THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

This circular is for information only and does not constitute an invitation or offer to acquire, purchase or subscribe for any securities of the Company.

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

If you have sold or transferred all your shares in Intelli-Media Group (Holdings) Limited, you should at once hand this circular with the accompanying form of proxy to the purchaser(s) or the transferee(s) or to the bank, the licensed securities dealer or registered institution in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or transferee(s).

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

智庫媒體集團（控股）有限公司

Intelli - Media Group (Holdings) Limited
(incorporated in the Cayman Islands with limited liability)
(Stock code: 8173)

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION: ACQUISITION OF THE ENTIRE EQUITY INTEREST IN FIRST PINE ENTERPRISES LIMITED INVOLVING ISSUE OF PROMISSORY NOTE, CONSIDERATION SHARES AND CONVERTIBLE BONDS

Independent Financial Adviser to
the Independent Board Committee and the Independent Shareholders

AmCap
Ample Capital Limited
豐盛融資有限公司

Capitalised terms used in this cover page have the same meanings as defined in the section headed “Definitions” in this circular.

A notice convening the EGM to be held at 3:00 p.m. on 8 December 2008 at Board Room I, 7/F, The Park Lane Hong Kong, 310 Gloucester Road, Hong Kong is set out on pages 327 to 328 of this circular. Whether or not you are able to attend the EGM in person, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon and deposit it with the Company’s branch share registrar and transfer office in Hong Kong, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong as soon as possible and in any event not later than 48 hours before the time appointed for holding the EGM or any adjournment thereof.

Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.

This circular will remain on the GEM website at www.hkgem.com on the “Latest Company Announcements” page for at least seven days from the date of its posting.

21 November 2008

CHARACTERISTICS OF GEM

GEM has been positioned as a market designed to accommodate companies to which a higher investment risk may be attached than other companies listed on the Exchange. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors.

Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main Board of the Stock Exchange and no assurance is given that there will be a liquid market in the securities traded on GEM.

CONTENTS

Page

DEFINITIONS 1

LETTER FROM THE BOARD 9

LETTER FROM THE INDEPENDENT BOARD COMMITTEE 51

LETTER FROM AMPLE CAPITAL LIMITED 52

APPENDIX I - FINANCIAL INFORMATION ON THE GROUP 74

APPENDIX II - ACCOUNTANTS' REPORT ON THE TARGET COMPANY 183

APPENDIX III - ACCOUNTANTS' REPORT ON MOGAN 196

APPENDIX IV - UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP 213

APPENDIX V - TECHNICAL REPORT 225

APPENDIX VI - VALUATION REPORT 288

APPENDIX VII - LETTER FROM CACHET 310

APPENDIX VIII - LETTER FROM THE DIRECTORS 312

APPENDIX IX - GENERAL INFORMATION 313

NOTICE OF EGM 327

DEFINITIONS

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

"Acquisition Agreement"
the conditional agreement entered into on 2 May 2008 between, among other persons, the Vendor and the Purchaser in relation to, among others, the Acquisition and unless the context otherwise requires, as supplemented by a supplemental agreement dated 8 November 2008.

"Acquisition Price"
the consideration for the entire Acquisition, being the aggregate sum of HK$5,700 million, particulars of which are set out in the paragraph headed "Acquisition Price" in this circular.

"Acquisition"
the purchase of the Sale Shares by the Purchaser from the Vendor subject to the terms and conditions of the Acquisition Agreement.

"acting in concert"
has the meaning ascribed to it in the Takeovers Code.

"Alcoa"
The Aluminium Company of America.

"Ample Capital" or "Independent Financial Adviser"
Ample Capital Limited, a licensed corporation for types 4, 6 and 9 (advising on securities, advising on corporate finance and asset management respectively) regulated activities under the SFO, the independent financial adviser to the Independent Board Committee and the Independent Shareholders with respect to the Acquisition

"associate(s)"
has the meaning ascribed to it in the GEM Listing Rules.

"Baosteel"
Baosteel Group Corporation Limited, a state owned enterprise that is listed on the Shanghai Stock Exchange.

"Belgravia Investment"
Belgravia Investment Holdings, Inc. is an investment holding company organized and existing under the laws of the Philippines. Immediately prior to Completion, it will own 30% of the outstanding capital stock of Mogan and will be owned as to 60% by Independent Third Parties and 40% by the Target Company after Completion.

"BHP Billiton"
BHP Billiton Limited, a company listed on the Australian Securities Exchange and the London Stock Exchange.

"Board"
the board of Directors.

"Bondholder(s)"
a person in whose name a Convertible Bond is registered in the register of bondholders, and "holder" in relation to a Convertible Bond has the corresponding meaning.

DEFINITIONS

“BRIC”	Brazil, Russia, India and the PRC.
“Business Day”	a day (other than Saturdays, Sundays and such other days during which a “black” rainstorm warning or a tropical cyclone warning signal number 8 or above is in force in Hong Kong), on which licensed banks in Hong Kong are open for business throughout their normal business hours.
“CA”	Co-Production Agreement.
“Cachet”	Cachet Certified Public Accountants Limited
“CAGR”	compounded annual growth rate.
“CCIF”	CCIF CPA Limited.
“CCOP”	Coordinating Committee for GeoScience Programmes (previously known as the Committee for Coordination of Joint Prospecting for Mineral Resources in Asian Offshore Areas).
“Chalco”	Aluminium Company of China Limited.
“CIF”	Cost, Insurance, and Freight.
“CLRF”	Contingent Liability and Rehabilitation Fund.
“CMRB”	City Mining Regulatory Board.
“Company”	Intelli-Media Group (Holdings) Limited, a company incorporated in the Cayman Islands with limited liability and whose Shares are listed on GEM.
“Completion Date”	the date on which Completion occurs.
“Completion”	completion of the Acquisition in accordance with the Acquisition Agreement.
“Connected Person(s)”	has the meaning ascribed to it under the GEM Listing Rules.
“Consideration Shares”	500,000,000 new Shares to be allotted and issued to satisfy the Acquisition Price in part.
“Conversion Price”	HK$0.70 per Conversion Share (subject to adjustment).
“Conversion Shares”	7,300,000,000 new Shares falling to be issued upon exercise by the Bondholder(s) of the conversion rights attached to the Convertible Bonds.

DEFINITIONS

"Convertible Bonds"
up to US$655,128,205 (the US$ equivalent of HK$5,110 million) zero coupon convertible bonds, comprising the Tranche A Bonds and the Tranche B Bonds, due on the 10th anniversary of the Completion Date, to be created by an instrument to be executed by the Company by way of a deed poll and for the time being outstanding or, as the context may require, any number of them.

"DENR"
Department of Environment and Natural Resources, Philippines.

"Director(s)"
director(s) of the Company.

"ECC"
Environmental Compliance Certificate.

"EGM"
an extraordinary general meeting of the Company to be convened for the purpose of considering, and if thought fit, approving: (i) the Acquisition Agreement and the transactions contemplated thereunder; (ii) the grant of Specific Mandate; and (iii) the issue of the Convertible Bonds.

"EMB"
Environmental Management Bureau.

"Enlarged Group"
the Group as enlarged by the Acquisition upon Completion.

"EPEP"
Environmental Protection and Enhancement Program.

"EWP"
Environmental Work Program.

"FOB"
Freight on Board.

"FTAA"
Financial or Technical Assistance Agreement.

"GEM"
the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited.

"GEM Listing Committee"
has the meaning ascribed to it in the GEM Listing Rules.

"GEM Listing Rules"
the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited.

"Group"
collectively, the Company and its subsidiaries from time to time.

"ha"
hectare.

"Hong Kong"
the Hong Kong Special Administrative Region of the PRC.

"ICC"
Indigenous Cultural Communities.

DEFINITIONS

“Ilva”	Ilva S.P.A.
“Independent Board Committee”	an independent committee of the Board of Directors of the Company comprising Mr. Lai Kai Jin, Michael, Mr. Ng Yat Cheung, JP, Mr. Chan Siu Wing, Raymond, being all the independent non-executive directors.
“Independent Shareholders”	Shareholders other than the Vendor, its ultimate beneficial owners and/or their associates.
“Independent Third Party(ies)”	third party(ies) (and its ultimate beneficial owner) who are independent of, and not connected with, the Group and who are not connected person(s) of the Group.
“IPRA”	Indigenous Peoples Right Act.
“IISI”	International Iron and Steel Institute.
“Last Trading Day”	2 May 2008, being the last trading day immediately prior to the signing of the Acquisition Agreement.
“Latest Practicable Date”	14 November 2008, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained in this circular.
“LGC”	Local Governmental Code.
“LGU”	Local Government Unit.
“Long Stop Date”	31 December 2008 or such later date as the Purchaser may at its sole and absolute discretion determine. (Please refer to the Company’s announcement dated 30 September 2008 regarding the extension of the Long Stop Date)
“MAP”	Mineral Action Plan.
“Material Adverse Change”	in relation to any person, any change (or effect) which has a material and adverse effect on the financial position, business or operations of such person.
“Maturity Date”	the date falling on the 10th anniversary of the Completion Date.
“MGB”	Mines and Geo-Sciences Bureau of the DENR.
“Mining Act”	Philippine Mining Act of 1995.

DEFINITIONS

"Mining Area"

the areas covered by Mogan's offshore exploration permit applications, namely (i) EXPA 000110VIII which covers an area of approximately 15,781.611 hectares within the Leyte Gulf region along the municipalities of Tanauan, Tolosa, Dulag, Mayorga, MacArthur and Abuyog in Leyte Province; (ii) EXPA OMR002VIII (formerly EXPA-000115-VIII) which covers an area of approximately 25,312.2425 hectares within the Leyte Gulf region along the municipalities of Basey and Marabut in Samar Province, and the city of Tacloban in Leyte Province, as described in "Information on the Target Group". As announced by the Company on 9 November 2008, the areas covered by (a) EXPA 000099VI which covers an area of approximately 17,205.2259 hectares within the Panay Gulf region along the municipalities of Ilog, Suay, Himamaylan, Binalbagan and Hinigaran in Negros Occidental Province; and (b) EXPA 000166XIII which covers an area of approximately 15,535.8295 hectares along the city of Tandag and municipality of Cagwait (formerly disclosed as Claver) in Surigao del Sur Province have been excluded.

"Mining Claims"

all of the rights of Mogan to explore, develop and utilize in and to magnetite and other minerals located in the Mining Area pursuant to the issuance in favor of Mogan of an Exploration Permit, Mineral Agreement (MPSA, Co-Production Agreement or Joint Venture Agreement) or FTAA, as the case may be, and subject to the activities allowed thereunder.

"MMH"

Mt. Mogan Holdings, Inc., is an investment holding company organized and established under the laws of the British Virgin Islands. Immediately prior to Completion, it will own 40% of the outstanding capital stock of Mogan and will be wholly owned by the Target Company after Completion.

"Mogan" or "Philippine Subsidiary"

Mt. Mogan Resources and Development Corporation, a corporation organized and existing under the laws of the Philippines.

"Mogan SHA"

the relevant shareholders' agreements to be entered on the date of completion of the Mogan SPA between, among other persons, the Target Company and the other shareholders of Mogan, Belgravia Investment and Triple Edge (as the case may be), to regulate their relationship as shareholders of Mogan, Belgravia Investment and Triple Edge upon completion of the Target Company's acquisition of the 64% indirect interest in Mogan under the Mogan SPA.

DEFINITIONS

"Mogan SPA"
the relevant sale and purchase agreement entered into on 2 May 2008 between the Target Company and the then existing shareholders of Mogan in connection with the Reorganization and the Target Company's acquisition of a 64% indirect equity shareholding interest in Mogan, including any amendments or supplements entered into among the relevant parties concerned in relation thereto.

"MOU"
the non-legally binding memorandum of understanding dated 8 April 2008 entered into between the Purchaser, the Target Company and the Vendor setting out the preliminary understanding in relation to the Acquisition.

"MPSA"
Mineral Production Sharing Agreement.

"MRF"
Mine Rehabilitation Fund.

"Mr. Wong"
Mr. Wong Chung Yu Denny, an executive Director

"Mr. Yin"
Mr. Yin Mark Teh-min, a non-executive Director

"NGO"
Non-governmental organization.

"Nippon Steel"
Nippon Steel Corporation, Japan's largest steel company and the world's second largest steel producer.

"PASAR"
Philippine Associated Smelting and Refining Corporation.

"PMRB"
Provincial Mining Regulatory Board.

"POSCO"
Pohang Iron and Steel Company, South Korea's largest steel company and the world's third largest steel producer.

"PRC"
the People's Republic of China which, for the purposes of this circular, excludes Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan.

"Promissory Note"
the HK$200 million promissory note to be issued by the Company to the Vendor to satisfy the Acquisition Price in part.

"Purchaser"
Black Sand Enterprises Limited, a company incorporated in Hong Kong and a wholly owned subsidiary of the Company.

DEFINITIONS

"Reorganization"
the reorganization, as contemplated under the Mogan SPA, of the shareholding of Mogan, which was previously individually held by 8 Filipinos, into a shareholding structure whereby Mogan's equity share capital is currently 40% directly held by MMH, and the remaining 60% held as to 30% each by Belgravia Investment and Triple Edge. The current shareholding structure of Mogan after the Reorganization is set out in the paragraph headed "Structure charts prior to/after Completion" in this circular.

"Rio Tinto"
Rio Tinto Group plc, a company listed on the Australian Securities Exchange, the London Stock Exchange and the New York Stock Exchange.

"Sale Shares"
such number of ordinary shares of US$1.00 each as shall represent the entire issued share capital in the Target Company immediately before Completion.

"SFC"
Securities and Futures Commission of Hong Kong.

"SFO"
the Securities and Futures Ordinance, Chapter 571 of the Laws of Hong Kong

"Share(s)"
share(s) of HK$0.01 each in the capital of the Company.

"Shareholder(s)"
holder(s) of Share(s).

"Specific Mandate"
the specific mandate sought to be granted by Shareholders at the EGM to the Directors in relation to the issue and allotment of the Consideration Shares and the Conversion Shares.

"Stock Exchange"
The Stock Exchange of Hong Kong Limited.

"Substantial Shareholder(s)"
has the meaning ascribed to it in the Listing Rules.

"Takeovers Code"
the Hong Kong Code on Takeovers and Mergers.

"Target Company"
First Pine Enterprises Limited, a company incorporated in the British Virgin Islands and owned as to 100% by the Vendor.

"Target Group"
the Target Company, MMH, Belgravia Investment, Triple Edge and Mogan or Philippine Subsidiary, if applicable.

"Technical Adviser"
Behre Dolbear Asia, Inc., an Independent Third Party.

"ThyssenKrupp"
ThyssenKrupp AG.

DEFINITIONS

"Tranche A Bonds" the series of Convertible Bonds so designated, in the denomination of US$100,000 each, in registered form comprising a total principal amount of up to US$425,833,333, to be issued by the Company in accordance with the terms of the Acquisition Agreement.

"Tranche B Bonds" the series of Convertible Bonds so designated, in the denomination of US$100,000 each, in registered form comprising a total principal amount of up to US$229,294,872, to be issued by the Company in accordance with the terms of the Acquisition Agreement.

"Triple Edge" Triple Edge Resources Holdings, Inc. is an investment holding company organized and existing under the laws of the Philippines. Immediately prior to Completion, it will own 30% of the outstanding capital stock of Mogan and will be owned as to 60% by Independent Third Parties and 40% by the Target Company after Completion.

"UNDP" United Nations Development Programme.

"Vale" Companhia Vale do Rio Doce, a public company by the Brazilian Federal Government and the world's largest exporter of iron ore.

"Valuer" B.I. Appraisals Limited, an Independent Third Party.

"Vendor" Kesterion Investments Limited, a company incorporated in the British Virgin Islands with limited liability which is 100% owned by Ms. Eva Wong, an associate of Mr. Wong and Mr. Yin, and therefore a connected person of the Company.

"WS Option" the outstanding stock options granted by the Company to Well Spread Consultant Ltd. in respect of 5,000,000 Shares. Further details are set out in the section "Shareholding chart of the Company".

"HK$" Hong Kong dollar(s), the lawful currency of Hong Kong.

"US$" United States dollar(s), the lawful currency of the United States of America.

"%" means per cent.

"μ" a measurement in micron.

All amounts in US$ and HK$ have been translated into HK$ at the rate of US$1 = HK$7.80 in this circular for illustration purpose only. The exchange rate does not constitute a representation that any amount has been, could have been, or may be exchanged at this or any other rate or at all.

LETTER FROM THE BOARD

智庫媒體集團（控股）有限公司

Intelli - Media Group (Holdings) Limited

(incorporated in the Cayman Islands with limited liability)

(Stock code: 8173)

Executive Directors:

Mr. Chin Wai Keung, Richard
Mr. Kwong Wai Ho, Richard
Mr. Wong Chung Yu Denny

Non-executive Director:

Mr. Yin Mark Teh-min

Independent non-executive Directors:

Mr. Lai Kai Jin, Michael
Mr. Ng Yat Cheung, JP
Mr. Chan Siu Wing, Raymond

Registered Office:

P.O. Box 309
Ugland House
South Church Street
George Town
Grand Cayman
Cayman Islands
British West Indies

Head office and principal place of business in Hong Kong:

Suite 1412-13, Tower 1,
Times Square
1 Matheson Road
Causeway Bay
Hong Kong

To the Shareholders

21 November 2008

Dear Sir or Madam

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION: ACQUISITION OF THE ENTIRE EQUITY INTEREST IN FIRST PINE ENTERPRISES LIMITED INVOLVING ISSUE OF PROMISSORY NOTE, CONSIDERATION SHARES AND CONVERTIBLE BONDS

INTRODUCTION

On 2 May 2008, the Purchaser, which is a wholly-owned subsidiary of the Company, entered into a conditional Acquisition Agreement with the Vendor. Under the Acquisition Agreement, the Purchaser has agreed to acquire the entire issued share capital of the Target Company from the Vendor at the Acquisition Price in the sum of HK$5,700 million.

LETTER FROM THE BOARD

Subsequently, on 20 May 2008, Mr. Wong and Mr. Yin were appointed as an executive director and a non-executive director, respectively, of the Company with effect from 20 May 2008. The appointments were subsequent to, and not in connection with, the conditional Acquisition Agreement.

As stated in the Company's announcement dated 6 July 2008, the ultimate and sole beneficial owner of the Vendor, Ms. Eva Wong, is a sister of Mr. Wong and the sister-in-law of Mr. Yin. In this respect, Ms. Eva Wong is an associate of each of Mr. Wong and Mr. Yin, and therefore a connected person of the Company. Although the Acquisition did not constitute a connected transaction under Chapter 20 of the GEM Listing Rules at the time the Acquisition Agreement was entered into, by reason of the subsequent appointment of Mr. Wong and Mr. Yin as directors of the Company and their relationship with the beneficial owner of the Vendor, the Acquisition has been considered to have subsequently become a connected transaction of the Company under the GEM Listing Rules.

The purpose of this circular is to give you (i) further details of the Acquisition and the transactions contemplated therein; (ii) the recommendation from the Independent Board Committee relating to the Acquisition; (iii) the recommendation from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders relating to the Acquisition; (iv) the accountants' report on Target Company and Mogan; (v) the technical report on the Mining Claims prepared by the Technical Adviser; (vi) the valuation report prepared by the Valuer; and (vii) the notice of the EGM.

ACQUISITION AGREEMENT

Date

2 May 2008

Parties

(1) the Vendor, as vendor
(2) the Purchaser, as purchaser
(3) the Company, as co-warrantor, giving representations, warranties and undertakings in favor of the Vendor in respect of the due performance of certain obligations of the Purchaser under the Acquisition Agreement

Subject matter

The Sale Shares representing the entire issued share capital of the Target Company.

Acquisition Price

The Acquisition Price of HK$5,700 million, of which HK$40 million had been directly paid to the Vendor on 9 April 2008 as earnest money ("Earnest Money"), is to be satisfied upon Completion:

(1) as to HK$200 million by the issue of the Promissory Note to the Vendor (or such person(s) as nominated by the Vendor);

LETTER FROM THE BOARD

(2) as to HK$350 million by the Company allotting and issuing to the Vendor (or such person(s) as nominated by the Vendor) a total of 500,000,000 Consideration Shares. The Consideration Shares shall rank pari passu in all respects with the Shares in issue on the date of allotment and issue including the right to all dividends, distributions and other payments made or to be made for which the record date falls on or after the date of such allotment and issue; and

(3) as to HK$5,110 million by the Company issuing the Convertible Bonds to the Vendor (or such person(s) as nominated by the Vendor).

In the event that Completion does not take place and this is (i) not the result of any willful act or willful omission or willful default of the Vendor; or (ii) is not solely as a result of any act, omission or default of the Vendor; or (iii) is a result of any act or omission or default of the Purchaser or the Company, the Vendor shall be entitled to forfeit the Earnest Money paid by the Purchaser. The Directors consider that the terms of the forfeit (including the amount and the forfeit situations) are fair and reasonable and in the interest of the Company and the Shareholders as a whole.

In the event that Completion does not take place and this is solely a result of any act, omission or default of the Vendor or is a result of any willful act or willful omission or willful default of the part the Vendor, then the Vendor shall forthwith return, without any interest, the Earnest Money to the Purchaser.

The Earnest Money was funded with the proceeds received by the Company from the issue of the HK$50 million convertible notes on 26 February 2008. On or before 31 March 2008, the entire HK$50 million convertible notes were converted into 1,000,000,000 new Shares. Particulars of the subscription and subsequent conversions are contained in the Company's announcements dated 15 January 2008, 26 February 2008 and 3 April 2008.

In an announcement dated 7 April 2008, the Company had raised approximately HK$49.2 million by placing 114,000,000 new Shares during a fund raising exercise which was concluded on 17 April 2008. Proceeds from this placement have been designated for the Group's business expansion, including the proposed Acquisition.

In an announcement dated 3 October 2008, the Company had entered into a 3-year €200 million convertible loan agreement (the "CLA") with Fortress World Limited (the "Lender"), an Independent Third Party. The loan accrues interest in arrears at a fixed rate of 3.00% per annum, which is payable on annual basis. Pursuant to the terms of the CLA, the Lender may at any time after the drawdown date but before the third anniversary of the drawdown date, convert the amount outstanding under the loan into up to 2,000,000,000 new Shares of the Company at a rate of €0.10 per Share (equivalent to HK$1.11678 per Share, based on the exchange rate of Euro 1.00:HK$11.1678) at a fixed conversion rate of one (1) Euro to HK$11.1678. The loan will also be automatically converted into new Shares of the Company if the average closing price of the Shares traded on the Stock Exchange is not less than HK$1.11678 over a period of 5 consecutive trading days. No conversion of the Convertible Loan shall be permitted to the extent that following such conversion, the Lender and parties acting in concert with it will, directly or indirectly, control or be interested in twenty-nine per cent (29%) or more of the entire issued Shares or in such lower percentage as may from time to time be specified in the Takeovers Code as being the level for triggering a mandatory general offer. Under the terms of the CLA, the Lender shall not exercise the

LETTER FROM THE BOARD

Conversion Right if the allotment and issue of the Conversion Shares to the Lender pursuant to an exercise of the conversion right will cause the Company to be in breach of the minimum public float requirement stipulated under Rule 11.23 of the GEM Listing Rules.

As announced previously, the conversion right and the conversion shares to be allotted and issued under the CLA will be subject to the Shareholders approving the grant of a special mandate to the Directors at an extraordinary general meeting. The Company is preparing the relevant circular and will seek to conduct such extraordinary general meeting in due course.

The CLA is not conditional on the Acquisition Agreement and vice versa, and each is not interconditional with the other. To the best of knowledge, information and belief of the Directors after having made all reasonable enquiry, the Lender and its associates do not have any relationship with the parties of the Acquisition Agreement, Mogan SHA, Mogan SPA and the shareholders holding the remaining 60% interest in each of Belgravia and Triple Edge.

Prior to Completion, the Company has no obligation whatsoever to fund any of the Target Company's working capital requirements. In case of any advance is made to the Target Company prior to Completion, the Company will make appropriate disclosure in accordance with the requirement of the GEM Listing Rules.

Particulars of the Promissory Note, the Consideration Shares, and the Convertible Bonds are set out in the paragraphs headed "Promissory Note", "Consideration Shares" and "Convertible Bonds" below.

Basis of Determination of the Acquisition Price

The Acquisition Price was determined after considering the following factors:

(i) the exciting opportunity presented by the Acquisition for the Company, a foreign investor for Philippines purposes, to enter into a major joint venture set up to explore, drill, mine and trade magnetite and other valuable mineral resources since the Republic of the Philippines had banned beach mining in 1977 and subsequently suspended the acceptance or processing of offshore mining applications pursuant to a temporary suspension order issued by the DENR, and lifting of the temporary suspension on acceptance or processing of mining applications covering offshore areas in 2004;

(ii) the Company believes Mogan may be the holder of mining rights relating to very significant untapped sources of magnetite placer deposits based on the preliminary information available to the Purchaser on the social-economic, demography, physical, climatological and geological setting of Eastern Leyte Province and the Leyte Gulf as it relates to potential geological resource of the Mining Claims, including, among others, the marine seismic reflection survey jointly executed by the MGB and the Philippine Bureau of Coast and Geodetic Survey under the supervision of experts from the Project Office of the CCOP, a UNDP supported inter-governmental body which was established to help member countries explore their offshore area for mineral deposits;

(iii) the preliminary results from the grab sampling and piston coring sampling programs have indicated a high level of magnetics and iron content;

LETTER FROM THE BOARD

(iv) the Philippines' advantageous geographic location to the PRC relative to Brazil and Australia. The distance between Shanghai and the Amazons in Brazil is approximately 16,886 kilometers, or 10,943 miles, or 9,118 nautical miles. It is approximately 7,020 kilometers, or 4,362 miles, or 3,791 nautical miles from Shanghai to Western Australia (location of the Pilbara mines which is reputed to contain one of the world's largest magnetite reserves), and approximately 1,841 kilometers, or 1,144 miles, or 994 nautical miles from Shanghai to Manila in the Philippines. Manila is approximately 581 kilometers, or 361 miles, or 314 nautical miles away from Tacloban, the capital of Leyte Province. The Philippines' relatively shorter distance to China would enable the Chinese steel manufacturing companies to enjoy savings in the form of lower transportation costs when importing magnetite (the principal raw material in the production of steel products). The physical location(s) of the assets under the Acquisition will give the Company a natural advantage to compete more effectively (in terms of pricing) and efficiently (in terms of product delivery) in this global industry once it is in production operation;

(v) the then current state of the worldwide economy has placed a strong emphasis on the availability of natural resources;

(vi) the upward price trend(s) of magnetite as the principal raw material in the production of steel globally which has substantially increased in recent years; and

(vii) the Directors' belief that with optimization, the proposed Acquisition will provide a healthy and steady stream of future income as well as diversify the overall business risks of the Company.

The Acquisition Price was reached after arm's length negotiations between the parties to the Acquisition Agreement. The Directors consider that the terms of the Acquisition (including the amount and payment method of the Acquisition Price) are normal commercial terms that are fair and reasonable.

The Valuer, appointed by the Purchaser, has appraised the value of the business operation of Mogan in relation to the offshore magnetite mining tenements in Leyte Gulf and San Pedro Bay at approximately US$4,685 million (or US$2,998 million as to 64% of total value) as at 31 August 2008 using the discounted cash flow approach to valuation. The text of the valuation report is included in Appendix VI of this circular for your reference.

The discounted cash flow approach estimates the value of the future economic benefits a proposed project is anticipated to generate. Indications of value have been developed by discounting the project future the said business operation of net cash flows to their present worth at market driven rates of return. Using this approach to value Mogan is considered to be a profit forecast in respect of the Target Company. Cachet, the Company's reporting accountants, has confirmed that they have reviewed the accounting policies and calculations in respect of the profit forecast and the profit forecast is presented on a basis consistent in all material respects with accounting policies normally adopted by the Group; and the Directors have confirmed that the profit forecast has been made after due and careful consideration.

LETTER FROM THE BOARD

Conditions precedent

Completion of the Acquisition is subject to the fulfillment of the following conditions precedent:

(1) the Purchaser being satisfied with the results of a due diligence review of Target Group and that the Reorganization has been properly completed in accordance with applicable laws;

(2) the approval by the Shareholders of the Company (with such Shareholders as required under the GEM Listing Rules or the Takeovers Code abstaining from voting on the relevant resolution(s)) of the Acquisition Agreement and the transactions contemplated thereunder (including but without limitation to the issue of the Convertible Bonds and Consideration Shares) and all other consents and acts required under the GEM Listing Rules and the Takeovers Code being obtained and completed or, as the case may be, the relevant waiver from compliance with any of such requirements being obtained from the Stock Exchange or the SFC;

(3) the Purchaser receiving legal opinions obtained at the Purchaser's expense, in form and substance satisfactory to the Purchaser, to be issued by a firm of lawyers nominated by the Purchaser in such jurisdiction (including the British Virgin Islands and the Philippines) and covering such matters relating to the ownership of the Mining Claims and the business of Target Group and the Reorganization, having been obtained;

(4) the Purchaser being satisfied with the terms of the Mogan SPA and the Mogan SHA;

(5) the GEM Listing Committee having granted listing of and permission to deal in the Consideration Shares and the Conversion Shares;

(6) all approvals, consents and acts (whether required under laws, codes, regulations, the GEM Listing Rules or otherwise) for the purpose of or in connection with Completion being obtained and completed or, as the case may be, the relevant waiver from compliance with any of such provisions being obtained from the relevant authority (including without limitation, the Stock Exchange);

(7) the Board approving and authorizing the transactions contemplated in the Acquisition Agreement, the issue of the Convertible Bonds and the Promissory Note and the allotment and issue of the Consideration Shares and of the Conversion Shares upon the exercise of the conversion rights attached to the Convertible Bonds;

(8) the Purchaser having obtained a technical report issued by the Technical Adviser at the Purchaser's expense that indicates the Mining Area has an inferred geological resource of magnetite sand of not less than 1.5 billion metric tons;

(9) no indication being received from the Stock Exchange that the transactions contemplated under this Acquisition Agreement will be treated or, as the case may be, ruled by the Stock Exchange as a "reverse takeover" under the GEM Listing Rules;

LETTER FROM THE BOARD

(10) none of the warranties given by the Vendor and the Purchaser respectively in the Acquisition Agreement having been breached in any material respect (or, if capable of being remedied, not having been remedied), or is misleading or untrue in any material respect;

(11) the Purchaser being satisfied that, from the date of the Acquisition Agreement to Completion, there has not been any Material Adverse Change in respect of any member of Target Group; and

(12) (i) there being no event, or series of events, beyond the reasonable control of the relevant member of Target Group (including, without limitation, acts of government or orders of any courts, strikes, calamity, crisis, lock-outs, fire, explosion, flooding, civil commotion, acts of war, outbreak or escalation of hostilities (whether or not war is declared), acts of God, acts of terrorism, declaration of a national or international emergency, riot, public disorder, economic sanctions, outbreaks of diseases or epidemics including Severe Acute Respiratory Syndrome and H5N1 and such related or mutated forms or interruption or delay in transportation); or

(ii) there being no change or development involving a prospective change, or any event or series of events likely to result in any change or development involving a prospective change, in local, national, international, financial, economic, political, military, industrial, fiscal, regulatory, currency or market conditions or matters in the Philippines or Hong Kong; or

(iii) there being no new law or change or development involving a prospective change in existing laws or any change or development involving a prospective change in the interpretation or application thereof by any court or other competent authority in the Philippines or Hong Kong,

which in each case:

(a) is or will or could be expected to have a material adverse effect on the general affairs, management, business, financial, trading or other condition or prospects of any member of Target Group; or

(b) makes it impracticable for the Acquisition to proceed.

As at the Latest Practicable Date, only conditions set out in paragraphs (4) and (8) above have been fulfilled.

If any of the conditions set out above is not fulfilled or, except for the conditions (2), (5), (6), (7) and (9) which may not be waived, waived by the Purchaser (or in the case of condition (10), in respect of the warranties given by the Purchaser, waived by the Vendor) on or before 12:00 noon on the Long Stop Date, the obligations of the parties shall cease and determine (save and except the provisions on confidentiality which shall continue to have full force and effect) and none of the parties shall have any claim under the Acquisition Agreement against the others of them save in respect of any antecedent breaches.

LETTER FROM THE BOARD

Completion

Completion of the Acquisition shall take place on the fifth Business Day following the date on which all of the conditions (1) to (8) above shall have been fulfilled (or, where applicable, waived).

PROMISSORY NOTE

The non-interest bearing Promissory Note in the principal sum of HK$200 million shall be payable in four (4) installments as follows:

Payment	Installment Date	Amount
1.	The first Business Day immediately after three (3) months from the Completion Date	HK$50.0 million
2.	The first Business Day immediately after six (6) months from the Completion Date	HK$50.0 million
3.	The first Business Day immediately after nine (9) months from the Completion Date	HK$50.0 million
4.	The first Business Day immediately after twelve (12) months from the Completion Date	HK$50.0 million

The Purchaser reserves the right to defer all installment payments until the final installment date. The Purchaser shall have the right at any time to prepay the Promissory Note or to request for an extension by not exceeding six (6) months beyond the final installment date for the full repayment of the Promissory Note.

CONSIDERATION SHARES

The issue price of the Consideration Shares is HK$0.70 per Consideration Share, which was determined after arm's length negotiations between the parties with reference to the recent market price of the Shares (at the time when the Acquisition was entered into between the Vendor and the Purchaser) and the net asset value per Share as at 30 September 2007 of HK$0.012 (based on the unaudited net assets of the Company as at 30 September 2007), represents (i) a premium of approximately 5,833% over the net asset value per Share as at 30 September 2007 of HK$0.012; (ii) a discount of approximately 22.2% to the closing price of HK$0.90 per Share as quoted on the Stock Exchange on the Last Trading Day; (iii) a discount of approximately 14.6% to the average of the closing prices as quoted on the Stock Exchange for the last five trading days up to and including the Last Trading Day of HK$0.82 per Share; and (iv) a discount of approximately 6.7% to the average of the closing prices as quoted on the Stock Exchange for the last ten trading days up to and including the Last Trading Day of HK$0.75 per Share.

The Consideration Shares represent approximately 24.4% of the existing issued share capital of the Company and approximately 19.6% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares. The Consideration Shares will be issued under a specific mandate proposed to be obtained at the EGM. An application will be made to the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares.

LETTER FROM THE BOARD

In determining the issue price of the Consideration Shares, the Directors had considered (a) the net asset value per Share as at 30 September 2007 of HK$0.012 (based on the unaudited net assets of the Company as at 30 September 2007) and (b) the Vendor's willingness to accept the Consideration Shares instead of immediate cash settlement of the relevant part of the consideration for the Acquisition. The Shares were traded within a range of HK$0.07 to HK$0.90 per Share between 19 September 2007 to 2 May 2008, 150 trading days up to and including the Last Trading Day. The Directors consider that the recent increase in the trading prices of the Shares (at the time when the Acquisition was entered into between the Vendor and the Purchaser) might be attributable to the then recent market sentiment and in reaction to the Company's previous announcements on the MOU and fund raising exercises. Notwithstanding the then surge in the trading prices, the Directors had taken into account the fact that the issue price of the Consideration Shares of HK$0.70 per Consideration Share represents (a) a premium of about 5,833% over the net asset value per Share as at 30 September 2007; and (b) a premium of approximately 241.46% over the closing price of HK$0.205 per Share as quoted on the Stock Exchange on 12 November 2008, being the Latest Practicable Date. In view of the above, the Directors consider that the issue price of the Consideration Shares is fair and reasonable and is in the interest of the Company and the Shareholders as a whole.

CONVERTIBLE BONDS

The principal terms of the Convertible Bonds are as follows:

Principal amount

Approximately US$655,128,205 (approximately HK$5,110 million based on a fixed exchange rate of HK$7.8 to US$1) comprising two tranches: the total principal amount of Tranche A Bonds is US$425,833,333 while the total principal amount of Tranche B Bonds is US$229,294,872.

Form and denomination

The Convertible Bonds will be issued in registered form and in the denomination of US$100,000 each and in integral multiples of US$100,000 thereof.

Maturity Date

The date falling on the 10th anniversary of the Completion Date.

Interest

The Convertible Bonds shall accrue no interest.

Transferability

A Convertible Bond may be transferred to any person in whole multiples of US$100,000 (or such lesser amount as may represent the entire principal amount thereof).

LETTER FROM THE BOARD

The Company will promptly notify the Stock Exchange of Hong Kong upon becoming aware of any dealings in the Convertible Bonds by any connected person of the Company.

Conversion

Bondholders have the right to convert their Convertible Bonds into Conversion Shares at any time during the period from the date of issue of such Convertible Bonds up to the Maturity Date, in amounts of not less than a whole multiple of US$100,000, save that if at any time the outstanding principal amount of the Convertible Bond held by a Bondholder is less than US$100,000, or if a Bondholder intends to exercise the conversion rights attached to the entire principal amount of all the Convertible Bonds held by him, the Bondholder may convert the whole (but not part only) of such outstanding principal amount of the Convertible Bonds.

Upon full conversion of the Convertible Bonds into Conversion Shares, a total of 7,300 million Shares will be issued by the Company.

Each Bondholder shall exercise the conversion rights attaching to the Convertible Bonds only if the allotment and issue of the Conversion Shares to such Bondholder pursuant to an exercise of the conversion right will not cause the Company to be in breach of the minimum public float requirement stipulated under Rule 11.23 of the GEM Listing Rules.

No conversion right may be exercised by a Bondholder, to the extent that, following such exercise, a Bondholder and parties acting in concert with it, taken together, will directly or indirectly, control or be interested in 29% or more of the entire issued Shares (or in such lower percentage as may from time to time be specified in the Takeovers Code as being the level for triggering a mandatory general offer). The Acquisition will not result in a change of control of the Company.

The Conversion Shares will be issued pursuant to a specific mandate to be granted to the Directors by the Shareholders at the EGM.

Conversion Price

The Convertible Bonds shall be converted at the Conversion Price of HK$0.70 (subject to adjustment as mentioned below) per Conversion Share.

The Conversion Price of HK$0.70 per Conversion Share, which was determined after arm's length negotiations between the parties with reference to the recent market price of the Shares (at the time when the Acquisition was entered into between the Vendor and the Purchaser) and the net asset value per Share as at 30 September 2007 of HK$0.012 (based on the unaudited net assets of the Company as at 30 September 2007), represents (i) a premium of approximately 5.833% over the net asset value per Share as at 30 September 2007 of HK$0.012; (ii) a discount of approximately 22.2% to the closing price of HK$0.90 per Share as quoted on the Stock Exchange on the Last Trading Day; (iii) a discount of approximately 14.6% to the average of the closing prices as quoted on the Stock Exchange for the last five trading days up to and including the Last Trading Day of HK$0.82 per Share; and (iv) a discount of approximately 6.2% to the average of the closing prices as quoted on the Stock Exchange for the last ten trading days up to and including the Last Trading Day of HK$0.75 per Share.

LETTER FROM THE BOARD

For the same reason as mentioned above regarding the determination of the issue price of the Consideration Shares, the Directors have considered the net asset value per Share as at 30 September 2007 of HK$0.012 in determining the Conversion Price. The Conversion Price of HK$0.70 per Conversion Share represents (a) a premium of about 5,833% over the net asset value per Share as at 30 September 2007; and (b) a premium of approximately 341.46% over the closing price of HK$0.205 per Share as quoted on the Stock Exchange on 12 November 2008, being the Latest Practicable Date. The Directors consider that the Conversion Price is fair and reasonable and is in the interest of the Company and the Shareholder as a whole.

Redemption and purchase

Upon occurrence of an event of default set out in the conditions of the Convertible Bonds, a Bondholder shall have the right to require the Company to redeem in whole but not in part the entire outstanding principal amount of all of the Convertible Bonds held by such Bondholder by giving the Company a notice in writing. The date of redemption in respect of such outstanding amount shall be the date falling seven Business Days of the date of such notice.

The Company or any of its subsidiaries may at any time and from time to time purchase Convertible Bonds at any price as agreed between the Company or such subsidiaries and the relevant Bondholder.

The Company shall redeem any Convertible Bond which remains outstanding on the Maturity Date at its principal amount.

Cancellation

Immediately upon redemption by the Company or purchase by the Company or any of its subsidiaries, the Convertible Bonds so redeemed or purchased shall be cancelled. Any Convertible Bond so cancelled shall not be re-issued or re-sold.

Adjustment to Conversion Price

The Conversion Price is subject to adjustments upon the occurrence of, among other matters, subdivision or consolidation of Shares, capitalization issues, rights issues and grant to Shareholders of options, warrants or other rights to subscribe for or purchase any Shares (depending on the subscription or purchase prices), which adjustments shall be certified by an approved merchant banker or the auditors of the Company.

Voting rights and ranking

Bondholders shall not be entitled to attend or vote at any general meeting of the Company. Upon issue and allotment, Conversion Shares shall rank in all respects pari passu with all Shares in issue as at the date of allotment and issue.

Listing

The Convertible Bonds will not be listed on the Stock Exchange or any other stock exchange. An application will be made to the Stock Exchange for the listing of, and permission to deal in, the Conversion Shares.

LETTER FROM THE BOARD

Shareholding chart of the Company

The following chart sets out the percentage shareholding in the Company (i) as at the date of this circular, and (ii) after issue of the Consideration Shares (assumes no conversion under the Convertible Bond and the Convertible Loan and no exercise of the WS Option; (iii) after issue of the Consideration Shares (assumes the conversion of the Convertible Bond and conversion of the Convertible Loan (note 4) and the exercise of the WS Option); and (iv) after issue of the Consideration Shares (assumes the full conversion of the Convertible Bond and full conversion of the Convertible Loan and the exercise of the WS Option), assuming that there is no other change in the issued share capital of the Company:

| Shareholders | As at the date of this circular
No. of Shares
(%) | After issue of the Consideration Shares (assumes no conversion under the Convertible Bond and the Convertible Loan and no exercise of the WS Option)
No. of Shares
(%) | After issue of the Consideration Shares (assumes the conversion of the Convertible Bond and conversion of the Convertible Loan (note 4) and the exercise of the WS Option)
No. of Shares
(%) | After issue of the Consideration Shares (assumes the full conversion of the Convertible Bond and full conversion of the Convertible Loan and the exercise of the WS Option)
No. of Shares
(%) |
| --- | --- | --- | --- | --- |
| Nice Hill Investments Ltd.
(note 1) | 287,663,501
(14.056%) | 287,663,501
(11.296%) | 287,663,501
(7.214%) | 287,663,501
(2.427%) |
| Well Spread Consultant Ltd.
(note 2) | - | - | 5,000,000
(0.125%) | 5,000,000
(0.042%) |
| Vendors (and parties acting in concert with it)
(note 3) | 17,840,000
(0.872%) | 517,840,000
(20.335%) | 1,156,371,000
(28.999%) | 7,817,840,000
(65.965%) |
| Lender | - | - | 797,491,000
(19.999%)
(note 5) | 2,000,000,000
(16.875%) |
| Public | 1,741,030,522
(85.072%) | 1,741,030,522
(68.369%) | 1,741,030,522
(43.662%) | 1,741,030,522
(14.690%) |
| Total | 2,046,534,023
(100.00%) | 2,546,534,023
(100.00%) | 3,987,556,023
(100.00%) | 11,851,534,023
(100.00%) |

LETTER FROM THE BOARD

Notes:

Nice Hill Investments Ltd. is a company incorporated in the British Virgin Islands with limited liability and wholly owned by Mr. Chin Wai Keung, Richard, the chairman and executive director of the Company.
Well Spread Consultant Ltd. is the holder of stock options, granted by the Company on 6 March 2007 and expiring on 5 March 2017, which allows it to subscribe for 6,000,000 Shares at a subscription price of HK$0.188 per Share. As at the date of this Announcement, Well Spread Consultant Ltd. has subscribed for 1,000,000 Shares and has the option to further subscribe for another 5,000,000 Shares prior to expiry on 5 March 2017. Other than these stock options, Well Spread Consultant Ltd. does not have any other option, warrant or similar right to subscribe or purchase for shares in the capital of the Company. Save as disclosed, the Company has not granted any other option, warrant or similar right to subscribe or purchase for shares in the capital of the Company.
Each of Nice Hill Investments Ltd. and Mr. Chin Wai Keung, Richard (including their respective concert parties) has confirmed that he or it is not acting in concert with the Vendor and its concert parties (including Mr. Yin Mark Tehmin who holds 2,880,000 Shares as at the Latest Practicable Date).
Under the conditions of the Convertible Bonds, no conversion right may be exercised, to the extent that following such exercise, a Bondholder (including the Vendor and its concert parties) and parties acting in concert with it, taken together, will directly or indirectly, control or interested in 29% or more of all the issued Shares. Therefore, a Bondholder (including the Vendor and its concert parties) is able to convert any Convertible Bonds to the extent that the aggregate shareholding of the Vendor (and its concert parties) in the Company will be less than 29% as a result of such conversion. Further, a Bondholder shall exercise the conversion rights attaching to the Convertible Bonds only if the allotment and issue of the Conversion Shares to such Bondholder pursuant to an exercise of the conversion right will not cause the Company to be in breach of the minimum public float requirement stipulated under Rule 11.23 of the GEM Listing Rules.

For purposes of this table, it has been assumed that the maximum shareholding in the Company, after taking into account the Consideration Shares and the Shares to be issued upon conversion of the Convertible Bonds, which the Vendor and the parties acting in concert with it is interested in, is 28.99% of the enlarged share capital of the Company.

The Company is aware that under the Takeovers Code, a company which owns or controls 20% or more of the voting rights of the Company is considered an "associated company" of the Company and associated companies of the Company will be presumed to be acting in concert with each other, unless the contrary is established. For purposes of illustration, it has been assumed that the Lender will only convert the Convertible Loan into Shares representing a maximum of 19.99% of the enlarged share capital of the Company and will not be an associated company for purposes of the Takeovers Code. In any event, under the terms of the Convertible Loan Agreement, the conversion of the Conversion Right is subject to the Lender and the parties acting in concert with it not being interested in 29% or more of the enlarged share capital of the Company (or such lower percentage as may from time to time be specified in the Takeovers Code as being the level for triggering a mandatory general offer).

Dilution effect on Shareholders as a result of conversion of Convertible Bonds

The Conversion Shares (assuming the Convertible Bonds are exercised in full) represent (1) approximately 356.7% of the existing issued share capital of the Company; and (2) approximately 286.7% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares; and (3) approximately 74.1% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares and the Conversion Shares.

LETTER FROM THE BOARD

In view of the potential dilution effect on existing Shareholders on exercise of conversion rights attaching to the Convertible Bonds, for so long as any of the Convertible Bonds are outstanding, the Company will keep the Shareholders informed of the level of dilution and details of conversion as follows:

(i) the Company will make a monthly announcement (the “Monthly Announcement”) on the websites of the Stock Exchange and the Company. The Monthly Announcement will be made on or before the fifth business day following the end of each calendar month and will include the following details in a table for form:

(a) whether there is any conversion of the Convertible Bonds during the relevant month. If yes, details of the conversion(s), including the conversion date, number of new Shares issued, conversion price for each conversion. If there is no conversion during the relevant month, a negative statement to that effect;

(b) the outstanding principal amount of the Convertible Bonds after the conversion, if any;

(c) the total number of Shares issued pursuant to other transactions, including Shares issued pursuant to exercise of options under any share option scheme(s) of the Company;

(d) the total issued share capital of the Company as at the commencement and the last day of the relevant month; and

(ii) in addition to the Monthly Announcement, if the cumulative amount of new Shares issued pursuant to the conversion of the Convertible Bonds, reaches 5% of the issued share capital of the Company as disclosed in the last Monthly Announcement or any subsequent announcement made by the Company in respect of the Convertible Bonds (as the case may be) (and thereafter in a multiple of such 5% threshold), the Company will as soon as practicable but in any event no later than the fifth business day thereafter make an announcement on the websites of the Stock Exchange and the Company including details as stated in (i) above for the period commencing from the date of the last Monthly Announcement or any subsequent announcement made by the Company in respect of the Convertible Bonds (as the case may be), up to the date on which the total amount of Shares issued pursuant to the conversion amounts to 5% of the issued share capital of the Company as disclosed in the last Monthly Announcement or any subsequent announcement made by the Company in respect of the Convertible Bonds (as the case may be).

In addition, if the Company forms the view that any issue of Conversion Shares will trigger the disclosure requirements under Rule 17.10 of the GEM Listing Rules, then the Company is obliged to make such disclosure regardless of the issue of any announcement in relation to the Convertible Bonds as mentioned above.

LETTER FROM THE BOARD

RELATIONSHIP BETWEEN THE PARTIES AND IMPLICATION OF THE LISTING RULES

As disclosed in the Company's announcement dated 20 May 2008, Mr. Wong and Mr. Yin were appointed as an executive director and a non-executive director, respectively, of the Company with effect from 20 May 2008. The appointments were subsequent to, and not in connection with, the conditional Acquisition Agreement.

The ultimate and sole beneficial owner of the Vendor, Ms. Eva Wong, is a sister of Mr. Wong and the sister-in-law of Mr. Yin. In this respect, Ms. Eva Wong is an associate of each of Mr. Wong and Mr. Yin, and therefore a connected person of the Company. Although the Acquisition did not constitute a connected transaction under Chapter 20 of the GEM Listing Rules at the time the Acquisition Agreement was entered into, by reason of the subsequent appointment of Mr. Wong and Mr. Yin as directors of the Company and their relationship with the beneficial owner of the Vendor, the Acquisition has been considered to have subsequently become a connected transaction of the Company under the GEM Listing Rules (and is therefore subject to the reporting, announcement and independent shareholders' approval requirements under Chapter 20 of the Listing Rules).

The aggregate original subscription and purchase costs of the Vendor's interest in the Target Company and the Target Company's interests in MMH, Belgravia Investment and Triple Edge would be approximately HK$1.54 billion.

To the best of knowledge, information and belief of the Directors after having made all reasonable enquiry, apart from the Vendor, its ultimate beneficial owner, and/or its associates who hold approximately 17.84 million Shares, representing 0.872% of the total issued share capital of the Company as at the date of this circular, no other Shareholder has a material interest in the Acquisition and thus no Shareholder will be required to abstain from voting on the resolutions to approve the Acquisition at the EGM. The Vendor, its ultimate beneficial owner, and/or its associates including Mr. Yin Mark Teh-min will therefore be required to abstain from voting on the resolutions, which will be conducted by way of poll, approving the Acquisition Agreement and the transactions contemplated thereunder at the EGM, should he/she/it hold any Shares on the date of the EGM.

To the best of knowledge, information and belief of the Directors after having made all reasonable enquiry, the following parties do not hold shares in the Company: (i) the 8 Filipinos and their associates; (ii) the holders of the remaining 60% interest in Belgravia and their respective associates; (iii) the holders of the remaining 60% interest in Triple Edge and their respective associates; and (iv) the Lender and its associates. Should any of such parties hold any Shares on the date of the EGM, they will be required to abstain from voting on the resolutions approving the Acquisition Agreement and the transactions contemplated thereunder; the issue of Convertible Bonds; and the Specific Mandate at the EGM.

LETTER FROM THE BOARD

STRUCTURE CHARTS PRIOR TO/AFTER COMPLETION

As at the Latest Practicable Date and after completion of the Reorganization, the shareholding structure of Mogan is as follows:

*Note: To the best knowledge, information and belief of the Directors after having made all reasonable enquiries, at this stage, the shareholder(s) of MMH, Belgravia Investment and Triple Edge and their respective ultimate beneficial owners and/or associates are Independent Third Parties and do not have any relationship with Nice Hill Investments Ltd., its ultimate beneficial owners and their respective associates.

Shareholding structure of Target Group immediately prior to Completion is as follows:

*Note: This assumes completion of the Mogan SPA.

LETTER FROM THE BOARD

Shareholding structure of the Company and Target Group immediately after Completion:

*Note: The remaining 60% shareholding in Belgravia Investment and Triple Edge will be held by various Independent Third Parties and such Independent Third Parties do not have any relationship with Nice Hill Investments Ltd, its ultimate beneficial owners and their respective associates.

The Reorganization enables the Purchaser to acquire an effective 64% shareholding interest in Mogan, being the Philippine corporation that is or will be the legal holder of the Mining Claims. The principal business activities of MMH, Belgravia Investment and Triple Edge will be solely for the purpose of investment holding.

However, the state has the option of entering into co-production, joint venture or production sharing arrangements with Philippine corporations or associations or Philippine citizens. At least 60% of the capital of a corporation or association must be directly held by Philippine citizens for such corporation or association to be considered a Philippine corporation or association.

LETTER FROM THE BOARD

INFORMATION ON THE GROUP, THE VENDOR AND OTHERS

The Company is an investment holding company and its issued Shares are listed on GEM. The Group is principally engaged in the business of distributing home video entertainment – in both video compact disc and digital video disc formats – across popular genres to East Asian and Southeast Asian markets. In addition to home video distribution, the Company provides entertainment programs under license to other platforms including cable television. The Company's capability to license, co-produce and distribute animated feature films, animations and related merchandising has grown after it acquired Datewell Group in December 2006. It is currently the owner of the film library and rights to 150 episodes of exceptionally popular anime such as Pleasant Goat and Big Big Wolf. The Directors have no present intention to discontinue any of the existing principal business of the Group. Hence, the Directors do not consider the Acquisition constitutes a change of business of the Group. Instead, they are of the view that the Acquisition will lead to a diversification of the Group's business.

To the best knowledge of the Directors, the Vendor is an investment holding company incorporated in the British Virgin Islands.

The Directors expect to appoint person(s) with the relevant experience and expertise in the exploration, drilling, mining and trading of mineral resources in the management of the Group since the existing management of the Group does not have such relevant experience and expertise. The Directors currently do not expect there will be any change in the composition of the Board in connection with the Acquisition. The Company has identified various potential candidates with relevant experience in the mining, engineering or metallurgical industry and is in discussions with them to join the Group and provide technical support to its current management team.

None of the Vendor, the 8 individual Filipinos, the owner(s) of the remaining 60% of Mogan or their representatives will, on Completion, have any legal right to be appointed as the director(s) of the Group, save as disclosed below:

(a) the shareholders holding shares representing the remaining 60% of the share capital of Mogan, being Belgravia Investment and Triple Edge, will have the right to appoint up to two directors to the board of Mogan. MMH will have a right to appoint up to two directors to the board of Mogan. MMH, Belgravia Investment and Triple Edge shall jointly appoint the 5th and last director to the board of Mogan. In addition, it has been agreed in principle that on Completion, the final and fifth director to the board of Mogan will be an individual nominated by the Purchaser and who is of Philippine nationality and with a mining engineering background; and whose compensation package will be determined and borne by the Purchasers;

(b) the shareholders holding shares representing the remaining 60% of the share capital of each of Belgravia Investment and Triple Edge (i.e. other than First Pine) will have the right to appoint up to three directors to the board of Belgravia Investment and Triple Edge, respectively. First Pine or the Purchaser will have the right to appoint up to two directors to the board of each of Belgravia Investment and Triple Edge;

LETTER FROM THE BOARD

(c) under the Mogan SPA, the Target Company has committed to use all commercially reasonably efforts to ensure that the sellers under the Mogan SPA shall be entitled to nominate two (2) candidates as Directors. As at the Latest Practicable Date, based on information available to the Directors, no such nomination has been made.

As disclosed in the Company's announcement dated 20 May 2008, Mogan was held by 8 Filipino individuals who were Independent Third Parties and who did not have any relationship with Nice Hill Investments Ltd, its ultimate beneficial owners and their respective associates. There is no relationship between the Vendor and the 8 Filipinos (who were the previous shareholders of Mogan prior to the Reorganization), other than the Mogan SPA between the Target Company and the 8 Filipinos, who were then the shareholders of Mogan. There is also no relationship between the Vendor and the current shareholders of Mogan, other than the Mogan SPA to which they are now a party to this agreement by virtue of their acquisition of substantially all of the shareholding of Mogan previously held by the 8 Filipinos. There is also no relationship between Ms. Eva Wong, Mr. Wong or Mr. Yin with the 8 Filipinos or the current shareholders of Mogan, other than the relationship arising as a result of entering into the Mogan SPA.

The Purchaser could not have acquired Mogan directly from the 8 Filipinos for the following reasons: (i) there were pre-existing commercial arrangements or commitments entered into by the 8 Filipinos and the current shareholders of Triple Edge and Belgravia Investment; (ii) the shareholding structure of Mogan needed to be restructured to facilitate the Acquisition; and (iii) the Vendor had to realign the interests of the 8 Filipinos and the current shareholders of Triple Edge and Belgravia Investment to facilitate the Reorganization.

INFORMATION ON THE TARGET GROUP

The Target Company is a company incorporated in the British Virgin Islands with limited liability on 13 December 2007. The principal activity of Target Group has been securities trading. The Target Company is owned as to 100% by the Vendor.

Based on the audited financial accounts from the date of incorporation to 30 June 2008, the Target Company had a realised gain on securities trading of HK$407,500, a profit before taxation of HK$345,736 and an after-tax profit of HK$280,830 and had net assets of approximately HK$280,838. All the Target Company's assets, liabilities and transactions were denominated Hong Kong dollars and hence, the Target Company was not exposed to material fluctuations in exchange rates and any related hedges. Except for the acquisition contemplated under the Mogan SPA, based on information available to the Company, the Target Company does not have any concrete plan for any particular material investments or capital assets in the year under review.

Upon Completion, the Target Company will become a wholly owned subsidiary of the Company and its financial results will be consolidated with those of the Group.

The Target Company has entered into the Mogan SPA on 2 May 2008 to acquire certain interests in the share capital of Mogan, a corporation organized and existing under the laws of the Philippines on 16 January 2007. Mogan has been established to principally engage in and carry on the business of operating mines; and of prospecting, exploration and of mining.

LETTER FROM THE BOARD

MMH is a company incorporated in the British Virgin Islands with limited liability on 14 July 2008. The sole business activity of MMH is investment holding. MMH acquired the 40% equity interests in Mogan on 6 August 2008. Based on the unaudited financial accounts from the date of incorporation to 31 August 2008, MMH had no turnover, losses before and after-tax of PHP54,810 (approximately HK$9,921 and had net assets of PHP2,195,190 (approximately HK$401,720) comprising an investment in Mogan of PHP2,000,000 (approximately HK$366,000) and an amount due from a shareholder of PHP195,190 (approximately HK$35,720). MMH had no liability, capital commitment and litigation as at 31 August 2008. Upon Completion, MMH will become a wholly owned subsidiary of the Target Company and its financial results will be consolidated with those of the Group.

Belgravia Investment is a company incorporated in the Philippines with limited liability on 11 July 2008. The sole business activity of Belgravia Investment is investment holding. Belgravia Investment acquired the 30% equity interests in Mogan on 29 July 2008.. Based on the unaudited financial accounts from the date of incorporation to 31 August 2008, Belgravia Investment had no turnover, losses before and after tax of PHP206,832 (approximately HK$37,437 and had net assets of PHP2,293,168 (approximately HK$419,650) comprising mainly an investment in Mogan of PHP1,500,000 (approximately HK$274,500), bank and cash of PHP2,190,574 (approximately HK$400,875) and an amount due to a shareholder of PHP1,650,081 (approximately HK$301,965). The amount due to a shareholder was unsecured, interest free and repayable on demand. Belgravia Investment had no capital commitment and litigation as at 31 August 2008. Upon Completion, Belgravia Investment will become a 40% equity owned associated company of the Target Company and its financial results will be equity-accounted for with those of the Group.

Triple Edge is a company incorporated in the Philippines with limited liability on 8 July 2008. The sole business activity of Triple Edge is investment holding. Triple Edge acquired the 30% equity interests in Mogan on 29 July 2008. Based on the unaudited financial accounts from the date of incorporation to 31 August 2008, Triple Edge had no turnover, loss before and after tax loss of PHP205,879 (approximately HK$37,264 and had net assets of PHP2,294,121 (approximately HK$419,824) comprising mainly an investment in Mogan of PHP1,500,000 (approximately HK$274,500), bank and cash of PHP2,338,382 (approximately HK$427,924) and an amount due to a shareholder of PHP1,650,339 (approximately HK$302,012). The amount due to a shareholder was unsecured, interest free and repayable on demand. Triple Edge had no capital commitment and litigation as at 31 August 2008. Upon Completion, Triple Edge will become a 40% equity owned associated company of the Target Company and its financial results will be equity-accounted for with those of the Group.

Upon Completion, the 40% interest in each of Belgravia and Triple Edge acquired by the Group will be equity-accounted for as investment in associated companies. To the extent that the Group is able to demonstrate that the Target Company controls the composition of the board of directors of Mogan, Mogan will be treated as a subsidiary of the Target Company through MMH and in turn, the Company, in accordance with the Hong Kong Financial Reporting Standards. If the Company is unable to demonstrate that the Target Company is able to control the composition of the board of directors of Mogan, then upon Completion, it will only be able to account for the financial results of Mogan on an equity accounting basis. As at the Latest Practicable Date, based on MMH's right to appoint up to two directors to the board of Mogan and the agreed in principle arrangement as regards the fifth and last director of Mogan, the Company believes that it will be able to demonstrate that the Target Company would have control over a majority of members of the board of directors of Mogan and that Mogan can be treated as a subsidiary of the Group.

LETTER FROM THE BOARD

As disclosed in the Company's announcement dated 21 April 2008, Mogan has filed applications to the MGB for permits to conduct exploration activities ("Exploration Permit" or "EP") in the following offshore areas in the Philippines:

(1) EXPA 000110VIII, the offshore Exploration Permit application lodged with the MGB for the mining of magnetite and other associated minerals, covering approximate 15,781.611 hectares along the municipalities of Tanauan, Tolosa, Dulag, Mayorga, MacArthur and Abuyog in Leyte Province;

(2) EXPA OMR002VIII (formerly EXPA-000115-VIII), the offshore Exploration Permit application lodged with the MGB for the mining of magnetite and other associated minerals, covering approximate 25,312.2425 hectares along the municipalities of Basey and Marabut in Samar Province, and the city of Tacloban in Leyte Province.

As disclosed in the Company's announcement dated 9 November 2008, the parties to the Mogan SPA have entered into an amendment agreement (the "Amendment Agreement") to exclude the following two applications (the "Excluded Applications") from Mogan:

(3) EXPA 000099VI, the offshore Exploration Permit application lodged with the MGB for the mining of magnetite and other associated minerals, covering approximate 17,205.2259 hectares along the municipalities of Ilog, Suay, Himamaylan, Binalbagan and Hinigaran in Negros Occidental Province; and

(4) EXPA 000166XIII, the offshore Exploration Permit application lodged with the MGB for the mining of magnetite and other associated minerals, covering approximate 15,535.8295 hectares along the city of Tandag and municipality of Cagwait (formerly disclosed as Claver) in Surigao del Sur Province.

In connection with the exclusion under the Amendment Agreement, the Target Company was given a right of first refusal (the "Right of First Refusal") to acquire any commercial opportunity relating to the Excluded Applications at the consideration of US$1.00. There is no other premium paid by the Company and the Target Company in relation to the Right of First Refusal. The Right of First Refusal is exercisable within 60 days from receipt of a written notice by any of the grantors of its intention to sell, dispose, transfer or otherwise deal with the Excluded Applications. The Right of First Refusal is valid for 6 years from the date of the Amendment Agreement.

The Mining Claims, once accepted by the Philippine Mines and Geo-Sciences Bureau and the respective EXPA(s) have subsequently been reallocated, are essentially legal rights claimed by the holder. The applications, once accepted by the MGB and the respective EXPA(s) numbers assigned thereto, essentially give the applicant priority over the applied areas. This means that said areas cannot be the subject of subsequent applications unless and until the pending applications have been denied by the MGB. Some of the requirements for the Exploration Permit application are the application itself (MGB Form No. 5-1), location and topography maps, the relevant corporate documents (as it relates to the applicant company), formulation and design of the two (2) year exploration work program, two (2) year environmental work program, endorsement certification from the National Commission of Indigenous Peoples, certification from the Environmental Management and Community Relations, proof of financial capability, proof of technical competence, among others.

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As advised by the Company's legal advisers as to the Philippines' law, PJS Law, an EP application will not be accepted if the regional office of MGB considered the documents submitted are incomplete or overlap with the existing mining permits. The acceptance of Mogan's EP applications by the regional offices of MGB concerned implies that the said applications have complied with the said requirements and the said mining areas are not in conflict with any existing mining rights, permits or applications. According to the Company's legal advisers as to the Philippines' law, PJS Law, the notice of the Area Status and Clearance will be issued by a committee formed by the regional office of MGB and the regional office of DENR to indicate that the applied area is open to mining applications. As advised by PJS Law, Mogan's relevant EP applications which have been included in the Acquisition have obtained the Area Status and Clearance notices. After obtaining the Area Status and Clearance notice, Mogan shall arrange for the publication, posting and radio announcement relating to its EP applications, after which interested parties may file any adverse claim, protest or opposition to Mogan's EP applications and the EPs will only be issued if there are no such claims, protests or oppositions or after all claims, protests or oppositions are resolved. As at the Latest Practicable Date, the respective publication, posting and radio announcement relating to Mogan's EP applications (namely EXPA000110VIII and EXPAOMR002VIII at Leyte Province) which have obtained the Area Status and Clearance notices have been made by Mogan.

Onshore mining of mineral sands is permitted in the Philippines except within 200 meters from the mean low tide level along the coast; while offshore mining is permitted except within 500 meters of the mean low tide level, provided this does not interfere with existing marine life. The sea floor in the offshore claimed area is believed to be barren sand, with no coral or aquatic life. It is however illegal under Philippine Law to perform any exploration activities without an approved Exploration Permit, subject to the pertinent provisions on FTAAs and except as may be allowed under applicable regulations as discussed in the succeeding paragraph.

On 1 November 2008, the DENR and Mogan have entered into a one-year memorandum of agreement (the "MOA") setting forth the terms and conditions whereby the parties to the MOA would jointly conduct mineral exploration activities within the Mining Area. The MOA essentially allows Mogan to undertake a joint technical study with the DENR of the areas covered by the Exploration Permits where an immediate technical study of such areas is deemed necessary. The joint technical study team must submit to DENR within 30 days after 6 months from the effective date of the MOA, a report on the implementation of the exploration work program and expenditures, including the results of the survey. The MOA is valid for one year from the date of its registration until such time as the relevant EPs are issued. As at the Latest Practicable Date, EGS (Asia) Limited ('EGS'), a technical consultant and an Independent Third Party, has been appointed and engaged to perform a wide range of services specializing in the area of geophysical and hydrographic studies in a marine environment together with the DENR.

In relation the engagement of EGS and signing of the MOA, an exploration program has been designed to more accurately identify the areas of heavy mineral concentration within the Mining Area within the Leyte Province. The information derived from these additional marine surveys will serve as the basis under which the Philippine Subsidiary will define its' mining objectives ahead of actual mining operations. The principal stages of the exploration work include:

Stage 1 Desk study (report no. 1) – An assessment will be made on the local records from the Philippine Mines and Geosciences Bureau to ascertain the previous mining history. Mining activities would be plotted on site plans for each of the two prospects; and

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Site visits, to assess and confirm mining activities, and to decide on the logistics of carrying out surveys. Fishing activities, vessel anchorages, tide gauge locations, other projects in progress, marine parks, accommodation for surveyors, will all have to be assessed.

Stage 2
The initial surveys would comprise three long lines in each Mining Area. This Stage would be carried out from the survey vessel, M V Sakura. The following equipment would be simultaneously deployed: Swath (multi-beam) echo sounder; dual frequency echo sounder; the EGS high resolution boomer, dual channel side scan sonar; and marine magnetometer.

Stage 3
A careful analysis of Stage 2 results (report no. 2), leading to conclusions about likely mineralized areas. It is conceivable that some of the Mining Area(s) may have to be abandoned during this assessment.

Stage 4
Detailed surveys will be conducted over those areas within the Mining Area considered to be adequately mineralized during the Stage 3 analysis. Surveys would be carried out from local Banka hired in each Mining Area. Surveys would be carried out along lines some 100m to 300m apart (in accordance with JORC Standards). The following equipment would be deployed: dual frequency echo sounder; the EGS high resolution boomer; dual channel side scan sonar; and marine magnetometer.

Stage 5
A final analysis will be made on all geophysical results gathered (report no. 3), leading to recommendations for drilling and testing.

Stage 6
A geochemical analysis will be conducted on pre-determined minerals to be tested. On completion of the analysis coupled with the past mining history identified during the Desk Study, it would be possible to identify those horizons where dredging for mineralization would take place.

Stage 7
A geotechnical (soils) analysis will be conducted. Such tests are essential for undertaking mineral extraction by dredging and comprise of classification and strength tests. Classification tests establish the nature of mineral-bearing sediments (and overlying sediments where present). Particle size distribution and bulk wet density tests would be essential, but the final testing schedule is specified by the dredging company. Strength tests determine the strengths of soils to be dredged, and include unconfined compressive strength tests; again, the testing schedule is specified by the dredging company.

As at the Latest Practicable Date, this Exploration Permit application process is still ongoing. It is difficult to ascertain as to when the MGB will approve the relevant applications. The Directors, will use reasonable efforts to ensure that the Exploration Permits can be obtained at the earliest possible time.

Once approved, an Exploration Permit has an expiry date of two (2) years from the date of issuance and can be renewed for like periods of up to six (6) years. Subject to fulfillment of the terms and conditions of the Exploration Permit, an Exploration Permit can be converted into a number of different mining licenses for the development and exploitation of the applied mineral resources.

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For the avoidance of doubt, it has been agreed that the following onshore mining tenements of Mogan for chromite, nickel laterite, nickeliferrous laterite and other associated mineral deposits will not form part of the assets of Mogan on Completion (the “Exclusion”) and hence the Group will not acquire any interest in such mining tenements pursuant to the Acquisition Agreement:

(a) over 5,103.00 hectares of onshore mining tenements for chromite, nickel laterite and other associated mineral deposits situated within the Municipalities of Las Nieves and Esperanza in the Province of Agusan Del Norte and Agusan Del Sur;

(b) over 2,916.00 hectares of onshore mining tenements for chromite, nickel laterite and other associated mineral deposits situated within the Municipalities of Impasug-ong and Malitbog in the Province of Bukidnon; and

(c) over 190.8571 hectares of onshore mining tenement for nickeliferous laterite and other associated mineral deposits situated within the Municipalities of Basilisa and Cagdianao, Dinagat Island in the Province of Dinagat.

Based on the audited financial statements of Mogan for the 6 months ending 30 June 2008, Mogan had a net loss of PHP1,988,027 (approximately HK$377,725) and a net liability of PHP798,708 (approximately HK$146,164). Other than its Mining Claims, Mogan does not have any other substantial or material asset and liability. In the circumstances, the reporting accountants have indicated in its accountants’ report on Mogan (see Appendix III) that there is material uncertainty relating to the going concern basis of Mogan. However, given that the amounts of the losses and net liabilities are relatively insignificant and the potential of the mining projects contemplated under the Acquisition, the Directors consider the terms of the Acquisition to be fair and reasonable and in the interest of the Company and the shareholders as a whole, notwithstanding the financial position of Mogan as set out in the Mogan accountants’ report. For further financial information of Mogan, please refer to Appendix III to the circular.

Upon Completion, the Target Company will become a wholly owned subsidiary of the Purchaser while Mogan will become an indirect subsidiary of the Company and their respective financial results will be consolidated with those of the Group.

MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET COMPANY

The Target Company was incorporated on 13 December 2007 in British Virgin Islands with an issued capital of US$1 (approximately HK$8) and the principal activity of securities trading. According to the accountants’ report on the Target Company as set out in Appendix II, during the period from 13 December 2007 (date of incorporation) to 30 June 2008 the Target Company had a realised gain on securities trading of HK$407,500, an operating profit of HK$345,736 and a profit attributable to equity holders of HK$280,830.

As of 30 June 2008 the Target Company had net assets of HK$280,838 mainly comprising trading securities of HK$402,000, an amount due to a director of HK$49,234 and tax payable of HK$64,906. The Target Company had no bank borrowing, no charge on asset, no contingent liability and no litigation as at 30 June 2008.

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During the period from 13 December 2007 (date of incorporation) to 30 June 2008, all assets and liabilities of the Target Company were denominated in Hong Kong dollars and had no exposure to foreign currency risk. Save for the Mogan SPA, the Target Company had no employee, no acquisition and disposal. Upon Completion, the Target Company will be accounted for as a wholly owned subsidiary of the Company.

MANAGEMENT DISCUSSION AND ANALYSIS OF MOGAN

Mogan was incorporated on 16 January 2007 in The Philippines with an issued capital of PHP2,500,000 (approximately HK$457,500) engaging in the business of mining. Mogan adopted 31 December as the financial year end date. During the 12 months from 1 July 2007 to 30 June 2008 Mogan's business was not exposed to material seasonal fluctuation. According to the accountants' report on Mogan as set out in Appendix III, during the 6 month period from 1 January 2008 to 30 June 2008 Mogan had no turnover and had an operating loss and loss attributable to shareholder of PHP1,988,027 (approximately HK$377,725).

As of 30 June 2008 Mogan had net liabilities of PHP798,708 (approximately HK$146,164) mainly comprising mining rights and deferred exploration costs of PHP5,133,180 (approximately HK$939,372) and an advance from an individual and a company of PHP6,101,000 (approximately HK$1,116,483). Both of the individual and the company subsequently acquired equity interests in Mogan through MMH, Belgravia Investment and Triple Edge after 30 June 2008. Mogan had no bank borrowing, no charge on asset, no contingent liability and no litigation as at 30 June 2008.

As of 30 June 2008 all assets and liabilities of Mogan were denominated in Philippines Pesos and had no material exposure to foreign currency fluctuations. Mogan had no employee, no acquisition and disposal and had no concrete plan for acquiring any material investment or capital assets during the period from 16 January 2007 (date of incorporation) to 30 June 2008. Upon Completion, Mogan will be accounted for as a subsidiary of the Company.

BUSINESS PLAN

Target Group, through the Philippine Subsidiary, is targeting to commence mining operations in the first half of 2009. The Company is in discussions with specialist equipment providers as regards dredgers needed for purpose of mineral extraction, and intends to build, construct and operate an onshore beneficiation plant. It is also envisioned that the related shipping logistics facilities will be built and operated by the Philippine Subsidiary.

The Philippine Subsidiary has engaged Parsons Brinckerhoff, a worldwide leading Engineering and Project Management firm, to handle project management, procure proposals and feasibility studies from various professional service providers including Furgo Survey Ltd., Jan De Nul Group and GHD and to manage the construction processes and operation logistics.

During the first phase of business development, the plan requires the Philippine Subsidiary to purchase not less than 5 dredgers over a 12 month period to kick start the business. It is expected that each dredger will cost at least US$12.1 million (the final cost, model and make may vary depending on capacity, capability and delivery schedule). The total capital expenditure for the first phase will amount to approximately US$193.3 million. Each dredger is expected to have a minimum dredging capability

LETTER FROM THE BOARD

of 2,500 cubic meters per hour. In relation to the proposed beneficiation plant, piling warehouses, and related shipping logistics facilities, those facilities are now in the planning stage. Based on the projected operations, the Group initially plans to set up 2 principal offices in the Philippines, one will be situated near or about at the mining site to facilitate mining operations, while the main local office in metro Manila in Makati City will serve as the sales and administrative office. The Group will also retain the existing office in Hong Kong principally to serve as a sales office for regional customers, and for the accounting functions.

GEOLOGY BACKGROUND

Southern Leyte Island is dominantly covered by Quaternary volcanics and Early Miocene pyroclastics and sediments. Its eastern coast line is believed to be dotted with sizeable deposits of magnetite sand, and was once the site of magnetite mining by Vale INCO in the 1970s prior to the ban on beach mining. Southern Samar on the eastern side of the Leyte Gulf is generally covered by basaltic flows with intercalation of essentially greywacke. Ultramafics of peridotite and gabbro intrude the volcanics. San Pedro and San Pablo Bay is a small depositional basin, about 300 square kilometers oriented parallel to the Island of Leyte. Superficial sediments are found to be thin out to the east and thicken to the west.

Onshore, the alluvial deposits of magnetite iron ore are believed to occur along the east coast of the Leyte Island in a large plain of unconsolidated alluvial and eluvial sand, which has a north-south diminension of approximately 45 kilometers and maximum width of 15 kilometers. The alluvial plain is bounded by the Central highlands to the west (which hosts significant geothermal power) and Leyte Gulf to the east. The west coast of Leyte Island hosts the PASAR copper smelter and the super phosphate plant of Philphos.

The placer magnetite sand deposits are believed to have resulted from the weathering, persistent wave and river action occurring over the past 150,000 years, of basement rocks, the remnants from the beach and shoreline due to the steady incline of the continental margins. The basement rocks are generally pre-Miocene metamorphic rocks consisting chiefly of epidote actinolite-albite schist, serpentine and gabbro associated with spilitic basalt and are intensely folded and faulted.

Progressive reworking of the placer deposits by sea currents and wave action has resulted in the growth of the heavy mineral rich sand, gravel and clay deposits. Strand lines that indicate higher grade magnetite deposit belts are not identifiable at ground level but can be identified in satellite imagery. Similarly, underwater magnetometer, radiometric and thermographic surveys could be of additional assistance in locating strandlines for offshore exploration.

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PAST MINERALOGY (source: MGB)

The sand deposits consist of grains of the various source rocks and vary in proportion from place to place. The dark minerals generally have a high specific gravity and are resistant to mechanical and chemical weathering. They are dominantly magnetite, ilmenite, hornblende and a little pyroxene. The light colored minerals are feldspar, quartz, zircon and epidote. Also present in varying amounts are small fragments of limestone, glass and argillaceous clay. The sand is mostly -28 to +120 mesh in size (-590μ +125μ).

The magnetite and hornblende show well formed crystal faces. Magnetite occurs usually as octahedral crystals and in a few instances as an impregnation in the ilmenite and silicate minerals. The ilmenite is generally in the form of flattened rhombehedral crystals which are violet green under transmitted light. The most common non-opaque minerals are feldspar and hornblende.

Besides the magnetite, ilmenite and hornblende possess magnetic susceptibility and in rare cases, some of the feldspars are slightly magnetic, possibly due to inclusions of magnetite. Polished surfaces of grain mounts show minute blebs of magnetite are intergrown with ilmentite while hornblende crystals show magnetite dust on the crystal faces and a few feldspars show minute magnetite inclusions.

PHILIPPINE MINING INDUSTRY

The Republic of the Philippines is located just north of the equator about 1,100 kilometers east of the coast of the mainland of Southeast Asia. The country is an archipelago that comprises more than 7,000 islands, of which fewer than 900 are inhabited by the country's 85 million people. The major islands are Luzon in the north, Visayas in the middle and Mindanao in the south. The Philippine islands include 18 active volcanoes, and lie within the Pacific 'rim of fire', an orogenic belt associated with active ore-forming mineralization, because of the intense volcanic activity at the margins of the tectonic plates.

The Philippines is a resources rich country and it continues to rank as one of the most highly mineralized countries in the world due to its collection of volcanic islands. In terms of mineral potential, according to the National Economic Development Authority, the Philippines ranks third in gold, fourth in copper, fifth in nickel, and sixth in chromite. The vast mineral reserves have remained untapped for many years due to a variety of socio-economic, legal, and environmental reasons.

The Philippines was one of the major suppliers of iron ore for steel production that radically contributed to the industrialization and development of Japan. However from 1974 onwards, mining activities started to decline with the prices of magnetite iron ore dropping worldwide owing to the excess production of certain countries in the world market. The situation worsened with the Philippine Government's ban on beach mining and offshore mining due to irresponsible and improper mining practices.

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CURRENT GOVERNMENT POLICIES

On January 16, 2004, President Gloria Macapagal Arroyo issued Executive Order No. 270 providing a set of principles under which the revitalization of the mining industry in the country will be governed. The guiding principles of economic development, environmental protection and social equity for responsible mining created a much needed operating platform for sustainable development.

The DENR, in collaboration with other national agencies, have formed the MAP to simplify the operational procedures of Executive Order No. 270 and fast-track the processing of mining applications and the issuance of exploration permits to applying mining companies. The MAP also aims to harmonize conflicting laws towards the Mining Act by diminishing the role, and responsibilities and authority of LGUs. In addition, the DENR is tasked to oversee and monitor the implementation of the MAP.

This lifting of the temporary suspension on the acceptance of offshore Exploration Permit applications in 2004 and the promulgation of the Supreme Court ruling later in 2005 allowing 100% foreign ownership of mining companies operating under an FTAA, are intended to revitalize the country's mining industry and thereby providing a boost to the Philippine economy.

GEOGRAPHIC LOCATION

Tacloban City, the capital of Leyte Province, is serviced daily by several jet air services from Manila and Cebu. The city has a low population density with housing being scattered largely along the major roadways. It is economically depressed as most of the (onshore) land areas primarily consisted of productive agricultural farmland with rice and coconut being the main products. A national highway runs through the eastern portion of the island and much of the hinterland is serviced by good quality cement roads.

Relative to Brazil and Australia, iron ore mines from the Philippines enjoys a huge geographic competitive advantage to the major steel manufacturing countries including the PRC, South Korea and Japan. For illustration purposes, the distance between Shanghai and the Amazons in Brazil is approximately 16,886 kilometers, or 10,943 miles, or 9,118 nautical miles. It is approximately 7,020 kilometers, or 4,362 miles, or 3,791 nautical miles from Shanghai to Western Australia (location of the Pilbara mines which is reputed to contain one of the world's largest magnetite reserves), and approximately 1,841 kilometers, or 1,144 miles, or 994 nautical miles from Shanghai to Manila in the Philippines. Brazil shipping routes' to China takes about 30 days to complete, and ships at Australian ports were known to have waited in line for more than two weeks to load their cargo before embarking on their 9 day trip to China in recent times. It takes less than 3 days for ships to travel from the Philippines to the PRC.

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The Directors believe that the Philippines' relative proximity to the world's top three largest steel producing countries, the PRC, South Korea and Japan, provides the Company, through the Acquisition, a natural competitive advantage in this global industry. The Directors believe that the Company, through Mogan, may be able to offer the steel manufacturing companies in these countries significant savings in the form of lower transportation costs when importing the iron ore needed by their existing operations.

LOCAL LABOR FORCE

The general skilled labor market in the Philippines is relatively inexpensive making it an attractive factor to potential foreign investors when considering investing. Local hiring of the needed geologists and mining engineers or sourcing civil, electrical and commerce graduates personnel should not be difficult in the region due to the presence of universities in Tacloban and closeness to other major metropolis in the Philippines, i.e., Cebu City. In the circumstances, the Directors believe that there should be a sufficient supply of skilled personnel available particularly for the mining industry.

INDUSTRY OUTLOOK

The big three, Vale, along with Rio Tinto and BHP Billiton, dominates the global seaborne iron ore trade. The trio, representing one of the most heavily consolidated sectors of the global resources group, exerts considerable influence during annual negotiations to set price contracts. In the past few years, iron ore prices have soared on the back of the PRC's displacement of Japan as the world's biggest steelmaking country. Most iron ore miners prefer to specialize in the logistics operations including railways, ports, and even a shipping fleet (due to the prevailing global tight supply situation of recent years). The market trend is to move to offering of advanced customer service package.

In 2006, the global seaborne iron ore production was nearly 700 million tons and such traffic has been projected to continue to grow.

According to various published newspaper articles dated 18 February 2008, Nippon Steel and POSCO were the first of the steel making companies to agree on the contract price for iron ore. They have agreed to pay Vale US$78.90 per ton for its Itabira fine ore (a lower quality product) in the year starting 1 April 2008. This represented an increase of 65% and the sixth annual increase in a row. Thyssenkrupp and Ilva shortly follow suit when they too agreed to a 65% increase for the iron ore from Vale's Southern System mines (Tubarão fines) and a 66% increase for iron ore from Vale's massive Carajás mine in the Amazon. Baosteel, who was the first steel manufacturing company to finalize its negotiations with Vale in 2007, concluded its discussions on 23 February 2008 by agreeing to a price hike of 65% for iron ore from Vale's Southern System mines (US$118.98 FOB) and 71% iron ore from Vale's Carajás mine (US$125.17 FOB) when compared with 2007.

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Annual Contract Price for Iron Ore

Sources: EconStats, CVRD, Wall Street Journal, US Steel and other steel producers

Notes: Fines are the most heavily traded category of iron ore;
Lump Ore consists of golf ball sized pieces that has higher iron content than Fines; and
Pellets are semi-refined iron ore, blast furnace pellets.

Iron ore prices are anticipated to continue to be on the rise, particularly if China's steel manufacturing companies allow a freight premium into this year's contract price when it concludes its discussions with BHP Billiton and Rio Tinto. The Australian producers are contending that, when shipping magnetite to China, Australia is geographically a lot closer to China than Brazil. China should therefore pay higher price given the shorter delivery time and savings in freight transportation cost. According to a 2 September 2008 Bloomberg article, in spite of the recent falls in iron ore shipping cost, it cost on 28 August 2008 approximately US$72.17 per dry metric ton to ship from Brazil to China and approximately US$27.93 per dry metric ton from Australia to China. Based on the information available to the Directors, it costs approximately US$15 per dry metric ton to ship from Tacloban to a port in Shanghai, the PRC.

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NEAR TERM FACTORS

(a) Vale presses to recoup loss income from Asian customers

Australian mining companies were successful in securing a supplementary price increase of 79.8 – 96.5% to make up for its shipping cost advantage. This is being compared with the 65 – 71% price increase Vale has secured in 1Q08. Historically, Vale offers its Asian customers a 12 – 13% discount versus its European customers to offset the difference in higher shipping costs.

As the leading iron ore mining company, Vale traditionally produces a higher grade iron ore that is well received by steel companies and results in improved efficiency. The PRC market, in recent years, had purchased from Vale and imported over 100 million tons annually. Consensus view believes Vale is unlikely to replicate the Australian mining companies’ success in 2008 but they will more than likely to be in a strong position to set the tone during the next round of pricing negotiation in 2009 to ensure there is a continuous uptrend in long term contract price of iron ore.

(b) Mining industry consolidation may heat up with active participation from PRC Companies while industry players are likely to continue their current pricing practices

BHP’s US$173 billion hostile takeover bid for Rio Tinto is expectedly to take another 9 to 12 months due to complicated regulatory processes. Further complicating the situation is Chalco/Alcoa’s existing 12% stake in Rio Tinto and the latest market rumors that Chalco or another PRC company may be buying a further stake in Rio Tinto could become additional obstacles to BHP’s takeover bid.

The emergence of Fortescue Metal Group (‘Fortescue’) as the third largest iron ore exporter out of Australia’s Pilbara region may help break the stranglehold that BHP and Rio Tinto Group have held. Fortescue now ships iron ore to PRC customers at an annual rate of 55 million tons and the company already has plans to increase capacity to 200 million tons a year through production expansion.

Meanwhile, it was announced on 22 September 2008 that Sinosteel Corporation (‘Sinosteel’), the PRC’s second largest iron ore trading company, had received approval from the Australian government to acquire a controlling 49.9% stake in Murchison Metals. Sinosteel already controls Midwest Corporation, a neighboring iron ore producer to Murchison Metals in the mid-west region of Australia. Sinosteel has already publicly stated it will adhere to the industry practice of selling its products to the highest bidder. Concurrently, the CITIC Group and Wuhan Iron and Steel Group are considering to bid for the iron ore and coal assets from the fourth largest Australian mining company, Aquila Resources, which has recently been put up for sale.

LETTER FROM THE BOARD

The State owned Assets Supervision and Administration Commission of the State Council (SASAC) of the PRC has been encouraging consolidation among CSOEs in order to improve corporate governance, profitability and global competitiveness. Among CSOEs, Anshan Iron & Steel Group is edging closer in increasing its holdings in Panzhihua Iron & Steel Group. At the same time, both Baosteel and Wuhan Iron & Steel Group are actively participating in reorganization of southern steel industry in the Guangdong and Guangxi province respectively. Meanwhile, the potential industry consolidation in Hebei Province through the formation of Hebei Iron & Steel Group may potentially displace Baosteel's status as the PRC's largest steel maker. With the State's continued encouragement for a general shift in the current paradigm towards high value added economy and increase productivity, the industry consolidation will likely to weed out the small to medium size inefficient steel makers leading to improvements in procurement through economy of scale as well as end products pricing power.

(d) Steady demand from China

The PBOC's current monetary policy indicates a easing of bank lending rates and their required reserve ratio. The State Government has adopted a proactive stance trying to stimulate the PRC economy to achieve continued growth rates in the high single digit post 2008 Olympics and amid the current worldwide economic slowdown. Unlike its peers from the developed world, the PRC has a high saving rate and strong public finances to provide additional fiscal stimulation as required. At the same time, there are positive factors such as the RMB's appreciation to offset raising import raw materials cost, and steady steel demand emanating from the anticipated massive reconstruction efforts from the recent natural disasters such as the Yangzi river region snowstorm and massive earthquake in Sichuan region. Meanwhile, positive pricing differential between overseas and domestic market coupled with ongoing export VAT rebate continues to favor exporters for selected high value added steel products. China remains short of iron ore supplies that have enough iron content to meet international manufacturing standards for steel. Ore from Chinese mines contains about 30% iron, compared with as much as 65% in Australia and 67% in Brazil. According to Citigroup research data as quoted by the South China Morning Post May 2008, the PRC is expected to procure an estimated 452 million tons iron ore from the overseas market this year up 17.7% YoY.

STEEL INDUSTRY

According to the IISI, in spite of the robust statistics of recent years, world steel demand is projected to remain strong through 2015. China's demand for steel is expected to grow at a CAGR of 8.4% until 2010 and at 6.2% between 2011 and 2015. This is compared with a CAGR of 3% for the rest of the world. Numerically, the world's demand for crude steel is expected to increase by a further 481.4 million metric tons or 37.6% over the course of the next 8 years.

In fact, the IISI has upgraded its global forecasts for apparent steel consumption for 2008 implying there will be significant ongoing positive knock-on effects for mining companies producing the various inputs that go into the steel making process. The IISI's projects the worldwide steel use will grow at 6.8% to about 1,280 millions in 2008.

LETTER FROM THE BOARD

Global steel production is at the outset of a new period of accelerated growth as BRIC countries are fuelling the demand on the back of their accelerated developments in urbanization and industrialization. According to the IISI, the BRIC countries, which accounted for about 41% of global steel demand in 2006, will again be leading the growth with an expected increase of 11.1% for 2008. Overall, 71% of world growth in 2008 will take place in BRIC according to the IISI.

Of the BRIC countries, it is noteworthy to mention the speed and magnitude under which the PRC intends to urbanize and industrialize itself is unprecedented. According to the National Development and Reforms Commission, China has plans to further develop 20 large economic zones involving 358 cities, of which 11 cities have a population of over 15 million people, and 18 cities have a population of about 10 million people. As previously mentioned, the near term positive factors such as the RMB appreciation may partially offset the rising cost of imported raw materials, but the country's expected massive reconstruction efforts due to the recent catastrophic natural disasters caused by the winter snow storms in the Yangzi river region during the month of February 2008 and the Great Sichuan Earthquake, which broke out on 12 May 2008 measuring 8.0 magnitude by the China Seismological Bureau, should continue to boost China's domestic steel demand.

ENVIRONMENTAL IMPACT

There is currently very limited direct information available pertaining to environmental impact that may result from commercial offshore mining in the Philippines. It is therefore difficult for the Company to form any basis on which to estimate the potential effect on the environment during operations, short of conducting an independent report on the environmental impact on the Mining Area. Even in the cases of channel and harbor dredging operations or the recovery of sand in beach nourishment, some were studied in detail but, in most cases, they were sporadic. Hence, any results or conclusions therefrom cannot appropriately and effectively be used to assess the environmental impact, if any, which may result in a long term placer dredge mining operation involving the moving of considerably more materials from a larger area of the seafloor.

The magnetite potentially contained in the Mining Area is believed to be already in sand form. To mine the mineral resource, the Directors believe the mining process entails dredging the content out of the water areas, desalinating, beneficiating (by way of magnetic separation which is a mechanical process), and de-moisturizing it before transporting the products to a port for shipping to overseas customers. The Directors believe such mining process to be environmentally friendly. There is no need for explosives to blast through surface rock to access iron ore deposits below the ground, and no need to crush the iron ore into smaller pieces of varying sizes for classification in accordance with customer specifications. As such, tailings, which will be in their original form, will be temporarily stored onshore before they are put back in their respective water area after mining of that area has been completed.

Nonetheless, the disturbance from a dredge mining operation consists of physically removing a layer of the seafloor, conveying it to the surface, and re-injecting the unwanted material(s) back onto the seabed. The process is expected to generate a transient "plume" of sediment that will affect the surface, the water column, and adjacent areas of the ocean floor over an uncertain period of time.

LETTER FROM THE BOARD

Experience with sand and gravel mining in Europe and with the dredging operations of the U.S. Army Corps of Engineers suggests that as long as sensitive areas (e.g., fish spawning and nursery grounds) are avoided, surface and mid-water effects from either shallow or deep water mining should be minimal and transient. Benthic communities assuredly will be destroyed if mined, and some nearby areas may be adversely affected by sediment returning to the seafloor. Mining equipment can be designed to minimize such damage, and, except where rare marine life occurs, entire benthic populations can be eliminated, or the substrate is permanently altered. However, over time, the seafloor should recolonize and this is expected to take place more quickly in shallow water communities.

In order to comply with the Philippine Government's regulations to adequately protect the environment during mining, it is therefore necessary to anticipate and avoid the high-risk sensitive areas. To further mitigate damage, improved equipment design and operating procedures can be employed to help reduce the potential impact from offshore mining. Environmental monitoring during the mining process will provide an additional margin of safety and add to the knowledge of what effects seabed mining might have on the marine environment as well. Concurrent observations in undisturbed control areas similar to those being mined could also provide a better understanding of the processes for future work in adjacent or other areas.

RISK FACTORS RELATING TO THE ACQUISITION

In considering the Acquisition, the Shareholders are advised to take into account of all the information contained in this circular including certain potential risk factors relating to the Acquisition as set out below.

Profitability, of which revenue is largely derived from the production and sale of iron ore, of the Philippine Subsidiary's magnetite mining operations may be affected by fluctuations in the market price of iron ore. Hence, earnings from operations may be affected by prevailing actual market situations as the pricing for iron ore has historically been cyclical and volatile. Pricing may be influenced by numerous factors that are beyond the control of the Company, including, among others, worldwide and regional demand, forward selling activities and general economic conditions. With Asian steel makers having dominated the worldwide steel production capacity and China having evolved to become the leading seaborne iron ore importing country, the demand alone from the PRC is believed to have a strong influence over the direction of market price for iron ore. Operational factors such as the quality of the iron ore, composition of the ferrous and non-ferrous content as well as the transportation cost associated with China's iron mining industry will render the country as a net importer in the foreseeable future. The Company believes the Philippine Subsidiary's cost structure, strategic location, in the form of distance and lead time will lead to cost savings, and the quality of its products and services will allow the operation to be profitable amid any potential adverse pricing fluctuations in the near to medium term future.
The prospects of mining as a business involve a great deal of uncertainties particularly in the results of the exploration activities. The Technical Adviser has indicated in its technical report that the total exploration potential of the two Permit Application areas at the Leyte Gulf and San Pedro Bay is in the order of 3.3 billion to 7.7 billion tons of magnetite-bearing sand at an unknown grade, but potentially greater than $5\%$ magnetic fraction. Furthermore,

LETTER FROM THE BOARD

the technical report has indicated that “the material presented to the Technical Advisor for the purpose of technical report does not meet the definition of a mineral resource as defined by “Australian Code for reporting of Exploration results, Mineral resources and Ore reserves (the JORC Code). In the absence of more definitive information pertaining to the Mining Claims, the technical report also indicated that it is possible that future exploration work may not be successful in converting the material to a mineral resource”. There is no assurance that the Company is able to actually realize, wholly or partially, the indicated potential of the Mining Claims once it commences mining and production operations.

Furthermore, if the actual amount of magnetite iron ore which the Company is able to exploit out of the Mining Area falls short of expectation, the average cost spent to produce each ton of magnetite iron will incrementally increase. This will have an adverse impact on the Group’s overall financial condition and its operating performance.

Mineral resources are natural endowments that are non-renewable. If the magnetite iron ore production of the two mining claims in the Leyte Gulf region falls short of its expected potential, the Philippine Subsidiary may not be able to achieve or maintain the projected production level over the estimated mining life of these two mining claims.
As disclosed above, although Mogan’s relevant EP applications which are included in the Acquisition have obtained the Area Status and Clearance notices, Mogan has to arrange for the publication, posting and radio announcement relating to its EP applications; after which interested parties may file any adverse claim, protest or opposition to Mogan’s EP applications. The EPs will only be issued if there are no such claims, protests or oppositions or after all claims, protests or oppositions are resolved. There is therefore a risk that the Company may not be able to obtain the EPs after the completion of the Acquisition.
The Acquisition is the Company’s first foray in the exploration and exploitation of mineral resources. The Acquisition in itself is also a start-up project. The Company may lack the management skills and expertise in carrying out this new business to be engaged by the Group. The Company is in the process of identifying and recruiting other suitable experienced professionals to join the management team of the Group, including but not limited to those senior and/or retired executives from leading mining companies including Vale, BHP Billiton, Rio Tinto, among others. The Directors are also expecting to recruit local personnel or specialists with experience in the areas of geology, mining, exploration, production and surveying in the Philippines to assist and participate in the management and operation of the project. The Company is also considering engaging or has engaged other qualified independent consultants to conduct the research and development in respect of the project. The inability to recruit, hire or appoint the much needed and necessary personnel to assist and participate in the management and operation of the project may slow the Company’s production commencement and in turn, it’s operating performance.
The entering into the mining industry, through the Acquisition, requires significant investments in capital expenditure, such as dredgers, processing or beneficiation plants as well as construction of port facilities, as it relates to its operations over the near to medium term. The Philippine Subsidiary is anticipated to finance a majority of such capital

LETTER FROM THE BOARD

expenditures through equity capital raisings and borrowings, with the balance coming from funds on hand and internally generated funds. Under prevailing equity and debt capital market conditions, there are no assurances that such equity capital and/or borrowings can be raised. The inability to procure the necessary funding may have a negative impact on the Philippine Subsidiary's overall business development and operating performance.

The value of the business operation of Mogan in relation to the offshore magnetite mining tenements in Leyte Gulf and San Pedro Bay was appraised by the Valuer using the discounted cash flow approach which estimates the value of the future economic benefits the proposed project is anticipated to generate. Indication of value was developed by discounting the projected future net cash flows to their present worth at market-derived rates of return. Using the discounted cash flow approach to value the Philippine Subsidiary is considered to be a profit forecast in respect of the Philippine Subsidiary. Profit forecasts or forward-looking statements regarding the prospects of a business and the associated level of risks represent an opinion by the writer. Such statements of opinion are based on certain assumptions regarding present and future business. Actual results or performance may differ materially from forecasted scenarios, expressed or implied.
With the Philippine Government placing strict emphasis for the mining industry to be more environmentally-friendly, any change in the relevant policy or directives may superimpose additional costs and other approval procedures which may hinder the Philippine Subsidiary's ability to effectively operate. As such, the Philippine Subsidiary may be required to incur additional and substantial cost or expense in order to comply with such local rules and regulations, and/or new policies and directives. The additional cost or expense may in turn have a negative impact on the Philippine Subsidiary's financial condition and its ability to operate effectively.
Natural disasters such as tropical cyclone, seasonal rainstorm, earthquakes and floods tend to simultaneously affect large areas of the country as well as the economy as a whole. These events, when they occur, may have a negative impact on the Philippine Subsidiary's business operations as a whole as production and port facilities as well as shipping schedules may be disrupted for prolonged or indefinite periods of time.
While the Company's revenue is denominated in US dollars, virtually all of the costs and expenses relating to the Philippine Subsidiary's operation are denominated in the Philippine Peso. Since the Peso is a freely tradable currency, the strengthening of the currency may have a negative impact to the Group's overall financial condition including its results from operations. For the past five years, the Philippine Peso to US Dollar has been trading in the range of PHP56 – PHP40.5 to US$1.00, plus or minus a 16% change from the midpoint exchange rate of PHP48.5 to US$1.00. Since a majority of the project's capital expenditure is expected to be deployed in the initial phase, over the next 12 – 18 months when the Philippine Peso is trading near its near term high, the Directors believes the local currency is likely to trend downwards should the global and regional economy experience a slowdown. Although the Directors believe the long term impact arising from the foreign currency exchange risk on the Philippine Subsidiary's operating and financial condition will be subdued, there is no assurance this scenario will actually materialize.

LETTER FROM THE BOARD

Mining of the magnetite placer deposits requires the Philippine Subsidiary to dredge the mineral beneath recent sedimentary top layer of mud level which can range from 0 – 25 meters and in water depths of 1 to over 30 meters and must take account of the effects of the ocean environment, i.e., waves, currents, tides, and winds. Application of dredging to mining, which began over a century ago, consists of various processes by which large floating machines or dredgers excavate unconsolidated material from the ocean bottom, raise it to the surface, and then discharge it into a hopper, pipeline, or barge. It has long been applied to clearing sand and silt from rivers, harbors, and ship channels, and is the most widely used technology for the offshore mining of tin, diamonds, sea shells, and sand and gravel.

The Directors believe the above operational issues can be overcome by implementing a detailed exploration program, careful planning and following of proper procedures. The Company has already invited the Jan De Nul Group, a leading contractor for dredging, to submit a production proposal. In addition, the Company has contacted leading manufacturer of dredgers, IHC Holland B.V. and Damen Shipyards Group, for proposals to build dredgers to specifically address the expected operational needs.

REASONS AND BENEFITS FOR THE ACQUISITION

The Directors consider that the Group will be able to broaden its source of income by diversifying into the business of exploration, drilling, mining, and trading of natural resources, particularly the mineral magnetite. The Acquisition represents an attractive opportunity for the Company to enter into one of the first major joint ventures after the Philippines, under Executive Order No. 270 – National Policy Agenda on Revitalizing Mining in the Philippines, dated January 16, 2004, and signed by President Gloria Macapagal Arroyo, and the lifting of the temporary suspension on acceptance or processing of mining applications covering offshore areas in the country on August 14, 2004.

Magnetite is the iron ore that is most commonly used today as the principal raw material in the production of steel. It is also the natural mineral with the highest iron content. The potential of the Company's investment through the Acquisition is made that much more attractive given there is currently a strong emphasis being placed on natural resources in the worldwide economy, and the fact that China is now the world's largest producer and consumer of steel. The PRC's rapidly growing economy and the demand for steel products and magnetite as a raw material have already driven the worldwide contract fine prices of about US$25 per ton in year 2001 to over US$130 per ton to date. In line with this upward pricing trend, according to a research report by a leading international financial institution, the spot prices for iron ore for Vale CIF, Chinese Spot, Indian CIF, and Australian CIF have ranged between US$123 to US$215 per ton in April 2008; while in an South China Morning Post article dated 7 May 2008, it was indicated that the spot iron ore price ranged between US$180 to US$190 per ton.

Currently, the sale and purchase of magnetite or iron ore is still very much a barter trade. Iron ore prices are rarely published, due to the fact that most iron ore is used internally by steel companies, and iron ore mines that sell their ore usually do so under long term contracts, negotiated with each buyer. In today's market, typically, the first large steel manufacturing companies to reach on an agreement with one of the top three leading producers, Vale, BHP Billiton and Rio Tinto, sets the benchmark price for the industry.

LETTER FROM THE BOARD

In a news article dated 18 February 2008 by the Herald Tribune, Nippon Steel had announced that it and POSCO have agreed on paying Vale US$78.90 per ton for its Itabira fine ore (a lower quality product) in the year starting 1 April 2008. This represented an increase of 65% and the sixth annual increase in a row. According to a Reuters' news article dated 20 February 2008, Ilva had agreed to a 65% increase for the iron ore from Vale's Southern System mines (Tubarão fines) and a 66% increase for iron ore from Vale's massive Carajás mine in the Amazon. Thyssenkrupp had just earlier agreed to a similar deal. Baosteel, the first steel manufacturing company to finalize its negotiations with Vale in 2007, concluded its discussions on 23 February 2008 by agreeing to a price hike of 65% for iron ore from Vale's Southern System mines (US$118.98 FOB) and 71% iron ore from Vale's Carajás mine (US$125.17 FOB) when compared with 2007.

Iron ore prices are anticipated to continue to be on the rise, particularly if China's steel manufacturing companies allow a freight premium into this year's contract price when it concludes its discussions with BHP Billiton and Rio Tinto. The Australian producers are contending that, when shipping magnetite to China, Australia is geographically a lot closer to China than Brazil. China should therefore pay higher price given the shorter delivery time and savings in freight transportation cost. According to a September 2, 2008 Bloomberg article, in spite of the recent falls in iron ore shipping cost, it costed on August 28, 2008 approximately US$72.17 per dry metric ton to ship from Brazil to China and approximately US$27.93 per dry metric ton from Australia to China. Based on the information available to the Directors, it costs approximately US$15 per dry metric ton to ship from Tacloban to a port in Shanghai, the PRC.

The Directors believe that considerable national demand in the PRC for this raw material will continue to grow in line with the expanding economy in the near to medium future. The Directors therefore believe that the Acquisition will enable the Group to diversify into the business of exploring, drilling, mining and trading of mineral resources such as magnetite, which the Directors' view as an investment with good prospects over the medium to long term.

The Directors consider that the terms of the Acquisition (including the amount and the payment methods of the Acquisition Price) are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

FINANCIAL EFFECTS OF THE ACQUISITION

Upon Completion, the Company will indirectly hold 100% of the equity interest in the Target Company, who in turn, will directly hold 100% of the equity interest in MMH and 40% of the equity interest in each of Belgravia Investment and Triple Edge, and indirectly, a controlling stake in Mogan. Accordingly, the financial accounts of the Target Company, MMH and Mogan will be consolidated with that of the Group.

The Group recorded an audited consolidated net loss attributable to equity holders of the Company of approximately HK$47.52 million for the year ended 31 March 2008. Based on the unaudited pro forma financial information of the Enlarged Group set out in Appendix IV to this circular, the unaudited consolidated loss attributable to equity holders of the parent of the Enlarged Group would be increased by approximately HK$203.30 million, assuming the completion of the Acquisition, including the issue of the Promissory Note, the allotment and issue of the Consideration Shares, and the issue of the Convertible Bonds, have taken place on 1 April 2007.

LETTER FROM THE BOARD

As at 31 March 2008, the audited consolidated total assets of the Group were approximately HK$105.81 million. Based on the unaudited pro forma consolidated balance sheet of the Enlarged Group as set out in Appendix IV to this circular, total assets as at 31 March 2008 would be increased by approximately HK$8,836.31 million, mainly resulting from mining rights in progress of approximately HK$8,876.06 million arising from the Acquisition. For further details, please refer to Appendix IV to this circular.

The Group recorded audited consolidated total liabilities of approximately HK$49.89 million as at 31 March 2008. Based on the unaudited pro forma consolidated balance sheet of the Enlarged Group as set out in Appendix IV to this circular, the unaudited pro forma total liabilities of the Enlarged Group would increase by approximately HK$1,484.80 million, on the assumption that the Acquisition has been completed on 31 March 2008.

The Company expects that it will be able to consolidate the financial results of the Target Company and the Philippine subsidiary after Completion.

FINANCIAL TRADING PROSPECTS OF THE ENLARGED GROUP

The Group

The operating environment in the PRC for the distribution of video entertainment as well as for the licensing of entertainment programs to television platforms continues to be very difficult. Main issues are a lack of interest in locally produced films and the ongoing problem with copyright infringement. Finding the answers to these rather perplexing issues is not foreseeable at any time in the near future as profit margins deteriorate. Moreover, given the current operating environment existing and potential investors are reluctant and unwilling to further invest or continue investing in the promotion of intellectual property on concerns of being able to recoup their initial capital investment. Exasperating the situation is the negative impact brought on by a change in consumers' preference in the "return to cinema" phenomenon.

Earlier on in the year, the senior management of the Company undertook a comprehensive reassessment of its existing business model. Downward spiraling, or at best, flat business scale, and the current extremely challenging operating environment strongly suggested there is a need to explore new revenue streams to revive operation momentum. It was believed that it is in the minority shareholders' best interest for the Company to stem its losses and exit the market as and when appropriate.

The Acquisition represents a good opportunity for the Company to enter into the mining and trading of the iron ore. This is not just because the market prices for this commodity have reached unprecedented levels in recent years, but it due to the closer proximity of the placer deposits to where the strongest demand (the PRC, Japan, South Korea and India) for this resource is geographically located. Based on the information available to the Directors, the Philippine Subsidiary potentially may to the holder of one of the largest offshore magnetite deposits.

Upon Completion, the Group will continue to operate its existing animation and DVD distribution businesses but in a more carefully controlled manner.

LETTER FROM THE BOARD

The Target Group

With the strong iron ore demands emanating from PRC and other parts of Asia including Japan, and the excellently located mine site in vicinity to PRC, the Target Group is set to experience high growth and fast expansion. Additionally, the large mining claimed areas held by the Target Group and good relationships with local governments will ensure a smooth and efficient investment roll-out and continuous operations. The Directors believe all such factors will act together to help the Company evolve to become a strong and fast growing mining enterprise.

IMPLICATION UNDER THE GEM LISTING RULES

The Acquisition constitutes a very substantial acquisition for the Company under Chapter 19 of the Listing Rules and a connected transaction of the Company under Chapter 20 of the Listing Rules and is therefore subject to the reporting, announcement and independent Shareholders' approval requirements.

To the best of knowledge, information and belief of the Directors after having made all reasonable enquiry, apart from the Vendor, its ultimate beneficial owner, and/or its associates who hold approximately 17.84 million Shares, representing 0.87% of the total issued share capital of the Company as at the Latest Practicable Date, no other Shareholder has a material interest in the Acquisition and thus no Shareholder will be required to abstain from voting on the resolutions to approve the Acquisition at the EGM. The Vendor, its ultimate beneficial owner, and/or its associates (including Mr. Yin Mark Teh-min) will therefore be required to abstain from voting on the resolutions, which will be conducted by way of poll, approving the Acquisition Agreement and the transactions contemplated thereunder at the EGM, should he/she/it hold any Shares on the date of the EGM.

THE SPECIFIC MANDATE

At the Company's annual general meeting held on 18 July 2008, the Board has been granted by Shareholders a general mandate to allot issue and deal in up to 409.31 million Shares. Since the said date of the annual general meeting and up to the Latest Practicable Date, no new Shares have been issued under such general mandate. However, since the aggregate number of Consideration Shares and Conversion Shares to be issued will be up to 7,800 million Shares and will exceed the said general mandate of 409.31 million Shares, the resolution to approve the Acquisition Agreement to be proposed at the EGM will include a proposed grant to the Directors of a specific mandate to issue new Shares to accommodate the Consideration Shares and Conversion Shares (upon exercise of the conversion rights attaching to the Convertible Bonds) to be issued under the Acquisition Agreement.

As at the Latest Practicable Date, the authorized share capital of the Company is HK$200,000,000 (divided into 20,000 million Shares), of which there is approximately 17,953 million unissued Shares.

LETTER FROM THE BOARD

EGM

The EGM will be convened and held at 3:00 p.m. on 8 December 2008 at Board Room I, 7/F, The Park Lane Hong Kong, 310 Gloucester Road, Hong Kong for the purpose of considering, and if thought fit, approving: (i) the Acquisition Agreement and the transactions contemplated thereunder; (ii) the grant of Specific Mandate; and (iii) the issue of the Promissory Note, Consideration Shares, and Convertible Bonds.

A notice convening the EGM is set out on pages 327 to 328 of this circular. Whether or not you are able to attend the meeting, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company's share registrar and transfer office in Hong Kong, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen's Road East, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the meeting or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting at the EGM if you so wish.

PROCEDURE TO DEMAND A POLL AT EXTRAORDINARY GENERAL MEETING

In accordance with article 80 of the articles of association of the Company, the following persons may demand that the vote in respect of any resolution put to the general meeting be taken on a poll:

(a) the chairman of the meeting; or
(b) at least five members present in person or by proxy and entitled to vote or who represent in aggregate not less than one-tenth of the total voting rights of all members having the right to attend and vote at the meeting; or
(c) any member or members present in person or by proxy and holding Shares conferring a right to attend and vote at the meeting on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all Shares conferring that right; or
(d) if required by the GEM Listing Rules, the chairman of the meeting and/or any Director holding the proxies shall demand a poll, if such aggregate proxies held individually or collectively by (i) the chairman of a particular meeting, and/or (ii) the Directors, account for five (5) per cent or more of the total voting rights at such meeting, and if on a show of hands in respect of any resolution, the meeting votes in the opposition manner to that instructed in those proxies.

Unless a poll is so demanded and not withdrawn, a declaration by the chairman that a resolution has on a show of hands been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect in the Company's book containing the minutes of proceedings of meetings of the Company shall be conclusive evidence of that fact without proof of the number or proportion of the votes recorded in favour of or against such resolution.

A poll may be so demanded before or on the declaration of the result of the show of hands.

LETTER FROM THE BOARD

RECOMMENDATION

The Independent Board Committee, having considered the terms of the Acquisition and the proposed grant of the Specific Mandate as well as the advice and recommendation of the Independent Financial Advisor set out in the section headed "Letter from Ample Capital Limited" of this circular, considers the terms of the Acquisition and the proposed grant of the specific mandate are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Shareholders as a whole. Accordingly, the Independent Board Committee recommends that the Independent Shareholders vote in favor of the resolutions to be proposed at the EGM to approve, among other things, the Acquisition and the Specific Mandate. The "Letter from the Independent Board Committee" is set out on page 51 of this circular.

On the basis of the information set out in this circular, the Directors (including the Independent Board Committee) consider that the terms of the Acquisition are normal commercial terms that are fair and reasonable and the Acquisition is in the interests of the Shareholders as a whole. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of the relevant ordinary resolution approving each of the Acquisition Agreement and the transactions contemplated thereby (including without limitation the Acquisition, the grant of the Specific Mandate, the allotment and issue of the Consideration Shares and the Conversion Shares, and the issue of the Convertible Bonds) at the EGM.

ADDITIONAL INFORMATION

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

Yours faithfully,

For and on behalf of the Board

Intelli-Media Group (Holdings) Limited

Kwong Wai Ho, Richard

Executive Director

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

智庫媒體集團（控股）有限公司

Intelli - Media Group (Holdings) Limited

(incorporated in the Cayman Islands with limited liability)

(Stock code: 8173)

21 November 2008

To the Independent Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

We refer to the circular of the Company dated 21 November 2008 (the "Circular") to the Shareholders, of which this letter forms part. Terms defined in the Circular bear the same meanings in this letter unless the context otherwise requires.

We have been appointed as the members of the Independent Board Committee to (i) consider the Acquisition Agreement and the transactions contemplated thereunder; (ii) advise the Independent Shareholders as to the fairness and reasonableness of the Acquisition Agreement and the transactions contemplated thereunder; and (iii) recommend how the Independent Shareholders should vote at the EGM. Ample Capital has been appointed to advise the Independent Board Committee in relation to the Acquisition Agreement and the transactions contemplated thereunder.

We wish to draw your attention to the letter from the Board, as set out on pages 9 to 50 of this Circular, and the letter from Ample Capital to the Independent Board Committee, set out on pages 52 to 73 of the Circular, which contains its advice to us in respect of the Acquisition Agreement and the transactions contemplated thereunder.

Having taken into account of the advice of Ample Capital, the independent financial adviser, we consider that the terms of the Acquisition Agreement and the transactions contemplated thereunder to be fair and reasonable so far as the Independent Shareholders are concerned and the entering into of the Acquisition Agreement are in the interests of the Company and the Shareholders as a whole.

Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Acquisition Agreement and the transactions contemplated thereunder, including the issue of the Promissory Note, the Consideration Shares and the Convertible Bonds.

Yours faithfully

Independent Board Committee

Lai Kai Jin, Michael

Independent Non-executive

Director

Ng Yat Cheung, JP

Independent Non-executive

Director

Chan Siu Wing, Raymond

Independent Non-executive

Director

LETTER FROM AMPLE CAPITAL LIMITED

AmCap

Ample Capital Limited

塑盛融資有限公司

21 November 2008

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION: ACQUISITION OF THE ENTIRE EQUITY INTEREST IN FIRST PINE ENTERPRISES LIMITED INVOLVING ISSUE OF PROMISSORY NOTE, CONSIDERATION SHARES AND CONVERTIBLE BONDS

INTRODUCTION

We refer to our appointment as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the Acquisition Agreement and the transactions contemplated thereunder, details of which, among other things, are set out in the circular dated 21 November 2008 (the "Circular"), of which this letter forms a part. Terms defined in the Circular will have the same meanings when used in this letter unless the context requires otherwise.

On 2 May 2008, the Company, through its wholly-owned subsidiary, Black Sand Enterprises Limited, entered into the Acquisition Agreement in relation to the acquisition of the entire interest in the Target Company at the Acquisition Price of HK$5,700 million. The Acquisition Price, of which HK$40 million has been paid to the Vendor on 9 April 2008 as earnest money, will be satisfied as to HK$200 million by the issue of the Promissory Note, as to HK$350 million by the issue of 500,000,000 Consideration Shares at an issue price of HK$0.70 per Consideration Share and as to the remaining balance of HK$5,110 million by the issue of Convertible Bonds with an aggregate principal amount of US$655,128,205.

On 20 May 2008, the Company appointed Mr. Wong Chung Yu Denny ("Mr. Wong") and Mr. Yin Mark Teh-min ("Mr. Yin") as an executive Director and a non-executive Director, respectively, with effect from 20 May 2008. The appointments were subsequent to, and not in connection with, the Acquisition Agreement. The ultimate and sole beneficial owner of the Vendor, Ms. Eva Wong, is a sister of Mr. Wong and the sister-in-law of Mr. Yin. Accordingly, Ms. Eva Wong is an associate of both Mr. Wong and Mr. Yin and therefore a connected person of the Company. Although the Acquisition did not constitute a connected transaction under Chapter 20 of the GEM Listing Rules at the time the Acquisition Agreement was entered into, by reason of the subsequent appointment of Mr. Wong and Mr. Yin as Directors and their relationship with the beneficial owner of the Vendor, the Acquisition has subsequently become a connected transaction of the Company under the GEM Listing Rules and is therefore subject to the reporting, announcement and independent shareholders' approval requirements under Chapter 20 of the GEM Listing Rules.

LETTER FROM AMPLE CAPITAL LIMITED

The Independent Board Committee, comprising all of the independent non-executive Directors, namely Mr. Lai Kai Jin, Michael and Mr. Ng Yat Cheung, JP and Mr. Chan Siu Wing, Raymond, has been formed to advise the Independent Shareholders as to how they should vote on the relevant resolutions in respect of the Acquisition. We, Ample Capital Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders as to whether (i) the terms of the Acquisition are fair and reasonable and on normal commercial terms; and (ii) the entering into of the Acquisition Agreement is in the interest of the Company and the Independent Shareholders as a whole. Details of and the reasons for the proposed Acquisition are set out in the section headed "Letter from the Board" in the Circular (the "Board Letter").

As disclosed in the Board Letter, save for the Vendor, its ultimate beneficial owner, and/or its associates who in aggregate hold approximately 17.84 million Shares, representing approximately 0.87% of the total issued share capital of the Company as at the Latest Practicable Date, no other Shareholders have material interests in the Acquisition and are required to abstain from voting in relation to the relevant resolutions approving the Acquisition at the EGM.

In formulating our opinion, we have relied on the accuracy of the information and representations contained in the Circular and the information and representations provided to us by the Directors and management of the Group and have assumed that all information and representations made by the Group and the Directors were true, accurate and complete at the time they were made and continue to be so as at the date of the Circular. We consider that we have obtained from the Company all of the necessary information on which to form a reasonable basis for our opinion. We have also assumed that all statements of belief, opinion and intention made by the Directors in the Circular were reasonably made after due enquiry. We have no reason to suspect that any material facts have been omitted or withheld from the information contained or opinions expressed in the Circular nor to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors. We have not, however, conducted an independent in-depth investigation into the affairs of the Group nor have we carried out any independent verification of the information supplied.

LETTER FROM AMPLE CAPITAL LIMITED

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating and giving our independent financial advice to the Independent Board Committee and the Independent Shareholders in relation to the Acquisition, we have taken into account the following principal factors:

1. Reasons for and benefits of the Acquisition

(a) The Group's principal activities

As stated in the Board Letter, the Group is principally engaged in the business of distributing home video entertainment – in both video compact disc and digital video disc formats – across popular genres to East Asian and Southeast Asian markets as well as the provision of entertainment programs under license to other platforms including cable television. It currently owns a film library and rights to 150 episodes of anime such as Pleasant Goat and Big Big Wolf. The Directors do not intend to discontinue any of the existing principal businesses of the Group. Set out below is the summary of the financial results of the Group for the three years ended 31 March 2008 as extracted from the Company's annual reports for the two years ended 31 March 2007 and 2008 (the "2007 Annual Report" and "2008 Annual Report" respectively):

	For the year ended 31 March
	2008
(audited)	2007
(audited)	2006
(audited)
	HK$'000	HK$'000	HK$'000
Profit and loss
Turnover	33,157	59,671	83,901
Gross profit	3,306	1,853	28,302
(Loss)/profit from operations	(47,078)	(66,626)	5,894
(Loss)/profit for the year	(48,642)	(70,233)	2,450
Net cash flow from operating activities	809	19,775	42,334
	As at 31 March
	2008
(audited)	2007
(audited)	2006
(audited)
	HK$'000	HK$'000	HK$'000

Balance Sheet
Non-current assets	33,393	27,377	80,233
Current assets	72,419	60,807	70,781
Current liabilities	(42,990)	(71,933)	(65,441)
Non-current liabilities	(6,898)	(10,917)	(18,632)
Net assets	55,924	5,334	66,941

LETTER FROM AMPLE CAPITAL LIMITED

Due to the deteriorating market environment of the film distribution business, the turnover of the Group was decreased by approximately 60.4% from the year ended 31 March 2006 to approximately HK$33.2 million for the year ended 31 March 2008. The Group turned into a loss position in the year ended 31 March 2007 with a loss of approximately HK$70.2 million, which was mainly due to an one-off impairment loss of film rights of approximately HK$45.8 million. The Group's loss for the year ended 31 March 2008 was narrowed down by approximately 30.7% to approximately HK$48.6 million from previous year and in addition, the Group's gross profit was increased from approximately HK$1.8 million to approximately HK$3.3 million during the same corresponding year mainly due to the change in the Group's development strategies including development of animation business in the PRC and the change of sales mix of videos from locally produced films to overseas blockbuster produced films.

The net asset value of the Group as at 31 March 2008 amounted to approximately HK$55.9 million, representing an increase of approximately 948.4% from a year ago, mainly attributable to the funds raised from share placements and issues of convertible notes during the year ended 31 March 2008 to significantly expand the Group's capital base and cash position by approximately HK$51.7 million, representing approximately 48.9% of the total assets of the Group.

As set out in the 2008 Annual Report, in view of the PRC's economic growth and huge population of kids, the Group will focus on developing its animation business in the PRC for new licensing income stream. In addition, the Group will also pursue business opportunities including the mining business to maximize wealth of the Shareholders. In light of the existing loss-making business operations of the Group, we consider it reasonable for the Group to seek other business or development opportunities to broaden its revenue base. Given the strong economic growth of the PRC with corresponding strong demand for steel products and magnetite as raw materials (the details of which are discussed in the relevant section below), we are of the view that the Group's proposed diversification into the mining business through the Acquisition is in line with the corporate development plan of the Group.

(b) The Target Company and the Mining Area

As set out in the Board Letter, the Target Company was incorporated on 13 December 2007 and is wholly owned by the Vendor. Based on the audited financial statements from its date of incorporation to 30 June 2008, the Target Company had a realised gain on securities trading of HK$407,500, an operating profit of approximately HK$345,736 and an after-tax profit of HK$280,830 and net asset value of approximately HK$280,838. The realised gain on securities trading and profit were derived from sale of listed securities and, as advised by the management of the Company, all securities held as at 30 June 2008 were disposed of in July 2008 and the Target Company had ceased all securities trading activities thereafter. As at the Latest Practicable Date, the principal business activity of the Target Company is securities trading.

LETTER FROM AMPLE CAPITAL LIMITED

On 2 May 2008, the Target Company entered into the Mogan SPA with eight individual Filipinos to acquire an aggregate effective 64% interest in the share capital of Mogan, a corporation organised and existing under the laws of the Philippines on 16 January 2007 and principally engaged in and carry on the business of operating mines, and of prospecting, exploration and of mining. As stated in the Board Letter, Mogan is the holder of the Mining Claims, which include all of the rights, title and interests in and to the magnetite and other minerals located in the Mining Area. On 8 November 2008, the parties to the Mogan SPA entered into an amendment agreement, pursuant to which the sellers undertook to exclude Mogan from the exploration mining applications EXPA-000099-VI and EXPA-000166-XIII. As a result, the Mining Area includes only two exploration permits ("EP") applications, namely EXPA000110VIII and EXPAOMR002VIII (formerly EXPA-000115-VIII), with an aggregate area of approximately 41,094 hectares.

The management of the Company has confirmed that Mogan has filed the EP applications in the magnetite and other minerals located in the Mining Area with and processed by the MGB and the DENR. As advised by the Company's legal advisers as to the Philippines' law, PJS Law, an EP application is first filed with the regional office of MGB having jurisdiction over the applied area and is then forwarded to the central office of MGB for clearance and issuance of the EP. An EP application will not be accepted if the regional office of MGB considered the documents submitted are incomplete or overlap with the existing mining permits. The acceptance of Mogan's EP applications by the regional offices of MGB concerned implies that the said applications have complied with the said requirements and the said mining areas are not in conflict with any existing mining rights, permits or applications. According to PJS Law, the notice of the Area Status and Clearance will be issued by a committee formed by the regional office of MGB and the regional office of DENR to indicate that the applied area is open to mining applications. Prior to the issuance of the Area Status and Clearance notice, respective clearances of various departments of DENR (including MGB) and government agencies are required to be obtained. As advised by PJS Law, the EP applications of Mogan have obtained the Area Status and Clearance notices. After obtaining such Area Status and Clearance notices, Mogan shall arrange for the publication, posting and radio announcement relating to its EP applications, after which interested parties may file any adverse claim, protest or opposition to Mogan's EP applications and the EPs will only be issued if there are no such claims, protests or oppositions or after all claims, protests or oppositions are resolved. As confirmed by the management of the Company, the respective publication, posting and radio announcements relating to the EP applications have been made by Mogan as at the Latest Practicable Date. Given the status of the EP applications, there is a risk that Mogan's EP applications may face adverse claims, protests or oppositions.

As explained in the Board Letter, certain risks are associated with the Acquisition and the Shareholders should read those risk factors set out under the section headed "Risk Factors relating to the Acquisition" in the Board Letter carefully before voting on the relevant resolutions relating to the Acquisition. A summary of the risk factors is set out below for your easy reference:

Profitability, of which revenue is largely derived from the production and sale of iron ore, of the Philippine Subsidiary's magnetic mining operations may be affected by fluctuations in the market price of iron ore. Hence, earnings from operations may be affected by prevailing actual market situations as the pricing for iron ore has historically been cyclical and volatile.

LETTER FROM AMPLE CAPITAL LIMITED

The prospects of mining as a business involve a great deal of uncertainties particularly in the results of the exploration activities. There is no assurance that the Company is able to actually realize, wholly or partially, the indicated potential of the Mining Claims once it commences mining and production operations.
Mineral resources are natural endowments that are not-renewable.
The EPs will only be issued if there are no claims, protests or oppositions or after all claims, protests or oppositions are resolved. There is therefore a risk that the Company may not be able to obtain the EPs after the completion of the Acquisition.
The Acquisition is the Company's first foray in the exploration and exploitation of mineral resources. The Acquisition in itself is also a start-up project. The Company may lack the management skills and expertise in carrying out this new business to be engaged by the Group. The inability to recruit, hire or appoint the much needed and necessary personnel to assist and participate in the management and operation of the project may slow the Company's production commencement and in turn, it's operating performance.
The entering into the mining industry, through the Acquisition, requires significant investments in capital expenditure, such as dredgers, processing or beneficiation plants as well as construction of port facilities as it relates to its operations over the near to medium term. The inability to procure the necessary funding may have a negative impact on the Philippine Subsidiary's overall business development and operating performance.
The value of the business operation of Mogan in relation to the offshore magnetite mining tenements in Leyte Gulf and San Pedro Bay was appraised by the Valuer using the discounted cash flow approach which estimates the value of the future economic benefits the proposed project is anticipated to generate. Actual results or performance may differ materially from forecasted scenarios, expressed or implied.
With the Philippine Government placing strict emphasis for the mining industry to be more environmentally-friendly, any change in the relevant policy or directives may superimpose additional costs and other approval procedures which may hinder the Philippine Subsidiary's ability to effectively operate.
Natural disasters such as tropical cyclone, seasonal rainstorm, earthquakes and floods may have a negative impact of the Philippine Subsidiary's business operations as a whole as production and port facilities as well as shipping schedules may be disrupted for prolonged or indefinite periods of time.

LETTER FROM AMPLE CAPITAL LIMITED

While the Company's revenue is denominated in US dollars, virtually all of the costs and expenses relating to the Philippine Subsidiary's operation are denominated in the Philippine Peso. Since the Peso is a freely tradable currency, the strengthening of the currency may have a negative impact to the Group's overall financial condition including its results from operations.

PRC steel market

Crude steel production of PRC

Year	metric tons
2001	151,634,000
2002	182,366,000
2003	222,336,000
2004	282,911,000
2005	353,240,000
2006	419,149,000
2007	489,200,000

Source: International Iron & Steel Institute, 2007 China Statistical Yearbook

The above table shows the strong growth of PRC's crude steel production in recent years. During the period from 2001 to 2007, the crude steel production of China increased from approximately 151.6 million metric tons in 2001 to approximately 489.2 million metric tons in 2007, representing a compounded annual growth rate ("CAGR") of $21.56\%$ . The increase in crude steel production is driven by the growth of the industries of construction, transportation, power and home appliances in PRC. According to the International Iron and Steel Institute, the finished steel products in the PRC increased from approximately 158 million metric tons in 2001 to approximately 408.3 million metric tons in 2007, with a CAGR of approximately $17.14\%$ , indicating rapid growth on the consumption of steel in the PRC has been growing rapidly in recent years. In 2007, PRC is ranked the first in the global steel production and consumption in 2007 with the crude steel production volume of approximately 489.2 million metric tons and finished steel products of approximately 408.3 million metric tons, representing approximately $36.4\%$ and $33.8\%$ of the total world production and consumption, respectively.

LETTER FROM AMPLE CAPITAL LIMITED

PRC iron ore and historical price of iron ore

Iron ore is a principal raw material in the production of steel and magnetite is a natural ore with the highest iron content.

PRC's Import volume of iron ore

Year	metric tons
2001	92,310,000
2002	111,490,000
2003	148,120,000
2004	208,090,000
2005	275,230,000
2006	326,300,000
2007	383,090,000

Sources: China Customs, China Statistical Yearbooks

The growth in PRC steel industry in recent years has led to rapid growth in the demand for iron ore. The domestic iron ore demand has constantly exceeded the domestic supply and the import of iron ore has been increasing rapidly in recent years. According to the National Bureau of Statistics of PRC, PRC's imported iron ore was approximately 92.3 million metric tons in 2001 and reached approximately 383.1 million metric tons in 2007, representing a CAGR of approximately $26.77\%$ .

PRC's Import Iron ore price (US$ton)

Sources: China Customs, China Statistical Yearbooks

LETTER FROM AMPLE CAPITAL LIMITED

As set out in the above chart, the average import price of iron ore per tonne in PRC has been increasing from approximately US$27.1 per tonne in 2001 to approximately US$88.2 per tonne in 2007, an increase of approximately 225.46%. Such significant increase was mainly attributable to the strong demand for steel products coupled with PRC's economic growth. The management of the Company expects the price of fine iron ore to remain high in the foreseeable future and a number of renowned international steel manufacturing companies have recently agreed the iron ore supply contracts at higher prices. The management of the Company also expects PRC's steel manufacturing industry will continue to be on the rise and the demand for imported fine iron ore will remain strong in the foreseeable future. Given that Republic of the Philippines is located closer to PRC than Australia and Brazil (the two main countries of iron ore supplies to PRC), the management of the Company believes the freight transportation cost of the Mining Area will be lower than the counterparties in Australia and Brazil, which will provide price-competitive advantage to Mogan's magnetite or iron ore supplies in the future.

Principal terms of the Acquisition

(a) Consideration

Pursuant to the Acquisition Agreement, the Vendor agreed to sell and the Purchaser agreed to acquire the entire issued share capital of the Target Company at the Acquisition Price of HK$5,700 million.

As stated in the Board Letter, the Acquisition Price was determined after arm's length negotiation between the Company and the Vendor with reference to among other things, (i) the value of opportunity for the Group to gain access to the mining sector in Republic of the Philippines and to broaden the income base of the Group; (ii) the significant potential geological resource of the Mining Claims based on the marine seismic reflection survey jointly executed by the Philippine Mines and Geo-Sciences Bureau and the Philippine Bureau of Coast and Geodetic Survey; (iii) the preliminary assayed results have indicated that the sampling contains a high level of magnetics and iron content; (iv) the Philippines' advantageous geographical location to PRC relative to Brazil and Australia; (v) the strong emphasis on natural resources from the current state of worldwide economy; (vi) the upward price trend of magnetite sand in recent years; and (vii) the Acquisition will provide a healthy and steady stream of future income as well as diversify the overall business risks of the Company.

After Completion, the Company (through the Purchaser) will hold 100% of the Target Company which owns in turn an effective 64% shareholding interest in Mogan that is or will be the legal holder of the Mining Claims. It is noted that the effective 64% shareholding of the Company in Mogan after Completion is represented by direct 40% shareholding (through MMH which is wholly owned by the Target Company), and a 40% equity interest in each of Belgravia Investment and Triple Edge which holds 30% of Mogan respectively. We are confirmed by the Company that the remaining 60% of each of Belgravia Investment and Triple Edge are being held by Philippine citizens who are Independent Third Parties in order to comply with the 1987 Philippine Constitution.

LETTER FROM AMPLE CAPITAL LIMITED

Pursuant to the 1987 Philippine Constitution, all lands of the public domain, water minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and other natural resources are owned by the state. The exploration, development and utilization of these natural resources are also under the full control and supervision of the state. However, the state has the option of entering into co-production, joint venture or production sharing arrangements with Philippine corporations or associations or Philippine citizens. At least 60% of the capital of a corporation or association must be directly held by Philippine citizens for such corporation or association to be considered a Philippine corporation or association.

The principal asset of the Target Company is its 64% effective interest in Mogan (after Reorganisation), which is principally engaged in and carry on the business of operating mines and of prospecting, exploration and of mining. A valuation report (the "Project Valuation Report") has been produced by B.I. Appraisals Limited (the "Valuer"), an independent valuer, on the exploration and mining of the offshore magnetite or iron ore in the Mining Area covering an aggregate area of approximately 41,094 hectares in Leyte Gulf and San Pedro Bay off Leyte and Samar Provinces (the "Mining Project"). The Valuer has also confirmed that it has not had any transactions or relationship with the Company, its connected persons, the Vendor or its respective ultimate beneficial owners prior to the Acquisition.

Based on the Valuer's representation relating to its expertise in valuation of mining projects, the Valuer has prior relevant experiences in the valuation of mining projects. In preparing the Project Valuation Report, the Valuer has also made reference to the technical report titled "Black Sand Enterprises Limited Magnetite Beach-sand Project in Leyte Province, the Philippines" (the "Technical Report") prepared by the Technical Adviser and a geology report prepared by Mines and Geosciences Bureau of Republic of the Philippines (the "MGB Report"). We have reviewed the Technical Report and the scope of work relating to the Technical Report and noted that the Valuer has discussed with the Technical Adviser relating to the methodologies and reporting standards. The Valuer has confirmed that it is satisfied with such methodologies and reporting standards which are in accordance with the codes set by the Australasian Joint Ore Reserves Committee, being the internationally recognised standards relating to the reporting of mineral reserves. The Valuer has also confirmed that it had considered three generally accepted valuation approaches, namely, the cost approach, the market approach and the income approach, and that the Valuer determined the income approach to be the most appropriate method to assess the profitability of the Mining Project and based on the discounted cash flow method to calculate the net present value of the Mining Project. For assumption of the appropriate discount rate, the Valuer considers the cost of equity of the Capital Asset Pricing Model to be an appropriate model for the estimation of the cost of capital of Mining Project with reference to certain publicly listed mining companies in Hong Kong engaged in similar businesses. While the Valuer is positive on the trend of demand for iron ore in the PRC, the iron ore price is fixed at US$119.36 per ton in the course of valuation for conservative purpose. We note that Cachet Certified Public Accountants Limited, has examined and is satisfied with the arithmetical accuracy of the calculations of the discounted cash flow forecast underlying the Project Valuation Report.

LETTER FROM AMPLE CAPITAL LIMITED

According to the Project Valuation Report, the market value of 64% equity interest in the Mining Project is approximately US$2,998.4 million (approximately HK$23,387.52 million) as at 31 August 2008. Based on our review of the information available to us, we consider that, the assumptions, the basis and the methodology for the valuation of the Mining Project are fair and reasonable. Nevertheless, Shareholders are reminded that like all valuation methods involving forecasts of future events, revenue and profits cannot be projected with complete accuracy and are dependent on the assumptions made. As set out in the Project Valuation Report, the Mining Project is subject to uncertainty and there is no assurance that the business plan of Mogan will materialize. During the course of the valuation, the Valuer has considered a number of risk factors including, among other things, the operational risk impacted by the government policies and regulations, the cyclical nature of iron-ore markets, potential inaccuracy of the iron-ore reserve data, impact of the interest rates, foreign exchange rates and government policies on the profitability of the Mining Project. Such risk factors were considered since the Mining Project is at a preliminary stage and has not commenced any exploration activities. Accordingly, the valuation serves as a reference as to whether the business of the Mining Project, if successful, will yield the economic benefit to the interested party in the Mining Project subject to the known facts and hypothesis as contained in the relevant documents.

Given that the Acquisition Price of HK$5,700 million is substantially lower than the 64% interest of the valuation of the Mining Project of approximately HK$23,387.52 million, we are of the view that the Acquisition Price is fair and reasonable in so far as the Independent Shareholders are concerned and is in the interests of the Company and the Shareholders as a whole.

(b) Payment terms of the Consideration

Pursuant to the Acquisition Agreement, the Acquisition Price of HK$5,700 million shall be settled in the following manner:

(i) on 9 April 2008, immediately after the date of the Acquisition Agreement, an amount of HK$40 million was paid by Company to the Vendor as the Earnest Money and part of the Acquisition Price;

(ii) as to HK$200 million by the issue of the Promissory Note to the Vendor;

(iii) as to HK$350 million by the Company allotting and issuing to the Vendor (or such person(s) as nominated by the Vendor) a total of 500,000,000 Consideration Shares, credited as fully paid at the Issue Price on Completion; and

(iv) as to HK$5,110 million by the Company issuing the Convertible Bonds to the Vendor on Completion.

LETTER FROM AMPLE CAPITAL LIMITED

The Consideration Shares

Pursuant to the Acquisition Agreement, the Consideration Shares, representing approximately 24.4% of the issued share capital of the Company as at the Latest Practicable Date, will be issued at an issue price of HK$0.70 per Consideration Share to satisfy HK$350 million of the Acquisition Price. The issue price of HK$0.70 per Consideration Share represents:

(i) a discount of approximately 22.2% to the closing price of HK$0.90 per Share as quoted on the Stock Exchange on the Last Trading Day;

(ii) a discount of approximately 14.6% to the average closing price of approximately HK$0.82 per Share for the last five consecutive trading days up to and including the Last Trading Day;

(iii) a discount of approximately 6.7% to the average closing price of HK$0.75 per Share for the last ten consecutive trading days up to and including the Last Trading Day; and

(iv) a premium of approximately 2,319.0% over the audited consolidated net asset value per Share of approximately HK$0.029 as at 31 March 2008.

Set out below is the chart showing the closing prices and trading volume of the Shares traded on the Stock Exchange from 2 May 2007 (being one year immediately up to the Last Trading Day) up to and including the Last Trading Day, i.e. 2 May 2008 (the "Review Period") as compared to the issue price of HK$0.70 (which is also the Conversion Price).

Closing price per Share on the Stock Exchange

LETTER FROM AMPLE CAPITAL LIMITED

Trading volume of the Shares on the Stock Exchange

During the Review Period, the closing price of the Shares ranged from HK$0.071 to HK$0.900. The issue price of HK$0.70 represents (a) a price towards the upper end of the range at which the Shares have traded during the Review Period; and (b) a premium over the audited consolidated net asset value of approximately HK$0.029 per Share as at 31 March 2008; and (c) approximately 207% premium over the average closing price of approximately HK$0.228 per Share during the Review Period. We note that the closing price of the Shares has been on an overall upward trend during the Review Period.

During the Review Period, the average daily trading volume of the Shares was approximately 17.51 million, representing approximately 1.01% and 0.86% of the number of issued Shares in public hands and the total number of issued Shares respectively as at the Latest Practicable Date.

After the release of the announcement relating to the MOU on 8 April 2008, the closing price of the Shares gradually increased from HK$0.58 to HK$0.90 on the Last Trading Day, which is the highest price immediately before the announcement relating to the Acquisition. However, the issue price of HK$0.70 per Share represents a discount of less than 8% to the average closing price for the last 10 trading days of the Shares up to and including the Last Trading Day. The issue price of HK$0.70 per Share represents a premium of approximately 241.5% over the closing price per Share of HK$0.205 as at the Latest Practicable Date.

LETTER FROM AMPLE CAPITAL LIMITED

In order to further assess the fairness and reasonableness of the issue price of HK$0.70 per Share, we have reviewed the acquisitions announced by other companies listed on the Stock Exchange involving the issue of shares as all or part of the consideration during the period from 2 November 2007 (being the six months preceding the Last Trading Day) to the Last Trading Day with the amount of not less than HK$100 million (the "Issue Price Comparables"), which we consider are fair representative samples and can provide a relevant and appropriate reference to the common market practice of companies listed on the Stock Exchange in acquisitions involving the issue of shares as consideration. The table below illustrates our relevant findings:

Name of issuer	Stock code	Date of announcement	Issue price of the consideration shares HK$	Premium/(discount) of the issue price over/to the price of shares as at the last trading day prior to the release of the announcement %
Sino Union Petroleum & Chemical International Limited	346	9-Nov-07	1.44	7.46
Core Healthcare Investment Holdings Limited	8250	15-Nov-07	0.17	(70.70)
China Sci-Tech Holdings Limited	985	20-Nov-07	0.80	23.08
Neptune Group Limited	70	29-Nov-07	0.30	(13.04)
China National Resources Development Holdings Limited	661	30-Nov-07	1.58	38.60
K.P.I. Company Limited	605	30-Nov-07	0.45	(4.26)
China Resources Land Limited	1109	3-Dec-07	16.83	(9.20)
Tianjin Development Holdings Limited	882	3-Dec-07	8.32	(8.67)
China Rise International Holdings Limited	723	7-Dec-07	0.52	(7.14)
Galileo Holdings Limited	8029	11-Dec-07	1.10	(30.38)
ESPCO Technology Holdings Limited	8299	18-Dec-07	0.15	(54.55)
China Vanguard Group Limited	8156	17-Jan-08	0.69	(15.90)
Glory Future Group Limited	8071	23-Jan-08	0.40	2.56
Sungreen International Holdings Limited	8306	4-Feb-08	5.55	5.80
Wah Nam International Holdings Limited	159	12-Feb-08	0.30	(45.45)
Challenger Group Holdings Limited	8203	18-Feb-08	0.80	14.29
Nubrands Group Holdings Limited	835	19-Feb-08	0.25	(1.96)
Smart Rich Energy Finance (Holdings) Limited	1051	5-Mar-08	0.228	12.32
Mongolia Energy Corporation Limited	276	10-Mar-08	8.00	(3.38)
China Primary Resources Holdings Limited	8117	17-Mar-08	0.22	20.90
China Asean Resources Limited	8186	20-Mar-08	0.60	233.33
Tradeeasy Holdings Limited	8163	28-Mar-08	0.10	(64.29)
Asian Union New Media (Group) Limited	419	9-Apr-08	0.20	48.15
Wasion Meters Group Limited	3393	18-Apr-08	3.58	20.00
Sino Union Petroleum & Chemical International Limited	346	22-Apr-08	2.80	53.80
Champion Technology Holdings Limited	92	23-Apr-08	1.19	1.71
Ajisen (China) Holdings Limited	538	28-Apr-08	9.238	(8.53)
Maximum				233.33
Minimum				(70.70)
Average				5.35
The Company		19-May-08	0.70	(22.20)

LETTER FROM AMPLE CAPITAL LIMITED

As shown by the above table, the issue prices of the consideration shares of the Issue Price Comparables ranged from a discount of approximately 70.70% to a premium of approximately 233.33% to/over the closing prices of their shares as at the last trading days prior to the release of the acquisition announcements with an average of a premium of approximately 5.35%. Out of the 27 Issue Price Comparables, 14 Issue Price Comparables had issue prices of discount to the closing prices of their shares as at the last trading days. The discount of approximately 22.2% in relation to the issue price of HK$0.70 per Share falls within the said market range of Issue Price Comparables and is therefore in line with market practice.

Given the above, we consider that the issue price is fair and reasonable on the basis that (a) the issue price of HK$0.70 represents a premium of approximately 2,319.0% over the audited consolidated net asset value per Share as at 31 March 2008; (b) there is no immediate cash outlay for the Company to settle the Acquisition Price and the Vendor is willing to accept the Consideration Shares in place of cash; (c) the upward movements of the closing price of the Shares after the release of the MOU may be due to the market sentiment; (d) the discount of the issue price of HK$0.70 per Share falls within the said market range of Issue Price Comparables; and (e) the issue price of HK$0.70 per Share represents a substantial premium over the closing price as at the Latest Practicable Date.

The Convertible Bonds

As stated in the Board Letter, HK$5,110 million of the Acquisition Price shall be satisfied by issue of the Convertible Bonds. The principal amount of the Convertible Bonds is approximately US$655,128,205 comprising two tranches: Tranche A Bonds and Tranche B Bonds with total principal amount of US$425,833,333 and US$229,294,872, respectively. The principal terms of the Convertible Bonds are stated in the Board Letter, in particular, it has a term of 10 years with zero coupon rate and can be converted into Conversion Shares at any time from the date of issue up to the Maturity Date at an initial conversion price of HK$0.70, which will be subject to adjustment in certain events including, among other things, consolidations or subdivision of the Shares, capitalization issues, capital distributions and other dilution events.

LETTER FROM AMPLE CAPITAL LIMITED

In order to assess the fairness and reasonableness of the principal terms of the Convertible Bonds, we have reviewed those acquisitions of the equity interest in a company by way of, among others, issue of the convertible notes/bonds, which are denominated in Hong Kong dollars and announced by companies listed on the Stock Exchange during the period from 2 November 2007 (being the six months preceding the Last Trading Day) to the Last Trading Day with the amount of the convertible notes/bonds of not less than HK$500 million (the “CB Comparables”). In this connection, we have to the best of our knowledge, identified a total of 11 CB Comparables during the period under review, details of which are set out as follows:

Name of issuer (Stock code)	Date of announcement	Principal amount (HK$ million)	Maturity (years)	Interest rate per annum (%)	Premium/(discount) of the initial conversion price over/to the closing price of shares on the last trading day prior to the date of the corresponding announcement (%)	Earliest day to convert the convertible bond/note	Transferability
Bestway International Holdings Limited (718)	7-Nov-07	1,000	6	0	(19.60)	on the date of issue	Freely transferable
Neptune Group Limited (70)	29-Nov-07	984	10	1	(13.04)	on the date of issue	Upon prior consent from the company and other conditions
China Rise International Holdings Limited (723)	10-Dec-07	1,092	5	1.5	(7.14)	on the date of issue	Freely transferable
Espco Technology Holdings Limited (8299)	18-Dec-07	806.4	5	0	(54.55)	on the date of issue	Freely transferable
Rising Development Holdings Limited (1004)	10-Jan-08	837	3	1	(9.68)	on the date of issue	Freely transferable
Glory Future Group Limited (8071)	23-Jan-08	1,561.74	5	0	2.56	on the date of issue	Freely transferable
Frankie Dominion International Limited (704)	24-Jan-08	2,200	5	0	(19.19)	on the date of issue	Freely transferable

LETTER FROM AMPLE CAPITAL LIMITED

Name of issuer (Stock code)	Date of announcement	Principal amount (HK$ million)	Maturity (years)	Interest rate per annum (%)	Premium/(discount) of the initial conversion price over/to the closing price of shares on the last trading day prior to the date of the corresponding announcement (%)	Earliest day to convert the convertible bond/note	Transferability
Sungreen International Holdings Limited (8306)	4-Feb-08	756.9	7	3	5.8	on the date of issue	Upon prior notification to the company and other conditions
Challenger Group Holdings Limited (8203)	18-Feb-08	920	5	1	85.71	on the date of issue	Freely transferable
Tradeeasy Holdings Limited (8163)	28-Mar-08	776.9	3	0	(64.29)	on the date of issue	Upon prior written consent from the company
Xian Yuen Titanium Resources Holdings Limited (353)	18-Apr-08	960.78	5	0	(1.96)	on the date of issue	Freely transferable
Maximum			10	3	85.71
Minimum			3	0	(64.29)
Average			5	1	(8.67)
The Company	19-May 08	5,110	10	0	(22.20)	on the date of issue (no conversion if general offer obligation is triggered and/or public float less than 25%)	Freely transferable

LETTER FROM AMPLE CAPITAL LIMITED

We note from the above table that the conversion price of the CB Comparables ranged from a discount of approximately 64.29% to a premium of approximately 85.71% to the respective closing price as at the last trading day prior to the release of the relevant announcements with an average of a discount of approximately 8.67%. The discount of approximately 22.2% in relation to the Conversion Price falls within the said market ranges of CB Comparables and is therefore in line with market practice. In addition, we note that 8 out of the 11 CB Comparables are freely transferable and we consider such nature is in line with market practice. We consider that the CB Comparables are fair and representative samples in comparison with the Convertible Bonds.

In view of the above comparison and having taking into account (i) the deteriorated financial performance of the Group for the year ended 31 March 2008 as discussed above; and (ii) the low liquidity of the Share, we consider the Conversion Price of the Convertible Bonds is fair and reasonable and in the interests of the Company and the Independent Shareholders as a whole.

Given the fact that (i) the Conversion Price, which is the same as the Issue Price, represents a discount of approximately 22.2% to the closing price per Share as the Last Trading Day, which falls within the said market ranges of CB Comparables; (ii) the Convertible Bonds do not carry any interest and therefore do not have any adverse impact on the cash flow of the Group until maturity; (iii) the Convertible Bonds may enhance the capital base of the Company when conversion takes place; (iv) the terms of the Convertible Bonds are in line with those prevailing in the market when compared to the recent acquisitions (which involved the issue of convertible bonds) by other listed companies of the Stock Exchange; and (v) the benefits expected to be brought by the Acquisition, we consider the issue of the Convertible Bonds, as part of the payment terms under the Acquisition Agreement, to be in the interest of the Company and the Shareholders as a whole and the terms of the Convertible Bonds are fair and reasonable.

LETTER FROM AMPLE CAPITAL LIMITED

3. Financial impacts of the Acquisition

Upon Completion, the Target Company will become a wholly-owned subsidiary of the Purchaser while Mogan will become an indirect subsidiary of the Company with effective interest of 64% and their financial results will be consolidated into the Group's financial results with the corresponding treatment of the equity interests not owned by the Group as minority interests in its consolidated financial statements.

Earnings

Based on the "Unaudited pro forma consolidated income statement for the year ended 31 March 2008" (the "Pro Forma Income Statement") set out in Appendix IV to the Circular, the unaudited loss attributable to Shareholders of the Enlarged Group will be approximately HK$250.81 million, representing an increase of approximately HK$203.30 million from the audited net loss attributable to Shareholders of the Group of approximately HK$47.52 million for the year ended 31 March 2008. Such significant increase was mainly due to the imputed interest expenses of approximately HK$12.65 million and HK$190.74 million arising from the valuation of the Promissory Note and Convertible Bonds, which were prepared in accordance with the generally accepted accounting principles in Hong Kong. Having considered that (i) the imputed interest expenses are calculated in accordance with the generally accepted accounting principles in Hong Kong; (ii) there is no cashflow impact of the imputed interest expenses on the liquidity position to the Company; and (iii) the Acquisition will strengthen the consolidated net asset value of the Group upon Completion, we are of the view that the Acquisition is in the interest of the Company and the Shareholders as a whole notwithstanding that a significant amount of loss arising from the Acquisition is illustrated in the Pro Forma Income Statement.

Net asset value

As set out in the "Unaudited pro forma consolidated balance sheet as at 31 March 2008" (the "Pro Forma Balance Sheet") in Appendix IV to the Circular, the unaudited pro forma combined net assets of the Enlarged Group as at 31 March 2008 was approximately HK$7,407.44 million, representing an increase of approximately HK$7,351.52 million from the audited consolidated net assets of the Group of approximately HK$55.92 million as at 31 March 2008. Such significant increase was mainly due to the creation of a new intangible asset named "mining claims" of approximately HK$8,876.06 million arising out of the Acquisition.

On a per Share basis, the consolidated net assets per Share will increase, on a pro forma basis from HK$0.029 per Share as at 31 March 2008 to HK$0.752 per Share upon Completion, the issue of the Consideration Shares and the conversion of the full Convertible Bonds.

The increase in the combined net assets of the Group and the consolidated net assets per Share, on a pro forma basis, are beneficial to the Company and the Shareholders as a whole.

LETTER FROM AMPLE CAPITAL LIMITED

Cash position and gearing

As illustrated in the Pro Forma Balance Sheet, the Group had audited cash and cash equivalents (excluding pledged bank deposits) of approximately HK$51.75 million as at 31 March 2008. Given the audited total current assets of approximately HK$72.42 million and audited total current liabilities of approximately HK$42.99 million as at 31 March 2008, the Group had a net-current-assets position of approximately HK$29.43 million or a current ratio of approximately 1.68. In addition, the gearing ratio of the Group as at 31 March 2008 was approximately 18.04%, as represented by the Group's total borrowings of approximately HK$10.09 million over its net assets of approximately HK$55.92 million.

Based on the unaudited pro forma financial information of the Enlarged Group set out in Appendix IV to the Circular, prepared on the assumptions that (i) the Acquisition has been completed as at 31 March 2008; (ii) a total of 500,000,000 Consideration Shares were issued to the Vendor at Completion; and (iii) the remaining portion of the Consideration had been satisfied in full by the issue of the Promissory Notes and the Convertible Bonds at Completion without any conversion taking place as at 31 March 2008, the cash and cash equivalents of the Enlarged Group would decrease to approximately HK$11.75 million pursuant to the terms of the Acquisition. On the same basis, the total current assets and the total current liabilities of the Enlarged Group would become approximately HK$32.87 million and HK$44.23 million, respectively, representing net current liabilities of approximately HK$11.36 million or a net current ratio of approximately 0.74. As a result of the issue of the Promissory Note and the Convertible Bonds, the total borrowings of the Enlarged Group would increase significantly to approximately HK$1,493.64 million and the gearing ratio of the Enlarged Group would amount to approximately 20.16%. While the total borrowings of the Enlarged Group increased significantly upon Completion, the gearing ratio of the Enlarged Group increased slightly from approximately 18.04% to approximately 20.16% and this is mainly due to the significant increase in the net assets value of the Enlarged Group. Based on the above, we consider that the Acquisition will not have any significant impact of the gearing position on the Group.

On 30 September 2008, the Group entered into a convertible loan agreement in the principal amount of Euro 200 million (equivalent to approximately HK$2,230 million) ("Convertible Loan"), payable on the third anniversary of the drawdown date of the Convertible Loan and is convertible into Shares at the conversion rate of Euro 0.10 per Share at a fixed exchange rate of one Euro to HK$11.1678. The Directors confirm that, as at the Latest Practicable Date, the convertible loan agreement has not been completed and the Convertible Loan has not been drawn by the Company. Assuming successful completion of the Convertible Loan, the Directors have confirmed that the Company will obtain net proceeds of approximately Euro 185.5 million (equivalent to approximately HK$2,068 million) which will be mainly applied for the development of the Mining Project (including the repayment of HK$200 million Promissory Note, the capital expenditure and the general working capital for the Mining Project). Furthermore, as represented by the Directors, in the event the Company fails to issue the Convertible Loan, the Group may be required to raise the required funding from other sources, including bank borrowings or equity financing. Under the circumstances, depending on the fund raising methods, the Group's liquidity position may be adversely affected due to the payment of the Promissory Note.

LETTER FROM AMPLE CAPITAL LIMITED

4. Potential dilution effect on the shareholdings of the Independent Shareholders

As at the Latest Practicable Date, the existing Independent Shareholders (namely Nice Hill Investments Limited and the public Shareholders) are interested in 2,028,694,023 Shares or approximately 99.1% of the issued share capital of the Company of 2,046,534,023 Shares. If the Acquisition is approved and becomes unconditional, the Company will issue a maximum of 500,000,000 Consideration Shares to the Vendor, representing approximately 24.4% of the existing issued share capital of the Company and approximately 19.6% of the issued share capital of the Company as enlarged by the issue of the Consideration Shares. On this basis, the aggregate shareholding interests of the existing Independent Shareholders in the Company will be diluted from approximately 99.1% to approximately 79.7% of the Company's enlarged share capital of 2,546,534,023 Shares, representing a reduction of approximately 19.4%. Furthermore, on the assumption that (i) the Convertible Bonds are converted in full with the issue of additional 7,300,000,000 Conversion Shares; (ii) full conversion of the Convertible Loan with the addition of 2,000,000,000 new Shares; and (iii) full exercise of the WS Option with the addition of 5,000,000 new Shares, the aggregate shareholding interests of the existing Independent Shareholders in the Company will be diluted further to approximately 17.1% of the Company's enlarged share capital of 11,851,534,023 Shares, representing an overall absolute decrease of approximately 82.0% from their existing shareholdings of approximately 99.1%.

Each Bondholder shall exercise the conversion rights attaching to the Convertible Bonds only if the allotment and issue of the Conversion Shares to such Bondholders pursuant to an exercise of the conversion right will not cause the Company to be in breach of the minimum public float requirement stipulated under Rule 11.23 of the GEM Listing Rules.

Having considered (i) the existing loss-making business operations; (ii) the Acquisition as an opportunity for the Company to diversify into the mining business, the prospect of which is promising; (iii) the issue price for the Consideration Shares being fair and reasonable; (iv) the enhancement of consolidated assets per Share on a pro forma basis from HK$0.029 as at 31 March 2008 to HK$0.752 upon Completion, representing an increase of approximately 2,493.10%; and (v) it is not likely, if not impossible, for the Group to use other fund raising exercises such as rights issue or open offer in light of the significant amount of the funds required for the Acquisition and the current unfavourable market sentiment, we are of the view that the dilution on the shareholding interests of the Independent Shareholders in the Company is acceptable.

LETTER FROM AMPLE CAPITAL LIMITED

RECOMMENDATION

Having considered the principal factors and reasons, in particular, taking into account the followings:

(i) both the Company's asset value and equity base (a major portion of the Acquisition Price will be satisfied by the issue of the new Shares) will be enhanced;

(ii) the Group can diversify into the mining business to broaden the income base of the Group;

(iii) the steel industry in the PRC has been favourable resulting in a strong demand for iron ore and such demand is expected to continue to increase in the foreseeable future;

(iv) the iron ore price has been increased significantly in recent years and is expected to remain strong in the foreseeable future;

(v) the Acquisition Price of HK$5,700 million represents a significant discount of approximately 75.63% to the market value of a 64% equity interest in the Mining Project as at 31 August 2008 as appraised by the Valuer; and

(vi) the uncertainties and risks relating to Mogan's EP applications together with other relevant risk factors relating to the Acquisition as disclosed in the Board Letter,

we are of the view that the Acquisition (including the issue of the Promissory Note, the Consideration Shares and the Convertible Bonds) are in the interests of the Company and the Shareholders as a whole and the terms of the Acquisition Agreement (including the issue of the Promissory Note, the Consideration Shares and the Convertible Bonds) are fair and reasonable and on normal commercial terms. Accordingly, we would recommend (i) the Independent Board Committee to advise the Independent Shareholders and (ii) the Independent Shareholders, to vote in favor of the resolutions to be proposed at the EGM to approve the Acquisition.

Yours faithfully,

For and on behalf of

Ample Capital Limited

H. W. Tang

President

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

1. SUMMARY OF FINANCIAL INFORMATION FOR THE THREE YEARS ENDED 31 MARCH 2008

The following financial information has been extracted from the unqualified audited consolidated financial statements of the Group for each of the three years ended 31 March 2008 as shown in the annual report of the Company.

	For the year ended 31 March
	2008
HK$’000	2007
HK$’000	2006
HK$’000
Turnover	33,157	59,671	83,901
(Loss)/profit from operations	(47,078)	(66,626)	5,894
Finance costs	(1,564)	(3,569)	(2,512)
(Loss)/profit before income tax	(48,642)	(70,195)	3,382
Income tax	–	(38)	(932)
(Loss)/profit before minority interests	(48,642)	(70,233)	2,450
Minority interests	1,127	426	(145)
Net(loss)/profit for the year	(47,515)	(69,807)	2,305
	At 31 March
	2008
HK$’000	2007
HK$’000	2006
HK$’000
Total assets	106,979	88,184	151,014
Total liabilities	(51,055)	(82,850)	(84,073)
Minority interests	(5,192)	(6,319)	(6,745)
	50,732	(985)	60,196

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

2. THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2008

The following information has been extracted from the annual report of the Company for the year ended 31 March 2008.

Consolidated Income Statement
For the year ended 31 March 2008

| | Notes | 2008
HK$'000 | 2007
HK$'000 |
| --- | --- | --- | --- |
| Turnover | 5 | 33,157 | 59,671 |
| Cost of sales | | (29,851) | (57,818) |
| Gross profit | | 3,306 | 1,853 |
| Other revenue | 6 | 3,146 | 1,136 |
| Other income | 6 | 1,943 | 291 |
| Distribution costs | | (323) | (807) |
| Administrative expenses | | (27,713) | (19,200) |
| Provision on stock obsolescence | | (3,961) | (2,132) |
| Impairment on film rights | | - | (45,810) |
| Impairment on deposits for acquisition of film rights | | (322) | - |
| Impairment on trade receivables | | (13,400) | - |
| Impairment on prepayments and other receivables | | (6,062) | - |
| Loss on disposal of property, plant and equipment | | (2,346) | - |
| Other operating expenses | | (1,346) | (1,957) |
| Loss from operations | 7 | (47,078) | (66,626) |
| Finance costs | 8 | (1,564) | (3,569) |
| Loss before income tax | | (48,642) | (70,195) |
| Income tax | 11 | - | (38) |
| Loss for the year | | (48,642) | (70,233) |
| Attributable to: | | | |
| Equity holders of the Company | | (47,515) | (69,807) |
| Minority interests | | (1,127) | (426) |
| | | (48,642) | (70,233) |
| Loss per share | 13 | | |
| - Basic | | (HK$6.91) cents | (HK$16.62) cents |
| - Diluted | | N/A | N/A |

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

As at 31 March 2008

Consolidated Balance Sheet

	Notes	2008	2007
		HK$'000	HK$'000
ASSETS
Non-current assets
Property, plant and equipment	14	1,985	4,007
Other intangible assets	15	26,541	17,118
Goodwill	16	4,259	4,259
Films in progress		385	385
Deposits for acquisition of film rights		223	1,608
		33,393	27,377
Current assets
Inventories	18	9,169	17,641
Trade receivables	19	2,551	22,217
Deposits, prepayments and other receivables	20	6,786	11,367
Amounts due from related companies	38(c)	12	2,106
Pledged bank deposits	21	2,155	5,136
Cash and cash equivalents	22	51,746	2,340
		72,419	60,807
LIABILITIES
Current liabilities
Trade payables	23	11,112	18,606
Other payables and accruals	24	22,036	20,379
Amount due to a director	38(e)	517	7,593
Amount due to a related company	38(d)	1,275	-
Taxation payable	25	6	6
Obligations under finance leases
- due within one year	26	346	380
Secured bank and other borrowings
- due within one year	27	7,698	24,969
		42,990	71,933
Net current assets/(liabilities)		29,429	(11,126)
Total assets less current liabilities		62,822	16,251

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

| | Notes | 2008
HK$'000 | 2007
HK$'000 |
| --- | --- | --- | --- |
| Non-current liabilities | | | |
| Obligations under finance leases | | | |
| – due after one year | 26 | 333 | 679 |
| Secured bank and other borrowings | | | |
| – due after one year | 27 | 2,388 | 6,061 |
| Deferred tax liabilities | 25 | 4,177 | 4,177 |
| | | 6,898 | 10,917 |
| NET ASSETS | | 55,924 | 5,334 |
| CAPITAL AND RESERVES | | | |
| Share capital | 28 | 19,325 | 4,849 |
| Reserves | | 31,407 | (5,834) |
| | | 50,732 | (985) |
| Minority interests | | 5,192 | 6,319 |
| TOTAL EQUITY | | 55,924 | 5,334 |

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Consolidated Statement of Changes in Equity

For the year ended 31 March 2008

	Attributable to equity holders of the Company
	Share capital HK$'000	Share premium HK$'000	Special reserve HK$'000	Exchange reserve HK$'000	Share option reserve HK$'000	Equity component of convertible Accumulated notes HK$'000	Accumulated losses HK$'000	Total HK$'000	Minority interests HK$'000	Total equity HK$'000
At 1 April 2006	4,023	12,953	10,440	67	-	-	32,713	60,196	6,745	66,941
Issue of new shares
- Acquisition of subsidiaries	805	4,695	-	-	-	-	-	5,500	-	5,500
- Exercise of share options	21	49	-	-	-	-	-	70	-	70
Exchange difference on translation of the financial statements of foreign subsidiaries	-	-	-	1	-	-	-	1	-	1
Equity settled share-based transactions	-	-	-	-	3,055	-	-	3,055	-	3,055
Loss for the year	-	-	-	-	-	-	(69,807)	(69,807)	(426)	(70,233)
At 31 March 2007	4,849	17,697	10,440	68	3,055	-	(37,094)	(985)	6,319	5,334
Equity components of convertible notes	-	-	-	-	-	2,043	-	2,043	-	2,043
Issue of new shares
- Placing of shares	786	20,291	-	-	-	-	-	21,077	-	21,077
- Open offer	3,005	11,463	-	-	-	-	-	14,468	-	14,468
- Conversion of convertible notes	10,183	45,206	-	-	-	(2,043)	-	53,346	-	53,346
- Exercise of share options	502	10,516	-	-	(2,735)	-	-	8,283	-	8,283
Exchange difference on translation of the financial statements of foreign subsidiaries	-	-	-	15	-	-	-	15	-	15
Loss for the year	-	-	-	-	-	-	(47,515)	(47,515)	(1,127)	(48,642)
At 31 March 2008	19,325	105,173	10,440	83	320	-	(84,609)	50,732	5,192	55,924

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

For the year ended 31 March 2008

Consolidated Cash Flow Statement

	2008	2007
Notes	HK$'000	HK$'000
Operating activities
Loss before income tax	(48,642)	(70,195)
Adjustments for:
Finance costs	1,564	3,569
Interest income	(133)	(294)
Loss on disposal of property, plant and equipment	2,346	-
Amortisation of film rights	9,990	36,811
Amortisation of intellectual property rights	3,521	164
Amortisation of programme rights	258	140
Amortisation of trademark	-	15
Depreciation	1,332	1,503
Share-based payments	-	3,055
Provision on stock obsolescence	3,961	2,132
Impairment on film rights	-	45,810
Impairment on trade receivables	13,400	-
Impairment on prepayments and other receivables	6,062	-
Impairment on deposits for acquisition of film rights	322	-
Operating (loss)/profit before changes in working capital	(6,019)	22,710
Decrease in inventories	4,511	2,604
Decrease in amounts due from related companies	2,094	4,431
Decrease in trade receivables	6,266	2,066
Increase in deposits, prepayments and other receivables	(1,481)	(5,510)
Decrease in trade payables	(7,494)	(11,412)
Increase in other payables and accruals	1,657	5,000
Increase/(decrease) in amount due to a related company	1,275	(3)
Net cash generated from operations	809	19,886
Tax paid	-	(111)
Net cash generated from operating activities	809	19,775

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

	Notes	2008	2007
		HK$'000	HK$'000
Investing activities
Interest received		133	294
Acquisition of film rights		(5,692)	(23,479)
Acquisition of property, plant and equipment		(1,656)	(683)
Acquisition of intellectual property rights		(11,500)	-
Decrease in deposits for acquisition of film rights		1,063	866
Acquisition of subsidiaries	30	-	258
Proceeds from disposal of property, plant and equipment		-	92
Net cash used in investing activities		(17,652)	(22,652)
Financing activities
Proceeds from issue of new shares, net		43,828	70
Proceeds from issue of convertible notes, net		49,389	-
Decrease in other payables		-	(1,950)
(Decrease)/increase in amount due to a director		(7,076)	4,174
Decrease in pledged bank deposits		2,981	3,082
New bank loans raised		4,492	13,250
Repayment of interest on bank and other borrowings		(1,515)	(3,506)
Repayment of bank and other borrowings		(16,202)	(9,437)
Repayment of interest element of finance lease		(49)	(63)
Repayment of capital element of finance lease		(380)	(470)
Net cash generated from financing activities		75,468	5,150
Net increase in cash and cash equivalents		58,625	2,273
Cash and cash equivalents at beginning of the year		(8,798)	(11,072)
Effect of foreign exchange rate changes		15	1
Cash and cash equivalents at end of the year	22	49,842	(8,798)

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Notes to the Financial Statements

For the year ended 31 March 2008

1. GENERAL INFORMATION

Intelli-Media Group (Holdings) Limited (the “Company”) is an exempted company with limited liability incorporated in the Cayman Islands. The Company and its subsidiaries (collectively “the Group”) is principally engaged in the distribution of video products and provision of sub-licensing services.

On 2 May 2008, a subsidiary of the Company has entered into an acquisition agreement with an independent third party relating to the acquisition of certain exclusive offshore mining tenements in Philippines. The transaction is subject to certain conditions, to be completed within 12 months from the date of the acquisition agreement. The proposed acquisition signifies the Group’s new venture into mining business. Details of the acquisition are disclosed in note 36(b).

The financial statements are presented in Hong Kong dollars (“HK$’000”), unless otherwise stated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

These financial statements have been prepared in accordance with applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (“Listing Rule”). A summary of the significant accounting policies adopted by the Group is set out below.

(b) Basis of preparation

The financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain financial assets, which are carried at fair value.

The Group incurred a loss attributable to the equity holders of the Company of HK$47,515,000 for the year ended 31 March 2008.

On 3 April 2008, the Company entered into a placing and subscription agreement with Nice Hill Investments Limited, a company wholly and beneficially owned by Mr Chin Wai Keung, the Chairman and executive director of the Company. The placing and subscription were completed in April 2008, with net proceeds from the subscription amounted to approximately HK$49.2 million. Details are set out in note 36(a).

Subsequent to the balance sheet date and on 2 May 2008, the Group has entered into a conditional agreement with an independent third party to acquire certain mining tenements, as referred to note 36(b) to the financial statements, and consequently subject to the completion of the acquisition agreement, the Group’s principal business is energy and mining activities. The directors consider that in preparing the financial statements they have taken into account all information that could reasonably be expected to be available. On this basis, they consider that it is appropriate to prepare the financial statements on the going concern basis. This assumes that the acquisition mentioned in note 36(b) is successful and a profitable mining operation can be attained in future, and funds would be available for financing the consideration of the acquisition. The financial statements do not include any adjustments that would result if the acquisition is not successful, a profitable mining operation cannot be attained and the failure to obtain fundings for the acquisition.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The preparation of financial statements in conformity with HKFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4.

In current year, the Group adopted the new/revised standards and interpretations to the published standards below, which are relevant to its operation.

| HKAS 1
(Amendment) | Presentation of Financial Statements:
Capital Disclosures |
| --- | --- |
| HKFRS 7 | Financial Instrument: Disclosures |
| HK(IFRIC)-Int 8 | Scope of HKFRS 2 |
| HK(IFRIC)-Int 9 | Reassessment of Embedded Derivatives |
| HK(IFRIC)-Int 10 | Interim Financial Reporting and Impairment |
| HK(IFRIC)-Int 11 | HKFRS 2 – Group and Treasury Share Transactions |

The adoption of these new/revised standards and interpretations did not result in any substantial changes to the Group's accounting policies, except for disclosures relating to financial instruments made in the financial statements.

The Group has not adopted the following new and revised HKFRSs that have been issued but are not yet effective, in these financial statements.

HKAS 1 (Revised)	Presentation of Financial Statements^{1}
HKAS 23 (Revised)	Borrowing Costs^{1}
HKAS 27 (Revised)	Consolidated and Separate Financial Statements^{2}
HKFRS 2
(Amendment)	Vesting conditions and Cancellations^{1}
HKFRS 3 (Revised)	Business Combinations^{2}
HKFRS 8	Operating Segments^{3}
HK(IFRIC)-Int 12	Service Concession Arrangements^{3}
HK(IFRIC)-Int 13	Customer Loyalty Programmes^{4}
HK(IFRIC)-Int 14	HKAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction^{3}

Effective for annual periods beginning on or after 1 January 2009
Effective for annual periods beginning on or after 1 July 2009
Effective for annual periods beginning on or after 1 January 2008
Effective for annual periods beginning on or after 1 July 2008

The Group has already commenced an assessment of the impact of these new standards, amendments and interpretations but is not yet in a position to state whether they would have a significant impact on its results of operations and financial position.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The consolidated financial statements for the year ended 31 March 2008 comprise the Company and its subsidiaries.

Subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances and transactions and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

Minority interests represent the portion of the net assets of subsidiaries attributable to interests that are not owned by the Company, whether directly or indirectly through subsidiaries, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. Minority interests are presented in the consolidated balance sheet within equity, separately from equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between minority interests and the equity shareholders of the Company.

Where losses applicable to the minority exceed the minority's interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group's interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports profits, the Group's interest is allocated all such profits until the minority's share of losses previously absorbed by the Group has been recovered.

In the Company's balance sheet, an investment in a subsidiary is stated at cost less impairment losses, unless the investment is classified as held for sale (or included in a disposal group that is classified as held for sale).

(d) Goodwill

Goodwill represents the excess of the cost of a business combination over the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities.

Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment.

Any excess of the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over the cost of a business combination or an investment in an associate is recognised immediately in profit or loss.

On disposal of a cash generating unit during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(e) Property, plant and equipment

Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses, if any. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefit associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are expensed in the profit or loss during the financial period in which they are incurred.

Depreciation on property, plant and equipment is calculated using the straight-line method to allocate costs less their residual values over their estimated useful lives at the following rates per annum:

Leasehold improvements	10%
Furniture and fixtures	30%
Office equipment	30%
Motor vehicles	30%

The assets' residual values and useful lives are reviewed, and adjusted if appropriate at each balance sheet date.

An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

Gain or loss on disposal of a property, plant and equipment is the difference between the net sale proceeds and the carrying amount of the relevant asset, and is recognised in the consolidated income statement.

(f) Leased assets

(i) Assets acquired under finance leases

Where the Group acquires the use of assets under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments, of such assets are included in property, plant and equipment and the corresponding liabilities, net of finance charges, are recorded as obligations under finance leases. Depreciation is provided at rates which write off the cost or valuation of the assets over the term of the relevant lease or, where it is likely the Company or Group will obtain ownership of the asset, the life of the asset, as set out in note 2(e). Impairment losses are accounted for in accordance with the accounting policy as set out in note 2(i). Finance charges implicit in the lease payments are charged to the consolidated income statement over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period.

(ii) Operating lease charges

Where the Group has the use of assets under operating leases, payments made under the leases are charged to the consolidated income statement in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in the profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are written off as an expense of the accounting period in which they are incurred.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(g) Intangible assets

(i) Film rights

Advances prepaid and paid by instalments under licensing agreements for reproduction and distribution of audio-visual products and for sub-licensing of film titles, in specific geographical areas and time periods, are recorded as payment for acquisition of film rights. Upon receipt of the master materials of films, all required payments under the licensing agreements are recorded as film rights. The balances payable under the licensing agreements are recorded as liabilities.

Film rights are stated at cost less accumulated amortisation and any accumulated impairment losses.

Film rights are amortised at rates calculated to write off the costs in proportion to the expected revenues. Such rates are subject to annual review by the directors.

(ii) Trademark

Trademark represents license fee paid for the use of trademark and is stated at cost less accumulated amortisation and any identified impairment losses. The cost of trademark is amortised on a straight-line basis over the estimated useful life.

(iii) Programme and intellectual property rights

The cost of programme and intellectual property rights are stated at cost less accumulated amortisation and any identified impairment losses. Programme and intellectual property rights are amortised on a straight-line basis over the estimated useful life.

(h) Films in progress

Films in progress are stated at cost less any identified impairment losses. Costs include all direct costs associated with the production of films. Costs of films are transferred to film rights upon completion. Provisions are made for costs which are in excess of the expected future revenue generated by these films. The balance of film production cost not yet due are disclosed as commitments.

(i) Impairment of assets

(i) Impairment of trade and other receivables

Trade and other receivables are stated at cost or amortised cost and are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such evidence exists, any impairment loss is determined and recognised as follows:

significant financial difficulty of the debtor;
a breach of contract, such as a default or delinquency in interest or principal payments;
it becoming probable that the debtor will enter bankruptcy or other financial reorganisation; and
significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor.

If any such evidence exists, any impairment loss is determined and recognised as follows:

For trade receivables and other financial assets carried at amortised cost, the impairment loss is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows, discounted at the financial asset's original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

If in a subsequent period, the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset's carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years.

Impairment losses are written off against the corresponding assets directly, except for impairment losses recognised in respect of trade debtors included within trade and other receivables, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade debtors directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in the profit or loss.

(ii) Impairment of other assets

Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognised no longer exists or may have decreased:

goodwill;
property, plant and equipment;
intangible assets;
films in progress;
deposits for acquisition of film rights; and
investments in subsidiaries.

If any such indication exists, the asset's recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment.

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e., a cash-generating unit).

Recognition of impairment losses

An impairment loss is recognised in the profit or loss whenever the carrying amount of an assets, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.

A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.

(iii) Interim financial reporting and impairment

Under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited, the Group is required to prepare an interim financial report in compliance with HKAS 34, Interim financial reporting, in respect of the first six months of the financial year. At the end of the interim period, the Group applies the same impairment testing, recognition, and reversal criteria as it would at the end of the financial year.

Impairment losses recognised in an interim period in respect of goodwill is not reversed in a subsequent period. This is the case even if no loss, or a smaller loss, would have been recognised had the impairment been assessed only at the end of the financial year to which the interim period relates.

(j) Inventories

Inventories are carried at the lower of cost and net realizable value. Cost is calculated using the weighted average cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

(k) Trade and other receivables

Trade and other receivables are recognised initially at fair value and thereafter stated at amortised cost using the effective interest method, less impairment losses for bad debts, except where the receivables are interest-free loans made to related parties without fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts. A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the profit or loss.

(l) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, deemed deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts, if any, that are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(m) Trade and other payables

Trade and other payables are initially recognised at fair value. Except for financial guarantee liabilities, trade and other payables are subsequently stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(n) Interest-bearing borrowings

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the profit or loss over the period of the borrowings, using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

(o) Borrowing costs

Borrowing costs are expensed in the consolidated income statement in the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for it intended use or sale.

The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.

(p) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Group or the Company 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 expenditure 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 of economic benefits 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 of economic benefits is remote.

(q) Employee benefits

(i) Short-term employee benefits and contributions to defined contribution plans

Salaries, annual bonuses, paid annual leave, contributions to defined contribution plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

Contributions to appropriate local defined contribution retirement schemes pursuant to the relevant labour rules and regulations in the PRC are recognised as an expense in the consolidated income statement as incurred, except to the extent that they are included in the cost of inventories not yet recognised as an expense.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(ii) Share-based payments

For grants of share options which are conditional upon satisfying specified vesting conditions, the fair value of services received determined by reference to the fair value of share options granted at the grant date is expensed on a straight-line basis over the vesting period, with a corresponding increase in equity (share options reserve). The impact of the revision of the original estimates during the vesting period, if any, is recognised in the consolidated income statement with a corresponding adjustment to share options reserve.

For share options which are vested at the date of grant, the fair value of the share options granted is expensed immediately to the consolidated income statement.

During the vesting period, the number of share options expected to vest is reviewed. Any adjustment to the cumulative fair value recognised in prior years is charged/credited to profit or loss for the year under review, unless the original employee expenses qualify for recognition as an asset, with a corresponding adjustment to the capital reserve. On vesting date, the amount recognised as an expense is adjusted to reflect the actual number of share options that vests (with a corresponding adjustment to the capital reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company's shares. The equity amount is recognised in the capital reserve until either the option is exercised (when it is transferred to the share premium account) or the option expires (when it is released directly to retained profits).

For share options granted to consultants in exchange for goods or services, they are measured at the fair value of the goods and services received. The fair values of the goods and services are recognised as expenses immediately, unless the goods and services qualify for recognition as assets. Corresponding adjustments have been made to equity (share option reserve).

(iii) Paid leave carried forward

The Group provides paid annual leave to its employees under their employment contracts on a calendar year basis. Under certain circumstances, such leave which remains untaken as at the balance sheet date is permitted to be carried forward and utilised by the respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of such paid leave earned during the year by the employees and carried forward.

(r) Foreign currency translation

(i) Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated financial statements are presented in Hong Kong dollars, unless otherwise indicated, which is the Company's functional and presentation currency.

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit or loss, except when deferred in equity as qualifying cash flow hedges or qualifying net investment hedges.

Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss. Translation difference on nonmonetary items, such as equities classified as available-for-sale financial assets, are included in the investment revaluation reserve in equity.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(iii) Group companies

The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

(a) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

(b) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is disposed of, cumulative exchange differences that were recorded in equity are recognised in the profit or loss as part of the gain or loss on disposal.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

(s) Income tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in the profit or loss except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided that those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary differences or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

Additional income taxes that arise from the distribution of dividends are recognised when the liability to pay the related dividends is recognised.

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against tax liabilities, if the Company or the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or
in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

(t) Recognition of revenue

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group's activities. Revenue is shown net of value added tax, rebates and discounts. Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably. Revenue is recognised in the profit or loss as follows:

(i) Sale of goods

Revenue from sales of goods is recognised on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed.

(ii) Sub-licensing of film rights

Licence income from film rights licensed to licensees is recognised over the license period and when the films are available for showing or telecast.

(iii) Film exhibition and film distribution income

Film exhibition and film distribution income is recognised when the right to received payment is established.

(iv) Marketing service income and management fee income

Marketing service income and management fee income are recognised when the related services are rendered.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(v) Interest income

Interest income is recognised as it accrues using the effective interest method.

(u) Dividend distribution

Dividend distribution to the Company’s shareholder is recognised as a liability in the Group’s consolidated financial statements in the period in which the dividends are approved by the Company’s shareholders.

(v) Related parties

Parties are considered to be related to the Group if:

(i) the party has the ability, directly, or indirectly through one or more intermediaries, to control the Group or excise significant influence over the Group in making financial and operating policy decisions, or has joint control over the Group;

(ii) the Group and the party are subject to common control;

(iii) the party is an associate of the Group or a joint venture in which the Group is a venturer;

(iv) the party is a member of the key management personnel of the Group or its parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;

(v) the party is a close member of the family of any individual referred to in (i) or is an entity under the control, joint control or significant influence of such individuals; or

(vi) the party is a post-employment benefit plan which is for the benefit of employees of the Group, or of any entity that is a related party of the Group.

Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.

(w) Convertible notes

Convertible notes that can be converted into equity share capital at the option of the holder, where the number of shares that would be issued on conversion and the value of the consideration that would be received at that time do not vary, are accounted for as compound financial instruments which contain both a liability component and an equity component.

At initial recognition the liability component of the convertible notes is measured as the present value of the future interest and principal payments, discounted at the market rate of interest applicable at the time of initial recognition of similar liabilities that do not have a conversion option. Any excess of proceeds over the amount initially recognised as the liability component is recognised as the equity component. Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity component in proportion to the allocation of proceeds.

The liability component is subsequently carried at amortised cost. The interest expense recognised in the income statement on the liability component is calculated using the effective interest method. The equity component is recognised in the capital reserve until either the note is converted or redeemed.

If the note is converted, the capital reserve, together with the carrying amount of the liability component at the time of conversion, is transferred to share capital and share premium as consideration for the shares issued. If the note is redeemed, the capital reserve is released directly to retained profits.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(x) Financial guarantee

A financial guarantee (a kind of insurance contract) is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the original or modified terms of a debt instrument. The Group does not recognise liability for financial guarantees at inception, but perform a liability adequacy test at each reporting date by comparing its carrying amount of the net liability regarding the financial guarantee with its present legal or constructive obligation amount. If the carrying amount of the net liability is less than its present legal or constructive obligation amount; the entire difference is recognised in the consolidated income statement immediately.

(y) Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products and services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.

FINANCIAL RISK MANAGEMENT

The Group's principal financial instruments comprise interest-bearing bank loans and cash and short-term deposits. The main purpose of these financial instruments is to raise finance for the Group's operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables which arise directly from its operations.

The main risks arising from the Group's financial instruments are credit risk, liquidity risk, interest rate risk, business risk and foreign currency risk. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below.

(a) Credit risk

(i) Trade and other receivables

The Group's credit risk is primarily attributable to trade and other receivables. Management has a credit policy in place and the exposure to these credit risks are monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. These receivables are due within 30 to 90 days from the date of billing. Debtors with balances that are excess their credit period are requested to settle all outstanding balances before any further credit is granted.

The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. The default risk of the industry and country in which customers operate also has an influence on credit risk but to a lesser extent. Further quantitative analysis in respect of the Group's exposure to credit risk arising from trade and other receivables are set out in notes 19 and 20.

At the balance sheet date, the Group has a certain concentration of credit risk as 25% (2007: 42%) and 45% (2007: 59%) of the total trade receivables were due from the Group's largest customer and the five largest customers as at 31 March 2008, respectively.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the consolidated balance sheet.

(ii) Deposits with banks

The Group mitigates its exposure to credit risk by placing deposits with financial institutions with established credit ratings. Given the high credit ratings of the bank, management does not expect any counterparty to fail to meet its obligations.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(b) Liquidity risk

In the management of the liquidity risk, the Group monitors a level of cash and cash equivalents considered adequate by the management to finance the Group's operations and mitigate the effects of fluctuations in cash flows. The bank balances have maturity less than three months. In addition to issuance of new shares and convertible notes, the Group also relies on bank borrowings as a significant source of liquidity. The management monitors the utilisation of bank borrowings and ensures compliance with loan convenants.

The following table shows that time period after the balance sheet date during which contractual payments, presented on an undiscounted basis, are due to be made. These payments include, among others, interest payment computed using contractual rates (or fixed rate instruments) under the Group's non-derivative financial liabilities which are due to be paid.

Group

	2008	2007
Carrying amount HK$'000	Total contractual undiscounted cash flow HK$'000	Within 1 year or on demand HK$'000
Trade payables	11,112	11,112
Other payables and accruals	22,036	22,036
Amount due to a related company	1,275	1,275
Amount due to a director	517	517
Bank and other borrowings	10,086	10,726
Finance lease liabilities	679	751
	45,705	46,417

Company

	2008			2007
	Carrying amount HK$'000	Total contractual undiscounted cash flow HK$'000	Within 1 year or on demand HK$'000	Carrying amount HK$'000	Total contractual undiscounted cash flow HK$'000	Within 1 year or on demand HK$'000
Other payables and accruals	3,409	3,409	3,409	675	675	675

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(i) Interest rate profile

The Group's interest rate risk arises primarily from bank borrowings and deposits at bank. All of the bank loans of the Group were bearing prevailing market interest rates and were sensitive to any change in market interest rates. The Group did not use derivative financial instruments to hedge its debts obligations.

The Group manages the risk by setting roll-over periods of various duration on its revolving loans after due consideration of market conditions and expectation of future interest rate movements. However, the Group does not expect any significant changes in interest rates which might materially affect the Group's results of operations.

The following table details the interest rate profile of the Group's and the Company's interest-generating financial assets and interest-bearing financial liabilities at the balance sheet date:

Group

	2008		2007
	Effective interest rate	HK$'000	Effective interest rate	HK$'000
Pledged bank deposits	1.90%	2,155	4.83%	5,136
Cash and cash equivalents	3.00%	51,746	3.26%	2,340
Bank loan	6.05%	8,182	7.87%	19,572
Bank overdrafts	7.60%	1,904	7.05%	11,138
Other borrowings	5.91%	-	7.25%	320
Company
	2008		2007
	Effective interest rate	HK$'000	Effective interest rate	HK$'000
Cash and cash equivalents	3.00%	7,704	3.26%	4

(ii) Sensitivity analysis

At 31 March 2008, it is estimated that a general increase/decrease of 100 basis points in interest rates, with all other variable held constant, would increase/decrease the Group's loss after income tax and accumulated losses for the year by approximately HK$640,000 (2007: HK$385,000). Other components of equity would not be affected (2007: Nil) by the changes in interest rates.

The sensitivity analysis above has been determined assuming that the change in interest rates had occurred at the balance sheet date and had been applied to the exposure to interest rate risk for financial instruments in existence at that day. The 100 basis points increase or decrease represents management's assessment of a reasonably possible change in interest rates over the period until the next annual balance sheet date. The analysis is performed on the same basis for 2007.

(d) Business risk

The Group's video products are primarily sold to several major customers. The Group has a certain concentration of business risk as 29% (2007: 30%) of total sales were made from the Group's five largest customers. In the event that these customers ceased to purchase from the Group and the Group could not secure orders from other customers, the Group's turnover and profitability would be adversely affected.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(e) Foreign currency risk

The currency risk of the Group arises mainly from the its revenues from its film rights licensing and sub-licensing and purchases of film rights denominated in currencies other than the functional currency.

The Group minimized its currency risk by denominating majority of its foreign currency transactions in United States Dollars ("US$"), which is pledged with Hong Kong dollars at a destinated range such that the exposure on fluctuation of foreign currency rate is limited. Given that the foreign currency exposure is only to US$, seutivity analysis to changes in foreign currency rates is not presented thereof.

(f) Capital management

The Group's primary objectives when managing capital are to safeguard the Group's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

The Group manages its capital structure and makes adjustments to it, in light of change in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the years ended 31 March 2008 and 2007.

Consistent with the industry practice, the Group monitors its capital structure on the basis of net debt-to-capital ratio, which is calculated as the Group's total bank borrowings as shown in consolidated balance sheet less cash and cash equivalents. Debt-to-capital is defined as shareholders' equity over the Group's total debts. The net debt-to-capital ratios as at 31 March 2008 and 2007 were as follows:

	Group
	2008
HK$'000	2007
HK$'000
Current liabilities:
Amount due to a director	517	7,593
Amount due to a related company	1,275	-
Trade and other payables	33,148	38,985
Secured bank and other borrowings	7,698	24,969
Obligations under finance leases	346	380
Taxation payable	6	6
Non-current liabilities:	42,990	71,933
Secured bank and other borrowings	2,388	6,061
Obligations under finance leases	333	679
Total debt	45,711	78,673
Less: Cash and cash equivalents	(51,746)	(2,340)
Pledged bank deposits	(2,155)	(5,136)
Net (cash position)/debt	(8,190)	71,197
Total equity	55,924	5,334
Net debt-to-capital ratio	N/A	1334%

Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(g) Estimation of fair values

The following summarises the major methods and assumptions used in estimating the fair values of financial instruments:

(i) Interest-bearing loans and borrowings

The fair value is estimated as the present value of future cash flows, discounted at current market interest rates for similar financial instruments.

(ii) Liquid and/or short-term assets and liabilities

For financial assets and financial liabilities that are liquid or having a short term maturity, it is assumed that the carrying amounts approximate their fair values. The assumption is applied to trade and other receivables, trade and other payables, cash and cash equivalents without a specific maturity and variable rate financial instruments.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are discussed below.

(a) Useful lives and residual values of property, plant and equipment

Useful lives of the Group's property, plant and equipment are defined as the period over which they are expected to be available for use by the Group. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment or similar nature and functions. Management will increase the depreciation charge where useful lives are less than previously estimated lives, and will write off or write down technically obsolete or non-strategic assets that have been abandoned or sold. Actual economic lives may differ from estimated useful lives; and actual residual values may differ from estimated residual values. Periodic review could result in a change in depreciable lives and residual lives and therefore depreciation expense in future periods.

(b) Impairment of property, plant and equipment

Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The recoverable amounts are determined based on value-in-use calculations or market valuations. In determining the value in use, expected cash flows generated by the asset are discounted to their present values, which requires significant judgement relating to such items such as level of turnover and amount of operating costs. No impairment was provided during the year.

As set out in note 2(i), impairment loss on intangible assets, films in progress and deposits for acquisition of film rights are performed at each balance sheet date with references to both internal and external market information. As at 31 March 2008, the carrying value of intangible assets, films in progress and deposits for acquisition of film rights amounted to approximately HK$27,149,000.

(d) Impairment of goodwill

The Group tests annually whether goodwill has suffered any impairment in accordance with the accounting policy stated in note 2(i). The recoverable amounts of cash generating units are determined based on value-in-use calculation. These calculations require the use of estimates.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(e) Impairment of trade receivables and other receivables

The Group makes provision for impairment of trade and other receivables based on the evaluation of collectibility and ageing analysis of accounts and on management's judgement. A considerable amount of judgement is required in assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of each customer. If the financial conditions of customers of the Group were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

(f) Net realisable value of inventories

Net realisable value of inventories is the estimated selling price in the ordinary course of business, less estimated costs to completion and selling expenses. These estimates are made with reference to age analysis of inventories, projection of expected sale volume and management experience and judgement. Based on this review, write down of inventories will be made when the carrying amounts of inventories decline below their estimated net realisable value. Due to changes in market conditions, actual saleability of goods may be different from estimation and profit or loss could be affected by differences in this estimation.

(g) Income taxes

The Group is subject to income taxes in several jurisdictions. There are certain transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

(h) Convertible notes

The fair value of the liability component of the convertible notes is estimated by independent professional valuer based on transactions of similar financial instruments in the market which generally represent the best estimate of the market value.

TURNOVER AND SEGMENT INFORMATION

The Group is principally engaged in the distribution of video products, provision of sub-licensing services and sales of sub-licensed goods during the years ended 31 March 2008 and 2007.

Turnover represents the sales value of goods to customers net of goods returns and allowances, and revenue received and receivable from sub-licensing of film rights, film exhibition and film distribution, and is analysed as follows:

	2008	2007
	HK$'000	HK$'000
Sales of video products	27,446	43,167
Sub-licensing of film rights	2,141	10,699
Film exhibition and film distribution income	3,570	5,805
	33,157	59,671

(a) Business segments

Turnover and contribution to operating results and assets and liabilities by business segment has not been prepared as the Group has only one business segment which is the distribution of film rights by different audio-visual programmes and sub-licensing.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(b) Geographical segments

As the Group’s turnover for the years ended 31 March 2008 and 2007 are substantially made to customers based in Hong Kong and the operations of the Group are substantially located in Hong Kong, no separate analysis for the geographical segment information is provided accordingly.

OTHER REVENUE AND OTHER INCOME

	2008	2007
	HK$'000	HK$'000
Other revenue
Management fee income	605	–
Marketing service income	2,408	842
Interest income	133	294
	3,146	1,136
Other net income
Net exchange gain	30	104
Compensation received	1,324	–
Sundry income	589	187
	1,943	291
	5,089	1,427

LOSS FROM OPERATIONS

Loss from operations has been arrived at after charging:

	2008	2007
	HK$'000	HK$'000
Staff costs
Directors’ remuneration (note 9)	3,447	2,656
Other staff costs	5,833	8,039
Share-based payment	–	244
Retirement benefits scheme contributions other those included in Directors’ contributions (note 9)	238	370
	9,518	11,309
Depreciation
Owned assets	1,123	808
Assets under finance leases	209	695
Amortisation of film rights included in cost of sales	9,990	36,811
Amortisation of intellectual property rights included in cost of sales	3,521	164
Amortisation of programme rights included in cost of sales	258	140
Amortisation of trademark included in administrative expenses	–	15
Auditors’ remuneration
– audit services	650	400
– non-audit services	200	80
Cost of inventories included in cost of sales	13,602	10,771
Share-based payment (including amount paid to staff of HK$244,000)	–	3,055

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

8. FINANCE COSTS

	2008	2007
	HK$'000	HK$'000
Interest on:
Bank borrowings wholly repayable within five years	1,289	2,750
Other borrowings wholly repayable within five years	226	756
Finance charges on obligations under finance lease	49	63
	1,564	3,569

9. DIRECTORS' REMUNERATION

The emoluments of each director for the year ended 31 March 2008 are set out below:

| | Fees
HK$'000 | Salaries
and other
benefits
HK$'000 | Contribution
to retirement
benefits
scheme
HK$'000 | Total
HK$'000 |
| --- | --- | --- | --- | --- |
| Executive directors | | | | |
| Mr. Chin Wai Keung, Richard | - | 1,924 | 15 | 1,939 |
| Mr. Fung Yee Sang | - | - | - | - |
| Mr. Chow Alvin Chiyiu | - | 122 | 6 | 128 |
| Mr. Fung Yu Hing, Allan | - | 148 | 4 | 152 |
| Mr. Ling Macadam | - | 37 | 2 | 39 |
| Mr. Kwong Wai Ho, Richard | - | - | - | - |
| Mr. Lo Wing Keung | - | 322 | 11 | 333 |
| Mr. So Wing Lok, Jonathan | - | - | - | - |
| Ms. Wong Hoi Yan, Audrey | - | 561 | 8 | 569 |
| Independent non-executive directors | | | | |
| Mr. Chow Shiu Ki | 120 | - | - | 120 |
| Mr. Hung Tik | 33 | - | - | 33 |
| Mr. Lai Kai Jin, Michael | 14 | - | - | 14 |
| Mr. Lam Wai Leung | 20 | - | - | 20 |
| Mr. Shum Man Ching | 100 | - | - | 100 |
| | 287 | 3,114 | 46 | 3,447 |

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The emoluments of each director for the year ended 31 March 2007 are set out below:

| | Fees
HK$'000 | Salaries
and other
benefits
HK$'000 | Contribution
to retirement
benefits
scheme
HK$'000 | Total
HK$'000 |
| --- | --- | --- | --- | --- |
| Executive directors | | | | |
| Mr. Fung Yu Hing, Allan | - | 562 | 6 | 568 |
| Ms. Leung Siu Kuen, Janet | - | 141 | 6 | 147 |
| Mr. Fung Yee Sang | - | 810 | 12 | 822 |
| Mr. Au Lik Man, Simon | - | 238 | 6 | 244 |
| Mr. So Wing Lok, Jonathan | - | - | - | - |
| Mr. Lo Wing Keung | - | - | - | - |
| Mr. Tso Kin Nam | - | 80 | - | 80 |
| Mr. Chow Alvin Chiyiu | - | - | - | - |
| Mr. Chin Wai Keung, Richard | - | 240 | - | 240 |
| Mr. Ling Macadam | - | - | - | - |
| Non-executive directors | | | | |
| Dr. Lo Wing Yan, William, JP | 35 | - | - | 35 |
| Ms. Fung Suen Lai, Jacqueline | 35 | 233 | 9 | 277 |
| Independent non-executive directors | | | | |
| Mr. Chan Koon Chung, Johnny | 35 | - | - | 35 |
| Mr. Chau, Stephen | 35 | - | - | 35 |
| Mr. Hui Kwok Wah | 23 | - | - | 23 |
| Mr. Hung Tik | 50 | - | - | 50 |
| Mr. Lam Wai Leung | 50 | - | - | 50 |
| Mr. Chow Shiu Ki | 50 | - | - | 50 |
| | 313 | 2,304 | 39 | 2,656 |

During the both years, no emoluments were paid by the Group to any directors as an inducement to join or upon joining the Group or as compensation for loss of office. None of the directors waived any emoluments during both years.

10. INDIVIDUALS WITH HIGHEST EMOLUMENTS

The five highest paid individuals during the year included two directors (2007: three), details of the remaining three (2007: two) individuals with highest paid non-director are as follows:

| | 2008
HK$'000 | 2007
HK$'000 |
| --- | --- | --- |
| Salaries and other benefits | 1,333 | 742 |
| Bonus | - | - |
| Contributions to retirement benefits schemes | 49 | 27 |
| | 1,382 | 769 |

The aggregate emoluments of the highest paid individuals for the year is within the emoluments band ranging from nil to HK$1,000,000.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

11. INCOME TAX

	2008	2007
	HK$'000	HK$'000
Current year
PRC enterprise income tax	–	38

No provision has been made for the Hong Kong Profits Tax as the Group sustained losses in Hong Kong for taxation purposes during both years.

Pursuant to the income tax rules and regulations of the People's Republic of China ("PRC"), the applicable PRC enterprise income tax of the Group's subsidiary, Creative Power Entertaining Company Limited ("Creative Power") is 30% and the local income tax at 3%.

No provision for the PRC enterprise income tax has been made, as Creative Power did not have any assessable profits for the year ended 31 March 2008.

On 16 March 2008, the Fifth Plenary Session of the Tenth National People's Congress promulgated the Corporate Income Tax law of the PRC (the "New Tax Law"), which would become effective on 1 January 2008. According to the New Tax Law, from 1 January 2008, the standard corporate income tax rates for enterprises in the PRC will be reduced from 30% to 25%.

The charge for the year can be reconciled to the loss per the consolidated income statement as follows:

	2008	2007
	HK$'000	HK$'000
Loss before taxation	(48,642)	(70,195)
Notional tax on loss before income tax, calculated at rate applicable to loss in the countries concerned	(8,512)	(12,284)
Tax effect of income not taxable in determining taxable profit	(22)	(77)
Tax effect of expenses that are not deductible in determining taxable profit	3,800	9,671
Tax effect of temporary differences	690	2,456
Effect of different tax rates of operation in other jurisdictions	(332)	39
Tax loss utilised	–	(14)
Unrecognised tax loss	4,376	247
Tax charge for the year	–	38

Details of deferred taxation are set out in note 25.

12. LOSS ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

The consolidated loss attributable to equity holders of the Company included a loss of HK$12,103,000 (2007: loss of HK$47,542,000) which has been dealt with in the financial statements of the Company.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

13. LOSS PER SHARE

(a) Basic loss per share

The calculation of basic loss per share is based on the loss attributable to ordinary equity shareholders of the Company of $47,515,000 (2007: $69,807,000) and the weighted average of 687,201,000 ordinary shares (2007: 422,591,000 shares) in issue during the year, calculated as follows:

Weighted average number of ordinary shares

	2008	2007
	HK$'000	HK$'000
Issued ordinary shares at 1 January	484,860	402,300
Effect of convertible bond converted (note 28(b)(v))	18,142	–
Effect of shares issued by open offer (note 28(b)(iv))	101,268	20,280
Effect of share options exercised (note 28(b)(ii))	16,638	11
Effect of placing and top-up subscription (note 28(b)(iii))	66,293	–
Weighted average number of ordinary shares at 31 December	687,201	422,591

(b) Diluted loss per share

Diluted loss per share for the years ended 31 March 2008 and 2007 have not been presented as the effect of any dilution arising from the outstanding share options is anti-dilutive.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

14. PROPERTY, PLANT AND EQUIPMENT

Group

| | Leasehold improvements
HK$'000 | Furniture and fixtures
HK$'000 | Office equipment
HK$'000 | Motor vehicles
HK$'000 | Total
HK$'000 |
| --- | --- | --- | --- | --- | --- |
| Cost | | | | | |
| At 1 April 2006 | 2,528 | 1,632 | 3,766 | 3,191 | 11,117 |
| Additions | 80 | 285 | 339 | – | 704 |
| Disposals | – | – | – | (183) | (183) |
| At 31 March 2007
and 1 April 2007 | 2,608 | 1,917 | 4,105 | 3,008 | 11,638 |
| Additions | – | 477 | 409 | 770 | 1,656 |
| Disposals | (2,608) | (1,404) | (3,852) | – | (7,864) |
| At 31 March 2008 | – | 990 | 662 | 3,778 | 5,430 |
| Accumulated depreciation | | | | | |
| At 1 April 2006 | 232 | 981 | 3,387 | 1,619 | 6,219 |
| Charge for the year | 261 | 299 | 248 | 695 | 1,503 |
| Written back on disposals | – | – | – | (91) | (91) |
| At 31 March 2007
and 1 April 2007 | 493 | 1,280 | 3,635 | 2,223 | 7,631 |
| Charge for the year | 174 | 298 | 248 | 612 | 1,332 |
| Written back on disposals | (667) | (1,201) | (3,650) | – | (5,518) |
| At 31 March 2008 | – | 377 | 233 | 2,835 | 3,445 |
| Net book value | | | | | |
| At 31 March 2008 | – | 613 | 429 | 943 | 1,985 |
| At 31 March 2007 | 2,115 | 637 | 470 | 785 | 4,007 |

At 31 March 2008, the net book value of the Group's motor vehicles includes an amount of HK$192,000 (2007: HK$785,000) in respect of assets held under finance leases.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

15. OTHER INTANGIBLE ASSETS

Group

| | Film rights
HK$'000 | Trademark
HK$'000 | Programme rights
HK$'000 | Intellectual property rights
HK$'000 | Total
HK$'000 |
| --- | --- | --- | --- | --- | --- |
| Cost | | | | | |
| At 1 April 2006 | 184,776 | 75 | – | – | 184,851 |
| Additions | 23,479 | – | 1,288 | 2,815 | 27,582 |
| At 31 March 2007
and 1 April 2007 | 208,255 | 75 | 1,288 | 2,815 | 212,433 |
| Additions | 5,692 | – | – | 17,500 | 23,192 |
| At 31 March 2008 | 213,947 | 75 | 1,288 | 20,315 | 235,625 |
| Accumulated amortisation
and impairment | | | | | |
| At 1 April 2006 | 112,315 | 60 | – | – | 112,375 |
| Charge for the year | 36,811 | 15 | 140 | 164 | 37,130 |
| Impairment recognised
for the year | 45,810 | – | – | – | 45,810 |
| At 31 March 2007
and 1 April 2007 | 194,936 | 75 | 140 | 164 | 195,315 |
| Charge for the year | 9,990 | – | 258 | 3,521 | 13,769 |
| At 31 March 2008 | 204,926 | 75 | 398 | 3,685 | 209,084 |
| Net book value | | | | | |
| At 31 March 2008 | 9,021 | – | 890 | 16,630 | 26,541 |
| At 31 March 2007 | 13,319 | – | 1,148 | 2,651 | 17,118 |

Intangible assets are amortised on a straight line basis over their estimated useful lives at the follows:

Film rights 2 – 5 years

Trademark 5 years

Intellectual property rights 5 years

Programme rights 5 years

105

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Impairment tests on film rights

By reference to the valuation report prepared by independent professional valuer, Greater China Appraisal Limited ("Greater China"), there was no indication of impairment of film rights as at 31 March 2008 Greater China has estimated recoverable amount by determining value-in-use of film rights. The value-in-use of film rights has been determined based on the income approach, which uses several years cash flow forecast prepared by the management. The key parameters used for discounted cash flow calculation are as follows:

Parameters	Rate	Description
Risk-free rate	2.58%	Yield rate of the 10-year Hong Kong Government Bond
Expected market return	11.28%
Beta	0.64	Average of betas of publicly listed comparable companies that are in the same industry
Size premium	3.65%
Discount rate	12%

The directors considered that no impairment charge needed to be made as at 31 March 2008.

Impairment tests on intellectual property rights

By reference to the valuation report prepared by an independent professional valuer, BMI Appraisals Limited ("BMI"), there was no evidence of impairment on intellectual property rights as at 31 March 2008. The recoverable amount of intellectual property rights has been determined based on income approach, which uses cash flow projection based on a 10 year financial forecast approved by management. The key parameters used for discounted cash flow calculation are as follows:

Parameters	Rate	Description
Risk-free rate	2.58%	Yield rate of the 10-year Hong Kong Exchange Fund Note
Market risk premium	14.47%
Beta	0.596	Average of betas of publicly listed comparable companies that are in the same industry
Size premium	3.88%
Growth rate	3%
Discount rate	12.51%

BMI determined estimated discounted cash flow rate based on the past performance and its expectation for the market development. The weighted average growth rate used is consistent with the forecast included in industry reports.

The directors considered that no impairment charge needed to be made as at 31 March 2008.

Impairment tests on programme rights

Referring to the valuation report prepared by independent professional valuer, BMI, no evidence of impairment on programme rights as at 31 March 2008. BMI adopted cost approach to estimate the recoverable amount. Cost approach considers the cost to reproduce or replace in new condition the assets appraised in accordance with current market prices for similar assets with allowances for accrued amortisation and obsolescence.

The directors considered that no impairment charge needed to be made as at 31 March 2008.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

16. GOODWILL

| | Group
HK$'000 |
| --- | --- |
| Cost | |
| At 1 April 2006 | - |
| Arising on acquisition of subsidiaries (Note 30) | 4,259 |
| At 31 March 2007 and 31 March 2008 | 4,259 |
| Impairment | |
| At 1 April 2006, 31 March 2007 and 31 March 2008 | - |
| Carrying value | |
| At 31 March 2008 | 4,259 |
| At 31 March 2007 | 4,259 |

Impairment tests on goodwill

The goodwill arouse from the acquisition of Datewell Limited and its subsidiaries (“Datewell Group”) in the last year was treated as a separate cash generating unit (“CGU”) which is engaged in the holding and distribution of intellectual property rights. By reference to the valuation report prepared by an independent professional valuer, BMI Appraisals Limited (“BMI”), the recoverable amount of Datewell Group has been determined based on income approach, which uses discounted cash flow method, which uses cash flow projection based on several years financial forecast approved by management. The key parameters used for discounted cash flow calculation are as follows:

Parameters	Rate	Description
Risk-free rate	2.58%	Yield rate of the 10-year Hong Kong Exchange Fund Note
Market risk premium	14.47%
Beta	0.596	Average of betas of publicly listed comparable companies that are in the same industry
Size premium	3.88%
Growth rate	3%
Discount rate	12.51%

The directors considered that there was no impairment charge needed to be made against goodwill arising from acquisition of Datewell Group as at 31 March 2008.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

17. INTERESTS IN SUBSIDIARIES

	Company
	2008	2007
	HK$'000	HK$'000
Unlisted shares, at cost	31,372	31,072
Less: Impairment	(25,572)	(25,572)
	5,800	5,500
Amounts due from subsidiaries	97,356	15,904
Less: Impairment	(17,158)	(15,904)
	80,198	-
Amount to a subsidiary	-	(1,821)
	85,998	3,679

Movements on the provision for impairment of interests in subsidiaries is analysed as follows:

	Company
	2008	2007
	HK$'000	HK$'000
Investment cost
At 1 April	25,572	-
Impairment recognised	-	25,572
At 31 March	25,572	25,572
Amounts due from subsidiaries
At 1 April	15,904	-
Impairment recognised	1,254	15,904
At 31 March	17,158	15,904

The amounts due from/(to) subsidiaries are unsecured, interest-free and have no fixed terms of repayment. In the opinion of the directors, the amounts will not be repayable within twelve months from the balance sheet date and are shown as non-current.

Details of the Company's subsidiaries as at 31 March 2008 are set out in note 39.

18. INVENTORIES

	Group
	2008	2007
	HK$'000	HK$'000
Work in progress	2,487	3,760
Finished goods	6,682	13,881
	9,169	17,641

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

19. TRADE RECEIVABLES

(a) Ageing analysis

The Group normally grants a credit period of 30 to 90 days to its customers. Ageing analysis of trade receivables as of the balance sheet date was as follows:

	Group
	2008	2007
	HK$'000	HK$'000
Current to 30 days	1,370	3,966
31 to 60 days	75	3,267
61 to 90 days	322	2,228
91 to 180 days	2,210	2,498
181 to 360 days	3,228	3,423
Over 360 days	8,746	6,835
	15,951	22,217
Less: Allowance for doubtful debts	(13,400)	-
	2,551	22,217

(b) Impairment of trade receivables

Impairment losses in respect of trade receivables are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against trade receivables directly.

The movements in the allowance for doubtful debts during the year are as follows:

	Group
	2008	2007
	HK$'000	HK$'000
At 1 April	-	-
Impairment loss recognised	13,400	-
At 31 March	13,400	-

As at 31 March 2008, the Group's trade receivables of HK$13,400,000 (2007: HK$Nil) were individually determined to be impaired. The individually impaired receivables related to customers that were past due and slow paying or in financial difficulties and management assessed that these receivables are irrecoverable.

The Group does not hold any collateral over these balances.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The ageing analysis of trade receivables that are neither individually nor collectively considered to be impaired are as follows:

	Group
	2008	2007
	HK$'000	HK$'000
Neither past due nor impaired
Current to 30 days	1,370	3,966
31 to 60 days	75	3,267
61 to 90 days	32	2,228
91 to 180 days	400	2,498
181 to 360 days	674	3,423
Over 360 days	-	6,835
	2,551	22,217

Receivables that were neither past due or impaired relate to a wide range of customers for whom there was no recent history of default.

Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold any collateral over these balances.

DEPOSITS, PREPAYMENTS AND OTHER RECEIVABLES

	Group		Company
	2008	2007	2008	2007
	HK$'000	HK$'000	HK$'000	HK$'000
Deposits	5,075	3,131	157	178
Prepayments	2,311	1,792	-	150
Other receivables	5,462	6,444	-	-
	12,848	11,367	157	328
Less: Allowance for doubtful debts	(6,062)	-	-	-
	6,786	11,367	157	328

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(a) Impairment of deposits, prepayments and other receivables

Impairment losses in respect of deposits, prepayments and other receivables are recorded using an allowance account unless the Group's is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against deposits, prepayments and other receivables directly.

The movements in the allowance for doubtful debts during the year are as follows:

	Group		Company
	2008	2007	2008	2007
	HK$'000	HK$'000	HK$'000	HK$'000
At 1 April	-	-	-	-
Impairment recognised
- Prepayments	1,436	-	-	-
- Other receivables	4,626	-	-	-
At 31 March	6,062	-	-	-

As at 31 March 2008, the Group's deposits, prepayments and other receivables of HK$6,062,000 (2007: HK$Nil) were individually determined to be impaired. The counter-parties of the individual prepayments and receivables were in financial difficulties and management assessed that these prepayments and receivables are irrecoverable.

The deposits, prepayments and other receivables are set out below:

	Group		Company
	2008	2007	2008	2007
	HK$'000	HK$'000	HK$'000	HK$'000
Deposits	5,075	3,131	157	178
Prepayments	875	1,792	-	150
Other receivables	836	6,444	-	-
	6,786	11,367	157	328

In the opinion of the directors of the Company, the carrying amounts approximate their fair value at the balance sheet date.

PLEDGED BANK DEPOSITS

The pledged bank deposits were pledged as security for certain bank and other borrowings of a subsidiary, Panorama Distribution Limited (note 27).

The effective interest rates and average maturity were as follows:

	Group
	2008	2007
Effective interest rate	1.90%	4.83%
Average maturity	51 days	50 days

The pledged bank deposits are deposited with creditworthy banks. The carrying amounts of the pledged bank deposits approximate to their fair values.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

22. CASH AND CASH EQUIVALENTS

	Group		Company
	2008	2007	2008	2007
	HK$'000	HK$'000	HK$'000	HK$'000
Cash and cash equivalents in the consolidated balance sheet	51,746	2,340	7,704	4
Bank overdrafts (note 27)	(1,904)	(11,138)
Cash and cash equivalents in the consolidated cash flow statement	49,842	(8,798)

23. TRADE PAYABLES

The ageing analysis of the Group's trade payables, based on payment due date, is as follows:

	Group
	2008	2007
	HK$'000	HK$'000
Trade payables:
Current to 30 days	113	1,429
31 to 60 days	86	627
61 to 180 days	767	5,267
Over 180 days	10,146	11,283
	11,112	18,606

The carrying amounts of trade payables approximate their fair values.

24. OTHER PAYABLES AND ACCRUALS

	Group		Company
	2008	2007	2008	2007
	HK$'000	HK$'000	HK$'000	HK$'000
Accruals	654	20	-	-
Withholding tax payable	2,099	2,117	-	-
Receipts in advance	13,817	15,256	-	-
Other payables	5,466	2,986	3,409	675
	22,036	20,379	3,409	675

The carrying amounts of other payables and accruals approximate their fair value.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

25. INCOME TAX IN THE BALANCE SHEET

(a) Current taxation in the balance sheet represents:

	Group
	2008	2007
	HK$'000	HK$'000
Provisional for Singapore’s subsidiary– income tax	6	6

(b) Deferred tax assets and liabilities recognised

Group

The components of deferred tax (assets)/liabilities recognised in the consolidated balance sheet and the movements during the year are as follows:

	Depreciation allowances in excess of related depreciation HK$'000	Tax losses HK$'000	Total HK$'000
Deferred tax arising from: At 1 April 2006, 31 March 2007, 1 April 2007 and 31 March 2008	12,652	(8,475)	4,177

The following is the analysis of the deferred tax balances for financial reporting purposes:

	Group
	2008	2007
	HK$'000	HK$'000
Deferred taxation liability	12,652	12,652
Deferred taxation asset	(8,475)	(8,475)
Net deferred liability recognised on the balance sheet	4,177	4,177

(c) Deferred tax assets not recognised

At the balance sheet date, the Group has unused tax losses of HK$24,053,000 (2007: HK$5,588,000) available for offset against future profits that may be carried forward indefinitely. No deferred tax asset has been recognised in respect of these tax losses due to the unpredictability of future profit streams.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

26. OBLIGATIONS UNDER FINANCE LEASES

Amounts payable under finance leases are as follows:

	Group
	Present value of minimum lease payments		Total Minimum lease payments
	2008	2007	2008	2007
	HK$'000	HK$'000	HK$'000	HK$'000
Within one year	346	380	384	429
After one year but within two years	297	346	328	384
After two years but within five years	36	333	39	367
	333	679	367	751
	679	1,059	751	1,180
Less: Future finance total charges			(72)	(121)
Present value of lease obligations			679	1,059

It is the Group's policy to lease of its certain motor vehicles under finance leases. The average lease term is 2 years. Interest rates underly all obligations under finance leases are fixed at respective contract dates at approximately 3% per annum. No arrangements have been entered into for contingent rental payments.

27. SECURED BANK AND OTHER BORROWINGS

	Group
	2008	2007
	HK$'000	HK$'000
Bank overdrafts	1,904	11,138
Bank borrowings	8,182	19,572
Other borrowings	-	320
	10,086	31,030

The maturity profile of the secured bank and other borrowings is as follows:

	Group
	2008	2007
	HK$'000	HK$'000
On demand or within one year	7,698	24,969
After one year but within two years	2,049	2,515
After two years and within five years	339	3,546
	2,388	6,061
	10,086	31,030

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Effective interest rates the Group's secured bank and other borrowings were set out as below:

	Group
	2008	2007
Bank overdrafts	7.60%	7.05%
Bank borrowings	6.05%	7.87%
Other borrowings	5.91%	7.25%

At 31 March 2008, the banks and other borrowings were secured as follows:

	Group
	2008	2007
	HK$'000	HK$'000
Bank deposits	2,155	5,136
Film rights	769	2,219
Corporate guarantee by the Company	-	320
Guarantees by a subsidiary's directors	27,800	31,800
	30,724	39,475

As at 31 March 2008, the Group had total banking facilities amounting to HK$27,982,000 (2007: HK$38,187,000) which were utilised to the extent of HK$10,086,000 (2007: HK$31,030,000).

Subsequent to the balance sheet date, pledged time deposits, and personal guarantee provided by subsidiary's directors of HK$2,005,000 and HK$13,000,000 respectively were released.

The carrying amounts of the Group's secured bank and other borrowings approximate to their fair values.

28. SHARE CAPITAL

	Notes	No. of ordinary shares of HK$0.01 each	Nominal value of ordinary shares HK$'000
Authorised ordinary shares:
At 1 April 2006, 31 March 2007 and 1 April 2007		1,500,000,000	15,000
Increase in authorised share capital	(a)	18,500,000,000	185,000
At 31 March 2008		20,000,000,000	200,000
Issued and fully paid ordinary shares:
At 1 April 2006		402,300,000	4,023
Issue of new shares
- Acquisition of subsidiaries	(b)(i)	80,460,000	805
- Exercise of share options	(b)(ii)	2,100,000	21

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

	Notes	No. of ordinary shares of HK$0.01 each	Nominal value of ordinary shares HK$’000
At 31 March 2007 and 1 April 2007		484,860,000	4,849
Issue of new shares
- Placing of shares	(b)(iii)	78,670,000	786
- Open offer	(b)(iv)	300,511,341	3,005
- Conversion of convertible notes	(b)(v)	1,018,292,682	10,183
- Exercise of share options	(b)(ii)	50,200,000	502
At 31 March 2008		1,932,534,023	19,325

Notes:

(a) Authorised share capital

Pursuant to the extraordinary general meeting held at 18 February 2008, the authorised share capital of the Company was increased to HK$200,000,000 by the creation of an additional 18,500,000,000 shares of HK$0.01 each, ranking pari passu with the existing shares of the Company in all respects.

(b) Issue of share capital

(i) Issue of new shares for acquisition of subsidiaries

On 29 December 2006, the Company issued 80,460,000 new ordinary shares with a par value of HK$0.01 each, at HK$0.0684 per share of the Company as consideration for the acquisition of the Datewell Limited and its subsidiary (Note 30).

(ii) Issue of new shares upon exercise of share options

During the year, share options to subscribe for 50,200,000 (2007: 2,100,000) shares were exercised, of which HK$502,000 (2007: HK$21,000) was credited to share capital and the balance of HK$10,516,000 (2007: HK$49,000) was credited to the share premium account.

(iii) Issue of new shares under placing of shares

On 2 May 2007 and 29 May 2007, the Company issued 37,310,000 and 41,360,000 shares with a par value of HK$0.01 each, at a price of HK$0.268 and HK$0.299 per share respectively by way of placement to Nice Hill Investments Limited in which Mr. Chin Wai Keung, Richard is the sole beneficial owner. Net proceeds from such issues amounted to HK$21,077,000 (after offsetting issuing expenses of HK$1,288,000) out of which HK$786,000 and HK$20,291,000 were recorded in share capital and share premium, respectively.

(iv) Issue of new shares under open offer

On 30 November 2007, the Company issued 300,511,341 shares with a par value of HK$0.01 each, at a price of HK$0.050 per share by way of open offer to the issuance shareholders of the Company. Net proceeds from such issues amounted to HK$14,468,000 (after offsetting issuing expenses of HK$557,000) out of which HK$3,005,000 and HK$11,463,000 were recorded in share capital and share premium, respectively.

(v) Issue of new shares under conversion of convertible notes

18,292,682 and 1,000,000,000 shares with a par value of HK$0.01 each, were issued and allotted at HK$0.328 and HK$0.05 respectively per share as a result of the conversion of convertible notes by the convertible noteholders of the Company. HK$10,183,000 and HK$45,206,000 were recorded in share capital and share premium, respectively (after offsetting issuing expenses of HK$611,000).

All of the shares issued during the years ended 31 March 2007 and 2008 rank pari passu with the then existing shares in all respects.

116

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

29. RESERVES

Group

The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in the consolidated statements of changes in equity in the financial statements.

Company

| | Share premium
HK$'000 | Share option reserve
HK$'000 | Contributed surplus
HK$'000 | Equity component of convertible notes
HK$'000 | Accumulated losses
HK$'000 | Total
HK$'000 |
| --- | --- | --- | --- | --- | --- | --- |
| At 1 April 2006 | 12,953 | – | 25,571 | – | (294) | 38,230 |
| Issue of new shares | | | | | | |
| – Acquisition of subsidiaries
(note 28bi) | 4,695 | – | – | – | – | 4,695 |
| – Exercise of share options
(note 28bii) | 49 | – | – | – | – | 49 |
| Equity settled share-based transactions | – | 3,055 | – | – | – | 3,055 |
| Loss for the year | – | – | – | – | (47,542) | (47,542) |
| At 31 March 2007 | 17,697 | 3,055 | 25,571 | – | (47,836) | (1,513) |
| Equity component of the convertible notes | – | – | – | 2,043 | – | 2,043 |
| Issue of new shares | | | | | | |
| – Placing of shares
(note 28biii) | 20,291 | – | – | – | – | 20,291 |
| – Open offer (note 28biv) | 11,463 | – | – | – | – | 11,463 |
| – Conversion of convertible notes (note 28bv) | 45,206 | – | – | (2,043) | – | 43,163 |
| – Exercise of share options
(note 28bii) | 10,516 | (2,735) | – | – | – | 7,781 |
| Loss for the year | – | – | – | – | (12,103) | (12,103) |
| At 31 March 2008 | 105,173 | 320 | 25,571 | – | (59,939) | 71,125 |

(a) Share premium

Under the Companies Law (Revised) of the Cayman Islands, the funds in the share premium account of the Company are distributable to the shareholders of the Company provided that immediately following the date on which the dividend is proposed to be distributed, the Company will be in a position to pay off its debts as they fall due in the ordinary course of business.

(b) Special reserve

The special reserve of the Group represents the difference between the nominal value of the share of the subsidiaries acquired pursuant to the Group Reorganization to rationalise the group structure in preparation of the listing of the Company’s shares on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited, and the nominal value of the Company’s Shares issued in exchange.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The reserve is dealt with in accordance with the accounting policies in note 2(r).

(d) Share option reserve

The share option reserve represents the fair value of the actual or estimated number of unexercised share options granted to the eligible participants recognised in accordance with the accounting policy adopted for equity-settled payments in note 2(q).

(e) Contributed surplus

The contributed surplus of the Company represents the excess of the net assets of the subsidiaries acquired pursuant to the Group Reorganisation, over the nominal value of the Company's shares issued in exchange.

(f) Equity component of convertible notes

The value of unexercised equity component of convertible notes issued by the Company is recognised in accordance with the accounting policy adopted for convertible notes in note 2(w).

(g) Distributability of reserves

ACQUISITION OF SUBSIDIARIES

On 29 December 2006, the Group acquired 100% of the issued share capital of Datewell Limited and its subsidiaries ("Datewell Group") for a consideration of approximately HK$4,204,000. This transaction had been accounted for by the purchase method of accounting.

The directors were the opinion that the carrying amounts of the net assets acquired are approximately equal to their fair value.

The fair value of the net assets acquired in the transaction were as follows:

| | 2007
Acquiree's fair value before combination
HK$'000 |
| --- | --- |
| Property, plant and equipment | 21 |
| Intellectual property rights | 2,815 |
| Programme rights | 1,288 |
| Trade and other receivables | 1,991 |
| Bank balances and cash | 258 |
| Trade and other payables | (3,009) |
| Amount due to a director | (3,419) |
| Net liabilities acquired | (55) |
| Consideration (note a) | (4,204) |
| Goodwill (note b) | (4,259) |
| Net cash inflow arising on acquisition: | |
| Cash and cash equivalents acquired | 258 |

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(a) This represents the gross consideration of HK$5,500,000 less the guarantee profit receivable of HK$1,296,000 from the vendor of Datewell Limited in accordance with the sale and purchase agreement dated 22 November 2006. Details were set out in the Company’s circular dated 19 December 2006.

(b) The goodwill arising from the acquisition of subsidiaries is attributable to the anticipated future cash flows from the intellectual property rights and programme rights.

If the acquisition had been completed on 1 April 2006, the Group’s revenue for the year ended in March 2007 would have been HK$62,298,000 and its loss for the year ended in March 2007 would have been HK$70,289,000.

31. DEREGISTRATION OF A SUBSIDIARY

On 18 January 2008, deregistration of Slightly Off Beat Animation Entertainment Limited (“SOB”) was approved by the Companies Registry. SOB was dormant since its operation and no material assets and liabilities at the deregistration date.

32. SHARE OPTION SCHEMES

The Company has two share options schemes, including the Share Option Scheme and Pre-IPO Share Option Scheme. Details of the two share option schemes are as follows:

(a) Share Option Scheme

The Share Option Scheme was adopted on 25 April 2002 for the primary purpose of providing incentives and to recognise the contribution of the eligible participants to the growth of the Group and will expire on 24 April 2012. Under the Share Option Scheme, the Board may grant options to eligible full-time or part-time employees, including any executive, non-executive and independent non-executive Directors, and consultants or advisers of the Company and/or any of its subsidiaries.

The total number of shares in respect of which options may be granted under the Share Option Scheme, the Pre-IPO Share Option Scheme (as referred to below) and any other option schemes is not permitted to exceed 30% of the issued share capital of the Company from time to time. The number of shares in respect of which options may be granted to any individual in any one year is not permitted to exceed 1% of the issued share capital of the Company, without prior approval from the Company’s shareholders.

Options granted must be taken up within three days of the date of grant, upon payment of HK$1 per grant.

Options may be exercised at any time during a period to be notified by the board of Directors upon the grant of options provided that the option period shall not exceed 10 years from the date of grant of the options. No minimum period for which an option must be held is required. The exercise price, which is determined by the Board is the highest of: (i) the closing price per share on the date of grant; (ii) the average closing price per share for the five business days immediately preceding the date of grant; and (iii) the nominal value of a share.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The following table discloses the details of the Company's options held by employees and consultants and movements in such holdings during the years ended 31 March 2008 and 2007:

For the year ended 31 March 2008

	Outstanding at 1.4.2007	Granted during the year	Adjusted for the open offer (Note a)	Exercised during the year	Lapsed during the year	Outstanding at 31.3.2008 (Note b)
Senior management	4,800,000	–	1,200,000	(6,000,000)	–	–
Other employees	4,800,000	–	–	(4,800,000)	–	–
Consultants	38,400,000	–	6,000,000	(39,400,000)	–	5,000,000
	48,000,000	–	7,200,000	(50,200,000)	–	5,000,000

Notes:
(a) On 30 November 2007, 1,200,000 and 6,000,000 share options, with par value of HK$0.01 each, deemed to be issued in respect of the issuance of open offer.
(b) The exercise price of the outstanding share options at 31 March 2008 is HK$0.188 per share option.

The adjustments for the open offer made to the option grants are as follows:

Date of grant	Exercise price before adjustment	Exercise price after adjustment	Number of shares issuable under the options granted before adjustment	Number of shares issuable under the options granted after adjustment	Closing price immediately before the date on which the option was granted	Closing price immediately before the date on which the option was adjusted
28 February 2007	0.092	0.074	4,800,000	6,000,000	0.090	0.100
6 March 2007	0.235	0.188	24,000,000	30,000,000	0.200	0.100

For the year ended 31 March 2007

Category	Outstanding at 1.4.2006	Granted during the year	Exercised during the year	Lapsed during the year	Outstanding at 31.3.2007
Senior management	–	4,800,000	–	–	4,800,000
Other employees	–	4,800,000	–	–	4,800,000
Consultants	–	38,400,000	–	–	38,400,000
	–	48,000,000	–	–	48,000,000

Details of specific categories of options are as follows:

Date of grant	Vesting period	Exercisable period	Exercise price HK$
28/2/2007	–	28/2/2007 – 23/4/2012	0.092
6/3/2007	–	6/3/2007 – 23/4/2012	0.235

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The fair values were calculated using The Black-Scholes-Merton Option Pricing Model. The inputs into the model were as follows:

Grant date	28 February 2007	6 March 2007
Fair value at the grant date	HK$0.025	HK$0.080
Share price at the grant date	HK$0.090	HK$0.200
Exercise price at the grant date	HK$0.092	HK$0.235
Expected volatility	136.67%	170.23%
Risk-free rate	3.842%	3.741%
Expected dividend yield	–	–

Expected volatilities were based on the historical volatility of the share prices of the Company over the period that is equal to the expected life before the grant date.

The Group recognised the total expenses of HK$3,055,000 for the year ended 31 March 2007 in relation to share options granted by the Company.

(b) Pre-IPO Share Option Scheme

The Pre-IPO Share Option Scheme was adopted on 25 April 2002 for the primary purpose of providing incentives and to recognise the contribution of the eligible participants to the growth of the Group and/or to the listing of the Shares on GEM and expired on 9 May 2002. Options granted prior to such expiry shall continue to be valid and exercisable during the exercise period.

Under the Pre-IPO Share Option Scheme, the Board may grant options to eligible full-time or part-time employees, including any executive, non-executive and independent non-executive Directors, and consultants or advisers of the Company and/or any of its subsidiaries.

Options granted must be taken up by the end of the next business day following the date of grant, upon payment of HK$1 per grant. Options may be exercised at any time from the expiry of twelve months from and including the date when dealings in the shares first commenced on GEM to the 10th anniversary of the date on which dealings in the shares first commenced on GEM. The exercise price, which is determined by the Board is either 10% of the placing price (options granted at this price being referred to below as "Pool A Options") or 70% of the placing price (options granted at this price being referred to below as "Pool B Options").

The following table discloses the details of the Company's share options held by employees and movements in such holdings during the year ended 31 March 2007:

Category of participants	Option Type	Outstanding at 1.4.2006	Granted during the year	Exercised during the year (Note)	Lapsed during the year	Outstanding at 31.3.2007
Directors of the Company	Pool A Options	14,800,000	–	(2,100,000)	(12,700,000)	–
	Pool B Options	10,000,000	–	–	(10,000,000)	–
		24,800,000	–	(2,100,000)	(22,700,000)	–
Other employees	Pool A Options	1,400,000	–	–	(1,400,000)	–
	Pool B Options	3,800,000	–	–	(3,800,000)	–
		5,200,000	–	–	(5,200,000)	–
		30,000,000	–	(2,100,000)	(27,900,000)	–

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Details of specific categories of options are as follows:

Option type	Date of grant	Vesting period	Exercisable period	Exercise price HK$
Pool A Options	25/4/2002	26/4/2002 – 08/5/2003	09/5/2003 – 08/5/2012	0.033
Pool B Options	25/4/2002	26/4/2002 – 08/5/2003	09/5/2003 – 08/5/2012	0.231

Note: The closing price of the Company's share immediately before the dates on which the share options were exercised were HK$0.094 and HK$0.098 per share.

The Group has taken advantage of the transitional provisions of HKFRS 2 under which the new recognition and measurement policies have not been applied to all Share Options or Shares granted to employees or directors on or before 7 November 2002.

The financial impact of share options granted is not recorded in the Company's or the Group's balance sheet until such time as the options are exercised, and no change is recognised in the income statement in respect of the value of options granted. Upon the exercise of the share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options lapsed or cancelled prior to their exercise date are deleted from the register of outstanding options.

33. CONVERTIBLE NOTES

(a) Pursuant to the sales and purchase agreement entered into on 17 April 2007 with China Creative Power Entertaining Company Limited ("China Creative"), the Company issued Zero Coupon Convertible Note due 2009 for a principal amount of HK$6,000,000 to China Creative on 18 May 2007, to be converted up to 18,292,682 fully paid ordinary shares with a par value of HK$0.01 each of the Company at a conversion price of HK$0.328 per share.

The fair value of the liability and equity components of the convertible notes were determined by an independent professional qualified valuer at the issue date of the Convertible Bond.

On 17 July 2007, China Creative elected to convert the HK$6,000,000 Convertible Note into 18,292,682 new shares of HK$0.01 each in the Company. The equity component of the Convertible Note, which was booked as capital reserve, was reversed upon conversion.

(b) On 15 January 2008, the Company issued HK$50,000,000 Zero Coupon Convertible Notes due 2010 to eight subscribers. The conversion price is HK$0.05 and is subject to adjustment in the event of further issues of shares or other dilutive events.

The fair value of the liability and equity components of the convertible notes were determined by an independent professional qualified valuer at the issue date of the Convertible Notes.

During the year, the Convertible Notes were fully converted into ordinary shares of the Company.

34. NON-CASH TRANSACTION

(a) During the year, convertible note of HK$6,000,000 were issued to an independent third party as part of the consideration for the acquisition of intellectual property rights by a subsidiary (see note 33(a)).

In the last year, consideration of HK$5,500,000 in respect of the acquisition of Datewell Limited and its subsidiaries was settled by the issuance of 80,460,000 new ordinary shares of HK$0.01 at HK$0.0684 each (note 28(b)(i)).

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

35. COMMITMENTS

(a) Operating lease commitments

	Group		Company
	2008	2007	2008	2007
	HK$'000	HK$'000	HK$'000	HK$'000
Minimum lease payments under operating leases during the year:
Premises	1,946	2,195	534	-
Office equipment	154	164	-	-
	2,100	2,359	534	-

At 31 March 2008, the Group and the Company had commitments for future minimum lease under non-cancellable operating leases in respect of premises and office equipment which fall due as follows:

	Group		Company
	2008	2007	2008	2007
	HK$'000	HK$'000	HK$'000	HK$'000
Premises
Within one year	550	470	321	-
After one year but within five years	-	460	-	-
	550	930	321	-
Office equipment
Within one year	154	164	-	-
After one year but within five years	217	395	-	-
	371	559	-	-
	921	1,489	321	-

(b) Capital commitments

	Group
	2008	2007
	HK$'000	HK$'000
Contracted for but not provided for in the financial statements
- Film rights	1,010	8,412
- Cartoon Films	747	-
- Intellect Property rights	15,037	-
	16,794	8,412

Capital commitments represent license fees commitment to licensors for which film master materials have not been delivered to the Group.

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

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

36. POST BALANCE SHEET EVENTS

(a) Placing and top-up subscription of shares

On 3 April 2008, Nice Hill Investments Limited (“Nice Hill”), a company which is wholly and beneficially owned by Mr Chin Wai Keung, the Chairman and executive director of the Company, entered into a placing and subscription agreement with the placing agent and the Company. Pursuant to which, Nice Hill has conditionally agreed to place a maximum of 114,000,000 placing shares held by Nice Hill to selected individuals, corporate or institutional investors at a price of HK$0.44 per placing share. Nice Hill has conditionally agreed to subscribe for such number of top-up subscription shares equivalent to the number of placing shares actually sold by Nice Hill under the placing at a price of HK$0.44 per top-up subscription share.

The placing and top-up subscription were completed on 9 April 2008 and 17 April 2008, respectively. The net proceeds from the top-up subscription amounted to approximately HK$49.2 million.

(b) Acquisition of mining tenements

On 19 May 2008, the Company announced that on 2 May 2008, a subsidiary of the Company has entered into a conditional acquisition agreement (the “Acquisition”) with an independent third party to acquire 64% equity interest in Mt. Morgan Resources and Development Corporation (“Morgan”), which holds certain exclusive offshore mining tenements in Philippines, for a consideration of HK$5,700 million, of which HK$40 million has been paid on 9 April 2008 as refundable deposit, with the balance to be settled by (i) promissory note of HK$200 million payable within one year after the completion of the Acquisition; (ii) the issue of 500,000,000 new shares of the Company; and (iii) convertible bonds of HK$5,110 million of the Company with maturity on the 10th anniversary year upon the completion of the Acquisition.

The Acquisition is subject to the fulfillment of certain conditions and therefore, has not been completed as at the date when these financial statements are approved for issue by the directors.

Further details of the Acquisition are set out in the Company’s announcement dated 19 May 2008.

(c) Change in Hong Kong Profits Tax rate

On 27 February 2008, the Financial Secretary of the Hong Kong SAR Government announced his annual budget which proposed a cut in the Profits Tax rate from 17.5% to 16.5% with effect from the fiscal year 2008/09 and a one-off reduction of 75% of the tax payable for the 2007/08 assessment subject to a ceiling of HK$25,000. In accordance with the Group’s accounting police set out in note 2(s), no adjustments have been made to these financial statements as a result of the announcement.

The directors of the Company estimate that these proposed changes will have insignificant impact on the opening balance of the Group as at 1 April 2008 and it is impracticable to further estimate the impact on future financial statements of the change in tax rate.

37. CONTINGENT LIABILITIES

	Group		Company
	2008	2007	2008	2007
	HK$'000	HK$'000	HK$'000	HK$'000
Guarantees given to banks in respect of utilised banking facilities of:
Subsidiaries	-	-	-	320

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

38. RELATED PARTIES TRANSACTIONS

During the years ended 31 March 2008 and 2007, the directors are of the view that the following companies are related parties to the Group:

Name of the related party	Relationship
Golden Scene Company Limited
("Golden Scene")	A subsidiary’s director, has beneficial interest
Panorama Entertainment Holdings Limited
("Panorama Entertainment")	Ex-directors, Fung Yu Hing, Allan and Leung Siu Kuen, Janet, have beneficial interests
Players Pictures Company Limited
("Players Pictures")	An ex-director, Fung Yee Sang, has beneficial interest
Metropolis Communications Limited
("Metropolis")	Ex-directors, Fung Yu Hing, Allan and Leung Siu Kuen, Janet, have beneficial interests
Brilliant Business Limited
("Brilliant Business")	An ex-director, Fung Yee Sang has beneficial interest
Sunny Fancy Limited
("Sunny Fancy")	An ex-director, Fung Yee Sang has beneficial interest
Allen Fung Assets Limited
("Allen Fung")	An ex-director, Fung Yu Hing, Allan has beneficial interest

(a) Recurring transactions

	Group
	2008
HK$’000	2007
HK$’000
Golden Scene
- Acquisition of film rights	727	3,448
- Film exhibition expenses	171	252

The directors of the Company are of the opinion that the above related parties transactions were conducted on normal commercial terms and were priced with reference to prevailing market prices, and in the ordinary course of business.

Details of outstanding balance was set out in note 38c.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(b) Non-recurring transactions

	Notes	Group
		2008
HK$'000	2007
HK$'000
Management fee paid to:	(i)
– Golden Scene		–	1,000
Rental paid to:	(ii)
– Players Pictures		218	327
– Metropolis		218	327
– Brilliant Business		145	217
– Sunny Fancy		203	305

Notes:
(i) Management fee paid to Golden Scene were based on the relevant agreement which ceased on 31 March 2007.
(ii) Rental paid to Players Pictures, Metropolis, Brilliant Business and Sunny Fancy were determined based on the relevant rental agreements which ceased on 31 October 2007.

	Group
	2008
HK$'000	2007
HK$'000	Maximum amount outstanding during the year
			2008
HK$'000	2007
HK$'000
Trading nature:
– Golden Scene	–	2,104	–	6,537
Non-trading nature:
– Allen Fung	5	–	–	–
– Panorama Entertainment	7	2	–	2
	12	2,106	–	6,539

The amounts due from related companies are unsecured, interest-free and with no fixed terms of repayment.

No provision for doubtful debts related to the amounts due from related companies was made at 31 March 2008 and 31 March 2007. No expenses recognised during the current and last years in respect of bad or doubtful debts due from related companies.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(d) Amount due to a related company

	Group
	2008	2007
	HK$'000	HK$'000
Trading nature:
- Golden Scene	1,275	-

(e) Amount due to a director

	Group
	2008	2007
	HK$'000	HK$'000
So Wing Lok Jonathan	517	7,593

The amount due to a director is unsecured, interest-free and with no fixed terms of repayment.

(f) Key management personnel remuneration

Remuneration for key management personnel of the Group, including amounts paid to the Company's directors as disclosed in note 9 and certain of the highest paid individual as disclosed in note 10, is as follows:

	Group
	2008	2007
	HK$'000	HK$'000
Short-term employee benefits	3,401	2,743
Post-employment benefits	46	40
Equity compensation benefits	-	122
	3,447	2,905

Total remuneration is included in "staff costs" (note 7)

(g) Personal guarantee and security provided by a subsidiary's directors

During the year, a subsidiary's directors provided personal guarantees and security to banks and financial institution to the extent of HK$27,800,000 (2007: HK$31,800,000) to secure credit facilities granted to the subsidiary of the Company as follows:

(i) Certain properties owned by a subsidiary's directors.

(ii) Certain properties owned by Players Pictures, Metropolis, Brilliant Business and Sunny Fancy.

Subsequent to the balance sheet date, personal guarantee provided by subsidiary's directors of HK$13,000,000 were released.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

39. PARTICULARS OF SUBSIDIARIES

Details of the Company’s subsidiaries at 31 March 2008 are as follows:

Name of subsidiaries	Place of incorporation/establishment and operations (Note a)	Nominal value of issued ordinary share/registered capital	Percentage of equity interest attributable to the Company		Principal activities
			Directly	Indirectly
Black Sand Enterprises Limited	Hong Kong, limited liability company	HK$300,000	100%	–	Dormant
CPE Program Distribution Limited	British Virgin Islands/Hong Kong, limited liability company	US$1	–	100%	Dormant
Creative Power Entertaining Company Limited	People’s Republic of China, limited liability company	HK$500,000	–	100%	Marketing and sub-licensing
Datewell Limited	British Virgin Islands/Hong Kong, limited liability company	US$100	100%	–	Investment holding
Go Film Distribution Limited (Note c)	Hong Kong, limited liability company	HK$10,000	–	20%	Inactive
Intelli-Media (HK) Limited	Hong Kong, limited liability company	HK$100	–	100%	Marketing and sub-licensing
Panorama Distributions Company Limited	Hong Kong, limited liability company	HK$10,000,002	–	100%	Distribution of video products
Panorama Entertainment Company Limited	Hong Kong, limited liability company	HK$10,000	–	100%	Holding of film rights
Panorama Entertainment Group Limited	British Virgin Islands/Hong Kong, limited liability company	US$200	100%	–	Investment holding
Panorama Entertainment (Singapore) Pte Ltd.	Singapore, limited liability company	S$100,000	–	100%	Distribution of video products
Panorama Film Company Limited	British Virgin Islands/Hong Kong, limited liability company	US$1	–	100%	Inactive
Punch Pictures Company Limited	Hong Kong, limited liability company	HK$100	–	100%	Production of film
Panorama Theatrical Distributions Company Limited	British Virgin Islands/Hong Kong, limited liability company	US$100	–	100%	Investment holding

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Name of subsidiaries	Place of incorporation/establishment and operations (Note a)	Nominal value of issued ordinary share/registered capital	Percentage of equity interest attributable to the Company		Principal activities
			Directly	Indirectly
Scenerama Company Limited (Note c)	British Virgin Islands/Hong Kong, limited liability company	US$1,000	–	33.4%	Investment holding
Scenerama Holdings Company Limited	British Virgin Islands/Hong Kong, limited liability company	US$100	–	58%	Investment holding

Notes:
(a) They are limited liability companies incorporated in the respective jurisdictions.
(b) None of the subsidiaries had any debt securities outstanding at the end of the year or at any time during the year.
(c) These two companies are regarded as subsidiaries of the Company because the Company can command the majority of the voting rights and control the board in these two companies.

129

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

3. THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2007

The following information has been extracted from the annual report of the Company for the year ended 31 March 2007.

Consolidated Income Statement
For the year ended 31 March 2007

| | Notes | 2007
HK$'000 | 2006
HK$'000 |
| --- | --- | --- | --- |
| Turnover | 5 | 59,671 | 83,901 |
| Cost of sales | | (57,818) | (55,599) |
| Gross profit | | 1,853 | 28,302 |
| Other revenue | 5 | 1,136 | 185 |
| Other operating income | | 291 | 708 |
| Distribution costs | | (807) | (1,022) |
| Administrative expenses | | (19,200) | (19,032) |
| Other operating expenses | | (1,957) | (3,247) |
| Impairment loss on inventories | | (2,132) | - |
| Impairment loss on film rights | | (45,810) | - |
| (Loss)/profit from operations | 7 | (66,626) | 5,894 |
| Finance costs | 8 | (3,569) | (2,512) |
| (Loss)/profit before taxation | | (70,195) | 3,382 |
| Taxation | 12 | (38) | (932) |
| (Loss)/profit for the year | | (70,233) | 2,450 |
| Attributable to: | | | |
| Equity holders of the Company | | (69,807) | 2,305 |
| Minority interests | | (426) | 145 |
| | | (70,233) | 2,450 |
| (Loss)/earnings per share | 13 | | |
| - Basic | | (HK$16.62) cents | HK$0.57 cents |
| - Diluted | | N/A | HK$0.56 cents |

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

As at 31 March 2007

Consolidated Balance Sheet

	Notes	2007 HK$'000	2006 HK$'000
ASSETS
Non-current assets
Property, plant and equipment	14	4,007	4,898
Other intangible assets	15	17,118	72,476
Goodwill	16	4,259	-
Films in progress		385	793
Deposits for acquisition of film rights		1,608	2,066
		27,377	80,233
Current assets
Inventories	18	17,641	22,377
Trade and other receivables	19	33,584	26,853
Amounts due from related companies	20	2,106	6,537
Pledged bank deposits	21	5,136	8,218
Bank balances and cash	22	2,340	6,796
		60,807	70,781
LIABILITIES
Current liabilities
Trade and other payables	23	38,985	37,716
Amounts due to a director	24	7,593	-
Amounts due to a related company	20	-	3
Taxation payable		6	105
Obligations under finance leases
- due within one year	25	380	430
Bank and other borrowings
- due within one year	26	24,969	27,187
		71,933	65,441
Net current(liabilities)/assets		(11,126)	5,340
Total assets less current liabilities		16,251	85,573
Non-current liabilities
Other payable		-	6,596
Obligations under finance leases
- due after one year	25	679	1,099
Bank and other borrowings
- due after one year	26	6,061	6,760
Deferred tax liabilities	27	4,177	4,177
		10,917	18,632
NET ASSETS		5,334	66,941

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

	Note	2007	2006
		HK$’000	HK$’000
CAPITAL AND RESERVES
Share capital	28	4,849	4,023
Reserves		(5,834)	56,173
		(985)	60,196
Minority interests		6,319	6,745
TOTAL EQUITY		5,334	66,941

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Consolidated Statement of Changes in Equity

For the year ended 31 March 2007

	Attributable to equity holders of the Company
	Share capital HK$'000	Share premium HK$'000	Special reserve HK$'000	Translation surplus HK$'000	Share option reserve HK$'000	Accumulated losses HK$'000	Total HK$'000	Minority interests HK$'000	Total equity HK$'000
At 1 April 2005	4,023	12,953	10,440	67	-	28,888	56,371	6,600	62,971
Opening adjustment for the adoption of HKAS39	-	-	-	-	-	1,520	1,520	-	1,520
As restated	4,023	12,953	10,440	67	-	30,408	57,891	6,600	64,491
Profit for the year	-	-	-	-	-	2,305	2,305	145	2,450
At 31 March 2006 and 1 April 2007	4,023	12,953	10,440	67	-	32,713	60,196	6,745	66,941
Issue of new shares	805	4,695	-	-	-	-	5,500	-	5,500
Issue of new shares on exercise of share options	21	49	-	-	-	-	70	-	70
Exchange difference on translation of the financial statements of foreign subsidiaries	-	-	-	1	-	-	1	-	1
Equity settled share-based transactions	-	-	-	-	3,055	-	3,055	-	3,055
Loss for the year	-	-	-	-	-	(69,807)	(69,807)	(426)	(70,233)
At 31 March 2007	4,849	17,697	10,440	68	3,055	(37,094)	(985)	6,319	5,334

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

For the year ended 31 March 2007

Consolidated Cash Flow Statement

	Note	2007 HK$’000	2006 HK$’000
Operating activities
(Loss)/profit before taxation		(70,195)	3,382
Adjustments for:
Finance costs		3,569	2,512
Interest income		(294)	(185)
Gain on disposal of property, plant and equipment		-	(550)
Amortisation of film rights		36,811	27,132
Amortisation of intellectual property rights		164	-
Amortisation of programme rights		140	-
Amortisation of trademark		15	15
Depreciation		1,503	2,055
Share-based payments		3,055	-
Provision on stock obsolescence		2,132	-
Impairment on film rights		45,810	-
Bad debts written off		-	135
Operating cash flow before changes in working capital		22,710	34,496
Decrease in inventories		2,604	532
Decrease in amounts due from related companies		4,431	-
(Increase)/decrease in trade and other receivables		(3,444)	8,816
(Decrease)/increase in trade and other payables		(6,412)	224
Decrease in amount due to a related company		(3)	(1,591)
Increase in amount due to director		4,174	-
Net Cash generated from operations		24,060	42,477
Interest received		294	185
Tax paid		(111)	(328)
Net cash generated from operating activities		24,243	42,334
Investing activities
Acquisition of film rights		(21,005)	(32,413)
Acquisition of property, plant and equipment		(683)	(5,551)
Deposits for acquisition of film rights		(1,608)	(2,066)
Acquisition of subsidiaries	30	258	-
Proceeds from disposal of property, plant and equipment		92	550
Net cash used in investing activities		(22,946)	(39,480)

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

| | 2007
HK$'000 | 2006
HK$'000 |
| --- | --- | --- |
| Financing activities | | |
| New bank loans raised | – | 14,821 |
| Issue of new shares | 70 | – |
| Repayment from a related company | – | (6,017) |
| New finance leases raised | – | 1,369 |
| Decrease in other payable | (1,950) | (2,884) |
| Decrease in pledged banks deposits | 3,082 | 1,909 |
| Repayment of interest on banks
and other borrowings | (3,506) | (2,417) |
| Repayment of banks and other borrowings | 3,813 | (2,641) |
| Repayment of interest elements of finance lease | (63) | (95) |
| Repayment of capital elements of finance lease | (470) | (737) |
| Net cash (used in)/generated from
financing activities | 976 | 3,308 |
| Net increase in cash and cash equivalents | 2,273 | 6,162 |
| Cash and cash equivalents at beginning of the year | (11,072) | (17,234) |
| Effect of foreign exchange rates changes | 1 | – |
| Cash and cash equivalents at end of the year | (8,798) | (11,072) |
| Analysis of the balances of cash and
cash equivalents | | |
| Bank balance and cash | 2,340 | 6,796 |
| Bank overdrafts | (11,138) | (17,868) |
| | (8,798) | (11,072) |

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Notes to the Financial Statements

For the year ended 31 March 2007

1. GENERAL INFORMATION

The Company is incorporated as an exempted company with limited liability in the Cayman Islands and its shares are listed on the Growth Enterprise Market ("GEM") of the Stock Exchange of Hong Kong Limited ("Stock Exchange").

The Company is an investment holding company. The activities of its subsidiaries are set out in note 39.

These consolidated financial statements are presented in thousands of units of HK dollars (HK$'000) unless otherwise stated.

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Going concern basis

The Group had loss attributable to equity holders of HK$69,807,000 for the year ended 31 March 2007 and net current liabilities of HK$11,126,000 as at 31 March 2007. The Directors have adopted the going concern basis in the preparation of these financial statements after having taken due care and considerations of the following:

Net funds of approximately HK$20,000,000 (net of expenses) raised from subsequent share placements in April and May 2007, as referred to Note 38(b) below, to provide for expansion of the animated business and working capital of the Group of approximately HK$11,000,000;
Unused banking facilities of approximately HK$7,000,000 as at 31 March 2007; and
Written financial support letters provided by the two controlling shareholders of the Company, who have confirmed their willingness to provide adequate funds to the group to meet its debts as and when they fall due, both present and future.

In the opinion of the Directors, in light of the above, the Group will have sufficient working capital to finance its operations and carry on its business as a going concern in the foreseeable future. Accordingly, the Directors are satisfied that it is appropriate to prepare the financial statements on a going concern basis. Should the Group be unable to continue in business as a going concern, adjustments would have to be made in the financial statements to restate the values of the assets to their recoverable amounts, to provide for any further liabilities which might arise, and to reclassify non-current assets as current assets. The effect of these potential adjustments has not been reflected in the financial statements.

(b) Statement of compliance

These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards ("HKFRSs"), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards ("HKASs") and Interpretations issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA"), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the GEM Listing Rules. A summary of the significant accounting policies adopted by the Group is set out below.

The HKICPA has issued certain new and revised HKFRSs that are effective for accounting periods on or after 1 January 2006. The adoption of these new/revised HKFRSs had no material effect on how the results and financial position for the current and prior accounting periods have been prepared and presented. Accordingly, no prior period adjustment has been required.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The Group has not yet early adopted the following new standards, amendments and interpretations that have been issued but not yet effective.

HKAS 1 (Amendment)	Capital disclosures^{1}
HKFRS 7	Financial instruments: Disclosures^{1}
HKFRS 8	Operating segments^{2}
HK(IFRIC)-Int 7	Applying the restatement approach under HKAS 29 Financial Reporting in HyperinflationaryEconomies^{3}
HK(IFRIC)-Int 8	Scope of HKFRS 2^{4}
HK(IFRIC)-Int 9	Reassessment of embedded derivatives^{5}
HK(IFRIC)-Int 10	Interim financial reporting and impairment^{6}
HK(IFRIC)-Int 11	HKFRS 2-Group and treasury share transactions^{7}
HK(IFRIC)-Int 12	Service concession arrangements^{8}

Effective for annual periods beginning on or after 1 January 2007
Effective for annual periods beginning on or after 1 January 2009
Effective for annual periods beginning on or after 1 March 2006
Effective for annual periods beginning on or after 1 May 2006
Effective for annual periods beginning on or after 1 June 2006
Effective for annual periods beginning on or after 1 November 2006
Effective for annual periods beginning on or after 1 March 2007
Effective for annual periods beginning on or after 1 January 2008

The consolidated financial statements for the year ended 31 March 2007 comprise the Company and its subsidiaries.

The measurement basis used in the preparation of the financial statements is the historical cost basis.

The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experiences and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of HKFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in Note 4.

(d) Subsidiaries

An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances and transactions and any unrealised profits arising from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that this is no evidence of impairment.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Minority interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet and consolidated statement of changes in equity, separately from equity attributable to the equity holders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between minority interests and the equity holders of the Company.

Where loss applicable to the minority exceed the minority's interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group's interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports profits, the Group's interest is allocated all such profits until the minority's share of loss previously absorbed by the Group has been recovered.

An associate is an entity in which the Group or Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions.

(e) Goodwill

Goodwill represents the excess of the cost of a business combination or an investment in an associate over the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities.

Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment (see note 2(1)). In respect of associates, the carrying amount of goodwill is included in the carrying amount of the interest in the associate.

On disposal of a cash generating unit or an associate during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

(f) Property, plant and equipment

Property, plant and equipment are stated in the balance sheet at cost less accumulated depreciation and impairment losses (see note 2(1)).

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net proceeds on disposal and the carrying amount of the item and are recognised in profit or loss on the date of retirement or disposal.

Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follows:

Leasehold improvements	10%
Furniture and fixtures	30%
Office equipment	30%
Motor vehicles	30%

Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.

138

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FINANCIAL INFORMATION ON THE GROUP

(g) Film rights

Film rights are stated at cost less accumulated amortisation and any accumulated impairment losses (see note 2(l)).

The cost of film rights is amortised on a systemic basis over the underlying license periods, with reference to projected revenues from the relevant film right.

(h) Films in progress

Films in progress are stated at cost less any identified impairment losses (see note 2(l)). Costs include all direct costs associated with the production of films. Costs of films are transferred to film rights upon completion.

(i) Trademark

Trademark represents license fee paid for the use of trademark and is stated at cost less accumulated amortisation and any identified impairment losses (see note 2(l)). The cost of trademark is amortised on a straight-line basis over the estimated useful life.

(j) Programme and intellectual property rights

The cost of programme and intellectual property rights are stated at cost less accumulated amortisation and any identified impairment losses (see note 2(l)). Programme and intellectual property rights are amortised on a straight-line basis over the estimated useful life.

(k) Leased assets

(i) Assets acquired under finance leases

Where the Group acquires the use of assets under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments, of such assets are included in fixed assets and the corresponding liabilities, net of finance charges, are recorded as obligations under finance leases. Depreciation is provided at rates which write off the cost or valuation of the assets over the term of the relevant lease or, where it is likely the Company or Group will obtain ownership of the asset, the life of the asset, as set out in note 2(f). Impairment losses are accounted for in accordance with the accounting policy as set out in note 2(l). Finance charges implicit in the lease payments are charged to profit or loss over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period.

(ii) Operating lease charges

Where the Group has the use of assets under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are written off as an expense of the accounting period in which they are incurred.

139

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FINANCIAL INFORMATION ON THE GROUP

(l) Impairment of assets

property, plant and equipment;
film rights and deposits for acquiring film rights;
intellectual property rights;
programme rights;
film in progress;
investments in subsidiaries; and
trade and other receivables.

If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment.

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

Recognition of impairment losses

An impairment loss is recognised in profit or loss whenever the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or value in use, if determinable.

Reversals of impairment losses

(m) Debtors and other receivables

Debtors and other receivables are initially recognised at fair value and thereafter stated at amortised cost less impairment losses for bad and doubtful debts, except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts (see note 2(l)).

140

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FINANCIAL INFORMATION ON THE GROUP

(n) Interest-bearing borrowings

(o) Trade and other payables

Trade and other payables are initially recognised at fair value and thereafter stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(p) Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.

(q) Employee benefits

(i) Short term employee benefits and contributions to defined contribution plans

(ii) Share-based payments

The fair value of share options granted to employees or consultants is recognised as an employee cost or consultancy fees with a corresponding increase in a capital reserve within equity. The fair value is measured at grant date using The Black-Scholes-Merton Option Pricing Model, taking into account the terms and conditions upon which the options were granted. Where the employees or consultants have to meet vesting conditions before becoming unconditionally entitled to the share options, the total estimated fair value of the share options is spread over the vesting period, taking into account the probability that the options will vest.

During the vesting period, the number of share options expected to vest is reviewed. Any adjustment to the cumulative fair value recognised in prior years is charged/credited to the profit or loss for the year under review, unless the original employee expenses or consultancy fees qualify for recognition as an asset, with a corresponding adjustment to the capital reserve. On vesting date, the amount recognised as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the capital reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company's shares. The equity amount is recognised in the capital reserve until either the option is exercised (when it is transferred to the share premium account) or the option expires (when it is released directly to retained profits).

(r) Inventories

Inventories are stated at the lower of cost and net realisable value.

Cost is calculated using the first-in, first-out method. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realizable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognised as a reduction in the amount of inventories as an expense in the period in which the reversal occurs.

141

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(s) Income tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in the income statement except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity.

Deferred tax is provided in full, using the liability method, on all temporary differences arising from the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the company or the group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or
in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

142

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(t) Provisions and contingent liabilities

Where it is not probable that an outflow of economics benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits 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 of economic benefits is remote.

(u) Financial guarantee

A financial guarantee (a kind of insurance contract) is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the original or modified terms of a debt instrument. The Group does not recognise liabilities for financial guarantees at inception, but performs a liability adequacy test at each reporting date by comparing its net liability regarding the financial guarantee with the amount that would be required if the financial guarantee would result in a present legal or constructive obligation. If the liability is less than its present legal or constructive obligation amount, the entire difference is recognised in the income statement immediately.

(v) Revenue

Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in profit or loss as follows:

(i) Sales of goods

Revenue is recognised when goods are delivered and title has passed.

(ii) Sub-licensing film rights

Sub-licensing income is generated on an accrual basis in accordance with the terms of the underlying licence agreements.

(iii) Film exhibition and film distribution income

Income from exhibition of film and film distribution income are recognised when the right to receive payment is established and the amount can be measured reliably.

(iv) interest income

Interest income is recognised as it accrues using the effective interest rate method.

(v) Marketing services income

Marketing services income is recognised in the period the services are provided.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(w) Translation of foreign currencies

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are stated at the foreign exchange rates ruling at the balance sheet date. Exchange gains and losses are recognised in profit and loss, except those arising from foreign currency borrowings used to hedge a net investment in a foreign operation which are recognised directly in equity.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was determined.

The results of foreign operations are translated into Hong Kong dollars at the exchange rates approximating the foreign exchange rates ruling at the dates of transactions. Balance sheet items, including goodwill arising on consolidation of foreign operations are translated into Hong Kong dollars at the foreign exchange rates ruling at the balance sheet date. The resulting exchange differences are recognised directly in a separate component of equity. Goodwill arising on consolidation of a foreign operation acquired is translated at the foreign exchange rate that applied at the date of acquisition of the foreign operation.

On disposal of a foreign operation, the cumulative amount of the exchange differences recognised in equity which relate to that foreign operation is included in the calculation of the profit or loss on disposal.

(x) Borrowing costs

Borrowing costs are expensed in profit or loss in the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale.

(y) Related parties

For the purpose of these financial statements, parties are considered to be related to the Group if:

(i) the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating policy decisions, or has joint control over the Group;

(ii) the Group and the party are subject to common control;

(iii) the party is an associate of the Group or a joint venture in which the Group is a venturer;

(iv) the party is a member of key management personnel of the Group or the Group's parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals; or

(v) the party is a close family member of a party referred to in (i) or is an entity under the control, joint control or significant influence of such individuals, or

(vi) the party is a post-employment benefit plan which is for the benefit of employees of the Group or of any entity that is a related party of the Group.

Close family members of an individual are those family members who may be expected to influence, or be influenced by, that individual in their dealings with the entity.

144

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(z) Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

In accordance with the Group's internal financial reporting system, the Group has chosen business segment information as the primary reporting format and geographical segment information as the secondary reporting format for the purposes of these financial statements.

Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. For example, segment assets may include inventories, trade receivables and property, plant and equipment. Segment revenue, expenses, assets and liabilities are determined before intra-group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group entities within a single segment. Inter-segment pricing is based on similar terms as those available to other external parties.

Segment capital expenditure is the total cost incurred during the period to acquire segment assets (both tangible and intangible) that are expected to be used for more than one period.

Unallocated items mainly comprise financial and corporate assets, interest-bearing loans, borrowings, tax balances, corporate and financing expenses.

FINANCIAL RISK MANAGEMENT

The Group's activities expose it to a variety of financial risks: market risks (including currency risk, fair value, interest risk and price risk), credit risk, liquidity risk and cash flow interest rate risk.

(a) Market risks

(i) Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations.

(ii) Credit risk

The Group has no significant concentrations of credit risk. It has policies in place to ensure that sales of products are made to customers with an appropriate credit history.

(iii) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the available of funding through an adequate amount of committed credit facilities and the ability to close our market positions. Due to the dynamic nature of the underlying business, the Group aims to maintain flexibility in funding by keeping committed credit lines available.

(iv) Cash flow and fair value interest rate risk

As the Group has no significant interest-bearing assets, the Group's income and operating cash flows are substantially independent of changes in market interest rates.

145

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(b) Fair value estimation

The fair value of financial assets through profit or loss is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group used a variety of methods and made assumptions that are based on market conditions existing at each balance sheet date. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments.

The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purpose is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group made estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are discussed below:

(a) Impairment loss for bad and doubtful debts

The impairment loss for bad and doubtful debts of the Group is based on the evaluation of collectability and ageing analysis of the debts and on managements' judgement. A considerable amount of judgement is required in assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of each customer. If the financial conditions of customers of the Group were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

(b) Impairment loss of film rights, film in progress, trademark, programme and intellectual rights

The Group evaluates whether these assets have suffered any impairment loss whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, in accordance with the relevant accounting policy set out above. The recoverable amounts of cash generating units have been determined based on value in use calculations. These calculations require the use of estimates.

The Group tests annually whether goodwill has suffered any impairment in accordance with the accounting policy stated in Note 2 (l). The recoverable amounts of cash generating units are determined based on value-in-use calculation. These calculations require the use of estimates.

(d) Useful lives of property, plant and equipment

The Group's management determines the estimated useful lives and related depreciation charge for its property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of the property, plant and equipment of similar nature and functions. It could change significantly as a result of technical innovation. Management will change the depreciation charge where useful lives are different from the previously estimated lives. It will also write-off or write down technically obsolete or non-strategic assets that have been abandoned or sold.

146

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(e) Income taxes

The Group is subject to income taxes in several jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. There are transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that are initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

(f) Equity compensation

In determining the total expenses for the Group's equity compensation plans, the Group estimates the number of options/shares that are expected to become exercisable/vested at the date of grant. At each balance sheet date before the options/shares that are become exercisable/vested, the Group will revise the total expenses where the number of options/shares that are expected to become exercisable/vested are difference to previously estimated.

TURNOVER AND OTHER REVENUE

Turnover represents the net amounts received and receivable for sales of goods by the Group to outside customers, less returns and allowances, and revenue received and receivable from sublicensing of film rights, film exhibition and film distribution, and is analysed as follow:

| | 2007
HK$'000 | 2006
HK$'000 |
| --- | --- | --- |
| Turnover | | |
| Sales of goods | 43,167 | 61,730 |
| Sub-licensing of film rights | 10,699 | 10,389 |
| Film exhibition and film distribution income | 5,805 | 11,782 |
| | 59,671 | 83,901 |
| Other revenue | | |
| Marketing service income | 842 | - |
| Interest income | 294 | 185 |
| | 1,136 | 185 |

BUSINESS AND GEOGRAPHICAL SEGMENTS

As the Group's turnover for the year ended 31 March 2007 are substantially made to customers based in Hong Kong and the operations of the Group are substantially located in Hong Kong, no separate analysis for the geographical segment information is provided accordingly.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(Loss)/profit from operations has been arrived at after charging and crediting:

(LOSS)/PROFIT FROM OPERATIONS

	2007	2006
	HK$'000	HK$'000
Charging
Staff cost
Directors’ remuneration (Note 10)	2,656	3,689
Other staff costs	8,039	8,731
Equity settled share-based payment expenses	244	-
Retirement benefits scheme contributions, excluding Directors’ contributions	370	433
	11,309	12,853
Depreciation
Owned assets	808	1,164
Assets under finance leases	695	891
Amortisation of film rights included in cost of sales	36,811	27,132
Amortisation of intellectual property rights included in cost of sales	164	-
Amortisation of programme rights included in cost of sales	140	-
Amortisation of trademark included in administrative expenses	15	15
Auditors’ remuneration
Audit services	400	300
Other services	80	-
Cost of inventories included in cost of sales	10,771	16,012
Bad debts written off	-	135
Share-based payment (including amount paid to staff of HK$244,000)	3,055	-
Provision on stock obsolescence	2,132	-
Impairment loss on film rights	45,810	-
Crediting
Sundry income	187	90
Exchange gain	104	68
Gain on disposal of plant, property and equipment	-	550

FINANCE COSTS

	2007	2006
	HK$'000	HK$'000
Interest on:
Bank borrowings wholly repayable within five years	2,750	1,154
Other borrowings wholly repayable within five years	756	1,264
Finance leases	63	94
	3,569	2,512

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(LOSS)/PROFIT ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

The loss attributable to equity holders included a loss of HK$47,542,000 (2006: loss of HK$25,000) which has been dealt with in the financial statements of the Company.

DIRECTORS' REMUNERATION

The emoluments paid or payable to each of the eighteen (2006: nine) directors were as follows:

For the year ended 31 March 2007

| | Fees
HK$'000 | Salaries
and other
benefits
HK$'000 | Retirement
benefits
scheme
contribution
HK$'000 | Total
HK$'000 |
| --- | --- | --- | --- | --- |
| Executive directors | | | | |
| Mr. Fung Yu Hing, Allan | - | 562 | 6 | 568 |
| Ms. Leung Siu Kuen, Janet | - | 141 | 6 | 147 |
| Mr. Fung Yee Sang | - | 810 | 12 | 822 |
| Mr. Au Lik Man, Simon | - | 238 | 6 | 244 |
| Mr. So Wing Lok, Jonathan | - | - | - | - |
| Mr. Lo Wing Keung | - | - | - | - |
| Mr. Tso Kin Nam | - | 80 | - | 80 |
| Mr. Chow Alvin Chiyiu | - | - | - | - |
| Mr. Chin Wai Keung, Richard | - | 240 | - | 240 |
| Mr. Ling Macadam | - | - | - | - |
| Non-executive directors | | | | |
| Dr. Lo Wing Yan, William, JP | 35 | - | - | 35 |
| Ms. Fung Suen Lai, Jacqueline | 35 | 233 | 9 | 277 |
| Independent non-executive directors | | | | |
| Mr. Chan Koon Chung, Johnny | 35 | - | - | 35 |
| Mr. Chau, Stephen | 35 | - | - | 35 |
| Mr. Hui Kwok Wah | 23 | - | - | 23 |
| Mr. Hung Tik | 50 | - | - | 50 |
| Mr. Lam Wai Leung | 50 | - | - | 50 |
| Mr. Chow Shiu Ki | 50 | - | - | 50 |
| | 313 | 2,304 | 39 | 2,656 |

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

For the year ended 31 March 2006

During the year, no emoluments were paid by the Group to any directors as an inducement to join or upon joining the Group or as compensation for loss of office. None of the directors waived any emoluments during the year.

11. EMPLOYEES' EMOLUMENTS

During the year, the five highest paid individuals in the Group included three (2006: four) directors, details of whose emoluments are set out in note 10 above.

The emoluments of the remaining two (2006: one) individual for the year ended 31 March 2007, were as follows:

| | 2007
HK$'000 | 2006
HK$'000 |
| --- | --- | --- |
| Salaries and other benefits | 742 | 409 |
| Bonus | – | 12 |
| Retirement benefits schemes contributions | 27 | 12 |
| | 769 | 433 |

The aggregate emoluments of the highest paid employee for the year are within the emoluments band ranging from nil to HK$1,000,000.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

12. TAXATION

	2007	2006
	HK$'000	HK$'000
The charge comprises:
Hong Kong Profits tax	–	39
Other jurisdictions	38	–
Deferred tax charge (Note 27)	–	893
	38	932

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

Taxation in other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.

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

	2007	2006
	HK$'000	HK$'000
(Loss)/profit before taxation	(70,195)	(3,382)
Tax at the domestic income tax rate of 17.5% (2006: 17.5%)	(12,284)	592
Tax effect of income not taxable in determining taxable profit	(77)	–
Tax effect of expenses that are not deductible in determining taxable profit	9,671	277
Tax effect on temporary differences	2,456	–
Effect of different tax rates of operation in other jurisdictions	39	–
Tax loss utilised	(14)	–
Unrecognised tax loss	247	63
Tax charge for the year	38	932

Details of deferred taxation are set out in Note 27.

13. (LOSS)/EARNINGS PER SHARE

The calculation of the basic and diluted (loss)/earnings per share is based on the following data:

	2007	2006
	HK$'000	HK$'000
(Loss)/Earnings
(Loss)/profit attributable to equity holders of the Company for the year	(69,807)	2,305
Number of shares
Weighted average number of ordinary shares	422,590,973	402,300,000
Effect of dilutive potential ordinary shares:
Share options	N/A	9,906,738
Weighted average number of ordinary shares for the purpose of diluted earnings per share	N/A	412,206,738

Diluted loss per share for the year ended 31 March 2007 has not been presented as the effect of any dilution is anti-dilutive.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

14. PROPERTY, PLANT AND EQUIPMENT

The Group

| | Leasehold improvements
HK$'000 | Furniture and fixtures
HK$'000 | Office equipment
HK$'000 | Motor vehicles
HK$'000 | Total
HK$'000 |
| --- | --- | --- | --- | --- | --- |
| Cost | | | | | |
| At 1 April 2005 | – | 2,336 | 3,530 | 2,455 | 8,321 |
| Additions | 2,528 | 864 | 330 | 1,829 | 5,551 |
| Disposals | – | (1,568) | (94) | (1,093) | (2,755) |
| At 31 March 2006 | 2,528 | 1,632 | 3,766 | 3,191 | 11,117 |
| Additions | 80 | 285 | 339 | – | 704 |
| Disposals | – | – | – | (183) | (183) |
| At 31 March 2007 | 2,608 | 1,917 | 4,105 | 3,008 | 11,638 |
| Accumulated depreciation | | | | | |
| At 1 April 2005 | – | 2,203 | 2,895 | 1,821 | 6,919 |
| Provided for the year | 232 | 346 | 586 | 891 | 2,055 |
| Disposals | – | (1,568) | (94) | (1,093) | (2,755) |
| At 1 April 2006 | 232 | 981 | 3,387 | 1,619 | 6,219 |
| Provided for the year | 261 | 299 | 248 | 695 | 1,503 |
| Disposals | – | – | – | (91) | (91) |
| At 31 March 2007 | 493 | 1,280 | 3,635 | 2,223 | 7,631 |
| Net book value | | | | | |
| At 31 March 2007 | 2,115 | 637 | 470 | 785 | 4,007 |
| At 31 March 2006 | 2,296 | 651 | 379 | 1,572 | 4,898 |

At 31 March 2007, the net book value of the Group's motor vehicles includes an amount of HK$785,000 (2006: HK$1,572,000) in respect of assets held under finance leases.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

15. OTHER INTANGIBLE ASSETS

The Group

| | Film rights
HK$'000 | Trademark
HK$'000 | Programme rights
HK$'000 | Intellectual property rights
HK$'000 | Total
HK$'000 |
| --- | --- | --- | --- | --- | --- |
| Cost | | | | | |
| At 1 April 2005 | 151,332 | 75 | - | - | 151,407 |
| Additions | 33,444 | - | - | - | 33,444 |
| At 31 March 2006 | 184,776 | 75 | - | - | 184,851 |
| Additions | 23,479 | - | 2,791 | 1,312 | 27,582 |
| At 31 March 2007 | 208,255 | 75 | 2,791 | 1,312 | 212,433 |
| Amortisation and impairment | | | | | |
| At 1 April 2005 | 85,183 | 45 | - | - | 85,228 |
| Provided for the year | 27,132 | 15 | - | - | 27,147 |
| At 31 March 2006 | 112,315 | 60 | - | - | 112,375 |
| Provided for the year | 36,811 | 15 | 140 | 164 | 37,130 |
| Impairment loss recognised | 45,810 | - | - | - | 45,810 |
| At 31 March 2007 | 194,936 | 75 | 140 | 164 | 195,315 |
| Net book value | | | | | |
| At 31 March 2007 | 13,319 | - | 2,651 | 1,148 | 17,118 |
| At 31 March 2006 | 72,461 | 15 | - | - | 72,476 |

Other intangible assets are amortised on a straight-line basis over the respective periods ranging from 2 to 5 years.

The Directors reassessed the recoverable amount of the film rights as at 31 March 2007 by adopting the income approach. The income approach is the conversion of expected periodic benefits of ownership into an indication of value. The valuation was based on the present value of the expected future revenue arising from the distribution and sub-licensing of each film right and its residue value, which was derived from discounting the projected cash flows by a discount rate of 14%.

Based on the future sales plans, the Directors consider there is an impairment loss on the film rights for the year. As a result, the carrying amount of the film rights has been reduced to its recoverable amount. The impairment loss of HK$45,810,000 was recognised in the consolidated income statement during the year.

153

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

16. GOODWILL

Goodwill recognised in the consolidated balance sheet, arising from the acquisition of Datewell Limited and its subsidiaries is as follows:

| | The Group
HK$'000 |
| --- | --- |
| Cost | |
| At 1 April 2006 | - |
| Arising on acquisition of subsidiaries (Note 30) | 4,259 |
| At 31 March 2007 | 4,259 |
| Impairment | |
| At 1 April 2006 | - |
| Impairment loss recognised for the year | - |
| At 31 March 2007 | - |
| Carrying value | |
| At 31 March 2007 | 4,259 |
| At 31 March 2006 | - |

Particulars regarding impairment testing on goodwill arising from acquisition of subsidiaries are disclosed as follows:

The Directors are of the view that there was no evidence of impairment of goodwill as at 31 March 2007 by reference to the valuation of the goodwill as at 31 March 2007 performed by BMI Appraisals Limited (the "Valuer"), an independent firm of professional valuers.

The Valuer has adopted the income approach for the valuation methodology. The income approach use cash flow projections based in financial budgets approved by management covering a 10 year period. Future cash flows are discounted at the rate of 14% and growth rate of 6%. Since the recoverable amount of the cash generating unit is higher than its carrying amount as at 31 March 2007, therefore, the Directors consider that the carrying value of goodwill at the balance sheet date is not significantly impaired.

17. INVESTMENTS IN SUBSIDIARIES

	The Company
	2007	2006
	HK$'000	HK$'000
Unlisted shares, at cost	31,072	25,572
Amounts due from a subsidiary	15,904	16,867
Amounts to a subsidiary	(1,821)	-
	45,155	42,439
Provision on impairment loss	(41,476)	-
	3,679	42,439

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The amount due from/(to) a subsidiary is unsecured, interest-free and have no fixed terms of repayment. In the opinion of the directors, the amounts will not be repayable within twelve months from the balance sheet date and are shown as non-current.

Details of the Company’s subsidiaries as at 31 March 2007 are set out in note 39.

18. INVENTORIES

| | 2007
HK$’000 | 2006
HK$’000 |
| --- | --- | --- |
| Work in progress | 3,760 | 2,066 |
| Finished goods | 13,881 | 20,311 |
| | 17,641 | 22,377 |

At 31 March 2007, including in the inventories, finished goods of HK$13,881,000 (2006: HK$ Nil) was carried at net realizable value.

19. TRADE AND OTHER RECEIVABLES

The Group generally allows an average credit period of 30 to 90 days to its trade customers. The aged analysis of trade receivables at the balance sheet date is as follows:

| | 2007
HK$’000 | 2006
HK$’000 |
| --- | --- | --- |
| 0 – 30 days | 3,966 | 5,640 |
| 31 to 60 days | 3,267 | 2,885 |
| 61 to 90 days | 2,228 | 2,852 |
| 91 to 180 days | 2,498 | 6,369 |
| Over 180 days | 10,258 | 5,337 |
| | 22,217 | 23,083 |
| Other receivables | 11,367 | 3,770 |
| | 33,584 | 26,853 |

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

20. AMOUNTS DUE FROM/TO RELATED COMPANIES

During the year, the Group had the following balances with related companies:

| | Balance at 31.3.2007
HK$’000 | Balance at 31.3.2006
HK$’000 | Maximum amount outstanding during the year
HK$’000 |
| --- | --- | --- | --- |
| Amounts due from related companies: | | | |
| Golden Scene Company Limited (Note a) | 2,104 | 6,537 | 6,537 |
| Panorama Entertainment Holdings Limited (Note b) | 2 | – | 2 |
| | 2,106 | 6,537 | 6,539 |
| Amount due to related company: | | | |
| Panorama Entertainment Holdings Limited (Note b) | – | 3 | |
| | – | 3 | |

Notes:

(a) One of directors of Golden Scene Company Limited is also a director of a subsidiary of the Company. The amount is unsecured, interest-free and repayable on demand.

(b) Panorama Entertainment Holdings Limited is a company in which Mr. Fung Yu Hing, Allan, Ms. Leung Siu Kuen, Janet and Ms. Fung Suen Lai, Jacqueline have beneficial interests. The amount is unsecured, interest-free and repayable on demand.

21. PLEDGED BANK DEPOSITS

Included in pledged bank deposits in the balance sheet are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:

	The Group		The Company
	2007	2006	2007	2006
	HK$’000	HK$’000	HK$’000	HK$’000
Hong Kong Dollars	3,132	8,218	–	–
United States Dollars	257	–	–	–

22. BANK BALANCES AND CASH

Included in bank balances and cash in the balance sheet are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:

	The Group		The Company
	2007	2006	2007	2006
	HK$’000	HK$’000	HK$’000	HK$’000
Hong Kong Dollars	1,964	6,185	4	1
United States Dollars	1	1	–	–
Taiwan Dollars	33	518	–	–
China Yuan Renminbi	281	–	–	–
Singapore Dollars	23	86	–	–

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

23. TRADE AND OTHER PAYABLES

The aged analysis of trade payables at the balance sheet date is as follows:

	The Group
	2007	2006
	HK$'000	HK$'000
Trade payables:
0-30 days	1,429	5,732
31-60 days	627	3,285
61-180 days	5,267	8,531
Over 180 days	11,283	9,504
	18,606	27,052
Other payables	20,379	10,664
	38,985	37,716

24. AMOUNT DUE TO A DIRECTOR

The amount due is unsecured, interest-free and repayable on demand.

25. OBLIGATIONS UNDER FINANCE LEASES

Amounts payable under finance leases are as follows:

	The Group
	Present value of minimum lease payments		Minimum lease payments
	2007	2006	2007	2006
	HK$'000	HK$'000	HK$'000	HK$'000
Within one year	380	430	429	493
In the second to fifth years inclusive	679	1,099	751	1,230
	1,059	1,529	1,180	1,723
Less: Future finance charges	-	-	(121)	(194)
Present value of lease obligations	1,059	1,529	1,059	1,529
Less: Amount due within one year shown under current liabilities	(380)	(430)
Amount due after one year	679	1,099

The average lease term was 5 years (2006: 5 years). For the year ended 31 March 2007, the average effective annual interest rates is 3.0% (2006: 3.0%). Interest rates are fixed at the contract date. All leases were on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.

The Group's obligations under finance leases were secured by the lessor's charge over the leased assets.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The fair value of the Group's obligations under finance leases, determined based on the present value of the estimated future cash flows discounted using the prevailing market rate at the balance sheet date approximate to their carrying amounts.

26. BANK AND OTHER BORROWINGS

	The Group
	2007	2006
	HK$'000	HK$'000
Bank overdrafts	11,138	17,868
Bank borrowings	19,572	14,867
Other borrowings	320	1,212
	31,030	33,947
Analysed as:
Secured	31,030	32,467
Unsecured	-	1,480
	31,030	33,947
The maturity profile of the above loans and overdrafts is as follows:
On demand or within one year	24,969	27,187
More than one year, but not exceeding two years	6,061	6,760
	31,030	33,947
Less: Amounts due within one year shown under current liabilities	(24,969)	(27,187)
Amounts due after one year	6,061	6,760

The average effective annual interest rate during the year for bank overdrafts and bank borrowings are 7.50% and 7.87% respectively (2006: 8.44% and 7.09% respectively).

The other borrowing represented a loan granted by a financial institution bears interest at 5% per annum.

The carrying amounts of both current and non-current borrowings approximate to their fair values.

158

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

27. DEFERRED TAXATION

The following are the major deferred tax liability (asset) recognised by the Group and movements thereon for the year:

| | Accelerated tax depreciation
HK$’000 | The Group | |
| --- | --- | --- | --- |
| | | Tax losses
HK$’000 | Total
HK$’000 |
| At 1 April 2005 | 11,346 | (8,062) | 3,284 |
| Charge/(credit)to income statement for the year | 1,306 | (413) | 893 |
| At 31 March 2006, 1 April 2006 and 31 March 2007 | 12,652 | (8,475) | 4,177 |

The following is the analysis of the deferred tax balances for financial reporting purposes:

	The Group
	2007
HK$’000	2006
HK$’000
Deferred taxation liability	12,652	12,652
Deferred taxation asset	(8,475)	(8,475)
	4,177	4,177

The Company has no significant unrecognised deferred taxation for the year or at the balance sheet date.

28. SHARE CAPITAL

| | No. of shares | Amount
HK$’000 |
| --- | --- | --- |
| Authorised: | | |
| Ordinary shares of HK$0.01 each | 1,500,000,000 | 15,000 |
| Issued and fully paid: | | |
| At 1 April 2005, | | |
| 31 March 2006 and | | |
| 1 April 2006 | 402,300,000 | 4,023 |
| Exercise of share options (Note a) | 2,100,000 | 21 |
| Issue on acquisition of subsidiaries (Note b) | 80,460,000 | 805 |
| At 31 March 2007 | 484,860,000 | 4,849 |

Notes:
(a) During the year ended 31 March 2007, 2,100,000 shares of HK$0.01 each were issued and allotted at HK$0.033 per share as a result of the exercise of share options by the employees of the company.
(b) As detailed in the Company's circular dated 19 December 2006, the Company issued 80,460,000 new ordinary shares of HK$0.01 at HK$0.0684 each of the Company as consideration for the acquisition of the Datewell Group. Please also refer to note 16 and note 30 for further disclosure of the acquisition.

All the shares issued during the year ranked pari passu with the then existing shares in all respects.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

RESERVES

	The Company
	Share premium HK$’000	Share option reserve HK$’000	Contributed surplus HK$’000	Accumulated losses HK$’000	Total HK$’000
At 1 April 2005	12,953	–	25,571	(269)	38,255
Loss for the year	–	–	–	(25)	(25)
At 31 March 2006	12,953	–	25,571	(294)	38,230
Option granted	–	3,055	–	–	3,055
Issue of shares	4,744	–	–	–	4,744
Loss for the year	–	–	–	(47,542)	(47,542)
At 31 March 2007	17,697	3,055	25,571	(47,836)	(1,513)

The contributed surplus of the Company represents the excess of the net assets of the subsidiaries acquired pursuant to the Group Reorganisation, and the nominal value of the Company's shares issued in exchange.

The Company's reserves available for distribution represent the share premium, contributed surplus and accumulated losses. Under the Companies Law (Revised) Chapter 22 of the Cayman Islands, the share premium of the Company is available for paying distributions or dividends to shareholders subject to the provisions of its Memorandum or Articles of Association and provided that immediately following the distribution of dividend, the Company is able to pay its debts as they fall due in the ordinary course of business. At 31 March 2007, there is no reserve available for distribution to shareholders. At 31 March 2006, the reserve available for distribution to shareholders is HK$38,230,000 which represents the aggregate of share premium and contributed surplus of HK$38,524,000 net of accumulated losses HK$294,000.

ACQUISITION OF SUBSIDIARIES

On 29 December 2006, the Group acquired 100% of the issued share capital of Datewell Limited and its subsidiaries for a consideration of approximately HK$4,259,000. This transaction has been accounted for by the purchase method of accounting.

The directors are the opinion that the carrying amounts of the net assets acquired are approximately equal to their fair value.

The fair value of the net assets acquired in the transaction are as follows:

	Acquiree’s fair value before combination HK$’000
Property, plant and equipment	21
Intellectual property rights	2,815
Programme rights	1,288
Trade and other receivables	1,991
Bank balances and cash	258
Trade and other payables	(3,009)
Amount due to a director	(3,419)
Net liabilities acquired	(55)
Consideration (Note a)	(4,204)
Goodwill (Note b)	(4,259)
Net cash inflow arising on acquisition:
Cash and cash equivalents acquired	258

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(b) If the acquisition had been completed on 1 April 2006, the Group’s revenue for the year would have been HK$62,298,000 and its loss for the year would have been HK$70,289,000.

The goodwill arising from the acquisition of subsidiaries is attributable to the anticipated feature cash flows from the intellectual property rights and programme rights.

31. NON-CASH TRANSACTION

Consideration of HK$5,500,000 in respect of the acquisition of Datewell Limited and its subsidiaries was settled by the issuance of 80,460,000 new ordinary shares of HK$0.01 at HK$0.0684 each (see note 28).

32. SHARE OPTION SCHEMES

The Company has two share options schemes, including the Share Option Scheme and Pre-IPO Share Option Scheme. Details of the two share option schemes are as follows:

(a) Share Option Scheme

Options granted must be taken up within three days of the date of grant, upon payment of HK$1 per grant.

161

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

The following table discloses the details of the Company's are options held by employees and consultants and movements in such holding during the year ended 31 March 2007:

Category	Outstanding at 1.4.2006	Granted during the year	Exercised during the year	Lapsed during the year	Outstanding at 31.3.2007
Senior management	–	4,800,000	–	–	4,800,000
Other employees	–	4,800,000	–	–	4,800,000
Consultants	–	38,400,000	–	–	38,400,000
	–	48,000,000	–	–	48,000,000

Details of specific categories of options are as follows:

Date of grant	Vesting period	Exercisable period	Exercise price HK$
28/2/2007	–	28/2/2007–08/5/2012	0.092
6/3/2007	–	6/3/2007–08/5/2012	0.235

Note: The closing price of the Company's share immediately before the dates on which share options were exercised was HK$0.090 and HK$0.200 per share.

No option was exercised, cancelled or lapsed during the year.

The estimated fair values of the options granted on 28 February 2007 and 6 March 2007 are HK$0.025 and HK$0.08 respectively.

The fair values were calculated using The Black-Scholes- Merton Option Pricing Model. The inputs into the model were as follows:

Grant date	28 February 2007	6 March 2007
Exercise price	HK$0.092	HK$0.235
Expected volatility	136.67%	170.23%
Expected life	4 months	4 months
Risk-free rate	3.842%	3.741%
Expected dividend yield	–	–

Expected volatilities were based on the historical volatility of the share prices of the Company over the period that is equal to the expected life before the grant date.

The Group recognised the total expenses of HK$3,055,000 for the year ended 31 March 2007 in relation to share options granted by the Company.

(b) Pre-IPO Share Option Scheme

As at 31 March 2007, the number of shares in respect of which options had been granted and remained outstanding under the Pre-IPO Share Option Scheme was 48,000,000 (2006: 30,000,000), representing 9.9% (2006: 7.5%) of the shares of the Company in issue at balance sheet date.

162

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Options granted must be taken up by the end of the next business day following the date of grant, upon payment of HK$1 per grant. Options may be exercised at any time from the expiry of twelve months from and including the date when dealings in the shares first commenced on GEM to the 10th anniversary of the date on which dealings in the shares first commenced on GEM. The exercise price, which is determined by the Board is either 10% of the placing price (options granted at this price being referred to below as “Pool A Options”) or 70% of the placing price (options granted at this price being referred to below as “Pool B Options”).

The following table discloses the details of the Company's share options held by employees and movements in such holdings during the year ended 31 March 2007:

Category of participants	Option Type	Outstanding at 1.4.2006	Granted during the year	Exercised during the year (Note)	Lapsed during the year	Outstanding at 31.3.2007
Directors of the Company	Pool A Options	14,800,000	-	(2,100,000)	(12,700,000)	-
	Pool B Options	10,000,000	-	-	(10,000,000)	-
		24,800,000	-	(2,100,000)	(22,700,000)	-
Other employees	Pool A Options	1,400,000	-	-	(1,400,000)	-
	Pool B Options	3,800,000	-	-	(3,800,000)	-
		5,200,000	-	-	(5,200,000)	-
		30,000,000	-	(2,100,000)	(27,900,000)	-

The following table discloses the details of the Company's share options held by employees and movements in such holdings during the year ended 31 March 2006:

Category of participants	Option Type	Outstanding At 1.4.2005	Exercised during the year (Note)	Lapsed during the year	Outstanding At 31.3.2006
Directors of the Company	Pool A Options	14,800,000	-	-	14,800,000
	Pool B Options	10,000,000	-	-	10,000,000
		24,800,000	-	-	24,800,000
Senior Management	Pool A Options	-	-	-	-
	Pool B Options	500,000	-	(500,000)	-
		500,000	-	(500,000)	-
Other employees	Pool A Options	1,400,000	-	-	1,400,000
	Pool B Options	4,250,000	-	(450,000)	3,800,000
		5,650,000	-	(450,000)	5,200,000
		30,950,000	-	(950,000)	30,000,000

Details of specific categories of options are as follows:

Option type	Date of grant	Vesting period	Exercisable period	Exercise price HK$
Pool A Options	25/4/2002	26/4/2002-08/5/2003	09/5/2003-08/5/2012	0.033
Pool B Options	25/4/2002	26/4/2002-08/5/2003	09/5/2003-08/5/2012	0.231

Note: The closing price of the Company's share immediately before the dates on which the share options were exercised were HK$0.094 and HK$0.098 per share.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

33. OPERATING LEASE ARRANGEMENTS

	The Group
	2007	2006
	HK$'000	HK$'000
Minimum lease payments under operating leases during the year:
Premises	2,195	2,932
Office equipment	164	232
	2,359	3,164

At the balance sheet date, the Group had commitments for future minimum lease payments under non-cancellable operating leases in respect of premises and office equipment which fall due as follows:

	The Group
	2007	2006
	HK$'000	HK$'000
Premises
Within one year	470	433
in the second to fifth years inclusive	460	161
	930	594
Office equipment
Within one year	164	164
In the second to fifth years inclusive	395	559
	559	723
	1,489	1,317

Leases are negotiated for an average term of one to two years with fixed rentals.

34. OTHER COMMITMENTS

	The Group
	2007	2006
	HK$'000	HK$'000
Contracted for but not provided for in the financial statements	8,412	15,069

Other commitments represent license fees commitment to licensors for which film master materials have not been delivered to the Group.

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

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

PLEDGE OF ASSETS

At 31 March 2007, the Group pledged time deposits of approximately HK$5,136,000 (2006: HK$8,218,000) and a film right with a carrying value of HK$2,219,000 (2006: HK$ Nil) to banks to secure bank facilities granted to the Group.

CONTINGENT LIABILITIES

At 31 March 2007, the Company has given corporation guarantees with the amount of HK$320,000 (2006: HK$40,700,000) to a banks for banking facilities granted to the Group.

RELATED PARTY TRANSACTIONS

During the year, the Group had the following transactions with related parties:

Name of related party	Nature of transactions	The Group
		2007
HK$'000	2006
HK$'000
Golden Science Company Limited
(Note a)	Acquisitions of film right (Note e)	3,488	7,175
	Film exhibition expenses (Note e)	252	1,186
	Management fee (Note e)	1,000	1,000
Players Picture Company Limited
("PPCL") (Note b)	Office rental (Note e)	327	327
Metroplois Communications
Limited ("MCL") (Note c)	Office rental (Note e)	327	327
Brilliant Business Limited
("BBL") (Note d)	Office rental (Note e)	217	217
Sunny Fancy Limited ("SFL")
(Note d)	Office rental (Note e)	305	305

Notes:

(a) One of Directors of Golden Scene Company Limited is also a director of a subsidiary of the Company.

(b) PPCL is a company beneficially owned equally by Mr. Fung Yu Hing, Allan and Ms. Leung Siu Kuen, Janet.

(d) BBL and SFL are the companies wholly owned by Mr. Fung Yee Sang.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(e) These transactions were entered in accordance with the terms of the relevant agreements.

During the year, certain Directors provided personal guarantees and security to banks and financial institution to the extent of HK$31,800,000 (2006: HK$23,200,000) to secure credit facilities granted to the subsidiaries of the Company as follows:

(i) Properties owned by Ms. Leung Siu Kuen, Janet, an executive Director of the Company.

(ii) Properties owned by PPCL, MCL, BBL and SFL in which Mr. Fung Yu Hing, Allan, Ms. Leung Siu Kuen, Janet and Mr. Fung Yee Sang have interest.

(iii) Corporate guarantee from Patora Optical Industrial Limited in which the wife of Mr. Fung Yee Sang has interest

In addition, the Group had certain balances with related companies, details of which are set out in note 20.

38. POST BALANCE SHEET EVENTS

(a) On 16 April 2007, CPE Program Distribution Limited, a wholly-owned subsidiary of the Company, entered into an acquisition of copyright of agreement with an independent third party, 廣東原創文化傳播有限公司, for the acquisition and assignment of copyright of 150 episodes of a television cartoon series created by 廣東原創文化傳播有限公司 at a consideration of HK$15,000,000. The consideration was satisfied by cash of HK$9,000,000 and the balance was settled by the issue of convertible bonds in the aggregate amount of HK$6,000,000, details of which are set out in note (c) below.

(b) Pursuant to the Placing and Subscription Agreements entered into between Nice Hill Investments Limited ("Nice Hill") on 18 April 2007 and 15 May 2007, Nice Hill subscribed 37,310,000 and 41,360,000 place shares at a price of HK$0.268 and HK$0.299, respectively. Out of the net proceeds raised of approximately HK$20,000,000, HK$9,000,000 was used to finance partially for the acquisition of copyright as referred to note (a) above, the remaining balance of approximately HK$11,000,000 will be used for the expansion of animated business and working capital of the Group.

(c) On 18 May 2007, CPE Program Distribution Limited, a wholly-owned subsidiary of the Company, issued convertible bonds in the aggregate amount of HK$6,000,000 to 廣東原創文化傳播有限公司 as partial settlement for the acquisition of the copyright. These convertible bonds are non-interest bearing, have a maturity term of 2 years until 18 May 2009 and are convertible into the Company's ordinary shares at a conversion price of HK$0.328 per share (subject to adjustments).

166

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

39. PARTICULARS OF SUBSIDIARIES

Details of the Company’s subsidiaries at 31 March 2007 are as follows:

Name of subsidiaries	Place of incorporation/establishment and operations (Note)	Nominal value of issued ordinary share/registered capital	Percentage of equity interest attributable to the Company Held by the Company and its subsidiaries	Attributable to the Group	Principal activities
Panorama Entertainment Group Limited	British Virgin Islands/Hong Kong, limited liabilities company	US$200	100%	100%	Investment holding
Panorama Distributions Company Limited	Hong Kong, limited liabilities company	HK$10,000,002	100%	100%	Distribution of video products
Panorama Entertainment Company Limited	Hong Kong, limited liabilities company	HK$10,000	100%	100%	Holding of film rights
Panorama Entertainment (Singapore) Pte Ltd.	Singapore, Pte	S$100,000	100%	100%	Distribution of video products
Punch Pictures Company Limited	Hong Kong, limited liabilities company	HK$100	100%	100%	Production of film
Panorama Film Company Limited	British Virgin Islands/Hong Kong, limited liabilities company	US$1	100%	100%	Inactive
Panorama Theatrical Distributions Company Limited	British Virgin Islands/Hong Kong, limited liabilities company	US$100	100%	100%	Investment holding
Scenerama Holdings Company Limited	British Virgin Islands/Hong Kong, limited liabilities company	US$100	58%	58%	Investment holding
Scenerama Company Limited	British Virgin Islands/Hong Kong, limited liabilities company	US$1,000	57.50%	33.40%	Investment holding
Go Film Distribution Limited	Hong Kong, limited liabilities company	HK$10,000	60%	20%	Distribution of films

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Name of subsidiaries	Place of incorporation/establishment and operations (Note)	Nominal value of issued ordinary share/registered capital	Percentage of equity interest attributable to the Company Held by the Company and its subsidiaries	Attributable to the Group	Principal activities
Datewell Limited	British Virgin Islands/Hong Kong, limited liabilities company	US$100	100%	100%	Investment holding
Intelli-Media (HK) Limited (formerly known as Creative Power Entertaining Company Limited)	Hong Kong, limited liabilities company	HK$100	100%	100%	Marketing and sub-licensing services
Slightly off Beat Animation Entertaining Limited	Hong Kong, limited liabilities company	HK$100	51%	51%	Dormant
Creative Power Entertaining Company Limited	People's Republic of China, wholly foreign owned enterprise	HK$500,000	100%	100%	Marketing and sub-licensing services
CPE Program Distribution Limited	British Virgin Islands/Hong Kong, limited liabilities company	US$1	100%	100%	Dormant

Note:
They are limited companies incorporated in the respective jurisdictions.

With the exception of Panorama Entertainment Group Limited and Datewell Limited, all the subsidiaries are indirectly held.

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

168

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 MARCH 2008

TURNOVER AND NET LOSS

For the year ended 31 March 2008, turnover was approximately HK$33,157,000 (2007: HK$59,671,000), down by 44.4% as compared to the same period in 2007. Sales of goods for the year ended 2008 was approximately HK$27,446,000 (2007: HK$43,167,000), representing a decrease of approximately 36.4% over the corresponding period of last year due to drop of unit price and volume. Sales of goods accounts for 82.8% of the turnover of the Group. Sublicensing income for the year ended was approximately HK$2,141,000 (2007: HK$10,699,000), representing an approximate 80.0% decrease when compared to that of the same period in 2007. Film exhibition and distribution income for the year ended was HK$3,570,000 (2007: HK$5,805,000), representing a decrease of 38.5% over the corresponding period of last year due to change of consumer's tastes. Gross margin ratio was improved due to the change of sales mix of video from locally produced film to overseas blockbuster produced film. Loss for the year amounted to approximately HK$48,642,000 (2007: Loss HK$70,233,000), representing a decrease compared with that of last year mainly due to a reduction of impairment loss on assets.

LIQUIDITY AND FINANCIAL RESOURCES

As at 31 March 2008, the Group's current ratio was approximately 1.68, representing an increase of approximately 99% when compared to that of the previous financial year. Gearing ratio calculated based on non-current liabilities of approximately HK$6,898,000 (2007: HK$10,917,000) and total equity of approximately HK$55,924,000 (2007: HK$5,334,000) was 0.12 (2007: 2.05). The increase in current ratio was largely due to a balance of bank and cash of HK$51,746,000 as at 31 March 2008 as compared to the same year in 2007 was HK$2,340,000. The significant reduction of gearing ratio was the result of increase in total equity after several share issuances during the year.

EMPLOYEES AND REMUNERATION POLICIES

As at 31 March 2008, the Group employed 25 staff in total (2007: 63). The Directors believe that the professionalism, experience and quality of staff bring initiative and sustainability to the Group. The remuneration of the staff are based on experience and work performance. Staff is rewarded with bonus, medical benefits and share options to certain staff according to performance.

The Company's policy concerning remuneration of the executive Directors is as follows:

(i) the executive Directors' remuneration is determined on the basis of his or her experience, responsibility, workload and the time devoted to the Group; and

(ii) at the discretion of the Board or a committee thereof, the executive Directors may be granted options pursuant to the Share Option Scheme as defined in note 31 to the financial statements and/or any other such schemes of the Company as part of their remuneration package.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

SIGNIFICANT INVESTMENTS AND ACQUISITIONS

During the year under review, the Group acquired the copyrights of 150 episodes of Pleasant Goat and Big Big Wolf at a consideration of approximately HK$15,000,000. There were no material acquisitions and disposals of subsidiaries and affiliated companies during the year in review.

FUTURE PLANS FOR MATERIAL INVESTMENTS OR CAPITAL ASSETS IN THE COMING YEAR

Save for the Acquisition as disclosed in the "Letter from the Board" in this circular, the Group does not have any concrete plan for any particular material investments or capital assets for the year under review.

BORROWING FACILITIES

As at 31 March 2008, the Group had outstanding borrowings of approximately HK$10,765,000, comprising bank and other borrowings of approximately HK$8,182,000, bank overdrafts of approximately HK$1,904,000 and obligations under finance leases of approximately HK$679,000.

As at 31 March 2008, the Group had borrowings and banking facilities to the extent of approximately HK$27,982,000 for which the following collateral and security are provided by related parties:

a. Properties owned by a subsidiary's director;

b. Properties owned by Players Pictures Company Limited, Metropolis Communications Limited, Brilliant Business Limited and Sunny Fancy Limited in which the subsidiary's directors have beneficial interest; and

c. Personal guarantee by a subsidiary's directors.

In addition to the above, there were other assets which had been pledged, details of which are set out in the next paragraph headed "Pledge of Assets".

The Group generally finances its operation with internally generated resources and banking facilities provided by its bankers in Hong Kong.

As at 31 March 2008, the Group had aggregated composite banking facilities of approximately HK$27,982,000, of which HK$10,086,000 had been utilized.

As at 31 March 2008, the Group's bank borrowings of approximately HK$7,698,000 are repayable on demand or within one year.

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FINANCIAL INFORMATION ON THE GROUP

PLEDGE OF ASSETS

At 31 March 2008, the Group pledged time deposits of approximately HK$2,155,000 (2007: HK$5,136,000) and a film right with a carrying value of HK$769,000 (2007: HK$2,219,000) to banks to secure bank facilities granted to the Group.

FOREIGN CURRENCIES

The Group conducts its business mainly in the denomination of Hong Kong dollars. For transactions in other foreign currencies, the Group has not made any arrangement to hedge the Group's exchange rate risks. In addition, as the majority of the Group's assets are situated in Hong Kong, our exposure to exchange rate fluctuations, thus, is minimal.

CONTINGENT LIABILITIES

As at 31 March 2008, there was no contingent liability of the Company.

INDUSTRY REVIEW

The downward trend in the film industry in Hong Kong has caused serious attention to industry practitioners and governments to curb the problem of the theft of intellectual property. Despite numerous efforts were made, the preference to cheaper products catalyst the shrink of the DVD distribution market. The preference towards big-budget blockbusters seize the opportunities of small local film producer, which drives the Company to diversify of business strategies.

OPERATIONAL REVIEW

Intelli-Media mainly engages in the distribution of video entertainment to various countries and provides license entertainment programs to TV platforms. The Group also earns license income for its well known animated characters such as the Pleasant Goat and Big Big Wolf which was broadcasted in over twenty provinces in China. During the year, the Group acquired the copyrights of 150 episodes of the Pleasant Goat and Big Big Wolf film library.

In view of the poor sentiment of the locally produced film and ongoing unresolved piracy problem in the Asia region, the Group started to develop animation business in the last financial year which targeted the kids and consumer markets in China. With a selection of premium animated characters marketed in the region, the Group's net loss was improved to approximately HK$48.6 million for the year ended 31 March 2008 as compared to a net loss of approximately HK$70.2 million for same period in 2007. Loss per share was HK$6.91 cents for the year ended 31 March 2008 as compared to loss per share of HK$16.62 cents for same period in 2007.

The change of consumer taste to overseas blockbusters production and piracy issue in the region has led to shrink of the industry. Revenue contributed by the animated business was only started to emerge and to grow from last year at a low base and to accelerate in the future. Turnover of the Group was down by 44.4% which mainly attributes to the diminishing DVD distribution business for locally produced film. Gross profits margin ratio of the Group increased mainly due to the change of sales mix of video from

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FINANCIAL INFORMATION ON THE GROUP

locally produced film to overseas blockbuster produced film. Thanks for the support of a number of fundraising activities during the year, the Group is able to further explore and expand our animated business, to source premium animated characters, to build our brand and explore other new business initiatives such as mining business.

MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 MARCH 2007

TURNOVER AND NET PROFIT

Turnover of the Group for the year ended 31 March 2007 amounted to approximately HK$59,671,000 (2006: HK$83,901,000), representing approximately a 28.9% decrease as compared to that of the same period in 2006. Sales of goods for the year ended amounted to approximately HK$43,176,000 (2006: HK$61,730,000), representing a drop of approximately 30.1% over the corresponding period of last year due to decline of unit price and volume. Sub-licensing income for the year ended was approximately HK$10,690,000 (2006: HK$10,389,000), representing an approximate 2.9% increase when compared to that of the same period in 2006 due to licensing of animation characters from the newly acquired animation businesses. Film exhibition and distribution income for the year ended was HK$5,805,000 (2006: HK$11,782,000), representing a decrease of 50.7% over the corresponding period of last year due to change of consumer's tastes. Loss for the year amounted to approximately HK$70,233,000 (2006: Profit HK$2,450,000), representing a decrease compared with that of last year mainly due to impairment loss of film rights of approximately HK$45,810,000. Loss per share was 16.62 cent representing a decrease over that of the previous financial year.

LIQUIDITY AND FINANCIAL RESOURCES

In respect of the Group's liquidity position, its current ratio as at 31 March 2007 was approximately 0.84, representing a decrease of approximately 21.8% when compared to that of the previous financial year. Gearing ratio, calculated based on non-current liabilities of approximately HK$10,917,000 (2006: HK$18,632,000) and total equity of approximately HK$5,334,000 (2006: total equity HK$66,941,000) stood at 2.05 (2006: 0.28). The decrease in current ratio was largely due to a balance of trade and other receivable. The increase in gearing ratio was largely due to reduction of total equity after charging impairment loss on film rights during the year.

EMPLOYEES AND REMUNERATION POLICIES

As at 31 March 2007, the Group employed a staff of 63 in total (2006: a staff of 60). The Directors believe that the quality of its employees is the most important factor in sustaining the Group's reputation and improving its profitability. Staff is remunerated based on their work performance and experience. Apart from basic salaries, pension fund and medical schemes, discretionary bonuses and share options are awarded to certain staff according to the assessment of individual performance.

The Company's policy concerning remuneration of the executive Directors is as follows:

(i) the executive Directors' remuneration is determined on the basis of his or her experience, responsibility, workload and the time devoted to the Group; and

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

SIGNIFICANT INVESTMENTS AND ACQUISITIONS

During the year under review, on 29 December 2006 the Group acquired 100% of the issued share capital of Datewell Group for a consideration of approximately HK$5,500,000 in which the Group principally engaged on licensing of animation characters, design, co-production and distribution of animation characters.

The Group did not have any concrete plan for any material investment or capital asset for the year ended 31 March 2008.

BORROWING FACILITIES

As at 31 March 2007, the Group had outstanding borrowings of approximately HK$39,682,000, comprising bank and other borrowings of approximately HK$19,892,000, bank overdrafts of approximately HK$11,138,000, obligations under finance leases of approximately HK$1,059,000 and amount due to a director of approximately HK$7,593,000.

As at 31 March 2007, the Group had borrowings and banking facilities to the extent of approximately HK$38,187,000 for which the following collateral and security are provided by related parties:

a. Properties owned by a Director; and
b. Properties owned by Players Pictures Company Limited, Metropolis Communications Limited, Brilliant Business Limited and Sunny Fancy Limited in which the Directors has beneficial interest.

In addition to the above, there were other assets which had been pledged, details of which are set out in the next paragraph headed "Pledge of Assets".

The Group generally finances its operation with internally generated resources and banking facilities provided by its bankers in Hong Kong.

As at 31 March 2007, the Group had aggregated composite banking facilities of approximately HK$38,187,000, of which HK$31,030,000 had been utilized.

As at 31 March 2007, the Group's bank borrowings of approximately HK$24,969,000 are repayable on demand or within one year.

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FINANCIAL INFORMATION ON THE GROUP

PLEDGE OF ASSETS

FOREIGN CURRENCIES

CONTINGENT LIABILITIES

At 31 March 2007, the Company has given corporation guarantees with the amount of HK$320,000 (2006: HK$40,700,000) to a banks for banking facilities granted to the Group.

INDUSTRY REVIEW

The wider film industry in Hong Kong has battled two strong downward trends through most of the past year: a market that is shrinking and the theft of intellectual property.

Audiences have shown a preference for the king of big-budget blockbusters that domestic film makers cannot possibly re-create. They lack the significant channels to many blockbusters are closed off to smaller payers, forcing either a rationalisation of companies or providing the impetus to diversity.

The problem of piracy continues despite a Hong Kong SAR government-led crack down on the manufacturers of pirate feature films and increasing pressure from major trading partners such as the United States. The effect on any film distributor's bottom line is marked and, in part, has resulted in Intelli-Media's re-orientation from feature film distribution.

OPERATIONAL REVIEW

For the financial year ended 31 March 2007 the group recorded a turnover of HK$59,671,000, a decrease of 28.9 per cent over the previous year. A net loss of HK$70,233,000 was recorded due in large part to the one-time impairment loss of film rights at a cost of approximately HK$45,810,000. From last year's results, there was a clear increase in revenues from licensing.

During the year, the Board was acutely aware of the deterioration of the Company's performance and has taken active steps to improve it. After purchasing Datewell Limited in December, the board's determination to follow a strategy that capitalises on Hong Kong's creativity and management experience was partially realised.

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APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 MARCH 2006

TURNOVER AND NET PROFIT

Turnover of the Group for the year ended 31 March, 2006 amounted to approximately HK$83,901,000 (2005: HK$79,986,000), representing approximately a 4.9% increase as compared to that of the same period in 2005. Sales of good for the year ended amounted to approximately HK$61,730,000 (2005: HK$65,608,000), representing a drop of approximately 5.9% over the corresponding period of last year. Sub-licensing income for the year ended was approximately HK$10,389,000 (2005: HK$9,896,000), representing an approximate 5.0% increase when compared to that of the same period in 2005. Film exhibition and distribution income for the year ended was HK$11,782,000 (2005: HK$4,482,000), representing a remarkable increase over the corresponding period of last year. Profit for the year amount to approximately HK$2,450,000 (2005: HK$5,143,000), representing a decrease compared with that of last year. Earning per share was HK$0.57 cent representing a decrease over that of the previous financial year.

Sales of goods are the core business of the Group. Its overall business performance in the financial year 2005/06 remains stable as indicated by the sales of goods, which is approximately the same as that of last financial year.

LIQUIDITY AND FINANCIAL RESOURCES

In respect of the Group's liquidity position, its current ratio as at 31 March, 2006 was approximately 108%, representing a decrease of approximately 7% when compared to that of the previous financial year. Gearing ratio, calculated based on non-current liabilities of approximately HK$18,632,000 (2005: HK$15,882,000) and total equity of approximately HK$66,941,000 (2005: HK$62,971,000), was approximately 0.28 as at the balance sheet date. The decrease in current ratio was largely due to a balance of trade and other receivable. The increase in gearing ratio was largely due to increase in bank borrowings.

EMPLOYEES AND REMUNERATION POLICIES

As at 31 March, 2006, the Group employed a staff of 60 in total (2005: a staff of 65). The Directors believe that the quality of its employees is the most important factor in sustaining the Group's reputation and improving its profitability. Staff is remunerated based on their work performance and experience. Apart from basic salaries, pension fund and medical schemes, discretionary bonuses and share options are awarded to certain staff according to the assessment of individual performance.

The Company's policy concerning remuneration of the executive Directors is as follows:

(i) the executive Directors' remuneration is determined on the basis of his or her experience, responsibility, workload and the time devoted to the Group; and

(ii) at the discretion of the Board or a committee thereof, the executive Directors may be granted options pursuant to the Share Option Scheme as defined in note 27 to the financial statements and/or any other such schemes of the Company as part of their remuneration package.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

SIGNIFICANT INVESTMENTS AND ACQUISITIONS

During the year under review, the Group had no significant investments and had no material acquisitions or disposals of subsidiaries or associates. Besides, the Group had no concrete plan for any material investment or capital asset for the next year ended 31 March 2007.

BORROWING FACILITIES

As at 31 March, 2006, the Group has outstanding borrowings of approximately HK$35,479,000, comprising bank and other borrowings of approximately HK$16,079,000, bank overdrafts of approximately HK$17,868,000, obligations under finance leases of approximately HK$1,529,000 and amount due to a related company of approximately HK$3,000.

As at 31 March, 2006, the Group has borrowings and banking facilities to the extent to approximately HK$36,400,000 for which the following collateral and security are provided by related parties:

In addition to the above, there were other assets which had been pledged, details of which are set out in the next paragraph headed "Pledge of Assets".

The Group generally finances its operation with internally generated resources and banking facilities provided by its bankers in Hong Kong.

As at 31 March, 2006, the Group has aggregated composite banking facilities of approximately HK$ 36,400,000, of which HK$33,947,000 had been utilized.

As at 31 March, 2006, the Group's bank borrowings of approximately HK$27,187,000 are repayable on demand or within one year.

PLEDGE OF ASSETS

As at 31 March, 2006, the Group pledged time deposits of approximately HK$8,218,000.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

FOREIGN CURRENCIES

The Group conducts its business mainly in the denomination of Hong King dollars. For transactions in other foreign currencies, the Group has not made any arrangement to hedge the Group's exchange rate risks. In addition, as the majority of the Group's assets are situated in Hong Kong, our exposure to exchange rate fluctuations, thus, is minimal.

CONTINGENT LIABILITIES

As at 31 March, 2006, the Company's contingent liabilities were corporate guarantees given to banks in respect of approximately HK$40,700,000 for banking facilities granted to the Group.

LISTING

The Company obtained a listing on GEM on 9 May, 2002.

DIVIDENDS

No dividends have been paid or declared by the Company since its incorporation.

OPERATION REVIEW

It is believed that the financial year 2005/2006 was a year of revival in the local economy. Hong Kong has walked out of its gloomy economy and Panorama has witnessed the reviving consumer confidence and encouraging consumer sentiment in the film and video industry. The Group continued to enjoy a healthy business amidst the prosperous economic environment and this blossoming economy provides a golden opportunity for us to expand in overseas markets through enormous investment and participation in film productions. In the upcoming financial year, our Group will release major titles such as STORMBREAKER, AUGUST RUSH and THE NUMBER 23 and we are looking forward to a more lucrative and prosperous future.

Strategic Partnerships

The Group has continued to develop its relationships with strategic partnerships formed in the previous years. They help in solidifying the constant stream of high quality entertainment programmes for distribution for our Group, such as Shochiku Co. Ltd., The Cathay film library, New Line and Miramax, for exclusive home video rights in Hong Kong, Macau and the Mainland China.

Through regional partnerships, the Group is capable of extending its network beyond Asia and enhancing its film library by acquiring popular and art-house international titles influential film production companies.

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FINANCIAL INFORMATION ON THE GROUP

Title Acquisitions

It has always been a key strategy for our Group to acquire well-known film rights and quality film productions from around the globe. The Group is committed to strengthening its film library in terms of variety and quality to accommodate different tastes of its audiences. Key acquisitions of the financial year are listed below.

FILMS

The theatrical release of the Hollywood horror produced by Michael Bay, THE AMITYVILLE HORROR, has become a major commercial hit. The film is the second film version of the gruesome and terrifying haunted house story that actually happened in the United States. Directed by the master filmmaker Terry Gilliam, THE BROTHERS GRIMM enjoys both critical and commercial success. With its stunning visual imagery and special effects, the film finds itself selected in Competition at the Cannes Film Festival 2005, a strong contender for the most coveted Palme d'Or. It features strong performances from Hollywood stars such as Matt Damon, Heath Ledger, Monica Bellucci and Jonathan Pryce. Along with FINAL DESTINATION 3, the sequel to one of the most successful thriller franchises in the United States, THE BROTHERS GRIMM has become one of the highest grossing films that our Group has ever released.

From the best director of the Cannes Film Festival, Korean filmmaker Park Chan-wook has produced the most anticipated final episode of the Vengeance trilogy, SYMPATHY FOR LADY VENGEANCE, starring superstar of Korean TV series JEWEL IN THE PALACE, Lee Young-ae. The film has won numerous awards worldwide and enjoyed both critical and commercial success. It was nominated for the Best Asian Film at the prestigious Hong Kong Film Awards, and topped the Top Ten Foreign Films at the Hong Kong Bauhinia Film Awards. Other highly praised titles include THE HIDDEN BLADE, directed by master filmmaker Yamada Yoji of TWILIGHT SAMURAI, and starring popular Japanese idols Masatoshi Nagase and Takako Matsu; BLOOD AND BONES, starring Kitano Takeshi and directed by director of QUILL, Sai Yoichi; and SIN CITY, the film adaption of Frank Miller's comic classic that features Bruce Willis, Clive Owen and Jessica Alba, all of which have drawn large audiences and very good reviews.

Other notable acquisitions include THE NEW WORLD, a poetic epic directed by the legendary director, Terrence Malick, and starring Colin Farrell and Christian Bale; and WEDDING CRASHERS, a top box-office hit in the United States with Owen Wilson and Vince Vaughn as its stars; and MILLIONS, the delightful and heart-warming British comedy from the award-winning director of TRAINSPOTTING, Danny Boyle.

As for the video market, the Group has continued its strength in releasing popular titles that are appealing to both households and film lovers. During the financial year 2005/2006, Panorama has specially packaged, released and promoted three Hong Kong blockbusters with outstanding sales. They include box-office hit DRINK DRANK DRUNK, starring Miriam Yeung and Daniel Wu and directed by the Best Director of the Hong Kong Film Awards, Derek Yee, who also brought us another critical and commercial success, 2 YOUNG; Director Stanley Kwan's EVERLASTING REGRET, the official selection of the Venice Film Festival this year, which starred Sammi Cheng and Tong Leung Ka Fai, has been nominated for six awards at the Hong Kong Film Awards; and ELECTION 1 & 2, the pair of critically and commercially successful films that starred Tony Leung Ka Fai and Simon Yam, and directed by Johnnie

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FINANCIAL INFORMATION ON THE GROUP

To, one of the best directors working in Hong Kong today. ELECTION has been an overnight critical and box-office hit. It garnered the Best Film, Best Director and Best Actor Award at the Hong Kong Film Awards, proving the accurate judgement of our acquisition team.

The acquisition of the various World Cup and football documentaries, including DESTINATION GERMANY, FIFA WORLD CUP STORIES AND STEVEN GERRARD – MY STORY, have provided our consumers a good companion for enjoying the 2006 WORLD CUP. The video releases of Korean TV series such as LOVE STORY IN HARVARD and MY LOVELY SAM –SOON have also helped to strengthen our already tremendous film library and provide a variety of entertainment contents with a mass appeal for our customers.

To sustain the passion for film lovers, the Group has continued to release a number of important and contemporary classics. They include the catalogue of Ozu Yasujiro and the Tora-san series, directed by Yamada Yoji. The Korean drama MARATHON and Japanese teen love story NANA have also become box-office hits in Hong Kong and Asia.

ANIMATION

Our standing as market leaders in the distribution of animation has been established for many years. Following the immense success of GHOST IN THE SHELL – STAND ALONE COMPLEX, we have acquired the latest TV series GHOST IN THE SHELL – 2ND GIG, together with the Cannes Film Festival contender, GHOST IN THE SHELL 2: INNOCENCE by veteran animator Mamoru Oshii.

MUSIC PROGRAMMES

The Group has continued its endeavour to strengthen its music video catalogue, as our library contains one of the largest collections of pop, rock, soul, jazz and classical music titles in Southeast Asia.

During the financial year 2005/2006, the Group released ELVIS; THE GREAT PERFORMANCES, which contains legendary performances, intimate video clips and additional footage that spotlights the extraordinary career of the king of rock 'n' roll. The Group has also released the MONTREUX JAZZ FESTIVAL series, bringing formidable talents of musical superstars such as ERIC CLAPTON, SUZANNE VEGA, MARVIN GAYE, CHARLES MINGUS, and EARTHE WIDN & FIRE, just to name a few, to fans of high quality music in Southeast Asia. Other important releases include live concerts of BLONDIE LIVE, TUPAC SHAKUR, LEE RITENOUR, DUSTY SPRINGFIELD, SNOOP DOGG, NIRVANA and ELVIS COSTELLO.

Distribution Network and New Channels

Panorama has been making substantial progress in exploring new channels of content distribution and expanding the existing ones. Our corporate portal, www.panorama.com.hk, has become one of the most resourceful platforms for video users to browse the latest releases from Panorama and to anticipate upcoming titles from the Group. The Group aims to develop new distribution formats for our entertainment content like IPTV (Video On Demand), which allows our customers to purchase our products on the Internet in the near future.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Geographically, the Group has expanded its distribution network to the Mainland China and successfully released titles such as DANNY THE DOG, WEDDING CRASHERS, THE NEW WORLD and THE BORTHERS GRIMM. It proves that the presence of Panorama in the Mainland China and the Southeast Asia market has become stronger than ever.

Chinese Film Production and Theatrical Releases

After the critically acclaimed local production of the Group's first fully financed "A-1", we have been seeking suitable local projects for investment. As it has always been our passion to invest in local film productions, we have been developing our highly anticipated new local production, RUN PAPA RUN, which will be released in the upcoming year. The film features Ronald Cheng, the popular comedian of several successful local blockbusters in the past few years.

PRC Development

In view of the growth potential of the PRC market and the promising consumer base of its 1.3 billion populations, Panorama will continue to explore and expand the China market by developing various opportunities in China.

Regional Development

The Group continues to release its large catalogue of music titles regionally throughout Singapore, Taiwan, Malaysia, Thailand and the Philippines.

INDUSTRY REVIEW

During the financial year 2005/2007, Hong Kong has restored its vibrancy from its stagnant economy preceding that and the frequent influx of tourists from Mainland China has further created a favourable economic environment for all businesses. Panorama has been able to sustain its market standing as one of the leading entertainment content providers in Asia due to the reviving consumer confidence and encouraging consumer sentiment in the film industry. The resurgence of the video market allows the Group for more expansion and releasing quality films at a wider and more lucrative entertainment market.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

INDEBTEDNESS OF THE ENLARGED GROUP

At the close of business on 30 September 2008 (being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this Circular), the Enlarged Group (as defined in this Circular) had the following borrowings:

| | 30 September 2008
HK$'000 |
| --- | --- |
| Bank loans, secured | 4,305 |
| Bank overdraft, secured | 3,184 |
| Finance lease payable | 488 |
| Amount due to a director | 641 |
| | 8,618 |

The bank loans and overdrafts were secured by film rights of HK$769,000, pledged time deposit of HK$2,168,000 and personal guarantees of HK$14,800,000 from a subsidiary's directors. The amount due to a director is unsecured, non-guaranteed, interest-free and with no fixed terms of repayment.

As at 30 September 2008, the Enlarged Group had the following capital commitments:

| | 30 September 2008
HK$'000 |
| --- | --- |
| Contracted but not provided for: | |
| Film rights | 926 |
| Cartoon films | 747 |
| Intellect property rights | 15,037 |
| | 16,710 |

As at 30 September 2008, the Enlarged Group did not have any significant contingent liabilities.

Save as aforesaid or as otherwise disclosed herein and apart from intra-group liabilities, the Enlarged Group did not have any other outstanding bank or other borrowings, mortgages, charges, debentures, or other loan capital, bank overdrafts, loans or other similar indebtedness, guarantee, liabilities under acceptances, acceptance credits, hire purchase or other finance lease commitments or other contingent liabilities.

WORKING CAPITAL

As at the Latest Practicable Date, the Directors, after taking into account the Enlarged Group's internal resources, the presently available banking facilities in pursuant to the banking facilities letters issued by various banks of the Group, and in the absence of unforeseen circumstances, the Enlarged Group, after the completion of the Acquisition, will not have sufficient working capital for its present requirements for a period of 12 months from the date of this Circular, subject to full drawdown of the Convertible Loan Agreement.

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

Pursuant to the Convertible Loan Agreement dated 30 September 2008, the Lender has agreed to provide a financing facility of Euro 200 million (equivalent to approximately HK$2,230 million) to the Company, if the above financing facility is not available, the directors will seek other financing such as bank financing or equity financing in order to fulfill the future working capital requirements of the Enlarged Group.

MATERIAL ADVERSE CHANGE

Save as disclosed above, the Directors have confirmed that there has been no material change in the indebtedness and contingent liabilities of the Enlarged Group since 30 September 2008.

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APPENDIX II

ACCOUNTANTS' REPORT ON THE TARGET COMPANY

The following is the text of an accountant's report, prepared for the purpose of incorporation in this circular, received from the reporting accountants of the Company, CCIF CPA Limited, Certified Public Accountants, Hong Kong, for inclusion in this circular.

21 November 2008

The Board of Directors

Intelli-Media Group (Holdings) Limited

Dear Sirs

We set out below on the financial information of First Pine Enterprises Limited ("First Pine"), including the balance sheet as at 30 June 2008, and income statement, cash flow statement and statement of changes in equity for the period from 13 December 2007 (date of incorporation) to 30 June 2008 (the "Relevant Period") together with a summary of significant accounting policies and other explanatory notes thereto (collectively the "Financial Information") for inclusion in the circular (the "Circular") dated 21 November 2008 issued by Intelli-Media Group (Holdings) Limited (the "Company") in connection with the proposed acquisition of the entire equity interest in First Pine by the Company.

First Pine was incorporated on 13 December 2007 in British Virgin Islands (the "BVI") as a limited liability company under the International Business Companies Act (Cap. 291) of the BVI with an authorised share capital of US$50,000 divided into 50,000 ordinary shares of US$1 each. The principal activity of First Pine during the Relevant Period was securities trading.

As at the date of this report, First Pine has the direct interest in the following subsidiary:

Name of subsidiary	Issued capital	Date and place of establishment	Percentage of equity attributable to First Pine	Principal activities
Mt. Morgan Holdings, Inc	US$50,000	14 July 2008	100%	Investment holding
		BVI

No audited financial statements have been prepared in accordance with HKFRS for First Pine since its date of incorporation as there are no statutory audit requirements in the country of its jurisdiction.

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APPENDIX II

ACCOUNTANTS' REPORT ON THE TARGET COMPANY

For the purpose of this report, the directors of First Pine have prepared the financial statements of First Pine for the Relevant Period (the "Underlying Financial Statements") in accordance with Hong Kong Financial Reporting Standards ("HKFRSs") issued by the Hong Kong Institute of Certified Public Accountants (the "HKICPA"). We have, for the purpose of this report, carried out appropriate audit procedures in respect of the Underlying Financial Statements of First Pine for the Relevant Period, in accordance with Hong Kong Standards on Auditing issued by the HKICPA with no adjustments made thereon.

The Financial Information has been prepared based on the audited HKFRS Financial Statements or, where appropriate unaudited management accounts of First Pine for the Relevant Period prepared in accordance with HKFRSs with no adjustments made thereon.

DIRECTORS' RESPONSIBILITY

For the purpose of this report, the directors of the Company are responsible for the preparation of the Financial Information which gives a true and fair view. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of the Financial Information that are free from material misstatements, whether due to fraud and error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances.

REPORTING ACCOUNTANT'S RESPONSIBILITY

For the Financial Information for the Relevant Period, our responsible is to express an opinion on the Financial Information based on our examination and to report our opinion to you. We have examined the Financial Information and carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 "Prospectuses and the Reporting Accountant" issued by the HKICPA.

OPINION

In our opinion, for the purpose of this report, the Financial Information gives a true and fair view of the state of affairs of First Pine as at 30 June 2008 and of First Pine's results and cash flows for the Relevant Period then ended.

APPENDIX II

ACCOUNTANTS' REPORT ON THE TARGET COMPANY

I. FINANCIAL INFORMATION

1. Income Statement

| | Note | Period from
13 December 2007
(date of incorporation)
to 30 June 2008
HK$ |
| --- | --- | --- |
| Realised gain on disposal of trading securities | | 407,500 |
| Other revenue | 6 | 369 |
| Administrative expenses | 7 | (62,133) |
| Profit before income tax | 7 | 345,736 |
| Income tax | 9 | (64,906) |
| Profit for the period | | 280,830 |

2. Balance Sheet

| | Note | As at
30 June 2008
HK$ |
| --- | --- | --- |
| Current assets | | |
| Trading securities | 10 | 402,000 |
| Cash at bank | | 978 |
| | | 402,978 |
| Current liabilities | | |
| Accruals | 11 | 8,000 |
| Amount due to a director | 12 | 49,234 |
| Tax payable | | 64,906 |
| | | 122,140 |
| Net assets | | 280,838 |
| EQUITY | | |
| Share capital | 13 | 8 |
| Retained profit | | 280,830 |
| Total equity | | 280,838 |

APPENDIX II

ACCOUNTANTS' REPORT ON THE TARGET COMPANY

3. Statement of Changes in Equity

| | Share capital
HK$ | Retained profit
HK$ | Total
HK$ |
| --- | --- | --- | --- |
| Issue of share capital | 8 | – | 8 |
| Profit for the period | – | 280,830 | 280,830 |
| Balance at 30 June 2008 | 8 | 280,830 | 280,838 |

4. Cash Flow Statement

| | Period from
13 December 2007
(date of incorporation)
to 30 June 2008
HK$ |
| --- | --- |
| Cash flows from operating activities | |
| Profit before taxation | 345,736 |
| Adjustments: | |
| Unrealised loss on trading securities | 48,000 |
| Interest income | (369) |
| Operating profit before changes in working capital | 393,367 |
| Increase in accruals | 8,000 |
| Increase in amount due to a director | 49,234 |
| Cash generated from operations | 450,601 |
| Cash flows from investing activities | |
| Interest received | 369 |
| Increase in trading securities | (450,000) |
| Net cash used in investing activities | (449,631) |
| Cash flows from financing activities | |
| Proceeds from issue of share capital | 8 |
| Net cash generated from financing activities | 8 |
| Net increase in cash and cash equivalents at 30 June 2008 | 978 |

APPENDIX II

ACCOUNTANTS' REPORT ON THE TARGET COMPANY

II. NOTES TO THE FINANCIAL INFORMATION

1. CORPORATE INFORMATION

First Pine was incorporated in the BVI as an exempted company with limited liability on 13 December 2007 with an authorised share capital of US$50,000 divided into 50,000 ordinary shares of US$1 each. The registered office is P.O. Box 957, Offshore Incorporations Centre Road Town, Tortola, in the BVI. The principal activity of First Pine during the Relevant Period was securities trading.

The Financial Information is presented in Hong Kong dollars ("HK$"), unless otherwise stated.

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

The Financial Information set out in this report have been prepared in accordance with Hong Kong Financial Reporting Standards ("HKFRSs"), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards ("HKASs") and Interpretations issued by the HKICPA and the disclosure requirements of the Hong Kong Companies Ordinance. The Financial Information also complies with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange Limited.

First Pine has adopted all the new and amended HKFRSs which are relevant to and effective for the accounting periods beginning on 1 January 2007, issued by the HKICPA in the preparation of the Financial Information throughout the Relevant Period. HKFRS 1 "First-time Adoption of HKFRS" has been applied in preparing the Financial Information. The Financial Information is the first set of financial statements prepared in accordance with HKFRSs by First Pine.

At the date of this report, the following HKFRSs have been issued but are not yet effective:

HKAS 1 (Revised)	Presentation of Financial Statements^{1}
HKAS 23 (Revised)	Borrowing costs^{1}
HKAS 27 (Revised)	Consolidated and Separate Financial Statements^{4}
HKAS 32 & 1 (Amendment)	Puttable Financial Instruments and Obligations
Arising on Liquidation^{1}
HKFRS 2 (Amendment)	Share-based Payment-Vesting Conditions and Cancellations^{1}
HKFRS 3 (Revised)	Business Combinations^{4}
HKFRS 8	Operating Segments^{1}
HK(IFRIC) – Int 12	Service Concession Arrangements^{2}
HK(IFRIC) – Int 13	Customers Loyalty Programmes^{3}
HK(IFRIC) – Int 14	HKAS 19 – The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction^{1}
HK(IFRIC) – Int 15	Agreements for the Construction of Real Estate^{1}
HK(IFRIC) – Int 16	Hedges of a Ne Investment in a Foreign Operation^{5}

Effective for annual periods beginning on or after 1 January 2009
Effective for annual periods beginning on or after 1 January 2008
Effective for annual periods beginning on or after 1 July 2008
Effective for annual periods beginning on or after 1 July 2009
Effective for annual periods beginning on or after 1 October 2008

The directors of First Pine anticipate that the adoption of these standards, amendments and interpretations in future periods will have no material impact on the results of operations and financial position of First Pine.

(b) Basis of preparation of the Financial Information

The preparation of the Financial Information in conformity with HKRFSs the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying

APPENDIX II

ACCOUNTANTS' REPORT ON THE TARGET COMPANY

First Pine’s accounting policies. The areas involving a high degree of judgement or complexity, or areas where assumptions and estimates are significant to the Financial Information, are disclosed in note 5 to the Financial Information.

(c) Subsidiaries

Minority interests represent the portion of the net asset of subsidiaries attributable to interests that are not owned by the Company, whether directly or indirectly through subsidiaries, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. Minority interests are presented in the consolidated balance sheet within equity, separately from equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between minority interests and the equity shareholders of the Company.

Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports profits, the Group’s interest is allocated all such profits until the minority’s share of losses previously absorbed by the Group has been recovered.

In the Company’s balance sheet, an investment in a subsidiary is stated at cost less impairment losses, unless the investment is classified as held for sale (or included in a disposal group that is classified as held for sales).

(d) Financial assets

Financial assets are classified in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to maturity investments and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determined the classification of its financial assets at initial recognition and re-evaluated this designation at every reporting date.

(i) Financial assets at fair value through profit or loss

This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives were categorized as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either for trading or are expected to be realized within 12 months of the balance sheet date.

(ii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as long-term receivables and account receivables in the balance sheet.

188

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ACCOUNTANTS' REPORT ON THE TARGET COMPANY

(iii) Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determined payments and fixed maturities that the company has the positive intention and ability to hold to maturity.

(iv) Available-for-sale financial assets

Available-for-sale financial are non-derivatives that are either designed in this category or not classified in any of the other categories. They are included in non-current assets unless the management intends to dispose of the investment within 12 months of the balance sheet date.

Regular purchases and sales of investments are recognised on trade-date, the date on which First Pine commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Investments are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and First Pine has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortised cost using the effective interest method.

The fair values of quoted investment are based on current bid prices. For unlisted securities are determined by using valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing model refined to reflect the issuer's specific circumstances.

First Pine reassesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case equity securities classified as available-for-sale financial assets, the cumulative loss-measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement.

(e) Impairment

Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following asset may be impaired or, except in the case of goodwill, an impairment loss previously recognised no longer exists or may have decreased.

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

Recognition of impairment losses

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APPENDIX II

ACCOUNTANTS' REPORT ON THE TARGET COMPANY

Reversals of impairment losses

(f) Trade and other payables

Trade and other payables are initially recognised at fair value and are subsequently stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(g) Provision and contingent liabilities

Provisions are recognised for other liabilities of uncertain timing or amount when the company 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 expenditure expected to settle the obligation.

(h) Income tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity.

(i) Foreign currency translation

(i) Functional and presentation currency

Items included in the Financial Information of First Pine are measured using the currency of the primary economic environment in which First Pine operates (the “functional currency”). The Financial Information is presented in Hong Kong dollars (“HK$”), which is First Pine’s functional and presentation currency.

190

APPENDIX II

ACCOUNTANTS' REPORT ON THE TARGET COMPANY

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currency are recognised in the income instalments.

(j) Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to First Pine and when the revenue can be measured reliably, on the following bases:

(i) Revenue is recognised from the sale of trading securities at fair value on the transaction dates when the relevant contract notes are executed;

(ii) Interest income is recognised as it accrues using the effective interest method.

(k) Related parties

Parties are considered to be related to First Pine if:

(i) the party has the ability, directly, or indirectly through one or more intermediaries, to control the company or excise significant influence over the company in making financial and operating policy decisions, or has joint control over the company;

(ii) the company and the party are subject to common control;

(iii) the party is an associate of the company or a joint venture in which the company is a venturer;

(iv) the party is a member of the key management personnel of the company or its parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;

(v) the party is a close member of the family of any individual referred to in (i) or is an entity under the control, joint control or significant influence of such individuals; or

(vi) the party is a post-employment benefit plan which is for the benefit of employees of the company, or of any entity that is a related party of the company.

Close family members of an individual are those family members who may be expected to influence, or be influence by, that individual in their dealings with the entity.

FINANCIAL RISK MANAGEMENT

As at 30 June 2008, First Pine’s principal financial instruments comprise of trading securities, cash at bank, accruals and amount due to a director.

(a) Foreign exchange risk

First Pine’s assets and liabilities are mainly denominated in Hong Kong dollars and United States dollars of which the exchange rates have remained stable among each other for the Relevant Period. First Pine does not have hedging policy in respect of foreign currency risk. However, management monitors the related foreign currency risk exposure closely. The directors of First Pine considered that the foreign exchange risk is low.

(b) Credit risk

First Pine does not have any significant credit risk as credit given to any individual or corporate entity is not significant. All cash and cash equivalents are deposited with the major banks in Hong Kong. No

191

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ACCOUNTANTS' REPORT ON THE TARGET COMPANY

other financial assets carry a significant exposure to credit risk. Accordingly, First Pine has no significant concentrations of credit risk.

Liquidity risk is discreetly managed by maintaining sufficient cash or cash equivalents and the availability of funding through an adequate amount of credit facilities. First Pine ensures minimal liquidity risk by ensuring the availability of credit lines.

(d) Equity price risk

Equity price risk is the risk that the fair values of equity securities decrease as a result of changes in the levels of equity indices and the values of individual securities. The company is exposed to equity price risk arising from individual equity investments classified as held for trading securities as at 30 June 2008. The company's listed investments are listed on the Hong Kong and are valued at quoted market prices at the balance sheet date.

The market equity indices at the close of business of the nearest trading day in the year to the balance sheet date and their respective highest and lowest points during the year were as follows:

	30 June 2008	High/low 2008
Hong Kong – Hang Seng Index	22,102	27,616
		11,016

The following table demonstrates the sensitivity to every 1% change in fair value of the equity investments, with all other variables held constant and before any impact on tax, based on their carrying amounts at the balance sheet date.

	Carrying amount of equity investments HK$	Increase/ decrease in profit before tax HK$	Increase/ decrease in equity HK$
Investments listed in Hong Kong: - Held-for-trading	402,000	4,020	4,020

(e) Fair values

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date.

At the balance sheet date, the fair value of First Pine's current liability – amount due to a director is not materially different from its carrying amount because of its immediate or short term maturity.

CAPITAL RISK MANAGEMENT

First Pine's objectives of managing capital are to safeguard First Pine's ability to continue as a going concern in order to provide adequate returns for shareholders in the long term and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, First Pine may adjust the amount of dividends paid to shareholders, issue new shares or sell assets to reduce debt. No changes were made in the objectives, policies or process during the Relevant Period. Management regards total equity as capital, for capital management purposes.

First Pine is not subject to externally imposed capital requirements.

APPENDIX II

ACCOUNTANTS' REPORT ON THE TARGET COMPANY

5. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

First Pine makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definite, seldom equal the related actual results. However, there are no estimates or assumptions used on the Financial Information that the directors expect will have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year.

(a) Income taxes

The company recognised liabilities for anticipated tax based on estimates of whether additional tax will be due. Where the final tax outcome of these matters is different from the amount due that was initially recorded, such difference will impact the income tax and deferred tax in the period in which such determination is made.

6. OTHER REVENUE

| Period from | 13 December 2007
(date of incorporation)
to 30 June 2008
HK$ |
| --- | --- |
| Other revenue | |
| Bank interest income | 369 |

7. PROFIT BEFORE TAXATION

First Pine’s profit before taxation is arrived at after charging:

| Period from | 13 December 2007
(date of incorporation)
to 30 June 2008
HK$ |
| --- | --- |
| Directors’ remuneration | – |
| Auditor’s remuneration | 8,000 |
| Incorporation expenses | 6,133 |
| Unrealised loss on trading securities | 48,000 |
| | 62,133 |

8. DIRECTORS’ EMOLUMENTS

No remuneration was paid to the directors during the Relevant Period.

During the Relevant Period, no emoluments was paid by First Pine to a director or any of the five highest paid individuals as an inducement to join or upon joining First Pine or as compensation for loss of office.

APPENDIX II

ACCOUNTANTS' REPORT ON THE TARGET COMPANY

9. TAXATION

Hong Kong Profits Tax has been provided at 16.5% during the Relevant Period.

	Period from 13 December 2007 (date of incorporation) to 30 June 2008 HK$
Hong Kong Profits Tax-current period	64,906
The charge for the period can be reconciled to the profit per the Financial Information as follows:
	Period from 13 December 2007 (date of incorporation) to 30 June 2008 HK$
Profit before taxation	345,736
Tax at applicable income tax rate of 16.5%	57,046
Expense not deductible for tax	7,920
Income not subject to tax	(60)
	64,906

At the balance sheet date, there were no material unprovided deferred tax assets or liabilities.

10. TRADING SECURITIES

	As at 30 June 2008 HK$
Listed equity securities in Hong Kong, at market value	402,000

All of these listed shares were subsequently disposed of on 10 July 2008.

11. ACCRUALS

	As at 30 June 2008 HK$
Accrued auditor’s remuneration	8,000

12. AMOUNT DUE TO A DIRECTOR

The amount due is unsecured, interest-free and has no fixed terms of repayment. The carrying amount of the balance approximates to its fair value.

APPENDIX II

ACCOUNTANTS' REPORT ON THE TARGET COMPANY

13. SHARE CAPITAL

As at
30 June 2008
HK$

Authorised:
50,000 ordinary shares of US$1 each
390,000

Issued and fully paid:
1 ordinary share of US$1 each
8

First Pine was incorporated in the BVI on 13 December 2007 with an authorised share capital of US$50,000 divided into 50,000 ordinary shares of US$1 each. 1 subscriber share of US$1 was allotted and issued for cash to provide the initial working capital of First Pine.

14. RELATED PARTY TRANSACTIONS

Other than the balance due to a director as disclosed in note 12 of this section, First Pine had no outstanding balance and other transaction with related parties during the Relevant Period.

In the opinion of directors of First Pine, the directors of First Pine represented the key management personnel of First Pine.

15. EVENTS AFTER THE BALANCE SHEET DATE

Other than those disclosed in note 10 above, there were no other material events after the balance sheet date.

III. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by First Pine in respect of any period subsequent to 30 June 2008.

Yours faithfully

CCIF CPA Limited
Certified Public Accountants
Hong Kong

Leung Chun Wa
Practising Certificate Number P04963

APPENDIX III

ACCOUNTANTS' REPORT ON MOGAN

The following is the text of a report, prepared for the sole purpose of inclusion in this circular, from the independent reporting accountants, RSM Nelson Wheeler, Certified Public Accountants, Hong Kong.

RSM Nelson Wheeler

中瑞岳華(香港)會計師事務所

Certified Public Accountants

29th Floor

Caroline Centre

Lee Gardens Two

28 Yun Ping Road

Hong Kong

21 November 2008

The Board of Directors

Intelli-Media Group (Holdings) Limited

Dear Sirs,

We set out below our report on the financial information (the "Financial Information") of Mt. Mogan Resources & Development Corporation ("Mogan") for the period from 16 January 2007 (date of incorporation) to 31 December 2007 and the six months ended 30 June 2008 ("Relevant Periods") for inclusion in the circular dated 21 November 2008 issued by Intelli-Media Group (Holdings) Limited (the "Company") in connection with the proposed acquisition of the entire equity interest in First Pine Enterprises Limited (the "Circular").

Mogan was incorporated on 16 January 2007 in the Republic of the Philippines (the "Philippines") with limited liability and is engaged in the business of mining. It has adopted 31 December as the financial year end date.

The statutory financial statements of Mogan have been prepared in accordance with the relevant accounting principles and financial regulations applicable to companies established in the Philippines and were audited in accordance with Philippine Standards on Auditing by the following certified public accountants registered in the Philippines.

Financial period	Name of auditor
For the period from 16 January 2007
(date of incorporation) to 31 December 2007	Rachel S. Villanueva-Go,
Certified Public Accountant
For the six months ended 30 June 2008	SyCip Gorres Velayo & Co.,
Certified Public Accountants

For the purpose of this report, we have examined the audited financial statements of Mogan (the "Underlying Financial Statements") for the Relevant Periods and carried out such additional procedures as are necessary in accordance with Auditing Guideline 3.340 "Prospectuses and the Reporting Accountant" issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA").

196

APPENDIX III
ACCOUNTANTS' REPORT ON MOGAN

The Financial Information has been prepared from the Underlying Financial Statements in accordance with Hong Kong Financial Reporting Standards ("HKFRSs") issued by the HKICPA.

The directors of Mogan are responsible for the preparation of the Underlying Financial Statements. The directors of the Company are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the Financial Information set out in this report from the Underlying Financial Statements, to form an independent opinion on the Financial Information and to report our opinion to you.

For the purpose of this report, the directors of Mogan have prepared the comparative financial information of Mogan for the period from 16 January 2007 to 30 June 2007 (the "Comparative Financial Information") in accordance with HKFRSs. We have reviewed the Comparative Financial Information in accordance with Hong Kong Standard on Review Engagement 2400 "Engagements to Review Financial Statements" issued by the HKICPA. A review consists principally of making enquiries of Mogan management and applying analytical procedures to the Comparative Financial Information and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the Comparative Financial Information.

On the basis of our review which does not constitute an audit, we are not aware of any material modifications that should be made to the Comparative Financial Information.

In our opinion, for the purpose of this report, the Financial Information gives a true and fair view of the state of affairs of Mogan as at 31 December 2007 and 30 June 2008 and of Mogan's results and cash flows for the Relevant Periods.

Material uncertainty relating to the going concern basis

Without qualifying our opinion, we draw attention to note 2 to the Financial Information which mentions that Mogan incurred a loss of PHP1,988,027 for the six months ended 30 June 2008 and as at 30 June 2008 Mogan had net current liabilities and net liabilities of PHP6,063,122 and PHP798,708 respectively. These conditions indicate the existence of a material uncertainty which may cast significant doubt about Mogan's ability to continue as a going concern. The Financial Information has been prepared on a going concern basis, the validity of which depends upon the financial support from the shareholders of Mogan at a level sufficient to finance the working capital requirements of Mogan to meet its liabilities as they fall due. The Financial Information does not include any adjustments that would result from the failure to obtain the financial support. We consider that the material uncertainty has been adequately disclosed in the Financial Information.

197

APPENDIX III

ACCOUNTANTS' REPORT ON MOGAN

FINANCIAL INFORMATION

A. INCOME STATEMENTS

	Note	Period from 16 January 2007 (date of incorporation) to 31 December 2007 PHP	Period from 16 January 2007 (date of incorporation) to 30 June 2007 PHP (Unaudited)	Six months ended 30 June 2008 PHP
Turnover	7	-	-	-
Administrative expenses		(1,310,681)	(402,352)	(1,988,027)
Loss before tax		(1,310,681)	(402,352)	(1,988,027)
Income tax expense	8	-	-	-
Loss for the period	9	(1,310,681)	(402,352)	(1,988,027)

APPENDIX III

ACCOUNTANTS' REPORT ON MOGAN

B. BALANCE SHEETS

	Note	At 31 December 2007 PHP	At 30 June 2008 PHP
Non-current assets
Mining rights and deferred exploration costs	10	805,036	5,133,180
Property, plant and equipment	11	133,811	131,234
		938,847	5,264,414
Current assets
Prepayments and deposits		16,294	46,294
Bank balance		289,872	13,399
		306,166	59,693
Current liabilities
Advances from shareholders	12	55,694	21,815
Advances from other parties	12	-	6,101,000
		55,694	6,122,815
Net current assets/(liabilities)		250,472	(6,063,122)
NET ASSETS/(LIABILITIES)		1,189,319	(798,708)
Capital and reserves
Share capital	13	2,500,000	2,500,000
Reserves		(1,310,681)	(3,298,708)
EQUITY		1,189,319	(798,708)

APPENDIX III

ACCOUNTANTS' REPORT ON MOGAN

C. STATEMENTS OF CHANGES IN EQUITY

| | Share capital
PHP | Accumulated losses
PHP | Total
PHP |
| --- | --- | --- | --- |
| Issue of shares | 2,500,000 | – | 2,500,000 |
| Loss for the period | – | (1,310,681) | (1,310,681) |
| At 31 December 2007 | 2,500,000 | (1,310,681) | 1,189,319 |
| Loss for the period | – | (1,988,027) | (1,988,027) |
| At 30 June 2008 | 2,500,000 | (3,298,708) | (798,708) |
| Issue of shares | 2,500,000 | – | 2,500,000 |
| Loss for the period (unaudited) | – | (402,352) | (402,352) |
| At 30 June 2007 (unaudited) | 2,500,000 | (402,352) | 2,097,648 |

APPENDIX III

ACCOUNTANTS' REPORT ON MOGAN

D. CASH FLOW STATEMENTS

	Period from 16 January 2007 (date of incorporation) to 31 December 2007 PHP	Period from 16 January 2007 (date of incorporation) to 30 June 2007 PHP (Unaudited)	Six months ended 30 June 2008 PHP
CASH FLOWS FROM OPERATING ACTIVITIES
Loss before tax	(1,310,681)	(402,352)	(1,988,027)
Adjustments for: Depreciation	12,257	3,990	6,077
Operating loss before working capital changes	(1,298,424)	(398,362)	(1,981,950)
Increase in prepayments and deposits	(16,294)	(16,294)	(30,000)
Net cash used in operating activities	(1,314,718)	(414,656)	(2,011,950)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment	(146,068)	(92,438)	(3,500)
Increase in mining rights and deferred exploration costs	(805,036)	(680,520)	(4,328,144)
Net cash used in investing activities	(951,104)	(772,958)	(4,331,644)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from shareholders	55,694	-	-
Repayment to shareholders	-	-	(33,879)
Advances from other parties	-	-	6,101,000
Proceeds from issue of shares	2,500,000	2,500,000	-
Net cash generated from financing activities	2,555,694	2,500,000	6,067,121
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS	289,872	1,312,386	(276,473)
CASH AND CASH EQUIVALENT AT BEGINNING OF PERIOD	-	-	289,872
CASH AND CASH EQUIVALENT AT END OF PERIOD	289,872	1,312,386	13,399
ANALYSIS OF CASH AND CASH EQUIVALENTS
Bank balance	289,872	1,312,386	13,399

APPENDIX III

ACCOUNTANTS' REPORT ON MOGAN

E. NOTES TO THE FINANCIAL INFORMATION

1. GENERAL INFORMATION

Mogan was incorporated in the Philippines with limited liability with the Securities and Exchange Commission under Corporation Code of the Philippines. The address of its registered office is 18 Maaralin St. Diliman, Quezon City, Manila, the Philippines.

Mogan is engaged in the business of mining.

Mogan is currently in the research and exploratory stage. It has several pending exploration permit applications with the Mines and Geosciences Bureau of the Department of Environment and Natural Resources of the Philippines as at 30 June 2008.

2. GOING CONCERN BASIS

Mogan incurred a loss of PHP1,988,027 for the six months ended 30 June 2008 and at 30 June 2008 Mogan had net current liabilities and net liabilities of PHP6,063,122 and PHP798,708 respectively. These conditions indicate the existence of a material uncertainty which may cast significant doubt on Mogan's ability to continue as a going concern. Therefore, Mogan may be unable to realise its assets and discharge its liabilities in the normal course of business.

The Financial Information has been prepared on a going concern basis, the validity of which depends upon the financial support from the shareholders at a level sufficient to finance the working capital requirements of Mogan. The shareholders have agreed to provide adequate funds for Mogan to meet its liabilities as they fall due. The directors of Mogan are therefore of the opinion that it is appropriate to prepare the Financial Information on a going concern basis. Should Mogan be unable to continue as a going concern, adjustments would have to be made to the Financial Information to adjust the value of Mogan's assets to their recoverable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets as current assets.

3. ADOPTION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

During the Relevant Periods, Mogan has adopted all the new and revised HKFRSs that are relevant to its operations and effective for its accounting year beginning on 1 January 2008. HKFRSs comprise Hong Kong Financial Reporting Standards; Hong Kong Accounting Standards; and Interpretations.

Mogan has not applied the following new HKFRSs that have been issued but are not yet effective.

HKAS 1 (Revised)	Presentation of Financial Statements^{1}
HKAS 1 (Improvements)	Current/Non-current Classification of Derivatives^{1}
HKAS 16 (Improvements)	Recoverable Amount; Sale of Assets Held for Rental^{1}
HKAS 19 (Improvements)	Curtailments and Negative Past Service Cost; Plan Administration Costs; Replacement of Term ‘fall due’; Guidance on Contingent Liabilities^{1}
HKAS 20 (Improvements)	Government Loans with a Below-market Rate of Interest^{1}
HKAS 23 (Revised)	Borrowings Costs^{1}
HKAS 23 (Improvements)	Components of Borrowing Costs^{1}
HKAS 27 (Revised)	Consolidated and Separate Financial Statements^{2}
HKAS 27 (Improvements)	Measurement of Subsidiary Held for Sale in Separate Financial Statements^{1}
HKAS 28 (Improvements)	Required Disclosures when Investments in Associates are Accounted for at Fair Value Through Profit or Loss; Impairment of Investment in Associate^{1}
HKAS 29 (Improvements)	Description of Measurement Basis in Financial Statements^{1}
HKAS 31 (Improvements)	Required Disclosures when Interests in Jointly Controlled Entities are Accounted for at Fair Value Through Profit or Loss^{1}
HKAS 32 & 1 (Amendments)	Puttable Financial Instruments and Obligations Arising on Liquidation^{1}
HKAS 36 (Improvements)	Disclosure of Estimates Used to Determine Recoverable Amount^{1}
HKAS 38 (Improvements)	Advertising and Promotional Activities; Unit of Production Method of Amortisation^{1}

APPENDIX III

ACCOUNTANTS' REPORT ON MOGAN

HKAS 39 (Amendments) Eligible Hedged Items²
HKAS 39 & HKFRS 7 (Amendments) Reclassification of Financial Assets⁵
HKAS 39 (Improvements) Reclassification of Derivatives into or out of the Classification of at Fair Value Through Profit or Loss; Designating and Documenting Hedges at the Segment Level; Applicable Effective Interest Rate on Cessation of Fair Value Hedge Accounting¹
HKAS 40 (Improvements) Property under Construction or Development for Future Use as Investment Property¹
HKAS 41 (Improvements) Discount Rate for Fair Value Calculations; Additional Biological Transformation¹
HKFRS 1 and HKAS 27 (Amendments) Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate¹
HKFRS 2 (Amendments) Vesting Conditions and Cancellations¹
HKFRS 3 (Revised) Business Combinations²
HKFRS 5 (Improvements) Plan to Sell the Controlling Interest in a Subsidiary²
HKFRS 8 Operating Segments¹
HK(IFRIC)-Int 13 Customer Loyalty Programmes³
HK(IFRIC)-Int 15 Agreements for the Construction of Real Estate¹
HK(IFRIC)-Int 16 Hedges of a Net Investment in a Foreign Operation⁴

¹ Effective for annual periods beginning on or after 1 January 2009
² Effective for annual periods beginning on or after 1 July 2009
³ Effective for annual periods beginning on or after 1 July 2008
⁴ Effective for annual periods beginning on or after 1 October 2008
⁵ Effective from 1 July 2008

In addition to the above new and revised HKFRSs, there are also improvements to HKFRSs which contain amendments to HKFRS 7; and HKAS 8, 10, 18, 20, 29, 34, 40 and 41. These amendments represent terminology or editorial changes only, which are expected to have no or minimal effect on accounting. They are effective for annual periods beginning on or after 1 January 2009.

Mogan has already commenced an assessment of the impact of these new HKFRSs but is not yet in a position to state whether these new HKFRSs would have a material impact on its results of operation and financial position.

4. SIGNIFICANT ACCOUNTING POLICIES

The Financial Information has been prepared in accordance with HKFRSs, accounting principles generally accepted in Hong Kong and the applicable disclosures required by the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance.

The Financial Information has been prepared under the historical cost convention.

The preparation of Financial Information in conformity with HKFRSs requires the use of certain key assumptions and estimates. It also requires the directors to exercise its judgements in the process of applying the accounting policies. The areas involving critical judgements and areas where assumptions and estimates are significant to the Financial Information, are disclosed in note 5 to the Financial Information.

The significant accounting policies applied in the preparation of the Financial Information are set out below.

(a) Foreign currency translation

(i) Functional and presentation currency

Items included in the Financial Information are measured using the currency of the primary economic environment in which Mogan operates (the "functional currency"). The Financial Information is presented in the Philippine Peso ("PHP"), which is Mogan's functional and presentation currency.

APPENDIX III
ACCOUNTANTS' REPORT ON MOGAN

(ii) Transactions and balances in financial statements

Transactions in foreign currencies are translated into the functional currency using the exchange rates prevailing 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 income statement.

Translation differences on non-monetary items, such as equity instruments classified as financial assets at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equity instruments classified as available-for-sale financial assets, are included in the investment revaluation reserve in equity.

(b) Property, plant and equipment

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

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Mogan and the cost of the item can be measured reliably. All other repairs and maintenance are expensed in the income statements during the period in which they are incurred.

Depreciation of property, plant and equipment is calculated at rates sufficient to write off their cost or revalued amounts less their residual values over the estimated useful lives on a straight-line basis. The useful lives are as follows:

Office equipment
2 – 5 years

The residual values, useful lives and depreciation method are reviewed and adjusted, if appropriate, at each balance sheet date.

The amounts recorded as mining rights and deferred exploration costs represent the costs incurred directly attributable to the application of exploration permit and associated activity. These costs are deferred until the discovery of economically exploitable reserves and the start-up of the production phase on a property-by-property basis or until the property is abandoned. Mining rights are abandoned when management allows property interests to lapse or when they determine that properties are not economically viable. Costs accumulated relating to projects that are abandoned are written-off in the year in which a decision to discontinue the project is made. Proceeds received on the sale or option on Mogan's properties are recorded as a reduction of the mineral property cost.

At each balance sheet date, Mogan reviews the carrying values of mining rights and deferred exploration expenditures with a view to assessing whether there has been any impairment in value. In the event that it is determined there is an impairment in the carrying value of any property, the carrying value will be written down or written off, as appropriate.

Mining rights and deferred exploration cost are reassessed at each balance sheet date and these costs are carried forward provided that at least one of the following conditions is met:

such costs are expected to be recouped in full through successful development and exploration of the area of interest or alternatively, by its sale; or
exploration and evaluation activities in the area of interest have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in relation to the area are continuing, or planned for the future.

204

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ACCOUNTANTS' REPORT ON MOGAN

(d) Operating leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Lease payments (net of any incentives received from the lessor) are expensed in the income statements on a straight-line basis are the lease term.

(e) Recognition and derecognition of financial instruments

Financial assets and financial liabilities are recognised in the balance sheet when Mogan becomes a party to the contractual provisions of the instruments.

Financial assets are derecognised when the contractual rights to receive cash flows from the assets expire; Mogan transfers substantially all the risks and rewards of ownership of the assets; or Mogan neither transfers nor retains substantially all the risks and rewards of ownership of the assets but has not retained control on the assets. On derecognition of a financial asset, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised directly in equity is recognised in the income statements.

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid is recognised in the income statements.

(f) Cash and cash equivalents

For the purpose of the cash flow statements, 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. Bank overdrafts which are repayable on demand and form an integral part of Mogan's cash management are also included as a component of cash and cash equivalents.

(g) Financial liabilities and equity instruments

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument under HKFRSs. An equity instrument is any contract that evidences a residual interest in the assets of Mogan after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below.

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred, and subsequently measured at amortised cost using the effective interest method.

Borrowings are classified as current liabilities unless Mogan has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

Equity instruments

Equity instruments issued by Mogan are recorded at the proceeds received, net of direct issue costs.

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ACCOUNTANTS' REPORT ON MOGAN

(h) Taxation

Income tax represents the sum of the current tax and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statements because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Mogan’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

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

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

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited to the income statements, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and Mogan intends to settle its current tax assets and liabilities on a net basis.

(i) Related parties

A party is related to Mogan if:

(i) directly or indirectly through one or more intermediaries, the party controls, is controlled by, or is under common control with, Mogan; has an interest in Mogan that gives it significant influence over Mogan; or has joint control over Mogan;

(ii) the party is an associate;

(iii) the party is a joint venture;

(iv) the party is a member of the key management personnel of Mogan or its parent;

(v) the party is a close member of the family of any individual referred to in (i) or (iv);

(vi) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (iv) or (v); or

(vii) the party is a post-employment benefit plan for the benefit of employees of Mogan, or of any entity that is a related party of Mogan.

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APPENDIX III
ACCOUNTANTS' REPORT ON MOGAN

(j) Impairment of assets

Intangible assets that have an indefinite useful life or not yet available for use are reviewed annually for impairment and are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

At each balance sheet date, Mogan reviews the carrying amounts of its tangible and intangible assets except receivables to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of any impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, Mogan estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognised immediately in the income statements, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognised immediately in the income statements, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

(k) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when Mogan has a present 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.

(l) Events after the balance sheet date

Events after the balance sheet date that provide additional information about Mogan'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 Information. Events after the balance sheet date that are not adjusting events are disclosed in the notes to the Financial Information when material.

207

APPENDIX III
ACCOUNTANTS' REPORT ON MOGAN

5. CRITICAL JUDGEMENTS AND KEY ESTIMATES

Critical judgements in applying accounting policies

In the process of applying the accounting policies, the directors have made the following judgements that have the most significant effect on the amounts recognised in the Financial Information (apart from those involving estimations, which are dealt with below).

(a) Going concern basis

The Financial Information has been prepared on a going concern basis, the validity of which depends upon the financial support of the shareholders at a level sufficient to finance the working capital requirements of Mogan. Details are explained in note 2 to Financial Information.

Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

(a) Recoverability of mining rights and deferred exploration costs

Mogan’s accounting policy for mining rights and deferred exploration costs results in certain items of expenditure being capitalised for an area of interest where it is considered likely to be recoverable by future exploitation or sale or where the activities have not reached a stage which permits a reasonable assessment of the existence of reserves. This policy requires management to make certain estimates and assumptions as to future events and circumstances, in particular whether an economically viable extraction operation can be established. Any such estimates and assumptions may change as new information becomes available. If, after having capitalised the expenditure under the policy, an estimate is made that recovery of the expenditure is unlikely, the relevant capitalised amount will be written off to the income statements.

(b) Property, plant and equipment, depreciation and impairment

Mogan estimates the useful lives of office equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of office equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. In addition, estimation of the useful lives of office equipment is based on collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances.

Mogan assesses impairment on property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that Mogan considers important which could trigger an impairment review include the following:

Significant underperformance relative to expected historical or projected future operating results;
Significant changes in the manner of use of the acquired assets or the strategy for overall business; and
Significant negative industry or economic trends.

208

APPENDIX III

ACCOUNTANTS' REPORT ON MOGAN

6. FINANCIAL RISK MANAGEMENT

Mogan’s activities expose it to a variety of financial risks: credit risk and liquidity risk. Mogan’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on Mogan’s financial performances.

(a) Credit risk

Credit risk refers to the potential loss arising from any failure by counterparties to fulfill their obligations, as and when they fall due.

With respect to credit risk arising from Mogan’s cash with bank, Mogan’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of this instrument. Mogan’s gross maximum exposure to credit risk is equivalent to its carrying value since there is no collateral agreement for this financial asset.

(b) Liquidity risk

Liquidity risk arises from the possibility that Mogan may encounter difficulties in raising funds to meet commitments from financial instruments or that a market for derivatives may not exist in some circumstances.

Mogan manages its liquidity based on business needs, tax capital or regulatory considerations, if applicable, through numerous sources of finance in order to maintain flexibility.

Mogan’s objective is to maintain a balance between continuity of funding and flexibility through the use of advances from shareholders. Mogan considers its available funds and its liquidity in managing its long-term financial requirements. For its short-term funding, Mogan’s policy is to ensure that there are sufficient capital inflows to match repayments of short-term debt.

Mogan’s advances from shareholders and other parties are payable on demand.

The maturity analysis of Mogan’s financial liabilities is as follows:

| | Less than 1 year
PHP | Between 1 and 2 years
PHP | Between 2 and 5 years
PHP | Over 5 years
PHP |
| --- | --- | --- | --- | --- |
| At 30 June 2008 | | | | |
| Advances from other parties | 6,101,000 | – | – | – |
| Advances from shareholders | 21,815 | – | – | – |
| At 31 December 2007 | | | | |
| Advances from shareholders | 55,694 | – | – | – |

(c) Fair values

The carrying amounts of Mogan’s financial assets and financial liabilities as reflected in the balance sheets approximate their respective fair values.

7. TURNOVER

Mogan had no turnover during the Relevant Periods.

APPENDIX III

ACCOUNTANTS' REPORT ON MOGAN

8. INCOME TAX EXPENSE

No provision for current income tax is required since Mogan has no assessable profit for the Relevant Periods.

At 31 December 2007 and 30 June 2008, Mogan has unused tax losses of PHP780,258 and PHP1,159,554 respectively available for offset against future taxable profits. No deferred tax asset has been recognised in respect of the tax losses due to the unpredictability of future profit streams. Included in unrecognised tax losses are losses of PHP780,258 that will expire in 2010. Other tax losses will expire in 2011.

The reconciliation between the income tax expense and the product of loss before tax multiplied by the Philippine corporate income tax rate is as follows:

	Period from 16 January 2007 (date of incorporation) to 31 December 2007 PHP	Period from 16 January 2007 (date of incorporation) to 30 June 2007 PHP (Unaudited)	Six months ended 30 June 2008 PHP
Loss before tax	(1,310,681)	(402,352)	(1,988,027)
Tax at the domestic tax rate of 35%	(458,738)	(140,823)	(695,809)
Tax effect of expenses that are not deductible	185,648	31,731	563,056
Deferred tax assets not recognised	273,090	109,092	132,753
Income tax expense	-	-	-

9. LOSS FOR THE PERIOD

Mogan's loss for the period is stated after charging the following:

	Period from 16 January 2007 (date of incorporation) to 31 December 2007 PHP	Period from 16 January 2007 (date of incorporation) to 30 June 2007 PHP (Unaudited)	Six months ended 30 June 2008 PHP
Auditor's remuneration	15,000	-	-
Depreciation	12,257	3,990	6,077
Directors' emoluments	-	-	-
Operating lease rental in respect of land and buildings	169,806	43,430	36,340

APPENDIX III

ACCOUNTANTS' REPORT ON MOGAN

10. MINING RIGHTS AND DEFERRED EXPLORATION COSTS

	Acquisition costs of exploration permits PHP
Cost
Additions, at 31 December 2007 and 1 January 2008	805,036
Additions	4,328,144
At 30 June 2008	5,133,180

The carrying amount represents the cost of mining rights that would entitle Mogan to explore magnetite sand and other associated mineral deposits. As at 31 December 2007 and 30 June 2008, no exploration permits had been granted to Mogan.

The directors of Mogan have reassessed the recoverable amount of the mining rights and deferred exploration costs and considered that no impairment against its carrying amount is required as at 31 December 2007 and 30 June 2008.

11. PROPERTY, PLANT AND EQUIPMENT

	Office equipment PHP
Cost
Additions, at 31 December 2007 and 1 January 2008	146,068
Additions	3,500
At 30 June 2008	149,568
Accumulated depreciation
Charge for the period, at 31 December 2007 and 1 January 2008	12,257
Charge for the period	6,077
At 30 June 2008	18,334
Carrying amount
At 31 December 2007	133,811
At 30 June 2008	131,234

12. ADVANCES FROM SHAREHOLDERS AND OTHER PARTIES

The advances from shareholders were unsecured, interest free and repayable on demand.

The advances from other parties represent advances from Mr. Ryan Luis V. Singson ("Mr. Singson") and Romryraq Holdings, Inc. ("Romryraq"), a company in which Mr. Singson has equity interest. The advances were unsecured, interest free and repayable on demand. Romryraq and Mr. Singson acquired equity interest in Mogan through three holding companies after 30 June 2008.

APPENDIX III

ACCOUNTANTS' REPORT ON MOGAN

13. SHARE CAPITAL

| | At 31 December 2007
PHP | At 30 June 2008
PHP |
| --- | --- | --- |
| Authorised:
100,000 ordinary shares of PHP100 each | 10,000,000 | 10,000,000 |
| Issued and fully paid:
25,000 ordinary shares of PHP100 each | 2,500,000 | 2,500,000 |

The primary objective of Mogan's capital management is to ensure that Mogan has sufficient funds to support its business, pay existing obligations and maximize shareholder value.

Mogan manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, Mogan may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the Relevant Periods.

Mogan considers equity as its capital.

14. RELATED PARTY TRANSACTION

One of the directors had assumed the liability to pay the legal fee of PHP273,400 of Mogan for the six months ended 30 June 2008.

15. SUBSEQUENT EVENTS

No significant subsequent event took place subsequent to 30 June 2008.

16. SUBSEQUENT FINANCIAL STATEMENTS

No subsequent financial statements have been prepared by Mogan in respect of any period subsequent to 30 June 2008.

Yours faithfully,

RSM Nelson Wheeler

Certified Public Accountants

Hong Kong

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

A. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Introduction

The accompanying unaudited pro forma financial information (the “Unaudited Pro Forma Financial Information”) of the Enlarged Group, comprising the unaudited pro forma income statement, balance sheet and cash flow statement of the Enlarged Group, has been prepared by the directors in accordance with paragraph 31 of Chapter 7 of the Rules Governing the Listing of Securities on The Growth Enterprise Market of The Stock Exchange of Hong Kong Limited, to illustrate the effect of the proposed acquisition of the entire issued share capital of First Pine Enterprises Limited (“First Pine”), which effectively has an aggregate 64% of equity interest in Mt. Mogan Resources & Development Corporation (“Mogan”) (the “Acquisition”) on the results of operations, financial position and cash flows of the Group as if the Acquisition had been completed on (i) 1 April 2007 in respect of the unaudited pro forma income statement and cash flow statement of the Enlarged Group; and (ii) 31 March 2008 in respect of the unaudited pro forma balance sheet of the Enlarged Group.

The unaudited pro forma consolidated income statement and unaudited pro forma consolidated cash flow statement of the Enlarged Group have been prepared based upon the audited consolidated income statement and audited consolidated cash flow statement of the Group for the year ended 31 March 2008 as set out in Appendix I to this Circular and the audited income statements and audited cash flow statements of First Pine and Mogan for the period ended 30 June 2008 as set out in Appendices II and III to this Circular, after incorporating the unaudited pro forma adjustments described in the accompanying notes. The unaudited pro forma consolidated balance sheet of the Enlarged Group is prepared based on the audited consolidated balance sheet of the Group as at 31 March 2008 as set out in Appendix I to this Circular and the audited balance sheets of First Pine and Mogan as at 30 June 2008 as set out in Appendices II and III to this Circular, after incorporating the unaudited pro forma adjustments described in the accompanying notes. A narrative description of the unaudited pro forma adjustments of the Acquisition that are (i) directly attributable to the transactions concerned and not relating to future events or decisions; and (ii) factually supportable, are summarised in the accompanying notes.

The Unaudited Pro Forma Financial Information of the Enlarged Group is based on a number of assumptions, estimates, uncertainties and currently available information. As a result of these assumptions, estimates and uncertainties, the accompanying Unaudited Pro Forma Financial Information of the Enlarged Group does not purport to describe the actual financial position of the Enlarged Group that would have been attained had the Acquisition been completed on 31 March 2008, or the results and cash flows of the Enlarged Group that would have been attained had the Acquisition been completed on 1 April 2007. Further, the accompanying Unaudited Pro Forma Financial Information of the Enlarged Group does not purport to predict the Enlarged Group’s future financial position, results or cash flows.

The Unaudited Pro Forma Financial Information of the Enlarged Group should be read in conjunction with the financial information of the Group as set out in Appendix I to this Circular, the financial information of First Pine and Mogan as set out in Appendices II and III to this Circular and other financial information included elsewhere in this Circular.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

ON THE ENLARGED GROUP

Unaudited pro forma consolidated income statement for the year ended 31 March 2008

	The Group for the year ended 31 March 2008Note (1)HK$'000	First Pine for the period from 13 December 2007 (date of incorporation) to 30 June 2008Note (2)HK$'000	Mogan for the period from 1 January 2008 to 30 June 2008Note (3)HK$'000	Pro forma adjustmentsNote (4)HK$'000	Pro forma adjustmentsHK$'000	Pro forma consolidated income statement of the Enlarged Group for the year ended 31 March 2008HK$'000
Turnover	33,157	1,491	-			34,648
Cost of sales	(29,851)	(1,084)	-			(30,935)
Gross profit	3,306	407	-			3,713
Other revenue	3,146	-	-			3,146
Other income	1,943	-	-			1,943
Distribution costs	(323)	-	-			(323)
Administrative expenses	(27,713)	(62)	(378)	(10)		(28,163)
Provision for stock obsolescence	(3,961)	-	-			(3,961)
Impairment on deposits for acquisition of film rights	(322)	-	-			(322)
Impairment on trade receivables	(13,400)	-	-			(13,400)
Impairment on prepayments and other receivables	(6,062)	-	-			(6,062)
Loss on disposal of property, plant and equipment	(2,346)	-	-			(2,346)
Other operating expenses	(1,346)	-	-			(1,346)
Share of results of associates	-	-	-		(30)	(30)
(Loss)/profit from operations	(47,078)	345	(378)			(47,151)
					(12,649)	11
					(190,738)	16
Finance costs	(1,564)	-	-		(203,387)	(204,951)
Loss before income tax	(48,642)	345	(378)			(252,102)
Income tax	-	(65)	-			(65)
(Loss)/profit for the year/period	(48,642)	280	(378)			(252,167)
Attributable to:
Equity holders of the company	(47,515)	280	(151)	(10)	(30)	(250,813)
					(12,649)	11
					(190,738)	16
					(203,417)
Minority interests	(1,127)	-	(227)			(1,354)
	(48,642)	280	(378)			(252,167)

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION

ON THE ENLARGED GROUP

Unaudited pro forma consolidated balance sheet as at 31 March 2008

	The Group as at 31 March 2008 Note (1) HK'000	First Pine as at 30 June 2008 Note (2) HK$'000	Mogan as at 30 June 2008 Note (3) HK$'000	Pro forma adjustments		Pro forma adjustments		Pro forma consolidated balance sheet of the Enlarged Group as at 31 March 2008 HK$'000
				Note (4) HK$'000	Note (5) HK$'000	HK$'000	Note (6) HK$'000
Non-current assets
Property, plant and equipment	1,985	-	24					2,009
Other intangible assets	26,541	-	-					26,541
Interest in subsidiary	-	-	-
Mining claims	-	-	939			8,875,117	17,7	8,876,056
Goodwill	4,259	-	-			(220)	6	4,039
Interest in subsidiaries	-	-	-	366	(366)			-
Films in progress	385	-	-					385
Deposit for acquisition of film rights	223	-	-					223
	33,393	-	963					8,909,253
Current assets
Inventories	9,169	-	-					9,169
Trading securities	-	402	-					402
Trade debtors	2,551	-	-					2,551
Deposits, prepayments and other receivables	6,786	-	8	36				6,830
Amounts due from related companies	12	-	-					12
Pledged bank deposits	2,155	-	-					2,155
Cash and bank balances	51,746	-	3			(40,000)	8,14	11,749
	72,419	402	11					32,868
Current liabilities
Trade payables	11,112	-	-					11,112
Other payables and accruals	22,036	8	1,120					23,164
Amount due to a director	517	49	-					566
Amount due to a related company	1,275	-	-					1,275
Taxation payable	6	65	-					71
Obligations under finance leases	346	-	-					346
Secured bank and other borrowings	7,698	-	-					7,698
	42,990	122	1,120					44,232
Net current assets/(liabilities)	29,429	280	(1,109)					(11,364)
Total assets less current liabilities	62,822	280	(146)					8,897,889

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION

ON THE ENLARGED GROUP

	The Group as at 31 March 2008Note (1)HK'000	First Pine as at 30 June 2008Note (2)HK$'000	Mogan as at 30 June 2008Note (3)HK$'000	Pro forma adjustments		Pro forma adjustmentsHK$'000	Note	Pro forma consolidated balance sheet of the Enlarged Group as at 31 March 2008HK$'000
				Note (4)HK$'000	Note (5)HK$'000
Non-current liabilities
Obligations under finance leases	333	-	-					333
Promissory note	-	-	-			180,698	11	180,698
Convertible note	-	-	-			1,302,855	12	1,302,855
Secured bank and other borrowings	2,388	-	-					2,388
Deferred tax liabilities	4,177	-	-					4,177
	6,898	-	-					1,490,451
Net assets/(liabilities)	55,924	280	(146)					7,407,438
Capital and reserves
Share capital	19,325	-	458	412	(458)	(412)5,000	18	24,325
						4,588
						(220)35	6
						(211)18
					(424)604	345,000	8,15
						3,807,145	12
Reserves	31,407	280	(604)	(10)	180	4,151,679		4,182,932
	50,732	280	(146)					4,207,257
						35	17
						3,195,042	7,17
Minority interests	5,192	-	-		(88)	3,195,077		3,200,181
Total equity	55,924	280	(146)					7,407,438

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION

ON THE ENLARGED GROUP

Unaudited pro forma consolidated cash flow statement for the year ended 31 March 2008

	The Group for the year ended 31 March 2008 Note (1) HK$'000	First Pine for the period from 13 December 2007 (date of incorporation) to 30 June 2008 Note (2) HK$'000	Mogan for the period from 1 January 2008 to 30 June 2008 Note (3) HK$'000	Pro forma adjustments HK$'000	Pro forma consolidated cash flow statement of the Enlarged Group for the year ended 31 March 2008 HK$'000
Operating activities				(10) 4
(30) 6
(12,649) 11
(190,738) 16
(Loss)/profit before taxation	(48,642)	345	(378)	(203,427)	(252,102)
Adjustments for:
				12,649 11
190,738 16
Finance costs	1,564	-	-	203,387	204,951
Interest income	(133)	-	-		(133)
Loss on disposal of property, plant and equipment	2,346	-	-		2,346
Amortisation of film rights	9,990	-	-		9,990
Amortisation of intellectual property rights	3,521	-	-		3,521
Amortisation of programme rights	258	-	-		258
Unrealised loss on trading securities	-	48	-		48
Depreciation	1,332	-	1		1,333
Provision for stock obsolescence	3,961	-	-		3,961
Impairment on trade receivables	13,400	-	-		13,400
Impairment on prepayments and other receivables	6,062	-	-		6,062
Impairment on deposits for acquisition of film rights	322	-	-		322
Share of results of associates	-	-	-	30	30
Operating (loss)/profit before working capital changes	(6,019)	393	(377)		(6,013)
Decrease in inventories	4,511	-	-		4,511
Decrease in amounts due from related companies	2,094	-	-		2,094
Decrease in trade receivables	6,266	-	-		6,266
Increase in deposits, prepayments and other receivables	(1,481)	-	(6)	(36)	(1,523)
Decrease in trade payables	(7,494)	-	-		(7,494)
Increase in other payables and accruals	1,657	8	-		1,665
Decrease in amount due to a related company/a director	1,275	49	-		1,324

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION

ON THE ENLARGED GROUP

	The Group for the year ended 31 March 2008Note (1)HK$'000	First Pine for the period from 13 December 2007 (date of incorporation) to 30 June 2008Note (2)HK$'000	Mogan for the period from 1 January 2008 to 30 June 2008Note (3)HK$'000	Pro forma adjustmentsHK$'000	Note	Pro forma consolidated cash flow statement of the Enlarged Group for the year ended 31 March 2008HK$'000
Net cash generated from/(used in) operating activities	809	450	(383)			830
Investing activities
Payment for the Acquisition	-	-	-	(40,000)	8,14	(40,000)
Acquisition of associates				(220)	6	(220)
Acquisition of subsidiary				(366)	4	(366)
Interest received	133	-	-			133
Purchase of trading securities	-	(450)	-			(450)
Acquisition of film rights	(5,692)	-	-			(5,692)
Acquisition of mining rights and deferred exploration costs	-	-	(822)			(822)
Acquisition of property, plant and equipment	(1,656)	-	(1)			(1,657)
Acquisition of intellectual property rights	(11,500)	-	-			(11,500)
Decrease in deposits for acquisition of film rights	1,063	-	-			1,063
Net cash used in investing activities	(17,652)	(450)	(823)			(59,511)
Financing activities
Proceeds from issue of new shares, net	43,828	-	-	412	4	44,240
Proceeds from issue of convertible notes	49,389	-	-			49,389
Increase in amounts due to a director/shareholders	(7,076)	-	-			(7,076)
Decreased in pledged bank deposits	2,981	-	-			2,981
New bank loans raised	4,492	-	-			4,492
Repayment of interest on bank and other borrowings	(1,515)	-	-			(1,515)
Repayment to shareholder	-	-	(6)			(6)
Advance from other parties	-	-	1,159			1,159
Repayment of bank and other borrowings	(16,202)	-	-			(16,202)
Repayment of interest element of finance lease	(49)	-	-			(49)
Repayment of capital element of finance lease	(380)	-	-			(380)
Net cash generated from financing activities	75,468	-	1,153			77,033
Net increase/(decrease) in cash and cash equivalents	58,625	-	(53)			18,352
Cash and cash equivalents at beginning of year	(8,798)	-	55			(8,743)
Changes in exchange rates	15	-	(13)			2
Cash and cash equivalents at end of year	49,842	-	(11)	(40,220)	8,14	9,611

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

Notes to the Unaudited Pro Forma Financial Information

(1) The balances are extracted from the audited financial information of the Group for the year ended 31 March 2008 as set out in Appendix I to this Circular.

(2) The balances are extracted from the audited information of First Pine for the period ended 30 June 2008 as set out in Appendix II to this Circular.

(3) The balances are extracted from the audited financial information of Mogan for the period ended 30 June 2008 as set out in Appendix III to this Circular and were translated to Hong Kong dollars at translation rates of PHP100 = HK$18.3 in respect of unaudited pro forma balance sheet and PHP100 = HK$19.0 in respect of the unaudited pro forma income statement and cash flow statement.

According to the Letter from the Board and the accountant’s report on Mogan as set out in this Circular, Mogan has neither commenced exploration work nor mining work on the mining claims for the period from 16 January 2007 (date of incorporation) to 30 June 2008. As a result, Mogan’s financial results during the six month period ended 30 June 2008 had not been subject to seasonal fluctuation.

(4) The adjustment is to reflect the financial information of MMH as if it had been in existence at 30 June 2008.

(5) The adjustment is to reflect the effect of the acquisition of the 40% interest in Mogan by MMH as if it had been in existence at 31 March 2008.

Details of the net identified assets to be acquired and goodwill arising from the Acquisition are calculated as follows:

	HK$'000
Cost of acquisition	366
Net identified assets to be acquired
– Net liabilities of Mogan (40% of HK$146,000)	58
– Goodwill written off	(424)

(6) The adjustment represents the interests in the 40% equity interest associates, namely Belgravia Investment and Triple Edge, each of them in turn holds 30% equity interest in Mogan.

The 24% (40% of 30% equity interest in each of Belgravia Investment and Triple Edge held by the Group) net liabilities of Mogan at the date of Completion, amounted to approximately HK$35,000.

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

Details of the net identified assets to be acquired and goodwill arising from acquisition of associates are calculated as follows:

HK$'000

First Pine’s 40% equity interests in Belgravia Investment and
Triple Edge – total cost of acquisition
220
Fair value of net identified assets to be acquired – Share of net assets of Mogan
-
Goodwill written off
-
(220)
-
HK$'000

Share of results of associates:
– Belgravia Investment (40% × HK$38,000)
(15)
– Triple Edge (40% × HK$38,000)
(15)
(30)

(7) Under the Hong Kong Financial Reporting Standard 3 Business Combination issued by the HKICPA, the Group will apply the purchase method to account for the acquisition of First Pine and Mogan in the consolidated financial statements of the Group.

The calculation is to reflect the effect of the Acquisition on the consolidated balance sheet of the Group as if the Acquisition had taken place on 31 March 2008.

Details of the net identified assets to be acquired and goodwill arising from the Acquisition are calculated as follows:

HK$'000

Total cost of acquisition (note 8)
5,680,698
Fair value of net identified assets to be acquired
– Net assets of the Target Group acquired (note 13)
(623)
– Mining claims
(5,680,075)
-
Goodwill
-

There is no goodwill arising from the acquisition of the Target Group. As the mining rights have not yet been granted by the relevant authorities in Philippine at the date of this circular, and based on the assumption the cost of investments equal to the fair value of the Target Group, the fair value of the mining claims is the excess of the consideration of HK$5,680,075,000 over the net assets of the Target Group:

HK$'000

Target Group’s 64% interest in mining claims
5,680,075
Minority’s 36% interest in mining claims
3,195,042
-
Total mining claims
8,875,117
-

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

(8) In accordance with the Acquisition Agreement (as defined in this Circular), the aggregate consideration of the Acquisition is HK$5,700,000,000, satisfied as to: (i) HK$40,000,000 in cash; (ii) HK$350,000,000 by the issue Consideration Shares by the Company at the date of Completion; (iii) HK$200,000,000 by the issue of the Promissory Note and (iv) HK$5,110,000,000 by the issue of the Convertible Bonds by the Company at the date of Completion.

An analysis of the total cost of Acquisition is set out as follows:

HK$'000

Consideration for the Acquisition:
Consideration Shares (note 10)	350,000
Fair value of Promissory Note (note 11)	180,698
Convertible Bonds (note 12)	5,110,000
Cash (note 14)	40,000
	5,680,698

Taking into account the fair value of the Promissory Note as mentioned in note (11) below, the aggregate fair value of the Group's purchase cost of the Acquisition amounted to HK$5,680,698,000.

(9) Upon granting the mining rights, the mining rights were valued at US$4,685,000,000 (equivalent to approximately HK$36,543,000,000) by B.I. Appraisals Limited based on the market value at 31 August 2008. The Company will be interested in 64% of the mining rights, i.e. HK$23,387,520,000. The Company is in the progress in obtaining the mining rights at the date of this Circular.

(10) The value of Consideration Shares issued for the Acquisition was based on 500,000,000 ordinary shares of HK$0.01 each of the Company issued at HK$0.70 per Consideration Share in accordance with the Acquisition Agreement. However, the fair value of the Consideration Shares issued as consideration for the Acquisition so arrived at as aforesaid and used for the purpose of the unaudited pro forma financial information set out above may be substantially different from their fair value at the date of Completion. Accordingly, the actual goodwill arising from the Acquisition may be different from that shown in note (7) above.

(11) The Promissory Note with the principal value of HK$200,000,000 is to be issued by the Company as consideration for the Acquisition. The Promissory Note is repayable in 4 installments over 1 year of the date of issue at no interest. The Company reserves the right to defer all installment payments until the final installment date i.e a lump sum payment on the 1.5 years of the date of issue. The Promissory Note is classified as a financial liability and should be initially measured at fair value, and subsequently measured at amortised cost, using the effective interest rate method. The fair value of the Promissory Note is determined at HK$180,698,000 at the date of issue using the discount rate of 7% per annum, which is within the range of the effective interest rate of the Group's existing financial facilities, over the entire term of the Promissory Note, i.e. 1.5 years. The shortfall of HK$19,302,000 of the fair value of HK$180,698,000 below the principal value of HK$200,000,000 will be recognised as an interest expense of the Group over a term of 1.5 years using the effective interest rate method. The effective interest expense of the Promissory Note amounts to HK$12,649,000 based on the applicable principal amount of HK$180,698,000 and interest rate of 7% per annum.

(12) The Convertible Bonds with an aggregate principal amount of HK$5,110,000,000 to be issued by the Company as consideration for the Acquisition will be separated into a liability component and an equity component for the purpose of recognition of the Convertible Bonds in the unaudited pro forma balance sheet in accordance with Hong Kong Accounting Standard ("HKAS") 32 Financial Instruments: Disclosures and Presentation issued by the HKICPA. The fair value of the liability component amounted to approximately HK$1,302,855,000, which was valued (i) using the discounted cashflow method with an effective discount rate of 14.64% at which the directors of the Company believe the Group could borrow funds of similar amount and similar terms of maturity; and (ii) based on the fact that the Convertible Bonds issued as consideration is ten-years zero coupon bond. As such, the liability component is 25.496% of the principal amount computed by the formula $1/(1+14.64\%)^10$. The residue amount of HK$3,807,145,000 was assigned to the equity component of the Company.

221

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

(13) The net assets of the Target Group acquired is calculated as follows:

	HK$'000
Net assets of First Pine	280
Net assets of MMH Group	343
	623

MMH and Mogan are referred to as the MMH Group.

(14) The cash portion of the consideration of the Acquisition was funded by internal resources of the Group.

(15) Upon the issuance of the 500,000,000 Consideration Shares of HK$0.7 per Consideration Share by the Company in connection with the Acquisition at value of HK$350,000,000, the share capital of the Company will be increased by approximately HK$5,000,000 and the share premium arising from the issuance is approximately HK$345,000,000.

(16) Being the recognition of the imputed interest expense for the Convertible Bonds, which is to be issued as consideration for the Acquisition in accordance with HKAS 39 Financial Instruments: Recognition and Measurement. The interest rate used for the purpose of this adjustment is 14.64%, being the rate used for the determination of the liability component of HK$1,302,855,000 of the Convertible Bonds as detailed in note (12), and the date of issue is assumed to be 1 April 2007 for the purpose of the unaudited pro forma income statement and cash flow statement of the Enlarged Group, and 31 March 2008 for the purpose of the unaudited pro forma balance sheet of the Enlarged Group. The effective interest expense of the Convertible Bonds amounts to HK$190,738,000 based on the applicable liability amount of HK$1,302,855,000 and interest rate of 14.64% per annum.

(17) Being the minority interests in the loss and mining claims of Mogan, (being the 36% of HK$8,875,117) as at 31 March 2008, calculated based on 64% equity interest in Mogan to be held by the Group pursuant to the terms of the Acquisition Agreement.

(18) This reflects the adjustment on the elimination of investments in subsidiaries and the pre-acquisition reserves.

(19) Adjustments 11 and 16 in pro-forma consolidated income statement and consolidated cash flow statement are expected to have a continuing effect on the Enlarged Group.

(20) As at the latest practicable date MMH will have the right to appoint two out of five directors of the board of Mogan and the agreed in principle arrangement as regards the fifth and last director of Mogan, the Company would have control over a majority of members of the board of Mogan and that Mogan can be treated as a subsidiary of the Group.

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

B. ACCOUNTANTS' REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

CCIF CPA LIMITED

陳業馮會計師事務所有限公司

20/F Sunning Plaza

10 Hysan Avenue

Causeway Bay Hong Kong

21 November 2008

The Directors

Intelli-Media Group (Holdings) Limited

Dear Sirs

We report on the unaudited pro forma financial information (the "Unaudited Pro Forma Financial Information") of Intelli-Media Group (Holdings) Limited (the "Company") and its subsidiaries (collectively referred to as the "Group") as set out in Appendix I to the circular dated 21 November 2008 (the "Circular") of the Company, in connection with the proposed acquisition of the entire issued share capital of First Pine Enterprises Limited (the "Acquisition"). The Unaudited Pro Forma Financial Information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Acquisition might have affected the relevant financial information of the Group. The basis of preparation of the Unaudited Pro Forma Financial Information is set out on in Section A of Appendix IV to the Circular.

Respective responsibilities of directors of the Company and the Reporting Accountants

It is solely the responsibility of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with paragraph 31 of Chapter 7 of the Rules Governing the Listing of Securities on The Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the "GEM Listing Rules") and with reference to Accounting Guideline 7 "Preparation of Pro Forma Financial Information for inclusion in Investment Circulars" issued by the Hong Kong Institute of Certified Public Accountants (the "HKICPA").

It is our responsibility to form an opinion, as required by paragraph 31 (7) of Chapter 7 of the GEM Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owned to those to whom those reports were addressed by us at the dates of their issue.

223

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

Basis of opinion

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

We planned and performed our work so as to obtain the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 31 (1) of Chapter 7 of the GEM Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and because of its hypothetical nature, it does not provide any assurance or indication that any event will take place in the future and may not be indicative of:

the financial position of the Enlarged Group as at 31 March 2008 or any future date; or
the results and cash flows of the Enlarged Group for the year ended 31 March 2008 or any future periods.

Opinion

In our opinion:

(a) the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 31 (1) of Chapter 7 of the GEM Listing Rules.

CCIF CPA Limited
Certified Public Accountants
Hong Kong

Leung Chun Wa
Practising Certificate Number P04963

APPENDIX V

TECHNICAL REPORT

The following is the text of the technical report in respect of the Mining Claims prepared by Behre Dolbear, Asia, Inc. for the purpose of inclusion in this circular.

1.0 EXECUTIVE SUMMARY 227
2.0 TERMS OF REFERENCE 230
3.0 DISCLAIMER 231
3.1 ELECTRONIC DISCLAIMER 231
3.2 RELIANCE ON OTHER EXPERTS 231
4.0 INTRODUCTION 232
4.1 LOCATION 232
4.2 CLIMATE 233
4.3 REGULATORY FRAMEWORK 233
4.4 PHILIPPINE GEOLOGY AND MINERALIZATION 235
4.5 EXPLORATION HISTORY (MAGNETITE) 236
4.6 GEOLOGY OF LEYTE 237
5.0 THE EXPLORATION PERMIT APPLICATION AREAS 242
5.1 PERMIT ACQUISITION 242
5.2 PERMIT TENURE AND LOCATION 242
5.3 DESCRIPTION OF THE PERMIT APPLICATION AREAS 246
5.4 SOURCES OF DATA 248
5.5 CCOP/MGB SURVEY (1981) 249
5.6 MMRDC/GCI/MGB SURVEY (2008) 252
5.7 CORRELATION WITH THE 1981 CCOP/MGB SURVEY 258
6.0 DISCUSSION OF SAMPLING RESULTS 260
6.1 SAMPLE PREPARATION AND FIELD ANALYSES (2008) 262
6.2 DATA VERIFICATION 262
7.0 EXPLORATION POTENTIAL 263
8.0 ENVIRONMENTAL IMPACT 265
9.0 CONCLUSIONS 266
10.0 RECOMMENDATIONS 267
11.0 PROPOSED EXPLORATION PROGRAMME 268
12.0 REFERENCES 268
13.0 COMPETENT PERSON - QUALIFICATIONS AND EXPERIENCE 269

APPENDIX 1 Grab Sample Data and Reports 271

APPENDIX 2 Piston-core Sample Data and Reports 282

LIST OF TABLES

Table S1 Summary Exploration Potential of the four Priority Areas 229
Table 1 Mineralogy of Magnetite-bearing sand 241
Table 2 Exploration Permit No. EXPA 000110-VIII (Leyte Gulf) (Area = 157.81 km²) 243
Table 3 Exploration Permit No. EXPA OMR002-VIII 245
Table 4 Selected sand-grade sample results. 262
Table 5 Summary of Exploration Potential of the 4 Priority Area 265

APPENDIX V

TECHNICAL REPORT

LIST OF FIGURES

Figure 1 Location map of Leyte Island in the Philippine Republic 233
Figure 2 Simplified tectonic map of the Philippines 236
Figure 3 Geology of Leyte Island 238
Figure 4 Landsat image of east coast of Leyte near Tolosa showing fossil dunes/strand lines 240
Figure 5 Sampling magnetite-bearing sand (dark colouration) at Tolosa Beach, Leyte 240
Figure 6 Exploration Permit Application EXPA 000110-VIII (Source: Admiralty Chart) 244
Figure 7 Exploration Permit Application EXPA OMR002-VIII (previously 000115-VIII) 246
Figure 8 Location of the San Pedro Bay and Leyte Gulf Permit Applications. 247
Figure 9 Geological interpretation along seismic profile 8 (adapted from CCOP, 1982) 251
Figure 10 Sea-bed geology of Leyte Gulf and seismic profiles (Source: CCOP, 1981) 252
Figure 11 Survey vessel "RPS Explorer" 253
Figure 12 Sea-Bed bathymetric Map of San Pedro Bay and Leyte Gulf 254
Figure 13 Track of the Boomer Seismic survey (2008). 255
Figure 14 Location of 12 KHz Echo Sounder Tracklines (2008). 256
Figure 15 Location of Grab Samples of Sea-bed Sediment in Leyte Gulf. 257
Figure 16 Location of Piston-Core samples of Sea-bed Sediments in Leyte Gulf 258
Figure 17 Seismic interpretation of thickness of mud layer (Unit 5) in San Pedro Bay 259
Figure 18 Apparent concentration of magnetic fraction due to sample loss 263

APPENDIX V

TECHNICAL REPORT

1.0 EXECUTIVE SUMMARY

Behre Dolbear Asia, Inc. (Behre Dolbear) was asked by BI Appraisals Limited (BIA), based in Hong Kong, to prepare an independent technical appraisal of a magnetite sand project held by Mt. Mogan Resources and Development Corporation (MMRDC), in Leyte Gulf off the east coast of Leyte Island in the Philippines Republic, in which Black Sand Enterprises Limited (BSEL) had, or proposed to acquire, an interest. Behre Dolbear was not asked to comment on the legal structure of MMRDC or BSEL, nor on the legal status or validity of the properties.

As of 30th May 2008, Mt. Mogan was still in the process of securing all the required clearances from the Department of Environment and Natural Resources and from the Bureau of Fisheries and Aquatic Resources. These clearances are required to determine whether the entire area applied for by Mt. Mogan is open for mining. As far as Behre Dolbear was aware, the situation had not changed at the time of preparing this report on 1st September 2008.

The 1987 Philippine Constitution vests all mineral resources in the State and provides for mineral rights in the form of Exploration Permits, Mineral Agreements and Financial or Technical Assistance Agreements (FTAA). An Exploration Permit provides the right to explore in a specified area for a term of two years, renewable for a maximum of eight years for metallic minerals and six years for non-metallic minerals.

There is a long history of mining iron ore in the Philippines, but production ceased in 1977 when beach-sand and the issue of off-shore mining Permits was suspended for environmental reasons. After the suspension of off-shore mining was lifted in 2004, MMRDC identified the off-shore magnetite iron-ore potential in Leyte Province, where magnetite, in the form of titaniferous-magnetite beach-sand type deposits, was known to occur along a 40 km length of coastline south of Tacloban. Some of these deposits were explored in the 1970's and at least one deposit was mined prior to the ban on beach mining. These beach deposits ranged from 2m to 5m in thickness and contained up to 30% magnetite although the magnetite layers were discontinuous both vertically and horizontally, so that the average magnetic fraction was in the order of 15% to 20%. Some reports indicated that the magnetite content increased with depth and the highest magnetite values were found resting on the bed-rock surface.

In 1981, a marine seismic reflection and magnetic survey was carried out in Leyte Gulf, by the Coordinating Committee for Off-shore Prospecting (CCOP), the Bureau of Coast and Geodetic Survey and the Mines and Geosciences Bureau (MGB). The survey revealed the occurrence of potential magnetite-bearing sand deposits along the western side of Leyte Gulf within a sandy sedimentary sequence similar to the magnetite-bearing sediments on-shore. This mineralised sedimentary unit (Unit 3) occurs along the western side of Leyte Gulf parallel to the shoreline of Leyte Island where most of the sediment of this unit is believed to have originated. It extends from the mouth of San Pedro Bay for about 45 km south to latitude 10°40′N. On the seismic profiles, the thickness of this Unit 3 was estimated to be about 20 to 60 metres. The depth to the top of this unit, measured from the sea-bed surface, varies from 30 to 90 metres with a veneer of muddy overburden (Unit 5) ranging in thickness from less than 1m to 25m.

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In early 2008, MMRDC applied for four offshore mining licences for magnetite sand and other associated minerals, identified as EXPA 000110-VIII (Area = 157.81 km²) in Leyte Gulf and EXPA OMR002-VIII (Area = 253.12 km²) in San Pedro Bay, Province of Leyte and two other Permits EXPA 000099-VI (Area = 172.05 km²) in Binalbagan and Hinigaran Province of Negros Occidental, and EXPA 000166-XIII (Area = 155.35 km²) in Tandag and Cagwait Province of Surigao del Sur. However, for the purpose of this independent technical appraisal, only the information pertaining to EXPA 000110-VIII and EXPA OMR002VIII in Leyte Province have been reviewed and is being appraised. However, none of these Off-shore Exploration Permits had been approved or granted at the date of preparing this report. In May 2008, First Pine Enterprises Limited (FPE) agreed to acquire an effective 64% interest in MMRDC and subsequently BSEL agreed to acquire the entire share capital of FPE.

In 2008, Mt. Mogan commissioned an assessment of the potentially magnetite-bearing sand deposits in San Pedro Bay and Leyte Gulf, including collection of sea-bed sediment grab-samples and piston-core samples within the Exploration permit applications EXPA 000110-VIII (Leyte Gulf) and EXPA OMR002-VIII (San Pedro Bay). This new data was collected by the Marine Geology Section of the Mines and Geosciences Bureau, using the government-owned marine research vessel "RPS Explorer"

A total of 96 grab samples and 27 piston-core samples were collected within the EXPA 000110-VIII (Leyte Gulf) area and a total of 57 grab samples and 25 piston-core samples were collected within the EXPA OMR002-VIII (San Pedro Bay) area. Samples typically consisted of about 5 to 10 kilograms of sediment. The locations of the sample sites are shown on Figures 15 and 16.

The magnetic fraction content of the grab samples ranged from 1% to 41.78%.

Most of the samples consisted of an olive-green silty mud that corresponds to the most recent sedimentary unit (Unit 5) identified by the 1981 MGB-CCOP-UNDP survey. These mud samples had a magnetic fraction content ranging from 1% to 4.6%, with the average being about 2% magnetic fraction content.

The smaller number of sand-grade samples, possibly representing the underlying Unit 3 sand horizon, had a magnetic fraction content ranging from 5% to 15% with the average being about 10% (if sample No.LEY26 is excluded).

These sampling results are comparable with the results reported from the historical on-shore mining activity on the east coast of Leyte and demonstrate that potentially economic magnetite grades extend for a considerable distance off-shore. However, these sampling results are too widely spaced to be considered representative of a mineral resource as defined by the JORC Code.

By analogy with the historical data from the on-shore mining areas along the east coast of Leyte Island, the economically significant magnetite-bearing sands may be restricted to the lower part of the sand horizon. Therefore, if a conservative average thickness of 10m for the magnetite-bearing sand horizon is assumed, then the exploration potential of the Permit Application areas is in the order of 10 million tonnes per square kilometre.

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The current price of magnetite is about US$130/t, so, allowing for post-mining costs such as transport and shipping, an assumed mine-gate value of US$100/t is not unreasonable. On this basis, each 1% of magnetite content may equate to about US$1/t mine revenue. Therefore, the minimum in-situ magnetite content that would be of economic interest would be about 10%, equating to about US$10/t mine revenue.

The available seismic and sampling data indicate that such a magnetite-bearing sand horizon extends over almost the whole of the Permit Application areas. However, the area can be sub-divided into smaller exploration targets based on factors such as the water-depths, the nature of the sea-bed, and the mineral potential of the sea-bed sediments.

The first priority target should be the north-west part of San Pedro Bay north of latitude 11°12' and west of Jinamoc Island, where there are large areas of sandy sea-bed with water depths of less than 10m.

The second priority should be the northeast part of San Pedro Bay north of latitude 11°12' and east of Jimanoc Island, where there are some limited areas of sandy sea-bed, large areas of muddy sea-bed and numerous bed-rock and/or coral reefs, in water depths of less than 10m.

The third priority should be the southern two-thirds of the San Pedro Bay Permit Application area between 11°00' and 11°12' latitude, where there is sample data showing the presence of muddy sediments containing up to 4% magnetite that may form a cover several metres in thickness over the higher-grade magnetite-bearing sand horizon.

The forth priority should be the Leyte Gulf Permit Application area south of 11°00' latitude, where the cover of low-grade mud (Unit 5) may be 10m to 20m in thickness; and where there are numerous coral reefs and water depths of 20m to 40m, that would make exploration more difficult than in the northern areas.

Table S-1 Summary Exploration Potential of the four Priority Areas

PRIORITY/ PERMIT AREA	WATER DEPTH	SEDIMENT TO DEPTH BEDROCK	AREA km²	POTENTIAL THICKNESS OF SAND*	POTENTIAL TONNAGE OF SAND**	POTENTIAL THICKNESS OF MUD/ OVERBURDEN
1 NW 002	2 – 10 m	0 – 10 m	50	0 – 5 m	200 – 500 Mt	0 – 1 m
2 NE 002	2 – 10 m	1 – 20 m	50	0 – 5 m	100 – 500 Mt	1 – 5 m
3 Sthn 002	10 – 20 m	20 – 90 m	150	5 – 10 m	1500 – 3000 Mt	4 – 10 m
4 All 110	20 – 50 m	30 – 90 m	150	5 – 10 m	1500 – 3000 Mt	5 – 25 m
TOTAL	–	–	400	–	3300 – 7000 Mt	0 – 25 m

Assume only the Lower half of the sand horizon is mineralised.
** Assume S.G. (Specific Gravity) of 2.0 for in-situ material.

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TECHNICAL REPORT

This indicates that the total exploration potential of the two Permit Application areas is in the order of 3300 to 7000 million tonnes of magnetite-bearing sand at an unknown grade, but potentially greater than 5% magnetic fraction. This material does not meet the definition of a mineral resource as defined by the "Australian Code for reporting of Exploration results, Mineral resources and Ore reserves" (the JORC Code).

Further exploration work is recommended to locate areas of sand-grade sediments within the offshore Permit Application areas. This should include drilling one or more deep cored drill-holes down to bed-rock to investigate and sample the stratigraphy of the sedimentary cover in the northern and central parts of the bay. This may require drilling to a depth of 10m to 30m below the sea-bed depending on location. These stratigraphic drill-holes should then be used as "ground-truth" to re-interpret the existing seismic and other geophysical data in order to better identify any magnetite-bearing sand horizons.

2.0 TERMS OF REFERENCE

Behre Dolbear Asia, Inc. was asked by BI Appraisals Limited (BIA), based in Hong Kong, to prepare a technical appraisal of a magnetite sand project located off the east coast of Leyte Island in the Philippines Republic in which Black Sand Enterprises Limited (BSEL) had, or proposed to acquire an interest.

The appraisal commenced with a visit during the period 25th to 30th August 2008 to the BSEL offices in Manila to review the available technical data, and included a site visit to the project area in Leyte Province. Following the site visit, this report was prepared by Behre Dolbear in accordance with internationally accepted standards for the classification and reporting of exploration results, mineral resources and ore reserves, as published by the Australasian Institute of Mining and Metallurgy (the JORC Code, 2004).

The reporting and classification standards used in this report are consistent with JORC, the internationally recognized standards for Australasian Institute of Mining and Metallurgy standards.

The work undertaken included a technical review of all the relevant information available from Global Consult Inc (GCI), the Mines and Geosciences Bureau (MGB) and MMDC and obtained during the site visit, as was considered appropriate for an evaluation of the exploration and mineral resource potential of the Exploration Permit Application areas.

Persons assisting included:

Name	Position	Organisation
William Sham	Executive Director	BI Appraisals Limited
Ross Tsang	Associate Director	BI Appraisals Limited
Richard Kwong	Managing Director	Black Sand Enterprises Limited
Denny Wong	Director	Black Sand Enterprises Limited
Edgardo Gonzales	Chief, Marine Geological Survey Division	Mines and Geosciences Bureau
		Department of Environment and Natural Resources
Ramesh Paliza	Geologist	Global Consult Inc.

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TECHNICAL REPORT

3.0 DISCLAIMER

Behre Dolbear does not accept any liability other than its statutory liability to any individual, organization or company and takes no responsibility for any loss or damage arising from the use of this report, or any information, data, or assumptions contained therein. With respect to the Behre Dolbear report, and its use thereof by BIA., each entity does agree to indemnify and hold harmless Behre Dolbear, its shareholders, directors, officers and associates from any and all losses, claims, damages, liabilities or actions to which they or any of them may become subject under any securities act, statute or common law and will reimburse them on a current basis for any legal or other expenses incurred by them in connection with investigating any claims or defending, any actions.

3.1 ELECTRONIC DISCLAIMER

Electronic mail copies of this report are not official unless authenticated and signed by Behre Dolbear and are not to be modified in any manner without Behre Dolbear's expressed written consent.

3.2 RELIANCE ON OTHER EXPERTS

Behre Dolbear has not been asked to comment on the legal structure of MMRDC or BSEL, nor on the legal status or validity of the properties.

Behre Dolbear has relied on the written advice of BSEL's legal advisors, PJS Law, that the Off-shore Mineral Exploration Permit Applications discussed in this report are Exploration Permit Applications pending before the regional offices of the Mines and Geosciences Bureau (MGB) that, as of 3rd June 2008, had been properly applied for and that based on the pre-plotting done by MGB, the Application areas were not in conflict with any existing mining rights, permits or applications. As of 30th May 2008, MGB Region VI was still in the process of securing all the required clearances from the different divisions of the Department of Environment and Natural Resources and from the Bureau of Fisheries and Aquatic Resources. These clearances are required to determine whether the entire area applied for by MMRDC is open for mining.

After obtaining all the clearances, the next steps will be as follows:

a. Obtain the Areas Status Clearance from the One-Stop-Shop Committee;
b. Publication, posting and radio announcement of the applications;
c. Obtain certifications for the publication, posting and radio announcement;
d. Obtain certifications from the Panel of Arbitrators that there is no protest or opposition to the application, or that any protest or opposition has been resolved;
e. Obtain National Commission for Indigenous Peoples (NCIP) clearance;
f. Presentation of Environmental Work Program and Exploration Work Program to the affected local government units (if required);
g. Submission of documents to MGB Central Office for final evaluation;
h. Issuance and registration of Exploration Permit by MGB Regional Office. (Collectively the "EP Clearances")

APPENDIX V

TECHNICAL REPORT

Since the MGB regional office has accepted these exploration permit applications, it presupposes that the applied areas are not in conflict with any existing mining rights, permits or applications. Legally, however, these Applications do not confer any rights to MMRDC unless and until they are approved by the MGB. If and when approved, they will entitle MMRDC to conduct exploration activities in the applied areas, but will not entitle the company to engage in extraction of minerals. These applications, however, give the company priority over the applied areas. This means that the applied areas cannot be the subject of other exploration or mining applications until MMRDC’s applications are denied, in which case they will again be considered open areas.

The processing of an exploration permit application can take between 6 months to 2 years. This is mainly due to the number of government offices involved in the clearance and approval process and documentary submissions required. Further, extensive coordination with and monitoring of the concerned agencies is necessary in order for the approval process to progress significantly.

As far as Behre Dolbear is aware, the situation had not changed at the time of preparing this report on 1st September 2008, but during the early part of September, MMRDC was in negotiations with the DENR to establish a joint exploration programme with the MGB over the Leyte Permit Application areas.

4.0 INTRODUCTION

The Philippines is an English-speaking country, but with over a hundred different ethnic groups, there is a rich local culture that pre-dates the Spanish and American heritage.

The Philippine archipelago consists of 7,107 islands that extend from just south of China to the northern tip of Borneo. The country is divided into three geographical areas: Luzon in the north, Visayas in the centre and Mindanao in the south. Administratively, it is divided into 17 regions, 79 provinces, 115 cities, 1,499 municipalities, and 41,969 Barangays (a Barangay is the smallest political unit into which cities and municipalities in the Philippines are divided. They consist of less than 1,000 inhabitants residing within the territorial limit of a city or municipality).

4.1 LOCATION

The Philippine archipelago is located between latitude $40^{\circ}23'\mathrm{N}$ and $21^{\circ}25'\mathrm{N}$ and longitude $116^{\circ}\mathrm{E}$ and $127^{\circ}\mathrm{E}$ with a land area of $299,764\mathrm{km}^2$. It extends about $1,850\mathrm{km}$ north to south and about $965\mathrm{km}$ from east to west. The total coastline adds up to $17,500\mathrm{km}$.

The topography of the larger islands – Luzon and Mindanao – and most of the smaller islands, is characterized by a central core of high hills or mountains cut by narrow valleys and surrounded by narrow alluvial coastal plains. The highest mountains range from 1,790 to 3,144 metres in altitude.

The capital city, Metro Manila, is located in the centre of Luzon, at the mouth of the Pasig River on the eastern coast of Manila Bay.

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TECHNICAL REPORT

Figure 1 Location map of Leyte Island in the Philippine Republic

4.2 CLIMATE

The Philippines has a tropical climate with abundant rainfall. There are three seasons: the wet or rainy season from June to October, the cool, dry season from November to February, and the hot, dry season from March to May.

Temperatures in Manila range from $21^{\circ}\mathrm{C}$ to $32^{\circ}\mathrm{C}$ with a $27^{\circ}\mathrm{C}$ average. The coolest month is January and the warmest is May. Both temperature and humidity levels reach the maximum in April and May.

4.3 REGULATORY FRAMEWORK

The Philippine Constitution vests all mineral lands, minerals and mineral resources in the State. The Republic Act No. 7942 (also known as the Philippine Mining Act of 1995) designates the Department of Environment and Natural Resources (DENR) as the main agency for supervision and management of all activities concerning the country's mineral resources. DENR devolves the jurisdiction of mining lands and mineral resources to the Mines and Geosciences Bureau (MGB).

Mineral exploration and mining activity is also subject to other laws including Presidential Decree 1586, on environmental impact statement and other issues related to environmental management; RA 7586 or the National Integrated Protected Areas System (NIPAS) Act of 1992; RA 7160 or the Local Government Code of 1991; and RA 7916 or the Special Economic Zone Act of 1995.

The 1987 Constitution provides for mineral rights in the form of Exploration Permits, Mineral Agreements and Financial or Technical Assistance Agreements (FTAA).

APPENDIX V

TECHNICAL REPORT

An Exploration Permit (EP) grants the right to explore in a specified area for a term of two years, renewable for a maximum of eight years for metallic minerals and six years for non-metallic minerals.

A Mineral Agreement may be in the form of a Mineral Production Sharing Agreement (MPSA), Co-Production, or Joint-Venture Agreement, and grants the contractor the right to conduct mining operations within a contract area and share in the gross output. These Agreements have terms of 25 years, renewable for a further 25 years and are open to Filipinos or to corporations with 60% Filipino equity.

An FTAA is intended to cover financial or technical assistance for large-scale exploration, development and utilisation of mineral resources. This type of contract is open to Filipino and foreign corporations with up to 100% foreign equity and has a term of 25 years, renewable for a further 25 years.

An important feature of the Mining Act is the annual mandatory relinquishment of part of the area granted to the contractor; and after the exploration stage, reduction to a final mining area of not more than 5,000 ha for metals and 1,000 ha for non-metals.

Various interest groups have questioned the constitutionality of the Mining Act, but on December 1, 2004, the Supreme Court affirmed the constitutionality of the Philippine Mining Act and its Implementing Rules and Regulations insofar as they relate to financial or technical assistance agreements.

National Policy to Promote and Revitalize Mining

In 2003, President Gloria Macapagal-Arroyo announced a change in government policy "from tolerance to active promotion of the mining industry" and signed Executive Order No. 270 on January 16, 2004 setting out the "National Policy Agenda on Revitalizing Mining".

Executive Order 270 stated that the exploration, development and utilization of the country's mineral resources should be pursued within the framework of sustainable development and must contribute to the country's economic growth, environmental protection and social equity and development. The twelve principles that guide the revitalization policy for mining are summarized as follows:

Recognize the critical role of investments in the mineral industry.
Institute clear, stable and predictable investment and regulatory policies.
Pursue value-adding of minerals and products.
Recognize and formalize the small-scale mining sector.
Adopt efficient technologies in the extraction and utilization of minerals.
Integrate environmental protection, mitigation and progressive rehabilitation in mining projects.
Safeguard the ecological integrity of areas affected by mining including biodiversity and small-island ecosystems.
Pursue mining within the framework of multiple land use and sustainable utilization of minerals.
Remediate and rehabilitate abandoned mine sites.
Ensure equitable sharing of economic and social benefits from mining.
Enhance public awareness and respect for the rights of communities.
Institutionalize continuous and meaningful consultation processes with the industry and other stakeholders.

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TECHNICAL REPORT

The Minerals Action Plan (MAP) identifies specific mining issues, concerns, strategies and activities formulated to address the mining rehabilitation policy guidelines. The MAP is now being implemented by government agencies, the private sector and other stakeholders.

4.4 PHILIPPINE GEOLOGY AND MINERALIZATION

The geology of the Philippines is complex, as it consists of a collage of continental metamorphic terrains, magmatic arcs, ophiolitic complexes and marine sedimentary basins, all of which have been subjected to tectonic processes of subduction, collision and major strike-slip faulting.

The continental block includes northern Palawan, southern Mindoro, Romblon Island Group and the Buruanga Peninsula in Panay Island, known collectively as the North Palawan Block. This area is mainly composed of schists and chert formations of Late Permian to Jurassic age.

The rest of the archipelago consists of the Philippine Mobile Belt that is approximately co-axial with the Philippine Fault, a major strike-slip fault that may have developed in response to the tectonic forces related to the subduction along the mobile belt. Many parts of the mobile belt are underlain by ophiolitic complexes ranging in age from Jurassic to early Paleogene. These consist of tectonized peridotite, layered gabbro, sheeted dike complex, pillow basalts and pelagic sedimentary rocks. The ultramafic rocks within the ophiolites host deposits of chromite and nickel. Laterites over these rocks also contain economic deposits of secondary nickel minerals. Massive sulphide and manganese deposits are associated with the volcanic and sedimentary rocks within the ophiolite sequences.

The magmatic arcs in the mobile belt are characterized by thick volcanic flows intercalated with pyroclastic and sedimentary rocks, and intrusions of diorite, quartz diorite and andesitic to dacitic rocks. The age of the diorite intrusions varies from Early Cretaceous to Pliocene. Younger volcanic rocks, occurring as flows and intrusions, are associated with active subduction zones, such as the Bataan volcanic belt and Bicol volcanic chain.

The subduction zones include the west-dipping Philippine Trench extending from Mindanao to Luzon and the East Luzon Trough. The East-dipping subduction zones include the Manila Trench, Negros Trench and the Cotabato Trench (figure 2).

Sedimentary basins located between the volcanic arcs include the Ilocos-Central Valley Basin, Cagayan Valley Basin, southeast Luzon Basin, Visayan Sea Basin, Agusan-Davao Basin and Cotabato Basin.

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Figure 2 Simplified tectonic map of the Philippines

4.5 EXPLORATION HISTORY (MAGNETITE)

The principal types of iron deposits in the Philippines are primary contact-metasomatic, skarn-type magnetite deposits associated with the Neogene intrusions of diorite and quartz diorite, and residual beach-sand (magnetite) deposits. The total magnetite resources have been estimated to be about 4 billion tonnes, but grades are generally low.

Iron mining dates back to pre-Spanish times when the art of smelting was introduced by the Chinese. In the modern era, significant mining of iron ore did not start until 1934 (at Jose Panganiban, Camarines Norte). Several other mines followed, but all were closed during the 1939-45 war. Production resumed in 1948 and by 1952 output had reached 1 million tonnes. From 1971 to 1973 production peaked at over 2.2 million tonnes annually. Thereafter, the industry declined rapidly as iron-ore prices declined on the world market and production ceased in 1977 when beach-sand and off-shore mining was suspended for environmental reasons. Only insignificant quantities of iron ore have been produced in recent years, mostly as a by-product of other mining operations. Most of the iron ore produced in the Philippines was exported to Japan.

APPENDIX V

TECHNICAL REPORT

Filmag Inc. and Inco Mining Corporation were the two principal beach-sand mining operators prior to the cessation of production in 1976 as a result of the ban on beach and off-shore mining operations (J. C. Fernandez, 1976, Iron resources of the Philippines, Phil-1692:14).

In January 2004, President Gloria Macapagal Arroyo issued Executive Order No. 270 intended to revitalize the mining industry, based on the objectives of sustainable development: economic development, environmental protection and social equity. The lifting of the ban on off-shore mining in 2004 and the subsequent Supreme Court ruling in 2005 permitting ownership by foreign companies, have stimulated interest and investment in the mining industry. In order to implement Executive Order 270, the DENR, in collaboration with other national agencies, has established the Minerals Action Plan (MAP) to revitalize the mining sector.

Following these developments, MMRDC reviewed the historical data that had been collected by the MGB in collaboration with CCOP (Coordinating Committee for Offshore Prospecting), UNDP (United Nations Development Program) and ESCAFE (Economic Commission for Asia and the Far East) under project RAS/86/138, that identified the off-shore magnetite iron potential in various parts of the country, including off-shore Leyte, and applied for offshore mining licences over these areas.

4.6 GEOLOGY OF LEYTE

The geological development of Leyte Island, Leyte Gulf and Samar Island is reasonably well documented. They are located within the Philippine Rift Zone and major NNW-trending fault lines traverse Leyte Island. The area experienced strong earthquakes in 1907, 1948 (M=6.9) and 1984 (M=6.4).

Leyte Island includes four broad lithological units:

(i) the Miocene & Older Systems, including metamorphic schists and a mafic igneous complex of probable Cretaceous to Oligocene age.

(ii) the Plio-Pleistocene Sedimentary Series deposited from early Miocene to Pleistocene times.

(iii) the Quaternary volcanic series, and

(iv) the Recent Sedimentary (Holocene) Series of near-surface unconsolidated sediments.

The rocks that may have been the source of the magnetite and other associated placer minerals were probably the Miocene and Quaternary volcanic rocks that range in composition from andesitic to gabbroic (i.e. rich in ferromagnesian minerals). The rivers and tributaries draining the area of the known magnetite beach deposits traverse a greater proportion of these volcanic rocks than rivers in other areas (Zerda, 1974). The magnetite sand may also have been derived by reworking of the younger (Quaternary) sedimentary cover.

APPENDIX V

TECHNICAL REPORT

Figure 3 Geology of Leyte Island

Magnetite Placer Deposits

In the 1970s the Philippines government, through the MGB, recognised the great potential of the coastal and offshore areas of the archipelago for placer minerals and marine aggregates and carried out beach-sand and near-shore exploration surveys and resource assessments in various parts of the country. This work came to halt when beach-sand and offshore mining was unofficially suspended in 1986 and officially suspended in 1994.

APPENDIX V

TECHNICAL REPORT

The formation of beach and near-shore placer deposits starts with the mechanical and chemical breakdown of rocks containing appreciable amount of heavy minerals, including magnetite, that are resistant to both mechanical and chemical disintegration. This is followed by the transportation of these minerals by streams and rivers and their eventual accumulation along the coasts and beaches by the combined concentrating mechanism of waves and currents that sort the heavy minerals, such as magnetite, from the lighter minerals such as quartz and feldspar.

The coastline of eastern Leyte, particularly from Tacloban south to Abuyog was known to have good potential for economic occurrences of titaniferous magnetite sand deposits, as prior to the ban on beach mining, several mining and exploration companies had mining claims in these areas.

The Great Pacific Mining Corporation had mineral claims along the coast of San Pedro Bay and Leyte Gulf commencing near Barangay San Jose in Tacloban City and extending about 6 km southward to the town proper of Tolosa. From the available literature, the magnetite sand deposit within the claim area held by the Great Pacific Mining Corporation, contained an estimated geological resource, based on a minimum cut-off of 5% magnetic fraction, of 2.255 million tonnes of beach sediments with an average depth of 3.3m that, where sampled, contained a magnetic fraction ranging from 3.9% to 27.3% and averaged 9.7%. The magnetic fraction assayed 59% Fe and 7% TiO₂. (Zerda, 1974).

The INCO mining corporation had a magnetite mining operation in the municipalities of Dulag, McArthur and Tolosa, about 30 km south of Tacloban Leyte. This was located in an area of old sand dunes about 1 km inland from the coastline. The magnetite bearing sands were 2m to 5m thick and the magnetic fraction increased with depth with the highest values occurring immediately above the bedrock. The average grade varied from area to area within the range of 15% to 20%. The specific gravity averaged 1.8. The production was transported by conveyor belt to a small jetty and then by barge to larger ships offshore.

Pacific Minerals and Petroleum Corp held mineral claims further south in the municipalities of Javier and MacArthur 55 km south of Tacloban. The magnetite bearing sand ranged from 1m to 3m (average 2m) in thickness. The average magnetic fraction content was about 20% and occurred as thin layers and lenses up to 30 cm thick, separated by layers of light coloured quartz sand.

These past investigators mostly agreed that the probably source of the magnetite sand in these areas were the andesite, dacite and iron-bearing sedimentary rocks that occur in the mountainous hinterland to the west. Progressive reworking of the placer deposits by sea currents and wave action has resulted in the development of the heavy mineral rich sand and gravel deposits. Strand lines that indicate higher grade magnetite deposit belts are not identifiable at ground level but can be identified in satellite imagery (figure 4).

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TECHNICAL REPORT

Figure 4 Landsat image of east coast of Leyte near Tolosa showing fossil dunes/strand lines

Figure 5 Sampling magnetite-bearing sand (dark colouration) at Tolosa Beach, Leyte

APPENDIX V

TECHNICAL REPORT

In 2006-07, some mineralogical tests were carried out on samples collected on-shore in the vicinity of MacArthur. The results of these tests are presented in table 1 below:

Table 1 Mineralogy of Magnetite-bearing sand

Sample-Hole	RC 02	RC 02	RC 02
Depth (m)	0-1	1-2	2-3
SINKS/FLOATS USING TBE @ SG = 2.95
Oversize reject +2mm	-	0.1	-
Undersize reject -53um	4.3	7.7	3.3
Light Fraction (Floats %)	30.7	32.6	26.8
Heavy fraction (Sinks %)
Magnetic	18.7	27.3	33.6
Ferromagnetic	21.1	18.9	23.1
Paramagnetic	25.0	13.2	13.2
Non Magnetic	0.1	0.2	0.1
Total Heavy Fraction	64.9	59.6	69.9
Total All Fractions	99.9	100.0	100.0
MINERALOGY OF MAGNETIC FRACTION (%)
Titanomagnetite	44.7	34.5	29.3
Altered Titanomagnetite	27.4	30.4	35.9
Titanomagnetite/Hematite	12.2	20.6	16.3
Hematite	3.7	1.1	4.6
Hematite/Titanomagnetite	2.9	-	5.3
Titanomagnetite/Ilmenite	-	0.4	-
Hematite/Ilmenite	0.5	2.1	-
Ilmenite	2.0	3.7	3.7
Goethite	1.1	2.3	3.1
Staurolite	5.1	-	-
Pyroxene/amphibole	-	4.7	1.6
Biotite	0.3	-	-
Others	-	0.2	0.2
Total	99.9	100.0	100.0
MINERALOGY OF FERROMAGNETIC FRACTION (%)
Titanomagnetite	2.8	1.4	0.4
Altered Titanomagnetite	-	-	0.3
Titanomagnetite/Hematite	-	-	0.9
Hematite	3.3	6.9	7.1
Hematite/Titanomagnetite	1.9	5.5	5.8
Hematite/Rutile	8.2	12.6	19.7
Ilmenite	2.6	4.3	4.2
Goethite	-	-	0.3
Chromite	-	-	0.9

APPENDIX V

TECHNICAL REPORT

Zircon	0.5	-	-
Pyroxene/amphibole	79.8	69.3	58.6
Epidote	-	-	1.4
Others	0.8	-	0.3
Total	99.9	100.0	99.9

ANALYSIS OF TITANOMAGNETITE GRAINS

Fe	70.2	67.1	71.4
FeO	90.3	86.4	91.8
TiO2	8.8	12.5	7.3
MnO	0.9	1.1	0.9

These tests show that the bulk of the magnetic heavy-mineral fraction consists of titano-magnetite, partially altered to hematite, that contains between $67\%$ and $71.4\%$ Fe (average $69.5\%$ Fe) and between $7.3\%$ and $12.5\%$ (average $9.5\%$ ) $\mathrm{TiO_2}$ .

5.0 THE EXPLORATION PERMIT APPLICATION AREAS

5.1 PERMIT ACQUISITION

In March and April 2008, Mt. Mogan Resources and Development Corporation (MMRDC), a company registered in the Philippines, applied for four Off-shore Exploration Permits for magnetite sand and other associated minerals, identified as EXPA 000110-VIII in Leyte Gulf and EXPA OMR002-VIII in San Pedro Bay, in the Province of Leyte; as well as EXPA 000099-VI in Binalbagan and Hinigaran Province of Negros and EXPA 000166-XIII (Area = 155.35 km²) in Tandag and Cagwait Province of Surigao del Sur. However, for the purpose of this independent technical appraisal, only the information pertaining to EXPA 000110-VIII and EXPA OMR002-VIII have been reviewed and is being appraised. In any event, none of these Off-shore Exploration Permits have yet been approved or granted.

In May 2008, First Pine Enterprises Ltd (FPE) agreed to acquire an effective $64\%$ interest in MMRDC. Black Sand Enterprises Limited (BSEL), a wholly-owned subsidiary of Intelli-Media Group (Holdings) Ltd (IMG), has agreed to acquire the entire share capital of FPE.

5.2 PERMIT TENURE AND LOCATION

EXPA 000110-VIII was applied for on 18th March 2008 and is located in Leyte Gulf on the eastern seaboard of Leyte Island in the central part of the Philippine archipelago. The Permit Application covers an area of 15,781.611 hectares $(157.81\mathrm{km}^2)$ in the Municipalities of Tanauan, Tolosa, Dulag, Mayorga, MacArthur and Abuyog in the Province of Leyte. The Application area lies about $3\mathrm{km}$ off-shore, varies from $2\mathrm{km}$ to $6\mathrm{km}$ in width and is $43\mathrm{km}$ in length from north to south. The co-ordinates of the Permit Application are:

APPENDIX V

TECHNICAL REPORT

Table 2 Exploration Permit No. EXPA 000110-VIII (Leyte Gulf) (Area = 157.81 km²)

CORNER No.	LATITUDE (NORTH)	LONGITUDE (EAST)
1	10°45' 00"	125°04' 30"
2	10°46' 30"	125°02' 45"
3	10°48' 30"	125°02' 15"
4	10°52' 00"	125°02' 15"
5	10°53' 00"	125°02' 31"
6	10°54' 00"	125°02' 53"
7	10°55' 00"	125°03' 23"
8	10°56' 00"	125°04' 01"
9	10°56' 30"	125°04' 02"
10	10°58' 00"	125°04' 06"
11	10°59' 00"	125°04' 12"
12	11°00' 00"	125°04' 14"
13	11°04' 00"	125°04' 14"
14	11°06' 00"	125°03' 15"
15	11°08' 00"	125°03' 15"
16	11°08' 00"	125°06' 30"
17	10°56' 00"	125°06' 30"
18	10°55' 00"	125°05' 30"
19	10°54' 00"	125°04' 30"
20	10°52' 30"	125°04' 00"
21	10°50' 00"	125°03' 30"
22	10°48' 30"	125°03' 30"
23	10°47' 00"	125°04' 00"
24	10°45' 00"	125°05' 00"

APPENDIX V

TECHNICAL REPORT

Figure 6 Exploration Permit Application EXPA 000110-VIII (Source: Admiralty Chart)

EXPA OMR002-VIII (previously identified as EXPA 000115-VIII) was applied for on 18 April 2008 and is located in San Pedro Bay that separates the islands of Leyte and Samar, at the northern end of Leyte Gulf on the eastern seaboard of Leyte Island. The Permit Application covers an area of 25,312.242 hectares (253.12 km²) in the Municipalities of Basey and Marabut in Samar Province, and Tacloban City in the Province of Leyte.

APPENDIX V

TECHNICAL REPORT

The Application area lies about $1\mathrm{km}$ off-shore, varies from $4\mathrm{km}$ to $20\mathrm{km}$ in width and is about $28\mathrm{km}$ in length from north to south. The co-ordinates of the Permit Application are shown in Table 3.

Table 3 Exploration Permit No. EXPA OMR002-VIII
(Area $= 253.12\mathrm{km}^2$

CORNER No.	LATITUDE (NORTH)	LONGITUDE (EAST)	CORNER No.	LATITUDE (NORTH)	LONGITUDE (EAST)
1	11°12' 30"	125°01' 52"	34	11°15' 30"	125°05' 18"
2	11°13' 00"	125°01' 50"	35	11°16' 05"	125°05' 04"
3	11°14' 00"	125°01' 56"	36	11°16' 33"	125°04' 30"
4	11°14' 30"	125°01' 55"	37	11°16' 43"	125°04' 30"
5	11°14' 35"	125°01' 35"	38	11°16' 30"	125°05' 00"
6	11°14' 35"	125°00' 56"	39	11°16' 30"	125°06' 00"
7	11°14' 00"	125°00' 56"	40	11°16' 45"	125°07' 00"
8	11°13' 17"	125°00' 42"	41	11°16' 46"	125°07' 30"
9	11°13' 19"	125°00' 30"	42	11°16' 30"	125°08' 30"
10	11°13' 30"	125°00' 25"	43	11°14' 30"	125°10' 00"
11	11°14' 00"	125°00' 26"	44	11°05' 00"	125°10' 00"
12	11°14' 46"	125°00' 48"	45	11°05' 00"	125°08' 30"
13	11°15' 00"	125°00' 46"	46	11°02' 30"	125°08' 30"
14	11°15' 30"	125°00' 30"	47	11°02' 30"	125°08' 51"
15	11°15' 30"	125°00' 00"	48	11°00' 00"	125°08' 52"
16	11°15' 18"	125°59' 45"	49	11°00' 00"	125°06' 30"
17	11°16' 02"	125°59' 17"	50	11°08' 00"	125°06' 30"
18	11°16' 02"	125°59' 04"	51	11°08' 00"	125°05' 00"
19	11°16' 30"	125°59' 04"	52	11°12' 00"	125°05' 00"
20	11°16' 45"	125°59' 43"	53	11°12' 00"	125°06' 00"
21	11°16' 53"	125°59' 00"	54	11°12' 30"	125°07' 00"
22	11°16' 26"	125°59' 30"	55	11°14' 00"	125°06' 00"
23	11°15' 50"	125°59' 45"	56	11°14' 00"	125°05' 30"
24	11°15' 50"	125°00' 36"	57	11°13' 30"	125°05' 30"
25	11°16' 22"	125°00' 42"	58	11°13' 30"	125°06' 00"
26	11°16' 26"	125°01' 00"	59	11°12' 00"	125°06' 00"
27	11°16' 15"	125°01' 30"	60	11°12' 00"	125°05' 00"
28	11°16' 25"	125°02' 00"	61	11°12' 00"	125°04' 00"
29	11°16' 30"	125°03' 00"	62	11°12' 30"	125°04' 00"
30	11°16' 10"	125°03' 30"	63	11°12' 30"	125°03' 06"
31	11°15' 30"	125°04' 00"	64	11°13' 30"	125°03' 06"
32	11°14' 56"	125°05' 00"	65	11°13' 30"	125°02' 25"
33	11°15' 15"	125°05' 18"	66	11°12' 30"	125°02' 25"

APPENDIX V

TECHNICAL REPORT

Figure 7 Exploration Permit Application EXPA OMR002-VIII (previously 000115-VIII) (Source: Admiralty Chart)

5.3 DESCRIPTION OF THE PERMIT APPLICATION AREAS

5.3.1 Leyte Province - Location, access and infrastructure

Leyte Province is located at $10^{\circ} - 11^{\circ}$ North Latitude and $124^{\circ} - 125^{\circ}$ East Longitude and is one of the six provinces of the Eastern Visayas Region (Region 8). The total population of Leyte Province is about 1.3 million.

Tacloban, the Administrative capital of Leyte Province, is located about $600\mathrm{km}$ south of Manila and is served by 6 flights per day operated by two companies, Philippine Airlines and Cebu Pacific. Flight times are about 1 hour. There are also regular sea-ferry services between Manila and Tacloban. There are limited port facilities at Tacloban, but along the shallow coastline of Leyte Gulf there are only small jetties suitable for local fishing or trading boats. The former INCO Jetty $30\mathrm{km}$ south of Tacloban is no longer operational.

APPENDIX V

TECHNICAL REPORT

All the usual facilities such as communications, fuel, supplies and some semi-skilled labour are available from Tacloban. The island has adequate water supplies and electric power is supplied by the Tongonen geothermal facility which also exports power via a submarine cable to Luzon.

There is a good sealed road – the Luzon to Mindanao national highway – that extends along the eastern coast of Leyte and provides access to the shoreline parallel to the Permit Application areas. There are no significant access or transport facilities on the west coast of Samar Island.

Figure 8 Location of the San Pedro Bay and Leyte Gulf Permit Applications

APPENDIX V

TECHNICAL REPORT

5.3.2 Topography and Climate

Leyte Province has a rugged mountainous interior region, surrounded by a relatively flat coastal fringe area. The highest mountain in the province is Mount Lobi (or Majuyag), at an elevation of 1250 metres above sea level. The mountainous areas are sparsely populated. The fringing alluvial coastal plains range from a few metres to several kilometres in width. They are relatively densely populated with large areas cultivated for Palm oil, copra, rice and fruits.

The monsoon seasons will be a critical factor during both exploration and production. The north-east monsoon lasts from October to March with strong north-east winds. The south-west monsoon that is also the typhoon season, lasts from June to September with strong south-west winds.

Leyte Province is located within an area of less frequent tropical cyclones and generally only experiences heavy rain and occasional high winds. In 2004, the province experienced 163 days of rain, with the total rainfall amounting to 1,729mm. The maximum daytime temperature was 31°C and the minimum temperature was 24°C.

The maximum tidal range in Leyte Gulf is about 0.75m.

5.4 SOURCES OF DATA

The main sources of data relevant to the Permit Application areas include:

National 1:50,000 scale Topographic map sheets 3952, 3953 and 4052. These are in the form of a combined topographic map of the land areas and a marine hydrographic chart of the intervening sea areas. Consequently they form an excellent base-map for the off-shore Permit areas.
Reports on Mining Claim applications for magnetite for the period 1970-75 from the archives of the Mines and Geosciences Bureau. These provide useful data on the occurrence and sampling of magnetite deposits along the east coast of Leyte Island. The reports were produced by officers of the Bureau of Mines and are therefore considered to be both accurate and reliable sources of data.
A series of reports covering a 1981-82 marine seismic reflection and magnetic survey carried out in Leyte Gulf, Hinatuan Passage, Surigao Strait and Dinagat Sound, by CCOP, the Bureau of Coast and Geodetic Survey (now the Coast and Geodetic Survey Department of NAMRIA) and the MGB. The primary objective of these surveys was to determine the distribution and geological characteristics of the unconsolidated surficial sediments and the underlying bedrock profile, as a guide to identifying areas with possible economic concentrations of heavy-minerals. The survey revealed the occurrence of potential magnetite-bearing sand deposits along the eastern margin of Leyte Gulf.
A report prepared for MMRDC entitled "Preliminary Assessment of the Magnetite Bearing Deposits off Eastern Leyte Province and San Pedro Bay" by the Department of Environment and Natural Resources, Mines and Geosciences Bureau, Republic of the Philippines in 2008.

APPENDIX V

TECHNICAL REPORT

5.5 CCOP/MGB SURVEY (1981)

In 1981, a marine seismic reflection and magnetic survey was carried out in Leyte Gulf, Hinatuan Passage, Surigao Strait and Dinagat Sound, by CCOP, the Bureau of Coast and Geodetic Survey (now the Coast and Geodetic Survey Department of NAMRIA) and the MGB. The primary objective of these surveys was to determine the distribution and geological characteristics of the unconsolidated surface sediments and the underlying bedrock, as a guide to identifying areas with possible economic concentrations of heavy-minerals. The survey revealed the occurrence of potential magnetite-bearing sand deposits along the western side of Leyte Gulf where a sandy deltaic sedimentary sequence (pro-gradational facies) was identified.

In the CCOP/MGB report, San Pedro Bay was described as a small depositional basin about 300 square kilometres extent, located between the islands of Leyte to the west and Samar to the east. The floor of the bay deepens from 4m in the north to 100m in the southeast, with the sea-bed sediments thinning to the east and thickening to the west. Five acoustically reflective horizons were identified from the boomer (seismic) profiles.

In areas of strong seismic penetration, especially in the south-eastern part of the bay, a reflective surface exhibiting parabolic characteristics was believed to be the acoustic basement (i.e. bed-rock).

Within the sediments above bed-rock, a strong persistent reflector, observed on almost all the profiles, except in the northern and eastern parts of the bay, was used as a key-horizon (KH) for correlation. This key-horizon separates a disturbed and, in some traces, a folded sedimentary sequence above the bed-rock, from two undisturbed, almost flat-lying, unconsolidated sediment units separated by a strongly reflective (erosional) surface, above the key-horizon. This erosional surface appears more rugged in the east-west section than in the north-south section. The lower of these stratified units is more reflective than the upper, and the lower set of sediments display foreset bedding which is indicative of deltaic deposition. This type of bedding is particularly pronounced in the near-shore area adjacent to the large Palo and Tanuan rivers. The less reflective upper unit may be due to less pronounced layering of these topmost sediments being indicative of a quieter marine environment.

A time-isopach map was drawn to show the variations in thickness of the sediments within San Pedro Bay. Using the key-horizon as a datum, the sediments exhibit a normal thickening towards the open sea to the southeast, except where isolated reefs occur. This map also showed that the sediments on the western (Leyte) side of the bay are thicker than on the eastern (Samar) side.

The CCOP/MGB report identified five seismo-stratigraphic units, from Unit 1 (oldest) to Unit 5 (youngest), based on their individual seismic reflection patterns and characteristics, as follows:

Unit 1 – Horizontally layered marine sediments.

This unit appears to be the oldest sedimentary sequence identified by the sparker profiles in Leyte Gulf. This unit is characterized by parallel to sub-parallel reflections with on-lapping and top-lapping sequences that indicate fluctuating sea levels and/or tectonic movements. The individual beds thin eastward as does the whole sequence, although its continuity is masked by an opaque zone in the central part of the basin.

249

APPENDIX V

TECHNICAL REPORT

Unit 2 – Fine grained deltaic sediments.

These are characterized by pro-grading patterns, consisting of S-shaped (sigmoidal) reflections, the lower and upper parts of which dip gently and are thinner than the more steeply-dipping middle segment. They generally overlie nearly horizontal beds. The internal reflections within this unit have variable amplitudes. The easterly dip of these pro-graded beds tends to decrease towards the centre of the basin, gradually becoming parallel with the beds of the underlying horizontally layered marine sediments. This configuration, together with the sigmoidal reflection pattern, indicates a low-energy sedimentary regime such as that found in deltaic environments where the transporting power of the medium is suddenly arrested. The deltaic sequence in this unit was inferred to consist mostly of silt and clay with some sand at the top of the sequence.

Unit 3 – Coarse grained deltaic sediment.

This unit consists of relatively steeply dipping strata terminated downdip and updip by toplap at or near a relatively flat upper surface and downdip. This seismically opaque pro-gradational facies, indicative of a sand-prone facies, suggests a higher energy environment than that of the underlying (Unit 2) deltaic sequence. This unit occurs along the western side of Leyte Gulf parallel to the shoreline of Leyte Island where most of the sediment of this unit is believed to have originated. It extends from the mouth of San Pedro Bay southward to latitude 10° 40′N. On figure 10 the light blue area represents the area considered to contain heavy-mineral accumulations, characterized by an obliquely dipping seismic reflection pattern that is indicative of a pro-gradational sand facies. The depth to the top of this unit measured from the seabed surface, varies from 30 to 90 metres with the overburden ranging in thickness from a few metres to ten metres. On the seismic profiles, the thickness of this Unit 3 was estimated to be about 20 to 60 metres with the sandy portion occurring in the upper part. Erosional features including truncation occur on the top of this unit near the Leyte shoreline.

Unit 4 – Chaotic bedded sediments.

This unit occurs on top of the Unit 3 described above, along the western side of Leyte Gulf, pinching out to the east. It is characterized by chaotic reflection patterns with variable amplitudes. The lower boundary of this unit is irregular and in places represents an erosional surface. This unit was interpreted as shallow-water sediments including channel-fill deposits that may have been deposited in a fluvial (river) environment along the eastern coast of Leyte Island.

Unit 5 – Superficial sediments.

This unit is the most recent sediment recognized in Leyte Gulf and reaches a maximum thickness of 25 metres. It is characteristically seismically transparent with faint parallel internal reflections. It was inferred to consist of fine silt on the margin of the basin grading into mud towards the centre.

(Note: Unit 5 is probably the green mud sampled during the 2008 survey – see Appendix 2)

250

APPENDIX V

TECHNICAL REPORT

Figure 9 Geological interpretation along seismic profile 8 (adapted from CCOP, 1982)

Analysis of the seismic reflection profiles indicated that the bulk of the sediments deposited in Leyte Gulf originated mainly from Leyte and Samar Islands, located to the west and northeast of the basin, respectively. Interpreted seismic profiles along lines 2, 4, 6, 8 and 10 showed sections where the entire sedimentary sequence thins out to the east, particularly in the case of Unit 1 where the included beds pinch out eastwards. The concentration of deltaic sediments in the western half of Leyte Gulf and the eastward direction of dip of the foreset beds, clearly suggest that most of the sediments in this unit originated from the west (Leyte Island).

The almost flat-lying sedimentary layers in the central part of the basin completely pinch-out updip to the east at a scarpment believed to coincide with the Philippine Fault that trends northwest from Homonhon Island to Samar Island. Farther south, the sediments also pinch out updip to the east against submerged bedrock that shows no coherent reflection pattern, suggesting its rigidity. Towards the southern periphery of the Gulf, the sediment layers become thinner and appear to diminish in Surigao Strait.

A more detailed study of the seismic and magnetic profiles outlined the sea-bed geology of Leyte Gulf based on the Sparker profiles and shows the location of the seismo-stratigraphic units as well as the location of the seismic traverses. In the areas where substantial near-bottom sand-prone deltaic sedimentary sequences, where heavy-mineral accumulation, particularly magnetite, was most likely to occur, a sand-prone deltaic sedimentary sequence (Units 3 and 4) characterized by an obliquely dipping reflection pattern indicated a high-energy depositional environment typical of the pro-graded coastal plain sedimentary sequence. This zone, shown in blue on Figure 10 below, is located adjacent and almost parallel to the shoreline of Leyte from near Taytay Point northwards to the southern part of San Pedro Bay, between latitude $10^{\circ}40'$ and $11^{\circ}06'$ north. This zone may actually extend further west towards the coastline than its inferred boundary as the seismic traverses did not extend further west than the delineated boundary. The thickness of this unit ranges from $30\mathrm{m}$ to $60\mathrm{m}$ . It is covered by a veneer of more recent sediment (Unit 5) ranging in thickness from a few metres to as much as $25\mathrm{m}$ in the sediment-filled channels cut into the top of the sand-prone unit.

APPENDIX V

TECHNICAL REPORT

Figure 10 Sea-bed geology of Leyte Gulf and seismic profiles (Source: CCOP, 1981)

The report entitled "Preliminary Interpretation of the Marine Geophysical Data in Leyte Gulf, Surigao Strait and Dinagat Sound" prepared by the Bureau of Mines and Geosciences (now the Mines and Geosciences Bureau (MGB); and the report entitled "Report on the Interpretation of Marine Seismic Data in Leyte Gulf, Surigao Strait, Dinagat Sound and Hinatuan Passage," published by the Coordinating Committee of Joint Prospecting for Mineral Resources in Asian Offshore Areas (now known as the Coordinating Committee for Geoscience Programmes (CCOP), concluded the potential magnetite-bearing sediments in San Pedro Bay and Leyte Gulf represented a geological resource of not less than 9,533 million tonnes with an un-quantified magnetite content.

5.6 MMRDC/GCI/MGB SURVEY (2008)

In 2008, MMRDC contracted Global Consult Inc. (GCI), a geo-technical consulting company based in the Philippines, to undertake an assessment of the potentially magnetite-bearing sand deposits in San Pedro Bay, San Pablo Bay and Leyte Gulf off the eastern coast of Leyte Province. This assessment consisted of the collation and review of existing data which was compiled into a report entitled "Report on the Socio-economic, Demography, Physical, Climatological and Geological setting of Eastern Leyte Province and Leyte Gulf" prepared by GCI in June 2008.

APPENDIX V

TECHNICAL REPORT

MMRDC also commissioned some preliminary collection of new data consisting of a sea-bed topographic survey, sea-bed sediment sampling and piston-core sampling within the MMRDC exploration permit applications EXPA 000110-VIII (Leyte Gulf) and EXPA OMR002-VIII (San Pedro Bay). This was a reconnaissance survey for the assessment of magnetite-bearing sand deposits within the MMRDC offshore Exploration Permit Application areas and was carried out by the Marine Geology Section of the Mines and Geosciences Bureau (MGB) MGB between 23rd June and 28th July, 2008, using the government-owned marine research vessel "RPS Explorer". The results were recorded in a report entitled "Preliminary Assessment of the Magnetite Bearing Deposits off Eastern Leyte Province and San Pedro Bay" prepared by the MGB in July 2008. The MGB study was prepared by Mr. Edgardo Gonzales, who is head of the Technical Division of the Marine Geological Survey Division at MGB, and who was a key member of the MGB team that conducted the 1981 marine seismic reflection survey supervised by CCOP and one of the principal authors of both published MGB and CCOP reports.

Figure 11 Survey vessel "RPS Explorer"

Bathymetric survey

The bathymetric survey was carried out using a Bathy 1500 Precision Depth Recorder with an over-the-side mounted transducer using a transmit frequency of 200KHz. Positioning was done using an L1 Trimble GPS with sub-metre accuracy. Aside from the continuous graphical recording from the line-printer, logging of water depths was done manually at one-minute intervals synchronized with one-minute position fixing by GPS.

East-west traverse lines for bathymetric profiling were spaced at 2 kilometre intervals and north-south tie-lines were spaced at 4 kilometre intervals. A total of 364 line-kilometres of bathymetric traverses were accomplished within EXPA 000110-VIII (Leyte Gulf) and its immediate vicinity, while 168 line-kilometres were accomplished EXPA OMR002-VIII (San Pedro Bay).

APPENDIX V

TECHNICAL REPORT

The bathymetric data were corrected for diurnal tidal variations using the NAMRIA tide and current tables for the months of June and July 2008. The bathymetric data were presented as contours and 3-dimensional view of the sea bed.

A 12 KHz echo sounder (Bathy 2010P) was also used to ascertain the thickness of the surficial silt/ mud layer that overlies the sand-prone pro-gradational sediments.

The location of the bathymetric traverses, seismic profiles and 12 KHz echo sounder profiles are presented in figures 12-14, respectively.

Figure 12 Sea-Bed bathymetric Map of San Pedro Bay and Leyte Gulf

APPENDIX V

TECHNICAL REPORT

Figure 13 Track of the Boomer Seismic survey (2008)

APPENDIX V

TECHNICAL REPORT

Figure 14 Location of 12 KHz Echo Sounder Tracklines (2008)

Sea-bed Sediment Sampling

Simultaneous with the sea-bed topographic (bathymetric) survey, but using a separate survey platform, sea-bed sediment sampling was carried out within the exploration permit areas, mostly along the bathymetric survey lines. Sea-bed sediment samples were collected using a grab-sampler in the shallow-water areas and a dredge-sampler in water depths of more than 30 metres. The dredge-sampler was manually deployed and retrieved over the stern of the outrigger. Positioning was done using an E-Trex Global Positioning System.

APPENDIX V

TECHNICAL REPORT

A total of 96 grab samples and 27 piston-core samples were collected within the EXPA 000110-VIII (Leyte Gulf) area and a total of 57 grab samples and 25 piston-core samples were collected within the EXPA OMR002-VIII (San Pedro Bay) area. Samples typically consisted of about 5 to 10 kilograms of sediment. The location of the sample sites are shown on Figures 15 and 16.

Figure 15 Location of Grab Samples of Sea-bed Sediment in Leyte Gulf

APPENDIX V

TECHNICAL REPORT

Figure 16 Location of Piston-Core samples of Sea-bed Sediments in Leyte Gulf

5.7 CORRELATION WITH THE 1981 CCOP/MGB SURVEY

The sea-bed samples (mostly mud) collected in Leyte Gulf in 2008 correspond to the most recent sedimentary unit (Unit 5), as delineated by the previous 1981 MGB survey in which Unit 5 was inferred to consist of fine-grained silt in the western part of the Gulf near the Leyte shoreline, that gradually graded into mud toward the middle of the Gulf.

APPENDIX V

TECHNICAL REPORT

The thickness of this overlying mud within the EXPA 000110-VIII appears to vary from a few metres to more than 7 metres, and it contains an anomalously higher than average magnetic fraction than would be expected for ordinary mud. The intention of the piston-coring programme is to confirm the distribution of the surface mud layer (Unit 5) and possibly the presence of the underlying pro-graded sand unit (Units 3 and 4) that may contain magnetite-bearing sand.

Figure 17 Seismic interpretation of thickness of mud layer (Unit 5) in San Pedro Bay

APPENDIX V

TECHNICAL REPORT

This data clearly shows that the Unit 5 mud layer thickens to the south from about 1m at 11°03'N to over 7m at 10°50'N near the southern end of the permit area, as shown by the individual profiles, whose locations are shown on figure 14.

Line 1 – Average Mud thickness 1.28 metres

Line 2 – Average Mud thickness 4.80 metres

Line 3 – Average Mud thickness 4.44 metres

Line 4 – Average Mud thickness 6.42 metres

Line 5 – Average Mud thickness 7.05 metres

The thickness of the mud layer within the Permit areas averaged about 4 to 5 metres.

6.0 DISCUSSION OF SAMPLING RESULTS

EXPA OMR002-VIII San Pedro Bay

San Pedro Bay is a semi-enclosed body of water measuring about 300 km² oriented almost parallel to the islands of Leyte and Samar. The Bay connects San Juanico Strait to the north with Leyte Gulf to the south. The Bay is shallow (less than 5m) in the north and becomes gradually deeper to the south reaching more than 75m at the southern end. San Pedro Bay is characterized by numerous small islands, shoals and coral reefs. Because of these shoals and reefs, there is a marked navigation channel for ships going into Tacloban City. The entrance of this route is near the southern side of Samar Island traversing northwest toward Tacloban.

The sea-bed topography of San Pedro Bay is generally rugged with numerous bathymetric highs represented by shoals and reefs. A prominent line of islands and a connecting submerged ridge running from Bassey on the coast of Samar through Jinamoc Island and Punubulu Island, divides San Pedro Bay into distinct western and eastern parts. The western part has a predominantly sandy floor, whilst the eastern part has a predominantly muddy floor. The sea bed gradually slopes to the south with the shallowest part measured at 1.68m occurring at northern end of the Bay near Samar Island and the deepest part at the southern margin.

EXPA 000110-VIII Leyte Gulf

The sea-bottom topography is generally flat and smooth with low relief except in its northern part where shoals and reefs are abundant. The water depth within the exploration area ranges from 12 metres in the northern part near the mouth of San Pedro Bay to about 45 metres in the south-western part. Along the shores of both Leyte and Samar Islands, the sea-bed contours show a relatively steep slope down to a depth of 10 to 15m and then a relatively flat surface across the central part of the bay. Figure 12 shows the sea bottom contours of San Pedro Bay and Leyte Gulf.

APPENDIX V

TECHNICAL REPORT

Coral reefs

The southern half of the Permit application area contains numerous (> 50) small rocky reefs that may be outcrops of bedrock, but which are more likely to be small coral reefs. Most of these reefs rise only a few metres above the sea-bed but some are up to 30m in height and represent a significant hazard to shipping, including any exploration survey vessels that may be operating in their vicinity, to such an extent that a lighthouse has been built on one of the reefs at Maraquildault Island.

Grab samples of Sea-bed Sediments

Sea-bed sediment samples collected in the Permit Application area ranged in particle size from mud to coarse-grained sand with the former mainly in the deeper water and latter generally located close to the coastline and in the vicinity of shoals and coral reefs. Figure 15 shows the location of the samples collected in San Pedro Bay and Leyte Gulf. The magnetic fraction content of the grab samples ranged from 1% to 41.78%. The results of visual examination and hand-magnet separation are presented in Appendix 1.

Visual examination showed that the sand consists of moderately well-sorted grains of various rocks including coral limestone and shell fragments, mixed with the sand particles consisting of light-coloured quartz, feldspar, zircon and epidote; and dark ferro-magnesian minerals including hornblende, magnetite and ilmenite. The sand-grade samples mostly had a magnetic fraction content ranging from about 5% to 13% with the average being about 10% (if sample No.LEY26 is excluded).

The mud samples consisted of a fairly uniform olive-green silty mud that corresponds to the most recent sedimentary unit (Unit 5) identified by the 1981 MGB-CCOP-UNDP survey, when this layer was interpreted to consist of fine-sand and silt at the western margin of the Gulf, grading into mud toward the centre of the bay. The mineralogy of the mud consists of clay minerals, mostly illite. Compared to ordinary mud these samples had a relatively high magnetic fraction content ranging from 1% to 4.6%, with the average being about 2% magnetic fraction content.

Piston-coring samples

A programme of piston-core sampling of sediments along selected sampling sites in the eastern part of Leyte Gulf was intended to confirm the thickness of the surficial sedimentary mud layer (Unit 5) using a 4-metre or 6-metre core sampler and to obtain samples of the underlying sand-prone pro-graded sediments. A total of 57 core samples were collected. All the samples recovered were less than 4m in length and the majority were less than 2m in length. Figure 16 shows the location of the samples collected in the Permit area.

The piston core samples gathered in the northern part of the Permit area showed that the veneer of recent surficial sediments is thinner in this northern area compared to the southern and western side (toward the middle of the basin). This confirms the earlier results of the 12 KHz profiling survey, which showed the thickness of the mud layer. All the results of visual examination and hand-magnet separation are presented in Appendix 2.

APPENDIX V

TECHNICAL REPORT

The sand material encountered below the mud layer had a magnetic fraction content ranging from $1\%$ to $12.7\%$ and a bulk density of about $2.7~\mathrm{gm / ml}$ . The average bulk density of grab/dredge samples of sandy material was about $2.45~\mathrm{gm / ml}$ .

Table 4 Selected sand-grade sample results

GRAB SAMPLES		PISTON-CORE SAMPLES
Sample No.	Magnetic fraction %	Sample No.	Magnetic fraction %
LEY - 26	41.78	LCP - 24	1.62
LEY - 33	12.49	LCP - 26	2.24
LEY - 42	6.99	LCP - 30	12.73
LEY - 88	14.38	LCP - 31	2.47
LEY - 109	11.93	LCP - 36	10.72
LEY - 110	7.9	LCP - 41	10.37
Average	15.91	Average	6.69

Note: these are selected samples and are not representative of the whole sand horizon.

Most of these sand-grade grab samples consisted predominantly of sand, whereas the piston-core samples mostly had a significant thickness of mud/silt overlying the sand-grade material. Assuming this mud contained a typical $2\%$ magnetic fraction it would significantly dilute the magnetic fraction of the sand-grade material.

These sampling results are comparable with the results reported from the historical on-shore mining activity on the east coast of Leyte (section 4.6 above) and demonstrate that potentially economic magnetite grades extend for a considerable distance off-shore. However, these sampling results are too widely spaced and too erratic in quality to be considered representative of a sufficient body of mineralised sand to represent a mineral resource as defined by the JORC Code.

6.1 SAMPLE PREPARATION AND FIELD ANALYSES (2008)

The sea-bed sediment samples collected were sun-dried in the field and visually examined for grain-size and mineral composition, using an AAPG grain-size comparator.

Each dried sample was coned and quartered to provide a representative 300 to 500 gram subsample. Each sub-sample was weighed, the magnetic fraction separated using a hand-held magnet, and then the magnetic and non-magnetic fractions were weighed using a triple-beam weighing balance. The results of the visual examination and magnetic separation are presented in Appendix 1 and 2.

6.2 DATA VERIFICATION

The sampling, the sample examinations and the reporting of the sample results were carried out by agents of the Permit applicant. Some of the grab samples were examined by Behre Dolbear but the sample data and analytical results have not been physically verified. However, the methods used were consistent with accepted industry practice and the results are consistent with other published historical data. Therefore, Behre Dolbear has no reason to doubt their validity or accuracy.

APPENDIX V

TECHNICAL REPORT

Some basic statistical analysis of the 2008 sample data showed that the magnetic fraction content of some of the grab and dredge samples seemed to show an inversely proportional relationship to the original sample weight. This may indicate that the fine mud fraction may have been lost as the water content drained from the sampling device, leaving a concentrated heavy-mineral fraction behind.

A plot of the grab-sample results showed that only those samples weighing less than 100 grams (Sample No. LEY 151, 146, 152, 03 and 141), from a nominal 500 gram sample, showed a definite proportional increase in the magnetic fraction content, as shown in figure 18 below.

Figure 18 Apparent concentration of magnetic fraction due to sample loss

From this it is concluded that any grab samples weighing less than 100g, or less than 20% of the expected sample weight, should be discarded as unreliable. Samples containing at least 25% of the expected sample weight are likely to be reliable.

7.0 EXPLORATION POTENTIAL

The current price of magnetite is about US$130 per tonne, so, allowing for post mining costs such as transport and shipping, an assumed mine-gate value of US$ 100 per tonne is not unreasonable.

On this basis:

1% of magnetite content may equate to about US$ 1/tonne mine revenue
10% of magnetite content may equate to about US$ 10/tonne mine revenue
20% of magnetite content may equate to about US$ 20/tonne mine revenue

APPENDIX V

TECHNICAL REPORT

Thus, the minimum in-situ magnetite content that would be of economic interest would be about 10%, which is higher than the cut-off grade of 5% used at the INCO on-shore mining site in 1970-71.

In the off-shore Permit Application areas, the magnetic fraction of the near-surface muddy sediment (Unit 5) samples ranged from 0.76% to 4.64% and averaged 1.98%; whilst the magnetic fraction of the sand-grade samples ranged from 1% to 14.38% and averaged about 10% (if Sample LEY26 is excluded).

Based on the seismic and bathymetric data and the derived isopach maps, the indicated thickness of the magnetite-bearing sand horizon (Units 3 and 4) ranged from 20 to 60 metres, but by analogy with the historical data from the on-shore mining areas along the east coast of Leyte Island, the economically significant magnetite sands may be limited to the lower part only. Therefore, if it is conservatively assumed that the average thickness of the magnetite-bearing sand is 10 metres, then the exploration potential will be in the order of 10 million tonnes per square kilometre.

The available seismic and sampling data indicates that such a magnetite-bearing sand horizon extends over almost the whole of the Permit Application areas that cover a total area of about 410 km². This total area can be sub-divided into smaller exploration targets according to the water-depths, the nature of the sea-bed and the mineral potential of the sea-bed sediments, as follows:

First Priority should be given to exploration of the northwest part of San Pedro Bay north of latitude 11°12' and west of Jinamoc Island, where there are large areas of sandy sea-bed with water depths of less than 10m.

Second priority should be given to exploration of the northeast part of San Pedro Bay north of latitude 11°12' and east of Jinamoc Island, where there are some limited areas of sandy sea-bed, large areas of muddy sea-bed and numerous bed-rock and/or coral reefs, in water depths of less than 10m.

Third priority should be given to exploration of the southern two-thirds of the San Pedro Bay Licence application area between 11°00' and 11°12' latitude, where there is sample data showing the presence of muddy sediments containing up to 4% magnetite that may form a cover several metres in thickness over the higher-grade magnetite-bearing sand horizon.

Fourth priority should be given to the Leyte Gulf licence application area south of 11°00' latitude, where the cover of low-grade mud (Unit 5) may be up to 10m to 20m in thickness; and where there are numerous coral reefs and water depths of 20m to 40m, that would make exploration more difficult than in the northern areas.

264

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TECHNICAL REPORT

Table 5 Summary of Exploration Potential of the 4 Priority Areas

PRIORITY/ PERMIT AREA	WATER DEPTH	SEDIMENT DEPTH TO BEDROCK	AREA km²	POTENTIAL THICKNESS OF SAND*	POTENTIAL TONNAGE OF SAND**	POTENTIAL THICKNESS OF MUD/ OVERBURDEN
1 NW 002	2 – 10 m	0 – 10 m	50	0 – 5 m	200 – 500 Mt	0 – 1 m
2 NE 002	2 – 10 m	1 – 20 m	50	0 – 5 m	100 – 500 Mt	1 – 5 m
3 Sthn 002	10 – 20 m	20 – 90 m	150	5 – 10m	1500 – 3000 Mt	4 – 10 m
4 All 110	20 – 50 m	30 – 90 m	150	5 – 10 m	1500 – 3000 Mt	5 – 25 m
TOTAL	-	-	400	-	3300 – 7000 Mt	0 – 25 m

Assume only the Lower half of the sand horizon is mineralised.
** Assume SG of 2.0 for in-situ material.

8.0 ENVIRONMENTAL IMPACT

There is currently very little direct information available about the environmental impact that may result from commercial offshore mining. It will be necessary to carry out an independent environmental impact assessment of the effects that may result from a long-term dredge mining operation involving large quantity of materials from a large area of the sea-floor within the Application Areas.

The magnetite is already in sand form, so the mining process may entail dredging the magnetite-bearing sand areas, desalination, beneficiation by way of magnetic separation and de-watering, before transporting the magnetite product to a port for shipping to overseas customers. Compared with conventional onshore mining, dredge mining is more environmentally friendly as there is no need for explosives to blast the rock to access the iron-ore and no need to crush the iron-ore for size classification in accordance with customer specifications. Any tailings will be in their original form and can be put back in their respective area after mining has been completed.

Nonetheless, the disturbance from a dredge mining operation consists of physically removing a layer of the seafloor, conveying it to the surface and returning the unwanted material back onto the seabed. The process is expected to generate a transient plume of muddy sediment that will affect the water column and the adjacent areas of the sea-floor over an uncertain distance and period of time.

265

APPENDIX V

TECHNICAL REPORT

Experience with sand and gravel mining in Europe and with the dredging operations of the U.S. Army Corps of Engineers suggests that as long as sensitive areas, such as fish-spawning and nursery grounds are avoided, surface and water-column effects from either shallow- or deep-water dredging should be minimal and transient. Benthic communities in the mined areas will initially be destroyed and some nearby areas may be adversely affected by sediment returned to the seafloor. However, the benthic community will rapidly re-colonize the dredged areas. In order to comply with the Philippine Government's regulations to adequately protect the environment during mining, it will be necessary to identify and avoid the high-risk or sensitive areas. Environmental monitoring during the mining process will provide additional level of knowledge of the effects that seabed mining may have on the marine environment. Concurrent observations in undisturbed control areas, adjacent or similar to those being mined, would also provide a better understanding of the environmental effects in the area.

9.0 CONCLUSIONS

Magnetite in the form of beach-sand type deposits are known to occur along a 40 km length of coastline south of Tacloban on the east coast of Leyte Island. Some of these deposits were explored in the 1970's and at least one deposit was mined.
The 1970s exploration reports indicate that these beach deposits ranged from 2m to 5m in thickness, with the magnetite content increasing with depth as the highest magnetite values were found resting on the bed-rock surface. These deposits contained up to 30% magnetite, but the magnetite layers were discontinuous both vertically and horizontally, so that the average magnetic fraction was in the order of 15% to 20%.
The deposits were at least 500m in width and extended for at least 1 km inland from the coast, whilst the 1981 geophysical (seismic) studies indicated that the magnetite bearing sand horizon may extend for some considerable distance off-shore in Leyte Gulf.
A geophysical (seismic and bathymetric) survey in 2008 confirmed the results of the earlier 1981 survey and systematic grab sampling and piston-core sampling demonstrated that the off-shore sediments contain magnetite. The sea-bed samples of mud and silt contained from 1% to 4% (average 2%) magnetic fraction and a few sand samples contained up to 15% magnetic fraction.
These results showed that magnetite occurs in the uppermost sea-bed sediments (Units 3-5) in most parts of the bay. A preliminary estimate of the volume of magnetite-bearing sediments in the two off-shore Exploration Permit areas indicated that there could be up to 10 million cubic metres of magnetite bearing sand per square kilometre, with an average magnetite content ranging from 2% for muddy sediment up to 10% to 15% for sandy sediment.
Further studies are required to locate and quantify any areas of magnetite-bearing sands that may have a higher (5% to 20%) magnetite content, similar to those that occur along the Leyte coastline south of Tacloban. The seismic data indicates that such sands (Units 3 and 4) occur off-shore, particularly in the western part of San Pedro Bay and may underlie the muddy sea-bed sediments (Unit 5) in the central and southern parts of the bay.

APPENDIX V

TECHNICAL REPORT

By analogy with the coastal magnetite-bearing sands, any off-shore magnetite-bearing sands are most likely to be located in the 5m thick interval directly above the bed-rock contact.
On the basis of these assumptions, the exploration potential of the permit application areas may be prioritised according to the following recommendations.

10.0 RECOMMENDATIONS

Further exploration work is recommended to locate areas of sand-grade sediments within the offshore Permit Application areas.

This should include drilling one, or more, deep-cored drill-holes down to bed-rock to investigate and sample the stratigraphy of the sedimentary cover in the northern and central parts of San Pedro Bay and Leyte Gulf. This may require drilling to a depth of 10m to 30m below the sea-bed depending on location. These stratigraphic drill-holes should then be used as "ground-truth" to re-interpret the existing seismic and other geophysical data in order to better identify any magnetite-bearing sand horizons.

The Permit Application area may be sub-divided into smaller exploration targets according to the water-depths, the nature of the sea-bed and the mineral potential of the sea-bed sediments.

First Priority should be given to exploration of the northwest part of San Pedro Bay north of latitude 11°12' and west of Jinamoc Island, where there are large areas of sandy sea-bed with water depths of less than 10m.

Second priority should be given to exploration of the northeast part of San Pedro Bay north of latitude 11°12' and east of Jinamoc Island, where there are some limited areas of sandy sea-bed, large areas of muddy sea-bed and numerous bed-rock and/or coral reefs, in water depths of less than 10m.

Third priority should be given to exploration of the southern two-thirds of the San Pedro Bay Permit Application area between 11°00' and 11°12' latitude, where the sample data shows the presence of muddy sediments containing up to 4% magnetite that may form a cover several metres in thickness over the higher-grade magnetite-bearing sand horizon.

Fourth priority should be given to the Leyte Gulf Permit Application area south of 11°00' latitude, where the cover of low-grade mud (Unit 5) may be 10m to 20m in thickness; and where there are numerous coral reefs and water depths of 20m to 40m, that would make exploration more difficult than in the northern areas.

The total exploration potential of the two Permit Application areas is in the order of 3300 to 7000 million tonnes of magnetite-bearing sand at an unknown grade, but potentially greater than 5% magnetic fraction. This material does not meet the definition of a mineral resource as defined by the "Australian Code for reporting of Exploration results, Mineral resources and Ore reserves" (the JORC Code) and a further exploration and sampling programme will be required to convert this potential into a mineral resource.

APPENDIX V

TECHNICAL REPORT

11.0 PROPOSED EXPLORATION PROGRAMME

The company proposes to carry out a new survey to locate further resources which would consist of the following stages:

Stage 1: Desk study, recommendations for stage 2 and preliminary report no.1
Stage 2: Initial site surveys (along lines in each permit area)
Stage 3: Analysis of results – recommendations for stage 4 and report no 2
Stage 4: In April/May 2009 – detailed surveys based on the recommendations in preliminary report no. 2
Stage 5: Analysis of results, recommendations for drilling and testing and report no. 3
Stage 6: Geochemical and geotechnical correlation
Stage 7: Final interpretation and report

12.0 REFERENCES

Preliminary Assessment of the Magnetite Bearing Deposits off Eastern Leyte Province and San Pedro Bay, Department of Environment and Natural Resources, Mines and Geosciences Bureau, Republic of the Philippines, 2008.

Pertinent Sections of DAO 96-40 as amended, relating to Offshore Mineral Exploration and Mineral Agreements.

Executive Order No. 153 – Authorizing the Utilization of Offshore Areas not covered by Approved Mining Permits and Contracts as Sources of Dredge Fill Materials for Government Reclamation Projects and for other purposes.

Coordinating Committee of Joint Prospecting for Mineral Resources in Asian Offshore Areas. Technical Bulletin No. 5., 1982.

Offshore Mineral Resources – A General Review. pp. 1-12
Detrital Heavy Mineral Deposits in Eastern Asia. pp. 13-31
Annex G, Country Report: The Philippines. pp. 79-83

Radioactive Detrital Minerals in Beach Sands of Northwest Palawan. Coordinating Committee of Joint Prospecting for Mineral Resources in Asian Offshore Areas. Proceedings of the Twentieth Session. pp. 14-19.

Report on the Geological Evaluation of 16 Placer Claims of Great Pacific Mining Corporation located at Palo, Tanauan, Tolosa and Tacloban City, Leyte.

Annex L, Report on the interpretation of the marine seismic data in Leyte Gulf, Surigao Strait, Dinagat Sound and Hinatuan Passage (Philippines) (from Document CCOP (XIX)/76).

APPENDIX V

TECHNICAL REPORT

Annex M, Beach and near-offshore reconnaissance survey for detrital mineral deposits (from Document CCOP (XIX)/78).

The Geological and Geochemical Exploration of Panaon Island, Philippines – Final Report, pp 5-15 (Korean Institute of Geology, Mining and Materials).

Report on Leyte-Mindanao Interconnection Engineering Project – Marine Survey Oceanographic and Meteorological Desk Study (April 1997).

Preliminary Quaternary Geological Investigation in Leyte and Northwestern Luzon, Philippines.

Preliminary Interpretation of the Marine Geophysical Data in Leyte Gulf, Surigao Strait and Dinagat Sound Report of investigation No. 110. Bureau of Mines and Geosciences (April 1982).

Fernandez J.C., 1965, Magnetometer Survey of Black Sand in the Eastern Coast Leyte. Bureau of Mines (August 1965), Manila.

Almogela D.M., 1970, Report on the verification of survey of Betty II Placer Claim as per PLA-5608-D in Macarthur, Leyte Del Norte. Bureau of Mines (April 1970), Manila.

Santiago J.U., 1971, Mineral verification for magnetite in the sand deposit in Javier & Macarthur, Leyte Del Norte. Bureau of Mines (March 1970), Manila.

Zepeda Z.C., 1971, Memorandum report on the geological investigation for verification on the magnetite sand in Dulag, Leyte Del Norte. Bureau of Mines (October 1970), Manila.

Manalang E.M., 1973, Geological investigation and mineral verification on the magnetite beach sand deposit in the Municipalities of Tolosa, Dulag, Mayorga & Abuyog, Eastern Leyte. Bureau of Mines (September 1973), Manila.

Apelo M.R., 1973, Report on the mineral verification of sixteen placer claims of Great Pacific Mining Corp. in Palo, Leyte Del Norte. Bureau of Mines (September 1973), Manila.

Zerda R.R, 1973, Geological evaluation of sixteen placer claims of Great Pacific Mining Corp. located at Palo, Tanuan, Tolosa and Tacloban City, Leyte Province. Bureau of Mines (February 1974).

13.0 COMPETENT PERSON – QUALIFICATIONS AND EXPERIENCE

This report was prepared by R.J.Fletcher, Senior Geological Associate with Behre Dolbear Asia, Inc., who consents to the filing of this Technical Report with any stock exchange and other regulatory authority and any publication by them, including electronic publication in the public company files on their websites accessible by the public.

APPENDIX V

TECHNICAL REPORT

R. J. Fletcher is a graduate of University of Leicester (UK), with a BSc Honours Degree in Geology (1966) and a MSc Degree in Mineral Exploration and Mining Geology (1975) from the University of North Queensland (Australia). He is a Fellow of the Australasian Institute of Mining and Metallurgy and is a Chartered Geologist (Aust) and a Chartered Engineer (UK). He has 40 years' experience in the minerals industry and has worked in Europe, Asia, Australia, Africa, Canada, U.S.A., and Latin America. This experience covers a wide range of minerals, with emphasis on the economics of exploring, evaluating and developing mineral properties, including exploration strategies, reserve estimation, feasibility studies, mine development and financing.

Date and signature ____

This report was prepared on a normal, arm's length commercial basis for a pre-determined professional fee. Behre Dolbear, nor any of its employees, staff or associates; has no arrangement or understanding with, nor expect to become, an insider, associate, affiliated entity or employee of MMRDC, BSEL or BIA, or any associated or affiliated entities.

Neither Behre Dolbear, nor any affiliated entity, own either directly or indirectly, nor expect to receive, any interest in the properties or securities, nor have we earned the majority of our income during the preceding three years, from MMRDC, BSEL or BIA, or any associated or affiliated companies.

Presented on behalf of Behre Dolbear Asia, Inc.

by:

Date and signature ____

Robert Hansen, CEO

Behre Dolbear Asia, Inc.

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APPENDIX V

TECHNICAL REPORT

APPENDIX 1.0 GRAB SAMPLING RESULTS

Table A1-1 Sea-bed sediment Grab samples (Leyte Gulf, July 2008)

Sample No. (LEY)	Approx. Depth (m)	Latitude N	Longitude E	Description (Megascopic)	Remarks (by hand magnet)

1	46m	10°45'33.4"	125°02'45.9"	olive gray mud, homogeneous	slightly attracted to magnet
2	50m	10°46'00.7"	125°03'56.3"	olive gray mud, homogeneous	slightly attracted to magnet
3	56m	10°46'33.8"	125°05'02.4"	olive gray mud, homogeneous	slightly attracted to magnet
4	60m	10°48'53.5"	125°04'55.0"	olive gray mud, homogeneous	slightly attracted to magnet
5	56m	10°48'41.4"	125°03'29.1"	olive gray mud, homogeneous	slightly attracted to magnet
6	36m	10°48'38.4"	125°02'10.6"	olive gray mud, homogeneous	slightly attracted to magnet
7	27m	10°48'40.3"	125°01'07.9"	olive gray mud, homogeneous	slightly attracted to magnet
8	12m	10°48'38.2"	125°00'21.6"	olive gray sandy mud, homogeneous	moderately attracted to magnet
9	5m	10°48'38.2"	125°00'10.8"	olive gray fine sand	strongly attracted to magnet
10	34m	10°50'43.9"	125°01'23.7"	olive gray mud, homogeneous	slightly attracted to magnet
11	45m	10°51'00.3"	125°02'35.1"	olive gray mud, homogeneous	slightly attracted to magnet
12	52m	10°50'58.1"	125°03'43.1"	olive gray mud, homogeneous	slightly attracted to magnet
13	57m	10°53'23.9"	125°03'44.9"	olive gray mud, homogeneous	slightly attracted to magnet
14	50m	10°53'24.2"	125°02'28.3"	olive gray mud, homogeneous	slightly attracted to magnet
15a	14m	10°53'20.7"	125°01'06.1"	olive gray sandy mud, homogeneous	moderately attracted to magnet
15b	14m	10°53'20.1"	125°01'05.2"	olive gray sandy mud, homogeneous	moderately attracted to magnet
16	18m	10°55'30.3"	125°02'01.8"	olive gray sandy mud, homogeneous	moderately attracted to magnet
17	34m	10°55'39.3"	125°03'19.1"	olive gray sandy mud, homogeneous	moderately attracted to magnet

APPENDIX V

TECHNICAL REPORT

Sample No. (LEY)	Approx. Depth (m)	Latitude N	Longitude E	Description (Megascopic)	Remarks (by hand magnet)

18	50m	10°55'42.9"	125°04'33.2"	olive gray mud, homogeneous	slightly attracted to magnet
19	55m	10°55'46.9	125°05'27.3"	olive gray mud, homogeneous	slightly attracted to magnet
20	67m	10°55'58.7"	125°06'51.1"	olive gray mud, homogeneous	slightly attracted to magnet
21	58m	10°58'06.0"	125°06'19.4"	olive gray mud, homogeneous	slightly attracted to magnet
22	45m	10°58'05.9"	125°05'12.3"	olive gray mud, homogeneous	slightly attracted to magnet
23	48m	10°58'04.2"	125°04'05.1"	olive gray mud, homogeneous	slightly attracted to magnet
24	12m	10°57'57.0"	125°02'38.2"	olive gray sandy mud, homogeneous	moderately attracted to magnet
25	5m	10°57'56.0"	125°02'18.7"	dark olive gray to black fine sand	strongly attracted to magnet
26	8m	11°00'07.1"	125°02'29.4"	dark olive gray to black fine pebbly sand	strongly attracted to magnet
27	42m	11°00'25.9"	125°03'46.3"	olive gray mud, homogeneous	slightly attracted to magnet
28	41m	11°00'39.8"	125°05'16.5"	olive gray mud, homogeneous	slightly attracted to magnet
29	56m	11°00'41.0"	125°06'26.2"	olive gray mud, homogeneous	slightly attracted to magnet
30	52m	11°02'56.4"	125°06'17.2"	olive gray mud, homogeneous	slightly attracted to magnet
31	24m	11°02'55.6"	125°04'56.8"	olive gray sandy mud, homogeneous	moderately attracted to magnet
32	34m	11°02'48.3"	125°03'36.1"	olive gray mud, homogeneous	slightly attracted to magnet
33	10m	11°02'41.4"	125°02'20.6"	olive gray fine sand w/ minor shell fragments	strongly attracted to magnet
34	6m	11°04'45.6"	125°02'04.3"	olive gray sandy mud, homogeneous	moderately attracted to magnet
35	24m	11°04'50.6"	125°03'19.1"	olive gray mud, homogeneous	slightly attracted to magnet
36	33m	11°04'50.7	125°04'50.7"	olive gray mud, homogeneous	slightly attracted to magnet
37	41m	11°04'56.5"	125°06'22.9"	olive gray mud, homogeneous	slightly attracted to magnet

APPENDIX V

TECHNICAL REPORT

Sample No. (LEY)	Approx. Depth (m)	Latitude N	Longitude E	Description (Megascopic)	Remarks (by hand magnet)

38	36m	11°07'01.8"	125°06'18.2"	olive gray mud, homogeneous	slightly attracted to magnet
39	28m	11°6'57.3"	125°05'08.5"	olive gray mud, homogeneous	slightly attracted to magnet
40	26m	11°06'53.1"	125°03'54.4"	olive gray mud, homogeneous	slightly attracted to magnet
41	21m	11°6'46.3"	125°02'37.6"	olive gray mud, homogeneous	slightly attracted to magnet
42	9m	11°06'41.0"	125°01'39.7"	dark olive gray fine sand, homogeneous	moderately attracted to magnet
43	30m	10°44'08.5"	125°03'01.4"	olive gray mud, homogeneous	slightly attracted to magnet
44	45m	10°44'14.2"	125°04'15.5"	olive gray mud, homogeneous	slightly attracted to magnet
45	57m	10°44'10.3"	125°05'30.9"	olive gray mud, homogeneous	slightly attracted to magnet
46	56m	10°45'17.1"	125°05'37.1"	olive gray mud, homogeneous	slightly attracted to magnet
47	57m	10°45'06.8"	125°04'24.9"	olive gray mud, homogeneous	slightly attracted to magnet
48	53m	10°47'23.7"	125°4'21.7	olive gray mud, homogeneous	slightly attracted to magnet
49	48m	10°47'23.8	125°03'16.3"	olive gray mud, homogeneous	slightly attracted to magnet
50	42m	10°47'19.7"	125°2'04.3"	olive gray mud, homogeneous	slightly attracted to magnet
51	18m	10°47'14.9"	125°01'04.3"	olive gray sandy mud, homogeneous	moderately attracted to magnet
52	16m	10°47'13.4"	125°00'25.3"	brown sandy mud, homogeneous	moderately attracted to magnet
53	7m	10°49'16.6"	125°00'18.9"	brown sandy mud, homogeneous	moderately attracted to magnet
54	35m	10°49'20.0"	125°01'18.3"	olive gray mud, homogeneous	slightly attracted to magnet
55	43m	10°49'31.2"	125°02'17.7"	olive gray mud, homogeneous	slightly attracted to magnet
56	51m	10°49'44.1"	125°03'23.0"	olive gray mud, homogeneous	slightly attracted to magnet
57	43m	10°52'18.5"	125°03'23.4"	olive gray mud, homogeneous	slightly attracted to magnet

APPENDIX V

TECHNICAL REPORT

Sample No. (LEY)	Approx. Depth (m)	Latitude N	Longitude E	Description (Megascopic)	Remarks (by hand magnet)

58	35m	10°52'19.1"	125°01'56.4"	olive gray mud, homogeneous	slightly attracted to magnet
59	17m	10°52'16.5"	125°00'36.3"	brown sandy mud, homogeneous	moderately attracted to magnet
60	20m	10°54'32.0"	125°01'42.6"	olive gray sandy mud, homogeneous	moderately attracted to magnet
61	31m	10°54'38.6"	125°02'55.6"	olive gray mud, homogeneous	slightly attracted to magnet
62	48m	10°54'46.2"	125°04'10.0"	olive gray mud, homogeneous	slightly attracted to magnet
63	57m	10°54'50.2"	125°05'26.0"	olive gray mud, homogeneous	slightly attracted to magnet
64	54m	10°57'00.3"	125°06'16.4"	olive gray mud, homogeneous	slightly attracted to magnet
65	37m	10°57'02.3"	125°05'05.0"	olive gray mud, homogeneous	slightly attracted to magnet
66	28m	10°57'01.0"	125°03'47.2"	olive gray mud, homogeneous	slightly attracted to magnet
67	8m	10°56'57.9"	125°02'32.5"	brown mud, homogeneous	slightly attracted to magnet
68	10m	10°59'07.5"	125°02'36.8"	olive gray sandy mud, homogeneous	moderately attracted to magnet
69	30m	10°59'11.2"	125°03'48.6"	olive gray mud, homogeneous	slightly attracted to magnet
70	35m	10°59'24.3"	125°05'23.4"	olive gray mud, homogeneous	slightly attracted to magnet
71	48m	10°59'27.3"	125°06'41.3"	olive gray mud, homogeneous	slightly attracted to magnet
72	6m	11°01'32.8"	125°02'24.6"	dark olive gray fine sand, homogeneous	strongly attracted to magnet
73	31m	11°01'36.0"	125°03'32.3"	olive gray mud, homogeneous	slightly attracted to magnet
74	21m	11°01'35.0"	125°04'43.1"	olive gray fine sand w/ minor shell fragments	strongly attracted to magnet
75	13m	11°05'40.6"	125°01'51.1"	brown sandy mud, homogeneous	slightly attracted to magnet
76	20m	11°05'47.1"	125°02'56.0"	olive gray mud, homogeneous	slightly attracted to magnet
77	25m	11°05'53.8"	125°04'00.0"	olive gray mud, homogeneous	slightly attracted to magnet

APPENDIX V

TECHNICAL REPORT

Sample No. (LEY)	Approx. Depth (m)	Latitude N	Longitude E	Description (Megascopic)	Remarks (by hand magnet)

78	30m	11°05'57.0"	125°05'00.8"	olive gray mud, homogeneous	slightly attracted to magnet
79	38m	11°06'00.1"	125°06'02.6"	olive gray mud, homogeneous	slightly attracted to magnet
80	24m	11°08'22.0"	125°05'44.0"	olive gray mud, homogeneous	slightly attracted to magnet
81	20m	11°08'16.5"	125°04'16.9"	olive gray sandy mud, homogeneous	moderately attracted to magnet
82	18m	11°08'16.1"	125°03'01.2"	olive gray sandy mud, homogeneous	moderately attracted to magnet
83	12m	11°08'16.3"	125°01'39.6"	olive gray sandy mud, homogeneous	moderately attracted to magnet
84	13m	11°09'38.0"	125°01'37.9"	olive gray mud, homogeneous	moderately attracted to magnet
85	16m	11°09'40.3"	125°02'52.1"	olive gray mud, homogeneous	slightly attracted to magnet
86	19m	11°09'42.9"	125°04'06.6"	olive gray sandy mud, homogeneous	moderately attracted to magnet
87	21m	11°09'46.8"	125°05'16.6"	olive gray mud, homogeneous	slightly attracted to magnet
88	17m	11°03'39.5"	125°02'27.4"	dark olive gray coarse, pebbly sand	strongly attracted to magnet
89	27m	11°03'50.6"	125°03'45.5"	olive gray mud, homogeneous	slightly attracted to magnet
90	32m	11°04'00.5"	125°05'03.0"	olive gray mud, homogeneous	slightly attracted to magnet
91	41m	11°04'00.3"	125°06'24.5"	olive gray mud, homogeneous	slightly attracted to magnet
92	14m	10°50'40.1"	125°00'26.6"	olive gray sandy mud, homogeneous	moderately attracted to magnet
93	13m	10°48'03.1"	125°00'24.4"	brown sandy mud, homogeneous	moderately attracted to magnet
94	37m	10°46'14.7"	125°03'01.0"	olive gray mud, homogeneous	slightly attracted to magnet
95	11m	10°45'56.2"	125°00'56.5"	olive gray sandy mud, homogeneous	moderately attracted to magnet
96	18m	11°09'59.0"	125°06'25.0"	olive gray sandy mud	moderately attracted to magnet
97	26m	11°10'02.3"	125°07'44.5"	olive gray mud	slightly attracted to magnet
98	24m	11°10'03.4"	125°08'57.4"	olive gray mud	slightly attracted to magnet

APPENDIX V

TECHNICAL REPORT

Sample No. (LEY)	Approx. Depth (m)	Latitude N	Longitude E	Description (Megascopic)	Remarks (by hand magnet)

99	17m	11°10'08.8"	125°10'15.6"	olive gray mud	slightly attracted to magnet
100	10m	11°10'13.1"	125°11'23.8"	olive gray sandy mud	moderately attracted to magnet
101	16m	11°11'05.0"	125°11'24.5"	olive gray sandy mud	moderately attracted to magnet
102	15m	11°11'05.0"	125°10'10.1"	olive gray mud	slightly attracted to magnet
103	15m	11°11'08.6"	125°08'59.3"	olive gray mud	slightly attracted to magnet
104	21m	11°11'01.7"	125°07'54.1"	olive gray mud	slightly attracted to magnet
105	21m	11°10'58.0"	125°06'30.2"	olive gray mud	slightly attracted to magnet
106	24m	11°10'55.6"	125°05'23.5"	olive gray mud	slightly attracted to magnet
107	19m	11°10'54.0"	125°04'10.1"	olive gray mud	slightly attracted to magnet
108	19m	11°10'52.5"	125°03'01.5"	olive gray mud	slightly attracted to magnet
109	5m	11°10'47.2"	125°01'16.3"	fine sand w/shell/coral fragments	strongly attracted to magnet
110	6m	11°12'07.1"	125°01'45.7"	brown, muddy sand	strongly attracted to magnet
111	15m	11°12'07.8"	125°03'10.7"	olive gray mud	slightly attracted to magnet
112	17m	11°12'14.8"	125°04'32.5"	olive gray mud	slightly attracted to magnet
113	16m	11°12'46.1"	125°05'50.8"	olive gray mud	slightly attracted to magnet
114	14m	11°12'19.7"	125°07'14.8"	olive gray mud	slightly attracted to magnet
115	16m	11°12'21.2"	125°08'33.2"	olive gray mud	slightly attracted to magnet
116	12m	11°12'21.7"	125°00'53.9"	olive gray mud	slightly attracted to magnet
117	3m	11°12'27.4"	125°10'44.8"	olive gray sandy mud	moderately attracted to magnet
118	4m	11°13'44.8"	125°10'15.4"	olive gray sandy mud	moderately attracted to magnet
119	9m	11°13'50.4"	125°09'12.2"	olive gray mud	slightly attracted to magnet
120	12m	11°13'49.4"	125°07'59.8"	olive gray mud	slightly attracted to magnet
121	9m	11°13'49.3"	125°06'47.1"	olive gray mud	slightly attracted to magnet
122	8m	11°13'48.7"	125°05'34.6"	olive gray sandy mud	moderately attracted to magnet
123	10m	11°13'45.0"	125°04'20.6"	olive gray fine sand w/ SF	moderately attracted to magnet
124	9m	11°13'42.3"	125°03'02.2"	olive gray sandy mud	moderately attracted to magnet
125	7m	11°13'39.4"	125°02'04.9"	olive gray sandy mud	moderately attracted to magnet
126	7m	11°16'10.2"	124°58'59.9"	fine - medium grained sand w/shell fragments	moderately attracted to magnet
127	4m	11°16'15.8"	124°59'50.9"	olive gray mud	slightly attracted to magnet

APPENDIX V

TECHNICAL REPORT

Sample No. (LEY)	Approx. Depth (m)	Latitude N	Longitude E	Description (Megascopic)	Remarks (by hand magnet)

128	16m	11°15'27.1"	125°00'26.7"	fine – medium grained sand w/shell fragments	moderately attracted to magnet
129	17m	11°15'30.4"	125°01'51.9"	fine – medium grained sand w/shell fragments	slightly attracted to magnet
130	13m	11°15'31.6"	125°03'06.3"	coarse sand w/abundant shell fragments	slightly attracted to magnet
131	6m	11°15'30.9"	125°04'22.9"	coarse sand w/abundant shell fragments	slightly attracted to magnet
132	3m	11°15'31.3"	125°05'19.0"	olive gray sandy mud	moderately attracted to magnet
133	5m	11°15'33.7"	125°06'15.9"	olive gray mud	slightly attracted to magnet
134	6m	11°15'37.4"	125°07'34.5"	olive gray mud	slightly attracted to magnet
135	5m	11°15'41.0"	125°08'43.9"	olive gray mud	slightly attracted to magnet
136	2m	11°15'42.9"	125°09'30.9"	olive gray sandy mud	moderately attracted to magnet
137	2m	11°16'15."	125°08'27.7"	olive gray sandy mud	moderately attracted to magnet
138	2m	11°16'22.3"	125°07'20.6"	olive gray sandy mud	moderately attracted to magnet
139	2m	11°16'20.3"	125°06'35.2"	olive gray sandy mud	moderately attracted to magnet
140	27m	11°08'17.5"	125°07'06.6"	olive gray mud	slightly attracted to magnet
141	27m	11°08'12.1"	125°08'16.6"	olive gray mud	slightly attracted to magnet
142	33m	11°08'17.4"	125°09'23.5"	olive gray mud	slightly attracted to magnet
143	29m	11°08'21.3"	125°10'33.0"	olive gray mud	slightly attracted to magnet
144	23m	11°08'26.3"	125°11'36.7"	olive gray mud	slightly attracted to magnet
145	34m	11°07'25.5"	125°11'42.7"	olive gray mud	slightly attracted to magnet
146	37m	11°06'04.3"	125°11'50.1"	olive gray mud	slightly attracted to magnet
147	46m	11°06'02.3"	125°10'24.2"	olive gray mud	slightly attracted to magnet
148	37m	11°07'14.0"	125°10'20.3"	olive gray mud	slightly attracted to magnet
149	40m	11°07'24.6"	125°09'05.6"	olive gray mud	slightly attracted to magnet
150	35m	11°07'14.4"	125°07'42.4"	olive gray sandy mud	moderately attracted to magnet
151	-	11°06'07.0"	125°07'33.8"	olive gray mud	slightly attracted to magnet
152	47m	11°05'57.9"	125°08'32.6"	olive gray mud	slightly attracted to magnet

APPENDIX V

TECHNICAL REPORT

Table A1-2 - Results of Initial Magnetic Separation Analysis (Leyte Gulf, June 2008)

Sample No.	Approx. Weight (grams)	Non-Magnetic Fractions	Magnetic Fractions	Percentage

LEY - 01	307.05	301.2	5.85	1.91
LEY - 02	157.3	150	7.3	4.64
LEY - 03	54	47.2	6.8	12.59
LEY - 04	181.7	174	7.7	4.24
LEY - 05	428.2	421.7	6.5	1.52
LEY - 06	324	319.3	4.7	1.45
LEY - 07	350.5	343	7.5	2.14
LEY - 08	226.75	197.7	29.05	12.81
LEY - 09	350.3	328.7	21.6	6.17
LEY - 10	351.15	342	9.15	2.61
LEY - 11	186.4	181.9	4.5	2.41
LEY - 12	364	358.2	5.8	1.59
LEY - 13	378.3	372.3	6	1.59
LEY - 14	334.3	330	4.3	1.29
LEY - 15	311.5	304.9	6.6	2.12
LEY - 16	316.6	293.4	23.2	7.33
LEY - 17	206.05	200.3	5.75	2.79
LEY - 18	255.2	250.3	4.9	1.92
LEY - 19	442.9	435.8	7.1	1.60
LEY - 20	434.7	430	4.7	1.08
LEY - 21	328.2	323.5	4.7	1.43
LEY - 22	318.35	313.65	4.7	1.48
LEY - 23	267.55	263.3	4.25	1.59
LEY - 24	312.35	283.4	28.95	9.27
LEY - 24B	316.3	259	57.3	18.12
LEY - 25	225.5	169.5	56	24.83
LEY - 26	512.7	298.5	214.2	41.78
LEY - 27	337	329.8	7.2	2.14
LEY - 28	317.85	310.5	7.35	2.31
LEY - 29	407.5	401.8	5.7	1.40
LEY - 30	627.8	622.4	5.4	0.86
LEY - 31	214.5	208.9	5.6	2.61
LEY - 32	442.4	437.1	5.3	1.20
LEY - 33	210.95	184.6	26.35	12.49
LEY - 33B	342.95	316	26.95	7.86
LEY - 34	376.7	354.4	22.3	5.92
LEY - 34B	299.6	294.35	5.25	1.75
LEY - 35	368.9	363.6	5.3	1.44
LEY - 36	588.8	584.1	4.7	0.80
LEY - 37	609.15	603.75	5.4	0.89
LEY - 38	272.75	267.65	5.1	1.87
LEY - 39	357.35	351.9	5.45	1.53
LEY - 40	221.5	215.75	5.75	2.60
LEY - 41	423.9	414.6	9.3	2.19
LEY - 42	220.25	204.85	15.4	6.99

APPENDIX V

TECHNICAL REPORT

Sample No.	Approx. Weight (grams)	Non-Magnetic Fractions	Magnetic Fractions	Percentage

LEY - 43	664.55	659.15	5.4	0.81
LEY - 44	208.9	203.3	5.6	2.68
LEY - 45	196.75	191.75	5	2.54
LEY - 46	361.1	354.3	6.85	1.90
LEY - 47	352.52	345.3	7.2	2.05
LEY - 48	469.8	461.75	8.05	1.71
LEY - 49	238	232.6	5.4	2.27
LEY - 50	364.05	358.85	5.2	1.43
LEY - 51	311.65	305.1	6.55	2.10
LEY - 52	450.6	435.4	15.2	3.37
LEY - 53	386.8	380.6	6.2	1.60
LEY - 54	366.3	359	7.3	1.99
LEY - 55	480.45	472.9	7.55	1.57
LEY - 56	247.95	242.9	5.05	2.04
LEY - 57	383.8	377.5	6.3	1.64
LEY - 58	266.3	259.1	7.2	2.70
LEY - 59	319	299.5	19.5	6.11
LEY - 60	245	229.4	15.6	6.37

APPENDIX V

TECHNICAL REPORT

Sample No.	Approx. Weight (grams)	Non-Magnetic Fractions	Magnetic Fractions	Percentage

LEY - 61	238.95	232.25	6.7	2.80
LEY - 62	299.1	291.8	7.3	2.44
LEY - 63	132.8	127.8	5	3.77
LEY - 64	152.5	146.75	5.75	3.77
LEY - 65	242.25	236.75	5.5	2.27
LEY - 66	227.9	223.3	4.6	2.02
LEY - 67	334.05	329.5	4.55	1.36
LEY - 68	225.4	189	36.4	16.15
LEY - 69	424.45	416.7	7.75	1.83
LEY - 70	301.8	296	5.8	1.92
LEY - 71	242.35	237.3	5.1	2.08
LEY - 72	476.45	409.9	66.55	13.97
LEY - 73	433.6	425.8	7.75	1.79
LEY - 74	357.95	353.6	4.35	1.22
LEY - 75	331.95	326.7	5.25	1.58
LEY - 76	342.1	337.2	4.9	1.43
LEY - 77	383.5	378.7	4.8	1.25
LEY - 78	610.8	606.15	4.65	0.76
LEY - 79	300.8	295.7	5.1	1.70
LEY - 80	245.45	241.1	4.35	1.77
LEY - 81	205.85	201.55	4.3	2.09
LEY - 82	192.35	187.55	4.8	2.50
LEY - 83	544.75	537.6	7.15	1.31
LEY - 84	288.1	283.5	4.6	1.60
LEY - 85	309.05	304.25	4.8	1.55
LEY - 86	673.5	669.05	4.45	0.66
LEY - 88	251.05	214.95	36.1	14.38
LEY - 89	356.75	349.8	6.95	1.95
LEY - 90	361.55	355.25	6.3	1.74
LEY - 91	428.95	424.3	4.65	1.08
LEY - 92	440.55	432.75	7.8	1.77
LEY - 93	305.25	294.05	11.2	3.67
LEY - 94	458.9	453.95	4.95	1.08
LEY - 95	588.55	575.85	12.7	2.16
LEY - 96	327.45	320.55	6.9	2.11
LEY - 97	427.05	420.8	6.25	1.46
LEY - 98	236.5	230.7	5.8	2.45
LEY - 99	235.9	229.8	6.1	2.59
LEY - 100	223.2	217.6	5.6	2.51
LEY - 101	424.9	417.4	7.5	1.77
LEY - 102	350.5	343	7.5	2.14
LEY - 103	296.75	288.4	8.35	2.81
LEY - 104	200.75	195.15	5.6	2.79
LEY - 105	209.1	203.2	5.9	2.82
LEY - 106	375.3	370	5.3	1.41
LEY - 107	368.42	362.6	5.82	1.58
LEY - 108	368.82	362.22	6.6	1.79

APPENDIX V

TECHNICAL REPORT

Sample No.	Approx. Weight (grams)	Non-Magnetic Fractions	Magnetic Fractions	Percentage

LEY - 109	579.1	510	69.1	11.93
LEY - 110	404.9	372.9	32	7.90
LEY - 111	258.2	248.7	9.5	3.68
LEY - 112	299.35	293.5	5.85	1.95
LEY - 113	312.7	306.6	6.1	1.95
LEY - 114	202.75	197.1	5.65	2.79
LEY - 115	390.4	383.6	6.8	1.74
LEY - 116	149.61	143.91	5.7	3.81
LEY - 117	286.6	278.7	7.9	2.76
LEY - 118	302	296.2	5.8	1.92
LEY - 119	350.55	345.35	5.2	1.48
LEY - 120	266.5	260.5	6	2.25
LEY - 121	362.1	356.4	5.7	1.57
LEY - 122	495.25	489.9	5.35	1.08
LEY - 123	432.5	424.63	7.9	1.83
LEY - 124	407.15	400.5	6.65	1.63
LEY - 125	388.8	379.4	9.4	2.42
LEY - 126	350.6	345.1	5.5	1.57
LEY - 127	-	-	-	-
LEY - 128	474.3	463	11.3	2.38
LEY - 129	591.8	584.1	7.7	1.30
LEY - 130	270.6	265	5.6	2.07
LEY - 131	338.45	333	5.45	1.61
LEY - 132	384.5	377.5	7	1.82
LEY - 133	165.05	159.05	6	3.64
LEY - 134	325.3	319.8	5.5	1.69
LEY - 135	166	160	6	3.61
LEY - 136	524.5	517.2	7.25	1.38
LEY - 137	-	-	-	-
LEY - 138	343	337.1	5.9	1.72
LEY - 139	586.22	578.92	7.3	1.25
LEY - 140	190.5	182.5	8	4.20
LEY - 141	73.1	67.5	5.6	7.66
LEY - 142	154.4	148.2	6.2	4.02
LEY - 143	161.55	154.5	7.05	4.36
LEY - 144	206.15	200.35	5.8	2.81
LEY - 145	-	-	-	-
LEY - 146	30.97	25.82	5.15	16.63
LEY - 147	227.82	222	5.8	2.55
LEY - 148	265.42	257.5	7.92	2.98
LEY - 149	322.5	315.6	6.9	2.14
LEY - 150	335.85	330.4	5.45	1.62
LEY - 151	13.5	8.4	5.1	37.78
LEY - 152	50.07	44.92	5.15	10.29

APPENDIX V

TECHNICAL REPORT

APPENDIX 2.0 - PISTON CORE SAMPLING RESULTS

Table A2-1 - Description of Piston Coring Samples Collected in Leyte Gulf, July 2008

Sample No. (LCP)	Water Depth (m)	Latitude (N)	Longitude	Description (Megascopic)	Remarks (by hand magnet)

1	21.84	11°04'50.18"	125°04'07.82"	Silty mud w/minor amount of shell fragments	Slightly magnetic
2	32.76	11°04'14.42"	125°08'04.92"	Silty mud	Slightly magnetic
3	30.94	11°02'12.00"	125°06'00"	Silty mud	Slightly magnetic
4	43.68	11°01'23.16"	125°08'08.99"	Silty mud w/minor amount of shell fragments	Slightly magnetic
5	25.48	11°00'16.62"	125°04'42.38"	Silty mud w/minor amount of shell fragments	Slightly magnetic
6	34.58	10°58'47.73"	125°06'03.21"	Silty mud	Slightly magnetic
7	30.94	10°56'50.03"	125°04'10.25"	Silty mud	Slightly magnetic
8	20.0	11°08'54.15"	125°06'22.56"	Olive gray silty mud with minute shell fragments	Slightly magnetic
9	14.82	11°08'53.47"	125°09'09.79"	Olive gray homogenous silty mud with minor amounts of shell fragments	Slightly magnetic
10	13.5	-	-	Olive gray silty mud with sporadic amounts of minute shell fragments	Slightly magnetic
11	7.46	11°12'29.59"	125°04'36.94"	Olive gray silty mud with sporadic amounts of minute shell fragments	Slightly magnetic
12	15.5	11°10'55.89"	125°07'33.49"	Olive gray homogenous silty mud with minor amount of shell fragment	Slightly magnetic
13	7 - 9	11°12'09.09"	125°09'37.10"	Olive gray homogenous silty mud with scattered shell fragments	Slightly magnetic
14	14.74	11°11'10.93"	125°05'35.94"	Olive gray homogenous silty mud with scattered shell fragments	Slightly magnetic
15	16-18	11°10'40.08	125°08'57.90"	Olive gray homogenous silty mud with sporadic shell fragments	Slightly magnetic
16	14.56	11°09'55.97"	125°05'53.60	Silty mud w/occasional minutes of shell fragments	Slightly magnetic

APPENDIX V

TECHNICAL REPORT

Sample No. (LCP)	Water Depth (m)	Latitude (N)	Longitude	Description (Megascopic)	Remarks (by hand magnet)

17	20.0	11°10'00.81"	125007'31.70"	Olive gray homogenous silty mud with scattered shell fragments	Slightly magnetic
18	11.83 - 14.56	11°10'4.56"	125°10'08.65"	Slightly silty mud	Slightly magnetic
19	14-16	11°08'03.81"	125°03'03.41"	Slightly sticky silty mud w/ occasional shell fragments	Slightly magnetic
20	20	11°07'57.88"	125005'11.16"	Olive gray silty mud with scattered minute shell fragments	Slightly magnetic
21	25.48 - 29.12	11°08'06.86"	125°08'25.51"	Silty mud w/occasional shell fragments	Slightly to moderately magnetic
22	-	-	-	-	-
23	23.66	11°06'58.66"	125°06'29.41"	Silty mud w/occasional shell fragments, hard, compacted mud from.05-0.55m, 3-3.10m, 3.74-3.90m	Slightly magnetic
24	18.2 - 30.94	11°07'10.99"	125°09'06.64"	Sandy mud from 3.10m -3.98m (fine-medium course grained sand)	Slightly magnetic
25	21.84	11°05'57.42"	125°04'59.90"	Silty mud w/occasional shell fragments	Slightly magnetic
26	29.12 - 30.94	11°05'50.55"	125°08'54.24"	Silty mud, highly weathered rock fragments from 0.77-0.85m, and 3.85m, fine - pebbly sand at 3.95m	Moderately magnetic
27	34.58	11°10'04.56"	125°10'20.58"	Mud	Slightly magnetic
28	27.3 - 29.12	11°04'46.90"	125°06'30.69"	Silty mud w/occasional shell fragments	Slightly magnetic
29	30.94	11°05'02.81"	125°07'54.98"	Silty mud, silty mud w/ intercalated layers of shell fragments from at 0.42-1.85m, 2.15-2.35m, 3.2-3.9m	Slightly magnetic
30	23.66 - 25.48	11°03'50.32"	125°06'30.69"	Silty mud w/occasional shell fragments (minute), black medium grained sand materials at 3.50-3.96m	Strongly magnetic

APPENDIX V

TECHNICAL REPORT

Sample No. (LCP)	Water Depth (m)	Latitude (N)	Longitude	Description (Megascopic)	Remarks (by hand magnet)
31	34.58	11°03'53.93"	125°07'35.55"	Silty pebbly mud, silty mud at 2-2.34m, 3.25-3.35m, 3.87-3.99m	Slightly magnetic
32	20.02 – 27.30	11°02'59.57"	125°05'30.92"	Silty mud w/minor amounts of shell fragments, medium-coarse grained black sand from 1.93-2.37m, medium-coarse grained muddy sand from 3.46-3.97m	Slightly magnetic
33	32.76	11°02'51.30"	125°06'26.04"	Silty mud w/minor shell fragments	Slightly magnetic
34	32.76 – 36.4	11°03'01.80"	125°08'29.50"	Slightly sticky silty mud w/ occasional amounts of minute shell fragments	Slightly magnetic
35	27.3	11°01'51.35"	125°05'06.80"	Silty mud w/sporadic shell fragments	Slightly magnetic
36	34.58	11°01'52.50"	125°07'09.61"	Silty mud, shell fragment layer interspersed w/coarse sand from 1.17m-1.55m, mixture of coarse sand, shell frags and mud from 1.78-1.82m	Slightly magnetic
37	41.86	11°01'35.96"	125°08'31.28"	Silty mud w/sporadic amounts of shell fragments	Slightly magnetic
38	–	–	–	–	–
39	35.00	11°00'29.15"	125°06'32.34"	Silty mud with sporadic shell fragments; Dark olive gray sand at 3.5 to 3.97 m	Slightly to moderately magnetic
40	38.50	11°00'34.50"	125°07'51.54"	Olive gray silty mud with minor amounts of shell fragments w/ sand lenses	Slightly to moderately magnetic
41	32.5	11°00'23.35"	125°08'52.51"	Moderately compacted silty sand; dark olive gray with minor amount of shell fragments	Moderately magnetic
42	25.48	10°58'59.29"	125°04'20.80"	Dark olive gray homogenous silty mud minor amount of shell fragments; slightly silty dark olive gray sand at 3.5 to 3.6 meters	Slightly magnetic
43	31	10°59'17.05"	125°05'30.66"	Olive gray homogenous silty mud with sporadic amounts of minute shell fragments	Slightly magnetic

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TECHNICAL REPORT

Sample No. (LCP)	Water Depth (m)	Latitude (N)	Longitude	Description (Megascopic)	Remarks (by hand magnet)

44	-	-	-	-	-
45	-	-	-	-	-
46	36.4	10°56'59.12"	125°05'11.45"	Olive gray homogenous silty mud with minor amount of shell fragments	Slightly magnetic
47	43.68	10°56'45.13"	125°06'27.76"	Olive gray silty mud	Slightly magnetic
48	25.58	10°55'45.20"	125°04'48.84"	Olive gray homogenous silty mud with minor amount of shell fragments	Slightly magnetic
49	35 - 38	10°54'37.40"	125°04'15.23"	Olive gray homogenous silty mud with minor amount of shell fragments	Slightly magnetic
50	33	10°53'37.40"	125°02'43.76"	Olive gray homogenous silty mud with minor amount of shell fragments	Slightly magnetic
51	40	10°52'07.52"	125°03'30.34"	Olive gray homogenous silty mud with minor amount of minute shell fragments	Slightly magnetic
52	40	10°50'51.17"	125°02'42.39"	Olive gray homogenous silty mud with sporadic minute shell fragments	Slightly magnetic
53	38 - 40	10°49'36.81"	125°03'26.45"	Olive gray homogenous silty mud with minor amount of shell fragments	Slightly magnetic
54	35	10°48'29.15"	125°02'20.58"	Olive gray homogenous silty mud with minor amount of shell fragments	Slightly magnetic
55	38	10°47'16.80"	125°03.26.59"	Olive gray homogenous silty mud with scattered shell fragments	Slightly magnetic
56	35	10°46'09.72"	125°03.13.43"	Olive gray homogenous silty mud with scattered shell fragments	Slightly magnetic
57	42	10°45'14.48"	125°04'23.29"	Olive gray homogenous silty mud with minor amount of shell fragments	Slightly magnetic

APPENDIX V

TECHNICAL REPORT

Table A2-2 Results of magnetic separation & density analysis of selected piston core samples

Sample No. (LEY-P)	Sample Weight (gms)	Weight Non-Magnetic Fraction	Weight Magnetic Fraction	Volume	Density S.G.	Percentage Magnetic Fraction.

1	219.52	215.13	4.39	95	2.31	2.00
3	308.55	303.85	4.7	140	2.20	1.52
4	250.25	243.85	6.4	100	2.50	2.56
5	308	303.4	4.6	140	2.20	1.49
6	259.05	254.47	4.58	120	2.16	1.77
7	410.43	403.63	6.8	180	2.28	1.66
8	158.05	154.028	4.025	70.05	2.26	2.55
9	283.07	279.050	4.020	142.05	1.99	1.42
11	421.173	416.136	5.037	200.05	2.11	1.20
12	161.058	157.028	4.015	64.00	2.52	2.49
13	106.11	103.022	3.089	50.05	2.12	2.91
14	244.9	241.00	3.900	120.05	2.04	1.59
15	203.1005	199.081	4.020	95.05	2.14	1.98
16	180.1	176.048	4.052	85.0	2.12	2.25
17	126.1139	123.022	3.092	50.05	2.52	2.45
18	211.166	208.082	3.084	100.05	2.11	1.46
19	865.261	861.192	9.069	599.01	1.44	1.05
20	142.53	138.410	4.120	55.05	2.59	2.89
21	139.10	132.025	7.076	57.15	2.43	5.09
23	175.064	171.045	4.019	120.5	1.45	2.30
24	251.1489	247.088	4.061	110.05	2.28	1.62
25	673.277	670.178	3.099	475.05	1.42	0.46
26	292.35	285.95	6.4	120	2.44	2.19
27	276.097	273.02	3.095	140	1.97	1.12
28	531.2675	525.202	6.066	225	2.36	1.14
29	187.055	183.040	4.015	-	-	2.15
30	433.54	383.34	55.2	160	2.71	12.73
31	245.1	239.00	6.050	114	2.15	2.47
32	388.179	384.095	4.084	184	2.11	1.05
33	275.1523	269.056	6.096	131	2.10	2.22
34	94.65	89.100	5.55	36	2.63	5.86
35	485.226	480.130	5.096	241	2.01	1.05
36	59.137	53.061	6.076	26.0	2.27	10.27
37	160.1	155.064	5.036	70.97	2.26	3.15
39	498.2	475.145	23.025	220	2.26	4.62
40	96.114	90.071	6.043	44	2.18	6.29

APPENDIX V

TECHNICAL REPORT

Sample No. (LEY-P)	Sample Weight (gms)	Weight Non-Magnetic Fraction	Weight Magnetic Fraction	Volume	Density S.G.	Percentage Magnetic Fraction.

41	145.1355	130.082	15.054	71	2.04	10.37
42	257.1088	251.086	6.023	114	2.26	2.34
43	291.157	288.065	3.092	130.05	2.24	1.06
46	112.2	105.890	6.310	64.0	1.75	5.62
47	177.07	172.070	5.00	84	2.11	2.82
48	308.47	297.78	10.69	139	2.22	3.47
49	377.23	361.54	15.69	171	2.21	4.16
50	222.07	213.055	9.015	89	2.50	4.06
51	298.087	291.032	7.055	148	2.01	2.37
52	236.11	227.810	8.30	87	2.71	3.52
53	290.13	284.43	5.70	138	2.10	1.96
54	302.11	292.085	10.025	138	2.19	3.32
55	224.053	216.033	8.020	103.5	2.16	3.58
56	133.56	124.630	8.93	54	2.47	6.69
57	180.038	176.017	4.021	93	1.94	2.23
			Average		2.19	3.11

APPENDIX VI

VALUATION REPORT

The following is the text of a letter, summary of value and valuation certificate prepared for the purpose of incorporation in this circular received from B.I. Appraisals Limited, an independent valuer, in connection with the equity interest valuation of a business operation of Morgan as at 31 August 2008.

B. I. Appraisals Limited 保柏國際評估有限公司

Registered Professional Surveyors, Valuers & Property Consultants

Unit 1301, 13th Floor, Tung Wai Commercial Building,

Nos. 109-111 Gloucester Road, Wan Chai, Hong Kong

Tel: (852) 2127 7762 Fax: (852) 2137 9876

Email: [email protected]

Website: www.bisurveyors.com.hk

21 November 2008

The Board of Directors

Black Sand Enterprises Limited

Suites 1412-13, Tower One, Times Square

1 Matheson Street

Causeway Bay

Hong Kong

Dear Sirs,

Re: The 100 per cent. equity interest in the business operation in relation to the offshore magnetite mining tenements covering an area of 41,093.85 hectares in Leyte Gulf and San Pedro Bay off Leyte and Samar Provinces in Republic of the Philippines ("the Philippines") of the business enterprise of Mt. Mogan Resources and Development Corporation

In accordance with the instructions from Black Sand Enterprises Limited (hereinafter together referred to as the "Company") for us to value the 100 per cent. equity interest in the business operation in relation to the offshore magnetite mining tenements covering an area of 41,093.85 hectares in Leyte Gulf and San Pedro Bay off Leyte and Samar Provinces in the southeastern part of the Philippines (hereinafter referred to as the "Business") of the business enterprise of Mt. Mogan Resources and Development Corporation (hereinafter together referred to as the "Business Enterprise" or "Mt. Mogan"), certain interest of which are proposed to be acquired by the Company, we confirm that we have conducted inspections, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market value of the Business Enterprise as at 31 August 2008 (hereinafter referred to as the "Date of Valuation").

This report states the purpose of valuation and scope of our works, identifies the business valued, describes the basis and methodology of our valuation, investigation and analysis, assumptions and limiting conditions, and presents our opinion of value.

APPENDIX VI
VALUATION REPORT

PURPOSE OF VALUATION

This report is being prepared solely for the use of the directors and management of the Company for reference purpose. It is our understanding that our opinion of value and/or valuation report on the Business may subsequently be included in the circular to be issued in relation to the proposed acquisition.

This report is not to be used for any purpose other than that mentioned above, including issue to third parties, without our prior approval of the use, form and context in which it is released.

B.I. Appraisals Limited assumes no responsibility whatsoever to any person other than the directors and management of the Company in respect of, or arising out of, the contents of this report. If others choose to rely in any way on the contents of this report they do so entirely on their own risk.

SCOPE OF WORK

This engagement involved an analysis of the Business as of the Date of Valuation. Our valuation report has been prepared based on information provided by the Company, which includes the following documents:

a) Descriptive information of the Business Enterprise;

b) Descriptive information of the Business and its development plan;

c) A copy of the proposed Exploration Programme to be undertaken by EGS (Asia) Limited, a technical consultant and an Independent Third Party, has been appointed and engaged to perform a wide range of services specializing in the area of geophysical and hydrographic studies in a marine environment together with the DENR.

d) A copy of the Memorandum regarding the status of exploration permit applications on the Mining Claims (as defined in the following section) issued by PJS Law, the Company's legal advisor, on 23 June 2008 (hereinafter referred to as the "Memorandum");

e) A copy of Area Status and Clearance (For Mining Applications) regarding each of the applications for exploration permit (offshore) of the concerned mining claims with Application Nos. EXPAOMR002VIII (previously designated as EXPA-000115-VIII) and EXPA-000110-VIII dated 3 September 2008 and issued by Regional Office No. 8, Department of Environment and Natural Resources ("DENR") of the Philippines;

f) A copy of the Memorandum of Agreement for the conduct of a joint technical study in the area covered by the Exploration Permit applications entered into between Mt. Mogan and DENR of the Philippines dated 1 November 2008;

g) A copy of Preliminary Assessment of the Magnetite Bearing Deposits off Eastern Leyte Province and San Pedro Bay dated 30 July 2008 prepared by Mines and Geosciences Bureau ("MGB") of the Philippines (hereinafter referred to as the "MGB Report");

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VALUATION REPORT

h) A copy of Technical Report on Black Sand Enterprises Limited Magnetite Beach-sand Project in Leyte Province, the Philippines prepared in September 2008 (hereinafter referred to as "Technical Report") by Behre Dolbear Asia, Inc. – an independent qualified mineral technical adviser; and

i) A financial projection of the proposed magnetite bearing deposits operation in Leyte Gulf and San Pedro Bay of the Business Enterprise.

In preparing this report, we have had discussions with the management of the Company in relation to the development and prospects of the iron-ore extracting and processing industries in the Philippines, and the development, operations and other relevant information of the Business Enterprise and the Business.

Our valuation conclusions are based on the assumptions stated herein and on the information, in particular the Technical Report and the financial forecasts prepared by the Company. The Company is responsible for the assumptions upon which the forecasts are based. The assumptions adopted reflect the Company's judgment of its ability to develop the Business. The profit projections are based on the view of the Company of present circumstances as to both the most likely set of operating and economic conditions and the course of action the Business is most likely to take in the business development. In developing these projections, the Company has had due regard to published research data, current industry conditions and relevant transactions which have occurred in the market. The Company's profit projections are based on a number of assumptions and are subject to uncertainties and contingencies, many of which are beyond the control of the Company. Accordingly, actual results during the projection period may vary from the projections, as it is often the case that some events and circumstances do not occur as expected, or are not anticipated.

As part of our analysis, we have reviewed such financial information, Technical Report and other pertinent data concerning the Business provided to us by the Company and have considered such information and data which are considered to be truth and accurate and reflecting the situation of the subject business, as attainable and reasonable.

We have no reason to believe that any material facts have been withheld from us, however, we do not warrant that our investigations have revealed all of the matters which an audit or more extensive examination might disclose.

We do not express an opinion as to whether the actual results of the Business will approximate those projections in the business plan because assumptions regarding future events by their nature are not capable of independent substantiation. In applying these projections to the valuation of the market value of the Business, we are making no representation that the Business will be successful, or that market growth and penetration will be realized.

THE BUSINESS ENTERPRISE

Mt. Mogan is a corporation organized and existing under the laws of the Philippines on 16 January 2007. It has been established to principally engage in and carry on the business of operating mines; and of prospecting, exploration and of mining.

290

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VALUATION REPORT

According to the information provided, the primary economic assets of the Business Enterprise include the claims of two offshore magnetite mining tenements covering an area of 41,093.85 hectares ("ha") in Leyte and Samar Provinces in the southeastern part of the Philippines (hereinafter referred to as the "Mining Claims"). We have focused our valuation to the business operation in relation to the Mining Claims.

In May 2008, First Pine Enterprises Ltd agreed to acquire an effective 64% interest in Mt. Mogan and subsequently the Company, a wholly owned subsidiary of Intelli-Media Group (Holdings) Ltd, agreed to acquire the entire share capital of First Pine Enterprises Ltd.

The Shareholding Structure

The Business Enterprise as at the Date of Valuation is owned by eight individual Filipinos. We have been advised by the Company that a reorganization is being facilitated at the request of the Company to enable the Company to acquire an effective 64 per cent. equity interest in the Business.

THE MINING CLAIMS

According to the information provided, the Business Enterprise has claimed two offshore mining tenements covering a total area of approximately 41,093.85 ha in the southeastern part of the Philippines as follows:

(1) an offshore mining tenement (Exploration Mining Application No.: EXPA-000110-VIII) for magnetite placer deposits and other associated minerals in the Leyte Gulf region, covering an area of approximately 15,781.611 hectares along the municipalities of Tanauan, Tolosa, Dulag, Mayorga, MacArthur and Abuyog in Leyte Province; and

(2) an offshore mining tenement (Exploration Mining Application No.: EXPAOMR002VIII) for magnetite placer deposits and other associated minerals in the Leyte Gulf region, covering an area of approximately 25,312.2425 hectares along the municipalities of Basey and Marabut in Samar Province, and Tacloban City in Leyte Province.

APPENDIX VI

VALUATION REPORT

Fig. 1: The locations of the Mining Claims

Pursuant to the instructions from the Company, we have focused our valuation to the business operation in relation to the two offshore magnetite mining tenements covering an area of approximately 41,093.85 hectares in Leyte Gulf and San Pedro Bay off Leyte and Samar Provinces (i.e. the Mining Claims No. 1 and No. 2, hereinafter referred to as the "Subject Areas").

In early 2008, Mt. Mogan applied to the relevant regional offices of MGB for the two offshore mining licences for magnetite sand and other associated minerals, identified as EXPA-000110-VIII (Area = 15,781.611 hectares) in Leyte Gulf and EXPAOMR002VIII (Area = 25,312.2425 hectares) in San Pedro Bay, Province of Leyte. These Off-shore Exploration Permits have not yet been approved or granted. However, pursuant to the Memorandum prepared by PJS Law, as the concerned MGB regional offices have accepted these exploration permit applications, it presupposes that the applied areas are not in conflict with any existing mining rights, permits or applications. Legally, these applications give the Business Enterprise priority over the Subject Areas. This means that the Subject Areas cannot be the subject of other mining applications until the Business Enterprise's applications are denied, in which case they will again be considered open areas.

Location

The Philippines is an archipelago of 7,107 islands stretching from the south of China to the northern tip of Borneo. The Philippine archipelago is located between latitude 4°23'N and 21°25'N and longitude 112°E and 127°E with a land area of 299,764 sq km. It extends about 1,850 km from north to south and about 965 km from east to west. The total coastline adds up to 17,500 km.

The country is divided into three geographical areas: Luzon in the north, Visayas in the centre and Mindanao in the south. Administratively, it is divided into 17 regions, 79 provinces, 115 cities, 1,499 municipalities, and 41,969 barangays (a barangay is the smallest political unit into which cities and municipalities in the Philippines are divided. They consist of less than 1,000 inhabitants residing within the territorial limit of a city or municipality).

APPENDIX VI

VALUATION REPORT

Leyte Province, having a population of about 1.3 million, is located at $10^{\circ} - 11^{\circ}$ North Latitude and $124^{\circ} - 125^{\circ}$ East Longitude and is one of the six provinces of the Eastern Visayas Region. Tacloban, the Administrative capital of Province Leyte, is located about $600\mathrm{km}$ south of Manila and is served by 6 flights per day operated by two companies, Philippine Airlines and Cebu Pacific. Flight times are about 1 hour. There are also regular sea-ferry services between Manila and Tacloban. There are limited port facilities at Tacloban, but along the shallow coastline of Leyte Gulf there are only small jetties suitable for local fishing or trading boats. The former INCO Jetty $30\mathrm{km}$ south of Tacloban is no longer operational.

Fig. 2: Location of Leyte Island in the Philippine Republic

All the usual facilities such as communications, fuel, supplies and some semi-skilled labour is available from Tacloban. The island has adequate water supplies and electric power is supplied by the Tongonen geothermal facility which also exports power via a submarine cable to Luzon.

There is a good sealed road – the Luzon to Mindanao national highway – that extends along the eastern coast of Leyte and which provides access to the shoreline parallel to the Permit Application areas. There are no significant access or transport facilities on the west coast of Samar Island.

EXPA-000110-VIII is located in Leyte Gulf on the eastern seaboard of Leyte Island in the central part of the Philippine archipelago. The Permit Application covers an area of 15,781.611 hectares (157.81 km²) at about 3 km offshore in the Municipalities of Tanauan, Tolosa, Dulag, Mayorga, MacArthur and Abuyog in Leyte Province. It varies from 2 km to 6 km in width and being 43 km in length from north to south.

EXPAOMR002VIII is located at about $1\mathrm{km}$ offshore in San Pedro Bay, which separates Leyte and Samar Islands, at the northern end of Leyte Gulf on the eastern seaboard of Leyte Island. The Permit Application covers an area of 25,312.242 hectares $(253.12\mathrm{km}^2)$ in the Municipalities of Basey and Marabut in Samar Province, and Tacloban City in Leyte Province of Leyte. The Application area varies from $4\mathrm{km}$ to $20\mathrm{km}$ in width and is about $28\mathrm{km}$ in length from north to south.

APPENDIX VI

VALUATION REPORT

Fig. 3: Location of the San Pedro Bay and Leyte Gulf Permit Applications

Topography and Climate

Leyte Province has a rugged mountainous interior region surrounded by a relatively flat coastal fringe area. The highest mountain in the province is Mount Lobi (or Majuyag), at an elevation of 1250 metres above sea level. The mountainous areas are sparsely populated. The alluvial coastal plains range from a few metres to several kilometres in width. They are relatively densely populated with large areas cultivated for palm oil, copra, rice and fruits.

The monsoon seasons will be a critical factor during both exploration and production. The northeast monsoon lasts from October to March with strong north-east winds. The south-west monsoon that is also the typhoon season, lasts from June to September with strong south-west winds.

Leyte Province is located within an area of less frequent tropical cyclones and generally only experiences heavy rain and occasional high winds. In 2004, the province experienced 163 days of rain, with the total rainfall amounting to $1,729\mathrm{mm}$ . The maximum daytime temperature was $31^{\circ}\mathrm{C}$ and the minimum temperature was $24^{\circ}\mathrm{C}$ .

Leyte Gulf is a depositional basin that generally trends toward the northwest. It is approximately 2,542 square kilometers and is bounded by Leyte Island in the west, Samar Island in the north and Homonhon Island in the east. The sea bottom topography is generally smooth with low relief except in its northern part where shoals and reefs are abundant.

APPENDIX VI
VALUATION REPORT

From the eastern coast of Leyte, the contours of the sea bottom are more closely spaced as compared to the more widely spaced contour toward the middle of Leyte Gulf. This indicates that the sea bottom near the coast slopes toward the east relatively less gently than toward the middle of the basin. This is a characteristic of high-energy coasts. About the centre of Leyte Gulf is a depression with a maximum depth of about 133.5 metres. The water depth within this exploration area ranges from 12 metres at the northern part near the mouth of San Pedro Bay to about 45 metres at the southwestern part.

San Pedro Bay is a small body of water measuring about 300 square kilometers oriented almost parallel to the islands of Leyte and Samar. Connecting San Juanico Strait with Leyte Gulf and dotted by numerous islands and islets, San Pedro Bay is a semi-closed body of water that generally dips toward the south and is characterized by numerous shoals and reefs. It is generally deeper in the eastern side adjacent to Samar Island.

The sea bottom topography of San Pedro Bay is generally rugged with numerous occurrences of bathymetric highs represented by shoals and reefs. The seabed generally slopes toward the south. The deepest part of it was measured to be about 24.14 metres near its eastern margin and the shallowest portion is about 1.68 metres at its northern margin near Samar Island.

Geology of Leyte

The geological development of Leyte Island, eastern Leyte and Leyte Gulf is reasonably well understood and documented. The rock formations that may have contributed as the source of magnetite and other associated placer minerals include the Cretaceous to Paleogene rock suites and Miocene to Quaternary volcanic rocks. The volcanic rocks that range in composition from andesitic to gabbroic (i.e. rich in ferromagnesian minerals) are believed to be main source of magnetite than the Cretaceous to Paleogene rock suites. The drainage and tributaries draining the area traverses a greater portion of the volcanic rocks. The magnetite sand may also have been derived from younger sedimentary rocks as reworked derivatives.

Sampling Methods

Sediment sampling was carried out within and in the immediate vicinity of the exploration permit areas. Sea bottom sediment samples were collected using mostly dredge sampler. Approximately 5 to 10 kilograms of sediments were gathered in each sampling stations. The dredge is manually deployed and retrieved at the astern of the outrigger. A total of 96 samples were gathered in eastern Leyte covering EXPA-000110-VIII, whereas a total of 57 samples were collected in San Pedro Bay within EXPAOMR002VIII all using an E-Trex Global Positioning System.

295

APPENDIX VI
VALUATION REPORT

The sea bottom sediment samples collected were sun-dried in the field and megascopically analyzed for mineral constituents and approximate grain size composition using AAPG (American Association of Petroleum Geologists) grain size comparator. Representative samples were quartered and weighed for magnetic separation using a hand magnet. Approximately 300 to 500 grams samples were analyzed for magnetic fraction content. The magnetic and non-magnetic fractions were then weighed using a triple beam weighing balance.

The samples within the exploration permit areas exhibit relatively high magnetic fraction content, most of which have about 2% magnetic fraction content with the highest being 4.6% for the samples from Leyte Gulf and 3.8% for those from San Pedro Bay.

In the assessment of the potentially magnetite-bearing sand deposits in San Pedro Bay and Leyte Gulf, including collection of seabed sediment grab-samples and piston-core samples within the subject areas, commissioned by Mt. Mogan and conducted by the Marine Geology Section of MGB in 2008, a total of 96 grab samples and 27 piston-core samples were collected within the EXPA-000110-VIII area and a total of 57 grab samples and 25 piston-core samples were collected within the EXPAOMR002VIII area. Samples typically consisted of about 5 to 10 kilograms of sediments. The magnetic fraction content of the grab samples ranged from 1% to 41.78%.

In order to confirm the thickness of the surface sedimentary layer and to gather samples of the underlying sand prone pro-graded sediments in the eastern Leyte, 4-metre and 6-metre core samplers were used. A total of 57 samples were gathered. The piston core samples gathered in the northern part Leyte Gulf indicate that there is a thinner veneer of recent surface sediments in this part of Leyte Gulf compared to its southern and western side. The magnetic fraction content of the sand material encountered below the mud layer registered a value of 14.39% with a bulk density of approximately 2.70 gm/ml. The average bulk density of dredge samples with sand and sandy materials has a value of approximately 2.45 gm/ml.

Exploration Potential

Pursuant to the Technical Report, the magnetic fraction of the near-surface muddy sediment samples in the offshore Permit Application areas ranged from 0.76% to 4.64% and averaged 1.98%; whilst the magnetic fraction of the sand-grade samples ranged from 1.00% to 14.38% and averaged about 10.00%.

Based on the seismic and bathymetric data and the derived isopach maps, the indicated thickness of the magnetite-bearing sand horizon (Units 3 and 4) ranged from 20 to 60 metres, but by analogy with the historical data from the on-shore mining areas along the east coast of Leyte Island, the economically significant magnetite sands may be limited to the lower part only. Therefore, if it is conservatively assumed that the average thickness of the magnetite-bearing sand is 10m, then the exploration potential will be in the order of 10 million tonnes/km².

296

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VALUATION REPORT

The available seismic and sampling data indicates that such a magnetite-bearing sand horizon extends over almost the whole of the Subject Areas that cover a total area of about 410 km². This total area can be sub-divided into smaller exploration targets according to the water-depths, the nature of the sea-bed and the mineral potential of the sea-bed sediments, as follows:

Second priority should be given to exploration of the northeast part of San Pedro Bay north of latitude 11°12' and east of Jimanoc Island, where there are some limited areas of sandy sea-bed, large areas of muddy sea-bed and numerous bed-rock and/or coral reefs, in water depths of less than 10m.

Fourth priority should be given to the Leyte Gulf licence application area south of 11°00' latitude, where the cover of low-grade mud may be up to 10m –20m in thickness; and where there are numerous coral reefs and water depths of 20m – 40m, that would make exploration more difficult than in the northern areas.

PRIORITY/PERMIT AREA	WATER DEPTH	SEDIMENT DEPTH TO BEDROCK	AREA km²	POTENTIAL THICKNESS OF SAND*	POTENTIAL TONNAGE OF SAND*	POTENTIAL THICKNESS OF MUD/OVERBURDEN
1 NW 002	2 – 10 m	0 – 10 m	50	0 – 5 m	200 – 500 Mt	0 – 1 m
2 NE 002	2 – 10 m	1 – 20 m	50	0 – 5 m	100 – 500 Mt	1 – 5 m
3 Sthn 002	10 – 20 m	20 – 90 m	150	5 – 10m	1,500 – 3,000 Mt	4 – 10 m
4 All 110	20 – 50 m	30 – 90 m	150	5 – 10 m	1,500 – 3,000 Mt	5 – 25 m
TOTAL	–	–	400	–	3,300 – 7,000 Mt	0 – 25 m

Assume only the Lower half of the sand horizon is mineralised.
** Assume SG of 2.0 for in-situ material.

This indicates that the total exploration potential of the Subject Areas is in the order of 3,300 to 7,000 million tonnes of magnetite bearing sand at an unknown grade, but potentially greater than 5% magnetic fraction.

APPENDIX VI
VALUATION REPORT

Current Status

During the course of inspection conducted in the period from 26 August to 28 August 2008, we noted that there were no exploration or mining activities being conducted on the Subject Areas. According to the information provided to us, we understand that applications for exploration permit have been filed to the relevant MGB regional office on 18 March 2008 and 18 April 2008 respectively. Pursuant to the relevant copies of Area Status and Clearance, the subject applied areas are "open" for Mining Application. The comments on Area Clearance from DENR Regional Office No. 8 are summarized as follows:

The applied areas have no existing DENR Development Projects;
The municipalities of which the applied areas affected interpose no objection to the issuance of Permit; and
The applied areas are outside any area placed under the National Integrated Protected Areas System.

Under the Philippine law, it is illegal to perform any exploration activities without an exploration permit. However, according to Section 17 of DENR Administrative Order No. 96-40, as amended, the implementing rules and regulations of Republic Act No. 7942, it is provided that in case of an immediate technical study of an area covered by an Exploration Permit application is necessary, the DENR and the applicant concerned may enter into an agreement to jointly undertake such study. Pursuant to the MoA, such agreement of joint undertaking technical study has been entered into between Mt. Mogan and DENR on 1 November 2008.

Having concluded the MoA, Mt. Mogan will be able to carry out a new survey in accordance with the proposed exploration programme to locate further resources within the Subject Areas.

BUSINESS DEVELOPMENT PLAN

The Business is planned to be developed by the three stages commencing from the 4th quarter of 2008. The targets of each stage are summarized as follows:

(1) In Stage One development, a pilot scale operation is planned to be commenced to:

Commence preliminary and long term exploration and drilling over the Leyte Gulf tenements to quantify and qualify the total ore potential;
Send trial shipments to potential customers/enter into long term sales contracts;
Conclude negotiations for an alliance with strategic partner(s);

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Conclude negotiations for the granting of a mining concession with market player(s); and
Conduct ongoing evaluation and study of a steel plant on site to optimize and enhance the production value of magnetite sand feasibility studies.

(2) In Stage Two development, the operation will be expanded progressively to a production rate of not less than 4 million metric ton per annum of magnetite concentrates by sub-contracting dredging work and aim at:

Grinding the magnetite concentrate, subject to the metallurgical test work, to improve concentrate grade of iron ("Fe") to up to 65% Fe or higher (if required by the market);
Formulating operational logistics set up locally; and
Negotiating the various incentives from the Philippines government including tax holidays and tariff protection since the Philippines imports 100% of its steel need.

(3) In Stage Three development, it is aimed to finalize feasibility studies for the production of pig iron or steel and vanadium in the Philippines using a direct reduction process which is highly suitable for the processing of magnetite fines and to focus on the recovery of ferrovanadium and associated vanadium products as part of the steel making process by conventional process.

Planned Mining Process

According to the information provided, the mining process will be conducted in the following two ways:

(a) For offshore areas where water depths are less than 3 metres, a placer deposit will be extracted with earth moving equipments after the area has been blocked off and seawater has been drained.

(b) For other offshore areas, the mineral resource in the placer deposit will be dredged via suction vessels and will be desalinated, beneficiated and de-moisturized before shipping to customers.

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OVERVIEW

International Iron-ore Market

World production averages one billion metric tons of raw ore annually. The world's largest producer of iron ore is the Brazilian mining corporation Companhia Vale Do Rio Doce ("CVRD"), followed by Australian company BHP Billiton ("BHP") and the Anglo-Australian Rio Tinto Group ("Rio Tinto"). A further Australian supplier, Fortescue Metals Group Ltd, is currently entering the development stage and may eventually bring Australia's production to second in the world.

Over the 2006, the iron ore industry has reportedly seen a $145\%$ price increase, as prices in India rose from USD53 to USD130 per ton year-on-year. Even as mining companies in Australia, the world's biggest iron ore exporter, struggle to churn out higher output, spot prices in Australia have jumped $39\%$ , while Brazil shot up by $71\%$ .

The estimated price hikes coincides with slowed global growth, particularly in the U.S. and Europe. However in 2008, the International Monetary Fund's interim forecast indicates continual growth for two emerging markets, the PRC and India. Morgan Stanley, Merrill Lynch and Macquarie Bank foresee a $50\%$ increase in iron ore prices in the Asia region, while JP Morgan has set the increase at between $25\%$ to $30\%$ . It is due to the fact that the demand for the iron-ore for manufacturing the steel products in Asia region is increased drastically.

According to the CRU Steel Price Indices, Asia meet the record high in July 2008 with $83.8\%$ year-on-year which also stimulating the growth of the Global Steel Price Index.

Fig. 4: International Carbon Steel Prices Indices July 2006 - July 2008

APPENDIX VI

VALUATION REPORT

The PRC Iron-ore Industry

China is currently the largest consumer of iron ore which translates to be the world's largest steel producing country. China is followed by Japan and Korea which consume a significant amount of raw iron ore and metallurgical coal. According to 2007 market report conducted by "Asia Consulting Alliance", in the first three quarters of 2006, China produced 308 million tons of iron ore and recorded 28% growth year-on-year. In view of the whole year of 2006, it produced 588 million tons with an annual growth of 38%.

Fig. 5: China's Crude Steel Output 2005-2007 (in 100 million tons)

Source: Asia Consulting Alliance

According to the National Bureau of Statistics of China, up to June 2007, the total production amount of iron-ore was 321,286,600 tons with a rise of 29.3% annually. Whilst, the total production amounts of cast iron and steel were 226,815,400 tons and 237,580,600 tons, the percentage growth were 16.8% and 18.9% respectively. China's iron-ore demand is expected to remain strong over the near to medium terms as the country continues on its plans for expansion. Demand is also expected to be driven by the imminent massive reconstruction efforts resulting from the snow storms in the Yangzi River region and the Great Sichuan Earthquake occurred in the 1st half of 2008.

Iron-ore Price Trend in the PRC

According to China's Iron and Steel Association, for the first three quarters of 2007, the onshore price of the iron-ore raised 31.95% and 27.06% from January to September year-on-year. Being no doubt, the boosting of steel manufacturing industry (weighted 40% of consumption of steel in all over the world) is the key stimulator of the iron-ore price.

On the other hand, the onshore price of the iron-ore from other countries such as Brazil, Australia, Indonesia, etc. is stressed to rise. The rationale behind, other than the rising of delivering cost, is the proposed merging of BHP and Rio Tinto which produced 140,000,000 tons and 100,000,000 tons iron-ore per annum respectively and occupied for 30% to 35% of the market shares. The iron-ore onshore offer price would have a good room to rise due to the lack of competitors.

APPENDIX VI
VALUATION REPORT

RISK FACTORS

This valuation is based on the assumptions and financial projections provided by the Company. While the assumptions and considerations of such matters and projections of future net cash flows have been carefully scrutinized, they are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Business Enterprise.

The Business is subject to uncertainty and there is no assurance that the business plan of the Business Enterprise and the Business will materialize. In the course of our valuation, we have considered the following potential risks:

The business operations are extensively impacted by the policies and regulations of the Philippines Government.
The continuing success depends on the ability to continue developing iron-ore resources.
The business and results of operations are susceptible to the cyclical nature of iron-ore markets and are vulnerable to fluctuations in iron-ore prices.
The business requires significant and continuous capital investment.
The iron-ore resource/reserve data may be inaccurate, and hence the projected future production volumes, revenue and capital expenditures, which are based on these estimates, may differ materially from actual figures.
It may not have sufficient insurance coverage against potential operational risks.
Adverse changes in the economic, political and social conditions as well as governmental policies in the Philippines could have a material adverse effect on the overall economic growth, which could in turn adversely affect the financial condition and results of operations.
Market risk associated with changes in interest rates, foreign exchange rates and government policies will affect the profitability of the Business Enterprise.

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BASIS OF VALUATION AND ASSUMPTIONS

We have valued the Business on the basis of its market value which is defined herein as the estimated amount at which a business entity should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

Our valuation has been prepared in accordance with The Hong Kong Business Valuation Forum Business Valuation Standards and under generally accepted valuation procedures and practices.

In the course of our valuation, we have adopted certain specific assumptions in this valuation and the major ones are as follows:

We have relied on the Technical Report provided by the Company and we have no responsibility for the reliability of the advice;
We have assumed the Business Enterprise has free and uninterrupted rights to use or assign the interests of the Subject Areas for the whole of the unexpired terms as granted and any mining rights premiums/administrative costs payable have already been fully paid;
The mining right is able to renew from time to time in order to achieve the planned extraction phase;
The mining area of 41,093.85 hectares and the production capacity of 4,000,000 tons per annum is adopted;
As per information from the Technical Report, the exploration potential of the Subject Areas is in the order of 3,300 to 7,000 million tons for magnetic-bearing sand at a potential grade of greater than 5%;
The current market price for the iron concentrate with an average grade of 60% are USD119.36 per ton and in the course of our valuation, we have adopted zero future growth rate for the market price throughout the forecasting period;
We adopted a projection period of 10 fiscal years ending 31 March 2009–2018 based on the business development plan and the financial projections provided to us and our discussion with the Company. The reasons include: a) The business was shown to be in a developing stage in the initial years with production scale was expected by the Company to be increased annually; and b) We were given to understand that the business would have been developed to a more or less stable production level in Year 2018;
The business licence/registration is able to renew from time to time in order to achieve the planned extraction phase;
The Business Enterprise will successfully complete the subsequent expansion program and obtained the expected result by using the mining right as part of its going concern business;

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All required licenses, certificates, consents, or other legislative or administrative authority from any local, provincial, or national government or private entity or organization have been or can readily be obtained or renewed on which the valuation contained in our report are based;
There will not be material changes in government policies or political, legal (including legislation or regulations or rules), fiscal (including interest rate and exchange rate), market or economic conditions, the bases or rates of taxation in the Philippines;
The Business Enterprise successfully develop the Subject Areas as planned, and is able to mine, to transport and sell the products at market price as projected;
The Business Enterprise has adequate working capital to implement the scheduled mining operations from time to time;
The Business Enterprise has adopted reasonable and necessary security measures and has considered several contingency plans against any disruption (such as fire, change of government policy, labour dispute, implementation of serious statutory mining safety measures, geologic formation structurally deformed and other types of unexpected accident or natural disasters of catastrophes) to the scheduled mining operations;
There exist reliable and adequate transportation network and capacity for the mining products;
The Business Enterprise can be freely disposed of and transferred free of all encumbrances for its existing or approved uses in the market to purchasers without payment of any premium to the government;
All relevant legal approvals and business certificates or licences to operate the Business would be officially obtained and renewable upon expiry;
The projections outlined in the financial information provided are reasonable, reflecting market conditions and economic fundamentals;
The financial projections provided will materialize;
There are no outstanding debts and loans incurred at the date of valuation;
There will be a sufficient supply of technical staff in the industry in which the Business Enterprise operates;
The Business Enterprise will retain competent management, key personnel and technical staff to support its ongoing operation and development;
There will be no major changes in the current taxation laws in the specific market areas and that the rates of tax payable shall remain unchanged and that all applicable laws and regulations will be complied with;

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There will be no major changes in the political, legal, economic or financial conditions in the specific market areas, which would adversely affect the revenues attributable to and profitability of the Business Enterprise; and
Interest rates and exchange rates in the specific market areas will not differ materially from those presently prevailing.

INVESTIGATION AND ANALYSIS

We confirm that we have carried out discussions with the management of the Company, made relevant inquiries and obtained such further information, as we consider necessary for the purpose of this valuation. As part of our analysis, we have reviewed such financial information and other pertinent data concerning the Company provided to us and have assumed their accuracy. We have also consulted other sources of financial and business information.

The valuation of an interest in the Business requires consideration of all pertinent factors, which affect the operation of the business and its ability to generate future investment returns. The factors considered in this valuation include the following:

The nature of the Business Enterprise and its history from inception;
The nature of the Business;
The financial condition of the Business Enterprise;
The nature and the characteristics of the mining right such as the historical background and the ground work to develop the mining areas;
Technical review of the mining operations and resource/reserve estimation by the technical experts;
Projections made by the Management of the Business Enterprise;
The nature of the mining right such as the remaining life and its characteristics;
The capability of the Business Enterprise in exploring the mines and its subsequent operations;
The economic and industry data affecting the mines and the mineral extraction industry in the Philippines;
The economic outlook of the Philippines in general and the specific economic environment and market elements in the world that may affect the Business as a whole;
The financial and business risk of the Business and its projected results; and
Investment returns and market transactions of entities engaged in similar lines of business.

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APPROACHES TO VALUE

In the course of our valuation, we have considered the three generally accepted approaches to assess the value of an asset, namely, the Cost Approach, Market Approach and Income Approach. Each of these approaches is appropriate in certain circumstances. The decision as to which approach to utilize generally depends on the approach most commonly adopted in valuing the asset that is similar in nature with the assets in question and the availability of appropriate information. The theory of these approaches is outlined as follows:

1) The Cost Approach establishes value based on the cost of reproducing or replacing in new condition the assets valued in accordance with current market prices for similar assets, with allowance for accrued depreciation arising from condition, utility, age, wear and tear, or physical deterioration and obsolescence present (functional or economic) taking into account past and present maintenance policy and rebuilding history.

Reproduction Cost New is defined as the estimated current cost of reproducing a new replica of an asset with the same or closely similar materials.

Replacement Cost New is defined as the estimated current cost of the new asset having the nearest equivalent utility as the asset being appraised.

Physical Deterioration is the loss in value of an asset from wear and tear of asset in operation and exposure to various elements.

Functional Obsolescence is the loss in value due to factors inherent in the asset itself and changes in design, materials, or process that result in inadequacy, over capacity, excess construction, lack of functional utility or excess operating costs, etc.

Economic Obsolescence is an incurable loss in value caused by unfavorable external conditions.

When market transactions of comparable assets are not available, when data cannot be extrapolated from larger transactions, or when transactions are non-existent, under premise of continued use and assuming adequate earnings, the Depreciated Replacement Cost Approach is the preferred valuation procedure.

2) The Market Approach involves the collection of market data pertaining to the subject assets being valued. The primary intent of the Market Approach is to determine the desirability of the assets through recent sales or offerings of similar assets currently on the market in order to arrive at an indication of the most probable selling price for the assets being valued. If the comparable sales are not exactly similar to the asset being valued, adjustments must be made to bring them as closely in line as possible with the subject asset.

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3) The Income Approach considers value in relation to the present worth of future benefits derived from ownership and is usually measured through the capitalization of a specific level of income. This approach is most applicable to investment and general-use properties where there is an established and identifiable rental market.

In any valuation study, all three approaches to value must be considered, as one or more approaches may be applicable to value the Business.

VALUATION METHODOLOGY

Given the nature of the Business and the information available, we considered the Income Approach to be the most appropriate approach and adopted the Yield Capitalization Method, also known as the Discounted Cash Flow Analysis. By virtue of this method, value depends on the present worth of future economic benefits derived from ownership of the shareholders' equity. Indications of value have been developed by discounting projected future net cash flows available for payment of shareholders' loans and interest, and in some cases, repayment of registered capital plus interest, dividends to their present worth at market-derived rates of return which in our opinion is appropriate to reflect the risk and hazard of the business.

When developing the discount rate to apply to the future economic income streams attributable to shareholders, the discount rate is the cost of equity. The cost of equity was developed by using Capital Asset Pricing Model ("CAPM"). CAPM states that an investor requires excess returns to compensate systemic risks and provide no excess return for other risks. Risks that are correlated with the return from the stock market are referred to as systemic; other risks are referred to as non-systematic. Under CAPM, the appropriate rate of return is the sum of the risk-free return and the equity risk premium required by investors to compensate for the systematic risks assumed. In addition, the rate of return of the Business is affected by other firm specific risk factors that are independent of the general market.

In developing the discount rate for the Business, several listed companies in Hong Kong with similar business nature were selected as comparable companies, which include Hua Yi Copper Holdings Limited (00559), Fosun International Limited (00656), Apac Resources Limited (01104) and Zijin Mining Group Co Ltd. (02899).

The discount rate of approximately $19.3\%$ adopted was determined by the risk-free rate of approximately $(8.05\%)$ (the yield of the Philippines' 10-year National Bond), market return of approximately $(11.9\%)$ and estimated beta of the Business of approximately (0.72) and firm specific risk factors including the country risk premium $(2.5\%)$, start-up risk premium $(5\%)$ and small size premium $(0.92\%)$.

A projection period of 10 fiscal years ending 31 March 2009–2018 was adopted based on the business development plan and the financial projections provided to us and our discussion with the Company. The reasons include:

a) The business was shown to be in a development stage in the initial years with production scale was expected by the Company to be increased annually; and
b) We were given to understand that the business would have been developed to a more or less stable production level in Year 2018.

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VALUATION COMMENTS

We have not investigated any industrial safety environmental and health-related regulations in association with this particular production process. It is assumed that all-necessary licenses, procedures, and measures were implemented in accordance with the Government legislation and guidance.

We have not been provided with copies of exploration permit relating to the Subject Areas and are not able to verify their ownership. We have assumed no responsibility for the title to the Subject Areas. Unless otherwise stated, it is assumed that they are free from encumbrances, restrictions and outgoings of an onerous nature, which could affect their values. It is further assumed that there are no hidden or unapparent conditions of the Subject Areas, which would render the Business more or less valuable.

LIMITING CONDITIONS

This valuation reflects facts and conditions existing at the Date of Valuation. Subsequent events have not been considered and we are not required to update our report for such events and conditions.

To the best of our knowledge, all data set forth in this report are true and accurate. The data, opinions, or estimates identified as being furnished by others which have been used in formulating this analysis are gathered from reliable sources, yet, no guarantee is made nor liability assumed for their accuracy.

We have relied to a considerable extent on information provided in arriving at our opinion of value. We assume, without independent verification, the accuracy of all information provided to us. We have had no reason to doubt the truth and accuracy of the information furnished to us and to doubt that any material facts have been omitted from the information provided. No responsibilities for the operation and financial information that have not been provided to us are accepted.

We would particularly point out that our valuation has relied heavily on the information as contained in the information provided to us.

Our conclusion of the market value is derived from generally accepted valuation procedures and practices that rely substantially on the use of various assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained.

Neither the whole nor any part of this valuation report nor any reference thereto may be included in any document, circular or statement without our written approval of the form and context in which it will appear.

In accordance with our standard practice, we must state that this valuation report is for the sole use of the party to whom it is addressed and for the specific purpose stated above. No responsibility is accepted to any third party for the whole or any part of its contents.

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CURRENCY

Unless otherwise stated, all monetary amounts stated in this valuation report are in US Dollar (US$). Where necessary, the exchange rates adopted in our valuation was US$1=HK$7.80 and US$1=PHP45.63, which was approximately the prevailing exchange rates as at the Date of Valuation.

OPINION OF VALUE

Premised on the foregoing, we are of the opinion that the market value of the 100 per cent. equity interest in the Business as at 31 August 2008, was reasonably represented by the amount of USD$4,685,000,000 (US DOLLARS FOUR BILLION SIX HUNDRED AND EIGHTY-FIVE MILLION ONLY). The arithmetic breakdown of the market value of the 64 per cent. equity interest in the Business as at 31 August 2008 was in the sum of USD$2,998,400,000 (US DOLLARS TWO BILLION NINE HUNDRED AND NINETY-EIGHT MILLION AND FOUR HUNDRED THOUSAND ONLY).

We hereby confirm that we have neither present nor prospective interest in the Company, the Business Enterprise, the Business, the Subject Areas or the values reported herein.

Yours faithfully,

For and on behalf of

B.I. APPRAISALS LIMITED

William C. K. Sham

Registered Professional Surveyor (G.P.)

Registered Business Valuer

China Real Estate Appraiser

MRICS, MHKIS, MCIREA

Executive Director

Note: Mr. William C. K. Sham has been conducting asset valuations and consultancy works in the Greater China and the Asia Pacific regions for various purposes for 25 years. He has undertaken various valuation assignments on business enterprises and intangible assets since 1998 and has extensive experience in the valuation of patent and proprietary technology; infrastructure project including power plants, toll roads, port facilities; and business enterprises in various industries such as information technology, health products, pharmaceutical and biotechnology, media, energy, etc.

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APPENDIX VII

LETTER FROM CACHET

CACHET

Cachet Certified Public Accountants Limited

穗楠會計師事務所有限公司

21 November 2008

The Board of Directors

Black Sand Enterprises Limited

Unit 1412-1413, 14/F., Tower One,

Times Square, Causeway Bay

Hong Kong

Dear Sirs,

We refer to the valuation report dated 21 November 2008 (the "Valuation Report") prepared by B.I. Appraisals Limited (the "Valuer") in respect of the 100% equity interest in the business operation in relation to the offshore magnetite mining tenements covering an area of 41,093.85 hectares in Leyte Gulf and San Pedro Bay off Leyte and Samar Provinces in Republic of the Philippines (the "Philippine") of the business enterprise (the "Magnetite Business") of Mt. Mogan Resources and Development Corporation (the "Valuation").

The Valuation, including the bases and assumptions as set out in the Valuation Report, for which the directors of Black Sand Enterprises Limited (the "Company") and the Valuer are responsible, has been prepared by the valuation approach known as the discounted cash flow analysis. Pursuant to paragraph 19.61 of the Growth Enterprise Market Listing Rule (the "GEM listing rules") on The Stock Exchange of Hong Kong Limited, any valuation of assets (other than land and buildings) or businesses acquired by a listed issuer based on discounted cash flows or projections of profits, earnings or cash flows will be regarded as a profit forecast adopted for the purpose of preparing the Valuation. The profit projection of the Magnetite Business for a 10 year period from the year ending 31 March 2009 to the year ending 31 March 2018 (the "Profit Forecast") has been prepared by the directors of the Company using a set of assumptions that include hypothetical assumptions about future events and other assumptions that may or may not necessarily be expected to occur. Consequently, readers are cautioned that the Profit Forecast may not be appropriate for purposes other than for deriving the Valuation of Magnetite Business as at 31 August 2008. Even if the events anticipated under the hypothetical assumptions occur, actual results are still likely to be different from the Profit Forecast since the other anticipated events may or may not occur as expected.

Our engagement was conducted in accordance with Hong Kong Standard on Assurance Engagements 3000 "Assurance Engagements Other Than Audits or Reviews of Historical Financial Information" with reference to the procedures under Auditing Guideline 3.341 "Accountants' Report on Profit Forecasts" issued by the Hong Kong Institute of Certified Public Accountants. Our work was performed solely to assist the directors of the Company to evaluate whether the Profit Forecast was complied properly so far as the accounting policies that have been used and the related calculations are concerned. We have reviewed and compared the accounting policies underlying the Profit Forecast with the accounting policies normally adopted by the Company. We found that the accounting policies are

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consistent with those accounting policies normally adopted by the Company. Our work does not constitute any valuation of Magnetite Business and we were unable to obtain sufficient appropriate evidence to evaluate or express any opinion on the appropriateness of the bases and assumptions made.

In our opinion, the Profit Forecast, so far as the calculations are concerned, has been properly compiled in accordance with bases and assumptions adopted by the directors of the Company in preparing the Profit Forecast and is presented on a basis consistent in all material respects with the accounting policies normally adopted by the Company.

This letter is provided solely for your information. Therefore you cannot, without our prior written consent, refer to or use our name or the letter for any other purpose, refer to them in any documents, or make them available or communicate them to any other party, save as required by the regulatory authorities including but not limited to The Stock Exchange of Hong Kong Limited and the Securities and Futures Commission from time to time. In performing our duties in the subject matter, subject to the industry standards of which we are a member, we accept no liability to any other party who is shown or gains access to this letter.

Yours faithfully,

CACHET CERTIFIED PUBLIC ACCOUNTANTS LIMITED
Certified Public Accountants
Hong Kong

Chan Chi Yuen
Practising Certificate Number P02671

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APPENDIX VIII
LETTER FROM THE DIRECTORS

21 November 2008

The Shareholders
Intelli-Media Group (Holdings) Limited
Suites 1412–13, Tower One,
Times Square, One Matheson Street
Causeway Bay, Hong Kong

Dear Sirs,

We refer to the valuation report dated 21 November 2008 prepared by B.I. Appraisals Limited (the “Valuer”) in respect of the appraisal of the 100% equity interest in the business operation in relation to the offshore magnetite mining tenements covering an area of 41,093.85 hectares in Leyte Gulf and San Pedro Bay off Leyte and Samar Provinces in Republic of the Philippines (the “Philippine”) of the business enterprise (the “Magnetite Business”) of Mt. Mogan Resources and Development Corporation as at 31 August 2008 (the “Valuation”) as set out in Appendix VI to the circular issued by Intelli-Media Group (Holdings) Limited (the “Company”) dated 21 November 2008 and the requirements under the Rule 19.62(3) and 19.64(3) of the Rule Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM Listing Rules”).

We note that the Valuation has been developed by the Valuer through the application of the valuation approach known as the discounted cash flow analysis based on the profit projection of the Magnetite Business (the “Forecast”) and under Rule 19.61 of the GEM Listing Rules, any valuation of assets (other than land and buildings) or businesses acquired by a listed issuer based on discounted cash flows or projection of profits, earnings or cash flows will be regarded as a profit forecast. Accordingly, the Valuation is regarded as a profit forecast under the GEM Listing Rules.

In this regard, we hereby confirm that the Forecast, for which we are solely responsible, has been made after our due and careful enquiry.

Yours faithfully,
The Board of Directors
Intelli-Media Group (Holdings) Limited

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GENERAL INFORMATION

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the GEM Listing Rules for purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief:

the information contained in this circular is accurate and complete in all material respects and not misleading;
there are no other matters the omission of which would make any statement in this circular misleading; and
all opinions expressed in this circular have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable.

2. SHARE CAPITAL

The authorised and issued share capital of the Company (a) as at the Latest Practicable Date were, (b) immediately following the allotment and issue of the Consideration Shares and (as the case may be) the Conversion Shares upon full conversion of the Convertible Bonds (and assuming no other Shares being allotted and issued at all) will be, as follows:

Authorised share capital:

HK$

20,000,000,000 Shares	(as at the Latest Practicable Date)	200,000,000

Issued and fully paid, or credited as fully paid, share capital:

2,046,534,023 Shares	(as at the Latest Practicable Date)	20,465,340
500,000,000 Shares	(assuming the allotment and issue of the Consideration Shares only)	25,465,340
7,800,000,000 Shares	(assuming the allotment and issue of the Consideration Shares and Conversion Shares upon exercise of the conversion rights attaching to the Convertible Bonds in full)	98,465,340

All the issued Shares rank pari passu with each other in all respects including the rights as to voting, dividends and return of capital. The Consideration Shares to be allotted and issued will, when issued and fully paid, rank pari passu in all respects with the Shares in issue on the date of allotment and issue of the Consideration Shares including the right to all dividends, distributions and other payments made or to be made for which the record date falls on or after the date of such allotment and issue. The Conversion Shares to be allotted and issued will, when issued and fully paid, rank in all respects pari passu with all Shares in issue as at the date of allotment and issue of the respective Conversion Shares.

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Save for the Convertible Bonds (to be issued in connection with the Acquisition), the Convertible Loan (pending completion) and the WS Option, the Company did not have any other debt securities in issue, options, warrants and other convertible securities or rights affecting the Shares and no capital of any member of the Group is under option, or agreed conditionally or unconditionally to be put under option as at the Latest Practicable Date.

3. DIRECTORS' INTERESTS

(a) As at the Latest Practicable Date, the interests and short positions of each Director and chief executive of the Company in the shares, underlying shares and debentures of the Company or any associated corporation (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions in which they were deemed or taken 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 maintained by the Company referred to therein, or which were required, pursuant to Rules 5.46 to 5.67 of the GEM Listing Rules, to be notified to the Company and the Stock Exchange were as follows:

Name of Director or Company	Nature of Interests	Number of Shares Held		Approximate percentage of the issued share capital of the Company
		Long position	Short position
Chin Wai Keung, Richard (note 1, 2)	Beneficial	287,663,501	Nil	14.06%
Yin Mark Teh-min (note 2)	Beneficial	2,880,000	Nil	0.14%

Notes:
1. Mr. Chin Wai Keung, Richard held 287,663,501 shares of the Company through Nice Hill Investments Ltd., a company incorporated in the British Virgin Islands with limited liability.
2. Mr. Chin Wai Keung, Richard is an executive Director, while Mr. Yin Mark Teh-min is a non-executive Director.

(b) Save as disclosed in this circular, as at the Latest Practicable Date, none of the Directors and chief executive of the Company had any interest and short positions in the shares, underlying shares and debentures of the Company or any 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 and 8 of Part XV of the SFO (including interests and short positions in which they were deemed or taken 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 maintained by the Company referred to therein, or which were required, pursuant to Rules 5.46 to 5.67 of the GEM Listing Rules, to be notified to the Company and the Stock Exchange.

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(c) As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any asset which had been acquired, or disposed of by, or leased to any member of the Enlarged Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Enlarged Group since 31 March 2008, the date to which the latest published audited financial statements of the Group were made up.

(d) As at the Latest Practicable Date, none of the Directors was materially interested, directly or indirectly, in any contract or arrangement entered into by any member of the Enlarged Group since 31 March 2008, being the date to which the latest published audited financial statements of the Company were made up, and which was significant in relation to the business of the Enlarged Group.

(e) As at the Latest Practicable Date, the Directors are not aware of any business or interest of the Directors or their respective associates that competes or may compete with the business of the Enlarged Group and any other conflicts of interests which any such person has or may have with the Enlarged Group.

4. SUBSTANTIAL SHAREHOLDERS

(a) As at the Latest Practicable Date, so far as is known to the Directors or the chief executive of the Company, the following persons, other than a Director or chief executive of the Company, had an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or were directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company:

Name	Nature of Interests	Number of Shares Held		Approximate percentage of the issued share capital of the Company
		Long Position	Short Position
Kwan Yuet Wah, Rosanna (note 1)	Beneficial	287,663,501	Nil	14.06%
Cheung Yuk Lui, Cynthia	Beneficial	120,000,000	Nil	5.86%
Soh Szu Wei (note 2)	Beneficial	119,700,000	Nil	5.85%
Ho Kin	Beneficial	120,000,000	Nil	5.86%

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Notes:

Ms. Kwan Yuet Wah, Rosanna is the spouse of Mr. Chin Wai Keung, Richard, the chairman and executive Director of the Company and whose's beneficial interest in the Company is held in Nice Hill Investments Ltd.
Mr. Soh Szu Wei's beneficial interest in the Company is held in Voelcliffe Investments Limited.

(b) As at the Latest Practicable Date, so far as is known to the Directors, the following entities were interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of other members of the Enlarged Group:

Name	Nature of Interests	Number of Shares Held		Approximate percentage of the issued share capital of the Company
		Long Position	Short Position
Nice Hill Investments Ltd. (note 1)	Beneficial	287,663,501	Nil	14.06%
Voelcliffe Investments Limited (note 2)	Beneficial	119,700,000	Nil	5.85%

Notes:

Nice Hill Investments Ltd. is wholly owned by Mr. Chin Wai Keung, Richard, the chairman and executive director of the Company. Mr. Chin Wai Keung, Richard is also a director of Nice Hill Investments Ltd.
Voelcliffe Investments Limited is wholly owned by Mr. Soh Szu Wei.

(c) Save as disclosed in this circular, so far as is known to the Directors, there is no other person (not being a Director or chief executive of the Company) who had an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, had a direct or indirect interests amounting to 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any members of the Enlarged Group.

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5. MATERIAL CONTRACTS

Within the two years immediately preceding the Latest Practicable Date, the following agreements, being contracts not entered into in the ordinary course of business, has been entered into by members of the Enlarged Group and is or may be material:

(a) the Acquisition Agreement;
(b) the supplemental agreement dated 8 November 2008 in relation to the Acquisition Agreement;
(c) the Convertible Loan Agreement;
(d) the acquisition agreement dated 16 April 2007 entered between CPE Program Distribution Limited, a wholly owned subsidiary of the Company, and 廣東原創動力文化傳播有限公司 (Creative Power Entertaining Company Limited), an independent thirty party, for the acquisition of a film library for a consideration of HK$15 million satisfied by convertible bonds in the principal amount of HK$6 million and cash payment of HK$9 million; and
(e) the acquisition agreement dated 22 November 2006 entered between the Company (formerly known as Panorama International Holdings Limited), Mr. So Wing Lok Jonathan and Mr. Lo Wing Keung, for the acquisition of the entire issued share capital of Datewell Limited for a consideration of HK$5.5 million satisfied by allotment and issue of consideration shares by the Company. Mr. So and Mr. Lo, the vendors, both subsequently became executive directors of the Company on 20 April 2007; but have since resigned from their directorships in the Company.

6. LITIGATION

As at the Latest Practicable Date, none of any member of the Enlarged Group was 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 by or against any member of the Enlarged Group.

7. DIRECTORS' SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had a service contract with any member of the Enlarged Group which is not determinable by the Enlarged Group within one year without payment of compensation other than statutory compensation.

The aggregate remuneration and benefits in kind payable to Directors of the Company will not be varied only in consequence of the Acquisition. However, it is expected that the remuneration package of the Directors may be adjusted to reflect market conditions and individual performance as regards salary packages and employee incentives and any adjustment to the remuneration package will be considered by the remuneration committee of the Company and in accordance with any applicable GEM Listing Rules.

8. EXPERT AND CONSENT

(a) The following are the qualifications of the experts who have given their opinions and advice which are included in this circular:

Name	Qualification
Behre Dolbear Asia, Inc.	Minerals industry consultants
B.I. Appraisals Limited	Professional valuer
Cachet Certified Public Accountants Limited	Certified Public Accountants
CCIF CPA Limited	Certified Public Accountants

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Ample Capital	a licensed corporation for types 4, 6 and 9 (advising on securities, advising on corporate finance and asset management respectively) regulated activities under the SFO
PJS Law	Company’s legal advisers as to the Philippines’ law
RSM Nelson Wheeler	Certified Public Accountants

(b) None of the Independent Financial Adviser, Technical Adviser, Valuer, Cachet, CCIF, PJS Law nor RSM Nelson Wheeler has any shareholding, directly or indirectly, in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

(c) Each of the Independent Financial Adviser, Technical Adviser, Valuer, Cachet, CCIF, PJS Law and RSM Nelson Wheeler has given and has not withdrawn its written consent to the issue of this circular, with the inclusion of the references to its name and/or its opinion or report in the form and context in which they are included.

(d) None of the Independent Financial Adviser, Technical Adviser, Valuer, Cachet, CCIF, PJS Law nor RSM Nelson Wheeler had any direct or indirect interest in any asset which had been acquired, or disposed of by, or leased to any member of the Enlarged Group, or was proposed to be acquired, or disposed of by, or leased to any member of the Enlarged Group since 31 March 2008, the date to which the latest published audited financial statements of the Group were made up.

9. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors confirmed that there were no material adverse change in the financial or trading position of the Group since 31 March 2008, being the date to which the latest published audited financial statements of the Group were made up.

10. MISCELLANEOUS

(a) The registered office of the Company is located at P.O. Box 309, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands, British West Indies.

(b) The head office and principal place of business of the Company in Hong Kong is at Suites 1412-13, Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong.

(c) The branch share registrar and transfer office of the Company is Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Hong Kong.

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(d) The company secretary and the qualified accountant of the Company is Mr. Chan Ming Cho, Joe. Mr. Chan holds a master degree in business administration and he is a member of the Institute of Chartered Accountants, and fellow member of the Hong Kong Institute of Certified Public Accountants (HKICPA) and Association of Chartered Certified Accountants. Mr. Chan has 20 years of experience in auditing, finance and accounting.

(e) The compliance officer of the Company is Mr. Chin Wai Keung Richard.

(f) The audit committee of the Company comprises one non-executive Director Mr. Yin Mark Teh-min and three independent non-executive Directors, Mr. Lai Kai Jin, Michael, Mr. Ng Yat Cheung, JP, and Mr. Chan Siu Wing, Raymond. The audit committee reviews and provides supervision over the financial reporting process and internal control of the Group.

(g) Details of the Directors are as follows:

Mr. Chin Wai Keung, Richard ("Mr. Chin"), aged 59, is an executive Director and the chairman of the Company and the director of Datewell Limited, CPE Program Distribution Limited and Intelli-Media (HK) Limited, all being subsidiaries of the Company, has over 30 years of extensive management experience in trading, contracting and financing business and over 12 years of experience in taking the positions of managing director of multinational corporations.

Between 2002 and 2004, Mr. Chin was the deputy chairman and an executive director of Dickson Group Holdings Limited, a listed company on the Stock Exchange (Stock Code: 313). Mr. Chin was appointed as an executive director of Hung Fung Group Holdings Limited ("Hung Fung") (now known as Poly Development Holdings Ltd.) (Stock Code: 1141), a Bermuda incorporated company principally engaged in the designing, manufacturing and selling of toys in December 2000, re-designated as non-executive director of Hung Fung in April 2001 and he subsequently resigned as non-executive director of Hung Fung in December 2001. Mr. Chin was an executive director of Mansion Holdings Limited (now known as Sun Innovation Holdings Ltd.) (Stock Code: 547), a Bermuda incorporated company principally engaged in the business of fire safety. Save as disclosed above, Mr. Chin did not hold any directorship in other listed public companies or other major appointments or qualifications in the last three years.

Pursuant to a service contract entered into between the Company and Mr. Chin on 2 April 2007, Mr. Chin was appointed for a term of three years commencing from 2 April 2007 and thereafter the appointment is automatically renewable for successive terms of one year unless terminated by either party by a three months' written notice to the other party. His appointment is subject to the retirement and re-election provisions in the Articles of Association. He is entitled to a monthly salary of HK$148,000.00 and a discretionary bonus which were determined by the remuneration committee of the Board with reference to the remuneration policy of the Company, the Group's results and performance for the financial year concerned, his duties and the prevailing market level of remuneration for executives of similar positions.

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Save as disclosed, as at the Latest Practicable Date, Mr. Chin does not have any relationship with any directors, senior management, substantial or controlling shareholders of the Company. As at the Latest Practicable Date, Mr. Chin is interested in 287,663,501 Shares, representing approximately 16.50% of the issued share capital of the Company within the meaning of Part XV of the SFO.

Mr. Kwong Wai Ho, Richard (“Mr. Kwong”), aged 45, is an executive Director and a director of Black Sand Enterprises Limited, a subsidiary of the Company. Mr. Kwong is a seasoned finance professional with over 18 years of experience in the banking and finance industry. He was a financial consultant to Lanwa International (Group) Co. Ltd., a mid-sized Chinese property developer, for two years. Before that, he worked with Societe Generale Asia Limited for 9 years where he held the position of director of financial engineering. In that capacity, he served as financial advisor to a number of listed companies whose principal businesses cover a wide range of industries. He has also researched and developed a variety of tax driven structured products which create value-added benefits by arbitrating areas in existing tax, accounting and regulatory frameworks. In addition, Mr. Kwong has a wealth of experience in Asian debt capital markets. Prior to joining the Company, for the period 11 July 2007 to 4 October 2007, Mr. Kwong was an executive director of Tiger Tech Holdings Limited, a company whose shares are listed on the GEM (Stock Code: 8046). Saved as disclosed, Mr. Kwong did not hold any directorship in other listed companies or other major appointments or qualifications in the last three years.

Pursuant to the service contract entered into between Black Sand Enterprises Limited, a subsidiary of the Company, and Mr. Kwong dated 18 February 2008, Mr. Kwong is appointed for a fixed term of two years and his appointment will be subject to retirement by rotation and re-election at the next following annual general meeting of the Company in accordance with the Articles of Association. Mr. Kwong will be entitled to an annual remuneration of HK$960,000.00 and will be entitled to discretionary bonus. Mr. Kwong’s emoluments were determined by the remuneration committee of the Board with reference to the remuneration policy of the Company which was fixed with reference to his duties and responsibilities with the Company as well as the Company’s remuneration policy.

Save as disclosed, as at the Latest Practicable Date, Mr. Kwong does not have any relationship with any directors, senior management, substantial or controlling shareholders of the Company. As at the Latest Practicable Date, Mr. Kwong does not have any interest in the Shares within the meaning of Part XV of the SFO.

Mr. Wong Chung Yu, Denny (“Mr. Wong”), aged 38, is an executive Director. Mr. Wong earned a Bachelor of Science in Electrical Engineering at Rutgers University and a Master of Business Administration from New York University in the United States. Mr. Wong possesses more than 12 years of experience in the banking and financial industry and has a strong background market investment development. He was previously a senior research analyst for China Construction Bank International Securities Company Limited covering the H-share market strategy and small/mid-cap sectors. Prior to that, Mr. Wong worked for the investment banking division of China Merchant Securities (HK) Limited and had participated in numerous transactions involving mergers and acquisitions, corporate restructuring, and

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business valuation. Before that, he was vice president and chief financial officer of Mandra Capital Company Limited, a private investment company specializing in PRC industrial and resources investments, and had participated in various transactions including privatization of a state owned enterprise, debt to equity conversion, as well as assessed numerous investment opportunities covering, among others, the healthcare, paper mills, mining, forestry, and property industries. Prior to that, Mr. Wong had worked at Salomon Smith Barney and Citigroup in the United States and Hong Kong as vice president equity research analyst and was a member of the Institutional Investor second ranked equity quantitative research team. In addition, he holds offices as a director with a number of privately held companies that are principally engaged in investment and charitable activities. Saved as disclosed, Mr. Wong did not hold any directorship in other listed companies or other major appointments or qualifications in the last three years.

Pursuant to a service contract entered into between Black Sand Enterprises Limited, a subsidiary of the Company and Mr. Wong on 20 May 2008, the appointment is for an initial term of two years, which is renewable for a term of one year and his appointment is subject to retirement by rotation and re-election at the annual general meeting of the Company in accordance with the Articles of Association. Mr. Wong will be entitled to an annual remuneration of HK$960,000.00 and a discretionary bonus which is determined based on his performance in connection with Mr. Wong's appointment. His emoluments were determined by the remuneration committee of the Board which was fixed with reference to his duties and responsibilities with the Company as well as the Company's remuneration policy.

Mr. Wong is the brother-in-law of Mr. Yin. Save as disclosed, as at the Latest Practicable Date, Mr. Wong does not have any relationship with any directors, senior management, substantial or controlling shareholders of the Company. As at the Latest Practicable Date, Mr. Wong does not have any interest in the Shares within the meaning of Part XV of the SFO.

Mr. Yin Mark Teh-min ("Mr. Yin"), aged 38, is a non-executive Director. Mr. Yin has over 17 years of experience as an operational sales and marketing executive. Mr. Yin has held executive management and operational roles at both small and large multinational firms, particularly specializing in high-tech ventures. His experience in the United States and Asia includes business planning and managing large scale projects spanning multiple organizations. Since 2001, he has served as a vice president at Infinera Corporation (NASDAQ: INFN) ("Infinera"), a manufacturer of telecommunications equipment. He was the company's initial vice president of marketing. In this position, Mr. Yin participated in business activities in relation to financing, key business decisions, product definition, pricing strategies and engaging closely with all customers. Later, he served as a vice president in Asia Pacific sales and market development. Prior to joining Infinera, Mr. Yin served as a sales and marketing executive at Lightera Networks, a technology start-up that was subsequently acquired by Ciena Corporation (NASDAQ: CIEN) and Cisco Systems (through the acquisition of Stratacom). Mr. Yin earned a Bachelor of Science in Electrical Engineering at Rutgers University and a Master of Science in Operations Research at Stanford University. Saved as disclosed, Mr. Yin did not hold any directorship in other listed companies or other major appointments or qualifications in the last three years.

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Pursuant to a letter of appointment entered into between the Company and Mr. Yin on 20 May 2008, the appointment is for an initial term of one year, which is renewable for a term of one year and his appointment is subject to retirement by rotation and re-election at the annual general meeting of the Company in accordance with the Articles of Association. Mr. Yin will be entitled to an annual remuneration of HK$120,000.00 and not be entitled to any bonus in connection with Mr. Yin’s appointment. His emoluments were determined by the Board which was fixed with reference to his duties and responsibilities with the Company as well as the Company’s remuneration policy.

Mr. Yin is the brother-in-law of Mr. Wong. Save as disclosed, as at the Latest Practicable Date, Mr. Yin does not have any relationship with any directors, senior management, substantial or controlling shareholders of the Company. As at the Latest Practicable Date, Mr. Yin is interested in 2,880,000 Shares, representing approximately 5.08% of the issued share capital of the Company as at the Latest Practicable Date within the meaning of Part XV of the SFO.

Mr. Lai Kai Jin, Michael (“Mr. Lai”), aged 38, is an independent non-executive Director. Mr. Lai graduated from the National University of Singapore with a L.L.B (Hons) degree in 1994 and was called to the Singapore Bar the following year. He joined KhattarWong, one of the largest law firms in Singapore with over 100 professional staff and offices in Singapore, Shanghai, Hanoi and Ho Chih Minh as a partner in 2007. Mr. Lai is also the Singapore editor of Forwarderlaw and a trainer/lecturer in shipping, air law and marine insurance for the Singapore Logistics Association’s continuous training program. Mr. Lai’s practice focuses on marine insurance, shipping and admiralty law and involves handling legal disputes arising out of international trade and transport. Mr. Lai handles a wide array of maritime cases including claims arising out of loss of or damage to cargo, charterparty disputes, bunkering contracts, ship sale and purchase agreements, shipboard personal injuries and accidents, ship construction and repair, freight forwarding and logistics. He also handles claims arising from the carriage of goods by road and by air. Mr. Lai has acted as counsel in numerous cases before the High Court and Court of Appeal of Singapore and in arbitrations. Mr. Lai is presently the chairman of the Advisory Body Legal Matters, FIATA and the Legal Counsel for the Singapore Logistics Association. He sits on the board of directors of EOC Limited (“EOC”) as an independent director and a member of each of the remuneration, nomination and audit committees of EOC. EOC is a leading owner and operator of FPSOs and offshore construction based in Asia and is listed on the Oslo Stock Exchange. Mr. Lai has also served on the board of directors of Sembawang Kimtrans Limited, a major Singapore logistics services provider. Saved as disclosed, Mr. Lai did not hold any directorship in other listed companies or other major appointments or qualifications in the last three years.

Pursuant to a letter of appointment entered into between the Company and Mr. Lai on 18 February 2008, Mr. Lai is appointed for a fixed term of one year and his appointment will be subject to retirement by rotation and re-election at the next following annual general meeting of the Company in accordance with the Articles of Association. Mr. Lai will be entitled to an annual remuneration of HK$120,000.00 and will not be entitled to any discretionary bonus. Mr. Lai’s emoluments were determined by the Board with reference to the remuneration policy of the Company which was fixed with reference to his duties and responsibilities with the Company as well as the Company’s remuneration policy.

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Save as disclosed, as at the Latest Practicable Date, Mr. Lai does not have any relationship with any directors, senior management, substantial or controlling shareholders of the Company. As at the Latest Practicable Date, Mr. Lai does not have any interest in the Shares within the meaning of Part XV of the SFO.

Mr. Ng Yat Cheung, JP (“Mr. Ng”), aged 52, is an independent non-executive Director. Mr. Ng received an Associate Degree of Arts in Business Data Processing from Chabot College in the United States in 1981. He holds offices as a director with a number of private companies which are principally engaged in technology, property development, insurance, finance and property holding. Mr. Ng was appointed as an independent non-executive director of Tao Heung Holdings Limited on 1 March 2007, a company whose shares are listed on the Main Board of the Stock Exchange. For the period from 9 February 2004 to 15 August 2005, Mr. Ng was a non-executive director of M Dream Inworld Limited (formerly known as Inworld Group Limited), a company whose shares are listed on the GEM of the Stock Exchange.

Mr. Ng was appointed as an executive director of Gold-Face Holdings Limited (“Gold-Face”) on 4 January 2004, a company whose shares was listed on the Main Board of the Stock Exchange but was subsequently delisted on 20 September 2006. Gold-Face, a company incorporated in Bermuda with limited liability, was principally engaged in the business of property development and investment, operation of a power plant and money lending business in Hong Kong, other regions in the People’s Republic of China and the United Kingdom. The listing of shares of Gold-Face was subsequently cancelled on 20 September 2006 and a winding-up order against Gold-Face was granted by the Court of First Instances in the High Court of the Hong Kong Special Administrative Region (the “Petition”).

Since (a) Mr. Ng was not involved in the Petition or in the events leading to the Petition; (b) Mr. Ng was neither investigated in relation to the Petition nor held liable for any liabilities of Gold-Face and there was no allegation of fraud or impropriety on Mr. Ng’s part during the Petition; (c) Mr. Ng is currently the independent non-executive director of a listed company in Hong Kong and he was a nonexecutive director of another listed company in Hong Kong in the last three years; and (d) Mr. Ng has been a Justice of Peace since July 2002, the directors of the Company do not consider the above to have any adverse effect on Mr. Ng’s integrity as an independent non-executive Director. In view of the above, the Board considers that Mr. Ng is able to demonstrate a standard of competence commensurate with his position as an independent non-executive director under Rule 5.07 of the GEM Listing Rules and that Mr. Ng will be a valuable addition to the Company as an independent non-executive Director. Saved as disclosed, Mr. Ng did not hold any directorship in other listed companies or other major appointments or qualifications in the last three years.

Pursuant to a letter of appointment entered into between the Company and Mr. Ng dated 13 May 2008, the appointment of Mr. Ng is for an initial term of one year, which is renewable for a term of one year and his appointment is subject to retirement by rotation and re-election at the annual general meeting of the Company in accordance with the Articles of Association of the Company. Mr. Ng will be entitled to an annual remuneration of HK$120,000.00. His emoluments were determined by the Board with reference to the remuneration policy of the

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Company which was fixed with reference to his duties and responsibilities with the Company as well as the Company's remuneration policy. Mr. Ng will not be entitled to any bonus payment.

Save as disclosed, as at the Latest Practicable Date, Mr. Ng does not have any relationship with any directors, senior management, substantial or controlling shareholders of the Company. As at the Latest Practicable Date, Mr. Ng does not have any interest in the Shares within the meaning of Part XV of the SFO.

Mr. Chan Siu Wing, Raymond ("Mr. Chan"), aged 43, is an independent non-executive Director. Mr. Chan is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants, a Certified Practising Accountant of the CPA Australia, a founding member of Macau Society of Certified Practising Accountant and a member of the Hong Kong Securities Institute. Mr. Chan received a Bachelor of Economics degree, majoring in accounting and economics, from University of Sydney in 1985. Mr. Chan has over 20 years of experience in the field of accounting, taxation and trust and has been the chief operating officer of Chinachem Group since 15 November 2008. Before joining the Company, he served as senior consultant of International Taxation Advisory Services Limited for over ten years. In 2003, he joined Asiaciti Trust Hong Kong Limited as general manager. Before this appointment, Mr. Chan was the financial controller and company secretary of Hua Xia Healthcare Holdings Limited, a company whose shares are listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the "GEM").

Mr. Chan currently holds the position as an independent non-executive director of each of Prosperity Investment Holdings limited, a company whose shares are listed on the Main Board of The Stock Exchange of Hong Kong Limited (the "Stock Exchange") and Cardlink Technology Group Limited, a company whose shares are listed on the GEM of the Stock Exchange. For the period from 18 June 2004 to 22 August 2006, Mr. Chan was an independent non-executive director of Core Healthcare Holdings Limited (formerly known as Plasmagene Biosciences Limited), a company whose shares are listed on the GEM of the Stock Exchange.

Pursuant to a letter of appointment entered into between the Company and Mr. Chan dated 1 September 2008, the appointment of Mr. Chan is for an initial term of one year, which is renewable for a term of one year and his appointment is subject to retirement by rotation and re-election at the annual general meeting of the Company in accordance with the Articles of Association of the Company. Mr. Chan will be entitled to an annual remuneration of HK$120,000.00. His remuneration was fixed with reference to his duties and responsibilities with the Company as well as the Company's remuneration policy. Mr. Chan will not be entitled to any bonus payment.

Save as disclosed above, (a) Mr. Chan has not previously held any position with the Company or any of its subsidiaries and has not been a director in any other listed company in the past three years; (b) Mr. Chan is not connected with any directors, senior management, management shareholders, substantial shareholders or controlling shareholders of the Company; (c) there is no information relating to Mr. Chan that is required to be disclosed

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pursuant to Rule 17.50(2)(h) to (v) of the Rules Governing the Listing of Securities on the GEM of the Stock Exchange; and (d) there is no other matter in relation to Mr. Chan’s appointment that needs to be brought to the attention of the shareholders of the Company. As at the date of this circular, Mr. Chan has no interest in the shares of the Company within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).

(h) In the event of inconsistency, the English text of this circular shall prevail over the Chinese text.

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the head office and principal place of business of the Company in Hong Kong, Suites 1412-13, Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong, up to and including the date of the EGM:

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

(b) the consolidated audited financial statements of the Group for the three years ended 31 March 2008;

(d) the accountants’ report prepared by CCIF on the Target Company, the text of which is set out in Appendix II to this circular;

(e) the accountants’ report prepared by RSM Nelson Wheeler, on the Philippine Subsidiary, the text of which is set out in Appendix III to this circular;

(f) the letter from CCIF in respect of the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix IV to this circular;

(g) the technical report prepared by the Technical Adviser, the text of which is set out in Appendix V to this circular;

(h) the valuation report prepared by the Valuer, the text of which is set out in Appendix VI to this circular;

(i) the letter of from Cachet relating to the valuation and the underlying financial forecast prepared by the Valuer, the text of which is set out in Appendix VII to this circular;

(j) the letter from the Directors relating to the forecast information set out in the valuation report, the text of which is set out in Appendix VIII to this circular;

(k) the letters of consent referred to under the paragraph headed “Experts and consent” in this appendix;

APPENDIX IX
GENERAL INFORMATION

(1) a copy of each of the material contracts referred to in the paragraph headed “Material contracts” in this Appendix;
(m) a copy of the Mogan SPA;
(n) a copy of the Mogan SHA;
(o) a copy of the amendment agreement dated 8 November 2008 in relation to the Mogan SPA;
(p) a copy of the memorandum of agreement dated 1 November 2008 between DENR and Mogan;
(q) the letter from Ample Capital, the text of which is set out in this circular;
(r) a copy of the memorandum of understanding dated 8 April 2008 in relation to the Acquisition; and
(s) this circular.

326

NOTICE OF EGM

智庫媒體集團（控股）有限公司

Intelli - Media Group (Holdings) Limited

(incorporated in the Cayman Islands with limited liability)

(Stock code: 8173)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Intelli-Media Group (Holdings) Limited (the "Company") will be held at Board Room I, 7/F, The Park Lane Hong Kong, 310 Gloucester Road, Hong Kong, on 8 December 2008 at 3:00 p.m. (the "EGM") for the purpose of considering and, if thought fit, passing, with or without modifications, the following resolutions as ordinary resolutions of the Company:

ORDINARY RESOLUTION

"THAT:

(a) the acquisition agreement dated 2 May 2008 made between Kesterion Investments Limited as vendor (the "Vendor"), Black Sand Enterprises Limited as purchaser (the "Purchaser") and the Company as co-warrantor, as supplemented by a supplemental agreement dated 8 November 2008 (collectively, the "Acquisition Agreement"), in relation to the sale and purchase of the entire issued share capital in First Pine Enterprises Limited at a consideration of HK$5,700 million (a copy of which has been produced to the meeting, marked "A" and initialed by the chairman of the meeting for the purpose of identification; and further details which are set out in the circular of the Company dated 21 November 2008 (the "Circular") (a copy of which has been produced to the meeting marked "B" and signed by the chairman of the meeting for the purpose of identification)) and all the transactions contemplated thereby be and are hereby approved;

(b) the creation and issue of the Convertible Bonds (as defined in the Circular), on and subject to the terms of the Acquisition Agreement, be and is hereby approved;

(c) the directors (the "Directors") of the Company be and are hereby generally and specifically authorised to allot and issue (i) 500,000,000 new shares of HK$0.1 each in the capital of the Company as Consideration Shares (as defined in the Circular); and (ii) such number of new shares in the capital of the Company as may be allotted and issued upon the exercise of conversion rights in full attaching to the Convertible Bonds; and

(d) the Directors be and are hereby authorised to do all such acts and things, to sign and execute all such further documents and to take such steps as the Directors in their discretion may consider necessary, appropriate, desirable or expedient to give effect to or in connection with the Acquisition Agreement, the allotment and issue of the Consideration Shares and the Conversion Shares (as defined in the Circular) (upon exercise of the conversion rights attaching to the Convertible Bonds), the issue of the Convertible Bonds or any of the transactions contemplated under the Acquisition Agreement (including but not limited to

327

NOTICE OF EGM

the execution of the instrument which will constitute the Convertible Bonds) and to agree to such variation, amendments, waiver or matters relating thereto (including any variation, amendments or waiver of such documents, which are not fundamentally different from those as provided under the Acquisition Agreement) as are, in the opinion of the Directors, in the interest of the Company and its shareholders as a whole."

By Order of the Board
Intelli-Media Group (Holdings) Limited
Kwong Wai Ho Richard
Executive Director

Hong Kong, 21 November 2008

Principal place of business in Hong Kong:
Suites 1412-13, Tower One,
Times Square, 1 Matheson Street,
Causeway Bay, Hong Kong

Notes:

Any member of the Company entitled to attend and vote at the EGM shall be entitled to appoint a person or persons (if he holds two or more Shares) as his proxy or proxies to attend and vote instead of him and a proxy so appointed shall have the same right as the member to speak at the EGM. A proxy need not be a member of the Company.
To be valid, a form of proxy together with any power of attorney or other authority (if any) under which it is signed or a notarially certified copy of such power or authority, must be delivered to the Company's share registrar in Hong Kong, Tricor Tengis Limited, 26th floor, Tesbury Centre, 28 Queen's Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding the EGM or any adjourned meeting, and in default thereof the form of proxy shall not be treated as valid. No instrument appointing a proxy shall be valid after the expiry of 12 months from the date of its execution.
Completion and deposit of the form of proxy shall not preclude a shareholder from attending and voting in person at the EGM if the shareholder so desires and in such event the form of proxy shall be deemed to be revoked.

As at the date of this circular, the Board comprises three executive Directors, Mr. Chin Wai Keung, Richard, Mr. Kwong Wai Ho, Richard, Mr. Wong Chung Yu Denny; one non-executive Director Mr. Yin Mark Teh-min; and three independent non-executive Directors, Mr. Lai Kai Jin, Michael, Mr. Ng Yat Cheung, JP and Mr. Chan Siu Wing, Raymond.

328

AI assistant

Hephaestus Holdings Limited — Proxy Solicitation & Information Statement 2008

51310_rns_2008-11-20_d2d24ff5-3093-4492-b4e5-bf177c157e08.pdf

智庫媒體集團（控股）有限公司

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION: ACQUISITION OF THE ENTIRE EQUITY INTEREST IN FIRST PINE ENTERPRISES LIMITED INVOLVING ISSUE OF PROMISSORY NOTE, CONSIDERATION SHARES AND CONVERTIBLE BONDS

智庫媒體集團（控股）有限公司

Intelli - Media Group (Holdings) Limited

Executive Directors:

Non-executive Director:

Independent non-executive Directors:

Registered Office:

Head office and principal place of business in Hong Kong:

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION: ACQUISITION OF THE ENTIRE EQUITY INTEREST IN FIRST PINE ENTERPRISES LIMITED INVOLVING ISSUE OF PROMISSORY NOTE, CONSIDERATION SHARES AND CONVERTIBLE BONDS

INTRODUCTION

ACQUISITION AGREEMENT

Date

Parties

Subject matter

Acquisition Price

Basis of Determination of the Acquisition Price

Conditions precedent

PROMISSORY NOTE

CONSIDERATION SHARES

CONVERTIBLE BONDS

Principal amount

Form and denomination

Maturity Date

Interest

Transferability

Conversion

Conversion Price

Redemption and purchase

Cancellation

Adjustment to Conversion Price

Voting rights and ranking

Listing

Shareholding chart of the Company

RELATIONSHIP BETWEEN THE PARTIES AND IMPLICATION OF THE LISTING RULES

STRUCTURE CHARTS PRIOR TO/AFTER COMPLETION

INFORMATION ON THE GROUP, THE VENDOR AND OTHERS

INFORMATION ON THE TARGET GROUP

MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET COMPANY

MANAGEMENT DISCUSSION AND ANALYSIS OF MOGAN

BUSINESS PLAN

GEOLOGY BACKGROUND

PAST MINERALOGY (source: MGB)

PHILIPPINE MINING INDUSTRY

CURRENT GOVERNMENT POLICIES

GEOGRAPHIC LOCATION

LOCAL LABOR FORCE

INDUSTRY OUTLOOK

NEAR TERM FACTORS

(a) Vale presses to recoup loss income from Asian customers

(b) Mining industry consolidation may heat up with active participation from PRC Companies while industry players are likely to continue their current pricing practices

RISK FACTORS RELATING TO THE ACQUISITION

REASONS AND BENEFITS FOR THE ACQUISITION

FINANCIAL EFFECTS OF THE ACQUISITION

FINANCIAL TRADING PROSPECTS OF THE ENLARGED GROUP

The Group

The Target Group

IMPLICATION UNDER THE GEM LISTING RULES

THE SPECIFIC MANDATE

EGM

PROCEDURE TO DEMAND A POLL AT EXTRAORDINARY GENERAL MEETING

RECOMMENDATION

ADDITIONAL INFORMATION

智庫媒體集團（控股）有限公司

Intelli - Media Group (Holdings) Limited

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION: ACQUISITION OF THE ENTIRE EQUITY INTEREST IN FIRST PINE ENTERPRISES LIMITED INVOLVING ISSUE OF PROMISSORY NOTE, CONSIDERATION SHARES AND CONVERTIBLE BONDS

INTRODUCTION

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Reasons for and benefits of the Acquisition

(a) The Group's principal activities

The Consideration Shares

The Convertible Bonds

3. Financial impacts of the Acquisition

Earnings

Net asset value

4. Potential dilution effect on the shareholdings of the Independent Shareholders

Hephaestus Holdings Limited Proxy Solicitation & Information Statement 2008