K. H. Group Holdings Limited — Proxy Solicitation & Information Statement 2003

Mar 6, 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Techtronic Industries Company Limited (the “Company”), you should at once hand this circular with the enclosed form of proxy to the purchaser or other transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

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(Incorporated in Hong Kong with limited liability)

MAJOR TRANSACTION – PROPOSED ACQUISITION OF ROYAL APPLIANCE MANUFACTURING CO. BY WAY OF MERGER

A notice convening an extraordinary general meeting of the Company to be held at Chatham Room, Level 7, Conrad Hong Kong, Pacific Place, 88 Queensway, Hong Kong on 31st March, 2003 at 9:30 a.m. (the “Extraordinary General Meeting”) is set out on pages 127 and 128 of this circular. Whether or not you propose to attend the Extraordinary General Meeting, you are requested to complete and return the accompanying form of proxy to the Company’s registered office at 24th Floor, CDW Building, 388 Castle Peak Road, Tsuen Wan, New Territories, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the Extraordinary General Meeting or any adjournment thereof. Completion of the form of proxy shall not preclude you from attending and voting at the Extraordinary General Meeting or any adjourned meeting should you so wish.

6th March, 2003

CONTENTS

	Pages
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	ii
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
The Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2
Corporate structure of the Group before and after the Merger . . . . . . . . . . . . . . .	12
Information on the Acquiror and Merger Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Information on Royal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Reasons for and benefits of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Business review and prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Financial effects of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Appendix I – Financial Information of the Royal Group . . . . . . . . . . . . . . . . . . . . .	25
Appendix II – Financial Information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . .	56
Appendix III – Pro Forma Financial Information of the Enlarged Group . . . . . . . .	115
Appendix IV – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	119
Notice of Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	127

— i —

DEFINITIONS

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

“Acquiror”	RAMC Holdings, Inc., a corporation incorporated in the State
	of Delaware, the US and a direct wholly-owned subsidiary
	of the Company
“Affiliate”	in relation to any corporation means another corporation that
	directly or indirectly, through one or more intermediaries,
	controls, is controlled by, or is under common control with,
	such first corporation
“Board”	the board of Directors
“Closing”	closing of the Merger Agreement
“Company”	Techtronic Industries Company Limited, a public company
	limited by shares incorporated in Hong Kong, the Shares
	of which are listed on the Stock Exchange
“Directors”	the directors of the Company
“Dissenting Shares”	Royal Common Shares which are outstanding immediately
	prior to the Effective Time and held by persons who shall
	have properly demanded payment of the fair cash value of
	such Royal Common Shares in accordance with section
	1701.85 of the OGCL

“Effective Time”	the time on which the Merger becomes effective in
	accordance with the OGCL
“Enlarged Group”	the Group as enlarged upon the implementation of the
	Merger
“Extraordinary General Meeting”	the extraordinary general meeting of the Company to be
	convened to approve the Merger
“GAAP”	generally accepted accounting principles
“Group”	the Company and its subsidiaries
“Hong Kong”	Hong Kong Special Administrative Region of the People’s
	Republic of China
“Latest Practicable Date”	3rd March, 2003, being the latest practicable date prior to
	the printing of this circular for ascertaining certain information
	contained herein

— ii —

DEFINITIONS

“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange
“Merger”	the merger of Merger Sub into Royal upon and subject to
	the terms and conditions of the Merger Agreement
“Merger Agreement”	the agreement and plan of merger dated as of 17th
	December, 2002 among Royal, the Company, the Acquiror
	and Merger Sub
“Merger Consideration”	US$7.37 in cash for each issued and outstanding Royal
	Common Share
“Merger Sub”	TIC Acquisition Corp., a corporation incorporated in the State
	of Ohio, the US and an indirect wholly-owned subsidiary of
	the Company
“NYSE”	New York Stock Exchange
“OGCL”	Ohio General Corporation Law
“Option Shares Merger	a cash amount equal to the product of the excess, if
Consideration”	any, of the Merger Consideration minus the exercise price,
	if any, of each Royal Stock Option multiplied by the aggregate
	number of Royal Common Shares issuable upon the exercise
	in full of such Option at the Effective Time
“Royal”	Royal Appliance Manufacturing Co., a limited liability
	corporation incorporated in the State of Ohio, the US and
	whose shares of common stock are listed and traded on
	NYSE
“Royal Common Shares”	the shares of common stock, without par value, of Royal
“Royal Group”	Royal and its subsidiaries
“Royal Shareholders”	holders of Royal Common Shares
“Royal Special Shareholders	the special meeting of Royal Shareholders to be held
Meeting”	on or around 15th April, 2003 for the purpose of considering,
	and if thought fit, approving the Merger

— iii —

DEFINITIONS

“Royal Stock Option”	each unexercised option, warrant, phantom stock award or
	other security of Royal (including any stock option granted
	to directors, consultants and employees of Royal)
“Royal Stock Option Plans”	all incentive plans adopted by Royal for the purpose of
	granting options, warrants, phantom stock awards or other
	securities to directors, consultants and employees of Royal
“SDI Ordinance”	the Securities (Disclosure of Interests) Ordinance (Chapter
	396 of the Laws of Hong Kong)
“SEC”	the Securities and Exchange Commission of the US
“Shares”	shares of HK$0.20 each in the capital of the Company
“Shareholders”	holders of Shares
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“US”	United States of America
“HK$”	the lawful currency of Hong Kong
“US$”	the lawful currency of US

Unless otherwise specified, where financial information in this circular has been converted from US dollars into Hong Kong dollars, it has been converted at the exchange rate of US$1:HK$7.8. Such conversion has been made solely for the convenience of readers and should not be construed as a representation that such amounts have been, could have been or could be converted into Hong Kong dollars at such rate or at any rate or at all.

— iv —

LETTER FROM THE BOARD

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(Incorporated in Hong Kong with limited liability)

Executive Directors:

• Mr. Horst Julius Pudwill (Chairman and Chief Executive Officer)

• Mr. Roy Chi Ping Chung (Managing Director)

• Mr. Kin Wah Chan

• Mr. Chi Chung Chan

Registered Office: 24th Floor CDW Building 388 Castle Peak Road Tsuen Wan New Territories Hong Kong

• Dr. Akio Urakami

Non-executive Director:

Mr. Susumu Yoshikawa

Independent Non-executive Directors:

• Mr. Vincent Ting Kau Cheung

• Mr. Joel Arthur Schleicher

• Mr. Christopher Patrick Langley

6th March, 2003

To the Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION – PROPOSED ACQUISITION OF ROYAL APPLIANCE MANUFACTURING CO. BY WAY OF MERGER

INTRODUCTION

On 18th December, 2002, the Board announced that the Company, Royal, the Acquiror and Merger Sub have, on 17th December, 2002, entered into the Merger Agreement whereby, the parties have agreed, subject to certain conditions, that at the Effective Time:

• (a) Royal will become an indirect wholly-owned subsidiary of the Company through the merger of Merger Sub with and into Royal as a result of which the separate corporate existence of Merger Sub will cease and Royal will continue as the surviving corporation;

— 1 —

LETTER FROM THE BOARD

• (b) each issued and outstanding Royal Common Share (other than (i) any Royal Common Shares held by Royal in its treasury, (ii) any Royal Common Shares owned by Royal and any direct or indirect wholly-owned subsidiary of Royal or owned by the Acquiror or any affiliate of the Acquiror and (iii) any Dissenting Shares) will be converted into the right to receive the Merger Consideration in cash; and

• (c) each outstanding Royal Stock Option will be extinguished and converted into the right to receive the Option Shares Merger Consideration in cash.

As the estimated total consideration for the Merger represents more than 50% but less than 100% of the latest published unaudited consolidated net tangible assets of the Company for the six months ended 30th June, 2002, the Merger constitutes a major transaction for the Company under the Listing Rules and will require the approval by the Shareholders at the Extraordinary General Meeting.

The purpose of this circular is to provide you with further information relating to the Merger and to seek your approval of the Merger at the Extraordinary General Meeting.

THE MERGER AGREEMENT

Date of agreement : 17th December, 2002

• Parties : 1. Company;

• Royal;

• Acquiror, a direct wholly-owned subsidiary of the Company; and 4. Merger Sub, an indirect wholly-owned subsidiary of the Company.

Royal and its shareholders are independent of and not connected with the directors, chief executive and substantial shareholders of the Company and its subsidiaries or any of their respective associates (as defined in the Listing Rules). To the best of the Directors’ knowledge, neither Royal nor its shareholders hold any Shares at the Latest Practicable Date.

None of the directors of the Group, the Company and its subsidiaries hold any Royal Common Shares or Royal Stock Options at the Latest Practicable Date.

The following is a summary of the principal terms and conditions of the Merger Agreement:

(a) The Merger

As at the Effective Time, by virtue of OGCL, Merger Sub will be merged with and into Royal and the corporate existence of Merger Sub will cease thereafter. Royal will be the surviving corporation in the Merger and the corporate existence of Royal, with all its purposes, objects, rights, privileges, powers, immunities and franchises, will continue and be unaffected by the Merger, subject to paragraph (c) below.

— 2 —

LETTER FROM THE BOARD

After the Merger, Royal’s results and assets and liabilities will be consolidated into the financial statements of the Company using the acquisition accounting method. Goodwill of approximately HK$558.5 million representing the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of Royal at the date of acquisition, will arise on consolidation of Royal. In accordance with the accounting policies of the Group, such goodwill will be capitalised and amortised on a straight-line basis over its useful economic life of 20 years. Such goodwill will also be presented separately in the balance sheet of the Group.

The Merger will become effective at such time as a Certificate of Merger in such form as is required by and executed in accordance with the relevant provisions of the OGCL is duly filed with the Secretary of State of the State of Ohio, the US or at such later date or time as Royal and the Acquiror shall agree and specify in such Certificate of Merger. It is expected that the Certificate of Merger will be filed with the Secretary of State of the State of Ohio, the US after the approval of the Merger by the requisite majority of Royal Shareholders at the Royal Special Shareholders Meeting on or around 15th April, 2003. The expected effective date of the Merger, being at or around the same time as Closing, will be before 30th April, 2003.

The Merger Agreement provides that the directors and officers of Merger Sub immediately before the Effective Time will become the directors and officers, respectively of Royal after the Merger. Upon Closing, all the existing five non-executive directors of Royal will resign from the board of Royal. Mr. Michael J. Merriman is the only executive director of Royal who will remain as an executive director, the Chief Executive Officer and President of Royal after Closing. Further information on Mr. Merriman is set out in the paragraph headed “Information on Royal” below. Save as aforesaid, there is no intention to change any of the existing directors and officers of Royal upon Closing.

(b) Articles of incorporation and By-laws

By virtue of the Merger, the articles of incorporation and by-laws of Merger Sub shall be the articles of incorporation and by-laws, respectively of Royal as the surviving corporation until thereafter changed or amended in the manner as provided in the Merger Agreement or by applicable law.

The articles of incorporation and by-laws of Merger Sub will become the articles of incorporation and by-laws of Royal as the surviving corporation, since the existing articles of incorporation and by-laws of Royal are suitable for corporations quoted on NYSE and are unduly restrictive for the Acquiror after the Merger. There is no intention to make any major changes to the articles of incorporation and by-laws of Merger Sub after the Merger.

— 3 —

LETTER FROM THE BOARD

(c) Effect of the Merger on capital stock and stock options

At the Effective Time, by virtue of the Merger:

• (i) Cancellation of Royal’s treasury stock and Royal-owned stock

Each Royal Common Share that is owned by Royal and any direct or indirect wholly-owned subsidiary of Royal or owned by the Acquiror or an Affiliate of the Acquiror or held in the treasury of Royal shall automatically be cancelled and retired and shall cease to exist, and no consideration will be payable in exchange therefor.

As at the Latest Practicable Date, 13,102,507 Royal Common Shares were held by Royal in its treasury. Save as aforesaid, no Royal Common Share is owned by Royal or any direct or indirect wholly-owned subsidiary of Royal or owned by the Acquiror or an Affiliate of the Acquiror.

(ii) Conversion of Royal Common Shares

As at the Latest Practicable Date, 12,816,452 Royal Common Shares (excluding those held by Royal in its treasury) were issued and outstanding. Each issued and outstanding Royal Common Share (other than the Dissenting Shares) shall be automatically converted into the right to receive the Merger Consideration of US$7.37 in cash payable by the Company or its exchange agent in the manner described in sub-paragraph (vi) below.

(iii) Royal Stock Option Plans

Royal shall take all actions necessary to ensure that, at the Effective Time, each outstanding Royal Stock Option, vested or unvested, exercisable or nonexercisable, shall be extinguished and converted into the right to receive the Option Shares Merger Consideration. Based on the average exercise price of approximately US$3.98 per share, the Option Shares Merger Consideration will amount to approximately US$3.39 per share in cash payable by the Company or its exchange agent in the manner described in sub-paragraph (vi) below. The holders of Royal Stock Options have no right to vote on the Merger and there is no alternative compensation arrangement for them under the Royal Stock Option Plans or the OGCL.

Unlike holders of Dissenting Shares, holders of Royal Stock Options have no right to demand the fair value of their options under the OGCL. Any holder of Royal Stock Options who does not wish to receive the Option Shares Merger Consideration may take one of the following courses of action.

— 4 —

LETTER FROM THE BOARD

Firstly, he may convert his Royal Stock Options into Royal Common Shares and vote such shares for the Merger at the Royal Special Shareholders Meeting and receive the Merger Consideration.

Secondly, he may convert his Royal Stock Options into Royal Common Shares and vote such shares against the Merger at the Royal Special Shareholders Meeting and demand the fair value of his shares under the OGCL as mentioned in paragraph (vii) below.

Thirdly, he may convert his Royal Stock Options and dispose the resultant Royal Common Shares in the market.

Any holder of Royal Stock Options who fails to take any of the above actions before the Effective Time will receive the Option Shares Merger Consideration upon the Merger becoming effective. As advised by Royal’s management, the Directors expect that very few holders of Royal Stock Options will take any of the above courses of action in light of the fact that such holders will have to finance the exercise monies personally or by borrowings and the Merger Consideration is higher than the exercise prices of the outstanding Royal Stock Options and the current market price of the Royal Common Shares.

Without prejudice to the existing rights of holders of outstanding Royal Stock Options, the Royal Stock Option Plans shall terminate at the Effective Time so that no further grant of Royal Stock Options can be made thereunder and the provisions in any other plan, program or arrangement providing for the issuance or grant of any other interest in respect of the capital stock of Royal or any subsidiary of Royal shall be terminated at the Effective Time. Under the terms of Royal Stock Option Plans and any other stock option plan, program or arrangement of Royal, the board of Royal has the right to administer and terminate the future operation of the Royal Stock Option Plans and such other stock option plan, program or arrangement.

(iv) Cancellation and retirement of Royal Common Shares

At the Effective Time, all Royal Common Shares (other than shares to be cancelled in accordance with paragraph (i) above and Dissenting Shares as described in paragraph (vii) below) shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such Royal Common Shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration, without interest, upon surrender of such certificate.

(v) Capital stock of Merger Sub

Each common share of Merger Sub issued and outstanding immediately before the Effective Time will be converted into one Royal Common Share.

— 5 —

LETTER FROM THE BOARD

• (vi) Payment Procedures

Before the Effective Time, Merger Sub will deposit the estimated total consideration to be paid in the Merger of approximately US$105.5 million (or HK$822.9 million) with an exchange agent acceptable to Royal and the Company.

As soon as practicable after the Effective Time, the Company or the exchange agent will send to each Royal Shareholder and holder of Royal Stock Options a letter of transmittal and instructions to effect the surrender of the share certificates or other documentation that represent shares or options, warrants, phantom stock rights or any other security of Royal entitled to receive payment under the Merger Agreement, if any, in exchange for payment of the consideration offered in respect of these shares or options, warrants, phantom stock rights or other security entitled to receive payment under the Merger Agreement.

Each Royal Shareholder and holder of Royal Stock Options will be entitled to receive the consideration offered to Royal Shareholders and holder of Royal Stock Options, after giving effect to any required tax withholdings, only upon surrender to the exchange agent of the relevant share certificates, together with a properly completed letter of transmittal. The Company will not pay interest on the consideration offered to Royal Shareholders and holder of Royal Stock Options. The exchange agent will not make payments to any person who is not the registered holder of the certificates surrendered unless the certificate is properly endorsed or otherwise in proper form for transfer. Furthermore, the person requesting the payment will be required to pay any transfer or other taxes required as a result of this payment to a person other than the registered holder of the certificate surrendered, or establish to the satisfaction of the exchange agent that the tax has been paid or is not payable.

(vii) Dissenting Shares

Dissenting Shares shall not be converted into or represented the right to receive the Merger Consideration, but shall be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to section 1701.85 of the OGCL. Section 1701.85 of the OGCL provides that within 10 days after the approval of the Merger by Royal Shareholders at the Royal Special Shareholders Meeting, any Royal Shareholder who does not vote in favour of the Merger can file a written demand, stating what he or she or it believes to be the fair value of his or her or its Dissenting Shares. If such Royal Shareholder and Royal fail to reach agreement as to the fair value of the Dissenting Shares within 3 months after the written demand, either party may apply to the Ohio courts for a determination of the fair value of such Dissenting Shares. Under the OGCL, the parties to the agreement are Royal and the holder of Dissenting Shares. However, as the prospective ultimate holding company of Royal, Royal will have proper regard to the views of the Company throughout the negotiation of the fair value between Royal

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LETTER FROM THE BOARD

and the holder of Dissenting Shares. Upon determination of the fair value by the Ohio courts, it is Royal, and not the Company, which will be obliged by law to pay such fair value to the holder of Dissenting Shares. The cost of such application is to be borne by the holder of the Dissenting Shares. If any holder of Dissenting Shares fails to apply to the Ohio courts within the period prescribed by the OGCL, his dissenter’s rights will lapse and he will receive the Merger Consideration instead.

(viii) No Further Ownership Rights in Royal

After the Effective Time, the Royal Shareholders (including holders of Dissenting Shares) will no longer have any rights as a shareholder, except for the right to either exercise dissenters’ rights as permitted under the OGCL as mentioned in paragraph (vii) above or surrender his, her or its certificates representing the Royal Common Shares in exchange for the right to receive the consideration offered to Royal Shareholders represented by the delivered certificates at the time of surrender. The Company or Royal as the surviving corporation shall be under no further liability to pay the Merger Consideration or (where appropriate) the Option Shares Merger Consideration to any holders of Royal Common Shares or Royal Stock Options who shall fail to surrender their share certificates or (where appropriate) option certificates to Royal as the surviving corporation on the expiry of 5 years after the Effective Time (or such earlier date as shall be prescribed by US laws regarding forfeiture of abandoned property by US government entities).

After the Effective Time, no transfer of Royal Common Shares shall be made on the share transfer books of Royal except as contemplated by the Merger Agreement. Any certificates representing Royal Common Shares presented after the Effective Time for transfer will be cancelled and exchanged for the right to receive the consideration offered to Royal Shareholders.

(d) Consideration

As at the Latest Practicable Date, (i) 12,816,452 Royal Common Shares (excluding those held by Royal in its treasury) were issued and outstanding and (ii) 2,758,540 unissued Royal Common Shares were subject to outstanding Royal Stock Options. The outstanding Royal Stock Options are exercisable at an average exercise price of approximately US$3.98 per share. The exercise prices of the Royal Stock Options have been fixed in accordance with the terms of the Royal Stock Option Plans before the date of the Merger Agreement and the average exercise of the Royal Stock Options of US$3.98 per share is approximately 46% lower than the Merger Consideration.

— 7 —

LETTER FROM THE BOARD

Assuming that there will be no Dissenting Shares and based on the Merger Consideration and the Option Shares Merger Consideration, the Directors estimate that the total consideration payable by the Company under the Merger will not be more than US$105.5 million (or HK$822.9 million) and the costs and expenses (including accounting and legal fees) for the Merger will be approximately US$2 million (or HK$15.6 million). Shareholders should note that the total consideration payable by the Company may be higher or lower depending on whether there will be any Dissenting Shares and the fair value as agreed by the parties or determined by the Ohio courts (as applicable). The Company will make such further announcement to update Shareholders regarding the outcome of the Royal Special Shareholders Meeting, any Dissenting Shares and the final amount payable by the Company under the Merger as soon as such information becomes available.

The Merger Consideration of US$7.37 per Royal Common Share has been determined with reference to the historical earnings before interest tax depreciation and amortisation of Royal and represents:

• (i) a premium of approximately 23.24% above the closing price of US$5.98 per Royal Common Share as quoted on NYSE on 16th December, 2002;

• (ii) a premium of 42.25% above the average closing price of US$5.181 per Royal Common Share as quoted on NYSE for 10 consecutive trading days ending on 16th December, 2002;

• (iii) a premium of approximately 0.96% above the closing price of US$7.30 per Royal Common Share as quoted on NYSE as at the Latest Practicable Date;

• (iv) a premium of approximately 0.83% above the average closing price of US$7.309 per Royal Common Share as quoted on NYSE for 10 consecutive trading days ending on the Latest Practicable Date;

• (v) a premium of approximately 136.22% above the audited consolidated net tangible asset value per Royal Common Share (on the basis of 12,365,700 Royal Common Shares were issued and outstanding) of approximately US$3.12 as at 31st December, 2001; and

• (vi) a premium of approximately 155.90% above the unaudited consolidated net tangible asset value per Royal Common Share (on the basis of 13,102,800 Royal Common Shares were issued and outstanding) of approximately US$2.88 as at 30th September, 2002.

The Merger Consideration also represents a price earnings multiple of 10.68 times the projected earnings of Royal for the year ended 31st December, 2002.

— 8 —

LETTER FROM THE BOARD

The Directors (including the independent non-executive Directors) consider that such premium is fair and reasonable having regard to the brand portfolios of Royal, including the Dirt Devil[®] , Royal[®] and Telezapper[®] brandnames, which are reputable and well established brand names. The principal products marketed and sold under the Dirt Devil[®] and Royal[®] brandnames include upright and hand held vacuum cleaners, canister vacuum cleaners and stick vacuum cleaners. The principal products marketed and sold under the Telezapper[®] brandname include a telephone attachment that helps block unwanted telemarketing calls and removes consumers’ phone numbers from telemarketers’ computerised dialing lists. North America is the principal market for Royal’s products.

When determining the Merger Consideration, the Company also had due regard to the latest financial position and trading prospects of Royal as disclosed in its quarterly report for the quarter ended 30th September, 2002 (including the legal proceedings instituted by or against the Royal Group as disclosed in the paragraph headed “Information on Royal” below and the section headed “Litigation” in Appendix IV to this circular). As advised by the management of Royal, Royal has a good defence under each of the legal proceedings pending against it and/or its subsidiaries.

Subject to the Merger becoming effective, the Merger Consideration and the Option Shares Merger Consideration (as applicable) will be payable in cash to the Royal Shareholders (other than holders of the Dissenting Shares) and holders of Royal Stock Options (as applicable) as soon as reasonably practicable after the Effective Time. Further details of the payment procedures are set out in sub-paragraph (vi) of the paragraph headed “Effect of the Merger on capital stock and stock options” above.

The Company will finance the consideration for the Merger from its internal resources and by bank borrowings. As at the Latest Practicable Date, the Directors have not yet reached a final decision on the financing split between internal resources and bank borrowings. Taking into account that the Group had cash in hand and at bank of approximately HK$1,794 million as at 31st December, 2002, the Group would be able to finance the estimated total consideration for the Merger completely from its internal cash resources.

(e) Effect of Dissenting Shares on the Merger

As mentioned above, the final consideration payable by the Company under the Merger may be subject to adjustment as a result of the existence of Dissenting Shares (if any). As at the Latest Practicable Date, the Company is unable to estimate, with any reasonable degree of certainty, the amount to be paid for the Dissenting Shares (if any) as the outcome of the Royal Special Shareholders Meeting is still unknown. Upon the Merger becoming effective, the rights of the Royal Shareholders will be automatically converted into the right to receive the Merger Consideration or (where appropriate) the fair value of the Dissenting Shares as determined by the Ohio courts.

Based on the foregoing, the Directors consider that the existence of Dissenting Shares (if any) will not affect the percentage of shareholding of the Acquiror in Royal or the timetable for the implementation of the Merger.

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LETTER FROM THE BOARD

Shareholders should note that the Acquiror has the right to terminate the Merger Agreement in the event that the number of Dissenting Shares is greater than the total number of Royal Common Shares outstanding immediately prior to the Effective Time. Even if the number of Dissenting Shares is less than 10% of the total number of Royal Common Shares outstanding immediately prior to the Effective Time so that the Acquiror cannot terminate the Merger Agreement, the fair value of the Dissenting Shares will be determined by the Ohio courts based on objective factors such as Royal’s historical share prices, earnings per share and net tangible asset per share rather than subjective factors. Since the Merger Consideration is higher than Royal’s historical share prices and net tangible asset per share, the Directors expect that the fair value of the Dissenting Shares (if any) as determined by the Ohio courts should not deviate substantially from the Merger Consideration. Accordingly, the Directors consider that the existence of Dissenting Shares (if any) and any related legal costs and expenses will not alter the classification of the Merger from a “major transaction” to a “very substantial acquisition” under the Listing Rules.

(f) Conditions

The Merger Agreement is subject to the satisfaction or waiver by the parties thereto of the following principal conditions:

• (i) the approval of the Merger by Royal Shareholders at the Royal Special Shareholders Meeting and the approval of the Shareholders at the Extraordinary General Meeting;

• (ii) all consents, approvals and actions of, filings with and notices to any governmental entity required of Royal, the Acquiror, Merger Sub, or any of their subsidiaries to consummate the Merger and the other transactions contemplated by the Merger Agreement (including the filing of the Certificate of Merger with the Secretary of State of the State of Ohio, the US as mentioned in paragraph (a) above), the failure of which to be obtained or taken is reasonably expected to have a material adverse effect on Royal as the surviving corporation and its subsidiaries, taken as a whole, shall have been obtained in form and substance reasonably satisfactory to the Acquiror;

• (iii) no judgment, order, decree, statute, law, ordinance, rule or regulation, entered, enacted, promulgated, enforced or issued by any court or other governmental entity of competent jurisdiction or other legal restraint or prohibition (the “Restraints”) affecting the Closing or seeking to prohibit the transactions contemplated under the Merger Agreement shall be in effect; provided that the parties asserting this condition shall have used its commercially reasonable efforts to prevent the entry of any such Restraints and to appeal as promptly as possible any such Restraints that may be entered;

• (iv) the waiting or similar period (including any extension thereof) applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any applicable foreign anti-trust laws shall have expired or been terminated; and

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LETTER FROM THE BOARD

• (v) the Acquiror shall have received evidence, in form and substance reasonably satisfactory to it, that the number of Dissenting Shares shall constitute no greater than 10% of the total number of Royal Common Shares outstanding immediately prior to the Effective Time. The number of Dissenting Shares will be known on the day of the Royal Special Shareholders Meeting and in any event not more than 10 days thereafter.

Conditions (i), (ii), (iv) and (v) are not intended to be waived by the parties to the Merger Agreement. As at the Latest Practicable Date, condition (iv) has been fulfilled.

(g) Royal Shareholders’ approval

As provided in the OGCL and Royal’s articles of incorporation, the Merger will be subject to approval by two-thirds of the Royal Shareholders present and voting at the Royal Special Shareholders Meeting.

Richmont Capital Partners I, L.P. and E. Patrick Nalley, individually and as Trustee of the Eldon P. Nalley U/T/A dated 18th January, 1993, being the holders of an aggregate of 3,989,900 Royal Common Shares (representing approximately 31.13% of all the Royal Common Shares in issue as at the Latest Practicable Date), who are independent third parties not connected with the Directors, chief executive and substantial shareholders of the Company and its subsidiaries or any of their respective associates, have undertaken to the Company to vote in favour of the Merger so long as the board of directors of Royal continues to recommend that Royal Shareholders vote in favour of the Merger.

(h) Closing

Closing will take place at 10:00 a.m. (US time) on a date to be specified by the parties, which shall be no later than the second business day after satisfaction or waiver (subject to applicable law) of the conditions (excluding conditions (if any) that, by their terms, cannot be satisfied until the date of Closing) set out above, unless another time or date is agreed to by the parties hereto.

It is expected that Closing will take place on or before 30th April, 2003.

— 11 —

LETTER FROM THE BOARD

CORPORATE STRUCTURE OF THE GROUP BEFORE AND AFTER THE MERGER

The following sets out a simplified corporate structure of the Group before and after the Merger:

Before the Merger

==> picture [301 x 121] intentionally omitted <==

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

Holders of Royal Royal
Company
Stock Options Shareholders
100%
Acquiror
100%
Merger Sub Royal
----- End of picture text -----

Interim (i.e. the merger of Merger Sub with and into Royal)

==> picture [301 x 121] intentionally omitted <==

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

Holders of Royal Royal
Company
Stock Options Shareholders
100%
Acquiror
100%
Merger
Merger Sub Royal
----- End of picture text -----

After the Merger

==> picture [73 x 121] intentionally omitted <==

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

Company
100%
Acquiror
100%
Royal
----- End of picture text -----

— 12 —

LETTER FROM THE BOARD

INFORMATION ON THE ACQUIROR AND MERGER SUB

The Acquiror is a limited liability corporation incorporated in the State of Delaware, the US on 9th December, 2002 for the purpose of becoming the holding company of Royal after the Merger and is a direct wholly-owned subsidiary of the Company. Merger Sub is a limited liability corporation incorporated in the State of Ohio, the US on 6th December, 2002 for the purpose of implementing the Merger in accordance with the requirements of the OGCL and is an indirect wholly-owned subsidiary of the Company. Save for entering into the Merger Agreement and the transactions contemplated thereunder, none of the Acquiror and Merger Sub has carried on any business since their respective dates of incorporation. Other than directors and officers, none of the Acquiror and Merger Sub has any employees. Mr. Horst Julius Pudwill and Mr. Roy Chi Ping Chung, being the Chairman and Chief Executive Officer and the Managing Director of the Company respectively, are the existing directors of Acquiror and Merger Sub.

INFORMATION ON ROYAL

Royal is a limited liability corporation incorporated in the State of Ohio, the US and primarily develops, assembles, sources, and markets vacuum cleaners and other cleaning appliances for home and commercial use under the Dirt Devil[®] and Royal[®] brand names, as well as the Telezapper[®] call-blocking device. The authorised capital stock of Royal consists of (i) 101,000,000 Royal Common Shares and (ii) 1,000,000 shares of preferred stock. As at the Latest Practicable Date: (i) 12,816,452 Royal Common Shares were issued and outstanding; (ii) 13,102,507 Royal Common Shares were held by Royal in its treasury; and (iii) 2,758,540 unissued Royal Common Shares were subject to outstanding Royal Stock Options. None of the shares of preferred stock of Royal were issued as at the Latest Practicable Date. Save as aforesaid, Royal did not have any outstanding warrants, options or convertible securities as at the Latest Practicable Date. The Royal Common Shares have been quoted on NYSE under the symbol “RAM” since 1992. Based on the closing price of US$7.30 per Royal Common Share as quoted on NYSE as at the Latest Practicable Date and 12,816,452 Royal Common Shares in issue, the total market capitalisation of Royal (assuming none of the Royal Stock Options were exercised as at the Latest Practicable Date) was approximately US$93,560,099 (or HK$729,768,772). Following the Merger, Royal will have no shareholder other than the Acquiror and accordingly, the listing of the Royal Common Shares on NYSE will be withdrawn thereafter. It is expected that Royal will be delisted on or around 30th April, 2003 on the assumption that the Royal Special Shareholders Meeting will be held on or around 15th April, 2003. The Directors believe the delisting of Royal Common Shares on NYSE will not have any material adverse impact on the Group.

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LETTER FROM THE BOARD

The audited consolidated net income before and after tax and the audited consolidated net tangible assets of Royal Group for the three years ended 31st December, 2001 as extracted from Royal’s annual report for the year ended 31st December, 2001 and the audited consolidated net income before and after tax of Royal for the year ended 31st December, 2002 as extracted from the annual results of Royal for the year ended 31st December, 2002 as announced on 13th February, 2003, were as follows:

					Year ended	Year ended
		31st	December,	31st December,		31st	December,	31st December,
			2002		2001		2000	1999
		US$	HK$	US$	HK$	US$	HK$	US$	HK$
Net income	before tax	14,909,000 116,290,200		14,382,000	112,179,600	7,464,000	58,219,200	20,292,000	158,277,600
Net income	after tax	9,565,000	74,607,000	9,324,000	72,727,200	5,939,000	46,324,200	12,682,000	98,919,600
Net tangible	assets	(Note)	(Note)	38,622,000	301,251,600	31,053,000	242,213,400	44,669,000	348,418,200

Note: Royal has not published its audited balance sheet as at the Latest Practicable Date.

Royal has to file its annual report for the year ended 31st December, 2002, comprising its audited consolidated balance sheet as at 31st December, 2002, its audited consolidated statement of operations and its audited consolidated cash flow statement for the year ended 31st December, 2002 together with the relevant notes thereto, to the SEC on or before 31st March, 2003. As at the Latest Practicable Date, Royal has not filed its latest annual report to the SEC. The Company will make timely disclosure of the financial information of Royal as disclosed in such annual report by way of an announcement together with comments from the Directors on the Merger as a result of such updated financial information of Royal.

As disclosed in the annual report of Royal for the year ended 31st December, 2001, certain customers of the Royal Group, including Kmart, have filed for protection under the applicable bankruptcy laws of the US. As advised by Royal’s management, the amounts due from these bankrupt customers have been fully provided for under the general doubtful debt reserves of Royal. Based on the foregoing, the Directors consider that such doubtful debts should not have a material adverse impact on the financial position of the Royal Group.

As mentioned above, the existing directors of Merger Sub, namely Mr. Horst Julius Pudwill and Mr. Roy Chi Ping Chung, will become the directors of Royal upon the Merger becoming effective. In addition, all the existing five non-executive directors of Royal will resign upon Closing. Mr. Michael J. Merriman is the only executive director of Royal who will remain as an executive director, the Chief Executive Officer and President of Royal after Closing. Save as aforesaid, there is no intention to change the directors, officers and staff of Royal or the business of Royal after Closing.

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LETTER FROM THE BOARD

Mr. Michael J. Merriman, aged 46, joined Royal in 1992 as Vice President of Finance and became a director of Royal in 1993. He was appointed the Chief Executive Officer and President of Royal in 1995. Mr. Merriman is responsible for the overall management of the operations, marketing, sales and engineering, finance, quality and information technology of Royal. Prior to joining Royal, he worked for 14 years with the international accounting firm, Arthur Andersen & Co. He was a partner and certified public accountant in the firm’s Special Services division from 1990 to May 1992, where he provided business consulting services to high growth companies. From 1983 to 1990, Mr. Merriman managed merger, acquisition and audit engagements in the firm’s closely-held business division. For the past five years, Mr. Merriman has served on WalMart’s Supplier Council, which is comprised of 12 key supplier executives. Mr. Merriman is also a director of National City Bank’s Ohio bank board. Mr. Merriman is a member of Leadership Cleveland and serves on the following non-profit boards: past national chairman of Students in Free Enterprise (SIFE), the Vacuum Cleaner Manufacturers Association (VCMA), and trustee of The Singing Angels. Mr. Merriman graduated magna cum laude from John Carroll University with a BS in Business Administration and also serves on the University’s Board of Trustees. Royal has a service agreement with Mr. Merriman, which will be amended to reflect the change in control of Royal after Closing. The service agreement is a 1-year agreement commencing from 14th March, 2002, which extends automatically unless notice is served by either party. Mr. Merriman’s current annual salary under the service agreement is US$420,000 (or HK$3,276,000). Moreover, his benefits under the service agreement include the use of a company car, participation in bonus programs, club membership and other typical benefits such as medical, vacation and retirement matching contributions. Under the bonus program, the amount of bonus is determined with reference to the earnings before interest, tax, depreciation and amortisation (EBITDA) of Royal for the year ending 31st December, 2003 subject to a maximum of US$3.5 million (or HK$27.3 million). Mr. Merriman is entitled to 34% of the total amount of bonus payable by Royal under the bonus program.

Royal is one of the Group’s customers and its business complements with the Group’s existing floor care business. The Group’s sales to Royal for the two years ended 31st December, 2001 and the six months ended 30th June, 2002 were approximately HK$304,729,000, HK$336,190,000 and HK$176,678,000 respectively. The profit (before interest and tax) attributable to the Group’s sales to Royal for the two years ended 31st December, 2001 and the six months ended 30th June, 2002 were approximately HK$13,080,000, HK$19,529,000 and HK$5,782,000 respectively. The Directors believe that the Merger paves way for a horizontal integration of the Group’s existing floor care business in terms of expansion of the Group’s product development, marketing and logistics capabilities in the floor care market.

— 15 —

LETTER FROM THE BOARD

Litigation of the Royal Group

The Hoover Company (“Hoover”) filed a lawsuit in federal court, in the Northern District of Ohio (case #1:00cv0347), against Royal on 4th February, 2000, under the patent, trademark, and unfair competition laws of the US. The Complaint asserted that Royal’s Dirt Devil Easy Steamer infringed three utility patents and two design patents held by Hoover, and also that the Easy Steamer design infringed the trade dress of Hoover’s carpet extractor products. Royal filed a lawsuit in federal court, in the Northern District of Ohio (case #1:01cv2775), against Hoover on 10th December, 2001, under the patent, trademark and unfair competition laws of the US. The Complaint asserted that Hoover infringed certain patents relating to bagless technology held by Royal. As advised by Royal’s management, no provision was made by Royal for this lawsuit in its financial statements for the two years ended 31st December, 2001 as it was not certain, based on available information at the relevant year end date, whether this lawsuit would crystallise into a liability to Royal. On 17th October, 2002, Royal and Hoover reached a settlement of all patent-related litigation described above. Hoover has granted rights to Royal with regard to its existing carpet extractor patents. Royal has granted rights to Hoover with regard to its existing bagless upright vacuum cleaner patents. The settlement includes cash payments to Royal.

Royal filed a lawsuit in federal court, in the Northern District of Ohio (case #1:02cv0338), against Bissell Homecare, Inc. (“Bissell”) on 22nd February, 2002, under the patent, trademark and unfair competition laws of the US. The Complaint asserts that Bissell infringes certain patents relating to bagless technology held by Royal. Royal has already proven the validity of the patents of its bagless vacuum technology by obtaining favourable settlements from Hoover as mentioned above. Royal seeks damages, injunction on future production and legal fees. No specific amount of damages was claimed by Royal and the amount of damages will be determined by the relevant US courts. As advised by Royal’s management, Royal’s attorneys and Bissell’s attorneys have exchanged correspondence and other pre-trial court documents and no court hearing has been fixed for this lawsuit as at the Latest Practicable Date. As advised by Royal’s management, if Royal were to lose this lawsuit, which Royal’s management believes to be unlikely, it would not have a material adverse effect on Royal’s consolidated financial position, results of operations or cash flows.

— 16 —

LETTER FROM THE BOARD

Bissell Homecare, Inc. (“Bissell”) filed a lawsuit in federal court, in the Eastern District of Michigan (case #1:02cv71079), against Royal on 20th March, 2002, under the patent, trademark and unfair competition laws of the US. On 25th April, 2002, Royal filed a Motion to Transfer the case from the Eastern District of Michigan to the Northern District of Ohio. On 19th June, 2002, the Court transferred the case to the Northern District of Ohio. On 15th July, 2002 the case (now 1:02cv1358) was assigned to Judge Leslie Wells in the Northern District of Ohio. The Complaint asserts that Royal’s Dirt Devil Easy Steamer and Platinum Force Extractor infringes certain patents held by Bissell. As advised by Royal’s management, these products account for less than 10% of the total revenue and profit of Royal. Bissell seeks damages, injunction on future production and legal fees. No specific amount of damages was claimed by Bissell and the amount of damages will be determined by the relevant US courts. As further advised by Royal’s management, Bissell’s attorneys and Royal’s attorneys have exchanged correspondence and other pre-trial court documents and no court hearing has been fixed for this lawsuit as at the Latest Practicable Date. Royal is vigorously defending the suit and believes it is without merit. According to the opinion of Royal’s legal advisers, Royal’s management believes that Royal has a good defence against this lawsuit. In addition, Royal’s management believes that its claims against Bissell for infringement of Royal’s bagless vacuum technology as mentioned above would more than offset Bissell’s claims against Royal under this lawsuit. As further advised by Royal’s management, no provision was made by Royal for this lawsuit in its financial statements for the year ended 31st December, 2002 as it was not certain, based on all available information on 31st December, 2002, whether this lawsuit would crystallise into a liability of Royal. Nevertheless, if Bissell were to prevail on all of its claims, it would have a material adverse effect on Royal’s consolidated financial position, results of operations or cash flows.

Royal filed a lawsuit in federal court, in the Northern District of Ohio (case #1:02cv1127), against White Consolidated, Ltd. (Eureka) on 14th June, 2002, under the patent, trademark and unfair competition laws of the US. The Complaint asserts that Eureka infringes certain patents relating to bagless technology held by Royal. Royal has already proven the validity of the patents of its bagless vacuum technology by obtaining favourable settlements from Hoover as mentioned above. Royal seeks damages, injunction on future production and legal fees. No specific amount of damages was claimed by Royal and the amount of damages will be determined by the relevant US courts. As advised by Royal’s management, Royal’s attorneys and Eureka’s attorneys have exchanged correspondence and other pre-trial court documents and no court hearing has been fixed for this lawsuit as at the Latest Practicable Date. As further advised by Royal’s management, if Royal were to lose this lawsuit, which Royal’s management believes to be unlikely, it would not have a material adverse effect on Royal’s consolidated financial position, results of operations or cash flows.

— 17 —

LETTER FROM THE BOARD

Royal filed a lawsuit in federal court, in the Northern District of Ohio (case #1:02cv2249) against Euro-Pro Corporation and Sanyo North America Corporation (together referred to as “Defendants”) on 15th November, 2002, under the patent, trademark and unfair competition laws of the US. The Complaint asserts that the Defendants infringe certain patents relating to bagless technology held by Royal. Royal has already proven the validity of the patents of its bagless vacuum technology by obtaining favourable settlements from Hoover as mentioned above. Royal seeks damages, injunction on future production and legal fees. No specific amount of damages was claimed by Royal and the amount of damages will be determined by the relevant US courts. As advised by Royal’s management, Royal’s attorneys and the Defendants’ attorneys have exchanged correspondence and other pre-trial court documents and no court hearing has been fixed for this lawsuit as at the Latest Practicable Date. As further advised by Royal’s management, if Royal were to lose this lawsuit, which Royal’s management believes to be unlikely, it would not have a material adverse effect on Royal’s consolidated financial position, results of operations or cash flows.

Phone Zap, LLC (“Phone Zap”) filed a lawsuit in US District Court, District of Columbia (case #1:03cv00013), against Royal and Privacy Technologies, Inc., a subsidiary of Royal, on 6th January, 2003, under the patent, trademark and unfair competition laws of the US. No specific amount of damages has been quantified by Phone Zap and the amount of damages will be determined by the relevant US courts. The Complaint asserts trademark infringement by Royal and Privacy Technologies, Inc. with its Telezapper[®] trademark. As advised by Royal’s management, these products account for approximately 30% of the total revenue and profit of Royal. As further advised by Royal’s management, Phone Zap’s attorneys and Royal’s attorneys have exchanged correspondence and other pre-trial court documents and no court hearing has been fixed for this lawsuit as at the Latest Practicable Date. Royal is vigorously defending the suit and believes it is without merit. According to the opinion of Royal’s legal advisers, Royal’s management believes that there are significant weaknesses in Phone Zap’s lawsuit. To begin with, Phone Zap’s trademark application appears to be invalid. Even assuming that such trademark application is valid, Phone Zap has to prove that customers were misled by Royal’s products and thought that they were buying Phone Zap’s products, which are not even available at retail. Accordingly, the Directors consider the chance of Phone Zap being prevailed on all of its claims to be low. As further advised by Royal’s management, no provision was made by Royal for this lawsuit in its financial statements for the year ended 31st December, 2002 as it was not certain, based on all available information on 31st December, 2002, whether this lawsuit would crystallise into a liability of Royal. Nevertheless, if Phone Zap were to prevail on all of its claims, it would have a material adverse effect on Royal’s consolidated financial position, results of operations or cash flows.

Royal is involved in various other claims and litigation arising in the ordinary and normal course of business and the amount of each such claims and litigation does not exceed US$100,000 (or HK$780,000). Royal has product liability and general liability insurance policies in amounts that should cover such claims and Royal’s management believes such insurance coverage to be reasonable. There can be no assurance, however, that such insurance will be adequate to cover all potential product or other liability claims against Royal. In the opinion of Royal’s management, the ultimate resolution of these actions will not materially affect the consolidated financial position, results of operations or cash flows of Royal.

— 18 —

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE MERGER

The Group is principally engaged in the manufacturing and trading of electrical and electronic products mainly in North America and Europe.

The Directors (including the independent non-executive Directors) consider that the terms of the Merger Agreement, which have been concluded after arm’s length negotiation between the parties on normal commercial terms after taking into account the established brand portfolios of Royal and the latest financial position and trading prospects of Royal (including the legal proceedings instituted by and against the Royal Group as disclosed in the paragraph headed “Information on Royal” above and the section headed “Litigation” in Appendix IV to this circular), are fair and reasonable so far as the Company and its shareholders are concerned.

The Directors (including the independent non-executive Directors) believe that the Merger represents a significant step in the Company’s world-wide branding strategy, which began with its acquisitions of the Ryobi[®] brand for power tools in most of the world’s markets (further details of which were announced by the Company in June and July, 2000), and the Homelite[®] brand for lawn and garden tools (further details of which were contained in the interim report of the Company for the six months ended 30th June, 2002). By integrating forward from its strong position as a high-quality, low-cost original equipment manufacturer (OEM) to become a brand marketing company in key markets worldwide (such as the US, Europe and Asia), the Company expects to create additional business opportunities at both the manufacturing and retail distribution levels. The Royal acquisition extends this strategy into floor care, and greatly strengthens the Company’s product development, marketing and logistics capabilities in this industry, while adding several respected brand names to its portfolio.

The Merger will enable the Company to integrate and expand the existing product development and supply link between Royal and the Company. Following the Merger, the Company expects to expand its role as a manufacturer of Royal products by using existing production facilities and capabilities of the Group. Following the Merger, the Company also intends to pursue potential cross-marketing synergies with the major retailers of its power tool and floor care lines of business in the US and European markets, as well as potential operational synergies in logistics and customer service.

— 19 —

LETTER FROM THE BOARD

BUSINESS REVIEW AND PROSPECTS

As disclosed in the interim report of the Group for the six month period ended 30th June, 2002, the Group acquired, in March 2002, two power-tools companies in Australasia from Ryobi Limited as well as the perpetual rights for the Royal[®] brandname in Australia and New Zealand. In July 2002, the Group’s 40.8% associated company, Gimelli Laboratories Company Limited, acquired an 18.8% investment in a German brandname company, Medisana AG. Had the Merger been completed before 31st December, 2002, the Merger would be the fourth acquisition by the Group in the last financial year. The acquisitions of the Royal[®] brand power-tools business and the Homelite[®] brand outdoor products business were very successful and these businesses delivered strong growth in sales in the US in the last financial year. The Group also saw the successful integration of the two newly acquired power-tools companies in Australasia with its existing power-tools operations and these companies also started to contribute to the Group in the second half of the last financial year.

The forward looking economic environment shows resilience as the important North American economy delivered moderate growth and Europe remains mixed across the different countries. The Group has taken the view that its brand names, marketing, and product focus are right for this uncertainty. The Group has a low cost structure, with manufacturing infrastructure in Greater China. The Group nurtures strong relationships with the high volume retailers of power tools and outdoor products. The Ryobi[®] and Homelite[®] brands are well recognized and value positioned. The floor care appliance division and solar and electronic measuring division maintain partnerships with the leading brand name companies in their respective industries. The addition of the Dirt Devil[®] , Royal[®] and Telezapper[®] brandnames will further strengthen the Group’s brand portfolio and market profile in the US and European markets. With this platform of better-value products, strong customers, and powerful brands, the Group is well positioned to deliver growth in uncertainty.

FINANCIAL EFFECTS OF THE MERGER

(a) Net tangible assets

Set out in section 1 of Appendix III to this circular is the pro forma statement of adjusted combined net tangible assets of the Enlarged Group. On the basis set out in that Appendix, the pro forma adjusted unaudited combined net tangible assets of the Enlarged Group per Share will be approximately HK$1.50 (based on 645,716,826 Shares in issue as at the Latest Practicable Date). This represents a downward adjustment of approximately 36.97% when compared with the pro forma adjusted unaudited consolidated net tangible assets of the Group per Share of approximately HK$2.38 (based on 645,716,826 Shares in issue as at the Latest Practicable Date).

The net tangible assets of the Enlarged Group has been reduced by approximately HK$567.4 million, representing the goodwill arising from the Merger of approximately HK$558.5 million and the unrealised profit on inventories purchased from the Group which were still held by Royal as at 30th June, 2002 of approximately HK$8.9 million.

— 20 —

LETTER FROM THE BOARD

Shareholders should note that the goodwill arising on acquisition of Royal of approximately HK$558.5 million has been calculated with reference to the unaudited net tangible assets of the Royal Group as at 30th June, 2002. Accordingly, the final amount of goodwill may be subject to higher or lower depending on the latest financial figures of the Royal Group after Closing.

(b) Gearing

Before the Merger, based on the unaudited consolidated financial statements of the Group as at 30th June, 2002, the gearing ratio (as measured by total net bank borrowings as a percentage of shareholders’ funds) of the Group was approximately 20.46%. After the Merger and assuming the Company shall finance the estimated total consideration for the Merger of approximately US$105.5 million (or HK$822.9 million) completely from its internal cash resources, the gearing ratio calculated on the same basis will be increased to approximately 88.36%. The increase in gearing ratio after the Merger is mainly attributed to the rate of increase in the Group’s total net bank borrowings is greater than the rate of increase in Group’s shareholders’ funds. Shareholders should note that the gearing ratio after the Merger has been calculated on the assumption that the Company has not incurred any bank borrowings to finance the Merger. Accordingly, the gearing ratio after the Merger will be higher in the event that the Company shall finance the consideration for the Merger partly from its internal resources and partly by bank borrowings. The Directors expect that such increase in gearing will be temporary in nature and the gearing of the Enlarged Group will be reduced to an acceptable level by the end of the year ending 31st December, 2003 through the strong internally generated cashflows of the Enlarged Group.

(c) Earnings

Set out in section 3 of Appendix III to this circular is the pro forma statement of combined results of the Enlarged Group prepared on the basis that the Merger was implemented on 1st July, 2001 and Royal was a wholly-owned subsidiary of the Company throughout the twelve month period ended 30th June, 2002. On the basis set out in that Appendix, the pro forma adjusted unaudited combined profit after taxation and minority interests of the Enlarged Group was approximately HK$324,331,000, representing a pro forma earnings per Share of approximately HK55.35 cents (using the weighted average of 585,957,761 Shares in issue for the twelve month period ended 30th June, 2002). This represents an increase of approximately 3.89% when compared with the earnings per Share of the Group for the twelve month period ended 30th June, 2002 of approximately HK53.28 cents, which was calculated based on the unaudited consolidated profit after taxation and minority interests of the Group for the twelve month period ended 30th June, 2002 of HK$312,172,000 and the weighted average of 585,957,761 Shares in issue for the twelve month period ended 30th June, 2002.

— 21 —

LETTER FROM THE BOARD

Shareholders should have regard to the following matters when interpreting the pro forma earnings per Share of the Enlarged Group:

• (i) The pro forma profit for the year and the related pro forma earnings per Share of the Enlarged Group as shown in section 3 of Appendix III to this circular have been calculated on the basis that the Group will finance the consideration for the Merger entirely from its internal resources. No interest/finance cost has been included in the calculation of such pro forma figures since the Company has not yet reached a final decision on the financing split between internal resources and bank borrowings and accordingly, the Company cannot quantify the exact interest/finance cost of such bank borrowings. In view of the above, the pro forma earnings per Share of the Enlarged Group may be subject to adjustment in the event that the Group shall finance the consideration for the Merger partly from its internal resources and partly by bank borrowings. The Group has received interest on its cash balances at prevailing bank deposit rates and has paid interest on its bank borrowings at LIBOR plus market spread;

• (ii) Royal’s net sales for the year ended 31st December, 2002 was approximately 7.5% lower than the previous corresponding period due to lower average selling prices of its products. It is expected that Royal’s net sales will be improved in the financial year ending 31st December, 2003 since Royal will benefit from new products launched in the market as well as a lower cost base as a result of economies of scale after the Merger;

• (iii) certain of Royal’s customers, including Kmart, have filed for protection under the applicable bankruptcy laws of the US. As advised by Royal’s management, the amounts due from these bankrupt customers have been fully provided for under the general doubtful debt reserves of Royal. Based on the above, the Directors consider that these doubtful debts should not have a material adverse impact on the financial position of the Royal Group;

• (iv) Royal recorded earnings of US$3,371,000 (or HK$26,293,800) in the fourth quarter of 2002 from the settlement of the lawsuit brought by The Hoover Company in the federal court, in the Northern District of Ohio (case #1:00cv0347) on 4th February, 2000. Further details of this lawsuit are set out in the paragraph headed “Information on Royal” above and the section headed “Litigation” in Appendix IV to this circular. The earnings arising from the settlement of this lawsuit are not expected to recur in the future; and

• (v) Goodwill arising on acquisition of Royal will amount to approximately HK$558.5 million which will translate into an annual amortisation expense of approximately HK$27.9 million. Nevertheless, the Directors believe that such annual amortisation expense will be absorbed by an overall improvement of the earnings of the Group’s floor care division as a result of greater economies of scale and a better product pipeline.

— 22 —

LETTER FROM THE BOARD

The Directors consider that the Merger will serve to broaden the Group’s income base and contribute towards its profits going forward. The Directors further consider that the improvement in the earnings of the Group in the long term will militate against the reduction of the net tangible asset backing and the increase in the gearing of the Group in the short term.

EXTRAORDINARY GENERAL MEETING

A notice convening the Extraordinary General Meeting to be held at Chatham Room, Level 7, Conrad Hong Kong, Pacific Place, 88 Queensway, Hong Kong on 31st March, 2003 at 9:30 a.m. is set out on pages 127 and 128 of this circular. At the Extraordinary General Meeting, an ordinary resolution will be proposed to approve the Merger.

A form of proxy for use by the Shareholders at the Extraordinary General Meeting is enclosed. Whether or not you are able to attend the meeting in person, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon to the Company’s registered office at 24th Floor, CDW Building, 388 Castle Peak Road, Tsuen Wan, New Territories, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the Extraordinary General Meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the Extraordinary General Meeting or any adjourned meeting thereof (as the case may be) should you so wish.

The Company and the Directors have confirmed that no Shareholder will be required to abstain from voting on the Merger as required under the Listing Rules.

RECOMMENDATION

The Directors (including the independent non-executive Directors) believe that the Merger is in the best interest of the Company and the Shareholders as a whole and recommend the Shareholders to vote in favour of the resolution to be proposed at the Extraordinary General Meeting to approve the Merger.

The executive Directors and their respective associates (as defined in the Listing Rules), beneficially holding a total of 201,324,871 Shares, which represented approximately 31.18% of the existing issued share capital of the Company as at the Latest Practicable Date, have indicated that they intend to vote such Shares in favour of the resolution to approve the Merger at the Extraordinary General Meeting.

— 23 —

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

Your attention is also drawn to the information set out in the appendices and the notice of the Extraordinary General Meeting set out in this circular.

By Order of the Board Techtronic Industries Company Limited Horst Julius Pudwill Chairman and Chief Executive Officer

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Under Rule 14.16(4) of the Listing Rules, a circular issued in connection with a major transaction (as defined in Rule 14.09 of the Listing Rules) must contain an accountants’ report on the business, company or companies being acquired unless it is a listed company which is being acquired, in which case the inclusion of the last published balance sheet and of three years’ profits (after the deduction of all charges, except taxation which charge shall be shown separately) taken from the published accounts of the company to be acquired, will suffice. The accounts on which any such accountants’ report is based must relate to a financial period which must have ended not more than six months before the date of the circular.

Under Rule 4.03 of the Listing Rules, all accountants’ report must be prepared by professional accountants who are qualified under the Professional Accountants Ordinance for appointment as auditors of a company and who are independent both of the issuer and of any other company concerned to the same extent as that required of an auditor under the Companies Ordinance and in accordance with the guideline on independence (Statement 1.203) issued by the Hong Kong Society of Accountants, provided that, in the case of a circular issued by a listed issuer in connection with the acquisition of an overseas company, the Stock Exchange may be prepared to permit the accountants’ report to be prepared by a firm of accountants which is not so qualified but which is acceptable to the Stock Exchange. Such a firm must normally have an international name and reputation and be a member of a recognised body of accountants.

Under Rule 4.04(2) of the Listing Rules, the accountants’ report must include the results of any business or subsidiary acquired, agreed to be acquired or proposed to be acquired since the date to which the latest audited accounts of the issuer have been made up in respect of each of the three financial years immediately preceding the issue of the listing document or in respect of each of the financial years since commencement of such business or the incorporation or other establishment of such subsidiary (as the case may be) if this occurred less than three years prior to such issue or shorter period as may be acceptable to the Stock Exchange.

Under Rule 4.11 of the Listing Rules, the financial history of results and the statement of assets and liabilities included in the accountants’ report must normally be drawn up in conformity with:

• (a) accounting standards adopted by the Hong Kong Society of Accountants and laid down in the Statements of Standard Accounting Practice issued from time to time by that Society; or

• (b) International Accounting Standards (“IAS”) as promulgated from time to time by the International Accounting Standards Committee. Listed issuers and listing applicants, which adopt IAS, are required:

• (i) to disclose and explain differences of accounting practice between IAS and generally accepted accounting principles in Hong Kong, which have a significant effect on their financial statements (the “Hong Kong Accounting Standards”); and

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

(ii) to compile a statement of the financial effect of any such material differences.

Royal’s management has issued a formal statement to the Company that it will not, at any time before Closing, grant the Company or its auditors access to its books and records for the purpose of preparing any new or additional financial statements of Royal for inclusion in the Company’s circular on the grounds that such new or additional financial statements as audited under Hong Kong Accounting Standards will be contrary to its previous filings with the SEC and may be a violation of the relevant US laws and regulations. Royal’s management has further stated that Royal does not agree to the engagement by the Company of its independent accountants, namely PricewaterhouseCoopers LLP. or its Hong Kong office, as the Company’s reporting accountants for the purpose of preparing any new or additional financial statements of Royal for inclusion in the Company’s circular on the grounds that PricewaterhouseCoopers LLP. are currently involved in completing their work on the audit of Royal’s financial statements for the year ended 31st December 2002 which must, under US law, be filed with the SEC before 31st March, 2002 and that any diversion of effort or resources would severely impair Royal’s ability to comply with such legal requirement. As a result, it is impractical for the Company to appoint qualified professional accountants where they could prepare an accountants’ report on Royal for the three financial years immediately preceding the issue of the circular drawing up in conformity with Hong Kong Accounting Standards with reported period ended not more than 6 months before the date of the circular. Accordingly, the Company has made an application for, and the Stock Exchange has granted, a waiver from strict compliance with the requirements of Rules 14.16(4), 4.03, 4.04(2) and 4.11 of the Listing Rules.

Under the relevant securities laws and regulations of the US, Royal has to file its annual report (on Form 10-K) and quarterly reports (on Form 10-Q) to the SEC by certain prescribed due dates. As at the Latest Practicable Date, Royal has filed its annual report for the year ended 31st December, 2001 and its quarterly reports for the three quarters ended 31st March, 2002, 30th June, 2002 and 30th September, 2002 respectively to the SEC. Full texts of such annual report and quarterly reports can be downloaded at the official website of Royal at www.royalappliance.com. Royal has, on 13th February, 2003, announced its audited results for the year ended 31st December, 2002. Royal has to file its annual report for the year ended 31st December, 2002, comprising its audited consolidated balance sheet as at 31st December, 2002, its audited consolidated statement of operations and its audited consolidated cash flow statement for the year ended 31st December, 2002 together with the relevant notes thereto, to the SEC on or before 31st March, 2003. As at the Latest Practicable Date, Royal has not filed its latest annual report to the SEC. As a result, the most current financial information of Royal that is only available is the audited financial statements of Royal for the year ended 31st December, 2001 and the audited results of Royal for the year ended 31st December, 2002 as announced on 13th February, 2003 which are included in sections 2 and 3 of this Appendix respectively. As the financial statements of Royal are prepared in accordance with US GAAP, which differ in certain significant respects from Hong Kong GAAP, your attention is also drawn to the summary and reconciliation of the significant differences between US GAAP and Hong Kong GAAP in section 4 of this Appendix.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

The Company will make timely disclosure of the financial information of Royal as disclosed in its annual report for the year ended 31st December, 2002 by way of an announcement together with comments from the Directors on the Merger as a result of such updated financial information of Royal.

1. SUMMARY OF RESULTS FOR THE FIVE YEARS ENDED 31ST DECEMBER, 2002

Set out below is a summary of the audited consolidated statements of operations of Royal for the five years ended 31st December, 2002 as extracted from the annual report of Royal for the year ended 31st December, 2001 and the annual results of Royal for the year ended 31st December, 2002 as announced by Royal on 13th February, 2003.

Consolidated statements of operations

Year ended 31st December

Net sales Cost of sales Gross margin Selling, general and administrative expenses Charge for tooling obsolescence Income from operations Interest expense, net Receivable securitization and other expense (income), net Income before taxes Income tax expense Net income	2002 US$ 389,726 301,692 88,034 74,684 — 13,350 1,413 (2,972) 14,909 5,344 9,565	2001 2000 1999 (US Dollars in thousands) US$ US$ US$ 428,425 408,223 407,984 325,746 315,849 304,452 102,679 92,374 103,532 84,701 79,694 77,849 — — 2,621 17,978 12,680 23,062 2,415 3,503 1,401 1,181 1,713 1,369 14,382 7,464 20,292 5,058 1,525 7,610 9,324 5,939 12,682	1998 US$ 282,720 208,861 73,859 68,346 — 5,513 1,521 (140) 4,132 1,606 2,526

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

2. AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER, 2001

Set out below is a summary of the audited consolidated balance sheets as at 31st December, 1999, 2000 and 2001, the audited consolidated statements of operations and the audited consolidated cash flow statements for each of the three years ended 31st December, 2001, together with the relevant notes as extracted from the annual reports of Royal for the two years ended 31st December, 2001. The financial statements of Royal are prepared in accordance with US GAAP and have not been qualified by PricewaterhouseCoopers LLP., the auditors of Royal, for the last three financial years.

Consolidated balance sheets

As at 31st December

ASSETS Current assets: Cash Trade accounts receivable, less allowance for doubtful accounts of US$3,000, US$1,300 and US$900 at 31st December, 2001, 2000 and 1999, respectively Inventories Refundable and deferred income taxes Prepaid expenses and other Total current assets Property, plant and equipment, at cost: Land Buildings Molds, tooling, and equipment Furniture, office and computer equipment, and software Assets under capital leases Leasehold improvements and other Less accumulated depreciation and amortization Computer software and tooling deposits Other Total assets

2001 2000 1999 (US Dollars in thousands) US$ US$ US$ 3,421 704 1,427 35,986 42,097 48,526 50,807 45,470 50,461 4,549 4,735 5,074 1,636 1,573 1,681 96,399 94,579 107,169 1,541 1,541 1,541 7,777 7,777 7,777 52,031 48,650 49,515 12,154 12,721 7,787 3,171 3,171 4,694 7,456 5,067 5,137 84,130 78,927 76,451 (46,556) (37,119) (37,556) 37,574 41,808 38,895 4,405 807 5,177 2,066 1,358 651 140,444 138,552 151,892

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Consolidated balance sheets (Cont’d) As at 31st December

Consolidated balance sheets(Cont’d) As at 31st December
	2001	2000	1999
	(US	Dollars in thousands)
	US$	US$	US$
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	27,433	22,209	22,280
Accrued liabilities:
Advertising and promotion	11,196	13,103	15,932
Salaries, benefits, and payroll taxes	7,258	3,355	8,005
Warranty and customer returns	9,950	9,800	10,050
Income taxes	1,370	—	3,366
Other	6,479	6,091	3,301
Current portions of capital lease
obligations and notes payable	147	136	5,285
Total current liabilities	63,833	54,694	68,219
Revolving credit agreement	32,000	46,400	32,200
Capitalized lease obligations,
less current portion	1,978	2,137	2,504
Total long-term debt	33,978	48,537	34,704
Deferred income taxes	4,011	4,268	4,300
Total liabilities	101,822	107,499	107,223
Commitments and contingencies
(Note 4 and 5)	—	—	—
Shareholders’ equity:
Serial preferred shares; authorized –
1,000,000 shares; none issued
and outstanding	—	—	—
Common shares, at stated value;
authorized –
101,000,000 shares; issued
25,829,452, 25,509,152 and
25,464,352 at 31st December, 2001,
2000 and 1999, respectively	214	212	212
Additional paid-in capital	44,167	43,038	42,528
Retained earnings	70,489	61,165	55,226
	114,870	104,415	97,966
Less treasury shares, at cost (12,365,700,
11,780,500 and 8,491,000 shares at
31st December, 2001, 2000 and 1999,
respectively)	(76,248)	(73,362)	(53,297)
Total shareholders’ equity	38,622	31,053	44,669
Total liabilities and shareholders’ equity	140,444	138,552	151,892

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Consolidated statements of operations

Year ended 31st December

Net sales Cost of sales Gross margin Selling, general and administrative expenses Charge for tooling obsolescence Income from operations Interest expense, net Receivable securitization and other expense (income), net Income before income taxes Income tax expense Net income Basic Weighted average number of common shares outstanding (in thousands) Earnings per share Diluted Weighted average number of common shares and equivalents outstanding (in thousands) Earnings per share	2001 2000 1999 (US Dollars in thousands except per share amounts) US$ US$ US$ 428,425 408,223 407,984 325,746 315,849 304,452 102,679 92,374 103,532 84,701 79,694 77,849 — — 2,621 17,978 12,680 23,062 2,415 3,503 1,401 1,181 1,713 1,369 14,382 7,464 20,292 5,058 1,525 7,610 9,324 5,939 12,682 13,731 15,083 18,155 0.68 0.39 0.70 14,297 15,574 18,371 0.65 0.38 0.69	2001 2000 1999 (US Dollars in thousands except per share amounts) US$ US$ US$ 428,425 408,223 407,984 325,746 315,849 304,452 102,679 92,374 103,532 84,701 79,694 77,849 — — 2,621 17,978 12,680 23,062 2,415 3,503 1,401 1,181 1,713 1,369 14,382 7,464 20,292 5,058 1,525 7,610 9,324 5,939 12,682 13,731 15,083 18,155 0.68 0.39 0.70 14,297 15,574 18,371 0.65 0.38 0.69
		103,532 77,849 2,621
		23,062 1,401 1,369
		20,292 7,610
		12,682
		18,155 0.70 18,371 0.69

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Consolidated statements of shareholders’ equity

Balance at 31st December, 1998 Shares issued from stock option plan Purchase of treasury shares Net income Balance at 31st December, 1999 Compensatory effect of stock options Shares issued from stock option plan Purchase of treasury shares Net income Balance at 31st December, 2000 Compensatory effect of stock options Shares issued from stock option plan Purchase of treasury shares Net income Balance at 31st December, 2001	Common Shares Number Amount (US US$ 25,347,924 211 116,428 1 — — — — 25,464,352 212 — — 44,800 — — — — — 25,509,152 212 — — 320,300 2 — — — — 25,829,452 214	Additional Total Paid-in Retained Treasury Shares Shareholders’ Capital Earnings Number Amount Equity Dollars in thousands, except share amounts) US$ US$ US$ US$ 42,115 42,544 5,726,400 (38,147) 46,723 413 — — — 414 — — 2,764,600 (15,150) (15,150) — 12,682 — — 12,682 42,528 55,226 8,491,000 (53,297) 44,669 361 — — — 361 149 — — — 149 — — 3,289,500 (20,065) (20,065) — 5,939 — — 5,939 43,038 61,165 11,780,500 (73,362) 31,053 586 — — — 586 543 — — — 545 — — 585,200 (2,886) (2,886) — 9,324 — — 9,324 44,167 70,489 12,365,700 (76,248) 38,622

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Consolidated statements of cash flows

Year ended 31st December

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization Charge for tooling obsolescence Compensatory effect of stock options (Gain) loss on sale of property, plant and equipment, net Deferred income taxes (Increase) decrease in assets: Trade accounts receivable, net Inventories, net Refundable and accrued income taxes Prepaid expenses and other Other Increase (decrease) in liabilities: Trade accounts payable Accrued advertising and promotion Accrued salaries, benefits, and payroll taxes Accrued warranty and customer returns Accrued other Total adjustments Net cash from operating activities Cash flows from investing activities: Purchases of tooling, property, plant, and equipment, net Proceeds from sale of property, plant and equipment (Increase) decrease in computer software and tooling deposits Net cash from investing activities

2001 2000 1999 (US Dollars in thousands) US$ US$ US$ 9,324 5,939 12,682 15,279 15,836 11,896 — — 2,621 586 361 — — (32) 85 (382) 618 (1,853) 6,111 6,429 (10,990) (5,337) 4,991 (19,373) 1,681 (3,677) 1,436 (63) 108 2,891 (1,509) (1,147) (308) 5,224 (1,700) 2,745 (1,907) (2,829) 7,164 3,903 (4,650) 5,706 150 (250) 1,950 388 2,257 (3,508) 24,124 16,315 462 33,448 22,254 13,144 (10,244) (17,776) (16,474) — 32 — (3,598) 4,370 (2,407) (13,842) (13,374) (18,881)

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Consolidated statements of cash flows (Cont’d) Year ended 31st December

Cash flows from financing activities: (Payments) proceeds on bank debt, net Payments on notes payable Proceeds from exercise of stock options Payments on capital lease obligations Purchase of treasury shares Net cash from financing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year Supplemental disclosure of cash flow information: Cash payments for: Interest Income taxes, net of refunds

2001 2000 1999 (US Dollars in thousands) US$ US$ US$ (14,400) 15,829 22,488 — (5,186) (302) 545 149 414 (148) (330) (286) (2,886) (20,065) (15,150) (16,889) (9,603) 7,164 2,717 (723) 1,427 704 1,427 — 3,421 704 1,427 2,611 3,818 1,594 3,759 4,574 8,021

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Notes to consolidated financial statements

(In thousands, except per share amounts)

1. Accounting Policies:

Description of Business – Royal Appliance Mfg. Co. (“Royal”), an Ohio corporation with its corporate offices in the Cleveland, Ohio metropolitan area, develops, assembles or sources and markets a full line of cleaning products for home and some for commercial use, primarily in North America under the Dirt Devil and Royal brand names. In 1984, Royal introduced the first in a line of Dirt Devil floorcare products, which Royal believes has become one of the largest selling lines of vacuum cleaners in the United States. Royal has used the Dirt Devil brand name recognition to gain acceptance for other Dirt Devil floorcare products. Royal continues to market certain metal vacuum cleaners for home and commercial use under the Royal brand name.

During 2001, Royal’s subsidiary, Privacy Technologies, Inc. (“Privacy Technologies”) introduced the TeleZapper – a telephone attachment that helps block unwanted telemarketing calls and removes consumers’ phone numbers from the telemarketers’ computerized dialing lists.

Royal also created Product Launch Partners, Inc. Product Launch Partners, Inc. was established as a vehicle for inventors and start-up consumer product companies to joint venture with Royal on new product launch opportunities.

The following is a summary of significant policies followed in the preparation of the accompanying Consolidated Financial Statements.

Basis of Presentation – The Consolidated Financial Statements include the accounts of Royal and its wholly owned subsidiaries after elimination of all intercompany accounts and transactions. The companies are hereinafter referred to as “Royal”.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, the reserve for returns and allowances, and depreciation and amortization, among others.

Certain prior year amounts have been reclassified to conform to the 2001 presentation.

Net income per common share is computed based on the weighted average number of common shares outstanding for basic earnings per share and on the weighted average number of common shares and common share equivalents outstanding for diluted earnings per share.

Royal’s revenue recognition policy is to recognize revenues when products are shipped. Royal’s return policy is to replace, repair or issue credit for product under warranty. Returns received during the current period are expensed as received and a provision is provided for future returns based on current shipments. All sales are final upon shipment of goods to the customers. Royal’s revenue recognition policy is in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.”

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

International operations, primarily Canadian, are conducted in their local currency. Assets and liabilities denominated in foreign currencies are translated at current exchange rates, and income and expenses are translated using weighted average exchange rates. The net effect of currency gains and losses realized on these business transactions is included in the determination of net income.

Royal has used forward exchange contracts to reduce fluctuations in foreign currency cash flows related to receivables denominated in foreign currencies. The terms of the currency instruments are consistent with the timing of the transactions being hedged. The purpose of Royal’s foreign currency management activity is to protect Royal from the risk that the eventual cash flows from the foreign currency denominated transactions may be adversely affected by changes in exchange rates. Gains and losses on forward exchange contracts are deferred and recognized in income when the related transactions being hedged are recognized. Such gains and losses are generally reported on the same financial line as the hedged transaction. Royal does not use derivative financial instruments for trading or speculative purposes. Outstanding as of 31st December, 2001 and 2000 were US$0 and US$2,670, respectively, in contracts to purchase foreign currency forward. There is no significant unrealized gain or loss on these contracts. All contracts have terms of four months or less.

Advertising and Promotion – Cost incurred for producing and communicating advertising are expensed during the period aired, including costs incurred under Royal’s cooperative advertising program. Advertising and promotion costs were US$44,486, US$47,154 and US$46,546 for the years ended 31st December, 2001, 2000 and 1999, respectively.

Inventories – Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method.

Inventories at 31st December, consisted of the following:

Finished goods Work in process and component parts	2001 US$ 43,277 7,530 50,807	2000 US$ 37,832 7,638
		45,470

Property, Plant and Equipment – Royal capitalizes, as additions to property, plant and equipment, expenditures at cost for molds, tooling, land, buildings, equipment, furniture, computer software, and leasehold improvements. Expenditures for maintenance and repairs are charged to operating expense as incurred. The asset and related accumulated depreciation or amortization accounts are adjusted to reflect retirements and disposals and the resulting gain or loss is included in the determination of net income.

Internal and external costs incurred to develop internal use computer software during the application development stage are capitalized and amortized on the straight line method over the estimated useful life of software. Capitalized costs include payroll costs and related benefits, costs of related hardware and consulting fees. During 2001 and 2000, US$185 and US$94, respectively of such internal costs were capitalized.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Plant and equipment are depreciated over the estimated useful lives of the respective classes of assets. Leasehold improvements and assets held under capital leases are amortized over the shorter of useful lives or their respective lease terms. Accumulated amortization on assets under capital leases totaled US$1,555 and US$1,407 at 31st December, 2001 and 2000, respectively.

Depreciation for financial reporting purposes is computed on the straight-line method using the following depreciable lives:

Buildings 40 years Building under capital lease 20 years Molds, tooling, and equipment 3 – 5 years Furniture, office and computer equipment, and software 2 – 5 years Vehicles 3 years Internal use software 2 – 5 years

Accelerated methods as permitted by the applicable tax law are used for tax reporting purpose.

Royal reviews for impairment whenever events or changes in circumstances indicate that the carrying amount of property, plant and equipment may not be recoverable under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of. If it is determined that an impairment loss has occurred based on expected future cash flows, the loss is recognized on the Consolidated Statement of Operations.

Fair Value of Financial Instruments – Financial instruments consist of a revolving credit agreement that is carried at an amount which approximates fair value.

New Accounting Pronouncements – Royal implemented Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, in the first quarter of 2001. The implementation of SFAS No. 133 did not have a material impact on its consolidated financial position, results of operations, or cash flows.

Royal is required to implement the following new accounting pronouncements during the first quarter of 2002:

SFAS No. 141, “Business Combinations” – This statement requires that all business combinations be accounted for under a single method, the purchase method. Use of the poolingof-interests method is no longer permitted.

SFAS No. 142, “Goodwill and Other Intangible Assets” – This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets, and in summary, discontinues the amortization of goodwill and other intangibles with indefinite lives.

SFAS No. 143, “Accounting for Asset Retirement Obligations” – This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” – This statement addresses financial accounting and reporting for the impairment or disposal of longlived assets.

Royal expects that the implementation of the above standards will not have a material impact on its consolidated financial position, results of operations or cash flows.

2. Changes in Depreciable Lives and Charges for Tooling Obsolescence:

During 2001 and 2000, Royal shortened the useful lives of tooling for certain product families due to declining sales volumes, reduced product life cycles and the launch of replacement products. As a result of the reduced useful lives for certain product families, including certain Royal metal products during 2001 and the Dirt Devil Corded Mop Vac, Dirt Devil Stick Vac and Dirt Devil Broom Vac during 2000, Royal recorded accelerated depreciation expense of US$191 and US$1,788 during 2001 and 2000, respectively.

Also during 2000, Royal relocated its corporate headquarters. As a result of the move, the remaining net book value of leasehold improvements associated with the former corporate headquarters was amortized on an accelerated basis from the date the decision was made to move through the actual date of the move. Due to this event, accelerated depreciation expense of approximately US$1,200 was recorded in 2000.

During the fourth quarter of 1999, the wholesale price for the cordless Dirt Devil Mop Vac[®] (Mop Vac) decreased significantly. This reduction in wholesale price triggered an impairment review for cordless Mop Vac tooling. Previous to the fourth quarter reduction in wholesale prices, the cordless Mop Vac had net future cash flows in excess of the remaining net book value of the tooling. However, earlier that year, Royal shortened the depreciable lives of such tooling due to the decision to discontinue the product line at the end of 1999. Subsequent to the price reduction, the product was no longer profitable and therefore discontinued. As a result of the impairment review, Royal determined that net future cash flows for the product were negative, therefore, an impairment charge of US$992 was recorded during the fourth quarter of 1999.

During 1999, the Dirt Devil Ultra MVP[®] lost its shelf placement in retail stores, however, the unit was slotted for special promotions at several retailers. When the unit lost its shelf placement at retail, an impairment review was performed resulting in no impairment charge as the estimated net future cash flows exceeded the net book value of the tooling. During the 1999 Holiday season, the Dirt Devil Ultra MVP had some limited special promotion distribution. However, retail subsequently lowered the retail price point below the wholesale price. With the reduction of price, Royal would no longer be able to produce the unit at a profit, thus triggering an impairment review. As a result of the review, an impairment charge of US$1,629 was recorded at the end of the fourth quarter and accelerated depreciation of US$436 was also taken during the fourth quarter of 1999.

Prior to the fourth quarter of 1999, due to sales commitments and component part usage requirements, the assets were considered as “held for use” in accordance with SFAS No. 121. However, due to specific trigger events which occurred during the fourth quarter, the remaining value of the assets were determined to be impaired and the assets were written down to zero and removed from service during the fourth quarter of 1999.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

3. Debt:

At 31st December, 2001, Royal had a reducing collateralized revolving credit facility with availability of up to US$72,000 and a maturity date of 7th March, 2003. Under the agreement, pricing options of the bank’s base lending rate and LIBOR rate are based on a formula, as defined. In addition, Royal pays a commitment fee based on a formula, as defined, on the unused portion of the facility. The revolving credit facility contains covenants which require, among other things, the achievement of minimum net worth levels and the maintenance of certain financial ratios. Royal was in compliance with all applicable covenants as of 31st December, 2001. The revolving credit facility is collateralized by the assets of Royal and prohibits the payment of cash dividends. As long as Royal remains in compliance with all covenants, the revolving credit facility permits additional share repurchases up to US$40,000, of which US$22,952 was utilized through 31st December, 2001. Royal’s effective interest rate was 7.34% and 9.28% for 2001 and 2000, respectively.

Royal also utilizes a revolving trade accounts receivable securitization program to sell without recourse, through a wholly-owned subsidiary, certain trade accounts receivable. Under the program, the maximum amount allowed to be sold at any given time through 31st December, 2001, was US$35,000. At 31st December, 2001 and 2000, Royal had received approximately US$24,700 and US$19,200, respectively, from the sale of trade accounts receivable that has not yet been collected. The proceeds from the sales were used to reduce borrowings under Royal’s revolving credit facility. Costs of the program, which primarily consist of the purchaser’s financing cost of issuing commercial paper backed by the receivables, totaled US$993, US$1,559, and US$1,281 in 2001, 2000 and 1999, respectively, and have been classified as Receivable securitization and other (income) expense, net in the accompanying Consolidated Statements of Operations. Royal’s effective borrowing rate under this program was 5.42%, 7.56%, and 6.51% for 2001, 2000, and 1999, respectively. Royal, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables. Additionally, the program contains covenants which Royal was in compliance with as of 31st December, 2001.

— 38 —

FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

4. Leases:

Royal leases various facilities, equipment, computers, software and vehicles under capital and operating lease agreements. Operating lease payments totaled US$2,905, US$1,912, and US$796 for the years ended 31st December, 2001, 2000, and 1999, respectively.

Minimum commitments under all capital and operating leases at 31st December, 2001 are as follows:

Year 2002 2003 2004 2005 2006 Thereafter Total minimum lease payments Less amount representing interest Total present value of capital obligation Less current portion Long-term obligation under capital leases	Capital US$ 235 315 317 314 318 1,562 3,061 936	Capital US$ 235 315 317 314 318 1,562 3,061 936	Operating US$ 3,419 3,057 2,760 2,117 1,849 13,438
			26,640
	2,125 147 1,978

5. Commitments and Contingencies:

At 31st December, 2001, Royal estimates having contractual commitments for future advertising and promotional expense of approximately US$3,000, including commitments for television advertising through 31st December, 2002. Other contractual commitments for items in the normal course of business total approximately US$4,300.

Royal is self-insured with respect to workers’ compensation benefits in Ohio and carries excess workers’ compensation insurance covering aggregate claims exceeding US$350 per occurrence.

The Hoover Company (“Hoover”) filed a lawsuit in federal court, in the Northern District of Ohio (case #1:00cv 0347), against Royal on 4th February, 2000, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that Royal’s Dirt Devil Easy Steamer infringes certain patents held by Hoover. Hoover seeks damages, injunction of future production, and legal fees. Royal is vigorously defending the suit and believes that it is without merit. If Hoover were to prevail on all of its claims, it could have a material adverse effect on the consolidated financial position, results of operations, or cash flows of Royal.

Royal filed a lawsuit in federal court, in the Northern District of Ohio (case #1:01cv 2775), against The Hoover Company (“Hoover”) on 10th December, 2001, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that Hoover infringes certain patents relating to bagless technology held by Royal. Royal seeks damages, injunction on future production, and legal fees.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Royal filed a lawsuit in federal court, in the Northern District of Ohio (case #1:02cv 0338), against Bissell Homecare, Inc. (“Bissell”) in 2002, under the patent, trademark, and unfair competition laws of the United States. The Complaint asserts that Bissell infringes certain patents relating to bagless technology held by Royal. Royal seeks damages, injunction on future production, and legal fees.

Bissell Homecare, Inc. (“Bissell”) filed a lawsuit in federal court, in the Western District of Michigan (case #1:02cv 0142), against Royal in 2002, under the patent, trademark, and unfair competition laws of the United States. The complaint asserts that Royal’s Dirt Devil Easy Steamer and Platinum Force Extractor infringes certain patents held by Bissell. Bissell seeks damages, injunction of future production, and legal fees. Royal is vigorously defending the suit and believes that it is without merit. If Bissell were to prevail on all of its claims, it could have a material adverse effect on the consolidated financial position, results of operations, or cash flows of Royal.

Royal is involved in various claims and litigation arising in the normal course of business. In the opinion of management, the ultimate resolution of these actions will not materially affect the consolidated financial position, results of operations, or cash flows of Royal.

6. Income Taxes:

The income tax expense consisted of the following:

Current: Federal State and local Deferred Total	2001 US$ 4,888 552 (382) 5,058	2000 US$ 782 125 618 1,525	1999 US$ 8,683 780 (1,853) 7,610

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Deferred income taxes reflect the impact, for financial statement reporting purposes, of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At 31st December, 2001 and 2002, the components of the net deferred tax asset were as follows:

Deferred tax assets: Warranty and customer returns Bad debt reserve Inventory basis difference Accrued vacation, compensation and benefits State and local taxes Accrued advertising Self insurance reserves Deferred compensation plan State and local taxes Other Deferred tax liabilities: Accounts receivable mark to market Basis difference in fixed and intangible assets State and local taxes Other Net deferred tax asset	2001 US$ 3,881 1,170 636 866 127 98 90 164 — — — (4,566) (240) (1,688) 538	2000 US$ 4,017 507 833 422 166 164 59 154 309 7 (658) (4,409) — (1,415) 156

The differences between income taxes at the statutory federal income tax rate of 34% and those reported in the Consolidated Statements of Operations are as follows:

2001 US$ Tax expense at statutory rate 4,890 Research and experimentation credit (400) State and local income taxes, net of federal benefit 360 Federal surtax on income over US$10 million 42 Other, net 166 5,058	Year ended 31st December, % of % of Pre-tax Pre-tax Income 2000 Income 1999 % US$ % US$ 34.0 2,538 34.0 6,900 (2.8) (1,130) (15.1) — 2.5 81 1.1 507 0.3 — — 196 1.2 36 0.4 7 35.2 1,525 20.4 7,610	% of Pre-tax Income % 34.0 — 2.5 1.0 — 37.5

During 2000, Royal performed a detailed study of Research and Experimentation (“R&E”) expenses over the preceding three-year period. As a result of this study, it was determined that additional expenditures qualify under the current guidance. Based on revised calculations, Royal was entitled to R & E credits of US$462, US$166 and US$302 for the years ended 1999, 1998 and 1997, respectively. These Federal Income Tax refunds were received in 2001. For the years ended 31st December, 2001 and 2000, the R & E credit amounted to US$400 and US$200, respectively.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

7. Major Customers:

Royal’s three largest customers represented approximately 31.1%, 14.3% and 14.1% of total net sales in 2001. Royal’s three largest customers represented approximately 32.6%, 13.5% and 13.1% in 2000 and 36.9%, 13.6% and 12.1% of total net sales in 1999. Additionally, a significant concentration of Royal’s business activity is with major domestic mass market retailers whose ability to meet their financial obligations with Royal is dependent on economic conditions germane to the retail industry. During recent years, several major retailers have experienced significant financial difficulties and some, including Kmart, have filed for protection from creditors under applicable bankruptcy laws. As of 31st December, 2001, the net exposure related to Kmart as well as other customers balances for which management believes collection is doubtful was included in the calculation of allowance for doubtful accounts. Royal sells its products to certain customers that are in bankruptcy proceedings.

Royal provides credit, in the normal course of business, to the retail industry which includes mass market retailers, warehouse clubs, and independent dealers. Royal performs ongoing credit evaluations of its customers and establishes appropriate allowances for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

8. Stock Based Plans:

Under the terms of Royal’s stock option plans for employees, outside directors and consultants, all outstanding options have been granted at prices at least equal to the then current market value on the date of grant. Certain stock options granted become exercisable in cumulative 20% installments, commencing one year from date of grant with full vesting occurring on the fifth anniversary date, and expire in ten years, subject to earlier termination in certain events related to termination of employment. Other stock options granted vest at the end of five years (“5 year cliff vesting”) and expire in six to ten years, subject to earlier termination in certain events related to termination of employment. Vesting may be accelerated in certain events relating to change of Royal’s ownership.

The following summarizes the changes in the number of Royal Common Shares under option:

Options outstanding at beginning of the year Options granted during the year Options exercised during the year Options canceled during the year Options outstanding at end of the year Options exercisable at end of the year Options price range per share US$2.50	2001 2000 1999 2,673 2,764 2,244 204 90 673 (321) (45) (116) (185) (136) (37) 2,371 2,673 2,764 1,651 865 669 to US$10.25 US$2.50 to US$10.25 US$2.50 to US$10.25

The 1,651 exercisable options at 31st December, 2001 are exercisable at an average exercise price of US$6.14. Royal’s current option plans, which provide for a total of 3,060 options, have 59 options remaining for future grants at 31st December, 2001.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Royal adopted the disclosure only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” in fiscal 1996. As permitted by SFAS No. 123, Royal continues to measure compensation cost in accordance with Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for its plans. Had compensation cost for Royal’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under these plans consistent with the method of SFAS 123, Royal’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

	Year ended 31st December,	Year ended 31st December,	Year ended 31st December,
	2001	2000	1999
	US$	US$	US$
Net income (in thousands)
As reported	9,324	5,939	12,682
Pro forma	9,091	5,623	12,314
Basic earnings per share
As reported	0.68	0.39	0.70
Pro forma	0.66	0.37	0.68
Diluted earnings per share
As reported	0.65	0.38	0.69
Pro forma	0.64	0.36	0.67

The effect on net income and earnings per share is not expected to be indicative of the effects on net income and earnings per share in future years. Since the SFAS No. 123 method of accounting has not been applied to options granted prior to 1995, the resulting pro forma compensation costs may not be representative of those to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Year	ended 31st December,	ended 31st December,
	2001	2000	1999
Expected volatility	35.70%	36.60%	39.00%
Risk-free interest rate	4.85%	5.12%	6.70%
Expected life of options in years	7 years	7 years	7 years
Expected dividend yield	0%	0%	0%

During fiscal years 2001, 2000 and 1999 the weighted average grant-date fair value of options granted was US$2.17, US$2.39 and US$1.44 per share, respectively.

Royal has also established compensation plans under which stock rights have been granted to certain key employees to receive Royal stock upon exercise. These rights become 60% vested on the third anniversary from date of grant and an additional 20% vested for each subsequent year, subject to earlier termination in certain events related to termination of employment. Vesting may be accelerated in certain events relating to change of Royal’s ownership. During 2001 and 2000, Royal awarded 116 and 330 stock rights under the plans, respectively, with a weighted average fair value at the date of grant of US$4.25 and US$4.89 per share for the years ended 31st December, 2001 and 2000, respectively. Royal amortizes unearned compensation to expense over the five-year vesting period. Compensation expense related to these awards was US$586 and US$361 for 2001 and 2000, respectively. At 31st December, 2001, 4 total stock rights were reserved for future issuance.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

9. Shareholder Rights Plan:

Royal has a Shareholder Rights Plan which provides that under certain circumstances each Right will entitle the shareholder to purchase one one-hundredth of a share of Series A Participating Preferred Stock at an exercise price of US$40. Upon the occurrence of certain other events, including if a “Person” becomes the beneficial owner of more than 20% of the outstanding Common Shares or an “Adverse Person” becomes the beneficial owner of 10% of the outstanding Common Shares, the holder of a Right will have the right to receive, upon exercise, Common Shares of Royal, or Common Stock of the acquirer, having a value equal to two times the exercise price of the Right. The Shareholder Rights Plan is designed to deter abusive market manipulation or unfair takeover tactics and to prevent an acquirer from gaining control of Royal without offering a fair price to all shareholders. The Rights expire to 2nd November, 2003, unless redeemed prior to that date. The Rights can be redeemed at a price of US$0.01 per Right.

10. Benefit Plans:

Royal sponsors a 401 (k) defined contribution plan which covers substantially all of its employees who have satisfied the plan’s eligibility requirements. Participants may contribute to the plan by voluntarily reducing their salary up to a maximum of 15% of qualified compensation subject to annual I.R.S. limits. All contributions vest immediately. For each of the last three years, the matching contribution was 100%, up to the first 3% of qualified compensation, and 50% of the next 2% of such compensation. Royal has also made discretionary contributions to the plan. Royal’s provisions for matching and discretionary contributions totaled approximately US$965, US$1,017, and US$906 for the years ended 31st December, 2001, 2000 and 1999, respectively. Voluntary after-tax contributions and certain rollover contributions are also permitted.

Royal also sponsors a non-qualified deferred compensation plan which permits key employees to annually elect (via individual contracts) to defer a portion of their compensation on a pretax basis until retirement. The retirement benefit to be provided is based on the amount of compensation deferred, Royal match and investment earnings. All contributions vest immediately. Although the Plan is designed to be unfunded, Royal has funded the deferred compensation liability with investments in marketable securities, primarily stock mutual funds, which are classified as current assets. Royal’s provisions for matching and discretionary contributions totaled approximately US$72, US$77 and US$25 for the years ended 31st December, 2001, 2000 and 1999, respectively. The deferred compensation liability which equals the related assets recorded by Royal was US$419 and US$395 as of 31st December, 2001 and 2000, respectively.

Royal does not offer any other post-retirement benefits, accordingly, it is not subject to the provisions of SFAS No. 106, “Employers’ Accounting for Post Retirement Benefits Other Than Pensions.”

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

11. Share Repurchase Program:

In February 2000, Royal’s Board of Directors authorized a common share repurchase program that enabled Royal to purchase, in the open market and through negotiated transactions, up to an additional 4,250 of its outstanding common shares. Royal completed the program repurchasing 3,289 shares for an aggregate purchase price of US$20,065 in February 2001. In April 2001, Royal’s Board of Directors authorized another common share repurchase program that enables Royal to purchase, in the open market and through negotiated transactions, up to an additional 3,400 of its outstanding common shares. As of 11th March, 2002, Royal has repurchased approximately 1,052 for an aggregate purchase price of US$5,250 under the program that expires in December 2002.

12. Earnings Per Share:

Basic earnings per share excludes dilution and is computed by dividing income by the weighted average number of common shares outstanding for the period. Diluted earnings per share includes the dilution of common stock equivalents.

Net income BASIC: Common shares outstanding, net of treasury shares, beginning of year Weighted average common shares issued during year Weighted average treasury shares repurchased during year Weighted average common shares outstanding, net of treasury shares, end of year Net income per common share DILUTED: Common shares outstanding, net of treasury shares, beginning of year Weighted average common shares issued during year Weighted average common share equivalents Weighted average treasury shares repurchased during year Weighted average common shares outstanding, net of treasury shares, end of year Net income per common share	2001 US$ 9,324 13,729 170 (168) 13,731 0.68 13,729 170 566 (168) 14,297 0.65	2000 US$ 5,939 16,973 23 (1,913) 15,083 0.39 16,973 23 491 (1,913) 15,574 0.38	1999 US$ 12,682 19,622 68 (1,535) 18,155 0.70 19,622 68 216 (1,535) 18,371 0.69

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

13. Business Segment Information:

Royal has two reportable segments: Consumer Products – Floorcare and Consumer Products – Other. The operations of the Consumer Products – Floorcare segment includes the design, assembly or sourcing, marketing and distribution of a full line of plastic and metal vacuum cleaners. The primary brand names associated with this segment include Dirt Devil and Royal. These products are sold primarily to major mass merchant retailers and independent dealers in North America. The operations of the Consumer Products – Other segment represents business conducted by Privacy Technologies, Inc. and Product Launch Partners, Inc., both of which are wholly owned subsidiaries of Royal. Currently, the primary product line within this segment is the TeleZapper, a telephone attachment that helps block unwanted telemarketing calls and removes consumers’ phone numbers from telemarketers’ computerized dialing lists. These products are sold primarily to major mass merchant retailers and national electronic chains in North America.

Royal’s reportable segments are distinguished by the nature of products sold. Royal evaluates performance and allocates resources to reportable segments primarily based on net sales and operating income. The accounting policies of the reportable segments are the same as those described in Note 1. Royal records its federal and state tax assets and liabilities at corporate. There are no intersegment sales.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Financial information for Royal’s reportable segments consisted of the following:

Net Sales Consumer Products – Floorcare Consumer Products – Other Consolidated Total Income from Operations Consumer Products – Floorcare Consumer Products – Other Consolidated Total Capital Expenditures Consumer Products – Floorcare Consumer Products – Other Total for Reportable Segments Corporate Consolidated Total Depreciation and Amortization Consumer Products – Floorcare Consumer Products – Other Total for Reportable Segments Corporate Consolidated Total Total Assets Consumer Products – Floorcare Consumer Products – Other Total for Reportable Segments Corporate Consolidated Total	Year ended 31st December, 2001 2000 1999 US$ US$ US$ 406,502 408,223 407,984 21,923 — — 428,425 408,223 407,984 15,882 12,680 23,062 2,096 — — 17,978 12,680 23,062 6,011 7,298 16,827 74 — — 6,085 7,298 16,827 7,757 6,076 2,054 13,842 13,374 18,881 12,079 13,046 11,012 208 — — 12,287 13,046 11,012 2,992 2,790 884 15,279 15,836 11,896 114,376 124,638 139,763 6,773 — — 121,149 124,638 139,763 19,295 13,914 12,129 140,444 138,552 151,892	Year ended 31st December, 2001 2000 1999 US$ US$ US$ 406,502 408,223 407,984 21,923 — — 428,425 408,223 407,984 15,882 12,680 23,062 2,096 — — 17,978 12,680 23,062 6,011 7,298 16,827 74 — — 6,085 7,298 16,827 7,757 6,076 2,054 13,842 13,374 18,881 12,079 13,046 11,012 208 — — 12,287 13,046 11,012 2,992 2,790 884 15,279 15,836 11,896 114,376 124,638 139,763 6,773 — — 121,149 124,638 139,763 19,295 13,914 12,129 140,444 138,552 151,892
		407,984
		23,062 —
		23,062
		16,827 —
		16,827 2,054
		18,881
		11,012 —
		11,012 884
		11,896
		139,763 —
		139,763 12,129
		151,892

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Financial information related to Royal’s operations by geographic location consisted of the following:

Revenues, net: United States All other Countries Long lived assets, net: United States All other Countries	2001 US$ 408,289 20,136 428,425 32,527 5,047 37,574	2000 US$ 389,867 18,356 408,223 38,109 3,699 41,808	1999 US$ 390,121 17,863
			407,984
			34,676 4,219
			38,895

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

3. AUDITED ANNUAL RESULTS FOR THE YEAR ENDED 31ST DECEMBER, 2002 AS ANNOUNCED BY ROYAL ON 13TH FEBRUARY, 2003

The audited annual results of Royal for the year ended 31st December, 2002 as announced on 13th February, 2003 is reproduced below:

“CLEVELAND, Ohio – 13th February, 2003 – Royal Appliance Mfg. Co. (RAM – NYSE), maker of Dirt Devil[®] floor care products and the Telezapper[®] , had net income of US$9.6 million, or US$0.69 per share for the year ended 31st December, 2002, compared to US$9.3 million or US$0.65 per share for the year ended 31st December, 2001. Net sales for the year ended 31st December, 2002 were US$389.7 million, down 7.5% from last year’s US$421.3 million.

Net income increased for the fourth quarter ended 31st December, 2002, to US$7.7 million, or US$0.56 per share, from US$3.8 million, or US$0.27 per share for the comparable 2001 period. Net sales for the fourth quarter ended 31st December, 2002 decreased 7.6% to US$117.5 million from US$127.2 million for the comparable 2001 period.

The Company recorded earnings of US$0.31 per share in the fourth quarter of 2002 from the settlement of litigation and revenues from various licensing agreements of the Company’s intellectual property, including the TeleZapper[®] and the Company’s bagless upright vacuum technology.

As previously announced, Royal has entered into a definitive agreement (“agreement”) for its acquisition by TechTronic Industries. The agreement provides for Royal Appliance shareholders to receive US$7.37 per share in cash, or a total purchase price of approximately US$105 million.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Under the terms of the agreement, Royal will be merged with a subsidiary of TechTronic Industries which, following the completion of the merger, will operate as a wholly owned subsidiary of TechTronic Industries. The transaction is expected to close in late March or early April of 2003. It is subject to, among other things, the expiration or termination of the Hart-Scott-Rodino Act waiting period and approval by the shareholders of both TechTronic Industries and Royal Appliance.

Net sales Cost of sales Gross margin Selling, general and administrative expenses Income from operations Interest expense, net Litigation settlement, receivable securitization and other expense (income), net Income before income taxes Income tax expense Net income Basic Weighted average number of common shares outstanding (in thousands) Earnings per share Diluted Weighted average number of common shares and equivalents outstanding (in thousands) Earnings per share	Three months ended Twelve months ended 31st December, 31st December, 2002 2001 2002 2001 (Dollars in thousands, except per share amounts) US$ US$ US$ US$ 117,467 127,236 389,726 421,311 85,211 94,573 301,692 325,746 32,256 32,663 88,034 95,565 23,423 26,168 74,684 77,587 8,833 6,495 13,350 17,978 371 518 1,413 2,415 (3,561) 116 (2,972) 1,181 12,023 5,861 14,909 14,382 4,348 2,088 5,344 5,058 7,675 3,773 9,565 9,324 12,823 13,634 12,983 13,731 0.60 0.28 0.74 0.68 13,696 14,206 13,877 14,297 0.56 0.27 0.69 0.65	Three months ended Twelve months ended 31st December, 31st December, 2002 2001 2002 2001 (Dollars in thousands, except per share amounts) US$ US$ US$ US$ 117,467 127,236 389,726 421,311 85,211 94,573 301,692 325,746 32,256 32,663 88,034 95,565 23,423 26,168 74,684 77,587 8,833 6,495 13,350 17,978 371 518 1,413 2,415 (3,561) 116 (2,972) 1,181 12,023 5,861 14,909 14,382 4,348 2,088 5,344 5,058 7,675 3,773 9,565 9,324 12,823 13,634 12,983 13,731 0.60 0.28 0.74 0.68 13,696 14,206 13,877 14,297 0.56 0.27 0.69 0.65
		95,565 77,587
		17,978 2,415 1,181
		14,382 5,058
		9,324
		13,731 0.68 14,297 0.65

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Royal Appliance primarily develops, assembles, sources, and markets vacuum cleaners and other cleaning appliances for home and commercial use under the Dirt Devil[®] and Royal[®] brand names, as well as the Telezapper[®] , a device that helps reduce computer-dialed telemarketing calls. The Company’s executive offices are located at 7005 Cochran Road, Glenwillow, Ohio 44139.

Web site addresses: www.royalappliance.com, www.dirtdevil.com, www.telezapper.com, www.privacytechnologies.com, www.productlaunchpartners.com and www.royalvacuums.com.

Forward-looking statements in this release are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. Potential risks and uncertainties include, but are not limited to: approval of the merger agreement by the shareholders of both TechTronic Industries and the Company, the financial strength of the retail industry particularly in the major mass retail channel; the impact of Kmart’s recent bankruptcy filing on Royal’s future sales and earnings; the competitive pricing and aggressive product development environment within the floorcare industry; the impact of private-label programs by mass retailers; the cost and effectiveness of planned advertising, marketing and promotional campaigns; the success at retail and the continued acceptance by consumers of the Company’s new products, the dependence upon the Company’s ability to continue to successfully develop and introduce innovative products; the uncertainty of the Company’s global supply chain and suppliers to continuously supply sourced finished goods and component parts; and general business and economic conditions.”

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

4. SUMMARY AND RECONCILIATION OF SIGNIFICANT DIFFERENCES BETWEEN US GAAP AND HONG KONG GAAP

(A) Summary of significant differences

The audited/unaudited consolidated financial statements of Royal as set out in sections 1, 2 and 3 of this Appendix are prepared and presented in accordance with US GAAP, which differ in certain significant respects from Hong Kong GAAP. Summary of certain significant differences between US GAAP and Hong Kong GAAP relevant to the audited consolidated financial statements of Royal as set out below. Such summary should not be construed to be exhaustive.

(a) Deferred Income Taxes

Under Hong Kong GAAP, deferred taxation is provided for under the liability method for timing difference arise from the recognition for tax purposes of certain items of income and expenses in a different accounting period from that in which they are recognized in the financial to the extent that it is probable that a liability or an asset will crystallise in the foreseeable future.

Under US GAAP, deferred taxation is recognized for all temporary differences regardless of whether or not the timing differences are likely to reverse. The deferred tax assets and liabilities are classified as current or non-current based on the classification of the asset or liability that gives rise to the temporary difference. Under Hong Kong GAAP, the classification is based on the period in which the timing differences are expected to crystallise.

(b) Compensatory effect of stock options

Under Hong Kong GAAP, there is no specific recognition and measurement requirements for equity compensation benefits. Disclosure of the plan is required for the users of the financial statements to assess the effect of equity compensation benefits on an enterprise’s financial position, performance and cash flows.

Under US GAAP, compensation is recognized to the extent that the quoted market price of the share exceeds the exercise price of the share options granted. The compensation expense is amortised over the vesting period on a systematic basis.

(c) Impairment of Assets

Under Hong Kong GAAP, an impairment exists when the carrying amount of an asset exceeds its recoverable amount which is measured as the higher of an asset’s net selling price and its value in use. Value in use is the discounted future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount and the reversed amount is recognized as income immediately.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

Under US GAAP, impairment exists if the future cash flows, undiscounted and excluding interest, expected to result from use and eventual disposal of the asset is less than its carrying value. If the impairment loss previously recognized for an asset no longer exists, the amount recognized are not reversed and the written down value of the asset becomes a new cost basis.

(d) Goodwill and Negative Goodwill

Under Hong Kong GAAP, goodwill arising on acquisition should be amortised on a systematic basis over its useful live, which will not exceed 20 years from its initial recognition. Negative goodwill will initially offset against any expected future losses. The remaining amount, which does not exceed the fair values of the acquired nonmonetary assets, will then amortise over the remaining weighted average useful life of the acquired assets. Any amount which in excess of the fair values of the acquired non-monetary assets should be recognized as income immediately.

Under US GAAP, goodwill arising on acquisition need not be amortised unless there is evidence that the goodwill has a limited life. Negative goodwill is written off proportionately against non-current assets other than marketable securities.

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

(B) Reconciliation of significant differences

A reconciliation of the significant differences between US GAAP and Hong Kong GAAP which have a significant effect on the net income and shareholders’ equity of Royal are set out below. The Directors believe that, other than those differences set out in the reconciliation, there would be no material differences between Royal’s consolidated financial statements as prepared under US GAAP and under Hong Kong GAAP.

The effect on net income of significant differences between US GAAP and Hong Kong GAAP is as follows:

Net income under US GAAP Hong Kong GAAP adjustments: Deferred income taxes Compensatory effect of stock options Net income under Hong Kong GAAP Basic net income per share under Hong Kong GAAP: Weighted average number of common shares outstanding (in thousands) Earnings per share Diluted net income per share under Hong Kong GAAP: Weighted average number of common shares and equivalents outstanding (in thousands) Earnings per share

Year ended 31st December, 2001 2000 1999 US$’000 US$’000 US$’000 9,324 5,939 12,682 186 339 (926) 586 361 — 10,096 6,639 11,756 13,731 15,083 18,155 0.735 0.440 0.648 14,297 15,574 18,371 0.706 0.426 0.640

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FINANCIAL INFORMATION OF THE ROYAL GROUP

APPENDIX I

The effect on shareholders’ equity of significant differences between US GAAP and Hong Kong GAAP is as follows:

Shareholders’ equity under US GAAP Hong Kong GAAP adjustments: Deferred income taxes Shareholders’ equity under Hong Kong GAAP	As at 2001 US$’000 38,622 (4,549) 34,073	31st December, 2000 1999 US$’000 US$’000 31,053 44,669 (4,735) (5,074) 26,318 39,595

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

1. SUMMARY OF RESULTS FOR THE THREE YEARS ENDED 31ST DECEMBER, 2001

The following is a summary of the audited consolidated results of the Group for the three years ended 31st December, 2001, extracted from the Group’s annual reports for the three years ended 31st December, 2001.

Turnover Profit before share of results of associates and taxation Share of results of associates Profit before taxation Taxation Profit before minority interests Minority interests Profit for the year	Year ended 31st December, 2001 2000 1999 HK$ HK$ HK$ 6,101,140,000 4,551,482,000 2,699,337,510 265,212,000 212,855,000 166,964,986 (300,000) (1,221,000) 227,612 264,912,000 211,634,000 167,192,598 (22,940,000) (31,221,000) (8,537,958) 241,972,000 180,413,000 158,654,640 (3,125,000) 504,000 (1,773,813) 238,847,000 180,917,000 156,880,827

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

2. AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER, 2001

Set out below are the audited consolidated income statements of the Group for the two years ended 31st December, 2001 and the audited consolidated balance sheets of the Group as at 31st December, 2001 and 30th December, 2000 together with the consolidated cash flow statements, consolidated statements of recognised gains and losses and related notes for the year ended 31st December, 2001 as extracted from the annual report of the Group for the year ended 31st December, 2001.

Consolidated Income Statement

For the year ended 31st December, 2001

Notes Turnover Cost of sales Gross profit Other revenue 5 Selling, distribution and advertising expenses Administrative expenses Research and development costs Profit from operations 6 Finance costs 7 Profit before share of results of associates and taxation Share of results of associates Profit before taxation Taxation 10 Profit before minority interests Minority interests Profit for the year Dividends 11 Earnings per share 12 Basic Diluted	2001 HK$’000 6,101,140 (4,594,011) 1,507,129 41,396 (516,684) (595,698) (79,931) 356,212 (91,000) 265,212 (300) 264,912 (22,940) 241,972 (3,125) 238,847 (60,057) 42.02 cents 41.83 cents	2000 HK$’000 (As restated) 4,551,482 (3,584,733) 966,749 30,807 (295,237) (375,036) (38,796) 288,487 (75,632) 212,855 (1,221) 211,634 (31,221) 180,413 504 180,917 (53,291) 32.31 cents 32.10 cents

— 57 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Audited Consolidated Balance Sheet

At 31st December, 2001

Notes ASSETS Non-current assets Property, plant and equipment 13 Goodwill 14 Negative goodwill 15 Intangible assets 16 Interests in associates 18 Investments in securities 19 Deposit for acquisition of a subsidiary 20 Deferred tax asset 30 Other assets Current assets Inventories 21 Trade and other receivables 22 Deposits and prepayments Bills receivable Investments in securities 19 Trade receivable from an associate Pledged bank deposit 23 Bank balances, deposits and cash Current liabilities Trade and other payables 24 Warranty provision 25 Taxation payable Obligations under finance leases and hire purchase contracts – due within one year 26 Bank borrowings – due within one year 27 Net current assets Total assets less current liabilities

2001 2000 HK$’000 HK$’000 (As restated) 678,629 665,320 83,815 74,729 (26,722) (16,919) 5,759 6,847 108,366 79,833 60,530 54,520 148,200 — 21,193 16,069 1,195 1,195 1,080,965 881,594 799,975 856,950 598,361 593,685 309,448 183,642 331,431 155,076 4,899 7,892 2,511 7,361 27,300 — 616,739 281,335 2,690,664 2,085,941 1,705,603 985,234 26,979 33,386 12,149 8,486 10,263 7,888 217,060 155,155 1,972,054 1,190,149 718,610 895,792 1,799,575 1,777,386

— 58 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Audited Consolidated Balance Sheet (Cont’d)

At 31st December, 2001

Notes CAPITAL AND RESERVES Share capital 28 Reserves 29 MINORITY INTERESTS NON-CURRENT LIABILITIES Obligations under finance leases and hire purchase contracts – due after one year 26 Bank borrowings – due after one year 27 Deferred tax liability 30	2001 2000 HK$’000 HK$’000 (As restated) 114,903 112,243 988,471 796,539 1,103,374 908,782 9,977 6,852 8,721 7,312 675,967 852,839 1,536 1,601 686,224 861,752 1,799,575 1,777,386

— 59 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Audited Balance Sheet of the Company

At 31st December, 2001

Notes ASSETS Non-current assets Property, plant and equipment 13 Intangible assets 16 Investments in subsidiaries 17 Interests in associates 18 Investments in securities 19 Other assets Current assets Inventories 21 Trade and other receivables 22 Deposits and prepayments Bills receivable Investments in securities 19 Amounts due from subsidiaries Pledged bank deposit 23 Bank balances, deposits and cash Current liabilities Trade and other payables 24 Amounts due to subsidiaries Amount due to an associate Taxation payable Obligations under finance leases and hire purchase contracts – due within one year 26 Bank borrowings – due within one year 27 Net current assets Total assets less current liabilities

2001 2000 HK$’000 HK$’000 (As restated) 220,604 248,760 132 235 447,137 343,502 79,417 84,698 20,908 21,708 1,195 1,195 769,393 700,098 258,518 217,479 43,262 91,253 75,480 121,856 250,282 136,731 4,899 — 462,519 294,100 27,300 — 303,519 150,877 1,425,779 1,012,296 526,131 360,974 191,376 2,714 — 3,221 3,725 6,581 6,636 3,830 114,193 69,575 842,061 446,895 583,718 565,401 1,353,111 1,265,499

— 60 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Audited Balance Sheet of the Company (Cont’d)

At 31st December, 2001

Notes CAPITAL AND RESERVES Share capital 28 Reserves 29 NON-CURRENT LIABILITIES Obligations under finance leases and hire purchase contracts – due after one year 26 Bank borrowings – due after one year 27 Deferred tax liability 30	2001 2000 HK$’000 HK$’000 (As restated) 114,903 112,243 997,345 874,042 1,112,248 986,285 5,469 2,961 234,000 274,859 1,394 1,394 240,863 279,214 1,353,111 1,265,499

— 61 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Statement of Recognised Gains and Losses

For the year ended 31st December, 2001

	2001	2000
	HK$’000	HK$’000
		(As restated)
Loss not recognised in the consolidated income statement
Exchange differences arising on translation
of overseas operations	(1,567)	(5,772)
Profit for the year	238,847	180,917
Total recognised gains	237,280	175,145
Prior year adjustments arising from effects of changes
in accounting policies (note 2)
– decrease in retained profits at 1st January, 2000		(62,437)
– decrease in goodwill reserve at 1st January, 2000		179,124
		116,687

— 62 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Cash Flow Statement

For the year ended 31st December, 2001

Notes NET CASH INFLOW FROM OPERATING ACTIVITIES 31 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Dividends paid Interest paid Interest received NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE TAXATION Hong Kong Profits Tax paid Overseas Tax paid Overseas Tax refunded TAX PAID INVESTING ACTIVITIES Purchase of property, plant and equipment Acquisition of subsidiaries (net of cash and cash equivalents acquired) 32 Deposit paid for acquisition of a subsidiary Payment of consideration for prior year acquisitions Proceeds from disposal of property, plant and equipment Proceeds from disposal of unlisted investments Additions to intangible assets Purchase of investments in securities Increase in pledged bank deposit Advances to associates NET CASH OUTFLOW FROM INVESTING ACTIVITIES NET CASH INFLOW (OUTFLOW) BEFORE FINANCING

2001 2000 HK$’000 HK$’000 (As restated) 1,104,387 248,616 (60,057) (53,291) (91,000) (75,632) 14,412 8,947 (136,645) (119,976) (20,140) (15,735) (5,108) (26,916) 3,282 — (21,966) (42,651) (188,768) (129,187) (102,778) (672,880) (148,200) — (4,466) — 1,938 7,443 — 15,680 (382) (1,649) (7,221) (29,250) (27,300) — (28,833) (31,253) (506,010) (841,096) 439,766 (755,107)

— 63 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Cash Flow Statement (Cont’d)

For the year ended 31st December, 2001

Notes FINANCING 33 Proceeds from issue of shares New bank loans obtained Repayment of obligations under finance leases and hire purchase contracts Repayment of bank loans NET CASH (OUTFLOW) INFLOW FROM FINANCING INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR EFFECT OF FOREIGN EXCHANGE RATE CHANGES CASH AND CASH EQUIVALENTS AT END OF THE YEAR ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Bank balances, deposits and cash Trust receipt loans Bank overdrafts

2001 2000 HK$’000 HK$’000 (As restated) 17,369 2,717 28,915 823,830 (10,575) (10,044) (169,316) (66,042) (133,607) 750,461 306,159 (4,646) 138,030 143,606 3,811 (930) 448,000 138,030 616,739 281,335 (137,567) (88,972) (31,172) (54,333) 448,000 138,030

— 64 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Notes to the Financial Statements

For the year ended 31st December, 2001

1. GENERAL

The Company is a public limited company incorporated in Hong Kong and its shares are listed on The Stock Exchange of Hong Kong Limited.

The principal activities of the Group are the manufacturing and trading of electrical, electronic, professional industrial products.

2. ADOPTION OF NEW AND REVISED STATEMENTS OF STANDARD ACCOUNTING PRACTICE

A number of new and revised Statements of Standard Accounting Practice (“SSAPs”) issued by the Hong Kong Society of Accountants have become effective for the current financial year. These, where applicable, have been adopted by the Company as its accounting policies, as set out in note 3. In addition, the new and revised SSAPs have introduced additional and revised disclosure requirements which, where applicable, have been adopted in these financial statements.

The adoption of these new and revised SSAPs has resulted in the following changes to the Group’s accounting policies that have affected the amounts reported for the current or prior years.

Dividends proposed or declared after the balance sheet date

In accordance with SSAP 9 (Revised) Events after the Balance Sheet Date, dividends proposed or declared after the balance sheet date are not recognised as a liability at the balance sheet date, but are disclosed in the notes to the financial statements. This change in accounting policy has been applied retrospectively.

Segment reporting

In the current year, the Group has changed the basis of identification of reportable segments to that required by SSAP 26 Segment Reporting. Segment disclosures for the year ended 31st December, 2000 have been amended so that they are presented on a consistent basis.

Goodwill

In the current year, the Group has adopted SSAP 30 Business Combinations and has elected to restate goodwill (negative goodwill) previously eliminated against (credited to) reserves. Accordingly, the amount of such goodwill (negative goodwill) has been remeasured in accordance with the requirements of SSAP 30. Accumulated amortisation and impairment losses in respect of goodwill between the date of acquisition of the relevant subsidiary or associate and the date of adoption of SSAP 30 have been recognised retrospectively. Negative goodwill which would have been recognised as income between the date of acquisition of the relevant subsidiary or associate and the date of adoption of SSAP 30 has been recognised retrospectively. Following restatement, goodwill is presented as an asset in the balance sheet and negative goodwill is presented as a deduction from assets. Goodwill is amortised over its estimated useful life. Negative goodwill will be released to income based on the remaining weighted average useful life of the acquired identifiable assets.

— 65 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidation

SSAP 32 Consolidated Financial Statements and Accounting for Investments in Subsidiaries has introduced a new definition of subsidiary, i.e. an enterprise that is controlled by the Group. However, certain associates of the Group which fall under this new definition of a subsidiary are not permitted to be consolidated in these financial statements, because as the Company is a Hong Kong incorporated company, these associates do not meet the definition of a subsidiary as set out in Hong Kong Companies Ordinance. In this case, pursuant to SSAP 32, the Group disclose certain additional information to enable users of the consolidated financial statements to assess the effects as if this SSAP had been fully applied.

The effect of the adoption of the new and revised accounting policies described above on the financial position of the Group at 1st January, 2000 is summarised as follows:

Balance at 1st January, 2000 As originally stated Derecognition of liability for final dividend for 1999 Restatement as an asset of goodwill held in reserves with retrospective recognition of accumulated amortisation As restated	Goodwill reserve HK$’000 (179,124) — 179,124 —	Retained Profits HK$’000 507,423 30,743 (93,180) 444,986

The effect of these changes in accounting policies on the results for the current and prior year is as follows:

Amortisation of goodwill Release of negative goodwill to income	2001 HK$’000 (4,927) 2,395 (2,532)	2000 HK$’000 (11,215) 1,601 (9,614)

— 66 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

3. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost convention as modified for the revaluation of investments in securities and in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies adopted are as follows:

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31st December each year. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

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

Goodwill

Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or an associate at the date of acquisition.

Goodwill is capitalised and amortised on a straight-line basis over its useful economic life. Goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet.

On disposal of a subsidiary or an associate, the attributable amount of unamortised goodwill is included in the determination of the profit or loss on disposal.

Negative goodwill

Negative goodwill represents the excess of the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or an associate at the date of acquisition over the cost of acquisition.

Negative goodwill is presented as a deduction from assets and is released to income based on an analysis of the circumstances from which the balance resulted.

To the extent that the negative goodwill is attributable to losses or expenses anticipated at the date of acquisition, it is released to income in the period in which those losses or expenses arise. The remaining negative goodwill is recognised as income on a straight-line basis over the remaining average useful life of the identifiable acquired depreciable assets. To the extent that such negative goodwill exceeds the aggregate fair value of the acquired identifiable nonmonetary assets, it is recognised as income immediately.

Negative goodwill arising on the acquisition of subsidiaries is presented separately in the balance sheet as a deduction from assets.

Investments in subsidiaries

Investments in subsidiaries are included in the Company’s balance sheet at cost less any identified impairment loss. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

— 67 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Interests in associates

The consolidated income statement includes the Group’s share of the post-acquisition results of its associates for the year. In the consolidated balance sheet, interests in associates are stated at the Group’s share of the net assets of the associates, less any identified impairment loss.

The results of associates are accounted for by the Company on the basis of dividends received and receivable during the year. In the Company’s balance sheet, investments in associates are stated at cost, as reduced by any identified impairment losses.

Patents and trademarks

Patents and trademarks are measured initially at purchase cost and amortised on a straight line basis over their estimated useful lives.

Assets held under finance leases and hire purchase contracts

Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership of the assets concerned to the Group.

Assets held under finance leases and hire purchase contracts are capitalised at their fair values at the date of acquisition. The corresponding liability to the lessor or hirer is included in the balance sheet as an obligation under finance leases or hire purchase contracts. Finance costs, which represent the difference between the total leasing commitments and the fair value of the assets acquired, are charged to the income statement over the period of the relevant lease and hire purchase contract so as to produce a constant periodic rate of charge on the remaining balance of the obligations for each accounting period.

All other leases are classified as operating leases and the annual rentals are charged to the income statement on a straight line basis over the term of the relevant lease.

Property, plant and equipment

Property, plant and equipment, other than construction in progress, are stated at cost less depreciation or amortisation and accumulated impairment losses.

Depreciation and amortisation is charged so as to write off the cost of property, plant and equipment other than construction in progress, over their estimated useful lives, using the straight line method, at the following rates per annum:

Freehold land	Nil
Leasehold land and land use rights	2% or over the term of the relevant lease, if shorter
Buildings	4%
Leasehold improvements	25%
Office equipment, furniture and fixtures	162/3% – 25%
Plant and machinery	25%
Motor vehicles	162/3% – 25%
Moulds and tooling	20% – 331/3%
Vessel	20%

— 68 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any identified impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

The gain or loss arising from disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. Assets held under hire purchase contracts are depreciated over their expected useful lives on the same basis as owned assets.

Impairment

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset 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 had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Investments in securities

Investments in securities are recognised on a trade-date basis and are initially measured at cost.

Investments other than held-to-maturity debt securities are classified as investment securities and other investments.

Investment securities, which are securities held for an identified long-term strategic purpose, are measured at subsequent reporting dates at cost, as reduced by any impairment loss that is other than temporary.

Other investments are measured at fair value, with unrealised gains and losses included in the income statement for the year.

Other assets

Other assets are stated at cost less any identified impairment loss.

Inventories

Inventories are stated at the lower of cost and net realisable value.

— 69 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Research and development costs

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

An internally-generated intangible asset arising from development expenditure is recognised only if it is anticipated that the development costs incurred on a clearly-defined project will be recovered through future commercial activity. The resultant asset is amortised on a straight line basis over its useful life.

Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred.

Turnover

Turnover represents the net amounts received and receivable for goods sold, less returns and allowances, to outside customers during the year.

Revenue recognition

Sales of goods are recognised when goods are delivered and title has passed.

Service income is recognised when services are provided.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rates applicable.

Taxation

The charge for taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. Timing differences arise from the recognition for tax purposes of certain items of income and expense in a different accounting period from that in which they are recognised in the financial statements. The tax effect of timing differences, computed using the liability method, is recognised as deferred taxation in the financial statements to the extent that it is probable that a liability or asset will crystallise in the foreseeable future.

Foreign currencies

Transactions in currencies other than Hong Kong dollars are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are retranslated at the rates prevailing on the balance sheet date. Profits and losses arising on the exchange are included in profit or loss for the year.

On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the year. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the year in which the operation is disposed of.

— 70 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are capitalised as part of the cost of those assets. Capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale.

All other borrowing costs are recognised as an expense in the period in which they are incurred.

Retirement benefits schemes

Retirement benefits arrangements are made in accordance with the relevant laws and regulations. Payments to defined contribution retirement benefits schemes are charged as expenses as they fall due. For defined benefits schemes, the projected future cost of providing retirement benefits is recognised when the employees render services instead of when claims are incurred.

4. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

For management purposes, the Group is engaged in the manufacturing and trading of electrical, electronic, professional industrial products. The segment information is disclosed in accordance with different types of products.

INCOME STATEMENT

For the year ended 31st December, 2001

Solar powered Power Floor care and tools appliance electronic products products products HK$’000 HK$’000 HK$’000 REVENUE External sales 4,523,295 1,171,793 163,734 Inter-segment sales 74,584 26,336 6,516 Total revenue 4,597,879 1,198,129 170,250 Inter-segment sales are charged at prevailing market rates. RESULT Segment result 293,323 56,877 14,255 Finance costs Share of results of associates — — — Profit before taxation Taxation Profit after taxation

Other products Eliminations Consolidated HK$’000 HK$’000 HK$’000 242,318 — 6,101,140 226,240 (333,676) — 468,558 (333,676) 6,101,140 (8,243) — 356,212 (91,000) (300) — (300) 264,912 (22,940) 241,972

— 71 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

BALANCE SHEET

At 31st December, 2001

Power tools products HK$’000 Assets Segment assets 2,884,275 Interests in associates — 2,884,275 Liabilities Segment liabilities (2,303,385) OTHER INFORMATION For the year ended 31st December, 2001	Floor care appliance products HK$’000 467,199 — 467,199 (209,483)	Solar powered and electronic products HK$’000 62,445 — 62,445 (19,822)	Other products Consolidated HK$’000 HK$’000 249,344 3,663,263 108,366 108,366 357,710 3,771,629 (113,439) (2,646,129)

			Solar
			powered
	Power	Floor care	and
	tools	appliance	electronic	Other
	products	products	products	**products **	Consolidated
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
Capital additions	109,810	66,446	3,798	25,270	205,324
Depreciation and amortisation	151,605	43,529	3,172	15,505	213,811

— 72 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

INCOME STATEMENT

For the year ended 31st December, 2000

Solar powered Power Floor care and tools appliance electronic products products products HK$’000 HK$’000 HK$’000 REVENUE External sales 3,076,822 1,083,797 173,495 Inter-segment sales 113,551 — 9,382 Total revenue 3,190,373 1,083,797 182,877 Inter-segment sales are charged at prevailing market rates. RESULT Segment result 235,275 43,885 11,303 Finance costs Share of results of associates — — — Profit before taxation Taxation Profit after taxation

Other products Eliminations Consolidated HK$’000 HK$’000 HK$’000 (As restated) 217,368 — 4,551,482 131,903 (254,836) — 349,271 (254,836) 4,551,482 (1,976) — 288,487 (75,632) (1,221) — (1,221) 211,634 (31,221) 180,413

BALANCE SHEET

At 31st December, 2000

Assets Segment assets Interests in associates Liabilities Segment liabilities	Power tools products HK$’000 2,198,828 — 2,198,828 (1,567,679)	Floor care appliance products HK$’000 409,764 — 409,764 (340,421)	Solar powered and electronic products HK$’000 72,355 — 72,355 (18,898)	Other products Consolidated HK$’000 HK$’000 (As restated) 206,755 2,887,702 79,833 79,833 286,588 2,967,535 (261,100) (2,188,098)

— 73 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

OTHER INFORMATION

For the year ended 31st December, 2000

			Solar
			powered
	Power	Floor care	and
	tools	appliance	electronic	Other
	products	products	products	**products **	Consolidated
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
					(As restated)
Capital additions	45,397	51,181	4,005	21,049	121,632
Depreciation and amortisation	128,900	36,938	9,839	17,290	192,967

Geographical segments

(i) The following table provides an analysis of the Group’s sales by geographical market location:

Turnover 2001 2000 HK$’000 HK$’000 By geographical market location: North America 5,247,979 3,838,283 Europe 589,326 410,363 Other countries 263,835 302,836 6,101,140 4,551,482 Finance costs Contribution from associates Profit before taxation	Contribution to results from ordinary activities before taxation 2001 2000 HK$’000 HK$’000 (As restated) 332,013 244,305 4,680 17,847 19,519 26,335 356,212 288,487 (91,000) (75,632) (300) (1,221) 264,912 211,634

— 74 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

• (ii) The following table provides an analysis of segment assets, and additions to property, plant and equipment and intangible assets, analysed by geographical areas in which the assets are located:

Hong Kong and People’s Republic of China (“PRC”) North America Europe Other countries	Carrying amount of segment assets 2001 2000 HK$’000 HK$’000 (As restated) 1,941,485 1,333,818 1,615,665 1,484,305 180,835 91,866 33,644 57,546 3,771,629 2,967,535	Additions to property, plant and equipment and intangible assets 2001 2000 HK$’000 HK$’000 (As restated) 164,123 107,645 38,804 7,033 2,051 758 346 6,196 205,324 121,632

5. OTHER REVENUE

Included in other revenue is interest income analysed as follows: Interest earned on bank deposits Interest earned on amounts due from associates Interest income for the year	2001 HK$’000 7,659 6,753 14,412	2000 HK$’000 8,505 442 8,947

— 75 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

6. PROFIT FROM OPERATIONS

Profit from operations has been arrived at after charging (crediting): Amortisation of intangible assets included in administrative expenses Auditors’ remuneration Amortisation of goodwill included in administrative expenses Depreciation and amortisation on property, plant and equipment Owned assets Assets held under finance leases and hire purchase contracts Impairment loss of investment securities recognised Loss (gain) on disposal of property, plant and equipment Release of negative goodwill to income included in administrative expenses Operating lease charges Premises Motor vehicles Plant and machinery Retirement benefits scheme contributions Research and development costs Less: amounts capitalised Staff costs Directors’ remuneration Fees Other emoluments Others

2001 2000 HK$’000 HK$’000 (As restated) 1,379 866 3,623 4,807 4,927 11,215 200,837 174,816 9,063 7,671 4,204 1,944 5,179 (2,412) (2,395) (1,601) 24,978 25,039 4,541 3,077 8,727 8,387 5,958 1,765 79,931 39,996 — (1,200) 79,931 38,796 128 50 21,436 19,958 229,953 195,817 251,517 215,825

Staff costs disclosed above do not include an amount of HK$43,582,000 (2000: HK$23,425,000) relating to research and development activities, which is included under research and development costs.

— 76 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

7. FINANCE COSTS

2001 HK$’000 Interest on: Bank loans and overdrafts wholly repayable within five years 89,253 Obligations under finance leases and hire purchase contracts 1,747 91,000 8. DIRECTORS’ EMOLUMENTS 2001 HK$’000 Directors’ fees: Executive 40 Non-executive 10 Independent non-executive 78 128 Other emoluments for executive directors: Salaries and other benefits 20,886 Contributions to retirement benefits scheme 52 20,938 Other emoluments for non-executive directors: Salaries and other benefits 366 Contributions to retirement benefits scheme 4 370 Total emoluments 21,436 The emoluments of the directors were within the following bands:	2000 HK$’000 74,247 1,385
	75,632
	2000 HK$’000 40 10 —
	50
	18,727 —
	18,727
	1,231 —
	1,231
	20,008

	Number of	directors
	2001	2000
Nil to HK$1,000,000	6		6
HK$1,000,001 to HK$1,500,000	—		1
HK$3,000,001 to HK$3,500,000	3		—
HK$4,000,001 to HK$4,500,000	1		3
HK$5,500,001 to HK$6,000,000	—		1
HK$6,500,001 to HK$7,000,000	1		—

— 77 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

9. EMPLOYEES’ EMOLUMENTS

Of the five individuals with the highest emoluments in the Group, all (2000: four) were executive directors of the Company whose emoluments are included in the disclosures in note 8 above. The emoluments of the remaining individual for the year ended 31st December, 2000 represented salary and other benefits amounting to HK$1,839,000.

During each of the two years ended 31st December, 2001 and 2000, no emoluments had been paid by the Group to the five highest paid individuals, including directors, as an inducement to join or upon joining the Group or as compensation for loss of office. No director had waived any emoluments during those years.

10. TAXATION

The total taxation charge comprises: Hong Kong Profits Tax calculated at 16% of the estimated assessable profit for the year (Over)underprovision in prior years Deferred taxation charge Overseas taxation on profit for the year Underprovision in prior years Deferred taxation credit	2001 HK$’000 18,500 (153) — 18,347 9,611 170 (5,188) 4,593 22,940	2000 HK$’000 15,000 2,026 1,394 18,420 28,833 35 (16,067) 12,801 31,221

Overseas taxation is calculated at the rates prevailing in the relevant jurisdictions.

The deferred taxation credit represents the amount of deferred tax asset on timing differences arising overseas from the use of the receipts and payments basis for tax purposes and the accrual basis for the financial statements. The deferred tax asset has been recognised to the extent that the timing differences will be realised in the near future.

Details of deferred taxation are set out in note 30.

— 78 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

11. DIVIDENDS

	2001		2000
	HK$’000		HK$’000
		(As restated)
Final dividend paid:
2000: HK6.0 cents (1999: HK 5.5 cents) per share	34,213		30,743
Interim dividend paid:
2001: HK4.5 cents (2000: HK 4.0 cents) per share	25,844		22,548
	60,057		53,291
The final dividend of HK7.0 cents (2000: HK6.0 cents) per share has been proposed by the
directors and is subject to approval by the shareholders in the	annual general meeting.

12. EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share is based on the following data:

	2001		2000
	HK$’000		HK$’000
			(As restated)
Earnings for the purposes of basic and
diluted earnings per share:
Profit for the year	238,847		180,917
Weighted average number of ordinary shares
for the purposes of basic earnings per share	568,437,155		560,015,593
Effect of dilutive potential ordinary shares:
Share options	2,505,232		3,652,395
Weighted average number of ordinary shares
for the purposes of diluted earnings per share	570,942,387		563,667,988
The adjustments to comparative basic and diluted earnings per share, arising from the changes
in accounting policies shown in note 2 above, are as follows:
	Basic		Diluted
	HK cents		HK cents
Reconciliation of earnings per share for
the year ended 31st December, 2000
Reported figure before adjustment	34.02		33.80
Adjustments arising from adoption of SSAP 30	(1.71)		(1.70)
	32.31		32.10

— 79 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

13. PROPERTY, PLANT AND EQUIPMENT

THE GROUP COST At 1st January, 2001 Currency realignment Additions Acquisition of subsidiaries Disposals Reclassification At 31st December, 2001 DEPRECIATION AND AMORTISATION At 1st January, 2001 Currency realignment Provided for the year Eliminated on disposals At 31st December, 2001 NET BOOK VALUES At 31st December, 2001 At 31st December, 2000	Land and land use rights and buildings outside Leasehold Hong Kong improvements HK$’000 HK$’000 265,205 63,782 215 (44 ) 16,337 11,299 23,071 1,629 — (2,226) 408 — 305,236 74,440 17,696 47,994 (811 ) (38 ) 12,752 8,258 — (2,134) 29,637 54,080 275,599 20,360 247,509 15,788	Office equipment, furniture and fixtures HK$’000 144,253 (747 ) 42,595 1,003 (5,210 ) — 181,894 71,742 (595 ) 29,103 (3,815 ) 96,435 85,459 72,511	Plant and machinery HK$’000 289,995 (1,059 ) 34,765 552 (31,871 ) — 292,382 163,091 (1,018 ) 42,465 (26,006 ) 178,532 113,850 126,904	Motor vehicles HK$’000 11,160 (44 ) 5,348 193 (331 ) — 16,326 9,128 (32 ) 1,385 (233 ) 10,248 6,078 2,032	Moulds and tooling HK$’000 569,550 (406 ) 84,320 — (16,160) 4,229 641,533 373,822 (342 ) 115,776 (16,493) 472,763 168,770 195,728	Construction Vessel in progress HK$’000 HK$’000 3,322 4,637 — — — 8,463 — — — — — (4,637 ) 3,322 8,463 3,111 — — — 161 — — — 3,272 — 50 8,463 211 4,637	Total HK$’000 1,351,904 (2,085) 203,127 26,448 (55,798) —
							1,523,596
							686,584 (2,836) 209,900 (48,681)
							844,967
							678,629
							665,320

— 80 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Leasehold land and land use rights and buildings outside Leasehold Hong Kong improvements HK$’000 HK$’000 THE COMPANY COST At 1st January, 2001 72,393 61,413 Additions — 9,450 Disposals — — Transfer to subsidiaries — (13,358) At 31st December, 2001 72,393 57,505 DEPRECIATION AND AMORTISATION At 1st January, 2001 11,368 46,050 Provided for the year 2,767 5,932 Eliminated on disposals — — Eliminated on transfer to subsidiaries — (7,938) At 31st December, 2001 14,135 44,044 NET BOOK VALUES At 31st December, 2001 58,258 13,461 At 31st December, 2000 61,025 15,363	Office equipment, furniture and fixtures HK$’000 58,263 15,842 (223) (7,281) 66,601 37,798 8,772 (172) (4,289) 42,109 24,492 20,465	Plant and machinery HK$’000 133,407 43,291 (2,159) (18,171) 156,368 97,382 16,076 (1,678) (11,756) 100,024 56,344 36,025	Motor vehicles HK$’000 7,675 2,484 (160) — 9,999 7,198 676 (80) — 7,794 2,205 477	Moulds and tooling HK$’000 449,796 44,993 — (146,133) 348,656 334,391 45,950 — (97,529) 282,812 65,844 115,405	Total HK$’000 782,947 116,060 (2,542) (184,943) 711,522 534,187 80,173 (1,930) (121,512) 490,918 220,604 248,760

The net book values of the Group’s and the Company’s property, plant and equipment include amounts of approximately HK$26,870,000 (2000: HK$19,534,000) and HK$16,651,000 (2000: HK$7,936,000), respectively, in respect of assets held under finance leases and hire purchase contracts.

THE GROUP 2001 2000 HK$’000 HK$’000 The net book value of land and land use rights and buildings are situated outside Hong Kong and are analysed as follows: Freehold 217,341 186,484 Medium-term lease 58,258 61,025 275,599 247,509	THE COMPANY 2001 2000 HK$’000 HK$’000 — — 58,258 61,025 58,258 61,025

The Group has pledged certain freehold land and building having a net book value of HK$15,413,000 (2000: Nil) to secure general banking facilities granted to the Group.

— 81 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

14. GOODWILL

	THE GROUP
	HK$’000
COST
At 1st January, 2001	179,214
Arising on acquisition of a subsidiary	14,013
At 31st December, 2001	193,227
AMORTISATION
At 1st January, 2001	104,485
Charge for the year	4,927
At 31st December, 2001	109,412
NET BOOK VALUES
At 31st December, 2001	83,815
At 31st December, 2000	74,729

The amortisation period adopted ranges from 9 to 20 years as determined by the estimated foreseeable useful lives of the goodwill arising on past acquisitions.

— 82 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

15. NEGATIVE GOODWILL

	THE GROUP
	HK$’000
GROSS AMOUNT
At 1st January, 2001	18,610
Adjustments to measurements of purchase consideration
for acquisitions in prior year (see below)	(4,466)
Arising on acquisition of subsidiaries	16,664
At 31st December, 2001	30,808
RELEASED TO INCOME
At 1st January, 2001	1,691
Adjustments to amounts released to income in prior year	(406)
Released in the year	2,801
At 31st December, 2001	4,086
CARRYING AMOUNTS
At 31st December, 2001	26,722
At 31st December, 2000	16,919

The negative goodwill is released to income on a straight-line basis over a period of eleven years, being the remaining weighted average useful life of the depreciable assets acquired.

During the year, an adjustment was made to the cost of investment of a business acquired in 2000, representing related legal and professional fees finalised and paid during the year.

— 83 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

16. INTANGIBLE ASSETS

Deferred development cost HK$’000 THE GROUP COST At 1st January, 2001 5,553 Currency realignment (161) Additions 74 At 31st December, 2001 5,466 AMORTISATION At 1st January, 2001 2,210 Currency realignment (70) Provided for the year 549 At 31st December, 2001 2,689 NET BOOK VALUES At 31st December, 2001 2,777 At 31st December, 2000 3,343 THE COMPANY COST At 1st January, 2001 and 31st December, 2001 AMORTISATION At 1st January, 2001 Provided for the year At 31st December, 2001 NET BOOK VALUES At 31st December, 2001 At 31st December, 2000	Patents and trademarks HK$’000 10,476 — 308 10,784 6,972 — 830 7,802 2,982 3,504	Total HK$’000 16,029 (161) 382 16,250 9,182 (70) 1,379 10,491 5,759 6,847 Patents HK$’000 1,037 802 103 905 132 235

All intangible assets of the Group and the Company are amortised on a straight line basis over ten years.

— 84 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

17. INVESTMENTS IN SUBSIDIARIES

Investments in unlisted shares, at cost Amount due from a subsidiary	2001 HK$’000 362,635 84,502 447,137	2000 HK$’000 343,502 —
		343,502

Particulars of the principal subsidiaries of the Company at 31st December, 2001 are set out in note 41.

The amount due from a subsidiary is unsecured, non-interest bearing and has no fixed repayment terms. In the opinion of directors, no part of the amount will be repaid within the next twelve months and the amount is therefore presented as non-current.

18. INTERESTS IN ASSOCIATES

Unlisted shares, at cost less impairment loss recognised Share of net assets Amounts due from associates, less impairment loss recognised	THE GROUP 2001 2000 HK$’000 HK$’000 — — 1,967 2,267 106,399 77,566 108,366 79,833	THE COMPANY 2001 2000 HK$’000 HK$’000 — 46,268 — — 79,417 38,430 79,417 84,698	THE COMPANY 2001 2000 HK$’000 HK$’000 — 46,268 — — 79,417 38,430 79,417 84,698
			84,698

Particulars of the associates at 31st December, 2001 are set out in note 42.

The amounts due from associates are unsecured, bear interest at rates ranging from prime rate to prime rate minus 0.5% and have no fixed repayment terms. In the opinion of directors, no part of the amounts will be repaid within the next twelve months and the amounts are therefore presented as non-current.

The amounts due from associates for the year ended 31st December, 2000 were non-interest bearing.

At the balance sheet date, the Group holds 40.8% of the shares of Gimelli International (Holdings) Limited and its subsidiaries (together “Gimelli Group companies”). In accordance with the requirement of SSAP32, the Group controls Gimelli Group companies. However, because the Company is incorporated in Hong Kong and Gimelli Group companies do not meet the definition of a subsidiary under the Hong Kong Companies Ordinance, Gimelli Group companies have not been consolidated in these financial statements. Rather, it has been accounted for as associates using the equity method of accounting. The equity carrying value of the Group’s interests in Gimelli Group companies is nil at both 31st December, 2000, and 31st December, 2001.

— 85 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Had Gimelli Group companies been consolidated in these financial statements, its assets and liabilities, and income and expenses, would have been accounted for on a line-by-line basis. The analysis of the share of net liabilities and of share of net (loss) profit would have been as follows:

Non-current assets Current assets Current liabilities Non-current liabilities Share of net liabilities attributable to the Group Turnover Operating expenses Taxation Share of net (loss) profit attributable to the Group INVESTMENTS IN SECURITIES THE GROUP 2001 2000 HK$’000 HK$’000 Non-current assets Unlisted investment securities (equity), at cost less impairment loss recognised 60,530 54,520 Current assets Other listed investments (equity securities), at market price 4,899 — Unlisted investment securities (equity securities), at cost — 7,892 4,899 7,892

2001 2000 HK$’000 HK$’000 22,481 14,014 34,966 26,017 (176,254) (157,494) (315) — (119,122) (117,463) 130,349 113,550 (132,009) (112,787) — — (1,660) 763 THE COMPANY 2001 2000 HK$’000 HK$’000 20,908 21,708 4,899 — — — 4,899 —

19. INVESTMENTS IN SECURITIES

The Group’s investments above included investments in Nack Products USA Limited (“Nack”) and in America Direct, Inc. (“ADI”), with the carrying values of approximately HK$20,908,000 (2000: HK$20,908,000) and HK$8,806,000 (2000: HK$11,007,000), respectively. The Company’s investments included its investment in Nack of the same amount. Both companies are incorporated in the United States of America (“U.S.A.”). Nack has the exclusive rights to market and distribute a registered product in the U.S.A., of which the Group holds the manufacturing right. Its principal activity is the marketing and distribution of the registered product and other related products in the U.S.A. ADI is engaged in marketing through a combination of direct response television and retail distribution in the U.S.A. and selected international markets.

— 86 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

The Group’s investment represents approximately 25% (2000: 25%) of Nack’s issued shares held directly by the Company and 26% (2000: 26%) of ADI’s common stocks in issue held by a 51% subsidiary of the Company. Both Nack and ADI are not regarded as associates of the Group because the Group has no significant influence over their affairs.

20. DEPOSIT FOR ACQUISITION OF A SUBSIDIARY

In November 2001, the Group entered into a conditional sale and purchase agreement to acquire the entire equity interest of a company (the “subsidiary”) whose principal activity is the manufacture and trade of garden tools equipment in Mexico. The amount paid to date pursuant to the agreement of approximately HK$148,200,000 is classified as a non-current deposit.

21. INVENTORIES

Raw materials Work in progress Finished goods	THE GROUP 2001 2000 HK$’000 HK$’000 255,095 244,177 62,336 47,238 482,544 565,535 799,975 856,950	THE COMPANY 2001 2000 HK$’000 HK$’000 159,758 155,142 44,715 36,636 54,045 25,701 258,518 217,479	THE COMPANY 2001 2000 HK$’000 HK$’000 159,758 155,142 44,715 36,636 54,045 25,701 258,518 217,479
			217,479

The value of inventories carried at net realisable value at the balance sheet date was insignificant.

22. TRADE AND OTHER RECEIVABLES

The Group has a policy of allowing credit periods ranging from 60 days to 120 days. The aging analysis of trade receivables is as follows:

0 to 60 days 61 to 120 days 121 days or above Total trade receivables Other receivables	THE GROUP 2001 2000 HK$’000 HK$’000 433,714 372,953 81,058 79,401 37,542 35,503 552,314 487,857 46,047 105,828 598,361 593,685	THE COMPANY 2001 2000 HK$’000 HK$’000 16,471 48,779 5,024 2,242 21,767 35,642 43,262 86,663 — 4,590 43,262 91,253	THE COMPANY 2001 2000 HK$’000 HK$’000 16,471 48,779 5,024 2,242 21,767 35,642 43,262 86,663 — 4,590 43,262 91,253
			86,663 4,590
			91,253

— 87 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

23. PLEDGED BANK DEPOSIT

The amount represents a deposit pledged to a bank to secure short-term banking facilities granted to the Group and the Company and is therefore classified as a current asset.

24. TRADE AND OTHER PAYABLES

The aging analysis of trade payables is as follows:

0 to 60 days 61 to 120 days 121 days or above Total trade payables Other payables	THE GROUP 2001 2000 HK$’000 HK$’000 293,334 328,338 146,230 157,058 35,649 26,497 475,213 511,893 1,230,390 473,341 1,705,603 985,234	THE COMPANY 2001 2000 HK$’000 HK$’000 124,808 194,547 85,474 68,125 5,969 8,125 216,251 270,797 309,880 90,177 526,131 360,974

25. WARRANTY PROVISION

At 1st January Additional provision in the year Utilisation of provision At 31st December	THE GROUP 2001 2000 HK$’000 HK$’000 33,386 33,569 1,569 14,811 (7,976) (14,994) 26,979 33,386

The warranty provision represents management’s best estimate of the Group’s liability under 24 months warranties granted on electrical products based on past experience of product returns and industry averages for defective products.

— 88 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

26. OBLIGATIONS UNDER FINANCE LEASES AND HIRE PURCHASE CONTRACTS

The maturity of obligations under finance leases and hire purchase contracts is as follows:

THE GROUP Amounts payable under finance leases and hire purchase contracts: Within one year In the second to fifth year inclusive Less: future finance charges Present value of lease obligations Less: Amount due for settlement within one year shown under current liabilities Amount due for settlement after one year	Minimum lease payments 2001 2000 HK$’000 HK$’000 11,063 8,950 9,088 7,762 20,151 16,712 (1,167) (1,512) 18,984 15,200	Present value of minimum lease payments 2001 2000 HK$’000 HK$’000 10,263 7,888 8,721 7,312 18,984 15,200 — — 18,984 15,200 (10,263) (7,888) 8,721 7,312

— 89 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

THE COMPANY Amounts payable under finance leases and hire purchase contracts: Within one year In the second to fifth year inclusive Less: future finance charges Present value of lease obligations Less: Amount due for settlement within one year shown under current liabilities Amount due for settlement after one year	Minimum lease payments 2001 2000 HK$’000 HK$’000 7,116 4,306 5,727 3,111 12,843 7,417 (738) (626) 12,105 6,791	Present value of minimum lease payments 2001 2000 HK$’000 HK$’000 6,636 3,830 5,469 2,961 12,105 6,791 — — 12,105 6,791 (6,636) (3,830) 5,469 2,961

It is the Group’s policy to lease certain of its plant and machinery, fixtures and equipment under finance leases and hire purchase contracts. The lease terms range from three to four years. For the year ended 31st December, 2001, the average effective borrowing rate was 8.4%. Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.

— 90 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

27. BANK BORROWINGS

Trust receipt loans Bank loans Bank overdrafts Analysed into: Secured Unsecured	THE GROUP 2001 2000 HK$’000 HK$’000 137,567 88,972 724,288 864,689 31,172 54,333 893,027 1,007,994 6,099 — 886,928 1,007,994 893,027 1,007,994	THE COMPANY 2001 2000 HK$’000 HK$’000 74,492 69,575 273,700 274,859 1 — 348,193 344,434 — — 348,193 344,434 348,193 344,434

All bank borrowings of the Group and the Company are repayable as follows:

On demand or within one year In the second year In the third to fifth year inclusive After five years Less: Amount due for settlement within one year shown under current liabilities Amount due for settlement after one year	THE GROUP 2001 2000 HK$’000 HK$’000 217,060 155,155 1,403 40,859 669,775 811,980 4,789 — 893,027 1,007,994 (217,060) (155,155) 675,967 852,839	THE COMPANY 2001 2000 HK$’000 HK$’000 114,193 69,575 — 40,859 234,000 234,000 — — 348,193 344,434 (114,193) (69,575) 234,000 274,859

— 91 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

28. SHARE CAPITAL

Ordinary shares of HK$0.20 each Authorised Issued and fully paid: At 1st January Issue of shares on exercise of share options At 31st December	Number 2001 800,000,000 561,216,826 13,300,000 574,516,826	of shares 2000 800,000,000 558,866,826 2,350,000 561,216,826	Share capital 2001 2000 HK$’000 HK$’000 160,000 160,000 112,243 111,773 2,660 470 114,903 112,243	Share capital 2001 2000 HK$’000 HK$’000 160,000 160,000 112,243 111,773 2,660 470 114,903 112,243
				111,773 470
				112,243

The shares issued during the year rank pari passu in all respects with the existing shares.

Share options

At 31st December, 2001, the Company had 25,350,000 outstanding share options granted to certain directors of the Company and employees of the Group, details of which are as follows:

Date share	Number of share
options granted	options outstanding	Subscription price
		HK$
4.2.1994	500,000	1.2800
27.10.1997	100,000	1.1504
1.4.1998	400,000	1.7440
20.9.1999	100,000	1.1584
27.11.1999	400,000	1.0800
30.12.1999	100,000	0.9776
4.1.2000	1,300,000	1.0000
5.6.2000	500,000	1.0144
26.6.2000	100,000	1.4768
6.6.2001	3,050,000	2.9020
8.6.2001	1,000,000	2.1960
19.6.2001	5,000,000	2.2600
5.7.2001	2,200,000	2.1480
23.7.2001	10,500,000	2.1160
10.10.2001	100,000	2.4750
	25,350,000

— 92 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

29. RESERVES

THE GROUP At 1st January, 2000 – as originally reported – prior year adjustments (note 2) – as restated Exchange differences on translation of overseas operations Premium on shares issued Profit for the year Final dividend – 1999 Interim dividend – 2000 At 31st December, 2000 and at 1st January, 2001 Exchange differences on translation of overseas operations Premium on shares issued Profit for the year Final dividend – 2000 Interim dividend – 2001 At 31st December, 2001	Share premium HK$’000 225,356 — 225,356 — 2,248 — — — 227,604 — 14,709 — — — 242,313	Goodwill Translation reserve reserve HK$’000 HK$’000 (179,124) 2,095 179,124 — — 2,095 — (5,772) — — — — — — — — — (3,677) — (1,567) — — — — — — — — — (5,244)	Retained profits HK$’000 507,423 (62,437) 444,986 — — 180,917 (30,743) (22,548) 572,612 — — 238,847 (34,213) (25,844) 751,402	Total HK$’000 555,750 116,687 672,437 (5,772) 2,248 180,917 (30,743) (22,548) 796,539 (1,567) 14,709 238,847 (34,213) (25,844) 988,471

— 93 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

THE COMPANY At 1st January, 2000 – as originally reported – prior year adjustment in respect of change in accounting policy for dividend recognition – as restated Premium on shares issued Profit for the year Final dividend – 1999 Interim dividend – 2000 At 31st December, 2000 and at 1st January, 2001 Premium on shares issued Profit for the year Final dividend – 2000 Interim dividend – 2001 At 31st December, 2001	Share premium HK$’000 225,356 — 225,356 2,248 — — — 227,604 14,709 — — — 242,313	Goodwill Translation reserve reserve HK$’000 HK$’000 — — — — — — — — — — — — — — — — — — — — — — — — — —	Retained profits HK$’000 481,927 30,743 512,670 — 187,059 (30,743) (22,548) 646,438 — 168,651 (34,213) (25,844) 755,032	Total HK$’000 707,283 30,743 738,026 2,248 187,059 (30,743) (22,548) 874,042 14,709 168,651 (34,213) (25,844) 997,345

The Group’s retained profits include the Group’s share of the post acquisition losses of associates of HK$13,005,000 (2000: HK$12,705,000), and the Group’s translation reserve of a credit balance HK$460,000 (2000: HK$460,000) in respect of associates.

At 31st December, 2001, the Company’s reserves available for distribution to shareholders comprised the retained profits of HK$755,032,000 (2000 as restated: HK$646,438,000).

— 94 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

30. DEFERRED TAXATION

Balance at 1st January Currency realignment Charge for the year (note 10) Credit for the year (note 10) Balance at 31st December	THE GROUP 2001 2000 HK$’000 HK$’000 (14,468) 208 (1) (3) — 1,394 (5,188) (16,067) (19,657) (14,468)	THE COMPANY 2001 2000 HK$’000 HK$’000 1,394 — — — — 1,394 — — 1,394 1,394	THE COMPANY 2001 2000 HK$’000 HK$’000 1,394 — — — — 1,394 — — 1,394 1,394
			1,394

At the balance sheet date, the major components of the net deferred tax (asset) liability provided were as follows:

Tax effect of timing differences because of: Excess of tax allowances over depreciation Accruals and provisions Representing: Deferred tax liability Deferred tax asset	THE GROUP 2001 2000 HK$’000 HK$’000 1,536 1,601 (21,193) (16,069) (19,657) (14,468) 1,536 1,601 (21,193) (16,069) (19,657) (14,468)	THE COMPANY 2001 2000 HK$’000 HK$’000 1,394 1,394 — — 1,394 1,394 1,394 1,394 — — 1,394 1,394	THE COMPANY 2001 2000 HK$’000 HK$’000 1,394 1,394 — — 1,394 1,394 1,394 1,394 — — 1,394 1,394
			1,394
			1,394 —
			1,394

— 95 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

At the balance sheet date, the major components of the potential deferred tax (asset) liability unprovided were as follows:

Tax effect of timing differences because of: Excess of tax allowances over depreciation Taxation losses Other timing differences	THE GROUP 2001 2000 HK$’000 HK$’000 17,408 4,911 (102,825) (91,057) 405 (3,601) (85,012) (89,747)	THE COMPANY 2001 2000 HK$’000 HK$’000 10,915 13,130 — — — — 10,915 13,130

No provision for deferred taxation liability has been recognised in the financial statements in respect of timing differences on the excess of tax allowances over depreciation for certain group companies as it is not expected that the potential deferred taxation liability will crystallise in the foreseeable future, after taking into account the Group’s medium-term financial plans and projections on these companies.

Deferred tax assets of certain group companies in respect of tax losses available to offset future profits and other timing differences have not been recognised in the financial statements as it is not certain that the tax losses will be utilised in the foreseeable future.

The major components of the unprovided deferred tax charge (credit) of the Group for the year were as follows:

Tax effect of timing differences because of: Excess of tax allowances over depreciation Taxation losses Other timing differences	THE GROUP 2001 2000 HK$’000 HK$’000 12,497 (4,017) (11,768) (5,010) 4,006 2,372 4,735 (6,655)

— 96 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

31. RECONCILIATION OF PROFIT BEFORE TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES

Profit before taxation Share of results of associates Interest expense Interest income Amortisation of intangible assets Amortisation of goodwill Release of negative goodwill to income Depreciation and amortisation on property, plant and equipment Impairment loss of investment securities recognised Loss (gain) on disposal of property, plant and equipment Decrease (increase) in inventories Increase in trade and other receivables, deposits and prepayments Increase in bills receivable Decrease in trade receivable from an associate Increase in trade and other payables Decrease in warranty provision Net cash inflow from operating activities	2001 HK$’000 264,912 300 91,000 (14,412) 1,379 4,927 (2,395) 209,900 4,204 5,179 175,978 (31,969) (176,405) 4,850 573,346 (6,407) 1,104,387	2000 HK$’000 (As restated) 211,634 1,221 75,632 (8,947) 866 11,215 (1,601) 182,487 1,944 (2,412) (183,038) (483,531) (21,872) 454 464,564 — 248,616

— 97 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

32. ACQUISITION OF SUBSIDIARIES

NET ASSETS ACQUIRED Property, plant and equipment Inventories Trade and other receivables, deposits and prepayments Taxation recoverable Bank balances and cash Trade and other payables Bank overdrafts Negative goodwill arising on acquisition Goodwill arising on acquisition Consideration SATISFIED BY Cash Net cash outflow arising on acquisition: Cash consideration Bank balances and cash acquired Bank overdrafts acquired Net outflow of cash and cash equivalents in respect of the purchase of subsidiaries	2001 HK$’000 26,448 123,890 105,060 2,258 13,548 (152,227) (36,791) 82,186 (16,664) 14,013 79,535 79,535 2001 HK$’000 (79,535) 13,548 (36,791) (102,778)	2000 HK$’000 405,973 353,765 55,218 364 7,981 (123,920) — 699,381 (18,520) — 680,861 680,861 2000 HK$’000 (680,861) 7,981 — (672,880)

The cash flows of the Group attributable to the subsidiaries acquired during the year are as follows:

Net cash inflow from operating activities Tax paid Net cash utilised in investing activities Net cash outflow from financing	HK$’000 29,788 2,127 (441) (35,038)

The subsidiaries acquired during the year contributed HK$193,820,000 to the Group’s turnover, and HK$9,868,000 to the Group’s profit from operations.

— 98 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

33. ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR

Share capital and share premium HK$’000 Balance at 1st January, 2000 337,130 Proceeds from issue of shares for cash 2,717 Inception of finance leases and hire purchase contracts — New bank loans obtained — Repayment — Balance at 31st December, 2000 and 1st January, 2001 339,847 Proceeds from issue of shares for cash 17,369 Inception of finance leases and hire purchase contracts — New bank loans obtained — Repayment — Balance at 31st December, 2001 357,216

Obligations under finance leases and Bank hire purchase loans contracts HK$’000 HK$’000 106,901 15,838 — — — 9,406 823,830 — (66,042) (10,044) 864,689 15,200 — — — 14,359 28,915 — (169,316) (10,575) 724,288 18,984

34. MAJOR NON-CASH TRANSACTIONS

During the year, the Group entered into finance lease and hire purchase arrangements in respect of assets with a total capital value at the inception of the leases and hire purchase contracts of HK$14,359,000 (2000: HK$9,406,000).

35. LEASE COMMITMENTS

At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases, which fall due as follows:

Within one year In the second to fifth year inclusive After five years	THE GROUP 2001 2000 HK$’000 HK$’000 27,436 26,500 67,884 49,727 46,759 39,297 142,079 115,524	THE COMPANY 2001 2000 HK$’000 HK$’000 10,107 14,153 15,640 22,084 238 — 25,985 36,237

Operating lease payments represent rentals payable by the Group for certain of its plant and machineries and office properties. Leases are negotiated for a term ranging from 3 months to 10 years.

— 99 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

36. CONTINGENT LIABILITIES

Guarantees given to banks and an independent third party in respect of credit facilities utilised by Associates Subsidiaries Bills discounted with recourse	THE GROUP 2001 2000 HK$’000 HK$’000 15,230 10,083 — — 466,226 370,106 481,456 380,189	THE COMPANY 2001 2000 HK$’000 HK$’000 15,230 10,083 70,141 34,076 358,124 369,767 443,495 413,926	THE COMPANY 2001 2000 HK$’000 HK$’000 15,230 10,083 70,141 34,076 358,124 369,767 443,495 413,926
			413,926

The extent of guarantees utilised as shown above relates to guarantees given by the Group and the Company to secure bank facilities granted to associates and subsidiaries amounting to HK$132,500,000 (2000: HK$163,500,000) and HK$1,678,739,000 (2000: HK$1,409,205,000), respectively, at the balance sheet date.

37. RETIREMENT BENEFITS SCHEMES

The Company and its subsidiaries operating in Hong Kong have participated in the Mandatory Provident Fund Schemes (“MPF Schemes”) registered under the Mandatory Provident Fund Ordinance since December 2000.

At 31st December, 2001, the Group had a number of employees who have completed the required number of years of services under Hong Kong Employment Ordinance (the “Ordinance”) to be eligible for long service payments on termination of their employment. The Group is only liable to make such payments if the termination meets the circumstances which are specified in the Ordinance.

Under the circumstances specified by the Ordinance, had the employment of all eligible employees been terminated on 31st December, 2001 the maximum potential exposure would have been approximately HK$13,765,000 (2000: HK$14,741,000). Provision of HK$2,400,000 (2000: Nil) has been made in the financial statements in respect of such long service payments. The Group’s overseas subsidiaries operate a number of defined contribution schemes and defined benefit schemes which cover substantially all of their employees. Contributions to the defined contribution schemes applicable to each year are made at a certain percentage of the employees’ payroll.

The pension costs of the defined benefit plan is assessed in accordance with an actuarial valuation as at 1st January, 2002 performed by Aon Consulting, an employee benefits consulting group, using the Projected Unit Credit method. A medical trend rate of 10.5% and a discount rate of 7.5% were assumed for calculating the actuarial valuation. There are no assets set aside for these benefits and the plan is funded on a pay-as-you-go basis. The accrued benefit costs under such scheme are to be reimbursed by a former shareholder of the overseas subsidiary in accordance with an assignment assumption, reimbursement and indemnification agreement. As such, the oversea subsidiary has set up a receivable and an accrued benefit cost of same amount of approximately HK$28,000,000 (2000: HK$29,600,000) at 31st December, 2001.

— 100 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

38. CAPITAL COMMITMENTS

Capital expenditure contracted for but not provided in the financial statements in respect of the purchase of property, plant and equipment	THE GROUP 2001 2000 HK$’000 HK$’000 29,322 36,409	THE COMPANY 2001 2000 HK$’000 HK$’000 12,511 26,353

39. RELATED PARTY TRANSACTIONS

During the year, the Group entered into the following transactions with related parties:

Associates Purchases Management fee income Management fee expenses Interest income received Sales income Subcontracting expenses Rental income Equipment charge income Service expenses	2001 HK$’000 30,291 3,369 417 6,753 21,103 250 785 22 21	2000 HK$’000 27,216 8,340 1,614 442 18,062 919 562 48 40

The above transactions were carried out based on market price/rate, or where no market price/rate was available, at cost plus a percentage profit markup.

40. EVENTS AFTER THE BALANCE SHEET DATE

Subsequent to 31st December, 2001, the Group acquired two subsidiaries, namely Roybi Australia Pty and Ryobi New Zealand, at a consideration of AUD5,900,000 equivalent to approximately HK$23,600,000.

— 101 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

41. PARTICULARS OF PRINCIPAL SUBSIDIARIES

Particulars of the principal subsidiaries of the Company at 31st December, 2001 are as follows:

			Proportion of	Proportion of
	Place of	Issued and	nominal value of
	incorporation	**fully paid **	issued capital held
Name of subsidiary	and operation	share capital	by the Company			Principal activities
			**Directly **	Indirectly
			%		%
Digiwireless Limited	Hong Kong	HK$2	100		—	Investment holding
Full Team International	Hong Kong	HK$2	100		—	Investment holding
Limited
Gimelli Industries	Hong Kong	HK$3,000,000	51		—	Trading of electrical
Company Limited						and health care
						products
MacEwen Property Co. Inc.	United States	US$100	100		—	Property holding
	of America
Marco Polo Industries &	Hong Kong	HK$100,000	100		—	Trading of household
Merchandising Company						electronic and
Limited						electrical products
One World Technologies	Bermuda/	US$12,000	100		—	Investment holding
Limited	Hong Kong
One World Technologies	United States	US$10	—	100		Investment holding
Inc.	of America
OWT France SAS	France	FFr245,984	—	100		Investment holding
Ryobi Technologies France	France	FFr117,000,000	—	100		Trading of electric
S.A. (formerly known as						power tools products
Ryobi Europe S.A.)
OWT Taiwan Limited	Taiwan	NT$5,000,000	100		—	Provision of inspection
(formerly known as						services
Ryobi Taiwan Corporation)
OWT Industries, Inc.	United States	US$10	—	100		Manufacture of electric
	of America					components and
						power tools products
Ryobi Technologies	Canada	C$600,000	—	100		Trading of electric
Canada, Inc.						power tools products
Ryobi Technologies, Inc.	United States	US$10	—	100		Trading of electric
	of America					power tools products

— 102 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

			Proportion of	Proportion of
	Place of	Issued and	nominal value of
	incorporation	**fully paid **	issued capital held
Name of subsidiary	and operation	share capital	by the Company		Principal activities
			**Directly **	Indirectly
			%	%
Ryobi Technologies (UK) Ltd.	The United	£4,000,000	100	—	Trading of electric
(formerly known as	Kingdom				power tools products
Ryobi Power Equipment
(UK) Ltd.)
*Royal Appliance	Germany	DM2,000,000	51	—	Trading of household
International GmbH					and electrical
					products
Santo Industries Limited	Hong Kong	HK$2,000,000	100	—	Trading of household
					electronic and
					electrical products
Sang Tech Industries	Hong Kong	HK$1,000,000	100	—	Manufacture of
Limited					plastic parts
Solar Wide Industrial	Hong Kong	HK$2,000,000	75.725	—	Manufacture of
Limited					electronic products
Solar Wide (Overseas)	The British	US$1	—	100	Manufacture of
Limited	Virgin Islands/				electronic products
	The PRC
Techtronic Appliances Co.	Republic of	S$250,000	100	—	Liaison office
Pte Ltd.	Singapore
Techtronic Appliances	The British	US$1	100	—	Trading of electronic
International Limited	Virgin Islands/				and electrical
	Republic of				products
	Indonesia
P.T. Techtronic Appliances	Republic of	US$300,000	1	99	Manufacture of
	Indonesia				electronic and
					electrical products
Techtronic Appliances	Bermuda/	US$12,000	100	—	Investment holding
Holdings Company	Hong Kong
Limited
Techtronic Appliances	Hong Kong	HK$2	—	100	Trading and
(Hong Kong) Limited					manufacture of
					floor care products

— 103 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

			Proportion of
	Place of	Issued and	nominal value of
	incorporation	**fully paid **	issued capital held
Name of subsidiary	and operation	share capital	by the Company		Principal activities
			Directly Indirectly
			%	%
Vax Limited	The United	£33,000	100	—	Assembly, procurement
	Kingdom				and distribution of
					floor care products
Vax Appliances	Australia	A$1,200,008	100	—	Assembly and
(Australia) Pty. Ltd.					distribution of floor
					care products

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results or assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

• Company not audited by Deloitte Touche Tohmatsu. The result of operation and net assets of this subsidiary is insignificant to the Group.

None of the subsidiaries had any loan capital outstanding at the end of the year, or at any time during the year.

42. PARTICULARS OF ASSOCIATES

Particulars of the associates at 31st December, 2001 are as follows:

	Place of	Issued and	Proportion of	Proportion of
	incorporation/	fully paid	nominal value of
	registration	**share/registered **	issued capital held
Name of associate	and operation	capital	by the Company		Principal activities
			**Directly **	Indirectly
			%	%
Polytron Enterprises	Hong Kong	HK$1,650,000	25.0	—	Inactive
Limited
Gimelli International	The Cayman	US$6,250	40.8	—	Investment holding
(Holdings) Limited	Islands/
	Hong Kong
Gimelli Laboratories	Hong Kong	HK$5,000,000	—	100	Manufacture and trading
Company Limited					of electrical and
					dental care products
Gimelli Produktions A.G.	Switzerland	SFR930,000	—	100	Marketing and research
					and development
Gimelli Precision Moulding	Hong Kong	HK$2	—	100	Manufacture of plastic
Company Limited					parts
North (Shenyang) Chinetek	The PRC	US$1,200,000	50.0	—	Inactive
Techtronic Industries Ltd.

— 104 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

3. UNAUDITED INTERIM RESULTS FOR THE SIX MONTHS ENDED 30TH JUNE, 2002

Set out below is a summary of the unaudited consolidated results of the Group for the six months ended 30th June, 2002 together with the comparative figures for the last corresponding period as extracted from the Group’s interim report for the six months period ended 30th June, 2002. The restatement of the figures for the six months period ended 30th June, 2001 was due to the adoption of new and revised Statements of Accounting Practice issued by the Hong Kong Society of Accountants have become effective for the year ended 31st December, 2001.

Condensed consolidated income statement

For the six months ended 30th June, 2002

Notes Turnover (3) Cost of sales Gross profit Other revenue Selling and distribution expenses Administrative expenses Research and development costs Profit from operations Finance costs Profit before share of results of associates and taxation Share of results of associates Profit before taxation Taxation (4) Profit before minority interests Minority interests Profit for the period Dividend Profit for the period, retained Earnings per share (5) Basic Diluted		2002 HK$’000 (Unaudited) 3,958,850 (2,994,707) 964,143 38,508 (269,562) (461,853) (46,071) 225,165 (37,548) 187,617 (168) 187,449 (14,920) 172,529 (4,904) 167,625 (45,025) 122,600 28.01 cents 27.57 cents		2001 HK$’000 (Unaudited) (as restated) 2,315,629 (1,824,114) 491,515 28,677 (112,893) (208,979) (43,319) 155,001 (47,814) 107,187 (280) 106,907 (9,616) 97,291 (2,991) 94,300 (33,679) 60,621 16.75 cents 16.69 cents

— 105 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Condensed consolidated balance sheet

At 30th June, 2002

Notes ASSETS Non-current assets Property, plant and equipment Goodwill Negative goodwill Intangible assets Interests in associates Investments in securities Deposit for acquisition of a subsidiary Deferred tax asset Other assets Current assets Inventories Trade and other receivables (6) Deposits and prepayments Bills receivable Investments in securities Trade receivable from an associate Bank balance, deposits and cash Current liabilities Trade and other payables (7) Bills payable Taxation payable Dividend payable Obligations under finance leases and hire purchase contracts – due within one year Bank borrowings – due within one year Net current assets Total assets less current liabilities	30th June, 31st December, 2002 2001 HK$’000 HK$’000 (Unaudited) (Audited) 877,828 678,629 85,881 83,815 (25,321) (26,722) 5,823 5,759 126,481 108,366 60,489 60,530 — 148,200 25,856 21,193 1,195 1,195 1,158,232 1,080,965 1,331,914 799,975 1,132,176 598,361 279,170 309,448 148,473 331,431 7,239 4,899 5,649 2,511 1,212,300 644,039 4,116,921 2,690,664 1,572,577 1,129,679 496,843 602,903 2,920 12,149 45,025 — 8,372 10,263 746,626 217,060 2,872,363 1,972,054 1,244,558 718,610 2,402,790 1,799,575	30th June, 2001 HK$’000 (Unaudited) (as restated) 636,952 72,616 (16,276) 6,464 89,317 53,918 — 16,068 1,195 860,254 808,243 594,183 340,432 158,718 9,893 10,882 187,213 2,109,564 715,358 214,770 15,995 33,679 9,243 244,816 1,233,861 875,703 1,735,957

— 106 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Condensed consolidated balance sheet (Cont’d) At 30th June, 2002

Notes CAPITAL AND RESERVES Share capital (8) Reserves (9) MINORITY INTERESTS NON-CURRENT LIABILITIES Obligations under finance leases and hire purchase contracts – due after one year Bank borrowings – due after one year Deferred tax liabilities	30th June, 31st December, 2002 2001 HK$’000 HK$’000 (Unaudited) (Audited) 128,863 114,903 1,473,742 988,471 1,602,605 1,103,374 14,881 9,977 5,216 8,721 779,940 675,967 148 1,536 785,304 686,224 2,402,790 1,799,575	30th June, 2001 HK$’000 (Unaudited) (as restated) 114,083 863,070 977,153 9,843 12,014 736,743 204 748,961 1,735,957

— 107 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Condensed consolidated cash flow statement

For the six months ended 30th June, 2002

OPERATING ACTIVITIES Cash (used) generated by operations Income tax paid Interest paid NET CASH USED IN OPERATING ACTIVITIES INVESTING ACTIVITIES Purchase of property, plant and equipment Additions to intangible assets Advances to associates Purchase of investments in securities Purchase of business and subsidiaries (net of cash and cash equivalents) Proceeds from disposal of property, plant and equipment NET CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES Proceeds from issue of shares New bank loans obtained Repayment of bank loans New obligations under finance leases and HP contracts Repayment of obligations under finance leases and HP contracts NET CASH INFLOW (OUTFLOW) FROM FINANCING INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD EFFECT OF FOREIGN EXCHANGE RATE CHANGES CASH AND CASH EQUIVALENTS AT END OF THE PERIOD ANALYSIS OF THE BALANCES OF CASH AND CASH EQUIVALENTS Bank balances, deposits and cash Bank overdrafts	30th June, 2002 HK$’000 (Unaudited) (134,613) (10,259) (37,548) (182,420) (124,397) (236) (18,284) (2,299) (13,564) 12,484 (146,296) 382,653 506,623 (27,509) — (5,396) 856,371 527,655 612,868 (3,318) 1,137,205 1,212,300 (75,095) 1,137,205	30th June, 2001 HK$’000 (Unaudited) (Restated) 44,754 (3,504) (47,814) (6,564) (67,579) (41) (9,764) (1,399) — 3,853 (74,930) 10,407 38,290 (69,485) 11,838 (5,781) (14,731) (96,225) 227,002 (2,658) 128,119 187,213 (59,094) 128,119

— 108 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Notes to the condensed financial statements

For the six months ended 30th June, 2002

1. SIGNIFICANT ACCOUNTING POLICIES

The interim report has been prepared in accordance with the Statement of Standard Accounting Practice No. 25 “Interim financial reporting (“SSAP 25”) issued by the Hong Kong Society of Accountants.

The condensed financial statements have been prepared under the historical cost convention as modified for the revaluation of the investments in Securities.

2. ADOPTION OF NEW AND REVISED STATEMENTS OF STANDARD ACCOUNTING PRACTICE

The principal accounting policies and methods of computation used in the preparation of these condensed accounts are consistent with those used in the annual accounts for the year ended 31st December, 2001 except that the Group has changed certain of its accounting policies following its adoption of the following Statements of Standard Accounting Practice (SSAPs) issued by the Hong Kong Society of Accountants which are effective for accounting period commencing on or after 1st January, 2002 and applicable to the Group:

SSAP 1 (revised) : Presentation of financial statements SSAP 15 (revised) : Cash flow statements SSAP 25 (revised) : Interim financial reporting SSAP 34 : Employee benefits

The effect of adopting this new and revised accounting policies described above on the financial position of the Group at 30th June, 2001 is insignificant. Disclosure and certain comparative figures have been modified accordingly.

— 109 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

3. SEGMENT INFORMATION

By principal activity: Manufacture and trading of Power and outdoor products Floor care appliances products Solar powered and electronic products Other products Finance costs Contribution from associates Profit before taxation By geographical market location: North America Europe Other countries Finance costs Contribution from associates Profit before taxation

For the six months ended 30th June, Contribution to results from ordinary activities Turnover before taxation 2002 2001 2002 2001 HK$’000 HK$’000 HK$’000 HK$’000 (as restated) 3,140,168 1,600,563 182,696 115,050 617,795 524,789 15,900 17,254 123,755 102,807 21,910 13,238 77,132 87,470 4,659 9,459 3,958,850 2,315,629 225,165 155,001 (37,548) (47,814) (168) (280) 187,449 106,907 3,307,651 1,963,013 199,255 131,702 506,408 250,800 15,179 10,694 144,791 101,816 10,731 12,605 3,958,850 2,315,629 225,165 155,001 (37,548) (47,814) (168) (280) 187,449 106,907

— 110 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

4. TAXATION

The total tax charge comprises: Hong Kong Profit Tax calculated at 16% of the estimated assessable profit of the period Overseas taxation on profit for the period	For the six months ended 30th June, 2002 2001 HK$’000 HK$’000 13,877 9,000 1,043 616 14,920 9,616	For the six months ended 30th June, 2002 2001 HK$’000 HK$’000 13,877 9,000 1,043 616 14,920 9,616
		9,616

5. EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share is based on the following data:

Earnings for the purposes of basic and diluted earnings per shares: Profit for the period Weighted average number of ordinary shares for the purposes of basic earnings per share Effect of dilutive potential ordinary shares: Options Weighted average number of ordinary shares for the purposes of diluted earnings per share	For the six months ended 30th June, 2002 2001 HK$’000 HK$’000 167,625 94,300 598,395,714 562,987,936 9,583,121 2,016,788 607,978,835 565,004,724	For the six months ended 30th June, 2002 2001 HK$’000 HK$’000 167,625 94,300 598,395,714 562,987,936 9,583,121 2,016,788 607,978,835 565,004,724
		562,987,936 2,016,788
		565,004,724

— 111 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

6. TRADE RECEIVABLES

The Group has a policy of allowing credit periods ranging from 60 days to 120 days. The aging analysis of trade receivables is as follows:

0 – 60 days 61 – 120 days Over 121 days Total trade receivables Other receivables	30th June, 31st 2002 HK$’000 877,688 147,114 53,276 1,078,078 54,098 1,132,176	December, 2001 HK$’000 433,714 81,058 37,542 552,314 46,047 598,361	30th June, 2001 HK$’000 458,683 58,771 46,853
			564,307 29,876
			594,183

7. TRADE PAYABLES

The aging analysis of trade payables is as follows:

0 – 60 days 61 – 120 days Over 121 days Total trade payables Other payables	30th June, 31st 2002 HK$’000 592,523 73,858 9,795 676,176 896,401 1,572,577	December, 2001 HK$’000 293,334 146,230 35,649 475,213 654,466 1,129,679	30th June, 2001 HK$’000 434,442 61,996 5,160
			501,598 213,760
			715,358

— 112 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

8. SHARE CAPITAL

Ordinary shares of HK$0.20 each Authorised Issued and fully paid: At 1st January Issue of shares during the period	Number of Shares 30th June, 31st December, 2002 2001 800,000,000 800,000,000 574,516,826 561,216,826 69,800,000 13,300,000 644,316,826 574,516,826	Share Capital 30th June, 31st December, 2002 2001 HK$’000 HK$’000 160,000 160,000 114,903 112,243 13,960 2,660 128,863 114,903

The shares issued during the period rank pari passu in all respects with the existing shares.

9. RESERVES

THE GROUP At 1st January, 2002 Net loss not recognised in the income statement Exchange differences on translation of overseas operations Premium on shares issued Profit for the period Final dividend – 2001 At 30th June, 2002	Share premium HK$’000 242,313 — 368,692 — — 611,005	Translation reserve HK$’000 (5,244) (6,021) — — — (11,265)	Retained profits HK$’000 751,402 — — 167,625 (45,025) 874,002	Total HK$’000 988,471 (6,021) 368,692 167,625 (45,025) 1,473,742

— 113 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

3. STATEMENT OF INDEBTEDNESS

At the close of business on 30th November, 2002, being the Latest Practicable Date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group had outstanding bank borrowings of approximately HK$1,437,508,000, of which approximately HK$6,027,000 was secured by certain land and building of the Enlarged Group with an aggregate net book value of approximately HK$13,913,000. In addition, the Enlarged Group also had outstanding at that date obligations under finance lease and hire purchase contracts of approximately HK$30,891,000.

At the close of business on 30th November, 2002, the Group gave guarantees to banks in respect of bank facilities granted to associates and non-wholly subsidiaries of approximately HK$14,080,000 and HK$22,427,000, respectively. The Enlarged Group had contingent liabilities in respect of export bill discounted with recourse of approximately HK$1,106,438,000.

In addition, The Royal Group had various outstanding legal cases as at 30th November, 2002. Details of these litigations of material importance are set out in Appendix IV of this circular under the section headed “Litigation”.

Save as aforesaid or as otherwise disclosed herein, and apart from intra-group liabilities and normal trade payables, none of the companies in the Enlarged Group had outstanding at the close of business on 30th November, 2002 any mortgages, charges, debentures, or other loan capital or bank overdrafts, loans, debt securities or similar indebtedness, or any obligations under finance leases or hire purchase contracts or any guarantees or other material contingent liabilities.

Foreign currency amounts have been translated into Hong Kong dollars at the approximate exchange rates prevailing at the close of business on 30th November, 2002.

4. WORKING CAPITAL

The Directors are of the opinion that, the Enlarged Group will, following completion of the Merger and taking into account of the present available credit facilities and internal resources of the Enlarged Group, have sufficient working capital for its present requirement and any possible increase in consideration payable to the holders of Dissenting Shares in the absence of unforeseen circumstances.

5. MATERIAL ADVERSE CHANGES

The Directors are not aware of any material adverse changes in the financial or trading position of the Group since 31st December, 2001, being the date to which the Group’s latest audited accounts were made up.

— 114 —

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

1. PRO FORMA STATEMENT OF ADJUSTED COMBINED NET TANGIBLE ASSETS OF THE ENLARGED GROUP

The following is a statement of the pro forma adjusted combined net tangible assets of the Enlarged Group immediately following the completion of Merger. It is based on the unaudited consolidated financial statements of the Company as at 30th June, 2002 and adjusted to reflect the effect of the Merger. The pro forma figures presented below will also be subject to adjustment as a result of the significant differences between US GAAP and Hong Kong GAAP.

Unaudited consolidated net asset of the Group as at 30th June, 2002 (note 1) Less: Intangible assets of the Group as at 30th June, 2002 Pro forma adjusted consolidated net tangible assets of the Group as at 30th June, 2002 before the Merger Value of net assets of the Royal Group as per Form 10-Q filed with the SEC on 12th August, 2002 for the six months ended 30th June, 2002 Consideration payable for the Merger Estimated expenses relating to the Merger Less: Goodwill arising on acquisition of Royal (note 2) Less: Unrealised profit on inventories (note 3) Pro forma adjusted combined net tangible assets of the Enlarged Group Pro forma adjusted consolidated net tangible assets of the Group per Share (based on 645,716,826 Shares in issue as at the Latest Practicable Date) Pro forma adjusted combined net tangible assets of the Enlarged Group per Share (based on 645,716,826 Shares in issue as at the Latest Practicable Date)	HK$’000 280,004 (822,900) (15,600)	HK$’000 1,602,605 (66,383) 1,536,222 (558,496) (8,926) 968,800 HK$ 2.38 1.50

Notes:

1. The pro forma figures have been calculated based on the unaudited consolidated figures of the Group as at 30th June, 2002 as those figures are the latest published financial figures of the Group.

2. The goodwill arising on acquisition of Royal will be capitalised and amortised on a straight-line basis over its useful economic life of 20 years. On the above basis, the annual amortisation expense will amount to approximately HK$27.9 million. As the goodwill arising on acquisition of Royal has been calculated with reference to the unaudited net tangible assets of the Royal Group as at 30th June, 2002, the final amount of goodwill may be higher or lower depending on the latest financial figures of the Royal Group after Closing.

1. The amount represents the unrealised profit on inventories purchased from the Group which were still held by Royal as at 30th June, 2002.

— 115 —

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

2. PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

The following is a pro forma statement of the assets and liabilities of the Enlarged Group based on the unaudited consolidated balance sheet of the Group as at 30th June, 2002 prepared on the same basis as set out in section 1 above. The pro forma figures presented below will also be subject to adjustment as a result of the significant differences between US GAAP and Hong Kong GAAP.

Unaudited Unaudited consolidated consolidated balance sheet Consideration balance sheet of the and of the Group Royal Group estimated as at as at expenses 30th June, 30th June, payable for 2002 2002 the Merger HK$’000 HK$’000 HK$’000 (note 1) (note 2) Property, plant and equipment 877,828 290,456 — Goodwill 85,881 — 558,496 Negative goodwill (25,321) — — Intangible assets 5,823 — — Interests in associates 126,481 — — Investments in securities 60,489 — — Deferred tax asset 25,856 39,211 — Other assets 1,195 21,271 — Current assets 4,116,921 704,512 (838,500) Current liabilities (2,872,363) (729,262) — TOTAL ASSETS LESS CURRENT LIABILITIES 2,402,790 326,188 (280,004) Obligation under finance leases and hire purchase contracts – due after one year (5,216) (14,898) — Bank borrowings – due after one year (779,940) — — Deferred tax liabilities (148) (31,286) — Minority interests (14,881) — — NET ASSETS 1,602,605 280,004 (280,004)	Unrealised profit on inventories HK$’000 (note 3) — — — — — — — — (8,926) — (8,926) — — — — (8,926)	Current account elimination HK$’000 — — — — — — — — (15,759) 15,759 — — — — — —	Total HK$’000 1,168,284 644,377 (25,321) 5,823 126,481 60,489 65,067 22,466 3,958,248 (3,585,866) 2,440,048 (20,114) (779,940) (31,434) (14,881) 1,593,679

Notes:

1. The pro forma figures have been calculated based on the unaudited consolidated figures of the Group as at 30th June, 2002 as those figures are the latest published financial figures of the Group.

2. The unaudited consolidated figures of the Royal Group were denominated in US dollars and had been translated into Hong Kong dollars at the conversion exchange rate of US$1 to HK$7.8.

3. The amount represents the unrealised profit on inventories purchased from the Group which were still held by Royal as at 30th June, 2002.

— 116 —

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

3. PRO FORMA STATEMENT OF COMBINED RESULTS

The following is the pro forma statement of combined results of the Enlarged Group prepared on the basis that the Merger was implemented on 1st July, 2001 and Royal was a wholly-owned subsidiary of the Company throughout the twelve month period ended 30th June, 2002. The pro forma figures presented below will also be subject to adjustment as a result of the significant differences between US GAAP and Hong Kong GAAP.

Unaudited consolidated results of the Group for the period from 1st July, 2001 to 30th June, 2002 HK$’000 (note 1 ) Turnover 7,744,361 Cost of sales (5,764,604 ) Gross Profit 1,979,757 Other Revenue 51,227 Operating expenses (1,604,608 ) Profit from operations 426,376 Finance cost (80,734) Profit before share of results of associates and taxation 345,642 Share of results of associates (188 ) Profit before taxation 345,454 Taxation (28,244) Profit before minority interests 317,210 Minority interests (5,038 ) Profit for the year(note 4) 312,172 Weighted average number of shares for the period 1st July, 2001 to 30th June, 2002 585,957,761 Earnings per share (cents) (note 4) 53.28	Unaudited consolidated results of the Royal Group for the period from 1st July, 2001 to 30th June, 2002 US$’000 HK$’000 (note 2 ) 426,407 3,325,975 (325,477) (2,538,721 ) 100,930 787,254 — — (89,517) (698,233 ) 11,413 89,021 (1,249) (9,742 ) 10,164 79,279 — — 10,164 79,279 (3,550) (27,690) 6,614 51,589 — — 6,614 51,589	Unrealised profit on inventories HK$’000 (note 3 ) (8,926)	Pro forma unaudited combined results Inter of the Enlarged company Group from transaction Goodwill 1st July, 2001 to elimination amortisation 30th June, 2002 HK$’000 HK$’000 HK$’000 (381,543) 10,679,867 381,543 (7,921,782) 2,758,085 51,227 (30,504) (2,333,345) 475,967 (90,476) 385,491 (188) 385,303 (55,934) 329,369 (5,038) 324,331 585,957,761 55.35

— 117 —

PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Notes:

1. The pro forma figures have been calculated based on the unaudited consolidated figures of the Group as at 30th June, 2002 as those figures are the latest published financial figures of the Group.

2. The unaudited consolidated figures of the Royal Group were denominated in US dollars and had been translated into Hong Kong dollars at the conversion exchange rate of US$1 to HK$7.8.

3. The amount represents the unrealised profit on inventories purchased from the Group which were still held by Royal as at 30th June, 2002.

4. The profit for the year and the related earnings per share as shown above have been arrived at on the assumption that the Group will finance the consideration for the Merger entirely from its internal resources. No interest/finance cost has been included in the calculation of the above figures since the Company has not yet reached a final decision on the financing split between internal resources and bank borrowings and cannot quantify the exact interest/finance cost of such bank borrowings. Such amounts may be subject to adjustment if the Group were to finance the consideration for the Merger partly from its internal resources and partly by bank borrowings. The Group received interest on its cash balances at prevailing bank deposit rates and paid interest on its bank borrowings at LIBOR plus market spread.

— 118 —

GENERAL INFORMATION

APPENDIX IV

RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained herein (except for information relating to the Royal Group which is based on publicly available information) and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement herein misleading.

DISCLOSURE OF INTERESTS

(a) Interest in securities

As at the Latest Practicable Date, the interests of the Directors or chief executive of the Company in the share capital of the Company and its associated corporations (within the meaning of the SDI Ordinance) which were required to be notified to the Company and the Stock Exchange pursuant to Section 28 of the SDI Ordinance (including the interests which they were deemed or taken to have under Section 31 or Part I of the Schedule to the SDI Ordinance) or which were required pursuant to Section 29 of the SDI Ordinance, to be entered in the register referred to therein or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules, to be notified to the Company and the Stock Exchange were as follows:

(i) Shares

Shares
	Number of Shares		held	Approximate
	Personal	Family	Corporate	percentage of
Name of Director	interests	interests	interests	shareholding
				(%)
Mr. Horst Julius Pudwill	33,796,000	380,000	111,329,897(a)	22.53(c)
Mr. Roy Chi Ping Chung	54,750,974	68,000	18,537,515(b)	11.36(c)
Mr. Kin Wah Chan	1,000,000	—	—	0.15
Mr. Chi Chung Chan	—	—	—	—
Dr. Akio Urakami	—	—	—	—
Mr. Susumu Yoshikawa	—	—	—	—
Mr. Vincent Ting Kau Cheung	960,000	—	—	0.15
Mr. Joel Arthur Schleicher	100,000	—	—	0.015
Mr. Christopher Patrick Langley	150,000	—	—	0.023

(a) These Shares were held by the following companies in which Mr. Horst Julius Pudwill has a beneficial interest:

No. of Shares Sunning Inc. 92,792,382 Cordless Industries Company Limited* 18,537,515 111,329,897

— 119 —

GENERAL INFORMATION

APPENDIX IV

• (b) These Shares were held by Cordless Industries Company Limited* in which Mr. Roy Chi Ping Chung has a beneficial interest.

• Cordless Industries Company Limited is jointly owned by Messrs. Horst Julius Pudwill and Roy Chi Ping Chung.

• (c) The corporate interest of Mr. Roy Chi Ping Chung was wholly duplicated in the corporate interest of Mr. Horst Julius Pudwill. Had such duplication been ignored, the aggregate number of Shares held by Mr. Horst Julius Pudwill, Mr. Roy Chi Ping Chung and their respective associates would be 200,324,871 Shares, representing approximately 31.02% of the Shares in issue as at the Latest Practicable Date.

(ii) Share options

The following Directors were granted share options to subscribe for Shares:

		Share options
	Date of	balance at the
	share	Latest	Subscription
	options	Practicable	price	Exercise
Name of Directors	granted	Date	HK$	period
Mr. Horst Julius Pudwill	6.6.2001	800,000*	2.0920	6.6.2001 – 5.6.2006
	19.6.2001	3,000,000*	2.2600	19.6.2001 – 18.6.2006
	5.7.2001	1,200,000*	2.1480	5.7.2001 – 4.7.2006
	28.6.2002	12,864,000**	7.2000	28.6.2002 – 27.6.2007
Mr. Roy Chi Ping Chung	6.6.2001	1,000,000*	2.0920	6.6.2001 – 5.6.2006
	19.6.2001	1,000,000*	2.2600	19.6.2001 – 18.6.2006
	5.7.2001	1,000,000*	2.1480	5.7.2001 – 4.7.2006
	28.6.2002	6,432,000**	7.2000	28.6.2002 – 27.6.2007
Mr. Kin Wah Chan	30.4.2002	300,000**	6.4000	30.4.2002 – 29.4.2007
	5.7.2002	200,000**	6.7000	5.7.2002 – 4.7.2007
	18.10.2002	1,000,000**	5.9000	18.10.2002 – 17.10.2007
Mr. Chi Chung Chan	6.6.2001	500,000*	2.0920	6.6.2001 – 5.6.2006
	19.6.2001	500,000*	2.2600	19.6.2001 – 18.6.2006
	30.4.2002	300,000**	6.4000	30.4.2002 – 29.4.2007
	5.7.2002	200,000**	6.7000	5.7.2002 – 4.7.2007
Dr. Akio Urakami	6.6.2001	250,000*	2.0920	6.6.2001 – 5.6.2006
	30.4.2002	250,000**	6.4000	30.4.2002 – 29.4.2007
	5.7.2002	100,000**	6.7000	5.7.2002 – 4.7.2007
Mr. Vincent	30.4.2002	200,000**	6.4000	30.4.2002 – 29.4.2007
Ting Kau Cheung
Mr. Joel Arthur Schleicher	30.4.2002	100,000**	6.4000	30.4.2002 – 29.4.2007
Mr. Christopher	30.4.2002	100,000**	6.4000	30.4.2002 – 29.4.2007
Patrick Langley

— 120 —

GENERAL INFORMATION

APPENDIX IV

Notes:

• Share options granted under the share option scheme adopted by the Company on 25th May, 2001.

• ** Share options granted under the share option scheme adopted by the Company on 28th March, 2002.

Save as disclosed herein, as at the Latest Practicable Date, none of the Directors or chief executives of the Company had any interest in the share capital of the Company or any associated corporations (within the meaning of the SDI Ordinance) which were required to be notified to the Company and the Stock Exchange pursuant to Section 28 of the SDI Ordinance (including the interests which they were deemed or taken to have under Section 31 or Part I of the Schedule to the SDI Ordinance) or pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules or which are required, pursuant to Section 29 of the SDI Ordinance, to be entered in the register referred to therein.

(b) Interests in contract or arrangement

Mr. Vincent Ting Kau Cheung is the managing partner of the firm of solicitors of Vincent T. K. Cheung, Yap & Co. (the “Firm”), which firm has been retained as the legal advisers to the Company (as to Hong Kong law) in connection with the Merger and will receive normal professional fees therefore. As advised by Mr. Vincent Ting Kau Cheung, the fees payable by the Company to the Firm represented less than 1% of the total fee income of the Firm for each of the Firm’s two financial years ended 31st March, 2002. Based on the foregoing, the Directors (except Mr. Vincent Ting Kau Cheung) consider that Mr. Vincent Ting Kau Cheung’s interest in the Merger to be immaterial. As at the Latest Practicable Date, Mr. Vincent Ting Kau Cheung was personally interested in 960,000 Shares and will be eligible to vote at the Extraordinary General Meeting.

None of the Directors is materially interested (other than the interest of Mr. Vincent Ting Kau Cheung in his capacity as legal advisers as mentioned above) in any contract or arrangement subsisting as at the Latest Practicable Date which is significant in relation to the business of the Group taken as a whole.

(c) Interests in assets

Since 31st December, 2001, the date to which the latest published audited financial statements of the Company were made up, none of the Directors has, or has had, any direct or indirect interest in any assets which have been acquired, disposed of by or leased to or which are proposed to be acquired, disposed of by or leased to, any member of the Group.

— 121 —

GENERAL INFORMATION

APPENDIX IV

MATERIAL CONTRACTS

Save as disclosed below, none of the Company or any other members of the Group has entered into any material contracts (not being contracts entered into in the ordinary course of business carried on by the Group) within the last two years preceding the date of this circular and which are or may be material:

1. the Merger Agreement;

2. a placing and underwriting agreement dated 25th April, 2002 made between Mr. Horst Julius Pudwill and Mr. Roy Chi Ping Chung (collectively, the “Vendors”), CLSA Limited (“CLSA”) and the Company whereby, the Vendors had appointed CLSA and Cazenove Asia Limited as the placing agents to unconditionally place 60 million existing ordinary shares (“Placing Shares”) of the Company at a price of HK$6.275 per Placing Share; and

3. a subscription agreement dated 25th April, 2002 made between Mr. Horst Julius Pudwill and Mr. Roy Chi Ping Chung (collectively, the “Subscribers”) and the Company whereby, the Subscribers agreed to subscribe for 60 million new Shares (“Subscription Shares”) at a price of HK$6.275 per Subscription Share.

SUBSTANTIAL SHAREHOLDER

Other than the interests disclosed under the heading “Disclosure of Interests” above, the register of substantial shareholders maintained by the Company pursuant to Section 16(1) of the SDI Ordinance discloses no other person as having an interest representing 10% more of the issued share capital of the Company as at the Latest Practicable Date.

SERVICE CONTRACTS

(a) The Group

None of the Directors has an unexpired service contract with the Company or any of its subsidiaries which is not determinable by the Company or the relevant subsidiary within one year without payment of compensation, other than statutory compensation.

(b) The Royal Group

Save for the service agreement of Mr. Michael Merriman as disclosed in the paragraph headed “Information on Royal” under the “Letter from the Board” of this circular, none of the directors of Royal has an unexpired service contract with Royal or any of its subsidiaries which is not determinable by Royal or the relevant subsidiary within one year without payment of compensation, other than statutory compensation.

— 122 —

GENERAL INFORMATION

APPENDIX IV

LITIGATION

(a) The Group

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against the Company or any of its subsidiaries.

(b) The Royal Group

The Hoover Company (“Hoover”) filed a lawsuit in federal court, in the Northern District of Ohio (case #1:00cv0347), against Royal on 4th February, 2000, under the patent, trademark, and unfair competition laws of the US. The Complaint asserted that Royal’s Dirt Devil Easy Steamer infringed three utility patents and two design patents held by Hoover, and also that the Easy Steamer design infringed the trade dress of Hoover’s carpet extractor products. Royal filed a lawsuit in federal court, in the Northern District of Ohio (case #1:01cv2775), against Hoover on 10th December, 2001, under the patent, trademark and unfair competition laws of the US. The Complaint asserted that Hoover infringed certain patents relating to bagless technology held by Royal. As advised by Royal’s management, no provision was made by Royal for this lawsuit in its financial statements for the two years ended 31st December, 2001 as it was not certain, based on available information at the relevant year end date, whether this lawsuit would crystallise into a liability to Royal. On 17th October, 2002, Royal and Hoover reached a settlement of all patent-related litigation described above. Hoover has granted rights to Royal with regard to its existing carpet extractor patents. Royal has granted rights to Hoover with regard to its existing bagless upright vacuum cleaner patents. The settlement includes cash payments to Royal.

Royal filed a lawsuit in federal court, in the Northern District of Ohio (case #1:02cv0338), against Bissell Homecare, Inc. (“Bissell”) on 22nd February, 2002, under the patent, trademark and unfair competition laws of the US. The Complaint asserts that Bissell infringes certain patents relating to bagless technology held by Royal. Royal has already proven the validity of the patents of its bagless vacuum technology by obtaining favourable settlements from Hoover as mentioned above. Royal seeks damages, injunction on future production and legal fees. No specific amount of damages was claimed by Royal and the amount of damages will be determined by the relevant US courts. As advised by Royal’s management, Royal’s attorneys and Bissell’s attorneys have exchanged correspondence and other pre-trial court documents and no court hearing has been fixed for this lawsuit as at the Latest Practicable Date. As advised by Royal’s management, if Royal were to lose this lawsuit, which Royal’s management believes to be unlikely, it would not have a material adverse effect on Royal’s consolidated financial position, results of operations or cash flows.

— 123 —

GENERAL INFORMATION

APPENDIX IV

Bissell Homecare, Inc. (“Bissell”) filed a lawsuit in federal court, in the Eastern District of Michigan (case #1:02cv71079), against Royal on 20th March, 2002, under the patent, trademark and unfair competition laws of the US. On 25th April, 2002, Royal filed a Motion to Transfer the case from the Eastern District of Michigan to the Northern District of Ohio. On 19th June, 2002, the Court transferred the case to the Northern District of Ohio. On 15th July, 2002 the case (now 1:02cv1358) was assigned to Judge Leslie Wells in the Northern District of Ohio. The Complaint asserts that Royal’s Dirt Devil Easy Steamer and Platinum Force Extractor infringes certain patents held by Bissell. As advised by Royal’s management, these products account for less than 10% of the total revenue and profit of Royal. Bissell seeks damages, injunction on future production and legal fees. No specific amount of damages was claimed by Bissell and the amount of damages will be determined by the relevant US courts. As further advised by Royal’s management, Bissell’s attorneys and Royal’s attorneys have exchanged correspondence and other pre-trial court documents and no court hearing has been fixed for this lawsuit as at the Latest Practicable Date. Royal is vigorously defending the suit and believes it is without merit. According to the opinion of Royal’s legal advisers, Royal’s management believes that Royal has a good defence against this lawsuit. In addition, Royal’s management believes that its claims against Bissell for infringement of Royal’s bagless vacuum technology as mentioned above would more than offset Bissell’s claims against Royal under this lawsuit. As further advised by Royal’s management, no provision was made by Royal for this lawsuit in its financial statements for the year ended 31st December, 2002 as it was not certain, based on all available information on 31st December, 2002, whether this lawsuit would crystallise into a liability of Royal. Nevertheless, if Bissell were to prevail on all of its claims, it would have a material adverse effect on Royal’s consolidated financial position, results of operations or cash flows.

Royal filed a lawsuit in federal court, in the Northern District of Ohio (case #1:02cv1127), against White Consolidated, Ltd. (Eureka) on 14th June, 2002, under the patent, trademark and unfair competition laws of the US. The Complaint asserts that Eureka infringes certain patents relating to bagless technology held by Royal. Royal has already proven the validity of the patents of its bagless vacuum technology by obtaining favourable settlements from Hoover as mentioned above. Royal seeks damages, injunction on future production and legal fees. No specific amount of damages was claimed by Royal and the amount of damages will be determined by the relevant US courts. As advised by Royal’s management, Royal’s attorneys and Eureka’s attorneys have exchanged correspondence and other pre-trial court documents and no court hearing has been fixed for this lawsuit as at the Latest Practicable Date. As further advised by Royal’s management, if Royal were to lose this lawsuit, which Royal’s management believes to be unlikely, it would not have a material adverse effect on Royal’s consolidated financial position, results of operations or cash flows.

— 124 —

APPENDIX IV

GENERAL INFORMATION

Royal filed a lawsuit in federal court, in the Northern District of Ohio (case #1:02cv2249) against Euro-Pro Corporation and Sanyo North America Corporation (together referred to as “Defendants”) on 15th November, 2002, under the patent, trademark and unfair competition laws of the US. The Complaint asserts that the Defendants infringe certain patents relating to bagless technology held by Royal. Royal has already proven the validity of the patents of its bagless vacuum technology by obtaining favourable settlements from Hoover as mentioned above. Royal seeks damages, injunction on future production and legal fees. No specific amount of damages was claimed by Royal and the amount of damages will be determined by the relevant US courts. As advised by Royal’s management, Royal’s attorneys and the Defendants’ attorneys have exchanged correspondence and other pre-trial court documents and no court hearing has been fixed for this lawsuit as at the Latest Practicable Date. As further advised by Royal’s management, if Royal were to lose this lawsuit, which Royal’s management believes to be unlikely, it would not have a material adverse effect on Royal’s consolidated financial position, results of operations or cash flows.

Phone Zap, LLC (“Phone Zap”) filed a lawsuit in US District Court, District of Columbia (case #1:03cv00013), against Royal and Privacy Technologies, Inc., a subsidiary of Royal, on 6th January, 2003, under the patent, trademark and unfair competition laws of the US. No specific amount of damages has been quantified by Phone Zap and the amount of damages will be determined by the relevant US courts. The Complaint asserts trademark infringement by Royal and Privacy Technologies, Inc. with its Telezapper[®] trademark. As advised by Royal’s management, these products account for approximately 30% of the total revenue and profit of Royal. As further advised by Royal’s management, Phone Zap’s attorneys and Royal’s attorneys have exchanged correspondence and other pre-trial court documents and no court hearing has been fixed for this lawsuit as at the Latest Practicable Date. Royal is vigorously defending the suit and believes it is without merit. According to the opinion of Royal’s legal advisers, Royal’s management believes that there are significant weaknesses in Phone Zap’s lawsuit. To begin with, Phone Zap’s trademark application appears to be invalid. Even assuming that such trademark application is valid, Phone Zap has to prove that customers were misled by Royal’s products and thought that they were buying Phone Zap’s products, which are not even available at retail. Accordingly, the Directors consider the chance of Phone Zap being prevailed on all of its claims to be low. As further advised by Royal’s management, no provision was made by Royal for this lawsuit in its financial statements for the year ended 31st December, 2002 as it was not certain, based on all available information on 31st December, 2002, whether this lawsuit would crystallise into a liability of Royal. Nevertheless, if Phone Zap were to prevail on all of its claims, it would have a material adverse effect on Royal’s consolidated financial position, results of operations or cash flows.

Royal is involved in various other claims and litigation arising in the ordinary and normal course of business and the amount of each such claims and litigation does not exceed US$100,000 (or HK$780,000). Royal has product liability and general liability insurance policies in amounts that should cover such claims and Royal’s management believes such insurance coverage to be reasonable. There can be no assurance, however, that such insurance will be adequate to cover all potential product or other liability claims against Royal. In the opinion of Royal’s management, the ultimate resolution of these actions will not materially affect the consolidated financial position, results of operations or cash flows of Royal.

— 125 —

GENERAL INFORMATION

APPENDIX IV

MISCELLANEOUS

1. The registered office of the Company is situated at 24th Floor, CDW Building, 388 Castle Peak Road, Tsuen Wan, New Territories, Hong Kong.

2. The Secretary of the Company is Mr. Chi Chung Chan who is a fellow member of The Chartered Association of Certified Accountants and The Hong Kong Society of Accountants, an associate of the Taxation Institute of Hong Kong and qualified to practise as a Certified Public Accountant in Hong Kong.

3. The registrars and transfer office of the Company is Secretaries Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.

4. The English text of this circular and proxy form shall prevail over the Chinese text.

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the registered office of the Company at 24th Floor, CDW Building, 388 Castle Peak Road, Tsuen Wan, New Territories, Hong Kong during normal business hours up to and including 31st March, 2003:

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

• (b) the annual report of the Company for the year ended 31st December, 2001 and the annual reports of Royal for each of the years ended 31st December, 2000 and 2001;

• (c) the interim report of the Group for the six months ended 30th June, 2002;

• (d) the relevant provisions of the OGCL regarding the rights and obligations of the holders of Dissenting Shares; and

• (e) the material contracts referred to on page 122 in this Appendix.

— 126 —

NOTICE OF EXTRAORDINARY GENERAL MEETING

==> picture [330 x 31] intentionally omitted <==

(Incorporated in Hong Kong with limited liability)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “Extraordinary General Meeting”) of the shareholders of Techtronic Industries Company Limited (the “Company”) will be held at Chatham Room, Level 7, Conrad Hong Kong ,Pacific Place, 88 Queensway, Hong Kong on 31st March, 2003 at 9:30 a.m., for the purpose of considering and, if thought fit, passing with or without amendments, the following resolution as an ordinary resolution of the Company:

ORDINARY RESOLUTION

“THAT the Merger Agreement (as defined in the circular dated 6th March, 2003 issued by the Company to its shareholders (the “Circular”), a copy of which has been produced to this meeting and marked “A” and signed by the Chairman of this meeting for the purpose of identification), the Merger (as defined in the Circular, a copy of which has been produced to this meeting and marked “B” and signed by the Chairman of this meeting for the purpose of identification) and all other transactions contemplated therein, be and are hereby confirmed and approved and any director of the Company as directed by the board of the Company be authorised to execute all such documents and to do all such acts, matters and things as he may in his discretion consider necessary or desirable on behalf of the Company for the purpose of or in connection with the Merger or the implementation or the exercise or enforcement of any of the rights and performance of the obligations under the Merger Agreement.”

By order of the board Techtronic Industries Company Limited Chi Chung Chan Company Secretary

Hong Kong, 6th March, 2003

Registered Office:

24th Floor

CDW Building 388 Castle Peak Road Tsuen Wan New Territories Hong Kong

— 127 —

NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

1. A member entitled to attend and vote at the Extraordinary General Meeting is entitled to appoint one or more proxies to attend and, on a poll, vote in his stead. A proxy need not be a member of the Company.

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

3. In order to be valid, the form of proxy and the power of attorney or other authority, if any, under which it is signed, or a notarially certified copy thereof, must be lodged with the registered office of the Company at 24th Floor, CDW Building, 388 Castle Peak Road, Tsuen Wan, New Territories, Hong Kong not less than 48 hours before the time appointed for holding the Extraordinary General Meeting or any adjourned meeting (as the case may be). Completion and return of the form of proxy shall not preclude members from attending and voting in person at the Extraordinary General Meeting or at any adjourned meeting should they so wish.

— 128 —

==> picture [330 x 32] intentionally omitted <==

(Incorporated in Hong Kong with limited liability)

FORM OF PROXY

I/We[(1)]

of

,

being the registered holder(s) of[(2)] shares of HK$0.20 each in the capital of Techtronic Industries Company Limited (the “Company”), HEREBY APPOINT[(3)] the Chairman of the meeting or[(3)]

of

as my/our proxy to act for me/us and on my/our behalf at the Extraordinary General Meeting (or at any adjournment thereof) of the Company to be held at Chatham Room, Level 7, Conrad Hong Kong, Pacific Place, 88 Queensway, Hong Kong on 31st March, 2003 at 9:30 a.m., for the purpose of considering and, if thought fit, passing the resolution as set out in the notice convening the said meeting and at such meeting (or at any adjournment thereof) to vote for me/us in my/our name(s) in respect of the said resolution as hereunder indicated, and, if no such indication is given, as my/our proxy thinks fit.

ORDINARY RESOLUTION

FOR[(4)] AGAINST[(4)]

Date:

Signature[(6)] :

Notes:

1. Full name(s) and address(es) to be inserted in BLOCK CAPITALS.

2. Please insert the number of shares in which the proxy relates registered in your name(s). If no number is inserted, this form of proxy will be deemed to relate to all the shares in the Company registered in your name(s).

3. If any proxy other than the Chairman of the meeting is preferred, strike out the words “the Chairman of the meeting or” and insert the name and address of the proxy desired in the space provided. ANY ALTERATION MADE TO THIS FORM OF PROXY MUST BE INITIALLED BY THE PERSON WHO SIGNS IT.

4. IMPORTANT: IF YOU WISH TO VOTE FOR THE RESOLUTION, TICK IN THE BOX MARKED “FOR”. IF YOU WISH TO VOTE AGAINST THE RESOLUTION, TICK IN THE BOX MARKED “AGAINST”. Failure to tick either box will entitle your proxy to cast your vote at his discretion. Your proxy will also be entitled to vote at his discretion on any resolution properly put to the meeting other than that referred to in the notice convening the meeting.

5. You are requested to lodge this form of proxy, together with the power of attorney (if any) or other authority (if any) under which it is signed or a notarially certified copy thereof, at the registered office of the Company at 24th Floor, CDW Building, 388 Castle Peak Road, Tsuen Wan, New Territories, Hong Kong not less than 48 hours before the time appointed for the holding of the meeting (or any adjournment thereof).

6. This form of proxy must be signed by you or your attorney duly authorised in writing or, in the case of a corporation, must be either under its common seal or under the hand of an officer or attorney duly authorised.

7. In the case of joint holders of any share, any one of such persons may vote at the said meeting, either personally or by proxy, in respect of such share as if he were solely entitled thereto, but if more than one of such joint holders is present at the said meeting, personally or by proxy, that one of the said persons so present whose name stands first on the register in respect of such share shall alone be entitled to vote in respect thereof.

8. A proxy need not be a member of the Company but must attend the meeting in person to represent you. Completion and return of the form of proxy will not preclude you from attending and voting at the said meeting if you so wish.