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 Tse Sui Luen Jewellery (International) Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee, or to the bank, stockbroker or other agent through whom the sale or the transfer was effected for transmission to the purchaser or the transferee.

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

TSE SUI LUEN JEWELLERY (INTERNATIONAL) LIMITED

(Incorporated in Bermuda with limited liability)

Advised by

CORPORATE FINANCE, LIMITED

MAJOR AND CONNECTED TRANSACTIONS

and the transactions contemplated thereunder including

(i) the issues of new shares in IAC and TSL China,

(ii) the deemed disposal of 21.04% equity interest in each of IAC and TSL China, (iii) the Repurchase and Cancellation and

(iv) the transactions contemplated under the Shareholder’s Loan Agreement

Independent financial adviser to the Independent Board Committee

EQUITAS CAPITAL LIMITED

A letter from the Independent Board Committee containing its recommendations in respect of the proposed transactions is set out on pages 29 and 30 of this circular.

A letter from Equitas Capital Limited, the independent financial adviser to the Independent Board Committee, containing its recommendations in respect of the proposed transactions to the Independent Board Committee is set out on pages 31 to 45 of this circular.

A notice convening a special general meeting to be held at 9:30 a.m. on Saturday, 31st August, 2002 at Ground Floor, Block B, Summit Building, 30 Man Yue Street, Hunghom, Kowloon, Hong Kong, is set out on pages 54 to 56 of this circular. A form of proxy for use in the special general meeting is enclosed. Whether or not you propose to attend the meeting, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the special general meeting or any adjourned meeting thereof. Delivery of a form of proxy will not preclude you from attending and voting in person at the special general meeting or any adjourned meeting, should you so desire.

8th August, 2002

		Page
Definitions	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
1.	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
2.	The Subscription Agreements
	(a) IAC Subscription Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
	(b) TSL China Subscription Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
	(c) Information on IAC and TSL China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
	(d) Deemed disposal of assets and consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
	(e) Conditions Precedent for the Subscription Agreements . . . . . . . . . . . . . . . . . . . . .	15
	(f) Completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
3.	Other documents
	(a) Shareholders’ Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
	(b) Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
	(c) Shareholder’s Loan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
	(d) Deed of Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
	(e) Letters of undertaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
	(f) Security documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
4.	Further extension of the Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
5.	Variation of the Bye-Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
6.	Pro forma financial effects of the Repurchase and Cancellation . . . . . . . . . . . . . . . . . . .	24
7.	Reasons for the Repurchase and Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
8.	Future plan and prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
9.	Waiver from SFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
10.	Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
11.	Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
12.	Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		29
Letter from Equitas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		31

– i –

		Page
Appendix I	– Financial information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	46
Appendix II	– General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	48
Notice of the	Special General Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	54

– ii –

DEFINITIONS

“associates”

has the meaning ascribed thereto under the Listing Rules

“Bank Creditors”
the existing bank creditors of the Company and certain of its wholly-owned subsidiaries, who are independent of and not connected with the directors, chief executive, substantial shareholder of the Company, its subsidiaries or any of their respective associates
“Bank Loans” the indebtedness owed to the Bank Creditors by the Company and certain of its wholly-owned subsidiaries as set out in the Restructuring Agreement, being HK$272,877,763.10 as at 17th June, 2002
“Best Accurate”
Best Accurate International Limited, a company incorporated in the British Virgin Islands and wholly owned by Mr. Qi
“Board”

the board of directors of the Company

“Bye-Laws”

the current Bye-Laws of the Company

“Company” Tse Sui Luen Jewellery (International) Limited, a company incorporated in Bermuda with limited liability, the ordinary shares of which are listed on the Stock Exchange
“Completion” completion of the Subscription Agreements, which shall take place on or before the fifth business day following fulfilment or waiver, as the case may be, of all of the Conditions Precedent
“Conditions Precedent” the conditions precedent to which Completion is subject, details of which are disclosed in the “Conditions Precedent” section of this circular
“Deed of Release”
a deed of release to be dated and entered into upon Completion between the Company and the Preference Shareholder to release all claims, obligations and liabilities of the Company and each of its officers and employees (past and present) under the Preference Share Subscription Agreement
“Definitive Agreements” the Subscription Agreements, the Shareholders’ Agreements and the Guarantee
“Director(s)”

the director(s) of the Company

“Equitas”

Equitas Capital Limited, an exempt dealer and an exempt investment adviser under the Securities Ordinance (Chapter 333 of the Laws of Hong Kong) and the independent financial adviser to the Independent Board Committee

– 1 –

DEFINITIONS

“Executive”

the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director

“Group”

the Company and its subsidiaries

“Guarantee”
the guarantee to be dated and granted upon Completion by IAC and TSL China as the guarantors for repayment of the Bank Loans to the Security Agent
“HK$” and “cents”

Hong Kong dollars and cents, the lawful currency of Hong Kong

“Hong Kong”

the Hong Kong Special Administrative Region of the People’s Republic of China

“IAC”

Infinite Assets Corp., a company incorporated in the British Virgin Islands and owned as to 77.5%, indirectly, by the Company and as to 22.5% by Best Accurate prior to Completion

“IAC “A” Shares” the “A” ordinary shares of HK$1.00 each in nominal value in the share capital of IAC
“IAC “B” Shares” the “B” ordinary shares of HK$1.00 each in nominal value in the share capital of IAC
“IAC Group”

IAC and its subsidiaries from time to time

“IAC Shareholders’ Agreement”
the shareholders’ agreement to be dated and entered into upon Completion between the Company, TSLJ, IAC, Liberty Mark, Best Accurate, Mr. Qi and the Preference Shareholder by which TSLJ, Liberty Mark, Best Accurate and the Preference Shareholder agree to conduct their relationship as shareholders in IAC in accordance with such agreement
“IAC Subscription Agreement”
the conditional subscription agreement dated 17th June, 2002 entered into between the Company, TSLJ, IAC, Liberty Mark, Best Accurate and the Preference Shareholder by which, amongst other things, Best Accurate and the Preference Shareholder agreed to subscribe for 8,733 new IAC “A” Shares and 66,521 new IAC “B” Shares, respectively
“Independent Board Committee”
an independent committee of the Board, comprising the independent non-executive Directors of the Company, namely Mr. Chui Chi Yun, Robert, Mr. Lui Pui Kee, Francis, Mr. Hong Po Kui, Martin and Mr. Gerald Clive Dobby

– 2 –

DEFINITIONS

“Independent Shareholders” the shareholders of the Company, other than Best Accurate, Mr. Qi, the Preference Shareholder and each of their respective associates
“Latest Practicable Date”
2nd August, 2002, being the latest practicable date for ascertaining certain information for inclusion in this circular
“Liberty Mark”
Liberty Mark Limited, a company incorporated in the British Virgin Islands and a wholly owned subsidiary of the Company, which owns 7.5% and will own 5.46% equity interests in each of IAC and TSL China prior to and after Completion, respectively
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Macau” Macau Special Administration Region of the People’s Republic of China
“Mainland China” the People’s Republic of China which, for the purpose for this circular, excludes Hong Kong, Macau and Taiwan
“Maturity Date” the date of redemption of the Preference Shares, being 28th February, 2002
“Mr. Qi”
Mr. Qi Jian Hong (a PRC national) who is a director of and, through his wholly owned company, Best Accurate, is a substantial shareholder, and, for himself, a director of each of IAC and TSL China, and, therefore, a connected person (as defined under the Listing Rules) of the Company. Save for such connection, Mr. Qi is independent of and not connected with the directors, chief executive or substantial shareholder of the Company, its subsidiaries or any of their respective associates
“PRC” the People’s Republic of China
“Preference Shares”
22,220 6.5% convertible non-voting redeemable preference shares of US$1,000 each issued by the Company to the Preference Shareholder pursuant to the Preference Share Subscription Agreement
“Preference Shareholder”
The China Retail Fund, LDC, a limited duration company incorporated in the Cayman Islands and a direct investment fund. The Preference Shareholder and its sponsor are independent of and not connected with the directors, chief executive, or substantial shareholder of the Company, its subsidiaries or their respective associates

– 3 –

DEFINITIONS

“Preference Share Subscription Agreement”
“Repurchase and Cancellation”
“Restructuring Agreement”
“Restructuring Arrangements”
“SDI Ordinance”
“Security Agent”
“SFC”
“Shareholders’ Agreements”
“Shareholder’s Loan”

a subscription agreement dated 31st December, 1997 entered into between the Company as the issuer, the Preference Shareholder and Mr. Tse Sui Luen as the controlling shareholder of the Company at that time

the proposed repurchase and cancellation of the Preference Shares by the Company at a consideration of (a) an aggregate payment of approximately HK$89,786 (being the total of (i) approximately HK$79,368 payable by the Company to the Preference Shareholder and (ii) approximately HK$10,418 payable by the Company to the Two Subsidiaries for the par value of the new shares in the Two Subsidiaries to be issued to Best Accurate) and (b) the Company agreeing to procure the issue of shares in the Two Subsidiaries to the Preference shareholder and Best Accurate, pursuant to the Subscription Agreements
the agreement dated 3rd August, 2000 entered into between, inter alia, the Company and the Bank Creditors, details of which was described in the Company’s announcement dated 5th August, 2000
such arrangements as may, from time to time, be agreed in writing between the Company, the Security Agent and any Bank Creditor or Bank Creditors in relation to, amongst other things, entitlements under the Guarantee, including without limitation, the Restructuring Agreement, as the same may from time to time be amended, supplemented or varied and in which of such cases, an announcement will be made as and when appropriate
Securities (Disclosure of Interests) Ordinance (Chapter 396 of the Laws of Hong Kong)
The Hongkong and Shanghai Banking Corporation Limited as agent and trustee for the Bank Creditors under the Restructuring Arrangements

the Securities and Futures Commission

the IAC Shareholders’ Agreement and the TSL China Shareholders’ Agreement
the loan of approximately HK$184.5 million owing by IAC to TSLJ as at 28th February, 2002 referred to under the Shareholder’s Loan Agreement

– 4 –

DEFINITIONS

“Shareholder’s Loan Agreement”
the shareholder’s loan agreement to be dated and entered into upon Completion between TSLJ and IAC to formalise the Shareholder’s Loan
“Shareholder’s Loan Guarantee” the guarantee to be dated and granted upon Completion by TSL China as the guarantor for repayment of the outstanding amounts under the Shareholder’s Loan Agreement
“Special General Meeting”

the special general meeting of the Company to be held at Ground Floor, Block B, Summit Building, 30 Man Yue Street, Hunghom, Kowloon, Hong Kong and on Saturday, 31st August, 2002 at 9:30 a.m. and any adjournment thereof

“Stock Exchange”

The Stock Exchange of Hong Kong Limited

“Subscription Agreements”
the IAC Subscription Agreement and the TSL China Subscription Agreement
“TSL China”

Tse Sui Luen Investment (China) Limited, a company incorporated in the British Virgin Islands, owned as to 77.5% indirectly by the Company and as to 22.5% by Best Accurate prior to Completion

“TSL China “A” Shares”
the “A” ordinary shares of US$1.00 each in nominal value in the share capital of TSL China
“TSL China “B” Shares”
the “B” ordinary shares of US$1.00 each in nominal value in the share capital of TSL China
“TSL China Group”

TSL China and its subsidiaries from time to time

“TSL China Shareholders’ Agreement”

the shareholders’ agreement to be dated and entered into upon Completion between the Company, TSLJ, TSL China, Liberty Mark, Best Accurate, Mr. Qi and the Preference Shareholder by which TSLJ, Liberty Mark, Best Accurate and the Preference Shareholder agree to conduct their relationship as shareholders in TSL China in accordance with such agreement

“TSL China Subscription Agreement”

the conditional subscription agreement dated 17th June, 2002 entered into between the Company, TSLJ, TSL China, Liberty Mark, Best Accurate and the Preference Shareholder by which, amongst other things, Best Accurate and the Preference Shareholder agreed to subscribe for 216 new TSL China “A” Shares and 1,647 TSL China “B” Shares, respectively

– 5 –

DEFINITIONS

“TSLJ”

“Two Subsidiaries”

“U.S.”

“US$”

Tse Sui Luen Jewellery Company Limited, a company incorporated in Hong Kong and a wholly owned subsidiary of the Company, which owns 70% and will own 51% equity interests in each of IAC and TSL China prior to and after Completion, respectively

IAC and TSL China

the United States of America

United States dollars, the lawful currency of the United States of America

– 6 –

LETTER FROM THE BOARD

TSE SUI LUEN JEWELLERY (INTERNATIONAL) LIMITED

(Incorporated in Bermuda with limited liability)

Executive Directors: Mr. Tse Tat Fung, Tommy (Chairman) Ms. Chung Yuen Ling (Deputy Chairman) Mr. Leung Yit Kuen, Raymond

Registered office: Clarendon House Church Street Hamilton HM 11 Bermuda

Independent non-executive Directors: Mr. Hong Po Kui, Martin Mr. Chui Chi Yun, Robert Mr. Gerald Clive Dobby Mr. Lui Pui Kee, Francis

Head office and principal place of business: G/F, Block B Summit Building 30 Man Yue Street Hunghom, Kowloon, Hong Kong 8th August, 2002

To all the shareholders of the Company

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTIONS

(i) the issues of new shares in IAC and TSL China,

(ii) the deemed disposal of 21.04% equity interest in each of IAC and TSL China,

(iii) the Repurchase and Cancellation, and

(iv) the transactions contemplated under the Shareholder’s Loan Agreement

1. INTRODUCTION

The Company announced on 11th July, 2002, inter alia, that:

(i) the Company reached a conditional agreement with the Preference Shareholder on 17th June, 2002 for the Repurchase and Cancellation by entering into the Subscription Agreements with the Preference Shareholder, Best Accurate and the other parties as detailed below;

– 7 –

LETTER FROM THE BOARD

(ii) subject to the terms of the Subscription Agreements, IAC and TSL China will each issue new “A” and “B” shares to Best Accurate and the Preference Shareholder, respectively;
(iii) upon Completion, major documents will be executed and delivered by the relevant parties to the Subscription Agreements including (a) the Shareholders’ Agreements whereby TSLJ, Liberty Mark, the Preference Shareholder and Best Accurate agree to conduct their relationship as shareholders of IAC or TSL China (where applicable) in accordance with the agreements and (b) the Shareholder’s Loan Agreement to formalise the Shareholder’s Loan;
(iv) the Company and the Preference Shareholder mutually agreed on 21st June, 2002 to further extend the Maturity Date to 31st August, 2002 in order to provide more time for Completion; and
(v) the Directors propose to ratify the variation of the Bye-Laws arising from the extension of the Maturity Date and the Repurchase and Cancellation.

Under the Listing Rules, the Subscription Agreements, the Shareholders’ Agreements and the Shareholder’s Loan Agreement constitute major and connected transactions of the Company for which prior approval from the Independent Shareholders at a special general meeting is required.

In accordance with the Bye-Laws, the proposed ratification of the variation of the Bye-Laws requires the approval of the members of the Company (being the holders of ordinary shares of the Company and the Preference Shareholder voting as a single class) at the same special general meeting of the Company by way of a special resolution. The variation of the terms of the Preference Shares is also subject to the sanction of the Preference Shareholder. The sanction for the variation of the Maturity Date has been obtained by the Company from the Preference Shareholder.

The Independent Board Committee comprising Mr. Lui Pui Kee, Francis, Mr. Chui Chi Yun, Robert, Mr. Hong Po Kui, Martin and Mr. Gerald Clive Dobby has been formed to consider and (if appropriate) make a recommendation to the Independent Shareholders. Equitas has been appointed as the independent financial adviser to the Independent Board Committee in this respect.

The purpose of this circular is to provide you with, inter alia, information relating to the Repurchase and Cancellation and the proposed ratification of the variation of the Bye-Laws, and to set out the recommendation of the Independent Board Committee, based on the advice from Equitas, in respect of the Subscription Agreements, the Shareholders’ Agreements and the Shareholder’s Loan Agreement and to give you notice of the Special General Meeting for the purpose of considering and, if thought fit, approving the aforesaid transactions by way of ordinary and special resolutions.

– 8 –

LETTER FROM THE BOARD

2. THE SUBSCRIPTION AGREEMENTS

(a) IAC Subscription Agreement

Date: 17th June, 2002

Parties: The Company, TSLJ, Liberty Mark, IAC, Best Accurate and the Preference Shareholder

Under the IAC Subscription Agreement, subject to the fulfilment (or waiver) of the Conditions Precedent and other terms summarised below, Best Accurate agreed to subscribe for and IAC agreed to issue to Best Accurate 8,733 IAC “A” Shares at par, amounting to a total sum of HK$8,733 payable in cash by the Company, and the Preference Shareholder agreed to subscribe for and IAC agreed to issue to the Preference Shareholder 66,521 IAC “B” Shares at par, amounting to a total sum of HK$66,521 payable in cash by the Preference Shareholder.

(b) TSL China Subscription Agreement

Date: 17th June, 2002

Parties: The Company, TSLJ, Liberty Mark, TSL China, Best Accurate and the Preference Shareholder

Under the TSL China Subscription Agreement, subject to the fulfilment (or waiver) of the Conditions Precedent and other terms summarised below, Best Accurate agreed to subscribe for and TSL China agreed to issue to Best Accurate 216 TSL China “A” Shares at par, amounting to a total sum of US$216 or approximately HK$1,685 payable in cash by the Company, and the Preference Shareholder agreed to subscribe for and TSL China agreed to issue to the Preference Shareholder 1,647 TSL China “B” Shares at par, amounting to a total sum of US$1,647 or approximately HK$12,847 payable in cash by the Preference Shareholder.

In consideration of the Company, TSLJ and Liberty Mark procuring IAC and TSL China to issue the abovementioned shares to the Preference Shareholder, the Preference Shareholder and the Company agreed that, at Completion:

(i) the Company shall repurchase from the Preference Shareholder all of the Preference Shares held by the Preference Shareholder as at that date at a price equal to the aggregate payment of approximately HK$89,786 (being the total of approximately HK$79,368 payable by the Company to the Preference Shareholder and approximately HK$10,418 payable by the Company to the Two Subsidiaries for the par value of the new shares in the Two Subsidiaries to be issued to Best Accurate); and
(ii) the Preference Shareholder shall release the Company and each of its officers and employees (past and present) from all claims, obligations and liabilities whatsoever under or in relation to the Preference Shares, including, for the avoidance of doubt, all damages, losses, claims, liabilities accrued or incurred prior to Completion and all accrued and unpaid dividends and interest estimated at approximately HK$43 million as at 17th June, 2002 and any other amounts outstanding in respect of the Preference Shares. (Please refer to the subsection headed “Deemed disposal of assets and consideration” under this section and the section headed “Special General Meeting” in this letter for further details)

– 9 –

LETTER FROM THE BOARD

(c) Information on IAC and TSL China

The Company and its subsidiaries are principally engaged in the manufacturing, design, export and retailing of jewellery products.

The Company’s business in Mainland China is primarily undertaken by the IAC Group and the TSL China Group. IAC and TSL China are investment holdings companies and through their subsidiaries, are engaged in the sale of platinum and gem-stone jewellery via retail outlets in Mainland China under the licence of the Company and/or any of its subsidiaries. In addition, TSL China Group also provides the processing of platinum and gem-stone jewellery for sale in Mainland China.

Each of IAC and TSL China is 77.5% owned by the Company through its wholly-owned subsidiaries, TSLJ and Liberty Mark, and 22.5% owned by Best Accurate.

IAC

IAC is a company incorporated in the British Virgin Islands on 5th July, 1996. It has an authorised ordinary share capital of HK$300,000 divided into 300,000 ordinary shares of HK$1.00 each. The number of shares issued by IAC is 202,000, out of which 156,550 and 45,450 are indirectly owned by the Company and directly owned by Best Accurate, respectively. Prior to Completion, the authorised ordinary share capital of IAC will be reclassified into 60,000 IAC “A” Shares and 240,000 IAC “B” Shares such that Best Accurate will hold 45,450 IAC “A” Shares and the Company, indirectly, will hold 156,550 IAC “B” Shares. Following the issue of new shares in accordance with the IAC Subscription Agreement, IAC will have an aggregate issued share capital of HK$277,254 divided into 54,183 IAC “A” Shares and 223,071 IAC “B” Shares. The Company will then indirectly hold 56.46%, the Preference Shareholder will hold 24% (in the form of “B” shares) and Best Accurate will hold 19.54% (in the form of “A” shares) of the aggregate enlarged issued share capital of IAC.

The audited consolidated net profit of IAC for the two years ended 28th February, 2002 are as follows:

	2001	2002
	HK$’000	HK$’000
Profit before taxation and extraordinary items	81,668	8,173
Profit attributable to IAC shareholders	81,668	8,173

The audited consolidated net assets of IAC as at 28th February, 2002 were approximately HK$5,153,000, representing a net asset value per share of approximately HK$25.5 prior to the issue, and HK$18.9 (after adjusting the proceeds from issue of new shares) following the issue of new IAC “A” and “B” shares in accordance with the IAC Subscription Agreement, and 8.2% of the audited consolidated net tangible assets of the Group as at 28th February, 2002.

– 10 –

LETTER FROM THE BOARD

TSL China

TSL China is a company incorporated in the British Virgin Islands on 8th February, 2000. It has an authorised ordinary share capital of US$50,000 divided into 50,000 ordinary shares of US$1.00 each. The number of shares issued by TSL China is 5,000, out of which 3,875 and 1,125 are indirectly owned by the Company and directly owned by Best Accurate, respectively. Prior to Completion, the authorised ordinary share capital of TSL China will be reclassified into 10,000 TSL China “A” Shares and 40,000 TSL China “B” Shares such that Best Accurate will hold 1,125 TSL China “A” Shares and the Company, indirectly, will hold 3,875 TSL China “B” Shares. Following the issue of new shares in accordance with the TSL China Subscription Agreement, TSL China will have an aggregate issued share capital of US$6,863 divided into 1,341 TSL China “A” Shares and 5,522 TSL China “B” Shares. The Company will then, following such issue, indirectly hold 56.46%, the Preference Shareholder will hold 24% (in the form of “B” shares) and Best Accurate will hold 19.54% (in the form of “A” shares) of the aggregate enlarged issued share capital of TSL China.

TSL China commenced its operations in August 2001. The audited consolidated net loss of TSL China for the year ended 28th February, 2002 is as follows:

	2002
	HK$’000
Loss before taxation and extraordinary items	2,129
Loss attributable to TSL China shareholders	2,136

The audited consolidated net liabilities of TSL China as at 28th February, 2002 were approximately HK$2,231,000, representing a net liability value per share of approximately HK$446.2 before the issue and HK$322.9 (after adjusting the proceeds from issue of new shares) after the issue of new TSL China “A” and “B” shares in accordance with the TSL China Subscription Agreement.

– 11 –

LETTER FROM THE BOARD

IAC’s and TSL China’s shareholdings prior to and following Completion

The following is a summary of the shareholdings in IAC, in terms of percentage of share capital, before and following Completion:

The Company, indirectly through TSLJ and Liberty Mark Best Accurate The Preference Shareholder Total	Prior to Completion % of voting No of rights shares 77.50 156,550 22.50 45,450 0 0 100.00 202,000	Following Percentage Completion Change % of % of voting No of voting rights shares rights 56.46 156,550 (21.04) “B” shares 19.54 54,183 (2.96) “A” shares 24.00 66,521 24.00 “B” shares 100.00 277,254

The following is a summary of the shareholdings in TSL China, in terms of percentage of share capital, before and following Completion:

The Company, indirectly through TSLJ and Liberty Mark Best Accurate The Preference Shareholder Total	Prior to Completion % of voting No of rights shares 77.50 3,875 22.50 1,125 0 0 100.00 5,000	Following Percentage Completion Change % of % of voting No of voting rights shares rights 56.46 3,875 (21.04) “B” shares 19.54 1,341 (2.96) “A” shares 24.00 1,647 24.00 “B” shares 100.00 6,863

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LETTER FROM THE BOARD

At present, the board of directors of IAC comprises 4 directors, 3 of whom were nominated by the Company and 1 by Best Accurate, and the board of directors of TSL China comprises 6 directors, 5 of whom were nominated by the Company and 1 by Best Accurate. Following Completion, IAC and TSL China will remain as subsidiaries of the Company and the Company will have the power to nominate 5 out of the 9 directors on each of the boards of the Two Subsidiaries as mentioned in the subsection headed “Shareholders’ Agreements” of this letter below.

A simplified organisation chart of IAC and TSL China prior to Completion is depicted below:

==> picture [279 x 163] intentionally omitted <==

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

The Company Mr. Qi
100%
100%
TSLJ Liberty Mark Best Accurate
70% 7.5% 22.5%
IAC TSL China
----- End of picture text -----

A simplified organisation chart of IAC and TSL China after Completion is depicted below:

==> picture [363 x 155] intentionally omitted <==

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

The Company Mr. Qi
100%
100%
The Preference
TSLJ Liberty Mark Best Accurate
Shareholder
51% 5.46% 19.54% 24%
IAC TSL China
----- End of picture text -----

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LETTER FROM THE BOARD

(d) Deemed disposal of assets and consideration

The proposed issues of new shares in IAC and TSL China pursuant to the Subscription Agreements will reduce the Company’s equity interest in each of IAC and TSL China by 21.04% following Completion. This will give rise to a deemed disposal of a 21.04% equity interest by the Company under the Listing Rules.

As noted in section 2(b) of this letter above, the Preference Shareholder will upon Completion release the Company from, inter alia, all accrued and unpaid dividend, interest and any other amounts outstanding in respect of the Preference Shares. The consideration of (i) the proposed deemed disposal of the 21.04% equity interest in each of IAC and TSL China by the Company and (ii) the aggregate payment of approximately HK$89,786 (being the total of approximately HK$79,368 payable by the Company to the Preference Shareholder and approximately HK$10,418 payable by the Company to the Two Subsidiaries for the par value of the new shares in the Two Subsidiaries to be issued to Best Accurate), for the subscription of new shares in IAC and TSL China by Best Accurate can therefore be calculated by reference to the amount of liabilities in respect of the Preference Shares from which the Company will be released upon Completion. As at 17th June, 2002, the total amount of such liabilities was approximately HK$276 million based on the formula as set out in an announcement dated 2nd January, 1998 made by the Company for the issue of the Preference Shares. This total amount comprises:

Face amount of the Preference Shares Premium payable on redemption Unpaid dividend accrued up to 17th June, 2002 Default interest for unpaid dividend accrued up to 17th June, 2002 Total amount of liabilities	HK$ Million 173 60 37 6
	276

The consideration of approximately HK$276 million for the proposed deemed disposal has been arrived at after detailed and arm’s length negotiations between the parties to each of the Subscription Agreements. It represents approximately 217 times the combined audited profits attributable to the 21.04% equity interest in IAC and TSL China of approximately HK$1,270,000 for the year ended 28th February, 2002, and approximately 449 times the combined audited net asset values attributable to the 21.04% equity interest in IAC and TSL China of approximately HK$615,000 as at 28th February, 2002.

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LETTER FROM THE BOARD

(e) Conditions Precedent for the Subscription Agreements

The Subscription Agreements are conditional upon fulfilment of the following conditions on or before 31st August, 2002 (or such later date as the parties thereto may agree in writing):

(i) consent to the Definitive Agreements having been obtained from the Bank Creditors by 30th June, 2002;
(ii) compliance with section 42A of the Companies Act 1981 of Bermuda in relation to the Repurchase and Cancellation which requires the Board to confirm that there are no reasonable grounds for believing that the Company is or would be, following the Repurchase and Cancellation, unable to pay its liabilities as they become due;
(iii) consent to the Definitive Agreements and the transactions contemplated thereunder, including the Repurchase and Cancellation, having been obtained from the investment committee of the Preference Shareholder, as documented in the written resolution passed by the board of directors of the Preference Shareholder;
(iv) the completion of a business, financial and legal due diligence with respect to IAC, TSL China and their respective immediate subsidiaries and the transactions contemplated under the Definitive Agreements and the results thereof being to the satisfaction of the Preference Shareholder;
(v) consents, if any, of the Stock Exchange for the Subscription Agreements and the transactions contemplated under each of these two agreements having been obtained;
(vi) approval of the Subscription Agreements and the transactions contemplated under each of these two agreements and the ratification by special resolution of the variation of the Bye-Laws of the Company arising from the non-redemption of the Preference Shares on the Maturity Date by the Independent Shareholders and authorising the Directors to take such steps as are appropriate to implement the same;
(vii) an opinion from British Virgin Islands legal counsel, in a form reasonably acceptable to the parties to the Subscription Agreements, confirming the regulatory and legal enforceability of the issuance and subscription of the shares under the Subscription Agreements;
(viii) an opinion from Cayman Islands legal counsel, in a form reasonably acceptable to the parties to the Subscription Agreements, confirming that the Preference Shareholder has full corporate capacity to execute, deliver and perform its obligations under the Definitive Agreements and the Deed of Release and that the execution and performance of the obligations contained in such agreements have been duly authorised and are in accordance with the laws and regulations applicable to the Preference Shareholder; and

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LETTER FROM THE BOARD

(ix) such other consents and approvals which may arise under contract or otherwise as are necessary for the transactions contemplated under the Definitive Agreements.

In the event that the conditions referred to above are not fulfilled (or, save for statutory or regulatory requirements as mentioned in items (ii) and (v), waived by Best Accurate and the Preference Shareholder or, in the case of items (iii) and (iv), waived by the Preference Shareholder) by 31st August, 2002 as specified above, the Subscription Agreements shall terminate between the parties thereto and be of no further effect save for antecedent breaches.

On 17th June, 2002, the Bank Creditors granted their “in principle approval” to the transactions contemplated by the Definitive Agreements. The “in principle approval” is subject to conditions which mainly include:

(a) the execution or the procurement of the Subscription Agreements, the Shareholders’ Agreement, the Shareholder’s Loan Agreement, the Shareholder’s Loan Guarantee and the Deed of Release;
(b) the execution of the security documents as summarised in section 3 of this letter, below; and
(c) the fulfilment of the other Conditions Precedent.

Save for the items (ii) and (iii) of the Conditions Precedent which has been fulfilled as mentioned below, none of the above conditions subject to which the Bank Creditors granted their “in principle approval”, have been fulfilled or waived.

By a written resolution of the Directors dated 7th August, 2002, the Directors have confirmed that there are no reasonable grounds for believing that the Company is or would be, following the Repurchase and Cancellation, unable to pay its liabilities as they become due.

On 10th July, 2002, the Company also received the resolutions passed by the board of directors of the Preference Shareholder as described in item (iii) of the Conditions Precedent above.

(f) Completion

Completion shall take place on or before the fifth business day following fulfilment or waiver, as the case may be, of all of the Conditions Precedent.

Upon Completion, certain documents will be executed and delivered by the relevant parties to the Subscription Agreements. Major documents include:

(i) the Shareholders’ Agreements;
(ii) the Guarantee;
(iii) the Deed of Release;

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LETTER FROM THE BOARD

(iv) the Shareholder’s Loan Agreement;
(v) the Shareholder’s Loan Guarantee; and
(vi) the letters of undertaking to be given by TSL China, IAC and Tse Sui Luen Enterprises (China) Limited.

The major terms in these documents and other documents mentioned in this announcement are summarised below.

3. OTHER DOCUMENTS

(a) Shareholders’ Agreements

Date: To be dated upon Completion

Parties: The Company, TSLJ, Liberty Mark, IAC or TSL China (where applicable), Mr. Qi, Best Accurate and the Preference Shareholder

Pursuant to the Subscription Agreements, the above parties will, upon Completion, execute and deliver the Shareholders’ Agreements which govern the relationships between the parties thereto.

The Shareholders’ Agreements are conditional, and become effective, upon Completion.

Principal terms in the Shareholders’ Agreements will include the following:

(i) Mr. Qi unconditionally and irrevocably guarantees to each of the other shareholders of IAC and TSL China the prompt performance by Best Accurate of all its obligations under the Subscription Agreements, the Shareholders’ Agreements and related documents;
(ii) Mr. Qi undertakes with each of the other parties that whenever Best Accurate does not pay any amount when due under or in connection with any of the Subscription Agreements, the Shareholders’ Agreements and related documents, he shall forthwith on demand pay that amount;
(iii) each of the parties thereto undertakes that all connected party transactions in IAC and TSL China will be on an arm’s length basis and on the Two Subsidiaries’ normal commercial terms;
(iv) each of IAC and TSL China will enter into the Guarantee in favour of the Security Agent in relation to the Bank Loans;
(v) at all time during the continuance of the Shareholders’ Agreements, the nature of business of the IAC Group and the TSL China Group will remain unchanged;

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LETTER FROM THE BOARD

(vi) the Company will use its reasonable endeavours to procure the public offering of the equity share capital of TSL China on an acceptable stock exchange at the earliest practicable date (no plan has been formulated for the public offering as at the date of this circular and the progress of which will be announced by the Company as and when appropriate) ;
(vii) subject to the direction from time to time given by the board of each of IAC and TSL China, the Company and its subsidiaries (excluding the IAC Group and TSL China Group) will have the exclusive right to the daily management and control of the business and operations of the IAC Group and the TSL China Group;
(viii) within one month following the date of the Shareholders’ Agreements, each of IAC and TSL China will enter into a master supply agreement with the Company and/or its wholly-owned subsidiaries pursuant to which materials and/or finished goods will be supplied by the Company and/or its wholly-owned subsidiaries to the Two Subsidiaries;
(ix) within one month following the date of the Shareholders’ Agreements, TSLJ and/or its wholly-owned subsidiaries will each enter into a comprehensive services agreement with the IAC Group and the TSL China Group pursuant to which TSLJ and/or its wholly-owned subsidiaries will provide production support (including technical support and quality assurance etc.), the procurement of raw materials and products, and product design and development services to each of the IAC Group and the TSL China Group in consideration for a service fee in an aggregate amount equal to 1% of the monthly aggregate turnover of the Two Subsidiaries;
(x) within one month following the date of the Shareholders’ Agreements, TSLJ and/or its wholly-owned subsidiaries will enter into a trademark licence contract within the IAC Group and TSL China Group pursuant to which TSLJ will grant a licence to the IAC Group and the TSL China Group to have the non-exclusive use of certain trademarks in Mainland China in consideration for a royalty fee in an aggregate amount equal to 1% of the monthly aggregate turnover of the Two Subsidiaries;
(xi) the Company, through TSLJ and Liberty Mark, will together be entitled to nominate up to 5 directors to each of the boards of the Two Subsidiaries, the Preference Shareholder will be entitled to nominate up to 2 directors, and Best Accurate will be entitled to nominate up to 2 directors;
(xii) any shareholder holding more than 50% of the issued share capital in any of the Two Subsidiaries shall be entitled to appoint the chairman of the board of the relevant company;
(xiii) prior approval of not less than three-quarters (3/4) of the directors (including approval of at least a director from the Preference Shareholder) will be required for certain major matters such as any material change to the business or to the business scope of any member of the IAC Group and TSL China Group, the effecting of any reorganisation or merger of any member of the IAC Group and TSL China Group;

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LETTER FROM THE BOARD

(xiv) with effect from Completion and in each fiscal quarter of the Company until such time as the Bank Loans are fully repaid or refinanced (whichever happens earlier):
(a) no dividend will be declared and paid and no other distribution, whether in specie or otherwise, will be made in respect of the IAC “B” Shares and TSL China “B” Shares;
(b) the holder of IAC “A” Shares and TSL China “A” Shares will be entitled to receive a dividend subject to available cash (which according to the Shareholder’s Loan Agreement will be in priority over the repayment of the Shareholder’s Loan) in respect of each of such shares held by it, from the Two Subsidiaries based on the formulae which will effectively give the holder, in each year, a dividend per share equivalent to the distributable profits (less any reserves agreed by the relevant board by approval of not less than three-quarters (3/4) of the directors to be retained by the relevant company) divided by the total number of shares in issue as at the last business day of each year; and
(xv) after the Bank Loans are repaid in full or after such Bank Loans are refinanced (whichever occurs earlier), the holders of IAC “B” Shares and TSL China “B” Shares will firstly receive dividends equivalent to the total amount of the dividends which would have been declared and paid in respect of the IAC “B” Shares and TSL China “B” Shares had the Two Subsidiaries distributed the full amount of their distributable profits (less any reserves agreed by the relevant board to be retained by the relevant company) during the period between Completion to the date when the Bank Loans are repaid in full or refinanced (whichever occurs earlier). The two classes of shares in IAC and TSL China will rank pari passu in dividend entitlements thereafter.

As mentioned in (xiv) above, the holder of IAC “A” Shares and TSL China “A” Shares (being Best Accurate as at the Latest Practicable Date) will have priority over the holders of IAC “B” Shares and TSL China “B” Shares (being TSLJ, Liberty Mark and the Preference Shareholder) to receive dividends from the Two Subsidiaries before all of the Bank Loans are repaid or refinanced (whichever occurs earlier). This priority is given to Best Accurate in consideration of the dilution of its percentage of shareholding in each of the Two Subsidiaries from 22.50% to 19.54% as a result of the proposed Repurchase and Cancellation. This dividend arrangement has been arrived at following arm’s length negotiations between the parties to the Shareholders’ Agreements. Save as aforesaid, there is no difference in the terms of and rights attributable to the two classes of shares in each of the Two Subsidiaries.

The Shareholders’ Agreements also contain other major provisions such as those which:

(i) provide for the nomination and secondment of a general manager by the Company and the right to nominate a group financial controller for the Two Subsidiaries by the Preference Shareholder;
(ii) set out the financial reporting requirements of the Company;

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LETTER FROM THE BOARD

(iii) govern the issue and transfers of shares in the Company;

(iv) protect minority shareholders;
(v) restrict the shareholders of the Two Subsidiaries and Mr. Qi from engaging in business competing with the Two Subsidiaries in Mainland China; and
(vi) direct the way in which further future funding, whether for capital or revenue expenditure, will be obtained (no such funding arrangement has been made or committed to be made as at the Latest Practicable Date) .

(b) Guarantee

Date: To be dated upon Completion

Parties: IAC and TSL China as guarantors in favour of the Security Agent

Under the Guarantee, IAC and TSL China, as primary obligors and not merely as sureties, shall irrevocably and unconditionally jointly and severally guarantee all amounts owing to the Bank Creditors by the Company and certain of its wholly-owned subsidiaries under the Restructuring Arrangements. The maximum amount recoverable under the Guarantee in aggregate from IAC and TSL China will not exceed (a) HK$272,877,763.10, plus (b) interest on such amount which accrues from 17th June, 2002 in accordance with the Restructuring Arrangements and which is outstanding on the date on which a termination notice is served on the Company under the Restructuring Arrangements together with all legal and other costs incurred by the Security Agent in relation to the Guarantee which are outstanding on the date of enforcement and which arise thereafter (and remain unpaid), subject to the aggregate of interest and costs in this paragraph (b) being up to a maximum of HK$30 million, less all principal repayments from time to time received by the Bank Creditors under the Restructuring Arrangements after the date of Completion.

(c) Shareholder’s Loan Agreement

Date: To be dated upon Completion

Parties: TSLJ and IAC

The inventory of IAC has been supplied by TSLJ to IAC through consignments in the normal course of business. The aggregate value of the consignment inventory supplied by TSLJ to IAC was approximately HK$106.1 million as at 28th February, 2002. The outstanding trading account due from IAC to TSLJ as at 28th February, 2002 was HK$78.4 million. In view of the introduction of the Preference Shareholder as a substantial shareholder in IAC, the consignment inventories of HK$106.1 million were sold to IAC on 28th February, 2002 and the Shareholder’s Loan Agreement will be entered into by the parties thereto to formalise the total amount of HK$184.5 million owing by IAC to TSLJ under the consignments and the trading account.

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LETTER FROM THE BOARD

Under the Shareholder’s Loan Agreement, interest will accrue on the Shareholder’s Loan as follows:

(i) on and from Completion and until the earlier of the date on which: (a) all the Bank Loans are fully repaid; or (b) all the Bank Loans are refinanced, interest will be calculated monthly on the Shareholder’s Loan at the rate equal to the rate of interest charged by the Bank Creditors (i.e. 1-month HIBOR plus 2% as at the Latest Practicable Date) on the Bank Loans during that month on any outstanding amounts of the Bank Loans, provided that the total amount of interest which accrues on the Shareholder’s Loan in any month will not be greater than the total amount of interest which accrues in respect of the Bank Loans (including any default interest charged by the Bank Creditors) during that month; and
(ii) on and from the earlier of the date on which: (a) the Bank Loans are repaid in full or (b) the Bank Loans are refinanced, interest will accrue on the Shareholder’s Loan at the rate to be agreed by IAC and TSLJ within 9 months from the date on which the Bank Loans are repaid in full or the Bank Loans are refinanced (as the case may be). During this nine-month period, (or earlier if IAC and TSLJ have agreed on the rate of interest) interest will accrue on the Shareholder’s Loan at the rate of interest charged by the Bank Creditors during the month in which the date that the Bank Loans are repaid in full, or the Bank Loans are refinanced in full (as the case may be).

IAC will make repayments of the shareholder’s loan and interest as follows:

(i) on and from Completion and until the earlier of the date on which (a) the Bank Loans are repaid in full; or (b) the Bank Loans are refinanced, IAC will make repayments of the Shareholder’s Loan (after dividends payment to the holder of IAC “A” Shares) and interest on the last business day of each month commencing from the month in which Completion falls in an amount equal to the cash balances of IAC Group less trade debts, petty cash and payments in the companies’ ordinary course of business (subject to the availability of the same and after dividends payment to the holder of IAC “A” Shares);
(ii) on and from the earlier of the date on which: (a) the Bank Loans are repaid in full or (b) the Bank Loans are refinanced, the outstanding balance of the Shareholder’s Loan and any accrued interest thereon will be repayable on the terms as agreed by IAC and TSLJ within 9 months from the date on which the Bank Loans are repaid in full or the Bank Loans are refinanced (as the case may be) during which IAC will continue to repay the shareholder’s loan in the manner as mentioned in (i) above; and
(iii) if the terms of repayment of the Shareholder’s Loan and/or the rate of interest on such loan cannot be agreed between IAC and TSLJ within the 9 month period, TSLJ may by delivering a written demand to IAC demand immediate repayment of the Shareholder’s Loan and any accrued interest thereon.

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LETTER FROM THE BOARD

TSLJ and IAC agreed that upon:

(i) the Bank Creditors serving a termination notice to the Company in accordance with the Restructuring Agreement; or
(ii) TSLJ receiving written instructions from the Security Agent to make demand to IAC for immediate repayment of the Shareholder’s Loan,

TSLJ shall deliver a written demand to IAC demanding immediate repayment of all amounts outstanding under the Shareholder’s Loan Agreement.

As required by the Shareholder’s Loan Agreement, TSL China will on Completion execute the Shareholder’s Loan Guarantee in favour of TSLJ, by which TSL China, as primary obligor and not merely as surety, irrevocably and unconditionally guarantees the repayment of the Shareholder’s Loan to TSLJ and secures the liabilities of IAC thereunder.

Mr. Qi is a director and substantial shareholder of each of IAC and TSL China and thus a connected person of the Company (as defined under the Listing Rules). Shareholders of IAC other than the Company have not provided similar loans such as the Shareholder’s Loan to IAC. Under Chapter 14 of the Listing Rules, the Shareholder’s Loan Agreement constitutes a connected transaction, which requires the prior approval of the Independent Shareholders at the Special General Meeting.

(d) Deed of Release

Date: To be dated upon Completion

Parties: The Preference Shareholder and the Company

Subject to and condition upon Completion and in accordance with the terms of the Deed of Release, the Preference Shareholder will, on the date of this deed, absolutely unconditionally and irrevocably fully and finally discharge and release the Company and each of its officers and employees (past and present) from all and any claims, obligations and liabilities whatsoever under the Preference Share Subscription Agreement.

(e) Letters of undertaking

Date: To be dated upon Completion

Parties: IAC, TSL China, Tse Sui Luen Enterprises (China) Limited

Three letters of undertaking from IAC, TSL China and Tse Sui Luen Enterprises (China) Limited, a wholly-owned subsidiary of TSL China, under which each separately undertakes, amongst other things, to maximise its available cash, after deduction of trade debts and payments in the companies’ ordinary course of business, to repay, inter alia, the Shareholder’s Loan owed by IAC to TSLJ.

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LETTER FROM THE BOARD

(f) Security documents

As part of the conditions for the Bank Creditors’ approval of the transactions contemplated under the Definitive Agreements, the following security documents, in addition to the Guarantee and the letters of undertaking, will be executed and delivered upon Completion:

(i) a charge over the shares held by TSLJ in each of the Two Subsidiaries executed by TSLJ in favour of the Security Agent;
(ii) a charge over the shares held by Liberty Mark in each of the Two Subsidiaries executed by Liberty Mark in favour of the Security Agent;
(iii) an agreement by which each of the Company, TSLJ, Liberty Mark, the Preference Shareholder, Mr. Qi and Best Accurate undertakes to the Security Agent that, until the Bank Loans are repaid in full or refinanced (whichever happens earlier) it will not amend the memorandum and articles of association of each of the Two Subsidiaries or either of the Shareholders’ Agreements, without the prior written consent of the Security Agent; and
(iv) an agreement by which each of TSLJ and IAC undertakes to the Security Agent that, until the Bank Loans are fully repaid or refinanced (whichever happens earlier) it will not amend the Shareholder’s Loan Agreement, without the prior written consent of the Security Agent.

4. FURTHER EXTENSION OF THE MATURITY DATE

In contemplation of Completion, the Company and the Preference Shareholder entered into a further supplemental deed on 21st June, 2002 on the following principal terms:

(i) pending Completion, which must take place on or before 31st August, 2002, the Preference Shareholder agreed not to enforce any rights and/or claims in respect of the Preference Shares under the Preference Share Subscription Agreement and/or Bye-Laws; and
(ii) except as varied or modified as aforesaid, all the terms and conditions contained in the Preference Share Subscription Agreement and the provisions of the Bye-Laws shall remain in full force and effect in all respects, and all obligations of the Company thereunder shall not be affected in any way.

If Completion has not taken place on or before 31st August, 2002, the Company will approach the Preference Shareholder for a further extension of the Maturity Date. If Completion has not taken place on or before 31st August, 2002 and a further extension of Maturity Date is not obtained, the Company may be required to redeem the Preference Shares for an amount not less than HK$276 million, which may adversely affect the financial position of the Company.

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LETTER FROM THE BOARD

5. VARIATION OF THE BYE-LAWS

The Directors propose to ratify the variation of the Bye-Laws arising from the extension of the Maturity Date (being 28th February, 2002) to 31st August, 2002 and the Repurchase and Cancellation. The proposed variation of the Bye-Laws is subject to the ratification by the members of the Company (being the holders of the ordinary shares of the Company and the Preference Shareholder voting as a single class) at the Special General Meeting by way of a special resolution. The variation of the terms of the Preference Shares is also subject to the sanction of the Preference Shareholder. The sanction for the variation of the Maturity Date has been obtained by the Company from the Preference Shareholder.

6. PRO FORMA FINANCIAL EFFECTS OF THE REPURCHASE AND CANCELLATION

(a) Net tangible assets

As set out in the section headed “Unaudited pro forma statement of adjusted consolidated net tangible assets of the Group” under Appendix I to this circular, the unaudited pro forma adjusted consolidated net tangible assets of the Group upon Completion (assuming that Completion occurred on 28th February, 2002) attributable to all shareholders of the Company (only ordinary shares will exist upon Completion) was approximately HK$100.5 million or approximately HK$0.256 per ordinary share (based on 391,889,263 ordinary shares in issue upon Completion ).

The audited consolidated net tangible assets of the Group attributable to all of the Company’s shareholders (including its ordinary shareholders and the Preference Shareholders) was approximately HK$62.9 million as at 28th February, 2002. Assuming that the Preference Shares would not be converted into the Company’s ordinary shares and taking into account that the Preference Shareholder will have a priority over the Company’s ordinary shareholders in the event of a return of capital on liquidation or otherwise (other than on redemption of the Preference Shares) pursuant to the Preference Share Subscription Agreement, the net deficits attributable to the Company’s ordinary shareholders was approximately HK$109 million or HK$0.278 per ordinary share, based on 391,889,263 ordinary shares in issue on 28th February, 2002. However, as the ordinary shareholders are not required to make good the Company’s deficits, the consolidated net tangible assets attributable to the Company’s ordinary shareholders prior to Completion would accordingly be HK$nil or HK$nil per ordinary share. The net loss of approximately HK$565,000 from the deemed disposal of equity interest in each of IAC and TSL China, which represents the change in the Group’s share of net assets of IAC and TSL China upon completion of the Repurchase and Cancellation, would be adjusted to the Group’s contributed surplus.

Therefore the effects of the Repurchase and Cancellation on the consolidated net tangible assets are:

(i) an improvement of approximately HK$37.6 million on the consolidated net tangible assets of the Group attributable to all of the Company’s shareholders when comparing (a) the unaudited adjusted consolidated net tangible assets of the Group attributable to all of the Company’s shareholders upon Completion (only ordinary shares will exist

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LETTER FROM THE BOARD

upon Completion) of approximately HK$100.5 million with (b) the audited consolidated net tangible assets of the Group attributable to all of the Company’s shareholders prior to Completion of approximately HK$62.9 million as at 28th February, 2002; or

(ii) an improvement of approximately HK$100.5 million on the consolidated net tangible assets of the Group attributable to the Company’s ordinary shareholders when comparing (a) the unaudited adjusted consolidated net tangible assets of the Group attributable to all of the Company’s shareholders upon Completion (only ordinary shares will exist upon Completion) of approximately HK$100.5 million with (b) the consolidated net tangible assets of the Group attributable to all of the Company’s ordinary shareholders prior to Completion of HK$Nil as at 28th February, 2002; or
(iii) an improvement of approximately HK$0.256 on the consolidated net tangible assets of the Group attributable to each of the Company’s ordinary shares when comparing (a) the unaudited adjusted consolidated net tangible assets of the Group attributable to each of the Company’s ordinary shares upon Completion of HK$0.256 with (b) the consolidated net tangible assets of the Group attributable to each of the Company’s ordinary shares prior to Completion of HK$Nil as at 28th February, 2002.

(b) Profit and loss account

As also shown in the abovementioned section under Appendix I of this circular, default interest on any unpaid dividend accruing on the Preference Shares amounted to HK$4.6 million was accrued up to 28th February, 2002. Upon Completion, this amount of default interest together with the amount of default interest accrued from 1st March, 2002 to the date of Completion will be written back from liabilities and become a profit of the Company.

7. REASONS FOR THE REPURCHASE AND CANCELLATION

Upon Completion, the Preference Shareholder will become a 24% shareholder in each of IAC and TSL China. The Directors consider that the introduction of the Preference Shareholder as a strategic investor in TSL’s business in Mainland China will strengthen the Company’s market position, benefit the business development and raise the profile of the Company in the long term. The introduction will also enhance the development of the Company’s operations in Mainland China which has been progressing smoothly to take opportunities arising from China’s accession into the World Trade Organisation.

Since the Company signed the Restructuring Agreement with the Bank Creditors on 3rd August, 2000, the outstanding amount of the Bank Loans up to 31st May, 2002, being the latest practicable date for the purpose of the indebtedness statement as set out in section headed “Indebtedness” under Appendix I of this circular, has reduced from approximately HK$399 million as at 3rd August, 2000 by approximately HK$125.8 million to approximately HK$273.2 million as at 31st May, 2002. If the Repurchase and Cancellation are successfully implemented, actual and contingent liabilities of not less than HK$276 million (please refer to the subsection headed “Deemed disposal of assets and consideration” in this letter for details) will be waived by the Preference Shareholder upon Completion. This waiver will significantly improve the financial position of the Company as described in the Section 6(a) above.

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LETTER FROM THE BOARD

8. FUTURE PLAN AND PROSPECTS

The Company will continue its endeavours to lay a solid foundation for future growth of its core jewellery business.

Looking forward, the Directors anticipate the Group’s performance in the current year will improve based on the following positive factors:

(a) the continued recovery of the U.S. economy will help to improve the overall export trading volume in Hong Kong;
(b) the relaxation of controls over the number of inbound tourists from Mainland China to Hong Kong will inject new vitality into the Hong Kong retail industry; and
(c) the Group’s extensive network of sale outlets will benefit from the promising economic growth in Mainland China.

9. WAIVER FROM SFC

The SFC is of the view that the proposed repurchase by the Company of the Preference Shares constitutes an off-market share repurchase within the meaning of the Share Repurchase Code. The Company has made an application to the Executive for a waiver from compliance with the requirements of the Share Repurchase Code and the Executive has granted such a waiver as the Preference Shares are more analogous to debt securities than equity securities.

10. SPECIAL GENERAL MEETING

A notice of the Special General Meeting is set out on pages 54 to 56 of this circular. The meeting will be held at 9:30 a.m. on 31st August, 2002 at Ground Floor, Block B, Summit Building, 30 Man Yue Street, Hunghom, Kowloon, Hong Kong. Ordinary and special resolutions will be proposed to approve, inter alia:

(i) the ratification of the variation of the Bye-Laws arising from the extension of the Maturity Date and the Repurchase and Cancellation;
(ii) the Subscription Agreements and the transactions contemplated thereunder:
(a) the issues of 8,733 IAC “A” Shares and 216 TSL China “A” Shares to Best Accurate which constitute connected transactions of the Company under the Listing Rules;
(b) the deemed disposal of the 21.04% equity interest in each of IAC and TSL China by the Company pursuant to the Subscription Agreements together with the Shareholders’ Agreements which constitutes a major and connected transaction of the Company under the Listing Rules;

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LETTER FROM THE BOARD

(c) the Repurchase and Cancellation; and
(d) the transactions contemplated under the Shareholder’s Loan Agreement which constitutes a connected transaction of the Company under the Listing Rules.

Save for the undertaking mentioned below in respect of Mr. Tse Sui Luen, the past and present officers and employees of the Company were not parties to the Preference Share Subscription Agreement or the Deed of Release and, accordingly, have no right to enforce the Preference Share Subscription Agreement or the Deed of Release and no obligations thereunder. Under the Preference Share Subscription Agreement, Mr. Tse Sui Luen provided an undertaking to procure the appointment of a non-executive director nominated by the Preference Shareholder until the redemption or conversion of the Preference Shares. Mr. Tse Sui Luen fulfilled such undertaking while he was a director of the Company but is unable and cannot fulfill such an undertaking again as he ceased to be a Director in September 2000 and was declared bankrupt in September 2000. As such, the undertaking provided by Mr. Tse Sui Luen is unenforceable.

Save for the Preference Shareholder and Mr. Qi and their respective associates, all ordinary shareholders of the Company including its directors, chief executive, officers and employees are allowed to vote on the ordinary resolutions (as set out in the Notice of the Special General Meeting) at the Special General Meeting to be convened in relation to the major and connected transactions.

As mentioned above in this letter, in accordance with the Bye-Laws, the special resolutions as set out in the Notice of the Special General Meeting require the approval of the members of the Company (being the holders of ordinary shares of the Company and the Preference Shareholder voting as a single class) at the Special General Meeting of the Company.

Save for the Preference Shares held by the Preference Shareholder, the Preference Shareholder, Best Accurate, Mr. Qi and their associates do not own any shares in the Company.

If the Subscription Agreements, which provide, amongst other things, for the Repurchase and Cancellation, together with the various ancillary agreements to be executed and delivered on Completion, are not approved at the Special General Meeting, the Company may be required to redeem in full for cash the Preference Shares, pursuant to the Preference Share Subscription Agreement and the Bye-Laws, on 31st August, 2002.

The Company is in no position to discharge its liabilities in relation to the redemption of the Preference Shares in full as it has neither the distributable reserves nor the financial resources to enable it to do so. Default interest on the redemption amount due to the Preference Shareholders as well as the unpaid dividends in relation to the Preference Share will accrue after 31st August 2002 at the rate of 10% per annum compounded monthly.

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LETTER FROM THE BOARD

considerable time would have to be spent again in the negotiation of new terms acceptable to the Company, the Preference Shareholder, the Bank Creditors and Best Accurate. During such time in the negotiation of any new terms, the Group would enter into a period of considerable uncertainties, during which doubts in respect of the Group’s future financial position is likely to have a significant adverse impact on its business operations.

If the approval for the Shareholder’s Loan Agreement is not obtained at the Special General Meeting, the Company would request immediate repayment of the Shareholder’s Loan to ensure compliance with the Listing Rules.

11. RECOMMENDATIONS

Your attention is drawn to: (a) the letter from the Independent Board Committee set out on pages 29 to 30 of this circular which contains its recommendations to the Independent Shareholders, based on the advice from Equitas, in respect of the Subscription Agreements, the Shareholders’ Agreements and the Shareholder’s Loan Agreement; and (b) the letter from Equitas on pages 31 to 45 of this circular which contains its recommendations to the Independent Board Committee as well as the principal factors and reasons considered by Equitas in arriving at its recommendations.

Taking into account the interests of the Company’s shareholders as a whole, the Directors consider that the variation of the Bye-Laws are bona fide in the commercial interests of the Company and its shareholders taken as a whole and therefore recommend the shareholders of the Company to vote in favour of the relevant resolution to be proposed at the Special General Meeting.

12. ADDITIONAL INFORMATION

Please refer to the appendices to this circular for additional information.

By order of the Board Tse Sui Luen Jewellery (International) Limited Tse Tat Fung, Tommy Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

TSE SUI LUEN JEWELLERY (INTERNATIONAL) LIMITED

(Incorporated in Bermuda with limited liability)

8th August, 2002

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTIONS

Proposed ratification of a variation of the Bye-Laws arising from the extension of the Maturity Date of the Preference Shares and the repurchase and cancellation of the Preference Shares, proposed implementing, completing and giving effect to the Subscription Agreements, the Shareholders’ Agreements and the Shareholder’s Loan Agreement and the transactions contemplated thereunder including (i) the issues of new shares in IAC and TSL China, (ii) the deemed disposal of 21.04% equity interest in each of IAC and TSL China, (iii) the Repurchase and Cancellation and

(iv) the transactions contemplated under the Shareholder’s Loan Agreement

We refer to the circular to the shareholders of the Company dated 8th August, 2002 (the “Circular”) issued by the Company, of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as defined in the Circular unless the context otherwise requires.

As we have no interest in the proposed ratification of a variation of the Bye-Laws arising from the extension of the Maturity Date and the Repurchase and Cancellation, the proposed implementing, completing and giving effect to the Subscription Agreements, the Shareholders’ Agreements and the Shareholder’s Loan Agreement and the transactions contemplated thereunder including: (i) the issues of new shares in IAC and TSL China, (ii) the deemed disposal of 21.04% equity interest in each of IAC and TSL China, (iii) the Repurchase and Cancellation and (iv) the transactions contemplated under the Shareholder’s Loan Agreement, and are not connected with the Preference Shareholder, Best Accurate, Mr. Qi or their respective associates, we have been appointed by the Board as the Independent Board Committee to consider the terms of the Subscription Agreements, the Shareholders’ Agreements and the Shareholder’s Loan Agreement.

Equitas has been appointed by the Company to advise the Independent Board Committee as to whether the terms of the Subscription Agreements, which provides for, inter alia , the Repurchase and Cancellation, together with the various ancillary agreements to be executed and delivered on Completion

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

including the Shareholders’ Agreements and the Shareholder’s Loan Agreement (the “Agreements”), are fair and reasonable so far as the Independent Shareholders are concerned. Details of its advice, together with the principal factors taken into consideration in arriving at such advice, are set out on pages 31 to 45 of the Circular.

Your attention is also drawn to the letter from the Board set out on pages 7 to 28 of the Circular and the additional information set out in the appendices to the Circular.

Having considered the terms of the Agreements and the advice of Equitas, we consider that the terms of the Agreements are fair and reasonable as far as the Independent Shareholders are concerned and that the Agreements are in the interests of the Company and the Independent Shareholders. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions as set out in the Notice of the Special General Meeting to approve the implementing, completing and giving effect to the Subscription Agreements, the Shareholders’ Agreements and the Shareholder’s Loan Agreement and the transactions contemplated thereunder, including (i) the issues of shares in IAC and TSL China, (ii) the deemed disposal of 21.04% equity interest in each of IAC and TSL China, (iii) the Repurchase and Cancellation, and (iv) the transactions contemplated under the Shareholder’s Loan Agreement. We also recommend the Independent Shareholders to vote in favour of the special resolutions as set out in the same Notice to approve the ratification of the variation of the Bye-Laws arising from the extension of the Maturity Date and the Repurchase and Cancellation.

Yours faithfully, Independent Board Committee of Tse Sui Luen Jewellery (International) Limited Chiu Chi Yun, Robert Lui Pui Kee, Francis Hong Po Kui, Martin Gerald Clive Dobby Independent Independent Independent Independent Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director

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LETTER FROM EQUITAS

The following is the text of a letter of advice received from Equitas in relation to the major and connected transactions, which letter has been prepared for the purpose of inclusion in this circular:

EQUITAS CAPITAL LIMITED 盈均財務顧問有限公司

Exempt Dealer – Exempt Investment Adviser

5/F Winning Centre, 46-48 Wyndham Street, Central, Hong Kong.

8th August, 2002

The Independent Board Committee

Tse Sui Luen Jewellery (International) Limited

Ground Floor, Block B Summit Building 30 Man Yue Street Hunghom, Kowloon

Dear Sirs,

MAJOR AND CONNECTED TRANSACTIONS

Proposed implementing, completing and giving effect to the Subscription Agreements, Shareholders’ Agreements and the Shareholder’s Loan Agreement and the transactions contemplated thereunder including

(i) the issues of new shares in IAC and TSL China,

(ii) the deemed disposal of 21.04% equity interest in each of IAC and TSL China,

(iii) the Repurchase and Cancellation and

(iv) the transactions contemplated under the Shareholder’s Loan Agreement, and proposed ratification of a variation of the Bye-Laws arising from the extension of the Maturity Date of the Preference Shares and the repurchase and cancellation of the Preference Shares by ways other than those required by the Bye-Laws

We, Equitas Capital Limited, refer to our appointment by the Directors of the Company as independent financial adviser to advise the Independent Board Committee in relation to the proposed issues of shares in IAC and TSL China in consideration for the repurchase and cancellation of the Preference Shares and ancillary matters which was the subject of the public announcement released by the Company on 11th July, 2002. Pursuant to the Listing Rules, the Subscription Agreements, which provide for the Repurchase and Cancellation, together with the various other ancillary agreements referred to herein below constitute major and connected transactions for the Company and are, accordingly, subject to the approval of Independent Shareholders.

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LETTER FROM EQUITAS

Equitas is unconnected with any of the Company; Best Accurate (a company wholly owned by Mr. Qi); the China Retail Fund, LDC (being the Preference Shareholder); the Bank Creditors (including the Security Agent); the directors, chief executive and substantial shareholders of the Company, Best Accurate, the Preference Shareholder, the Bank Creditors and any of their respective subsidiaries; and the associates of each of them; and, accordingly, is considered suitable to give independent advice to you. Apart from normal professional fees payable to us in connection with this appointment, no arrangement exists whereby Equitas will receive any fees or benefits from the Company; Best Accurate, the Preference Shareholder, the Bank Creditors; the directors, chief executive and substantial shareholders of the Company, Best Accurate, the Preference Shareholder, the Bank Creditors and any of their respective subsidiaries; or any party associated with any of them.

The expressions defined in the circular to all of the shareholders of the Company dated 8th August, 2002 in respect of the above-mentioned major and connected transactions, of which this letter forms part, have the same meanings in this letter unless the context requires otherwise.

In formulating our opinion, we have reviewed the published information on the Company, including its annual reports and audited financial statements for each of the two years ended 28th February, 2001 and 2002; the Subscription Agreements; the Shareholders’ Agreements; the Shareholder’s Loan Agreement and the various other ancillary agreements referred to in the public announcement released by the Company on 11th July, 2002; the audited financial statements of IAC and of TSL China for each of the two years ended 28th February, 2001 and 2002; the unaudited management accounts of the Company for the three months ended 31st May, 2002 and the Group’s operating and cash flow budgets for the 21 months ending 29th February, 2004. We have also considered an opinion from the Company’s legal advisers regarding the redemption of the Preference Shares. We have discussed with the Directors the current financial condition of the Group, recent developments and the future direction of the Group’s jewellery business, particularly in Mainland China. We consider that the information which we have received is sufficient for us to reach our opinion as set out in this letter and to justify our relying on such information as the basis therefor and we have no reason to doubt the truthfulness and accuracy of the information provided to us. The Directors have confirmed to us that no material facts have been omitted from the information supplied and opinions expressed. We have relied on such information and opinions and have not conducted a comprehensive review of the business, operations or financial condition of the Group or the current state or likely prospects of the sectors of the jewellery manufacturing and retail industry in which the Group operates.

REPURCHASE AND CANCELLATION

Background

Since February, 1998, the Company had outstanding the Preference Shares in the principal amount of US$22,220,000 (equivalent to approximately HK$173 million). Pursuant to the terms of issue of the Preference Shares, if the Preference Shares had not been converted into ordinary shares of the Company prior to their maturity on 28th February, 2002, the Company would be required to redeem the Preference Shares in full on that date.

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LETTER FROM EQUITAS

The total amount payable by the Company on full redemption of the Preference Shares would amount to approximately HK$276 million, comprising:

	HK$ million
Face amount of the Preference Shares	173
Premium payable on redemption (in accordance with the terms of issue thereof)	60
Unpaid dividends accrued up to 17th June, 2002	37
Default interest for unpaid dividend accrued up to 17th June, 2002	6
Total amount payable by the Company	276

Since September 1999, the Company began holding negotiations with the Preference Shareholder with a view to redeem the Preference Shares without cash payment. Between February and May, 2002, the Company entered into four deeds with the Preference Shareholder to postpone the Maturity Date of the Preference Shares to 24th March, 21st April, 2nd June and 22nd June, 2002, respectively, in order to provide more time for finalising the definitive agreements. On 17th June, 2002, the Company entered into the Subscription Agreements with the Preference Shareholder to repurchase and cancel the Preference Shares for a consideration which represents a 24% equity interest in each of IAC and TSL China, being the Company’s two subsidiaries which, together with their respective subsidiaries, carry out the Group’s jewellery business in Mainland China. On 21st June, 2002, the Company and the Preference Shareholder agreed by way of a further supplemental deed to extend further the maturity date of the Preference Shares to 31st August, 2002 in order to provide more time for Completion. A brief summary of the terms of such supplemental deed is contained in the section headed “ 4. Further extension of the Maturity Date ” in the Letter from the Board.

The Subscription Agreements

Details of each of the IAC Subscription Agreement and the TSL China Subscription Agreement are contained in the section headed “ 2. The Subscription Agreements ” in the Letter from the Board.

Under the Subscription Agreements, each of IAC and TSL China has agreed to issue at par new shares to the Preference Shareholder (as to 66,521 IAC ‘B’ shares and 1,647 TSL China ‘B’ shares) and Best Accurate (as to 8,733 IAC ‘A’ shares and 216 TSL China ‘A’ shares) and the Company has agreed to repurchase from the Preference Shareholder all of the Preference Shares held by the Preference Shareholder as at that date at a price equal to the sum of HK$66,521 and US$1,647 payable in cash by the Company. In consideration therefor, the Preference Shareholder will, upon Completion, execute and deliver to the Company the Deed of Release which will release the Company and each of its officers and employees (past and present) from all claims, obligations and liabilities whatsoever under or in relation to the Preference Shares.

Pursuant to the Subscription Agreements, the Company, TSLJ, IAC or TSL China (where applicable), Liberty Mark, Mr. Qi, Best Accurate and the Preference Shareholder will, upon Completion, execute and deliver the Shareholders’ Agreements which will govern the relationships between the parties thereto with effect from Completion.

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LETTER FROM EQUITAS

In addition, upon Completion, IAC and TSL China, as primary obligors and not merely as sureties, will execute the Guarantee in favour of the Security Agent whereby IAC and TSL China shall irrevocably and unconditionally jointly and severally guarantee all amounts owing to the Bank Creditors by the Company and certain of its wholly owned subsidiaries under the Restructuring Arrangements.

Conditions Precedent of the Subscription Agreements

The Conditions Precedent to which the Subscription Agreements are subject are set out in the subparagraph headed “ (e) Conditions Precedent of the Subscription Agreements ” under the section headed “ 2. The Subscription Agreements ” in the Letter from the Board. The principal Conditions Precedent include the following:

(i) consent to the Subscription Agreements, the Shareholders’ Agreements and the Guarantee having been obtained from the Bank Creditors by 30th June, 2002;
(ii) compliance with section 42A of the Companies Act 1981 of Bermuda in relation to the repurchase and cancellation of the Preference Shares which requires the Board to confirm that there are no reasonable grounds for believing that the Company is or would be, following the repurchase and cancellation of the Preference Shares, unable to pay its liabilities as they become due;
(iii) the completion of a business, financial and legal due diligence with respect to IAC, TSL China and their respective immediate subsidiaries and the transactions contemplated under the agreements referred to in (i) above and the results thereof being to the satisfaction of the Preference Shareholder; and
(iv) approval of the Subscription Agreements and the transactions contemplated thereunder and the ratification by special resolution of the variation of the Bye-Laws of the Company arising from the non-redemption of the Preference Shares on the Maturity Date from the Independent Shareholders and authorising the Directors to take such steps as are appropriate to implement the same.

On 17th June, 2002, an “in principle approval” has been given by the Bank Creditors to the transactions contemplated by the Subscription Agreements, the Shareholders’ Agreements and the Guarantee. Such “in principle approval” is subject to conditions which mainly include:

(i) the execution or the procurement of the Subscription Agreements, the Shareholders’ Agreement, the Shareholder’s Loan Agreement, the Shareholder’s Loan Guarantee and the Deed of Release;
(ii) the execution of the security documents as summarised in the sub-paragraph headed “ (f) Security documents ” under the section headed “ 3. Other documents ” in the Letter from the Board; and
(iii) the fulfilment of the Conditions Precedent.

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LETTER FROM EQUITAS

The business, financial and legal due diligence referred to in Condition Precedent (iii) herein above with respect to IAC, TSL China and their respective subsidiaries and the transactions contemplated under the Subscription Agreements, the Shareholders’ Agreements, the Shareholder’s Loan Agreement and the Guarantee is progressing to an advanced stage and is expected to be completed before 31st August, 2002.

Completion

Pursuant to the Subscription Agreements, Completion shall take place on or before the fifth business day following fulfilment or waiver, as the case may be, of all the Conditions Precedent.

Upon Completion, as referred to above, certain agreements and/or documents will be executed and delivered by the relevant parties to the Subscription Agreements. Such agreements and/or documents include the Shareholders’ Agreements; the Guarantee; the Deed of Release; the Shareholder’s Loan Agreement; and the Shareholder’s Loan Guarantee.

The principal terms of these and other documents mentioned in this letter are summarised in the relevant sections in the Letter from the Board.

Effects of the Subscription Agreements

The Group’s jewellery business in Mainland China is primarily undertaken by the IAC Group and the TSL China Group. IAC and TSL China are investment holdings companies and through their subsidiaries, are engaged in the sale of platinum and gem-stone jewellery via retail outlets in Mainland China under the licence of the Company and/or any of its subsidiaries. In addition, the TSL China Group also provides the processing of platinum and gem-stone jewellery for sale in Mainland China.

Each of IAC and TSL China is 77.5% owned by the Company through its wholly owned subsidiaries, TSLJ (as to 70%) and Liberty Mark (as to 7.5%), and 22.5% owned by Best Accurate.

Further information relating to IAC and TSL China is contained in the sub-paragraph headed “ (c) Information on IAC and TSL China ” under the section headed “ 2. The Subscription Agreements ” in the Letter from the Board.

The Subscription Agreements also provide for the reclassification of the share capital of each of IAC and TSL China into “A” shares (to be held exclusively by Best Accurate) and “B” shares (to be held exclusively by TSLJ, Liberty Mark and the Preference Shareholder). There is no difference in the terms of and rights attached to the two classes of shares in each of IAC and TSL China, save and except that, with effect from Completion until such time as the Bank Loans owed by the Group to the Bank Creditors under the Restructuring Arrangements are fully repaid or refinanced (whichever is the sooner), the holder of “A” shares in each of IAC and TSL China will have a priority over the holders of the “B” shares to receive dividends from these two companies. The provisions for this priority are contained in the Shareholders’ Agreements which are further described herein below.

The changes in the shareholdings in each of IAC and TSL China as a result of the Subscription Agreements are set out in the sub-paragraph headed “IAC’s and TSL China’s shareholdings prior to and following Completion” under the section headed “ 2. The Subscription Agreements ” in the Letter from

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LETTER FROM EQUITAS

the Board. Following Completion, the equity interests of the Company, Best Accurate and the Preference Shareholder in the enlarged issued share capital of each of IAC and TSL China will be 56.46% (reduced from 77.5%), 19.54% (reduced from 22.5%) and 24% respectively.

Thus, Completion of the Subscription Agreements will reduce the Company’s equity interest in each of IAC and TSL China by 21.04% following Completion. This will give rise to a deemed disposal of a 21.04% equity interest in these two companies by the Company, which constitutes a major and connected transaction for the Company under the Listing Rules.

After Completion, IAC and TSL China will remain as subsidiaries of the Company and the Company will have the power to appoint 5 out of the 9 directors in each of the boards of IAC and TSL China.

The Shareholders’ Agreements

As referred to herein above, TSLJ, Liberty Mark, Best Accurate and the Preference Shareholder, being the existing or proposed shareholders of each of IAC and TSL China, together with the Company (as the holding company of TSLJ and Liberty Mark), Mr. Qi (as the guarantor of the obligations of Best Accurate) and IAC or TSL China (as applicable) will, upon Completion, execute and deliver the IAC Shareholders’ Agreement and the TSL China Shareholders’ Agreement, as the case may be, which agreements will govern the relationships between the parties to the relevant agreement and prescribe the manner in which the IAC Group and the TSL China Group will be managed. The Shareholders’ Agreements contain provisions requiring the Company to enter into agreements with the IAC Group and the TSL China Group in respect of supply of materials and finished goods; design, merchandising, quality assurance and other technical support services; and trade-mark licensing on a non-exclusive basis. The Shareholders’ Agreements also restrict the shareholders of IAC and TSL China (including Mr. Qi) from engaging in businesses which compete with these two companies in Mainland China (other than through these two companies).

Details of the principal terms of the Shareholders’ Agreements are contained in the sub-paragraph headed “ (a) Shareholders’ Agreements ” under the section headed “ 3. Other documents ” in the Letter from the Board.

The Shareholders’ Agreements constitute a connected transaction for the Company under the Listing Rules and is, accordingly, conditional to the approval of Independent Shareholders at the Special General Meeting.

The Shareholder’s Loan Agreement

TSLJ currently finances the operations of IAC through consignment and trading accounts which amounted to a total of approximately HK$184.5 million as at 28th February, 2002. Upon Completion, the Shareholder’s Loan Agreement will be entered into by TSLJ and IAC to formalise this financing arrangement by way of an interest bearing shareholder’s loan (the “Shareholder’s Loan”) in the same amount.

A summary of the terms of the Shareholder’s Loan Agreement is set out in the sub-paragraph headed “ (c) Shareholder’s Loan Agreement ” under the section headed “ 3. Other documents ” in the Letter from the Board.

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LETTER FROM EQUITAS

As required by the Shareholder’s Loan Agreement, TSL China will upon Completion execute the Shareholder’s Loan Guarantee in favour of TSLJ, whereby TSL China, as primary obligor and not merely as surety, irrevocably and unconditionally guarantees the repayment of the Shareholder’s Loan to TSLJ and secures the liabilities of IAC thereunder.

Mr. Qi is a director and substantial shareholder of each of IAC and TSL China and is thus a connected person (as defined under the Listing Rules) of the Company. Shareholders of IAC other than the Company have not provided similar loans such as the Shareholder’s Loan to IAC. Under of the Listing Rules, the Shareholder’s Loan Agreement constitutes a connected transaction for the Company, which requires the prior approval of the Independent Shareholders at the Special General Meeting.

VARIATION OF THE BYE-LAWS

The Directors have approved the variation of the Bye-Laws arising from the extension of the Maturity Date (being 28th February, 2002 as defined in the Bye-Laws) to 31st August, 2002 and the Repurchase and Cancellation. In accordance with the Bye-Laws, the proposed ratification of the variation of the Bye-Laws requires the approval (by way of special resolution) of the members of the Company (being the holders of ordinary shares of the Company and the Preference Shareholder voting as a single class) at a special general meeting. The variation of the terms of the Preference Shares is also subject to the sanction of the holders of the Preference Shares. The sanction for the variation of the Maturity Date has already been obtained by the Company from the Preference Shareholder.

WAIVER FROM SFC

The SFC is of the view that the Repurchase and Cancellation by the Company of the Preference Shares constitutes an off-market share repurchase within the meaning of the Share Repurchase Code. The Company has made an application to the Executive for a waiver from compliance with the requirements of the Share Repurchase Code on the grounds that the Preference Shares are more analogous to debt securities than equity securities and the Executive has granted such a waiver.

PRINCIPAL FACTORS AND REASONS

In arriving at our opinion and advice stated below, we have considered, inter alia, the following principal factors and reasons:-

1. background to, and reasons for, the Subscription Agreements

The Subscription Agreements provide for the repurchase and cancellation of the Preference Shares which have become due for redemption. As at 17th June, 2002, the total amount of the Company’s liabilities in relation to the Preference Shares was approximately HK$276 million. This amount included all accrued and unpaid dividends and default interest thereon (such interest being calculated at 10% per annum compounded on a monthly basis) estimated at an aggregate of approximately HK$43 million as at that date.

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LETTER FROM EQUITAS

As at 28th February, 2002, based on audited accounts, the Company and the Group had a deficit in the reserves account of approximately HK$215.4 million and HK$207.0 million respectively, whilst the Group’s consolidated net assets attributable to all of the Company’s shareholders amounted to HK$62.9 million (which had been arrived at after deducting provisions for accrued but unpaid preference dividend and default interest thereon totalling approximately HK$38.3 million as at the same date). We have been given to understand that, under the Companies Act of Bermuda, the Company may only redeem the Preference Shares out of its distributable reserves or capital, provided that it does not render the Company being unable to pay its liabilities as they become due and the realisable value of the Company’s assets thereby being less than its liabilities. On the basis of its latest audited accounts, the Company is clearly in no position to discharge its liabilities in relation to the Preference Shares (being approximately HK$276 million in total) as the Company has neither the distributable reserves nor the financial resources which may enable it so to do. We have also been given to understand that, under the Companies Act of Bermuda, the Preference Shareholder cannot force the Company to redeem all of the Preference Shares on the Maturity Date, because the redemption will result in the Company being unable to pay its liabilities as they become due based on the latest audited accounts.

Notwithstanding the fact that the Preference Shareholder presently cannot force the Company to redeem the Preference Shares and discharge the Company’s liabilities in relation thereto, we consider that failure to reach a settlement with the Preference Shareholder will have a significant negative impact on the Group’s financial position. Default interest on unpaid preference dividend will continue to mount. The Company’s ability to raise permanent equity capital would be seriously impaired.

On the other hand, the settlement with the Preference Shareholder represented by the Subscription Agreements will enable the Company sooner to restore dividend payments to the ordinary shareholders of the Company, subject to future profitability and the generation of cash flow sufficient for the repayment or the refinancing of the Bank Loans owed to the Bank Creditors under the Restructuring Arrangements.

In addition, we note that the introduction of the Preference Shareholder as a direct strategic investor in the Group’s jewellery business in Mainland China is considered by the Directors to have a positive effect on the Company’s market position, which will benefit the business development and raise the profile of the Company in the long term. This introduction is also expected to enhance the development of the Company’s operations in Mainland China which are well positioned to take advantage of opportunities arising from China’s accession to membership of the World Trade Organisation.

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LETTER FROM EQUITAS

2. valuation of the interests in IAC and TSL China

The audited consolidated results of each of IAC and TSL China for each of the two financial years ended 28th February, 2001 and 2002, based on audited accounts, were as follows:

IAC

Profit before taxation and extraordinary items Profit attributable to IAC shareholders TSL China (which commenced operations in August, 2001) Loss before taxation and extraordinary items Loss attributable to TSL China shareholders	2001 HK$’000 81,668 81,668 2001 HK$’000 – –	2002 HK$’000 8,173

		8,173

		2002 HK$’000 2,129

		2,136

The audited consolidated net assets of IAC as at 28th February, 2002 were approximately HK$5,153,000, representing a net asset value per share of approximately HK$25.5. Following the issue of new shares in accordance with the IAC Subscription Agreement, the net asset value (after adjusting for the proceeds from such issue of new shares) per share of IAC will be HK$18.9.

The audited consolidated net liabilities of TSL China as at 28th February, 2002 were approximately HK$2,231,000, representing a net liability per share of approximately HK$446.2. Following the issue of new shares in accordance with the TSL China Subscription Agreement, the net liability (after adjusting for the proceeds from such issue of new shares) per share of TSL China will be HK$322.9.

The consideration of approximately HK$276 million for the proposed deemed disposal of the Group’s 21.04% interest in IAC and TSL China, which, we understand, has been arrived at after detailed and arm’s length negotiations between the parties to the Subscription Agreements, represents approximately 217 times the combined audited profits attributable to the 21.04% equity interest in IAC and TSL China of approximately HK$1,270,000 for the year ended 28th February, 2002.

If the results of IAC and TSL China for the year ended 28th February, 2001 were considered instead, such consideration would represent approximately 16 times the combined audited profits attributable to the 21.04% equity interest in IAC and TSL China (effectively only IAC as TSL China did not commence operations until August, 2001) of approximately HK$17,183,000 for the year ended 28th February, 2001.

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LETTER FROM EQUITAS

It should be noted that, from the perspective of the Preference Shareholder (who acquired an equity interest of 24% in each of IAC and TSL China in consideration for the Repurchase and Cancellation), the consideration of approximately HK$276 million represents multiples of approximately 190 times and 14 times the combined net profits attributable to such equity interest for each of the two years ended 28th February, 2002 and 2001, respectively.

We consider that this level of multiple, particular that relating to the year ended 28th February, 2002, is somewhat in excess of what the market would accept for a minority participation in a trading business.

On the basis of the above, we believe that the terms of issue of shares in IAC and TSL China to the Preference Shareholder pursuant to the Subscription Agreements are in the interests of the Company.

3. financial effects of the Subscription Agreements

3.1 Net tangible assets

Set out in paragraph 1 of Appendix I of this circular is a statement of the unaudited pro forma adjusted consolidated net tangible assets of the Group.

The audited consolidated net tangible assets of the Group as at 28th February, 2002 attributable to all of the Company’s shareholders (that is to say, the Preference Shareholder as well as the ordinary shareholders including Independent Shareholders) were approximately HK$62,895,000. After deducting the Company’s liabilities in relation to the Preference Shares which had become due for redemption on 28th February, 2002 (excluding amounts which had already been provided for in the Company’s accounts for accrued but unpaid preference dividends and default interest thereon totalling approximately HK$38,261,000 as at the same date), the audited consolidated net tangible assets of the Group as at 28th February, 2002 attributable to the Company’s ordinary shareholders was a deficit in net assets of approximately HK$109 million.

Following Completion of the Subscription Agreements (which are assumed for the purpose of this exercise to have taken effect on 28th February, 2002), the unaudited pro forma adjusted consolidated net tangible assets of the Group attributable to the Company’s ordinary shareholders, after accounting for the adjustments to reflect the effect of the Repurchase and Cancellation of the Preference Shares, would amount to approximately HK$100,501,000. We consider that this represents a very substantial improvement in the net tangible assets position from the perspective of both the Company and its ordinary shareholders.

3.2 Profit and loss account

For the year ended 28th February, 2002, default interest on unpaid dividends accrued on the Preference Shares amounted to approximately HK$4.6 million. Upon Completion, this amount of default interest together with any amount of default interest accrued from 1st March, 2002 to the date of Completion will be written back and accounted for as a credit item in the profit and loss account of the Company.

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LETTER FROM EQUITAS

However, following Completion, the contribution from IAC and TSL China to Group results will be reduced, in line with the reduction of the Group’s equity interest in these two companies from 77.50% to 56.46%. On the basis of the audited results of IAC and TSL China for the year ended 28th February, 2002, this would represent a decrease of approximately HK$1.27 million.

3.3 Liabilities, gearing, indebtedness and working capital

As at 28th February, 2002, based on audited accounts, the consolidated total liabilities (excluding minority interests) and the consolidated net assets of the Group were approximately HK$548,992,000 and HK$62,895,000 respectively, representing a gearing ratio of approximately 8.7 times.

On the basis of the same audited accounts, following Completion of the Subscription Agreements (which are assumed for the purpose of this exercise to have taken effect on 28th February, 2002), the Group’s consolidated total liabilities would be reduced by approximately HK$38,261,000 (being the write back of the accrued but unpaid preference dividends and default interest thereon as referred to in paragraph 3.1 herein above) to approximately HK$510,731,000, representing a gearing ratio of approximately 5.1 times when compared with the unaudited pro forma adjusted consolidated net tangible assets of the Group of approximately HK$100,501,000 as referred to in paragraph 3.1 herein above.

A statement of the indebtedness of the Group as at 31st May, 2002 is set out in paragraph 2 of Appendix I of this circular. It is not expected that the Repurchase and Cancellation will have any effect on the indebtedness of the Group.

We note that, as stated in paragraph 4 of Appendix I of this circular, the Directors are of the opinion that the Group will have sufficient working capital for its present requirement after taking into account the available banking facilities and internal resources of the Group.

4. the Shareholders’ Agreements

Under the Subscription Agreements, new shares in each of IAC and TSL China will also be issued to Best Accurate. However, as shown in the table setting out the changes in IAC’s and TSL China’s shareholding structure prior to and following Completion referred to in the paragraph headed “Effects of the Subscription Agreements” above, the shareholding of Best Accurate in each of IAC and TSL China will, upon Completion, be reduced from 22.50% to 19.54%, representing a dilution of 2.96%. Thus, Best Accurate is effectively contributing to the Company’s settlement with the Preference Shareholder.

Pursuant to the Shareholders’ Agreement, in consideration of the dilution of the interests of Best Accurate in IAC and TSL China as a result of the Subscription Agreements, Best Accurate (as the holder of the ‘A’ shares in IAC and TSL China) will be accorded a temporary priority to receive dividends from these two companies over the holders of the ‘B’ shares therein (namely, TSLJ, Liberty Mark and the Preference Shareholder) to the effect that:

(a) no dividend will be declared and paid and no other distribution, whether in specie or otherwise, will be made in respect of the IAC “B” Shares and TSL China “B” Shares; and

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LETTER FROM EQUITAS

(b) the holder of IAC “A” Shares and TSL China “A” Shares will be entitled, subject to available free cash flow (being the cash balances of IAC and TSL China less trade debts, petty cash and payments in the ordinary course of business of these companies) and in priority over the repayment of the Shareholder’s Loan and interest accrued thereon as provided for in the Shareholder’s Loan Agreement referred to in paragraph 5 herein below, to receive a dividend, in respect of each of such shares held by it, from IAC and TSL China based on the formula which will effectively give the holder, in each year, a dividend per share equivalent to the distributable profits (less any reserves agreed by the relevant board to be retained by the relevant company) divided by the total number of shares in issue (“A” Shares and “B” Shares together) as at the last business day of each year.

Best Accurate will enjoy this temporary priority until the Bank Loans owed by the Group to the Bank Creditors are fully repaid or refinanced. As soon as the Bank Loans are fully repaid or refinanced (whichever occurs earlier), this temporary priority will cease and TSLJ, Liberty Mark and the Preference Shareholder (as the holders of the ‘B’ shares in IAC and TSL China) will firstly be entitled to receive dividends in such aggregate amounts as they would have received during the period the above-mentioned priority enjoyed by Best Accurate had been effective had IAC and TSL China distributed the full amount of their distributable profits (less any reserves aforesaid) and thereafter the two classes of shares in IAC and TSL China will rank pari passu in all respects including dividend entitlements.

We note that this dividend payment arrangement has been arrived at following arm’s length negotiations between the parties to the Shareholders’ Agreements. We are of the view that this is a reasonable concession for the Company to make in favour of Best Accurate in consideration of the 2.96% dilution of its interest in each of IAC and TSL China (from 22.5% to 19.54%).

We further note that, in circumstances where a profit is achieved by IAC and TSL China and the available free cash flow of IAC and TSL China is insufficient to satisfy both the dividend payment on the “A” Shares and repayment on the Shareholder’s Loan, the repayment schedule of the Shareholder’s Loan may necessarily be deferred. We believe that this situation is unlikely to be sustained over an extended period of time as it is in the interests of the Group to ensure that a tight control is exercised over the working capital requirements of IAC and TSL China so that sufficient free cash flow is generated by IAC and TSL China to effect repayment on the Shareholder’s Loan as rapidly as possible after satisfying any dividend payment on the “A” Shares. Indeed, each of IAC and TSL China, which will continue to be managed by the Company following Completion, has given an undertaking to the Security Agent (acting for the Bank Creditors), inter alia, to maximise the generation of free cash flow from its business operations. Accordingly, despite the temporary priority on dividend payments enjoyed by Best Accurate, we do not expect that the Group will be materially disadvantaged in terms of cash flow from its business in Mainland China.

We have also considered the various provisions of the Shareholders’ Agreements including that which restricts the Group from engaging in businesses competing with IAC and TSL China in Mainland China (other than through these companies). We are of the view that, other than the above-mentioned temporary priority accorded to Best Accurate in respect of dividend payments, these provisions represent standard provisions in similar agreements and do not prejudice the Group’s position as a controlling shareholder in IAC and TSL China.

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LETTER FROM EQUITAS

5. the terms of the Shareholder’s Loan Agreement

Under the Shareholder’s Loan Agreement which will come into effect on Completion, interest will accrue on the Shareholder’s Loan at the rate equal to the rate of interest charged by the Bank Creditors (being one-month HIBOR plus 2% as at the Latest Practicable Date) on the Bank Loans during that month on any outstanding amounts of the Bank Loans, provided that the total amount of interest which accrues on the Shareholder’s Loan in any month will not be greater than the total amount of interest which accrues in respect of the Bank Loans (including any default interest charged by the Bank Creditors) during that month for so long as the Restructuring Arrangement remains effective; and IAC will make repayments of the Shareholder’s Loan and interest (after payment of any dividend declared on the “A” Shares) on the last business day of each month commencing from the month in which Completion falls in an amount equal to the cash balances of the IAC Group less trade debts, petty cash and payments in the ordinary course of business of these companies (subject to the availability of the same and after the payment of any dividend declared on the “A” Shares).

The Shareholder’s Loan Agreement contains provision for negotiating an agreed adjustment to both the interest rate and the repayment of the Shareholder’s Loan once the Bank Loans are repaid or refinanced within nine months of such event happening and during this nine month period (or earlier if IAC and TSLJ have reached agreement on the rate of interest), interest will continue to accrue on the Shareholder’s Loan at the interest rate charged by the Bank Creditors during the month in which the Bank Loans are repaid or refinanced in full (as the case may be).

We are of the view that the financing arrangement as contained in the Shareholder’s Loan Agreement represents a significant improvement on the previous informal arrangement between TSLJ and IAC. The rate of interest to be accrued on the Shareholder’s Loan appear low compared with market rates. On the other hand, it is the same rate as that charged by the Bank Creditors on the Bank Loans which have provided partly the underlying financing for the Shareholder’s Loan. The repayment schedule for the Shareholder’s Loan is wholly dependent on the available free cash flow (being the cash balances of the IAC Group less trade debts, petty cash and payments in the ordinary course of business of these companies) after the payment of any dividend declared on the “A” Shares. Such repayment schedule will leave the IAC Group with the bare minimum of cash resources for its operations and will undoubtedly have an effect on its ability to expand its future business.

However, bearing in mind that: (i) the present financial position of the IAC Group does not allow for another repayment schedule which enables the Company to recover the Shareholder’s Loan faster than that as set out in the Shareholder’s Loan Agreement without significantly affecting the IAC Group’s business operations and (ii) the terms of the Repurchase and Cancellation, of which the Shareholder’s Loan Agreement forms part, have been negotiated by the Company, the Preference Shareholder, the Bank Creditors and Best Accurate on an arm’s length basis for more than two years, we are of the view that this arrangement is acceptable.

Taking into account our comments in relation to the temporary dividend priority enjoyed by the fact that the financing arrangement had arisen from a trading relationship, we are of the view that the terms of the Shareholder’s Loan Agreement are fair and reasonable.

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LETTER FROM EQUITAS

6. due diligence review

Completion of the Subscription Agreements are conditional on the results of a due diligence review being to the satisfaction of the Preference Shareholder; we understand that such due diligence review is in progress and the Company is not aware of any reason why the results thereof will not be to the satisfaction of the Preference Shareholder.

7. variation of the Bye-Laws

We are of the view that the ratification of the variation of the Bye-Laws has been proposed to enable the transactions contemplated under the Subscription Agreements to be effected and has no bearing otherwise on the terms thereof.

8. alternative courses of action open to the Company

Independent Shareholders should note that if the Subscription Agreements, which provide (inter alia) for the Repurchase and Cancellation of the Preference Shares, together with the various ancillary agreements to be executed and delivered on Completion, are not approved at the Special General Meeting, the Company may be required to redeem in full for cash the Preference Shares on 31st August, 2002.

As stated in paragraph 1 herein above, the Company is in no position to discharge its liabilities in relation to the Preference Shares in full as it has neither the distributable reserves nor the financial resources to enable it so to do. Default interest on the redemption payment due to the Preference Shareholder as well as the unpaid preference dividend will mount after 31st August, 2002 at the rate of 10% per annum compounded on a monthly basis. We believe that this situation will have a significant negative impact on the Group’ financial position and may ultimately affect the Group’s long term viability.

As the terms of the Repurchase and Cancellation have been reached only after lengthy negotiations by the Company with the Preference Shareholder, the Bank Creditors and Best Accurate, we would agree with the view of the Director that an alternative settlement arrangement with terms that represent a significant improvement on the current terms are unlikely. Judging from the time spent for the negotiations for the Repurchase and Cancellation, before any of such alternative settlement could be reached, considerable time would have to be spent again in the negotiation of new terms acceptable to the Company, the Preference Shareholder, the Bank Creditors and Best Accurate. During such time in the negotiation of any new terms, the Group would enter into a period of considerable uncertainties, where doubts in respect of the Group’s future financial position would likely have a significant adverse impact on its business operations

OUR OPINION AND ADVICE

Having considered these factors and reasons, we, Equitas Capital Limited, are of the opinion that the terms of the Subscription Agreements (which provide, inter alia, for the Repurchase and Cancellation, the issue of shares in IAC and TSL China, the deemed disposal of a 21.04% equity interest in each of IAC and TSL China and the transaction contemplated under the Shareholder’s Loan Agreement), together with the various ancillary agreements to be executed and delivered on Completion, including the Shareholders’ Agreement and the Shareholder’s Loan Agreement, are fair and reasonable and that the

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LETTER FROM EQUITAS

Repurchase and Cancellation is in the interests of the Company and its shareholders. Accordingly, we advise the Independent Board Committee to recommend to Independent Shareholders that they should vote in favour of the ordinary resolutions as set out in the Notice of the Special General Meeting to approve the implementing, completing and giving effect to the Subscription Agreements, the Shareholders’ Agreements and the Shareholder’s Loan Agreement (and the transactions contemplated thereunder), including (i) the issues of shares in IAC and TSL China, (ii) the deemed disposal of 21.04% equity interest in each of IAC and TSL China, (iii) the Repurchase and Cancellation, and (iv) the transactions contemplated under the Shareholder’s Loan Agreement. We also advise the Independent Board Committee to recommend to Independent Shareholders that they should vote in favour of the special resolutions as set out in the same notice to approve the ratification of the variation of the Bye-Laws arising from the extension of the Maturity Date and the Repurchase and Cancellation.

Yours faithfully, For and on behalf of

Equitas Capital Limited Ng Ming Wah, Charles Managing Director

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FINANCIAL INFORMATION

APPENDIX I

1. UNAUDITED PRO FORMA STATEMENT OF ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS OF THE GROUP

The following is a statement of the unaudited pro forma adjusted consolidated net tangible assets of the Group based on the audited consolidated financial statements of the Group as at 28th February, 2002, adjusted to reflect the effect of the Repurchase and Cancellation should such have taken effect on 28th February, 2002:

Consolidated net tangible assets of the Group as per audited financial statements as at 28th February, 2002_(note a) Increase in net tangible assets of the Group arising from the proposed transactions: Write back of accrued dividend of the Preference Shares up to 28th February, 2002 to reserves(note b) Write back of default interest for unpaid dividend of the Preference Shares up to 28th February, 2002 to the profit and loss account Increase in the share of minority interests in net tangible assets of IAC and TSL China Unaudited pro forma adjusted consolidated net tangible assets of the Group upon completion of the proposed transactions Unaudited pro forma adjusted consolidated net tangible assets per ordinary share of the Company (based on 391,889,263 ordinary shares in issue upon Completion)(HK$)_	HK$’000 33,666 4,595 (655)	HK$’000 62,895 37,606
		100,501

		0.256

Notes:

a. The consolidated net tangible assets of the Group as at 28th February, 2002 included the Preference Shares amounting to HK$171,916,000.
b. The accrued dividend of the Preference Shares up to 28th February, 2002 of HK$33,666,000 was appropriated from the Group’s reserves.

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FINANCIAL INFORMATION

APPENDIX I

2. INDEBTEDNESS

As at the close of business on 31st May, 2002 (being the latest practicable date for ascertaining information regarding this indebtedness statement prior to the printing of this circular), the Group had outstanding bank borrowings of approximately HK$276.5 million comprising secured bank loans of approximately HK$273.2 million and secured bank overdrafts of approximately HK$3.3 million.

The Group’s secured bank overdrafts were secured by a property held by the Group and a minority shareholder. The Group’s secured bank loans were secured by (a) all of the undertakings, properties and assets of the Company and 28 of its subsidiaries by way of fixed and floating charges and rental revenue of the Group; and (b) the capital contribution to a subsidiary of the Group and all the benefits accruing to the pledged equity interest. The banking facilities in respect of the secured bank loans of approximately HK$273.2 million are not available for reutilisation pursuant to the Restructuring Agreement.

Save as aforesaid or otherwise disclosed herein, and apart from intra-group liabilities and normal trade debts payable, the Group did not have, as at the close of business on 31st May, 2002, any loan capital, bank overdrafts and liabilities under acceptances or other similar indebtedness, debentures, mortgages, charges, loans, acceptance credits, hire purchase commitments, guarantees or other material contingent liabilities. (Please refer to the subsection headed “Litigation” under appendix II to this circular for details of any litigation, arbitration or claim of material importance known to the Directors to be pending or threatened against any members of the Group.)

All the outstanding borrowings of the Group denominated in foreign currencies have been translated into Hong Kong dollars at the rates of exchange prevailing at the close of business on 31st May, 2002 for the purpose of this indebtedness statement.

3. MATERIAL CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 28th February, 2002, the date to which the latest audited financial statements of the Company were made up.

4. WORKING CAPITAL

The Directors are of the opinion that the Group will have sufficient working capital for its present requirement after taking into account the available banking facilities and internal resources of the Group.

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GENERAL INFORMATION

APPENDIX II

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 jointly and severally accept full responsibility for the accuracy of the information contained in this circular, and confirm, having made all reasonable enquires, 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. DISCLOSURE OF INTERESTS

(a) Interests in the Company’s ordinary shares held by the Directors

As at the Latest Practicable Date, the Directors held the following interests in the Company’s ordinary shares:

Personal Name of Director interest Tse Tat Fung, Tommy –	Number of ordinary shares held Family Corporate Other interest Interest interest – 195,971,534_(i) 1(ii)_

Notes:

(i) These shares were held through Blink Technology Limited, a company beneficially owned by Mr. Tse Tat Fung, Tommy.

(ii) Blink Technology Limited acquired the rights, title and interest in various financing documents under which this share, representing the share of which Mr. Tse Sui Luen has personal interest, was charged. Accordingly, Mr. Tse Tat Fung, Tommy is deemed to be interested in this share.

(b) Interests in the Company’s share options held by Directors

As at the Latest Practicable Date, the Directors had the following interests in options to subscribe for shares granted under the share option scheme adopted on 20th August, 1993. Each option gives the holder the right to subscribe for one share.

Name of Director Leung Yit Kuen, Raymond	Exercisable No. of options Date of grant period 6,647,500 15th September, 15th March, 2000 1999 to 19th August, 2003	Exercise price
		HK$0.25

Save as disclosed in this circular, as at the Latest Practicable Date, none of the Directors had any interests in the shares or other securities of the Company or any associated corporations (within the meaning of the SDI Ordinance) which require notification to the Company and the Stock Exchange pursuant to Section 28 of the SDI Ordinance (including interests which any such Director has taken or is deemed to have under Section 31 or Part I of the Schedule

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GENERAL INFORMATION

APPENDIX II

to the SDI Ordinance) or which are required to be entered into the register maintained by the Company pursuant to Section 29 of the SDI Ordinance, or which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to be notified to the Company and the Stock Exchange.

(c) Substantial interests in the ordinary shares of the Company

The Company has been notified of the following interests in the Company’s issued ordinary shares as at the Latest Practicable Date amounting to 10% or more of the ordinary shares in issue:

		Number of ordinary shares held	Number of ordinary shares held
		Percentage		Percentage
Name		of total		of total
		issued		issued
	Direct interest	shares	Other interest	shares
Blink Technology Limited	195,971,534	50.0%	1_(i)_	0%
Notes:

(i) Blink Technology Limited acquired the rights, title and interest in various financing documents under which this share, representing the share of which Mr. Tse Sui Luen has personal interest, was charged. Accordingly, Blink Technology Limited is deemed to be interested in this share.

Save for the shares referred to above so far as was known to the Directors and the chief executive of the Company, no person or corporation has any interest in the share capital of the Company, according to the register required to be kept by the Company under Section 16(1) of the SDI Ordinance.

3. DIRECTORS’ SERVICE CONTRACTS

No Directors has an unexpired service contract which is not terminable by the Company or any of its subsidiaries within one year without payment of compensation, other than normal statutory obligations.

4. EXPERT’S CONSENT

Equitas has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter of advice and the references to its name in the form and context in which it appears.

As at the Latest Practicable Date, Equitas was not interested beneficially or otherwise in any shares in the Company or any of its subsidiaries or associated corporations and did not have any right (whether legally enforceable or not) or option to subscribe for or to nominate persons to subscribe for any shares in the Company or any of its subsidiaries or associated corporations nor did it have any interest, either direct or indirect, in any assets which have been, since the date to which the latest published audited financial statements of the Company were made up, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group.

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APPENDIX II

GENERAL INFORMATION

5. LITIGATION

(a) Prior to the entering into the Restructuring Agreement, three of the Bank Creditors had served formal demands on the Group. Further to these demand letters, one of these Bank Creditors had served statutory demands for payment dated 13th August 1999 but no other formal legal proceedings had been taken by any of these Bank Creditors. Each of these Bank Creditors was involved in negotiations that took place between the Group and the Bank Creditors for a rescheduling of the Group’s indebtedness. On 3rd August 2000, the Restructuring Agreement was entered into between the Company and all the Bank Creditors whereby, amongst other things, each of the Bank Creditors who had instituted legal or other proceedings against the Group agreed to stay the proceedings until the termination or expiry of the restructuring period.
(b) A writ was issued against a subsidiary of the Company, Tse Sui Luen Jewellery (China) Limited (“the Defendant”) in July, 1998 by Tse’s (China Concept) Development Limited (“the Plaintiff”) alleging breach of an agreement entered into in August, 1993 (“the Agreement”). The Plaintiff is independent of Mr. Tse Sui Luen and his family and has no relationship with the Group. The claim alleges the failure of the Defendant to transfer to the Plaintiff the Defendant’s interest and shares in a joint venture company established by the Defendant and a Mainland company for the purpose of jewellery trading. The claim is for the return by the Defendant of the sum of US$1 million together with interest and unspecified loss and damage. The Defendant filed the defence and counterclaim whereby it counterclaims against the Plaintiff for the balance due by the Plaintiff under the Agreement for the sum of HK$2,863,550 and for the commission on the turnover of the joint venture company from August 1993 to present together with interest and costs. The Plaintiff also filed the reply and defence to counterclaim. The case has now proceeded to the exchange of documents and the filing of the witnesses’ statements by the parties. The Defendant will seek for counsel advice on evidence and upon completion of all the interlocutory applications, the case will be set down for trial.
(c) Fortune Tenet Co. Ltd. (“Fortune Tenet”) is a subsidiary of the Company and was the registered owner of the property at No.38 Wong Chuk Hang Road, Aberdeen, Hong Kong (“the property”). The property was sold to the purchaser, Bright Skill Ltd. (“Bright Skill”), and the sale and purchase had been completed on 15th June 2001. The property included three units of passenger lifts (“the lifts”) and a maintenance agreement (“Maintenance Agreement”) had been entered between Fortune Tenet and Hong Kong Lifts Ltd. (“Hong Kong Lifts”), on 31st July 2000 in which Hong Kong Lifts would provide maintenance service to the lifts at the monthly fee of HK$9,000 for a term to expire on 31st December 2001. After the property was sold to Bright Skill, Hong Kong Lifts continued to provide maintenance service to the lifts despite notification by Fortune Tenet that the property was sold to Bright Skill and maintenance service was no longer required. Hong Kong Lifts issued a writ against Fortune Tenet in the District Court in April 2002 claiming for outstanding maintenance fee as from July 2001 to March 2002 for the sum of HK$81,000 pursuant to the provisions of the Maintenance Agreement. A defence was filed by Fortune Tenet contesting the liability to pay for the outstanding maintenance fee. Hong Kong Lifts made an application for summary judgment against Fortune Tenet. Fortune Tenet has recently reached an agreement in principle with Hong Kong Lifts in settlement of the subject action, and a consent application for settlement is expected to be filed to the District Court in the near future.

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APPENDIX II

GENERAL INFORMATION

Save for the aforesaid and so far as the Directors are aware, none of the members of the Group is engaged in any litigation or arbitration of material importance and there is no litigation, arbitration or claim of material importance known to the Directors to be pending or threatened against any members of the Group.

6. MATERIAL CONTRACTS

As at the Latest Practicable Date, the following contracts (not being contracts entered into in the ordinary course of business) were entered into by members of the Group within the two years immediately preceding the date of this circular and are, or may be, material:

(a) the Restructuring Agreement;
(b) a sale and purchase agreement dated 3rd August, 2000 made between TSL Properties Management Limited, a subsidiary of the Company, as vendor and Wellbery International Limited, an independent third party, as purchaser, for sale and purchase of a car parking space in Hong Kong for a consideration of HK$300,000;
(c) a sale and purchase agreement dated 29th December, 2000 made between Horlon Enterprises Limited, a subsidiary of the Company, as vendor and November, Inc., an independent third party, as purchaser, for the sale and purchase of a residential property in Hong Kong for a consideration of HK$ 1,020,000;
(d) a sale and purchase agreement dated 16th February, 2001 made between Foyer Investment Limited, a subsidiary of the Company, as vendor and Mr. Chow Man Chan, an independent third party, as purchaser, for the sale and purchase of an industrial property in Hong Kong for a consideration of HK$742,800;
(e) an agreement dated 20th March, 2001 between TSLJ and Gold Million International Ltd (“Gold Million”), to terminate the joint venture agreement made between TSLJ and Gold Million on 1st March, 1999 in such way that, inter alias, Gold Million would acquire from TSLJ its entire equity interest in the joint venture company for a consideration of HK$2,750,000;
(f) a sale and purchase agreement dated 17th May, 2001 made between Fortune Tenet Company Limited, a subsidiary of the Company, as vendors and Bright Skill Limited, an independent third party, as purchaser, for sale and purchase of a property in Hong Kong for a consideration of HK$34 million;
(g) a sale and purchase agreement dated 30th May, 2001 made between TSL Properties Management Limited, a subsidiary of the Company, as vendor and Mr. Ma Pak Cheong, an independent third party, as purchaser, for the sale and purchase of an industrial property in Hong Kong for a consideration of HK$1,100,000;

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APPENDIX II

GENERAL INFORMATION

(h) a sale and purchase agreement dated 17th August, 2001 made between TSL Properties Management Limited, a subsidiary of the Company, as vendor and Mr. Or Hon Chung and Ms Chan Mei Kam, independent third parties, as purchasers, for the sale and purchase of an industrial property in Hong Kong for a consideration of HK$720,000;
(i) a sale and purchase agreement dated 18th October, 2001 made between Horlon Enterprises Limited, a subsidiary of the Company, as vendor and Mr. Daswani, Rajkumar Murlidhar, an independent third party, as purchaser, for the sale and purchase of a residential property in Hong Kong for a consideration of HK$1,420,000;
(j) a sale and purchase agreement dated 26th November, 2001 made between Foyer Investment Limited, a subsidiary of the Company, as vendor and Kinghall Development Ltd., an independent third party, as purchaser, for the sale and purchase of an industrial property in Hong Kong for a consideration of HK$2,280,000;
(k) a sale and purchase agreement dated 7th June, 2002 between Tse Sui Luen Development Company Limited, a subsidiary of the Company, as vendor and White Heron Ltd, an independent third party, as purchaser, for the sale and purchase of certain interests in, and debts due to the Tse Sui Luen Development Company Limited by, an unlisted entity for a consideration of HK$2,226,840;
(l) a sale and purchase agreement dated 7th June, 2002 between Tse Sui Luen Development Company Limited, a subsidiary of the Company, as vendor and City Court Properties Ltd, an independent third party, as purchaser, for the sale and purchase of certain interests in and debts due to the Tse Sui Luen Development Company Limited by, an unlisted entity for a consideration of HK$600,661;
(m) the Subscription Agreements; and
(n) a sale and purchase agreement dated 31st July, 2002 made between TSL Properties Management Limited, a subsidiary of the Company, as vendor and Cubic Zirconia Jewellery Manufactory Ltd., an independent third party, as purchaser, for the sale and purchase of two car parking spaces in Hong Kong for a consideration of HK$ 468,000.

7. MISCELLANEOUS

(a) There is no contract or arrangement entered into by any member of the Group in which any Directors are materially interested and which is significant in relation to the business of the Group.
(b) None of the Directors has, or has had, any direct or indirect interest in any assets which have been acquired, disposed of or leased to, or which are proposed to be acquired, disposed of or leased to, the Company or any of its subsidiaries since 28th February, 2002, the date to which the latest published audited financial statements of the Group were made up.

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APPENDIX II

GENERAL INFORMATION

(c) The registered office of the Company is at Clarendon House, Church Street, Hamilton HM 11, Bermuda. The head office and principal place of business of the Company is at Ground Floor, Block B, Summit Building, 30 Man Yue Street, Hunghom, Kowloon, Hong Kong. The Hong Kong branch share registrar of the Company is Secretaries Limited of 5th Floor, Wing On Centre, 111 Connaught Road Central, Hong Kong.
(d) The secretary of the Company is Ms. Chung Yuen Ling who is an associate member of The Chartered Institute of Management Accountants and fellow member of the Hong Kong Society of Accountants.
(e) The English texts of this circular and the accompanying form of proxy shall prevail over their respective Chinese texts.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during business hours at the head office and principal place of business of the Company at Ground Floor, Block B, Summit Building, 30 Man Yue Street, Hunghom, Kowloon, Hong Kong from the date of this circular up to and including the date of the Special General Meeting:

(a) the memorandum of association and Bye-Laws of the Company;
(b) the Subscription Agreements;
(c) execution copies of the Shareholders’ Agreements, the Guarantee, the Shareholder’s Loan Agreement, the Deed of Release, the letters of undertaking from IAC, TSL China and Tse Sui Luen Enterprises (China) Limited and the Shareholder’s Loan Guarantee;
(d) the letter of advice from Equitas dated 8th August, 2002, the text of which is set out on pages 31 to 45 of this circular;
(e) the letter of consent referred to in paragraph 4 of this appendix;
(f) the consolidated audited financial statements of the Group for the two years ended 28th February, 2002;
(g) the audited financial statements of IAC and TSL China for the two years ended 28th February, 2002; and
(h) the material contracts referred to in the subsection headed “Material contracts” in this appendix.

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NOTICE OF THE SPECIAL GENERAL MEETING

TSE SUI LUEN JEWELLERY (INTERNATIONAL) LIMITED

(Incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a special general meeting of Tse Sui Luen Jewellery (International) Limited will be held at 9:30a.m. on Saturday, 31st August, 2002 at Ground Floor, Block B, Summit Building, 30 Man Yue Street, Hunghom, Kowloon, Hong Kong for the purpose of considering and, if thought fit, passing the following resolutions, in the case of resolutions numbered 1 and 2, as ordinary resolutions of the Company, and in the case of resolutions numbered 3 and 4, as special resolutions:

ORDINARY RESOLUTIONS

“ THAT ,
(i) the subscription agreement entered into between Tse Sui Luen Jewellery Company Limited (“ TSLJ ”), Infinite Assets Corp. (“ IAC ”), Liberty Mark Limited (“ Liberty Mark ”), Best Accurate International Limited (“ Best Accurate ”), The China Retail Fund, LDC (the “ Preference Shareholder ”) and the Company and the subscription agreement between TSLJ, Tse Sui Luen Investment (China) Limited (“ TSL China ”), Liberty Mark, Best Accurate, the Preference Shareholder and the Company (the “ IAC Subscription Agreement ” and the “ TSL China Subscription Agreement ” hereinafter collectively referred to as the “ Subscription Agreements ”), both dated 17th June, 2002 in relation to, inter alia, the repurchase and cancellation of all of the 22,220 6.5 per cent. convertible non-voting redeemable preference shares of US$1,000 each in the capital of the Company (the “ Preference Shares ”) held by the Preference Shareholder as at that date on the terms contained therein, the issue of new “A” shares in the capital of IAC and TSL China, fully paid, to Best Accurate and new “B” shares in the capital of IAC and TSL China, fully paid, to the Preference Shareholder by the Company (copies of which have been produced at this meeting marked “A” and “B”, respectively and initialled by the Chairman hereof for the purpose of identification) be and is hereby approved confirmed and ratified; and
(ii) the shareholder’s loan agreement to be entered into between TSLJ and IAC to formalise the total amounts of HK$184.5 million owing by IAC to TSLJ (the “ Shareholder’s Loan Agreement ”) (a copy of which has been produced at this meeting marked “C”and initialled by the Chairman hereof for the purpose of identification) be and is hereby approved,

and that the directors of the Company be and are hereby authorised to do all acts and things and to negotiate, agree, execute and deliver such further documents which they consider necessary or expedient for the purpose of implementing, completing and giving effect to each of the Subscription Agreements and the Shareholder’s Loan Agreement and the transactions contemplated thereunder including, without limitation, the execution and delivery of the IAC Shareholders’ Agreement, the

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NOTICE OF THE SPECIAL GENERAL MEETING

TSL China Shareholders’ Agreement and the Shareholder’s Loan Agreement (as such terms are defined in each of the Subscription Agreements) upon completion of the Subscription Agreements in accordance with their terms.”

“ THAT subject to the passing of resolution number 1 in the Notice of Special General Meeting dated 8th August, 2002 (“Notice”) of which this resolution forms part:
(i) the directors of the Company be and are hereby authorised to repurchase all of the 22,220 6.5 per cent. convertible non-voting redeemable preference shares of US$1,000 each in issue in capital of the Company and cancel the same; and
(ii) the issue of 8,733 new “A” ordinary shares of HK$1.00 each in the capital of Infinite Assets Corp. (“ IAC ”) and 216 new “A” ordinary shares of US$1.00 each in the capital of Tse Sui Luen Investment (China) Limited (“ TSL China ”), each credited as fully paid, to Best Accurate International Limited and the issue of 66,521 new “B” ordinary shares of HK$1.00 each in the capital of IAC, each credited as fully paid and 1,647 new “B” ordinary shares of US$1.00 each in the capital of TSL China, each credited as fully paid, to The China Retail Fund, LDC (the “ Preference Shareholder ”) as the consideration payable to such Preference Shareholder pursuant to the terms of the Subscription Agreements (as defined in resolution number 1 set out in the Notice).”

SPECIAL RESOLUTIONS

“ THAT conditional upon and with effect from the date on which the Subscription Agreements (as defined in resolution number 1 of the Notice of Special General Meeting dated 8th August, 2002 of which this resolution forms part) becoming unconditional in all respects:
(i) the authorised share capital of the Company be and is hereby reduced from HK$270,000,000 and US$22,220,000 to HK$270,000,000 by the repurchase and cancellation of 22,220 6.5 per cent. convertible non-voting redeemable preference shares of US$1,000 each in the capital of the Company (the “ Preference Shares ”);
(ii) following the repurchase and cancellation of the 22,220 Preference Shares pursuant to subparagraph (i) of this resolution, the authorised share capital of the Company be and is hereby reclassified into 1,080,000,000 ordinary shares of HK$0.25 each (the “ Ordinary Shares ”) and the existing 1,080,000,000 issued and unissued shares of the Company shall be deemed Ordinary Shares; and
(iii) the Bye-Laws of the Company be amended by:
- (a) deleting Bye-law 3(1) and substituting therefor the following:
  - “The authorised share capital of the Company at the date of adoption of this Bye-law is HK$270,000,000 divided into 1,080,000,000 Ordinary Shares of HK$0.25 each”; and
- (b) deleting Bye-law 3A.”

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NOTICE OF THE SPECIAL GENERAL MEETING

“ THAT the variation of the Bye-laws of the Company by the extension of the maturity date of the 6.5% convertible non-voting redeemable preference shares of US$1,000 each in the capital of the Company (the “ Preference Shares ”) from 28th February, 2002 to 31st August, 2002, and the repurchase and cancellation of the Preference Shares by means other than redemption and payment of the redemption amount to the holder of the Preference Shares as required by the Bye-laws of the Company, be and is hereby approved, confirmed and ratified.”

By Order of the Board Chung Yuen Ling Company Secretary

Hong Kong, 8th August, 2002

Notes:

Any member of the Company entitled to attend and vote at the meeting to be convened by the above notice 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.
A form of proxy in respect of the special general meeting is enclosed. Whether or not you intend to attend the meeting in person, you are requested to duly complete, sign and return the form of proxy in accordance with the instructions printed thereon.
To be valid, the form of proxy, together with any power of attorney or other authority (if any) under which it is signed or a notarially certified copy of that power of attorney or authority must be lodged at the head office and principal place of business of the Company at Ground Floor, Block B, Summit Building, 30 Man Yue Street, Hunghom, Kowloon, Hong Kong, not less than 48 hours before the time appointed for the meeting or adjourned meeting.
Where there are joint registered holders of a share of the Company, any one of such holders may vote at the meeting either personally or by proxy in respect of such share as if he was solely entitled thereto, but if more than one of such holders be present at the meeting personally or by proxy, that one of such holders so present whose name stands first on the register of members of the Company in respect of such share shall alone be entitled to vote in respect thereof.
Delivery of an instrument appointing a proxy shall not preclude a member of the Company from attending and voting in person at the meeting should he so wish.

– 56 –

AI assistant

Ko Yo Chemical (Group) Limited — Proxy Solicitation & Information Statement 2002

49492_rns_2002-09-10_51b73488-d611-4c8b-92d5-f28cc0215026.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

TSE SUI LUEN JEWELLERY (INTERNATIONAL) LIMITED

Advised by

MAJOR AND CONNECTED TRANSACTIONS

EQUITAS CAPITAL LIMITED

CONTENTS

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

LETTER FROM THE BOARD

TSE SUI LUEN JEWELLERY (INTERNATIONAL) LIMITED

MAJOR AND CONNECTED TRANSACTIONS

1. INTRODUCTION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

2. THE SUBSCRIPTION AGREEMENTS

(a) IAC Subscription Agreement

(b) TSL China Subscription Agreement

LETTER FROM THE BOARD

(c) Information on IAC and TSL China

IAC

LETTER FROM THE BOARD

TSL China

IAC’s and TSL China’s shareholdings prior to and following Completion

LETTER FROM THE BOARD

LETTER FROM THE BOARD

(d) Deemed disposal of assets and consideration

LETTER FROM THE BOARD

(e) Conditions Precedent for the Subscription Agreements

LETTER FROM THE BOARD

(f) Completion

LETTER FROM THE BOARD

3. OTHER DOCUMENTS

(a) Shareholders’ Agreements

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

(b) Guarantee

(c) Shareholder’s Loan Agreement

LETTER FROM THE BOARD

LETTER FROM THE BOARD

(d) Deed of Release

(e) Letters of undertaking

LETTER FROM THE BOARD

(f) Security documents

4. FURTHER EXTENSION OF THE MATURITY DATE

LETTER FROM THE BOARD

5. VARIATION OF THE BYE-LAWS

6. PRO FORMA FINANCIAL EFFECTS OF THE REPURCHASE AND CANCELLATION

(a) Net tangible assets

LETTER FROM THE BOARD

(b) Profit and loss account

7. REASONS FOR THE REPURCHASE AND CANCELLATION

LETTER FROM THE BOARD

8. FUTURE PLAN AND PROSPECTS

9. WAIVER FROM SFC

10. SPECIAL GENERAL MEETING

LETTER FROM THE BOARD

LETTER FROM THE BOARD

11. RECOMMENDATIONS

12. ADDITIONAL INFORMATION

TSE SUI LUEN JEWELLERY (INTERNATIONAL) LIMITED

MAJOR AND CONNECTED TRANSACTIONS

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

LETTER FROM EQUITAS

EQUITAS CAPITAL LIMITED 盈均財務顧問有限公司

MAJOR AND CONNECTED TRANSACTIONS

LETTER FROM EQUITAS

REPURCHASE AND CANCELLATION

Background

LETTER FROM EQUITAS

The Subscription Agreements

LETTER FROM EQUITAS

Ko Yo Chemical (Group) Limited Proxy Solicitation & Information Statement 2002