Ko Yo Chemical (Group) Limited — Proxy Solicitation & Information Statement 2006

Aug 8, 2006

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)

(Stock Code: 417)

Advised by

MAJOR AND CONNECTED TRANSACTION

ACQUISITION OF A SUBSTANTIAL INTEREST IN TSE SUI LUEN INVESTMENT (CHINA) LIMITED

Independent financial adviser to the Independent Board Committee of Tse Sui Luen Jewellery (International) Limited

A letter from the Independent Board Committee containing its recommendations in respect of the proposed transaction is set out on page 13 of this circular.

A letter from Quam Capital Limited, the independent financial adviser to the Independent Board Committee and the shareholders of the Company, containing its recommendations in respect of the proposed transaction is set out on pages 14 to 19 of this circular.

• For identification purpose only

7 August, 2006

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
The Share Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Information on the Company and TSL China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Financial effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Views of the board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Letter from Quam Capital Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Appendix I — Financial Information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Appendix II — Accountants’ Report on TSL China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	71
Appendix III — Unaudited pro forma financial information on the Enlarged Group . .	99
Appendix IV — General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	106

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DEFINITIONS

• ‘‘A Shares’’ the ‘‘A’’ ordinary shares of US$1.00 each in nominal value in the share capital of TSL China

• ‘‘B Shares’’ the ‘‘B’’ ordinary shares of US$1.00 each in nominal value in the share capital of TSL China

• ‘‘associates’’ has the meaning ascribed thereto under the Listing Rules ‘‘Best Accurate’’ Best Accurate International Limited, a company incorporated in the British Virgin Islands and wholly owned by Mr. Qi Jian Hong, a director of TSL China

• ‘‘Company’’ and ‘‘TSL’’ 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 Share Acquisition, which was expected to take place on or before the seventh day from the date which TSL China notified The China Retail Fund, LDC (in its capacity as the vendor of the Sale Shares) of the acquirers of the Sale Shares and which, for the purpose of the Share Acquisition, was expected to be on or before 24 July, 2006

• ‘‘Director(s)’’ the director(s) of the Company ‘‘Enlarged Group’’ for the purposes of the pro forma financial information in appendix III of this circular, the Group and additional interest in TSL China Group together

• ‘‘Group’’ the Company and its subsidiaries ‘‘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

• ‘‘Independent Board an independent committee of the board of directors of the Company, Committee’’ comprising the independent non-executive Directors, namely Mr. Chui Chi Yun, Robert and Mr. Gerald Clive Dobby

• ‘‘Latest Practicable Date’’ 4 August, 2006, 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 5.46% equity interests in TSL China prior to Completion

• ‘‘Listing Rules’’ the Rules Governing the Listing of Securities on the Stock Exchange ‘‘Mainland China’’ the People’s Republic of China which, for the purpose for this circular, excludes Hong Kong, Macau (being Macau Special Administration Region of the People’s Republic of China) and Taiwan

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DEFINITIONS

‘‘Sale Shares’’	from a minimum of 1,223 B Shares up to a maximum of 1,647 B
	Shares, representing a minimum and maximum of 17.8% and 24% of
	the issued shares in TSL China, respectively
‘‘SFO’’	the Securities and Futures Ordinance, Chapter 571 of the Laws of Hong
	Kong, as amended, supplemented or otherwise modified from time to
	time
‘‘Share Acquisition’’	acquisition by Liberty Mark and TSLJ of the Sale Shares (being up to
	1,647 B Shares, representing 24% of the issued shares in TSL China)
	currently owned by The China Retail Fund, LDC by way of an exercise
	of pre-emption rights under the TSL China Shareholders’ Agreement
‘‘Stock Exchange’’	The Stock Exchange of Hong Kong Limited
‘‘TSL China’’	Tse Sui Luen Investment (China) Limited, a company incorporated in
	the British Virgin Islands, which is owned as to 24% by The China
	Retail Fund, LDC, 56.46% indirectly by the Company and 19.54% by
	Best Accurate prior to Completion
‘‘TSL China Shareholders’	the shareholders’ agreement dated 31 August, 2002 and entered into
Agreement’’	between the Company, TSLJ, TSL China, Liberty Mark, Best Accurate,
	Mr. Qi Jian Hong and The China Retail Fund, LDC by which TSLJ,
	Liberty Mark, Best Accurate and The China Retail Fund, LDC agree to
	conduct their relationship as shareholders of TSL China in accordance
	with such agreement
‘‘TSL China Group’’	TSL China and its subsidiaries
‘‘TSLJ’’	Tse Sui Luen Jewellery Company Limited, a company incorporated in
	Hong Kong and a wholly owned subsidiary of the Company, which
	owns 51% equity interests in TSL China prior to Completion
‘‘US$’’	United States dollars, the lawful currency of the United States of
	America

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LETTER FROM THE BOARD

TSE SUI LUEN JEWELLERY (INTERNATIONAL) LIMITED

(Incorporated in Bermuda with limited liability)

(Stock Code: 417)

Executive Directors:

Mr. Tse Tat Fung, Tommy (Chairman) Mr. Peter Gerardus Van Weerdenburg (Deputy Chairman and Chief Executive Officer)

Mr. Erwin Steve Huang (Deputy Chairman) Mr. Alex Chan

Mr. Cheung Tse Kin, Michael Ms. Yau On Yee, Annie

Independent non-executive Directors:

Mr. Chui Chi Yun, Robert Mr. Gerald Clive Dobby

Registered office: Clarendon House Church Street Hamilton HM 11 Bermuda

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

7 August, 2006

To the shareholders of the Company

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION

ACQUISITION OF A SUBSTANTIAL INTEREST IN TSE SUI LUEN INVESTMENT (CHINA) LIMITED

INTRODUCTION

On 17 July, 2006, the Company announced that, through its two wholly owned subsidiaries Liberty Mark and TSLJ, the Company had exercised its pre-emption rights to acquire from The China Retail Fund, LDC the Sale Shares, representing a maximum of 24% shareholding interest in TSL China (or such lesser number of shares in TSL China as is allocated to it by TSL China if other shareholders of TSL China also accept the offer being made to them under the terms of the TSL China Shareholders’ Agreement). On 17 July, 2006, the Company, through Liberty Mark and TSLJ, was allocated 17.8% shareholding interest in TSL China. Under the TSL China Shareholders’ Agreement, the acquirer of the shares in TSL China is required to complete the Share Acquisition within 7 days from the date on which TSL China notifies the selling shareholder of the acquirers of the shares.

• For identification purpose only

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LETTER FROM THE BOARD

Under the Listing Rules, the Share Acquisition constitutes a major and connected transaction of the Company within the meaning of the Listing Rules. The China Retail Fund, LDC, the vendor of the Sale Shares, is a connected person within the meaning of the Listing Rules as it is a substantial shareholder of TSL China, a subsidiary of the Company. The Share Acquisition is subject to the announcement, reporting and independent shareholders’ approval requirements under Chapters 14 and 14A of the Listing Rules.

As the Share Acquisition is made pursuant to an exercise of a pre-emption rights under the TSL China Shareholders’ Agreement entered into amongst shareholders of TSL China, none of the shareholders of the Company has an interest that is different from other shareholders and no shareholder of the Company is required to abstain from voting in respect of the Share Acquisition. The TSL China Shareholders’ Agreement was duly approved by the independent shareholders of the Company at a special general meeting of the Company on 31 August, 2002.

On 29 June, 2006, Partner Logistics Limited, which owns 152,960,914 shares in the Company, representing 73.87% of the issued shares in the Company gave the Company its written approval for the Share Acquisition. Partner Logistics Limited is a company controlled by Mr. Tse Tat Fung, Tommy, the Chairman of the board of Directors and who has no relationship with The China Retail Fund, LDC, a financial investor in TSL China.

The Company applied to the Stock Exchange for, and was granted, a waiver under 14A.43 of the Listing Rules from the requirement to hold a shareholders’ meeting to consider and approve the Share Acquisition. The waiver was granted on the basis that (i) no shareholder of the Company is required to abstain from voting if the Company were to convene a general meeting to approve the Share Acquisition; and (ii) a written approval has been obtained from Partner Logistics Limited which holds more than 50% in nominal value of the securities giving the right to attend and vote at the general meeting of the Company to approve the Share Acquisition.

The Independent Board Committee comprising Mr. Chui Chi Yun, Robert and Mr. Gerald Clive Dobby was formed to consider and, if appropriate, make a recommendation to the shareholders of the Company in relation to the Share Acquisition. Quam Capital Limited was 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 Share Acquisition and to set out the recommendation of the Independent Board Committee, based on the advice from Quam Capital Limited, in respect of the Share Acquisition and the letter from Quam Capital Limited to the Independent Board Committee and the shareholders of the Company.

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LETTER FROM THE BOARD

THE SHARE ACQUISITION

Parties:

Liberty Mark and TSLJ, as acquirers

The China Retail Fund, LDC, as vendor

The China Retail Fund, LDC is a limited duration company incorporated in the Cayman Islands and a direct investment fund. The duration of The China Retail Fund, LDC is limited to a period of fifteen years from the date of its incorporation on 13 May, 1996. It is a substantial shareholder of TSL China and Infinite Assets Corp., which are both subsidiaries of the Company. The China Retail Fund, LDC and the Company are parties to two shareholders’ agreements both dated 31 August, 2002 under which the parties agree to conduct their relationships as respective shareholders of TSL China and Infinite Assets Corp., in accordance with such agreements. Save as disclosed, The China Retail Fund, LDC does not have any other relationship with the Company and, or its subsidiaries.

Sale Shares: From a minimum of 1,223 B Shares up to a maximum of 1,647 B Shares, representing a minimum and maximum of 17.8% and 24% of the issued shares in TSL China, respectively. On 17 July, 2006, the Company, through Liberty Mark and TSLJ, was allocated 1,223 B Shares.

Consideration: From US$1.56 million for a total of 1,223 B Shares up to a total of US$2.1 million for a total of 1,647 B Shares, based on a price of US$1,275 per B Share. The consideration is based on the price specified in the offer for sale, being the price at which The China Retail Fund, LDC has found a third party purchaser to acquire the B Shares held by it, subject to the pre-emption rights of the existing shareholders of TSL China under the TSL China Shareholders’ Agreement.

Terms of payment: The consideration will be payable in cash upon Completion.

Upon Completion, the Company will increase its shareholding interest in TSL China from 56.46% to a minimum of 74.28% or up to 80.46% if no other shareholders of TSL China exercise the pre-emption rights under the TSL China Shareholders’ Agreement.

Background to the Share Acquisition

On 17 May, 2006, The China Retail Fund, LDC served a notice on TSL China advising that it would like to sell its shares in TSL China to a third party. On 26 May, 2006, Liberty Mark and TSLJ in their respective capacities as shareholders of TSL China received an offer from TSL China, on behalf of The China Retail Fund, LDC, offering for sale to the shareholders of TSL China the Sale Shares that The China Retail Fund, LDC currently holds in TSL China. The Sale Shares represent 24% of the issued shares in TSL China. The offer is made in accordance with the TSL China Shareholders’ Agreement which requires that a shareholder of TSL China wishing to dispose of its shares in TSL China must first offer such shares to the existing shareholders of TSL China. The consideration under the offer is US$2.1 million.

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LETTER FROM THE BOARD

Financing of the Share Acquisition

The Share Acquisition will be financed from external borrowings of the Company. The Company’s gearing ratio (which is the ratio of net borrowings to total equity) will increase from 23% to 31% due to increased borrowings to finance the Share Acquisition. The external borrowings together with related interest expenses will have no material impact on the Company’s working capital position.

Completion of the Share Acquisition

On 17 July, 2006, Liberty Mark and TSLJ accepted the offer from TSL China, on behalf of The China Retail Fund, LDC, to acquire the Sale Shares owned by The China Retail Fund, LDC. Under the TSL China Shareholders’ Agreement, the acquirer of the shares in TSL China is required to complete the share acquisition within 7 days from the date which TSL China notifies the selling shareholder of the acquirers of the shares.

It was initially expected that completion of the acquisition of the Sale Shares from The China Retail Fund, LDC by TSLJ and Liberty Mark would take place on or before 24 July, 2006. On 27 July, 2006, the Company announced that the Completion did not take place at the completion meeting held on 24 July, 2006. Liberty Mark and TSLJ, which pursuant to the terms of the TSL China Shareholders’ Agreement had been allocated the Sale Shares by TSL China on behalf of The China Retail Fund, LDC, delivered to TSL China cashier orders for the amounts due to The China Retail Fund, LDC in respect of the Sale Shares. The China Retail Fund, LDC declined to deliver executed transfers of the Sale Shares to TSLJ and Liberty Mark. Best Accurate, who had also accepted the offer made by TSL China on behalf of The China Retail Fund, LDC, did not attend the completion meeting on 24 July, 2006 and therefore did not present payment for the 424 B Shares in TSL China it had been allocated by TSL China on behalf of The China Retail Fund, LDC. In addition, The China Retail Fund, LDC offered for sale 66,521 shares in Infinite Assets Corp. at the same time as it offered the shares in TSL China. TSLJ and Liberty Mark did not accept the offer to acquire the shares in Infinite Assets Corp. Best Accurate accepted in full the 66,521 shares offered in Infinite Assets Corp. However, the Company understands that Best Accurate did not attend the completion meeting on 24 July, 2006 in respect of shares in Infinite Assets Corp.

The China Retail Fund, LDC claimed that it was not obliged to complete the transfers of the shares in TSL China unless all of the shares in both TSL China and Infinite Assets Corp. held by it were transferred and it received the total consideration of US$4.2 million for the transfer of all such shares. TSLJ and Liberty Mark consider that they have complied with the provisions of the notice as stated in the TSL China Shareholders’ Agreement and are therefore entitled to require transfer of the shares in TSL China. TSLJ and Liberty Mark intend to rely on the default provisions in the TSL China Shareholders’ Agreement in order to complete the Share Acquisition for an aggregate of 1,647 B Shares at US$2.1 million and are taking legal advice as to the necessary action to be taken.

As at the Latest Practicable Date, the Directors are not aware of any new developments on the Share Acquisition save for those disclosed in the Company’s announcement dated 27 July 2006. The Company will notify the shareholders of the Company on any further developments relating the Share Acquisition as and when appropriate.

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LETTER FROM THE BOARD

Reasons for, and benefits of, the Share Acquisition

The Directors believe that the jewellery retail market in China offers good growth potential. As part of its plan to expand into China, the Company believes that it is in its interest to increase its shareholding interest in TSL China by way of the Share Acquisition. The Company currently has 112 retail outlets in China, and 17 in Hong Kong. The Directors believe that the Share Acquisition will complement the Company’s plan to expand its retail business in China. For the year ended 28 February, 2006, TSL China posted an audited consolidated net profit after taxation attributable to equity holders of some HK$41.8 million. Consolidated net assets attributable to equity holders as at that date amount to some HK$83.4 million. The consideration of US$2.1 million for a 24% stake in TSL China represents a price to earnings multiple of 1.6 times, or a price to book ratio of 0.8 times. Given the discount to book value implied under the consideration of the Share Acquisition, the Share Acquisition will result in an overall increase in the net asset value of the Company.

Shareholding structure of TSL China prior to and following Completion

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

The Company, indirectly through TSLJ and Liberty Mark Best Accurate The China Retail Fund, LDC Total	Prior to Completion % of voting rights No. of shares 56.46% 3,875 B Shares 19.54% 1,341 A Shares 24.00% 1,647 B Shares 100.00% 6,863	Following Completion (assuming TSLJ, Liberty Mark and Best Accurate exercised the pre-emption rights under the TSL China Shareholders’ Agreement) % of voting rights No. of shares 74.28% 5,098 B Shares 25.72% 1,341 A Shares and 424 B Shares 0 0 100.00% 6,863	Following Completion (assuming only TSLJ and Liberty Mark exercised the pre-emption rights under the TSL China Shareholders’ Agreement) % of voting rights No. of shares 80.46% 5,522 B Shares 19.54% 1,341 A Shares 0 0 100.00% 6,863	Following Completion (assuming only TSLJ and Liberty Mark exercised the pre-emption rights under the TSL China Shareholders’ Agreement) % of voting rights No. of shares 80.46% 5,522 B Shares 19.54% 1,341 A Shares 0 0 100.00% 6,863
				6,863

As mentioned above, Best Accurate failed to attend the completion meeting in respect of the Share Acquisition on 24 July, 2006. TSLJ and Liberty Mark intend to rely on the default provisions in the TSL China Shareholders’ Agreement in order to complete the Share Acquisition in respect of the total aggregate 1,647 B Shares. This would increase the number of B Shares held by the Company indirectly through TSLJ and Liberty Mark to 5,522, being 80.46% of the voting rights.

INFORMATION ON THE COMPANY AND TSL CHINA

The Company and its subsidiaries are principally engaged in the manufacturing, design, export and retailing of jewellery products. TSL China is the main operating subsidiary of the Company through which the Company conducts its business in China. TSL China is engaged in the sale of

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LETTER FROM THE BOARD

platinum and gemstone jewellery via retail outlets in Mainland China under the license of the Company and, or its subsidiaries. In addition, TSL China and its subsidiaries also process platinum and gemstone jewellery for sale in Mainland China.

TSL China is a company incorporated in the British Virgin Islands on 8 February, 2000. It has an issued share capital of US$6,863 divided into 1,341 A Shares and 5,522 B Shares. Prior to Completion, the Company through Liberty Mark and TSLJ, its two wholly owned subsidiaries, holds in aggregate 3,875 B Shares, representing 56.46% of the issued shares in TSL China. The China Retail Fund, LDC is a financial investor holding, prior to Completion, 1,647 B Shares, representing 24% of the issued shares in TSL China. The other shareholder of TSL China is Best Accurate which owns 1,341 A Shares, representing 19.54% of the issued shares in TSL China. Best Accurate is a private company wholly owned by Mr. Qi Jian Hong who is a director of TSL China and Infinite Assets Corp., a subsidiary of the Company. Best Accurate is also a substantial shareholder of Infinite Assets Corp. Mr. Qi is a business partner of the Company where certain subsidiaries of the Company sold and consigned finished goods to Mr. Qi and companies controlled by him (the details of which are set out in the circular dated 6 November, 2003 issued by the Company). Save as disclosed, Best Accurate does not have any other relationships with the Company and, or its subsidiaries.

In 2002, The China Retail Fund, LDC purchased 24% equity interest in each of TSL China and Infinite Assets Corp., (which was a 77.5%-owned subsidiary of TSL before such purchase) for a total consideration of HK$276 million which represented the aggregate of the face value of the 22,220 6.5% convertible non-voting redeemable preference shares in the Company held by The China Retail Fund, LDC and related accrued liabilities. (Please refer to the circular issued by the Company on 8 August, 2002 for further details.)

The following table summarises certain audited financial information of TSL China:

	For the year ended	For the year ended
	28 February,
	2006	2005
	HK$’000	HK$’000
100.0% shareholding interest in TSL China
Net assets attributable to equity holders	83,372	Note 1
Profits before taxation and extraordinary items	64,939	24,825
Profits after taxation and extraordinary items	45,656	12,628
24.0% shareholding interest in TSL China
Net assets attributable to equity holders	20,009	Note 1
Profits before taxation and extraordinary items	15,585	5,958
Profits after taxation and extraordinary items	10,957	3,031
17.8% shareholding interest in TSL China
Net assets attributable to equity holders	14,840	Note 1
Profits before taxation and extraordinary items	11,559	4,419
Profits after taxation and extraordinary items	8,127	2,248

Note 1: Not required to be disclosed under the Listing Rules

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LETTER FROM THE BOARD

Management Analysis of TSL China Group

Turnover Cost of sales Gross profit Other revenue Selling expenses Administrative expenses Profit from operating activities before taxation Taxation Profit for the year Attributable to: Equity holders of the Company Minority interests Profit for the year	2004 HK$’000 139,455 (98,700) 40,755 395 — (10,514) 30,636 (1,965) 28,671 26,480 2,191 28,671	2005 HK$’000 281,708 (162,907) 118,801 235 (62,249) (31,963) 24,824 (12,196) 12,628 12,486 142 12,628	2006 HK$’000 444,649 (191,306) 253,343 1,029 (145,756) (43,677) 64,939 (19,283) 45,656 41,753 3,903 45,656

Financial results for the years ended 28 February, 2006 and 2005

Turnover for the year ended 28 February, 2006 amounted to HK$444.6 million representing an increase of approximately 58% from HK$281.7 million for the year ended 28 February, 2005. Profit attributable to shareholders of TSL China amounted HK$41.8 million representing an increase of 2.3 times from HK$12.5 million for the year ended 28 February, 2005. The improvement in financial results were attributable to the increase in number of stores under TSL China Group and the improvement of gross margin through better merchandising.

Financial results for the years ended 28 February, 2005 and 29 February, 2004

Turnover for the year ended 28 February, 2005 amounted to HK$281.7 million representing an increase of approximately 1 times from HK$139.5 million for the year ended 29 February, 2004. Profit attributable to shareholders of TSL China amounted HK$12.5 million representing a decrease of 53% from HK$26.5 million for the year ended 29 February, 2004. The increase in turnover was because TSL China commenced to expand the retail stores and it benefited from the increasing demand for jewellery products in Mainland China. However, the profitability declined because the initial increase in selling expenses were more than offset by the increase in turnover.

Liquidity, financial resources, funding and treasury policy

TSL China Group is mainly financed by internally generated cash flows and intra-group financing from the Group. The balances due to immediate holding company and fellow subsidiaries were HK$110.3 million, HK$160.4 million and HK$185.5 million as at 29 February, 2004, 28 February, 2005 and 28 February, 2006, respectively.

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LETTER FROM THE BOARD

Balances of cash at bank and in hand were HK$6.2 million, HK$28.4 million and HK$60.5 million as at 29 February, 2004, 28 February, 2005 and 28 February, 2006, respectively.

The assets and liabilities of TSL China Group are mainly denominated in Renminbi and Hong Kong Dollars. The impact of fluctuation of foreign exchange rates in insignificant to the Group.

Employees and remuneration policies

At 28 February, 2006, the total number of employees of TSL China Group was approximately 1,300. The human resources policy, in general, follows the Group’s human resources policy and the mainland’s legal and regulatory requirements

Pledge of assets

As at 29 February, 2004, 28 February, 2005 and 28 February, 2006, the TSL China Group has pledged the capital contribution amounting to US$235,000, US$235,000 and US$235,000, respectively, and all the benefits accruing to the pledged equity interest of 11.625%, 11.625% and 11.625%, respectively, of a subsidiary, Beijing Tse Sui Luen Jewellery Company Limited, to the Group’s bankers and financial creditors as security for, inter alia, all obligations and liabilities, actual or contingent from time to time owing by the Group to the bankers and financial creditors.

Contingent liabilities

At 29 February, 2004, 28 February, 2005 and 28 February, 2006, there were contingent liabilities in respect of the following:

Guarantees given to banks by TSL China in respect of banking facilities extended to the Group with maximum liability amounting to HK$278,427,000, HK$125,371,000 and HK$180,096,000, respectively.

Guarantees given to TSLJ, an immediate holding company, by TSL China in respect of outstanding balance, obligations and liabilities owing by Infinite Assets Corp., a fellow subsidiary, to TSLJ. At 29 February, 2004, 28 February, 2005 and 28 February, 2006, the outstanding balance owing by Infinite Assets Corp. to TSLJ amounted to HK$120,409,000, HK$115,129,000 and HK$123,241,000, respectively.

FINANCIAL EFFECT

Set out in appendix III to this circular is an unaudited pro forma statement prepared based upon the audited consolidated balance sheet of the Group as at 28 February, 2006 as if the Share Acquisition was completed on 28 February, 2006. On the basis of acquiring a maximum of 24% additional interest in TSL China, after completion of the Share Acquisition, except for the increase in liabilities of HK$16.4 million (or HK$12.2 million if acquiring a minimum of 17.8% additional interest in TSL China) as a result of the borrowing to finance such an acquisition, there would be no other change in the assets and liabilities of the Enlarged Group as TSL China has been a subsidiary and has been consolidated into the financial statements of the Group. The total equity attributable to the equity holders of the Group will be increased by approximately HK$3.6 million (or HK$2.7 million if acquiring a minimum of 17.8% additional interest in TSL China). There would be no change in the earnings of the Enlarged Group as TSL China has been a subsidiary and has been consolidated into the financial statements of the Group.

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LETTER FROM THE BOARD

The Share Acquisition will be financed from external borrowings of the Company. The Company’s gearing ratio will increase from 23% to 31% (or 29% if acquiring a minimum of 17.8% additional interest in TSL China) for this reason.

VIEWS OF THE BOARD

Based on the net asset value of TSL China as at 28 February, 2006, the consideration under the Share Acquisition represents a price to book ratio of 0.8 times which is in line with the average prevailing price to book ratios of all jewellery companies, including the Company, listed on the Stock Exchange (calculated based on their respective closing share price on 17 July, 2006 and the latest published annual report of the comparable companies). Taking into account this factor and the benefits of the Share Acquisition described above, the Directors believe the terms of the Share Acquisition to be fair and reasonable and are in the interests of the Company and its shareholders as a whole.

Your attention is drawn to: (a) the letter from the Independent Board Committee set out on page 13 of this circular which contains its views in relation to the Share Acquisition, based on the advice from Quam Capital Limited in respect of the Share Acquisition; and (b) the letter from Quam Capital Limited on pages 14 to 19 of this circular which contains its views in relation to the Share Acquisition as well as the principal factors and reasons considered by Quam Capital Limited in arriving at its conclusion.

GENERAL

The Stock Exchange had granted to the Company a waiver from the requirement to hold a shareholders’ general meeting to consider and approve the Share Acquisition. If a shareholders’ meeting is to be held, a resolution put to vote at the shareholders’ meeting shall be decided on a show of hands unless a poll is required by the Listing Rules or (before or on the declaration of the result of the show of hands or on withdrawal of any other demand for a poll) is duly demanded by:

• (a) the chairman of the meeting; or

• (b) at least three members present in person or by proxy and entitled to vote; or

• (c) any member or members present in person or by proxy and representing in the aggregate not less than one-tenth of the total voting rights of all members having the right to attend and vote at the meeting;

• (d) any member or members present in person or by proxy and holding shares conferring a right to attend and vote at the meeting on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all shares conferring that right; or

• (e) any of the directors who individually or collectively (including the chairman of the relevant meeting of the Company) hold proxies in respect of shares holding 5% or more of the total voting rights at a particular meeting of the Company, and if on a show of hands such meeting votes in the opposite manner to that instructed in those proxies, such directors shall have the right to demand a poll.

— 11 —

LETTER FROM THE BOARD

At the request of the Company the shares in the Company were suspended from trading from 9: 30 a.m. on Thursday, 19 January, 2006. Trading in the shares in the Company will remain suspended pending the release of a further announcement in respect of the investigation by the Independent Commission Against Corruption into the affairs of the Company as announced by the Company on 15 July, 2005, 1 February, 2006 and 20 April, 2006.

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

— 12 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

TSE SUI LUEN JEWELLERY (INTERNATIONAL) LIMITED

(Incorporated in Bermuda with limited liability)

(Stock Code: 417)

7 August, 2006

To the shareholders of the Company

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION

ACQUISITION OF A SUBSTANTIAL INTEREST IN TSE SUI LUEN INVESTMENT (CHINA) LIMITED

We refer to the circular to the shareholders of the Company dated 7 August, 2006 (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 Share Acquisition, we have been appointed by the board of Directors as the Independent Board Committee to consider the terms of the Share Acquisition.

Quam Capital Limited has been appointed by the Company to advise the Independent Board Committee and the independent shareholders of the Company as to whether the terms of the Share Acquisition are fair and reasonable so far as the shareholders of the Company are concerned. Details of its advice, together with the principal factors taken into consideration in arriving at such advice, are set out on pages 14 to 19 of the Circular.

Your attention is also drawn to the letter from the board set out on pages 3 to 12 of the Circular and the additional information set out in the appendices to the Circular.

Having considered the terms of the Share Acquisition and the advice of Quam Capital Limited, we consider the terms of the Share Acquisition to be fair and reasonable as far as the shareholders of the Company are concerned and that the Share Acquisition is in the interests of the Company and the shareholders of the Company.

We understand that Partner Logistics Limited had on 29 June, 2006 given its approval in relation to the Share Acquisition. As the Stock Exchange had granted to the Company a waiver from the requirement to hold a shareholders general meeting to consider and approve the Share Acquisition, it will not be necessary for the shareholders of the Company to vote on the Share Acquisition.

Yours faithfully, Independent Board Committee of

Tse Sui Luen Jewellery (International) Limited

Chiu Chi Yun, Robert Gerald Clive Dobby Independent Independent Non-Executive Director Non-Executive Director

• For identification purpose only

— 13 —

LETTER FROM QUAM CAPITAL LIMITED

The following is the full text of the letter of advice from Quam Capital Limited, the independent financial adviser to the Independent Board Committee and the shareholders of the Company, which has been prepared for the purpose of incorporation into this circular, setting out its advice to the Independent Board Committee and the shareholders of the Company in respect of the Share Acquisition.

==> picture [232 x 47] intentionally omitted <==

7 August, 2006

To the Independent Board Committee and the shareholders of the Company Tse Sui Luen Jewellery (International) Limited G/F, Block B Summit Building, 30 Man Yue Street Hunghom, Kowloon Hong Kong

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION ACQUISITION OF A SUBSTANTIAL INTEREST IN TSE SUI LUEN INVESTMENT (CHINA) LIMITED

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the shareholders of the Company in respect of the Share Acquisition. Details of the Share Acquisition are set out in the ‘‘Letter from the Board’’ contained in the circular issued by the Company to its shareholders dated 7 August, 2006 (the ‘‘Circular’’), of which this letter forms part. Terms used in this letter shall have the same meaning as defined in the Circular unless the context otherwise requires.

Messrs. Chui Chi Yun, Robert and Gerald Clive Dobby, the independent non-executive Directors of TSL, have been appointed as members of the Independent Board Committee to advise the shareholders of the Company as to whether the Share Acquisition is on normal commercial terms, in the ordinary and usual course of business of the Group, fair and reasonable and in the interest of the Company and its shareholders as a whole. As the independent financial adviser, our role is to give an independent opinion to the Independent Board Committee and the shareholders of the Company.

Quam Capital Limited is independent of and not connected with any members of the Group or any of their substantial shareholders, directors or chief executives, or any of their respective associates, and is accordingly qualified to give an independent advice in respect of the Share Acquisition.

In formulating our recommendation, we have relied on the information, facts supplied by the Company and its advisers, and the opinions expressed by and the representations of the Directors and management. We have assumed that all the information and representations contained or referred to in the Circular were true and accurate in all respects at the date thereof and may be relied upon. We have also assumed that all statements and representations made or referred to in the Circular are

— 14 —

LETTER FROM QUAM CAPITAL LIMITED

true at the time that they were made and continue to be true at the date thereof. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and the Directors have confirmed to us that no material facts have been withheld or omitted from the information provided and referred to in the Circular, which would make any statement in the Circular misleading.

We consider that we have reviewed sufficient information currently available to reach an informed view and to justify our reliance on the accuracy of the information contained in the Circular so as to provide a reasonable basis for our recommendation. We have not, however, carried out any independent verification of the information, nor have we conducted any form of in-depth investigation into the business, affairs, operations, financial position or future prospects of any member of the Group.

TSL CHINA AND THE SHARE ACQUISITION

TSL China is the main operating subsidiary of the Company through which the Company conducts its business in Mainland China. Prior to Completion, Liberty Mark together with TSLJ (both being wholly owned subsidiaries of the Company) held an aggregate 56.46% interests in TSL China in form of ‘‘B’’ shares. The balance of the shareholding interests in TSL China were owned as to 24% and 19.54% by The China Retail Fund, LDC (in form of ‘‘B’’ shares’’) and Best Accurate International Limited (in form of ‘‘A’’ shares) respectively. It is noted that under the TSL China Shareholders’ Agreement, there are provisions and undertaking given by the shareholders of TSL China, which restrict any dividend payout and other distribution to the ‘‘B’’ shares in the issued share capital of TSL China until certain existing loans due to the creditors of the Group are fully repaid or refinanced (the ‘‘Distribution Restrictions’’).

On 26 May, 2006, Liberty Mark and TSLJ, in their respective capacities as shareholders of TSL China received an offer from TSL China, on behalf of The China Retail Fund, LDC, offering for sale to all the other shareholders of TSL China, its 24% shareholding interest in TSL China for an aggregate cash consideration of US$2.1 million (equivalent to around HK$16.4 million) (the ‘‘Offer’’). The Offer was made after The China Retail Fund, LDC received an offer of effectively the same terms from an independent third party (the ‘‘Third Party Offer’’) which, in accordance with the TSL China Shareholders’ Agreement, requires pre-emption rights to be given to all the other shareholders if any shareholder intends to dispose of its stake in TSL China.

On 17 July, 2006, the Company announced that it had accepted the Offer and would proceed to acquire a maximum of 24% shareholding interest in TSL China or its entitlement if the other shareholder of TSL China does not accept the Offer.

As The China Retail Fund, LDC is a substantial shareholder of TSL China and hence a ‘‘connected person’’ of the Company, the Share Acquisition constitutes a ‘‘major and connected transaction’’ for the Company under the Listing Rules.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our recommendation, we have taken into consideration the following principal factors and reasons:

— 15 —

LETTER FROM QUAM CAPITAL LIMITED

1. Reasons for the Share Acquisition

The Group is principally engaged in the design, retail, export and manufacture of jewellery products. For each of the two financial years ended 28 February, 2005 and 28 February, 2006, the Group has recorded an operating profit of around HK$80.1 million and HK$48.6 million respectively. It is noted that sales derived from Mainland China have been one of the major profit contributors, representing around 22% and 33% of the Group’s total sales respectively during the two years ended 28 February, 2006.

It is stated in the ‘‘Letter from the Board’’ in the Circular that the Directors believe that the jewellery retail market in Mainland China offers good growth potential and the Share Acquisition will complement the Company’s plan to expand its jewellery retail business in Mainland China. Upon Completion, the aggregate percentage shareholding interests of the Group in TSL China’s ‘‘B’’ Shares will increase from 56.46% to a minimum of 74.28% or up to 80.46% if the other shareholder of TSL China does not accept the Offer.

We were advised by the Company that prior to the financial year ended 28 February, 2006 (the ‘‘Financial Year 2006’’), its business operations in Mainland China had been conducted through TSL China as well as Infinite Assets Corp., a non-wholly owned subsidiary of the Company. Since the beginning of the Financial Year 2006, TSL China has become the sole holding company for the Group’s operating subsidiaries in Mainland China. Its audited consolidated turnover and net profit attributable to equity holders for the Financial Year 2006 amounted to around HK$444.6 million and HK$41.8 million respectively, with its turnover representing around 33% of the Group’s total sales for the same period. It should also be noted that the Group had recorded a net loss of around HK$28.1 million for the same period.

Given that jewellery business is the Group’s core operation, the Share Acquisition is undoubtedly conducted within its ordinary and usual course of business. Furthermore, as discussed above, the Mainland China operation has been one of the major profit contributors to the Group with TSL China being the sole holding company for the Group’s operating subsidiaries in Mainland China. In this regard, we concur with the Directors’ view that the Share Acquisition is in the interest of the Company and its shareholders as a whole as it will increase the Company’s participation in its Mainland China business operations.

2. Consideration for the Share Acquisition

(a) Basis of determining the consideration

We have reviewed the terms and conditions of the Third Party Offer, it is noted that the total consideration for the Share Acquisition of US$1.56 million (equivalent to around HK$12.2 million) or US$2.1 million (equivalent to around HK$16.4 million) if the other shareholder of TSL China does not accept the Offer (the ‘‘Consideration’’) is based on and the same as the Third Party Offer in accordance with the provisions of the TSL China Shareholders’ Agreement. It should also be noted that the Third Party Offer to The China Retail Fund, LDC was made by an independent third party unconnected with any members of the Group or any of their substantial shareholders, directors or chief executives, or any of their respective associates, as confirmed by the Directors.

In light of the above, we consider that the aggregate consideration payable for the Share Acquisition has been determined on normal commercial terms and is fair and reasonable.

— 16 —

LETTER FROM QUAM CAPITAL LIMITED

• (b) Price-to-earnings ratio and price-to-book ratio analysis

Price-to-earnings ratio (‘‘PER’’) and price-to-book ratio (‘‘PBR’’) are the two most commonly used valuation benchmarks for retail and manufacturing enterprises. As such, we consider it appropriate to appraise the reasonableness and fairness of the Consideration with a PER and PBR analysis.

It is noted that at present there are no companies engaged in the exactly the same business as that of TSL China, i.e. retail and manufacture of jewellery product with the Mainland China (excluding Hong Kong) being the only market, listed on the Stock Exchange. In light of this, we have reviewed all the Hong Kong listed companies with their principal activities similar to that of TSL but with China including Hong Kong as their major markets except for the Company (the ‘‘Comparable Companies’’), the closest comparables the information of which are publicly available currently, for the purposes of the aforementioned analysis.

Set out below are the PERs and the PBRs for each of these Comparable Companies based on the respective closing price of their shares as at the Latest Practicable Date and that of TSL China represented by the Consideration for a maximum of 24% interest in TSL China under the Offer.

			Latest audited	Latest audited
			net profit/(loss)	net asset value
	Year	Market	attributable to	attributable to
Company	Ended	Capitalisation	equity holders	equity holders	PER	PBR
		HK$’million	HK$’million	HK$’million	Times	Times
Chow Sang Sang Holdings
International Limited
(Stock code: 116)	31/12/2005	1,811.8	187.3	2,092.5	9.7	0.9
King Fook Holdings Limited
(Stock code: 280)	31/3/2006	178.4	17.9	576.4	10.0	0.3
Luk Fook Holdings
(International) Limited
(Stock code: 590)	31/3/2006	624.6	95.7	715.2	6.5	0.9
Hang Fung Gold Technology
Limited
(Stock code: 870)	31/3/2006	717.3	129.6	1,127.8	5.5	0.6
TSL China		68.3	41.8	83.4	1.6	0.8

Sources: Bloomberg, website of the Stock Exchange and the latest published annual reports of the Comparable Companies.

As illustrated above, the PER of TSL China under the Offer of 1.6 times is substantially lower than those of the profitable Comparable Companies, while the PBR represented by the Consideration for a maximum of 24% interest in TSL China under the Offer of 0.8 times is within range of those of the Comparable Companies from 0.3 times to 0.9 times.

— 17 —

LETTER FROM QUAM CAPITAL LIMITED

It is noted that the PER that may be commanded by TSL China in respect of the ‘‘B’’ shares in its issued share capital will inevitably be adversely affected by the Distribution Restrictions as discussed in the section headed ‘‘TSL CHINA AND THE SHARE ACQUISITION’’ above. Furthermore, in general the PER of a private company, such as TSL China will be lower than that of a publicly listed company, as its securities are not freely tradable on the Stock Exchange. Notwithstanding the aforementioned, given that the PER represented by the Consideration is at a substantial discount to and the PBR is in line with those of the Comparable Companies, we consider the Consideration to be fair and reasonable and in the interest of the Company and its shareholders.

3. Financial impacts of the Share Acquisition on the financial position of the Group

(a) Net asset value

The audited net asset value attributable to equity holders of TSL China as at 28 February, 2006 was around HK$83.4 million, and therefore, the net asset value of the 17.8% or 24% interest stake under the Offer amounts to around HK$14.8 million or HK$20.0 million respectively. As the Consideration represents a discount to such net asset value, there will be an increase in the net asset value of the Enlarged Group following Completion.

(b) Working capital position

We have reviewed the cash flow projections of the Group for the period from 1 July, 2006 to 31 August, 2007 prepared by the Company and considered the letter addressed to the Company from Moore Stephens regarding the accounting policies and calculations upon the cash flow projections have been made. We concur with the Directors’ opinion that the additional external borrowings for financing the Share Acquisition together with the related interest expenses will have no material impact on the Company’s working capital position and that the Group will have sufficient working capital for its present requirements for at least the twelve months following Completion.

(c) Gearing position

The Share Acquisition will be financed by external borrowings of the Company. Based on the unaudited pro forma financial information on the Enlarged Group set out in Appendix III to this circular, the gearing ratio (which is calculated as the ratio of net borrowings to total equity attributable to equity holders of the Company) of the Group after the Share Acquisition of a maximum of 24% interest in TSL China will increase from around 23% to 31%, as a result of the increase in borrowings for funding the Share Acquisition.

The gearing ratio of the Comparable Companies, calculated on the same basis with their latest published audited financial information, ranges from a negative value to 64%. As such, we are of the view that the gearing ratio of the Company following Completion, is on an acceptable level and therefore, is not expected to have any adverse impact on its business operations.

— 18 —

LETTER FROM QUAM CAPITAL LIMITED

RECOMMENDATION

Having taken into account the principal factors and reasons as discussed above and in particular the followings (which should be read in conjunction with and interpreted in the full context of this letter):

• . The Mainland China operation has been one of the major profit contributors to the Group and the Share Acquisition will increase the Company’s percentage shareholding interests in TSL China, the sole holding company for the Group’s operating subsidiaries in Mainland China;

• . The Consideration is based on and the same as the Third Party Offer, which was made by an independent third party unconnected with any members of the Group or any of their substantial shareholders, directors or chief executives, or any of their respective associates;

• . The PER represented by the Consideration for a maximum of 24% interest in TSL China under the Offer of 1.6 times is substantially lower than those of the profitable Comparable Companies, while the PBR represented by the Consideration for a maximum of 24% interest in TSL China under the Offer of 0.8 times is within range of those of the Comparable Companies from 0.3 times to 0.9 times; and

• . The net asset value of the Group will increase following Completion and there will be no material adverse impact on either the gearing or working capital position of the Group as a result of the Share Acquisition,

we are of the view that the Share Acquisition is conducted in the ordinary and usual course of business of the Group and based on normal commercial terms, and it is fair and reasonable and in the interests of the Company and its shareholders as a whole.

The Company has obtained from Partner Logistics Limited the written approval of the Share Acquisition and has applied for a waiver from the Stock Exchange to approve the Share Acquisition by way of a written independent shareholders’ approval in lieu of holding a shareholders general meeting. If a shareholders general meeting was to be held for the purpose of considering and, if thought fit, approving the Share Acquisition, we would recommend the independent shareholders to vote in favour of the resolution to approve the Share Acquisition.

Yours faithfully, For and on behalf of Quam Capital Limited Karen C. Wong Director

— 19 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

The following is a summary of the audited financial results of the Group for each of the three financial years ended 28 February, 2006 as extracted from the audited consolidated financial statements of the Group for the relevant periods respectively.

Results

Turnover Profit/(loss) from ordinary activities before taxation Taxation (Loss)/profit for the year Attributable to: Equity holders of the company Minority interests (Loss)/profit for the year	Year ended 28/29 February, 2006 2005 2004 HK$’000 HK$’000 HK$’000 1,324,132 1,275,996 955,625 42,433 78,418 32,830 (70,551) (35,223) (17,012) (28,118) 43,195 15,818 (47,977) 35,813 4,194 19,859 7,382 11,624 (28,118) 43,195 15,818

— 20 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Assets and liabilities

Property, plant and equipment (including investment properties) Deferred tax assets Interest in associates Investments in securities and non-current assets Current assets Current liabilities Obligation under Finance lease Bank and other loans — secured Amounts due to minority shareholders Employee benefit obligations Deferred tax liabilities NET ASSETS Capital and reserves Share capital Reserves Total equity attributable to equity shareholders of the company Minority interests TOTAL EQUITY

Year ended 28/29 February, 2006 2005 2004 HK$’000 HK$’000 HK$’000 117,691 105,684 76,571 20,834 17,684 3,143 — — — 603 600 597 712,673 674,266 550,655 (484,605) (445,712) (553,453) 367,196 352,522 77,513 (614) (876) — (110,867) (74,433) — — — (1,497) (8,759) (10,190) (9,570) (46) (15) (189) 246,910 267,008 66,257 51,766 51,766 97,972 155,186 197,594 (44,316) 206,952 249,360 53,656 39,958 17,648 12,601 246,910 267,008 66,257

— 21 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

AUDITED FINANCIAL INFORMATION OF THE GROUP

The following financial information includes the financial statements of the Group for the two financial years ended 28 February, 2006 together with the notes thereto as extracted from the annual report of the Company for the year ended 28 February, 2006.

Consolidated Income Statement

Note Turnover 2 & 10 Cost of sales Gross profit Other revenue 3 & 10 Selling expenses Administrative expenses Other operating expenses Profit from operations Finance costs 4(a) Cost of financial restructuring Loss on disposal of properties Recovery of debts written off in prior years Profit from ordinary activities before taxation 4 Taxation 5(a) (Loss)/profit for the year Attributable to: Equity holders of the Company Minority interests (Loss)/profit for the year 8 (Loss)/earnings per share Basic 9	2006 HK$’000 1,324,132 (657,896) 666,236 2,744 (510,587) (109,754) (47) 48,592 (6,159) — — — 42,433 (70,551) (28,118) (47,977) 19,859 (28,118) (23.2) cents	2005 HK$’000 (restated) 1,275,996 (693,496) 582,500 9,035 (424,816) (86,311) (280) 80,128 (5,037) (1,142) (68) 4,537 78,418 (35,223) 43,195 35,813 7,382 43,195 47.7 cents

— 22 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Balance Sheet

Note Non-current assets Property, plant and equipment — Investment properties 11(a) — Other property, plant and equipment 11(a) Other financial asset 13 Club debenture Deferred tax assets 22(b) Current assets Investments in securities Inventories 14 Trade and other receivables 15 Current tax recoverable 22(a) Cash at bank and in hand 16 Current liabilities Trade and other payables 17 Bank overdrafts — secured 18 Bank loans — secured 18 Other loans — secured 19 Obligations under finance leases 20(a) Current tax payable 22(a) Net current assets Total assets less current liabilities carried forward	2006 HK$’000 HK$’000 — 117,691 117,691 500 103 20,834 139,128 1 500,723 109,680 1,020 101,249 712,673 ------------ (355,019) (18,550) (4,000) (14,500) (660) (91,876) (484,605) ------------ 228,068 367,196	2005 HK$’000 HK$’000 (restated) (restated) 1,420 104,264 105,684 500 100 17,684 123,968 38 494,557 97,194 652 81,825 674,266 ------------ (367,902) — (18,656) — (508) (58,646) (445,712) ------------ 228,554 352,522	2005 HK$’000 HK$’000 (restated) (restated) 1,420 104,264 105,684 500 100 17,684 123,968 38 494,557 97,194 652 81,825 674,266 ------------ (367,902) — (18,656) — (508) (58,646) (445,712) ------------ 228,554 352,522
			105,684 500 100 17,684
			123,968 228,554
			352,522

— 23 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Note Total assets less current liabilities brought forward Non-current liabilities Bank loans — secured 18 Other loans — secured 19 Obligations under finance leases 20(a) Employee benefit obligations 21(a) Deferred tax liabilities 22(b) NET ASSETS CAPITAL AND RESERVES Share capital 23 Reserves Total equity attributable to equity holders of the Company Minority interests TOTAL EQUITY	2006 HK$’000 HK$’000 367,196 (53,000) (57,867) (614) (8,759) (46) (120,286) 246,910 51,766 155,186 206,952 39,958 246,910	2005 HK$’000 HK$’000 (restated) (restated) 352,522 (2,066) (72,367) (876) (10,190) (15) (85,514) 267,008 51,766 197,594 249,360 17,648 267,008

— 24 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Balance Sheet

Note Non-current assets Property, plant and equipment 11(b) Interests in subsidiaries 12 Current assets Other receivables, deposits and prepayments Cash at bank and in hand Current liabilities Other payables and accruals Obligations under finance leases 20(b) Net current assets/(liabilities) Total assets less current liabilities Non-current liability Obligations under finance leases 20(b) NET ASSETS CAPITAL AND RESERVES Share capital 23 Reserves 24 TOTAL EQUITY	2006 HK$’000 HK$’000 235 206,270 206,505 6,042 2 6,044 ------------ (4,685) (446) (5,131) ------------ 913 207,418 (466) 206,952 51,766 155,186 206,952	2005 HK$’000 HK$’000 (restated) (restated) — 243,842 243,842 5,635 172 5,807 ------------ (6,378) (305) (6,683) ------------ (876) 242,966 (515) 242,451 51,766 190,685 242,451

— 25 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

1 March, 2004 — as previously reported — prior year adjustments in respect of leasehold land and buildings held for own use — As restated Capital reorganisation Shares issued under loan conversion Shares issued under open offer Capital reorganisation and share issue expenses Exchange difference on translation of financial statements of subsidiaries Share of exchange reserve by minority shareholders Profit for the year (restated) 28 February, 2005 (restated)	Share capital HK$’000 97,972 —	Share premium HK$’000 86,037 —	Special reserve HK$’000 336,362 —	Capital reserve HK$’000 97,992 —	Land and buildings revaluation reserve Share-based compensation reserve HK$’000 HK$’000 21,412 — (21,412) — — — — — — — — — — — — — — — — — — —	Land and buildings revaluation reserve Share-based compensation reserve HK$’000 HK$’000 21,412 — (21,412) — — — — — — — — — — — — — — — — — — —	Exchange reserve Capital redemption reserve Accumulated losses Total Minority Interests Total equity HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (7,486) 170,873 (762,632) 40,530 12,601 53,131 — — 34,538 13,126 — 13,126 (7,486) 170,873 (728,094) 53,656 12,601 66,257 — (170,873) 681,447 — — — — — — 137,365 — 137,365 — — — 35,546 — 35,546 — — — (14,308) — (14,308) 2,491 — — 2,491 (3,538) (1,047) (1,203) — — (1,203) 1,203 — — — 35,813 35,813 7,382 43,195 (6,198) — (10,834) 249,360 17,648 267,008	Accumulated losses Total HK$’000 HK$’000 (762,632) 40,530 34,538 13,126	Minority Interests HK$’000 12,601 —	Total equity HK$’000 53,131 13,126
					— — — — — — — —	— — — — — — — —
	51,766	116,634	—	97,992	—	—		(10,834) 249,360	17,648	267,008

— 26 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1 March, 2005 as previously reported Prior year adjustments in respect of leasehold land and buildings held for own use 1 March, 2005 (restated) Issue of share options Exchange difference on translation of financial statements of subsidiaries Loss for the year 28 February, 2006	Share capital HK$’000 51,766 —	Share premium HK$’000 116,634 —	Special reserve HK$’000 — —	Capital reserve HK$’000 97,992 —	Land and buildings revaluation reserve Share-based compensation reserve HK$’000 HK$’000 24,997 — (24,997) — — — — 2,332 — — — — — 2,332	Land and buildings revaluation reserve Share-based compensation reserve HK$’000 HK$’000 24,997 — (24,997) — — — — 2,332 — — — — — 2,332	Exchange reserve Capital redemption reserve HK$’000 HK$’000 (6,198) — — — (6,198) — — — 3,237 — — — (2,961) —	Accumulated losses Total HK$’000 HK$’000 (42,740) 242,451 31,906 6,909	Minority Interests HK$’000 17,648 —	Total equity HK$’000 260,099 6,909
	51,766 — — —	116,634 — — —	— — — —	97,992 — — —	— — — —	— 2,332 — —				267,008 2,332 5,688 (28,118)
	51,766	116,634	—	97,992	—	2,332		(58,811) 206,952	39,958	246,910

— 27 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

Operating activities Profit from ordinary activities before taxation Adjustments for: — Finance costs — Cost of financial restructuring — Loss on disposal of properties — Write back of provision for properties held for sale — Loss on disposal of property, plant and equipment — Depreciation — Interest income — Equity-settled share option expenses — Foreign exchange loss Operating profit before changes in working capital Increase in inventories Increase in trade and other receivables (Decrease)/increase in trade and other payables (Decrease)/increase in employee benefit obligations Cash generated from operations Tax paid — Hong Kong Profits Tax — Overseas tax Net cash generated from operating activities Investing activities Payment to acquire property, plant and equipment Proceeds from disposal of property, plant and equipment Net proceeds from sale of properties held for sale Decrease in pledged bank deposits Interest received Net cash used in investing activities	2006 HK$’000 42,433 6,159 — — — 47 24,225 (279) 2,332 4,322 79,239 (6,166) (12,079) (12,896) (1,431) 46,667 (21,008) (19,800) 5,859 ------------ (36,107) 13 — — 279 (35,815) ------------	2005 HK$’000 (restated) 78,418 5,037 1,142 68 (913) 197 15,378 (132) — 2,300 101,495 (84,561) (18,052) 75,665 620 75,167 (6,715) (5,261) 63,191 ------------ (22,139) 163 1,276 792 132 (19,776) ------------

— 28 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Financing activities Capital element of finance lease rentals paid Repayment to minority interests Proceeds from new bank loan Repayment of bank loans Proceeds from shares issued under open offer Capital reorganisation and share issue expenses paid Interest element of finance lease rentals paid Other borrowing costs paid Payment of cost of financial restructuring Dividend paid to a minority shareholder Net cash generated from/(used in) financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rates changes Cash and cash equivalents at end of year Analysis of balances of cash and cash equivalents Cash at bank and in hand Bank overdrafts	2006 HK$’000 (516) — 77,000 (40,722) — — (60) (6,087) — — 29,615 ------------ (341) 81,825 1,215 82,699 101,249 (18,550) 82,699	2005 HK$’000 (restated) (475) (1,497) — (16,955) 35,546 (5,391) (47) (5,020) (3,660) (3,538) (1,037) ------------ 42,378 39,277 170 81,825 81,825 — 81,825

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

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

(b) Basis of preparation of financial statements

The measurement basis used in the preparation of the financial statements is historical cost modified by the marking to market of certain investments in securities as explained in the accounting policies set out below.

The principal accounting policies and methods of computation used in the preparation of the financial statements for the year ended 28 February, 2006 are consistent with those adopted in the financial statements for the year ended 28 February, 2005, except for the adoption of the new and revised HKFRSs as explained in (c) below.

(c) Adoption of new and revised Hong Kong Financial Reporting Standards

During the current year, the Group has adopted new and revised HKFRSs which are effective for accounting periods commencing on or after 1 January, 2005. The new and revised HKFRSs which are relevant to the Group’s operations are:

HKAS 1	Presentation of Financial Statements
HKAS 2	Inventories
HKAS 7	Cash Flow Statements
HKAS 8	Accounting Policies, Changes in Accounting Estimates and Errors
HKAS 10	Events after the Balance Sheet Date
HKAS 12	Income Taxes
HKAS 14	Segment Reporting
HKAS 16	Property, Plant and Equipment
HKAS 17	Leases
HKAS 18	Revenue
HKAS 19	Employee Benefits
HKAS 21	The Effects of Changes in Foreign Exchange Rates
HKAS 23	Borrowing Costs
HKAS 24	Related Party Disclosures
HKAS 26	Accounting and Reporting by Retirement Benefit Plans
HKAS 27	Consolidated and Separate Financial Statements
HKAS 32	Financial Instruments: Disclosure and Presentation
HKAS 33	Earnings Per Share
HKAS 36	Impairment of Assets
HKAS 37	Provisions, Contingent Liabilities and Contingent Assets
HKAS 39	Financial Instruments: Recognition and Measurement
HKAS 40	Investment Property
HKFRS 2	Share-based Payment
HKFRS 3	Business Combinations

The adoption of HKASs 2, 7, 8, 10, 12, 14, 16, 18, 19, 23, 26, 32, 33, 37, 39 and 40 has had no material impact on the accounting policies of the Group and the Company and the methods of computation in the Group’s and the Company’s financial statements.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The impact of the adoption of the other HKFRSs on the financial statements is as follows:

• (i) Share option scheme (HKFRS 2 ‘‘Share-based Payment’’)

In prior years, no amounts were recognised when option holders were granted share options over shares in the Company. If the option holders chose to exercise the options, the nominal amount of share capital and share premium were credited only to the extent of the option’s exercise price receivable.

With effect from 1 March, 2005, in order to comply with HKFRS 2, the Group recognises the fair value of such share options as an expense in the income statement, or as an asset, if the cost qualifies for recognition as an asset under the Group’s accounting policies. A corresponding increase is recognised in a share-based compensation reserve within equity.

Where the option holders are required to meet vesting conditions before they become entitled to the options, the Group recognises the fair value of the options granted over the vesting period. Otherwise, the Group recognises the fair value in the period in which the options are granted.

If an option holder chooses to exercise options, the related share-based compensation reserve is transferred to share capital and share premium, together with the exercise price. If the options lapse unexercised the related share-based compensation reserve is transferred directly to retained earnings.

The new accounting policy has been applied retrospectively with comparatives restated in accordance with HKFRS 2, except that the Group has taken advantage of the transitional provisions set out in paragraph 53 of HKFRS 2 under which the new recognition and measurement policies have not been applied to the following grants of options:

• (a) all options granted to option holders on or before 7 November, 2002; and

• (b) all options granted to option holders after 7 November, 2002 but which had vested before 1 March, 2005.

As all the Group’s options were granted to option holders either before 7 November, 2002 or after 1 March, 2005, the adoption of HKFRS 2 has no impact on the Group’s net assets and results for the prior years.

The amount charged to the income statement as a result of the change of policy increased cost of sales, selling expenses and administrative expenses for the year ended 28 February, 2006 by HK$185,000, HK$1,829,000 and HK$318,000 respectively (year ended 28 February, 2005: Nil), with the corresponding amounts credited to the share-based compensation reserve.

Details of the share option scheme are set out in note 26.

• (ii) Leasehold land and buildings held for own use (HKAS 17 ‘‘Leases’’)

In prior years, leasehold land and buildings held for own use were stated at revalued amounts less accumulated depreciation and accumulated impairment losses. Movements of revaluation surpluses or deficits were normally taken to the land and buildings revaluation reserve.

With the adoption of HKAS 17 as from 1 March, 2005, the leasehold interest in the land held for own use is accounted for as being held under an operating lease where the fair value of the interest in any buildings situated on the leasehold land could be separately identified from the fair value of the leasehold interest in the land at the time the lease was first entered into by the Group, or taken over from the previous lessee, or at the date of construction of those buildings, if later. In case the two elements cannot be allocated reliably, the entire lease is classified as a finance lease and carried at cost less accumulated depreciation and accumulated impairment losses.

As from 1 March, 2005, the buildings are also stated at cost less accumulated depreciation, rather than at fair value, to be consistent with the new policy required to be adopted for the land element which should be classified as operating lease and cannot be revalued.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The new accounting policies have been adopted retrospectively with the opening balances of accumulated losses, land and buildings, land and buildings revaluation reserve, deferred tax assets, deferred tax liabilities and the comparative information adjusted as follows:

Effect of new policy (increase/(decrease)) Accumulated losses Land and buildings revaluation reserve Land and buildings Deferred tax liabilities	As at 1 March, 2006 2005 HK$’000 HK$’000 (31,906) (34,537) (24,997) (21,412) 6,143 13,014 (766) (111)

In respect of the year ended 28 February, 2006, it is not practicable to estimate the extent to which the loss for the year, or the income or expenses taken directly to equity, are higher or lower than they would have been had the previous policy still been applied in the current year.

• (iii) Amortisation of positive and negative goodwill (HKFRS 3 ‘‘Business Combinations’’ and HKAS 36 ‘‘Impairment of Assets’’)

In prior periods:

• . positive or negative goodwill which arose prior to 1 March, 2001 was taken directly to reserves at the time it arose, and was not recognised in the income statement until disposal or impairment of the acquired business;

• . positive goodwill which arose on or after 1 March, 2001 was amortised on a straight line basis over its useful life and was subject to impairment testing when there were indications of impairment; and

• . negative goodwill which arose on or after 1 March, 2001 was amortised over the weighted average useful life of the depreciable/amortisable non-monetary assets acquired, except to the extent it related to identified expected future losses as at the date of acquisition. In such cases it was recognised in the income statement as those expected losses were incurred.

With effect from 1 March, 2005, in accordance with HKFRS 3 and HKAS 36, the Group no longer amortises positive goodwill. Such goodwill is tested annually for impairment, including in the year of its initial recognition, as well as when there are indications of impairment. Impairment losses are recognised when the carrying amount of the cash generating unit to which the goodwill had been allocated exceeds its recoverable amount.

Also with effect from 1 March, 2005 and in accordance with HKFRS 3 and HKAS 36, if the fair value of the net assets acquired in a business combination exceeds the consideration paid (i.e. an amount arises which would have been known as negative goodwill under the previous accounting policy), the excess is recognised immediately in the income statement as it arises.

In accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been taken directly to reserves (i.e. goodwill which arose before 1 March, 2001) will not be recognised in the income statement on disposal or impairment of the acquired business, or under any other circumstances.

The change in policy relating to negative goodwill had no effect on these financial statements as there was no negative goodwill deferred as at 28 February, 2005.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

• (iv) Retranslation of goodwill relating to a net investment in a foreign operation (HKAS 21 ‘‘The Effects of Changes in Foreign Exchange Rates’’)

In prior years, goodwill was recognised directly in equity or carried at cost less amortisation and impairment.

With effect from 1 March, 2005, in order to comply with HKAS 21, any goodwill arising on the acquisition of a foreign operation is treated as an asset of the foreign operation. Thus it is expressed in the functional currency of that foreign operation and is retranslated at the closing rate at each balance sheet date. Any resulting exchange difference is taken directly to the exchange reserves, together with any other differences arising from the retranslation of the net assets of the foreign operation.

In accordance with the transitional provisions in HKAS 21, this new policy has not been adopted retrospectively and will only be applied to acquisitions occurring on or after 1 March, 2005. As the Group has not acquired any new foreign operations since that date, the change in policy has had no impact on these financial statements.

• (v) Minority interests (HKAS 1 ‘‘Presentation of Financial Statements’’ and HKAS 27 ‘‘Consolidated and Separate Financial Statements’’)

In prior years, minority interests at the balance sheet date were presented in the consolidated balance sheet separately from liabilities and as deduction from net assets. Minority interests in the results of the Group for the year were also separately presented in the income statement as a deduction before arriving at the profit attributable to shareholders.

With effect from 1 March, 2005, in order to comply with HKAS 1 and HKAS 27, minority interests at the balance sheet date are presented in the consolidated balance sheet within equity, separately from the equity attributable to the equity holders of the Company, and minority interests in the results of the Group for the year are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between the minority interests and the equity holders of the Company.

The presentation of minority interests in the consolidated balance sheet, income statement and statement of changes in equity for the previous year has been restated accordingly.

(d) Judgement and estimates

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

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

(e) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 28 February, 2006. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the Group.

A subsidiary, in accordance with the Hong Kong Companies Ordinance, is a company in which the Group, directly or indirectly, holds more than half of the issued share capital or controls more than half the voting power or controls the composition of the board of directors. Subsidiaries are considered to be controlled if the Company has the power, directly or indirectly, to govern the financial and operating policies, so as to obtain benefits from their activities.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. Intra-group balances and transactions, and any unrealised profits arising from intra-group transactions, are eliminated in full on consolidation. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

The acquisition of subsidiaries during the year has been accounted for using the purchase method of accounting. This method involves allocating the cost of the business combinations to fair values of the assets acquired, and liabilities and contingent liabilities assumed at the date of acquisition. The cost of the acquisition is measured at the aggregate of the fair values of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.

Any excess of the cost of the acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment. Any excess of the Group’s interest in fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination is recognised immediately in the income statement.

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

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

(f) Impairment of assets

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cash- generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately, unless the relevant asset is land or buildings other than investment property carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(g) Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost, less provisions for depreciation and any impairment losses. Details are set out in note 11. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable cost of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the item has been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the income statement in the year in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the item, the expenditure is capitalised as an additional cost of the item. When an item of property, plant and equipment is sold, its cost and accumulated depreciation are removed from the financial statements and any gain or loss resulting from the disposal, being the difference between the net disposal proceeds and the carrying amount of the asset, is included in the income statement.

Depreciation is provided on the straight-line method, based on the estimated economic useful lives of the individual assets, as follows:

Leasehold land and buildings	55 years from the date of purchase
Furniture, fixtures and equipment	1 to 10 years
Plant and machinery	3 to 7 years
Motor vehicles	4 to 10 years

• (h) Leased assets

• (i) Classification of assets leased to the Group

Assets that are held by the Group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases.

(ii) Assets acquired under finance leases

Where the Group acquires the use of assets under finance leases, the amounts representing the fair value of the leased assets, or, if lower, the present value of the minimum lease payments of such assets, are included in property, plant and equipment and the corresponding liabilities, net of finance charges, are recorded as obligations under finance leases. Depreciation is provided at rates which write off the cost or valuation of assets over the term of the relevant leases or, where it is likely the Group or the Company will obtain ownership of the assets, the life of the assets, as set out in note 1(g) above. Impairment losses are accounted for in accordance with the accounting policy as set out in note 1(f) above. Finance charges implicit in the lease payments are charged to income statement over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period. Contingent rentals, if any, are charged to income statement in the accounting period in which they are incurred.

(iii) Operating lease charges

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

(i) Investments in subsidiaries

Investments in subsidiaries are stated in the Company’s balance sheet at cost less any identified impairment losses. Results of the subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(j) Investments in securities

From 1 March, 2005 onwards, the Group classifies and measures its debt and equity securities in accordance with HKAS 39 ‘‘Financial Instruments: Recognition and Measurement’’. Under HKAS 39, financial assets are classified as ‘‘financial assets at fair value through profit or loss’’, ‘‘available-for- sale financial assets’’, ‘‘loans and receivables’’, or ‘‘ held-to-maturity financial assets’’. ‘‘Financial assets at fair value through profit or loss’’ that are not part of a hedging relationship and ‘‘available-for-sale financial assets’’ are carried at fair value, with changes in fair values recognised in profit or loss and equity respectively. ‘‘Loans and receivables’’ and ‘‘held-to-maturity financial assets’’ are measured at amortised cost using the effective interest method.

The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to current market value of another instrument, which is substantially the same; a discounted cash flow analysis and option pricing models. When the fair value of unlisted equity securities cannot be reliably measured because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value, such securities are stated at cost less any impairment losses.

(k) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

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

(l) Foreign currency translation

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date. Foreign exchange gains and losses are recognised in the income statement.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was determined.

The results of foreign operations are translated into Hong Kong dollars at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Balance sheet items, including goodwill arising on consolidation of foreign operations acquired on or after 1 January, 2005, are translated into Hong Kong dollars at the foreign exchange rates ruling at the balance sheet date. The resulting exchange differences are recognised directly in a separate component of equity. Goodwill arising on consolidation of a foreign operation acquired before 1 January, 2005 is translated at the foreign exchange rate that applied at the date of acquisition of the foreign operation.

On disposal of a foreign operation, the cumulative amount of the exchange differences recognised in equity which relate to that foreign operation is included in the calculation of the profit or loss on disposal.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(m) Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at cost less allowance for bad and doubtful debts.

(n) Trade and other payables

Trade and other payables are initially recognised at fair value and thereafter stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(o) Provisions

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

When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the income statement.

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

(p) Employee benefits

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

• (ii) Contributions to Mandatory Provident Funds as required under the Hong Kong Mandatory Provident Fund Schemes Ordinance and contributions to the retirement schemes operated by the relevant authorities for employees of the subsidiaries in the People’s Republic of China (‘‘PRC’’) and Malaysia are recognised as an expense in the income statement as incurred, except to the extent that they are included in the cost of inventories not yet recognised as an expense.

• (iii) The Group’s net obligation in respect of lump sum long service amounts payable on cessation of employment in certain circumstances under the Hong Kong Employment Ordinance is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using the projected unit credit method by a qualified actuary, discounted to its present value, and the fair value of any related plan assets is deducted. The discount rate is the yield at balance sheet date on Exchange Fund Notes that have maturity dates approximating the terms of the Group’s obligations.

(q) Income tax

• (i) Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in the income statement except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity.

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

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

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

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

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, negative goodwill treated as deferred income, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination).

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

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

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

• . in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or

• . in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:

  • . the same taxable entity; or

  • . different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(r) Revenue recognition

Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in the income statement as follows:

• (i) Sale of goods

Revenue is recognised when the customer has accepted the goods and the related risks and rewards of ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts and returns.

• (ii) Commission and consultancy service income

Commission and consultancy service income are recognised when the related services are rendered.

• (iii) Rental income from operating leases

Rental income receivable under operating leases is recognised in the income statement in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives granted are recognised in the income statement as an integral part of the aggregate net lease payments receivable. Contingent rental are recognised as income in the accounting period in which they are earned.

• (iv) Dividends

• . Dividend income from unlisted investments is recognised when the shareholder’s right to receive payment is established.

• . Dividend income from listed investments is recognised when the share price of the investment goes ex-dividend.

(v) Interest income

Interest income from bank deposits is accrued on a time-apportioned basis by reference to the principal outstanding and at the rate applicable.

(s) Borrowing costs

Borrowing costs are expensed as incurred except where they relate to the financing of major capital projects where they are capitalised up to the date that the assets are brought into a working condition for their intended use.

(t) Cash and cash equivalents

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

(u) Related parties

A party is considered to be related to the Group if:

• (i) the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence;

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

• (ii) the party is a member of the key management personnel of the Group;

• (iii) the party is a close member of the family of any individual referred to in (i) or (ii);

• (iv) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (ii) or (iii); or

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

(v) Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

In accordance with the Group’s internal financial reporting, the Group has chosen geographical segment information as the primary reporting format. No business segments analysis of the Group is presented as all the Group’s turnover and trading result are generated from the manufacture, sale and marketing of jewellery products and provision of related agency services.

Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. For example, segment assets may include inventories, trade receivables and fixed assets. Segment revenue, expenses, assets and liabilities are determined before intra-group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group enterprises within a single segment.

Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one year.

Unallocated items mainly comprise financial and corporate assets, interest-bearing loans, borrowings, corporate and financing expenses.

2. TURNOVER

The principal activities of the Group are the manufacture, sale and marketing of jewellery products and provision of related agency services.

Turnover represents the sales value of jewellery products sold to customers and commission income. The amount of each significant category of revenue recognised in turnover during the year is as follows:

Sales of jewellery products Commission income	2006 HK$’000 1,323,678 454 1,324,132	2005 HK$’000 1,253,603 22,393
		1,275,996

— 40 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. OTHER REVENUE

Rental income Interest income Foreign exchange gain Consultancy service income Others	2006 HK$’000 32 279 908 — 1,525 2,744	2005 HK$’000 161 132 2,755 256 5,731
		9,035

4. PROFIT FROM ORDINARY ACTIVITIES BEFORE TAXATION

Profit from ordinary activities before taxation is arrived at after charging/(crediting):

(a) Finance costs Interest on bank loans and overdraft Interest on other loans Interest on amount due to a minority shareholder Finance charges on obligations under finance leases (b) Staff costs Contribution to defined contribution retirement plan Expense recognised in respect of long service payments (note 21(a)(ii) and (iii)) Retirement costs Equity-settled share option expenses Salaries, wages and other benefits	2006 HK$’000 2,049 4,050 — 60 6,159 2006 HK$’000 4,814 (1,431) 3,383 2,332 190,876 196,591	2005 HK$’000 739 4,189 62 47
		5,037
		2005 HK$’000 4,518 844
		5,362 — 144,742
		150,104

— 41 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(c) Other items Auditors’ remuneration — current year provision — prior year under provision Cost of inventories sold Depreciation Operating leases charges — land and buildings situated in Hong Kong — land and buildings situated other than in Hong Kong Loss on disposal of property, plant and equipment Write back of provision for properties held for sale Reversal of provision for inventories Rentals receivable from properties less direct outgoings of HK$12,000 (2005: HK$48,000)	2006 HK$’000 3,250 1,077 657,896 24,225 66,512 9,830 47 — (2,701) (20)	2005 HK$’000 (restated) 3,218 1,114 693,496 15,378 48,662 4,476 197 (913) (350) (113)

Cost of inventories sold includes HK$37,829,000 (2005: HK$26,324,000) relating to staff costs, depreciation expenses, operating lease charges and reversal of provision for inventories, which amount is also included in the respective total amounts disclosed separately above in note 4(b) and 4(c) for each of these types of expenses.

5. TAXATION

(a) Income tax in the consolidated income statement represents:

Current tax — Provision for Hong Kong Profits Tax Tax for the year Underprovision in respect of prior years Current tax — overseas Tax for the year Overprovision in respect of prior years Deferred tax Origination and reversal of temporary differences	2006 HK$’000 815 50,964 51,779 22,948 (1,107) 21,841 (3,069) 70,551	2005 HK$’000 (restated) 9,683 26,005 35,688 14,249 — 14,249 (14,714) 35,223

(i) The provision for Hong Kong Profits Tax is calculated at 17.5% (2005: 17.5%) of the estimated assessable profits for the year. Taxation for overseas subsidiaries is similarly charged at the appropriate current rate of taxation ruling in the relevant countries.

— 42 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

• (ii) Since the end of the last financial year and up to the date of these financial statements, certain subsidiaries of the Group received from the Inland Revenue Department (‘‘IRD’’) additional assessments amounting to approximately HK$51,000,000 relating to certain offshore income and agents commission payments and promoter fees essentially for all prior years under dispute in respect of which the IRD has been challenging the tax treatments adopted by the subsidiaries.

The subsidiaries are in the process of gathering relevant information to support the tax treatments adopted. The directors consider it prudent to establish a full provision of HK$51,000,000 in respect of the above which has been charged to the consolidated income statement for the year.

• (b) Reconciliation between taxation and accounting profit at applicable tax rates:

Profit before taxation Notional tax on profit before tax, calculated at the rates applicable to profits in the countries concerned Tax effect of profits entitled to tax exemption Tax effect of non-deductible expenses Tax effect of non-taxable revenue Tax effect of prior year’s tax losses utilised this year Tax effect of temporary differences not recognised Tax effect of prior year’s temporary difference recognised this year Tax effect of unused tax losses not recognised Underprovision in respect of prior years Actual tax expense	2006 HK$’000 42,433 4,810 (811) 21,414 (10,733) (1,197) 2,328 (1,808) 6,691 49,857 70,551	2005 HK$’000 (restated) 78,418
		20,495 (700) 4,233 (1,624) (360) 342 (15,373) 2,205 26,005
		35,223

6. DIRECTORS’ REMUNERATION

Directors’ remuneration disclosed pursuant to section 161 of the Hong Kong Companies Ordinance is as follows:

Fees Salaries and other emoluments Performance related incentives Share-based payments Contributions to retirement benefits scheme	2006 HK$’000 1,260 7,128 3,784 1,139 25 13,336	2005 HK$’000 (restated) 1,440 6,480 4,114 — 36
		12,070

Included in the directors’ remuneration were fees of HK$1,260,000 (2005: HK$1,440,000) paid to the non-executive directors during the year.

— 43 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2006 Executive directors: Tse Tat Fung, Tommy Peter Gerardus Van Weerdenburg Leung Yit Kuen, Raymond Alex Chan Erwin Steve Huang Non-executive directors: Hong Po Kui, Martin Chui Chi Yun, Robert Gerald Clive Dobby Lui Pui Kee, Francis*	Fees HK$’000 — — — — — — 180 360 360 360 1,260 1,260	Salaries and other emoluments HK$’000 3,078 1,765 195 830 1,260 7,128 — — — — — 7,128	Performance related incentives HK$’000 3,001 156 92 35 500 3,784 — — — — — 3,784	Contributions to retirement benefits scheme HK$’000 12 — 1 12 — 25 — — — — — 25	Share-based payments HK$’000 530 530 — 53 26 1,139 — — — — — 1,139	Total HK$’000 6,621 2,451 288 930 1,786
						12,076
						180 360 360 360
						1,260
						13,336

• Independent non-executive directors.

2005 Executive directors: Tse Tat Fung, Tommy Peter Gerardus Van Weerdenburg Leung Yit Kuen, Raymond Alex Chan Non-executive directors: Hong Po Kui, Martin Chui Chi Yun, Robert Gerald Clive Dobby Lui Pui Kee, Francis*	Fees HK$’000 — — — — — 360 360 360 360 1,440 1,440	Salaries and other emoluments HK$’000 2,999 1,765 1,041 675 6,480 — — — — — 6,480	Performance related incentives HK$’000 3,000 600 214 300 4,114 — — — — — 4,114	Contributions to retirement benefits scheme HK$’000 12 — 12 12 36 — — — — — 36	Share-based payments HK$’000 — — — — — — — — — — —	Total HK$’000 6,011 2,365 1,267 987
						10,630
						360 360 360 360
						1,440
						12,070

• Independent non-executive directors.

— 44 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

7. INDIVIDUALS WITH HIGHEST EMOLUMENTS

Of the five individuals with the highest emoluments, three (2005: three) are directors whose emoluments are disclosed in note 6. The aggregate of the emoluments in respect of the other two (2005: two) individuals are as follows:

Salaries and other emoluments Performance related incentives Contributions to retirement benefits scheme Share-based payments	2006 HK$’000 2,408 2,456 24 86 4,974	2005 HK$’000 (restated) 1,296 4,167 24 —
		5,487

The emoluments of the two (2005: two) individuals with the highest emoluments are within the following bands:

HK$1,000,001 to HK$1,500,000 HK$3,500,001 to HK$4,000,000 HK$4,000,001 to HK$4,500,000	2006 Number of individuals 1 1 —	2005 Number of individuals 1 — 1

8. LOSS ATTRIBUTABLE TO SHAREHOLDERS

The consolidated loss attributable to shareholders includes a loss of HK$37,831,000 (2005: profit of HK$59,281,000) which has been dealt with in the financial statements of the Company.

9. (LOSS)/EARNINGS PER SHARE

(a) Basic (loss)/earnings per share

The calculation of basic (loss)/earnings per share is based on the loss attributable to shareholders of HK$47,977,000 (2005: profit attributable to shareholders of HK$35,813,000 — restated) and the weighted average of 207,063,221 ordinary shares (2005: 75,063,433 ordinary shares after adjusting for the capital reorganisation in 2005) in issue during the year.

(b) Diluted (loss)/earnings per share

Diluted loss per share is not shown for the year ended 28 February, 2006 as all the potential ordinary shares (i.e. the share options) are anti-dilutive.

There were no dilutive potential ordinary shares in existence during the year ended 28 February, 2005.

— 45 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

10. SEGMENT REPORTING

Segment information is presented in respect of the Group’s geographical segments. Information relating to geographical segments based on the location of assets is chosen because this is more relevant to the Group in making operating and financial decisions. No business segments analysis of the Group is presented as all the Group’s turnover and trading result are generated from the manufacture, sale and marketing of jewellery products and provision of related agency services.

Revenue from external customers Inter-segment revenue Other revenue from externalcustomers Total Segment results Finance costs Cost of financial restructuring Loss on disposal of properties Recovery of debts written off in prior years Income tax (Loss)/profit for the year Depreciation for the year Significant non-cash expenses (other than depreciation) Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Capital expenditure incurred during the year	PRC (including Hong Kong) 2006 2005 HK$’000 HK$’000 1,297,568 1,249,624 10,254 11,134 2,397 8,688 1,310,219 1,269,446 48,144 79,252 24,193 14,786 47 374 921,814 870,602 420,662 374,309 36,014 23,987	Others 2006 2005 HK$’000 HK$’000 26,564 26,372 — — 347 347 26,911 26,719 448 876 32 592 — — 16,699 18,891 110,190 112,612 93 11	Inter-segment elimination 2006 2005 HK$’000 HK$’000 — — (10,254) (11,134) — — (10,254) (11,134) (108,565) (109,595) (108,565) (109,595)	Consolidated 2006 2005 HK$’000 HK$’000 (restated) 1,324,132 1,275,996 — — 2,744 9,035 1,326,876 1,285,031 48,592 80,128 (6,159) (5,037) — (1,142) — (68) — 4,537 (70,551) (35,223) (28,118) 43,195 829,948 779,898 21,853 18,336 851,801 798,234 422,287 377,326 182,604 153,900 604,891 531,226

— 46 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

11. PROPERTY, PLANT AND EQUIPMENT

(a) The Group

Cost or valuation: 1 March, 2004 Exchange adjustments Additions Transfer from properties held for sale Disposals Surplus on revaluation 28 February, 2005 Exchange adjustments Additions Transfer from investment properties Disposals 28 February, 2006 — at cost Accumulated depreciation: 1 March, 2004 Exchange adjustments Charge for the year On disposals 28 February, 2005 Exchange adjustments Charge for the year On disposals 28 February, 2006 Net book value: 28 February, 2006 28 February, 2005	Land and buildings HK$’000 (restated) 76,469 — — 19,906 — — 96,375 — — 1,420 — 97,795 18,377 — 1,391 — 19,768 — 1,910 — 21,678 76,117 76,607	Furniture, fixtures and equipment HK$’000 112,605 110 19,662 — (6,235) — 126,142 517 33,785 — (4,926) 155,518 98,017 61 12,142 (5,946) 104,274 353 20,121 (4,875) 119,873 35,645 21,868	Plant and machinery HK$’000 19,527 9 3,337 — (1,322) — 21,551 28 1,887 — (496) 22,970 16,358 2 1,409 (1,251) 16,518 11 1,827 (496) 17,860 5,110 5,033	Motor vehicles HK$’000 3,718 6 999 — (935) — 3,788 6 435 — (1,318) 2,911 3,527 4 436 (935) 3,032 3 367 (1,310) 2,092 819 756	Sub-total HK$’000 (restated) 212,319 125 23,998 19,906 (8,492) — 247,856 551 36,107 1,420 (6,740) 279,194 136,279 67 15,378 (8,132) 143,592 367 24,225 (6,681) 161,503 117,691 104,264	Investment properties HK$’000 530 — — 850 — 40 1,420 — — (1,420) — — — — — — — — — — — — 1,420	Total HK$’000 (restated) 212,849 125 23,998 20,756 (8,492) 40 249,276 551 36,107 — (6,740) 279,194 136,279 67 15,378 (8,132) 143,592 367 24,225 (6,681) 161,503 117,691 105,684

— 47 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

• (b) The Company

Cost: 1 March, 2004 and 28 February, 2005 Additions Disposals At 28 February, 2006 Accumulated depreciation: 1 March, 2004 and 28 February, 2005 Charge for the year On disposals 28 February, 2006 Net book value: 28 February, 2006 28 February, 2005 The analysis of net book value of properties is as follows: In Hong Kong — Long leases — Medium-term leases Other parts of the PRC — Long leases — Medium-term leases

Furniture, fixtures and equipment HK$’000 207 240 (3) 444 207 5 (3) 209 235 — The Group 2006 2005 HK$’000 HK$’000 (restated) 7,292 7,462 64,877 66,530 72,169 73,992 ------- ------ -- --------- -- 1,909 1,951 2,039 2,084 3,948 4,035 ~~------- ------~~ ~~-- --------- --~~ 76,117 78,027

• (c) The analysis of net book value of properties is as follows:

At the balance sheet date, the property ownership certificates in respect of the property interests held in other parts of the PRC of HK$1,909,000 as stated above have not been issued by the relevant PRC government authority.

• (d) The net book value of machinery and motor vehicle held under finance leases of the Group and the Company was HK$499,000 (2005: HK$715,000).

— 48 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

12. INTERESTS IN SUBSIDIARIES

Unlisted shares/capital contributions, at cost Due from subsidiaries Less: Impairment loss	The Company 2006 2005 HK$’000 HK$’000 708,072 708,072 426,274 300,236 1,134,346 1,008,308 (928,076) (764,466) 206,270 243,842	The Company 2006 2005 HK$’000 HK$’000 708,072 708,072 426,274 300,236 1,134,346 1,008,308 (928,076) (764,466) 206,270 243,842
		1,008,308 (764,466)
		243,842

The following list contains only the particulars of subsidiaries which principally affected the results, assets or liabilities of the Group. The class of shares held is ordinary unless otherwise stated.

Name of company Place of establishment/ incorporation and operation Particulars of issued and paid up capital Beijing Tse Sui Luen Jewellery Company Limited#/ (‘‘BTSL’’) PRC Rmb1,750,000 and US$1,800,000 Excellent Ford Development Limited (‘‘EF’’) Hong Kong HK$10,000 Foyer Investment Limited Hong Kong HK$10,000 Guangzhou Xi Yun Jewellery Company Limited#/ PRC Rmb2,000,000 Guangzhou Xiang Yun Jewellery Company Limited (‘‘GZ Xiang Yun’’)#/ PRC Rmb3,000,000 Ho Loong Jewellery Casting Company Limited Hong Kong/ PRC HK$2 Impromptus Asia Pacific Limited Hong Kong HK$10,000 Infinite Assets Corp. (‘‘IAC’’) British Virgin Islands (‘‘BVI’’) HK$275,254 Queen Busy Limited Hong Kong HK$2 Shanghai Fu Yun Jewellery Company Limited#/* PRC Rmb1,000,000 ( ) PRC US$140,000 Tse Sui Luen Investment (China) Limited (‘‘TSL China’’) BVI US$6,863

Proportion of ownership interest Principal activity Group’s effective interest held by the Company held by subsidiary 56.46% — 56.46% Jewellery manufacturing and trading 56.46% — 56.46% Jewellery trading 100% — 100% Property holding and investment 56.46% — 56.46% Jewellery retailing 56.46% — 56.46% Jewellery trading and retailing 100% — 100% Jewellery retailing 100% — 100% Goldsmith and jewellery trading 56.46% — 56.46% Investment holding 100% — 100% Property holding 56.46% — 56.46% Jewellery retailing 56.46% — 100% Provision of consultancy services 56.46% — 56.46% Investment holding

— 49 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Name of company Place of establishment/ incorporation and operation Particulars of issued and paid up capital Tse Sui Luen Jewellery Company Limited (‘‘TSLJ’’) Hong Kong HK$34,000 Tse Sui Luen Jewellery (Malaysia) Limited Hong Kong/ Malaysia HK$3,000,000 Tse Sui Luen Jewellery Trading & Distribution Limited (‘‘TSL Trading’’) Samoa US$1 TSL Investment (B.V.I.) Limited BVI HK$1,000 TSL Jewellery (H.K.) Company Limited Hong Kong HK$490 TSL Properties Management Limited Hong Kong HK$1,000

Proportion of ownership interest Principal activity Group’s effective interest held by the Company held by subsidiary 100% — 100% Jewellery manufacturing, trading and retailing 100% — 100% Jewellery retailing 56.46% — 56.46% Jewellery trading and provision of related agency services 100% 100% — Investment holding 100% — 100% Jewellery retailing 100% — 100% Property holding and investment

Unofficial translation

• Registered under the laws of the PRC as sino-foreign joint venture

• ** Registered under the laws of the PRC as limited liability company

• *** Registered under the laws of the PRC as foreign enterprise

13. OTHER FINANCIAL ASSET

Investment security, at cost less provision — Membership and seat in the Chinese Gold and Silver Exchange Society INVENTORIES Raw materials Work in progress Finished goods Finished goods — consigned outward	The Group 2006 2005 HK$’000 HK$’000 500 500 The Group 2006 2005 HK$’000 HK$’000 80,776 76,283 54,422 56,337 365,525 333,340 — 28,597 500,723 494,557	The Group 2006 2005 HK$’000 HK$’000 500 500 The Group 2006 2005 HK$’000 HK$’000 80,776 76,283 54,422 56,337 365,525 333,340 — 28,597 500,723 494,557
		494,557

14. INVENTORIES

— 50 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

15. TRADE AND OTHER RECEIVABLES

Included in trade and other receivables are trade debtors (net of provision for bad and doubtful debts) with the following ageing analysis:

0 to 30 days 31 to 60 days 61 to 90 days Over 90 days Total trade debtors Other receivables, deposits and prepayments	The Group 2006 2005 HK$’000 HK$’000 41,983 30,348 3,117 1,675 2 3,966 20,386 10,437 65,488 46,426 44,192 50,768 109,680 97,194	The Group 2006 2005 HK$’000 HK$’000 41,983 30,348 3,117 1,675 2 3,966 20,386 10,437 65,488 46,426 44,192 50,768 109,680 97,194
		46,426 50,768
		97,194

Details of trade and other receivables denominated in different currencies are as follows:

Hong Kong dollars Chinese Renminbi United States dollars Others	2006 HK$’000 52,235 52,576 4,169 700 109,680	2005 HK$’000 35,694 57,467 3,626 407
		97,194

The directors consider that trade and other receivables approximate their fair value.

Apart from retail customers, the Group allows an average credit period from 30 to 75 days to other customers.

16. CASH AT BANK AND IN HAND

Details of cash at bank and in hand denominated in different currencies are as follows:

Hong Kong dollars Chinese Renminbi Malaysian Ringgits United States dollars Others	The Group 2006 2005 HK$’000 HK$’000 34,824 43,940 62,937 32,289 2,125 2,363 1,069 2,911 294 322 101,249 81,825	The Group 2006 2005 HK$’000 HK$’000 34,824 43,940 62,937 32,289 2,125 2,363 1,069 2,911 294 322 101,249 81,825
		81,825

— 51 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

17. TRADE AND OTHER PAYABLES

Included in trade and other payables are trade creditors with the following ageing analysis:

0 to 30 days 31 to 60 days 61 to 90 days Over 90 days Total trade creditors Other payables and accruals	The Group 2006 2005 HK$’000 HK$’000 34,603 28,147 31,713 32,582 19,209 28,757 97,461 124,270 182,986 213,756 172,033 154,146 355,019 367,902	The Group 2006 2005 HK$’000 HK$’000 34,603 28,147 31,713 32,582 19,209 28,757 97,461 124,270 182,986 213,756 172,033 154,146 355,019 367,902
		213,756 154,146
		367,902

Details of trade and other payables denominated in different currencies are as follows:

Hong Kong dollars Chinese Renminbi United States dollars Others	2006 HK$’000 141,699 101,901 107,774 3,645 355,019	2005 HK$’000 123,199 95,450 145,570 3,683
		367,902

The directors consider that trade and other payables approximate their fair values.

18. BANK LOANS AND OVERDRAFTS — SECURED

At 28 February, 2006, the secured bank loans were repayable as follows:

Within 1 year or on demand After 1 year but within 2 years After 2 years but within 5 years	The Group 2006 2005 HK$’000 HK$’000 4,000 18,656 ------- ------ -- --------- -- 12,800 1,907 40,200 159 53,000 2,066 ~~------- ------~~ ~~-- --------- --~~ 57,000 20,722	The Group 2006 2005 HK$’000 HK$’000 4,000 18,656 ------- ------ -- --------- -- 12,800 1,907 40,200 159 53,000 2,066 ~~------- ------~~ ~~-- --------- --~~ 57,000 20,722
		2,066 ~~-- --------- --~~
		20,722

Details of the securities for the bank loans and overdrafts are set out in note 28 to the financial statements.

— 52 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

19. OTHER LOANS — SECURED

At 28 February, 2006, the other loans were repayable as follows:

Within 1 year or on demand After 1 year but within 2 years After 2 years but within 5 years	The Group 2006 2005 HK$’000 HK$’000 14,500 — ------- ------ -- --------- -- 21,800 22,000 36,067 50,367 57,867 72,367 ~~------- ------~~ ~~-- --------- --~~ 72,367 72,367	The Group 2006 2005 HK$’000 HK$’000 14,500 — ------- ------ -- --------- -- 21,800 22,000 36,067 50,367 57,867 72,367 ~~------- ------~~ ~~-- --------- --~~ 72,367 72,367
		72,367 ~~-- --------- --~~
		72,367

• (a) Other loans represent the secured loans from Partner Logistics Limited. At 28 February, 2006, the other loans are secured, interest bearing at Hong Kong Interbank Offering Rate plus 2%.

• (b) Details of the securities for other loans are set out in note 28 to the financial statements.

20. OBLIGATIONS UNDER FINANCE LEASES

The Group leases office equipment and a motor vehicle under finance leases expiring in two years (note 11(d)). The Group also leases computer equipment of HK$1,349,000 (2005: HK$943,000) under finance leases expiring in three years. The computer equipment was included in prepayments. At the end of the lease term, the Group has the option to purchase the assets at a price deemed to be a bargain purchase option. None of the leases included contingent rentals.

At 28 February, 2006, the Group and the Company had obligations under finance leases repayable as follows:

(a) The Group

Within 1 year After 1 year but within 2 years After 2 years but within 5 years		2006	Total minimum lease payments HK$’000 720 - --------- - 503 141 644 ~~- --------- -~~ 1,364		2005
	Present value of the minimum lease payments HK$’000 660 - --------- - 479 135 614 ~~- --------- -~~ 1,274	Interest expense relating to future periods HK$’000 60 ------ ----- 24 6 30 ~~------ -----~~ 90		Present value of the minimum lease payments HK$’000 508 ------ ----- 534 342 876 ~~------ -----~~ 1,384	Interest expense relating to future periods HK$’000 57 - --------- - 31 6 37 ~~- --------- -~~ 94	Total minimum lease payments HK$’000 565 ------ ----- 565 348
						913 ~~------ -----~~
						1,478

— 53 —

APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

(b) The Company

Within 1 year After 1 year but within 2 years After 2 years but within 5 years		2006	Total minimum lease payments HK$’000 493 - --------- - 352 141 493 - --------- - 986		2005
	Present value of the minimum lease payments HK$’000 446 - --------- - 331 135 466 - --------- - 912	Interest expense relating to future periods HK$’000 47 ------ ----- 21 6 27 ------ ----- 74		Present value of the minimum lease payments HK$’000 305 ------ ----- 320 195 515 ------ ----- 820	Interest expense relating to future periods HK$’000 34 - --------- - 19 3 22 - --------- - 56	Total minimum lease payments HK$’000 339 ------ ----- 339 198
						537 ------ -----
						876

21. EMPLOYEE BENEFIT OBLIGATIONS

(a) Long service payments

Under the Hong Kong Employment Ordinance, the Group is obliged to make lump sum payments on cessation of employment in certain circumstances to certain employees who have completed at least five years of service with the Group. The amount payable is dependent on the employees’ final salary and years of service, and is reduced by entitlements accrued under the Group’s retirement plan that are attributable to contributions made by the Group. The Group does not set aside any assets to fund any remaining obligations.

(i) The amount recognised in the consolidated balance sheet is as follows:

Present value of unfunded obligations	The Group 2006 2005 HK$’000 HK$’000 8,759 10,190

(ii) Movements in the net liability recognised in the consolidated balance sheet are as follows:

At beginning of the year Expense recognised in the income statement (note 4(b)) Employer contributions/benefit payments At end of the year	The Group 2006 2005 HK$’000 HK$’000 10,190 9,570 (1,431) 844 — (224 8,759 10,190	The Group 2006 2005 HK$’000 HK$’000 10,190 9,570 (1,431) 844 — (224 8,759 10,190
		10,190

— 54 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(iii) Expense recognised in the consolidated income statement is as follows:

Current service cost Interest cost Net actuarial (gains)/losses recognised	The Group 2006 2005 HK$’000 HK$’000 13 99 427 522 (1,871) 223 (1,431) 844	The Group 2006 2005 HK$’000 HK$’000 13 99 427 522 (1,871) 223 (1,431) 844
		844

(iv) The expense is recognised in the following line items in the consolidated income statement:

Cost of sales Selling expenses Administrative expenses	The Group 2006 2005 HK$’000 HK$’000 (289) 96 (854) 553 (288) 195 (1,431) 844	The Group 2006 2005 HK$’000 HK$’000 (289) 96 (854) 553 (288) 195 (1,431) 844
		844

(v) The principal actuarial assumptions used as at 28 February, 2006 (expressed as weighted average) are as follows:

	The Group
	2006	2005
Discount rate	4.25%	4.25%
Future salary increases
Year 2006	4%	3%
Year 2007 and thereafter	3%	3%

(b) Defined contribution retirement plan

The Group operates a Mandatory Provident Fund Scheme (‘‘the MPF Scheme’’) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed under the jurisdiction of the Hong Kong Employment Ordinance. The MPF Scheme is a defined contribution retirement scheme administered by independent trustees. Under the MPF Scheme, the employer and its employees are each required to make contributions to the scheme at 5% of the employees’ relevant income, subject to a cap of monthly relevant income of HK$20,000. Contributions to the scheme vest immediately.

The Group also operates defined contribution retirement benefits schemes for all qualifying employees in the PRC and Malaysia with contributions to the schemes at 7% and 12% of the gross salaries respectively. The assets of the schemes are held separately from those of the Group in funds under the control of independent trustees.

— 55 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

22. CURRENT TAX (RECOVERABLE)/PAYABLE

• (a) Current taxation in the balance sheet represents:

Provision for Hong Kong Profits Tax for the year Provisional Profits Tax paid Overseas taxation Balance of profits tax provision relating to prior years Representing: Tax recoverable Tax payable	The Group 2006 2005 HK$’000 HK$’000 815 9,683 (1,353) (2,226) (538) 7,457 9,553 10,418 81,841 40,119 90,856 57,994 (1,020) (652) 91,876 58,646 90,856 57,994

• (b) Deferred tax assets and liabilities recognised:

The Group

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

Deferred tax arising From: 1 March, 2004 As previously reported Prior year adjustments As restated (Charged)/credited to consolidated income statement — restated 28 February, 2005 and 1 March, 2005 — restated (Charged)/credited to consolidated income statement Exchange difference 28 February, 2006	Depreciation allowances in excess of related depreciation HK$’000 252 110 362 (3,328) (2,966) (1,278) (11) (4,255)	Revaluation of properties HK$’000 221 (221) — — — — — —	Employee benefit obligations HK$’000 — — — (1,783) (1,783) 250 — (1,533)	Provision for inventories HK$’000 — — — (10,052) (10,052) 43 (39) (10,048)	Tax losses HK$’000 (3,316) — (3,316) 448 (2,868) (2,084) — (4,952)	Total HK$’000 (2,843) (111) (2,954) (14,715) (17,669) (3,069) (50) (20,788)

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Net deferred tax asset recognised on the consolidated balance sheet Net deferred tax liability recognised on the consolidated balance sheet	2006 HK$’000 (20,834) 46 (20,788)	2005 HK$’000 (restated) (17,684) 15 (17,669)

• (c) Deferred tax assets and liabilities not recognised

The components of unrecognised deferred tax (assets)/liabilities at the balance sheet date are as follows:

Depreciation allowances in excess of related depreciation Tax losses Net deferred tax assets not recognised	2006 HK$’000 4,156 (107,617) (103,461)	2005 HK$’000 (restated) 3,997 (81,959) (77,962)

The net deferred tax assets have not been recognised in the financial statements in view of the uncertainty of the recoverability.

23. SHARE CAPITAL

Authorised: Ordinary shares of HK$0.25 each Issued and fully paid: Ordinary shares At beginning of the year Capital reorganisation (note (a)) Shares issued under loan conversion (note (b)) Shares issued under open offer (note (c)) At end of the year	2006 No. of shares Amount ’000 HK$’000 1,500,000 375,000 207,063 51,766 — — — — — — 207,063 51,766	2005 No. of shares Amount ’000 HK$’000 1,500,000 375,000 391,889 97,972 (352,700) (88,175) 133,364 33,341 34,510 8,628 207,063 51,766

Notes:

• (a) By a special resolution passed at the special general meeting held on 18 November, 2004, a capital reorganisation was approved and details of which are as follows:

• (i) Every 100 issued ordinary shares of HK$0.25 each in the capital of the Company was consolidated into one issued consolidated ordinary share of HK$25 (‘‘Consolidated Share’’);

• (ii) The nominal value of each issued Consolidated Share was reduced from HK$25 to HK$2.5 by cancelling paid-up capital to the extent of HK$22.5 on each issued Consolidated Share (‘‘Capital Reduction’’);

• (iii) The amount standing to the credit of the share premium account of the Company as at 29 February, 2004, being HK$86,037,000, was cancelled (‘‘Share Premium Cancellation’’);

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

• (iv) The amount standing to the credit of the contributed surplus account and the capital redemption reserve account of the Company as at 29 February, 2004, being HK$532,336,000 and HK$173,969,000 respectively, was released from such accounts;

• (v) Each issued Consolidated Share of HK$2.5 was subdivided into ten adjusted shares of HK$0.25 each (‘‘Adjusted Share’’);

• (vi) The credit arising from the Capital Reduction and the Share Premium Cancellation in the amount of HK$174,212,000, together with the amount of HK$173,969,000 released from the capital redemption reserve account of the Company (as referred to (iv) above), totalling together HK$348,181,000, was transferred to the contributed surplus account of the Company;

• (vii) The directors authorised the set-off of the aggregate amount of HK$348,181,000 transferred to the contributed surplus account of the Company (as referred to (vi) above), together with the amount of HK$532,336,000 already standing to the credit of the contributed surplus account of the Company, against all of the accumulated losses of the Company as at 29 February, 2004, being HK$865,747,000; and

• (viii) The authorised share capital of the Company was increased from HK$270,000,000 to HK$375,000,000 by the creation of 420,000,000 new Adjusted Shares.

• (b) Partner Logistics Limited converted secured other loans of HK$137,365,000 into 133,364,000 Adjusted Shares at a conversion price of HK$1.03 per Adjusted Share. The share capital and share premium account have been increased by HK$33,341,000 and HK$104,024,000 respectively.

• (c) Pursuant to an open offer in 2005 34,510,000 Adjusted Shares were issued at a subscription price of HK$1.03 per Adjusted Share. The share capital and share premium account were increased by HK$8,628,000 and HK$26,918,000 respectively.

24. RESERVES

The Company

1 March, 2004 Capital reorganisation (note 23) Shares issued under loan conversion (note 23) Shares issued under open offer (note 23) Share issue expenses Profit for the year 28 February, 2005 1 March, 2005 Issue of share options Loss for the year 28 February, 2006	Share premium HK$’000 86,037 (86,037) 104,024 26,918 (14,308) — 116,634 116,634 — — 116,634	Contributed surplus HK$’000 532,336 (517,566) — — — — 14,770 14,770 — — 14,770	Share-based compensation reserve HK$’000 — — — — — — — — 2,332 — 2,332	Capital redemption reserve HK$’000 173,969 (173,969) — — — — — — — — —	(Accumulated losses)/retained profits HK$’000 (865,747) 865,747 — — — 59,281 59,281 59,281 — (37,831) 21,450	Total HK$’000 (73,405) 88,175 104,024 26,918 (14,308) 59,281 190,685 190,685 2,332 (37,831) 155,186

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APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

• (i) The contributed surplus of the Company arose from the difference between the consolidated net assets of the Group’s subsidiaries acquired pursuant to a group reorganisation at the date on which the reorganisation became effective, and the nominal amount of the Company’s ordinary shares issued under the reorganisation; less the setoff of the accumulated losses of the Company amounting to HK$865,747,000 as at 29 February, 2004 pursuant to a capital reorganisation.

Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus account of the Company is available for distribution.

However, the Company cannot declare or pay a dividend or make a distribution out of contributed surplus if:

• (a) it is, or would after the payment be, unable to pay its liabilities as they become due; or

• (b) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts.

• (ii) The aggregate amount of reserves available for distribution to shareholders of the Company at 28 February, 2006 was HK$155,186,000 (2005: HK$190,685,000).

25. COMMITMENTS

• (a) Capital commitments outstanding at 28 February, 2006 not provided for in the financial statements were as follows:

Contracted for	The Group 2006 2005 HK$’000 HK$’000 3,017 1,267	The Company 2006 2005 HK$’000 HK$’000 — —

(b) At 28 February, 2006, the total future minimum lease payments under non-cancellable operating leases are payable as follows:

Within 1 year After 1 year but within 5 years After 5 years	The Group 2006 2005 HK$’000 HK$’000 57,444 46,164 56,829 45,147 — 701 114,273 92,012	The Company 2006 2005 HK$’000 HK$’000 3,174 2,520 — 1,050 — — 3,174 3,570	The Company 2006 2005 HK$’000 HK$’000 3,174 2,520 — 1,050 — — 3,174 3,570
			3,570

The Group leases a number of properties under operating leases. The leases typically run for an initial period of one to three years, with an option to renew the lease when all terms are renegotiated. Lease payments are usually adjusted to reflect market rentals upon renegotiation of the terms of the lease.

26. SHARE OPTIONS

As disclosed under the heading of Share Option Scheme, 8,825,000 options were granted in 2005 to the directors, employees and service providers of the Company and its subsidiaries pursuant to the 2003 Share Option Scheme. 20% options granted are exercisable from 22 August, 2005. The next 40% options granted are exercisable from 18 months from the date of grant and the remaining 40% options granted are exercisable from 24 months from the date of grant.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The fair value of options granted, was determined by using the Binomial valuation model. The significant inputs into the model were share price of $1.71 at the grant date, exercise price of $1.76, expected volatility of the Company’s share price: 60% p.a., expected life of options of 4 years, expected nil dividend, annual risk-free interest rate of 3.38% p.a., rate of leaving service of 15% p.a. and assume option holders will exercise their options when the share price is at least 180% of the exercise price. The fair value of options granted are as follows:

	Fair value	No. of vested
Exercise period	per option	options granted
22 August, 2005 – 25 July, 2009	$0.56	1,765,000
22 January, 2007 – 25 July, 2009	$0.69	3,530,000
25 July, 2007 – 25 July, 2009	$0.73	3,530,000

Given the above assumptions and the inherent limitations of the Binomial valuation model, shareholders and other investors are hereby warned of the subjectivity and uncertainty of the aforementioned values of the options.

27. CONTINGENT LIABILITIES

• (a) At 28 February, 2006, the Company has issued guarantees to banks and financial creditors in respect of general banking and other credit facilities extended to certain subsidiaries of the Company amounting to HK$150,096,000 (2005: HK$95,346,000).

• (b) As set out in the announcements of the Company dated 1 February, 2006 and 20 , 2006, the Company was informed that two directors, a consultant and an employee (collectively ‘‘the Officers’’) were charged by the Independent Commission Against Corruption (‘‘ICAC’’) relating to the alleged offences under the Prevention of Bribery Ordinance, the Crime Ordinance and the Theft Ordinance (‘‘the ICAC Charges’’). It is alleged that the Officers were involved in a scheme to offer illegal commissions to employees of a number of travel agencies and to help them to evade tax.

Under the Company’s Bye-Laws, the Company may be required to indemnify its directors from and against all actions, costs, charges, losses, damages and expenses which they or any of them may incur in execution of their duty, provided that such indemnity shall not be extended to any matter in respect of, among other things, fraud and dishonesty.

The directors have consulted with the Company’s legal advisers as to what legal implication the ICAC Charges may have, if any, for the Group as a whole. In view of the discussions with the legal advisers, the directors are of the view that they are not in a position to conclude whether and/or to what extent the Company may be required to indemnify the directors involved in relation to the ICAC Charges.

• (c) As explained in note 5(a)(ii), the outcome of the challenges by the IRD on the tax treatments adopted by the Group relating to certain offshore income and agent commission payments and promoter fees arising in prior years is undetermined as at 28 February, 2006. The Group has established a provision of approximately HK$91,000,000 in respect of such disputes. In the event that the Group is not successful in defending the tax treatments adopted, the Group may be subject to significant additional tax liabilities and possibly penalties which, under the provisions of the current tax legislation, may be up to three times any tax under-reported as assessed by the IRD. Furthermore, the ICAC’s allegations as mentioned in (b) above and the ongoing investigation may or may not have impact on the IRD’s challenges on the tax treatments adopted by the Group relating to agents commission payments and promoter fees arising in prior years. The directors consider that it is impractical to estimate the potential amount of additional tax liabilities arising if the IRD’s challenge in respect of the agent commission payments and promoter fees is successful.

28. PLEDGE OF ASSETS

• (a) At 28 February, 2006, debentures were executed by the Group in favour of its bankers and financial creditors charging, by way of fixed and floating charges, all of the undertakings, properties and assets of the Company and of its 17 subsidiaries as security for, inter alia, all obligations and liabilities, actual or contingent, from time to time owing by the Group to the bankers and financial creditors. Rental revenue of the Group is also charged in favour of the Group’s bankers.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

• (b) At 28 February, 2006, the Group pledged the capital contribution to a subsidiary of the Group amounting to US$235,000 and all the benefits accruing to the pledged equity interest of 11.625% of the subsidiary to the Group’s bankers and financial creditors as security for, inter alia, all obligations and liabilities, actual or contingent, from time to time owing by the Group to the bankers and financial creditors.

• (c) At 28 February, 2006, the Group pledged all rights, titles and interests in 56.46% of the entire share capital of IAC and TSL China and all benefits accruing to the pledged equity interest to the Group’s bankers and financial creditors as security for, inter alia, all obligations and liabilities, actual or contingent, from time to time owing by the Group to the bankers and financial creditors.

29. CONNECTED AND RELATED PARTY TRANSACTIONS

• (a) During the year ended 28 February, 2006, four subsidiaries of the Company, BTSL, EF, GZ Xiang Yun and TSL Trading sold and consigned finished goods to Hua Long amounting to HK$9,480,000 (2005: HK$128,417,000) and Rui Feng amounting to HK$684,000 (2005: HK$16,852,000) and Mr. Qi Jian Hong (‘‘Mr. Qi’’) amounting to HK$2,888,000. The transactions were carried out by way of cost- plus pricing arrangements in the normal course of business of the subsidiaries.

Hua Long and Rui Feng were licensees of Tse Sui Luen Jewellery (China) Limited and distributed the consigned finished goods to shop outlets operating under the trade names of ‘‘Tse Sui Luen’’ in the Mainland China. There was no monetary consideration paid by the licensees in respect of using the trademark licenses.

During the year ended 28 February, 2006, TSL Trading received commission, depending on the nature of the products, amounting to HK$372,000 (2005: HK$19,515,000) and HK$82,000 (2005: HK$2,878,000) from Hua Long and Rui Feng for their respective confirmed purchases from BTSL.

During the year ended 28 February, 2006, Tse Sui Luen Jewellery Consultancy Service Limited (‘‘TSLJCS’’) paid Hua Long consultation fee amounting to HK$605,000 (2005: HK$558,000) for Hua Long’s advice of public relation matters to TSLJCS.

In March, and , 2004, (formerly, Shanghai Tse Sui Luen Consultancy Service Limited) received consultancy fees of HK$226,000 and HK$30,000 from Hua Long and Rui Feng, respectively. No consultancy fees have been charged to Hua Long and Rui Feng since 1 May, 2004.

At 28 February, 2006, the amount due to Hua Long was HK$2,461,000 (2005: due from Hua Long of HK$15,183,000) and the amount due from Mr. Qi was HK$2,888,000 (2005: Nil). At 28 February, 2005, the amount due from Rui Feng was HK$17,000.

Hua Long and Rui Feng are companies controlled by Mr. Qi who is a substantial shareholder and a director of the two subsidiaries of the Company, IAC and TSL China, and is also a director of a subsidiary of TSL China, BTSL. The licensing, sales, consignment, commission and consultancy service arrangements therefore constituted connected transactions under the Listing Rules.

The independent non-executive directors of the Company have reviewed these connected transactions and confirmed that such transactions were:

• entered into the ordinary and usual course of business of the Group;

• conducted either on normal commercial terms or, if there is no available comparison, on terms that are fair and reasonable so far as the shareholders of the Company are concerned;

• in accordance with the Licensing and Consignment Terms (as defined in the circular dated November 2003), master supply agreement, comprehensive services agreement, and other terms governing the continuing connected transactions that are fair and reasonable and in the interests of the shareholders of the Company as a whole; and

• within the respective limits as set out in the circular dated 6 November, 2003.

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APPENDIX I

FINANCIAL INFORMATION ON THE GROUP

• (b) Partner Logistics Limited acquired all the rights, title and interests in the indebtedness due to certain of the bank lenders by the Group amounting to HK$195,731,000 and HK$14,000,000 on 11 February, 2004 and 2 April, 2004, respectively. Partner Logistics Limited is a company controlled by Mr. Tse Tat Fung, Tommy, the substantial shareholder and a director of the Company.

On 16 December, 2004, Partner Logistics Limited converted HK$137,365,000 of the loans owned by the Group into ordinary shares of HK$0.25 each in the capital of the Company.

The outstanding loans due to Partner Logistics Limited amounted to HK$72,367,000 (2005: HK$72,367,000) are secured and interest bearing at Hong Kong Interbank Offering Rate plus 2%. During the year ended 28 February, 2006, interest expenses paid to Partner Logistics Limited amounted to HK$3,880,000 (2005: HK$4,189,000).

• (c) During the year ended 28 February, 2006, TSLJ, a subsidiary of the Company, purchased raw materials and finished goods from Rosy Blue Hong Kong Limited (‘‘Rosy Blue HK’’) amounting to HK$144,782,000 (2005: HK$122,000,000) and sold raw materials to Rosy Blue HK amounting to HK$2,020,000 (2005: Nil). As at 28 February, 2006, the amount due to Rosy Blue HK was HK$78,987,000 (2005: HK$67,000,000).

During the year ended 28 February, 2006, TSLJ sold raw materials to Rosy Blue Japan Limited (‘‘Rosy Blue Japan’’) amounting to HK$184,000 (2005: Nil), sold raw materials to Rosy Blue Inc. amounting to HK$100,000 (2005: Nil) and sold raw materials to Rosy Blue Fine Inc. amounting to HK$375,000 (2005: Nil). As at 28 February, 2006, the amount due from Rosy Blue Fine Inc. was HK$134,000.

TSLJ borrowed HK$15,600,000 (US$2,000,000) from Rosy Blue HK on 2 September, 2005. The loan is unsecured, bears interest at London Interbank Offering Rate plus 3% per annum and was fully repaid on 14 October, 2005. Interest expenses paid to Rosy Blue HK amounted to HK$170,000 for the year ended 28 February, 2006 (2005: Nil).

During the year ended 28 February, 2006, EF sold raw materials to BTSL through Rosy Blue (Shanghai) Diamond Company Limited (‘‘Rosy Blue SH’’), an authorised diamond trading company in the PRC, amounting to HK$48,433,000 (2005: HK$71,000,000). As at 28 February, 2006, the amount due from Rosy Blue SH was HK$665,000 (2005: HK$5,000,000).

Rosy Blue HK, Rosy Blue Japan, Rosy Blue Fine Inc., Rosy Blue Inc. and Rosy Blue SH are subsidiaries of Rosy Blue Investments S.a.R.L., a preference shareholder of Partner Logistics Limited. In the opinion of the Directors of the Company, the transactions were carried out on normal commercial terms and in the ordinary course of business.

• (d) TSLJ has entered into a Consultancy Agreement on 11 April, 2005 with Mr. Tse Sui Luen (‘‘Mr. Tse’’) for the provision of consultancy service. Mr. Tse is the father of Mr. Tse Tat Fung, Tommy, the substantial shareholder and a director of the Company. During the year ended 28 February, 2006, consultancy fees of HK$2,080,000 and share-based payments of HK$40,000 were paid to Mr. Tse.

• (e) The Group paid key management personnel compensation as follows:

Short-term employee benefits Post-employment benefits Equity compensation benefits	2006 HK$’000 12,980 37 1,165 14,182	2005 HK$’000 13,844 48 —
		13,892

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

30. FINANCIAL RISK MANAGEMENT AND ESTIMATION OF FAIR VALUES

• (a) Financial risk management

The Group is exposed to a variety of risks including foreign currency risk, credit risk, liquidity risk and cash flow interest rate risk arising in the normal course of the Group’s business activities.

The Group does not have any written risk management policies and guidelines. The directors monitor the financial risk management of the Group and take such measures as considered necessary from time to time to minimise such financial risks.

• (i) Foreign currency risk

Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

The Group is exposed to foreign currency risk primarily through sales and purchases that are denominated in a currency other than the functional currency of the operations to which they relate. The currencies giving rise to this risk are primarily United States dollars, Malaysian Ringgits and Chinese Renminbi. The Group does not hold or issue any derivative financial instruments for trading purposes or to hedge against fluctuations in foreign exchange rates. The Group mitigates this risk by conducting the sales and purchases transactions in the same currency, whenever possible.

• (ii) Credit risk

Credit risk arises from the possibility that customers may not be able to settle obligations within the normal terms of transactions. The Group performs ongoing credit evaluation of the debtors’ financial condition and maintains an account for allowance for doubtful trade and other accounts receivable based upon the expected collectibles of all trade and other accounts receivable.

At the balance sheet date, there were no major concentrations of credit risk.

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

Cash is held with financial institutions of good standing.

• (iii) Liquidity risk

Liquidity risk is the risk that an enterprise will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value.

Prudent liquidity risk management implies maintaining sufficient cash. The Group monitors and maintains a level of bank balances deemed adequate to finance the Group’s operations.

• (iv) Cash flow and fair value interest rate risk

Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates.

As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

(b) Estimation of fair values

The notional amounts of financial assets and liabilities with a maturity of less than one year (including trade and other receivables, cash at bank, trade and other payables) are assumed to approximate their fair values. The fair value of finance lease liabilities is estimated as the present value of future cash flows, discounted at current market interest rates for similar financial instruments.

The fair value of non-trade balances due from/to group and related companies has not been determined as the timing of the expected cash flows of these balances cannot be reasonably determined because of the relationship.

31. RECENT ACCOUNTING AND FINANCIAL REPORTING PRONOUNCEMENTS

The HKICPA has issued the following amendments, new standards and interpretations which may be/ are relevant to the preparation of the Group’s financial statements after 31 December, 2005:

		Effective for
		accounting periods
		beginning on or
		after
HKAS 1 (Amendment)	Presentation of Financial Statements: Capital Disclosures	1 January, 2007
HKAS 19 (Amendment)	Employee Benefits — Actuarial Gains and Losses,	1 January, 2006
	Group Plans and Disclosures
HKAS 21 (Amendment)	The Effects of Changes in Foreign Exchange Rate	1 January, 2006
HKAS 39 (Amendment)	Financial Instruments: Recognition and Measurement	1 January, 2006
HKFRS 1 (Amendment)	First-time Adoption of Hong Kong Financial Reporting	1 January, 2006
	Standards
HKFRS 6	Exploration for and Evaluation of Mineral Resources	1 January, 2006
HKFRS 7	Financial Instruments: Disclosures	1 January, 2007
HKFRS-Int 4	Determining whether an Arrangement contains a Lease	1 January, 2006
HKFRS-Int 5	Rights to Interests arising from Decommissioning,	1 January, 2006
	Restoration and Environmental Rehabilitation Funds
HK(IFRIC)-Int 6	Liabilities arising from Participating in a Specific Market —	1 December, 2005
	Waste Electrical and Electronic Equipment
HK(IFRIC)-Int 7	Applying the Restatement Approach under HKAS 29 Financial	1 March, 2006
	Reporting in Hyperinflationary Economics
HK(IFRIC)-Int 8	Scope of HKFRS 2	1 May, 2006
HK(IFRIC)-Int 9	Reassessment of Embedded Derivatives	1 June, 2006

In addition, the Hong Kong Companies (Amendment) Ordinance 2005 came into effect on 1 December, 2005 and will be first applicable to the Group’s financial statements for the year beginning 1 March, 2006.

The Group is in the process of making an assessment of what the impact of these amendments, new standards and interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of these amendments, new standards and interpretations is unlikely to have a significant impact on the Group’s results of operations and financial position.

32. ULTIMATE CONTROLLING PARTY

At 28 February, 2006, the Directors consider the ultimate holding company to be Blink Technology Limited, which is incorporated in the British Virgin Islands, and the ultimate controlling party to be Mr. Tse Tat Fung, Tommy.

— 64 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

MANAGEMENT ANALYSIS OF THE GROUP

Financial results for the years ended 28 February, 2006, 2005, and 29 February, 2004

Consolidated profit and loss account

Turnover Profit/(loss) from ordinary activities before taxation Taxation (Loss)/profit for the year Attributable to: Equity holders of the company Minority interests (Loss)/profit for the year	Year ended 28/29 February, 2006 2005 2004 HK$’000 HK$’000 HK$’000 1,324,132 1,275,996 955,625 42,433 78,418 32,830 (70,551) (35,223) (17,012) (28,118) 43,195 15,818 (47,977) 35,813 4,194 19,859 7,382 11,624 (28,118) 43,195 15,818

Financial year ended 28 February, 2006 (‘‘financial year 2006’’) compared with the financial year ended 28 February, 2005 (‘‘financial year 2005’’)

Operating results

During the financial year ended 28 February, 2006, the Group achieved an overall increase of 3.8% in its consolidated turnover as compared to 2005. Consolidated turnover for the year was HK$1,324 million (2005: HK$1,276 million). Gross profit ratio for the 2006 improved to about 50.3% from about 45.6% in 2005.

The Group reported an overall loss attributable to equity holders of the Company for the year of HK$48 million (2005: Profit of HK$36 million after adjusting for changes in accounting policies). Of this loss, HK$51 million relates to provisions that have been made by the Group in respect of the assessments issued by IRD during the period relating to prior years. Loss per share for the year was HK$0.232 (2005: earning per share of HK$0.477 as restated).

Business review

The Group experienced a slow start to the year due to a marked slowdown that occurred in the retail jewellery market in Hong Kong between April and November 2005 as compared to the same period last year. This slowdown was mainly attributable to lower spending by tourists from the Mainland China which trend appears to be more specific to the retail jewellery sector in Hong Kong than to the overall retail market in general.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Retail and showroom operations in Hong Kong

During the period under review, the Group opened three new stores in Hong Kong comprising (i) two new stores in Mongkok which were opened in April, 2005 and July, 2005 and (ii) a new flagship store in Tsim Sha Tsui which was opened in late July, 2005. This new flagship store launches the next generation of the Group’s store image which will be applied to future store opening by the Group both in Hong Kong and the Mainland China. These new stores and image have been very well received by our customers.

The Group’s showroom business continues to trade well with a pleasing increase in the overall number of non-Mainland tourists visiting its showrooms during the period which has helped to offset a reduction in the overall spending by Mainland tourists during the first half of the year. The Group expects that this business will continue to prosper albeit that competition for Mainland tourists remains fierce.

Retail operations in Mainland China

The Group also opened a net 6 new stores in the Mainland China. Sales from the Group’s business in the Mainland China have remained steady with growth being achieved from the new store openings. About 90% of the mainland outlets have now been upgraded to the new brand image and we expect the balance to be completed this year. The outlook for the Mainland China remains positive for next financial year.

Retail operations in overseas

The Group’s Malaysian business remained stable in the period under review. The Group’s export business has continued to grow steadily and become one of the major sources of growth of the Group during the period under review.

Liquidity, capital structure and gearing

At 28 February, 2006, the Group’s total borrowings were HK$149.2 million, an increase of HK$54.7 million since 28 February, 2005 following new facilities of HK$77 million being made available and being drawn down by the Group in November 2005. The debt to equity ratio (ratio of net borrowings to net assets) has increased from 5.1% to 23.2% mainly because of the decrease in net assets value resulting from the loss incurred during the year and the increase in bank borrowings. As at 28 February, 2006, the Group had cash balances of HK$101.2 million which is sufficient for the present working capital requirements.

Employees and remuneration policies

As at 28 February, 2006, the total number of employees of the Group was approximately 2,500. The increase in head count was mainly in sales and marketing in the Mainland China. Employees are rewarded on a performance basis with reference to market rates. Other employee benefits include medical cover and subsidies for job-related continuing education.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Financial year ended 28 February, 2005 compared with the financial year ended 29 February, 2004 (‘‘financial year 2004’’)

Operating results

Turnover for the year ended 28 February, 2005 was HK$1,276 million (2004: HK$956 million), a 33.5% increase on that achieved last year. Gross profit ratio improved to 45.6% from 38.3% in 2004. The profit for the year was HK$38 million (2004: HK$7.5 million), an improvement of HK$30.5 million on that achieved last year. Earnings per share was HK$0.506 as compared to HK$0.191 (after adjusting for capital reorganisation in 2004/05) in last financial year.

Business review

During this year the retail market in Hong Kong and Mainland China showed great improvement over that of the last financial year. This, when combined with new store openings in Hong Kong and Mainland China, allowed the Group to record a much improved turnover and profit for the year.

Retail and showroom operations in Hong Kong

Both if the Group’s retail and showroom operations in Hong Kong improved as a result of the continuing relaxation of restrictions on Individual Visitor Scheme from Mainland China and the overall rebound of the economy of Hong Kong.

Retail operations in Mainland China

Turnover and profitability of the business in the Mainland China grew satisfactorily. The increasing affluent population of the Mainland China creates a large demand for quality jewellery products. Number of outlets in the Mainland China has increased from 86 of last year to 103 by the end of February, 2005 to tap the growth potential of the market.

The Group has also introduced the new brand I Saxx to the Mainland China market to better serve the different segments of the market. The increasing number of outlets helps to increase turnover and profitability and to capture the gains from the economies of scale.

Retail operations in overseas

The Malaysian operation remains stable in the year under review. The Group resumed its export business a few years ago and has attained encouraging growth both in turnover and profitability during the year.

Liquidity, capital structure and gearing

As at 28 February, 2005, the Group had total borrowings from banks and financial creditors of HK$94.5 million. Of this, HK$72.4 million was due to Partner Logistics Limited, a company controlled by Mr. Tse Tat Fung, Tommy, the substantial shareholder and a director of the Group and HK$20.7 million was due to three banks, which together are secured by all the assets and undertakings of the Group (collectively ‘‘the Lenders’’). A new loan agreement was entered into with the Lenders on 27 September, 2004 pursuant to which the repayment of this debt was rescheduled out over two to three years. There was also a balance of HK$1.4 million of obligations under finance leases.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The capital reorganisation, the open offer and the profit for the year increased the shareholders fund from HK$40.5 million to HK$242.5 million. The gearing (ratio of interest bearing borrowings less cash and bank balances to net asset value) was reduced from 5.1 times to 0.05 times.

Employees and remuneration policies

At the end of the financial year ended 2005, the Group had approximately 1,860 employees. Employees are rewarded on a performance basis with reference to market rates. Other employee benefits include medical cover and subsidies for job-related continuing education.

Future plan and prospects

Despite the retail environment in Hong Kong remaining very competitive and patchy, the Directors believe that i) the commitment to provide quality services and products to customers across the Group; ii) the benefits emerging from the brand building and positioning exercises undertaken by the Group in Hong Kong and the Mainland China during the year and planned for next year; iii) the new product lineup and releases during the year and planned for next year; iv) the benefits that are emerging (and are yet to emerge) from the reinvestment program; and v) the increasing strength and growth of other businesses outside Hong Kong, can all lead the Group through the less favourable retail environment in Hong Kong.

The Group sees the reinvestment program, including the IT project, opening of new factory, store renovations and expansion, as critical to its future competitiveness and expect to complete the same within 2007. Such initiatives are important steps to lead the Group to growth and to our mission to become the leading, most innovative, efficient and profitable jewellery retailer in Asia.

Exposure to exchange rate fluctuation and any related hedges

The transactions of the Group were mainly denominated in local currencies, Renminbi and US dollars. The impact of the fluctuation of foreign exchange rates of these currencies is insignificant to the Group.

Charges on assets

1. At 28 February, 2006, debentures were executed by the Group in favour of its bankers and financial creditors charging, by way of fixed and floating charges, all of the undertakings, properties and assets of the Company and 17 of its subsidiaries as security for, inter alia, all obligations and liabilities, actual or contingent, from time to time owing by the Group to the bankers and financial creditors.

2. At 28 February, 2006, the Group pledged the capital contribution to a subsidiary of the Group amounting to US$235,000 and all the benefits accruing to the pledged equity interest of 11.625% of the subsidiary to the Group’s bankers and financial creditors as security for, inter alia, all obligations and liabilities, actual or contingent, from time to time owing by the Group to the bankers and financial creditors.

3. At 28 February, 2006, the Group pledged all rights, titles and interest in 56.46% of the entire share capital of Infinite Assets Corp. and TSL China and all benefits accruing to the pledged equity interest to the Group’s bankers and financial creditors as security for, inter alia, all obligations and liabilities, actual or contingent, from time to time owing by the Group to the bankers and financial creditors.

— 68 —

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

INDEBTEDNESS

As at the close of business on 30 June, 2006, being the latest practicable date for the purpose of ascertaining certain information relating to this indebtedness statement prior to the printing of this circular, the Group had outstanding borrowings of approximately HK$155.5 million comprising the following:

Secured bank loans Secured bank overdrafts Secured other loans Finance lease obligations	HK$ million 57.0 18.5 72.4 7.6
	155.5

The Group’s secured bank loans, overdrafts and other loans are secured by (a) all of the undertakings, properties and assets of TSL and 17 of its subsidiaries by way of fixed and floating charges; (b) the capital contribution to a subsidiary of the Group amounting to US$235,000 and all the benefits accruing to the pledged equity interest of 11.625% and (c) all rights, titles and interests in 56.46% of the entire share capital of two subsidiaries of the Group and all benefits accruing to the pledged equity interest.

Other Commitments

The Group had outstanding capital commitments as of 30 June, 2006. The amount contracted for was approximately HK$1,988,000. As at 30 June, 2006, the Group had outstanding minimum commitments under non-cancellable operating leases in respect of land and buildings which fall due within one year, in the second to fifth years inclusive and over five years of approximately HK$58,341,000, HK$56,564,000 and nil respectively.

Contingent Liabilities

At 30 June, 2006, the Company has issued guarantees to banks and financial creditors in respect of general banking and other credit facilities extended to certain subsidiaries of the Company amounting to HK$149,250,000.

As set out in the announcements of the Company dated 1 February, 2006 and 20 April, 2006, the Company was informed that two directors, a consultant and an employee (collectively ‘‘the Officers’’) were charged by the Independent Commission Against Corruption (‘‘ICAC’’) relating to the alleged offences under the Prevention of Bribery Ordinance, the Crime Ordinance and the Theft Ordinance (‘‘the ICAC Charges’’). It is alleged that the Officers were involved in a scheme to offer illegal commissions to employees of a number of travel agencies and to help them to evade tax.

Under the Company’s Bye-Laws, the Company may be required to indemnify its directors from and against all actions, costs, charges, losses, damages and expenses which they or any of them may incur in execution of their duty, provided that such indemnity shall not be extended to any matter in respect of, among other things, fraud and dishonesty.

The Directors have consulted with the Company’s legal advisers as to what legal implication the ICAC Charges may have, if any, for the Group as a whole. In view of the discussions with the legal advisers, the Directors are of the view that they are not in a position to conclude whether and/or to what extent the Company may be required to indemnify the Directors involved in relation to the ICAC Charges.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

The outcome of the challenges by the IRD on the tax treatments adopted by the Group relating to certain offshore income and agent commission payments and promoter fees arising in prior years is undetermined as at 30 June, 2006. The Group has established a provision of approximately HK$91,000,000 in respect of such disputes. In the event that the Group is not successful in defending the tax treatments adopted, the Group may be subject to significant additional tax liabilities and possibly penalties which, under the provisions of the current tax legislation, may be up to three times any tax under-reported as assessed by the IRD. Furthermore, the ICAC’s allegations as mentioned above and the ongoing investigation may or may not have impact on the IRD’s challenges on the tax treatments adopted by the Group relating to agents commission payments and promoter fees arising in prior years. The Directors consider that it is impractical to estimate the potential amount of additional tax liabilities arising if the IRD’s challenge in respect of the agent commission payments and promoter fees is successful.

Disclaimer

Save as disclosed above or otherwise disclosed herein, and apart from intra-group liabilities, the Group did not, as at the close of business on 30 June, 2006, have any outstanding loan capital issued or agreed to be issued, shares or debentures, mortgage loans, or other similar indebtedness or any finance lease commitments, hire purchase commitments, liabilities under acceptance, acceptance credits, guarantees or other material contingent liabilities.

The Directors have confirmed that there had not been any material change in the Group’s indebtedness subsequent to 30 June, 2006.

WORKING CAPITAL

The Directors are of the opinion that, upon Completion, taking into account of the expected cash flow, the present internal financial resources and the bank and other facilities available to the Group, the Group will have sufficient working capital for its present requirements for the next twelve months from the date of this circular.

MATERIAL CHANGE

The Directors are not aware of any material adverse changes in the financial or trading position of the Group since 28 February, 2006, the date to which the latest published audited financial statements of the Group were made up.

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ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

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7 August 2006

The Directors

Tse Sui Luen Jewellery (International) Limited Tse Sui Luen Investment (China) Limited

Dear Sirs,

We set out below our report relating to the financial information (‘‘Financial Information’’) of Tse Sui Luen Investment (China) Limited (the ‘‘Company’’) and its subsidiaries (hereinafter collectively referred to as the ‘‘Group’’) for the years ended 29 February 2004, 28 February 2005 and 28 February 2006 respectively (the ‘‘Relevant Periods’’) for inclusion in the circular of Tse Sui Luen Jewellery (International) Limited dated 7 August 2006 (the ‘‘Circular’’), in connection with its acquisition of a substantial interest in the Company.

The Company was incorporated as a limited liability company under the International Business Companies Act in the British Virgin Islands on 8 February 2000. During the Relevant Periods, the principal activity of the Company was investment holding. The principal activities of the Company’s subsidiaries consisted of jewellery manufacturing, trading and retailing.

The companies which were in existence as of 28 February 2006 and were subsidiaries of the Company are as follows:

					Place of	Proportion of
					incorporation/	ownership	Principal
Name		of company			establishment	interest	activities
Excellent Ford Development					Hong Kong	100%	Jewellery trading
Limited
Beijing Tse Sui Luen			Jewellery		The People’s	*90%	Jewellery
Company Limited# (				)	Republic of China (‘‘PRC’’)		manufacturing and trading
Beijing Qi Li Yun Jewellery					PRC	*100%	Jewellery retailing
Company Limited (				)
Guangzhou Xiang Yun				Jewellery	PRC	*100%	Jewellery trading
Company Limited#							and retailing
(			)

— 71 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

Place of Proportion of incorporation/ ownership Principal Name of company establishment interest activities Guangzhou Hong Yun Jewellery PRC 100% Jewellery retailing Company Limited ( ) Guangzhou Xi Yun Jewellery PRC 100% Jewellery retailing Company Limited[#] ( ) Shanghai Fu Yun Jewellery PRC *100% Jewellery retailing Company Limited[#] ( )

• Interest indirectly held by the Company

• Unofficial translation

The Financial Information of the Group for the Relevant Periods set out in this report has been prepared from the audited consolidated financial statements of the Group for the Relevant Periods (the ‘‘Underlying Financial Statements’’), on the basis set out in note 2 to the Financial Information below.

We have acted as auditors of the Company and its subsidiaries for the year ended 28 February 2006. We have examined the Underlying Financial Statements for the year ended 28 February 2006 in accordance with the Auditing Guideline ‘‘Prospectuses and the Reporting Accountant’’ issued by the Hong Kong Institute of Certified Public Accountants.

The Underlying Financial Statements for the years ended 29 February 2004 and 28 February 2005 were audited by KPMG. The Financial Information of the Group for the years ended 29 February 2004 and 28 February 2005 was extracted and reproduced from the Underlying Financial Statements for the years ended 29 February 2004 and 28 February 2005 respectively and is presented in this report for illustrative purposes only. We have not carried out any audit procedures on the Underlying Financial Statements for the years ended 29 February 2004 and 28 February 2005 respectively.

We have not audited any financial statements of the Company, its subsidiaries or the Group in respect of any period subsequent to 28 February 2006.

The preparation of the Financial Information is the responsibility of the directors of the Company who approve the issue. The directors of Tse Sui Luen Jewellery (International) Limited are responsible for the contents of the Circular in which this report is included. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion to you.

In our opinion, the Financial Information of the Group for the year ended 28 February 2006, for the purpose of this report and on the basis of presentation set out in note 2 to the Financial Information below, gives a true and fair view of the state of affairs of the Group as at 28 February 2006 and of the results and cash flows of the Group for the year then ended.

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ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

FINANCIAL INFORMATION

• I. Consolidated Income Statement

For the years ended 29 February 2004, 28 February 2005 and 28 February 2006

Note Turnover 3 Cost of sales Gross profit Other revenue 3 Selling expenses Administrative expenses Profit from operating activities before taxation 4 Taxation 8 Profit for the year Attributable to: Equity holders of the Company Minority interests Profit for the year	2004 HK$’000 139,455 (98,700) 40,755 395 — (10,514) 30,636 (1,965) 28,671 26,480 2,191 28,671	2005 HK$’000 281,708 (162,907) 118,801 235 (62,249) (31,963) 24,824 (12,196) 12,628 12,486 142 12,628	2006 HK$’000 444,649 (191,306) 253,343 1,029 (145,756) (43,677) 64,939 (19,283) 45,656 41,753 3,903 45,656

— 73 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

II. Consolidated Balance Sheet 29 February 2004, 28 February 2005 and 28 February 2006

Note Non-current assets Property, plant and equipment 9 Deferred tax assets 10 Current assets Inventories 11 Trade and other receivables 12 Due from fellow subsidiaries 13 Current tax recoverable Cash at bank and in hand 14 Current liabilities Trade and other payables 15 Due to immediate holding company 13 Due to fellow subsidiaries 13 Current tax payable Net current assets Total assets less current liabilities Non-current liabilities Deferred tax liabilities 10 Net assets Capital and reserves Share capital 16 Reserves Total equity attributable to equity holders of the Company Minority interests Total equity	2004 HK$’000 2,186 — 2,186 102,006 28,629 — — 6,231 136,866 1,566 — 110,300 1,965 113,831 23,035 25,221 — 25,221 54 21,385 21,439 3,782 25,221	2005 HK$’000 9,038 340 9,378 152,310 50,679 825 509 28,421 232,744 33,729 15,481 144,918 7,462 201,590 31,154 40,532 — 40,532 54 36,534 36,588 3,944 40,532	2006 HK$’000 13,676 3,165
			16,841
			171,332 64,505 4,166 — 60,503
			300,506
			31,341 13,869 171,643 8,675
			225,528
			74,978
			91,819
			46
			91,773
			54 83,319
			83,373 8,400
			91,773

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ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

III. Consolidated Statement of Changes in Equity For the years ended 29 February 2004, 28 February 2005 and 28 February 2006

1 March 2003 Exchange differences on translation of financial statements of subsidiaries Profit for the year 28 February 2004 and 1 March 2004 Exchange differences on translation of financial statements of subsidiaries Profit for the year 28 February 2005 and 1 March 2005 Exchange differences on translation of financial statements of subsidiaries Profit for the year 28 February 2006	Share capital HK$’000 54 — — 54 — — 54 — — 54	Exchange reserve HK$’000 (288) (286) — (574) 2,663 — 2,089 5,032 — 7,121	Retained profits HK$’000 (4,521) — 26,480 21,959 — 12,486 34,445 — 41,753 76,198	Total HK$’000 (4,755) (286) 26,480 21,439 2,663 12,486 36,588 5,032 41,753 83,373	Minority interests HK$’000 1,591 — 2,191 3,782 20 142 3,944 553 3,903 8,400	Total equity HK$’000 (3,164) (286) 28,671 25,221 2,683 12,628 40,532 5,585 45,656 91,773

— 75 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

IV. Consolidated Cash Flow Statement

For the years ended 29 February 2004, 28 February 2005 and 28 February 2006

Cash flows from operating activities Profit from operating activities before taxation Adjustments for: Depreciation Loss on disposal of property, plant and equipment Operating profit before changes in working capital Increase in inventories Increase in trade and other receivables Increase in amounts due from fellow subsidiaries Increase/(decrease) in trade and other payables Increase/(decrease) in amount due to immediate holding company Increase in amounts due to fellow subsidiaries Cash (used in)/generated from operating activities Tax paid Hong Kong Profits Tax Overseas tax Net cash (used in)/generated from operating activities Investing activities Proceeds from disposal of property, plant and equipment Payments to acquire of property, plant and equipment Net cash used in investing activities (Decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year Analysis of the balances of cash and cash equivalents Cash at bank and in hand	2004 HK$’000 30,636 555 6 31,197 (71,509) (26,808) — 548 — 54,244 (12,328) — — (12,328) 1 (724) (723) (13,051) 19,568 (286) 6,231 6,231	2005 HK$’000 24,824 4,366 35 29,225 (50,304) (22,050) (825) 32,163 15,481 34,618 38,308 (3,582) (3,966) 30,760 153 (11,357) (11,204) 19,556 6,231 2,634 28,421 28,421	2006 HK$’000 64,939 11,234 — 76,173 (19,022) (13,826) (3,341) (2,388) (1,612) 26,725 62,709 (539) (19,800) 42,370 — (15,728) (15,728) 26,642 28,421 5,440 60,503 60,503

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ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

V. Notes to the Financial Information

• 29 February 2004, 28 February 2005 and 28 February 2006

• General

The Company is a limited liability company incorporated in the British Virgin Islands. The Company’s principal activity is investment holding. Particulars of the principal activities of its direct and indirect subsidiaries are set out in note 22.

1. Significant accounting policies

2. (a) Statement of compliance

These financial statements have been prepared in accordance with accounting principles generally accepted in Hong Kong, which include all applicable Hong Kong Financial Reporting Standards (‘‘HKFRSs’’), such term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (‘‘HKASs’’) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’). A summary of the significant accounting policies adopted by the Group is set out below.

• (b) Basis of preparation of financial statements

The measurement basis used in the preparation of the financial statements is historical cost modified by the marking to market of certain investments in securities as explained in the accounting policies set out below.

The principal accounting policies and methods of computation used in the preparation of the financial statements for the year ended 28 February 2006 are consistent with those adopted in the financial statements for the years ended 29 February 2004 and 28 February 2005, except for the adoption of the new and revised HKFRSs as explained in c) below.

• (c) Adoption of new and revised Hong Kong Financial Reporting Standards

During the year ended 28 February 2006, the Group has adopted new and revised HKFRSs which are effective for accounting periods commencing on or after 1 January 2005. The new and revised HKFRSs which are relevant to the Group’s operations are:

HKAS 1	Presentation of Financial Statements
HKAS 2	Inventories
HKAS 7	Cash Flow Statements
HKAS 8	Accounting Policies, Changes in Accounting Estimates and Errors
HKAS 10	Events after the Balance Sheet Date
HKAS 12	Income Taxes
HKAS 16	Property, Plant and Equipment
HKAS 18	Revenue
HKAS 19	Employee Benefits
HKAS 21	The Effects of Changes in Foreign Exchange Rates
HKAS 24	Related Party Disclosures
HKAS 26	Accounting and Reporting by Retirement Benefit Plans
HKAS 27	Consolidated and Separate Financial Statements
HKAS 32	Financial Instruments: Disclosure and Presentation
HKAS 36	Impairment of Assets
HKAS 37	Provisions, Contingent Liabilities and Contingent Assets
HKAS 39	Financial Instruments: Recognition and Measurement
HKFRS 2	Share-based Payment

The adoption of HKASs 2, 7, 8, 10, 12, 16, 18, 19, 24, 26, 32, 36, 37 and 39 has had no material impact on the accounting policies of the Group and the Company and the methods of computation in the Group’s financial statements.

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ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

The impact of the adoption of the other HKFRSs on the financial statements is as follows:

• (i) Minority interests (HKAS 1 ‘‘Presentation of Financial Statements’’ and HKAS 27 ‘‘Consolidated and Separate Financial Statements’’)

In prior years, minority interests at the balance sheet date were presented in the consolidated balance sheet separately from liabilities and as deduction from net assets. Minority interests in the results of the Group for the year were also separately presented in the income statement as a deduction before arriving at the profit attributable to shareholders.

With effect from 1 March 2005, in order to comply with HKAS 1 and HKAS 27, minority interests at the balance sheet date are presented in the consolidated balance sheet within equity, separately from the equity attributable to the equity holders of the Company, and minority interests in the results of the Group for the year are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year between the minority interests and the equity holders of the Company.

The presentation of minority interests in the consolidated balance sheet, income statement and statement of changes in equity for the two years ended 28 February 2005 has been restated accordingly.

• (ii) Retranslation of goodwill relating to a net investment in a foreign operation (HKAS 21 ‘‘The Effects of Changes in Foreign Exchange Rates’’)

In prior years, goodwill was recognised directly in equity or carried at cost less amortisation and impairment.

With effect from 1 March 2005, in order to comply with HKAS 21, any goodwill arising on the acquisition of a foreign operation is treated as an asset of the foreign operation. Thus it is expressed in the functional currency of that foreign operation and is retranslated at the closing rate at each balance sheet date. Any resulting exchange difference is taken directly to the exchange reserves, together with any other differences arising from the re-translation of the net assets of the foreign operation.

In accordance with the transitional provisions in HKAS 21, this new policy has not been adopted retrospectively and will only be applied to acquisitions occurring on or after 1 March 2005. As the Group has not acquired any new foreign operations since that date, the change in policy has had no impact on these financial statements.

• (iii) Share option scheme (HKFRS 2 ‘‘Share-based Payment’’)

In prior years, no amounts were recognised when option holders were granted share options over shares in the Company. If the option holders chose to exercise the options, the nominal amount of share capital and share premium were credited only to the extent of the option’s exercise price receivable.

With effect from 1 March 2005, in order to comply with HKFRS 2, the Group recognises the fair value of such share options as an expense in the income statement, or as an asset, if the cost qualifies for recognition as an asset under the Group’s accounting policies. A corresponding increase is recognised in a share-based compensation reserve within equity.

Where the option holders are required to meet vesting conditions before they become entitled to the options, the Group recognises the fair value of the options granted over the vesting period. Otherwise, the Group recognises the fair value in the period in which the options are granted.

If an option holder chooses to exercise options, the related share-based compensation reserve is transferred to share capital and share premium, together with the exercise price. If the options lapse unexercised the related share-based compensation reserve is transferred directly to retained earnings.

— 78 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

The new accounting policy has been applied retrospectively with comparatives restated in accordance with HKFRS 2, except that the Group has taken advantage of the transitional provisions set out in paragraph 53 of HKFRS 2 under which the new recognition and measurement policies have not been applied to the following grants of options:

• (a) all options granted to option holders on or before 7 November 2002; and

• (b) all options granted to option holders after 7 November 2002 but which had vested before 1 March 2005.

As all the Group’s options were granted to option holders either before 7 November 2002 or after 1 March 2005, the adoption of HKFRS 2 has no impact on the Group’s net assets and results for the prior years.

The amount charged to the income statement as a result of the change of policy increased administrative expenses for the years ended 29 February 2004, 28 February 2005 and 28 February 2006 by nil, nil and HK$226,000, respectively, with the corresponding amount credited to amount due to immediate holding company.

Details of the share option scheme are set out in note 17.

(d) Judgment and estimates

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

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

(e) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to the balance sheet dates. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the Group.

A subsidiary, in accordance with the Hong Kong Companies Ordinance, is a company in which the Group, directly or indirectly, holds more than half of the issued share capital or controls more than half the voting power or controls the composition of the board of directors. Subsidiaries are considered to be controlled if the Company has the power, directly or indirectly, to govern the financial and operating policies, so as to obtain benefits from their activities.

The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. Intra-group balances and transactions, and any unrealised profits arising from intra-group transactions, are eliminated in full on consolidation. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

The acquisition of subsidiaries during the year has been accounted for using the purchase method of accounting. This method involves allocating the cost of the business combinations to fair values of the assets acquired, and liabilities and contingent liabilities assumed at the date of acquisition. The cost of the acquisition is measured at the aggregate of the fair values of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.

— 79 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

Any excess of the cost of the acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment. Any excess of the Group’s interest in fair values of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination is recognised immediately in the income statement.

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

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

(f) Impairment of assets

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately, unless the relevant asset is land or buildings other than investment property carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

(g) Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost, less provisions for depreciation and any impairment losses. Details are set out in note 9. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable cost of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the item has been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the income statement in the year in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the item, the expenditure is capitalised as an additional cost of the item. When an item of property, plant and equipment is sold, its cost and accumulated depreciation are removed from the financial statements and any gain or loss resulting from the disposal, being the difference between the net disposal proceeds and the carrying amount of the asset, is included in the income statement.

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ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

Depreciation is provided on the straight-line method, based on the estimated economic useful lives of the individual assets, as follows:

Plant and machinery 3 to 7 years Furniture and fixtures 1 to 10 years Motor vehicles 4 to 10 years

• (h) Leased assets

Operating lease charges

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

(i) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

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

(j) Foreign currency translation

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date. Foreign exchange gains and losses are recognised in the income statement.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the dates the fair value was determined.

The results of foreign operations are translated into Hong Kong dollars at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Balance sheet items, including goodwill arising on consolidation of foreign operations acquired on or after 1 January 2005, are translated into Hong Kong dollars at the foreign exchange rates ruling at the balance sheet date. The resulting exchange differences are recognised directly in a separate component of equity.

(k) Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at cost less allowance for bad and doubtful debts.

— 81 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

• (l) Trade and other payables

Trade and other payables are initially recognised at fair value and thereafter stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

• (m) Provisions

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

When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in the income statement.

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

(n) Employee benefits

• (i) Salaries, annual bonuses, paid annual leave, leave passage and the cost to the Group of nonmonetary benefits are accrued in the year in which the associated services are rendered by employees of the Group. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

• (ii) Contributions to Mandatory Provident Funds as required under the Hong Kong Mandatory Provident Fund Schemes Ordinance and contributions to the retirement schemes operated by the relevant authorities for employees of the subsidiaries in the People’s Republic of China (‘‘PRC’’) are recognised as an expense in the income statement as incurred, except to the extent that they are included in the cost of inventories not yet recognised as an expense.

• (iii) The Group’s net obligation in respect of lump sum long service amounts payable on cessation of employment in certain circumstances under the Hong Kong Employment Ordinance is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using the projected unit credit method by a qualified actuary, discounted to its present value, and the fair value of any related plan assets is deducted. The discount rate is the yield at balance sheet date on Exchange Fund Notes that have maturity dates approximating the terms of the Group’s obligations.

• (o) Taxation

• (i) Taxation for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in the income statement except to the extent that they relate to items recognised directly in equity, in which case they are recognised in equity.

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

— 82 —

APPENDIX II

ACCOUNTANTS’ REPORT ON TSL CHINA

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

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

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, negative goodwill treated as deferred income, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination).

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

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

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

• . in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or

• . in the case of deferred tax assets and liabilities, if they relate to taxation levied by the same taxation authority on either:

  • the same taxable entity; or

• different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

• (p) Revenue recognition

Revenue is recognised when the customer has accepted the goods and the related risks and rewards of ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts and returns.

— 83 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.

Sundry income is recognised on an actual basis.

• (q) Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition, less advances from banks repayable within three months from the date of the advance.

• (r) Related parties

A party is considered to be related to the Group if:

• (i) the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or exercise significant influence over the Group in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence;

• (ii) the party is a member of the key management personnel of the Group;

• (iii) the party is a close member of the family of any individual referred to in (i) or (ii);

• (iv) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (ii) or (iii); or

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

3. Turnover and revenue

Turnover represents the sales value of jewellery products sold to customers. An analysis of turnover and revenue is as follows:

Turnover Other revenue Bank interest income Overdue interest received from an immediate holding company Sundry income Write back of handling fee Total revenue recognised during the year	2004 HK$’000 139,455 41 — 146 208 395 139,850	Group 2005 HK$’000 281,708 56 — 179 — 235 281,943	2006 HK$’000 444,649 199 383 447 —
			1,029
			445,678

— 84 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

4. Profit from operating activities before taxation

Profit from operating activities before taxation is arrived at after charging:

Auditors’ remuneration — current year provision — prior year under provision Cost of inventories# Depreciation Loss on disposal of property, plant and equipment Operating lease charges Provident fund contributions (included in staff costs below) Provision for inventories Staff costs — directors’ emoluments (note 5) — other	2004 HK$’000 458 — 98,700 555 6 757 439 — — 5,020	Group 2005 HK$’000 567 — 162,907 4,366 35 1,499 1,300 — — 25,653	2006 HK$’000 735 1,433 191,306 11,234 — 4,496 3,717 5,435 — 53,372

Cost of inventories for the years ended 29 February 2004, 28 February 2005 and 28 February 2006 include HK$2,012,000, HK$2,511,000 and HK$3,455,000, respectively, relating to staff costs, depreciation and operating lease charges, which amount is also included in the respective total amounts disclosed separately above for each of these types of expenses.

5. Directors’ emoluments

							Group
						2004	2005	2006
						HK$’000	HK$’000	HK$’000
Fees						—	—	—
Other	—	for	management	services	rendered	—	—	—
						—	—	—

6. Individuals with highest emoluments

The aggregate of emoluments in respect of the five individuals are as follows:

Salaries and other emoluments Performance related incentives Contributions to retirement benefits scheme Share-based payments	2004 HK$’000 2,136 283 48 — 2,467	Group 2005 HK$’000 3,208 542 58 — 3,808	2006 HK$’000 3,446 816 58 192
			4,512

— 85 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

The emoluments of the five, five and five individuals with the highest emoluments for the year ended 29 February 2004, 28 February 2005 and 28 February 2006, respectively, are within the following bands:

Below HK$1,000,000 HK$1,000,001 to HK$1,500,000	2004 4 1 5	Group 2005 4 1 5	2006 4 1
			5

7. Segment reporting

Segment information is presented in respect of the Group’s geographical segments. Information relating to geographical segments based on the location of assets is chosen because this is more relevant to the Group in making operating and financial decisions. No geographical segment analysis of the Group is presented as all the Group’s turnover and trading results are generated in PRC (including Hong Kong). No business segments analysis of the Group is presented as all the Group’s turnover and trading results are generated from the manufacture, sale and marketing of jewellery products.

8. Taxation

The provision for Hong Kong Profits Tax is calculated at 17.5%, 17.5% and 17.5% of the estimated assessable profits for the years ended 29 February 2004, 28 February 2005 and 28 February 2006, respectively. Taxation for overseas subsidiaries is similarly charged at the appropriate current rates of taxation ruling in the relevant countries.

Taxation in the consolidated income statement represents:

Current tax — Provision for Hong Kong Profits Tax Tax for the year Underprovision in respect of prior years Current tax — overseas Tax for the year Overprovision in respect of prior years Deferred tax Origination and reversal of temporary differences	2004 HK$’000 1,829 — 1,829 136 — 136 — 1,965	Group 2005 HK$’000 1,106 137 1,243 11,293 — 11,293 (340) 12,196	2006 HK$’000 170 —
			170
			22,948 (1,106)
			21,842 (2,729)
			19,283

— 86 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

The reconciliation between accounting profit and taxation at applicable tax rates is as follows:

Profit before taxation Notional tax on profits before tax, calculated at the rates applicable to profits in jurisdictions concerned Tax effect of profits entitled to tax exemption Tax effect of expenses that are not deductible in determining taxable profits Tax effect of income that is not taxable in determining taxable profits Tax effect of unused tax losses not recognised Effect of temporary differences not recognised Deferred tax not recognised in prior years Prior year underprovision/(overprovision) Tax effect of prior year’s tax losses utilised this year Taxation	2004 HK$’000 30,636 9,712 (7,574) 16 — — — — — (189) 1,965	Group 2005 HK$’000 24,824 9,328 (699) 3,451 (21) — — — 137 — 12,196	2006 HK$’000 64,939 14,155 (811) 3,541 (2) 2,414 1,071 21 (1,106) — 19,283

— 87 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

9. Property, plant and equipment

Group Cost or valuation 1 March 2003 Additions Disposals 29 February 2004 Exchange adjustments Additions Disposals 28 February 2005 Exchange adjustments Additions Disposals 28 February 2006 Accumulated depreciation 1 March 2003 Charge for the year On disposals 29 February 2004 Exchange adjustments Charge for the year On disposals 28 February 2005 Exchange adjustments Charge for the year On disposals 28 February 2006 Net book value 29 February 2004 28 February 2005 28 February 2006	Plant and machinery HK$’000 175 214 — 389 9 462 (34) 826 28 263 — 1,117 46 45 — 91 2 157 (17) 233 10 195 438 298 593 679	Furniture and fixtures HK$’000 2,662 510 (13) 3,159 71 10,702 (252) 13,680 453 15,030 (36) 29,127 767 510 (6) 1,271 29 4,197 (81) 5,416 331 10,925 (36) 16,636 1,888 8,264 12,491	Motor vehicles HK$’000 — — — — — 193 — 193 6 435 — 634 — — — — — 12 — 12 2 114 — 128 — 181 506	Total HK$’000 2,837 724 (13) 3,548 80 11,357 (286) 14,699 487 15,728 (36) 30,878 813 555 (6) 1,362 31 4,366 (98) 5,661 343 11,234 (36) 17,202 2,186 9,038 13,676

— 88 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

1. Deferred tax assets and liabilities

2004 HK$’000 Deferred tax assets 1 March — Exchange adjustments — Credit to income statements — 28 February — Deferred tax assets arise from the following temporary differences: 2004 HK$’000 Differences between the carrying amount of property, plant and equipment and its tax base — Deductible temporary differences arising from provisions — — 2004 HK$’000 Deferred tax liabilities 1 March — Charge to income statement — 28 February — Deferred tax liabilities arise from the following temporary differences: 2004 HK$’000 Differences between the carrying amount of property, plant and equipment and its tax base — 11. Inventories 2004 HK$’000 Raw materials 2,112 Work in progress 8,966 Finished goods 90,928 102,006	Group 2005 HK$’000 — — 340 340 Group 2005 HK$’000 — 340 340 Group 2005 HK$’000 — — — Group 2005 HK$’000 — Group 2005 HK$’000 9,931 14,499 127,880 152,310	2006 HK$’000 340 50 2,775
		3,165
		2006 HK$’000 770 2,395
		3,165
		2006 HK$’000 — 46
		46
		2006 HK$’000 46
		2006 HK$’000 5,723 17,913 147,696
		171,332

— 89 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

As at 29 February 2004 and 28 February 2005, the Group had consigned finished goods to the licensees, Beijing Hua Long Rui Lin Economic and Trading Company Limited (‘‘Hua Long’’) and Beijing Rui Feng Da Lin Jewellery Co., Ltd. (‘‘Rui Feng’’), both established in the PRC, amounting to HK$78,704,000 and HK$23,808,000, and HK$10,556,000 and HK$4,800,000, respectively. The licensees are responsible for distributing the consigned finished goods to the shop outlets operating under the trade names of ‘‘Tse Sui Luen’’ in the PRC. As at 29 February 2004 and 28 February 2005, the Group had an amount due from Hua Long and Rui Feng amounting to HK$13,974,000 and HK$11,693,000, and nil and HK$17,000, respectively. Since the Group cannot supervise the activities of the licensees, the directors consider that it is possible that the Group may not be able to recover possession of all or certain of these consigned finished goods in the event that the licensees are unable to meet their financial obligations. The directors are not aware of any circumstances that lead the Group to believe that the licensees are unable to meet their financial obligations. As at 28 February 2006, the Group did not have any consigned finished goods.

As at 29 February 2004, 28 February 2005 and 28 February 2006, included in finished goods are inventories of HK$14,422,000, HK$27,201,000 and HK$37,883,000, respectively, stated net of a general provision, made in order to state these inventories at the lower of their cost and estimated net realisable value.

12. Trade and other receivables

Included in trade and other receivables are trade debtors (net of provision for bad and doubtful debts) with the following ageing analysis:

0 to 30 days 31 to 60 days 61 to 90 days Over 90 days Total trade receivables Other receivables, deposits and prepayments	2004 HK$’000 6,459 5,510 7,701 691 20,361 8,268 28,629	Group 2005 HK$’000 26,846 769 3,453 9,841 40,909 9,770 50,679	2006 HK$’000 40,068 2,300 1,644 14,100
			58,112 6,393
			64,505

Details of trade and other receivables denominated in different currencies are as follows:

Hong Kong dollars United States dollars Renminbi	2004 HK$’000 14,650 — 13,979 28,629	Group 2005 HK$’000 10,276 4,588 35,815 50,679	2006 HK$’000 18,916 — 45,589
			64,505

The directors consider that trade and other receivables approximate to their fair value.

— 90 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

13. Due from/to immediate holding company and fellow subsidiaries

The amounts due from/to immediate holding company and fellow subsidiaries are unsecured, interest-free and there are no fixed terms for repayment.

14. Cash at bank and in hand

Details of cash at bank and in hand denominated in different currencies are as follows:

Hong Kong dollars United States dollars Renminbi	2004 HK$’000 600 — 5,631 6,231	Group 2005 HK$’000 651 86 27,684 28,421	2006 HK$’000 605 179 59,719
			60,503

15. Trade and other payables

Included in trade and other payables are trade creditors with the following ageing analysis:

0 to 30 days 31 to 60 days 61 to 90 days Over 90 days Total trade payables Other payables and accruals	2004 HK$’000 — — — — — 1,566 1,566	Group 2005 HK$’000 3,018 — — 5,128 8,146 25,583 33,729	2006 HK$’000 3,308 11 20 50
			3,389 27,952
			31,341

Details of trade and other payables denominated in different currencies are as follows:

Hong Kong dollars United States dollars Renminbi	2004 HK$’000 300 — 1,266 1,566	Group 2005 HK$’000 6,480 — 27,249 33,729	2006 HK$’000 2,827 (6,619) 35,133
			31,341

The directors consider that trade and other payables approximate to their fair value.

— 91 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

16. Share capital

Authorised: 9,770 ordinary shares of US$1 each (A shares) 40,230 ordinary shares of US$1 each (B shares) Issued and fully paid: 1,341 ordinary shares of US$1 each (A shares) 5,522 ordinary shares of US$1 each (B shares)	2004 HK$’000 76 314 390 11 43 54	2005 HK$’000 76 314 390 11 43 54	2006 HK$’000 76 314
			390
			11 43
			54

By a special resolution passed on 27 August 2002, the Company’s authorised share capital was reclassified into A shares and B shares of US$1 each. The rights attaching to the shares of the relevant class with A rights and B rights will be identical, save as to the payment of dividends in the following circumstances:

• (i) Before the bank loans of Tse Sui Luen Jewellery (International) Limited and its subsidiaries (‘‘the TSL Group’’) under an agreement dated 3 August 2000 (‘‘the Bank Loans’’) are fully repaid or refinanced (whichever happens earlier):

• . no dividend will be declared and paid and no other distribution, whether in specie or otherwise, will be made in respect of the B shares; and

• . the holder of A shares will be entitled to receive a dividend subject to available cash in respect of each of such shares held by it, 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 board by approval of not less than three-quarters of the directors to be retained by the Company) divided by the total number of shares in issue as at the last business day of each year.

• (ii) After the Bank Loans are repaid in full or after such Bank Loans are refinanced (whichever occurs earlier):

• . no dividend shall be declared and paid and no other distribution, whether in specie or otherwise, shall be made in respect of the A shares except to the extent such dividend relates to the period prior to the date on which the Bank Loans have been repaid in full or have been refinanced; and

• . the holder of 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 B shares had the Company distributed the full amount of its distributable profits (less any reserves agreed by the board to be retained by the Company) during the period between 31 August 2002 to the date when the Bank Loans are repaid in full or refinanced (whichever occurs earlier). The two classes of shares will rank pari passu in dividend entitlements thereafter.

17. Share options

The immediate holding company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Company’s operations. 875,000 options were granted in 2005 to the directors, employees and service providers of the Company and its subsidiaries pursuant to the 2003 Share Option Scheme. 20% options granted are exercisable from 22 August, 2005. The next 40% options granted are exercisable from 18 months from the date of grant and the remaining 40% options granted are exercisable from 24 months from the date of grant.

— 92 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

The fair value of options granted, was determined by using the Binomial valuation model. The significant inputs into the model were share price of $1.71 at the grant date, exercise price of $1.76, expected volatility of the intermediate holding company’s share price: 60% p.a., expected life of options of 4 years, expected nil dividend, annual risk-free interest rate of 3.38%p.a., rate of leaving service of 15% p.a. and assume option holders will exercise their options when the share price is at least 180% of the exercise price. The fair value of options granted are as follows:

Exercise period	Fair value per option	No. of vested options granted
22 August 2005–25 July 2009	$0.56	175,000
22 January 2007–25 July 2009	$0.69	350,000
25 July 2007–25 July 2009	$0.73	350,000

Given the above assumptions and the inherent limitations of the Binomial valuation model, shareholders and other investors are hereby warned of the subjectivity and uncertainty of the aforementioned values of the options.

18. Commitments

• (a) Capital commitments

Contracted but not accounted for (b) Lease commitments	2004 HK$’000 —	Group 2005 HK$’000 667	2006 HK$’000 3,017

At 29 February 2004, 28 February 2005 and 28 February 2006, the outstanding commitments under noncancellable operating leases in respect of land and buildings were respectively as follows:

Leases which expire: Within one year In the second and fifth years inclusive	2004 HK$’000 333 — 333	Group 2005 HK$’000 2,867 7,698 10,565	2006 HK$’000 4,263 6,597
			10,860

The Group leases a number of properties under operating leases. The leases typically run for an initial period of one to three years, with an option to renew the lease when all terms are renegotiated. Lease payments are usually adjusted to reflect market rentals upon renegotiated of the terms of the lease.

19. Pledge of assets

As at 29 February 2004, 28 February 2005 and 28 February 2006, the Group has pledged the capital contribution to a subsidiary of the Group amounting to US$235,000, US$235,000 and US$235,000, respectively, and all the benefits accruing to the pledged equity interest of 11.625%, 11.625% and 11.625%, respectively, of the subsidiary to the TSL Group’s bankers and financial creditors as security for, inter alia, all obligations and liabilities, actual or contingent from time to time owing by the TSL Group to the bankers and financial creditors.

— 93 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

20. Contingent liabilities

At 29 February 2004, 28 February 2005 and 28 February 2006, there were contingent liabilities in respect of the following:

Guarantees given to banks by the company in respect of banking facilities extended to the TSL Group with maximum liability amounting to HK$278,427,000, HK$125,371,000 and HK$180,096,000, respectively.

Guarantees given to Tse Sui Luen Jewellery Company Limited (‘‘TSLJ’’), an immediate holding company, by the Company in respect of outstanding balance, obligations and liabilities owing by Infinite Assets Corp. (‘‘IAC’’), a fellow subsidiary, to TSLJ. At 29 February 2004, 28 February 205 and 28 February 2006, the outstanding balance owing by IAC to TSLJ amounted to HK$120,409,000, HK$115,129,000 and HK$123,241,000, respectively.

21. Related party transactions

(a) Transactions with related companies during the years ended 29 February 2004, 28 February 2005 and 28 February 2006 not disclosed elsewhere in the financial statements are summarised as follows:

Handling fee paid to immediate holding company Royalty and management fee paid to immediate holding company Rental expenses paid to immediate holding company Purchase of goods from immediate holding company Sales of goods to immediate holding company Repairing fee paid to immediate holding company Interest income received from immediate holding company Sales of goods to a fellow subsidiary Purchase of goods from fellow subsidiaries Sub-contracting fee paid to a fellow subsidiary Consultancy fee paid to a fellow subsidiary Net sales of goods to companies under common control (Note 1)	2004 HK$’000 207 2,789 — 104,272 — — — — — — 183 128,038	Group 2005 HK$’000 — 5,731 136 110,079 — 313 — — — — 416 138,044	2006 HK$’000 — 8,733 146 113,928 7,900 1,061 383 98 16,755 2,185 569 7,392

Note 1: During the years ended 29 February 2004, 28 February 2005 and 28 February 2006, the Group sold finished goods to Hua Long Rui Lin Economic and Trading Company Limited (‘‘Hua Long’’) amounting to HK$120,450,000, HK$122,290,000 and HK$4,504,000, respectively; and sold finished goods to Mr. Qi Jian Hong (‘‘Mr. Qi’’) amounting to nil, nil and HK$2,888,000, respectively; and sold finished goods to Beijing Rui Feng Da Lin Jewellery Co., Ltd (‘‘Rui Feng’’) amounting to HK$7,588,000, HK$15,754,000 and nil, respectively. As at 29 February 2004, 28 February 2005 and 28 February 2006, the amount due from Hua Long was HK$13,082,000, HK$15,776,000 and HK$11,571,000, respectively; and the amount due from Mr. Qi was nil, nil and HK$2,888,000, respectively; and the amount due from Rui Feng was nil, HK$17,000 and nil, respectively.

Hua Long and Rui Feng are companies controlled by Mr. Qi who is a substantial shareholder and a director of the Group.

— 94 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

• Note 2: During the years ended 29 February 2004, 28 February 2005 and 28 February 2006, Excellent Ford Development Limited, a subsidiary of the Company, sold raw materials to Beijing Tse Sui Luen Jewellery Company Limited, a subsidiary of the Company, through Rosy Blue (Shanghai) Diamond Co., Ltd. (‘‘Rosy Blue SH’’), an authorised diamond trading company in the PRC, amounting to HK$4,859,000, HK$70,618,000 and HK$51,976,000, respectively. As at 29 February 2004, 28 February 2005 and 28 February 2006, the amount due from Rosy Blue SH was nil, HK$4,588,000 and HK$665,000, respectively.

Rosy Blue SH is a fellow subsidiary of Prime Investment S.A., a preference shareholder of Partner Logistics Limited, the intermediate holding company.

The above transactions were made at prices and terms as agreed between the parties in the normal course of business.

• (b) Remuneration for key management personnel, including amounts paid to the Company’s directors as disclosed in note 5, is as follows:

Short-term employee benefits Post-employment benefits	2004 HK$’000 — — —	Group 2005 HK$’000 — — —	2006 HK$’000 — —
			—

1. Subsidiaries

Details of the principal subsidiaries of the Group are as follows:

					Place of	Proportion of
					incorporation/	ownership
Name	of company				establishment	interest	Principal activities
Excellent Ford Development Limited					Hong Kong	100%	Jewellery trading
Beijing Tse Sui Luen Jewellery					PRC	*90%	Jewellery manufacturing
Company Limited#							and trading
(				)
Beijing Qi Li Yun			Jewellery Company		PRC	*100%	Jewellery retailing
Limited
(				)
Guangzhou Xiang Yun				Jewellery	PRC	*100%	Jewellery trading and
Company Limited#							retailing
(			)
Guangzhou Hong Yun				Jewellery	PRC	*100%	Jewellery retailing
Company Limited
(			)
Guangzhou Xi Yun Jewellery Company					PRC	*100%	Jewellery retailing
Limited#
(			)
Shanghai Fu Yun Jewellery Company					PRC	*100%	Jewellery retailing
Limited#
(			)

— 95 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

• Interest indirectly held by the Company.

• Unofficial translation

23. Financial instruments

• (a) Financial risk management

The Group is exposed to a variety of risks including foreign currency risk, credit risk, liquidity risk and cash flow interest rate risk arising in the normal course of the Group’s business activities.

The Group does not have any written risk management policies and guidelines. The directors monitor the financial risk management of the Group and take such measures as considered necessary from time to time to minimise such financial risks.

(i) Foreign currency risk

Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

The Group is exposed to foreign currency risk primarily through sales and purchases that are denominated in a currency other than the functional currency of the operations to which they relate. The currencies giving rise to this risk are primarily United States dollars and Chinese Renminbi. The Group does not hold or issue any derivative financial instruments for trading purposes or to hedge against fluctuations in foreign exchange rates. The Group mitigates this risk by conducting the sales and purchases transactions in the same currency, whenever possible.

(ii) Credit risk

Credit risk arises from the possibility that customers may not be able to settle obligations within the normal terms of transactions. The Group performs ongoing credit evaluation of the debtors’ financial condition and maintains an account for allowance for doubtful trade and other accounts receivable based upon the expected collectibles of all trade and other accounts receivable.

At the balance sheet date, there were no major concentrations of credit risk.

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

Cash is held with financial institutions of good standing.

(iii) Liquidity risk

Liquidity risk is the risk that an enterprise will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value.

Prudent liquidity risk management implies maintaining sufficient cash. The Group monitors and maintains a level of bank balances deemed adequate to finance the Group’s operations.

(iv) Cash flow and fair value interest rate risk

Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates.

As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates.

— 96 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

• (b) Estimation of fair values

The notional amounts of financial assets and liabilities with a maturity of less than one year (including trade and other receivables, cash at bank and in hand, trade and other payables) are assumed to approximate their fair values. The fair value of finance lease liabilities is estimated as the present value of future cash flows, discounted at current market interest rates for similar financial instruments.

The fair value of non-trade balances due from/to group and related companies has not been determined as the timing of the expected cash flows of these balances cannot be reasonably determined because of the relationship.

24. Recent accounting and financial reporting pronouncements

The HKICPA has issued the following amendments, new standards and interpretations which may be/are relevant to the preparation of the Group’s financial statements after 28 February 2006:

		Effective for
		accounting periods
		beginning on or after
HKAS 1 (Amendment)	Presentation of Financial Statements: Capital	1 January 2007
	Disclosures
HKAS 19 (Amendment)	Employee Benefits — Actuarial Gains and Losses,	1 January 2006
	Group Plans and Disclosures
HKAS 21 (Amendment)	The Effects of Changes in Foreign Exchange Rate	1 January 2006
HKAS 39 (Amendment)	Financial Instruments: Recognition and Measurement	1 January 2006
HKFRS 1 (Amendment)	First-time Adoption of Hong Kong Financial Reporting	1 January 2006
	Standards
HKFRS 6	Exploration for and Evaluation of Mineral Resources	1 January 2006
HKFRS 7	Financial Instruments: Disclosures	1 January 2007
HKFRS-Int 4	Determining whether an Arrangement contains a Lease	1 January 2006
HKFRS-Int 5	Rights to Interests arising from Decommissioning,	1 January 2006
	Restoration and Environmental Rehabilitation Funds
HK(IFRIC)-Int 6	Liabilities arising from Participating in a Specific	1 December 2005
	Market — Waste Electrical and Electronic Equipment
HK(IFRIC)-Int 7	Applying the Restatement Approach under HKAS 29	1 March 2006
	Financial Reporting in Hyperinflationary Economics
HK(IFRIC)-Int 8	Scope of HKFRS 2	1 May 2006
HK(IFRIC)-Int 9	Reassessment of Embedded Derivatives	1 June 2006

In addition, the Hong Kong Companies (Amendment) Ordinance 2005 came into effect on 1 December 2005 and will be first applicable to the Group’s financial statements for the year beginning 1 March 2006.

The Group is in the process of making an assessment of what the impact of these amendments, new standards and interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of these amendments, new standards and interpretations is unlikely to have a significant impact on the Group’s results of operations and financial position.

25. Parent and ultimate holding company

The company is a partially-owned subsidiary of Tse Sui Luen Jewellery Company Limited, which is incorporated in Hong Kong.

At 28 February 2006, the directors consider the ultimate holding company to be Blink Technology Limited, which is incorporated in the British Virgin Islands, and the ultimate controlling party to be Mr. Tse Tat Fung, Tommy.

— 97 —

ACCOUNTANTS’ REPORT ON TSL CHINA

APPENDIX II

VI. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Group in respect of any period subsequent to 28 February 2006.

Yours faithfully,

Moore Stephens

Certified Public Accountants Hong Kong

— 98 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

A. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ON THE ENLARGED GROUP

The accompanying unaudited pro forma consolidated balance sheet of the Enlarged Group has been prepared to illustrate the effects of the acquisition of a minimum of additional 17.8% and a maximum of additional 24% interest in the issued share capital of Tse Sui Luen Investment (China) Limited (the ‘‘Share Acquisition’’), assuming the transaction had been completed as at 28 February 2006, might have affected the financial position of the Enlarged Group.

The unaudited pro forma consolidated balance sheet is prepared based on the audited consolidated balance sheet of the Group as at 28 February 2006 as set out in Appendix I to this circular after making certain pro forma adjustments resulting from the Share Acquisition.

The unaudited pro forma consolidated balance sheet is prepared based on a number of assumptions, estimates, uncertainties and currently available information, and is provided for illustrative purposes only. Accordingly, as a result of the nature of the unaudited pro forma consolidated balance sheet, it may not give a true picture of the actual financial position of the Enlarged Group that would have been attained had the Share Acquisition actually occurred on 28 February 2006. Furthermore, the unaudited pro forma consolidated balance sheet does not purport to predict the Enlarged Group’s future financial position.

• A1. The following illustrates the effect of the acquisition of a minimum of additional 17.8% interest in the issued share capital of TSL China.

Non-current assets Property, plant and equipment Other financial asset Club debenture Deferred tax assets Current assets Investments in securities Inventories Trade and other receivables Current tax recoverable Cash at bank and in hand	The Group — as at 28 February 2006 (audited) Pro forma adjustment Pro forma adjustment HK$’000 HK$’000 HK$’000 (Note 1) (Note 2) 117,691 500 103 20,834 139,128 1 500,723 109,680 1,020 101,249 (12,168) 12,168 712,673	Unaudited pro forma consolidated balance sheet of the Enlarged Group HK$’000 117,691 500 103 20,834
		139,128
		1 500,723 109,680 1,020 101,249
		712,673

— 99 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

Current liabilities Trade and other payables Bank overdrafts — secured Bank loans — secured Other loans — secured Obligations under finance leases Current tax payable Net current assets Total assets less current liabilities Non-current liabilities Bank loans — secured Other loans — secured Obligations under finance leases Employee benefit obligations Deferred tax liabilities Net assets Capital and reserves Shares capital Reserves Total equity attributable to equity holders of the company Minority interests Total equity	The Group — as at 28 February 2006 (audited) Pro forma adjustment Pro forma adjustment HK$’000 HK$’000 HK$’000 (Note 1) (Note 2) 355,019 18,550 4,000 14,500 12,168 660 91,876 484,605 228,068 367,196 53,000 57,867 614 8,759 46 120,286 246,910 51,766 155,186 2,672 206,952 39,958 (14,840) 246,910	Unaudited pro forma consolidated balance sheet of the Enlarged Group HK$’000 355,019 18,550 4,000 26,668 660 91,876
		496,773
		215,900
		355,028
		53,000 57,867 614 8,759 46
		120,286
		234,742
		51,766 157,858
		209,624 25,118
		234,742

— 100 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

Notes:

1. The decrease in cash at bank and in hand represents the payment of consideration of US$1,560,000 (i.e. US$1,560,000 x 7.8 = HK$12,168,000) for the Share Acquisition of a minimum of 17.8% interest of TSL China from The China Retail Fund, LDC.

The decrease of HK$14,840,000 in minority interests reflects reduction of 17.8% minority interest’s share of the total equity attributable to equity holders of TSL China as at 28 February 2006 (i.e. HK$83,372,000 x 17.8%) following the Share Acquisition.

Adjustment to reserves of HK$2,672,000 represents the negative goodwill which is determined by comparing the consideration amounting to HK$12,168,000 and the net asset value of 17.8% of the TSL China Group as at 28 February 2006 amounting to HK$14,840,000.

1. The adjustment reflects the external loan borrowings to finance the Share Acquisition.

— 101 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

• A2. The following illustrates the effect of the acquisition of a maximum of additional 24% interest in the issued share capital of TSL China.

Non-current assets Property, plant and equipment Other financial asset Club debenture Deferred tax assets Current assets Investments in securities Inventories Trade and other receivables Current tax recoverable Cash at bank and in hand Current liabilities Trade and other payables Bank overdrafts — secured Bank loans — secured Other loans — secured Obligations under finance leases Current tax payable Net current assets Total assets less current liabilities Non-current liabilities Bank loans — secured Other loans — secured Obligations under finance leases	The Group — as at 28 February 2006 (audited) Pro forma adjustment Pro forma adjustment HK$’000 HK$’000 HK$’000 (Note 1) (Note 2) 117,691 500 103 20,834 139,128 1 500,723 109,680 1,020 101,249 (16,380) 16,380 712,673 355,019 18,550 4,000 14,500 16,380 660 91,876 484,605 228,068 367,196 53,000 57,867 614	Unaudited pro forma consolidated balance sheet of the Enlarged Group HK$’000 117,691 500 103 20,834
		139,128
		1 500,723 109,680 1,020 101,249
		712,673
		355,019 18,550 4,000 30,880 660 91,876
		500,985
		211,688
		350,816
		53,000 57,867 614

— 102 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

Employee benefit obligations Deferred tax liabilities Net assets Capital and reserves Shares capital Reserves Total equity attributable to equity holders of the company Minority interests Total equity	The Group — as at 28 February 2006 (audited) Pro forma adjustment Pro forma adjustment HK$’000 HK$’000 HK$’000 (Note 1) (Note 2) 8,759 46 120,286 246,910 51,766 155,186 3,629 206,952 39,958 (20,009) 246,910	Unaudited pro forma consolidated balance sheet of the Enlarged Group HK$’000 8,759 46
		120,286
		230,530
		51,766 158,815
		210,581 19,949
		230,530

Notes:

1. The decrease in cash at bank and in hand represents the payment of consideration of US$2,100,000 (i.e. US$2,100,000 x 7.8 = HK$16,380,000) for the Share Acquisition of a maximum of 24% interest of TSL China from The China Retail Fund, LDC.

The decrease of HK$20,009,000 in minority interests reflects reduction of 24% minority interest’s share of the total equity attributable to equity holders of TSL China as at 28 February 2006 (i.e. HK$83,372,000 x 24%) following the Share Acquisition.

Adjustment to reserves of HK$3,629,000 represents the negative goodwill which is determined by comparing the consideration amounting to HK$16,380,000 and the net asset value of 24% of the TSL China Group as at 28 February 2006 amounting to HK$20,009,000.

1. The adjustment reflects the external loan borrowings to finance the Share Acquisition.

— 103 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

B. ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following is the test of a report, prepared for inclusion in this circular, from the reporting accountants of the Company, Moore Stephens, Certified Public Accountants, Hong Kong.

==> picture [138 x 26] intentionally omitted <==

==> picture [138 x 95] intentionally omitted <==

7 August 2006

The Directors

Tse Sui Luen Jewellery (International) Limited Tse Sui Luen Investment (China) Limited

Dear Sirs,

We report on the unaudited pro forma financial information of Tse Sui Luen Jewellery (International) Limited (the ‘‘Company’’) and its subsidiaries (hereinafter collectively referred to as the ‘‘Group’’), which has been prepared by the directors for illustrative purposes only, to provide information about how the proposed acquisition of a minimum of additional 17.8% and a maximum of additional 24% interest in the issued share capital of Tse Sui Luen Investment (China) Limited (the ‘‘Share Acquisition’’) might have affected the financial information presented, for inclusion as Appendix III to the Circular of the Company dated 7 August 2006 (the ‘‘Circular’’). The basis of preparation of the pro forma financial information is set out on pages 99 to 103 to the Circular.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ‘‘Listing Rules’’) and with reference to AG 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’).

It is our responsibility to form an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

— 104 —

UNAUDITED PRO FORMA FINANCIAL INFORMATION ON THE ENLARGED GROUP

APPENDIX III

Basis of opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements (HKSIR) 300 ‘‘Accountants’ Reports On Pro Forma Financial Information in Investment Circulars’’ issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the pro forma financial information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the pro forma financial information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purpose of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

The unaudited pro forma financial information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of:

• . the financial position of the Enlarged Group as at 28 February 2006 or any future date; or

• . the results of the Enlarged Group for the year ended 28 February 2006 or any future periods.

Opinion

In our opinion:

• a. the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated;

• b. such basis is consistent with the accounting policies of the Group; and

• c. the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29 (1) of the Listing Rules.

Yours faithfully,

Moore Stephens

Certified Public Accountants Hong Kong

— 105 —

GENERAL INFORMATION

APPENDIX IV

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Share Acquisition. 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 in this circular misleading.

2. DISCLOSURE OF INTERESTS

Directors’ and Chief Executive’s Interests and Short Positions in Shares, Underlying Shares and Debentures of the Company

At as the Latest Practicable Date, the interests and short positions of the Directors and chief executive and/or their respective associates of the Company in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the ‘‘SFO’’)), which were required to be notified to the Company and The Stock Exchange of Hong Kong Limited (the ‘‘Stock Exchange) pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO), or which were required to be entered in the register maintained by the Company pursuant to section 352 of the SFO, or which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies (the ‘‘Model Code’’), were as follows:

(i) Interests and short positions in issued shares of the Company

			Ordinary shares of HK$0.25 each	Ordinary shares of HK$0.25 each	Ordinary shares of HK$0.25 each
				Derivative			% of
				interest			total
	Personal	Family	Corporate	(share	Short	Other	Issued
Name of director	Interest	Interest	Interest	option)	position	Interest	shares
Tse Tat Fung, Tommy	—	—	152,960,914	2,000,000	—	—	73.87%
			(note 1)
				100,000
				(note 2)
Peter Gerardus Van	2,252,000	—	—	2,000,000	—	—	1.09%
Weerdenburg
Erwin Steve Huang	—	—	—	100,000	—	—	—
Alex Chan	—	—	—	200,000	—	—	—
Cheung Tse Kin,	—	—	—	75,000	—	—	—
Michael
Yau On Yee, Annie	—	—	152,960,914	100,000	—	—	73.87%
			(note 3)
				2,000,000
				(note 4)

— 106 —

GENERAL INFORMATION

APPENDIX IV

Notes:

1. These ordinary shares were held by Partner Logistics Limited, a company which is owned and controlled by Blink Technology Limited. Blink Technology Limited is wholly and beneficially owned by Mr. Tse Tat Fung, Tommy. By virtue of the SFO, Mr. Tse Tat Fung, Tommy is deemed to be interested in all the shares held by Partner Logistics Limited.

2. These 100,000 share options were granted to Ms. Yau On Yee, Annie, the spouse of Mr. Tse Tat Fung, Tommy. By virtue of the SFO, Mr. Tse Tat Fung is deemed to be interested in these share options.

3. These ordinary shares were held by Partner Logistics, a company which is owned and controlled by Blink Technology Limited, Blink Technology is wholly and beneficially owned by Mr. Tse Tat Fung, Tommy, the spouse of Ms. Yan On Yee, Annie. By virtue of SFO, Ms. Yau On Yee, Annie is deemed to be interested in all the shares held by Partner Logistics Limited.

4. These 2,000,000 share options were granted to Mr. Tse Tat Fung, Tommy, the spouse of Ms. Yau On Yee, Annie. By virtue of the SFO, Ms. Yau On Yee, Annie is deemed to be interested in these share options.

(ii) Interests in underlying shares

As at the Latest Practicable Date, the Directors had interests in option to subscribe for shares of the Company as follows:

					Number of
					share options
					held as at the
					Latest
		Date of	Exercise	Exercisable	Practicable
Name of director	Date of grant	acceptance	price	period	Date
Tse Tat Fung, Tommy	25 July, 2005	28 July, 2005	HK$1.76	22 August, 2005	2,000,000
			(note 1)	to 25 July,
				2009
				(note 2)
Peter Gerardus Van	25 July, 2005	28 July, 2005	HK$1.76	22 August, 2005	2,000,000
Weerdenburg			(note 1)	to 25 July,
				2009
				(note 2)
Erwin Steve Huang	25 July, 2005	1 August,	HK$1.76	22 August, 2005	100,000
		2005	(note 1)	to 25 July,
				2009
				(note 2)
Alex Chan	25 July, 2005	1 August,	HK$1.76	22 August, 2005	200,000
		2005	(note 1)	to 25 July,
				2009
				(note 2)
Cheung Tse Kin, Michael	25 July, 2005	28 July, 2005	HK$1.76	22 August, 2005	75,000
			(note 1)	to 25 July,
				2009
				(note 2)
Yau On Yee, Annie	25 July, 2005	28 July, 2005	HK$1.76	22 August, 2005	100,000
			(note 1)	to 25 July,
				2009
				(note 2)

— 107 —

GENERAL INFORMATION

APPENDIX IV

Notes:

1. The closing price of the Company’s shares traded on the Hong Kong Stock Exchange on 25 July, 2005 was HK$1.71, being the date on which the relevant options were offered for grant.

2. For one of the conditions of grant, the grantee concerned agreed with the Company that (i) 20% of the options granted can be exercised during the period from 22 August, 2005 to 25 July, 2009; (ii) the next 40% of the options granted can be exercised during the period from 25 January, 2007 to 25 July, 2009; and (iii) the remaining 40% of the options granted can be exercised during the period from 25 July, 2007 to 25 July, 2009.

Other than as disclosed above and certain nominee shares in subsidiaries held by the Directors in trust for the Company or its subsidiaries, none of the Directors, chief executive and their respective associates, had any other interests or short positions in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were required notification to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which any such director or chief executive is taken or deemed to have taken under such provisions of the SFO); or which were required pursuant to section 352 of the SFO to be entered into the register maintained by the Company; or which were required, pursuant to the Model Code contained in the Listing Rules, to be notified to the Company or the Stock Exchange.

Substantial Shareholders’ and Other Person’s Interests and Short Positions in Shares and underlying Shares of the Company

So far as is known to the Directors, as at the Latest Practicable Date, the interests and short positions of any substantial shareholders (not being Directors or chief executive of the Company) in the shares or underlying shares of the Company which have been disclosed to the Company pursuant to the provisions of Divisions 2 and 3 of Part XV of the SFO and have been recorded in the register required to be kept by the Company pursuant to section 336 of the SFO were as follows:

			Ordinary shares	Ordinary shares	of HK$0.25	each
			% of total		% of total		% of total
			Issued		Issued		Issued
		Direct	share	Short	share	Other	share
Name	Capacity	Interest	capital	position	capital	Interest	capital
Partner Logistics	Beneficial	152,960,914	73.87%	—	—	—	—
Limited (note 1)	owner
Blink Technology	Deemed	—	—	—	—	152,960,914	73.87%
Limited (note 1)	interest
Prime Investments	Deemed	—	—	—	—	152,960,914	73.87%
S.A. (note 2)	interest
Rosy Blue	Deemed	—	—	—	—	152,960,914	73.87%
Investments	interest
S.a`.R.L. (note 2)
Harshad Ramniklal	Deemed	—	—	—	—	152,960,914	73.87%
Mehta (note 2)	interest

— 108 —

GENERAL INFORMATION

APPENDIX IV

Notes:

1. These ordinary shares were held by Partner Logistics Limited, a company which is owned and controlled by Blink Technology Limited. Blink Technology Limited is wholly and beneficially owned by Mr. Tse Tat Fung, Tommy. Ms. Yau On Yee is the spouse of Mr. Tse Tat Fung, Tommy. By virtue of the SFO, Blink Technology Limited, Mr. Tse Tat Fung, Tommy and Ms. Yau On Yee, Annie are deemed to be interested in all the shares held by Partner Logistics Limited.

2. These ordinary shares were held by Partner Logistics Limited, a company which is owned and controlled by Blink Technology Limited. Prime Investments S.A. is the preference shareholder of Partner Logistics Limited. Prime Investments S.A. is owned as to 99.83% by Rosy Blue Investments S.a.R.L., which in turn is owned as to 75% by Mr. Harshad Ramniklal Mehta. By virtue of the SFO, each of Prime Investments S.A., Rosy Blue Investments S.a.R.L. and Mr. Harshad Ramniklal Mehta, is deemed to be interested in all the shares held by Partner Logistics Limited.

Other than as disclosed above, the Company had not been notified of any persons who had interests or short positions in the shares and/or underlying shares of the Company, which were required to be recorded in the register required to be kept by the Company pursuant to section 336 of Part XV of the SFO.

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. DIRECTORS’ INTERESTS IN COMPETING BUSINESS

Save as disclosed in note 29 of appendix I to this circular, none of the Directors is materially interested in any contract or arrangement subsisting at the date hereof which is significant in relation to the business of the Group taken as a whole.

5. DIRECTORS’ INTERESTS IN ASSETS

Save as disclosed in note 29 of appendix I to this circular, none of the Directors has any direct or indirect interest in any assets which they have, since 28 February, 2006, the date to which the latest published audited consolidated financial statement of the Company were made up, acquired, disposed of by or leased to, any members of the Group, or are proposed to be acquired, disposed of by, or leased to, any member of the Group.

— 109 —

GENERAL INFORMATION

APPENDIX IV

6. EXPERT’S QUALIFICATION, CONSENT AND INTERESTS

The following are the qualifications of the expert(s) (the ‘‘Experts’’) who have given their advice for the inclusion in this circular:

			Nature of opinion
Name		Qualifications	or advice	Date of opinion
Quam	Capital Limited	Deemed licensed	Letter to the	7 August, 2006
		corporation to	Independent
		carry out types 4,	Board Committee
		6 and 9 regulated	and the
		activities under	shareholders of
		the SFO	the Company
Moore	Stephens	Certified public	Accountants’	7 August, 2006
		accountants	Report

The Experts have given and have not withdrawn their respective written consent to the issue of this circular with the inclusion of their respective letter of advice and the references to their names in the form and context in which they respectively appears.

As at the Latest Practicable Date, each of the Experts 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.

7. LITIGATION

Neither the Company nor any of its subsidiaries is engaged in any litigations or arbitration of material importance and no litigations or claim of material importance is known to the Directors to be pending or threatened against the Company or any of its subsidiaries.

8. MATERIAL CHANGES

The Directors have confirmed that there have been no material adverse changes to the financial or trading position of the Group since 28 February, 2006, being the date to which the latest published audited consolidated financial statements of the Group were made up.

9. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in ordinary course of business of the Group) have been entered into the Group within two years immediately preceding the Latest Practicable Date and are or may be material:

• (a) the subscription agreement dated 27 September, 2004 entered into between the Company, Partner Logistics Limited, Tse Sui Luen Jewellery Company Limited, Winter Pine Co. Limited setting out the terms of the Debt Conversion (as defined in the circular issued by

— 110 —

GENERAL INFORMATION

APPENDIX IV

the Company on 29 November, 2004) as supplemented and amended by a supplemental agreement dated 26 October, 2004 between the parties extending the completion of the Debt Conversion;

• (b) the Revised Debt Restructuring Agreement dated 27 September, 2004 entered into between the TSL Obligors (as defined in the circular issued by the Company on 29 November, 2004), Partner Logistics Limited and the Continuing Banks (as defined in the circular issued by the Company on 29 November, 2004);

• (c) the Underwriting Agreement dated 26 November, 2004 entered into between the Underwriter (as defined in the circular issued by the Company on 29 November, 2004) and the Company in relation to the underwriting of the Open Offer (as defined in the circular issued by the Company on 29 November, 2004); and

• (d) the Amendment Agreement dated 25 October, 2005 entered into between the Company and certain of its subsidiaries who were parties to the agreement, Standard Chartered Bank (Hong Kong) Limited, Bank of China (Hong Kong) Limited, ABN AMRO Bank N.V. and Partner Logistics Limited for the new money arrangement of HK$77,000,000 made available by ABN AMRO Bank N.V. to Tse Sui Luen Jewellery Company Limited.

10. MISCELLANEOUS

• (a) 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 26/F, Tesbury Centre, 28 Queen’s Road East, Hong Kong.

• (b) The secretary of the Company is Mr. Au Shiu Kee, Anthony who is an associate member of The Hong Kong Institute of Chartered Secretaries and The Institute of Chartered Secretaries and Administrators, U.K.

• (c) The qualified accountant of the Company is Mr. Lai Tsz Mo, Lawrence who is a fellow member of the Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants, U.K.

• (d) The English texts of this circular shall prevail over the Chinese texts.

11. 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 21 August, 2006:

• (a) the memorandum of association and Bye-Laws of the Company;

• (b) the letter of advice from Quam Capital Limited dated 7 August, 2006, the text of which is set out on pages 14 to 19 of this circular;

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GENERAL INFORMATION

APPENDIX IV

• (c) the letter for the Independent Board Committee, the text of which is set out on page 13 to this circular;

• (d) the consolidated audited financial statements of the Group for the two years ended 28 February, 2006;

• (e) the material contracts as referred to in paragraph headed ‘‘Material Contracts’’ in this appendix;

• (f) the accountants’ report on TSL China, the text of which is set out in appendix II to this circular;

• (g) the pro forma statement of the unaudited consolidated balance sheet of the Group immediately after Completion, the text of which is set out in appendix III to this circular;

• (h) the letters from Moore Stephens in relation to the indebtedness statement and the sufficiency of working capital, of the Group;

• (i) the letter of consent from the Experts referred to in the paragraph headed ‘‘Expert’s Qualification, Consent and Interest’’ in this appendix;

• (j) the letter dated 26 May, 2006 from TSL China, as an agent, offering the Sale Shares to shareholders of TSL China;

• (k) the forms dated 17 July, 2006 from TSLJ and Liberty Mark respectively to TSL China accepting the offer to buy all the Sale Shares.

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