital Ltd., Gold Chief Investment Ltd. and the Company’s existing public Shareholders, who altogether have an aggregate beneficial interest in approximately 89.5% of the Company’s issued share capital as at the Latest Practicable Date. After the Open Offer and implementation of the Creditors’ Scheme, the Independent Shareholders’ aggregate beneficial interests in the Company’s resultant issued share capital (as enlarged by the issue of the Creditors Shares and Offer Shares) would be (i) approximately 11.5%, which represents a dilution effect on Independent Shareholders’ interests in the Company of about 87% assuming the scenario where none of the Underwritten Shares are taken up by the Independent Shareholders and are entirely taken up by the Underwriter; (ii) approximately 40.4%, which represents a dilution effect on Independent Shareholders’ interests in the Company of about 55% assuming the scenario where 50% of the Underwritten Shares are taken up by the Independent Shareholders and the remainder are taken up by the Underwriter; and (iii) approximately 69.2%, which represents a dilution effect on Independent Shareholders’ interest in the Company of about 23% assuming the scenario where the entire Underwritten Shares are taken up by the Independent Shareholders. Therefore, we consider that it would be in the interests of the Independent Shareholders to participate in the Open Offer if they wish to avoid any significant dilution in their aggregate beneficial interests in the Company as a result of the completion of the Open Offer.

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8. Effect of the winding-up petition against the Company on the Open Offer

As referred to in the Company’s announcement dated 9th October, 2003, the Company received on 8th October, 2003 a winding-up petition filed by Mr. Siu against the Company to the Hong Kong Court, which is scheduled to be heard at the Hong Kong Court on 3rd December, 2003. Notwithstanding the foregoing, the Company will continue to proceed with the Restructuring Proposal as referred to in the Company’s announcement dated 1st September, 2003 which includes, inter alia, the Open Offer. Therefore, we consider that the winding-up petition by Mr. Siu against the Company will have no effect on the proposed Open Offer.

9. Recommendation

Having taken into consideration the principal factors and reasons referred to above, in particular that:

the Group demonstrates an unfavourable financial results performance in view of its consecutive losses for the past five financial years ended 31st December, 2002 as well as an increase in the Company’s unaudited consolidated net loss attributable to Shareholders during the six months ended 30th June, 2003 when compared with that during the corresponding period of six months ended 30th June, 2002. The Group was also in an unfavourable financial position based on its limited cash resources as at 30th June, 2003 as well as its significant gearing ratio (as represented by the Group’s total amount of redeemable debenture and convertible loan note less free cash resources when compared with the Group’s net asset value) of approximately 520% as at 30th June, 2003, and that the Group does not have sufficient funding resources to settle the Scheme Indebtedness (which amounted to between HK$131.4 million and HK$143.2 million as at 31st August, 2003) or to finance its core business operations;
the Open Offer, if proceeded with, will enable the Group to procure funding (i) in the amount of HK$12 million for the purpose of settling part of the Scheme Indebtedness in accordance with the terms of the Creditors’ Scheme; and (ii) in the amount of HK$8.9 million for the purpose of financing the Group’s additional working capital for its core business operations in the interim, which we consider would help relieve the Group’s severe financial pressures. We were informed by the Directors about their estimate that, in addition to the HK$8.9 million to be raised from the proceeds of the Open Offer, the Group may require further funding of not more than HK$5 million to finance its working capital requirement. Mr. Tam has undertaken to the Company that subject to completion of the Restructuring Proposal (which comprises, inter alia, the Creditors’ Scheme and the Open Offer) and so long as he together with his associates shall remain as the Company’s single largest shareholder (for which he and his associates have no intention to relinquish as at the Latest Practicable Date), he will provide such additional funding of up to HK$5 million to finance the Group’s normal business operations. We noted that such additional working capital, in the aggregate amount of HK$14 million for the Group, represents approximately 13 times the amount of the Group’s cash balances as at 30th June, 2003 and that the Company will have the benefit of receiving the abovementioned proceeds of HK$14 million by mid February 2004 or thereabouts, based on the expected date of completion of the Restructuring Proposal on 16th February, 2004 as referred to in the section headed “Expected timetable” of the Circular. In this regard, based on the Group’s unaudited net cash outflow

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from operating activities of approximately HK$8.1 million during the period of six months ended 30th June, 2003, we consider that such additional working capital of approximately HK$14 million is able to provide a reasonable coverage over the Group’s net cash outflows during a period of six months in the year 2004;

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under the Open Offer, (i) there will not be any period available for the trading of nil-paid rights shares in the market (as would otherwise be noted in the case of a rights issue) which means that completion of the Open Offer would take a shorter period of time (by an estimated 7 to 10 days) when compared with the timetable for the completion of a rights issue; and (ii) there does not exist any mechanism for the application of excess Offer Shares under the terms of the Open Offer (as would otherwise be noted in the case of a rights issue) which means that the Underwriter, in this case being Main Faith (being a company wholly owned by Mr. Tam), will either itself subscribe for or procure independent investors to subscribe for any untaken Offer Shares, instead of the possibility under a rights issue where market investors may subscribe for any untaken rights shares through the purchases of nil-paid rights shares in the market. In this regard, given the Company’s unfavourable financial results performances and financial position, we do not consider that there would exist an active trading in the nil-paid rights shares in the market or an active volume of excess applications for the Offer Shares if the Company were to raise funds by way of a rights issue rather than by way of the Open Offer. Therefore, although we agree that a rights issue would have added flexibilities by enabling shareholders to realize their nil-paid rights shares in the market and by diversifying a shareholder base by way of application for excess rights shares (where none of such added flexibilities are seen in the case of the Open Offer), we consider that the Open Offer is a practicable fund raising mechanism for the Company for reasons that (i) the Open Offer requires a shorter time period to complete when compared with a rights issue; and (ii) given the Company’s unfavourable financial results performances and financial position, we do not expect an active trading in the nil-paid rights shares in the market or an active volume of excess applications for the Offer Shares if the Company were to raise funds by way of a rights issue rather than by way of the Open Offer. We consider that since Main Faith is underwriting the Open Offer, Main Faith as the Underwriter will take up all unsubscribed Offer Shares which are underwritten by it in the event Main Faith is required to fully exercise its underwriting obligations pursuant to the Underwriting Agreement, with the result that completion of the Open Offer may be expedited accordingly. Therefore, we consider that the Open Offer is more favourable than a rights issue given the circumstances of the Company and is in the overall interests of the Company and the Shareholders (including the Independent Shareholders);

the discounts of (i) approximately 87.5% as represented by the Subscription Price of HK$0.045 per Offer Share to the closing price of the Adjusted Shares (assuming the Capital Reorganization becomes effective) of HK$0.36 on the Last Trading Day; and (ii) approximately 83.9% as represented by the Subscription Price of HK$0.045 per Offer Share to the closing price of the Adjusted Shares (assuming the Capital Reorganization becomes effective) of HK$0.28 on the Latest Practicable Date, are attractive to the Independent Shareholders given that the aforementioned discounts are higher than the average discount of approximately 47.2% as represented by rights issue price/open offer price to underlying market price of the shares of the Issuers (immediately prior to the announcements of the relevant rights issues/open offers) which announced rights issues/open offers during the period of the last 12 months up to and including the Latest Practicable Date; and

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the discounts of (i) approximately 53.8% as represented by the Subscription Price of HK$0.045 per Offer Share to the theoretical ex-entitlement price per Adjusted Share (assuming the Capital Reorganization becomes effective) of HK0.0925 on the Last Trading Day; and (ii) approximately 46.6% as represented by the Subscription Price of HK$0.045 per Offer Share to the theoretical ex-entitlement price per Adjusted Share (assuming the Capital Reorganization becomes effective) of HK$0.0842 on the Latest Practicable Date, are attractive to the Independent Shareholders given that the aforementioned discounts are higher than the average discount of approximately 29.3% as represented by rights issue price/open offer price to the theoretical ex-rights price per share of the Issuers (based on the underlying market prices of the shares of the Issuers immediately prior to the announcements of the relevant rights issues/open offers) which announced rights issues/open offers during the period of the last 12 months up to and including the Latest Practicable Date;
subject to the ultimate level of subscription of the Offer Shares by the Independent Shareholders upon the close of the Open Offer, there exists the possibility where Mr. Tam and his concert parties may become the single largest shareholder of the Company and hence may acquire control of the Company. We also noted that Mr. Tam and his concert parties will apply for the grant of the Whitewash Waiver, upon which the completion of the Open Offer is conditional and which, if granted, would enable Mr. Tam and his concert parties to acquire a controlling interest in the Company without having to make a general offer pursuant to Rule 26 of the Code. In this regard, we noted that the Underwriting Agreement for the Open Offer is conditional upon, inter alia, the Specific Conditions that (i) the Whitewash Waiver be approved by the Independent Shareholders by way of a poll at the SGM; and (ii) the Whitewash Waiver be granted by the Executive, whereupon none of the Specific Conditions is agreed to be waived by the Underwriter and that in the event where any of the Specific Conditions cannot be satisfied, the Underwriting Agreement will not become unconditional as a result of which the Open Offer and the Creditors’ Scheme will not be completed. We therefore consider that it is fair and reasonable to the Independent Shareholders for the grant of the Whitewash Waiver to Mr. Tam and his concert parties, for reason that the Open Offer can be proceeded and expedited with, as a result of which the Group will (i) benefit from a full and final settlement of the Scheme Indebtedness by way of implementing the Creditors’ Scheme; and (ii) derive additional working capital of HK$8.9 million which would help relieve the Group’s severe financial pressures in the interim. We also noted that if Mr. Tam and his concert parties shall obtain the Whitewash Waiver, there exists the possibility for Mr. Tam and his concert parties to acquire control of the Company at the Subscription Price of HK$0.045 per Offer Share through underwriting the Open Offer, in the event where Mr. Tam and his concert parties would in aggregate become beneficially interested in 30% or more of the Company’s enlarged issued share capital after the Open Offer and the Creditors’ Scheme by honouring their underwriting obligations. Nevertheless, we wish to emphasize that the grant of the Whitewash Waiver to Mr. Tam and his concert parties is conditional upon, inter alia, the approval by the Independent Shareholders by way of a poll at the SGM. In other words, if the Independent Shareholders do not approve the grant of the Whitewash Waiver at the SGM, then Mr. Tam will be required to make a general offer pursuant to Rule 26 of the Code at an offer price of not less than HK$0.045 per share of the Company which is otherwise subject to the general offer in which case Independent Shareholders’ interests would be safeguarded;

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– assuming that none of the Underwritten Shares are taken up by the Independent Shareholders (and are entirely taken up by the Underwriter), the Independent Shareholders’ aggregate beneficial interests in the Company would be subject to a maximum dilution effect of approximately 87% and that, given the assured allotments of the Offer Shares will not be transferable or capable of renunciation and there will be no trading in assured allotments of the Offer Shares on the Stock Exchange, such Qualifying Shareholders will have their assured allotments taken up by the Underwriter or investors who may be procured by the Underwriter which will inevitably result in a dilution of such Qualifying Shareholders’ beneficial interests in the Company;

– in view of the merits of the Open Offer which will raise the relevant funding for the Group to implement the Creditors’ Scheme and to finance the Group’s additional working capital for its core business operations, we consider that the Open Offer provides the Shareholders with the opportunity to participate in the Group’s future growth and development at an attractive price as represented by the Subscription Price of HK$0.045 per Offer Share, which represents a discount to each of the (i) monthly highest recorded Share prices; (ii) monthly lowest recorded Share prices; and (iii) average daily closing Share prices (all of which are quoted after adjusting for the effect of the Share Consolidation) during the period from 1st August, 2002 (being the date falling on one year prior to the Last Trading Day) up to and including the Last Trading Day and from 2nd September, 2003 (being the day on which trading in the Shares resumed on the Stock Exchange after the publication of the Announcement) up to and including the Latest Practicable Date;

although the Subscription Price of HK$0.045 per Offer Share represents significant discounts of approximately 87.5% and 83.9% to the closing prices of the Shares (on an Adjusted Share basis) as at the Last Trading Day and the Latest Practicable Date, respectively, we would like to draw the attention of the Independent Shareholders to the merits of the Open Offer and its importance to the Group, without which the Group would not be able to implement the Creditors’ Scheme and thereby in discharging the Company’s Scheme Indebtedness and in providing additional working capital for the Group as an interim measure. The Open Offer is underwritten by Main Faith pursuant to Rule 7.24(1) of the Listing Rules and the success of the Open Offer is highly reliant on the Company’s ability to procure an underwriter, in view of the Group’s unfavourable financial results performances and the Group’s unfavourable financial position which altogether make it difficult for the Company to procure a commercial underwriter;
when compared with the rights issues/open offers announced by the Issuers during the past 12 months up to and including the Latest Practicable Date and whose share offer prices represent a significant discount in excess of 70% to the underlying share prices prior to the announcements of the rights issues/open offers, (i) the aggregate ‘cost’ of the Open Offer to the Company represents approximately 8.7% of the gross proceeds of the Open Offer and which figure is generally comparable to the corresponding average aggregate ‘cost’ of approximately 7.2% in the case of such Issuers; and (ii) the 2.5% underwriting commission payable by the Company to Main Faith as the Underwriter for the Open Offer is generally consistent with the corresponding average underwriting commission rate of approximately 2.3% in the case of such Issuers, and reflects a compensation for Main Faith in agreeing to underwrite the Open Offer where it is difficult for the Company to procure commercial

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underwriting interests and in the event where Main Faith is required to employ its own funding to take up any unsubscribed Underwritten Shares upon the close of the Open Offer;

in view of the historically very low average daily traded volume of the Shares on the Stock Exchange representing between approximately 0.34% and 2.05% of the Company’s issued share capital as at the Latest Practicable Date during the period from 1st August, 2002 up to and including the Last Trading Day, which constitutes the major part of the period from 1st August, 2002 up to and including the Latest Practicable Date, we consider that the Company may only be able to issue such number of new Shares which is equal to the number of Offer Shares to which Independent Shareholders are entitled to subscribe for under the one-forfive share offer ratio pursuant to the terms of the Open Offer, but at prices which represent significant discounts to the prevailing market prices of the Shares. Therefore, based on the foregoing, we consider that the Subscription Price of HK$0.045 per Offer Share has been determined on a fair and reasonable basis;
the Open Offer is being fully underwritten by the Underwriter in accordance with the requirements of Rule 7.24(1) of the Listing Rules;
after completion of the Open Offer (and implementation of the Creditors’ Scheme which is inter-conditional upon completion of the Open Offer), the Group would recognize an exceptional profit and there would be a turnaround in the Group’s net asset position as we have evaluated in the section headed “The Creditors’ Scheme” above;
the Independent Shareholders’ aggregate resultant interests in the Company after the Open Offer and implementation of the Creditors’ Scheme would range from approximately 11.5% (assuming the scenario where none of the Underwritten Shares are taken up by the Independent Shareholders and are entirely taken up by the Underwriter) to approximately 69.2% (assuming the scenario where the entire Underwritten Shares are taken up by the Independent Shareholders), which figures represent a dilution effect on the Independent Shareholders’ interests in the Company of about 87% and 23%, respectively. Therefore, we consider that it would be in the interests of the Independent Shareholders to participate in the Open Offer if they wish to avoid any significant dilution in their aggregate beneficial interests in the Company as a result of the completion of the Open Offer; and
the winding-up petition by Mr. Siu against the Company on 8th October, 2003 will have no effect on the proposed Open Offer,

we are of the view that the terms and conditions of the Open Offer are fair and reasonable and are in the overall interests of the Company and the Shareholders (including the Independent Shareholders). Therefore, we would advise the Independent Board Committee to recommend the Independent Shareholders to approve the resolution in relation to the Open Offer at the SGM.

In relation to the winding-up petition against the Company filed by Mr. Siu to the Hong Kong Court as referred to above, as referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, the Directors have estimated that if the Creditors’ Scheme does not become effective and that the Company goes into liquidation, the liquidation value for the Company is approximately HK$5 million which includes a cash balance of approximately HK$1 million as at 30th June, 2003. Therefore, we

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consider that the Directors’ estimated liquidation value of the Company is unable to service the amount of the Scheme Indebtedness of between HK$131.4 million and HK$143.2 million as at 31st August, 2003. Furthermore, we noted that assuming the Company were to enter into liquidation proceedings after the hearing by the Hong Kong Court (which is scheduled to take place on 3rd December, 2003), it would be difficult for the Company to invite new investment proposals for reasons that:

(i) the Company’s audited accounts for the financial year ended 31st December, 2002 were qualified by its auditors in respect of fundamental uncertainty relating to the Group’s business operations on a going concern basis;
(ii) the Group recorded unaudited adjusted net current liabilities of approximately HK$14.9 million as at 30th June, 2003, which indicates that the Group faced a liquidity problem in its business operations;
(iii) the Group recorded an unaudited consolidated net tangible shareholders’ deficit of approximately HK$81.7 million as at 30th June, 2003 (as referred in Appendix II to the Circular);
(iv) the amount of Scheme Indebtedness, which ranges between HK$131.4 million and HK$143.2 million as at 31st August, 2003, represents a substantially over-geared financial position based on the Group’s unaudited adjusted consolidated net tangible shareholders’ deficit of approximately HK$81.7 million as at 30th June, 2003; and
(v) based on the Group’s unaudited consolidated balance sheet as at 30th June, 2003, we noted that the Group’s largest balance sheet item is an intangible asset mainly comprising patents and trademarks in respect of a non wholly-owned subsidiary of the Company which is engaged in network security services in the PRC. The Group does not beneficially own a significant amount of marketable and liquid assets (such as properties and listed securities) which are realizable into cash or cash equivalents, which we consider is a feature that unfavourably limits the attraction of the Company as an investment target to potential investors.

Accordingly, from the viewpoint of the Company’s ability in procuring cash proceeds, we do not consider that liquidation proceedings, to be followed by the implementation of an investment proposal from an interested investor, would be a better alternative than the Open Offer.

THE WHITEWASH WAIVER

1. Reasons for the Whitewash Waiver

As referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, Mr. Tam and his concert parties (who are collectively beneficially interested in approximately 10.5% of the Company’s issued share capital as at the Latest Practicable Date) would be beneficially interested in (i) approximately 67.4% of the Company’s enlarged issued share capital after the Open Offer, assuming a scenario where none of the Underwritten Shares are taken up by the Independent Shareholders and are entirely taken up by the Underwriter; and (ii) approximately 38.5% of the Company’s enlarged issued share capital after

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the Open Offer, assuming a scenario where 50% of the Underwritten Shares are taken up by the Independent Shareholders and the remainder are taken up by the Underwriter. As these percentages exceed the trigger point of 30% under the Code, as a consequence, Mr. Tam and his concert parties would normally be required to make a general offer for the Consolidated Shares (assuming the Capital Reorganization becoming effective and after completion of the Open Offer) which are not already owned by them or agreed to be acquired by them under Rule 26 of the Code.

Nevertheless, under Note 1 to the Notes on dispensations from Rule 26 of the Code, it is stipulated that “ the requirement for a mandatory general offer will also be waived by the Executive, provided there has been an independent vote of shareholders, in cases involving the underwriting of an issue of shares ”. In the circumstances, we noted that the general offer obligation to which Mr. Tam and his concert parties would otherwise be subject under Rule 26 of the Code arises from the underwriting arrangement for Mr. Tam (through his wholly owned subsidiary, Main Faith) in respect of the Underwritten Shares under the terms of the Open Offer as discussed in the section headed “The Open Offer” above. Furthermore, as referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, Mr. Tam, his associates and concert parties have confirmed that they have not dealt in the Shares during the period of six months prior to the date of the Underwriting Agreement (at which Main Faith’s underwriting arrangements were confirmed with the Company) or since the date of the Underwriting Agreement up to and including the Latest Practicable Date, and have also undertaken to the Company that they will not deal in the Shares until the SGM has been held. Therefore, we are of the view that Mr. Tam and his concert parties have valid reasons to apply for the grant of the Whitewash Waiver from the Executive in accordance with Note 1 to the Notes on dispensations from Rule 26 of the Code.

Furthermore, as referred to in the letter from the Board as set out on pages 9 to 31 of the Circular, the Open Offer is conditional upon, inter alia, the Whitewash Waiver being approved by the Independent Shareholders by way of a poll at the SGM and the Whitewash Waiver being granted by the Executive, and the Underwriter for the Open Offer has stated that it does not intend to waive the abovementioned conditions. In other words, if the Whitewash Waiver is not approved by the Independent Shareholders and not granted by the Executive, then the Underwriting Agreement would not become unconditional and the Open Offer would not be completed. In this regard, given that implementation of the Creditors’ Scheme is conditional upon, inter alia, the Open Offer becoming unconditional (as discussed in the section headed “The Creditors’ Scheme” above), it follows that under such circumstances, the Creditors’ Scheme would not become effective as a result of which there would not be any relief in the Group’s financial pressures, for reason that (i) there would not be any full and final settlement between the Company and the Scheme Creditors in respect of the Scheme Indebtedness; and (ii) the Group would not be able to derive additional funding of approximately HK$8.9 million as additional working capital for its core business operations in the interim.

2. Effects of the Whitewash Waiver

We consider that, in the event the Whitewash Waiver would be approved by the Independent Shareholders and be granted by the Executive to Mr. Tam and his concert parties, the Independent Shareholders would forgo the benefit of a possible general offer which might otherwise be extended to them by Mr. Tam and his concert parties. In this regard, we have taken into consideration on the merits of the Open Offer which, if proceeded with, would enable the Creditors’ Scheme to become effective and thereby relieving the Group’s financial pressures by way of (i) achieving a full and final settlement of the Scheme Indebtedness between the Company and the Scheme Creditors; and (ii) enabling the Group to

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derive additional funding of approximately HK$8.9 million as additional working capital for its core business operations in the interim, as a result of which the Company and the Shareholders (including the Independent Shareholders) may benefit from the future growth and development of the Group under its improved financial position.

Therefore, we are of the view that given the Open Offer is conditional upon, inter alia, the approval of the Whitewash Waiver by the Independent Shareholders and hence the grant of the Whitewash Waiver by the Executive, it would be in the interests of the Independent Shareholders to approve the Whitewash Waiver notwithstanding the fact that the Independent Shareholders would forgo the opportunity of a general offer which would otherwise be extended to them from Mr. Tam and his concert parties by virtue of fully honouring their obligations pursuant to the Underwriting Agreement of the Open Offer.

3. Recommendation

Based on the terms of the Open Offer as discussed under the section headed “The Open Offer” above, we noted that Mr. Tam, through his wholly-owned subsidiary Main Faith, acts as the Underwriter for the Open Offer. Main Faith will receive an underwriting commission at the rate of 2.5% on the monetary value of the Underwritten Shares based on the Subscription Price of the HK$0.045 per Offer Share, as a result of which Main Faith will receive an underwriting commission of approximately HK$0.5 million (based on an aggregate of 458,558,705 Offer Shares underwritten by it). Furthermore, in the event where none of the Offer Shares are being taken up by the Independent Shareholders and are therefore entirely taken up by Main Faith as the Underwriter at the Subscription Price of HK$0.045 per Offer Share (which nevertheless represents significant discounts of approximately 87.5% and 83.9% to the closing prices of the Shares (on an Adjusted Share basis) as at the Last Trading Day and the Latest Practicable Date, respectively), Mr. Tam and his concert parties would then become a controlling shareholder of the Company but would apply for the grant of the Whitewash Waiver. The Whitewash Waiver, if granted, would relieve Mr. Tam and his concert parties from the obligation to make a general offer for the Adjusted Shares (assuming the Capital Reorganization becoming effective and after completion of the Open Offer) which are not already owned by them or agreed to be acquired by them under Rule 26 of the Code.

As referred to in our discussions in the section headed “The Open Offer” above, we noted the importance of Main Faith in underwriting the Open Offer (and upon which the success of the Open Offer is highly reliant) especially given the Group’s unfavourable financial results performances and the Group’s unfavourable financial position which altogether make it difficult for the Company to procure a commercial underwriter. We also noted the merits of the Open Offer and its importance to the Group, without which the Group would not be able to implement the Creditors’ Scheme and thereby in discharging the Company’s Scheme Indebtedness and in providing additional working capital for the Group as an interim measure. Therefore, we consider that it would be fair and reasonable to the Independent Shareholders for Mr. Tam to underwrite the Open Offer, through his wholly-owned subsidiary Main Faith, notwithstanding that Main Faith underwrites the Underwritten Shares at the Subscription Price of HK$0.045 per Offer Share which represents significant discounts of approximately 87.5% and 83.9% to the closing prices of the Shares (on an Adjusted Share basis) as at the Last Trading Day and the Latest Practicable Date, respectively. We further noted that (i) in the event where none of the Underwritten Shares are taken up by the Independent Shareholders and are therefore entirely taken up by the Underwriter, Mr. Tam and his concert parties would become beneficially interested in approximately 67.4% of the Company’s enlarged issued share capital after the Open Offer; and (ii) in the event where 50% of the Underwritten Shares are taken up by the Independent Shareholders and that the remaining 50% of the Underwritten Shares are therefore taken up by the Underwriter, Mr. Tam and his concert parties would become beneficially interested in approximately 38.5% of the Company’s enlarged issued share capital after the Open Offer.

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In either of the scenarios above, Mr. Tam and his concert parties may become the single largest shareholder of the Company and hence may acquire control of the Company. Mr. Tam and his concert parties will apply for the grant of the Whitewash Waiver, upon which the completion of the Open Offer is conditional and which, if granted, would enable Mr. Tam and his concert parties to acquire a controlling interest in the Company without having to make a general offer pursuant to Rule 26 of the Code.

We wish to draw the attention of the Independent Shareholders to the valid reasons as stipulated by the provisions of Note 1 on dispensations from Rule 26 of the Code for Mr. Tam and his concert parties in applying for the Whitewash Waiver, as discussed in the paragraph headed “Reasons for the Whitewash Waiver” above. Therefore, we would advise that it is fair and reasonable to the Independent Shareholders for the grant of the Whitewash Waiver to Mr. Tam and his concert parties. Nevertheless, we wish to emphasize that the grant of the Whitewash Waiver to Mr. Tam and his concert parties is conditional upon, inter alia, the approval by the Independent Shareholders by way of a poll at the SGM. In other words, if the Independent Shareholders do not approve the grant of the Whitewash Waiver at the SGM, then Mr. Tam will be required to make a general offer for all the remaining issued shares of the Company, other than those already owned or agreed to be acquired by him and his concert parties, pursuant to Rule 26 of the Code at an offer price of not less than HK$0.045 per share of the Company which is otherwise subject to the general offer. Therefore, we consider that the requirement for the Whitewash Waiver to be approved by the Independent Shareholders essentially safeguards the Independent Shareholders’ interests regarding the possibility for Mr. Tam and his concert parties to acquire control of the Company, at the Subscription Price of HK$0.045 per Offer Share, through Mr. Tam’s underwriting of the Open Offer without having to make a general offer pursuant to Rule 26 of the Code.

In summary, we have considered the principal factors and reasons as discussed in this section headed “The Whitewash Waiver”, in particular that (i) the Open Offer is conditional upon, inter alia, the Whitewash Waiver being approved by the Independent Shareholders by way of a poll at the SGM and the Whitewash Waiver being granted by the Executive; and (ii) the Underwriter for the Open Offer has stated that it does not intend to waive the conditions referred to in (i) above. Given our evaluation of the merits of the Open Offer which is inter-conditional with the Creditors’ Scheme, we consider that it is fair and reasonable to the Independent Shareholders for the grant of the Whitewash Waiver to the Underwriter, being Mr. Tam and his concert parties. Therefore, we consider that it is fair and reasonable and in the interests of the Independent Shareholders to approve the Whitewash Waiver by way of a poll at the SGM so that, as a result, the Whitewash Waiver may be granted by the Executive to Mr. Tam and his concert parties so as to enable the Open Offer to be proceeded with and hence for the Creditors’ Scheme to become effective. Therefore, we would advise the Independent Board Committee to recommend the Independent Shareholders to approve the resolution in relation to the Whitewash Waiver at the SGM.

Yours faithfully, For and on behalf of

Chateron Corporate Finance Limited Christopher Wong Director

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CREDITORS’ SCHEME

APPENDIX I

The following are the proposed terms of the scheme of arrangement (subject to amendment and modification).

In this Creditors’ Scheme, unless inconsistent with the subject or context, the following expressions bear the following meanings:

“Adjudicators” Mr. Alan Tang Chung Wah and Ms. Alison Wong Lee Fung Ying of Grant Thornton of 13th Floor, Gloucester Tower, The Landmark, 11 Pedder Street, Central, Hong Kong;
“Adjusted Share(s)” share(s) of HK$0.01 each in the share capital of the Company immediately after the Capital Reduction and Subdivision becoming effective;
“Bermuda Court” the Supreme Court of Bermuda; “Bermuda Scheme Creditors the meeting of the Scheme Creditors convened at the direction of Court Meeting” the Bermuda Court for the purpose of considering and, if thought fit, approving this Creditors’ Scheme;
“Board” the board of Directors; “Capital Reduction” the proposed reduction of capital of the Company by way of the cancellation of the paid-up capital to the extent of HK$1.99 on each the issued Consolidated Share such that the nominal value of all the then issued Consolidated Shares will be reduced from HK$2.0 each to HK$0.01 each;
“Capital Reorganisation” the proposed capital reorganisation of the Company involving the Capital Reduction, the Share Premium Cancellation and the Subdivision. For the avoidance of doubt, the Capital Reorganisation does not involve the Share Consolidation;
“Code” The Hong Kong Code on Takeovers and Mergers;
“Companies Act” the Companies Act 1981 of Bermuda;
“Companies Ordinance” the Companies Ordinance (Chapter 32 of the Laws of Hong Kong);
“Company”

China Nan Feng Group Limited (formerly named as “Prosper eVision Limited”), an exempted company incorporated in Bermuda with limited liability, the securities of which are listed on the Stock Exchange;

“Consolidated Share(s)” share(s) of HK$2.0 each in the share capital of the Company upon the Share Consolidation taking effect;

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CREDITORS’ SCHEME

APPENDIX I

“Creditors’ Scheme”
this scheme of arrangement under section 99 of the Companies Act and under section 166 of the Companies Ordinance as set out herein, with or subject to any modification thereof or addition thereto or condition approved or imposed by the Bermuda Court or the Hong Kong Court, as the case may be;
“Creditors’ Scheme Record Date” 4:00 p.m. (Hong Kong time) on [•••], being the date fixed for the determination of entitlements under this Creditors’ Scheme;
“Creditors Shares” the Adjusted Shares to be issued to the Scheme Creditors pursuant to the Creditors’ Scheme;
“Cut Off Date” 4:00 p.m. (Hong Kong time) on [•••], being the date by which Scheme Creditors are required to file a Notice of Claim to establish their claims in accordance with Part I of this Creditors’ Scheme;
“Director(s)” the director(s) of the Company appointed from time to time;
“Effective Date” the date on which the Creditors’ Scheme becomes effective;
“HK$” Hong Kong dollars, the lawful currency of Hong Kong;
“Hong Kong” the Hong Kong Special Administrative Region of the People’s Republic of China;
“Hong Kong Court” Court of First Instance of the High Court of Hong Kong;
“Hong Kong Scheme the meeting of the Scheme Creditors convened at the direction of Creditors Court Meeting” the Hong Kong Court for the purpose of considering and, if thought fit, approving this Creditors’ Scheme;
“Latest Practicable Date” [•••], being the latest practicable date prior to the printing of the Creditors’ Scheme for ascertaining certain information referred to in the Creditors’ Scheme;
“Notice of Claim” a notice of claim to be sent by the Company in accordance with Part I of this Creditors’ Scheme;
“Offer Shares” 512,308,705 new Adjusted Shares to be issued under the Open Offer;
“Open Offer” the issue of the Offer Shares on the basis of five Offer Shares for the equivalent of every Adjusted Share held on the Record Date at the Subscription Price;

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CREDITORS’ SCHEME

APPENDIX I

“Preferential Claims”
“Preferential Creditors”
“Record Date”
“Scheme Administrator”
“Scheme Creditors”
“Scheme Indebtedness”
“Scheme Record Date”
“SGM”
“Share(s)”
“Share Consolidation”
“Share Premium Cancellation”
“Shareholder(s)”
all claims against the Company which would, if the Company had commenced to be wound up on the Effective Date, have been payable out of the assets of the Company pursuant to the Companies Ordinance and/or the Companies Act in priority to the claims of the general unsecured creditors of the Company, which amounted to approximately HK$134,000 as at 3rd November, 2003;
creditors to the extent to which may have Preferential Claims against the Company;
the date to be fixed by the Directors by reference to which entitlements under the Open Offer will be determined, currently expected to be on [•••];
Mr. Wilfred Wu Yan Mo of YWC & Partners of 17th Floor, Punfet Building, 701 Nathan Road, Kowloon, Hong Kong;
creditors of the Company subject to the Creditors’ Scheme, which for the avoidance of doubt exclude the Preferential Creditors to the extent of their Preferential Claims;
the indebtedness and liabilities owing to the Scheme Creditors by the Company subject to the Creditors’ Scheme, which for the avoidance of doubt exclude the Preferential Claims;
the date for the determination of entitlement of the Scheme Creditors under the Creditors’ Scheme;
the special general meeting of the Company to be held at 9:15 a.m. on Monday, 1st December, 2003, for the purpose of considering and, if thought fit, approving, among other things, the Capital Reorganisation, the issue of the Creditors Shares, the Open Offer, the grant of the Whitewash Waiver, amendments to the Bye-laws and grant of general mandates to issue and repurchase shares;
share(s) of HK$0.10 each in the share capital of the Company;
the proposed consolidation of every 20 Shares into one Consolidated Share;
the cancellation of the entire amount standing to the credit of the share premium account of the Company as at the effective date of the Capital Reduction;
holder(s) of the Share(s) or of Consolidated Share(s) or of Adjusted Share(s), where appropriate;

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CREDITORS’ SCHEME

APPENDIX I

“Stock Exchange”

The Stock Exchange of Hong Kong Limited;

“Subdivision”

the subdivision of each authorised but unissued Consolidated Share into 200 Adjusted Shares;

“Subscription Price”

the subscription price of HK$0.045 per Offer Share pursuant to the Open Offer; and

“Whitewash Waiver”

the waiver from the Executive pursuant to Note 1 of the Notes on Dispensations from Rule 26 of the Code in relation to the obligation to make a mandatory general offer of Shares not already held or agreed to be subscribed by Euro Concord and its concert parties as a result of the Open Offer.

(A) The Company was incorporated on 24th March, 1997 under the Companies Act as an exempted company in Bermuda with limited liability and, as at the Latest Practicable Date, had an authorised share capital of HK$400,000,000 divided into 4,000,000,000 Shares of which 2,049,234,824 Shares have been issued and are fully paid or credited as fully paid.
(B) Pursuant to the Creditors’ Scheme, the Scheme Indebtedness and the Preferential Claims as at the Creditors’ Scheme Record Date will be discharged in full by a combination of a cash payment and the issuance of Creditors Shares. As at 31st August, 2003, the Scheme Indebtedness amounted to approximately HK$131.4 million. In addition, there were approximately HK$11.8 million of contingent liabilities as at the same date. The Scheme Indebtedness may include, if and to the extent they become actual liabilities or are admitted as Scheme Indebtedness, such contingent liabilities. For every HK$1 of valid claims, the Scheme Creditors will receive a combination of (i) cash payment payable on a pro-rata basis which equals the sum of HK$12 million (being the proceeds from the Open Offer) divided by the Scheme Indebtedness as at the Creditors’ Scheme Record Date subject to a cap of HK$0.1 of cash payment per HK$1 of valid claims, (ii) Creditors Shares to be issued on a pro-rata basis based on a total number of 180 million Creditors Shares divided by the Scheme Indebtedness as at the Creditors’ Scheme Record Date subject to a cap of 1.5 Creditors Shares per HK$1 of valid claims and which will be issued and credited as fully paid up at HK$0.1 per Creditors Share. Once the Creditors’ Scheme becomes effective, it will bind the Company and all Scheme Creditors, irrespective of whether they voted at the Hong Kong Scheme Creditors Court Meeting or the Bermuda Scheme Creditors Court Meeting or, if they voted, whether they voted for or against the Creditors’ Scheme. The Creditors Shares will rank pari passu in all respects with the other Consolidated Shares then in issue, including as to the right to receive all dividends and distributions which may be declared made or paid thereafter, save that holders of Creditors Shares will not be entitled to participate in the Open Offer. The Company had Scheme Indebtedness of approximately HK$131.4 million as at 31st August, 2003, all of which was unsecured. Assuming valid claims are made on the Scheme Indebtedness of HK$131.4 million and there is no valid claim to be made on the contingent liabilities of the Company, the Scheme Creditors would receive approximately HK$12 million in cash and 180 million Creditors Shares pursuant to the Creditors’ Scheme.

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CREDITORS’ SCHEME

APPENDIX I

THE CREDITORS’ SCHEME

PART I SCHEME

A. Cancellation of the Scheme Indebtedness

On the Creditors’ Scheme Record Date, pursuant to the Creditors’ Scheme, the Scheme Indebtedness and the Preferential Claims as at the Creditors’ Scheme Record Date will be discharged in full. As at 31st August, 2003, the Scheme Indebtedness amounted to approximately HK$131.4 million. In addition, there were approximately HK$11.8 million of contingent liabilities as at the same date. The Scheme Indebtedness may include, if and to the extent they become actual liabilities or are admitted as Scheme Indebtedness, such contingent liabilities. For every HK$1 of valid claims, the Scheme Creditors will receive a combination of (i) cash payment payable on a pro-rata basis which equals the sum of HK$12 million (being the proceeds from the Open Offer) divided by the Scheme Indebtedness as at the Creditors’ Scheme Record Date subject to a cap of HK$0.1 of cash payment per HK$1 of valid claims, (ii) Creditors Shares to be issued on a pro-rata basis based on a total number of 180 million Creditors Shares divided by the Scheme Indebtedness as at the Creditors’ Scheme Record Date subject to a cap of 1.5 Creditors Shares per HK$1 of valid claims and which will be issued and credited as fully paid up at HK$0.1 per Creditors Share. Once the Creditors’ Scheme becomes effective, it will bind the Company and all Scheme Creditors, irrespective of whether they voted at the Hong Kong Scheme Creditors Court Meeting or the Bermuda Scheme Creditors Court Meeting or, if they voted, whether they voted for or against the Creditors’ Scheme. Fractional Creditors Shares will not be issued to Scheme Creditors but will be aggregated and sold if a premium, net of expenses, can be obtained. The net proceeds thereof (if any) will be kept by the Company.
The issue of the Creditors Shares and payment to a Scheme Creditor of the cash to which that Scheme Creditor is entitled under this Creditors’ Scheme shall be in full and final satisfaction of its claim against the Company and shall be in full discharge and satisfaction of such Scheme Creditor’s proportion of the Scheme Indebtedness.
Any sum payable in accordance with this Creditors’ Scheme shall be satisfied solely from the net proceeds of the Open Offer by payment of a cheque drawn on a licensed bank in Hong Kong in favour of the relevant Scheme Creditor and by issue of the relevant Creditors Shares and despatch of a certificate for the relevant Creditors Shares to that Scheme Creditor. The cheque and certificate for the relevant Creditors Shares shall be sent by prepaid ordinary post (or by prepaid airmail if the Scheme Creditor is situated outside Hong Kong) to the address of the relevant Scheme Creditor as stated in the Notice of Claim submitted by such Scheme Creditor. If no address is set out in the Notice of Claim by a Scheme Creditor, then any cheque and share certificate shall be sent to the address of that Scheme Creditor last known to the Company. Cheque(s) and share certificate(s) issued to Scheme Creditors shall be posted at the risk of the addressees and neither the Company nor the Scheme Administrator shall be responsible for any loss or delay in transmission. The encashment of any cheque shall be a good discharge to the Company and satisfaction of the relevant debt. In the event

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CREDITORS’ SCHEME

APPENDIX I

that a cheque in favour of a Scheme Creditor which is despatched in accordance with this clause 3 is not encashed within six months from the date of the issuance of the cheque, the relevant Scheme Creditor’s entitlement under this Creditors’ Scheme, in the amount of such cheque, shall cease and determine and the amount thereof shall be retained for the account of the Company and no Scheme Creditor shall have any recourse whatsoever to the Company or the Scheme Administrator or the Adjudicators in respect thereof.

B. Preferential Claims

The Creditors Scheme shall discharge all Preferential Claims against the Company in priority to the distribution in respect of the claims of the Scheme Creditors.
All Preferential Creditors shall be entitled to claim the non-preferential balance (if any, after deduction of their Preferential Claims) of their claims against the Company as nonpreferential Scheme Creditors under the Creditors Scheme.

C. Bar to Scheme Creditors Proceedings

Save as provided in clause 14 of this Creditors’ Scheme, once this Creditors’ Scheme becomes effective, none of the Scheme Creditors or the Preferential Creditors shall be entitled to demand or exercise any right of set-off against the Company in respect of, or seek to recover from the Company by legal process or otherwise, or take any steps or proceedings against the Company or its properties or assets for the purpose of enforcing or recovering by way of execution or otherwise, any of the Scheme Indebtedness or Preferential Claims or to take or join in any proceedings to wind up the Company.
In the event this Creditors’ Scheme becomes effective and binding on the Company, any of the Scheme Creditors which is the petitioner or submitted petitioner petitioning for the winding-up of the Company, shall within 30 days of the date on which this Creditors’ Scheme becomes effective apply to the Hong Kong Court and the Bermuda Court (as the case may be) for the dismissal of the relevant petition with no order as to costs save for those of the Official Receiver which shall be borne by the relevant petitioner provided that nothing herein shall prejudice any cost or order specifically made by the Hong Kong Court or Bermuda Court (as the case may be) before the Effective Date in connection with the petition.

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CREDITORS’ SCHEME

APPENDIX I

D. Proof and Determination of the Scheme Indebtedness

The Scheme Indebtedness shall be proved and determined in accordance with the provisions set out in this part and which shall be submitted to the Scheme Administrator at the same time by means of submission of a Notice of Claim, which shall be on or before the Cut Off Date.
The Scheme Indebtedness for which the Company is liable at the Creditors’ Scheme Record Date shall be proved by any party claiming to be entitled thereto by delivering to the Scheme Administrator at such party’s own expense:
(a) not later than the Cut Off Date a Notice of Claim in respect of his/her/its portion of the Scheme Indebtedness completed in accordance with the instructions printed thereon; and
(b) such further documents or other evidence as the Scheme Administrator or the Adjudicators shall think fit for the purpose of substantiating the whole or any part of the Scheme Indebtedness.
Any of the Scheme Indebtedness in a currency other than Hong Kong dollars shall be translated to Hong Kong dollars at the exchange rate for the purchase of the relevant currency as posted by The Hongkong and Shanghai Banking Corporation Limited at its main office in Hong Kong (or, in the event of manifest error or non-publication, at such other offered rate for the purchase of the relevant currency of such other licensed bank in Hong Kong as the Scheme Administrator shall select) at the close of business on the Creditors’ Scheme Record Date, and shall for the purposes of this Creditors’ Scheme be treated as due in Hong Kong dollars.
Interest on any debt, payable at a certain time or otherwise, shall not be provable or admissible as Scheme Indebtedness or part of it unless arising out of a contract or under judgment and only for a period or periods ending on or before [•••].
The Scheme Administrator shall examine every Notice of Claim lodged and the grounds for the Scheme Indebtedness comprised therein and in writing admit or reject the Scheme Indebtedness in whole or in part, or require further evidence in support of it. If the Scheme Indebtedness is rejected in whole or in part, the Scheme Administrator shall state in writing the reasons for the rejection and shall send such statement forthwith to the relevant Scheme Creditor.

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CREDITORS’ SCHEME

APPENDIX I

No Scheme Creditor shall have any right after the submission date of the Notice of Claim to provide revised or further information in respect of a claim except, in the latter case, in response to a request for such revised or further information by the Scheme Administrator or the Adjudicators. If no information is supplied by a Scheme Creditor, such Scheme Creditor’s claim shall be determined on the basis of information available to the Scheme Administrator from the Company’s records. Any claims which are not agreed within seven (7) days of the submission date of the Notice of Claim shall be referred to the Adjudicators. The Adjudicators (acting as experts and not as arbitrators) shall then give a final and binding determination in respect of any claim referred to them within ten (10) days of such referral. Such time period may be extended at the discretion of the Company or the Adjudicators.
Any sums due to the Company from a Scheme Creditor and the amount of any counterclaim made by the Company against a Scheme Creditor which the Company believes it has and which is available in respect of such claim(s) shall be set-off against that Scheme Creditor’s claims. Such sums and counterclaims may include contingent and prospective debts.
If a Scheme Creditor is dissatisfied with the decision of the Scheme Administrator in respect of his/her/its Notice of Claim, he/she/it may refer such matter to the Adjudicators (acting as experts and not as arbitrators) who, in accordance with such procedures as the Adjudicators may think fit, may uphold or reverse or vary the decision and such determination by the Adjudicators shall be final, conclusive and binding on the Company and such Scheme Creditor. No application to reverse or vary the decision of the Scheme Administrator shall be entertained unless written notice of the application is given by the relevant Scheme Creditor to the Adjudicators before the expiration of five (5) days from the date of service of the notice of rejection as provided in clause 12 of this Creditors’ Scheme. The costs of such determination by the Adjudicators shall be borne by the Scheme Creditor in the event that the Scheme Administrator’s decision is upheld or otherwise borne by the Company or in such other manner as the Adjudicators shall determine.
For the avoidance of doubt, any of the Scheme Indebtedness which is not proved in accordance with this Creditors’ Scheme or which is rejected, in whole or in part, by the Scheme Administrator or the Adjudicators, as the case may be, shall be treated (and, if rejected in part, as to that part only) for all purposes as wholly and irrevocably discharged and the Company shall be released from such part of the Scheme Indebtedness and no Scheme Creditor or other claimant shall be entitled to payment thereof or make any claims or initiate any proceedings in relation thereto.
This Creditors’ Scheme shall terminate on notice of termination being given to the Scheme Creditors by the Scheme Administrator after the discharge of the Scheme Indebtedness owed to Scheme Creditors in accordance with the provisions of this Creditors’ Scheme and in any event not later than 30th June, 2004, or such later date as the Hong Kong Court and the Bermuda Court may allow on the application of the Company.

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CREDITORS’ SCHEME

APPENDIX I

(a) Any notice or demand hereby or by law authorised or required to be given shall be sufficiently given by posting via the ordinary post (or airmail if outside Hong Kong) to or transmission by leaving the same at:
- (i) in the case of the Company or the Scheme Administrator at 17th Floor, Punfet Building, 701 Nathan Road, Kowloon, Hong Kong (Attn: Mr. Wilfred Wu Yan Mo);
- (ii) in the case of the Adjudicators at 13th Floor, Gloucester Tower, The Landmark, 11 Pedder Street, Central, Hong Kong (Attn: Mr. Alan Tang Chung Wah and Ms. Alison Wong Lee Fung Ying);
- (iii) in the case of any Scheme Creditor, his, her or its address or fax number as stated in the Notice of Claim or the address last known to the Company, if no such address or fax number is stated.
(b) If such notice or demand is posted, it shall be deemed to have been received by the addressee 48 hours (or 72 hours, if from one country to another) after the same shall have been posted and proof that an envelope containing such notice was properly addressed prepaid and posted shall be sufficient evidence that such notice or demand has been duly served or given. If such notice or demand is delivered by hand, it shall be deemed to have been received by the addressee when the same is left at the relevant address and proof that the same was so left shall be sufficient evidence that such notice or demand has been duly served or given. If such notice or demand is transmitted by fax, it shall be deemed to have been received at the time of transmission, save that if such transmission is effected otherwise than between 9:00 a.m. and 4:00 p.m. on a business day in the territory in which the person to whom such transmission is effected is located, such transmission shall be deemed to have been received at 9:00 a.m. on the next business day in such territory and proof that such notice or demand was successfully transmitted to the correct facsimile number (by way of transmission confirmation or otherwise) shall be sufficient evidence that such notice or demand has been duly served or given.
The Company may consent for and on behalf of all concerned to any modification of or addition to this Creditors’ Scheme or to any condition which the Hong Kong Court or the Bermuda Court may see fit to approve or impose.
All costs, charges and expenses of and incidental to this Creditors’ Scheme and the costs of carrying the same into effect shall be borne by the Company.

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CREDITORS’ SCHEME

APPENDIX I

PART II GENERAL APPLICATION

A. Creditors’ Scheme Effective Date

This Creditors’ Scheme shall become effective upon the later of:
(a) an office copy of the order of the Hong Kong Court sanctioning the Creditors’ Scheme under section 166 of the Companies Ordinance being delivered to the Registrar of Companies in Hong Kong for registration; and
(b) an office copy of the order of the Bermuda Court sanctioning the Creditors’ Scheme, under section 99 of the Companies Act being delivered to the Registrar of Companies in Bermuda for registration.

B. Conditions of the Creditors’ Scheme

This Creditors’ Scheme is conditional upon:
(a) the approval of the Creditors’ Scheme by a majority in number representing threefourths in value of the Scheme Creditors who, being so entitled, are present in person or by proxy and vote at the Hong Kong Scheme Creditors Court Meeting, the sanction by the Hong Kong Court of the Creditors’ Scheme and the delivery of a copy of the order sanctioning the Creditors’ Scheme to the Registrar of Companies in Hong Kong for registration;
(b) the approval of the Creditors’ Scheme by a majority in number representing threefourths in value of the Scheme Creditors who, being so entitled, are present in person or by proxy and vote at the Bermuda Scheme Creditors Court Meeting, the sanction by the Bermuda Court of the Creditors’ Scheme and the delivery of a copy of the order sanctioning the Creditors’ Scheme to the Registrar of Companies of Bermuda for registration;
(c) the passing at the SGM of the resolution(s) necessary for approving the issue of Creditors Shares to the Scheme Creditors pursuant to the Creditors’ Scheme;
(d) all necessary consents or approvals of all relevant government or regulatory authorities in relation to the Creditors’ Scheme being obtained;
(e) the Listing Committee of the Stock Exchange granting listing of and permission to deal in the Creditors Shares to be issued pursuant to the Creditors’ Scheme;
(f) the Share Consolidation becoming unconditional and effective; and
(g) the Capital Reorganisation and the Open Offer becoming unconditional and effective (save as to the conditions requiring the Capital Reorganisation and/or the Open Offer and/or the Creditors’ Scheme to have become unconditional).

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CREDITORS’ SCHEME

APPENDIX I

C. Lapse

Unless this Creditors’ Scheme shall have become effective as aforesaid on or before 30th June, 2004 or such later date as the Courts may allow on application of the Company, this Creditors’ Scheme shall lapse.

D. General

This Creditors’ Scheme shall be governed by and construed in accordance with the laws of Hong Kong, and the Scheme Creditors agree that the Hong Kong Court shall have exclusive jurisdiction to hear and determine any suit, action or proceeding and to settle any dispute which may arise out of any provision of this Creditors’ Scheme, or out of any action taken or omitted to be taken under this Creditors’ Scheme or in connection with the administration of this Creditors’ Scheme. For such purposes, the Scheme Creditors irrevocably submit to the exclusive jurisdiction of the Hong Kong Court. The validity of any other provisions determining governing law and jurisdiction as between the Company and any of its Scheme Creditors, whether contained in any contract or otherwise, and not relating to any dispute arising out of any provision of this Creditors’ Scheme or any action or omission thereunder or in connection with its administration shall not be affected thereby.

Dated the [•••]

– 83 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

1. SHARE CAPITAL

The authorised and issued share capitals of the Company as at the Latest Practicable Date were, and following completion of the Restructuring Proposal will be, as follows:

HK$

Authorised:

4,000,000,000 Shares Issued and fully paid as at the Latest Practicable Date: 2,049,234,824 Shares Issued and fully paid upon completion of the Restructuring Proposal: 102,461,741.2 Adjusted Shares 180,000,000.0 Creditors Shares 512,308,705.0 Offer Shares 794,770,446.2	400,000,000

	204,923,482.4

	1,024,617.412 1,800,000.000 5,123,087.050
	7,947,704.462

All the existing issued Shares rank pari passu in all respects including all rights as to dividends, voting and capital. All the Shares to be in issue following completion of the Restructuring Proposal will rank pari passu in all respects with each other including as regards to dividends, voting and return of capital. As announced by the Company on 19th May, 2003, the Company allotted an aggregate of 108,774,440 new Shares to certain creditors of the Company in settlement of an aggregate amount of approximately HK$10.9 million owed by the Group to such creditors. Save for the aforesaid, there have been no changes to the authorised and issued share capital of the Company since 31st December, 2002 (being the end of the last financial year of the Company).

Under the Share Option Scheme adopted by the Company, the Directors may, at their discretion, invite employees of the Group, including Directors, to take up options to subscribe for shares of the Company.

As at the Latest Practicable Date, the Company or any member of the Group did not have any outstanding options, warrants or other securities convertible or exchangeable into Shares, and save and except for the Share Option Scheme, no other share or loan capital of the Company had been put under option or agreed conditionally or unconditionally to be put under option and no other conversion right affecting the Shares or other derivatives in respect of securities of the Company which are being offered for or which carry voting rights had been issued or granted or agreed conditionally or unconditionally to be issued or granted by the Company.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

1. SHARE CAPITAL (continued)

The Company has outstanding Convertible Notes with a conversion price of HK$0.1268 per Share. On 29th October, 2003, the Company and Happy Valley entered into an agreement whereby Happy Valley agreed to waive and extinguish the conversion rights attaching to the Convertible Notes with immediate effect at nil consideration.

As at the Latest Practicable Date, save as disclosed herein, no share or loan capital of the Company has been issued or is proposed to be issued for cash or otherwise and no commissions, discounts, brokerages or other special terms have been granted in connection with the issue or sale of any such capital.

The Shares are listed on the Stock Exchange. No part of the securities of the Company is listed or dealt in, nor is listing or permission to deal in the securities of the Company being or proposed to be sought, on any other stock exchange.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

2. FINANCIAL SUMMARY

The following information has been extracted from the audited consolidated accounts of the Group for each of the three years ended 31st December, 2002.

Results
Turnover
Operating loss after finance costs
(Loss)/gain on disposal of subsidiaries
Impairment loss on investments
held for resale
Share of results of associated
companies
Share of result of a joint venture
Amortisation of premium on acquisition
of associated companies
Loss before taxation
Taxation
Loss from operating activities
Minority interest
Extraordinary items_(Note 1)
Loss attributable to shareholders
Dividend
Loss per share(Note 2)_ – Basic
– Diluted
Dividend per share

Year ended 31st December
As restated
2002
2001
2000
HK$’000
HK$’000
HK$’000
24,645
46,870
83,926
(234,736)
(103,363)
(101,980)
(1,905)
(84,147)
26,954
(30,816)
–
–
(486)
(11,685)
(6,950)
–
(310)
(59)
(5,823)
–
–
(273,766)
(199,505)
(82,035)
–
(82)
(225)
(273,766)
(199,587)
(82,260)
60,762
(1)
–
–
–
–
(213,004)
(199,588)
(82,260)
–
–
–
11.98 cents
22.30 cents
14.54 cents
N/A
N/A
N/A
–
–
–

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

2. FINANCIAL SUMMARY (Continued)

Assets and Liabilities Total assets Total liabilities Minority interest Shareholders’ equity	As at 31st December, As restated 2002 2001 2000 HK$’000 HK$’000 HK$’000 255,217 550,767 435,708 (105,918) (184,732) (95,233) 149,299 366,035 340,475 (74,827) (135,589) – 74,472 230,446 340,475

Notes:

For each of the three years ended 31st December, 2002, the Group had not incurred any extraordinary items in the profit and loss account.
The calculation of basic loss per share is based on the Group’s loss attributable to shareholders of (2002: HK$213,004,000; 2001: HK$199,588,000; 2000: HK$82,260,000) and on the weighted average number of (2002: 1,777,431,995; 2001: 894,910,855; 2000: 565,899,940) ordinary shares in issue during the year.

The diluted loss per share for each of the three years ended 31st December, 2000, 2001 and 2002 are not shown as the ordinary shares issuable under outstanding share options and convertible loan notes were anti-dilutive.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

3. AUDITORS’ REPORT FOR THE YEAR ENDED 31ST DECEMBER, 2000

Set out below is the reproduction of the report of the auditors on the audited financial statements of the Group for the year ended 31st December, 2000 as extracted from the Company’s 2000 annual report.

“

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

Arthur Andersen & Co

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

TO THE SHAREHOLDERS OF PROSPER eVISION LIMITED (Formerly known as China Prosperity Holdings (Hong Kong) Limited)

(Incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 20 to 58 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The Companies Ordinance requires the directors to prepare financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you.

BASIS OF OPINION

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

– 88 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

FUNDAMENTAL UNCERTAINTY

The Group has an investment in associates with a carrying value of approximately HK$78 million as at 31st December, 2000. This investment relates to the Group’s 33% equity interest in CVN Group Inc. which is engaged in the development of a broadband interactive multimedia project, known as the CVN project. In forming our opinion, we have considered the adequacy of the disclosures made in the financial statements concerning the substantial amount of financing required to successfully carry out the CVN project. If the CVN project cannot ultimately secure the necessary financing, then there is substantial doubt about the future of the CVN project and consequently, there may be a need to adjust the carrying value of the investment in associates to recognize an impairment in value. We considered that the fundamental uncertainty has been adequately accounted for and disclosed in the financial statements and our opinion is not qualified in this respect.

OPINION

In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31st December, 2000 and of the loss and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Ordinance.

ARTHUR ANDERSEN & CO

Certified Public Accountants

Hong Kong, 20th April, 2001”

– 89 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

4. AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Set out below is the reproduction of the report of the auditors on, together with the audited financial statements of the Group for the year ended 31st December, 2002 as extracted from the Company’s 2002 annual report. In this section, references to the page number are referred to the page number in the Company’s 2002 annual report.

“ Nelson Wheeler

羅申美會計師行 Certified Public Accountants

TO THE SHAREHOLDERS OF

PROSPER eVISION LIMITED

(Incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 21 to 58 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The Company’s directors are responsible to prepare financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you.

BASIS OF OPINION

FUNDAMENTAL UNCERTAINTY RELATING TO GOING CONCERN

In forming our opinion, we have considered the adequacy of the disclosure made in the financial statements concerning the basis of preparation made by the directors. The financial statements have been prepared on a going concern basis, the validity of which depends upon the ability of the Group to attain

– 90 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

profitable and positive cash flows operations to meet its future working capital and financial requirements and ongoing financial support from the shareholders. The financial statements do not include any adjustments that would result from a failure to attain profitable and positive cash flow operation and ongoing financial support from the shareholders. Details of the circumstances relating to this fundamental uncertainty are described in note 2(a) to the financial statements. We consider that the fundamental uncertainty has been adequately disclosed in the financial statements and our opinion is not qualified in this report.

OPINION

In our opinion the financial statements give a true and fair view of the state of the affairs of the Company and of the Group as at 31st December, 2002 and of the Group’s loss and cash flows for the year then ended and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

RSM Nelson Wheeler

Certified Public Accountants

Hong Kong, 28th April, 2003

– 91 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Consolidated Income Statement

For the year ended 31st December, 2002

Note Turnover Continuing operations Discontinued operations 30 3 Other revenue 3 Construction contract costs Hotel operation costs Cost for provision of network security Production overhead Staff costs 4 Depreciation 4 Provision for doubtful debts and loans receivable Amortisation of intangible assets 4 Impairment loss on clubs membership 4 Other operating expenses Operating loss from operating activities Share of profits less losses of Associated companies Joint venture Amortisation of premium on acquisition of associated companies 4 Impairment loss on investments held for resale 4 Loss on disposal of subsidiaries 4 & 30 Finance costs 5 Loss from operating activities before taxation Continuing operations Discontinued operations Taxation 6 Loss from operating activities after taxation Minority interest Loss attributable to shareholders 7 & 21(a) Loss per share – Basic 8 – Diluted 8	2002 HK$’000 24,645 – 24,645 15,438 (23,628) (3,610) (803) – (10,564) (2,248) (63,165) (151,726) (700) (13,742) (230,103) (486) – (5,823) (30,816) (1,905) (4,633) (273,766) – – (273,766) 60,762 (213,004) 11.98 cents N/A	2001 HK$’000 29,479 17,391 46,870 12,641 (36,187) – – (3,119) (15,907) (5,647) (44,940) (30,000) – (26,078) (102,367) (11,685) (310) – – (84,147) (996) (195,225) (4,280) (82) (199,587) (1) (199,588) 22.30 cents N/A

– 92 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Consolidated Balance Sheet

At 31st December, 2002

Note ASSETS Non-current assets Intangible assets 11 Property, plant and equipment 12 Investments in associated companies 14 Clubs membership 15 Current assets Investments held for resale 13(a) Gross amounts due from customers on construction contracts 16 Loans receivable 18 Accounts receivable 17 Prepayments, deposits and other receivables Restricted cash Clubs membership 15 Bank and cash balances Current liabilities Gross amounts due to customers on construction contracts 16 Accounts payable 19 Accruals and other payables Amount due to a related company Provision for taxation Bank and other borrowings 22 Net current assets Total assets less current liabilities Non-current liabilities Redeemable debentures 24(a) Convertible loan notes 24(b) Shareholders’ loan 23 Other non-current liabilities	2002 HK$’000 207,017 2,137 19,624 – 228,778 – 568 – 2,269 20,765 – 1,063 1,774 26,439 229 14,456 11,128 – 156 – 25,969 470 229,248 52,800 17,000 794 9,355 79,949	2001 HK$’000 329,640 4,135 – 1,763
		335,538
		28,672 – 57,938 2,276 65,444 15,759 – 45,140
		215,229
		3,193 17,437 12,574 1,233 175 15,759
		50,371
		164,858
		500,396 120,800 10,000 – 3,561
		134,361

– 93 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Consolidated Balance Sheet (continued) At 31st December, 2002

Note Minority interest NET ASSETS CAPITAL AND RESERVES Share capital 20(a) Reserves 21(a) SHAREHOLDERS’ FUNDS	2002 HK$’000 74,827 74,472 194,046 (119,574) 74,472	2001 HK$’000 135,589
		230,446

		149,850 80,596
		230,446

– 94 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Balance Sheet

At 31st December, 2002

Note ASSETS Non-current assets Investments in subsidiaries 13(b) Current assets Prepayments, deposits and other receivables Bank and cash balances Current liabilities Accruals and other payables Net current assets Total assets less current liabilities Non-current liabilities Redeemable debentures 24(a) Convertible loan notes 24(b) Shareholders’ loan 23 Other non-current liabilities NET ASSETS CAPITAL AND RESERVES Share capital 20(a) Reserves 21(b) SHAREHOLDERS’ FUNDS	2002 HK$’000 225,912 14,525 210 14,735 2,467 12,268 238,180 52,800 17,000 794 6,426 77,020 161,160 194,046 (32,886) 161,160	2001 HK$’000 422,206 46,217 33,223
		79,440
		6,655
		72,785
		494,991
		120,800 10,000 – –
		130,800
		364,191

		149,850 214,341
		364,191

– 95 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Consolidated Statement of Changes in Equity

For the year ended 31st December, 2002

Balance at 1st January, 2001 Realisation of exchange reserve on disposal of subsidiaries Exchange differences arising on consolidation Net gains not recognised in the consolidated income statement Issue of shares Exercise of share option Premium arising on issue of shares, net of issuing expenses Loss for the year Balance at 31st December, 2001 Exchange differences arising on consolidation Net losses not recognised in the consolidated income statement Shares issued for conversion of convertible loan notes Issue of shares Premium arising on issue of shares, net of issuing expenses Premium arising on conversion of convertible loan notes Loss for the year Balance at 31st December, 2002	Share capital HK$’000 71,600 – – – 74,250 4,000 – – 149,850 – – 15,196 29,000 – – – 194,046	Reserves Share Contributed Exchange Accumulated premium surplus reserve losses HK$’000 HK$’000 HK$’000 HK$’000 436,523 22,130 (1,085) (188,693) – – 1,085 – – – 659 – – – 1,744 – – – – – – – – – 9,565 – – – – – – (199,588) 446,088 22,130 659 (388,281) – – (90) – – – (90) – – – – – – – – – 120 – – – 12,804 – – – – – – (213,004) 459,012 22,130 569 (601,285)	Total HK$’000 340,475 1,085 659 1,744 74,250 4,000 9,565 (199,588) 230,446 (90) (90) 15,196 29,000 120 12,804 (213,004) 74,472

– 96 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Consolidated Cash Flow Statement

For the year ended 31st December, 2002

Note CASH FLOWS FROM OPERATING ACTIVITIES 26(a) CASH FLOWS FROM INVESTING ACTIVITIES Net cash outflow from acquisition of a subsidiary 26(c) Net cash outflow from acquisition of an associated company Net cash inflow from disposal of subsidiaries Purchase of property, plant and equipment Advances to associated companies Advances to a subsidiary Proceeds from disposal of property, plant and equipment Deconsolidation of subsidiaries Net cash (used in)/from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of share capital 26(b) Redemption on debentures and promissory notes 26(b) Increase in restricted cash Payment of finance lease liabilities Repayment of secured bank borrowings Advances from shareholders Net cash (used in)/from financing activities NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT 1st JANUARY Effect of change in exchange rates CASH AND CASH EQUIVALENTS AT 31ST DECEMBER ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Bank and cash balances	2002 HK$’000 (10,273) (11,103) (1,838) – (842) – (2,144) 10 – (15,917) 29,120 (47,000) – – – 794 (17,086) (43,276) 45,140 (90) 1,774 1,774	2001 HK$’000 (11,681) (1,692) – 16,226 (173) (9,880) – 1,035 400 5,916 87,815 (35,000) 4,000 (126) (2,349) – 54,340 48,575 (236) (3,199) 45,140 45,140

– 97 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements

For the year ended 31st December, 2002

1. ORGANISATION AND OPERATION

The Company was incorporated in Bermuda on 24th March, 1997 under the Companies Act 1981 of Bermuda (as amended) as an exempted company limited by shares. Its shares have been listed on The Stock Exchange of Hong Kong Limited on 26th June, 1997. The Company is an investment holding company. The principal activities of its subsidiaries are set out in note 13(b) to the financial statements.

2. PRINCIPAL ACCOUNTING POLICIES

(a) Basis of preparation

The Group incurred a loss attributable to shareholders of HK$213,004,000 and reported a significant net cash outflow from operating activities of HK$10,273,000 for the year ended 31st December, 2002.

The Directors have continued to tighten cost controls over operating costs to improve the cash flows, profitability and operations of the Group. In addition, a substantial shareholder has confirmed his intention to continue to support financially the operations of the Company and to meet all third party obligations. The directors believe that the Group will have sufficient working capital for its future operational requirements. Accordingly, the financial statements have been prepared on a going concern basis. Currently, the Group’s operations are funded by its internal resources. The continuation of the Group’s business depends upon the ability of the Group to attain profitable and positive cash flow operations and ongoing financial support from the shareholders to meet its future working capital and financial requirements.

Should the Group be unable to continue in business as a going concern, adjustments would have to be made to the classification of recorded asset amounts, with these assets being written down to their recoverable amounts, and to the amounts and classification of liabilities, to reflect the fact that the Group may be required to realise its assets and extinguish its liabilities other than in the normal course of business, additional liabilities may crystallise and the resulting amounts may differ materially from those stated in the financial statements. The effects of these adjustments have not been reflected in the financial statements.

The financial statements have been prepared under the historical cost convention and in accordance with generally accepted accounting principles in Hong Kong and with accounting standards issued by the Hong Kong Society of Accountants.

The accounting policies used in the preparation of the financial statements are consistent with the previous year except that the Group has adopted the following new or revised Hong Kong Statements of Standard Accounting Practice (“SSAPs”) which became effective for the current financial year.

SSAP 1 (revised) : Presentation of financial statements SSAP 15 (revised) : Cash flow statements SSAP 33 : Discontinuing operations SSAP 34 (revised) : Employee benefits

The changes to accounting policies and the effects are as follows:

SSAP 1 (revised)

A statement of changes in equity is presented in the current year’s financial statements. In the previous year a statement of recognised gains and losses was presented.

SSAP 15 (revised)

This revised statement requires a change of the presentation of the cash flow statement and the related disclosures.

– 98 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

2. PRINCIPAL ACCOUNTING POLICIES (continued)

(a) Basis of preparation (continued)

SSAP 33

This new statement requires the segregate disclosure of major discontinuing operations. As a result the income statements for the current and previous year are segregated into continuing operations and discontinuing operations.

SSAP 34 (revised)

SSAP 34 prescribes the recognition, measurement and disclosure requirements for employee benefits. The adoption of this SSAP has resulted in a provision for the estimated liability for annual leave in the financial statements. No such provision was made in the previous year.

(b) Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries made up to 31st December. Subsidiaries are those entities in which the Company, directly or indirectly, controls more than half of the voting power; has the power to govern the financial and operating policies; to appoint or remove the majority of the members of the Board of Directors; or to cast majority of votes at the meetings of the Board of Directors.

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

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

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

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

In the Company’s balance sheet the investments in subsidiaries are stated at cost less provision for impairment losses, if any. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

(c) Associated companies

An associated company is a company, not being a subsidiary, in which an equity interest is held for longterm and significant influence is exercised in its management.

The Group’s investments in associated companies include the Group’s share of the net assets of the associated companies (plus the premium paid/less any discount on acquisition in so far as it has not already been written off or amortised). The Group’s share of post-acquisition profits or losses of associated companies is included in the consolidated income statement.

In the Company’s balance sheet the investments in associated companies are stated at cost less provision for impairment losses, if any. The results of associated companies are accounted for by the Company on the basis of dividends received and receivable. Unrealised profits and losses resulting from transactions between the Group and its associated companies are eliminated to the extent of the Group’s interest in the associated company, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are recognised in the consolidated income statement.

– 99 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

2. PRINCIPAL ACCOUNTING POLICIES (continued)

(d) Foreign currency translation

Transactions in foreign currencies are translated into Hong Kong dollars at the approximate rates of exchange ruling on the transaction dates. Monetary assets and liabilities in foreign currencies are translated at the rates ruling on the balance sheet date. Profits and losses resulting from this translation policy are included in the consolidated income statement.

The balance sheets of subsidiaries and associated companies expressed in foreign currencies are translated at the rates of exchange ruling at the balance sheet date whilst income statements’ items are translated at average rates. Exchange differences are dealt with as a movement in reserves. Upon the disposal of an overseas subsidiary or associated company, the related cumulative exchange difference is included in the consolidated income statement as part of the gain or loss on disposal.

(e) Intangibles

(i) Goodwill

Goodwill represents the excess of the cost of investments over the fair value of the Group’s share of the net assets of the acquired subsidiaries at the date of acquisition.

In accordance with SSAP 30, goodwill on acquisitions occurring on or after 1st January, 2001 is included in intangible assets and is amortised using the straight line method over its estimated useful life, but not exceeding 20 years.

(ii) Patents and trademarks

Patents and trademarks are stated at purchased cost less accumulated amortisation and impairment losses.

On the adoption of SSAP 29, expenditure on acquired patents and trademarks is capitalised and amortised using the sum of years digit method over their estimated useful lives but not exceeding 20 years. Patents and trademarks are not revalued as there is no active market for these assets.

(iii) Hotel operating licence

Hotel operating licence is stated at purchased cost less accumulated amortisation and impairment losses.

On the adoption of SSAP 29, expenditure on licence is capitalised and amortised using the straight line method over their estimated useful lives, but not exceeding 20 years. The licence is not revalued as there is no active market for the licence.

(iv) Impairment of intangible assets

Where an indication of impairment exists, the carrying amount of any intangible asset is assessed and written down immediately to its recoverable amount.

– 100 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

2. PRINCIPAL ACCOUNTING POLICIES (continued)

(f) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses and are depreciated at rates sufficient to write off their cost over their estimated useful lives on a straight line basis. The principal annual rates are as follows:

Leasehold improvements over unexpired lease term or 5 years, whichever is shorter Furniture, fixtures and equipment 20% to 30% Motor vehicles 20%

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

The gain or loss on disposal of an asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the consolidated income statement.

(g) Construction contracts in progress

When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred.

When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs are recognised over the period of the contract as revenues and expenses respectively. The Group uses the percentage of completion method to determine the appropriate amount of revenue and costs to be recognised in a given period. The state of completion is measured by reference to the proportion that contract costs incurred for work performed to date bear to the estimated total costs for the contract. When it is probable total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

In determining costs incurred up to the year-end, any costs relating to future activity on a contract are excluded and shown as contract work-in-progress. The aggregate of the costs incurred and the profit or loss recognised on each contract is compared against the progress billings up to the year-end. Where costs incurred and recognised profits (less recognised losses) exceed progress billings, the balance is shown as due from customers on construction contracts. Where progress billings exceed costs incurred plus recognised profits (less recognised losses), the balance is shown as due to customers on construction contracts.

(h) Revenue recognition

(i) Contract revenue

Revenue for construction contracts is recognised as set out in note 2(g).

(ii) Provision of system services

Revenue from provision of system services is recognised when services are rendered.

(iii) Hotel operation revenue

Revenue for hotel operation income is recognised when services are rendered.

(iv) Interest income

Interest income is recognised to the extent when the revenue can be measured reliably.

– 101 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

2. PRINCIPAL ACCOUNTING POLICIES (continued)

(i) Impairment of assets

The carrying amounts of assets are reviewed at each balance sheet date to assess whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated and where relevant, an impairment loss is recognised to reduce the asset to its recoverable amount. Such impairment losses are recognised in the consolidated income statement.

(j) Other investments

Other investments are stated at cost less provision for impairment losses, if any. The carrying amounts of the investments are reviewed at each balance sheet date to assess whether the fair values have declined below the carrying amounts. When a decline other than temporary has occurred, the carrying amount of such investment is reduced to its fair value. The amount of the reduction is recognised as an expense in the consolidated income statement.

(k) Clubs membership

Clubs membership are stated at cost less any impairment in value. An assessment of the membership is performed when there is an indication that the asset has been impaired or the impairment losses recognised in prior years no longer exist. Upon disposals of the membership, the difference between net disposal proceeds and the carrying amount is charged or credited to the consolidated income statement.

(l) Accounts receivable

Provision is made against accounts receivable to the extent they are considered to be doubtful. Accounts receivable in the consolidated balance sheet are stated net of such provision.

(m) Cash and cash equivalents

Cash and cash equivalents represent cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term highly liquid investments which are readily convertible into known amounts of cash and subject to an insignificant risk of change in value. For the purpose of cash flow, bank overdrafts which are repayable on demand and form an integral part of an enterprise’s cash management are also included as a component of cash and cash equivalents.

(n) Finance leases

Leases that substantially transfer to the Group all the risks and rewards of ownership of assets are accounted for as finance leases. At inception finance leases are capitalised at the lower of the fair value of the leased assets or the present value of the minimum lease payments.

Lease payments are allocated between the capital and finance charges. The corresponding rental obligations, net of finance charges, are recorded as obligations under finance leases. Finance charges are charged to the consolidated income statement over the lease periods.

(o) Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the leasing company are accounted for as operating leases. Rentals applicable to such operating leases are charged to the consolidated income statement on a straight line basis over the lease term.

(p) Borrowing costs

All borrowing costs are charged to the consolidated income statement in the year in which they are incurred.

– 102 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

2. PRINCIPAL ACCOUNTING POLICIES (continued)

(q) Provisions and contingent liabilities

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

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

(r) Related parties

Two parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.

(s) Event after the balance sheet date

Post-year-end events that provide additional information about the Group’s position at the balance sheet date or those that indicate the going concern assumption is not appropriate are adjusting events and are reflected in the financial statements. Post-year- end events that are not adjusting events are disclosed in the notes when material.

(t) Segment reporting

In accordance with the Group’s internal financial reporting the Group has determined that business segments be presented as the primary reporting format and geographical as the secondary reporting format.

(u) Employee benefits

(i) Obligations for contributions to defined contribution retirement plans, including contributions payable under the Hong Kong Mandatory Provident Fund Schemes Ordinance, are recognised as expenses in the consolidated income statement as incurred.
(ii) Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by employees up to the balance sheet date.
Employee entitlements to sick leave and maternity or paternity leave are not recognised until the time of leave.
(iii) Termination benefits are recognised when, and only when, the Group demonstrably commits itself to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

(v) Taxation

The charge for taxation is based on the results for the year as adjusted for items which are non-assessable or disallowable. Hong Kong profits tax is provided at the rate prevailing for the year based on the assessable profit for the year less allowable losses, if any, brought forward.

Deferred taxation is provided using the liability method on all material timing differences, other than those which are not expected to crystallise in the foreseeable future. A deferred tax asset is not recognised until its realisation is assured beyond reasonable doubt.

– 103 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

3. REVENUE AND TURNOVER

Turnover Construction contracts in Hong Kong Construction contracts in the PRC Sale of television programs Provision of network security services Hotel operation Other revenue Interest income – bank deposits – loans receivable – others Write back of over provided job costs Profit guarantee upon acquisition of a subsidiary Waiver of interest on convertible loan notes Others Total revenue	Group 2002 2001 HK$’000 HK$’000 12,664 29,441 9,368 5,589 – 11,801 1,172 39 1,441 – 24,645 46,870 97 420 – 1,980 21 – 1,566 6,964 8,000 – 1,030 – 4,724 3,277 15,438 12,641 40,083 59,511	Group 2002 2001 HK$’000 HK$’000 12,664 29,441 9,368 5,589 – 11,801 1,172 39 1,441 – 24,645 46,870 97 420 – 1,980 21 – 1,566 6,964 8,000 – 1,030 – 4,724 3,277 15,438 12,641 40,083 59,511
		46,870 420 1,980 – 6,964 – – 3,277
		12,641
		59,511

– 104 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

3. REVENUE AND TURNOVERS (continued)

Primary reporting format – business segments

Construction contracts in Hong Kong Construction contracts in the PRC Sale of television programs and film rights Provision of network security services Hotel operation Money lending Loss on disposal of subsidiaries Impairment loss on investments held for resale Share of results of associated companies Amortisation of premium on acquisition of associated companies Share of results of a joint venture Finance costs Loss from operating activities before taxation Taxation Loss from operating activities after taxation Minority interest Loss attributable to shareholders	Turnover 2002 2001 HK$’000 HK$’000 12,664 29,441 9,368 5,589 – 11,801 1,172 39 1,441 – – – 24,645 46,870	Operating profit/(loss) 2002 2001 HK$’000 HK$’000 (19,329) (24,192) 330 (2,773) – (27,313) (151,910) 2 (16,284) – (42,910) (48,091) (230,103) (102,367) (1,905) (84,147) (30,816) – (486) (11,685) (5,823) – – (310) (4,633) (996) (273,766) (199,505) – (82) (273,766) (199,587) 60,762 (1) (213,004) (199,588)	Operating profit/(loss) 2002 2001 HK$’000 HK$’000 (19,329) (24,192) 330 (2,773) – (27,313) (151,910) 2 (16,284) – (42,910) (48,091) (230,103) (102,367) (1,905) (84,147) (30,816) – (486) (11,685) (5,823) – – (310) (4,633) (996) (273,766) (199,505) – (82) (273,766) (199,587) 60,762 (1) (213,004) (199,588)
			(102,367) (84,147) – (11,685) – (310) (996)
			(199,505) (82)
			(199,587) (1)
			(199,588)

– 105 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

3. REVENUE AND TURNOVERS (continued)

Primary reporting format – business segments (continued)

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Sale of Provision of
television network
Construction programs security Hotel Money
contracts and film rights services operation lending Total
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Segment assets 6,913 8,738 – 30,000 191,645 358,176 18,176 – 78 67,940 216,812 464,854
Investments 1,063 1,763 – – – – – – – – 1,063 1,763
Unallocated assets – – – – – – – – – – 37,342 84,150
Total assets 7,976 10,501 – 30,000 191,645 358,176 18,176 – 78 67,940 255,217 550,767
Segment liabilities 22,249 27,031 – – 1,552 16,602 1,373 – – 33 25,174 43,666
Unallocated liabilities – – – – – – – – – – 80,744 141,066
Total liabilities 22,249 27,031 – – 1,552 16,602 1,373 – – 33 105,918 184,732
Capital expenditure 96 – – – – – – – – – 96 –
Depreciation and
amortisation 59 247 – – 139,670 – 12,126 – – – 151,855 247
Provision for doubtful
debts and loans
receivable 63,165 44,940
----- End of picture text -----

Secondary reporting format – geographical segments

Hong Kong PRC Taiwan Singapore	Turnover 2002 2001 HK$’000 HK$’000 12,664 29,441 11,981 5,628 – 11,801 – – 24,645 46,870	Operating (loss)/profit 2002 2001 HK$’000 HK$’000 (105,416) (199,193) (167,864) (2,771) – 2,459 (486) – (273,766) (199,505)	Total assets 2002 2001 HK$’000 HK$’000 45,066 192,591 210,151 358,176 – – – – 255,217 550,767	Capital expenditure 2002 2001 HK$’000 HK$’000 96 – – – – – – – 96 –	Capital expenditure 2002 2001 HK$’000 HK$’000 96 – – – – – – – 96 –
					–

– 106 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

4. OPERATING LOSS

Operating loss is stated after charging and crediting the following:

Charging:
Amortisation of intangible assets_(note 11)
Hotel operating licence
Patents and trademarks
Film copyright and licences
Goodwill
Amortisation of premium on acquisition of
associated companies(note 14(a))
Auditors’ remuneration
Depreciation:
– owned
– leased
Loss on disposal of property, plant and equipment
Loss on disposal of subsidiaries
Impairment loss on investments held for resale
Impairment loss on clubs membership
Operating leases:
Hire of office equipment
Land and buildings
Retirement benefit costs(note 9)
Staff costs(including directors’ emoluments, see note 10)_
Crediting:
Gain on disposal of property, plant and equipment
Write back of over provided job costs
5.
FINANCE COSTS
Interest on bank loans and overdraft
Interest on convertible loan notes and
redeemable debentures repayable within five years
Interest element of finance leases
Others

Group
2002
2001
HK$’000
HK$’000
12,126
–
139,083
–
–
30,000
517
–
151,726
30,000
5,823
–
500
450
2,248
5,617
–
30
582
–
1,905
84,147
30,816
–
700
–
185
–
3,267
3,200
181
332
10,564
15,907
–
148
1,566
6,964
Group
2002
2001
HK$’000
HK$’000
178
232
4,426
505
–
235
29
24
4,633
996

– 107 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

6. TAXATION

Company and subsidiaries – Hong Kong profits tax – PRC income taxes – Taiwan income tax	Group 2002 2001 HK$’000 HK$’000 – – – 2 – 80 – 82	Group 2002 2001 HK$’000 HK$’000 – – – 2 – 80 – 82
		82

No provision for Hong Kong profits tax is required since the Group has no assessable profit in Hong Kong for the year. No provision for overseas tax is required as the Group has no assessable profit in these places of operation for the year.

7. LOSS ATTRIBUTABLE TO SHAREHOLDERS

The loss attributable to shareholders is dealt with in the income statement of the Company to the extent of HK$182,615,000 (2001: HK$292,963,000).

8. LOSS PER SHARE

The calculation of basic loss per share is based on the Group’s loss attributable to shareholders of HK$213,004,000 (2001: HK$199,588,000) and on the weighted average number of 1,777,431,995 (2001: 894,910,855) ordinary shares in issue during the year.

The diluted loss per share for both years ended 31st December, 2001 and 2002 are not shown as the ordinary shares issuable under outstanding share options and convertible loan notes were anti-dilutive.

9. RETIREMENT BENEFIT COSTS

The Group operates a Mandatory Provident Fund scheme (the “MPF Scheme”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for those employees who are eligible to participate in the MPF Scheme. The MPF Scheme became effective on 1st December, 2000. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the consolidated income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with employees when contributed into the MPF Scheme.

The total cost charged to the consolidated income statement of approximately HK$181,000 (2001: HK$332,000) represents contributions payable to the MPF Scheme by the Group at rates specified in the rules of the MPF Scheme. As at 31st December, 2002, contributions of approximately HK$70,440 (2001: HK$21,000) due in respect of the current reporting period had not been paid over the MPF Scheme.

– 108 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

10. DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS

(a) Directors’ emoluments

Directors’ emoluments, disclosed pursuant to Section 161(1) of the Companies Ordinance and the Listing Rules of The Stock Exchange of Hong Kong Limited, were as follows:

Fees Other emoluments: Basic salaries Retirement benefit costs Other allowances	Group Executive Non-executive directors directors 2002 2001 2002 2001 HK$’000 HK$’000 HK$’000 HK$’000 – – 271 316 5,780 5,503 – – 39 48 – – 346 346 – – 6,165 5,897 271 316	Group Executive Non-executive directors directors 2002 2001 2002 2001 HK$’000 HK$’000 HK$’000 HK$’000 – – 271 316 5,780 5,503 – – 39 48 – – 346 346 – – 6,165 5,897 271 316
		316

During the year, no emoluments were paid to independent non-executive directors of the Company.

The number of directors whose emoluments fell within the following bands is as follows:


	2002	2001
	HK$’000	HK$’000
HK$Nil – HK$1,000,000	12	11
HK$1,000,001 – HK$1,500,000	–	–
HK$1,500,001 – HK$2,000,000	–	–
HK$2,000,001 – HK$2,500,000	1	–
HK$2,500,001 – HK$3,000,000	1	2

There was no arrangement under which a director waived or agreed to waive any emoluments during the year.

Options to acquire shares in the Company were granted to certain directors on 26th April, 2001 as set out in note 20(b) to the financial statements. All the options were lapsed during the year.

– 109 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

10. DIRECTORS’ AND SENIOR MANAGEMENT’S EMOLUMENTS (continued)

(b) Five highest paid individuals

The five individuals whose emoluments were the highest in the Group for the year include four (2001: two) directors whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining one (2001: three) individual during the year are as follows:

Basic salaries Retirement benefit costs Other allowances	Group 2002 2001 HK$’000 HK$’000 580 2,175 12 35 – – 592 2,210	Group 2002 2001 HK$’000 HK$’000 580 2,175 12 35 – – 592 2,210
		2,210

The number of individuals whose emoluments fell within the following bands is as follows:

HK$Nil – HK$1,000,000	Group 2002 2001 HK$’000 HK$’000 1 3

11. INTANGIBLE ASSETS

Group

Cost At 1st January, 2002 Additions At 31st December, 2002 Amortisation Charge for the year and at 31st December, 2002 Net book value At 31st December, 2002 At 31st December, 2001	Goodwill HK$’000 2,385 – 2,385 517 1,868 2,385	Patents and trademarks HK$’000 327,255 – 327,255 139,083 188,172 327,255	Hotel operating licence HK$’000 – 29,103 29,103 12,126 16,977 –	Total HK$’000 329,640 29,103 358,743 151,726 207,017 329,640

– 110 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

12. PROPERTY, PLANT AND EQUIPMENT

Group

Leasehold improvements HK$’000 Cost At 1st January, 2002 6,330 Additions 563 Disposals (957) At 31st December, 2002 5,936 Accumulated depreciation At 1st January, 2002 2,696 Charge for the year 1,865 Write back on disposals (366) At 31st December, 2002 4,195 Net book value At 31st December, 2002 1,741 At 31st December, 2001 3,634	Furniture, fixtures and equipment HK$’000 860 278 – 1,138 544 346 – 890 248 316	Motor vehicles HK$’000 185 – – 185 – 37 – 37 148 185	Total HK$’000 7,375 841 (957)
			7,259
			3,240 2,248 (366)
			5,122
			2,137

			4,135

– 111 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

13. INVESTMENTS

(a) Group – Investments held for resale Unlisted shares, at cost Amount due from investments held for resale _Less:_Impairment loss (b) Company – Investments in subsidiaries Unlisted shares, at cost _Less:_Impairment loss Amounts due from subsidiaries _Less:_Provision Amounts due to subsidiaries	2002 HK$’000 28,672 2,144 (30,816) – 2002 HK$’000 181,325 (132,336) 48,989 410,610 (165,000) 245,160 (68,687) 225,912	2001 HK$’000 28,672 – –
		28,672

		2001 HK$’000 155,537 (50,000)
		105,537
		387,200 –
		387,200
		(70,531)
		422,206

Amounts due from/(to) subsidiaries are unsecured, interest-free and have no fixed repayment terms.

– 112 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

13. INVESTMENTS (continued)

(b) Company – Investments in subsidiaries (continued)

The following is a list of the principal subsidiaries at 31st December, 2002:

	Place of		Equity
	incorporation	Issued and	interest
	and principal	paid up share	attributable	Principal
Company name	operation	capital	to the Group	activities
Prosperity Construction	Hong Kong	HK$5,000,000	100%	Construction
and Decoration Limited*				contractor
Prosperity Construction and	Hong Kong	HK$2	100%	Construction
Decoration (HK) Limited*				contractor
Prosperity Construction	Hong Kong	HK$2	100%	Construction
(Hong Kong) Limited*				contractor
Prosper eVision Finance	Hong Kong	HK$2	100%	Provision of money
Limited*				lending services
Prosper eVision	Hong Kong	HK$2	100%	Provision of
Management Limited*				management
				services
深圳安網達網絡技術	PRC	HK$15,000,000	60%	Provision of
有限公司#,^				system services
Keyway China Limited @,*	British Virgin	US$100	100%	Construction
	Islands/PRC			contractor
Smartop Development	British Virgin	US$1	100%	Hotel operation
Limited*	Islands/PRC			under a licence
				right

Company not audited by RSM Nelson Wheeler. The Group’s result before taxation attributable to this company amounted to loss of HK$486,000 (2001: profit of HK$2,000)
Limited liability companies
^ A contractual joint venture
@ Shares held directly by the Company

The above table sets out the subsidiaries which, in the opinion of the directors, materially affected the amounts of the results for the year or the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

– 113 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

14. INVESTMENTS IN ASSOCIATED COMPANIES

Share of net liabilities Premium on acquisition of associated companies _Less:_Amortisation of premium on acquisition	Group 2002 2001 HK$’000 HK$’000 (1,726) – 27,173 – (5,823) – 19,624 –	Group 2002 2001 HK$’000 HK$’000 (1,726) – 27,173 – (5,823) – 19,624 –
		–

(b) Details of the associated companies at 31st December, 2002 are as follows:

	Place of
	incorporation
	and principal	Class of	Effective	Principal
Company name	operation	shares	holding	activities
Great Win International	British Virgin	Ordinary	35%	Investment holding
Limited Islands
Intwell Technology (S)	Singapore	Ordinary	35%	System integration
Pte Limited				and training
Intwell Professional	Singapore	Ordinary	35%	System integration
Training & Consultancy				and training
Pte Limited

15. CLUBS MEMBERSHIP

At cost _Less:_Impairment loss	Group 2002 2001 HK$’000 HK$’000 1,763 1,763 (700) – 1,063 1,763	Group 2002 2001 HK$’000 HK$’000 1,763 1,763 (700) – 1,063 1,763
		1,763

Note: The Group will dispose of the clubs membership within the next twelve months. It is the directors’ opinion to re-classify the clubs membership as current assets in 2002.

– 114 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

16. CONSTRUCTION CONTRACTS IN PROGRESS

Costs incurred plus attributable profit less foreseeable losses _Less:_Progress billings Amounts due from customers on construction contracts Amounts due to customers on construction contracts	Group 2002 2001 HK$’000 HK$’000 64,929 62,609 (64,590) (65,802) 339 (3,193) 568 – (229) (3,193) 339 (3,193)	Group 2002 2001 HK$’000 HK$’000 64,929 62,609 (64,590) (65,802) 339 (3,193) 568 – (229) (3,193) 339 (3,193)
		(3,193)

		– (3,193)
		(3,193)

At 31st December, 2002, retention held by customers for contract work included in prepayments, deposits and other receivables of the Group amounted to HK$1,437,000 (2001: HK$2,417,000).

At 31st December, 2002, retention held by the Group for contract work included in accruals and other payables amounted to HK$1,725,000 (2001: HK$1,805,000).

17. ACCOUNTS RECEIVABLE

The Group has a policy of allowing its trade customers with credit period normally between 30 to 60 days or terms in accordance with construction contracts. The ageing analysis is as follows:

Less than 3 months 3 months to 6 months 6 months to 1 year Over 1 year _Less:_Provision for doubtful debts	Group 2002 2001 HK$’000 HK$’000 2,169 1,332 – – – 100 4,867 5,485 (4,767) (4,641) 2,269 2,276	Group 2002 2001 HK$’000 HK$’000 2,169 1,332 – – – 100 4,867 5,485 (4,767) (4,641) 2,269 2,276
		2,276

18. LOANS RECEIVABLE

Loans receivable _Less:_Provision on loans receivable	Group 2002 2001 HK$’000 HK$’000 75,584 90,584 (75,584) (32,646) – 57,938	Group 2002 2001 HK$’000 HK$’000 75,584 90,584 (75,584) (32,646) – 57,938
		57,938

– 115 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

19. ACCOUNTS PAYABLE

Less than 3 months 3 months to 6 months 6 months to 1 year Over 1 year 20. SHARE CAPITAL (a) Share capital	Group 2002 2001 HK$’000 HK$’000 1,155 3,998 2,491 811 – 11 10,810 12,617 14,456 17,437	Group 2002 2001 HK$’000 HK$’000 1,155 3,998 2,491 811 – 11 10,810 12,617 14,456 17,437
		17,437

Authorised: At 1st January, 2001 Increase in authorised ordinary share capital At 31st December, 2001 Increase in authorised ordinary share capital At 31st December, 2002 Issued and fully paid: At 1st January, 2001 Issue of shares Exercise of share option At 31st December, 2001 Placement of ordinary shares Shares issued for conversion of convertible loan notes_(note 24(b))_ At 31st December, 2002	Ordinary shares of HK$0.10 each Number Par value of shares HK$’000 800,000,000 80,000 1,200,000,000 120,000 2,000,000,000 200,000 2,000,000,000 200,000 4,000,000,000 400,000 716,005,000 71,600 742,500,000 74,250 40,000,000 4,000 1,498,505,000 149,850 290,000,000 29,000 151,955,830 15,196 1,940,460,830 194,046	Ordinary shares of HK$0.10 each Number Par value of shares HK$’000 800,000,000 80,000 1,200,000,000 120,000 2,000,000,000 200,000 2,000,000,000 200,000 4,000,000,000 400,000 716,005,000 71,600 742,500,000 74,250 40,000,000 4,000 1,498,505,000 149,850 290,000,000 29,000 151,955,830 15,196 1,940,460,830 194,046
		200,000 200,000
		400,000

		71,600 74,250 4,000
		149,850 29,000 15,196
		194,046

By an ordinary resolution passed on 30th January, 2002, the authorised ordinary share capital of the Company was increased from HK$200,000,000 to HK$400,000,000 by the creation of 2,000,000,000 shares of HK$0.10 each.

The following shares were issued by way of placement on 23rd May, 2002. The proceeds from the placing was used for additional general working capital and/or funds for potential acquisitions by the Company.

– 116 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

20. SHARE CAPITAL (continued)

(a) Share capital (continued)

==> picture [371 x 51] intentionally omitted <==

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

Number of At par
Date shares value Premium Total
HK$’000 HK$’000 HK$’000
23rd May, 2002 290,000,000 29,000 870 29,870
----- End of picture text -----

During the year, a total of 151,955,830 ordinary shares of par value of HK$0.10 each of the Company were issued in connection with the conversion of the convertible loan notes issued as consideration of acquisition of certain subsidiaries (see note 24(b)).

(b) Share option scheme

On 11th June, 1997, the Company in general meeting adopted a share option scheme under which the directors may, at their discretion and at any time during the ten years from the date of adoption, invite any full-time employee or executive director of the Group to take up options to subscribe for shares of the Company. The subscription price may not be less than the greater of 80% of the average closing price of the Company’s shares as quoted on The Stock Exchange of Hong Kong Limited (“Stock Exchange”) for the five trading days immediately preceding the date of offer of the option or the nominal value of the Company’s shares. The maximum number of shares in respect of which options may be granted may not exceed 10% of the issued share capital of the Company excluding any shares issued on the exercise of option from time to time. The scheme became effective upon the listing of the Company’s shares on the Stock Exchange on 26th June, 1997.

Movements in the number of share options granted pursuant to the scheme during the year were as follows:

==> picture [371 x 70] intentionally omitted <==

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

Number of options
Outstanding Granted Exercised Outstanding at
Exercise price Exercise at 1st January during the Lapsed during during the 31st December
per share period 2002 year the year year 2002
HK$0.16 13th July, 1999 to
16th May, 2002 10,000,000 – (10,000,000) – –
----- End of picture text -----

– 117 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

21. RESERVES

(a) Group

1st January, 2001 Realisation of exchange reserve on disposal of subsidiaries Premium arising on issue of shares, net of issuing expenses Exchange differences arising on consolidation Loss for the year At 31st December, 2001 Premium arising on issue of shares, net of issuing expenses Premium arising on conversion of convertible loan notes_(note 24(b))_ Exchange differences arising on consolidation Loss for the year At 31st December, 2002 Company and subsidiaries Associated companies At 31st December, 2001 Company and subsidiaries Associated companies At 31st December, 2002	Share premium HK$’000 436,523 – 9,565 – – 446,088 120 12,804 – – 459,012 446,088 – 446,088 459,012 – 459,012	Contributed surplus HK$’000 22,130 – – – – 22,130 – – – – 22,130 22,130 – 22,130 22,130 – 22,130	Exchange reserve HK$’000 (1,085) 1,085 – 659 – 659 – – (90) – 569 659 – 659 569 – 569	Accumulated losses HK$’000 (188,693) – – – (199,588) (388,281) – – – (213,004) (601,285) (388,281) – (388,281) (600,799) (486) (601,285)	Total HK$’000 268,875 1,085 9,565 659 (199,588)
					80,596 120 12,804 (90) (213,004)
					(119,574)

					80,596 –
					80,596

					(119,088) (486)
					(119,574)

The contributed surplus of the Group represents the difference between the nominal value of the shares of the subsidiaries acquired pursuant to the Group’s reorganisation scheme completed on 11th June, 1997 over the nominal value of the Company’s shares issued in exchange.

– 118 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

21. RESERVES (continued)

(b) Company

At 1st January, 2001 Premium arising on issue of shares, net of issuing expenses Impairment loss on investments Loss for the year At 31st December, 2001 Premium arising on issue of shares, net of issuing expenses Premium arising on conversion of convertible loan notes_(note 24(b))_ Impairment loss on investments Loss for the year At 31st December, 2002	Share premium HK$’000 436,523 9,565 – – 446,088 120 12,804 – – 459,012	Contributed surplus HK$’000 127,536 – (50,000) – 77,536 – – (77,536) – –	Accumulated losses HK$’000 (16,320) – – (292,963) (309,283) – – – (182,615) (491,898)	Total HK$’000 547,739 9,565 (50,000) (292,963) 214,341 120 12,804 (77,536) (182,615) (32,886)

The contributed surplus of the Company represents the difference between the nominal value of the Company’s shares issued in exchange for the issued share capital of the subsidiaries and the net asset value of the subsidiaries acquired pursuant to the Group’s reorganisation scheme completed on 11th June, 1997. Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus is distributable to shareholders under certain circumstances.

22. BANK AND OTHER BORROWINGS

Secured: Bank loans repayable – within one year	Group 2002 2001 HK$’000 HK$’000 – 15,759

23. SHAREHOLDERS’ LOAN

The shareholders’ loan is unsecured, interest free and will not be repayable within the next twelve months.

– 119 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

24. CONVERTIBLE LOAN NOTES

(a) Redeemable debentures

On 27th November, 2001, the Company issued redeemable debentures in the aggregate amount of HK$201,800,000 as consideration of acquisition of certain subsidiaries. These debentures bear interest at 6% per annum with maturity date three years from the date of issuance. If the debentures are redeemed in whole or in part within one year from the date of issuance, no interest will be payable on the part that are so redeemed.

During the year, a total of HK$68,000,000 (2001: HK$81,000,000) debentures were redeemed. The aggregate amount of the debentures outstanding as at 31st December, 2002 was HK$52,800,000 (2001: HK$120,800,000).

(b) Convertible loan notes

On 10th December, 1999, the Company issued convertible loan notes in the aggregate amount of HK$181,897,000 as consideration of acquisition of certain subsidiaries. These convertible loan notes bear interest at 5% per annum and are repayable in one lump sum after three years from the date of issuance or convertible into shares of the Company at the conversion price of HK$1 at any time after the date of issuance. If the convertible loan notes are redeemed or converted in whole or in part within one year from the date of issuance, no interest will be payable on the part that are so redeemed or converted. During the year, a total of HK$10,000,000 (2001: HK$Nil) were converted.

On 26th March, 2002, the Company issued convertible loan notes in the aggregate amount of HK$35,000,000 as consideration of acquisition of a subsidiary. These convertible loan notes bear interest at 3% per annum with maturity date three years from the date of issuance and are repayable after three years from the date of issuance or convertible into shares of the Company at the conversion price of HK$0.1268 at any time after the date of issuance. During the year, a total of HK$18,000,000 (2001: HK$Nil) were converted.

During the year ended 31st December, 2002, a total of HK$28,000,000 convertible loan notes were converted which resulted in an increase in share capital of HK$15,196,000 and share premium of HK$12,804,000 respectively. The aggregate amount of the convertible loan notes outstanding as at 31st December, 2002 was HK$17,000,000 (2001: HK$10,000,000).

25. DEFERRED TAXATION

The major components of the potential deferred taxation assets unprovided are as follows:

Tax effect of timing differences on: Excess of depreciation charges over depreciation allowances Tax losses carried forward	Group 2002 2001 HK$’000 HK$’000 (51) (110) 31,736 30,924 31,685 30,814	Group 2002 2001 HK$’000 HK$’000 (51) (110) 31,736 30,924 31,685 30,814
		30,814

As at 31st December, 2002, there was no significant unprovided deferred taxation.

– 120 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

26. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a) Reconciliation of loss from operating activities before taxation to net cash outflow from operating activities:

Loss from operating activities before taxation Adjustments for: Share of results of associated companies Share of result of a joint venture Provision for doubtful debts Interest income (excluding interest income on loans receivable) Finance costs Impairment loss on investments held for resale Impairment loss on clubs membership Depreciation of property, plant and equipment Amortisation of intangible assets Amortisation of premium on acquisition of associated companies Loss/(gain) on disposal of property, plant and equipment Loss on disposal of subsidiaries Loss on assignment of loans receivable Provision on loans receivable Profit guarantee upon acquisition of a subsidiary Operating loss before working capital changes (Increase)/decrease in gross amount due from customers on construction contracts Decrease in loans receivable (Increase)/decrease in accounts receivable Decrease in prepayments, deposits and other receivables (Decrease)/increase in amount due to a related party Decrease in accounts payable (Decrease)/increase in gross amount due to customers on construction contracts Increase in accruals and other payables Decrease in amount due to intermediate holding company Decrease in amount due to immediate holding company Net cash outflow generated from operation Net interest paid Hong Kong profits tax paid Net cash outflow from operating activities	2002 HK$’000 (273,766) 486 – 20,227 (118) 4,633 30,816 700 2,248 151,726 5,823 582 1,905 – 42,938 (8,000) (19,800) (568) 15,000 (2,970) 5,429 (1,233) (2,981) (2,964) 4,348 – – (5,739) (4,515) (19) (10,273)	2001 HK$’000 (199,505) 11,685 310 – (420) 996 – – 5,647 30,000 – (148) 84,147 5,287 49,742 –
		(12,259) 188 – 8,864 10,173 1,233 (14,844) 983 2,511 (3,921) (4,001)
		(11,073) (576) (32)
		(11,681)

– 121 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

26. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued)

(b) Analysis of changes in financing during the year:

Share capital and share premium HK$’000 Beginning of year 595,938 Proceeds from issue of share capital 29,120 Conversion on loan notes for non-cash consideration 28,000 Convertible loan notes issued for non-cash consideration – Redemption on debentures for non-cash consideration – Redemption on debentures and promissory notes – Promissory notes issued for acquisition of a subsidiary – Net repayment of banks loans and other loans for non-cash consideration – Payment of finance lease liabilities – Acquisition of subsidiaries – Disposal and deconsolidated of subsidiaries – End of year 653,058	Convertible loan notes, debenture and promissory notes HK$’000 130,800 – (28,000) 35,000 (41,000) (47,000) 20,000 – – – – 69,800	2002 Bank loans and other loans HK$’000 15,759 – – – – – – (15,759) – – – –	Total HK$’000 742,497 29,120 – 35,000 (41,000) (47,000) 20,000 (15,759) – – – 722,858	2001 Total HK$’000 534,761 87,815 – 201,800 (46,000) (35,000) – (2,349) (126) 15,759 (14,163)
				742,497

– 122 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

26. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued)

(c) Acquisition of a subsidiary:

Net assets acquired Intangible assets Prepayments Satisfied by: Cash Promissory notes	2002 HK$’000 29,103 2,000
	31,103

	2002 HK$’000 11,103 20,000
	31,103

27. LEASE COMMITMENTS

As at 31st December, 2002, the Group had the following operating lease commitments:

Total future minimum lease payments under non-cancellable operating leases in respect of Land and buildings: Within one year In the second to fifth years, inclusive Office equipment: Within one year In the second to fifth years, inclusive	Group 2002 2001 HK$’000 HK$’000 2,138 2,994 1,328 960 3,466 3,954 208 – 276 – 484 – 3,950 3,954	Group 2002 2001 HK$’000 HK$’000 2,138 2,994 1,328 960 3,466 3,954 208 – 276 – 484 – 3,950 3,954
		3,954
		– –
		–
		3,954

– 123 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

28. CONTINGENT LIABILITIES

As at 31st December, 2002, the Group had the following contingent liabilities:

(i) The Group gave letters of indemnity amounting to approximately HK$10,627,000 (2001: HK$24,514,000) to certain insurance companies for their issuance of surety bonds which are inherent in the nature of the Group’s construction business.
(ii) The Group is undergoing certain legal proceedings with its customers or sub-contractors in respect of alleged contractual entitlements. The amount of claim is approximately HK$5,190,000 (2001: HK$8,208,000). In the opinion of the directors, as the outcome cannot be reliably estimated, no provision for contingent losses has been made in the financial statements.
(iii) A former employee of the Group has filed a claim against the Company in respect of its failure to allot and issue to the former employee certain shares pursuant to the 1997 Share Option Scheme of the Company. In the opinion of the directors, the outcome of the claim is uncertain and cannot be reliably estimated. No provision has been made in respect of this claim in the financial statements.
(iv) An ex-chairman of the Company has issued a writ against the Company allegedly suffered loss and damages relating to purported share options exercised in 1999 amounting to HK$18,787,000. The Company has filed a counter-claim against the ex-chairman for HK$140,000,000. In the opinion of the directors, as the outcome cannot be reliably estimated, no provision has been made in the financial statements.
(v) Two subsidiaries of the Company were engaged in nominated subcontract works in relation to the interior fitting out works to hotel and services apartment of Beijing Oriental Plaza.

The Company has issued a counter indemnity in favour of Cosmic Insurance Corporation Limited (“Cosmic”), an independent third party which has issued a surety bond of HK$8,700,000 (refer to note 28(i)) in respect of the nominated subcontract works in favour of Beijing Oriental Plaza Co., Ltd. (“BOP”), the developer.

On and around July, 2001, a subsidiary of the Company filed a writ in People’s Court in Beijing against BOP for unpaid contract sums of RMB16,130,000 and HK$1,500,000 respectively. BOP filed a counterclaim of HK$29,000,000 and RMB16,000,000 respectively.

On 14th November, 2002, BOP and the main contractor issued a writ of summons in the High Court of Hong Kong respectively against Cosmic in the sum of HK$8,700,000 and against the two subsidiaries in the sums of HK$28,800,000 and RMB13,900,000 in respect of breaches of the nominated subcontract works.

The directors have been advised that the Group has a strong case against the claims from BOP. The lawyers are seeking a stay of proceedings in Hong Kong on the grounds that there are similar proceedings already under way in Beijing. The directors considered the maximum negative impact to the Company, in the unlikely event that the two subsidiaries lose the claim, will be around HK$8,700,000, being the counter indemnity provided in favour of Cosmic. In the opinion of the directors, the outcome cannot be reliably estimated and no provision for contingent losses has been made in the financial statements.

29. RELATED PARTY TRANSACTIONS

(a) The amounts with related parties were unsecured, interest-free and have no fixed repayment terms.
(b) During the year, the Group paid legal and professional fees amounting to approximately HK$1,183,913 (2001: HK$4,100,000) to a legal consultant who is also an ex-managing director of the Company for legal consultancy services rendered to the Group.

– 124 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Financial Statements (continued)

30. DISCONTINUED OPERATIONS

The Company entered into sale and purchase agreements with independent third parties in 2001 to dispose of the Group’ s 100% interest in Reach Video Production Co., Ltd., 100% interest in Starway Management Limited and its subsidiaries and joint venture and 100% interest in Brilliant Shine Development Limited and its subsidiaries and associated companies. The disposals were completed last year and the aggregate loss of HK$84,147,000 were recognised in 2001.

31. POST BALANCE SHEET EVENT

(a) On 14th February, 2003, pursuant to a Share Purchase Agreement, the Group will acquire 100% equity interest of Starwood Investment Limited (“Starwood”) from an independent third party. The acquisition will be satisfied by a consideration of HK$14 million payable in cash of HK$1.4 million and the remaining balance of HK$12.6 million by the issue of a redeemable promissory note to be redeemed at various date after completion of the Share Purchase Agreement with the first and latest redeemable dates being nine months and eighteen months respectively after completion. As announced on 14th April, 2003, pursuant to a supplemental agreement, the completion date of the Agreement has been extended to a date on or before 15th May, 2003.
(b) On 13th March, 2003, pursuant to a Heads of Agreement entered between the Group and Mr. TAM Jin Rong, a substantial shareholder and executive director of the Company, the Group is interested to acquire a 40% interest in Dongguan Zhonghao Mart Co. Ltd. (“Zhonghao”) for an aggregate consideration of HK$26.8 million which will be satisfied by the issue of 268 million new shares of the Company at HK$0.10 each. Zhonghao will hold a 100% interest in four supermarkets in Dongguan, Guangdong Province, the PRC and a 50% interest in a supermarket in Shunde, Foshan, Guangdong Province, the PRC.

32. APPROVAL OF DE-MINIMIS CONCESSION AND MODIFIED CALCULATION CONCESSION

On 4th October, 2002, the Stock Exchange approved the Company’s application for the right to apply (A) the Deminimis Concession; and (B) the Modified Calculation Concession for purposes of, amongst others, determining the “assets test” and the “consideration test” under Rules 14.06, 14.09, 14.12 and 14.20 and the net assets under Rules 14.24(5), 14.25(1) and 14.25(2)(b)(i) of the Listing Rules (as described in the Stock Exchange’s announcements dated 3rd May, 2001, 26th August, 2001 and 9th October, 2001).

The Stock Exchange’s approval for use of the De-minimis Concession and the Modified Calculation Concession will remain in effect from 4th October, 2002 until the publication or the due date of publication of the Company’s next annual report, whichever is earlier.

33. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform with current year’s presentation.

34. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved by the board of directors on 28th April, 2003.”

– 125 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

5. INTERIM REPORT FOR THE SIX MONTHS ENDED 30TH JUNE, 2003

Set out below are the unaudited consolidated financial statements of the Group for the six months ended 30th June, 2003 together with the comparative figures for the corresponding period in the last financial year extracted from the interim report of the Group for the six months ended 30th June, 2003:

“Condensed Consolidated Income Statement

			Six months ended	Six months ended
			30th	June,
			2003	2002
			(Unaudited)	(Unaudited)
		Note	HK$’000	HK$’000
Turnover		2	12,602	11,336
Other revenue			23	3,736
Construction contract	costs		(10,731)	(10,202)
Hotel operation costs			(2,705)	–
Cost for provision of	network security		(498)	–
System integration and training fees			–	(101)
Production overheads			–	(802)
Depreciation			(813)	(1,191)
Provision for doubtful debts			(6,366)	(926)
Amortisation of intangible assets			(56,602)	(21,309)
Staff costs			(3,035)	(5,920)
Professional fee			(3,517)	(508)
Consultancy fee			(2,881)	(1,118)
Other operating expenses			(10,851)	(6,658)
Operating loss from operating activities			(85,374)	(33,663)
Share of profits less losses of associated companies			2	–
Amortisation of premium on
acquisition of associated companies			(3,883)	–
Finance costs		3	(2,693)	(2,733)
Loss from operating activities before taxation			(91,948)	(36,396)
Taxation		4	–	–
Loss from operating activities after taxation			(91,948)	(36,396)
Minority interests			19,748	340
Loss attributable to shareholders			(72,200)	(36,056)
Loss per share –	Basic	5	(3.70 cents)	(2.22 cents)

–	Diluted	5	N/A	N/A

– 126 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Condensed Consolidated Balance Sheet

Condensed Consolidated Balance Sheet
		At	At
		30th June,	31st December,
		2003	2002
		(Unaudited)	(Audited)
	Note	HK$’000	HK$’000
ASSETS
Non-current assets
Intangible assets	6	150,415	207,017
Property, plant and equipment		1,201	2,137
Investment in associated companies		15,743	19,624
		167,359	228,778
Current assets
Gross amounts due from customers
on construction contracts		1,301	568
Accounts receivable	7	2,352	2,269
Prepayments, deposits and other receivables		5,058	20,765
Clubs membership		370	1,063
Bank and cash balances		1,117	1,774
		10,198	26,439
Current liabilities
Gross amounts due to customers
on construction contracts		758	229
Accounts payable	8	13,446	14,456
Accruals and other payables		10,759	11,128
Provision for taxation		153	156
		25,116	25,969
Net current (liabilities)/assets		(14,918)	470
Total assets less current liabilities		152,441	229,248

– 127 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Condensed Consolidated Balance Sheet (continued)

At 30th June, 31st 2003 (Unaudited) Note HK$’000 Non-current liabilities Redeemable debentures 10(i) 52,000 Convertible loan notes 10(ii) 17,000 Shareholders’ loan 7,850 Other non-current liabilities 7,453 84,303 Minority interests 55,079 NET ASSETS 13,059 CAPITAL AND RESERVES Share capital 9 204,923 Reserves (191,864) SHAREHOLDERS’ FUNDS 13,059	At December, 2002 (Audited) HK$’000 52,800 17,000 794 9,355 79,949 74,827 74,472 194,046 (119,574) 74,472

– 128 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30th June, 2003

Share capital (Unaudited) HK$’000 Balance at 1st January, 2002 149,850 Exchange differences arising on consolidation – Shares issued for conversion of convertible loan notes 14,196 Issue of shares 29,000 Premium arising on issue of shares, net of issuing expenses – Loss for the period – At 30th June, 2002 193,046 Balance at 1st January, 2003 194,046 Exchange differences arising on consolidation – Issue of shares 10,877 Loss for the period – Balance at 30th June, 2003 204,923	Reserves Share Contributed Exchange Accumulated premium surplus reserve losses Total (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 446,088 22,130 659 (388,281) 230,446 – – (200) – (200) – – – – 14,196 – – – – 29,000 3,924 – – – 3,924 – – – (36,056) (36,056) 450,012 22,130 459 (424,337) 241,310 459,012 22,130 569 (601,285) 74,472 – – (90) – (90) – – – – 10,877 – – – (72,200) (72,200) 459,012 22,130 479 (673,485) 13,059	Reserves Share Contributed Exchange Accumulated premium surplus reserve losses Total (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 446,088 22,130 659 (388,281) 230,446 – – (200) – (200) – – – – 14,196 – – – – 29,000 3,924 – – – 3,924 – – – (36,056) (36,056) 450,012 22,130 459 (424,337) 241,310 459,012 22,130 569 (601,285) 74,472 – – (90) – (90) – – – – 10,877 – – – (72,200) (72,200) 459,012 22,130 479 (673,485) 13,059
		241,310

		74,472 (90) 10,877 (72,200)
		13,059

– 129 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Condensed Consolidated Cash Flow Statement

For the six months ended 30th June, 2003

		2003	2002
		(Unaudited)	(Unaudited)
	Note	HK$’000	HK$’000
CASH FLOWS FROM
OPERATING ACTIVITIES	11	(8,110)	30,571
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from disposal of a club membership		632	–
Expenses on disposal of a club membership		(132)	–
Net cash outflow from acquisitions of subsidiaries		–	(33,110)
Purchase of property, plant and equipment		(13)	(681)
Proceeds from disposal of property,
plant and equipment		–	9
Net cash generated from/(used in) investing activities		487	(33,782)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital		–	29,120
Redemption of debentures and promissory notes		–	(60,000)
Advances from shareholders		7,056	–
Net cash generated from/(used in) financing activities		7,056	(30,880)
NET DECREASE IN CASH AND
CASH EQUIVALENTS		(567)	(34,091)
CASH AND CASH EQUIVALENTS AT 1ST JANUARY		1,774	45,140
Effect of change in exchange rates		(90)	(127)
CASH AND CASH EQUIVALENTS AT 30TH JUNE		1,117	10,922
ANALYSIS OF THE BALANCES OF
CASH AND CASH EQUIVALENTS
Cash and bank balances		1,117	11,123
Bank overdrafts – secured		–	(201)
		1,117	10,922

– 130 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Condensed Financial Statements

For the six months ended 30th June, 2003

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES

The unaudited condensed interim financial statements are prepared in accordance with Hong Kong Statement of Standard Accounting Practice (“SSAP”) 25 “Interim Financial Reporting” issued by the Hong Kong Society of Accountants. The accounting policies and basis of preparation used in the preparation of the condensed interim financial statements are the same as those used in the annual financial statements for the year ended 31st December, 2002 except that the Group has adopted the revised SSAP 12 “Income Tax” in respect of income tax which became effective for accounting periods commencing on or after 1st January, 2003.

This standard prescribes the basis for accounting and disclosure requirements for both current and deferred tax. The revised SSAP requires deferred tax to be provided in full, using the liability method, on temporary differences, arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The adoption of this revised standard has no significant financial impact to the financial statements for the period ended 30th June, 2003.

2. SEGMENTAL INFORMATION

The Group has determined that business segments be presented as the primary reporting format and geographical segments as the secondary reporting format.

Primary reporting format – business segments

Construction contracts in Hong Kong Construction contracts in the Peoples’ Republic of China (the “PRC”) System integration and training fees Provision of network security services Hotel operation Money lending	Unaudited For the six months ended 30th June, Turnover Operating (loss)/profit 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 2,319 9,689 (25,326) (9,868) 7,416 – 1,407 – – 476 – (4,335) 755 1,171 (51,510) (19,471) 2,112 – (9,936) – – – (9) 11 12,602 11,336 (85,374) (33,663)	Unaudited For the six months ended 30th June, Turnover Operating (loss)/profit 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 2,319 9,689 (25,326) (9,868) 7,416 – 1,407 – – 476 – (4,335) 755 1,171 (51,510) (19,471) 2,112 – (9,936) – – – (9) 11 12,602 11,336 (85,374) (33,663)
		(33,663)

Secondary reporting format – geographical segments

Hong Kong The PRC Singapore	Unaudited For the six months ended 30th June, Turnover Operating (loss)/profit 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 2,319 9,689 (25,335) (9,857) 10,283 1,171 (60,039) (19,471) – 476 – (4,335) 12,602 11,336 (85,374) (33,663)	Unaudited For the six months ended 30th June, Turnover Operating (loss)/profit 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 2,319 9,689 (25,335) (9,857) 10,283 1,171 (60,039) (19,471) – 476 – (4,335) 12,602 11,336 (85,374) (33,663)
		(33,663)

– 131 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Condensed Financial Statements (Continued)

3. FINANCE COSTS

Interest on bank loans and overdraft Interest on convertible loan notes and redeemable debentures repayable within five years Others	Unaudited For the six months ended 30th June, 2003 2002 HK$’000 HK$’000 – 178 1,835 2,552 858 3 2,693 2,733	Unaudited For the six months ended 30th June, 2003 2002 HK$’000 HK$’000 – 178 1,835 2,552 858 3 2,693 2,733
		2,733

4. TAXATION

No provision for Hong Kong profits tax is required since the Group has no assessable profit in Hong Kong for the period. No provision for overseas tax is required as the Group has no assessable profit in these places of operation for the period.

No recognition of the potential deferred tax assets relating to tax losses of certain subsidiaries has been made as the recoverability of the potential deferred tax assets is uncertain.

5. LOSS PER SHARE

The calculation of basic loss per share is based on the Group’s loss attributable to shareholders of HK$72,200,000 (2002: HK$36,056,000) and on the weighted average number of 1,953,681,587 (2002: 1,621,274,793) ordinary shares in issue during the period.

The diluted loss per share for period ended 30th June, 2003 and 2002 are not shown as the ordinary shares issuable under outstanding share options and convertible loan notes were anti-dilutive.

6. INTANGIBLE ASSETS

Hotel Patents and operating Goodwill trademarks licence (Unaudited) (Unaudited) (Unaudited) HK$’000 HK$’000 HK$’000 At 31st December, 2002 1,868 188,172 16,977 Less: Amortisation (238) (49,088) (7,276) At 30th June, 2003 1,630 139,084 9,701	Total (Unaudited) HK$’000 207,017 (56,602)
	150,415

7. ACCOUNTS RECEIVABLE

The Group has a policy of allowing its trade customers with credit period normally between 30 to 60 days or terms in accordance with construction contracts. The ageing analysis is as follows:

	At 30th June, At 31st December,	At 30th June, At 31st December,
	2003	2002
	(Unaudited)	(Audited)
	HK$’000	HK$’000
Less than 3 months	1,776	2,169
3 months to 6 months	–	–
6 months to 1 year	576	–
Over 1 year	4,767	4,867
Less: Provision for doubtful debt	(4,767)	(4,767)
	2,352	2,269

– 132 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Condensed Financial Statements (Continued)

8. ACCOUNTS PAYABLE

ACCOUNTS PAYABLE
	At 30th June, At 31st December,
	2003	2002
	(Unaudited)	(Audited)
	HK$’000	HK$’000
Less than 3 months	1,090	1,155
3 months to 6 months	325	2,491
6 months to 1 year	402	–
Over 1 year	11,629	10,810
	13,446	14,456

9. SHARE CAPITAL

SHARE CAPITAL
	Unaudited
	Ordinary shares of HK$0.10 each
	Number of shares	Par value
		HK$’000
Authorised:
At 31st December, 2002 and 30th June, 2003	4,000,000,000	400,000

Issued and fully paid:
At 1st January, 2002	1,498,504,554	149,850
Placement of ordinary shares	290,000,000	29,000
Shares issued for conversion of
convertible loan notes	151,955,830	15,196
At 31st December, 2002	1,940,460,384	194,046
Share issued for Debt Equity Swap	108,774,440	10,877
At 30th June, 2003	2,049,234,824	204,923

In May 2003, the Group has entered into settlement agreements (“Debt Equity Swap”) with 16 creditors whereby these creditors agreed to accept 108,774,440 new shares of the Company at HK$0.10 each as full and final settlements of the aggregate liabilities due to them amounting to HK$10,877,444.

10. CONVERTIBLE LOAN NOTES

(i) Redeemable debentures

During the period, a total of HK$800,000 debentures was redeemed as part of Debt Equity Swap in May 2003 (2002: HK$68 million). The aggregate amount of the debentures outstanding as at 30th June, 2003 and 31st December, 2002 was HK$52,000,000 and HK$52,800,000 respectively.

(ii) Convertible loan notes

There was no conversion of convertible loan notes during the period. The aggregate amount of the convertible loan notes outstanding as at 30th June, 2003 and 31st December, 2002 was HK$17,000,000.

– 133 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Condensed Financial Statements (Continued)

11. NOTES TO THE CONDENSED CONSOLIDATED CASH FLOW STATEMENT

Reconciliation of loss from operating activities before taxation to net cash (outflow)/inflow from operating activities:

Loss from operating activities before taxation Adjustments for: Amortisation of intangible assets Amortisation of premium on acquisition of associated companies Depreciation of property, plant and equipment Share of results of associated companies Provision for doubtful debts Loss on disposal of property, plant and equipment Loss on disposal of a club membership Interest income from bank deposits Finance costs Operating loss before working capital changes Increase in gross amounts due from customers on construction contracts (Increase)/decrease in accounts receivable Decrease in loans receivable Decrease in prepayments, deposits and other receivables Increase/(decrease) in accounts payable Increase in accruals and other payables Decrease in other non-current liabilities Increase/(decrease) in gross amounts due to customers on construction contracts Decrease in amount due to a related company Net cash (outflow)/inflow generated from operations Net interest paid Hong Kong profits tax paid Net cash (outflow)/inflow from operating activities	Unaudited For the six months ended 30th June, 2003 2002 HK$’000 HK$’000 (91,948) (36,396 56,602 21,309 3,883 – 813 1,191 (2) – 6,366 926 136 582 193 – (1) (53 2,693 2,733 (21,265) (9,708 (733) (1,909 (83) 353 – 15,000 9,341 36,173 4,306 (5,916 4,392 2,096 (1,902) – 529 (1,655 – (1,164 (5,415) 33,270 (2,692) (2,680 (3) (19 (8,110) 30,571	Unaudited For the six months ended 30th June, 2003 2002 HK$’000 HK$’000 (91,948) (36,396 56,602 21,309 3,883 – 813 1,191 (2) – 6,366 926 136 582 193 – (1) (53 2,693 2,733 (21,265) (9,708 (733) (1,909 (83) 353 – 15,000 9,341 36,173 4,306 (5,916 4,392 2,096 (1,902) – 529 (1,655 – (1,164 (5,415) 33,270 (2,692) (2,680 (3) (19 (8,110) 30,571
		(9,708 (1,909 353 15,000 36,173 (5,916 2,096 – (1,655 (1,164
		33,270 (2,680 (19
		30,571

12. COMMITMENTS

As at 30th June, 2003, the Group had the following operating lease commitments:

	At 30th June, At 31st December,	At 30th June, At 31st December,
	2003	2002
	(Unaudited)	(Audited)
	HK$’000	HK$’000
Total future minimum lease payments under non-cancellable
operating leases in respect of Land and buildings:
Within one year	1,168	2,138
In the second to fifth years, inclusive	852	1,328
	2,020	3,466
Office equipment:
Within one year	208	208
In the second to fifth years, inclusive	173	276
	381	484
	2,401	3,950

The Group had no significant capital commitments as at 30th June, 2003 and 31st December, 2002.

– 134 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Condensed Financial Statements (Continued)

13. CONTINGENT LIABILITIES

As at 30th June, 2003, the Group had the following contingent liabilities:

(i) The Company gave letters of indemnity amounting to approximately HK$9.9 million to certain insurance companies for their issuance of surety bonds, which are inherent in the nature of the Group’s construction business. A summary judgment was entered into against the Company on 9th September, 2003 for providing security to an insurance company for its issuance of a surety bond amounting to approximately HK$8.7 million. The Company intends to appeal against the decision. Counsel is of the opinion that the Company stands a fair chance of success in the appeal.
(ii) The Company provided guarantees to certain developers/main contractors in the PRC in respect of certain construction and renovation contracts entered into by a wholly owned subsidiary of the Company. Subsequent to the period end, claims were received from developers/main contractors in respect of two construction and renovation projects in the PRC amounting to approximately HK$17.3 million. The Company is taking legal advice regarding these claims. As the outcome cannot be reliably estimated, no provision for contingent losses has been made in the financial statements.
(iii) The Group is undergoing a number of legal proceedings with its customers or sub-contractors in respect of alleged contractual entitlements. The amount of claim is approximately HK$11.5 million. As the outcome of the litigation cannot be reliably estimated, no provision for contingent losses has been made in the financial statements.

Two wholly-owned subsidiaries of the Company were involved in litigation in relation to the interior fitting out works to hotel and services apartment of Beijing Oriental Plaza. On 28th May, 2003, the legal actions in Hong Kong were mutually agreed to be stayed and the venue was transferred to the Peoples’ Court in Beijing, the PRC, the judgment of which will be binding on both parties. The litigation in Beijing is still proceeding and hearing was postponed to later this year. The aggregate amount of claims by Beijing Oriental Plaza Co. Ltd and Beijing Construction Holdings Company Limited against the two subsidiaries of the Company was approximately HK$42.7 million. As the outcome of the litigation cannot be reliably estimated, no provision for contingent losses has been made in the financial statements.

A wholly owned subsidiary of the Company was involved in litigation in relation to alleged legal services provided by China Top Consultants Limited. Judgment was entered against the Company on 4th August, 2003 in the sum of approximately HK$3.2 million plus interest of approximately HK$0.65 million. Provisions of these amounts have been made in the financial statements.

(iv) On 15th August, 2002, Mr. Alfred Siu (“Mr. Siu”), an ex-director of the Company issued a writ against the Company allegedly suffered loss and damages relating to purported share options exercised in 1999 amounting to approximately HK$18.8 million. On 4th July, 2003, a summary judgment was awarded against the Company in the amount of HK$18.8 million plus interest and costs. On 8th August, 2003, the Company received a statutory demand from Mr. Siu demanding immediate payment of HK$25.8 million, being the amount awarded by the court (including interest calculated up to 8th August, 2003). In the event that the Company is required to pay such amount, the financial resources of the Group will be significantly constrained. Based on the legal advice received, the Company stands a fairly good chance in an appeal and will vigorously appeal against the decision which will be heard on 6th October, 2003. Therefore, no provision has been made in the financial statements.
(v) On 16th August and 6th September, 2003, two writs were received from a landlord of a wholly owned subsidiary of the Company in respect of unpaid rent amounting to approximately HK$0.47 million of which the Company is a guarantor of the subsidiary’s performance. This amount has been provided in the financial statements.

A writ was received on 8th August, 2003 from a supplier of services against the Company amounting to approximately HK$0.43 million. This amount has been provided in the financial statements.

A number of other writs were also received from suppliers of goods and services against a wholly owned subsidiary of the Company amounting to approximately HK$0.89 million. This amount has been provided in the financial statements.

– 135 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Notes to the Condensed Financial Statements (Continued)

14. PROPOSED CAPITAL REORGANISATION, CREDITORS’ SCHEME OF ARRANGEMENT, OPEN OFFER AND APPLICATION FOR WHITEWASH WAIVER

In response to summary judgment awarded against the Company and the statutory demand by Mr. Siu, the Company announced on 2nd September, 2003 that the board of directors proposed that the Company:

(i) implement a capital reorganisation of the Company (“Capital Reorganisation”) which will involve (a) a reduction in the nominal value of each issued share from HK$0.10 to HK$0.0005; (b) a subdivision of each authorised and unissued share into 200 adjusted shares of HK$0.0005 each; (c) cancellation of the entire amount standing to the credit of the share premium account of the Company; and (d) consolidation of every 20 adjusted shares of HK$0.0005 each into 1 consolidated share of HK$0.01 each (“Consolidated Share”);
(ii) implement a scheme of arrangement under section 99 of the Companies Act 1981 of Bermuda and under section 166 of the Companies Ordinance (Chapter 32 of the laws of Hong Kong) between the Company and the scheme creditors (the “Creditors’ Scheme”) which will result in the indebtedness and liabilities owing to scheme creditors (“Scheme Indebtedness”) as at the date for determination of entitlements of the scheme creditors (the “Scheme Record Date”) being discharged in full and final settlement by way of a combination of the cash payment and the issuance of Consolidated Shares (“Creditors Shares”) to the scheme creditors. Pursuant to the Creditors’ Scheme, for every HK$1 of valid claim, the Scheme Creditors will receive (a) cash payment of not more than HK$0.1; and (b) not more than 1.5 Creditors Shares (the exact amount of cash payment and number of Creditors Shares will depend on the amount of Scheme Indebtedness as at the Scheme Record Date) which will be issued credited as fully paid at HK$0.1 per Creditors Share; and
(iii) raise a minimum of approximately HK$23.1 million (before expenses) by way of the issue of not less than 512,308,705 new Consolidated Shares (“Offer Shares”) on the basis of an assured allotment of five Offer Shares for the equivalent of every Consolidated Share held by shareholders other than overseas shareholders (the “Qualifying Shareholders”) at the subscription price of HK$0.045 per Offer Share (the “Open Offer”). Qualifying Shareholders will not be allotted any Offer Shares in excess of their assured allotments.

The implementation of the Capital Reorganisation, the Creditors’ Scheme and the Open Offer is inter-conditional to each other.

Euro Concord Assets Limited (“Euro Concord”), which is wholly and beneficially owned by Mr. Tam, an executive director of the Company, currently holds 215,000,000 shares (equivalent to 10,750,000 Consolidated Shares), representing approximately 10.49% of the existing issued share capital of the Company. Euro Concord has irrevocably undertaken to the Company to apply or procure applications for its full assured allotment under the Open Offer, amounting to 53,750,000 Offer Shares.

Main Faith Limited (“Main Faith”), which is also wholly and beneficially owned by Mr. Tam, has agreed to underwrite the Open Offer (the “Underwriter”). In the event that Main Faith is required to subscribe in full the underwritten shares pursuant to the Underwriting Agreement, the shareholding of Mr. Tam would increase from approximately 10.49% to approximately 67.4% of the issued share capital of the Company as enlarged by the Creditors Shares and the Offer Shares. An application will be made by Mr. Tam to the Executive Director of the Corporate Finance Division of the Securities and Futures Commission (“Executive”) for a waiver from the obligation to make a mandatory offer under Rule 26 of The Hong Kong Code on Takeovers and Mergers (the “Code”) pursuant to Note 1 to the Notes on Dispensations from Rule 26 of the Code (“Whitewash waiver”). The Open Offer is subject to the satisfaction of certain conditions, in particular, it is subject to, among other things, the Capital Reorganisation and the Creditors’ Scheme becoming unconditional, the Whitewash Waiver being granted by the Executive and the Underwriter not terminating the Underwriting Agreement in accordance with its terms.”

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

6. PRO FORMA STATEMENT OF UNAUDITED ADJUSTED CONSOLIDATED NET TANGIBLE ASSET VALUE

Set out below is a pro forma statement of the unaudited adjusted consolidated net tangible asset value of the Group based on the audited consolidated net tangible assets of the Group as at 31st December, 2002 and adjusted as follows:

Audited consolidated net asset value
as at 31st December, 2002
Add: Issue of Shares during the period
Less: Exchange differences arising on consolidation
for the six months ended 30th June, 2003_(Note 1)
Less: Unaudited net loss for the period ended 30th June, 2003
Unaudited consolidated net asset value as at 30th June, 2003
Less: Intangible assets as at 30th June, 2003
Add: Minority interest in intangible assets
Unaudited consolidated deficiency in net tangible assets
as at 30th June, 2003
Add: the net proceeds from the Open Offer
Add: Increase in capital by the issuance of Creditors Shares
Add: Scheme Indebtedness waived pursuant to the Creditors’ Scheme(Note 2)_
Proforma unaudited adjusted consolidated net tangible asset value
upon completion of the Restructuring Proposal
Unaudited consolidated deficiency in net tangible
asset per share (based on 2,049,234,824 shares in
issue as at the Latest Practicable Date) before completion of
the Restructuring Proposal
Unaudited adjusted consolidated deficiency in net tangible asset
per Consolidated share (based on 102,461,741 Consolidated Shares)
immediately upon the Share Consolidation becoming effective
Proforma unaudited adjusted consolidated net tangible asset
value per Adjusted Share (based on 794,770,446
Adjusted Shares which will be in issue) upon
completion of the Restructuring Proposal

HK$ million
74.5
10.9
(0.1)
(72.2)
13.1
(150.4)
55.6
(81.7)
21.0
18.0
55.8
13.1
(HK$0.04)
(HK$0.80)
HK$0.016

Note 1: The exchange differences arising from the preparation of the consolidated financial statements of the Company where the balance sheets of subsidiaries and associated companies were expressed in foreign currencies. Such exchange differences are dealt with as a movement in reserves.

Note 2: Being the Scheme Indebtedness of HK$131.4 million as at 31st August, 2003 and without taking into account the contingent liabilities, after netting off the issue price for the Creditors Shares of HK$18 million, HK$12 million to be paid to the Scheme Creditors in cash and the increase in balance of the Scheme Indebtedness by approximately HK$45.6 million during the period from 1st July, 2003 to 31st August, 2003. The HK$131.4 million includes the HK$25.9 million (including interest calculated up to 31st August, 2003) and HK$17.3 million provision for Mr. Siu’s Claim and the PRC Claims respectively, details of which are set out under the below paragraph headed “Material changes since 31st December 2002” in this appendix.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

7. MATERIAL CHANGES SINCE 31ST DECEMBER, 2002

Save for the following, the Directors are not aware of any material changes in the financial or trading position or prospects of the Group since 31st December, 2002, the date to which the latest audited consolidated financial statements of the Group was made up:

2003 Interim Report

(a) the Company announced on 26th September, 2003 the interim results of the Group for the six months ended 30th June, 2003 (the “2003 Interim Report”), details of which are set out in paragraph 5 headed “Interim report for the six months ended 30th June, 2003” above. As reported in the 2003 Interim Report, the Group recorded a loss of approximately HK$72.2 million for the six months ended 30th June, 2003. The Group had unaudited consolidated net asset value of approximately HK$13.1 million and unaudited consolidated deficiency in net tangible assets of approximately HK$81.7 million as at 30th June, 2003. Total liabilities amounted to approximately HK$109.4 million, which included HK$1.7 million of contingent liabilities. Besides, the Group also had contingent liabilities of approximately HK$107.3 million, for which no provision had been made as at 30th June, 2003. The contingent liabilities arose from a number of litigation and claims, details of which are set out in note 13 to the 2003 Interim Report.

Of the approximately HK$107.3 million contingent liabilities as referred to in the 2003 Interim Report, the Group has subsequent to 30th June, 2003 made provisions of approximately HK$17.3 million for the claims in respect of two PRC projects and of approximately HK$25.9 million for Mr. Siu’s claim (including interest calculated up to 31st August, 2003) as referred to under item (ii) and item (iv) respectively of note 13 to the 2003 Interim Report as a result of development that occurred subsequent to 30th June, 2003.

In respect of the claim from Mr. Siu (“Mr. Siu’s Claim”) as regards the purported suffer of loss and damages relating to purported share options as referred to in note 13 to the 2003 Interim Report, a summary judgement was awarded against the Company in the amount of approximately HK$25.8 million (including interest calculated up to 8th August, 2003) on 4th July, 2003 and the Company lost its appeal against the summary judgement on 6th October, 2003. Consequently, the Company has, subsequent to 30th June, 2003, made a provision of approximately HK$25.9 million (including interest calculated up to 31st August, 2003) in its accounts for Mr. Siu’s Claim.

As regards the two aforesaid PRC projects, related claims (the “PRC Claims”) were received subsequent to 30th June, 2003. Consequently, the Company made a provision of approximately HK$17.3 million in respect of the PRC Claims in its accounts;

Restructuring Proposal

(b) on 1st September, 2003, the Company announced the Restructuring Proposal which involves the capital reorganisation, the Creditors’ Scheme and the Open Offer. The Restructuring Proposal, if materialised, will improve the Group’s net asset base, which is illustrated by the “Pro forma statement of unaudited adjusted consolidated net asset value” as contained in this appendix, and will bring additional working capital of approximately HK$8.9 million to the Group;

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

Winding-up Petition

(c) the Company was on 8th October, 2003 served a winding up petition (“Petition”) filed by Mr. Siu against the Company to the Hong Kong High Court. Mr. Siu has obtained the summary judgement in the amount of approximately HK$25.8 million (including interest calculated up to 8th August, 2003) for the loss and damages allegedly to have been suffered by him from the purported exercise of share options in 1999. Details of the Petition are set out under under the section headed “Litigations and claims” in Appendix IV to the Circular. The Petition is scheduled to be heard at the Hong Kong High Court on 3rd December, 2003;

New development of inactive claim and contingent liability

(d) a former employee of the Group, Mr. Chan, has filed a claim in June 2000 against the Company in respect of its failure to allot and issue to Mr. Chan certain shares pursuant to the Share Option Scheme. The Company received in October 2003 a letter from Mr. Chan whereby Mr. Chan informed that he will amend the claim to seek for HK$9.5 million as compensation for the alleged suffer of loss and damages relating to the purported share options exercised in 1999 and 2000. The Company is seeking legal advice and is considering to dismiss the action. Mr. Chan may prove his debt in accordance within the Creditors’ Scheme and the admissibility of his claim is subject to validation by the scheme administrator/ and adjudicator.

8. INDEBTEDNESS

As at 31st August, 2003, the Group had outstanding borrowings of approximately HK$80 million, comprising amount due to a shareholder, namely Euro Concord, of approximately HK$8 million, redeemable debentures and interest payable of HK$54.3 million and convertible loan notes and interest payable of HK$17.7 million.

As at 31st August, 2003, the Group did not have any mortgages or charges.

As at 31st August, 2003, the Group had the following contingent liabilities:

(i) On 30th April, 2003, Cosmic Insurance Corporation Limited (“Cosmic”) issued a writ against the Company and two of its wholly owned subsidiaries namely Prosperity Construction and Decoration Limited (“PCDL”) and Prosperity Construction and Decoration (HK) Limited (“PCDHK”) (collectively the “Defendants”) in relation to the security for a counter-indemnity issued by the Company in favour of Cosmic in the amount of HK$8,700,000. A summary judgment was awarded against the Defendants on 9th September, 2003. The Defendants have filed a Notice of Appeal on 11th October, 2003 with a view to appeal against the summary judgment.
(ii) On 15th August, 2002, Mr. Siu issued a writ against the Company in respect of the alleged suffer of loss and damages relating to purported share options exercised in 1999 amounting to approximately HK$18.8 million. On 4th July, 2003, a summary judgment was awarded against the Company in the amount of HK$18.8 million plus interest and costs. On 8th

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX II

August, 2003, the Company received a statutory demand from Mr. Siu demanding immediate payment of HK$25.8 million, being the amount awarded by the court (including interest calculated up to 8th August, 2003). The Company appealed against the summary judgment, which the appeal was heard on 6th October, 2003. The Court gave a judgment in favour of Mr. Siu and now the Company is considering appealing that judgment in the Court of Appeal. On 8th October, 2003, a winding up petition was served on behalf of Mr. Siu on the Company which will be heard at the High Court of Hong Kong on 3rd December, 2003. Provision for HK$25.9 million (including interest calculated up to 31st August, 2003) has been made in the accounts of the Company and this amount forms part of the Scheme Indebtedness as at 31st August, 2003.

(iii) The Company gave letters of indemnity amounting to approximately HK$1.2 million to an insurance company for its issuance of surety bonds, which are inherent in the nature of the construction business.

Save as aforesaid and apart from intra-group liabilities, the Group did not have, at the close of business on 31st August, 2003, any outstanding mortgages, charges, debentures, bank loans and overdrafts, debt securities or convertible loan notes or other similar indebtedness, loan capital issued or outstanding or agreed to be issued, finance leases, liabilities under acceptances or acceptance credits or any finance leases commitments, or any guarantees or other material contingent liabilities.

9. WORKING CAPITAL

Subject to the completion of the Restructuring Proposal, the Group will raise net proceeds of approximately HK$21 million, of which approximately HK$8.9 million will be used as working capital of the Group. Taking into account, among others, the approximately HK$8.9 million additional working capital, it is estimated that the Group may need further funding of not more than HK$5 million to finance its working capital requirement. Mr. Tam has undertaken to the Company that subject to completion of the Restructuring Proposal and so long as he together with his associates remain as the single largest shareholder of the Company, he will provide additional funding up to HK$5 million to finance the normal business operation of the Group. Mr. Tam has confirmed that he has no intention to reduce his beneficial shareholding in the Company upon completion of the Restructuring Proposal to the extent that he and his associates as a whole will cease to be the single largest shareholder of the Company.

The Directors are of the opinion that, in the absence of unforeseen circumstances and subject to the completion of the Restructuring Proposal and having taken into account the financial support undertaken to be provided by Mr. Tam, the Group will have sufficient working capital for its present requirements.

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EXPLANATORY STATEMENT

APPENDIX III

This appendix serves as an explanatory statement, as required by the Listing Rules, to provide information to Shareholders with regard to the Repurchase Mandate to be proposed at the SGM.

THE LISTING RULES

The Listing Rules permit companies with a primary listing on the Stock Exchange to repurchase their securities on the Stock Exchange or on another stock exchange on which the securities of the companies may be listed and recognised for this purpose by the SFC and the Stock Exchange subject to certain restrictions, the more important of which are summarised below:

1. Share capital

As at the Latest Practicable Date, the issued share capital of the Company comprised 2,049,234,824 shares of HK$0.10 each. If the Restructuring Proposal is not completed, the Repurchase Mandate if approved by the Shareholders at the SGM, will grant to the Directors the authority to repurchase shares up to 10% of the issued share capital of the Company as at the date of the SGM, which will amount to 204,923,482 Shares based on the issued share capital of the Company as at the Latest Practicable Date. On such basis, the Directors are not aware of any Code implications arising from the full exercise of the Repurchase Mandate. Upon the Share Consolidation becomes effective, the issued share capital of the Company will comprise 102,461,741.2 Consolidated Shares. Subject to the passing of the relevant resolutions approving the Repurchase Mandate and on the basis that no further shares are issued or repurchased prior to the SGM, exercise in full of the Repurchase Mandate would accordingly result in up to 10,246,174 Consolidated Shares being repurchased by the Company. Following completion of the Restructuring Proposal, the enlarged issued share capital of the Company will comprise 794,770,446 Adjusted Shares. Subject to the passing of the relevant resolutions approving the Repurchase Mandate and the implementation of the Restructuring Proposal, and on the basis that no further shares are issued or repurchased prior to the SGM, exercise in full of the Repurchase Mandate could accordingly result in up to 79,477,044 Adjusted Shares being repurchased by the Company during the course of the period prior to the next annual general meeting. Whether the full exercise of the Repurchase Mandate would have any Code implication depends on the level of subscription of the Offer Shares by the Independent Shareholders. The Directors are not aware of such implication in the event that the Underwritten Shares are fully taken up by the Underwriter.

2. Reasons for the repurchases

The Directors believe that it is in the interests of the Company and the Shareholders to have a general authority from Shareholders to enable the Directors to repurchase shares in the market. Such repurchases may, depending on market conditions and funding arrangements at the time, lead to an enhancement of the net asset value per share and will only be made when the Directors believe that such repurchases will benefit the Company and the Shareholders.

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EXPLANATORY STATEMENT

APPENDIX III

3. Funding of repurchases

Repurchases of shares will be funded entirely from funds legally available for the purchase in accordance with the memorandum of association and the Bye-laws and the applicable laws of Bermuda.

There might be an adverse effect on the working capital or gearing position of the Company upon the full exercise of the Repurchase Mandate when compared with the working capital and gearing position disclosed in the annual report of the Company for the year ended 31st December, 2002. However, the Directors would not propose to exercise the Repurchase Mandate to such an extent as would, in the circumstances, have a material adverse effect on the working capital position of the Company or the gearing level which in the opinion of the Directors is from time to time appropriate for the Company.

4. General

None of the Directors nor, to the best of their knowledge having made all reasonable enquiries, any of their associates, has any present intention to sell any shares to the Company if the Repurchase Mandate is exercised.

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

If as a result of a repurchase of the shares, a Shareholder’s proportionate interest in the voting rights of the Company increases, such increase will be treated as an acquisition for the purposes of the Code. As a result, a Shareholder, or group of Shareholders acting in concert, depending on the level of increase of the Shareholders’ interest, could obtain or consolidate control of the Company and become obliged to make a mandatory offer in accordance with Rule 26 of the Code.

No connected person (as defined in the Listing Rules) has notified the Company that he has a present intention to sell shares to the Company, or has undertaken not to do so, if the Repurchase Mandate is exercised.

Any purchase of Shares which results in the amount of shares held by the public being reduced to less than 25% could only be implemented with the agreement of the Stock Exchange. Except in extraordinary circumstances such agreement would not normally be given by the Stock Exchange.

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EXPLANATORY STATEMENT

APPENDIX III

5. Share prices

The highest and lowest prices at which the Shares have traded on the Stock Exchange during the period from October, 2002 to October, 2003 were as follows and the highest and lowest prices were HK$0.165 on 25th November, 2002 and HK$0.012 on 2nd September, 2003 respectively:

	Highest	Lowest
	HK$	HK$
2003
October	0.018	0.012
September	0.047	0.012
August	suspended	suspended
July	0.022	0.014
June	0.037	0.018
May	0.053	0.034
April	0.119	0.036
March	0.117	0.087
February	0.122	0.106
January	0.120	0.096
2002
December	0.152	0.101
November	0.165	0.099
October	0.109	0.082

6. Share repurchases made by the Company

The Company had not repurchased any Shares (whether on the Stock Exchange or otherwise) in the six months preceding the date of this circular.

– 143 –

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Code and the Listing Rules for the purpose of giving information with regard to the Group. The Directors jointly and severally accept full responsibility for the accuracy of the information contained in this circular (except for those relating to Euro Concord, Main Faith and Mr. Tam) and confirm, having made all reasonable inquiries, that to the best of their knowledge, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement in this circular misleading.

The information in this circular relating to Mr. Tam, Euro Concord and Main Faith have been supplied by Mr. Tam, the sole director of both Euro Concord and Main Faith. The issue of this circular has been approved by Mr. Tam who accepts full responsibility for the accuracy of information contained in this circular, and confirms, having made all reasonable inquiries, that to the best of his knowledge, opinions expressed in this circular relating to Euro Concord, Main Faith and Mr. Tam have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement in this circular misleading.

2. DISCLOSURE OF INTERESTS

(a) Interests in the Company

(i) Director’s interests in Shares

As at the Latest Practicable Date, the interests and short positions of the Directors in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which had been notified to the Company and the Stock Exchange pursuant to Divisions 7 & 8 of Part XV of the SFO (including interests or short positions which they are taken or deemed to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or which were required pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange were as follows:

				Approximate
	Capacity/			percentage of
Name of	Nature of	Number of		shareholding
Director	interests		Shares	in the Company
		Long position	Short position
Tam Jin Rong	Corporate	215,000,000	–	10.49%

Note 1: These Shares were held through Euro Concord, of which Mr. Tam is the sole director and sole shareholder.
Note 2: Please refer to the paragraph headed “Underwriting arrangements for the Open Offer” on pages 23 to 26 in the letter from the Board contained in this circular for information on Mr. Tam’s interest in the Open Offer.

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GENERAL INFORMATION

APPENDIX IV

Save as disclosed herein, as at the Latest Practicable Date, none of the Directors or chief executive of the Company have interest or short positions in the shares, underlying shares and debentures or other securities of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 & 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein or which were required in the Listing Rules pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange.

(ii) Substantial Shareholders

As at the Latest Practicable Date, so far as is known to, or can be ascertained after reasonable enquiry by the Directors or chief executive of the Company, the following persons had interests or short positions in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who are, directly or indirectly, deemed to be interested in 10 per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group and the amount of each of such person’s interests in such securities, together with particulars of any options in respect of such capital.

				Approximate
	Capacity/			percentage of
Name of	Nature of	Number of		shareholding
Shareholders	interests	Shares	held	in the Company
		Long position	Short position
Best Fortune Capital Ltd.	Corporate	253,769,585	–	12.38%
(“Best Fortune”)(Note 1)
China Convergent	Corporate	241,169,585	–	11.77%
Corporation Limited
(“China Convergent”)
(Note 2)
Gold Chief Investment Ltd.	Beneficial	241,169,585	–	11.77%
(“Gold Chief”)(Note 2)
Euro Concord_(Note 3)_	Beneficial	215,000,000	–	10.49%

Note 1: Best Fortune holding 49.96% interest is the controlling shareholder of China Convergent. The interests of Best Fortune in the Company are held through China Convergent and Gold Chief. In addition, Best Fortune also holds in its own name 0.61% interest of the Company.
Note 2: By virtue of the SFO, China Convergent holding a 100% interest in Gold Chief is deemed to be interested in the 241,169,585 Shares held by Gold Chief.
Note 3: Please refer to the paragraph headed “Underwriting arrangements for the Open Offer” on pages 23 to 26 in the letter from the Board in this circular for information on Euro Concord’s interest in the Open Offer.

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GENERAL INFORMATION

APPENDIX IV

Save as disclosed herein, no person as at the Latest Practicable Date was interested directly or indirectly, deemed to be interested in 10 per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group and the amount of each of such person’s interests in such securities, together with particulars of any options in respect of such capital.

(iii) The Underwriter and parties acting in concert with it

As at the Latest Practicable Date, as disclosed in subsection (i) Director’s interests in Shares, Euro Concord which is wholly beneficially owned by Mr. Tam, had a total of 215,000,000 Shares, representing approximately 10.49% of the issued share capital of the Company. Save as disclosed, the Underwriter, its director and parties acting in concert with any of them has no other interests in the securities of the Company.

(iv) Others

As at the Latest Practicable Date,

(aa) none of the subsidiaries of the Company, nor any pension funds of the Company or of any of its subsidiaries, nor Somerley nor Chateron nor any other advisor to the Company as specified in class (2) of the definition of “Associate” under the Code had any interest in any shares, convertible securities, warrants, options or derivatives which carry voting rights of the Company.
(bb) no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Code with the Company or any person who is an associate of the Company by virtue of clauses (1), (2), (3) and (4) of the definition of associate under the Code, Main Faith or with any party acting in concert with Main Faith.
(cc) no shareholding in the Company was managed on a discretionary basis by fund managers connected with the Company.

(b) Dealings in Shares

(i) Directors

None of the Directors or parties acting in concert with any of them had dealt in any shares, convertible securities, warrants, options or derivatives which carry voting rights of the Company during the period that commenced on 28th February, 2003 (being the date six months prior to the date of the Announcement) and ended on the Latest Practicable Date (the “Relevant Period”).

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GENERAL INFORMATION

APPENDIX IV

(ii) The Underwriter and parties acting in concert with it

During the Relevant Period, save for entering into the Underwriting Agreement, none of Main Faith, Mr. Tam nor any persons acting in concert with any of them had dealt in any shares, convertible securities, warrants, options or derivatives which carry voting rights of the Company.

(iii) Others

During the Relevant Period, none of the subsidiaries of the Company, nor any pension fund of the Company or any of its subsidiaries, nor Somerley, Chateron or any other advisor to the Company as specified in class (2) of the definition of “Associate” under the Code had dealt for value in any shares, convertible securities, warrants, options or derivatives which carry voting rights of the Company.

(c) Interests and dealings in Main Faith

Main Faith is a private investment holding company incorporated in the British Virgin Islands with limited liability and was acquired by Mr. Tam specifically for the purpose of underwriting the Open Offer. Since its incorporation on 22nd July, 2003, Main Faith has not carried on any business other than entering into the Underwriting Agreement. Save for the acquisition of shares in Main Faith by Mr. Tam, none of the Directors nor the Company had any interest in the securities issued by Main Faith nor had any of them dealt for value in any shares, convertible securities, warrants, options or derivatives in respect of securities which carry voting rights of Main Faith during the Relevant Period.

3. MARKET PRICES

The table below shows the closing prices of the Shares on the Stock Exchange at the end of each of the six calendar months immediately preceding the suspension of trading of Shares on 31st July, 2003, the last trading day before publication of the Announcement and on the Latest Practicable Date:

	HK$
2003
Latest Practicable Date	0.014
30th June	0.020
30th May	0.035
30th April	0.038
31st March	0.088
28th February	0.115
30th January	0.120

The lowest and highest closing market prices of the Shares recorded on the Stock Exchange during the Relevant Period were HK$0.012 on 23rd October, 2003 and HK$0.117 on 3rd March, 2003, respectively.

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GENERAL INFORMATION

APPENDIX IV

4. MATERIAL CONTRACTS

The following contracts have been entered into by the Company and its subsidiaries (not being contracts entered into in the ordinary course of business) after the date two years immediately preceding the date of the Announcement and are or may be material:

(a) a placing agreement dated 17th October, 2001 entered into between the Company and Kingston Securities Limited relating to the placing of a total of 200,000,000 new shares at a subscription price of HK$0.10 each in the capital of the Company and at an underwriting commission of 0.25%;
(b) an agreement and a supplemental agreement for sale and purchase dated 13th November, 2001 and 20th December, 2001 respectively entered into between Mr. Lu Qi and Win’s Movie Production Limited, a subsidiary of the Company, relating to the disposal of the Group’s 100% equity interest in Reach Video Production Co., Ltd. at a consideration of HK$20,000,000;
(c) a placing agreement dated 26th November, 2001 entered into between the Company and Luen Fat Securities Company Limited relating to the placing of a total of 249,700,000 new shares at a subscription price of HK$0.128 each in the capital of the Company and at an underwriting commission of 2.5%;
(d) a subscription agreement dated 27th November, 2001 entered into between the Company and Potential Energy Inc. for HK$201,800,000 6% debenture notes;
(e) a share sale agreement dated 20th December, 2001 entered into between Ms. Liang Hui and the Company relating to the disposal of 100% equity interest in Starway Management Limited at a consideration of HK$8,000,000;
(f) a deed of assignment of debt dated 21st December, 2001 entered into between Prosper eVision Finance Limited, a subsidiary of the Company, and Wide-Range Limited relating to an assignment of debt of HK$35,870,031 due from Union Concept Trading Limited at a consideration of HK$23,000,000; a deed of assignment of debt dated 21st December, 2001 entered into between Prosper eVision Finance Limited and the Company relating to an assignment of debt of HK$23,000,000 due from Wide-Range Limited at a consideration of HK$23,000,000; a deed of assignment of debt dated 21st December, 2001 entered into between the Company and Wide-Range Limited relating to an assignment of debt of HK$23,000,000 due from Wide-Range Limited at a consideration of HK$23,000,000;
(g) a deed of assignment of debt dated 21st December, 2001 entered into between Prosper eVision Finance Limited, a subsidiary of the Company, and Wide-Range Limited relating to an assignment of debt of HK$36,330,322 due from Mr. Ip Wa Seng at a consideration of HK$23,000,000; a deed of assignment of debt dated 21st December, 2001 entered into between Prosper eVision Finance Limited, a subsidiary of the Company, and the Company relating to the debt of HK$23,000,000 due from Wide-Range Limited at a consideration of HK$23,000,000; a deed of assignment of debt dated 21st December, 2001 entered into

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between the Company and Wide-Range Limited relating to an assignment of debt of HK$23,000,000 due from Wide-Range Limited at a consideration of HK$23,000,000;

(h) a share purchase agreement dated 27th December, 2001 entered into between the Company and Li Jian relating to the disposal of 100% equity interest in Brilliant Shine Development Limited at a consideration of HK$36,000,000;
(i) a share purchase agreement dated 4th February, 2002 entered into between the Company and Happy Valley relating to the acquisition of 50% equity interest in Great Win International Limited at a consideration of HK$36,000,000;
(j) a note instrument dated 26th March, 2002 relating to the issue of HK$35,000,000 3% interest bearing convertible notes to Happy Valley with a maturity date on 25th March, 2005;
(k) a share purchase agreement dated 30th April, 2002 entered into between Top Wishes Holdings Limited, a subsidiary of the Company, and Sun Rich Trading Limited relating to the acquisition of 100% equity interest in Smartop Development Limited at a consideration of HK$31,000,000;
(l) a placing agreement dated 7th May, 2002 entered into between the Company and Kingston Securities Limited relating to the placing of a total of 290,000,000 new shares at a subscription price of HK$0.103 each in the capital of the Company and at an underwriting commission of 2.5%;
(m) a share purchase agreement dated 18th September, 2002 entered into between the Company and Riseplus Finance Limited in relation to the acquisition of 100% equity interest in Peak One Investments Limited at a consideration of HK$33,000,000 and a subsequent cancellation agreement in relation thereto;
(n) a share purchase agreement dated 30th December, 2002 entered into between Superwise Business Limited and Lucky Dragon Assets Ltd., a subsidiary of the Company, relating to the disposal of 30% shareholding of Hodgkins Enterprises Limited at a consideration of HK$9,000,000;
(o) a share purchase agreement and a supplemental agreement dated 14th February, 2003 and 9th April, 2003 respectively entered into between Ambition Developments Limited, a subsidiary of the Company, Portman Properties Limited and Starwood Investment Limited relating to the acquisition of 100% equity interest in Starwood Investment Limited at a consideration of HK$14,000,000;
(p) a heads of agreement and a supplemental agreement dated 13th March, 2003 and 12th May, 2003 entered into between Mr. Tam and the Company relating to the acquisition of Hefferman Enterprises Limited at a consideration of HK$26,800,000. A termination agreement on the proposed transaction was then entered into by the same parties on 15th August, 2003;

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(q) settlement agreements dated 12th, 14th and 16th May, 2003 between the Company and its two subsidiaries, Cyber Energy Inc. and Prosperity Construction and Decoration Limited and sixteen creditors in relation to the settlement of debts in a total sum of HK$10,877,444;
(r) the Underwriting Agreement; and
(s) the agreement dated 29th October, 2003 entered into between the Company and Happy Valley whereby Happy Valley agreed to waive and extinguish the conversion rights attaching to the Convertible Notes at nil consideration.

5. LITIGATIONS AND CLAIMS

The following are particulars of litigation or arbitration of material importance in which the Company or any of its subsidiaries are engaged and litigation or claims of material importance which are pending or threatened by or against the Company or any of its subsidiaries:

(a) On 19th March, 1999, Winhop Limited (“Winhop”) issued a writ against Prosperity Construction and Decoration Limited (“PCDL”), one of the Company’s wholly owned subsidiaries, claiming for HK$420,000 regarding a construction dispute and PCDL counterclaimed against Winhop for around HK$5,100,000. Pleadings were closed and that the parties have exchanged witness statements in February 2000 but no further step has been taken by Winhop since then.
(b) On 19th March, 1999, Winhop issued a writ against PCDL for goods sold and services rendered in the sum of around HK$100,000. Winhop has on 23rd July, 2003 issued a notice of intention of proceed to keep the action pending.
(c) On 20th April, 1999, Greatworth Industrial Ltd. issued a writ against PCDL and others in relation to a construction dispute which involves a claim of around HK$1.9 million. Pleadings were closed and the parties have exchanged their lists of documents in September 2003.
(d) On 6th January, 2000, Brilliant Hope Engineering Ltd. (“Brilliant Hope”) issued a writ against PCDL for approximately HK$700,000 in relation to a claim on construction work performed. PCDL counter-claimed around HK$7,800,000 against Brilliant Hope. The parties have been negotiating with each other since October 2001 for a possible settlement but no settlement was reached as at the Latest Practicable Date.
(e) On 15th August, 2002, Mr. Siu issued a writ against the Company for the alleged suffer of loss and damages relating to purported share options exercised in 1999 amounting to approximately HK$18.8 million. On 4th July, 2003, a summary judgment was awarded against the Company in the amount of HK$18.8 million plus interest and costs. On 8th August, 2003, the Company received a statutory demand from Mr. Siu demanding immediate payment of HK$25.8 million, being the amount awarded by the court (including interest calculated up to 8th August, 2003). The Company appealed against the summary judgment, which appeal was heard on 6th October, 2003. The Court gave a judgment in favour of Mr.

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Siu and now the Company is considering appealing that judgment in the Court of Appeal. On 8th October, 2003, a winding up petition was served on behalf of Mr. Siu on the Company which will be heard at the High Court of Hong Kong on 3rd December, 2003.

(f) On 10th October, 2002, Brilliant (Man Sau) Engineering Ltd. (“Man Sau”) issued a writ against PCDL for approximately HK$7,000,000 in relation to a dispute on construction work performed. On 2nd August, 2003, Man Sau filed an amended statement of claim. PCDL is now finalizing its amended defence and counter-claim and expects to file and serve the same by around 5th November, 2003.
(g) On 28th January, 2003, Marnav Holdings Limited (“Marnav”) issued a writ against Prosper eVision Management Limited (“PeVM”), one of the Company’s wholly-owned subsidiaries, for breach of a tenancy agreement. Marnav claimed against PeVM for recovering vacant possession of the premises and around HK$650,000 being outstanding rental and interests thereon. The parties have been negotiating on the terms of a consent order to settle the matter, but no settlement was reached as at the Latest Practicable Date.
(h) On 21st March, 2003, Computershare Hong Kong Investor Services Limited (“Computershare”) issued a demand letter against the Company in the sum of HK$298,150.06 for the outstanding registrar fees. There was no further action taken by Computershare up to the Latest Practicable Date.
(i) On 25th March, 2003, Advance Packaging Limited (“AP”) issued a writ against PeVM for recovering vacant possession of a premises and HK$40,000 as outstanding rent plus mesne profit of HK$10,000 per month. A summon for summary judgment was fixed and heard on 28th April, 2003 claiming vacant possession and the said mesne profit. Vacant possession of the premises was delivered to AP by PeVM in around June 2003. The parties have been in negotiation regarding the monetary claim but no settlement was reached as at the Latest Practicable Date.
(j) On 30th April, 2003, Cosmic Insurance Corporation Limited (“Cosmic”) issued a writ against the Company and two of its wholly owned subsidiaries, PCDL and Prosperity Construction and Decoration (HK) Limited (“PCDHK”) (collectively the “Defendants”) in relation to the security for a counter-indemnity issued by the Company in favour of Cosmic in the amount of HK$8,700,000. A summary judgment was awarded against the Defendants on 9th September, 2003. The Defendants have filed a Notice of Appeal on 11th October, 2003 to appeal against the summary judgment. The appeal was fixed to be heard on 4th May, 2004.
(k) Action taken by Beijing Oriental Plaza Co. Ltd. against PCDL and PCDHK for approximately HK$42,700,000 in relation to a dispute on construction work performed in Beijing. On 28th May, 2003, the legal actions in Hong Kong were mutually agreed to be stayed and the venue was transferred to the PRC. The litigation in Beijing is still proceeding and the hearing is expected to be fixed and heard later this year.
(l) On 29th May, 2003, The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) issued a demand letter against the Company in sum of HK$211,000 for the outstanding annual listing fee for the year of 2003. There was no further action taken by the Stock Exchange up to the Latest Practicable Date.

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(m) The Company provided guarantees to certain developers/main contractors in the PRC in respect of certain construction and renovation contracts entered into by Keyway China Limited, a wholly owned subsidiary of the Company. In July and August, 2003, claims were received from developers/main contractors in respect of two construction and renovation projects in the PRC amounting to approximately HK$17.3 million. Provision of HK$17.3 million has been made in the accounts of the Company and forms part of the Scheme Indebtedness as at 31st August, 2003.
(n) On 1st August, 2003, a writ was issued by Fuji Xerox (Hong Kong) Limited (“Xerox”) against PeVM for HK$180,000 for breach of rental and service agreements regarding photocopying machines rented by PeVM from Xerox. PeVM has not yet received any sealed judgment from Xerox up to the Latest Practicable Date.
(o) On 4th August, 2003, China Top Consultants Ltd. (“CTCL”) obtained a judgment in the sum of around HK$3.86 million against PCDL. On 22nd August, 2003, CTCL made applications for a charging order in respect of a club debenture and garnishee orders in respect of certain bank accounts of PCDL. On 26th September, 2003, the parties attended a hearing for charging order notice to show cause and that the hearing was adjourned. Subsequently, the adjourned hearing was fixed to be heard on 19th November, 2003.
(p) On 8th August, 2003, iOne Financial Press Limited (“iOne”) issued a writ against the Company for around HK$450,000 for printing services rendered. A summon for summary judgment was fixed on 13th October, 2003 claiming around HK$440,000 with interests. The Court has granted an order in terms of the said summon and iOne is now obtaining a sealed order regarding the judgment.
(q) On 2 October 2003, Hongville Limited (“Hongville”) entered a final and interlocutory judgment in the sum of HK$352,238 (plus interest with damages and costs) against the Company and PeVM. On 6 October 2003, Hongville served a notice to PeVM and the Company to vacate the premises situated at Rooms 1801-3, 18/F., Hutchison House, Hong Kong by 14 October 2003. The Company has already vacated the said premises.
(r) On 23rd June, 2000, Mr. Chan Yiu Ming (“Mr. Chan”) issued a writ against the Company alleged to have suffered loss and damages relating to purported share options exercised in 1999 and 2000 for allotment of 5,500,000 shares in the Company as well as interest and costs. The Plaintiff filed his List of Documents in December 2000. On 9th October, 2003, Mr. Chan filed a Notice of Intention to Proceed After One Year giving notice to the Company that he intends to proceed with the action after expiration of one month from the date of service of such notice. The Company is seeking legal advice in response to the Notice of Intention to Proceed After One Year.
(s) On 29th October, 2003, a writ was issued by Simmons & Simmons for HK$1,300,403.97 in respect of legal services rendered. There was no further action taken by Simmons & Simmons.

Save as disclosed, neither the Company nor any other members of the Group is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against any member of the Group.

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6. EXPERTS

Each of Somerley and Chateron has given and has not withdrawn its written consent to the issue of this document with the inclusion herein of its letter(s) and/or references to its name in the form and context in which it appears.

The following are the qualifications of the experts who have provided their advices, reports and valuation (as the case may be), which are contained in this document:

Name Qualification Somerley Licensed corporation under the transitional arrangements to carry out, amongst other things, Type 6 (advising on corporate finance) regulated activity for the purposes of the SFO Chateron Licensed corporation under the transitional arrangements to carry out Type 6 (advising on corporate finance) regulated activity for the purposes of the SFO

As at the Latest Practicable Date, none of Somerley nor Chateron was beneficially interested in the share capital of any member of the Group nor did it have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group nor did it have any interest, either direct or indirect, in any assets which have been, since the date to which the latest published audited financial statements of the Company (i.e. the annual report of the Company for the year ended 31st December, 2002) were made up, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group.

7. ARRANGEMENTS AFFECTING DIRECTORS

(a) All executive Directors and Euro Concord are Scheme Creditors subject to the Creditors’ Scheme. Save for the Creditors’ Scheme, no benefit is being given to any Director as compensation for loss of office or otherwise in connection with the Restructuring Proposal including the Whitewash Waiver.
(b) Save for the Underwriting Agreement and the Creditors’ Scheme, there is no existing or proposed agreement, arrangement or understanding (including any compensation arrangement) between Mr. Tam or any person acting in concert with him and any Directors, recent Directors, Shareholders, recent Shareholders having any connection with or dependence upon the outcome of the Restructuring Proposal including the Whitewash Waiver or otherwise connected therewith.
(c) There is no agreement or arrangement exists between any Director and any other person which is conditional on or/dependent upon the outcome of the Restructuring Proposal or otherwise connected with the Restructuring Proposal including the Whitewash Waiver.
(d) Save for the Underwriting Agreement, there is no material contract entered into by Main Faith in which any Director or its subsidiaries has a material personal interest.

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(e) None of the Directors has, or has had, any direct or indirect interest in any assets which have been acquired, disposed of or leased to, or which are proposed to be acquired, disposed of or leased to, the Company or any of its subsidiaries since 31st December, 2002, the date to which the latest published audited financial statements of the Group were made up.

8. DIRECTORS’ SERVICE CONTRACTS

The following are particulars of services contracts between the Directors and the Company which are in force and which have more than 12 months to run:

(a) the agreement dated 11th February, 2003 between the Company with Mr. Tam Jin Rong (“Mr. Tam”) for appointment of Mr. Tam as an executive director of the Company for a fixed term of three years commencing from 11th February, 2003 and ending on 10th February, 2006 with a monthly salary of HK$200,000 (payable on a 13 months basis) together with other benefits;
(b) the agreement dated 28th May, 2003 between the Company with Mr. Tao Ke Wei (“Mr. Tao”) for appointment of Mr. Tao as an executive director of the Company for a fixed term of three years commencing from 1st June, 2003 and ending on 31st May, 2006 with a monthly salary of HK$150,000 (payable on a 13 months basis) together with other benefits;
(c) the agreement dated 28th May, 2003 between the Company with Mr. Tam Kai On (“Mr. Tam”) for appointment of Mr. Tam as general manager of the Company for a fixed term of three years commencing from 1st June, 2003 and ending on 31st May, 2006 with a monthly salary of HK$150,000 (payable on a 13 months basis) together with other benefits; and
(d) the agreement dated 28th May, 2003 between the Company with Mr. Ko Chung Ting, Peter (“Mr. Ko”) for appointment of Mr. Ko as an executive director of the Company for a fixed term of three years commencing from 1st June, 2003 and ending on 31st May, 2006 with a monthly salary of HK$150,000 (payable on a 13 months basis) together with other benefits.

Save as disclosed above, none of the Directors has entered into any service contract with any company in the Group or associated companies which are in force and which have more than 12 months to run, or which has been entered into or amended within six months before the date of Announcement.

9. MISCELLANEOUS

(a) The secretary of the Company is Mr. Ip Chi Wai, an associate member of the Hong Kong Society of Accountants and the Association of Chartered Certified Accountants.
(b) The Registrars of the Company are Computershare Hong Kong Investor Services Limited at 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.
(c) The registered office of the Company is at Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda and the principal place of business of the Company is at Room 2806, 28th Floor, West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong.
(d) The registered office of Main Faith is situated at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.

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(e) The executive Directors include Messrs. Tam, Tao Ke Wei, Tam Kai On and Ko Chung Ting, Peter. The Independent non-executive Directors include Messrs. Lau Kwok Wah and Choy Sai Man.
(f) Main Faith is wholly and beneficially owned by Mr. Tam, who is also its sole director. The correspondence address of Mr. Tam is at 5th Floor, Yin Li Commercial Building, Dongcheng Xi Road, Dongguan City, Guangdong Province, the PRC.
(g) No person had irrevocably committed themselves to vote for or against the Restructuring Proposal including the Whitewash Waiver.
(h) Somerley is the financial adviser to the Company, the registered office of which is situated at Suite 3108, One Exchange Square, 8 Connaught Place, Central, Hong Kong.
(i) Chateron is the independent financial adviser to the Independent Board Committee, the registered office of which is situated at Suite 20B, 20th Floor, 9 Queen’s Road Central, Hong Kong.
(j) The English text of this circular and form of proxy shall prevail over the Chinese text in the case of any inconsistency.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the Company’s principal place of business in Hong Kong from the date of this circular up to and including the date of the SGM:

(a) the memorandum of association and Bye-laws of the Company;
(b) the annual reports of the Company for the two financial years ended 31st December, 2002;
(c) the interim report of the Company for the six months ended 30th June, 2003;
(d) the letter from the Independent Board Committee, the text of which is set out on page 32 of this circular;
(e) the letter from Chateron to the Independent Board Committee, the text of which are set out on pages 33 to 72 of this circular;
(f) the material contracts referred to in the section headed “Material contracts” in this Appendix;
(g) the written consents referred to in the section headed “Consents” in this Appendix; and
(h) Services contracts of the Directors referred to the paragraph headed “Directors’ Service Interests” in this appendix;
(i) copy of a circular of the Company regarding the acquisition of shares in Starwood Investment Limited dated 14th April, 2003 which constituted a disclosable transaction under the Listing Rules.

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NOTICE OF SGM

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

(incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a special general meeting of China Nan Feng Group Limited (the “Company”) will be held at Ward Room, Royal Hong Kong Yacht Club, Kellett Island, Causeway Bay, Hong Kong on Monday, 1st December, 2003 at 9:15 a.m. for the purpose of considering and, if thought fit, passing the following resolutions as special resolutions or as ordinary resolutions (with or without modification), as indicated below:

ORDINARY RESOLUTION

“ THAT , conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited approving the listing of, and granting the permission to deal in, shares of HK$2.00 each in the issued capital of the Company upon the Share Consolidation (as defined below) becoming effective, with effect from 9:30 a.m. on the business day (not being a Saturday) after the date on which this resolution is passed, every twenty (20) issued and unissued shares of HK$0.10 each in the capital of the Company be consolidated into one (1) share of HK$2.00 (“Consolidated Share”) in the capital of the Company (the “Share Consolidation”) and any fractional entitlements to issued Consolidated Shares resulting from the Share Consolidation shall be sold in the form of Consolidated Shares for the benefit of the Company in such manner and on such terms as the directors of the Company may think fit.”

SPECIAL RESOLUTIONS

“ THAT , subject to the fulfilment of the conditions in respect of the Capital Reorganisation (as defined below) as set out in the circular dated 6th November, 2003 (the “Circular”) and a copy of which has been tabled at the meeting and initialled by the Chairman for the purpose of identification:
(a) the issued share capital of the Company be reduced by cancelling paid up capital to the extent of HK$1.99 on each existing issued share such that the nominal value of all the issued shares (the “Adjusted Shares”) will be reduced from HK$2.00 to HK$0.01 each (the “Capital Reduction”);
(b) subject to and forthwith upon the Capital Reduction taking effect, all of the authorised but unissued shares of HK$2.00 each in the capital of the Company (including those authorised but unissued shares arising from the Capital Reduction) be sub-divided into two hundred (200) Adjusted Shares of HK$0.01 each (the “Share Subdivision”);

* for identification purpose only

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NOTICE OF SGM

(c) subject to and forthwith upon the Capital Reduction taking effect, the credit amount standing to the credit of the share premium account of the Company be cancelled in accordance with the bye-laws of the Company and all applicable laws (the “Share Premium Cancellation”);
(d) the credit arising from the Capital Reduction and the Share Premium Cancellation be transferred to the contributed surplus account of the Company and thereafter be applied against the accumulated deficit of the Company as at 30th June, 2003;
(e) Bye-laws of the Company be amended by the inclusion of a new Bye-law 8A as follows:

“The Company may issue its shares in fractional denominations and deal with such fractions to the same extent as its whole shares and shares in fractional denominations shall have in proportion to the respective fractions represented thereby all of the rights of whole shares including (but without limiting the generality of the foregoing) the right to vote, to receive dividends and distributions and to participate in a windingup.”; and

(f) any director of the Company be and is hereby authorised to do all things and acts and sign all documents which he considers necessary, desirable, or expedient in connection with the implementation of the Capital Reduction, the Share Subdivision and the Share Premium Cancellation (collectively, the “Capital Reorganisation”).”
“ THAT , Bye-law 140 of the Bye-laws be and is hereby deleted and replaced by the following new Bye-law 140:

“The Company may, upon the recommendation of the Board, resolve to capitalise any part of the Company’s reserves (including any contributed surplus account and also including any share premium account or other undistributable reserve, but subject to the provisions of the law with regard to unrealised profits) or undivided profits not required for the payment or provision of the dividend on any shares with a preferential right to dividend, and accordingly that such part be sub-divided amongst the shareholders who would have been entitled thereto if distributed by way of dividend and in the same proportions, on condition that the same be not paid in cash but be applied either in or towards paying up any amounts for the time being unpaid on any shares held by such shareholders respectively or paying up in full unissued shares or debentures or other securities of the Company to be allotted and distributed credited as fully paid to and amongst such shareholders in the proportion aforesaid, or partly in one way and partly in the other provided that for the purpose of this Bye-law, any amount standing to the credit of any share premium account may only be applied in the paying up of unissued shares to be issued to shareholders of the Company as fully paid.”

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ORDINARY RESOLUTIONS

“ THAT , subject to the fulfilment of the conditions as set out in the section headed “Conditions of the Creditors’ Scheme” as set out in the circular dated 6th November, 2003 (the “Circular”) and a copy of which has been tabled at the meeting and initialled by the Chairman for the purpose of identification, with any modification thereof or addition thereto or conditions approved or imposed by the Supreme Court of Bermuda or the High Court of Hong Kong:
(a) the Creditors’ Scheme (as defined in the Circular) be and is hereby approved;
(b) the directors of the Company (the “Directors”) be and are hereby authorised to take all steps necessary or expedient in their opinion to implement and/or give effect to the Creditors’ Scheme including (without limitation) the payment of cash to Scheme Creditors (as defined in the Circular) pursuant to the terms of the Creditors’ Scheme and issue of the Creditors Shares (also as defined in the Circular) pursuant to the terms of the Creditors’ Scheme;
(c) the issue of the Creditors Shares (as defined in the Circular) to Euro Concord Assets Limited, Mr. Tam Jin Rong, Mr. Tao Ke Wei, Mr. Tam Kai On and Mr. Ko Chung Ting, Peter (each a Director) according to the terms of the Creditors’ Scheme be and are hereby approved; and
(d) any Director be and is hereby authorised to do all things and acts and sign all documents which he considers necessary, desirable or expedient in connection with the implementation of the Creditors’ Scheme.”
“ THAT , subject to the fulfilment of the conditions in the Underwriting Agreement as defined in the circular dated 6th November, 2003 (the “Circular”) and a copy of which has been tabled at the meeting and initialled by the Chairman for the purpose of identification:
(a) the offer (the “Open Offer”) of ordinary shares (“Offer Shares”) of HK$0.01 each in the capital of the Company to the holders of shares in the Company whose names appeared on the register of members of the Company at the close of business of a date to be fixed by the directors of the Company on the basis of assured allotments of five Offer Shares for every consolidated share then held at the subscription price of HK$0.045 per Offer Share and otherwise on the terms of the Open Offer with no facility for excess applications for the assured allotments of Offer Shares as set out in the Circular be and is hereby approved, and the directors of the Company (the “Directors”) be and are hereby authorised to allot and issue the Offer Shares pursuant to applications in the Open Offer;
(b) the Underwriting Agreement be and is hereby approved, confirmed and ratified and any Director (other than Mr. Tam Jin Rong) be and is hereby authorised to do such acts or execute such other documents which may be necessary, desirable or expedient in his opinion to carry into effect or to give effect to the terms of the Underwriting Agreement; and

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NOTICE OF SGM

(c) any Director be and is hereby authorised to do all things and acts and sign all documents which he considers necessary, desirable or expedient in connection with the implementation of the Open Offer.”
“ THAT subject to the passing of the Special Resolution Number 2 and the Ordinary Resolution Numbers 1 and 5 (set out in this notice of the Special General Meeting dated 6th November, 2003), the waiver granted pursuant to Note 1 of the Notes on dispensations from Rule 26 of the Hong Kong Code on Takeovers and Mergers by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission for Mr. Tam Jin Rong and parties acting in concert with him from all obligations to make a mandatory offer for all the issued shares in the capital of the Company under Rule 26 of the Hong Kong Code on Takeovers and Mergers which may otherwise arise as a result of completion of the Underwriting Agreement (as defined in the circular dated 6th November, 2003 and a copy of which has been tabled at the meeting and initialled by the Chairman for the purpose of identification) be and is hereby approved.”
“ THAT:
(a) subject to paragraph (b) below, the directors of the Company (the “Directors”) be hereby generally and unconditionally authorised to exercise during the Relevant Period (as that term is defined below) all the powers of the Company to allot, issue and deal with additional shares of the Company and to make or grant offers, agreements, and options (including warrants, bonds and debentures, notes and any securities which carry rights to subscribe for or are convertible into ordinary shares of the Company) which would or might require the exercise of any of such powers during or after the end of the Relevant Period;
(b) the approval in paragraph (a) above shall be in addition to any other authorisation given to the Directors;
(c) the aggregate nominal amount of the shares allotted, issued or otherwise dealt with or agreed conditionally or unconditionally to be allotted, issued or otherwise dealt with (whether pursuant to an option or otherwise) by the Directors pursuant to the approval in paragraph (a) above, other than pursuant to (i) a Rights Issue (as that term is defined below); or (ii) an issue of ordinary shares of the Company upon the exercise of rights of subscription or conversion under the terms of any warrants of the company or any securities which are convertible into ordinary shares of the Company; or (iii) an issue of ordinary shares of the Company by way of scrip dividend pursuant to the Bye-laws of the Company from time to time; or (iv) the exercise of any option granted under any option scheme or similar arrangement for the time being adopted for the grant or issue to employees of the Company and/or its subsidiaries, of options to subscribe for, or rights to acquire, shares of the Company, shall not in total exceed either:
- (i) 20% of the aggregate nominal amount of the share capital of the Company in issue subject to and immediately following completion of the Restructuring

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Proposal (as defined in the circular dated 6th November, 2003 and a copy of which has been produced to the meeting and initialled by the Chairman for the purpose of identification); or

(ii) in the event that the Restructuring Proposal lapses or fails to be completed in accordance with its terms, 20% of the aggregate nominal amount of the share capital of the Company in issue on the date of this resolution; and
(d) for the purpose of this resolution, “Relevant Period” means the period from the passing of this resolution until whichever is the earliest of:
(i) the conclusion of the next annual general meeting of the Company;
(ii) the revocation or variation of the authority given under this resolution by ordinary resolution of the shareholders in general meeting; or
(iii) the expiration of the period within which the next annual general meeting of the Company is required by the Bye-laws of the Company, or any applicable laws, to be held; and

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

“ THAT :
(a) the directors of the Company (the “Directors”) be and are hereby generally and unconditionally authorised to exercise during the Relevant Period (as that term is defined below) all the powers of the Company to purchase shares in the capital of the Company, subject to and in accordance with applicable laws;
(b) the approval in paragraph (a) above shall be in addition to any other authorisation given to the Directors;
(c) the aggregate nominal amount of the shares which may be purchased pursuant to the approval in paragraph (a) above shall not in total exceed either:
- (i) 10% of the aggregate nominal amount of the share capital of the Company in issue subject to and immediately following completion of the Restructuring Proposal (as defined in the circular dated 6th November, 2003 and a copy of which has been produced to the meeting and initialled by the Chairman for the purpose of identification); or

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NOTICE OF SGM

  - (ii) in the event that the Restructuring Proposal does not take place, lapses or fails to be completed in accordance with its terms, 10% of the aggregate nominal amount of the share capital of the Company in issue on the date of this resolution; and

(d) for the purpose of this resolution, “Relevant Period” means the period from the passing of this resolution until whichever is the earliest of:
- (i) the conclusion of the next annual general meeting of the Company;
- (ii) the revocation or variation of the authority given under this resolution by ordinary resolution of the shareholders in general meeting; or
- (iii) the expiration of the period within which the next annual general meeting of the Company is required by the Bye-laws of the Company, or any applicable laws, to be held.”
“ THAT , subject to the passing of the Ordinary Resolutions Numbers 7 and 8 (set out in this notice (“the Notice”) of the Special General Meeting dated 6th November, 2003), the aggregate nominal amount of the shares in the capital of the Company which are repurchased by the Company pursuant to and in accordance with Ordinary Resolution Number 8 set out in the Notice shall be added to the aggregate nominal amount of the share capital of the Company that may be allotted or agreed unconditionally or unconditionally to be allotted by the directors of the Company pursuant to and in accordance with Ordinary Resolution Number 7 set out in the Notice.”

By Order of the Board China Nan Feng Group Limited Tao Ke Wei Executive Director

Dated 6th November, 2003

Notes:

A form of proxy for use in connection with the Special General Meeting (the “Meeting”) is enclosed with this circular to which this notice forms part.
The form of proxy shall be in writing under the appointer or of his attorney duly authorised in writing or if the appointer is a corporation either under seal or under the hand of an officer or attorney duly authorised.
In order to be valid, a proxy together with a power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority must be deposited with the Company’s branch share registrars in Hong Kong, Computershare Hong Kong Investor Services Limited at 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong not later than 48 hours before the time for the Meeting or any adjournment thereof.
In the case of joint holders of a share, any one of such holders may vote at the Meeting either in person or by proxy in respect of such share, but if one of such joint holders is present at the Meeting personally or by proxy, the vote of the person so present whose name stands first on the register in respect of such share shall alone be entitled to vote in respect thereof.
Ordinary Resolution Number 6 will be voted on by way of a poll.
Scheme Creditors (as defined in the circular dated 6th November, 2003 (the “Circular”) and a copy of which has been tabled at the Meeting and initialled by the Chairman for the purpose of identification) who are also shareholders of the Company shall abstain from voting on Ordinary Resolution Number 6.

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AI assistant

Green Energy Group Limited — Proxy Solicitation & Information Statement 2003

49600_rns_2003-11-06_3e50c2a2-337c-486a-853d-9145e4d943fc.pdf

CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]

INTRODUCTION

(i) Share Consolidation

(ii) Capital Reorganisation

(iii) Creditors’ Scheme

(iv) Open Offer

LETTER FROM THE BOARD

LETTER FROM THE BOARD

RESTRUCTURING PROPOSAL

— SHARE CONSOLIDATION

Conditions

— CAPITAL REORGANISATION

Capital Reduction, Share Premium Cancellation and Subdivision

Effect of the Capital Reorganisation

Conditions of the Capital Reorganisation

Reasons for the Capital Reorganisation

— CHANGE OF BOARD LOT SIZE

LETTER FROM THE BOARD

—

TRADING ARRANGEMENTS AND FREE EXCHANGE OF NEW SHARE CERTIFICATES

LETTER FROM THE BOARD

— CREDITORS’ SCHEME

Terms

Conditions of the Creditors’ Scheme

Effects of the Creditors’ Scheme

LETTER FROM THE BOARD

— OPEN OFFER

Issue statistics:

LETTER FROM THE BOARD

Qualifying Shareholders and Overseas Shareholders

Fractions of Offer Shares

Subscription price for the Offer Shares

Share certificates

Status of the Offer Shares

— UNDERWRITING ARRANGEMENTS FOR THE OPEN OFFER

Underwriting Agreement

Termination of the Underwriting Agreement and force majeure

Conditions of the Underwriting Agreement

LETTER FROM THE BOARD

LISTING AND DEALINGS

EFFECTS OF THE RESTRUCTURING PROPOSAL

Shareholding Structure

LETTER FROM THE BOARD

APPLICATION FOR WHITEWASH WAIVER

INFORMATION ON MR. TAM

REASONS FOR THE RESTRUCTURING PROPOSAL AND USE OF PROCEEDS

LISTING

AMENDMENTS OF BYE-LAWS

LETTER FROM THE BOARD

RENEWAL OF GENERAL MANDATES

SGM

LETTER FROM THE BOARD

RECOMMENDATIONS

FURTHER INFORMATION

CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]

Creditors’ Scheme of Arrangement under section 99 of the Companies Act 1981 of Bermuda and section 166 of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong), Open Offer, Application for Whitewash Waiver

INTRODUCTION

PRINCIPAL FACTORS AND REASONS CONSIDERED

THE CREDITORS’ SCHEME

1. Reasons for the Creditors’ Scheme

2. Terms of the Creditors’ Scheme

or

3. The Creditors’ Scheme is conditional upon completion of the Open Offer

4. Issue price of the Creditors Shares under the Creditors’ Scheme

5. Financial effects of the Creditors’ Scheme on the Group

On profit and loss account

On net tangible asset position

6. Effect of the winding-up petition against the Company on the Creditors’ Scheme

7. Issue of Creditors Shares to connected persons

Green Energy Group Limited Proxy Solicitation & Information Statement 2003

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**

**CHINA NAN FENG GROUP LIMITED 中國南峰集團有限公司[*]**