AUTO ENTERPRISES LIMITED ABN 28 001 894 033

INFORMATION MEMORANDUM -NOTICE OF GENERAL MEETING, EXPLANATORY STATEMENT, INDEPENDENT EXPERT'S REPORT AND PROXY FORM

This Information Memorandum is an important document and requires your immediate attention. Please read it carefully. If you are in doubt as to what you should do, please consult your investment or other professional adviser.

For a General Meeting to be held on 15 October 2004 at 12.30pm (EST) at BDO Chartered Accountants, Level 19, Allianz Building, 2 Market Street, Sydney, New South Wales

INFORMATION MEMORANDUM CONTENTS PAGE

PAGE

Letter to Shareholders
Notice of General Meeting (setting out the proposed resolutions)
Explanatory Statement (explaining the proposed resolutions)	9
Glossary	25.
Independent Expert's Report	28.

Proxy Form

IMPORTANT INFORMATION

Role of ASX

A copy of this Memorandum has been lodged with ASX and the ASIC. Neither ASX, the ASIC nor any of their officers takes any responsibility for the contents of this Memorandum.

Future Statements

Certain statements in this Memorandum relate to the future. Those statements involve known and unknown risks, uncertainties, assumptions and other important factors, both specific to the Company and BrainyToys.com Pty Ltd and relating to the general business environment. Actual performance, results or events may be materially different to those expressed or implied in those statements. Such risks, uncertainties, assumptions and other important factors include, among other things, general economic conditions, investor sentiment towards the toys and games sector, competitive pressures and changes in those factors. Please see Section 1.7 in the Explanatory Statement for details of some of the risk factors.

Statements in the Memorandum are made as at 15 September 2004.

Defined terms

Certain capitalised terms used in the Memorandum are defined in the Glossary at the end of the Memorandum.

Enquiries

Shareholders are invited to contact the Company on (02) 9439 9964 if they have any queries in respect of the matters set out in this Memorandum.

LETTER TO SHAREHOLDERS

Dear Shareholder

Recently the Directors of Auto Enterprises Limited (Auto Enterprises or Company) announced that the Company had reached agreement to acquire Brainytovs.com Ptv Ltd (Brainytoys), subject to various conditions and Shareholder approvals, The acquisition will involve Auto Enterprises acquiring all of the shares in Brainytoys in exchange for issuing the sole shareholder of Brainytoys with securities in Auto Enterprises (Acquisition).

Enclosed is a Notice of Meeting and Proxy Form, together with an Explanatory Statement, dealing with all the Resolutions that the Directors are asking you to consider ahead of the General Meeting of Shareholders at which those Resolutions will be put to you, scheduled to be held on 15 October 2004. The purpose of the General Meeting is to obtain the Shareholder approvals necessary to implement the Acquisition and position the Company to raise funds for the Company's new business.

Auto Enterprises (formerly Speedy Wheels Ltd) listed on the Official List of Australian Stock Exchange Limited in 1987 with its principal business activities being the operation of a retail and trade wheels business. Since the sale of the Company's Speedy Wheels business in 1999, the Directors have been actively seeking new investment opportunities.

As a result of the Acquisition, the development and commercialisation of Brainytoys' range of products will now become the Company's main focus. As this will involve a significant change in the nature and scale of the Company's activities, the Company will need to comply with ASX's requirements for re-admission to its Official List. The process will also require the Company to raise funds under a prospectus (and a seed capital raisina) to fund the Company's new business activities following the Acquisition. The readmission process will result in the Company's securities continuing to be suspended from official quotation for a further period.

I strongly recommend you carefully read the Explanatory Statement in relation to the proposed transactions involved to complete the Acquisition and the Resolutions. In particular, I refer you to the report prepared by the Independent Expert, Horwath Securities (WA) Pty Ltd, who has concluded that the Acquisition is fair and reasonable to the non-associated shareholders in the Company.

The Board of Auto Enterprises unanimously recommends that Shareholders vote in favour of each and every Resolution set out in this Notice.

Yours sincerely

Bruce Gibson Chairman

TIME AND PLACE OF MEETING AND HOW TO VOTE

Venue

A general meeting of the shareholders of Auto Enterprises Limited will be held at:

BDO Chartered Accountants Level 19, Allianz Building 2 Market Street Sydney, NSW 2000

Commencina 12.30pm (EST) on 15 October 2004

How to Vote

The business of the meeting affects your shareholding and your vote is important. Please take action by voting in person (or authorised representative) or by proxy.

Voting in Person

To vote in person, attend the meeting on the date and at the place set out above. The meeting will commence at 12.30pm (EST).

Voling by Proxy

To vote by proxy, please complete and sign the proxy form enclosed with this Memorandum as soon as possible and either:

send the proxy form by facsimile to the Company on facsimile number (02) 9439 9963 (International: +61 2 9439 9963); or
deliver or post the proxy form to the Company's registered office at Stirling Warton $\blacksquare$ Williams Chartered Accountants, Level 11 St James Centre, 111 Elizabeth Street, SYDNEY NSW 2000.

so that it is received not later than 12.30pm (EST) on 13 October 2004. Proxy forms received later than this time will be invalid.

Your proxy form is enclosed.

AUTO ENTERPRISES LIMITED ABN 28 001 894 033

NOTICE OF GENERAL MEETING

Notice is given that the General Meeting of shareholders of Auto Enterprises Limited (Auto Enterprises or Company) will be held at BDO Chartered Accountants, Level 19, Allianz Building, 2 Market Street, Sydney, New South Wales at 12.30pm (EST) on 15 October 2004.

AGENDA

BUSINESS

The Explanatory Statement which accompanies and forms part of this Notice describes the matters to be considered as special business and terms used in this Notice have the meaning given to them in the Explanatory Statement.

SPECIAL BUSINESS

Resolution 1 - Change of Activities

To consider and, if thought fit, to pass, with or without amendment, the following resolution as an ordinary resolution:

"That, subject to the passing of Resolutions 2 to 7 (inclusive), for the purposes of Listing Rule 11.1 of the Listing Rules of Australian Stock Exchange Limited and for all other purposes, approval is given for the Company to make a significant change in the nature of its activities to a toys and games company and a significant change in the scale of those activities as described in the Explanatory Statement accompanying this Notice."

Short Explanation: The Listing Rules require the Company to seek Shareholder approval where it proposes to make a significant change to the nature or scale of its activities. Please refer to the Explanatory Statement for details.

Voting Exclusion: The Company will disregard any votes cast on this Resolution by a person who might obtain a benefit, except a benefit solely in the capacity of a security holder if the Resolution is passed, or any associate of those persons.

Resolution 2 - Allotment and Issue of Shares and Options in part consideration for the acquisition of Brainytoys.com Pty Ltd

To consider and, if thought fit, to pass, with or without amendment, the following resolution as an ordinary resolution:

"That, subject to the passing of Resolution 1 and Resolutions 3 to 7 (inclusive), for the purposes of Item 7 of Section 611 of the Corporations Act, Listing Rule 7.1 of the Listing Rules of Australian Stock Exchange Limited and for all other purposes, approval is given for the Company to allot and issue up to 60,953,000 fully paid ordinary shares in the capital of the Company and up to 12,500,000 options to subscribe for shares in the capital of the Company to the sole shareholder of Brainytoys.com Pty Ltd (or his nominee), as part consideration for the acquisition of all of the issued shares in Brainytoys.com Pty Ltd and otherwise on the terms and conditions set out in the Explanatory Statement accompanying this Notice."

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Short Explanation: As part of the acquisition of Brainytoys.com Pty Ltd. securities will be issued by the Company to the sole shareholder of Brainvtovs.com Pty Ltd. Accordinaly, Shareholder approval is being sought for the purposes of ASX Listing Rule 7.1 to allow this person to be issued securities in the Company. Under Listing Rule 7.1, the Company may issue up to 15% of its ordinary share capital in any 12 month rolling period without shareholder approval. By obtaining the prior approval of Shareholders for the issue of securities proposed under this Resolution, the Company retains the flexibility to make future issues of securities up to that threshold. In addition, the shareholder in Brainytoys.com Pty Ltd will together acquire a relevant interest in greater than 20% of the voting shares in the Company post completion of the Acquisition. Accordingly, shareholder approval is being sought in accordance with Item 7 of Section 611 of the Corporations Act.

Voting Exclusion: The Company will disregard any votes cast on this Resolution by a person who may participate in the proposed issue and a person who may obtain a benefit, except a benefit solely in the capacity of a security holder, if the Resolution is passed and any associates of those persons.

Expert's Report: Shareholders should carefully consider the independent expert's report prepared by Horwath Securities (WA) Pty Ltd in accordance with Item 7 of Section 611 of the Corporations Act which comments on the faimess and reasonableness of the transaction to the non-associated Shareholders in the Company.

Resolution 3 - Allotment and Issue of Shares and Options (Seed Capital Issue)

To consider and, if thought fit, to pass, with or without amendment, the following resolution as an ordinary resolution:

"That, subject to the passing of Resolutions 1 to 2 (inclusive) and Resolutions 4 to 7 (inclusive), for the purposes of Listing Rule 7.1 of the Listing Rules of Australian Stock Exchange Limited and for all other purposes, approval is given for the Company to allot and issue up to 27,782,000 fully paid ordinary shares in the capital of the Company at an issue price of \$0.03 per share and 13,891,000 free attaching options to subscribe for shares in the capital of the Company on the basis of 1 option for every 2 shares allotted and issued and otherwise on the terms and conditions set out in the Explanatory Statement accompanying this Notice."

Short Explanation: As a condition precedent to the acquisition of Brainvtoys.com Pty Ltd, securities will be issued by the Company to Eligible Investors. Accordingly, Shareholder approval is being sought for the purposes of ASX Listing Rule 7.1 to allow those parties to be issued securities in the Company. Under the Listing Rule 7.1, the Company may issue up to 15% of its ordinary share capital in any 12 month rolling period without Shareholder approval. By obtaining the prior approval of shareholders for the issue of securities proposed under this Resolution, the Company retains the flexibility to make future issues of securities up to that threshold.

Resolution 4 - Election of Mr Ian Allen

To consider and, if thought fit, to pass, with or without amendment, the following resolution as an ordinary resolution:

"That, subject to the passing of Resolutions 1 to 3 (inclusive) and Resolutions 5 to 7 (inclusive), Mr Ian Allen, being eligible and having consented to act, be elected as a director of the Company on and from the date of settlement of the Acquisition."

Short Explanation: As part of the acquisition of Brainytoys, new appointments to the Company's Board will be made. Please refer to the Explanatory Statement for details.

Resolution 5 - Election of Mr Alex Aguero

To consider and, if thought fit, to pass, with or without amendment, the following resolution as an ordinary resolution:

"That, subject to the passing of Resolutions 1 to 4 (inclusive) and Resolutions 6 to 7 (inclusive), Mr Alex Aguero, being eligible and having consented to act, be elected as a director of the Company on and from the date of settlement of the Acauisition."

Short Explanation: As part of the acquisition of Brainytoys, new appointments to the Company's Board will be made. Please refer to the Explanatory Statement for details.

Resolution 6 - Election of Mr Brett Fraser

To consider and, if thought fit, to pass, with or without amendment, the following resolution as an ordinary resolution:

"That, subject to the passing of Resolutions 1 to 5 (inclusive) and Resolution 7, Mr Brett Fraser, being eligible and having consented to act, be elected as a director of the Company on and from the date of settlement of the Acquisition."

Short Explanation: As part of the acquisition of Brainytoys, new appointments to the Company's Board will be made. Please refer to the Explanatory Statement for details.

Resolution 7 - Change of name

To consider and, if thought fit, to pass, with or without amendment, the following resolution as a special resolution:

"That, subject to the passing of Resolutions 1 to 6 (inclusive), for the purposes of Section 157(1) of the Corporations Act and for all other purposes, the name of the Company be changed to "Brainytoys Limited"."

Short Explanation: The Company proposes to change its name to more accurately reflect the merged entity.

DATED THIS 15th DAY OF SEPTEMBER 2004

BY ORDER OF THE BOARD DON WILSON COMPANY SECRETARY

NOTES:

$\mathbf{1}$ . A shareholder of the Company entitled to attend and vote is entitled to appoint not more than two proxies. Where more than one proxy is appointed, each proxy must be appointed to represent a specified proportion of the shareholder's voting rights. If the shareholder appoints two proxies and the appointment does not specify this proportion, each proxy may exercise half of the votes. A proxy need not be a shareholder of the Company.
$\overline{2}$ . Where a voting exclusion applies, the Company need not disregard a vote if it is cast by a person as a proxy for a person who is entitled to vote in accordance with the directions on the proxy form or it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides.
1. For the purposes of the Corporations Act, the Directors have set a snapshot date to determine the identity of those entitled to attend and vote at the Meeting. The snapshot date is the close of business on 13 October 2004.

EXPLANATORY STATEMENT

This Explanatory Statement and all attachments are important documents. They should be read carefully.

If you have any questions regarding the matters set out in this Explanatory Statement or the preceding Notice, please contact the Company, your stockbroker or other professional adviser.

$\mathbf{1}$ . GENERAL INFORMATION

This Explanatory Statement has been prepared for Shareholders in connection with the General Meeting of the Company to be held on 15 October 2004.

$1.1$ Overview

The Directors have been assessing alternative opportunities to generate wealth for Shareholders.

On 12 July 2004, the Company announced that it had entered into the Acquisition Agreement with Brainytoys, pursuant to which the Company agreed to acquire all of the issued shares in Brainytoys in exchange for the issue of securities in the Company to the Vendor.

Having conducted a substantial amount of research into numerous opportunities and proposals, the Directors are of the opinion that the proposed Acquisition meets the Board's criteria and represents a significant opportunity for Shareholders.

In the event all of the Resolutions are not approved by Shareholders, the Company's securities will remain suspended and the Directors will renew the search for an appropriate alternate investment.

Indicative Timetable

Set out below is an indicative timetable relating to the Acquisition. All times are times in Sydney, New South Wales (EST).

Event	Date*
Announcement of Acquisition	12 July 2004
Dispatch Notice of General Meeting seeking approval for the Acquisition	15 September 2004
Cut off for lodging proxy form for General Meeting	12.30pm 13 October 2004
Snapshot date for eligibility to vote at the General Meeting (which is the date you must own Shares)	5.00pm 13 October 2004
General Meeting to approve Acquisition and related matters	12.30pm 15 October 2004

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Despatch 2 ^nd Notice of General Meeting seeking approval for the Consolidation, Capital Raising and related matters	15 November 2004
Lodgement of Prospectus with the ASIC for Capital Raising	13 December 2004
2 ^nd General Meeting to approve Consolidation, Capital Raising and related matters	15 December 2004
Closing date of offer under Prospectus	13 January 2005
Anticipated date that the suspension of trading is lifted and the merged entity is re-listed on ASX	20 January 2005

* These dates are indicative only and are subject to change.

$1.2$ Operations of Brainytoys

$1.2.1$ Background

Brainytoys is an Australian unlisted private company, founded by its sole shareholder, Mr Alex Aguero, in 2000, involved in the development of a range of toys, games and children's education and animation products.

$1.2.2$ Description of the Brainytoys Products

Brainytoys has in excess of thirty products under development or developed. The following products are fully developed and have been test marketed:

$(a)$ FlipX, an electronic hand-held game; and
$(b)$ Chessgammon, a new board game.

In the Australian market alone there are more than 20,000 stores that can retail the type of products which Brainytoys is seeking to produce.

Brainytoys' corporate aim is to position this new company as a significant and profitable participant in the world's US\$200+ billion toy and games market, with a broad range of products covering key segments of this very large world market.

It is intended that the funds raised pursuant to the Seed Capital Issue and the Capital Raising will be utilised to:

$(a)$ secure the services of corporate and technical personnel;
establish management and technical infrastructure; $(b)$
purchase development tools; $\lfloor C \rfloor$
$(d)$ pre-manufacture development;
$(e)$ register patents;
manufacture products; $(f)$
$(q)$ market products;
$(h)$ develop distribution networks;
develop market opportunities. $\left{ \left\vert \right\vert \right}$

Brainvtovs has developed strategic manufacturing and marketing relationships relevant to this venture with the following parties:

$(a)$ A large Hong Kong based publicly listed electronic products manufacturer, which is the proposed manufacturer of FlipX and Chessgammon. This company is a contract manufacturer for Sony, Ricoh, GE (USA) and Tomy (a top four world toy company).
$(b)$ Two major distribution groups.

One group specialises in distributing to 1,200 toy and games stores, and 13,000 schools in Australia and New Zealand. The second group distributes electronic products to 3,000 retail points, consisting of major retail, chemist, electronic, and toy chains.

Brainytoys believes that many of its smaller sized products can all be marketed through a large number of new emerging retail outlets, which number approximately 20,000 in total. These are made up of post offices, chemist shops, petrol stations and newsagencies.

Brainytoys has identified a large number of highly profitable opportunities in the entertainment and educational markets, and has focused development on products for the following segments:

$(a)$ hand-held LCD electronic games;
$(b)$ die cast vehicles:
$\lfloor c \rfloor$ board games;
$(d)$ novelty/collectables/characters;
construction kits; $(e)$
$(f)$ electronic toys;
$(q)$ remote control/robotic toys;
$(h)$ educational products and toys; and
computer animation programs. $\mathbf{ii}$

Brainytoys has registered a number of Internet Web Domains, for marketing purposes, including:

$(a)$ Brainytoys.com;
$(b)$ Flipx.com;
Thelittlegreendoods.com; $|C|$
$(d)$ Cybertanks.com;
Puzzlemaniacs.com: $(e)$
$(f)$ Konektors.com:
$\alpha$ Mcflippers.com;
$(h)$ KrazyKaz.com;
$\left($ i $\right)$ Chessgammon.com;
Gravitonz.com; and fi)
Gamelites.com. $(k)$

Brainytoys believes that it combines a unique number of elements that will ensure the new company's success. These are:

innovative products; $\alpha$
$(b)$ proven management and technical skills; and
$|C|$ world class volume manufacturing relationships.

$1.3$ Summary of Terms of the Acquisition

Pursuant to the terms of an agreement (Acquisition Agreement) entered into between the Company and the sole shareholder of Brainvtoys (being Mr Alex Aguero) (Vendor) dated 28 June 2004, the Company has agreed to acquire 100% of the issued capital of Brainytoys.

The material terms of the Acquisition Agreement are set out below:

$(a)$ Stage 1 Terms

The Company has agreed to acquire 100% of the issued capital of Brainytoys from the Vendor in consideration for:

the issue to the Vendor of 35,953,000 Shares; ${1}$
a cash payment of \$25,000; and $(ii)$
$(iii)$ a royalty sum (1% of the annual sales generated by Brainytoys).

The above transactions are subject to and conditional upon the Company obtaining all necessary regulatory and Shareholder approvals required to complete the transactions, including the Acquisition and the Seed Capital Issue, contemplated by the Acquisition Agreement.

$(b)$ Stage 2 Terms

Upon the successful completion of the Stage 1 conditions precedent detailed above, the Company has agreed to undertake:

a consolidation of the Company's capital on a one (1) for five ${i}$ (5) basis (Consolidation); and

$(ii)$ a capital raising of not less than \$1,250,000 from the general public by the issue of 6,250,000 Shares at an issue price of \$0.20 per Share (post-Consolidation) pursuant to a prospectus (Capital Raising).

Upon the completion by the Company of the Consolidation and the Capital Raising, the Company has agreed to provide the following additional consideration to the Vendor:

$(iii)$ the issue to the Vendor, on a pre-Consolidation basis, of a further 25,000,000 Shares and 12,500,000 free attaching Options; and
$(iv)$ a cash payment of \$50,000.

The approval for the Consolidation and the Capital Raising will be the subject of a separate general meeting of Shareholders.

The completion by the Company of the Acquisition and the Seed Capital Issue (at the Meeting convened by this Notice), and the Consolidation and Capital Raising (at a future meeting of Shareholders) are necessary pre-requisites to making an application for the Company's securities to be re-admitted to quotation on the Official List of ASX.

$1.4$ Pro-forma statement of financial position

Set out in the Schedule is an audited statement of financial position of Auto Enterprises as at 30 June 2004, together with the pro-forma statement of financial position following completion of the Acquisition.

$1.5$ Advantages of the Acquisition

The Directors are of the view that the following non-exhaustive list of advantages may be relevant to a Shareholder's decision on how to vote on the proposed Acquisition:

$(a)$ The Seed Capital Issue of up to 27,782,000 Shares at an issue price of \$0.03 per Share to raise up to \$833,460 (as a condition precedent to the Acquisition) represents a strong endorsement by third party investors and underpins the commercial start up of the business.
$(b)$ Brainytoys has in excess of 30 products in development. The Directors note that:
${i}$ Brainytoys management is focused on harvesting the value inherent in the products;
two of the products (FlipX and Chessgammon) have been $(ii)$ developed and test marketed; and
$(iii)$ most products should be capable of being a manufactured and commercialised.
The toy and games industry has low barriers to entry but has been $|C|$ experiencing sales growth with annual turnover exceeding US\$200 billion.

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$(d)$ Mr Alex Aguero, the Vendor, is a creative toys and games product conceptualiser, who has a good understanding of the industry culture.
$(e)$ The industry can offer high returns with very high margins and is noted for case histories of product success.
Working with the benefit of the available sophisticated software and $(f)$ hardware, Brainytoys can develop (at minimal cost) product prototypes. We are informed that products in this sector do not require years of trialling and that it is a market driven process responsive to consumer aspirations invariably created by small companies like Brainytoys.
The proposed board of the Company is to comprise experienced $\alpha$ successful commercial people who will complement Alex Aguero's skill base.
$(h)$ Upon the successful completion of the Acquisition and the Seed Capital Issue (at the Meeting convened by this Notice), and the Consolidation and Capital Raising (at a future meeting of Shareholders), application will be made to ASX to lift the suspension currently imposed on the Company's securities.

$1.6$ Disadvantages of the Acquisition

The Directors are of the view that the following non-exhaustive list of disadvantages may be relevant to a Shareholder's decision on how to vote on the proposed Acquisition:

The Acquisition will result in the issue of securities to the Vendors which $(a)$ will dilute the current holdings of Shareholders.
$(b)$ The Company will be changing the nature of its activities to a toy, games and childrens product company which may not be consistent with the investment objectives of all Shareholders.
There are risk factors associated with Brainytoys's business and $|C|$ operations. Some of these are set out in Section 1.7 below.

$1.7$ Risks

Shareholders should be aware that if the proposed Acquisition is approved, the Company will be subject to various risk factors. Based on the information available, the non-exhaustive risk factors are as follows:

Share Market Risk $(a)$

The trading price of Shares (when the Shares are readmitted to trading on ASX) is likely to be volatile and subject to wide fluctuations in response to a number of factors including actual or anticipated variations in operating results, announcements by the Company or its competitors of significant actions, partnerships, joint ventures or alliances and additions or departures of key personnel. Many of these factors are beyond the immediate control of the Company.

$(b)$ Economic Risks

General economic conditions, movements in interest and inflation rates and currency exchange rates may have an adverse effect on the Company's activities, as well as on its ability to fund those activities.

Research and Development $|C|$

The Company can make no representations that any of its product development and commercialisation will be successful, that the Company's development milestones will be achieved or that the Company will develop products that are commercially exploitable. Projects can be delayed or fail, or product/market development may cease to be viable for a range of unexpected scientific and commercial reasons.

$(d)$ (d) Regulatory Issues & Government Regulation

The Company's products may be subject to various government requiatory approvals and controls throughout the world and these will affect both the timing and the cost of bringing these products to the market.

$\Theta$ Intellectual Property Rights

Securing and protecting rights to intellectual property, and in particular to patents, trademarks and copyrights is highly problematic in the toys and games industry. Accordingly, the best protection for Brainytoys to avoid infringements in international markets is to expedite the development and sale of the products.

$[f]$ Reliance on Key Personnel and Need to Attract Qualified Staff

Brainytoys is reliant on its key management team of specialists and, in particular, in the short term on Mr Aquero, the loss of whose services could materially affect the Company and impede the achievements of its development objectives.

As a result of the specialised nature of Brainytoys business, the ability of Brainytoys to commercialise its products and maintain product development programmes will depend in part upon their ability to attract and retain suitably qualified management, product development specialists and marketing people over time.

There can be no assurance that the Company will be able to attract or retain sufficiently qualified personnel on a timely basis, retain its key personnel, or maintain and develop relationships with specialist manufacturing and other organisations needed to support product development programmes.

$1.8$ Plans for the Company if the Acquisition is not approved

If the Acquisition is not approved, the Company intends to continue to attract and review other projects with a view to identifying an alternative acquisition that the Directors consider to be in the best interests of Shareholders. In the meantime, the Company's securities will remain suspended from trading.

1.9 Role of the Independent Expert

The Independent Expert's Report assesses whether the Acquisition is fair and reasonable to the non-associated Shareholders. This assessment is designed to assist all Shareholders in reachina their votina decision. Horwath Securities (WA) Pty Ltd have provided an opinion that it believes the Acquisition is fair and reasonable to non-associated Shareholders. It is recommended that all Shareholders read the Independent Expert's Report in full.

Directors' Recommendation $1.10$

The Directors do not have any material personal interest in the outcome of the Resolutions save for their interest solely in their capacity as Shareholders of the Company. The Directors' current shareholdinas in the Company are set out in the following table:

Director	Shares
Mr Bruce Gibson	850,000
Mr Don Wilson	250,000
Mr Geoff Gibbs	Nil
Mr Brian Tonkin (alternate for Mr Gibson)	627,900

Each of the Directors intends to vote their Shares in favour of all of the Resolutions, subject to any voting exclusions for particular Resolutions.

Based on the information available, including that contained in this Memorandum, including the risks outlined in Section 1.7, all of the Directors consider that the proposed transaction is in the best interests of the Company and recommend that Shareholders vote in favour of the Resolutions. The Directors have approved the proposal to put the Resolutions to Shareholders and separately approved the information contained in this Memorandum.

The Directors recommend the Resolutions set out in the Notice as this will enable the Company to change its activities to a toys, games and childrens education and animation company.

The Directors believe that all of the proposed Resolutions should be supported by Shareholders and in making this recommendation they have focused on their responsibility to Shareholders and rely on the opinion of the Independent Expert, noting that it has reached the view that the Acquisition is fair and reasonable to non-associated Shareholders.

$2.$ BUSINESS OF THE MEETING

$2.1$ Resolution 1 - Change of activities

Since the sale of the Company's interest in the Speedy Wheels business in 1999, and a failed endeavour to conclude satisfactory funding and requotation arrangements for a business called Halion Limited in 2001, the Directors have

been actively seeking new investment opportunities. After reviewing a number of potential opportunities, the Board decided that the Acquisition represents the best available transaction for Shareholders.

As set out in this Explanatory Statement, in particular Section 1.2, the Acquisition will result in a change in the nature and scale of the Company's activities to a toys, games, children's education and animation products company.

For this reason, the Company is seeking Shareholder approval for the Acquisition under ASX Listing Rule 11.1.

If Shareholders approve the proposed change of activities under Resolution 1, the Company will later be required to re-comply with the admission requirements of ASX set out in Chapters 1 and 2 of ASX Listing Rules. Those requirements will include the Company successfully completing the Consolidation, issuing the Prospectus and successfully completing the Capital Raising. As previously indicated, these matters will be the subject of a separate meeting of Shareholders.

$2.2$ Resolution 2 - Issue of securities for the acquisition of Brainytoys.com Pty Ltd

Background $2.2.1$

On 12 July 2004, the Directors advised ASX that the Company had entered into the Acquisition Agreement. The consideration to be provided to the Vendor for the acquisition of Brainvtovs includes, without limitation, the allotment and issue of securities in the Company on a two stage basis as follows:

Stage 1: 35,953,000 Shares
Stage 2: 25,000,000 Shares
12,500,000 Options

Further details in respect of Brainytoys are set out throughout this Memorandum, in particular Section 1.2 and the Independent Expert's Report. The Directors recommend you read this Memorandum in full.

The Corporations Act and ASX Listing Rules set out a number of regulatory requirements which must be satisfied in relation to the issue of securities under the Acquisition. These are summarised below.

$2.2.2$ ASX Listing Rule 7.1

ASX Listing Rule 7.1 provides that a company must not, subject to certain exceptions, issue during any 12 month period any equity securities, or other securities with rights of conversion to equity (such as an option), if the number of those securities exceeds 15% of the total ordinary securities on issue at the commencement of that 12 month period.

One circumstance where an issue is not taken into account in the calculation of this 15% threshold is where the issue has the prior approval of shareholders in general meeting.

The Acquisition will result in Shares and Options being issued to the Vendor. Accordinaly, Shareholder approval is being sought in accordance with ASX Listing Rule 7.1 in order to issue Shares and Options to him.

ASX Listing Rule 7.3 requires that the following information be provided to Shareholders for the purposes of obtaining Shareholder approval pursuant to ASX Listing Rule 7.1:

$(a)$ the maximum number of securities to be issued by the Company is 60,953,000 Shares and 12,500,000 Options (pre-Consolidation);
$(b)$ the allottee of the Shares and Options will be Mr Alex Aguero (or his nominee);
the Stage 1 Shares (being 35,953,000 Shares) will be issued no later than $\lfloor c \rfloor$ 3 months after the date of this General Meeting (or such later date as permitted by any ASX waiver or modification of the ASX Listing Rules);
$(d)$ the Stage 2 Shares and Options (being 25,000,000 Shares and 12,500,00 Options) will be issued no later than 7 days after the completion of the Capital Raising under the Prospectus (or such later date as permitted by any ASX waiver or modification of the ASX Listing Rules). For the avoidance of doubt, the Directors anticipate that this will occur no later than 3 months after the date of the General Meeting;
$(e)$ it is anticipated that allotment will occur on 14 January 2005;
$(f)$ the Shares will be issued for a deemed consideration of \$0.03 each. The Options will be granted for no consideration;
the Shares issued will rank equally with the existing Shares on issue. The $\alpha$ Options will be granted on the terms and conditions set out in Section 2.2.5 of this Explanatory Statement; and
the Company will not be raising any funds from the issue of the Shares $(h)$ and Options as they are being issued in consideration for the acquisition of all of the issued shares in Brainytoys.

$2.2.3$ Item 7 of Section 611 of the Corporations Act

Pursuant to Section 606(1) of the Corporations Act, a person must not acquire a relevant interest in issued voting shares in a listed company if the person acquiring the interest does so through a transaction in relation to securities entered into by or on behalf of the person and because of the transaction, that person's or someone else's voting power in the company increases:

$(a)$ from 20% or below to more than 20%; or
$(b)$ from a starting point above 20% and below 90%.

The voting power of a person in a body corporate is determined in accordance with Section 610 of the Corporations Act. The calculation of a person's voting power in a company involves determining the voting shares in the company in which the person and the person's associates have a relevant interest.

The "associate" reference includes a reference to a person:

$(a)$ who has the capacity to control a company;
$(b)$ a person who has the ability to control or influence the composition of a company's board or the conduct of a company's affairs; and
$|C|$ who is acting in concert in relation to a company's affairs.

A person has a relevant interest in securities if they:

$(a)$ are the holder of the securities:
$(b)$ have the power to exercise, or control the exercise of, a right to vote attached to the securities: or
have power to dispose of, or control the exercise of a power to dispose $|C|$ of, the securities.

It does not matter how remote the relevant interest is or how it arises. If two or more people can jointly exercise one of these powers, each of them is taken to have that power.

The aggregate voting power of the Vendor in the Company will exceed 20% on completion of the Acquisition.

Information is required to be provided to Shareholders under ASIC Policy Statement 74 and the Corporations Act. Shareholders are also referred to the Independent Expert's Report prepared by Horwath Securities (WA) Pty Ltd which forms part of this Memorandum.

For the purposes of the Corporations Act, the following information is disclosed:

Identity of persons who will hold a relevant interest in the Shares on completion of the Acquisition pursuant to the Acquisition Agreement

The identity of the person that will hold a relevant interest in the Shares on completion of the Acquisition is the Vendor, Mr Alex Aguero.

As at the date of this Memorandum, the Vendor is not entitled to any Shares in the Company.

The maximum number of securities that will be held by the Vendor on completion of the Acquisition is 60,953,000 Shares and 12,500,000 Options (pre-Consolidation and not taking into account the effects of the Capital Raising).

Set out below are the matters required to be disclosed in accordance with Item 7 of Section 611 of the Corporations Act being:

$\alpha$ the maximum extent of the increase in voting power of the Vendor (and his associates) is approximately 59.9% or 69.8%?; and
the maximum voting power that the Vendor and his associates would $(b)$ have as a result of the Acquisition is approximately 59.9% or 69.8%?.
${\bf i}.$ Assuming \$400,000 is raised under the Seed Capital Issue.
$\overline{2}$ . Assuming \$833,460 is raised under the Seed Capital Issue.

Further details on the voting power of the Vendor is set out in the Independent Expert's Report.

Other Required Information

The following further information is disclosed:

$(a)$ other than as disclosed elsewhere in this Explanatory Statement, the Vendor does not propose to change the business;
$(b)$ the Vendor does not have any present intention to inject further capital into the Company:
the Vendor has no current intention to change the Company's existing $|C|$ policies in relation to financial matters or dividends; and
$(d)$ there is no proposal whereby any property will be transferred between the Company and the Vendor.

The Independent Expert's Report prepared by Horwath Securities (WA) Pty Ltd sets out a detailed examination of the proposed Acquisition to enable Shareholders to assess the merits and decide whether to approve the Resolutions necessary to implement the Acquisition.

To the extent that it is appropriate, the Independent Expert's Report sets out further information with respect to the proposed Acquisition and concludes that the Acquisition is fair and reasonable to the non associated Shareholders.

Shareholders are urged to carefully read the Independent Expert's Report to understand the scope of the report, the methodology of the valuation and the sources of information and assumptions made.

$2.2.4$ Restricted Securities

ASX has advised the Company that it is likely that all of the Shares and Options to be issued to the Vendor in accordance with Resolution 2 will be restricted from trading for a period of between 12 and 24 months from the date the Company's securities are readmitted to trading on ASX.

$2.2.5$ Terms and Conditions of Options

The material terms and conditions of the Options are set out below:

$(a)$ the Options will be exercisable at any time prior to 5.00pm WST on 30 June 2009. Options not exercised on or before the expiry date will automatically lapse:
$(b)$ the exercise price of each Option will be \$0.05 each;
$|C|$ the Options may be exercised wholly or in part by completing an application form for Shares (Notice of Exercise) delivered to the Company's share reaistry and received by it any time prior to 5.00pm WST on 30 June 2009;
$(d)$ upon the exercise of a Option and receipt of all relevant documents and payment, the holder will be allotted and issued a Share ranking pari

passu with the then issued Shares. The Company will apply to ASX to have the Shares aranted Official Quotation;

$(e)$ a summary of the terms and conditions of the Options, including the Notice of Exercise, will be sent to all holders of Options when the initial holding statement is sent;
$[f]$ any Notice of Exercise received by the Company's share registry on or prior to the expiry date will be deemed to be a Notice of Exercise as at the last Business Day of the month in which such notice is received;
$(a)$ there will be no participating entitlements inherent in the Options to participate in new issues of capital which may be offered to Shareholders during the currency of the Options. Prior to any new prorata issue of securities to Shareholders, holders of Options will be notified by the Company in accordance with the requirements of the Listing Rules of Australian Stock Exchange Limited;
$(h)$ in the event the Company proceeds with a pro rata issue (except a bonus issue) of securities to the holders of Shares after the date of issue of the Options, the exercise price of the Options will be adjusted in accordance with the formula set out in ASX Listing Rule 6.22.2;
in the event of any reconstruction (including consolidation, sub-division, $\left($ i reduction or return) of the issued capital of the Company prior to the expiry date, all rights of an optionholder are to be changed in a manner consistent with the ASX Listing Rules; and
$\mathbf{ii}$ Shares issued pursuant to the exercise of a Option will be issued not more than 14 days after the date of the Notice of Exercise.

As at the date of this Memorandum, the Directors had not made a decision as to whether an application will be made for listing of the Options on ASX.

$2.3$ Resolution 3 - Allotment and issue of Shares and Options (Seed Capital Issue)

$2.3.1$ Background

As a condition precedent to the Acquisition, the Company is required to raise not less than \$400,000 and up to \$833,460 by the issue of up to 27,782,000 Shares at an issue price of \$0.03 per Share, together with the issue of up to 13,891,000 free attaching Options on the basis of 1 Option for every 2 Shares subscribed for to Eligible Investors (Seed Capital Issue).

Further details in respect of the Seed Capital Issue are set out throughout this Memorandum and the Independent Expert's Report.

$2.3.2$ ASX Listing Rule 7.1

ASX Listing Rule 7.1 provides that a company must not, subject to certain exceptions, issue during any 12 month period any equity securities or other securities with rights of conversion to equity (such as an option) if the number of those securities exceeds 15% of the total ordinary securities on issue at the commencement of that 12 month period.

One circumstance where an issue is not taken into account in the calculation of this 15% threshold is where the issue has the prior approval of shareholders in a general meeting.

The Company is seeking approval under this Listing Rule for the proposed offer of up to 27,782,000 Shares together with up to 13,891,000 free attaching Options under the Seed Capital Issue to allow this number of securities not to be included in the calculation under ASX Listing Rule 7.1. This will enable the Company to have the flexibility to issue equity securities in the future up to the 15% threshold without the requirement to obtain Shareholder approval.

ASX Listing Rule 7.3 requires that the following information be provided to Shareholders when seeking an approval for the purposes of ASX Listing Rule 7.1:

the maximum number of securities to be issued under this Resolution is $\alpha$ 27,782,000 Shares and 13,891,000 Options:
the Shares will be issued at a price of \$0.03 per Share. The Options will $(b)$ be issued for no consideration:
$\lfloor c \rfloor$ the Shares and the Options will be issued no later than three (3) months after the date of the General Meeting (or such later date to the extent permitted by any ASX waiver or modification of the ASX Listing Rules). It is anticipated that allotment of the Shares and the Options will occur on 29 October 2004:
$(d)$ the Shares issued will rank equally with the Company's current issued Shares:
the Options will be issued on the terms and conditions set out in Section $[_e]$ 2.2.5 of this Explanatory Statement;
$(f)$ the Shares and the Options will be offered to Eligible Investors; and
the Company intends to use the funds raised from the issue of the Shares $(q)$ for the following purposes:
general working capital; and ${ii}$
$(ii)$ to fund the development and commercialisation of the Brainytoys range of products (post completion of the Acquisition).

$2.3.3$ Restricted Securities

Notwithstanding any ASX imposed escrow restrictions, the Shares and Options proposed to be issued to Eligible Investors in accordance with Resolution 3 will be restricted from trading until the successful completion of the Capital Raising. Accordingly, each Eligible Investor will be required to enter into voluntary restriction agreements to this effect.

Resolutions 4-6 - Election of Directors $2.4$

In accordance with the Constitution and the Corporations Act, the appointment of Directors must be approved by resolution passed in a general meeting.

Accordingly, Resolutions 4 to seek the appointment of Mr Ian Allen, Mr Alex Aquero and Mr Brett Fraser.

Set out below is a summary of the background of each of the proposed Directors.

Mr Ian Allen Chairman

Mr Ian Allen (Aged 52) is a Charlered Accountant who has had extensive high level worldwide experience as Financial Director or Chief Financial Officer with a number of prominent Companies including Brambles Industries Limited, Schlumberger Limited in London, the Inchcape Group in London and Hong Kong, ERG Limited (1996 to 2001). Ian is currently a non executive director of Repcol Limited, Quadrant Iridium Limited and Hillcrest Resources Limited.

Mr Alex Aquero Managina Director

Mr Alex Aguero (Aged 47) is the developer of the Brainytoys product range. Alex has been involved in the development of a number of innovative high-tech products and systems since 1981, when he first developed the successful labelling device now marketed world wide by the Casio, Brother and Dymo companies, with several million units sold. Alex has worked on high level software and hardware development projects as follows:

ABC TV and Telstra: $\alpha$
$(b)$ Piloting FM data broadcasting techniques, development of computer aames (marketed by Imaaineerina and Pactronics), interactive information booths and voice activated robotics for Scitech Discover Centre, bio-feedback devices and visual stimulation systems, Mobile data projects (Nokia).

With reference to Brainytoys, Alex has management expertise in the development, manufacturing and marketing of advanced technologies, software, toys and games.

Mr Brett Fraser Director

Mr Brett Fraser (Aged 41), an Accountant and Business Degree Graduate has been involved at a senior management level in Investment Banking for over 20 years. This has also involved serving as a director on several public Company boards across a range of industries. Brett's most recent executive role related to the establishment, growth and development of Red Wave Media which was sold to West Australian Newspapers Limited. Brett is an active investor in a number of different projects and industries.

Resolution 7 - Change of Name $2.5$

The new name proposed to be adopted under Resolution 7 is "Brainytoys" Limited". The Directors believe that this new name more accurately reflects the proposed future operations of the Company.

GLOSSARY

Acquisition means the acquisition by the Company of all of the shares in Brainytoys in return for the issue of securities in the Company to the Vendors in accordance with the details set out in Section 1 of the Explanatory Statement.

Acquisition Agreement means the agreement between the Company and Mr Alex Aguero to implement the Acquisition, the Consolidation, the Seed Capital Issue and the Capital Raising.

ASIC means Australian Securities and Investments Commission.

ASX means Australian Stock Exchange Limited.

ASX Listing Rules or Listing Rules means the Listing Rules of ASX.

Board means the board of directors of the Company.

Brainytoys means Brainytoys.com Pty Ltd (ACN 091 822 481).

Capital Raising means the proposed raising of not less than \$1,250,000 under the Prospectus at an issue price of 4 cents per Share (representing 20 cents following the Consolidation) or such additional sum as is necessary to comply with the ASX Listing Rules.

Company and Auto Enterprises means Auto Enterprises Limited (ABN 28 001 894 033).

Consolidation means the proposed consolidation of the Company's capital on a one (1) for five (5) basis, to be considered at a later general meeting of Shareholders.

Constitution means the Company's constitution.

Corporations Act means the Corporations Act 2001 (Cth).

Directors means the current directors of the Company.

Eligible Investor means an investor who is entitled to be offered Shares and Options pursuant to Section 708 of the Corporations Act.

Explanatory Statement means the explanatory statement to the Memorandum.

General Meeting means the meeting convened by the Notice.

Independent Expert's Report means the independent expert's report prepared by Horwath Securities (WA) Pty Ltd which forms part of this Memorandum.

Memorandum means this information memorandum.

Notice means the notice of meeting which forms part of this Memorandum.

Official List means the official list of ASX.

Option means an option to acquire a Share on the terms and conditions set out in Section 2.2.5 of this Explanatory Statement.

C:\Documents and Settings\Administralor\My Occuments\AUTO E\PROPOSALS\HEAD\Notice of Meeting(8) {2},doc

Prospectus means the prospectus proposed to be issued by the Company for the purposes of the Capital Raising.

Resolutions means the resolutions set out in the Notice, or any one of them, as the context requires.

Seed Capital Issue has the meaning given to that term in Section 2.3.1 of the Explanatory Statement.

Settlement means settlement of the Acquisition on the terms of the Acquisition Agreement.

Share means a fully paid ordinary share in the capital of the Company.

Shareholder means a holder of a Share.

Vendor means the holder of 100% of the issued capital of Brainytoys, being Mr Alex Aguero.

SCHEDULE

PRO-FORMA STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2004

	Pre-Acquisition Audit	Brainytoys	Post Acquisition Auto Enterprises/ Brainytoys
Current Assets
Cash Assets	138		946
Receivables
Other financial assets	40		40
Current Assets	179		987
Non Current Assets
Property, plant and equipment		$\overline{2}$	$\overline{2}$
Intangibles			1,165
Non Current Assets			1,167
TOTAL ASSETS	179		2,154
Current liabilities	8		8
Payables
Provisions		$\overline{2}$	$\overline{2}$
Current liabilities	8		$\overline{10}$
Non current liabilities		86	61
TOTAL LIABILITIES		88	71
NET ASSETS	171	(86)	2,083
Equity
Contributed equity	3,671		5,583
Accumulated losses	(4,215)		(4,215)
Reserves	715		715
TOTAL EQUITY	171	(86)	2.083

The Statement of Financial Position set above has been prepared using the Statement of Financial Position as set out in Auto Enterprises audited financial statements as at 30 June 2004 together with Brainytoys unaudited financial statements at 30 June 2004 and taking into account relevant pro-forma adjustments. The following assumptions have been made in making pro-forma adjustments:

$\blacksquare$ there is a capital raising of \$833,460;
Brainytoys has been acquired for \$1,079,000 satisfied by the issue of 35,953,000 Shares; and
Auto Enterprises pay's \$25,000 in reduction of Brainytoys liabilities.

INDEPENDENT EXPERT'S REPORT

Refer to separate document.

APPOINTMENT OF PROXY AUTO ENTERPRISES LIMITED ABN 28 001 894 033

GENERAL MEETING
------------------------	--

I/We

being a Member of Auto Enterprises Limited entitled to attend and vote at the Meeting, hereby

Appoint

Name of proxy

or failing the person so named or, if no person is named, the Chairman of the Meeting or the Chairman's nominee, to vote in accordance with the following directions or, if no directions have been given, as the proxy sees fit at the General Meeting to be held at BDO Chartered Accountants, Level 19, Allianz Building, 2 Market Street, Sydney, New South Wales on 15 October 2004 at 12.30pm (EST) and at any adjournment thereof. If no directions are given, the Chairman will vote in favour of all of the resolutions.

Voting on Business of the Extraordinary General Meeting

		FOR
Resolution 1	Change of Activities
Resolution 2	Allotment and issue of Shares in consideration for the acquisition of Brainytoys.com Pty Ltd
Resolution 3	Allotment and Issue of Shares and Options (Seed capital Issue)	$\sim$
Resolution 4	Election of Mr Ian Allen
Resolution 5	Election of Mr Alex Aguero	$\sim$
Resolution 6	Election of Mr Brett Fraser
Resolution 7	Change of Name

If you do not wish to direct your proxy how to vote, please place a mark in this box

By marking this box, you acknowledge that the Chairman may exercise your proxy even if he has an interest in the outcome of the resolution and votes cast by him other than as proxy holder will be disregarded because of the interest. The Chairman will vote in favour of all of the resolutions if no directions are given.

YOU MUST EITHER MARK THE BOXES DIRECTING YOUR PROXY HOW TO VOTE OR MARK THE BOX INDICATING THAT YOU DO NOT WISH TO DIRECT YOUR PROXY HOW TO VOTE. OTHERWISE THIS APPOINTMENT OF PROXY FORM WILL BE DISREGARDED.

If you mark the abstain box for a particular item, you are directing your proxy not to vote on that item on a show of hands or on a poll and that your shares are not to be counted in computing the required majority on a poll.

Signed this 2004 day of

i ÷

Individuals and joint holders Companies (affix common seal if appropriate)

AUTO ENTERPRISES LIMITED ABN 28 001 894 033

Instructions for Completing 'Appointment of Proxy' Form

$\mathbf{L}$ A member entitled to attend and vote at a Meeting is entitled to appoint not more than two proxies to attend and vote on their behalf. Where more than one proxy is appointed, such proxy must be allocated a proportion of the member's voting rights. If the shareholder appoints two proxies and the appointment does not specify this proportion, each proxy may exercise half the votes.
$2.$ A duly appointed proxy need not be a member of the Company. In the case of joint holders, all must sian.
Corporate shareholders should comply with the execution requirements set out on the Proxy 3. Form or otherwise with the provisions of Section 127 of the Corporations Act. Section 127 of the Corporations Act provides that a company may execute a document without using its common seal if the document is signed by:
2 directors of the company;
a director and a company secretary of the company; or $\ddot{\phantom{1}}$
for a proprietary company that has a sole director who is also the sole company secretary - that director.

For the Company to rely on the assumptions set out in Section 129(5) and (6) of the Corporations Act, a document must appear to have been executed in accordance with Section 127(1) or (2). This effectively means that the status of the persons signing the document or witnessing the affixing of the seal must be set out and conform to the requirements of Section 127(1) or (2) as applicable. In particular, a person who witnesses the affixing of a common seal and who is the sole director and sole company secretary of the company must state that next to his or her signature.

1. Completion of a Proxy Form will not prevent individual shareholders from attending the meeting in person if they wish. Where a shareholder completes and lodges a valid proxy form and attends the meeting in person, then the proxy's authority to speak and vote for that shareholder is suspended while the shareholder is present at the meeting.
1. Where a Proxy Form or form of appointment of corporate representative is lodged and is executed under power of attorney, the power of attorney must be lodged in like manner as this proxy.

Horwath Securities (WA) Pty Ltd

ASN 24 009 328 643 A member of Horwath International 128 Hay Street Subiaco WA 6008 PO Box 700 West Perth WA 6872 Entail [email protected] Telepitone (08) 9380-8400 Facsimile (08) 9380 8499

14^th September 2004

The Directors Auto Enterprises Limited C/- Stirling Warton Williams Level 11, 111 Elizabeth Street SYDNEY NSW 2000

Dear Sirs,

INDEPENDENT EXPERT'S REPORT - PROPOSED ACQUISITION OF BRAINYTOYS.COM PTY LTD

$\mathbf{1}$ INTRODUCTION

Horwath Securities (WA) Pty Ltd ("Horwath Securities") has been requested by Auto $1.1$ Enterprises Limited ("Auto" / "the Company") to prepare an Independent Expert's Report in relation to the proposed acquisition of Brainytoys.com Pty Ltd ("Braintoys") by Auto. Horwath Securities is required to provide an opinion as to whether the proposed acquisition is fair and reasonable to the non-associated shareholders.
As proposed in Resolution 2 of the Notice of Meeting and Information Memorandum ('the $1.2$ Notice") and Pursuant to item 7 of Section 611 of the Corporations Act 2001 ("the Act") and Chapter 7 of the Australian Stock Exchange ("ASX") Listing Rules, Auto proposes to allot and issue up to 60,953,000 ordinary shares in the capital of the Company and up to 12,500,000 options to subscribe for shares in the capital of the Company to the shareholder of Brainytoys (or his nominee), cash payments totalling \$75,000 and a royalty sum (1% of the annual sales generated by Brainytoys) as consideration for the acquisition of all of the issued shares in Brainytoys ("the Offer"). The Offer is subject to a two stage acquisition process the details of which are in Section 8 of this report.
Auto is required under Listing Rule 7.1 of the ASX listing Rules to obtain shareholder $1.3$ approval for the proposed issue of shares that would exceed 15% of it's existing capital.
We understand that this report will comprise part of the Notice to be issued to Auto $1.4$ shareholders to assist the non-associated shareholders of Auto voting at the General Meeting to be held in October 2004.

$1.5$ The remainder of our report is divided into the following sections:

Report	Paragraph
Report Requirements	2
Basis of Assessment	3
Summary of Conclusions	4
Sources of Information	5
Background Information on Auto	6
Background Information on Brainytoys	7
Acquisition Agreement	8
Valuation Approach and Methodology	9
Valuation of Net Assets of Auto	10
Valuation of Brainytoys	11
Assessment as to the Fairness of the Offer	12
Assessment as to the Reasonableness of the Offer	13
Opinion	14
Sources of Information	15
Declarations, Interests and Fees	16

$\overline{2}$ REPORT REQUIREMENTS

$2.1$ Section 606 of the Act prohibits a transaction, that results in a person's or someone else's voting power increasing from 20% or below to more than 20%. Section 611 Item 7 of the Act, provides that Section 606 of the Act does not apply in relation to an acquisition of shares by virtue of an allotment or purchase approved by a resolution passed at a general meeting at which no votes were cast in favour of the resolution by the acquirer or their associates. The shareholders entitled to vote on such a resolution are referred to as "nonassociated" shareholders.
$2.2^{\circ}$ Section 611 (Item 7) of the Act also requires the acquirer, their associates and the company to provide all information known to them, that is material to the decision on how to vote on the resolution, to the members of the company.
$2.3$ The Australian Securities and Investment Commission ("ASIC") has issued Policy Statement 74 which provides guidance in relation to acquisitions pursuant to Section 611 (Item 7) of the Act.
$2.4$ In accordance with Policy Statement 74, the company has requested Horwath Securities, as an independent expert, to report on whether the transactions proposed in Resolution 2 of the Notice is fair and reasonable to the non-associated shareholders of Auto.
$2.5^{\circ}$ Policy Statement 74 requires the report to judge what is fair and reasonable in all the circumstances of the proposal. The analysis must compare the likely advantages and disadvantages for the non-associated shareholders if the proposal is agreed to, with the advantages and disadvantages to those shareholders if it is not agreed to. Comparing the value of shares to be acquired under a proposal and the value of the consideration to be paid for them is only one element of this assessment.
This report has been prepared to assist the non-associated shareholders of Auto in evaluating 2.6 the fairness and reasonableness of the Offer. This report should not be used for any other purpose.

$\overline{3}$ BASIS OF ASSESSMENT

$3.1$ The purpose of this report is to assess whether the Offer is fair and reasonable. In assessing the Offer we have had regard to the following ASIC Practice Notes and Policy Statements:
Practice Note 42 covering Independence of Expert's Reports;
Practice Note 43 covering Valuation Reports and Profit Forecasts;
Policy Statement 74 covering Acquisitions Agreed to by Shareholders; and $\bullet$
Policy Statement 75 covering Independent Expert Reports to Shareholders.
$3.2$ The analysis of fairness and reasonableness are separate considerations:

Policy Statement 74 requires that:

"What is fair and reasonable for non-associated shareholders should be judged in all the circumstances of the proposal. The report must compare the likely advantages and disadvantages for the non-associated shareholders if the proposal is agreed to, with the advantages and disadvantages to those shareholders if it is not".

$3.3$ In preparing this report our assessment of fairness is primarily the comparison between:
$3.4$ The value of the consideration payable:

Up to $60,953,000$ fully paid ordinary shares in the capital of Auto and up to $12,500,000$ options to subscribe for shares in the capital of Auto, cash payments totalling $$75,000$ and a royalty sum (1% of the annual sales generated by Brainytoys).

$3.5$ The value of the assets to be acquired:

Acquisition of all the issued shares in Brainytoys.

Our assessment of the reasonableness of the proposed transaction relates to other qualitative 3.6 matters and the effect of those matters on the non-associated shareholders of Auto.

$\overline{4}$ SUMMARY OF CONCLUSIONS

$4.1$ Having regard to all the factors set out in this report, in our opinion, the Offer by Auto of, up to 60,953,000 fully paid ordinary shares in the capital of the Company and up to 12,500,000 options to subscribe for shares in the capital of the Company, cash payments totalling \$75,000 and a royalty sum (1% of the annual sales generated by Brainytoys) as consideration for the acquisition of all the issued shares in Brainytoys is fair and reasonable for the non-associated shareholders of Auto.

5 SOURCES OF INFORMATION

During the course of this assignment, we were provided with information in respect of Auto $5.1$ and Brainytoys and we obtained additional information from public sources. A summary of the main items of information reviewed is set out in paragraph 15 of this report.
$5.2$ Our opinion is based upon the information reviewed, including economic and financial parameters prevailing at 26 August 2004. Such information can change significantly within short periods of time and, if it did so, the opinion in this report may also change. The disclaimers and limitations set out in paragraph 16 below should be carefully considered.

6 BACKGROUND INFORMATION ON AUTO

6.1 Auto was incorporated in New South Wales on 5 May 1980. On 16 January 1987 Auto was admitted to the ASX. Auto's shares have been suspended from trading on the ASX since 22 December 1998.
6.2 The Directors of Auto and their shareholdings are as follows:

Director	Shares
Mr Bruce Gibson-	850.000
Mr Don Wilson	250.000
Mr Geoff Gibbs-	Nil
Mr Brian Tonkin (Alternate for Mr Gibson)	627.900

6.3 Auto is currently a dormant company with no subsidiaries. The current focus of the directors is seeking and assessing new business opportunities.

Auto's Income and Expenditure

The following table sets out a summary of the income and expenditure of Auto for the half-6.4 year ended 31 December 2003 and the years ended 30 June 2003 and 30 June 2004.

Income Statement	Audited Consolidated 30 June 2004	Reviewed Consolidated 31 Dec 2003	Audited Consolidated 30 June 2003
Income	A\$000's 9	A\$000's 4	A\$000's 21
Expenses
Accounting and audit fees	(23)	(22)	(23)
Share registry, consulting and listing fees	(49)	(18)	(47)
Other	(5)	(5)	(5)
Provision for loss on term deposit – written back			105
Operating profit/(loss) before income tax expense	(58)	(41)	51
Income tax relating to ordinary activities
Net profit/(loss)	(58)	(41)	51

Source: The 31 December 2003 figures are from the reviewed half-year financial report and the 30 June 2003 and 30 June 2004 figures are from the audited annual financial reports.

Auto's Assets and Liabilities

The following table sets out a summary of the assets and liabilities of Auto as at 30 June 6.5 2004, 31 December 2003 and 30 June 2003.

	Audited	Reviewed	Audited
Balance Sheet	Consolidated	Consolidated	Consolidated
	30 June 2004	31 Dec 2003	30 June 2003
Current Assets	A\$000's	A\$000's	A\$000's
Cash assets	138	151	200
Receivables	1	3	4
Other financial assets	46	40	40
Total Current Assets	179	194	244
TOTAL ASSETS	179	194	244
Current Liabilities
Payables	8	6	15
Total Current Liabilities	8	6	15
TOTAL LIABILITIES	8	6	15
NET ASSETS	171	188	229
Equity
Contributed equity	3,671	3,671	3,671
Reserves	715	715	715
Accumulated losses	(4,215)	(4,198)	(4,157)
TOTAL EQUITY	171	188	229

Source: The 31 December 2003 figures are from the reviewed half-year financial report and the 30 June 2003 and 30 June 2004 figures are from the audited annual financial reports.

Capital Structure

6.6 The company currently has on issue $13,074,000$ ordinary fully paid shares. The company has no other classes of shares or options on issue. There has been no transactions or share issues in the previous 12 months.
$6.7$ The following table shows the top 10 shareholders of Auto as at 31 December 2003:

Shareholder	Number	Percentage %
Kopai Holdings Pty Ltd	1,081,106	8.27
Symvine Pty Ltd	938,900	7.18
John Bruce Gibson	850,000	6.50
Keith Gordon & Nita Isabel McKay	800,000	6.12
Wessex Capital Investment	664,312	5.08
Brian Keith Tonkin	627,900	4.80
Rob Wright	400,000	3.06
Golden Words Pty Ltd	269,300	2.06
Chi Cheng Huang	268,000	2.05
Donald Elliott Wilson	250,000	1.91
Total	6,149,518	47.03

Subsequent Events

6.8 Subsequent to 31 December 2003 we have not been made aware of any matters or circumstances that have arisen that have significantly affected or may significantly affect the operations, the results of those operations or the state of affairs of Auto.

Impact of the Introduction of International Financial Reporting Standards

6.9 For financial reporting periods beginning on or after 1 January 2005, Auto must comply with International Financial Reporting Standards (IFRS). It is likely that there will be no significant changes to accounting treatment under IFRS as it currently applies to Auto.
$6.10$ This report and the calculations made within it have not considered in detail the impact that IFRS will have on Auto. However we believe that the adoption of IFRS should not have a significant effect on the valuation of Auto, contained in this report.

$\tau$ BACKGROUND INFORMATION ON BRAINYTOYS

$7.1$ Brainytoys was incorporated in Western Australia on 1 March 2000. Brainytoys has no subsidiaries.
Brainytoys operations include the development, manufacture and marketing of toys, games, $7.2$ children's education and animation and entertainment products created by Alex Aguero and the Brainytoys team. The company currently has approximately thirty products which are under development. Two of these products have been more fully developed and testmarketed, being, an electronic hand-held game, Flip X, and a board game, Chessgammon.
$7.3$ The world market for toys and games is estimated to be in excess of US\$200 billion and Brainytoys has developed a number of products covering the key segments of this market. Within Australia there is estimated to be in excess of 20,000 stores, which can retail the type of products Brainytoys is developing.
$7.4$ Brainytoys has stated that it has identified a large number of highly profitable opportunities in the entertainment and educational markets, and has focused development on products for the following segments:
a) hand-held LCD electronic games;
$b)$ die cast vehicles;
$c)$ board games;
novelty/collectables/characters; d)
construction kits; $e)$
$\mathbf{f}$ electronic toys;
remote control/robotic toys; $g$ )
$h)$ educational products and toys; and
computer animation games. $i)$
$7.5$ Brainytoys requires additional capital to fund the development and marketing of its products to Australian and overseas markets.

Industry Background

7.6 The world toy industry is dominated by a small number of large companies. These companies main operations are product manufacturing and distribution. Product manufacturing is undertaken internally and externally through the use of contractors. The products are then either directly sold to the major retail outlets or forwarded to wholesalers with whom these companies have License and Distribution Agreements in place.

$7.7$ Production operations are predominately undertaken in Asia and spread between a number of manufacturers. As detailed above the majority of the retail sales are derived from the major retail outlets which in Australia include, Coles Myer, Kmart, Target, David Jones and Toys R Us
$7.8$ Worldwide product development is undertaken by a large number of small companies whose focus is predominately on the development of concepts and ideas.

Brainytoys's Income and Expenditure

7.9 The following table sets out a summary of the income and expenditure of Brainytoys for the years ending 30 June 2004 and 30 June 2003.

	Unaudited	Unaudited
	Management	Management
Income Statement	Accounts	Accounts
	30 June 2004	30 June 2003
	AS	AS
Income	6,770	8,896
Expenses
Depreciation	(136)	(879)
Research and development costs	(41, 872)	(3,804)
Other operating expenses	(6,342)	(48, 568)
Loss on ordinary activities before taxation	(41,580)	(44,355)
Taxation
Loss on ordinary activities after taxation	(41,580)	(44,355)

Source: The figures for the years ended 30 June 2003 and 2004 are taken from management accounts. It should be noted that neither set of figures has been subject to an audit.

Brainytoys Assets and Liabilities

The following table sets out the assets and liabilities of Brainytoys for the year ending $7.10$ 30 June 2004 and 30 June 2003.

	Unaudited	Unaudited
Balance Sheet	Management	Management
	Accounts	Accounts
	30 June 2004	30 June 2003
	$\overline{A}S$	A\$
Current Assets
Debtors	32	5,277
Cash at bank and in hand	349
Total Current Assets	381	5,277
Non-current Assets
Plant & equipment	2,586	1,827
Accumulated depreciation	(1,015)	(136)
Total Non-Current Assets	1,571	1,691
Total Assets	1,952	6,968
Liabilities
Bank overdraft		5,687
Unsecured loans	86,028	42,374
Payables	1,966	487
Total Liabilities	87,994	48,548
Net Asset Deficiency	(86, 041)	(41,580)
Equity
Contributed equity	1	1
Accumulated losses	(86, 042)	(41, 581)
TOTAL EQUITY	(86, 041)	(41,580)

Source: The figures for the years ended 30 June 2003 and 2004 are taken from management accounts. It should be noted that neither set of figures has been subject to an audit.

Capital Structure

7.11 The company currently has on issue one ordinary fully paid share currently owned by the sole shareholder and director Mr Alexander Aguero ("Mr Aguero").

Impact of the Introduction of International Financial Reporting Standards

$7.12$ For financial reporting periods beginning on or after 1 January 2005, Brainytoys must comply with International Financial Reporting Standards (IFRS). It is likely that there will be no significant changes to accounting treatment under IFRS as it currently applies to Brainytoys.
$7.13$ This report and the calculations made within it have not considered in detail the impact that IFRS will have on Brainytoys. However we believe that the adoption of IFRS should not have a significant effect on the valuation of Brainytoys, contained in this report.

8 ACQUISITION AGREEMENT

Auto and Brainytoys have entered in a Heads of Acquisition Agreement ("Acquisition 8.1 Agreement") where Auto has agreed to acquire 100% of the issued capital of Brainytoys. The material terms of the contract are as follows:

a) Stage 1 Terms

The company has agreed to acquire 100% of the issued capital of Brainytoys from the Vendor in consideration for:

i) The issue to the Vendor of 35,953,000 shares;
ii) a cash payment of \$25,000; and
iii) a royalty sum (1% of the annual sales generated by Brainytoys).

The above transactions are subject to and conditional upon the Company obtaining all necessary regulatory and shareholder approvals required to complete the transactions, including the acquisition and the seed capital issue, contemplated by the Acquisition Agreement.

$b)$ Stage 2 Terms

Upon the successful completion of stage 1 conditions precedent detailed above, the Company has agreed to undertake:

i) a consolidation of the Company's capital on a one for five basis ("Consolidation"); and
ii) a capital raising of up to \$1,250,000 from the general public pursuant to a prospectus ("Capital Raising").

Upon the completion by the Company of the Consolidation and the Capital Raising, the Company has agreed to provide the following additional consideration to the Vendor.

iii) The issue to the Vendor, on a pre-Consolidation basis, of a further 25,000,000 shares and 12,500,000 free attaching options; and
A cash payment of \$50,000. $\mathbf{i}(\mathbf{v})$

The approval of the Consolidation and Capital Raising will be the subject of a separate general meeting of shareholders.

Seed Capital Issue

Total

8.2 Pursuant to resolution 3 of the Notice the Company is planning to raise not less than \$400,000 and up to \$833,460 by the issue of 27,782,000 shares at an issue price of \$0.03 per share, together with the issue of up to $13,891,000$ free attaching options on the basis of 1 Option for every 2 shares subscribed for to Eligible Investors ("Seed Capital Issue").
8.3 The Seed Capital Issue is a condition of the first stage of the Acquisition Agreement. The Company's Directors have been informed by Lothbury Pty Ltd, the Company's financial adviser that it has received indicated commitments to meet at least the minimum seed capital raising requirements.

Effects on the Current Capital Structure if the Transaction is Approved

8.4 The approval of the resolutions subject to the Notice will only enable stage 1 of the Acquisition Agreement to proceed. The tables below illustrate the dilution effect on existing shareholders and option holders in accordance with the terms of stage one:

	Minimum Seed Capital Raising		Maximum Seed Capital Raising
Shareholder	Number	%	Number	%
Existing shareholders	13,074,000	21.0	13.074,000	17.0
Seed Investors	13,333,334	21.4	27,782,000	36.2
Vendor (Mr Aguero)	35,953,000	57.6	35,953,000	46.8
Total	62,360,334	100.0	76,809,000	100.0
	Minimum Seed Capital Raising		Maximum Seed Capital Raising
Optionholder	Number	%	Number	%
Existing shareholders		w	$\blacksquare$	$\overline{\phantom{a}}$
Seed Investors	6,666,667	100.0	13.891,000	100.0
Vendor (Mr Aguero)				┻

8.5 Pursuant to a separate general meeting and the approval of the Consolidation and Capital Raising the Vendor will be issued an additional 25,000,000 shares and 12,500,000 options as detailed in Stage 2 of the Acquisition Agreement above at Paragraph 8.1. The dilution effect on a pre consolidation basis on existing shareholders as a result of the issue of the additional shares to the Vendor as per the terms set out in stage 2 of the Acquisition Agreement above at Paragraph 8.1 is illustrated in the tables below:

6,666,667

100.0

13,891,000

$100.0$

	Minimum Seed Capital Raising		Maximum Seed Capital Raising
Shareholder	Number	%	Number	%
Existing shareholders	13,074,000	15.0	13.074,000	12.8
Seed Investors	13,333,334	15.2	27,782,000	27.3
Vendor (Mr Aguero)	60,953,000	69.8	60.953,000	59.9
Capital Raising (1)	w	$\,$	$\blacksquare$	۰
Total	87,360,334	100.0	101,809,000	100.0

$(1)$ – The details of the Capital Raising of \$1.25 million are yet to be determined, and have not been reflected in this table.

	Minimum Seed Capital Raising		Maximum Seed Capital Raising
Optionholder	Number	%	Number	$\%$
Existing shareholders				$\overline{\phantom{a}}$
Seed Investors	6,666,667	34.8	13,891,000	52.6
Vendor (Mr Aguero)	12,500,000	65.2	12.500,000	47.4
Capital Raising (1)				$\overline{\phantom{a}}$
Total	19,166,667	100.0	26,391,000	100.0

$(1)$ – The details of the Capital Raising of \$1.25 million are yet to be determined, and have not been reflected in this table.

Royalty

8.6 Pursuant to the agreement, the Vendor, Mr Aguero is entitled to a royalty stream of 1% of the annual sales generated by Brainytoys. As we are currently unable to determine the future sales of Brainytoys we are unable to attribute a value to this Royalty.
8.7 As it is planned Mr Aguero will be the Managing Director of Auto once this transaction has been completed a royalty of this nature would be consistent with an element of an executives performance based remuneration. In doing so this royalty links the performance of the Company with the executives remuneration and accordingly we have viewed the royalty as not being material to the transaction

Cash Payments to the Vendor

8.8 Pursuant to the terms above in paragraph 8.1, Auto will be required to make a cash payment of \$25,000 as detailed in stage one of the terms above and another cash payment of \$50,000 as detailed in stage two of the terms above.

$\overline{9}$ VALUATION APPROACH AND METHODOLOGY

$9.1$ In considering whether the terms of the proposal are fair and reasonable we need to firstly determine the value of the shares and options offered for consideration by Auto and then determine the value of the assets being acquired being Brainytoys.
9.2 The valuation methodologies we have considered in determining the current fair value of the assets disposed and consideration received are:
Cashflows/Earnings Approach $\bullet$
Asset Approach
Market Assessment Approach. $\bullet$

Cash Flows/Earnings Approach

9.3 This approach involves discounting a future stream of cash flows/earnings using an appropriate discount rate/capitalisation rate. This means there is a requirement for two sets of data:
a stream of future cash flows/earnings $\bullet$
a discount rate/capitalisation rate $\bullet$
9.4 In essence this valuation approach involves an assessment of the future cash flows/earnings a business is expected to generate and an assessment of the risks faced by that business.

Asset Approach

$9.5$ Of the asset approach methods to valuation the three most common methods are:
Net Realisable Value ٠
Liquidation Value
Replacement Value
9.6 The net realisable value method involves assessing what the assets of the business might realise, net of liabilities and realisation costs, if subject to an orderly realisation.
9.7 The liquidation method involves assessing what the assets of the business might realise, net of liabilities and disposal costs, if disposed of immediately. This usually results in a lower valuation than that obtained under the net realisable value approach.
9.8 The replacement value method involves valuing assets on a basis of determining the cost to purchase or construct the current assets.

Market Assessment Approach

9.9 This approach involves assessing the market value of securities that are listed on regulated stock exchanges. This method relies on the efficient market hypothesis which states in general terms the market price at any given point of time should fully reflect available information given willing buyers and willing sellers. This method is widely accepted and extensive evidence is available to support the hypothesis.
$9.10 -$ When assessing whether the market is accurately reflecting a fair value for the securities that are listed, we also have regard to the liquidity of the shares in the market and the volumes of trading in the securities.

Selection of Valuation Methodology for Auto

9.11 In determining the value of each Auto share we must:
a) first, assess the value of the company as a whole:
b) then allocate that value among the classes of issued securities in the company (taking into account the relative financial risk, and voting and distribution rights of the classes ): and
c) then allocate the value of each class pro rata among the securities in that class (without allowing a premium or applying a discount for particular securities in that class).
9.12 To determine what is the fair value for securities in a company, the value of the company as a whole must first be assessed. The usual approach to the valuation of an asset is to seek to determine what a hypothetical informed, willing but not anxious buyer, would pay to a hypothetical informed, willing but not anxious seller in an open market, assuming that the parties were reasonably knowledgeable and informed and were acting freely on an arm'slength basis. This standard of valuation is generally referred to as "fair market value". We have adopted that standard for present purposes as regards the valuation of Auto as a whole and as regards the valuation of the individual assets of Auto.
9.13 A fundamental aspect of any valuation is determining the appropriate valuation method to be applied. Auto is currently a dormant company with no developed cash flows or operating assets and, in our view, should be valued on an Assets Approach using the Net Realisable Value method.
9.14 Other methods are not considered suitable in this case.

Selection of Valuation Methodology for Brainytoys

$9.15$ In determining the value of Brainytoys we have assessed all of the above valuation approaches and methodologies in determining a valuation approach for Brainytoys.

9.16 We have assessed the cash flows/earnings approach to be inappropriate as Brainytoys currently doesn't have any historical or determinable future streams of cash flow or earnings. The future cash flows and earnings currently cannot be forecast, as there are no current sale contracts, production arrangements or distribution agreements in place for the products of Brainytoys to accurately forecast the potential future cash flows and earnings.
9.17 The market assessment approach is also inappropriate as Brainytoys is not currently listed on a regulated stock exchange.
9.18 The assets approach is the most appropriate approach to the valuation of Braintoys. The assets as detailed in section 11 of this report are predominately intangible in nature.
9.19 The value of the net assets of Brainytoys is demonstrated in the price in which the Eligible Investors, through the Seed Capital Issue are prepared to invest in Auto subject to the successful completion of this proposed transaction.

$10^°$ VALUATION OF NET ASSETS OF AUTO

In this section we consider the worth of each of the assets and liabilities shown in the $10.1$ balance sheet as at 30 June 2004 (see paragraph 6.5 above).

Cash

$10.2$ There has been no significant diminution in the cash holdings of Auto since 30 June 2004. As cash is a liquid investment there is no requirement to discount the amount.

Other Financial Assets

$10.3$ This financial asset is a fixed interest bond deposit security. As it is a liquid investment there is no requirement to discount the amount.

Other Assets and Liabilities

10.4 The other net assets comprise receivables and payables. These items are appropriately valued at book value.

Conclusion on Valuation of Net Assets

$10.5$ Based on what is said at paragraphs 10.2 to 10.4 above the worth of the net assets of Auto is calculated as set out in the following table:

NET ASSET VALUE OF AUTO	Paragraph	30 June 2004
		A\$000's
Assets
Cash	10.2	138
Receivables	10.4	1
Other Financial Assets	10.3	40
Total assets		179
Liabilities
Payables	10.4	8
Total liabilities		8
NET ASSETS		171

10.6 The net assets per share are is $$0.013$ (\$171,000 divided by 13,074,000 shares). There are no options on issue that will dilute the net asset value per share.

Tax losses

The audited accounts at 30 June 2004, disclose that Auto has unbooked future income tax $10.7$ benefits arising from accumulated losses and other net timing differences. The audited accounts note that the future income tax benefit of these losses will only be obtainable by Auto, if Auto derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions to be realised, if the entity continues to comply with the conditions for deductibility imposed by law, and if no changes to tax legislation affect the relevant entity in realising the benefit from the deductions. In our view, because of the uncertainty surrounding the ultimate realisation of the tax losses we have assessed them as having no value.

Conclusion on Value of Auto as a Whole

10.8 The overall value of Auto is summarised as follows:

Net asset value per share (see paragraph 10.6) A\$ 0.013

Allocation of Value among Shareholders

10.9 Having determined the value of Auto we are now required to allocate the value among classes of issued securities taking into account the relative financial risk and voting and distribution rights of the classes. As there is only one class of shares in Auto the value per ordinary share is as stated above in paragraph 10.8.

Dealings in Securities in Preceding 12 months

10.10 In determining what is fair value for securities for present purposes, the consideration paid for securities in that class must be "taken into account". The Act does not say what the phrase "taken into account" means. We have considered dealings in the twelve months prior to the announcement of the Offer.
10.11 As the shares are currently suspended there has been no known dealings in the securities of Auto for the preceding 12 months.

Conclusion on Auto Value

10.12 Having valued Auto, determined the appropriate allocation between classes of shares and taking into consideration dealings within the last 12 months, we have concluded that the fair value of one Auto ordinary share to be \$0.013.

$11$ VALUATION OF BRAINYTOYS

In determining the value of Brainytoys, as stated in paragraph 8.18 above, we will utilise the $11.1$ Asset Approach. The tangible assets and liabilities as stated in paragraph 7.7 are carried at their historical values, as such this gives Brainytoys a negative tangible asset value of \$86,041.

Intellectual Property

$11.2$ Within Brainytoys there is intellectual property currently not recognised on the balance sheet of Brainytoys. This intellectual property includes the two products Flip X and Chessgammon which have been test marketed, approximately 30 products which have been developed or currently under development and the following registered Internet Web Domains for marketing purposes:
Brainytoys.com; a)
$b)$ Flipx.com;
Thelittlegreendoods.com; $\mathcal{C}$
d) Cybertanks.com;
Puzzlemaniacs.com; $e)$
$f$ Konetors.com;
$g)$ Mcflippers.com;
KrazyKaz.com; $h)$
$i$ Chessgammon.com;
Gravitonz.com; and $j$
Gamelites.com. $\bf k)$
11.3 In addition there is an element of intellectual property within Brainytoys' management through strategic manufacturing and marketing relationships which have been developed with groups both within Australian and overseas markets. The management team also has a history of product creation and development.
11.4 In determining a value for this intellectual property we can not have regard to the earnings history or cash flows of the assets as the Brainytoys has been in a start up and development phase and has not yet generated cash flows and does not have reliably estimateable future profits.

11.5 The assets are also of a nature where there is not a readily traded market to assist in determining a market value.
11.6 There are investors willing to invest in Auto subject to the successful completion of the acquisition of Brainytoys for an issue price of 3 cents (see Seed Capital Issue paragraph 8.2), when the current net asset value of Auto is 1.3 cents (see paragraph 10.12 above). This then implies that there is a value associated with Brainytoys.

Management Team

$11.7$ The management team currently comprises the sole Director and shareholder Mr Aguero. There currently is no employee contract in place between Mr Aguero and Brainytoys. This matter is considered to be a risk area for Auto as Brainytoys is currently heavily reliant upon the skills, knowledge and relationships of Mr Aguero. This risk is reduced by Mr Aguero becoming the largest shareholder in the Company on the successful completion of the proposed transaction.

Conclusion on the Value of Brainytoys

11.8 In our opinion Brainytoys has a value which lies within the Intellectual Property. This value will be realised through the successful development, manufacture, marketing, distribution and sale of one of the existing or future products of Braintoys. A value for the intellectual property is supported by the commitment as indicated by the Directors of the Company to the Seed Capital Issue in Auto, subject to the successful completion of this transaction, at an amount of 3.0 cents per share which is greater than the current value per share of 1.3 cents.

$12^°$ ASSESSMENT AS TO THE FAIRNESS OF THE OFFER

$12.1$ As Auto's value prior to the proposed transaction has been determined to be 1.3 cents per share as detailed in paragraph 10.12 above and the value of Auto following the proposed transaction being 3.0 cents per share, we consider the proposed transaction to be FAIR.

13 ASSESSMENT AS TO THE REASONABLENESS OF THE OFFER

$13.1$ In accordance with ASIC Policy Statement 75, a transaction is reasonable if it is fair.
$13.2$ Detailed below are some of the factors including advantages and disadvantages that we have considered when assessing the reasonableness of the proposed transaction:

Advantages of the Acquisitions

Provides the current Auto shareholders the possibility to participate in future dividends and capital growth of Auto that may arise as a result of the acquisition of Brainytoys.
The Seed Capital Issue of a minimum of \$400,000 at an issue price of \$0.03 per $\bullet$ Share (as a condition precedent to the Acquisition) represents a strong demonstration of project value endorsement by third party investors (being the Eligible Investors) and ability to raise working capital.
Brainytoys has approximately 30 products capable of commercialisation. The Directors note that:
$\mathbf{i}$ .) Brainytoys management is focused on harvesting the value inherent in the products;
$\ddot{\mathbf{i}}$ .) two of the products (FlipX and Chessgammon) have been developed and test marketed;
$\overline{\mathbf{m}}$ .) and most products should be capable of being manufactured and commercialised.
The toy and games industry has low barriers to entry but has been experiencing sales growth with annual turnover exceeding US\$200 billion.
Mr Alex Aguero, the Vendor, is a creative toys and games product conceptualiser, $\bullet$ who has a good understanding of the industry culture and with the benefit of the necessary capital, believes Brainytoys will be in a position to satisfactorily consummate channels to market for the existing range of products.

The industry can offer high returns with very high margins and is noted for spectacular case histories of product success.
Working with the benefit of the available sophisticated software and hardware, Brainytoys can develop (at minimal cost) product prototypes, samples etc, and thereafter, sales for commercially viable products. Products in this sector do not require years of trialling. It is a market driven process responsive to consumer aspirations invariably created by small companies like Brainytoys.
The proposed board of the Company is to comprise experienced successful $\bullet$ commercial people who will complement Alex Aguero's skill base.
Upon the successful completion of the Acquisition and the Seed Capital Issue (at the Meeting convened by this Notice), and the Consolidation and Capital Raising (at a future meeting of Shareholders), it is likely that ASX will lift the suspension currently imposed on the Company's securities. Should this occur this will have the effect of increasing the current liquidity of Auto shares.

Disadvantages of the Acquisition

The Acquisition will result in the issue of securities to the vendors which will dilute $\bullet$ the current holdings of Shareholders.
The acquisition will result in the issue of securities to the vendor which will result in $\bullet$ control passing to the vendor.
There is the potential for further dilution of the shareholding as further capital will $\bullet$ possibly be required to be raised.
The Company will be changing the nature of its activities to a toy, games and $\bullet$ childrens product company which may not be consistent with the investment objectives of all Shareholders.
There are risk factors associated with Brainytoys's business and operations.

$14$ OPINION

$14.1$ Having regard to all the factors set out in this report, in our opinion, the Offer is fair and reasonable for the non-associated shareholders of Auto.

15 SOURCES OF INFORMATION

Reviewed financial report of Auto for the half-year ended 30 December 2003.
Audited financial report of Auto for the year ended 30 June 2003 and 2004.
Management Accounts for Brainytoys as at 30 June 2003 and 2004
Brainytoys Information Memorandum 2004.
Acquisition Agreement between Auto and Brainytoys dated 28^th June 2004.
Publicly available information from the ASX, ASIC and Dunn & Bradstreet
Notice of Meeting and Information Memorandum

16 DECLARATIONS, INTERESTS AND FEES

We declare as follows:

The preparation of this report has been undertaken pursuant to item 7 of s611 of the (a) Corporations Act 2001 and ASIC Policy Statements and Practice Notes. It is not intended that this report should be used for any purpose other than to accompany the Notice to be sent to Auto's shareholders.

In particular, it is not intended that this report should serve any purpose other than an expression of an opinion as to whether or not the proposed transaction affecting the non-associated shareholders of Auto is fair and reasonable.

Horwath Securities (WA) Pty Ltd is the holder of an Australian Financial Services $(b)$ Licence (License No 269291) issued by the ASIC. Glyn Donald O'Brien is a Director and Responsible Officer of Horwath Securities (WA) Pty Ltd.
$(c)$ Glyn Donald O'Brien is an associate of the Institute of Chartered Accountants. His professional experience includes areas of business valuation, preparation of expert reports, auditing and the evaluation of investment opportunities.
Neither he, nor Horwath Perth Chartered Accountants (a firm of which he is a partner), $(d)$ nor Horwath Securities (WA) Pty Ltd have any current relationship either directly or indirectly with Auto.
$(e)$ Horwath Securities (WA) Pty Ltd will be paid a fee of approximately \$12,000 based upon normal charge rates and professional time incurred in the compilation of information and the preparation of this report.
$(f)$ Horwath Securities (WA) Pty Ltd has given the directors of Auto permission to include this report with the Notice to be forwarded to Auto's shareholders.
The report has been prepared solely for the use of the directors and the shareholders of $(g)$ Auto that are the subject of the proposed transaction. Responsibility to persons other than those referred to above is not accepted. Whilst there are reasonable grounds to believe that the information included in this report is true and complete, we have not performed any independent verification.

This report should be read as a whole and no part of it quoted, otherwise referred to, or produced without prior written consent.

Horwath Securities (WA) Pty Ltd has not caused the issue of this independent $(i)$ specialists report and take no responsibility for any matter referred to in this independent expert report other than extracts from their report.
$(i)$ Horwath Securities (WA) Pty Ltd has no interest in Auto or the Proposed Transaction or any relationship either directly or indirectly with Auto.

Recognising that Horwath Securities (WA) Pty Ltd may rely on information provided by Auto and its officers (save where it would not be reasonable to rely on the information having regard to Horwath Securities (WA) Pty Ltd experience and qualifications), Auto has agreed:

$(a)$ to make no claim by it or its officers against Horwath Securities (WA) Pty Ltd to recover any loss or damage that Auto may suffer as a result of reasonable reliance by Horwath Securities (WA) Pty Ltd on information provided by Auto; and
to indemnify Horwath Securities (WA) Pty Ltd against any claim arising (wholly or in $(b)$ part) from Auto or any of its officers providing Horwath Securities (WA) Pty Ltd any false or misleading information or in the failure of Auto or its officers in providing material information;

except where the claim has arisen as a result of wilful misconduct or negligence by Horwath Securities (WA) Pty Ltd.

Yours faithfully HORWATH SECURITIES (WA) PTY LTD

HORWATH SECURITIES (WA) AV LTD

$G_{\text{H}}$

GLYN O'BRIEN Director

AI assistant

MACRO METALS LIMITED — Proxy Solicitation & Information Statement 2004

65283_rns_2004-09-15_4ff8e34f-25a2-4040-b62c-2149dcc23f83.pdf

AUTO ENTERPRISES LIMITED ABN 28 001 894 033

INFORMATION MEMORANDUM -NOTICE OF GENERAL MEETING, EXPLANATORY STATEMENT, INDEPENDENT EXPERT'S REPORT AND PROXY FORM

INFORMATION MEMORANDUM CONTENTS PAGE

PAGE

IMPORTANT INFORMATION

Role of ASX

Future Statements

Defined terms

Enquiries

LETTER TO SHAREHOLDERS

TIME AND PLACE OF MEETING AND HOW TO VOTE

Venue

How to Vote

Voting in Person

Voling by Proxy

Your proxy form is enclosed.

AUTO ENTERPRISES LIMITED ABN 28 001 894 033

NOTICE OF GENERAL MEETING

AGENDA

BUSINESS

SPECIAL BUSINESS

Resolution 1 - Change of Activities

Resolution 2 - Allotment and Issue of Shares and Options in part consideration for the acquisition of Brainytoys.com Pty Ltd

Resolution 3 - Allotment and Issue of Shares and Options (Seed Capital Issue)

Resolution 4 - Election of Mr Ian Allen

Resolution 5 - Election of Mr Alex Aguero

Resolution 6 - Election of Mr Brett Fraser

Resolution 7 - Change of name

DATED THIS 15th DAY OF SEPTEMBER 2004

NOTES:

EXPLANATORY STATEMENT

$\mathbf{1}$ . GENERAL INFORMATION

$1.1$ Overview

Indicative Timetable

$1.2$ Operations of Brainytoys

$1.2.1$ Background

$1.2.2$ Description of the Brainytoys Products

$1.3$ Summary of Terms of the Acquisition

$(a)$ Stage 1 Terms

$(b)$ Stage 2 Terms

$1.4$ Pro-forma statement of financial position

$1.5$ Advantages of the Acquisition

$1.6$ Disadvantages of the Acquisition

$1.7$ Risks

Share Market Risk $(a)$

$(b)$ Economic Risks

Research and Development $|C|$

$(d)$ (d) Regulatory Issues & Government Regulation

$\Theta$ Intellectual Property Rights

$[f]$ Reliance on Key Personnel and Need to Attract Qualified Staff

$1.8$ Plans for the Company if the Acquisition is not approved

1.9 Role of the Independent Expert

Directors' Recommendation $1.10$

$2.$ BUSINESS OF THE MEETING

$2.1$ Resolution 1 - Change of activities

$2.2$ Resolution 2 - Issue of securities for the acquisition of Brainytoys.com Pty Ltd

Background $2.2.1$

$2.2.2$ ASX Listing Rule 7.1

$2.2.3$ Item 7 of Section 611 of the Corporations Act

Identity of persons who will hold a relevant interest in the Shares on completion of the Acquisition pursuant to the Acquisition Agreement

Other Required Information

$2.2.4$ Restricted Securities

$2.2.5$ Terms and Conditions of Options

$2.3$ Resolution 3 - Allotment and issue of Shares and Options (Seed Capital Issue)

$2.3.1$ Background

$2.3.2$ ASX Listing Rule 7.1

$2.3.3$ Restricted Securities

Resolutions 4-6 - Election of Directors $2.4$

Mr Ian Allen Chairman

Mr Alex Aquero Managina Director

Mr Brett Fraser Director

Resolution 7 - Change of Name $2.5$

GLOSSARY

SCHEDULE

PRO-FORMA STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2004

INDEPENDENT EXPERT'S REPORT

APPOINTMENT OF PROXY AUTO ENTERPRISES LIMITED ABN 28 001 894 033

MACRO METALS LIMITED Proxy Solicitation & Information Statement 2004

$10^°$ VALUATION OF NET ASSETS OF AUTO

$12^°$ ASSESSMENT AS TO THE FAIRNESS OF THE OFFER