Kantone Holdings Limited — Proxy Solicitation & Information Statement 2005

Sep 20, 2005

IMPORTANT

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 advisers.

If you have sold or transferred all your shares in Kantone Holdings Limited, you should hand this circular at once to the purchaser or 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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KANTONE HOLDINGS LIMITED 看通集團有限公司[*]

(incorporated in the Cayman Islands with limited liability)

(Stock Code: 1059)

DISCLOSEABLE TRANSACTION

ACQUISITION AND SUBSCRIPTION OF SHARES IN A SYSTEMS PROVIDER FOR E-LOTTERY IN THE PRC

17 September 2005

• For identification purpose only

CONTENTS

		Page
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
LETTER FROM THE BOARD
1.	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
2.	Details Of The Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
3.	Information On The Target Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
4.	Information On The Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
5.	Reasons And Benefits Of The Acquisition And The Subscription . . . . . . .	16
6.	Financial Impact Of The Acquisition And The Subscription . . . . . . . . . . .	17
7.	General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
8.	Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
APPENDIX – GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		19

DEFINITIONS

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

• “Acquisition” the acquisition of the Sale Shares by the Purchaser pursuant to the terms and conditions of the Agreement

• “AML” Aspire Management Limited, a company incorporated in the British Virgin Islands with limited liability

• “Agreement” the agreement dated 27 August 2005 and entered into between the Vendors, the Purchaser and AML in relation to the Acquisition and the Subscription

• “Anhui Province Welfare 安徽省福利彩票發行中心 , a PRC governmental Lottery Issue Centre” authority authorised to operate the sale of welfare lottery tickets in the Anhui province and is directly under the auspices of the provincial civil affairs department and is supervised by the 中國福利彩票發 行管理中心 (China Welfare Lottery Issue and Administration Centre)

• “Anhui Co-operative Agreement” an agreement dated 28 July 2005 and made between Anhui Province Welfare Lottery Issue Centre and Shenzhen Helper, as supplemented by an agreement dated 16 August 2005 and made between the same parties

• “associate(s)” shall have the meaning ascribed to it under the Listing Rules

• “Board” the board of Directors “Business Day” a day on which banks are normally open for business in Hong Kong (excluding Saturdays and days on which a tropical cyclone warning signal number 8 or above or a “black” rain warning signal is hoisted in Hong Kong at any time between 9:00 a.m. and 5:00 p.m.)

• “Company” Kantone Holdings Limited, a company incorporated in the Cayman Islands with limited liability and the securities of which are listed on the main board of the Stock Exchange

• “Completion” completion of the Agreement in accordance with its terms

• “connected person(s)” shall have the meaning ascribed to it under the Listing Rules

– 1 –

DEFINITIONS

“Directors”	the directors of the Company
“e-lottery”	lottery using electronic, paper-less platforms, currently
	comprising fixed telephones, mobile phones, WAP
	phones and the websites operated by Shenzhen
	Helper’s business alliances
“Group”	the Company together with its subsidiaries
“Hong Kong”	Hong Kong Special Administrative Region of the PRC
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“Latest Practicable Date”	15 September 2005, being the latest practicable date
	prior to the printing of this circular for ascertaining
	certain information contained herein
“Listing Rules”	Rules Governing the Listing of Securities on the Stock
	Exchange
“Long Stop Date”	26 September 2005, or such later date as the Purchaser
	may agree, being the date on which the conditions for
	Completion, particulars of which are set out in the
	paragraph “Conditions for Completion” in this
	circular, must be fulfilled or, as the case may be,
	waived
“Mr. Lo”	Mr. Lo Ming Chi, Charles, one of the Vendors and a
	shareholder of AML
“Mr. Wang”	Mr. Wang Yu Peng, one of the Vendors and a
	shareholder of AML
“PRC”	the People’s Republic of China which, for the purpose
	of this circular only, excludes Hong Kong, the Macau
	Special Administrative Region of the PRC and Taiwan
“Purchaser”	Bingo Profits Limited, a company incorporated in the
	British Virgin Islands and a wholly owned subsidiary
	of the Company
“Reorganisation”	the reorganisation of the Target Group to be
	undertaken by the Vendors and AML as set out in the
	paragraph headed “Reorganisation” in this
	announcement
“RMB”	Renminbi, the lawful currency of the PRC

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DEFINITIONS

“Sale Shares”

the 660,000 shares of US$1 each in the capital of AML to be acquired by the Purchaser pursuant to the Acquisition

“SFO” Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

“Shanghai Co-operative an agreement dated 24 May 2000 and made between Agreement” Shanghai Welfare Lottery Issue Centre and Shenzhen Helper, as supplemented by an agreement dated 12 July 2001 and made between the same parties

“Shanghai Welfare Lottery 上海市福利彩票發行中心 , a PRC governmental Issue Centre” authority authorised to operate the sale of welfare lottery tickets in Shanghai and is directly under the auspices of the local civil affairs department and is supervised by the 中國福利彩票發行管理中心 (China Welfare Lottery Issue and Administration Centre)

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

• “Shareholder(s)” holder(s) of Share(s)

• “Shenzhen Co-operative an agreement dated 23 April 2004 between Shenzhen Agreement” Welfare Lottery Issue Centre and Shenzhen Helper

• “Shenzhen Hengyu” 囱譽科技 (深圳 )有限公司 (Shenzhen Hengyu Science and Technology Co., Ltd.), a wholly foreign owned enterprise established in the PRC and a wholly owned subsidiary of AML

“Shenzhen Helper” 深圳市囱朋科技開發有限公司 (Shenzhen Helper Science Development Co., Ltd.), a limited liability company established in the PRC which is owned as to about 61.54% by Shenzhen Hengyu, 23.08% by Mr. Wang and 15.38% by Shenzhen Helper Information Technology Co., Ltd., a company owned by the employees of Shenzhen Helper

• “Shenzhen Welfare Lottery Issue Centre”

深圳市福利彩票發行中心 , a PRC governmental authority authorised to operate the sale of welfare lottery tickets in Shenzhen and is directly under the auspices of the local civil affairs department and is supervised by the 中國福利彩票發行管理中心 (China Welfare Lottery Issue and Administration Centre)

– 3 –

DEFINITIONS

“SMS”	acronym of short message service
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Subscription”	the subscription of the Subscription Shares by the
	Vendors and the Purchaser pursuant to the terms and
	conditions of the Agreement
“Subscription Shares”	the aggregate of 400,000 shares of US$1 each in the
	capital of AML to be subscribed by the Purchaser and
	the Vendors pursuant to the Subscription
“Target Group”	collectively, AML, Shenzhen Hengyu and Shenzhen
	Helper
“US$”	United States dollars, the lawful currency of the United
	States of America
“Vendors”	collectively, Mr. Wang and Mr. Lo
“WAP”	acronym of wireless application protocol, an
	international standard for access of internet through
	mobile phones
“%”	per cent.

(In this circular, the exchange rate of HK$1.00 to RMB1.043 is used. However, it does not constitute a representation that any amount has been or may be exchanged at this or another rates or at all.)

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LETTER FROM THE BOARD

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KANTONE HOLDINGS LIMITED 看通集團有限公司[*]

(incorporated in the Cayman Islands with limited liability)

(Stock Code: 1059)

Directors:

Paul Kan Man Lok (Chairman) Lai Yat Kwong Leo Kan Kin Leung[#] Shirley Ha Suk Ling[#] Paul Michael James Kirby[#] Liang Xiong Jian[##] Ye Pei Da[##] Frank Bleackley[##] Julia Tsuei Jo[##] Ho Yiu Ming[##]

Registered office:

Century Yard, Cricket Square Hutchins Drive, P.O. Box 2681GT George Town, Grand Cayman Cayman Islands British West Indies

Head office in Hong Kong: 5th Floor, Kantone Centre 1 Ning Foo Street Chaiwan Hong Kong

Non-executive Directors

Independent non-executive Directors

17 September 2005

To the Shareholders

DISCLOSEABLE TRANSACTION ACQUISITION AND SUBSCRIPTION OF SHARES IN A SYSTEMS PROVIDER FOR E-LOTTERY IN THE PRC

Dear Sir or Madam,

1. INTRODUCTION

By the announcement dated 27 August 2005, the Board announced that on 27 August 2005, the Purchaser, a wholly owned subsidiary of the Company, entered into the Agreement with the Vendors and AML pursuant to which the Purchaser has agreed to purchase from the Vendors an aggregate of 660,000 Sale Shares at the aggregate cash consideration of HK$52 million. The Purchaser and the Vendors have also agreed to subscribe for an aggregate of 400,000 Subscription Shares, in proportion to their respective

• For identification purpose only

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LETTER FROM THE BOARD

shareholdings in AML upon Completion, for cash at the aggregate consideration of HK$30 million. Immediately after Completion, (1) the entire issued share capital of AML will be owned as to 60% by the Group and as to 20% by each of the Vendors; and (2) AML will have an effective entitlement to 90% of the turnover and profit attributable to shareholders of Shenzhen Helper.

Under Rule 14.33 of the Listing Rules, the Acquisition and the Subscription constitute discloseable transactions for the Company under Chapter 14 of the Listing Rules. The purpose of this circular is to provide you with further information regarding the Acquisition and the Subscription.

2. DETAILS OF THE TRANSACTIONS

Date of the Agreement

27 August 2005

Parties to the Agreement

• (i) The Purchaser, a wholly owned subsidiary of the Company, as purchaser and subscriber;

• (ii) Mr. Wang and Mr. Lo, as the vendors and subscribers; and

• (iii) AML, as the company.

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, the Vendors, AML and its ultimate beneficial owners are third parties independent of the Company and are not connected persons of the Company.

One of the brokers of the Group, who is familiar with its IT business and integrated solutions, perceived synergy between the Group and the Target Group and introduced the Vendors to the Group.

The Acquisition

AML is a company incorporated in the British Virgin Islands with limited liability, the authorised share capital of which is US$20 million divided into 20 million shares of US$1 each. As at the date of the Agreement, 1.1 million shares were in issue and were owned as to 550,000 shares by Mr. Wang and 550,000 shares by Mr. Lo. Under the memorandum and articles of association of AML, its shareholders are not entitled to any pre-emptive right to the Sale Shares upon their transfer.

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LETTER FROM THE BOARD

Under the Agreement, the Purchaser has agreed to acquire from the Vendors an aggregate of 660,000 Sale Shares, representing 60% of the existing issued share capital of AML, at an aggregate cash consideration of HK$52 million which will be payable in full on Completion.

Based on its audited financial statements for the year ended 31 December 2004 which were prepared in accordance with the accounting principles generally accepted in the PRC (the “ PRC GAAP ”), the audited net asset value of Shenzhen Helper as at 31 December 2004 was about RMB3.99 million (equivalent to about HK$3.83 million) and the audited loss attributable to shareholders for the year was about RMB2.01 million (equivalent to about HK$1.93 million). Based on its audited financial statements for the seven months ended 31 July 2005 which were prepared in accordance with the PRC GAAP, the net asset value of Shenzhen Helper as at 31 July 2005 was about RMB8.05 million (equivalent to about HK$7.72 million) and the profit attributable to shareholders for the seven months ended 31 July 2005 was about RMB1.05 million (equivalent to about HK$1.01 million). The purchase price for the Sale Shares was determined after arm’s length negotiation between the Company and the Vendors, having taken into account the net asset value of Shenzhen Helper as at 31 July 2005 and the financial results of Shenzhen Helper for the seven months ended 31 July 2005. In arriving at the consideration for the Sale Shares, the Directors have also taken into account principally the established business record of the Target Group, which was founded in 1996. If the Group were to develop the business on its own, it would have cost the Group a similar amount, if not more to attain the Target Group’s present stage of development due to Hong Kong’s higher labour and administrative costs. The Directors, including the independent nonexecutive Directors, consider that the purchase price for the Sale Shares is fair and reasonable so far as the Company and its Shareholders are concerned, and it is the present intention of the Board that the purchase price for the Sale Shares will be satisfied by the internal resources of the Group.

The Subscription

Under the Agreement, the parties have also agreed that, contemporaneously upon completion of the Acquisition, the Vendors and the Group will subscribe for an aggregate of 400,000 Subscription Shares for cash at the aggregate consideration of HK$30 million in the following manner:

	Number of	Subscription Price
Name of the subscriber	Subscription Shares	payable
The Purchaser	240,000	HK$18 million
Mr. Wang	80,000	HK$6 million
Mr. Lo	80,000	HK$6 million

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LETTER FROM THE BOARD

The subscription price for the Subscription Shares will be payable in full upon Completion. It was determined after arm’s length negotiation among the parties, taking into account the expected capital requirement for the future expansion and development of the Target Group. Save as disclosed above, the Group does not have any other future capital or financing commitment under the Agreement. The Directors, including the independent non-executive Directors, consider that the subscription price for the Subscription Shares is fair and reasonable so far as the Company and its Shareholders are concerned, and it is the present intention of the Board that the subscription price for the Subscription Shares to be subscribed by the Group will be satisfied by the internal resources of the Group. The Directors consider that the aggregate subscription price for the Subscription Shares should be sufficient for the Group’s preliminary plan for the future development of the Target Group as set out in the paragraph headed “ Information on the Target Group ” below.

The shareholding structure of AML immediately prior to and after Completion will be as follows:

Shareholder/ the Purchaser Mr. Wang Mr. Lo The Purchaser Total:	Shareholding in AML as at the date of this announcement No. of shares % 550,000 50 550,000 50 0 0 1,100,000 100	Shareholding in AML immediately after the Acquisition No. of shares % 220,000 20 220,000 20 660,000 60 1,100,000 100	Shareholding in AML immediately after the Subscription No. of shares % 300,000 20 300,000 20 900,000 60 1,500,000 100	Shareholding in AML immediately after the Subscription No. of shares % 300,000 20 300,000 20 900,000 60 1,500,000 100
				100

The Reorganisation

Under the Agreement, each of the Vendors and AML have also undertaken to the Group that it/he will implement or procure the implementation of the following steps on or before the date falling seven clear Business Days immediately preceding the Long Stop Date:

• (i) completion of AML’s contribution of the sum of RMB5 million (equivalent to about HK$4.79 million) to Shenzhen Hengyu’s registered capital which has in July 2005 been approved to be increased from RMB4 million (equivalent to about HK$3.84 million) to RMB9 million (equivalent to about HK$8.63 million);

• (ii) the registration with the Shenzhen Municipal Administration of Industry and Commerce of the acquisition of RMB5 million (equivalent to about HK$4.79 million) registered capital in Shenzhen Helper by Shenzhen Hengyu from Mr. Wang as referred to in the paragraph headed “ Information on the Target Group ” below;

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LETTER FROM THE BOARD

• (iii) waiver and release of all liabilities owing by the Target Group to the Vendors and/or their respective associates up to the date of Completion; and

• (iv) the entering into such agreement(s), in form and substance satisfactory to the Group, between shareholders of Shenzhen Helper and/or between Shenzhen Hengyu and Shenzhen Helper such that Shenzhen Hengyu will have an effective entitlement to 90% of the turnover and profit attributable to shareholders of Shenzhen Helper.

On 14 September 2005, Shenzhen Hengyu and Shenzhen Helper entered into a software development and technical support contract (the “ Technical Support Contract ”) pursuant to which Shenzhen Hengyu will, among others, provide technical services and support in respect of the development, management, operation, maintenance, sales and marketing of telephone betting operating systems and the related software systems of Shenzhen Helper and other relevant parties, which include the relevant regional welfare lottery issue centres and other operators of other sales medium such as telecommunications companies, banks and web portals, provision of staff training and other software and technical service, relating to the e-lottery business of Shenzhen Helper. The Directors will review and make necessary re-allocation of human and other resources between Shenzhen Hengyu and Shenzhen Helper to facilitate Shenzhen Hengyu in providing the above services under the Technical Support Contract.

In exchange for the provision of the above services, Shenzhen Hengyu will be entitled to 90% of the gross profit of Shenzhen Helper for each month during the term of the Technical Support Contract as service fees, and it will reimburse Shenzhen Helper 90% of the operational expenses (excluding tax and the aforesaid service fees payable to Shenzhen Hengyu) in respect thereof. As a result, Shenzhen Hengyu will have an effective entitlement to 90% of the turnover and profit attributable to shareholders of Shenzhen Helper.

As advised by the Company’s PRC legal advisers, the Technical Support Contract is legal and valid, and constitutes binding obligations on the parties thereof in accordance with its terms, and it is not necessary for Shenzhen Helper to obtain approval from its shareholders in respect of the signing and implementation of the Technical Support Contract by Shenzhen Helper under the prevailing PRC laws and the articles of association of Shenzhen Helper. All shareholders of Shenzhen Helper had already given their consents to the signing of the Technical Support Contract by Shenzhen Helper.

The Directors consider that the terms of the Technical Support Contract are fair and reasonable and are in the interest of the Shareholders as a whole.

Conditions of Completion

Completion is conditional upon fulfillment of the following conditions:

• (i) the Group being satisfied with the results of a due diligence review of the Target Group;

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LETTER FROM THE BOARD

• (ii) the legal opinions, in form and substance satisfactory to the Group, to be issued by a firm of lawyers nominated by the Group in such jurisdiction and covering such matters relating to the corporate status and the business of the Target Group as may be required by the Group having been obtained;

• (iii) the Reorganisation having been implemented and (if so required) all necessary approvals, consents, authorizations and licences in relation thereto having been obtained from the relevant governmental authorities or parties concerned;

• (iv) all other consents and acts required under the Listing Rules being obtained and completed or, as the case may be, the relevant waiver from compliance with any of such rules being obtained from the Stock Exchange; and

• (v) none of the warranties as set out in the Agreement having been breached in any material respect (or, if capable of being remedied, has not been remedied), or is misleading or untrue in any material respect.

Under the Agreement, if the conditions above are not fulfilled or, as the case may be, waived by the Group on or before the Long Stop Date, the obligations of the parties shall cease and determine and neither party shall have any claim under the Agreement against the other parties save in respect of any antecedent breaches of the Agreement. Save in respect of conditions (iii) (other than item (iii) under the section headed “Reorganisation” above which will become effective upon Completion) and (v) above (which is only capable to be complied with upon Completion), none of the above conditions has been fulfilled or waived as at the Latest Practicable Date. Condition (iv) will be fulfilled upon despatch of this circular to the Shareholders by the Company. The Board has no intention to waive any of the above conditions as at the Latest Practicable Date. Further announcement will be made by the Company in the event of any conditions being waived by the Group.

In respect of condition (i) above, the Group has undertaken, among others, the following due diligence on the Target Group prior to the signing of the Agreement:

• conducting site visits at the premises at which the operations of the Target Group are situated;

• testing of the websites operated by the Shanghai Agricultural Bank and a web portal in Shanghai for the telephone betting operating systems developed by Shenzhen Helper;

• meetings with the senior management of the Target Group;

• reviewed the financial statements of the Target Group;

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LETTER FROM THE BOARD

• commenced its legal due diligence exercise, including, among others, review of the corporate documents of each member of the Target Group, the co-operative agreements entered into by Shenzhen Helper with other regional welfare lottery issue centres in the PRC and the licences and permits for conducting its business;

• engaging Jingtian & Gongcheng, which are qualified lawyers in the PRC and are independent of and not connected with the Group, as the Company’s PRC legal advisers to advise the Group in respect of the PRC legal matters of this transaction;

• meetings with the Company’s Hong Kong legal advisers and the PRC legal advisers to review and discuss the agreements, licences and corporate structure of the Target Group;

• instructing the PRC lawyers to advise the Group in writing on the applicable PRC laws and regulations;

• consulting 財政部彩票管理處 (The PRC Ministry of Finance Lottery Administration Commission) through the Company’s PRC legal advisers certain aspects of the regulatory framework of e-lottery.

Such due diligence exercise is ongoing and has not been completed as at the Latest Practicable Date.

Completion

Completion of the Acquisition and the Subscription shall take place simultaneously on the fifth Business Day falling on the date of fulfillment or waiver of the above conditions.

3. INFORMATION ON THE TARGET GROUP

AML is an investment holding company. It owns the entire equity interests in Shenzhen Hengyu, a wholly foreign owned enterprise in the PRC which has about 61.54% equity interest in Shenzhen Helper. In July 2005, Shenzhen Hengyu acquired from Mr Wang a portion in the sum of RMB5 million (equivalent to about HK$4.79 million) of Shenzhen Helper’s registered capital. The registration of such acquisition with the Shenzhen Municipal Administration of Industry and Commerce has already been completed. The permitted scope of business of Shenzhen Hengyu comprises the development of computer software, integration of computer systems and design, development and information consultancy in respect of computer accessories. Shenzhen Hengyu does not have any significant operations, apart from its holding of equity interest in Shenzhen Helper. As at the Latest Practicable Date, Shenzhen Hengyu’s total registered capital was RMB9 million (equivalent to about HK$8.63 million).

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LETTER FROM THE BOARD

Shenzhen Helper is principally engaged in the development and provision of paperless lottery operating systems and other technological support to PRC governmental lottery administration authorities in respect of government-organized welfare lottery business. As at the Latest Practicable Date, Shenzhen Helper’s total registered capital was RMB13 million (equivalent to about HK$12.46 million).

Pursuant to the Shanghai Co-operative Agreement, in 2002, Shenzhen Helper completed the development of telephone betting operating systems for the Shenzhen Welfare Lottery Issue Centre and the Shanghai Welfare Lottery Issue Centre, which are currently in operation. Punters can access the telephone betting systems through paperless platforms, currently comprising fixed telephones, mobile phones, WAP phones and the websites operated by the Shanghai Agricultural Bank and a web portal in Shanghai, both being business partners of Shenzhen Helper. On 1 November 1996, pursuant to an agreement made between 深大電話信息諮詢服務公司 (Shenda Telephone Information Consultancy Service Company), an independent third party, and 深圳市社會福利有獎募 捐委員會 (Shenzhen Social Welfare Lottery Charity Committee), the predecessor of Shenzhen Welfare Lottery Issue Centre, 深大電話信息諮詢服務公司 (Shenda Telephone Information Consultancy Service Company) was appointed to develop the telephone betting operating system for Shenzhen. The development was sub-contracted to Shenzhen Helper on the same date and all intellectual property rights of the system are vested in Shenzhen Helper. Shenzhen Helper completed the development in 2001.

Shenzhen Helper is also licensed to provide lottery-related information service through SMS by virtue of a value added telecommunication business operation permit (中 華人民共和國增值電信業務經營許可証 ) granted by the PRC Ministry of Information Industry. The permit covers the provision of information data through SMS by Shenzhen Helper.

As advised by the Company’s PRC legal advisers, Shenzhen Helper is a systems developer of the telephone betting operating system, which does not require any specific licence or permit in the PRC other than its business licence. Mobile phones, fixed phones, websites and WAP phones are medium operated by other telecommunications companies, banks and web portals through which punters may access the telephone betting operating system developed by Shenzhen Helper. Shenzhen Helper has also entered into various alliance agreements with telecommunications companies, banks and web portals in respect of the systems development and connections of these medium with the telephone betting operating systems developed by Shenzhen Helper for Shenzhen and Shanghai.

Shenzhen Helper has entered into the following co-operative agreements with regional welfare lottery issue centres:

• (1) the Shanghai Co-operative Agreement, pursuant to which Shenzhen Helper has agreed to undertake, among other matters:

• to develop and maintain the telephone betting operation system for Shanghai welfare lotteries;

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LETTER FROM THE BOARD

• to develop the SMS betting operating system for Shanghai welfare lotteries, and subject to the consent of Shanghai Welfare Lottery Issue Centre, to enter into alliance agreements with mobile telephone service providers in the PRC;

• the day-to-day management and operation of the telephone betting business of the Shanghai Welfare Lottery Issue Centre at the cost of Shenzhen Helper;

• to develop other sales channels for sale of telephone lottery cards;

• to participate in the marketing of the telephone betting business of the Shanghai Welfare Lottery Issue Centre and the design and development of telephone lottery cards;

• to provide systematic operational and financial training to the staff of the Shanghai Welfare Lottery Issue Centre;

Under the Shanghai Co-operative Agreement, the Shanghai Welfare Lottery Issue Centre has agreed to undertake, among other matters:

• to promote the telephone betting system for welfare lotteries in Shanghai;

• to procure the supply of telephone lottery cards;

• to provide its own sales channels for sales of telephone lottery cards by Shenzhen Helper;

• to provide training to the operational and management staff of Shenzhen Helper.

The Shanghai Co-operative Agreement is for a term of seven years commencing from May 2000. Shenzhen Helper is entitled to an aggregate fee of (i) 2% of the aggregate betting turnover placed through the betting system developed by Shenzhen Helper; (ii) a percentage of the sales of lotteries generated by the telephone cards sold by Shenzhen Helper in the lottery stations operated by Shanghai Welfare Lottery Issue Centre, currently fixed at 7%; and (iii) a percentage of the aggregate sales of lotteries generated by other sales channels developed by Shenzhen Helper, currently fixed at 6.5%. Shenzhen Helper has entered into alliance agreements with banks, mobile telephone operators and a web portal in Shanghai for the development of these sales channels.

• (2) the Shenzhen Co-operative Agreement, pursuant to which Shenzhen Helper has agreed to undertake, among other matters:

• to develop and maintain the telephone betting operation system for Shenzhen welfare lotteries;

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LETTER FROM THE BOARD

• the day-to-day management and operation of the telephone betting business of the Shenzhen Welfare Lottery Issue Centre at the cost of Shenzhen Helper;

• the marketing of the telephone betting business of the Shenzhen Welfare Lottery Issue Centre under its supervision.

The Shenzhen Welfare Lottery Issue Centre was responsible for, among other matters:

• supervising the development of the telephone betting operation system;

• notifying Shenzhen Helper, on timely basis, as and when it adopts new lottery betting methods and rules, and assist Shenzhen Helper in making the corresponding modifications to the telephone betting operation system;

• providing lottery-related information to Shenzhen Helper;

• promoting the telephone betting business in its business promotional materials;

• providing free promotional materials to Shenzhen Helper.

The Shenzhen Co-operative Agreement is for a term of five years commencing from April 2004. Shenzhen Helper is granted the first right of refusal to renew the Shenzhen Co-operative Agreement upon its expiry.

Shenzhen Helper is entitled to 5% of the total sales of lotteries generated by the betting system developed by Shenzhen Helper.

• (3) the Anhui Co-operative Agreement, pursuant to which Anhui Province Welfare Lottery Issue Centre has appointed Shenzhen Helper to design, develop and maintain the telephone betting operating system for the entire Anhui province and to assist the development of e-lottery business in Anhui province. Shenzhen Helper is entitled to 8.5% of the total sales of lotteries generated by the betting system developed by Shenzhen Helper for Anhui Province Welfare Lottery Issue Centre. The Anhui Co-operative Agreement is for a term of five years commencing from the date of the agreement, and Shenzhen Helper is granted the first right of refusal to renew the Anhui Co-operative Agreement upon its expiry for an additional term of not less than five years. Shenzhen Helper is about to commence the development of the operating system for Auhui province.

It is the plan of Shenzhen Helper to enter into co-operative agreements with other regional welfare lottery issue centres in the PRC. Shenzhen Helper also intends to expand its business by developing SMS betting operating system. Under the Shanghai Co-operative

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LETTER FROM THE BOARD

Agreement, the Shanghai Welfare Lottery Issue Centre has appointed Shenzhen Helper to develop SMS betting operating system. Shenzhen Helper has completed the development of the SMS betting operating system for Shanghai pursuant to the Shanghai Co-operative Agreement. Such SMS betting operating system has not yet been launched in the market. Under the applicable PRC laws, the issue of all forms of lotteries has to be approved by the PRC Ministry of Finance. According to the Company’s PRC legal advisers, the sale of lotteries through SMS medium in the PRC has yet to be approved by the PRC Ministry of Finance. The Directors are positive that once the requisite approval has been obtained from the PRC Ministry of Finance, Shenzhen Helper will be well placed to launch the sales of lotteries through SMS, given that under the Shanghai Co-operative Agreement, the Shanghai Welfare Lottery Issue Centre has already authorised Shenzhen Helper to develop the SMS betting operating system, the development of which has been completed, and to conduct the sales of lotteries via SMS in collaboration with other telecommunications service providers. In the event that the sale of lotteries by way of SMS medium in the PRC is approved by the PRC Ministry of Finance, SMS medium will become one of the medium for punters to access the telephone betting operating systems developed by Shenzhen Helper. The service fees payable to Shenzhen Helper, which is currently determined as a percentage to the betting turnover as mentioned above, will be applicable to the sales of lotteries generated through this new medium. Shareholders and potential investors should be aware that the sale of lotteries through SMS medium in the PRC may or may not be approved by the PRC Ministry of Finance.

Under the applicable PRC laws and regulations, regional welfare lottery issue and administration centres are authorised to subcontract to third parties for, inter alia, the development of computer operating systems and sales and marketing of lotteries pursuant to 彩票發行和銷售管理暫行規定 (Provisional Rules for the Administration of Issue and Sales of Lottery), which was promulgated by the PRC Ministry of Finance in 2002. As advised by the Company’s PRC legal advisers, except for (i) Shenzhen Helper’s business licence issued by the local Administration of Industry and Commerce in the PRC permitting Shenzhen Helper to carry on its business; and (ii) the 中國人民共和國增值電信業務經營 許可証 (value added telecommunications business operation permit) granted by the PRC Ministry of Information Industry for the provision of lottery-related information service through SMS, the Target Group is not required to obtain any other specific approval, permit or authorization for carrying on its business and operations as prescribed under the aforesaid cooperative agreements.

Based on the audited financial statements of Shenzhen Helper for each of the two years ended 31 December 2004 which were prepared in accordance with PRC GAAP, the net asset value of Shenzhen Helper as at 31 December 2003 and 31 December 2004 was about RMB5.99 million (equivalent to about HK$5.74 million) and RMB3.99 million (equivalent to about HK$3.83 million), respectively. The net loss before and after taxation and extraordinary items for each of the two financial year ended 31 December 2004 were about RMB2.5 million (equivalent to about HK$2.40 million) and RMB2.01 million (equivalent to about HK$1.93 million) respectively. Based on its audited financial statements for the seven months ended 31 July 2005 which were prepared in accordance with the PRC GAAP, the net asset value of Shenzhen Helper as at 31 July 2005 was about RMB8.05 million (equivalent to about HK$7.72 million) and the profit attributable to shareholders for the seven months ended 31 July 2005 was about RMB1.05 million (equivalent to about HK$1.01 million).

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LETTER FROM THE BOARD

4. INFORMATION ON THE GROUP

The Group is a leading supplier of IT solutions and communications services with a global market presence in over 50 countries.

5. REASONS AND BENEFITS OF THE ACQUISITION AND THE SUBSCRIPTION

The PRC Ministry of Finance is responsible for promulgating the laws, regulations and policies to govern the issue, management and sale of lotteries in the PRC. It is also responsible for the administration of the lottery market and supervision of the issue and sale activities of lotteries. The PRC Ministry of Civil Affairs is responsible for promulgating and implementing the measures for the issue, sale and receipts of lottery sales in accordance with the laws, regulations and policies set by the PRC Ministry of Finance. 中國福利彩票 發行管理中心 (China Welfare Lottery Issue and Administration Centre), being the direct subordinate of the PRC Ministry of Civil Affairs, is responsible for the issue of lottery cards and the sales is further delegated to provisional and regional welfare lottery issue and administration centres in the PRC, with the authority to subcontract third parties for, among other matters, the development of computer operating systems and sales and marketing of lotteries. In recent years, with the advance in communications technology and the wide application of fixed telephones, mobile phones, credit cards and internet in developed cities in the PRC, the lottery operation system has been computerized, and paper-less platforms, such as fixed telephones, mobile phones, electronic cards (including credit cards and telephone cards) and websites have become another popular medium of lottery betting in addition to the traditional scrubbing-to-win paper lottery.

The Group has a proven track record in e-commerce projects and extensive IT product development and services business. Leveraging on the Group’s proficiency in the provision of communications and networking solutions and solid experience in the IT industry in the PRC, the Directors believe that the Acquisition and the Subscription represent good opportunity to broaden the Group’s income stream and enhance the value of the Group when the Target Group has become fully integrated with the Group’s operations. The Directors believe that the Group can capitalize on the Target Group’s first mover advantage in the e-lottery business in the PRC to capture the growing opportunities in the PRC e-gaming market.

The Group has not been engaged in telephone betting. It has a long history of the development of call centre handling systems, which, the Directors believe, has synergy with the existing business of the Target Group. It has also committed a lot of resources in researching extensively into e-gaming, covering global gaming practices and operations. The result of such efforts are reflected in a book published in 2002 entitled “e-Gambling: In Search of an Intelligent Policy” under the Group’s publication series “The Hong Kong e-Commerce Studies Series”. The Group continues its efforts in e-gaming by investing in various gaming websites. The Acquisition therefore presents a timely opportunity for the Group to gain an entry in the e-lottery market in the PRC.

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LETTER FROM THE BOARD

6. FINANCIAL IMPACT OF THE ACQUISITION AND THE SUBSCRIPTION

The Acquisition and the Subscription will be funded by internal resources of the Group. The Directors believe that it will not significantly affect the financial position of the Group in light of its current financial status.

Upon Completion, AML will become a non-wholly-owned subsidiary of the Company and will be owned as to 60% by the Group and as to the remaining 40% by the Vendors. Shenzhen Hengyu is a wholly-owned subsidiary of AML and holds about 61.54% of Shenzhen Helper with the remaining balance of shares of about 23.08% and 15.38% owned by Mr. Wang and Shenzhen Helper Information Technology Co., Ltd., a company owned by the employees of Shenzhen Helper, respectively. As part of the Reorganisation, the Technical Support Contract was entered into between Shenzhen Hengyu and Shenzhen Helper on 14 September 2005, pursuant to which Shenzhen Hengyu will have an effective entitlement to 90% of the turnover and profit attributable to shareholders of Shenzhen Helper after Completion. Upon Completion, each member of the Target Group will be accounted for as subsidiaries of the Company and their financial results (including earnings, assets and liabilities) will be consolidated into and reflected in the financial statements of the Group.

Given the rapid economic growth in the PRC and the increasing purchasing power of the Chinese population, the lottery market in the PRC has good growth potential. The market of e-lottery is still at its developing stage, but taken into account the increasing popularity of the Internet and mobile phone as means of communication in the PRC, the Directors expect that the emergence of e-lottery will have a major impact on the PRC welfare lottery market. The Directors consider that the Acquisition and Subscription presents a timely opportunity for the Group to gain entry to the e-lottery market in the PRC, and such business is expected to contribute to the Group’s results positively in the future. The quantitative effect of earnings contribution will, however, depend on the progress of the launch of lottery operating systems and the popularity of such products in the PRC market.

As the purchase price for the Sale Shares represents a premium to the aggregate amount of its share of net assets of the Target Group, a goodwill of approximately HK$47 million will be resulted from the Acquisition. Such amount will not be amortized and will be subject to the annual impairment review as stipulated under the Hong Kong Financial Reporting Standards. It is expected that the goodwill will not have any impact on the Group’s earnings and net asset value unless impairment needs to be recognized.

7. GENERAL

As the applicable percentage ratio of the consideration test (as calculated in accordance with Rule 14.07 of the Listing Rules) for the Acquisition and the Subscription (as aggregated) is more than 5% but less than 25%, the Acquisition and the Subscription constitute discloseable transactions for the Company under Chapter 14 of the Listing Rules and are subject to the reporting and announcement requirements pursuant to Rule 14.33 of the Listing Rules, and no shareholders’ or independent shareholders’ approval is required. Details about the Acquisition and the Subscription will be included in the Company’s annual report and financial statements for the year ending 30 June 2006.

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LETTER FROM THE BOARD

8. ADDITIONAL INFORMATION

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

Yours faithfully,

By order of the Board Kantone Holdings Limited Paul KAN Man Lok

Chairman

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APPENDIX

GENERAL INFORMATION

1. RESPONSIBILITY STATEMENT

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

2. DIRECTORS’ INTERESTS AND SHORT POSITIONS IN SECURITIES

As at the Latest Practicable Date, as far as it was known by the Directors, the interests and short positions of the directors and chief executive of the Company in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which are required to be notified to the issuer and the Stock Exchange pursuant to Division 7 and 8 of Part XV of the SFO or were recorded in the register required to be kept by the Company under Section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies were as follows:

(a) Interest in issued shares

			Percentage of
		Number of	the issued
Name of director	Capacity	shares	share capital
Shares of the Company	Interest of controlled	1,794,800,714	74.02%
Mr. Paul Kan Man Lok	corporation	(Note 1)
Shares of Champion	Interest of controlled	355,783,876	28.41%
Technology Holdings	corporation	(Note 2)
Limited (“Champion”,
the holding company
of the Company)
Mr. Paul Kan Man Lok
Securities of	Interest of controlled	119,969,171	79.98%
DIGITALHONGKONG.COM	corporation	(Note 3)
(“Digital HK”, a fellow
subsidiary of the Company)
Mr. Paul Kan Man Lok

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APPENDIX

GENERAL INFORMATION

Notes:

1. Among these 1,794,800,714 Shares, 407,779,752 Shares were held by Lawnside International Limited (“ Lawnside ”) and 1,387,020,962 Shares were held by Champion. Lawnside was wholly and beneficially owned by Mr. Paul Kan Man Lok who was deemed to be interested in all the Shares in which Lawnside and Champion were interested by virtue of the SFO.

2. These 355,783,876 shares of Champion, representing 28.41% of the entire issued share capital of Champion, were held by Lawnside. Mr. Paul Kan Man Lok was deemed to be interested in all the shares in which Lawnside was interested by virtue of the SFO.

3. Among these 119,969,171 shares, 117,300,000 shares were held by Champion and 2,669,171 shares were held by Lawnside. Mr. Paul Kan Man Lok was deemed to be interested in all the shares in Digital HK in which Lawnside and Champion were interested by virtue of the SFO.

(b) Interest in warrants of Champion

		Number of shares
		to be allotted and
		issued upon
		exercise in full of
		the subscription	Percentage of
		rights attaching to	the issued
Name of director	Capacity	the warrants	share capital
Mr. Paul Kan Man Lok	Interest of controlled	66,054,182	5.27%
	corporation	(Note)

Note: Lawnside held 66,054,182 units of warrants of Champion as at the Latest Practicable Date. Mr. Paul Kan Man Lok was deemed to be interested in all the underlying shares in Champion, to which these warrants relate, in which Lawnside was interested by virtue of the SFO. These warrants would expire on 16 February 2006.

3. SUBSTANTIAL SHAREHOLDERS

• (a) As at the Latest Practicable Date, as far as it was known by the Directors, the following persons (other than a director or chief executive of the Company disclosed under “Directors’ Interests and Short Positions in Securities” section above) had an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly interested in 10% or more of the normal value of any class of shares of the Company:

			Percentage of
			the issued
Name of Shareholder	Capacity	Number of shares	share capital
Champion	Beneficial owner	1,387,020,962	57.21%
Lawnside	Beneficial owner	407,779,752	16.82%

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APPENDIX

GENERAL INFORMATION

Save as disclosed herein, there is no person known to the Directors, who, as at the Latest Practicable Date, had an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly interested in 10% or more of the normal value of any class of shares of the Company.

• (b) So far as is known to the Directors, as at the Latest Practicable Date, the following was the only person interested in 10% or more of the registered capital of the subsidiaries of the Company:

	Name of	Total amount of	Percentage of
Name of subsidiary	shareholder	issued share capital	shareholding
BEL-MULTITONE	Bharat Electronics	Rupees 6,505,000	49%
(PRIVATE) LIMITED	Limited

Save as disclosed above, as at the Latest Practicable Date and so far as is known to the Directors or chief executive of the Company, there was no other person (other than a Director or chief executive of the Company) who had an interest or short position in the Shares or underlying shares in the Company (including interest in options, if any) which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SF Ordinance, or was directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings or, as the case may be, the registered capital of any other members of the Group.

4. SERVICE AGREEMENTS

As at the Latest Practicable Date, none of the Directors had entered or proposed to enter into a service contract with any member of the Group which is not determinable by the employer within one year without payment of compensation (other than statutory compensation).

5. LITIGATION

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

6. COMPETING INTEREST

As at the Latest Practicable Date, none of the Directors and his/her respective associates was interested in any business, apart from the business of the Group, which competes or is likely to compete, either directly or indirectly, with that of the Group.

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APPENDIX

GENERAL INFORMATION

7. EXPERT

Jingtian & Gongcheng is a firm of qualified lawyers in the PRC and is the Company’s PRC legal advisers in respect of the PRC legal matters of the Acquisition, the Subscription and the transactions contemplated thereby. Its letters of advice to the Company dated 25 August 2005 and 14 September 2005 were given for the purpose of advising the Company on, among others, the applicable PRC laws and regulations.

Jingtian & Gongcheng has given and has not withdrawn its written consent to the issue of this circular with the reference to its name and its advice included in this circular in the form and context in which they respectively appear.

As at the Latest Practicable Date, Jingtian & Gongcheng did not have any shareholding, directly or indirectly, in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for shares in any member of the Group.

8. MISCELLANEOUS

• (a) The company secretary of the Company is Ms. Jennifer Cheung Mei Ha. She is a solicitor practicing in Hong Kong. She was appointed as the company secretary of the Company in January 2005.

• (b) Mr Lai Yat Kwong is the qualified accountant of the Company. He holds a Bachelor’s degree in Business Administration from the Chinese University of Hong Kong and has over 32 years of experience in accounting, auditing and company secretarial matters. He is a fellow member of the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants (Practising).

• (c) The Principal share registrar and transfer office of the Company is the Harbour Trust Co. Ltd. of 3rd Floor, One Capital Place, P.O. Box 897GT, George Town, Grand Cayman, Cayman Islands, British West Indies.

• (d) The Hong Kong branch share registrar and transfer office of the Company is Secretaries Limited of Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.

• (e) The English text of this circular shall prevail over the Chinese text in case of inconsistency.

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