Paradise Entertainment Limited

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Paradise Entertainment Limited (the “ Company ”), you should at once hand this circular together with the accompanying form of proxy to the purchaser or transferee or to the bank, licensed securities dealer or registered institution in securities or other agent through whom the sale or the transfer was effected for transmission to the purchaser or transferee.

This circular is for information only and does not constitute an invitation or offer to acquire, purchase or subscribe for the shares or other securities of the Company.

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. This document appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for securities of the Company.

**PARADISE ENTERTAINMENT LIMITED 滙彩控股有限公司[*]**

(Incorporated in Bermuda with limited liability)

(Stock Code: 1180)

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF THE PATENTS INVOLVING ISSUE OF CONSIDERATION SHARES AND PROMISSORY NOTE;

(2) APPLICATION FOR WHITEWASH WAIVER; (3) PROPOSED CAPITAL REORGANISATION AND CHANGE OF BOARD LOT SIZE; AND (4) NOTICE OF SGM

Financial Adviser to the Company

==> picture [32 x 35] intentionally omitted <==

普頓資本有限公司 PROTON CAPITAL LIMITED

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

Capitalised terms used on this cover page have the same meanings as those in the section headed “Definitions” in this circular.

A letter from the Board is set out on pages 9 to 52 of this circular.

A letter from Nuada Limited, the independent financial adviser to the Independent Board Committee and the Independent Shareholders, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 55 to 73 of this circular.

A notice convening the SGM to be held on Monday, 3 June 2013 at 10:00 a.m. at Unit C, 19th Floor, Entertainment Building, 30 Queen’s Road Central, Hong Kong is set out on pages SGM-1 to SGM-3 of this circular.

Whether or not you intend to attend the SGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the office of the Company’s branch share registrar in Hong Kong, Tricor Secretaries Limited at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not less than 48 hours before the appointed time for holding the meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM and any adjournment thereof (as the case may be) should you so wish.

for identification purposes only

9 May 2013

Expected timetable	Expected timetable	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			3
Letter from the	Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		9
Letter from the	Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . .		53
Letter from the	Independent Financial Adviser . . . . . . . . . . . . . . . . . . . . . . . . . .		55
Appendix I	–	Financial Information of the Group . . . . . . . . . . . . . . . . . .	I-1
Appendix II	–	Additional Financial Information of the Group. . . . . . . . . .	II-1
Appendix III	–	Unaudited Pro Forma Financial Information of
		the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	III-1
Appendix IV(A) –		First Valuation Report of the Patents . . . . . . . . . . . . . . . . .	IV(A)-1
Appendix IV(B)	–	Second Valuation Report of the Patents . . . . . . . . . . . . . . .	IV(B)-1
Appendix V(A)	–	Letters on Projection underlying
		the First Valuation of the Patents . . . . . . . . . . . . . . . . . .	V(A)-1
Appendix V(B)	–	Letters on Projection underlying the Second Valuation of
		the Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	V(B)-1
Appendix VI	–	General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	VI-1
Notice of SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			SGM-1

– i –

EXPECTED TIMETABLE

Set out below is the expected timetable for the implementation of the Capital Reorganisation and the change in board lot size, which is indicative only and may be subject to change. Changes will be made as and when appropriate and announcements will be made in this regard by the Company accordingly.

2013

Latest time for lodging the form of proxy
for the SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10:00 a.m. on Saturday, 1 June
Expected date and time of the SGM . . . . . . . . . . . . . . . .	. . 10:00 a.m. on Monday, 3 June
Publication of SGM results announcement . . . . . . . . . . . . . . . . . . . . . . on Monday, 3 June
Effective date for the Capital Reorganisation . . . . . . . . . . . . 9:00 a.m. on Tuesday, 4 June
First day for free exchange of Existing Share Certificates
for New Share Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . on Tuesday, 4 June
Commencement of dealings
in New Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . 9:00 a.m. on Tuesday, 4 June
Original counter for trading in Existing Shares
in existing board lot size of 20,000 Existing Shares
(in the form of Existing Share Certificates)
temporarily closes . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . 9:00 a.m. on Tuesday, 4 June
Temporary counter for trading in New Shares in temporary
board lot size of 2,000 New Shares (in the form
of Existing Share Certificates) opens . . . . . . . . . . . . . .	. . . 9:00 a.m. on Tuesday, 4 June
Original counter for trading in New Shares in new
board lot size of 4,000 New Shares (in the form of
New Share Certificates) re-opens . . . . . . . . . . . . . . . .	9:00 a.m. on Wednesday, 19 June
Parallel trading in New Shares
(in the form of both Existing Share Certificates
in temporary board lot size of 2,000 New Shares
and New Share Certificates in new board lot size
of 4,000 New Shares) commences . . . . . . . . . . . . . . . .	9:00 a.m. on Wednesday, 19 June
Designated broker starts to stand in the market to provide
matching services for the sale and purchase of
odd lots of the New Shares . . . . . . . . . . . . . . . . . . . . .	9:00 a.m. on Wednesday, 19 June
Temporary counter for trading in New Shares
in temporary board lot size of 2,000 New Shares
(in the form of Existing Share Certificates)
closes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4:00 p.m. on Wednesday, 10 July

– 1 –

EXPECTED TIMETABLE

Parallel trading in New Shares

(in the form of both Existing Share Certificates in temporary board lot size of 2,000 New Shares and New Share Certificates in new board lot size of 4,000 New Shares) ends . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Wednesday, 10 July
Designated broker ceases to stand in the market to provide matching services for the sale and purchase of odd lots of the New Shares . . . . . . . . . . . . 4:00 p.m. on Wednesday, 10 July
Last day for free exchange of Existing Share Certificates for New Share Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . on Friday, 12 July

Note: All dates and times in this circular refer to Hong Kong local dates and times.

– 2 –

DEFINITIONS

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

“Acquisition”
the acquisition of the Patents by the Purchaser from the Vendor subject to the terms and conditions of the Agreement
“acting in concert” has the meaning ascribed to it under the Takeovers Code
“Agreement” the sale and purchase agreement dated 2 November 2012 (as supplemented by two supplemental agreements dated 7 January 2013 and 18 March 2013, respectively) entered into between Mr. Jay Chun as the Vendor and Solution Champion Limited as the Purchaser for the Acquisition
“Announcement”
the announcement of the Company dated 7 January 2013 in respect of, among others, the Acquisition, the Whitewash Waiver, the Capital Reorganisation and the change of board lot size
“associate(s)”
has the meaning ascribed to it under the Listing Rules
“Auditor” or “Pan-China” Pan-China (H.K.) CPA Limited, certified public accountants and the auditor of the Company
“Authorisation”
the proposed authorisation to the Directors to apply the entire amount standing to the credit of the contributed surplus account of the Company within the meaning of the Companies Act in such manner as they consider appropriate, including but not limited to setting off against the accumulated losses of the Company, subject to compliance with the Companies Act and the bye-laws of the Company
“Board” the board of Directors
“Business Day”

a day on which banks are generally open for business in Hong Kong, except a Saturday and a Sunday or a day on which a tropical cyclone warning signal no. 8 or above or a “black” rainstorm warning signal is hoisted in Hong Kong at any time between 9:00 a.m. and 5:00 p.m.

– 3 –

DEFINITIONS

“Capital Reduction” the proposed reduction of the nominal value of each of the issued Consolidated Shares from HK$1.00 to HK$0.001 by cancelling HK$0.999 paid up capital on each of the issued Consolidated Shares
“Capital Reorganisation” the Share Consolidation, the Capital Reduction, the Share Premium Reduction and the Share Subdivision
“CCASS” the Central Clearing and Settlement System established and operated by Hong Kong Securities Clearing Company Limited
“Companies Act” the Companies Act 1981 of Bermuda, as amended from time to time
“Company”
Paradise Entertainment Limited, a company incorporated under the laws of Bermuda with limited liability and the shares of which are listed on the Stock Exchange (stock code: 1180)
“Completion” completion of the Acquisition contemplated under the Agreement
“connected person(s)” has the meaning ascribed to it under the Listing Rules
“Consideration Shares” 600,000,000 New Shares in the share capital of the Company to be allotted and issued at HK$0.80 each, credited as fully paid, by the Company to the Vendor or his designated nominee (which is a special purpose vehicle wholly owned by the Vendor for the purpose of holding the Consideration Shares) as he may direct, as part of the consideration for the Acquisition, upon Completion
“Consolidated Shares” ordinary shares of HK$1.00 each in the issued share capital of the Company immediately upon the Share Consolidation becoming effective but prior to the Capital Reduction
“Convertible Debentures” the convertible debentures due in 2014 issued by the Company with outstanding principal amount of HK$24,000,000, US$1,000,000 and HK$57,000,000, respectively
“Directors” directors of the Company
“Enlarged Group”
the Group immediately after the Completion
“Executive”
the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director

– 4 –

DEFINITIONS

“Existing Share Certificate(s)” certificate(s) for the Existing Shares in pink colour “Existing Share(s)” existing ordinary share(s) of HK$0.10 each in the share capital of the Company
“Financial Adviser” or “Proton Proton Capital Limited, a licensed corporation to carry Capital” out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO, the financial adviser of the Company
“First Valuation Report” the valuation report dated 7 January 2013 prepared by Ample Appraisal Limited, an independent valuer, on the value of the Patents as at 31 December 2012, the text of which had been appended to the Announcement and is reproduced in Appendix IV(A) to this circular
“Group” the Company and its subsidiaries
“HKSCC” Hong Kong Securities Clearing Company Limited “HK$” Hong Kong dollars, the lawful currency of Hong Kong “Hong Kong” Hong Kong Special Administrative Region of the People’s Republic of China
“Independent Board Committee” the independent committee of the Board comprising all the independent non-executive Directors
“Independent Financial Adviser” Nuada Limited, a licensed corporation to carry out or “Nuada” Type 6 (advising on corporate finance) regulated activity under the SFO, appointed by the Company as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Acquisition and the Whitewash Wavier and as to voting
“Independent Shareholders” the Shareholders, other than the Vendor, August Profit Investments Limited and their respective concert parties and any parties involved or interested in the Acquisition and/or the Whitewash Waiver
“Independent Third Party(ies)”
third party(ies) who is (are) independent of and not connected with the Company and its connected persons
“Last Trading Day”

2 November 2012, being the last trading day of the Shares prior to the suspension of trading in the Shares pending the publication of the Announcement

– 5 –

DEFINITIONS

“Latest Practicable Date”
6 May 2013, being the latest practicable date prior to the despatch of this circular for ascertaining certain information contained in this circular
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Long Stop Date” 30 September 2013 or such other date as the Vendor and the Purchaser may agree in writing
“Macau”
Macau Special Administrative Region of the People’s Republic of China
“New Share Certificate(s)” certificate(s) for the New Shares in orange colour
“New Share(s)” ordinary share(s) of HK$0.001 each in the share capital of the Company immediately upon the Capital Reorganisation becoming effective
“Patents”
the five approved patents and six patents applications pending approval in the US in relation to a betting terminal system, which are beneficially owned by and stand or are proceeding in the name of the Vendor, including any continuations, continuations in part, divisions, reissues, re-examinations, extensions, substitutions thereof, details of which are set out in the section headed “Information on the Patents” in this circular
“Promissory Note”
the promissory note in the principal amount of HK$200,000,000 to be issued by the Company to the Vendor as part of the consideration for the Acquisition
“Purchaser”
Solution Champion Limited, a wholly-owned subsidiary of the Company
“Registrar”
the branch share registrar of the Company in Hong Kong, being Tricor Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong
“Second Valuation Report”
the valuation report dated 9 May 2013 prepared by Ample Appraisal Limited, an independent valuer, on the value of the Patents as at 31 March 2013, the text of which is set out in Appendix IV(B) to this circular

– 6 –

DEFINITIONS

“SFC”

the Securities and Futures Commission of Hong Kong

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

“SGM” the special general meeting of the Company to be convened to approve the Agreement and the transactions contemplated thereunder, the Whitewash Waiver and the Capital Reorganisation

“Share(s)” the Consolidated Shares, the Existing Shares or the New Shares, as the case may be
“Share Consolidation” the proposed consolidation of every ten issued Existing Shares into one Consolidated Share
“Share Options” the share options granted under the Share Option Scheme
“Share Option Scheme” the share option scheme of the Company adopted on 30 July 2007
“Share Premium Reduction” the proposed reduction of such amount as the Directors think fit standing to the credit of the share premium account of the Company
“Share Subdivision” the proposed subdivision of each authorised but unissued Existing Share of HK$0.10 into 100 New Shares of HK$0.001 each
“Shareholder(s)” holder(s) of the Shares
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“Takeovers Code” the Hong Kong Code on Takeovers and Mergers
“US” the United States of America
“US$” or “USD” United States Dollars, the lawful currency of the United States
“Vendor” Mr. Jay Chun, being an executive Director and a Shareholder

– 7 –

DEFINITIONS

“Whitewash Waiver” a waiver from the Executive pursuant to Note 1 on Dispensations from Rule 26 of the Takeovers Code to waive the obligation of the Vendor to make a mandatory offer for all the Shares not already owned or agreed to be acquired by the Vendor and parties acting in concert with him under Rule 26 of the Takeovers Code as a result of the issue of the Consideration Shares “%” per cent.

Unless the context requires otherwise, all amounts in US$ are translated into HK$ at an exchange rate of US$1: HK$7.75. Such translation should not be construed as a representation that the amount in question has been, could have been or could be converted at any particular rate at all.

– 8 –

LETTER FROM THE BOARD

**PARADISE ENTERTAINMENT LIMITED 滙彩控股有限公司[*]**

(Incorporated in Bermuda with limited liability)

(Stock Code: 1180)

Executive Directors:

Mr. Jay Chun (Chairman and Managing Director) Mr. Shan Shiyong, alias, Sin Sai Yung Mr. Hu Liming

Registered Office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Independent non-executive Directors:

Mr. Frank Hu Mr. Li John Zongyang Mr. Kuan Hin Meng

Head office and principal place of business in Hong Kong: Unit C, 19/F., Entertainment Building, 30 Queen’s Road Central, Hong Kong

9 May 2013

To the Shareholders and, for information only, the holders of the Share Options and the Convertible Debentures,

Dear Sirs,

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

IN RELATION TO THE ACQUISITION OF THE PATENTS INVOLVING ISSUE OF CONSIDERATION SHARES AND PROMISSORY NOTE;

(2) APPLICATION FOR WHITEWASH WAIVER; (3) PROPOSED CAPITAL REORGANISATION AND CHANGE OF BOARD LOT SIZE; AND (4) NOTICE OF SGM

INTRODUCTION

Reference is made to the Announcement.

* for identification purposes only

– 9 –

LETTER FROM THE BOARD

whereby the Purchaser conditionally agreed to acquire and the Vendor conditionally agreed to sell the Patents at the total consideration of HK$740,000,000. The Directors also propose to reorganise the capital structure of the Company with a change in the board lot size.

The purpose of this circular is to provide you with, among other things, (i) further information on the Agreement and the transactions contemplated thereunder, the Whitewash Waiver and the Capital Reorganisation; (ii) the letter from the Independent Board Committee to the Independent Shareholders in respect of the Acquisition and the Whitewash Waiver; (iii) the letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the Acquisition and the Whitewash Waiver; (iv) the unaudited pro forma financial information of the Enlarged Group upon Completion; (v) the valuation reports on the Patents; and (vi) the letters from the Financial Adviser and the Auditor in respect of the valuation of the Patents; and to give you a notice of the SGM at which resolutions will be proposed to consider and, if thought fit, approve the Agreement and the transactions contemplated thereunder, the Whitewash Wavier and the Capital Reorganisation.

1. THE AGREEMENT

Date

2 November 2012 (after the trading hours) (as supplemented by two supplemental agreements dated 7 January 2013 and 18 March 2013 to, among other things, include the completion of the Capital Reorganisation as one of the conditions precedent to Completion and extend the Long Stop Date from 31 March 2013 to 30 September 2013, respectively)

Parties

Vendor:

Mr. Jay Chun, an executive Director, holding approximately 10.14% shareholding interest of the Company directly and indirectly as at the Latest Practicable Date

Purchaser:

Solution Champion Limited, a company incorporated under the laws of the British Virgin Islands with limited liability, and a wholly-owned subsidiary of the Company

Assets to be acquired

The assets to be acquired by the Purchaser from the Vendor are the Patents in the US. The Patents relate to certain technological know-how applied in a computerized betting terminal system, the details of which are set out in the section headed “Information on the Patents” below.

– 10 –

LETTER FROM THE BOARD

Consideration

The total consideration for the Acquisition is HK$740,000,000 which will be satisfied in the following manner on Completion:

(a) HK$60,000,000 shall be paid in cash by the Purchaser to the Vendor;
(b) HK$200,000,000 shall be satisfied by the Company issuing to the Vendor the Promissory Note; and
(c) HK$480,000,000 shall be satisfied by the issue and allotment of the Consideration Shares to the Vendor or his designated nominee (which is a special purpose vehicle wholly owned by the Vendor for the purpose of holding the Consideration Shares).

The consideration for the Acquisition was arrived at based on normal commercial terms after arm’s length negotiations between the parties to the Agreement and by reference to the factors set out in the paragraph headed “Reasons for the Acquisition” below; and the valuation of the Patents by Ample Appraisal Limited (the “ Valuer ”), an independent valuer, as at 31 December 2012, which was in the amount of HK$819,000,000 (the “ First Valuation ”). The text of the First Valuation Report as appended to the Announcement is reproduced in Appendix IV(A) to this circular.

The Valuer has further updated the valuation of the Patents. According to the Second Valuation Report, the value of the Patents as at 31 March 2013 was in the amount of HK$810,000,000 (the “ Second Valuation ”, together with the First Valuation, the “ Valuations ”). The slight decrease in the fair value of the Patents from HK$819,000,000 in the First Valuation Report to HK$810,000,000 in the Second Valuation Report is due to the modification of the business plan resulting from the delay in marketing of the Electronic Gaming Machines and the lapse of 3 months of the economic life of the Patents between the two valuation dates as well as the decrease in the discount rate adopted in the Valuations arising from the changes in market data and reference data. Further details of these changes are set out in pages IV(B) 17 and VI(B) 18 of the Second Valuation Report in Appendix IV(B) to this circular.

The Valuations are appraisals of the fair value of the five Patents already granted by the United States Patent and Trademark Office (“ USPTO ”) beneficially owned by and stand or are proceeding in the name of the Vendor, together with the six Patents in continuations, continuations in part or division pending approval. Further details about the Patents are set out in the section headed “Information on the Patents” in this circular.

Based on the factors set out in the paragraph headed “Reasons for the Acquisition” below, the Valuations and the consideration for the Acquisition being at an approximately 9.65% discount to the First Valuation and an approximately 8.64% discount to the Second Valuation, the Directors (including the independent non-executive Directors) consider that the consideration for the Acquisition is fair and reasonable and that the Acquisition is in the interests of the Group and the Shareholders as a whole.

– 11 –

LETTER FROM THE BOARD

The Company intends to satisfy the cash portion of the consideration for the Acquisition from its internal resources.

Discounted cash flow forecast approach was adopted in the Valuations carried out by the Valuer. Pursuant to Rule 14.61 of the Listing Rules and Rule 11.1(a) of the Takeovers Code, any valuation of assets (other than land and buildings) acquired by a listed issuer based on discounted cash flows or projections of profits, earnings or cash flows will normally be regarded as a profit forecast. Accordingly, the Valuations will be regarded as a profit forecast, and therefore, the Company is required to comply with Rules 14.60A, 14.62 and 14A.56(8) of the Listing Rules and Rules 10 and 11 of the Takeovers Code.

Pursuant to Rules 14.60A, 14.62 and 14A.56(8) of the Listing Rules and Rule 10 of the Takeovers Code, financial advisers must satisfy themselves that the forecast has been prepared by the directors with due care and consideration, and auditors or reporting accountants must satisfy themselves that the forecast, so far as the accounting policies and calculations are concerned, has been properly compiled on the basis of the assumptions made.

In compliance with the requirement under Rule 10 of the Takeovers Code and Rule 14.62 of the Listing Rules, the forecast has been reported on in accordance with the Takeovers Code and the Listing Rules and the requisite reports from the Auditor and the Financial Adviser have been lodged with the Executive and the Stock Exchange and attached as appendices to this circular.

Save for the modification of the assumption in the business plan in the First Valuation Report for the first two years in view of the delay in the marketing of the Electronic Gaming Machines, there is no change in the assumptions adopted in the First Valuation Report and the Second Valuation Report. The following are the details of the assumptions, including commercial assumptions of the Valuations, prepared by the Directors, endorsed by the Valuer and reviewed by the Auditor and the Financial Adviser pursuant to Rule 10.2 of the Takeovers Code and set out in the First Valuation Report and the Second Valuation Report prepared by the Valuer as attached as Appendix IV(A) and Appendix IV(B), respectively, to this circular:

the future operation will be conducted as planned and the financial projections, including the expected selling prices and sales volume of the products, are realizable;
the Company will focus on potential customers in the states of Nevada, Mississippi, Connecticut, Pennsylvania, New Jersey, California and Florida in the US (the “ Localities ”);
there will be sufficient supply of technical staff and production support in the gaming equipment industry in which the Company operates;
the Company will retain competent management, key personnel and technical staff to support its ongoing operations and developments;

– 12 –

LETTER FROM THE BOARD

interest rates and exchange rates in the Localities for the operation of the Company will not differ materially from those presently prevailing;
all relevant legal approvals and business certificates or licences to operate the business in the Localities in which the Company operates or intends to operate would be officially obtained, and renewed upon expiry;
there will be no major changes in the current taxation laws in the Localities in which the Company operates or intends to operate, the rates of tax payable shall remain unchanged, sales tax in any Localities will be borne by the end customers, and that all applicable laws and regulations will be complied with; and
there will be no major changes in the political, legal, economic or financial conditions in the Localities in which the Company operates or intends to operate, which would adversely affect the revenues attributable to and profitability of the Company.

The Valuations have been prepared by the Valuer. The Auditor has reviewed the accounting policies and calculations adopted in arriving at the Valuations and is of the opinion that, so far as the accounting policies and calculations are concerned, the Valuations have been properly compiled in accordance with the assumptions made by the Directors set out above and are presented on a basis consistent in all material respects with the accounting policies adopted in preparing the financial statements of the Group for each of the two years ended 31 December 2011 and 31 December 2012, respectively.

The Valuations have also been reported on by the Financial Adviser in accordance with Rule 11.1(b) of the Takeovers Code. On the basis of the review work conducted by it, which includes reasonableness checks to assess the relevant experience and expertise of the Valuer, review and discussion with the Valuer of the qualifications, experience, expertise and relevant track records of the Valuer, the Financial Adviser is satisfied that the Valuer has the qualifications and experience to compile the Valuations.

The Financial Adviser has reviewed the First Valuation Report and the Second Valuation Report and discussed with the Directors, the management of the Company and the Valuer regarding the First Valuation Report and the Second Valuation Report, including, in particular, the valuation approach, and bases and assumptions. On the basis of the aforesaid work done by the Financial Adviser, the Financial Adviser is of the opinion that the bases and assumptions set out in the First Valuation Report and the Second Valuation Report have been prepared by the Directors with due care and consideration and objectivity, and on a reasonable basis.

Terms of the Promissory Note

Issuer: The Company Principal amount: HK$200,000,000

– 13 –

LETTER FROM THE BOARD

Maturity date:

Interest rate: Redemption:

The date falling the 48th month from the date of issue of the Promissory Note

The Promissory Note is non-interest bearing

The Company has the right to redeem the whole or any part of the outstanding principal amount of the Promissory Note at any time prior to the maturity date of the Promissory Note provided that the Company shall provide the holder of the Promissory Note with not less than 14 Business Days prior written notice (to the extent the holder being located and such notice served) specifying the date of redemption, the applicable discount rate and the amount of Promissory Note to be redeemed.

Holder of the Promissory Note shall not be entitled to request for an early redemption of the whole or any part of the outstanding principal amount of the Promissory Note at any time prior to the maturity date.

Early redemption of Promissory Note shall be subject to discount of the outstanding principal amount of the Promissory Note, the rate of which varies according to the period of early redemption.

– 14 –

LETTER FROM THE BOARD

Particulars of the discount are as follows:

	Discount
Time period in which repayment is made	rate
The 12 month period commencing on the date of the issue of the
Promissory Note (and, for the avoidance of doubt, excluding the
first anniversary of the date of the issue of the Promissory Note)	4%
The 12 month period commencing on the first anniversary of the
date of the issue of the Promissory Note (and, for the avoidance of
doubt, excluding the second anniversary of the date of the issue of
the Promissory Note)	3%
The 12 month period commencing on the second anniversary of the
date of the issue of the Promissory Note (and, for the avoidance of
doubt, excluding the third anniversary of the date of the issue of
the Promissory Note)	2%
The 12 month period commencing on the third anniversary of the
date of the issue of the Promissory Note (and, for the avoidance of
doubt, excluding the maturity date of the Promissory Note)	1%

Conditions Precedent

Completion is subject to the fulfillment of the following conditions precedent:

(a) the passing by the Independent Shareholders by way of poll of all necessary resolutions at the SGM approving the Agreement and other transactions contemplated thereunder and the grant of the Whitewash Waiver;
(b) the Stock Exchange having granted the approval for the listing of, and permission to deal in, the Consideration Shares;
(c) the Executive having granted the Whitewash Waiver;
(d) the Company having complied with all requirements under the Listing Rules and the Takeovers Code;
(e) completion of the Capital Reorganisation;
(f) the warranties as set out in the Agreement remaining true and accurate and not misleading in any respect as given as of the date of the Agreement and at all times up to and including the date of Completion; and

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(g) there being no applicable law, rules, regulations, order, injunction, decree or judgment of any court or other governmental authorities which prohibits, restricts or imposes conditions or limitations on, or is reasonably expected to operate to prohibit, restrict or impose conditions or limitations on, the consummation of any of the transactions contemplated in the Agreement.

Neither party to the Agreement shall be entitled to waive any of the conditions other than that the Purchaser may, at its absolute discretion, waive any of the conditions as set out in items (f) to (g) above at any time by notice in writing to the Vendor and such waiver may be made subject to such terms and conditions as are determined by the Purchaser.

The parties to the Agreement shall each use their respective best endeavours to fulfill, or procure the fulfillment of, the conditions (to the extent such party is responsible for such fulfillment) on or before the Long Stop Date and give such undertakings and do all such acts and things as may reasonably be required by the Stock Exchange and the SFC in connection therewith.

In the event that any of the conditions is not fulfilled (or waived by the Purchaser in accordance with the Agreement) on or before the Long Stop Date, neither party to the Agreement shall be obliged to proceed with the performance of his/its obligations under the Agreement; and the Agreement shall be automatically terminated forthwith and cease to be of any effect and the parties to the Agreement shall have no claim against each other arising out of or in connection with the Agreement save for any claims arising out of any antecedent breach of the Agreement.

Completion

Completion shall take place on the 14th Business Day after the date upon which the last of the conditions precedent is satisfied or waived or such other date as the parties may mutually agree in writing.

Consideration Shares

Upon Completion, the Company shall issue 600,000,000 Consideration Shares to the Vendor at the issue price of HK$0.80 per Consideration Share in partial settlement of the consideration for the Acquisition.

The Consideration Shares represent approximately 211.16% of the issued share capital of the Company immediately after completion of the Capital Reorganisation (details of which are set out in the section headed “Proposed Capital Reorganisation and Change of Board Lot Size” in this circular), but before the allotment and issue of the Consideration Shares, and approximately 67.86% of the issued share capital of the Company as enlarged by the allotment and issue of the Consideration Shares (assuming no further Shares will be allotted and issued prior to the issue of the Consideration Shares).

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LETTER FROM THE BOARD

The issue price of HK$0.80 per Consideration Share was determined after arm’s length negotiation between the parties to the Agreement after taking into account the prevailing market price of the Shares, which represents:

(i) a premium of approximately 2.56% over the theoretical closing price per New Share of HK$0.780 as quoted on the Stock Exchange on the Last Trading Day;
(ii) a premium of approximately 0.50% over the theoretical average closing price per New Share of approximately HK$0.796 as quoted on the Stock Exchange for the last five consecutive trading days up to and including the Last Trading Day;
(iii) a discount of approximately 0.25% to the theoretical average closing price per New Share of approximately HK$0.802 as quoted on the Stock Exchange for the last ten consecutive trading days up to and including the Last Trading Day; and
(iv) a discount of approximately 16.67% to the theoretical closing price of HK$0.960 per New Share as quoted on the Stock Exchange on the Latest Practicable Date.

The Directors (including the independent non-executive Directors) consider that the issue price of the Consideration Shares is fair and reasonable.

Mandate to issue the Consideration Shares

The Consideration Shares will be allotted and issued pursuant to a specific mandate to be sought from the Independent Shareholders at the SGM.

Application for Listing

The Company has applied to the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares.

INFORMATION ON THE PATENTS

The assets to be acquired are the five approved Patents in the US, which were granted in 2011 and 2012, together with their continuations, continuations in part or division (i.e. six Patents which are still pending approval, whose registration applications were filed in 2005, 2007, 2011 and 2012 respectively).

The Patents relate to certain technological know-how applied in a computerized betting terminal system (the “ System ”).

Among the six Patents which are still pending approval, the Vendor was notified by the USPTO in March 2012 that one registration application filed in 2005 had been rejected as being unpatentable as a result of two existing patents owned by Independent Third Parties.

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The Vendor has amended that registration application to differentiate and overcome those two existing patents. As at the Latest Practicable Date, the Vendor had not yet received the response from the USPTO.

Besides the Patents which are the subject of the Acquisition, the Vendor is the owner of two similar or competing patents in the US, which were granted on 13 November 2012 and 4 December 2012, respectively (the “ Excluded Patents ”). The Excluded Patents relate to the mechanisms for playing slot games simultaneously with other casino games.

The Company intends to sell electronic gaming machines for baccarat, roulette and sicbo games to the US market. Therefore, the Company, after consulting its legal adviser on the US laws on intellectual properties (the “ US IP Legal Adviser ”) on the approved Patents owned by the Vendor which are to be acquired by the Group, proposes to acquire the Patents in relation to the System from the Vendor so that the Group can sell the electronic gaming machines installed with the System (the “ Electronic Gaming Machines ”) to casinos in the US. The key source of revenue will be derived from the sale of the Electronic Gaming Machines in the US. The Excluded Patents do not relate to the technological know-how applied in the System of the Electronic Gaming Machines as the Electronic Gaming Machines do not involve the playing of slot games. The Vendor intends to retain the Excluded Patents for his own use and does not have the intention to sell the Excluded Patents.

The approved five Patents are the core elements implemented on the System to be marketed in the US, whereas the six Patents pending approval are the continuations, continuations in part or division of the approved Patents (collectively the “ Entire Patent Portfolio ”). According to the advice of the US IP Legal Adviser, as the eleven Patents relate to the same System, the USPTO would require any transfer/assignment of the Patents to cover the Entire Patent Portfolio. In addition, the Company can utilize all the Patents for commercial use in the US notwithstanding that the six Patents applications are still pending approval in the US or even if the six Patents applications are not approved subsequently. It will take approximately three to seven years for the USPTO to process and approve a patent application. According to the legal opinion obtained by the Company, the US IP Legal Adviser does not know of any substantial legal obstacles to obtain approval for the six Patents which are still pending approval.

For the avoidance of doubt, in the event that the Patents pending approval are not subsequently granted, it will not adversely affect the operation of the System as the design can still be implemented and the results of the Valuations will not be affected. Reverse engineering by competitors will not materially affect the sales of the System in the absence of the core technologies protected by the approved Patents.

The Patents relate to certain technological know-how applied in a computerized betting terminal system (i.e. the System) in relation to the operation of multi-gambling games. The System allows participants to play multiple and different live table games (i.e. baccarat, roulette and sicbo) with live dealers via remote terminals (i.e. gambling machines) and place bets at the same time. It is a sophisticated electronic platform which allows participants to wager at the privacy of a betting terminal.

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The System is connected to one or more live tables operated by human dealers at one end and remote terminals at the other such that participants of the games need not be physically present at dealer tables but can place bets at one of the remote terminals, which are located inside a casino but not at the same places as the live dealer, linked to the System.

Under the System, one or more dealer tables are linked to the server and the remote terminals. The dealer table itself does not contain any special electronic component but is equipped with the accessories such as card decks required by the dealer. A live dealer deals cards on the dealer table. The game is broadcasted live to players at the remote terminals via a server. Card value will be automatically displayed on the remote terminals as well as the screen behind the dealer for public viewing. Remote terminals also display game statistics and betting results. Many terminals can be linked to a single dealer table.

As the Patents have not yet been put to commercial use in the US, the historical net profits attributable to the Patents for the last two financial years are not available.

Reference is also made to the announcement of the Company dated 1 November 2012 pursuant to Rule 13.09 of the Listing Rules (the “ PSI Announcement ”) relating to the injunction proceedings initiated by Shuffle Master Asia Limited (“ Shuffle Master ”) against the Company, its subsidiaries (i) LT Game Limited (“ LT Game ”) (a non-wholly owned subsidiary of the Company and an entity which owns the global (including Macau) rights to use, distribute and maintain the material and equipment that uses the invention object of the Macau Invention Patent No. I/000150 (“ Macau Patent I/150 ”)) and the Macau Invention Patent No. I/000380) (“ Macau Patent I/380 ”)), and (ii) Natural Noble Limited (“ Natural Noble ”) (a wholly-owned subsidiary of the Company and the owner of Macau Patent I/380) and Mr. Jay Chun (the Chairman and an executive Director of the Company, the inventor and registered owner of Macau Patent I/150) (collectively the “ Respondents ”) (the “ Macau Injunction ”). The Macau Injunction seeks orders from the Macau Judicial Base Court to restrain, amongst others, the Respondents from, amongst other things, (i) making any representation or expression on any monopoly right over all and any solutions allowing players to play remotely in real time a plurality of live games; and (ii) unfairly competing with Shuffle Master in any manner, amongst other ancillary petitions.

As disclosed in the PSI Announcement, the Company and the Directors strongly refute the Macau Injunction, the claim, and the allegations made therein, and consider them to be without merit. As at the Latest Practicable Date, the Company, LT Game, Natural Noble and Mr. Jay Chun had filed their opposition to the Macau Injunction, and the hearing for the Macau Injunction had been scheduled for May and June 2013. The Company and the Directors believe that the Macau Injunction was initiated as one more phase of a litigation tactic to pressurize the Group, as a result of the infringement proceedings originally filed by Mr. Jay Chun, LT Game and Natural Noble, against, inter alia, Shuffle Master, for infringements of Macau Patent I/380 and Macau Patent I/150.

In October 2012, the Macau Intermediate Court (“ Tribunal de Segunda Instância ”) ruled on the criminal infringement proceedings commenced following the patents infringement by Shuffle Master at the 2009 “G2E Asia” exhibition, pursuant to which it considered that there were sufficient evidence and grounds indicating that the technological characteristics of the electronic gaming machines displayed by Shuffle Master are the same

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as those key technological characteristics of the electronic gaming machines installed with Macau Patent I/150 and ruled that the court of trial should take criminal prosecution against Shuffle Master according to section 289 of the current “Industrial Property Code”.

On 4 May 2012, Mr. Jay Chun, Natural Noble and LT Game filed an interim measure application in Macau against, inter alia, Shuffle Master to prevent and curb the practice of any violation acts of Macau Patents I/150 and I/380 during the 2012 “G2E Asia” exhibition held in the Convention and Exhibition Center of The Venetian Macau-Resort-Hotel. During the 2012 “G2E Asia” exhibition, Macau Customs enforced the injunction order granted by the Macau Court and sealed the suspected offending products displayed by Shuffle Master during the exhibition to prohibit Shuffle Master from displaying the suspected offending products. Mr. Jay Chun, Natural Noble and LT Game further filed infringement proceedings against, inter alia, Shuffle Master, for patent infringement after the said injunction application. As at the Latest Practicable Date, Shuffle Master had filed a statement of defence to the infringement proceedings and further requested the declaration of the invalidation of both Macau Patents I/150 and I/380 as well as to have the Company joined as a party in the lawsuit.

The Patents are patents in the US which are not related to or part of those Macau patents subject to the lawsuits in Macau. According to the US IP Legal Adviser, any ruling and/or decision in a foreign jurisdiction (e.g. Macau) on patents would not impact the patent rights of the Vendor or his assignee (i.e. the Group upon completion of the Acquisition) in the US. Patent law is territorial and according to jurisdiction. In view of the aforesaid, the Company considers that the Macau Injunction will not affect the Patents in any ways as contemplated under the Acquisition.

REASONS FOR THE ACQUISITION

The Company has installed a computerized system in other casinos in relation to the operation of a single gambling game (the “ Single Game System ”) since 2006. Such Single Game System contributed to the Group’s turnover in Macau in the amounts of approximately HK$2,000,000 (approximately 2.1% to total turnover), HK$16,000,000 (approximately 12.3% to total turnover) and HK$46,000,000 (approximately 21.0% to total turnover), respectively for each of the three years ended 31 December 2006, 2007 and 2008. In addition, the Company received positive response from many casino operators who inspected and played the game with the Single Game System.

However, with limited financial resources for the research and development of the Single Game System, the Company had no capacity to develop other computerized game systems, which requires sufficient financial support and takes a certain period of time. In light of the above, the Vendor has devoted his own financial resources and manpower to develop the System since 2005 and completed the same in 2006. In view of the changing technology and market demand, the Vendor further devoted his own financial resources to the upgrade and modification of the System subsequently.

The Vendor has licensed the use of the System to the Company at no cost since 2009 and the System has been installed in Casino Kam Pek Paradise in Macau. The System replaced the Single Game System and its contribution to the Group’s turnover increased

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from approximately HK$46,000,000, being sharing of net gaming win, (approximately 21.0% to total turnover) for the year ended 31 December 2008 to approximately HK$83,000,000, being sharing of net gaming win, (approximately 25.5% to total turnover) for the year ended 31 December 2009; approximately HK$89,000,000, being sharing of net gaming win, (approximately 23.8% to total turnover) for the year ended 31 December 2010 and approximately HK$140,000,000, being sharing of net gaming win and income from the distribution of electronic gaming machines installed with the System in Macau, (approximately 25.7% to total turnover) for the year ended 31 December 2011.

The increase in turnover of the Group from the sharing of net gaming win generated from the System from approximately HK$46,000,000 in 2008 to approximately HK$89,000,000 in 2010 illustrates the popularity of the System among its players as such increase was mainly attributable to the increase in the number of players and bets placed by players via the System. As such, the Company considers that the System has a growth potential in Macau. The Group acquired the patent of the System in Macau from the Vendor in 2010 and began in 2011 to engage in the sale of the System to casinos in Macau, some of which are operated by international casino operators with casinos in the US. In view of the positive response of customers in Macau who expressed their interests in introducing the System to their US casinos and in order to further expand the business of the Group, the Company proposes to acquire the Patents in the US so that the Group can sell the System to the US market where the number of casinos, demand for gambling machines and the market for gambling industry are much larger than in Macau.

The Company is of the view that the following salient features of the System will allow the Group to open up the US market successfully:

(a) in view of the high labour cost in the US, the System can achieve cost saving in labour, increase the productivity of dealers and reduce the number of dealer tables required as each traditional dealer table can only serve a limited number of players and all the calculation of betting results is done manually which is time-consuming. However, with the System, a dealer table can serve hundreds of players at the same time with all the calculation of betting results done by the System automatically and efficiently;
(b) the automatic and computerized features of the System can also reduce the risks of human errors and fraud. Based on the experience of the Company in using the System in Casino Kam Pek Paradise, which is managed by the Company, and other casinos in Macau for the past few years, other risks including hacking of the System are minimal;
(c) it takes about three minutes for a player to play one single game at a traditional felt table because the live dealer needs to (i) serve and wait for all players to place bets before he/she can start the game; and (ii) manually calculate and pay the winning amount (in the form of physical chips) to players at the traditional felt table one by one whereas it only takes one minute on average for a player to play one single game on the Electronic Gaming Machine because the live dealer (i) doesn’t have to serve a number of players but only needs to wait until the end of the betting time before he/she can start the game; and (ii) all the calculation

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and payment of the winning amount to the players of the Electronic Gaming Machines (in the form of credit recorded in the Electronic Gaming Machines) will be done electronically and simultaneously. It is therefore likely to increase the overall number of bets made by each player. As such, a higher betting rate is expected as the automatic feature of the System reduces the time for placing one single bet and/or playing one single game, which will increase the overall number of bets made by each player within the same fixed period of time, assuming the player has sufficient funds and is willing to bet; and

(d) there is likely to be an increase in the gambling amount for each player as players could bet on different games with different gambling amount at the same time while playing with the same machine because the Electronic Gaming Machine offers a variety of choices of games including baccarat, roulette and sicbo. Players can choose to play different games on the same machine. Such flexibility and convenience provides an incentive for players to play different games at the same time. The betting amount is likely to increase accordingly.

Based on the aforesaid, the Directors (including the independent non-executive Directors) consider that the terms of the Acquisition are fair and reasonable and in the interests of the Shareholders as a whole.

DUE DILIGENCE

The Company has engaged the US IP Legal Adviser to conduct due diligence works on the Patents. The US IP Legal Adviser has conducted legal search with the relevant government authorities in the US on the ownership, existence and details of any encumbrances on the approved Patents and the Patents pending approval. Based on the results of the aforesaid procedures, the US IP Legal Adviser confirmed that the Vendor is the ultimate beneficial owner of the approved Patents and the applicant of the Patents pending approval. Also, the approved Patents are free from any encumbrance.

INFORMATION ON THE GROUP

The Group is principally engaged in the development, provision and sales of electronic gaming systems and the provision of casino management services.

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BUSINESS MODEL

The business model of the Group in respect of the production and distribution of the Electronic Gaming Machines is illustrated below:

==> picture [214 x 367] intentionally omitted <==

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

Product design and
Stage one
customization
}
Production process
(The Group has outsourced Stage two
this process entirely ) }
The Group
Local manufacturers /
distributors / Stage three
sales agents
Casinos
(end-users)
workflow
----- End of picture text -----

Stage one: Product design and customization

This stage involves customization of the Electronic Gaming Machines according to customers’ specifications. It involves software development and hardware development.

Since the Electronic Gaming Machines are very unique and innovative in the gaming market, different customers normally have very different approaches on how to utilize the Group’s products in their businesses. As such, lots of design and customization of software programs are required. This is also a unique way that the Group works with its customers as compared to its major competitors.

The Group does most of the software development and customization in-house, and the process ranges from game design, software programming and graphic design to software testing according to market requirement although the Group may outsource a limited part of

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such work to external parties. As some countries have more advanced technology in the hardware aspect, the Group outsources the hardware design process to several companies located in Europe and Asia.

The in-house division of the Group for software development and customization of the Electronic Gaming Machines comprises 51 members specializing in game design, software programming, graphic design and software testing of live table game machines. The head of the division, namely the Chief Technology Officer, has extensive experience in software development as well as product design and is responsible for the Group’s overall technological development. Members of this division are graduates of universities / colleges in computer and information science, electronic engineering or graphic design and have worked as officers, technicians or designers of software houses or design houses. They are equipped with the required technical expertise and development experience in electronic machines.

Upon completion of the initial software development, the Group works with its customers to review the initial works and gather customers’ comments back to its research and development team. After several rounds of communications between the Group and its customers, the Group will finalize the game software version with the customers. The Electronic Gaming Machines’ cabinet hardware design is done by several well-known design firms from certain European and Asian countries. Throughout these processes, the Group keeps constant contact with its customers to make sure that its products’ development fits in with its customers’ needs precisely. Furthermore, with all these customization processes, the Group can constantly keep its products design and development in line with the market trend. Under this development model, the Group has formed strategic partnerships for products development with several major casino operators. The Group has also set up periodic products development road map and review meetings with all its major multi-national customers.

It usually takes three months for normal development or customization and one month for testing and verification of products design with customers. For customers who adopt the standard design or require fewer modifications to the standard design of the Electronic Gaming Machines, this process can be shortened.

All the service providers to which the design process is outsourced at this stage are Independent Third Parties.

Stage two: Production process

The Group currently outsources the entire hardware production process to two external suppliers as original equipment manufacturers (“ OEM ”) as those OEMs enjoy cheaper labour costs and stronger technical support. The whole OEM production process has been carried out exactly according to the Group’s design, specification and components requirement developed at the products design and customization stage, including but not limited to, products compliance with different jurisdictional, occupational and safety standards. The Group has adopted a stringent process in selecting its OEMs by taking into account their qualification, product qualities and whether they have obtained ISO accreditation in order to ensure that products quality can reach international standard. Upon

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receipt of the finished products, the Group will double-check its hardware quality before installing the Group’s gaming software into the hardware. During the software installation process, the Group’s technicians will follow the Group’s installation procedures and conduct tests according to the Group’s quality control procedures before delivery to customers.

The production lead time normally takes three months after confirmation on the production order is received.

All the manufacturers to which the production process is outsourced at this stage are Independent Third Parties.

Stage 3: Selling and distribution process

The final stage is the selling and distribution of the Electronic Gaming Machines. The finished Electronic Gaming Machines are sold and delivered to customers. While the end-users of the Electronic Gaming Machines are casinos, the Group’s target customers also include local manufacturers, distributors and sales agents for the re-sale of the Electronic Gaming Machines.

For orders made by the major customers of the Group, which involve substantial product design and customization, it normally takes an average of five to six months to complete the first order. Repeated orders will take much shorter time as all the development and customization works would have been done in the first order.

Human resources

The following table shows a breakdown of the employees by function of the Group as at the Latest Practicable Date:

Management, administration and human resources Casino management and support Sales, marketing and promotion Accounting Information technology	As at the Latest Practicable Date 63 218 21 15 72
	389

Revenue

The Group generates revenue from the selling and distribution of Electronic Gaming Machines through direct sales to end-users, i.e. casinos, and also through local manufacturers, distributors and sales agents for the re-sale of the Electronic Gaming Machines. The Group recognizes revenue as the Electronic Gaming Machines are delivered to casinos or local manufacturers, distributors and sales agents and issues invoices to the

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customers at the time of delivery of the Electronic Gaming Machines. The Group also generates revenue from leasing the Electronic Gaming Machines to casinos and recognizes the net gaming win shared with these casinos as the relevant services are rendered.

Costs

The costs of selling and distributing the Electronic Gaming Machines include the corresponding purchase costs of the Electronic Gaming Machines, the production of which is outsourced as well as the operating costs of the technical support centre established by the Group for the provision of technical support to the casinos, local manufacturers, distributors and sales agents. The Group outsources the entire hardware production process to external suppliers as OEMs which have the relevant manufacturing expertise and the required machines and facilities in place for such production. The outsourced production process enables the Group to control costs more effectively, which is favourable to its business development. The operating costs include rental costs, staff costs such as the technical support personnel as well as the management personnel and other office expenses.

BUSINESS PLAN

As the Group is a new comer to the US gaming market, it will adopt a cautious approach in developing the market and will focus on potential customers in the states of Nevada, Mississippi, Connecticut, Pennsylvania, New Jersey, California and Florida in the US, where the number of casinos and, according to the best knowledge of the Board, the gaming revenue are comparatively higher in the US. Among the foresaid states, the Group will initially focus its efforts on and open up the gaming market in the state of Nevada, where Las Vegas, the largest market of gaming industry in the US is located, in its first few years of operation before expanding to the rest of the targeted states of the US market gradually and one by one at a later time.

As the Group has outsourced the production of the Electronic Gaming Machines, it has not formulated any capital expenditure plans for the production of the Electronic Gaming Machines in respect of its business plan in connection with the Patents. The Group intends to finance the costs for the operation of the Group’s business in the US market from its internal resources.

To achieve the business plan of the Company, the Group intends to implement the following strategies:

(i) Promotion of the System to international casino operators with operations in Macau and the US

Several multi-national casino operators are the customers of the Company in Macau. The Company can therefore more easily introduce its products into the casinos operated by the Company’s existing customers in the US, especially in the Nevada market. It will help the Company to establish in the US market.

(ii) Cooperation with local manufacturers, distributors and sales agents in the US for the development of the US market

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The Company will build up its own sales and distribution channel through cooperation with local manufacturers or distributors in the US. By working with local manufacturers and distributors, the Company can take advantage of their existing business connection to quickly push the Company’s products into the US market.

(iii) Participation in selective gaming trade shows

There are a number of international gaming trade shows which provide the Group with a good opportunity to network with potential customers and increase the reputation of its products. The Group had participated in the “G2E Asia” exhibition in Macau in the past few years. After the acquisition of the Patents, the Group intends to participate in selective gaming trade shows in the US (e.g. G2E exhibition in Las Vegas in the US) in order to promote the Group’s products and enhance public awareness of its products.

(iv) Building up of its US sales and marketing team

Establishing its own US sales and marketing team will help the Company to have closer and more direct contact with its customers, reduce its marketing and sales cost and establish the Company’s own sales and distribution channel for its future products. During this process, the Company may also be able to identify more experienced and capable people to join the Group.

(v) Product modification according to US market’s unique requirements

The Company will develop and modify the Electronic Gaming Machines according to the requirements of the market and customers in the US in order to further increase the attractiveness and popularity of the Electronic Gaming Machines.

(vi) Product diversification

The Company will enrich the product line of the Electronic Gaming Machines for sale in the US market.

FINANCIAL EFFECTS OF THE ACQUISITION

Based on the pro forma financial information of the Enlarged Group set out in Appendix III to this circular and the bases and assumptions taken into account in preparing such pro forma financial information, as a result of the Acquisition, the Group’s total assets and total liabilities would be increased by approximately HK$597,535,000 and approximately HK$121,449,000, respectively. The Group would record a net profit of approximately HK$67,895,000 as a result of the Acquisition as compared to a net profit of approximately HK$143,309,000 for the year ended 31 December 2012. The details of the financial effects of the Acquisition on the financial position and results of the Group

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together with the bases and assumptions taken into account in preparing the unaudited pro forma financial information are set out, for illustrative purpose only, in Appendix III to this circular.

FINANCIAL AND TRADING PROSPECT OF THE ENLARGED GROUP

Looking forward, after Completion, the Enlarged Group will continue with the existing principal business of the Group. In addition, the Acquisition will enable the Enlarged Group to expand to the US gaming industry. The Directors are of the view that the Acquisition will enlarge the future income base of the Group. The Directors also believe that the Acquisition will lead to the diversification of the Group’s income source and the expansion of the Group’s business, thereby providing significant growth potential to the Group.

In view of the benefits of the Acquisition, the Directors believe that the Acquisition is in the interest of the Company and its Shareholders as a whole.

INDUSTRY OVERVIEW

The International Monetary Fund (hereinafter referred to as the “ IMF ”) opined in their recent report, World Economic Outlook, published in October 2012 that the recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook. Their forecast thus sees only a gradual strengthening of activity from the relatively disappointing pace of early 2012 and projected global growth at 3.3 and 3.6 percent in 2012 and 2013 respectively.

Output is expected to remain sluggish in advanced economies but still relatively solid in many emerging market and developing economies. Unemployment is likely to stay elevated in many parts of the world. Financial conditions will remain fragile, according to their Global Financial Stability Report also released in October 2012. Activity in Europe contracted by about 0.25% during the first half of 2012.

The main new development was a further escalation of financial stress during the second quarter in the euro area periphery, which, despite some easing, did not fully reverse in the third quarter through mid-September of 2012. The impact is most direct in these economies themselves, and all except Ireland are in recession now. But spillovers are increasingly reaching other economies in the region, given strong trade and financial linkages.

Another factor has been the diminishing offset from trade with faster-growing emerging market and advanced economies. Economies in the region with higher growth, including in the euro area core, have benefited from stronger trade linkages with faster growing economies outside the region. Still, robust growth in Russia has provided some offset to the weaker euro area external demand in emerging Europe.

In the US, a modest recovery with weak job creation continues amid a weak global environment, output in the US rose above the pre-crisis peak in the second half of 2011, sooner than in many other advanced economies. The recovery in Canada has been more robust, reflecting partly the effects of favorable financing conditions with less pressure for balance sheet adjustment and the commodity boom.

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Historical Perspective and Prospects of the US Economy

Chart 1 below shows the historical development and prospects of the US economy based on the GDP data retrieved from the IMF World Economic Outlook Database (April 2013):

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

22,000
20,078
20,000 19,021
18,012
18,000 17,049
16,000 15,685 [16,238]
14,000 12,623 [13,377] 14,029 [14,292] 13,974 [14,49915,076]
12,000 11,853
10,000 9,951 [10,28610,64211,142]
8,000
6,000
4,000
2,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Billion (US$)
----- End of picture text -----

Chart 1 – GDP (Current Prices) for the US (estimates for 2013-2017)

As shown in Chart 1 above, the GDP of the US maintained a growth trend in the past except in 2009, when there was a decrease from US$14,292 billion in 2008 to US$13,974 billion in 2009. The GDP of the US rose back to US$14,499 billion in 2010, representing an increase of 3.76% as compared to 2009. The GDP of the US further rose to US$15,076 billion and US$15,685 billion in 2011 and 2012, respectively. The IMF expected that this growth trend will continue in the next few years.

Gaming Equipment Industry in the US

According to the “Market Overview: The 2011 Global Gaming Bulletin” published by Ernst & Young, the US gaming industry has undergone a remarkable period of growth in the past 20 years. The recession that began in late 2007 continued to make 2010 a challenging year for the US gaming industry.

According to the statistics of the American Gaming Association, state gaming control boards, the US commercial casinos industry gross gaming revenues rose to approximately US$34.60 billion in 2010, representing an increase of 0.93% as compared to 2009. The gross gaming revenues further increased to US$35.64 billion in 2011, representing a growth of 3.01% from 2010.

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40 37.52
35.27 36.22 35.64
34.28 34.60
35 32.77
31.17
28.07 28.72
30
25
20
15
10
5
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Billion (US$)
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Chart 2 – US commercial casinos industry’s gross gaming revenue

Sources: American Gaming Association, state gaming control boards

Notwithstanding the decrease in total revenues in 2008 and 2009, the revenues of the US gaming market still accounted for over 48% of the revenues of the global gaming market in 2010. In terms of the total number of casinos, according to the “Market Overview: The 2011 Global Gaming Bulletin” published by Ernst & Young, more than 40% of the casinos were located in the US.

Bloomberg industry research analysts report that major gaming equipment suppliers in the US regained their growth momentum in the gross revenue after a decline in 2008. If the sharp increase in the revenue of the US gaming industry in 2007 is considered to be exceptional, the industry is on a growth trend over a longer time span. The recorded gross revenues of the major gaming equipment suppliers in US$ as reported by Bloomberg are shown in Chart 3 below.

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14,000
13,682
13,500
13,000 12,942 12,819
12,500
12,194
12,051
12,000 11,860
11,500
11,000
10,500
2006 2007 2008 2009 2010 2011
US$ (million)
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Chart 3 – Gross revenue (in US$ million) of major gaming equipment suppliers

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According to the American Gaming Association, gaming equipment manufacturing is an important sector of the gaming industry. During 2011, the gaming equipment manufacturing sector of the US gaming industry made significant contributions to the overall US economy, rebounding after two years of contraction due to the recession. Research conducted by Applied Analysis for the Association of Gaming Equipment Manufacturers and reported in the 2012 State of the States: The AGA Survey of Casino Entertainment reveals that, in 2011, the US gaming equipment manufacturing sector recorded US$12.3 billion in economic output (revenues), employed 30,300 people and paid salaries and wages of approximately US$2.2 billion. In 2011, the average annual salary within the industry was US$72,200.

Opportunities and Challenges

The Directors believe that the opportunity for growth of the Group in the US gaming market is the increase in the popularity of baccarat and roulette as baccarat, roulette and sicbo are the games which can be played by players on the Electronic Gaming Machines.

According to a report “Las Vegas Strip Table Mix: The Evolution of Casino Games, 1985-2011” from the Centre for Gaming Research of University of Nevada Las Vegas, over the past twenty five years, there has been a considerable realignment of aggregate table game mix on the Las Vegas Strip in the US:

Baccarat has spectacularly increased its win share in the past several years, out earning blackjack since 2009. Its unit share has grown proportionately with its revenue gain.
Twenty-One (also known as blackjack) has declined in terms of both units and revenue. In 1985, 77% of casino games were blackjack, whereas in 2011, 51% were. In 1985, blackjack accounted for just over half of all table game revenues; in 2010, it accounted for barely a quarter of table win.
Roulette has moderately increased both its revenue share and unit share.
Craps has declined remarkably as a money-maker for casinos. In 1985, it generated more than 28% of the overall table win. In 2011, it contributed about 9% to the total table win. Its decline in win-share is disproportionate to its slight decline in unit share.
Other games, including mini-baccarat, three card poker, and pai gow poker, have increased both their revenue share and their unit share.

The report further commented that these changes have impacted the ways in which casinos operate. The increased reliance on baccarat which is a more volatile game, has led to greater variance in reported field results for both individual properties and the Las Vegas Strip as a whole.

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60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Baccarat Blackjack Craps Roulette Others
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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Chart 4 −Las Vegas table game revenue evolution 1985 – 2011

With that said, the greatest challenge – at least in markets other than Asia Pacific – remains the continuing global economic uncertainty, and the possible decline in consumer spending. Competition in the gaming industry remains fierce. It is important to continue to refine and develop new games and technology. Additionally, the emergence of iGaming, including social gaming, is still relatively new and the industry continues to evolve. The growth of the iGaming industry and its impact on traditional land based gaming is subject to a degree of uncertainty.

To address these market challenges, while sustaining and growing day-to-day operations, it is important to interact with many organizations in both the public and private sectors – ranging from analysts and commercial lending institutions, to governing bodies and licensing agencies that regulate and monitor gaming operations.

Competition in the US

Competition within the US among manufacturers and distributors of gaming devices and gaming-related equipment is fierce. Competitors range from small, localized companies to large, multi-national corporations, several of which have substantial resources. These latter companies include, but are not limited to, International Game Technology (“ IGT ”), Bally Technologies, Inc. (“ Bally ”), Aristocrat Gaming (“ Aristocrat ”), WMS Industries Inc. (“ WMS ”), SHFL Entertainment, Inc (“ SHFL ”), Konami Gaming, Inc. (“ Konami ”), Aruze Corporation (“ Aruze ”) and Ainsworth Game Technology (“ Ainsworth ”). These companies manufacture and distribute a myriad of gaming products including electronic gaming machines, electronic table systems, and proprietary table games. They compete for space on the floors of casinos, including obtaining favorable placement of their products, as well as for capital spending from their customers.

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Competition is primarily based on the amount of profit their products generate for casinos. Additionally, competition focuses on player appeal, brand recognition, and the strength of the underlying intellectual property of their products.

Among the gaming products offered by the Group’s potential competitors in the US gaming market, the following two similar products are in competition with the Electronic Gaming Machines:

Automatic electronic table These are products with computer random number games: generator for the playing of the table games (human dealers are not required). Companies offering these types of games include SHFL, Aruze and IGT. These products are classified as slot games; and
Live dealer electronic table These are products which require human dealers game: to operate. Only one company, namely SHFL, offers this type of game. This type of game is classified as table game.

The Electronic Gaming Machines offer a hybrid of these two types of games, which is classified as table game. While the Electronic Gaming Machines require human dealers to operate the game, they have the features of slot games which allow table players to enjoy slot benefits like bonus play, accumulation of player loyalty points, lowering of the minimum bet, faster game play, etc. In addition, the Electronic Gaming Machines also offer progressive jackpot and allow players to switch between and play different games at the same time.

Entry Barriers

The commercial casino industry is one of the most regulated and taxed industries in the US. Either of these factors – regulations or taxes – may preclude manufacturers and distributors of gaming devices and gaming-related equipment from entering into the market.

Furthermore, changes in the existing gaming laws or regulations or new interpretations of the existing gaming laws or regulations may hinder or prevent entry into certain states in the US. In addition, the enactment of unfavourable legislation or government efforts affecting or directed at manufacturers or gaming operators, such as referendums to increase gaming taxes or requirements to use local distributors, could act as a barrier to entering a market.

Major Market Suppliers/Competitors

Competitors of the Group in the US gaming market include several large, multi-national corporations, such as IGT, Bally, Aristocrat, WMS, SHFL, Konami, Aruze and Ainsworth. These companies have plentiful resources. They also have worldwide presence, with most, if not all, having a presence in the major gaming markets of the US, Asia, Europe and Australia.

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Customers

Products and services are marketed to customers in the gaming equipment industry worldwide through a worldwide network of sales associates, as well as third-party distributors and agents in certain markets. Customer training programs are also offered to ensure the products are used to their full potential.

Customers of gaming equipment include leading casino operators such as Las Vegas Sands Corp. Leading casino operators have a presence in the leading gaming markets across the globe, including Macau, the US, Singapore and Australia. The quality and breadth of the customer base of gaming equipment is a strong testament to the quality of the product, technological innovation and customer service.

Future Trends

One important future trend for gaming is the proliferation of legalized gaming worldwide. The international gaming industry is rapidly growing, both in size and into new jurisdictions. As a result, a number of US commercial gaming companies, including operators, manufacturers and distributors, have established operations in foreign markets and continued to actively pursue further expansion abroad. Asian gaming markets in particular have experienced exponential growth, with Macau being at the forefront of this growth.

Another important trend is that the US commercial casino industry continues to introduce new technologies that improve the overall customer experience and the efficiency of casino operations. According to the American Gaming Association, a number of technologies are changing the modern gaming floor including: a general overall movement towards completely cashless slot floors as a result of the increasing utilization of ticket-in/ ticket-out technology; the introduction of server-based games that allow operators to make changes to any slot machine on the floor from a single secure computer server within the casino; and multi-player games that allow customers to compete against each other on a single machine. Finally, online gambling has emerged as one of the fastest growing and most hotly debated sectors within the broader gaming industry. According to a recent report, “The 10th Annual G2E Future Watch Series, An Insider Look at New Trends in Gaming” published in November 2012 by Global Gaming Expo, US residents are estimated to have spent nearly US$4 billion wagering online in 2011. This is despite the passage of the Unlawful Internet Gambling Enforcement Act in 2006.

Assuming that there are no successful efforts by the US Congress to legalize and regulate the US market during the next five years, but also assuming that a certain number of states opt to legalize online gaming on an intrastate basis, it is estimated that the US online gaming market will continue to increase in size over the next five years. According to the Global Gaming Expo, 67% of the industry executives, regulators and analysts interviewed as part of the 10th Annual G2E Future Watch Series believe US bettors will annually spend between US$8 billion and US$11 billion on Internet gambling in 2017.

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Roughly one quarter of the industry executives, regulators and analysts interviewed (28% of the interviewees) think the market will grow more moderately, to a size of US$6 billion to US$7 billion annually, over this time.

Moreover, in the event that the US Congress passes legislation legalizing and regulating online poker in the US within 2013, expectations for market growth over the ensuing five-year period rise significantly. According to the Global Gaming Expo, 61% of the industry executives, regulators and analysts interviewed envision the US market growing to US$10 billion or more over the course of the next several years, with 33% estimating that the US market would generate online gaming revenues between US$14 billion and US$17 billion annually by roughly 2018.

Similarly, the anticipated growth rates worldwide for Internet gaming are equally impressive. According to the Global Gaming Expo, it is estimated that worldwide online wagering totalled approximately US$30 billion in revenue in 2011. Moreover, a majority of industry executives, regulators and analysts interviewed as part of the 10th Annual G2E Future Watch Series believe that this market will grow by 50% or more over the next five years. 28% of the industry executives, regulators and analysts experts believe that the worldwide market will grow to be US$45 billion to US$49 billion in size by 2017, while an equal number (i.e. 28%) estimates it will be even larger and in the range of US$50 billion to US$60 billion by that time.

RISK FACTORS

The Directors have identified the following risks associated with the Acquisition, the Patents and the business under the Patents:

The approved Patents may be subject to infringement by competitors and third parties

The technological know-how of the System as applied in the Electronic Gaming Machines is protected by the approved Patents. However, there is no assurance that the intellectual property rights of the Group will be free from infringement by competitors and third parties, which may adversely affect the operation and profitability of the Group in respect of the US market. The Group has been monitoring and will continue to monitor any infringement of its intellectual property rights and take appropriate actions to protect its interest.

The Electronic Gaming Machine is a new product with no track record in the US

The Group intends to sell the Electronic Gaming Machines installed with the System to the US market. The Electronic Gaming Machine is a new product to the US market and has no track record of revenue generation in the US. However, the Company is confident that the financial projections in relation to the Patents set out in the valuation reports attached as Appendix IV to this circular can sustain and be materialized, in view of the following factors: (i) the Electronic Gaming Machines serve as a medium for its players to play live table games of baccarat, roulette and sicbo via remote terminals, allowing casinos to benefit from the salient features of the Electronic Gaming Machines, such as saving of labour cost and overhead, reducing the risks of staff (e.g. dealers) shortage, human errors and fraud,

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possible increase in the betting amount; (ii) like mahjong, baccarat, roulette and sicbo are traditional games with a very long history and are still very popular nowadays, the possibility of baccarat, roulette and sicbo becoming obsolete is relatively low; and (iii) the Company has installed similar electronic gaming machines in casinos in Macau since 2009 and the popularity of these electronic gaming machines has increased with time.

Changes in economic conditions of the US may adversely affect the Group

The demand for the Electronic Gaming Machines may be subject to changes in the general economic conditions of the US. Any downturn in the US economy may adversely affect the demand for the Electronic Gaming Machines and hence the Group’s business in the US. Notwithstanding the aforesaid, the Company is confident that the popularity of the Electronic Gaming Machines will increase as the cost saving features will allow US casinos to achieve greater cost saving especially when there is any downturn in the US economy.

Competition in the US market is intense

As stated in the section headed “Industry Overview” in this circular, the gaming equipment industry in the US has a number of industry players, and the Company, being a new comer to the US gaming equipment industry, faces competition from many existing industry players. There is no assurance that the Group will be able to compete successfully against its competitors.

The Group is dependent on a limited number of suppliers, which in turn exposes it to risks associated with product quality, delivery schedules and production capacity availability

The Group has outsourced the production of the Electronic Gaming Machines to two external OEMs. The Group’s heavy reliance on a limited number of outsourced OEMs, which are Independent Third Parties, exposes it to a number of risks, any of which could have a material and adverse effect on its business, financial condition and results of operations, including:

Its suppliers may fail to meet the Group’s production deadlines, maintain the required quality standards or, comply with the Group’s product specifications.
The suppliers may experience transportation delays and interruptions when delivering products.
Since the Group currently has only two OEMs, should the Group’s arrangement with its OEMs be interrupted or terminated, the Group may not be able to identify alternative manufacturing sources on a timely basis or on commercially acceptable terms, which may have an adverse impact on the production plan of the Group. Working with manufacturers with which the Group have no established relationships could expose it to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation.

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Should the suppliers experience any unforeseen circumstances which may require the Group to look for alternative suppliers, the Group may experience increased costs, disruptions in supply and reduced sales.

Notwithstanding the aforesaid, since the Group has established a long-term relationship with its suppliers and has not experienced any disruption of supply in the past, the Group considers the aforesaid risks to be quite remote. Also, the Group has been working with its OEMs closely during the production process so that any disruption / problem can be detected by the Group at the earliest instance and the Group can adopt remedial measures promptly.

The business model which is to be adopted in the US is a replication of the business model in Macau and may not perform

Leveraging on the Group’s successful operation in Macau, the Group intends to replicate in the US its existing business model in Macau. However, the US market is more complex and is different in many aspects from Macau. As such, the business model of the Group may not perform in the US and in such case, the profitability of the Group in respect of the US market may be adversely affected. The Group will monitor its business in the US market closely and will not hesitate to modify its business model in order to cope with the different needs of the US market.

Changes in technology may result in additional demand on the hardware and technical features of the Electronic Gaming Machines

The Electronic Gaming Machine serves as a medium for its player to play live table games of baccarat, roulette and sicbo so that casinos can benefit from its salient features, such as saving of labour cost and overhead, reducing the risks of staff (e.g. dealers) shortage, human errors and fraud, and possible increase in the betting amount. Like mahjong, baccarat, roulette and sicbo are traditional games with a very long history and are still very popular nowadays, the possibility of baccarat, roulette and sicbo becoming obsolete is relatively low. However, in view of the fast changing technology, players of Electronic Gaming Machines may have additional demand on the hardware and technical features of Electronic Gaming Machines. Any failure of the Group to improve the hardware or technical features of Electronic Gaming Machines in response to changes in technology may adversely affect the popularity of the Electronic Gaming Machines. To cope with this, the Group has been very attentive to the feedbacks of its customers on the products sold and customizes its products according to the specific needs of its customers.

Other risks in relation to the Electronic Gaming Machines and the Systems include hacking, software and hardware errors and fraudulent manipulation

The automatic and computerized features of the System can reduce the risks of human errors and fraud. The Company’s success also depends in part on its ability to avoid, detect, replicate and correct software and hardware errors and fraudulent manipulation of the Electronic Gaming Machines and the System. However, there is no guarantee that the Electronic Gaming Machines or the System will be completely free from hacking, software and hardware errors and fraudulent manipulation. In the unforeseeable event that the

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Electronic Gaming Machines or the System become the subject of hacking, software and hardware errors and fraudulent manipulation, confidence of buyers / users of the Electronic Gaming Machines will be affected, which may have an adverse impact on the reputation and profitability of the Group.

Notwithstanding the aforesaid, the Electronic Gaming Machines and the System have already had some built-in measures for security protection and based on the experience of the Company in using the System in Casino Kam Pek Paradise managed by the Company, and other casinos in Macau in the past few years, the Company considers that the aforesaid risks are minimal. Nevertheless, the Company will monitor and improve the Electronic Gaming Machines and the System whenever necessary in order to protect them from these risks.

Changes in government regulations or policies in the industry may affect the business and the business plan of the Group

The gaming industry in the US may be subject to government regulations, which vary from state to state. Changes in the existing gaming laws or regulations or new interpretations of the existing gaming laws or regulations may hinder or prevent the Group from expanding to a particular state of the US. The enactment of unfavourable legislation or government efforts on regulating the gaming industry may also affect the business and the business plan of the Group in respect of the US market.

Failure to attract, retain and motivate key employees may adversely affect the Group’s ability to compete

The Group’s success will depend on its ability to recruit and retain talented employees who have good knowledge and experience in the gambling industry and the US market. The market for qualified executives and highly skilled workers is intensely competitive. The loss of key employees or an inability to hire a sufficient number of experienced staff could limit the Group’s ability to compete in the US market. As the Group has not experienced material turnover of its staff in the past and is willing to offer competitive remuneration packages, the Company considers that the risk of failure to attract, retain and motivate key employees is relatively low.

Abrupt change in linked exchange rate system of Hong Kong could adversely affect the sale of the Electronic Gaming Machines and the profitability of the Group

Sale of the Electronic Gaming Machines will be denominated in US dollars whereas the Group’s revenues are denominated in Hong Kong dollars. The Hong Kong dollar has been linked to the US dollar since 1983. The exchange linkage of the Hong Kong dollar and the US dollar, is subject to potential changes due to, among other things, Hong Kong governmental policies and international economic and political developments.

There is no assurance that the Hong Kong dollar will continue to be linked to the US dollar. Any such change may result in severe fluctuations in the exchange rates for these currencies. Also, there is no assurance that the current rate of exchange fixed by the relevant monetary authorities for these currencies will remain at the same level. Any abrupt

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appreciation or depreciation of the Hong Kong dollar in relation to the US dollar could adversely affect the sale of the Electronic Gaming Machines as well as the profitability of the Group.

LEGAL AND REGULATORY REQUIREMENTS

The Company aims to sell the Electronic Gaming Machines installed with the System primarily in the state of Nevada of the US, where Las Vegas, the largest market of gaming industry in the US, is located. The following is an overview of the applicable laws and regulations that the Company believes may be applicable to it:

Regulations on gaming equipment

In Nevada, the System constitutes associated equipment. The Nevada Revised Statutes defines “associated equipment”, in relevant part, as “Any equipment or mechanical, electromechanical or electronic contrivance, component or machine used remotely or directly in connection with gaming or mobile gaming, any game, race book or sports pool that would not otherwise be classified as a gaming device, including dice, playing cards, links which connect to progressive slot machines, equipment which affects the proper reporting of gross revenue, computerized systems of betting at a race book or sports pool, computerized systems for monitoring slot machines and devices for weighing or counting money”. Persons manufacturing or distributing associated equipment do not generally have to obtain a licence or be found suitable, however manufacturers of associated equipment must register with the Nevada State Gaming Control Board. Additionally, the associated equipment must be approved by the Chairman of the Nevada State Gaming Control Board. A licensee cannot offer associated equipment for play in Nevada without this written approval. With that said, the Nevada State Gaming Control Board and the Nevada Gaming Commission have the discretion to require any manufacturer or distributor of associated equipment to file an application for a finding of suitability to be a manufacturer or distributor of associated equipment. Similarly, a manufacturer or distributor of associated equipment who sells, transfers or offers the associated equipment for use or play in Nevada may be required by the Nevada Gaming Commission, upon recommendation of the Nevada State Gaming Control Board, to file an application for a finding of suitability to be a manufacturer or distributor of associated equipment.

The Company will only sell the Electronic Gaming Machines in states where a specific type of gambling is legal. The Company is required to obtain approval from the Nevada State Gaming Control Board for the Electronic Gaming Machines before the Company can sell and distribute them. As advised by the Company’s legal adviser in the US, as at the Latest Practicable Date, approval-in-principle for the Electronic Gaming Machines has been obtained from the Nevada State Gaming Control Board. Formal approval from the Nevada State Gaming Control Board for the Electronic Gaming Machines will be obtained after completion of field trial of the Electronic Gaming Machines, which is expected to be available in June/July 2013. The approval by the Nevada State Gaming Control Board is to allow the Group to make technical improvements, which do not relate to the technology protected by the Patents, to the Electronic Gaming Machines if these products are to be

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operated in Nevada. Approval will be required every time when the Electronic Gaming Machines are improved and the entire technical improvement process is handled by the Group. For the avoidance of doubt, approval by the Nevada State Gaming Control Board is not a condition precedent to Completion.

Product liability for products

Product liability law in the US concerns the ability of a consumer to hold the manufacturer, distributor, supplier or retailer of a “product” responsible for any injury or damages the specific product might cause. Product liability law varies significantly from state to state, but generally adheres to the guidelines set forth in Section 2 of the Restatement (Third) of Torts: Product Liability. There are three types of product liability claims:

Manufacturing Defect – a defect that occurs in the manufacturing process and usually involves poor-quality materials or poor-quality workmanship;
Design Defect – a defect that occurs where the product design is inherently dangerous, useless or not up to the promised use. Design defects occur no matter how carefully manufactured the product may be. Design defect is typically claimed when the product does not satisfy consumer expectations or if the risks of the product outweigh its benefits; and
Failure to Warn – a defect that arises when a product carries an inherent non-obvious danger that could be avoided or mitigated through adequate warnings or instructions to the user. This type of defect is present regardless of how well the product is manufactured or designed for its intended purpose.

Depending on the state where the claim is made, the US court will apply specific burdens of proof on the consumer and the manufacturer to determine whether, and how much, a consumer can recover from the manufacturer. These theories of liability require different elements to be proven to present a successful claim:

Negligence – a negligence claim requires a consumer to provide proof that the manufacturer owed the consumer a certain standard, or duty, of care, that there was a breach of that duty, resulting in a defective product, and that the breach was the actual or proximate cause of the plaintiff’s verifiable injury. Negligence per se can be established through proof that the manufacturer violated a specific law or statute;
Strict Liability – in states that have adopted strict liability laws, the consumer does not need to show the existence and breach of a standard, or duty, of care. The consumer only needs to show the existence of a defect. Strict liability also expands liability from the manufacturer to any entity involved in the distribution, supply, or sale of the product to the consumer; and

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Breach of Warranty – a warranty is a statement, or promise, by a manufacturer or seller concerning the performance of a product. In many ways, a warranty functions as a guarantee to the consumer that the product will perform as promised. A warranty can be enforced when there is privity between the manufacturer and the consumer. The consumer is required to show the court that the product did not perform as promised in the warranty.

In addition to the above claims and standards, there are various state and national consumer protection laws that provide specific remedies for a variety of defects. Specifically, most states have laws that cover product defects that cause economic injury, even though they may not cause personal injury. For example, most states will have statutes that would protect the economic interests of the purchasers and users of electronic gaming devices, even through the gaming devices did not cause actual physical injury. Consumers would have the ability to claim that the gaming devices did not physically perform as expected (manufacturing defect), contained a flaw in its design or mechanism of performance (design defect) or that it should have provided certain warnings or instructions to the consumer prior to use (failure to warn). Typically a consumer will have two to six years to bring a claim for product liability. The time limitations for asserting a claim varies from state to state.

IMPLICATIONS OF THE LISTING RULES

As one or more of the applicable percentage ratios, where appropriate, calculated with reference to Rule 14.07 of the Listing Rules, exceed 100%, the Acquisition constitutes a very substantial acquisition for the Company under the Listing Rules and is therefore subject to the reporting, announcement and shareholders’ approval requirements under Chapter 14 of the Listing Rules. The Acquisition also falls within Rule 14.06(6)(a) of the Listing Rules but the Listing Committee of the Stock Exchange has agreed to grant a waiver to the Company from strict compliance with the aforesaid Listing Rule on the conditions that:

(i) the information contained in this circular should be enhanced to prospectus standard;
(ii) the Company should perform due diligence on the Patents;
(iii) this circular should include a valuation of the Patents; and
(iv) this circular should clearly indicate whether any value had been ascribed to the six Patents that are still pending approval.

As at the Latest Practicable Date, the Vendor who is an executive Director, and his concert parties owned approximately 10.14% of the issued Shares. The Vendor is therefore a connected person of the Company under the Listing Rules. Accordingly, the Acquisition and the transactions contemplated under the Agreement also constitute a non-exempt connected transaction for the Company under Chapter 14A of the Listing Rules and are subject to approval by the Independent Shareholders at the SGM. Any connected person with a material interest in the transaction, and any Shareholder with a material interest in the Acquisition and its associates, will not vote at the SGM in respect of the resolutions

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approving the Acquisition. As such, the Vendor and his concert parties will abstain from voting at the SGM in respect of the resolutions approving the Acquisition and other transactions contemplated thereunder.

Mr. Jay Chun, who has a material interest in the Acquisition, has abstained from voting on the Board resolution approving the Acquisition.

2. IMPLICATIONS OF THE TAKEOVERS CODE

Whitewash Waiver

The Vendor has made an application to the Executive for the Whitewash Waiver and the Executive has indicated that it will grant the Whitewash Waiver subject to, among other things, the approval of the Independent Shareholders taken by way of a poll at the SGM. It is one of the conditions precedent to Completion that the Whitewash Waiver be granted by the Executive and approved by the Independent Shareholders at the SGM. The aforesaid condition is not capable of being waived. If the Whitewash Waiver is not granted by the Executive or the Agreement and/or the Whitewash Waiver is not approved by the Independent Shareholders, the Acquisition will not proceed.

The Vendor and his concert parties (i.e. Mr. Jay Chun and August Profit Investments Limited) and Shareholders who are involved in or interested in the Agreement and/or the Whitewash Waiver will abstain from voting in respect of the resolutions approving the Agreement and the transactions contemplated thereunder and the Whitewash Waiver at the SGM.

Best Top Offshore Limited, a company wholly owned by Mr. Shan Shiyong, alias, Sin Sai Yung, an executive Director, has indicated that it will vote in favour of the resolutions in relation to the Agreement and the transactions contemplated thereunder and the Whitewash Waiver to be proposed at the SGM.

Shareholders should note that if the Whitewash Waiver is approved by the Independent Shareholders, the maximum potential holding of voting rights of the Company by the Vendor and parties acting in concert with him upon Completion will exceed 50% of the voting rights of the Company and that the Vendor and his

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concert parties may increase their holding without incurring any further obligations under Rule 26 of the Takeovers Code to make a general offer for the securities of the Company.

Dealings in the Shares by the Vendor and parties acting in concert with him

There has been no dealing in the Shares and other relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company by the Vendor and parties acting in concert with him during the six month period immediately prior to the date of the Announcement and up to the Latest Practicable Date. As at the Latest Practicable Date, other than the approximately 10.14% of the issued share capital of the Company owned by the Vendor and parties acting in concert with him (the details of which are set out under the section headed “CHANGES IN SHAREHOLDINGS STRUCTURE OF THE COMPANY” in this circular) and transactions contemplated under the Agreement (to which the Vendor and/or his concert party is/are a party(ies)):–

i. the Vendor and its concert parties held, owned, or had control or direction over 288,208,800 Shares, representing approximately 10.14% of the total issued share capital of the Company as at the Latest Practicable Date. Save as disclosed in this paragraph, the Vendor and its concert parties did not hold, own or have control or direction over any other Shares, convertible securities, warrants or options of the Company or any outstanding derivative in respect of any relevant securities (as defined in note 4 to Rule 22 of the Takeovers Code) of the Company;
ii. with reference to Note 8 to Rule 22 of the Takeovers Code, there was no arrangement (which includes any arrangement involving rights over shares, any indemnity arrangement, and any agreement or understanding, formal or informal, of whatever nature, relating to relevant securities which may be an inducement to deal or refrain from dealing) in relation to the Vendor or the Shares which may be material to the Whitewash Waiver and the Acquisition;
iii. there was no other agreement or arrangement to which any of the Vendor and parties acting in concert with him was a party which related to the circumstances in which it may or may not invoke or seek to invoke a pre-condition or a condition to the Whitewash Waiver and/or the Acquisition;
iv. the Vendor and parties acting in concert with him had not received any irrevocable commitment to accept or reject the Acquisition or to vote in favour of or against the resolutions on the Acquisition, the Whitewash Waiver and the transactions contemplated under the Agreement (including the allotment and issue of the Consideration Shares) to be proposed at the SGM;
v. the Vendor and parties acting in concert with him had not borrowed or lent any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company; and

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LETTER FROM THE BOARD

vi. there was no agreement, arrangement or understanding (including any compensation arrangement) between the Vendor or any person acting in concert with him and any of the Directors, recent Directors, Shareholders or recent Shareholders having any connection with or dependence upon the outcome of the Acquisition and/or the Whitewash Waiver.

Intention of the Vendor

It is the intention of the Vendor and his concert parties to maintain the listing of the Shares on the Stock Exchange. Following Completion, the Vendor and his concert parties intend to continue the existing business and the employment of the existing employees of the Group. The Vendor and his concert parties do not intend to introduce any major changes to the existing business operations and management structure of the Group, including any redeployment of the fixed assets of the Group. In view of the positive impact of the System that has been brought to the Group as detailed in the section headed “Reasons for the Acquisition”, the Vendor is confident that the Acquisition will allow the Group to open up the US market successfully.

3. PROPOSED CAPITAL REORGANISATION AND CHANGE OF BOARD LOT SIZE

The Directors propose to reorganise the share capital of the Company in the following manner:

(a) the Share Consolidation pursuant to which every ten issued Existing Shares will be consolidated into one Consolidated Share with nominal value of HK$1.00 each;
(b) the Capital Reduction pursuant to which the nominal value of each of the issued Consolidated Shares will be reduced from HK$1.00 to HK$0.001 by canceling the paid-up capital of the Company to the extent of HK$0.999 on each of the issued Consolidated Shares;
(c) the Share Premium Reduction pursuant to which such amount as the Directors think fit standing to the credit of the share premium account of the Company be reduced;
(d) the credit arising from the Capital Reduction and the Share Premium Reduction be transferred to the contributed surplus account of the Company within the meaning of the Companies Act;
(e) the granting of the Authorisation to the Directors to apply the entire amount standing to the credit of the contributed surplus account of the Company within the meaning of the Companies Act in such manner as they consider appropriate, including but not limited to setting off against the accumulated losses of the Company, subject to compliance with the Companies Act and the bye-laws of the Company; and

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LETTER FROM THE BOARD

(f) the Share Subdivision pursuant to which each authorised but unissued Existing Share of HK$0.10 will be subdivided into 100 New Shares of HK$0.001 each.

As at the Latest Practicable Date, the authorised share capital of the Company was HK$1,000,000,000 divided into 10,000,000,000 Shares of HK$0.10 each, of which 2,841,444,778 Existing Shares have been issued and fully paid or credited as fully paid. On the assumption that there is no change in the issued share capital of the Company from the Latest Practicable Date up to the date on which the Capital Reorganisation becomes effective, a credit of approximately HK$283.86 million will arise from the Capital Reduction.

Pursuant to the Authorisation, the Directors shall be authorised to apply the amount standing to the credit of the contributed surplus account of the Company within the meaning of the Companies Act in such manner as they consider appropriate, including but not limited to setting off against the accumulated losses of the Company subject to compliance with the Companies Act and the bye-laws of the Company.

As advised by the Company’s legal advisers as to the laws of Bermuda, under Bermuda law, the amount standing to the credit of the contributed surplus account of the Company within the meaning of the Companies Act is a distributable reserve and the Company may apply the contributed surplus in any manner not prohibited by the Companies Act and the bye-laws of the Company and subject to compliance with the Companies Act and the bye-laws of the Company.

Effects of the Capital Reorganisation

The issued New Shares will rank pari passu with each other in all respects, including the rights as to dividends, voting and return of capital. Any fractional entitlements to the New Shares will be aggregated, sold and retained for the benefit of the Company. Other than the expenses incurred in relation to the Capital Reorganisation, its implementation will not in itself, alter the underlying assets, business operations, management or financial position of the Group or the proportionate interests or rights of the Shareholders. The Capital Reorganisation itself will not have any material adverse effect on the financial position of the Group.

Set out below is a table summarising the effects of the Capital Reorganisation on the share capital structure of the Company as at the Latest Practicable Date and immediately after the Capital Reorganisation becomes effective (assuming no change in the issued share capital of the Company from the Latest Practicable Date up to the date on which the Capital Reorganisation becomes effective):

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LETTER FROM THE BOARD

		Immediately after the
	As at the Latest	Capital Reorganisation
	Practicable Date	becomes effective
Nominal value of the Shares	HK$0.10	HK$0.001
Authorised share capital	HK$1,000,000,000.00	HK$1,000,000,000.000
	divided into	divided into
	10,000,000,000	1,000,000,000,000
	Existing Shares	New Shares
Issued and fully paid up share	HK$284,144,477.80	HK$284,144.477
capital or credited as fully	divided into	divided into
paid up	2,841,444,778	284,144,477
	Existing Shares	Whole New Shares (Note)
Unissued share capital	HK$715,855,522.20	HK$999,715,855.523
	divided into	divided into
	7,158,555,222	999,715,855,523
	Existing Shares	New Shares

Note: The maximum number of New Shares in issue after the Capital Reorganisation will be 284,144,477 disregarding any fractional New Shares arising from the Capital Reorganisation. Please refer to the shareholding table on page 51 of this circular for details.

Conditions

The Capital Reorganisation is conditional upon:

(a) the passing of the necessary special resolution(s) by the Shareholders at the SGM to approve the Capital Reorganisation involving the Share Consolidation, the Capital Reduction, the Share Premium Reduction and the Share Subdivision;
(b) compliance with the relevant procedures and requirements under Bermuda laws and the Listing Rules to effect the Capital Reorganisation; and
(c) the Stock Exchange granting the listing of, and permission to deal in, the New Shares arising from the Capital Reorganisation.

The Capital Reorganisation is not subject to any approval or consent from the Bermuda court under the laws of Bermuda. The Capital Reorganisation will be completed upon the fulfilment of all the conditions of the Capital Reorganisation.

To the best information, knowledge and belief of the Directors having made all reasonable enquiries, as at the Latest Practicable Date, no Shareholder had an interest in the Capital Reorganisation that is materially different from the other Shareholders. Therefore, no Shareholder is required to abstain from voting on the resolution to be proposed at the SGM to approve the Capital Reorganisation.

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LETTER FROM THE BOARD

Reasons for the Capital Reorganisation and impact on the Company and the Shareholders

The Capital Reorganisation involves the Share Consolidation, the Capital Reduction, the Share Premium Reduction and the Share Subdivision. The nominal value of each of the Existing Shares is HK$0.10. Under the laws of Bermuda, a company may not issue shares at a discount to the nominal value of such shares. In view that the market price of the Existing Shares has been less than HK$0.10 since early June 2011, the Directors propose the Share Consolidation in order to ensure compliance with Rule 13.64 of the Listing Rules as it is expected that this would bring about a corresponding upward adjustment in the trading price of the New Shares. The Capital Reduction will reduce the nominal value of the Existing Shares so that the Company will have greater flexibility in the pricing for any issue of New Shares in the future.

The Company had accumulated losses of HK$599,900,300.87 as at 31 December 2012. The amount of credit arising from the Capital Reduction and the Share Premium Reduction will be applied to set off against the Company’s accumulated losses. The Directors consider that it will facilitate the restoration of the Company’s ability to declare dividends in future if retained earnings are available, which in turn will facilitate the Company’s negotiation with potential investors in respect of fund raising exercises through the issue of New Shares in future. The Directors (including the independent non-executive Directors) are of the view that the Capital Reorganisation will not have a material effect on the financial position of the Group. Other than the expenses to be incurred in relation to the Capital Reorganisation, the implementation thereof will not alter the underlying assets, business operations, management or financial position of the Company or the interests or rights of the Shareholders.

As at the Latest Practicable Date, the Company had issued 3 tranches of Convertible Debentures due in 2014 with outstanding principal amount of HK$24,000,000, US$1,000,000 and HK$57,000,000, respectively. The holders of the Convertible Debentures are Independent Third Parties. The conversion price of the Convertible Debentures shall be the higher of (i) the average closing price of the Shares of any three consecutive trading days (as selected by the debenture holder) within the sixty trading days immediately prior to the conversion date (i.e. three Business Days immediately following the date when a debenture holder lodges a conversion notice to the Company) and (ii) the nominal value for the time being of the Shares. According to the terms and conditions of the Convertible Debentures, no conversion rights may be exercised by a debenture holder if and to the extent that following such exercise, that debenture holder and parties acting in concert with it, taken together, will, directly or indirectly, control or be interested in more than 5% of the share capital of the Company then issued and outstanding.

In view that the nominal value of the Existing Shares is HK$0.10 and the closing price of the Existing Shares as at the Last Trading Day is HK$0.078, i.e. less than HK$0.10, the conversion price of the Convertible Debentures shall be HK$0.10 and the number of Existing Shares which may be issued upon conversion of the Convertible Debentures in full will be 887,500,000. Immediately after completion of the Share Consolidation, the nominal value of the Consolidated Shares (i.e. the minimum

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LETTER FROM THE BOARD

conversion price of the Convertible Debentures) will be HK$1.00. Upon completion of the Capital Reduction, the nominal value of the New Shares will be changed to HK$0.001 and therefore, theoretically, the Convertible Debentures can be converted at a price less than HK$1.00 and the number of New Shares which may be issued by the Company upon conversion of the Convertible Debentures will be higher.

Notwithstanding the potential dilution effect of the Capital Reorganisation, the Directors, after considering the aforesaid benefits of the Capital Reorganisation, consider that the Capital Reorganisation are in the interests of the Company and the Shareholders as a whole.

Listing and Dealings

Application will be made to the Stock Exchange for granting the listing of, and permission to deal in, the New Shares arising from the Capital Reorganisation.

Subject to the granting of the listing of, and permission to deal in, the New Shares on the Stock Exchange, the New Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealings in the New Shares on the Stock Exchange or, under contingent situation, such other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange on any trading day is required to take place in CCASS on the second trading day thereafter. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.

No part of the securities of the Company is listed or dealt in on which listing or permission to deal is being or is proposed to be sought on other stock exchanges.

Change of board lot size

Upon the Capital Reorganisation becoming effective, the board lot size of the Shares for trading on the Stock Exchange will be changed from 20,000 Existing Shares to 4,000 New Shares.

Arrangement for matching services for odd lots

In order to facilitate the trading of odd lots (if any) of the New Shares arising from the Capital Reorganisation and change of board lot size, the Company has appointed Get Nice Securities Limited to provide matching services for the sale and purchase of odd lots of the New Shares at the relevant market price per New Share during the period from 9:00 a.m. on Wednesday, 19 June 2013 to 4:00 p.m. on Wednesday, 10 July 2013 (both dates inclusive) for Shareholders on a best-effort basis. Shareholders who wish to acquire odd lots of the New Shares to make up a full board lot, or to dispose of their holding of odd lots of the New Shares may contact Get Nice Securities Limited at 10/F., Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Hong Kong (telephone number: (852) 2526 7738) during the office hours in the aforesaid period.

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LETTER FROM THE BOARD

Holders of odd lots of the New Shares should note that successful matching of the sale and purchase of odd lots of the New Shares is not guaranteed. The Company will bear the costs relating to the matching of sale and purchase of odd lots of the New Shares.

Free exchange of Share certificates and trading arrangements

Shareholders should note that the expected timetable set out in this circular with regard to the trading arrangement and exchange of share certificates is prepared on the assumption that the Capital Reorganisation will become effective on or about Tuesday, 4 June 2013. The Company will make an announcement in the event that there is a change in the expected timetable with regard to the trading arrangement and exchange of share certificates.

The New Share Certificates will be in the colour of orange in order to distinguish them from the Existing Share Certificates which are pink in colour. Subject to the Capital Reorganisation becoming effective, which is currently expected to be on Tuesday, 4 June 2013, the Existing Share Certificates, will only be valid for delivery, transfer, trading and settlement purposes for the period up to 4:00 p.m., Wednesday, 10 July 2013 and thereafter will not be accepted for delivery, transfer, trading and settlement purposes. However, the Existing Share Certificates will continue to be good evidence of legal title to the Shares and Shareholders may exchange them for the New Share Certificates by submitting them to the Registrar, at the expense of the Company, during the business hours between Tuesday, 4 June 2013 and Friday, 12 July 2013. Thereafter, the Existing Share Certificates will be accepted for exchange only on payment of a prescribed fee of HK$2.50 (or such higher amount as may from time to time be allowed by the Stock Exchange) for each New Share Certificate issued or each Existing Share Certificate submitted for cancellation, whichever the number of certificates involved is higher. It is expected that the New Share Certificates will be available for collection within a period of 10 Business Days after the date of submission of the Existing Share Certificates to the Registrar.

Adjustment to outstanding Share Options and Convertible Debentures

As at the Latest Practicable Date, there were outstanding Share Options granted under the Share Option Scheme to subscribe for 66,000,000 Shares and Convertible Debentures with outstanding principal amount of HK$24,000,000, US$1,000,000 and HK$57,000,000, respectively. Save as aforesaid, the Company had no other outstanding convertible securities, options or warrants in issue which confer any right to subscribe for, convert or exchange into Shares as at the Latest Practicable Date.

Pursuant to the terms of the Convertible Debentures, the Capital Reorganisation will not lead to any adjustments to the outstanding Convertible Debentures.

The Capital Reorganisation will cause adjustments to the exercise price of the outstanding Share Options and/or the number of New Shares which may fall to be allotted and issued upon exercise of the outstanding Share Options. The Company has appointed the Auditor to review and certify the bases of such adjustments to the

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LETTER FROM THE BOARD

outstanding Share Options to comply with Chapter 17 of the Listing Rules and the supplementary guidance issued by the Stock Exchange on 5 September 2005 and in accordance with the respective rules of the Share Option Scheme.

Further announcement will be made by the Company in respect of such adjustments as and when appropriate.

WARNING

Shareholders and potential investors should also be aware and take note that, the Capital Reorganisation involving the Share Consolidation, the Capital Reduction, the Share Premium Reduction and the Share Subdivision are conditional upon satisfaction of the conditions precedent set out in the paragraph headed “Conditions” in the section headed “Proposed Capital Reorganisation and Change of Board Lot Size”. Therefore, the Capital Reorganisation may or may not proceed.

Shareholders and potential investors are advised to exercise caution when dealing in the Shares, and if they are in any doubt about their position, they should consult their professional advisers.

CHANGES IN SHAREHOLDING STRUCTURE OF THE COMPANY

As at the Latest Practicable Date, except for the 66,000,000 outstanding Share Options and 3 tranches of Convertible Debentures due in 2014 with outstanding principal amount of HK$24,000,000, US$1,000,000 and HK$57,000,000, respectively, the Company had no outstanding derivatives, options, warrants, conversion rights or other similar rights which are convertible or exchangeable into Shares. The following table sets out the shareholding structure of the Company (i) as at the Latest Practicable Date; (ii) immediately after the completion of the Capital Reorganisation; (iii) immediately after the completion of the Capital Reorganisation and the issue of the Consideration Shares; and (iv) immediately after the completion of the Capital Reorganisation and the issue of the Consideration Shares, and assuming the exercise of all the outstanding Share Options and conversion of the Convertible Debentures in full (Note 1) (in each case assuming that there will be no further change in the issued share capital of the Company):

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LETTER FROM THE BOARD

The Vendor and his concert parties (Note 2) Best Top Offshore Limited (Note 3) Public Shareholders Total	As at the Latest Practicable Date No. of Existing Shares Appro. % 288,208,800 10.14 260,975,800 9.18 2,292,260,178 80.68 2,841,444,778 100.00	Immediately after the completion of the Capital Reorganisation No. of New Shares Appro. % 28,820,880 10.14 26,097,580 9.18 229,226,017 80.68 284,144,477 100.00	Immediately after the completion of the Capital Reorganisation and the issue of the Consideration Shares No. of New Shares Appro. % 628,820,880 71.12 26,097,580 2.95 229,226,017 25.93 884,144,477 100.00	(for illustrative purpose only) Immediately after the completion of the Capital Reorganisation and the issue of the Consideration Shares, and assuming the exercise of all the outstanding Share Options and conversion of the Convertible Debentures in full (Note 1) No. of New Shares Appro. % 628,820,880 62.60 26,097,580 2.60 349,608,068 34.80 1,004,526,528 100.00	(for illustrative purpose only) Immediately after the completion of the Capital Reorganisation and the issue of the Consideration Shares, and assuming the exercise of all the outstanding Share Options and conversion of the Convertible Debentures in full (Note 1) No. of New Shares Appro. % 628,820,880 62.60 26,097,580 2.60 349,608,068 34.80 1,004,526,528 100.00
					100.00

Notes:

This column shows the shareholding structure of the Company immediately after the completion of the Capital Reorganisation and the issue of the Consideration Shares, and assuming the exercise of all the outstanding Share Options and conversion of the Convertible Debentures in full at the assumed conversion price of HK$0.78 per conversion share. Since the conversion price of the Convertible Debentures shall be the higher of (i) the average closing price of the Shares of any three consecutive trading days (as selected by the holder of the Convertible Debentures) within the sixty trading days immediately prior to the conversion date and (ii) the nominal value for the time being of the Shares, the theoretical closing price of HK$0.78 per New Share has been adopted as the conversion price of the Convertible Debentures which however does not mean that the Convertible Debentures will be/ can be converted at this price after completion of the Capital Reorganisation. As such, this scenario is set out for illustrative purpose only. The number of New Shares to be issued under the outstanding Share Options has been adjusted in view of the Capital Reorganisation, such adjustment is subject to the review of independent financial adviser/auditors.
Among the 288,208,800 Shares owned by the Vendor, 286,967,200 Shares are held by August Profit Investments Limited, a company wholly owned by the Vendor.
Best Top Offshore Limited is a company wholly owned by Mr. Shan Shiyong, alias, Sin Sai Yung, an executive Director.

GENERAL

The Independent Board Committee comprising all the independent non-executive Directors, namely Mr. Frank Hu, Mr. Li John Zongyang and Mr. Kuan Hin Meng has been established to advise the Independent Shareholders in respect of the Acquisition and the Whitewash Waiver. Nuada has been appointed by the Company with the approval of the Independent Board Committee as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard. None of the members of the Independent Board Committee has been involved in, or is interested in the Acquisition and the Whitewash Waiver.

– 51 –

LETTER FROM THE BOARD

SGM

A notice convening the SGM to be held on Monday, 3 June 2013 at Unit C, 19th Floor, Entertainment Building, 30 Queen’s Road Central, Hong Kong at 10:00 a.m. is set out on pages SGM-1 to SGM-3 of this circular. Resolutions will be proposed at the SGM to consider and, if thought fit, to approve the Agreement and the transactions contemplated thereunder, the Whitewash Waiver and the Capital Reorganisation by way of poll.

A form of proxy for use at the SGM is enclosed with this circular. Whether or not you intend to attend the SGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the office of the Registrar, Tricor Secretaries Limited, at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not less than 48 hours before the appointed time for holding the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM and any adjournment thereof (as the case may be) should you so wish.

RECOMMENDATIONS

The Directors (including the independent non-executive Directors) are of the opinion that the terms of the Agreement are on normal commercial terms, the Acquisition is fair and reasonable and that the Acquisition, the Whitewash Waiver and the Capital Reorganisation are in the interests of the Company and the Shareholders as a whole. The Directors recommend the Shareholders to vote in favour of the resolutions as set out in the notice of SGM to approve, among other things, the Agreement and the transactions contemplated thereunder, the Whitewash Waiver and the Capital Reorganisation at the SGM.

ADDITIONAL INFORMATION

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

By the Order of the Board Paradise Entertainment Limited Stella Ho Company Secretary

– 52 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

**PARADISE ENTERTAINMENT LIMITED 滙彩控股有限公司[*]**

(Incorporated in Bermuda with limited liability)

(Stock Code: 1180)

9 May 2013

To the Independent Shareholders

Dear Sirs,

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF THE PATENTS INVOLVING ISSUE OF CONSIDERATION SHARES AND PROMISSORY NOTE; AND (2) APPLICATION FOR WHITEWASH WAIVER

We refer to the circular of the Company to the Shareholders dated 9 May 2013 (the “Circular”), of which this letter forms part. Unless the context requires otherwise, capitalized terms used in this letter have the same meanings given to them in the Circular.

We have been authorised by the Board to form the Independent Board Committee to advise the Independent Shareholders on whether the terms of the Agreement, the transactions contemplated therein, the Acquisition and the Whitewash Waiver are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. Nuada has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard. Details of their independent advice, together with the principal factors and reasons they have taken into consideration, are set out on pages 55 to 73 of this Circular.

Your attention is also drawn to the letter from the Board as set out on pages 9 to 52 of the Circular and the additional information set out in the appendices to the Circular.

Having considered, among other matters, the factors and reasons considered by the Independent Financial Adviser, we consider that the terms of the Agreement, the transactions contemplated therein, the Acquisition and the Whitewash Waiver are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole and accordingly recommend the Independent Shareholders

* for identification purposes only

– 53 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

to vote in favour of the resolutions in relation to the Agreement and the Whitewash Waiver to be proposed at the SGM.

Yours faithfully, For and on behalf of The Independent Board Committee Frank Hu Li John Zongyang Kuan Hin Meng Independent non-executive Independent non-executive Independent non-executive Director Director Director

– 54 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the full text of the letter of advice to the Independent Board Committee and Independent Shareholders from the Independent Financial Adviser dated 9 May 2013 prepared for incorporation in this circular.

==> picture [136 x 32] intentionally omitted <==

19th Floor, BLINK, 111 Bonham Strand Sheung Wan, Hong Kong 香港上環文咸東街111號BLINK 19字樓

9 May 2013

To the Independent Board Committee and the Independent Shareholders of Paradise Entertainment Limited

Dear Sirs,

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF THE PATENTS INVOLVING ISSUE OF THE CONSIDERATION SHARES AND THE PROMISSORY NOTE

AND (2) THE WHITEWASH WAIVER

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the Agreement and the Whitewash Waiver, details of which are set out in the letter from the Board (the “Letter”) contained in the circular to the Shareholders dated 9 May 2013 (the “Circular”), of which this letter forms part. Terms used in this letter have the same meanings as defined in the Circular unless the context requires otherwise.

On 2 November 2012 (after the trading hours), the Purchaser, a wholly-owned subsidiary of the Company, and the Vendor entered into the Agreement (as supplemented by two supplemental agreements dated 7 January 2013 and 18 March 2013, respectively) whereby the Purchaser conditionally agreed to acquire and the Vendor conditionally agreed to sell the Patents at the total consideration of HK$740,000,000, which will be satisfied in the following manner on Completion:

(i) HK$60,000,000 shall be paid in cash by the Purchaser to the Vendor;
(ii) HK$200,000,000 shall be satisfied by the Company issuing to the Vendor the Promissory Note; and
(iii) HK$480,000,000 shall be satisfied by the issue and allotment of the Consideration Shares to the Vendor or his designated nominee.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Vendor and his concert parties owned approximately 10.14% of the issued share capital of the Company as at the Latest Practicable Date. After the completion of the Capital Reorganisation and the issuance of the Consideration Shares to the Vendor, the Vendor and his concert parties will be interested in a total of 628,820,880 Shares, representing approximately 71.12% of the enlarged issued share capital of the Company (assuming no further Shares will be allotted and issued prior to the issue of the Consideration Shares).

As the Vendor who is an executive Director, together with his concert parties own approximately 10.14% of the issued Shares, the Vendor is a connected person of the Company under the Listing Rules. Accordingly, the Acquisition and the transactions contemplated under the Agreement constitute a non-exempt connected transaction for the Company under Chapter 14A of the Listing Rules and are subject to approval by the Independent Shareholders at the SGM.

The SGM will be convened by the Company at which resolutions will be proposed to seek approval from the Independent Shareholders of the Agreement and the transactions contemplated thereunder and the Whitewash Waiver, and the vote will be taken by poll. The Vendor and his concert parties and Shareholders who are involved in or interested in the Acquisition and/or the Whitewash Waiver will abstain from voting at the SGM in respect of such resolutions.

Mr. Frank Hu, Mr. Li John Zongyang, and Mr. Kuan Hin Meng, being the independent non-executive Directors, have been appointed by the Board to form the Independent Board Committee to advise and make recommendation to the Independent Shareholders as to how to vote at the SGM on the relevant ordinary resolutions regarding the Agreement and the transactions contemplated thereunder and the Whitewash Waiver.

We, Nuada Limited, have been appointed by the Independent Board Committee as the independent financial adviser to give our independent opinion to the Independent Board Committee and the Independent Shareholders as to (i) whether the terms of the Agreement are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned; (ii) whether the Acquisition is in the interests of the Company and the Shareholders as a whole; (iii) whether the Whitewash Waiver is fair and reasonable and in the interests of the Company and the Shareholders as a whole; and (iv) how the Independent Shareholders should vote on the relevant resolution(s) to approve the Acquisition and the Whitewash Waiver at the SGM.

– 56 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

BASIS OF OUR OPINION

In formulating our opinion, we have relied on the information, opinions and representations contained or referred to in the Circular and the information, opinions and representations provided to us by the management of the Company and the Directors. We have assumed that all information, opinions and representations contained or referred to in the Circular and all information, opinions and representations which have been provided by the management of the Company and the Directors, for which they are solely and wholly responsible, were true, accurate and complete at the time when they were made and continue to be so as at the Latest Practicable Date. Should there be any subsequent material changes which occurred during the period from the date of Circular up to the date of the SGM and would affect or alter our opinion, we will notify the Independent Board Committee and the Independent Shareholders as soon as possible.

Accordingly, we have no reason to suspect that any material facts or information have been withheld or to doubt the truth, accuracy and completeness of the information and representations contained in the Circular and provided to us by the Company and the Directors, or the reasonableness of the opinions expressed by the management of the Company and the Directors. The Directors collectively and individually accept full responsibility for the accuracy of the information in the Circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, opinions expressed in the Circular have been arrived at after due and careful consideration and there are no other facts the omission of which would make any statement in the Circular misleading. Furthermore, we relied on the Company that it has provided us with sufficient information to reach an informed view and to provide a reasonable basis for our opinion. We have relied on such information and opinions but have not, however, conducted any independent in-depth investigation into the business, financial conditions and affairs or the future prospects of the Group nor have we considered the taxation implication on the Group or the Shareholders as a result of the Acquisition.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our recommendation in relation to the terms of the Agreement, we have considered the following principal factors and reasons.

1. Reasons for and benefits of the Acquisition

a. Background information of the Group

The Group is principally engaged in the development, provision and sales of electronic gaming systems and the provision of casino management services.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(i) Financial information of the Group

The table below tabulates the financial results of the Group for each of the two years ended 31 December 2012 as extracted from the Group’s annual report for the financial year ended 31 December 2012 (the “Annual Report”).

	For the	year ended
	31 December
	2012	2011
	HK$’000	HK$’000
		(Restated)
Turnover:	749,338	545,646
– Gaming (Note)	728,954	464,582
– Biopharmaceutical	20,384	81,064
Profit/(Loss) for the year	143,309	39,336
Breakdown:
– Gaming (Note)	199,751	110,117
– Biopharmaceutical	185	1,167
– Others	(28,039)	(25,323)
– Other unallocated income/(expense)	(28,588)	(46,625)
Profit/(Loss) per share – basic	HK4.46 cents	HK1.33 cents

Note: Shareholders should note that the gaming segment includes the provision of management services, development, provision and sales of electronic gaming system, and therefore it does not solely represent the contribution of the System, being the sharing of net gaming win and provision and the sales of electronic gaming system, which will be discussed under the section headed “Financial contribution of the System”.

As stated in the Annual Report, the Group recorded a significant increase in revenue by 37.33% from approximately HK$546 million for the year ended 31 December 2011 to approximately HK$749 million for the year ended 31 December 2012. The increase in revenue was driven by the strong performance of the Group in the gaming business resulting from the rise in visitation to Macau.

In addition, the Group’s profit increased from approximately HK$39 million for the year ended 31 December 2011 to approximately HK$143 million for the year ended 31 December 2012, representing a 264.32% year-on-year growth rate.

We have reviewed the Annual Report and found that gaming revenue arising from the provision of management services, the development, provision and the sales of electronic gaming system in Macau (“Gaming Revenue”) accounted for 97.28% of the Group’s total revenue for the year ended 31 December 2012, as compared to 85.14% in 2011. The Group recorded a significant increase of 56.91% in Gaming Revenue from approximately HK$465 million in 2011 to approximately HK$729 million in 2012. As shown in the profit breakdown above, segment profit from gaming business, being the business of the provision of management services, the development, provision and sales of the electronic gaming system in Macau, showed a considerable growth of 81.40% from approximately HK$110 million in 2011 to approximately HK$200 million in 2012.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(ii) Financial contribution of the System

The table below shows the financial results of the Single Game System and the System for each of the six years ended 31 December 2011.

(million)	2006	2007	2008	2009	2010	2011
	HK$	HK$	HK$	HK$	HK$	HK$
Share of net gaming win of the
Single Game System	2	16	46	–	–	–
Share of net gaming win of the
System	–	–	–	83	89	140*
Approximate proportion to the
total turnover	2.1%	12.3	21.0	25.5	23.8	25.7

the figure includes the sales of electronic gaming machines installed with the System

The Company has installed the Single Game System in other casinos since 2006. As shown in the above, such Single Game System contributed to the Group’s turnover in Macau in the amounts of approximately HK$2,000,000, HK$16,000,000 and HK$46,000,000, respectively, for the year ended 31 December 2006, 2007 and 2008. The System, which was developed by the Vendor and the use of which has been licensed to the Company at no cost since 2009, replaced the Single Game System and its contribution to the Group’s turnover increased from approximately HK$46,000,000, being sharing of net gaming win, for the year ended 31 December 2008 to approximately HK$83,000,000, being sharing of net gaming win, for the year ended 31 December 2009; approximately HK$89,000,000, being sharing of net gaming win, for the year ended 31 December 2010; and approximately HK$140,000,000, being sharing of net gaming win and income from the distribution of electronic gaming machines installed with the System in Macau, for the year ended 31 December 2011.

In view of the positive response of customers in Macau, some of which are operated by international casino operators with casinos in the US, expressing their interests in introducing the System to their US casinos and in order to further expand the business of the Group, the Company proposes to acquire the Patents in the US so that the Group can sell the System to the US market where the number of casinos, demand for gambling machines and the market for gaming industry are much larger than in Macau. In addition, we reviewed the competitive landscape, regulations, entry barriers, business plan and other factors related to the entering into the US gaming market by the Company, details of which are disclosed in the Letter, it is apparent that the Company is leveraging on its existing business connection and existing operating experience in Macau to quickly launch the Company’s products into the US market. Also, the international casino operators with operations in both Macau and the US will be the target customers of the Group. Having considered (i) the positive responses of customers in Macau, some of which are operated by international casino operators with casinos in the US; (ii) our review on the competitive landscape, regulations, entry barriers, business plan and other factors related to the entering into the US gaming market by the

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Company; and (iii) the positive prospects of the US gaming market as discussed in the paragraph headed “Overview of the gaming industry in the US” below, we concur with the Directors that the Acquisition is in the interests of the Company and the Shareholders as a whole even though the electronic gaming machine is a new product to the US market and has no track record of revenue generation in the US.

b. Background information of the Patents

The assets to be acquired are five approved Patents in the US, which were granted in 2011 and 2012, together with their continuations, continuations in part or division (i.e. six Patents which are still pending approval, whose registration applications were filed in 2005, 2007, 2011 and 2012 respectively), details of which are set out in the paragraph headed “Information on the Patents” in the Letter.

We note that the Patents relate to certain technological know-how applied in the System in relation to the operation of multi-gambling games. The System allows participants to play multiple and different live table games (i.e. baccarat, roulette and sicbo) with live dealers via remote terminals (i.e. gambling machines) and place bets at the same time. It is a sophisticated electronic platform which allows participants to wager at the privacy of a betting terminal. The System is connected to one or more live tables operated by human dealers at one end and remote terminals at the other such that participants of games need not be physically present at dealer tables but can place bets at one of the remote terminals, which are located inside a casino but not at the same places as the live dealers, linked to the System.

As stated in the Letter, given (i) the high labour cost in the US, the System can achieve cost saving in labour, increase the productivity of dealers and lower the number of dealer tables required as each traditional dealer table can only serve a limited number of players and all the calculation of betting results is done manually which time is consuming. However, with the System, a dealer table can serve hundreds of players at the same time with all the calculation of betting results done by the System automatically and efficiently; (ii) the automatic and computerized features of the System can also reduce the risks of human errors and fraud; (iii) the live dealer doesn’t have to serve a number of players but only needs to wait until the end of the betting time before he/she can start the game and all calculation and payment of the winning amount to the players of the electronic gaming machines installed with the System will be done electronically and simultaneously and, therefore, it will be likely to increase the overall number of bets made by each player as a player will use shorter

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

time to play one single game on the electronic gaming machine when compared to playing one single game at a traditional felt table; and (iv) each player could bet on different games with different gambling amount at the same time while playing with the same machine because the electronic gaming machine installed with the System offers a variety of choices of games including baccarat, roulette and sicbo, such flexibility and convenience provides an incentive for players to play different games at the same time which may increase the betting amount accordingly, we consider that the above benefits of the System will be obvious.

The Company has installed a computerized system in other casinos in relation to the operation of the Single Game System since 2006. The Vendor has licensed the use of the System to the Company at no cost since 2009 and the System has replaced the Single Game System then. Upon the replacement of the Single Game System in 2009, the Group recorded a significant increase in the share of net gaming win of the System, being a growth of 80.43% as compared to 2008. Since then, the growth rate of the share of net gaming win generated from the System as a proportion of the Group’s turnover remains positive, which reveals the popularity of the System and the increase in the number of players and bets placed by players via the System.

Apart from the increase in the number of players and bets placed by players via the System, we believe that the System can help to reduce the high labour cost in the US, and therefore increase the profitability and competitiveness of the casinos.

We also note that among the six Patents which are still pending approval, the Vendor was notified by the United States Patent and Trademark Office (the “USPTO”) in March 2012 that one registration application filed in 2005 had been rejected as being unpatentable as a result of two existing patents owned by independent third parties. However, the Vendor has amended that registration application to differentiate and overcome those two existing patents. Moreover, we note that the Company has engaged the US IP Legal Adviser to conduct due diligence works on the Patents, which revealed that the Vendor is the owner of the approved Patents and the applicant of the Patents pending approval and the approved Patents are free from any encumbrance. As at the Latest Practicable Date, the Vendor had not yet received the response from the USPTO. Besides the Patents which are the subject of the Acquisition, the Vendor is the owner of two similar or competing patents in the US, which were granted on 13 November 2012 and 4 December 2012, respectively (the “Excluded Patents”). The Excluded Patents relate to the mechanisms for playing slot games simultaneously with other casino games. As stated in the Letter, however, the Excluded Patents do not relate to the technological know-how applied in the System of the electronic gaming machines as the electronic gaming machines do not involve the playing of slot games. The Vendor intends to retain the Excluded Patents for his own use and does not have the intention to sell the Excluded Patents. As such, there should not be any potential direct competition from the patents owned by the Vendor.

As mentioned in the Letter, in the event that the Patents pending approval are not subsequently granted, it will not adversely affect the operation of the System as the design can still be implemented and the Valuer has confirmed that the result of the

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Valuation will not be affected. Reverse engineering by competitors will not materially affect the sales of the System in the absence of the core technologies protected by the approved Patents.

As the Patents have not yet been put to commercial use in the US, the historical net profits attributable to the Patents for the last two financial years are not available. However, we note that since the acquisition of a similar patent by the Company in 2010, the segment profit from the gaming business showed growth in two consecutive years (2012: 81.40% and 2011: 1,075.80%), which represents a significant improvement to the Company. Despite relevant risk factors associated with the Acquisition, the Patents as well as the business under the Patents as disclosed in the paragraphs headed “Risk factors” in the Letter, the Board is optimistic about the expansion into the US gaming business by the Acquisition. Based on our review of the income forecast, being the income forecast of selling the electronic gaming machines in the US market provided by the Company, we consider that the Acquisition is expected to (i) provide an opportunity for the Group to tap into the US gaming market through sales of the electronic gaming machines to the casino operators in the US; and (ii) generate diversified income and additional cashflow for the Group through the operation in the US.

c. Overview of the gaming industry in the US

According to the American Gaming Association (“AGA”) Survey of Casino Entertainment (2012 edition) (the “Survey”), revenues of commercial casinos reached US$35.64 billion in 2011, representing an increase of 3.0 percent as compared to the 2010 figures. Commercial casinos paid US$7.93 billion of those revenues to states and localities of the US in the form of direct gaming taxes – representing a 4.5 percent increase as compared to 2010. The gaming industry also continued to create a significant number of job opportunities, offering jobs to 339,098 people who earned US$12.9 billion in wages, benefits and tips during 2011.

We reviewed the Survey and found that the total consumer spending at commercial casinos increased by 3.0 percent in 2011 when compared to 2010. Prior to 2010, the total consumer spending at commercial casinos reached the peak of approximately US$37.52 billion in 2007 and showed a decreasing trend from 2007 to 2009. Such spending started to rebound from US$34.28 billion in 2009 to US$34.6 billion in 2010. Therefore, we are of the view that the increase in total consumer spending at commercial casinos is a positive sign that the long and slow recovery process of the US gaming industry is well underway. As the economy continues to improve, gaming revenues which are dependent on consumer spending should continue to rise.

Reference is also made to the public opinion research in 2011 by VP Communications, Inc., which has conducted strategic public opinion research for corporate, political and trade association clients and has specialized in quantitative, survey-based research as well as qualitative, focus group and dial testing studies since 1999, and national pollster Peter D. Hart who has collaborated on the survey research associated with the AGA for more than a decade. Peter D. Hart is the chairman of

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Peter D. Hart Research Associates and the co-director of the NBC/Wall Street Journal poll. Such research shows that more than one-quarter (27 percent) of the US adult population visited a casino during 2011, totaling approximately 59.7 million people. Based on (i) the recovery of the US economy; and (ii) the popularity of visiting casinos in the US, we believe that the prospect of the gaming industry in US will be positive.

Having considered (i) the Group’s experience in distributing the gaming system in Macau; (ii) the improvement of the financial performance of the Group in the previous two years which was due to the successful record of the distribution of electronic gaming machines in Macau under a similar patent which was acquired by the Group in 2010; and (iii) the factors set out in the paragraph headed “Reasons for the Acquisition” in the Letter, we are of the view that the Acquisition is in the interests of the Company and the Shareholders as a whole.

2. Principal terms of the Agreement

a. Basis of the consideration

The consideration for the Acquisition is HK$740 million and was arrived at based on normal commercial terms after arm’s length negotiations between the parties to the Agreement and by reference to (a) the potential future earnings contribution to the Group by the Patents upon Completion; (b) other factors set out in the paragraph headed “Reasons for the Acquisition” in the Letter; and (c) the valuation of the Patents by an independent valuer in the amount of HK$819 million on 31 December 2012 (“the First Valuation”). In view of the consideration for the Acquisition being at a discount to the valuation of the Patents, which represents a minimum of approximately 22.23% of the annual return, we and the Directors are of the view that the consideration for the Acquisition is fair and reasonable. We understand that there is no assurance that the projected earnings will materialise. However, having considered (i) the Company’s experience of selling the electronic gaming machines in Macau during the past two years; and (ii) that the major target customers of the Group in the US market are those international casino operators with casinos in Macau, who are the existing customers of the Company, the Directors are of the view that the Company will be able to leveraging its existing business connection and existing operating experience in Macau to quickly launch the Company’s products into the US market. In addition, the potential earnings estimation is based on the Company’s experience and the information gathered in Macau, the existing selling price from its supplier and additional costs to be incurred for the US market and the sales according to the indication of interests from six potential clients in the US which no agreement has been signed for the time being. Such indication of interests from the potential clients is generated through the marketing contacts with potential clients. Such sales orders represent over 80 percent of the sales volume projected for 2013 and, therefore, we concur with the Directors believe that the potential earnings in the US market where the number of casinos, demand for gambling machines and the market for gaming industry are much larger than in Macau, shall be achievable.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We have reviewed and discussed with Ample Appraisal Limited which issued the report of Valuations (the “Valuation Reports”) included in Appendix IV to the Circular, the appraisal approaches and assumptions set out in the Valuation Reports, and are of the view that they are reasonably prepared and the forecast has been made with due care and consideration. Further details can be found in the paragraph headed “Valuation Reports” below. The Valuer has updated the valuation of the Patents because of the slight decrease in the fair value of the Patents from HK$819,000,000 in the First Valuation Report to HK$810,000,000 in the Second Valuation Report. Such decrease in the fair value of the Patents is due to the delay in the marketing of the Electronic Gaming Machines and the lapse of 3 months of the economic life of the Patents between the two valuation dates as well as the decrease in the discount rate adopted in the Valuations arising from the changes in market and reference data. Further details of these changes are set out in the Second Valuation Report in Appendix IV(B) to the Circular. Compared to the fair value of the Patents, which is approximately HK$810 million as stated in the Second Valuation Report, the consideration for the Acquisition represents a discount of approximately 8.64%.

b. Payment method

Pursuant to the terms of the Agreement, the consideration of HK$740 million shall be settled in the following manner:

(i) HK$60 million shall be paid in cash;
(ii) HK$200 million shall be satisfied by the Company issuing to the Vendor the Promissory Note; and
(iii) HK$480 million shall be satisfied by the issue and allotment of the Consideration Shares to the Vendor or his designated nominee.

Promissory Note

Pursuant to the Agreement, HK$200 million of the consideration shall be satisfied by the issuance of the Promissory Note. The Promissory Note has a term of 48 months and is non-interest bearing.

The Company has the right to redeem the whole or any part of the outstanding principal amount of the Promissory Note at any time prior to the maturity date. Early redemption of the Promissory Note shall be subject to discount of the outstanding principal amount of the Promissory Note, the rate of which varies from 1% to 4% according to the time period of early redemption.

Given that (i) the Promissory Note is non-interest bearing; and (ii) discount applies to early redemption of the Promissory Note, we are of the view that the terms of the Promissory Note are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Consideration Shares

As stated in the Letter, the Company shall issue 600,000,000 Consideration Shares to the Vendor at the issue price of HK$0.80 per Consideration Share in partial settlement of the consideration for the Acquisition.

The Consideration Shares represent approximately 211.16% of the issued share capital of the Company immediately after completion of the Capital Reorganisation (details of which are set out in the section headed “Proposed Capital Reorganisation and Change of Board Lot Size” in the Letter), but before the allotment and issue of the Consideration Shares, and approximately 67.86% of the issued share capital of the Company as enlarged by the allotment and issue of the Consideration Shares (assuming no further Shares will be allotted and issued prior to the issue of the Consideration Shares).

(i) a premium of approximately 2.56% over the theoretical closing price per New Share of HK$0.780 as quoted on the Stock Exchange on the Last Trading Day;
(ii) a premium of approximately 0.50% over the theoretical average closing price per New Share of approximately HK$0.796 as quoted on the Stock Exchange for the last five consecutive trading days up to and including the Last Trading Day;
(iii) a discount of approximately 0.25% to the theoretical average closing price per New Share of approximately HK$0.802 as quoted on the Stock Exchange for the last ten consecutive trading days up to and including the Last Trading Day;
(iv) a discount of approximately 44.44% to the theoretical net assets value per New Share of approximately HK$1.44 based on the Group’s net assets value as at 31 December 2012; and
(v) a discount of approximately 16.67% to the theoretical closing price per New Share of HK$0.96 as quoted on the Stock Exchange on the Latest Practicable Date.

The chart below shows the adjusted closing price performance of the Shares (assuming completion of the Capital Reorganisation) from 2 November 2011 (being 12 months prior to the date of entering into the Agreement) to the Latest Practicable Date.

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==> picture [415 x 183] intentionally omitted <==

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

1.2 Theoretical closing
price of the Shares
1 assuming the Capital
Reorganisation has
been completed (HK$)
0.8
Issue price of the
0.6
Consideration Shares
(HK$)
0.4
0.2
Theoretical average
0 closing price (HK$)
2/11/20112/12/20112/1/20122/2/20122/3/20122/4/20122/5/20122/6/20122/7/20122/8/20122/9/20122/10/20122/11/20122/12/20122/1/20132/2/20132/3/20132/4/20132/5/2013
----- End of picture text -----

Source: www.hkexnews.hk

Note: The trading in Shares was suspended from 5 November 2012 to 7 January 2013 (both dates inclusive).

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As shown in the chart above, the issue price of the Consideration Shares was generally above the adjusted closing price of the Shares. In addition, the issue price of the Consideration Shares represents (i) a discount of 7.5% to the highest adjusted closing price of the Shares; (ii) a premium of 19.83% over the average adjusted closing price of the Shares; (iii) a premium of 63.27% over the lowest adjusted closing price of the Shares; (iv) a discount of approximately 16.67% to the closing price of the Shares as at Latest Practicable Date; and (v) a discount of approximately 12.09% to the average adjusted closing price of the Shares of HK$0.91 after publication of the Announcement, during the review period.

Moreover, the Company has considered other fund raising alternatives, including both equity and debt financing namely, rights issue, open offer and bank borrowings. In order to obtain the bank loan offer with favourable terms, the Company should pledge a certain amount of assets which should not represent a significant discount to the loan amount as collateral. However, due to the significant value of the Consideration Shares which is amounted to HK$480 million, representing approximately 216% of the market value of the Company as at the Last Trading Day, the Company is not able to finance the Acquisition by those alternatives in a timely manner. Although the issue of the Consideration Shares will dilute the shareholding of the existing Shareholders significantly, given that (i) the value of the Consideration Shares is significant; and (ii) the issue price of the Consideration Shares is higher than the average adjusted closing price of the Shares during the period from 2 November 2011 to the Latest Practicable Date, we are of the view that the terms of the issuance of Consideration Shares are fair and reasonable. Even though the issue price of the Consideration Shares represents a discount to (i) the theoretical net assets value per New Share as at 31 December 2012; (ii) the theoretical closing price per New Share as at the Latest Practicable Date; and (iii) the average adjusted closing price after the publication of the Announcement, the issue price of HK$0.80 per Consideration Share was determined after arm’s length negotiation between the parties to the Agreement after taking into account the prevailing market price of the Shares, being the period prior to the Agreement and, therefore, the market price of the Shares after the publication of the Announcement shall be irrelevant to the determination of the issue price of the Consideration Shares. In addition, given that the adjusted closing price of the Share under the review period has always been lower than the Group’s net assets value per New Share as at 31 December 2012 whether it was the period prior to or after the publication of the Announcement, we are of the view that issuing of the Consideration Shares at a discount to the Group’s net assets value per New Share as at 31 December 2012 is fair and reasonable.

3. Valuation Reports

The Company has engaged Ample Appraisal Limited, a specialist valuation firm providing professional valuation and consultancy services to listed and unlisted corporate clients, as the independent valuer for the valuation of the fair value of the Patents. The Valuation Reports are attached as Appendix IV to the Circular. We have reviewed the

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valuation of the similar patents done by the valuer in 2010, details of which can be found in the circular dated 25 August 2010 of the Company, and consider that they are qualified to provide a reliable valuation of the Patents.

In assessing the fairness and reasonableness of the Valuations, we have studied the valuation methodology, basis of valuation and assumptions underlying the Valuation Reports.

a. Valuation methodology

It is stated in the Valuation Reports that Ample Appraisal Limited had considered three generally accepted valuation approaches, i.e. market approach, income approach and cost approach and decided to adopt the income approach.

b. Valuation of Patents and assumptions

We have discussed with Ample Appraisal Limited regarding the valuation methodology of the valuation, the forecast of the future income prepared by the Directors which is the major part of excess earnings generated from the Patents (the “Excess Earnings”) and the underlying assumptions of the valuation as stated in the Valuation Reports. After discussion with Ample Appraisal Limited, we understand that in the process of valuing the Patents, Ample Appraisal Limited has taken into consideration the uniqueness of the Company’s operation and the industry in which it is participating. Having considered the three general valuation methodologies, Ample Appraisal Limited believed that the income approach would be appropriate and reasonable in the appraisal of the market value of the Patents. On the other hand, the market approach is not appropriate as there are insufficient similar and relevant comparable intangible assets or transactions to form a reliable basis for its opinion of value. As the Patents are intangible assets, the cost approach is not appropriate as it cannot reflect the market value of the Patents and ignores the economic benefits accrued to the business. Therefore, we and Ample Appraisal Limited are of the view that the income approach is the most appropriate valuation methodology.

We have discussed with Ample Appraisal Limited regarding the factors taken into account in estimating the Excess Earnings and the determination of the discount rate adopted under the discounted cash flow methodology adopted in such valuation. We have been advised that the Excess Earnings were calculated on the basis of free cash flow from operation, net change in working capital and imputed cost of working capital, which are calculated at an annual rate of 5.00 percent, with reference to the US prime lending rate reported by Bloomberg as at 31 March 2013, being the valuation date, on the total working capital to support the business operation. We have reviewed the forecast of the future income, being the major part of the Excess Earnings, and concur with Ample Appraisal Limited that such forecast of the future income has been properly compiled in accordance with the assumptions made by the Directors which have been made with due care and consideration and made on an objective and a reasonable basis. The Excess Earnings were then arrived at by deducting the net change in working capital and imputed cost of working capital from the free cash flows from operation.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We also understand that the discount rate applied to the Excess Earnings is based on the cost of equity finance which is developed through the application of the Capital Asset Pricing Model (“CAPM”). The cost of equity of approximately 22.23%, representing the required rate of return of the Acquisition, is estimated by using the CAPM taking into account the market risk premium, risk free interest rate and market return of the US. The discount rate also takes into account the cost of equity, additional risk premium (for intangible assets on the basis of business risk involved in similar class of intangible assets) and size premium (according to the Ibbotson Valuation Yearbook 2013 and the size of the business enterprise).

Based on our review of the Valuation Reports and discussion with Ample Appraisal Limited regarding, among other things, (i) the scope of work and assumptions of the valuation; (ii) the valuation basis, including the Excess Earnings, the applied methodologies, in particular the discount rate adopted under the discounted cash flow method; and (iii) the due diligence works performed by Ample Appraisal Limited in preparing the Valuation Reports, we consider that the bases, assumptions and methodologies adopted by Ample Appraisal Limited in the Valuation Reports are appropriate and have been made with due care and consideration and on a reasonable basis. We, however, express no opinion on the actual results of the Excess Earnings.

Having considered the above, we are of the view that the Valuation Reports are well prepared and the valuation performed by Ample Appraisal Limited is fair and reasonable.

4. Financial effects of the Acquisition

Net Assets and Earnings

Upon Completion, as stated in Appendix III to the Circular, the net assets of the Group would increase from approximately HK$409 million to approximately HK$885 million; the profit of approximately HK$143 million would decrease to approximately HK$68 million due to the amortization cost of the Patents of approximately HK$55 million, based on the fair value of approximately HK$658 million and the estimated useful lives of 12 years of the Patents, the finance cost would amount to approximately HK$17 million, representing the imputed interest to be expensed by the Group for the year ended 31 December 2012 as a results of the issuance of the Promissory Note with a present value of approximately HK$118 million by using a discount rate of 14.21% per annum, and the administrative costs directly attributable to the Acquisition and Capital Reorganisation would amount to approximately HK$4 million. As the Patents have not yet been put to commercial use in the US, no historical net profit has been derived from the Patents. No adjustment has been made to the turnover and costs of turnover in the unaudited pro forma consolidated statement of comprehensive income.

Gearing Ratio

Based on the Annual Report, the gearing ratio (defined as the ratio of total outstanding interest bearing borrowing less bank balances and cash to total assets (excluding bank balances and cash)) was nil. According to the unaudited pro forma

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consolidated statement of financial position of the Enlarged Group as at 31 December 2012 as set out in Appendix III to the Circular, total outstanding interest bearing borrowing less bank balances and cash and total assets (excluding bank balances and cash) of the Enlarged Group are approximately HK$85 million and HK$1,020 million, respectively, with the gearing ratio of approximately 8.33%. Such increase in gearing ratio was due to the issuance of the Promissory Note under the Acquisition.

Working Capital

Immediately upon Completion, the bank and cash balances of the Group will decrease as a result of the cash payment of the Consideration of approximately HK$60 million from the Acquisition. In addition to the change in bank and cash balances, accrued charges of approximately HK$4 million, being the estimated costs directly attributable to the Acquisition and Capital Reorganisation, will arise from the Acquisition. Accordingly, the working capital (being the current assets less current liabilities) of the Group will be approximately HK$139 million as a result of the Acquisition.

Concluding from the above, we note that the Acquisition will have negative effects to the Group’s leverage position and liquidity. However, having considered (i) the past operating experience of the Group in operating the electronic gaming system in Macau since 2006; and (ii) the benefits of the System mentioned above, we are of the view that the Acquisition is in the interests of the Company and the Shareholders as a whole even though the profit would turn into a loss which has not taken into account the Excess Earning upon Completion.

Please refer to Appendix III to the Circular for further information about the unaudited pro forma financial information of the Enlarged Group.

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5. Effect of the Acquisition on the shareholding of the Independent Shareholders

As at the Latest Practicable Date, except for the 66,000,000 outstanding Share Options and 3 tranches of Convertible Debentures due in 2014 with outstanding principal amount of HK$24,000,000, US$1,000,000 and HK$57,000,000, respectively, the Company had no outstanding derivatives, options, warrants, conversion rights or other similar rights which are convertible or exchangeable into Shares. The following table sets out the shareholding structure of the Company (i) as at the Latest Practicable Date; (ii) immediately after the completion of the Capital Reorganisation and the issue of the Consideration Shares; and (iii) immediately after the completion of the Capital Reorganisation, the issue of the Consideration Shares, and assuming the exercise of all the outstanding Share Options and conversion of the Convertible Debentures in full (Note 1) (in each case assuming that there will be no further change in the issued share capital of the Company):

The Vendor and his concert parties (Note 2) Best Top Offshore Limited (Note 3) Public Shareholders Total	As at the Latest Practicable Date No. of Existing Shares Appro. % 288,208,800 10.14 260,975,800 9.18 2,292,260,178 80.68 2,841,444,778 100.00	Immediately after the completion of the Capital Reorganisation and the issue of the Consideration Shares No. of Existing Shares Appro. % 628,820,880 71.12 26,097,580 2.95 229,226,017 25.93 884,144,477 100.00	(for illustrative purpose only) Immediately after the completion of the Capital Reorganisation, the issue of the Consideration Shares, and assuming the exercise of all the outstanding Share Options and conversion of the Convertible Debentures in full (Note 1) No. of Existing Shares Appro. % 628,820,880 62.60 26,097,580 2.60 349,608,068 34.80 1,004,526,528 100.00	(for illustrative purpose only) Immediately after the completion of the Capital Reorganisation, the issue of the Consideration Shares, and assuming the exercise of all the outstanding Share Options and conversion of the Convertible Debentures in full (Note 1) No. of Existing Shares Appro. % 628,820,880 62.60 26,097,580 2.60 349,608,068 34.80 1,004,526,528 100.00
				100.00

Notes:

This column shows the shareholding structure of the Company immediately after the completion of the Capital Reorganisation, the issue of the Consideration Shares, and assuming the exercise of all the outstanding Share Options and conversion of the Convertible Debentures in full at the assumed conversion price of HK$0.78 per conversion share. Since the conversion price of the Convertible Debentures shall be the higher of (i) the average closing price of the Shares of any three consecutive trading days (as selected by the holder of the Convertible Debentures) within the sixty trading days immediately prior to the conversion date; and (ii) the nominal value for the time being of the Shares, the theoretical closing price of HK$0.78 per New Share has been adopted as the conversion price of the Convertible Debentures which however does not mean that the Convertible Debentures will be/ can be converted at this price after completion of the Capital Reorganisation. As such, this scenario

– 71 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

is set out for illustrative purpose only. The number of New Shares to be issued under the outstanding Share Options has been adjusted in view of the Capital Reorganisation, such adjustment is subject to the review of independent financial adviser/auditors.

Among the 288,208,800 Shares owned by the Vendor, 286,967,200 Shares are held by August Profit Investments Limited, a company wholly owned by the Vendor.
Best Top Offshore Limited is a company wholly owned by Mr. Shan Shiyong, alias, Sin Sai Yung, an executive Director.

Shareholders and potential investors should note that as a result of the Acquisition and the issue of the Consideration Shares, the shareholdings of public Shareholders will be diluted from approximately 80.68% to 34.8% upon the completion of the Capital Reorganisation and the issue of the Consideration Shares, assuming the exercise of all the outstanding Share Options and conversion of the Convertible Debentures in full. Taking into account (i) the reasons for and benefits of the Acquisition; and (ii) that the terms of the issue of Consideration Shares are in our opinion fair and reasonable, we consider that the aforementioned level of dilution to the shareholding interests as a result of the Acquisition and the issue of the Consideration Shares are acceptable as far as the Independent Shareholders are concerned.

6. Whitewash Waiver

As at the Latest Practicable Date, the Vendor and his concert parties owned approximately 10.14% of the shareholding in the Company. After the completion of the Capital Reorganisation and the issuance of the Consideration Shares to the Vendor, the Vendor and his concert parties will be interested in a total of 628,820,880 Shares, representing approximately 71.12% of the enlarged issued share capital of the Company (assuming no further Shares will be allotted and issued prior to the issue of the Consideration Shares). The Vendor will then have an obligation to make a mandatory general offer for all the Shares not already owned or agreed to be acquired by the Vendor and parties acting in concert with him pursuant to Rule 26 of the Takeovers Code, unless the Whitewash Waiver is granted by the Executive. An application has been made to the Executive by the Vendor for the Whitewash Waiver under Note 1 on dispensations from Rule 26 of the Takeovers Code. The Whitewash Waiver, if granted by the Executive, would be subject to, among other things, the approval of the Independent Shareholders by way of a poll. If the Whitewash Waiver is not granted by the Executive, the Acquisition will lapse and will not proceed.

Based on our analysis of the terms of the Agreement and the transactions contemplated thereunder, we consider that the Acquisition is in the interests of the Company and the Shareholders as a whole. If the Whitewash Waiver is not approved by the Independent Shareholders at the SGM, the Acquisition will not proceed and the Company will not be able to enjoy the benefits that are expected to be brought about by the Acquisition, i.e. expansion to the US gaming industry, enlarging the future income base of the Group and diversification of the Group’s income source. Accordingly, we are of the view that for the purposes of implementing the Acquisition, the approval of the Whitewash Waiver by the Independent Shareholders at the SGM is in the interests of the Company and the Shareholders as a whole.

– 72 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RECOMMENDATION

Given that (i) the Company’s revenue from gaming has been increasing in recent years; (ii) the positive prospect of the gaming industry in the US; (iii) the consideration for the Acquisition represents a discount to the valuation of the Patents performed by Ample Appraisal Limited; and (iv) the expected revenue to be generated by the Patents, we are of the opinion that the terms of the Agreement are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned and the Acquisition is in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend (i) the Independent Board Committee to advise the Independent Shareholders; and (ii) the Independent Shareholders, to vote in favor of the relevant resolutions at the SGM to approve the Agreement and the transactions contemplated thereunder.

The Acquisition is conditional upon the approval by the Independent Shareholders of the Whitewash Waiver at the SGM. If the Whitewash Waiver is not approved by the Independent Shareholders, the Acquisition will not proceed. Having taken into account our recommendation on the Acquisition above, we consider the terms of the Whitewash Waiver are fair and reasonable so far as the Independent Shareholders are concerned and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend (i) the Independent Board Committee to advise the Independent Shareholders; and (ii) the Independent Shareholders, to vote in favor of the relevant resolutions at the SGM to approve the Whitewash Waiver.

Yours faithfully, For and on behalf of Nuada Limited Kevin Chan Director

– 73 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

Financial information of the Group for the year ended 31 December 2010 and the year ended 31 December 2011 is disclosed on pages 20 to 83 of the 2010 annual report ( www.hkexnews.hk/listedco/listconews/SEHK/2011/0428/LTN20110428917.pdf ) published on 28 April 2011 and pages 20 to 79 of the 2011 annual report ( www.hkexnews.hk/listedco/listconews/ SEHK/2012/0426/LTN20120426308.pdf ) published on 26 April 2012, respectively, which are available on the websites of the Stock Exchange (www.hkexnews.hk) and the Company (www.hk1180.com). Financial information of the Group for the year ended 31 December 2012 ( www.hkexnews.hk/listedco/listconews/SEHK/2013/0408/LTN20130408406.pdf ) is set out in the later part of this appendix.

The following is a summary of the consolidated financial information of the Group for each of the three years ended 31 December 2010, 2011 and 2012, which has been restated to demonstrate the impact on the consolidated statement of comprehensive income in respect of the Group’s disposal of its biopharmaceutical business in April 2012 as extracted from the annual reports of the Company for each of the three years ended 31 December 2010, 2011 and 2012.

The financial statements for each of the three years ended 31 December 2010, 2011 and 2012 were audited by Pan-China (H.K.) CPA Limited which had not issued any qualified opinion in relation to these financial statements.

The Company had no items which are exceptional or extraordinary because of size, nature or incidence, and no dividend had been paid or declared by the Company for each of the three years ended 31 December 2010, 2011 and 2012.

– I-1 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Continuing operations
Turnover
Cost of sales and services
Gross profit
Other income
Marketing, selling and distribution costs
Administrative expenses
Share-based payments
Impairment loss for doubtful debts
Finance costs
Loss on derecognition of derivative financial
instruments
Amortisation for intangible assets
Loss on early redemption of promissory note
Profit (loss) before tax
Income tax expenses
Profit (loss) for the year from continuing
operations
Discontinued operation
Profit (loss) for the year from discontinued operation
Gain on disposal of the Disposed Group
Profit (loss) for the year
Attributable to:
Owners of the Company
Non-controlling interests

For the year ended 31 December
2012
2011
2010
HK$’000
HK$’000
HK$’000
(Audited)
(Restated)
(Restated)
728,954
464,582
267,174
(244,764)
(180,108)
(134,045)
484,190
284,474
133,129
1,986
7,677
5,757
(133,945)
(82,316)
(63,961)
(167,910)
(108,918)
(88,953)
–
(3,787)
–
(471)
(199)
(107)
(10,495)
(19,141)
(30,690)
–
–
(1,278)
(12,138)
(12,137)
(4,046)
(12,795)
(27,484)
(24,226)
148,422
38,169
(74,375)
(26,206)
–
–
122,216
38,169
(74,375)
185
1,167
(400)
20,908
–
–
21,093
1,167
(400)
143,309
39,336
(74,775)
126,698
35,543
(74,774)
16,611
3,793
(1)
143,309
39,336
(74,775)

– I-2 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Earnings (loss) per share (HK cents)
From continuing and discontinued operations
– Basic
– Diluted
From continuing operations
– Basic
– Diluted
Profit (loss) for the year
Other comprehensive income
Net gain recognised directly in equity
Exchange translation differences
Total comprehensive income for the year,
net of tax
Total comprehensive income
attributable to:
Owners of the Company
Non-controlling interests

For the year ended 31 December
2012
2011
2010
HK$’000
HK$’000
HK$’000
(Audited)
(Restated)
(Restated)
4.46
1.33
(7.61)
3.61
1.24
N/A
3.72
1.29
(7.57)
3.04
1.21
N/A
143,309
39,336
(74,775)
83
252
2,624
143,392
39,588
(72,151)
126,784
35,886
(72,150)
16,608
3,702
(1)
143,392
39,588
(72,151)

– I-3 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Non-current assets Property, plant and equipment Intangible assets Interest in an associate Deposit paid for acquisition of a subsidiary Current assets Inventories Debtors, deposits and prepayments Bank and cash balances Current liabilities Creditors and accrued charges Amounts due to directors Amount due to a related party Other borrowings – due within one year Obligations under finance leases – due within one year Current tax liabilities Net current assets Total assets less current liabilities	As at 31 December 2012 2011 2010 HK$’000 HK$’000 HK$’000 (Audited) (Audited) (Audited) 152,146 148,869 158,706 153,745 165,883 178,020 – – – – – 7,800 305,891 314,752 344,526 4,810 200 151 106,076 61,033 44,782 196,169 126,186 83,431 307,055 187,419 128,364 84,327 74,443 69,599 6,364 2,567 2,141 – – 2,106 – – 18,992 108 1,318 4,781 13,406 2,467 2,411 104,205 80,795 100,030 202,850 106,624 28,334 508,741 421,376 372,860	As at 31 December 2012 2011 2010 HK$’000 HK$’000 HK$’000 (Audited) (Audited) (Audited) 152,146 148,869 158,706 153,745 165,883 178,020 – – – – – 7,800 305,891 314,752 344,526 4,810 200 151 106,076 61,033 44,782 196,169 126,186 83,431 307,055 187,419 128,364 84,327 74,443 69,599 6,364 2,567 2,141 – – 2,106 – – 18,992 108 1,318 4,781 13,406 2,467 2,411 104,205 80,795 100,030 202,850 106,624 28,334 508,741 421,376 372,860
		344,526
		151 44,782 83,431
		128,364
		69,599 2,141 2,106 18,992 4,781 2,411
		100,030
		28,334
		372,860

– I-4 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Non-current liabilities Obligations under finance leases – due after one year Convertible loans – due after one year Promissory note Deferred tax liabilities Net assets Capital and reserves Share capital Reserves Equity attributable to owners of the Company Non-controlling interests Total equity	As at 31 December 2012 2011 2010 HK$’000 HK$’000 HK$’000 (Audited) (Audited) (Audited) 304 412 – 86,933 86,165 129,178 – 68,336 119,472 12,800 – – 100,037 154,913 248,650 408,704 266,463 124,210 284,144 284,144 186,344 104,100 (21,432) (62,183) 388,244 262,712 124,161 20,460 3,751 49 408,704 266,463 124,210

– I-5 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. AUDITED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR ENDED 31 DECEMBER 2012

The following is the audited financial statements of the Group together with accompanying notes as extracted from the annual report of the Company for the year ended 31 December 2012.

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2012

Notes CONTINUING OPERATIONS Turnover 7 Cost of sales and services Gross profit Other income 8 Marketing, selling and distribution costs Administrative expenses Impairment loss for doubtful debts Share-based payments Finance costs 9 Amortisation for intangible assets 17 Loss on early redemption of promissory note Profit before tax Income tax expenses 10 Profit for the year from continuing operations DISCONTINUED OPERATION Profit for the year from discontinued operation 11 Profit for the year 12 Attributable to: Owners of the Company Non-controlling interests	2012 HK$’000 728,954 (244,764) 484,190 1,986 (133,945) (167,910) (471) – (10,495) (12,138) (12,795) 148,422 (26,206) 122,216 21,093 143,309 126,698 16,611 143,309	2011 HK$’000 (Restated) 464,582 (180,108) 284,474 7,677 (82,316) (108,918) (199) (3,787) (19,141) (12,137) (27,484) 38,169 – 38,169 1,167 39,336 35,543 3,793 39,336

– I-6 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes Earnings per share (HK cents) 15 From continuing and discontinued operations – Basic – Diluted Earnings per share (HK cents) 15 From continuing operations – Basic – Diluted Profit for the year 12 Other comprehensive income Net gain recognised directly in equity Exchange translation differences Total comprehensive income for the year, net of tax Total comprehensive income attributable to: Owners of the Company Non-controlling interests	2012 HK$’000 4.46 3.61 3.72 3.04 143,309 83 143,392 126,784 16,608 143,392	2011 HK$’000 (Restated) 1.33

		1.24

		1.29

		1.21

		39,336 252
		39,588

		35,886 3,702
		39,588

– I-7 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Financial Position

As at 31 December 2012

Notes Non-current assets Property, plant and equipment 16 Intangible assets 17 Interest in an associate 18 Current assets Inventories 19 Debtors, deposits and prepayments 20 Bank and cash balances 21 Current liabilities Creditors and accrued charges 22 Amounts due to directors 34 Obligations under finance leases – due within one year 23 Current tax liabilities Net current assets Total assets less current liabilities	2012 HK$’000 152,146 153,745 – 305,891 4,810 106,076 196,169 307,055 84,327 6,364 108 13,406 104,205 202,850 508,741	2011 HK$’000 148,869 165,883 –
		314,752
		200 61,033 126,186
		187,419
		74,443 2,567 1,318 2,467
		80,795
		106,624
		421,376

– I-8 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes Non-current liabilities Obligations under finance leases – due after one year 23 Convertible loans – due after one year 24 Promissory note 25 Deferred tax liabilities 26 Net assets Capital and reserves Share capital 27 Reserves 28 Equity attributable to owners of the Company Non-controlling interests Total equity	2012 HK$’000 304 86,933 – 12,800 100,037 408,704 284,144 104,100 388,244 20,460 408,704	2011 HK$’000 412 86,165 68,336 – 154,913 266,463 284,144 (21,432) 262,712 3,751 266,463

– I-9 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

For the year ended 31 December 2012

		Attributable to owners of the Company	Attributable to owners of the Company	Total equity HK$’000 124,210 39,588 3,787 – 1,634 97,244
Share capital HK$’000 186,344 – – – – 97,800 97,800 284,144 284,144 – – – – 284,144	Share premium HK$’000 576,215 – – – – 5,414 5,414 581,629 581,629 – – – – 581,629	Special reserve Convertible loans reserve HK$’000 HK$’000 88,643 10,571 – – – – – – – 1,634 – (5,970) – (4,336) 88,643 6,235 88,643 6,235 – – – – – – – – 88,643 6,235	Option reserve Translation reserve Accumulated losses HK$’000 HK$’000 HK$’000 65,062 22,080 (824,754) – 343 35,543 3,787 – – (11,008) – 11,008 – – – – – – (7,221) 343 46,551 57,841 22,423 (778,203) 57,841 22,423 (778,203) – 86 126,698 (54,054) – 54,054 – (1,252) – (54,054) (1,166) 180,752 3,787 21,257 (597,451)
				142,253
				266,463

				266,463 143,392 – (1,151)
				142,241
				408,704

– I-10 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Cash Flows

For the year ended 31 December 2012

OPERATING ACTIVITIES Profit before tax: From continuing operations From discontinued operation Adjustments for: Finance costs Bank interest income Amortisation for intangible assets Loss on early redemption of promissory note Impairment loss for amount due from an associate Depreciation of property, plant and equipment Loss (gain) on disposal of property, plant and equipment Gain on disposal of the Disposed Group Provision for bad debts Waiver of other borrowing and payables Equity-settled employee benefits Equity-settled consultancy fees Operating cash flows before movements in working capital Increase in inventories Increase in debtors, deposits and prepayments Increase in creditors and accrued charges Cash generated from operations Income taxes paid NET CASH GENERATED FROM OPERATING ACTIVITIES INVESTING ACTIVITIES Purchases of property, plant and equipment Proceeds from disposal of property, plant and equipment Net cash disposed of Disposed Group Interest received NET CASH USED IN INVESTING ACTIVITIES	2012 HK$’000 148,422 21,093 169,515 10,495 (2) 12,138 12,795 82 28,219 34 (20,908) 389 – – – 212,757 (4,769) (57,517) 44,972 195,443 (18) 195,425 (32,351) – (2,441) 2 (34,790)	2011 HK$’000 38,169 1,167 39,336 19,141 (9) 12,137 27,484 199 28,563 (1,366) – – (4,986) 1,894 1,893 124,286 (44) (7,953) 4,225 120,514 (55) 120,459 (19,047) 1,740 – 9 (17,298)

– I-11 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

FINANCING ACTIVITIES Proceeds from issue of convertible loans Interest paid Repayment of obligations under finance leases Redemption of promissory note Interest in amounts due to directors Interest paid on obligations under finance leases NET CASH USED IN FINANCING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR EFFECT OF FOREIGN EXCHANGE RATE CHANGES CASH AND CASH EQUIVALENTS AT END OF THE YEAR ANALYSIS OF THE BALANCE OF CASH AND CASH EQUIVALENTS, represented by Bank and cash balances	2012 HK$’000 – (7,104) (1,318) (83,722) 1,447 (32) (90,729) 69,906 126,186 77 196,169 196,169	2011 HK$’000 42,000 (12,998) (3,051) (87,800) 408 (18) (61,459) 41,702 83,431 1,053 126,186 126,186

==> picture [48 x 317] intentionally omitted <==

– I-12 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2012

1. GENERAL

Paradise Entertainment Limited (the “Company”) was incorporated in Bermuda as an exempted company with limited liability under the Companies Act of Bermuda. The Company’s shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). The addresses of the registered office and principal place of business of the Company are disclosed in the “Corporate Information” section in the annual report.

The Company is an investment holding company. The principal activities of the Company’s associate and subsidiaries (together with the Company, collectively referred to as the “Group”) are set out in notes 18 and 35 respectively.

In respect of the Group’s operating subsidiaries established in the People’s Republic of China (the “PRC”) and engaged in the research, development and sales of biopharmaceutical products which was disposed of during the year, the functional currency is Renminbi (“RMB”). In respect of the Group’s operating subsidiaries established in Macau and engaged in the provision of management services, development, provision and sales of electronic gaming system, the functional currency is Macau Pataca (“MOP”). The functional currency of the Company and the other subsidiaries is Hong Kong dollars (“HK$”). The consolidated financial statements are presented in Hong Kong dollars.

2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”)

In the reporting year, the Group has applied all of the new and revised Standards, Amendments and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) that are relevant to its operations and effective for annual periods beginning on or after 1 January 2012. The application of the new and revised HKFRSs has had no material effect on how the results of the Group for the current or prior accounting periods are prepared and presented. Accordingly, no prior period adjustment is required.

The Group has not applied in advance the following new and revised Standards, Amendments and Interpretations that have been issued but are not yet effective.

Amendments to HKFRS 1 Government Loans[2] Amendments to HKFRS 7 Disclosures – Offsetting Financial Assets and Financial Liabilities[2] HKFRS 9 Financial Instruments[4] Amendments to HKFRS 7 and HKFRS 9 Mandatory Effective Date of HKFRS 9 and Transition Disclosures[4] HKFRS 10 Consolidated Financial Statements[2] HKFRS 11 Joint Arrangements[2] HKFRS 12 Disclosure of Interests in Other Entities[2] Amendments to HKFRS 10, Consolidated Financial Statements, Joint Arrangements HKFRS 11 and HKFRS 12 and Disclosure of Interests in Other Entities: Transition Guidence[2] Amendments to HKFRS 10, Investment Entities[3] HKFRS 12 and HKAS 27 HKFRS 13 Fair Value Measurement[2] Amendments to HKAS 1 Presentation of Items of Other Comprehensive Income[1] HKAS 19 (as revised in 2011) Employee Benefits[2] HKAS 27 (as revised in 2011) Separate Financial Statements[2]

– I-13 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

HKAS 28 (as revised in 2011) Investments in Associates and Joint Ventures[2] Amendments to HKAS 32 Presentation – Offsetting Financial Assets and Financial Liabilities[3] Amendments to HKFRSs Annual Improvement 2009-2011 Cycle[2] HK(IFRIC) – Interpretation 20 Stripping Costs of the Production Phase of a Surface Mine[2]

1 Effective for annual periods beginning on or after 1 July 2012

2 Effective for annual periods beginning on or after 1 January 2013

3 Effective for annual periods beginning on or after 1 January 2014

4 Effective for annual periods beginning on or after 1 January 2015

The Group is in the process of making an assessment of the impact of these new and revised HKFRSs upon initial application and the directors have so far concluded that the application of these new and revised HKFRSs will have no material impact on the Group’s financial statements.

3. SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

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

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of the Group and the Company. Note 2 provides information on any changes in accounting policies resulting from initial application of these developments to the extent that they are relevant to the Group for the current and prior accounting periods reflected in these financial statements.

(b) Basis of preparation of the consolidated financial statements

The consolidated financial statements for the year ended 31 December 2012 comprise the Company, its subsidiaries and the Group’s interest in an associate.

The measurement basis used in the preparation of the financial statements is the historical cost basis except for certain financial instruments which are measured at fair values.

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

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

– I-14 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(c) Subsidiaries and non-controlling interests

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from their activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

An investment in a subsidiary is consolidated into the financial statements from the date that control commences until the date that control ceases. Intra-group balances and transactions and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised profits but only to the extent that there is no evidence of impairment.

Non-controlling interests represent the portion of the net assets of subsidiaries attributable to interests that are not owned by the Company, whether directly or indirectly through subsidiaries, and in respect of which the Group has not agreed any additional terms with the shareholders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from equity attributable to the owners of the Company. Non-controlling interests in the results of the Group are presented on the face of the consolidated statement of comprehensive income as an allocation of the total profit or loss for the year between non-controlling interests and the owners of the Company.

Changes in the Group’s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within consolidated equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognised.

When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset or, when appropriate, the cost on initial recognition of an investment in an associate or jointly controlled entity.

In the Company’s statement of financial position, an investment in a subsidiary is stated at cost less any impairment losses.

(d) Investments in associates

An associate is an entity over which the Group or Company has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated statement of financial position at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the associates, less any identified impairment loss. When the Group’s share of losses of an associate equals or exceeds its interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognising its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate.

Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

– I-15 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Where a group entity transacts with its associate, profits and losses resulting from the transactions with the associate are recognised in the Group’s consolidated financial statements only to the extent of interests in the associate that are not related to the Group.

(e) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods sold and services provided in the normal course of business, net of discounts and sales related taxes.

Revenue from gaming operations, representing the net gaming wins, is recognised when the relevant services have been rendered and is measured at the entitlement of economic inflows of the Group from the business.

Revenue from the sales of goods is recognised when the goods are delivered and the title has passed.

Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease.

Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

(f) Property, plant and equipment

Property, plant and equipment including land and buildings held for use in the production or supply of goods or services, or for administrative purposes are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.

Depreciation is provided to write off the cost of items of property, plant and equipment over their estimated useful lives and after taking into account their estimated residual value, using the straight-line method.

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

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statement of comprehensive income in the year in which the item is derecognised.

(g) Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

The Group as lessor

Rental income from operating leases is recognised in the consolidated statement of comprehensive income on a straight-line basis over the term of the relevant lease.

– I-16 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group as lessee

Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss.

Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease.

(h) Leasehold land and building

The land and building elements of a lease of land and building are considered separately for the purpose of lease classification, unless the lease payments cannot be allocated reliably between the land and building elements, in which case, the entire lease is generally treated as a finance lease and accounted for as property, plant and equipment.

(i) Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (“foreign currencies”) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At the end of each of the reporting periods, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the end of the reporting period. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising from the settlement of monetary items, and from the retranslation of monetary items, are recognised in profit or loss in the period in which they arise, except for exchange differences arising from a monetary item that forms part of the Company’s net investment in a foreign operation, in which case, such exchange differences are recognised in equity in the consolidated financial statements. Exchange differences arising from the retranslation of non-monetary items carried at fair value, are included in profit or loss for the period.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Group (i.e. HK$) at the rate of exchange prevailing at the end of the reporting period, and their income and expenses are translated at the average exchange rates for the year. Exchange differences arising, if any, are recognised as a separate component of equity (the translation reserve). Such exchange differences are recognised in profit or loss for the period in which the foreign operation is disposed of.

(j) Borrowing costs

Borrowing costs are expensed in the consolidated statement of comprehensive income for the period in which they are incurred, except to the extent that they are capitalised as being directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale.

(k) Retirement benefit costs

Payments to the Mandatory Provident Fund Scheme and state-managed retirement benefit schemes are charged as an expense when employees have rendered the service entitling them to the contributions.

– I-17 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(l) Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax base used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising from investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

(m) Intangible assets

Intangible assets acquired separately

Intangible assets acquired separately and with finite useful lives are carried at costs less accumulated amortisation and any accumulated impairment losses. Amortisation for intangible assets with finite useful lives is provided on a straight-line basis over their estimated useful lives.

Gains or losses arising from derecognition of an intangible asset are measured at the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated statement of comprehensive income when the asset is derecognised.

(n) Research and development expenditure

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

(o) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method.

– I-18 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(p) Financial instruments

Financial assets and financial liabilities are recognised in the consolidated statement of financial position when a group entity becomes a party to the contractual provision of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets or financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

Financial assets

The Group’s financial assets are classified into financial assets at fair value through profit or loss (“FVTPL”) and loans and receivables. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of each category of financial assets are set out below.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Interest income is recognised on an effective interest basis for debt instruments.

Financial assets at fair value through profit or loss

Financial assets at FVTPL have two subcategories, including financial assets held for trading.

A financial asset is classified as held for trading if:

it has been acquired principally for the purpose of selling it in the near future; or
it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or
it is a derivative that is not designated and effective as a hedging instrument.

At the end of each of the reporting periods subsequent to initial recognition, financial assets at FVTPL are measured at fair value, with changes in fair value recognised directly in profit or loss in which they arise.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At the end of each of the reporting periods subsequent to initial recognition, loans and receivables (including debtors and deposits and bank and cash balances) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment loss on financial assets below).

– I-19 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Impairment loss on financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each of the reporting periods. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been affected.

For all of the Group’s financial assets, objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; or
default or delinquency in interest or principal payments; or
it becoming probable that the borrower will enter bankruptcy or financial re-organisation.

For certain categories of financial asset, such as trade debtors, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period as well as observable changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortised cost, an impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade debtors, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When a debt is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.

For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment which is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Financial liabilities and equity

Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The Group’s financial liabilities are generally classified into other financial liabilities.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Interest expense is recognised on an effective interest basis.

– I-20 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Other financial liabilities

Other financial liabilities including creditors and accrued charges, amounts due to directors, amount due to a related party, other borrowings, obligations under finance leases, convertible loans and promissory note are subsequently measured at amortised cost, using the effective interest method.

Convertible loans

Convertible loans issued by the Group that contain both the liability and conversion option components are classified separately into respective items on initial recognition. Conversion option that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Company’s own equity instruments is classified as an equity instrument.

On initial recognition, the fair value of the liability component is determined using the prevailing market interest of similar non-convertible debts. The difference between the gross proceeds of the issue of the convertible loans and the fair value assigned to the liability component, representing the conversion option for the holder to convert the convertible loans into equity, is included in equity (convertible loans reserve).

In subsequent periods, the liability component of the convertible loans is carried at amortised cost using the effective interest method. The equity component, representing the option to convert the liability component into ordinary shares of the Company, will remain in convertible loans reserve until the embedded option is exercised (in which case the balance stated in convertible loans reserve will be transferred to share premium). Where the option remains unexercised at the expiry date, the balance stated in convertible loans reserve will be released to the accumulated losses. No gain or loss is recognised in profit or loss upon conversion or expiration of the option.

Transaction costs that relate to the issue of the convertible loans are allocated to the liability and equity components in proportion to the allocation of the gross proceeds. Transaction costs relating to the equity component are charged directly to equity. Transaction costs relating to the liability component are included in the carrying amount of the liability portion and amortised over the period of the convertible loans using the effective interest method.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Derivative financial instruments

Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured at their fair value at the end of each of the reporting periods. The resulting gain or loss is recognised in profit or loss immediately.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised directly in equity is recognised in profit or loss.

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

– I-21 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Share-based payment transactions

Equity-settled share-based payment transactions

Share options granted to directors and employees

The fair value of services received determined by reference to the fair value of share options granted at the grant date is expensed on a straight-line basis over the vesting period with a corresponding increase in equity (option reserve).

At the end of each of the reporting periods, the Group revises its estimates of the number of options that are expected to ultimately vest. The impact of the revision of the estimates during the vesting period, if any, is recognised in profit or loss, with a corresponding adjustment to option reserve.

At the time when the share options are exercised, the amount previously recognised in option reserve will be transferred to share premium. When the share options are forfeited after the vesting date or are still not exercised at the expiry date, the amount previously recognised in option reserve will be transferred to accumulated losses.

Share options granted to consultants

Share options granted in exchange for services are measured at the fair values of the goods or services received. The fair values of the services received are recognised as expenses, with a corresponding increase in equity (option reserve), when the counterparties render the services, unless the services qualify for recognition as assets.

(q) Impairment losses on tangible and intangible assets

At the end of each of the reporting periods, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. In addition, intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that they may be impaired. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

(r) Related parties

A related party is a person or entity that is related to the entity that is preparing its financial statements.

(a) A person or a close member of that person’s family is related to a reporting entity if that person:
(i) has control or joint control over the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

– I-22 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) An entity is related to a reporting entity if any of the following conditions applies:
(i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.

4. KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Group’s accounting policies, which are described in note 3, the directors of the Company are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

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

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

(a) Estimated useful lives and impairment loss for property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and identified impairment losses. The estimation of useful lives impacts the level of annual depreciation expenses recorded. Property, plant and equipment are evaluated for possible impairment on a specific asset basis or in groups of similar assets, as applicable. This process requires management’s estimate of future cash flows generated by each asset or group of assets. For any instance where this evaluation process indicates impairment, the relevant asset’s carrying amount is written down to the recoverable amount and the amount of the write-down is charged against the consolidated statement of comprehensive income.

(b) Impairment loss for intangible assets

In connection with the carrying amount of intangible assets, the Group performs ongoing evaluation of the status of the underlying drug projects concerned. Sensitivity analysis has been carried out on its assumptions regarding future market shares and anticipated margins on these drugs and gaming projects independently and the Group believes that adequate provision for impairment was made on the carrying amount of intangible assets. The situation will be closely monitored, and adjustments will be made in future periods, if future market activity indicates that such adjustments are appropriate.

– I-23 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(c) Impairment loss for debtors

The policy for making impairment loss on debtors of the Group is based on the evaluation of collectability and aging analysis of accounts and on management’s judgement. A considerable amount of judgement is required in assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of each debtor. If the financial conditions of debtors of the Group were to deteriorate, resulting in an impairment of their ability to make payments, additional impairment loss may be required.

(d) Share-based payment expenses

The fair value of the share options granted to the directors, employees and consultants determined at the date of grant of the respective share options is expensed over the vesting period, with a corresponding adjustment to the Group’s option reserve. In assessing the fair value of the share options, the generally accepted option pricing models were used to calculate the fair value of the share options. The option pricing models require the input of subjective assumptions, including the expected dividend yield and expected life of options. Any changes in these assumptions can significantly affect the estimate of the fair value of the share options.

(e) Measurement of promissory note

On issue of promissory note, the fair value is determined using a market rate for an equivalent loan and this amount is carried at amortised cost until extinguished on redemption or cancellation.

5. CAPITAL RISK MANAGEMENT

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of convertible loans as disclosed in note 24, bank and cash balances and equity of the Company, comprising issued share capital disclosed in note 27 and reserves as disclosed in consolidated statement of changes in equity. The management reviews the capital structure by considering the cost of capital and the risks associated with each class of capital. In view of this, the Group will balance its overall capital structure through the payment of dividends, new share issues as well as make new borrowings or repayment of existing borrowings. The Group’s approach to capital management remained unchanged throughout the year.

6. FINANCIAL RISK MANAGEMENT

A. Financial risk, management objectives and policies

The Group’s major financial instruments include debtors and deposits; bank and cash balances; creditors and accrued charges; amounts due to directors; obligations under finance leases and convertible loans. Details of the financial instruments are disclosed in respective notes. The risks associated with these financial instruments include market risk (currency risk and interest rate risk), credit risk and liquidity risk. The policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented in a timely and effective manner.

Market risk

(a) Currency risk

Currency risk refers to the risk that movement in foreign currency rate will affect the Group’s financial results and its cash flow. The management considers the Group is not exposed to significant foreign currency risk as the majority of its operations and transactions are denominated in the functional currencies of the group entity. The Group currently does not have a foreign currency hedging policy in respect of foreign currency transactions, assets and liabilities. However, the Group monitors its foreign currency exposure and will consider hedging significant foreign currency exposure should the need arise.

– I-24 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Interest rate risk

The Group’s exposure to interest rate risk arises from its bank deposits, obligations under finance leases and convertible loans. The bank deposits bear interests at variable rates depending on the prevailing market condition. The obligations under finance leases and convertible loans bear interests at fixed rates and therefore expose the Group to fair value interest rate risks.

The Group’s result is not sensitive to changes in interest rate as the Group’s obligations under finance leases and convertible loans are at fixed interest rates and the interest income generated from bank deposits is insignificant.

Credit risk

The carrying amounts of debtors and deposits and bank and cash balances included in the consolidated statement of financial position represents the Group’s maximum exposure to credit risk in relation to the Group’s financial assets.

The Group has no significant concentrations of credit risk.

The credit quality of the counterparties in respect of debtors and deposits, is assessed by taking into account their financial position, credit history and other factors. Given the constant repayment history, the directors are of the opinion that the risk of default by these counterparties is low.

The credit risk on bank and cash balances is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies and the PRC large statecontrolled banks.

Liquidity risk

In the management of the liquidity risk, the Group monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance the Group’s operations and mitigate the effects of fluctuations in cash flows.

The ultimate responsibility for liquidity risk management rests with the board of directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements.

The following table details the Group’s remaining contractual maturity for its financial liabilities. For non-derivative financial liabilities, the table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows.

– I-25 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Weighted average effective interest rate % At 31 December 2012 Creditors and accrued charges – Amounts due to directors – Obligations under finance leases 6.54% Convertible loans 9.04% At 31 December 2011 Creditors and accrued charges – Amounts due to directors – Obligations under finance leases 1.93% Convertible loans 9.05% Promissory note 9.63%	Less than 1 year HK$’000 84,327 6,364 132 7,086 97,909 74,443 2,567 1,350 7,104 – 85,464	Between 1 and 2 years HK$’000 – – 132 95,838 95,970 – – 132 7,104 – 7,236	Between 2 and 5 years Total undiscounted cash flow HK$’000 HK$’000 – 84,327 – 6,364 197 461 – 102,924 197 194,076 – 74,443 – 2,567 329 1,811 95,856 110,064 88,950 88,950 185,135 277,835	Total carrying amount HK$’000 84,327 6,364 412 86,933
				178,036

				74,443 2,567 1,730 86,165 68,336
				233,241

B. Fair value of financial assets and financial liabilities

The fair values of financial assets and financial liabilities are determined as follows:

the fair values of financial assets and financial liabilities with standard terms and conditions and traded in active liquid markets are determined with reference to quoted market bid prices and ask prices, respectively;
the fair values of other financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions; and
the fair values of derivative instruments are calculated using quoted prices. Where such prices are not available, discounted cash flow analysis is performed using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives.

The carrying amounts of financial assets and financial liabilities (excluding liability component of convertible loans) reported in the consolidated statement of financial position approximate their carrying amounts due to their immediate or short-term maturities.

The directors consider that the carrying amounts of liability component of convertible loans recorded at amortised cost in the consolidated financial statements approximate their fair values because of the borrowing rate currently available for convertible loans with similar terms and maturities.

– I-26 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

C. Categories of financial instruments

Financial assets Loan and receivables – debtors and deposits – bank and cash balances Financial liabilities Other financial liabilities measured at amortised cost – creditors and accrued charges – amounts due to directors – obligations under finance leases – promissory note – convertible loans	2012 HK$’000 101,821 196,169 297,990 84,327 6,364 412 – 86,933 178,036	2011 HK$’000 60,492 126,186
		186,678

		74,443 2,567 1,730 68,336 86,165
		233,241

7. TURNOVER AND SEGMENT INFORMATION

For management purposes, the Group is organised into business units based on their products and services, and has two reportable operating segments as follows:

Biopharmaceutical – Research, development and sales of biopharmaceutical products which was classified as discontinued operation of the Group and was disposed of during the year Gaming – Provision of management services, development, provision and sales of electronic gaming system

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the consolidated financial statements. Group financing (including finance costs) is managed on a group basis and is not allocated to operating segments.

During the year, the Group’s operating segments changed as a result of the change in the Group’s internal organization structure. The corresponding information for the year ended 31 December 2011 has been re-stated accordingly.

The following tables present revenue and profit information regarding the Group’s operating segments for each of the two years ended 31 December 2012 and 2011, respectively.

– I-27 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(a) Business segments

For the year ended 31 December 2012

Continuing operations Gaming Others Sub-total HK$’000 HK$’000 HK$’000 728,954 – 728,954 199,751 (28,039) 171,712	Continuing operations Gaming Others Sub-total HK$’000 HK$’000 HK$’000 728,954 – 728,954 199,751 (28,039) 171,712	Total HK$’000 749,338
Gaming HK$’000 728,954 199,751	Others HK$’000 – (28,039)

		171,897 (10,495) (12,795) 20,908
		169,515 (26,206)
		143,309

As at 31 December 2012

Continuing operations Gaming Others Sub-total HK$’000 HK$’000 HK$’000 607,549 5,397 612,946 108,798 95,444 204,242 31,450 901 32,351 12,138 – 12,138 27,834 328 28,162 – 82 82	Continuing operations Gaming Others Sub-total HK$’000 HK$’000 HK$’000 607,549 5,397 612,946 108,798 95,444 204,242 31,450 901 32,351 12,138 – 12,138 27,834 328 28,162 – 82 82	Total HK$’000 612,946 –
Gaming HK$’000 607,549 108,798 31,450 12,138 27,834 –	Others HK$’000 5,397 95,444 901 – 328 82
		612,946

		204,242 –
		204,242

		32,351 12,138 28,219 82

– I-28 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

For the year ended 31 December 2011

Continuing operations Gaming Others Sub-total HK$’000 HK$’000 HK$’000 (Restated) (Restated) (Restated) 464,582 – 464,582 110,117 (25,323) 84,794	Continuing operations Gaming Others Sub-total HK$’000 HK$’000 HK$’000 (Restated) (Restated) (Restated) 464,582 – 464,582 110,117 (25,323) 84,794	Total HK$’000 (Restated) 545,646
Gaming HK$’000 (Restated) 464,582 110,117	Others HK$’000 (Restated) – (25,323)

		85,961 (19,141) (27,484)
		39,336 –
		39,336

As at 31 December 2011

Continuing operations Gaming Others Sub-total HK$’000 HK$’000 HK$’000 (Restated) (Restated) (Restated) 482,673 5,694 488,367 109,921 91,987 201,908 18,318 725 19,043 12,137 – 12,137 28,086 252 28,338 – 199 199	Continuing operations Gaming Others Sub-total HK$’000 HK$’000 HK$’000 (Restated) (Restated) (Restated) 482,673 5,694 488,367 109,921 91,987 201,908 18,318 725 19,043 12,137 – 12,137 28,086 252 28,338 – 199 199	Total HK$’000 (Restated) 502,171 –
Gaming HK$’000 (Restated) 482,673 109,921 18,318 12,137 28,086 –	Others HK$’000 (Restated) 5,694 91,987 725 – 252 199
		502,171

		235,708 –
		235,708

		19,047 12,137 28,563 199

– I-29 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Geographical segments

The PRC and Hong Kong Macau	Revenue 2012 2011 HK$’000 HK$’000 20,384 81,064 728,954 464,582 749,338 545,646	Total assets 2012 2011 HK$’000 HK$’000 5,397 185,714 607,549 316,457 612,946 502,171	Capital expenditure 2012 2011 HK$’000 HK$’000 1,581 803 30,770 18,244 32,351 19,047	Capital expenditure 2012 2011 HK$’000 HK$’000 1,581 803 30,770 18,244 32,351 19,047
				19,047

8. OTHER INCOME

Waiver of other borrowing and payables Bank interest income Gain on disposal of property, plant and equipment Rental income Net exchange gains Sundry income	2012 HK$’000 – 2 – 949 255 780 1,986	2011 HK$’000 (Restated) 4,986 1 1,366 720 204 400
		7,677

9. FINANCE COSTS

Interests on: Other borrowings wholly repayable within five years Obligations under finance leases wholly repayable within five years Effective interests on: Convertible loans_(note 24) Promissory note(note 25)_	2012 HK$’000 – 32 7,872 2,591 10,495	2011 HK$’000 155 18 9,788 9,180
		19,141

10. INCOME TAX EXPENSES

(i) Hong Kong Profits Tax

No provision for Hong Kong Profits Tax had been made as the Group did not generate any assessable profits in Hong Kong during both years.

(ii) PRC Enterprise Income Tax

For operating subsidiaries established in the PRC, PRC Enterprise Income Tax is calculated at the rate of 25% (2011: 25%) prevailing in the PRC for the year with certain tax preference.

No provision for PRC Enterprise Income Tax had been made as the Group’s subsidiaries either were enjoying tax holiday or did not generate any assessable profits or had available tax loss to offset against assessable profits during both years.

– I-30 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(iii) Macau Complementary Tax

For operating subsidiaries established in Macau, Macau Complementary Tax is calculated at the rate of 12% (2011: tax losses were brought forward to set off against profit for the year) prevailing in Macau for the year with certain tax preference.

Continuing operations Current tax – Macau Deferred tax Total tax charge for the year	2012 HK$’000 13,406 12,800 26,206	2011 HK$’000 – –
		–

The charge for the year that can be reconciled with the profit before tax per the consolidated statement of comprehensive income is as follows:

Profit before tax Tax at Macau Complementary Tax rate of 12% Tax effect of expenses not deductible for tax purpose Tax effect of income not taxable for tax purpose Tax effect of temporary differences not recognised Utilisation of tax loss previously not recognised Tax effect of deferred tax recognised in respect of temporary differences Tax effect of different tax rates of subsidiaries operating in other jurisdictions Tax effect of different tax rates enacted by local authority Income tax expenses	2012 HK$’000 148,422 17,811 24,343 (27,112) 1,119 – 12,800 – (2,755) 26,206	2011 HK$’000 (Restated) 38,169

		4,580 1,093 (1,579) (1,650) (2,271) – (173) –
		–

11. DISCONTINUED OPERATION

In April 2012, the Group disposed of its entire interest in LifeTec Pharmaceutical Limited and its subsidiaries (collectively the “Disposed Group”) for a nominal consideration of HK$7.80. For details of the disposal, please refer to the Company’s announcement dated 2 April 2012. A gain on disposal of the Disposed Group of HK$20,908,000 has been recognised during the year. The biopharmaceutical business segment which was solely carried out by the Disposed Group was classified as a discontinued operation during the year. The consolidated statement of comprehensive income and presentation of certain items of the corresponding reporting period have been restated to comply with the relevant requirements accordingly.

– I-31 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The results of the Disposed Group up to the disposal date were presented below:

2012
HK$’000
Revenue
20,384
Cost of sales and services
(19,265)
Gross profit
1,119
Other income
133
Marketing, selling and distribution costs
(286)
Administrative expenses
(781)
Profit for the year of the discontinued operation
185
Gain on disposal of the Disposed Group
20,908
Profit for the year from the discontinued operation
21,093
Attributable to:
Owners of the Company
21,088
Non-controlling interests
5
21,093
Earnings per share (HK cents)
– Basic
0.74
– Diluted
0.57
The net liabilities of the Disposed Group as at disposal date were as follows:
Property, plant and equipment
Inventories
Debtors, deposits and prepayments
Bank and cash balances
Creditors and accrued charges
Current tax liabilities
Non-controlling interest
Release of translation reserve
Net liabilities of the Disposed Group at the date of disposal

2011
HK$’000
81,064
(74,191)
6,873
172
(2,209)
(3,669)
1,167
–
1,167
1,217
(50)
1,167
0.04
0.03
HK$’000
828
159
12,017
2,441
(32,753)
(2,448)
100
(1,252)
(20,908)

– I-32 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The cash flow attributable to the discontinued operation was as follows:

2012 HK$’000 Net cash used in operating activities (195) Net cash generated from investing activities 2 Net cash generated from financing activities 59 Net (decrease) increase in cash and cash equivalents (134) Profit of the Disposed Group for the year has been arrived at after charging: 2012 HK$’000 Cost of inventories recognised as expenses 19,265 Depreciation of property, plant and equipment 57 Operating lease rentals paid in respect of rented premises 76 Loss on disposal of property, plant and equipment 32 Staff costs – Directors’ emoluments_(note 13) – – Other staff – Salaries and other benefits 179 – Retirement benefits scheme contributions 42 Total staff costs 221 PROFIT FOR THE YEAR 2012 _HK$’000 CONTINUING OPERATIONS Profit for the year has been arrived at after charging: Auditors’ remuneration 790 Cost of inventories recognised as expenses 40,016 Depreciation of property, plant and equipment 28,162 Operating lease rentals paid in respect of rented premises 6,704 Amortisation of intangible assets 12,138 Impairment loss for amount due from an associate 82 Loss on disposal of property, plant and equipment 33 Staff costs – Directors’ emoluments_(note 13)_ 23,692 – Other staff – Salaries and other benefits 46,507 – Retirement benefits scheme contributions 467 Total staff costs 70,666	2011 HK$’000 (2,525) 4 2,585 64 2011 HK$’000 74,191 225 243 –
	– 699 214
	913 2011 HK$’000 (Restated) 770 10,634 28,338 5,266 12,137 199 –
	6,863 38,437 512
	45,812

12. PROFIT FOR THE YEAR

– I-33 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

13. DIRECTORS’ AND EMPLOYEES’ EMOLUMENTS

Directors’ emoluments

The emoluments of each director were as follows:

Year ended 31 December 2012

Name Executive directors Mr. Jay Chun Mr. Shan Shiong, alias, Sin Sai Yung Mr. Hu Liming Independent non- executive directors Mr. Frank Hu Mr. Li John Zongyang Mr. Kuan Hin Meng Total Year ended 31 December 2011 Name Executive directors Mr. Jay Chun Mr. Shan Shiong, alias, Sin Sai Yung Mr. Hu Liming Independent non- executive directors Mr. Frank Hu Mr. Li John Zongyang Mr. Kuan Hin Meng Total	Fees HK$’000 – – – 120 120 120 360 Fees HK$’000 – – – 120 120 120 360	Salaries and other benefits HK$’000 10,792 10,725 120 – – – 21,637 Salaries and other benefits HK$’000 2,457 2,600 120 – – – 5,177	Accom- modation benefits Retirement benefits scheme contributions HK$’000 HK$’000 1,669 12 – 14 – – – – – – – – 1,669 26 Accom- modation benefits Retirement benefits scheme contributions HK$’000 HK$’000 1,302 12 – 12 – – – – – – – – 1,302 24	Total HK$’000 12,473 10,739 120 120 120 120
				23,692

				Total HK$’000 3,771 2,612 120 120 120 120
				6,863

No director waived or agreed to waive any emoluments during the two years ended 31 December 2012 and 2011.

– I-34 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Employees’ emoluments

The five highest paid individuals in the Group during the year included two (2011: two) directors whose emoluments are reflected in the analysis presented above. The remaining three (2011: three) individuals, include three (2011: one) senior management personnel, whose emoluments are set out below:

Salaries and other benefits Retirement benefit scheme contributions Their emoluments were within the following band: HK$0 to HK$1,000,000 HK$1,000,001 to HK$1,500,000 HK$4,500,001 to HK$5,000,000	2012 HK$’000 6,778 14 6,792 2012 Number of Individuals 1 1 1	2011 HK$’000 2,721 12
		2,733

		2011 Number of Individuals 2 1 –

During the two years ended 31 December 2012 and 2011, no emoluments were paid by the Group to any of the directors or the five highest paid individuals as an inducement to join or upon joining the Group or as compensation for loss of office.

14. DIVIDENDS

No dividend was paid or proposed during 2012, nor has any dividend been proposed since the end of the reporting period (2011: nil).

15. EARNINGS PER SHARE

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

For the purpose of calculating basic earnings per share Profit for the year – From continuing operations – From discontinued operation For the purpose of calculating diluted earnings per share Profit for the year – From continuing operations – From discontinued operation	2012 HK$’000 105,610 21,088 126,698 113,482 21,088 134,570	2011 HK$’000 (Restated) 34,326 1,217
		35,543

		44,114 1,217
		45,331

– I-35 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Number of shares Issued ordinary shares at 1 January Effect of conversion of convertible loans Weighted average number of ordinary shares for the purpose of calculating basic earnings per share Effect of dilutive potential ordinary shares on convertible loans Weighted average number of ordinary shares for the purpose of calculating diluted earnings per share	2012 2,841,444,778 – 2,841,444,778 887,500,000 3,728,944,778	2011 1,863,444,778 811,112,327
		2,674,557,105 988,469,863
		3,663,026,968

16. PROPERTY, PLANT AND EQUIPMENT

Cost At 1 January 2011 Additions Disposals Exchange realignment At 31 December 2011 Additions Disposals Disposals of subsidiaries Exchange realignment At 31 December 2012 Depreciation and impairment loss At 1 January 2011 Provided for the year Disposals Exchange realignment At 31 December 2011 Provided for the year Disposals Disposals of subsidiaries Exchange realignment At 31 December 2012 Carrying values At 31 December 2012 At 31 December 2011	Leasehold improvements HK$’000 118,861 4,737 – 135 123,733 7,822 – (2,796) 6 128,765 21,677 8,992 – 124 30,793 9,930 – (2,642) 5 38,086 90,679 92,940	Plant and machinery HK$’000 120,496 10,810 (1,378) 1,747 131,675 22,871 – (39,394) 43 115,195 81,467 16,912 (1,172) 1,741 98,948 15,611 – (39,286) 43 75,316 39,879 32,727	Furniture, fixtures and office equipment HK$’000 27,048 2,829 (2) 48 29,923 1,542 (213) (875) 6 30,383 5,480 2,231 (1) 34 7,744 2,496 (180) (698) 2 9,364 21,019 22,179	Motor vehicles HK$’000 4,825 671 (1,689) 72 3,879 116 – (1,616) 2 2,381 3,900 428 (1,523) 51 2,856 182 – (1,227) 1 1,812 569 1,023	Total HK$’000 271,230 19,047 (3,069) 2,002
					289,210 32,351 (213) (44,681) 57
					276,724

					112,524 28,563 (2,696) 1,950
					140,341 28,219 (180) (43,853) 51
					124,578

					152,146

					148,869

– I-36 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The above items of property, plant and equipment are depreciated on a straight-line basis, at the following rates per annum:

Leasehold improvements	20% or over the remaining terms of the leases
Plant and machinery	10-20%
Furniture, fixtures and office equipment	15-20%
Motor vehicles	10-20%

As at 31 December 2012, the gaming machines of the Group which were subject to charges for securing obligations under finance leases had net book value of nil (2011: HK$4,633,000). As at 31 December 2012, motor vehicles of the Group which were subject to charges for securing obligations under finance leases had net book value of HK$458,000 (2011: HK$592,000).

17. INTANGIBLE ASSETS

Cost At 31 December 2011 and at 31 December 2012 Amortisation and impairment At 1 January 2011 Amortisation for the year At 31 December 2011 Amortisation for the year At 31 December 2012 Carrying amount At 31 December 2012 At 31 December 2011	Patents- Biophar- maceutical products (note (a)) HK$’000 4,705 4,705 – 4,705 – 4,705 – –	Patent- Betting terminal system (note (b)) HK$’000 182,066 4,046 12,137 16,183 12,138 28,321 153,745 165,883	Total HK$’000 186,771

			8,751 12,137
			20,888 12,138
			33,026

			153,745

			165,883

(a) It represents the exclusive rights to use certain technologies acquired for the manufacture of certain biopharmaceutical products, which were fully amortised in prior years.
(b) The patent relates to a computerized system (the “System”) for operating multi-gambling games. The System was installed in Casino Kam Pek Paradise and other casinos in Macau. The Group generates revenue from sharing net gaming win with casino owners under income-sharing agreements and distributing electronic gaming machines installed with the System in Macau.

The patent was acquired during the year 2010 from Mr. Jay Chun, the Chairman and an executive director of the Company, for a total consideration of HK$280,000,000 comprising cash payment of HK$30,000,000 and a promissory note of HK$250,000,000.

– I-37 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The fair value of the patent as at the acquisition date was determined at HK$288,000,000 by the directors of the Company with reference to the valuation on the patent conducted by an independent professional valuer, Ample Appraisal Limited, under the income-based approach.

The cost of the patent was determined by the directors of the Company and represents the sum of the cash consideration, the amortised cost of the promissory note at the acquisition date using the effective interest method (note 25) and the capitalised transaction cost of the issuance of the promissory note. The patent is amortised over its useful life of 15 years using the straight-line method.

The directors of the Company conducted an impairment assessment and considered that there was no impairment to the carrying amount of the patent as at the end of the reporting period, with reference to the valuation on the patent conducted by an independent professional valuer, Ample Appraisal Limited, under the income-based approach.

18. INTEREST IN AN ASSOCIATE

Cost of investment in an associate, unlisted Share of post-acquisition losses and reserves Amount due from an associate Less: Impairment loss for amount due from an associate	2012 HK$’000 21,672 (21,672) – 9,689 9,689 (9,689) –	2011 HK$’000 21,672 (21,672) – 9,607 9,607 (9,607) –

Particulars of the Group’s associate as at 31 December 2012 are as follows:

				Issued and
	Form of		Principal	fully paid	Proportion
Name of	business	Place of	place of	share	of ownership	Principal
associate	structure	incorporation	operation	capital	interest	activities
LT3000 Online	Incorporated	British Virgin	Hong Kong	3,023,314 ordinary	47.47%	Development and trading of computer
Limited		Islands		shares of		hardware and software and provision
				US$0.1 each		of business consultancy services

The amount due from an associate is unsecured, interest-free and has no fixed term of repayment.

– I-38 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Summarised financial information in respect of the Group’s associate is set out below:

At 31 December Total assets Total liabilities Net liabilities Group’s share of associate’s net assets Year ended 31 December Total revenue Total loss for the year	2012 HK$’000 3,267 (11,740) (8,473) – – (120)	2011 HK$’000 3,365 (11,573) (8,208) – 2 (175)

The Group has not recognised loss for the year amounting to approximately HK$56,000 (2011: HK$82,000) for the Group’s associate. The accumulated losses not recognised were approximately HK$2,261,000 (2011: HK$2,205,000).

19. INVENTORIES

Trading goods 20. DEBTORS, DEPOSITS AND PREPAYMENTS Trade debtors Less: Accumulated impairment loss Other debtors, deposits and prepayments	2012 HK$’000 4,810 2012 HK$’000 65,662 (287) 65,375 40,701 106,076	2011 HK$’000 200 2011 HK$’000 43,147 (3,442) 39,705 21,328 61,033

The Group normally allows a credit period of 30 days and 90 to 180 days to its gaming partners and trade debtors, respectively. The credit policy is consistent with the gaming industry practice in Macau and the biopharmaceutical industry practice in the PRC, respectively.

– I-39 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

An ageing analysis of the trade debtors net of impairment loss recognised at the end of the reporting period is as follows:

Within 30 days 31-60 days 61-90 days 91-180 days BANK AND CASH BALANCES Cash at bank_(note)_ Cash chips in hand Cash in hand	2012 HK$’000 63,181 1,714 480 – 65,375 2012 HK$’000 51,687 106,314 38,168 196,169	2011 HK$’000 33,998 3,986 1,492 229
		39,705

		2011 HK$’000 26,752 47,354 52,080
		126,186

21. BANK AND CASH BALANCES

Note: The bank balances carry interest at prevailing market rate for both years.

As at 31 December 2012, the bank and cash balances of the Group denominated in RMB amounted to approximately HK$537,000 (2011: HK$2,614,000), which is not freely convertible in the international market and its exchange rate is determined by the Government of the PRC.

22. CREDITORS AND ACCRUED CHARGES

An ageing analysis of trade creditors, based on the date of receipt of goods is as follows:

Within 30 days 31-60 days 61-90 days 91-365 days More than 365 days Trade creditors Other creditors and accrued charges Value added tax payable	2012 HK$’000 – – – – – – 84,327 – 84,327	2011 HK$’000 4,618 4,026 1,664 1 97
		10,406 54,567 9,470
		74,443

– I-40 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

23. OBLIGATIONS UNDER FINANCE LEASES

Within one year More than one year, but not exceeding two years More than two year, but not exceeding five years Less: Future finance charges Present value of lease obligations Less: Amounts due for settlement within one year (shown under current liabilities) Amounts due for settlement after one year	Minimum lease payments 2012 2011 HK$’000 HK$’000 132 1,350 132 132 197 329 461 1,811 (49) (81) 412 1,730	Present value of minimum lease payments 2012 2011 HK$’000 HK$’000 108 1,318 116 100 188 312 412 1,730 – – 412 1,730 (108) (1,318) 304 412

It was the Group’s policy to lease certain of its motor vehicles under finance leases. The average lease term is 5 years (2011: 5 years) and interest rates are fixed at the contract dates.

It was the Group’s policy to lease certain of its gaming machines under finance leases and the average lease term was 2 years (2011: 2 years). The Group has to pay the lessors based on the gaming wins according to the lease agreements and at the end of the lease term, the Group has the option to acquire the gaming machines at the prices as set out in the lease agreements.

All obligations under finance leases are denominated in Hong Kong dollars.

The Group’s obligations under finance leases are secured by the lessor’s charge over the leased assets.

24. CONVERTIBLE LOANS

Pursuant to a subscription agreement dated 20 January 2010, the Company issued convertible notes with principal value of HK$116,000,000 on 14 April 2010 (“CN1”) to Edison International Inc. (“Edison”). Edison is entitled to convert the principal amount in whole or in part of HK$116,000,000 into new ordinary shares of the Company, at a conversion price being the higher of (i) the average of the closing price of the shares of any three consecutive trading days (as selected by the debenture holder) within the sixty trading days immediately prior to the conversion date and (ii) the par value for the time being of the Shares, which is HK$0.10, and at any time between the date of issue of CN1 and 31 December 2014. If CN1 are not converted before 31 December 2014, they will be redeemed at par on 31 December 2014. CN1 bear interests at 8% per annum payable quarterly on or before the fifth business day of January, April, July and October in each year until their settlement date. Details of CN1 are set out in the Company’s circular dated 16 March 2010 and announcements dated 21 January 2010, 1 March 2010, 1 April 2010 and 21 April 2010.

– I-41 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Pursuant to a subscription agreement dated 20 January 2010, the Company agreed to issue convertible notes with principal value of US$85,500,000 (or approximately HK$662,625,000) on 21 April 2010 (“CN2”) to Pioneer Link Associates Limited (“Pioneer Link”). Pioneer Link is entitled to convert the principal amount in whole or in part of HK$662,625,000 into new ordinary shares of the Company, at a conversion price being the higher of (i) the average of the closing price of the shares of any three consecutive trading days (as selected by the debenture holder) within the sixty trading days immediately prior to the conversion date and (ii) the par value for the time being of the shares, which is HK$0.10, and at any time between the date of issue of CN2 and 31 December 2014. If CN2 are not converted before 31 December 2014, they will be redeemed at par on 31 December 2014. CN2 bear interests at 8% per annum payable quarterly on or before the fifth business day of January, April, July and October in each year until their settlement date. Details of CN2 are set out in the Company’s circular dated 16 March 2010 and announcements dated 21 January 2010, 1 March 2010, 1 April 2010, 21 April 2010 and 23 April 2010.

On 21 April 2010, the Company received a partial payment of HK$88,700,000 for CN2. Pioneer Link failed to complete the subscription agreement on or before the intended completion date of 21 April 2010. A supplemental agreement was entered into between the Company and Pioneer Link to further extend the completion date to 21 October 2010.

Up to 21 October 2010, the Company had received an aggregate amount of HK$138,500,000 representing partial payment of the consideration for CN2. A supplemental agreement was entered into between the Company and Pioneer Link to further extend the completion date to 21 October 2011. Up to 19 November 2010, the Company had received an aggregate amount of HK$153,500,000 representing partial payment of the consideration for CN2. Details are set out in the Company’s announcements dated 21 October 2010, 2 November 2010 and 19 November 2010.

Up to 21 October 2011, the completion date of the supplemental agreement, the Company had received an aggregate amount of HK$207,500,000 representing partial payment of the consideration for CN2. Subscription monies of HK$455,125,000 remained unpaid by Pioneer Link and no new convertible notes will be issued thereto under the contract.

Pursuant to a subscription agreement dated 20 January 2010, the Company issued convertible notes with principal value of US$1,000,000 (or approximately HK$7,750,000) on 20 April 2010 (“CN3”) to Trueworthy Group Limited (“Trueworthy”). Trueworthy is entitled to convert the principal amount in whole or in part of HK$7,750,000 into new ordinary shares of the Company, at a conversion price being the higher of (i) the average of the closing price of the shares of any three consecutive trading days (as selected by the debenture holder) within the sixty trading days immediately prior to the conversion date and (ii) the par value for the time being of the shares, which is HK$0.10, and at any time between the date of issue of CN3 and 31 December 2014. If CN3 are not converted before 31 December 2014, they will be redeemed at par on 31 December 2014. CN3 bear interests at 8% per annum payable quarterly on or before the fifth business day of January, April, July and October in each year until their settlement date. Details of CN3 are set out in the Company’s circular dated 16 March 2010 and announcements dated 21 January 2010, 1 March 2010, 1 April 2010 and 21 April 2010.

The fair values of the debt element and the conversion options element of CN1, CN2 and CN3 are determined by the directors of the Company with reference to the valuation performed by Ample Appraisal Limited, an independent firm of professional valuers based on the discounted cash flow method.

– I-42 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The net proceeds received from the issue of CN1, CN2 and CN3 have been split into the liability components and equity components, as follows:

Nominal values of convertible loans issued Transaction costs Equity components Liability components at date of issue	CN1 HK$’000 116,000 (2,050) (16,933) 97,017	CN2 HK$’000 207,500 – (15,411) 192,089	CN3 HK$’000 7,752 – (1,132) 6,620	Total HK$’000 331,252 (2,050) (33,476) 295,726

The movement of liability components of the convertible loans for the two years ended 31 December 2012 and 2011 is set out below:

Liability components at 1 January 2011 Liability components at date of issue Interest charged_(note 9) Interest paid Converted into ordinary shares of the Company Liability components at 31 December 2011 and 1 January 2012 Interest charged(note 9)_ Interest paid Liability components at 1 December 2012	CN1 HK$’000 47,283 – 3,262 (2,226) (25,091) 23,228 2,151 (1,920) 23,459	CN2 HK$’000 75,114 52,366 5,701 (5,073) (72,153) 55,955 4,870 (4,560) 56,265	CN3 HK$’000 6,781 – 825 (624) – 6,982 851 (624) 7,209	Total HK$’000 129,178 52,366 9,788 (7,923) (97,244) 86,165 7,872 (7,104) 86,933

The interests charged for the year for CN1, CN2 and CN3 are calculated by applying the effective interest rates of 9.17%, 8.64% and 11.92% (2011: 9.17%, 8.64% and 11.92%), respectively to the liability components.

25. PROMISSORY NOTE

On 20 September 2010, the Group issued a promissory note with a principal amount of HK$250,000,000 to Mr. Jay Chun, the Chairman and an executive director of the Company, as part of the consideration for the Group’s acquisition of a patent in relation to a betting terminal system. The promissory note is unsecured, non-interest bearing and has a maturity period of 4 years from the date of issue but can be repaid in whole or in part before maturity at the discretion of the Company. Early redemption of the promissory note shall be subject to discount of the outstanding principal amount as follows: 8% within the first year, 6% within the second year, 4% within the third year and 2% within the fourth year.

– I-43 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

At 1 January_(note i) Interest charged(note 9) Early redemption during the year(note ii)_ At 31 December	2012 HK$’000 68,336 2,591 (70,927) –	2011 HK$’000 119,472 9,180 (60,316)
		68,336

Notes:

(i) The promissory note is measured at amortised cost using the effective interest method with the effective interest rate at 12.29% per annum.
(ii) During the year ended 31 December 2012, the Group redeemed principal amount of HK$83,722,000 (2011: HK$100,050,000). The loss on early redemption was the difference between the discounted repayment amount and the respective carrying amount at the date of redemption totalling HK$70,927,000 (2011: HK$60,316,000).

26. DEFERRED TAX LIABILITIES

The movements in deferred tax liabilities during the year are as follows:

At 1 January 2011, 31 December 2011 and 1 January 2012 Charged to the consolidated statement of comprehensive income At 31 December 2012	Accelerated tax depreciation HK$’000 – 12,800
	12,800

At 31 December 2012, the Group had unused tax losses of approximately HK$57,415,000 (2011: HK$112,407,000) available to offset against future taxable profits. No deferred tax asset has been recognised in respect of such losses due to the unpredictability of future profit streams. Included in unrecognised tax losses are losses of approximately nil (2011: HK$54,990,000 that will expire from 2012 to 2013). Other losses may be carried forward indefinitely.

27. SHARE CAPITAL

Authorised: At beginning of the year and end of the year Issued and fully paid: At beginning of the year Issue of shares on conversion of convertible loans_(note 24)_ At end of the year	Number of shares of HK$0.10 each 2012 2011 ’000 ’000 10,000,000 10,000,000 2,841,445 1,863,445 – 978,000 2,841,445 2,841,445	Share capital 2012 2011 HK$’000 HK$’000 1,000,000 1,000,000 284,144 186,344 – 97,800 284,144 284,144	Share capital 2012 2011 HK$’000 HK$’000 1,000,000 1,000,000 284,144 186,344 – 97,800 284,144 284,144

			186,344 97,800
			284,144

– I-44 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. RESERVES

(i) Share premium account

Share premium represents premium arising from the issue of shares at a price in excess of their par value per share and is not distributable but may be applied in paying up for unissued shares of the Company to be issued to the shareholders of the Company as fully paid bonus shares or in providing for the premiums payable on the repurchase of shares.

(ii) Special reserve represents the aggregate of:

The difference between the nominal amount of the share capital issued by the Company and the aggregate of the nominal amount of the issued share capital and the share premium account of LifeTec (Holdings) Limited, the subsidiary which was acquired by the Company pursuant to the group reorganisation in 1996, and
The effects of the capital reduction, share premium cancellation and elimination of accumulated losses, which took place in 1999.

(iii) Convertible loans reserve

The convertible loans reserve represents the value of the unexercised equity component of convertible loans issued by the Company recognised in accordance with the accounting policy adopted for convertible loans in note 3(p).

(iv) Option reserve

The option reserve represents the fair value of the actual or estimated number of unexercised share options granted to employees and consultants of the Group recognised in accordance with the accounting policy adopted for equity-settled share-based payments in note 3(p).

(v) Translation reserve

The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The reserve is dealt with in accordance with the accounting policies set out in note 3(i).

29. SHARE-BASED PAYMENTS

Equity-settled share option schemes

Pursuant to the share option scheme adopted by the Company on 15 July 2002 (the “Old Scheme”) the Company may grant options to the directors and employees of the Group; any supplier of goods or services to the Group; any customer of the Group; any adviser or consultant of the Group; any person or entity that provides research, development or other technological support to the Group; or any shareholders of the Group (collectively referred to as the “Eligible Participants”), at the exercise price determined by the directors of the Company, and will not be less than the highest of (i) the closing price of the Company’s shares on the date of grant; (ii) the average closing price of the shares for the five business days immediately preceding the date of grant; and (iii) the nominal value of the shares on the offer date. Options granted under the Old Scheme may be exercised at any time from the date of grant of the share option to the fifth anniversary of the date of grant.

The Old Scheme expired on 14 July 2007 and was replaced by the existing share option scheme which was adopted by the Company on 30 July 2007 (the “New Scheme’) for the purpose of providing incentives or rewards to the Eligible Participants for their contribution to the success of the Group’s operations. All outstanding options granted under the Old Scheme continue to be valid and exercisable in accordance with the terms of the Old Scheme. The New Scheme will expire on 29 July 2017.

– I-45 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Initially, the total number of shares in respect of which options may be granted under the New Scheme must not in aggregate exceed 10% of the shares in issue as at 30 July 2007, being the date of adoption of the New Scheme, without prior approval from the Company’s shareholders. The total number of shares issued and to be issued upon exercise of the options granted to each Eligible Participant in any twelve-month period is limited to 1% of the shares of the Company in issue at any time. Any further grant of shares options in excess of this limit is subject to shareholders’ approval in general meeting.

Share options granted to a director, chief executive or substantial shareholder of the Company, or to any of their associates, are subject to approval in advance by the independent non-executive directors. In addition, any share options granted to a substantial shareholder or an independent non-executive director of the Company, or to any of their associates, in excess of 0.1% of the shares of the Company in issue at any time or with an aggregate value (based on the price of the Company’s shares at the date of the grant) in excess of HK$5 million, within any twelve-month period, are subject to shareholders’ approval in advance in a general meeting.

The offer of a grant of share options may be accepted within 21 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the directors, and commences after a certain vesting period and ends on a date which is not later than ten years from the date of the offer of the share options or the expiry date of the New Scheme, if earlier.

The exercise price of the share options granted under the New Scheme is determinable by the directors, but may not be less than the highest of (i) the Stock Exchange closing price of the Company’ shares on the date of the offer of the share options; (ii) the average Stock Exchange closing price of the Company’s shares for the five trading days immediately preceding the date of the offer; and (iii) the nominal value of the Company’s shares on the date of the offer.

Share options do not confer rights on the holder to dividends or to vote at shareholders’ meetings.

Details of the movements in the Company’s share options during the year ended 31 December 2012 are as follows:

Old scheme

Number of share options	Number of share options	Number of share options
Outstanding at 1 January 2012 440,000 450,000 24,300,000 25,190,000 2.4200	Lapsed during the year Outstanding at 31 December 2012 (440,000) – (450,000) – (24,300,000) – (25,190,000) – – 2.4200 –
		–

		–

		–

– I-46 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

New scheme

Number of share options	Number of share options	Number of share options
Outstanding at 1 January 2012 3,600,000 200,000 33,000,000 22,800,000 33,000,000 92,600,000 0.5890	Lapsed during the year Outstanding at 31 December 2012 (3,600,000) – (200,000) – – 33,000,000 (22,800,000) – – 33,000,000 (26,600,000) 66,000,000 66,600,000 1.8024 0.1000
		66,000,000

		66,600,000

		0.1000

Details of the movements in the Company’s share options during the year ended 31 December 2011 are as follows:

Old scheme

Number of share options	Number of share options	Number of share options
Outstanding at 1 January 2011 490,000 550,000 28,000,000 24,300,000 53,340,000 1.6273	Lapsed during the year (50,000) (100,000) (28,000,000) – (28,150,000) 0.9180	Outstanding at 31 December 2011 440,000 450,000 – 24,300,000
		25,190,000

		25,190,000

		2.4200

– I-47 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

New scheme

	Number of share options	Number of share options	Number of share options
Outstanding at 1 January 2011 3,600,000 200,000 – 22,800,000 – 26,600,000 1.8020	Granted during the year – – 33,000,000 – 33,000,000 66,000,000 0.1000	Lapsed during the year Outstanding at 31 December 2011 – 3,600,000 – 200,000 – 33,000,000 – 22,800,000 – 33,000,000 – 92,600,000 92,600,000 – 0.5890
			92,600,000

			92,600,000

			0.5890

No share option granted was exercised during the two years ended 31 December 2012 and 2011.

The share options outstanding as at 31 December 2012 had a weighted average remaining contractual life of 3.08 years (2011: 2.54 years).

No equity settled employees benefit (including directors’ emoluments) was recognised for the year ended 31 December 2012 (2011: HK$1,894,000).

Share options were granted to certain consultants pursuant to the consultancy agreements entered into between LifeTec (Holdings) Limited, and each of the consultants for a period of five years commencing from the respective dates of the consultancy agreements as consideration for the following services to be provided by these consultants:

(a) Identify potential strategic investors and financial investors for the Group;
(b) Assist the Group in negotiating with the potential strategic investors and financial investors;
(c) Provide consultancy services in relation to the development of the gaming business of the Group; and
(d) Carry out other duties as appropriate and as agreed with LifeTec (Holdings) Limited.

– I-48 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

30. CONTINGENT LIABILITIES

(a) On 15 September 1999, LifeTec Enterprise Limited (“LifeTec Enterprise”), a subsidiary of the Company, was named as a defendant in a High Court action in respect of an alleged failure to repay a loan in an amount of HK$20,000,000. The plaintiff took out an application for summary judgement under Order 14 of the Rules of the High Court on 6 October 1999 and in the hearing of the application on 25 October 1999, LifeTec Enterprise was given unconditional leave to defend the plaintiff’s claim in the above action. LifeTec Enterprise filed its defence on 8 November 1999. The plaintiff should have filed its reply, if any, 14 days thereafter, but LifeTec Enterprise had not received any reply from the plaintiff and the time for the plaintiff to file the same has long expired and the pleadings should be deemed to be closed. The directors believe that there is no ground for the above claim and that it will not have any material adverse impact on the Group’s operations.
(b) In 2012, the Company had been served with a summon issued by the Macau Judicial Base Court (“Tribunal Judicial de Base”), pursuant to which Shuffle Master Asia Limited (“Shuffle Master”) has commenced injunction proceedings against the Company, its subsidiaries (i) LT Game Limited (“LT Game”) (an entity which owns the global (including Macau) rights to use, distribute and maintain the material and equipment that uses the invention object of the Macau Invention Patent No. I/000150 (“Patent I/150”) and the Macau Invention Patent No. I/000380 (“Patent I/380”)), and (ii) Natural Noble Limited (“Natural Noble”) (the owner of Patent I/380) and Mr. Jay Chun (the Chairman and an executive director of the Company, the inventor and registered owner of Patent I/150) (collectively, the “Respondents”) (the “Injunction”).

The Injunction seeks orders to restrain, amongst others, the Respondents from, amongst other things, (i) making any representation or expression on any monopoly right over all and any solutions allowing players to play remotely in real time on a plurality of live games; (ii) and unfairly competing with Shuffle Master in any manner, amongst other ancillary petitions. Details of the Injunction are set out in the Company’s announcement dated 1 November 2012. The Company and its directors strongly refute the Injunction, the claim and the allegation made therein, and consider them to be without merit.

As at the date of this report, the Company, LT Game and Natural Noble have filed their opposition to the Injunction. The Company and its directors believe that the Injunction was initiated as one more phase of a litigation tactic to pressurize the Group, as a result of the infringement proceedings originally filed by Mr. Jay Chun, LT Game and Natural Noble, against, inter alia, Shuffle Master, for infringements of Patent I/380 and Patent I/150.

31. OPERATING LEASE COMMITMENTS

At the end of the reporting period, the Group had commitments for future minimum lease payments under non-cancellable operating leases in respect of rented premises which fall due as follows:

Within one year In the second to fifth year inclusive	2012 HK$’000 7,241 7,608 14,849	2011 HK$’000 9,537 1,454
		10,991

Leases relate to directors’ quarters, warehouse facilities and office premises and are negotiated for average terms of one to five (2011: one to five) years.

– I-49 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32. CAPITAL COMMITMENTS

	2012	2011
	HK$’000	HK$’000
Capital expenditure contracted for but not provided in
the consolidated financial statements in respect of:
Acquisition of property, plant and equipment	18,780	11,927

33. RETIREMENT BENEFITS SCHEME

The Group operated a Mandatory Provident Fund Scheme for all qualifying employees in Hong Kong. The assets of the scheme are held separately from those of the Group, in funds under the control of trustees. The Group contributes 5% of the relevant payroll costs to the scheme, which contribution is matched by employees.

As stipulated by the rules and regulations in the PRC, the Group contributes to the retirement funds scheme managed by local social security bureau in the PRC. The Company contributes a certain percentage of the basic salaries of its employees to the retirement plan to fund the benefits.

The only obligation of the Group with respect to these retirement benefit schemes is to make the specified contributions. During the year ended 31 December 2012, the total retirement benefit scheme contributions charged to the consolidated statement of comprehensive income amounted to approximately HK$532,000 (2011: HK$749,000).

34. RELATED PARTY TRANSACTIONS

(a) In addition to those related party transactions and balances disclosed elsewhere in the consolidated financial statements, the Group had the following transactions with its related parties during the year:

Consultancy fees paid to_(notes a & b) Salaries and other benefits paid to(notes b & c) Amount due from (notes d & e) Amount(s) due to(note d)_	Directors 2012 2011 HK$’000 HK$’000 – – – – – – 6,364 2,567	Associate 2012 2011 HK$’000 HK$’000 – – – – 9,689 9,607 – –	Related 2012 HK$’000 367 4,793 – –	party 2011 HK$’000 376 1,301

				–

				–

Notes:

(a) The related party is the son of Mr. Shan Shiyong, alias, Sin Sai Yung, an executive director of the Company.

(b) The transactions were charged at predetermined amounts agreed between the parties involved.

– I-50 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(c) The related party is the spouse of Mr. Jay Chun, the Chairman and an executive director of the Company.
(d) The amounts due are unsecured, interest free and have no fixed terms of repayment.
(e) Impairment of approximately HK$82,000 (2011: HK$199,000) has been made for the year for the amount due from an associate as set out in note 12.
(b) During the year, the Group also entered into a sales and purchase agreement with Mr. Jay Chun, the Chairman and an executive director of the Company, for the acquisition of various patents in the United States of America. Details are set out in note 36(a).
(c) Key Management Personnel Remuneration

Short-term employee benefits Retirement benefits scheme contributions	2012 HK$’000 30,443 40 30,483	2011 HK$’000 9,392 36
		9,428

Further details of directors’ remuneration are included in note 13.

35. SUBSIDIARIES

Particulars of the Group’s subsidiaries as at 31 December 2012 are as follows:

				Proportion	of ownership	interest
	Place of	Issued and fully		Group’s
	incorporation/	paid share capital/		effective	Held by the	Held by
Name of subsidiary	registration	registered capital	Class of share	interest	Company	subsidiaries	Principal activities
Asset Manager	Hong Kong	HK$100	Ordinary	100%	–	100%	Inactive
Enterprises Limited
Bright View Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
Central Jade Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
CTI Limited	Hong Kong	HK$10	Ordinary	70%	–	70%	Inactive
Dream World Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
Elite Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
Fairy Host Limited	British Virgin Islands	US$1	Ordinary	82%	–	100%	Inactive
Good Note International	British Virgin Islands	US$1	Ordinary	100%	–	100%	Inactive
Limited
Grant Future Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
Great Fun Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive

– I-51 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

				Proportion	of ownership	interest
	Place of	Issued and fully		Group’s
	incorporation/	paid share capital/		effective	Held by the	Held by
Name of subsidiary	registration	registered capital	Class of share	interest	Company	subsidiaries	Principal activities
Hop Fu (Hong	Hong Kong	HK$10,000	Ordinary	100%	–	100%	Inactive
Kong) Trading
Company Limited
Huge Rise Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
Joy Union Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
LifeTec Enterprise	Hong Kong	HK$100	Ordinary	100%	–	100%	Provision of
Limited							management and
							consulting services
LifeTec (Holdings)	British Virgin Islands	HK$141,176	Ordinary	100%	100%	–	Investment holding
Limited
LT Capital Limited	British Virgin Islands	US$1	Ordinary	100%	–	100%	Investment holding
LT Card Limited	British Virgin Islands	US$1	Ordinary	100%	–	100%	Development of
							membership card
							services
LT Cleaning Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
LT Cosmos Limited	British Virgin Islands	US$1	Ordinary	100%	–	100%	Investment holding
LT Finance Limited	British Virgin Islands	US$1	Ordinary	100%	–	100%	Investment holding
LT Fortune Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
LT Game Limited	British Virgin Islands	US$5,000	Ordinary	82%	–	82%	Development, supply
							and sales of
							electronic gaming
							systems
LT Game (Canada)	Canada	CAD100	Ordinary	100%	–	100%	Inactive
Limited
LT Game Pachinko	British Virgin Islands	US$1	Ordinary	82%	–	100%	Inactive
Limited
LT Global Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
LT Harvest Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
LT Legend Limited	British Virgin Islands	US$1	Ordinary	100%	–	100%	Inactive
LT (Macau) Limited	Macau	MOP1,000,000	Ordinary	100%	–	100%	Provision of
							management service
							and operation of
							electronic gaming
							system
LT Mart Gift Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive

– I-52 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

				Proportion	of ownership	interest
	Place of	Issued and fully		Group’s
	incorporation/	paid share capital/		effective	Held by the	Held by
Name of subsidiary	registration	registered capital	Class of share	interest	Company	subsidiaries	Principal activities
LT Union Limited	British Virgin Islands	US$1	Ordinary	100%	–	100%	Investment holding
Luck Access Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
Natural Noble Limited	British Virgin Islands	US$1	Ordinary	100%	–	100%	Acquisition of patent
Shenzhen Caijing	PRC	RMB500,000	Registered	100%	–	100%	Inactive
Software Technology			capital
Co., Ltd_(note a)_
Solution Champion	British Virgin Islands	US$1	Ordinary	100%	–	100%	Inactive
Limited
Sunny Link	Hong Kong	HK$2	Ordinary	100%	–	100%	General trading
Trading Limited
Super Satisfaction	British Virgin Islands	US$1	Ordinary	82%	–	100%	Inactive
Limited
Tech (Macau) Limited	Macau	MOP25,000	Ordinary	82%	–	100%	Inactive
Top General	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
Renovation and
Decoration Limited
Top Growth Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
Top Ocean Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
Well Fortune Limited	Macau	MOP25,000	Ordinary	100%	–	100%	Inactive
Yip Hing Toys	Hong Kong	HK$100,000	Ordinary	100%	–	100%	Inactive
Manufactory Limited
Zhuhai Caijing Software	PRC	RMB500,000	Registered	100%	–	100%	Inactive
Technology Co., Ltd			capital
(note a)

Notes:

(a) The subsidiaries are established in the PRC as wholly owned foreign enterprises.
(b) Apart from Zhuhai Caijing Software Technology Co., Ltd. and Shenzhen Caijing Software Technology Co., Ltd. which carry out their principal activities in the PRC; LT Game (Canada) Limited which carries out its principal activities in Canada; and subsidiaries incorporated in Macau which carry out their principal activities in Macau, the principal activities of the remaining subsidiaries are carried out in Hong Kong.

– I-53 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

36. SUBSEQUENT EVENTS

(a) The Group intends to acquire various patents in the United States of America in relation to a betting terminal system from Mr. Jay Chun, the Chairman and an executive director of the Company (the “Acquisition”) and proposes to reorganise the share capital of the Company (the “Capital Reorganisation”). As at the date of this report, the Acquisition and the Capital Reorganisation were still in progress.

For details of the Acquisition and the Capital Reorganisation, please refer to the Company’s announcements dated 7 January 2013, 28 February 2013 and 18 March 2013.

(b) As at the date of this report, the Company, LT Game and Natural Noble have filed their opposition to the Injunction. Details are set out in note 30(b).

37. STATEMENT OF FINANCIAL POSITION OF THE COMPANY

Non-current assets Interests in subsidiaries Current assets Prepayments Bank and cash balances Current liabilities Other creditors and accrued charges Amounts due to directors Net current liabilities Total assets less current liabilities Non-current liabilities Convertible loans – due after one year Net assets Capital and reserves Share capital Reserves Total equity	2012 HK$’000 478,017 437 28 465 4,753 678 5,431 (4,966) 473,051 86,933 386,118 284,144 101,974 386,118	2011 HK$’000 377,331 146 24 170 2,042 798 2,840 (2,670) 374,661 86,165 288,496 284,144 4,352 288,496

– I-54 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP

Set out below are the management discussion and analysis on the Group for the three years ended 31 December 2010, 2011 and 2012.

(a) For the financial year ended 31 December 2010

BUSINESS REVIEW

2010 was a year of progress for the Group. We recorded a stable increase in revenue by 15% from approximately HK$325,224,000 for the year ended 31 December 2009 to approximately HK$374,000,000 for the year ended 31 December 2010. The Group’s net loss decreased by 55.3% from approximately HK$167,239,000 in 2009 to approximately HK$74,775,000 in 2010.

Gaming Business

Gaming market in Macau has experienced tremendous growth in the last few years. In year 2010, we saw the rise in visitation to Macau and the improvement of market sentiment. Our devotion during the year in strengthening our business focus on gaming and entertainment in Macau have also effectively improved our operational efficiency.

Gaming revenue arising from sharing of net gaming win of casinos in Macau accounted for 71.4% of the Group’s total revenue in the year 2010, as compared to 61.7% in 2009. The gaming revenue has seen a very strong growth, from approximately HK$200,821,000 in 2009 to approximately HK$267,174,000 in 2010, representing an increase of 33.0%. Gaming business showed a turn from loss of approximately HK$4,055,000 in 2009 to profit of approximately HK$9,166,000.

We anticipate the number of visitors to Macau and Casino Kam Pek Paradise to surge in the forthcoming years. Given the positive economic outlook in China, the strong support from Macau SAR Government and Macau’s geographic advantage, we expect a notable improvement in our performance in the coming years.

Biopharmaceutical Business

The revenue of biopharmaceutical business decreased from approximately HK$124,403,000 for 2009 to approximately HK$106,826,000 for 2010. Net loss narrowed by 99.7% from approximately HK$128,270,000 for 2009 to approximately HK$400,000 for 2010, mainly due to impairment charges made to certain assets of the biopharmaceutical business in 2009.

We have experienced continued challenges resulting from medical reform in Mainland China. In view of this, the Group will widen the spectrum of sales items and expand the market so as to reposition our presence in biopharmaceutical business.

– I-55 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Prospects

The year 2011 is expected to be a rewarding year for the Group with more favorable economic environment and continued support from the government of the People’s Republic of China. We are well-positioned to compete favorably and benefit from the rising performance of the gaming industry in Macau. We expect the gaming business will be the key driver of our future revenue growth while the biopharmaceutical business will continue to contribute stable revenue.

Liquidity, Financial Resources and Capital Structure

The Group generally finances its operations with internally generated resources and external borrowing through the issuance of the convertible debentures. As at 31 December 2010, the Group did not have any bank borrowings. The Group’s cash and bank balances as at 31 December 2010 had substantially increased to approximately HK$83,431,000 from approximately HK$44,853,000.

As at 31 December 2010, the Group’s borrowings, finance leases, liability components of convertible loans and promissory note at fixed interest stood at approximately HK$18,992,000, HK$4,781,000, HK$129,178,000 and HK$119,472,000, respectively, of which borrowings of HK$18,992,000 and finance leases of HK$4,781,000 were payable within 12 months. Current liabilities of the Group decreased from HK$132,498,000 to HK$100,030,000, representing a decrease of approximately 24.5%. The Group’s total liabilities increased from HK$207,912,000 to HK$348,680,000, representing an increase of approximately 67.7%. The Group’s total assets increased from HK$239,646,000 to HK$472,890,000. The percentage of total liabilities to total assets as at 31 December 2010 stood at 73.7% which is lower than 86.8% as at 31 December 2009.

As at 31 December 2010, the cash on hand and available financial resources are sufficient for financing ongoing activities of the Group.

Foreign Exchange Exposure

The Group’s operations are primarily based in the PRC and Macau and the income derived and expenses incurred are denominated in Renminbi (“RMB”) and Macau Pataca (“MOP”), respectively. On the other hand, the expenses of the headquarters are denominated in Hong Kong dollars (“HK$”) and are financed by funds raised in Hong Kong dollars. Due to the relatively matched position among Hong Kong, Macau and the PRC and the stability of the exchange rates between RMB and HK$ and between MOP and HK$, the directors do not consider specific hedges for currency fluctuation necessary.

– I-56 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Charges on Group Assets

As at 31 December 2010, the assets of the Group which were subject to charges for securing obligations under finance leases comprised gaming machines with net book value amounting to approximately HK$5,460,000 (2009: nil). During the year, a finance lease in respect of a motor vehicle was completed. The net book value of the motor vehicle as at 31 December 2010 was HK$87,000 (2009: HK$348,000).

Organization and Staff

The Group had 420 staff (2009: 305) as at 31 December 2010. The total staff costs (including Directors) amounted to HK$40,388,000 (2009: HK$37,632,000) for the year. Majority of the staff are marketing and promotion executives in Macau and sales and marketing executives in China. The Group is actively seeking talent in Macau, Hong Kong and China in order to cope with the fast growing operations.

The terms of employment of the staff, executives and directors conform to normal commercial practice. Share option benefits are granted to and included in the terms of selected senior executives of the Company.

Material acquisitions and disposal

The Group has acquired a patent in relation to a betting terminal system which constituted a very substantial acquisition and connected transaction of the Company during the year ended 31 December 2010. The Group made no material disposals of subsidiaries or associated companies during the year.

Significant investments

As at 31 December 2010, the Group did not have any significant investments.

Capital expenditure commitments

Capital expenditure commitments by the Group amounted to HK$10,033,000 as at 31 December 2010.

Future plans for material investments and expected source of funding

As at 31 December 2010, the Group was considering various investment projects and options but had not made any decision for its pursuing.

Future projects will be funded by a combination of internal resources and debt financing. The exact investment plans for the Group’s projects are subject to change based upon execution of the business plans, progress of the projects, market conditions and management’s view of future business conditions.

– I-57 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Gearing ratio

The Group’s gearing ratio (defined as the ratio of total outstanding interest bearing borrowing less bank balances and cash to total assets (excluding bank balances and cash)) was 49% as at 31 December 2010 (as at 31 December 2009: 46%)

Contingent liabilities

On 15 September 1999, LifeTec Enterprise Limited (“LifeTec Enterprise”), a subsidiary of the Company, was named as a defendant in a High Court action in respect of an alleged failure to repay a loan in an amount of HK$20,000,000. The plaintiff took out an application for summary judgement under Order 14 of the Rules of the High Court on 6 October 1999 and in the hearing of the application on 25 October 1999, LifeTec Enterprise was given unconditional leave to defend the plaintiff’s claim in the above action. LifeTec Enterprise filed its Defense on 8 November 1999. The plaintiff should have filed its reply, if any, 14 days thereafter, but LifeTec Enterprise had not received any reply from the plaintiff and the time for the plaintiff to file the same has long expired and the pleadings should be deemed to be closed. The directors believe that there is no ground for the above claim and that it will not have any material adverse impact on the Group’s operations.

(b) For the year ended 31 December 2011

BUSINESS REVIEW

2011 was a rewarding year for the Group. We recorded a strong growth in revenue by 45.9% from approximately HK$374,000,000 for 2010 to approximately HK$545,646,000 for 2011. The Group turned around from loss to profit of approximately HK$39,336,000 in 2011.

Gaming Business

Gaming revenue arising from sharing of net gaming win of casinos and distribution of electronic gaming machines in Macau accounted for 85.1% of the Group’s total revenue for the year 2011, as compared to 71.4% in 2010. The Group recorded a significant increase of 73.9% in gaming revenue from approximately HK$267,174,000 in 2010 to approximately HK$464,582,000 in 2011. Our devotion during the year to strengthening our business focus on gaming and entertainment in Macau has also effectively improved our operational efficiency. Profit from gaming business showed a tremendous growth of 1,075.8% from approximately HK$9,166,000 in 2010 to approximately HK$107,770,000 in 2011.

Biopharmaceutical Business

The Group has experienced continued challenges resulting from the medical reform and change of market conditions in Mainland China. The revenue of biopharmaceutical business decreased by 24.1% from approximately HK$106,826,000 for 2010 to approximately HK$81,064,000 for 2011 due to the intense market

– I-58 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

competition. With our effective cost control measures adopted during the year, biopharmaceutical business turned around from a loss of approximately HK$400,000 for 2010 to a profit of approximately HK$1,024,000 for 2011.

Prospects

The gaming market in Macau has experienced significant growth in the past few years. In the year 2011, visitation to Macau broke a new record of 28,002,279 of which visitors from the Mainland comprised 57.7%. The Group expects to have excellent future prospects.

Liquidity and Financial Resources

As at 31 December 2011, the Group’s finance lease, liability component of convertible loans and promissory note at fixed interest stood at HK$1,730,000, HK$86,165,000 and HK$68,336,000, respectively, of which HK$1,318,000, nil and nil respectively were payable within 12 months. Current liabilities of the Group decreased from HK$100,030,000 to HK$80,795,000, representing a decrease of approximately 19.2%. The Group’s total liabilities decreased from HK$348,680,000 to HK$235,708,000, representing a decrease of approximately 32.4%. The Group’s total assets increased from HK$472,890,000 to HK$502,171,000. The percentage of total liabilities to total assets as at 31 December 2011 stood at 46.9% which is lower than 73.7% as at 31 December 2010.

As at 31 December 2011, the cash on hand and available financial resources were sufficient for financing ongoing activities of the Group.

Foreign Exchange Exposure

Charges on Group Assets

As at 31 December 2011, the assets of the Group which were subject to charges for securing obligations under finance lease comprised a motor vehicle acquired during the year and gaming machines with net book value amounting to approximately HK$592,000 (2010: Nil) and HK$4,633,000 (2010: HK$5,460,000), respectively.

– I-59 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Organization and Staff

The Group had 379 staff (2010: 420) as at 31 December 2011. The total staff costs (including Directors) amounted to HK$46,725,000 (2010: HK$40,388,000) for the year. A majority of the staff are marketing and promotion executives in Macau. The Group is actively seeking talent in Macau, Hong Kong and China in order to cope with the fast growing operations.

Material acquisitions and disposals

The Group made no material acquisitions or material disposals of subsidiaries or associated companies during the year ended 31 December 2011.

Significant investments

As at 31 December 2011, the Group did not have any significant investments.

Capital expenditure commitments

Capital expenditure commitments by the Group amounted to HK$11,927,000 as at 31 December 2011.

Future plans for material investments and expected source of funding

As at 31 December 2011, the Group was considering various investment projects and options but had not made any decision for its pursuing.

Gearing ratio

The Group’s gearing ratio (defined as the ratio of total outstanding interest bearing borrowing less bank balances and cash to total assets (excluding bank balances and cash)) was 8% as at 31 December 2011 (as at 31 December 2010: 49%).

Contingent liabilities

– I-60 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

of the High Court on 6 October 1999 and in the hearing of the application on 25 October 1999, LifeTec Enterprise was given unconditional leave to defend the plaintiff’s claim in the above action. LifeTec Enterprise filed its Defense on 8 November 1999. The plaintiff should have filed its reply, if any, 14 days thereafter, but LifeTec Enterprise had not received any reply from the plaintiff and the time for the plaintiff to file the same has long expired and the pleadings should be deemed to be closed. The directors believe that there is no ground for the above claim and that it will not have any material adverse impact on the Group’s operations.

(c) For the year ended 31 December 2012

BUSINESS REVIEW

The Group has seen encouraging results for 2012. The Group’s gaming revenue arising from sharing of net gaming win of casinos and distribution of electronic gaming machines in Macau rose by 57% from approximately HK$464,582,000 for 2011 to approximately HK$728,954,000 for 2012 as a result of the continued strong performance of the gaming business which reflected increased visitation to Macau and increased spending per visitor. Profits of the Group surged almost triple from approximately HK$39,336,000 for 2011 to approximately HK$143,309,000 for 2012. The Group’s adjusted EBITDA increased by 114% to HK$203,754,000.

In order to focus on its gaming business, in April 2012, the Group disposed of the entire issued share capital of LifeTec Pharmaceutical Limited, which was the Group’s wholly-owned subsidiary and an investment holding company of the pharmaceutical business of the Group. Accordingly, the Group recognised a gain of approximately HK$20,908,000. The disposal enables the Group to enhance the efficacy of resource allocation.

The total number of visitor arrivals in Macau increased to a record high of 28,082,292 in 2012. The Group remains confident in the long-term growth of Macau and expects to have excellent future prospects.

Liquidity and Financial Resources

As at 31 December 2012, the Group’s finance lease and liability components of convertible loans at fixed interest stood at HK$412,000 and HK$86,933,000, respectively, of which HK$108,000 and nil, respectively, were payable within 12 months. Current liabilities of the Group increased from HK$80,795,000 to HK$104,205,000, representing an increase of approximately 29.0%. The Group’s total liabilities decreased from HK$235,708,000 to HK$204,242,000, representing a decrease of approximately 13.3%.

As at 31 December 2012, the cash on hand and available financial resources were sufficient for financing ongoing activities of the Group.

– I-61 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Foreign Exchange Exposure

The Group’s operations are primarily based in Macau and the income derived and expenses incurred are denominated in Macau Pataca (“MOP”). On the other hand, the expenses of the headquarters in Hong Kong and the subsidiaries in China are denominated in Hong Kong dollars (“HK$”) and Renminbi (“RMB”), respectively, and are financed by funds raised from the operations in Macau. Due to the stable exchange rates between RMB and HK$ and between MOP and HK$, the directors do not consider specific hedges for currency fluctuation necessary.

Charges on Group Assets

As at 31 December 2012, the assets of the Group which were subject to charges for securing obligations under finance lease comprised a motor vehicle and gaming machines with net book value amounting to approximately HK$458,000 (2011: HK$592,000) and nil (2011: HK$4,633,000), respectively.

Organization and Staff

The Group had 432 staff (2011: 379) as at 31 December 2012. The total staff costs (including Directors) amounted to HK$70,887,000 (2011: HK$46,725,000) for the year. A majority of the staff are operational staff and marketing executives in Macau. The Group is actively seeking talents in Macau, Hong Kong and China in order to cope with its fast growing operations.

The terms of employment of the staff, executives and directors conform to normal commercial practice. Share options are granted to and included in the terms of selected senior executives of the Company.

Material acquisitions and disposals

The Group made no material acquisitions or material disposals of subsidiaries or associated companies during the year ended 31 December 2012.

Significant investments

As at 31 December 2012, the Group did not have any significant investments.

Capital expenditure commitments

Capital expenditure commitments by the Group amounted to HK$18,780,000 as at 31 December 2012.

Future plans for material investments and expected source of funding

As at 31 December 2012, the Group was considering various investment projects and options but had not made any decision for its pursuing.

– I-62 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Gearing Ratio

The Group’s gearing ratio (defined as the ratio of total outstanding interest bearing borrowing less bank and cash balances to total assets (excluding bank and cash balances)) as at 31 December 2012 was nil (2011: 8%).

Contingent liabilities

a. On 15 September 1999, LifeTec Enterprise Limited (“LifeTec Enterprise”), a subsidiary of the Company, was named as a defendant in a High Court action in respect of an alleged failure to repay a loan in an amount of HK$20,000,000. The plaintiff took out an application for summary judgement under Order 14 of the Rules of the High Court on 6 October 1999 and in the hearing of the application on 25 October 1999, LifeTec Enterprise was given unconditional leave to defend the plaintiff’s claim in the above action. LifeTec Enterprise filed its Defense on 8 November 1999. The plaintiff should have filed its reply, if any, 14 days thereafter, but LifeTec Enterprise had not received any reply from the plaintiff and the time for the plaintiff to file the same has long expired and the pleadings should be deemed to be closed. The directors believe that there is no ground for the above claim and that it will not have any material adverse impact on the Group’s operations.
b. In 2012, the Company had been served with a summon issued by the Macau Judicial Base Court (“Tribunal Judicial de Base”), pursuant to which Shuffle Master Asia Limited (“Shuffle Master”) has commenced injunction proceedings against the Company, its subsidiaries (i) LT Game Limited (“LT Game”) (an entity which owns the global (including Macau) rights to use, distribute and maintain the material and equipment that uses the invention object of the Macau Invention Patent No. I/000150 (“Patent I/150”) and the Macau Invention Patent No. I/ 000380 (“Patent I/380”)), and (ii) Natural Noble Limited (“Natural Noble”) (the owner of Patent I/380) and Mr. Jay Chun (the Chairman and an executive director of the Company, the inventor and registered owner of Patent I/150) (collectively, the “Respondents”) (the “Injunction”).

– I-63 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

As at the date of this Circular, the Company, LT Game and Natural Noble have filed their opposition to the Injunction. The Company and its directors believe that the Injunction was initiated as one more phase of a litigation tactic to pressurize the Group, as a result of the infringement proceedings originally filed by Mr. Jay Chun, LT Game and Natural Noble, against, inter alia, Shuffle Master, for infringements of Patent I/380 and Patent I/150.

– I-64 –

APPENDIX II ADDITIONAL FINANCIAL INFORMATION OF THE GROUP

1. INDEBTEDNESS

(i) As at the close of business on 15 March 2013, being the latest practicable date for the purpose of this indebtedness statement, the Group had outstanding indebtedness comprising guaranteed and secured, and unguaranteed and unsecured indebtedness of HK$386,000 and HK$90,600,000, respectively. The indebtedness comprised as follows:–
(a) The Group had outstanding guaranteed and secured obligations under finance leases of approximately HK$386,000.
(b) The Group had outstanding unguaranteed and unsecured Convertible Debentures amounting to approximately HK$88,581,000. All of the Convertible Debentures are due in 2014.
(c) The Group had amounts due to the Directors of approximately HK$2,019,000. The amounts due to the Directors were unguaranteed, unsecured, interest-free and repayable on demand.
(ii) As at 15 March 2013, the Group had capital commitments and operating lease commitments of approximately HK$20,518,000 and HK$16,872,000, respectively. As of the same date, the Group had contingent liabilities of HK$20,000,000 and the Group was under an injunction in respect of the Group’s patents which in the opinion of the Directors was without merit.

Save as disclosed in points (i) and (ii) above in this section, and apart from intra-group liabilities, the Group did not have outstanding at the close of business on 15 March 2013 any loan capital issued and outstanding or agreed to be issued, bank overdrafts, loans or other similar indebtedness, obligations under finance lease contracts, liabilities under acceptances (other than normal trade bills) or acceptable credits, debentures, mortgages, charges, finance lease or hire purchases commitments, guarantees or contingent liabilities.

2. WORKING CAPITAL

The Directors are of the opinion that taking into account its presently available financial resources, including internally generated funds and the Promissory Note, the Enlarged Group after the Acquisition will have sufficient working capital for its normal business for at least the next 12 months from the date of this circular in the absence of unforeseen circumstances.

3. MATERIAL CHANGE

The Directors confirm that there has been no material change in the financial or trading position or outlook of the Group since 31 December 2012, the date to which the latest published audited financial statements of the Group were made up, up to the Latest Practicable Date.

– II-1 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

1. INTRODUCTION

The unaudited pro forma financial information of the Group and the Patents (the “Enlarged Group”), comprising the unaudited pro forma consolidated statement of comprehensive income, the unaudited pro forma consolidated statement of financial position and the unaudited pro forma consolidated cash flow statement of the Enlarged Group (the “Pro Forma Financial Information”), has been prepared by the Directors to illustrate the effect of the Acquisition and the Capital Reorganisation. The completion of the Capital Reorganisation is one of the conditions precedent to Completion.

The Pro Forma Financial Information should be read in conjunction with the financial information of the Group as set out in Appendix I and other financial information included elsewhere in this circular. The Pro Forma Financial Information does not take account of any trading or other transactions subsequent to the dates of the respective financial statements of the companies which are part of the Enlarged Group included in the Pro Forma Financial Information.

2. PRO FORMA CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME OF THE ENLARGED GROUP

The following is the unaudited pro forma consolidated statement of comprehensive income of the Enlarged Group as if the Acquisition and the Capital Reorganisation had been completed on 1 January 2012. The unaudited pro forma consolidated statement of comprehensive income has been prepared based on the audited consolidated statement of comprehensive income of the Group for the year ended 31 December 2012 as set out in Appendix I to this circular, after incorporating the pro forma adjustments as described in the accompanying notes to illustrate the effect of the Acquisition and the Capital Reorganisation.

The unaudited pro forma consolidated statement of comprehensive income has been prepared for illustrative purposes only, based on the judgments and assumptions of the Directors, and, because of its hypothetical nature, it may not give a true picture of the results of the Enlarged Group for the year ended 31 December 2012 or any future periods.

– III-1 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

The Group Year ended 31 December 2012 Pro forma adjustments for the Capital Reorganisation Pro forma Enlarged Group after the Capital Reorganisation HK$’000 HK$’000 HK$’000 (Audited) (Unaudited) Notes (Unaudited) Note 2.1 CONTINUING OPERATIONS Turnover 728,954 – 728,954 Cost of sales and services (244,764) – (244,764) Gross profit 484,190 – 484,190 Other income 1,986 – 1,986 Marketing, selling and distribution costs (133,945) – (133,945) Administrative expenses (167,910) – (167,910) Impairment loss for doubtful debts (471) – (471) Finance costs (10,495) – (10,495) Amortisation for intangible assets (12,138) – (12,138) Loss on early redemption of promissory note (12,795) – (12,795) Profit before tax 148,422 – 148,422 Income tax expenses (26,206) – (26,206) Profit for the year from continuing operations 122,216 – 122,216 DISCONTINUED OPERATION Profit for the year from discontinued operation 21,093 – 21,093 Profit for the year 143,309 – 143,309 Attributable to: Owners of the Company 126,698 − 126,698 Non-controlling interests 16,611 − 16,611 143,309 − 143,309 Profit for the year 143,309 – 143,309 Other comprehensive income Net gain recognised directly in equity Exchange translation differences 83 – 83 Total comprehensive income for the year, net of tax 143,392 – 143,392 Total comprehensive income attributable to: Owners of the Company 126,784 − 126,784 Non-controlling interests 16,608 − 16,608 143,392 − 143,392	Pro forma adjustments for the Acquisition Pro forma Enlarged Group after the Acquisition and the Capital Reorganisation HK$’000 HK$’000 (Unaudited) Notes (Unaudited) – 728,954 – (244,764) – 484,190 – 1,986 – (133,945) (3,914) 2.5 (171,824) – (471) (16,705) 2.3(b) (27,200) (54,795) 2.4 (66,933) – (12,795) (75,414) 73,008 – (26,206) (75,414) 46,802 – 21,093 (75,414) 67,895 (75,414) 51,284 − 16,611 (75,414) 67,895 (75,414) 67,895 – 83 (75,414) 67,978 (75,414) 51,370 − 16,608 (75,414) 67,978	Pro forma adjustments for the Acquisition Pro forma Enlarged Group after the Acquisition and the Capital Reorganisation HK$’000 HK$’000 (Unaudited) Notes (Unaudited) – 728,954 – (244,764) – 484,190 – 1,986 – (133,945) (3,914) 2.5 (171,824) – (471) (16,705) 2.3(b) (27,200) (54,795) 2.4 (66,933) – (12,795) (75,414) 73,008 – (26,206) (75,414) 46,802 – 21,093 (75,414) 67,895 (75,414) 51,284 − 16,611 (75,414) 67,895 (75,414) 67,895 – 83 (75,414) 67,978 (75,414) 51,370 − 16,608 (75,414) 67,978
		484,190 1,986 (133,945) (171,824) (471) (27,200) (66,933) (12,795)
		73,008 (26,206)
		46,802 21,093
		67,895

		51,284 16,611
		67,895

		67,895 83
		67,978

		51,370 16,608
		67,978

– III-2 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Notes to the unaudited pro forma consolidated statement of comprehensive income of the Enlarged Group:

2.1 For the purpose of the preparation of the unaudited pro forma consolidated statement of comprehensive income, the Capital Reorganisation is assumed to have been completed on 1 January 2012 and have no effect on the unaudited pro forma consolidated statement of comprehensive income. The costs attributable to the Capital Reorganisation, mainly the professional fees, are not separately estimated and recognised under the cost for the Acquisition (note 2.5).
2.2 The adjustments reflect the inclusion of the finance costs and amortisation as if the Acquisition had been completed on 1 January 2012. As the Patents have not yet been put to commercial use in the US, no historical net profit has been derived from the Patents. No adjustment has been made to the turnover and costs of turnover in the unaudited pro forma consolidated statement of comprehensive income.
2.3 The cost of the Patents is determined under Hong Kong Financial Reporting Standards HKAS 38 “Intangible Assets” and HKAS 39 “Financial Instruments: Recognition and Measurement” issued by the Hong Kong Institute of Certified Public Accountants of approximately HK$658 million:
(a) cash of HK$60 million had been paid on 1 January 2012;
(b) for the purpose of the determining the cost of the Patents, the 48 months non-interest bearing Promissory Note had been discounted to the present value of approximately HK$118 million by using a discount rate at 14.21% per annum. Such discount rate is determined by Ample Appraised Limited, an independent valuer and with reference to the Company’s historical borrowing rate as at 1 January 2012. It is assumed that the Promissory Note was issued on 1 January 2012 and the imputed interest to be expensed by the Group for amounts to approximately HK$17 million. This adjustment for imputed interest is expected to have a continuing effect on the Enlarged Group;
(c) for the purpose of the unaudited pro forma consolidated statement of financial position, it is assumed that the Consideration Shares were issued on 1 January 2012 and the issue price of HK$0.8 per Consideration Share was the fair value of the Shares as at 1 January 2012. The share capital of the Company was increased by HK$0.6 million and the share premium of the Company was increased by approximately HK$479 million; and
(d) the cost of the Patents amounting to approximately HK$658 million would be the sum of HK$60 million, HK$118 million and HK$480 million as stated in (a), (b) and (c) above.
2.4 The adjustment reflects the estimated amortisation charge of the Patents, based on the estimated useful lives of 12 years of the Patents.
2.5 The estimated costs directly attributable to the Acquisition and Capital Reorganisation amount to approximately HK$4 million.

– III-3 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

3. PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF THE ENLARGED GROUP

The following is the unaudited pro forma consolidated statement of financial position of the Enlarged Group as if the Acquisition and Capital Reorganisation had been completed on 31 December 2012. The unaudited pro forma consolidated statement of financial position has been prepared based on the audited statement of financial position of the Group as at 31 December 2012 as set out in Appendix I to this circular, after incorporating the pro forma adjustments as described in the accompanying notes to illustrate the effect of the Acquisition and the Capital Reorganisation. The unaudited pro forma consolidated statement of financial position has been prepared for illustrative purposes only, based on the judgments and assumptions of the Directors, and, because of its hypothetical nature, it may not give a true picture of the financial position of the Enlarged Group as at 31 December 2012 or any future date.

Non-current assets Property, plant and equipment Intangible assets Current assets Inventories Debtors, deposits and prepayments Bank and cash balances	The Group as at 31 December 2012 Pro forma adjustments for the Capital Reorganisation Pro forma Enlarged Group after the Capital Reorganisation Pro forma adjustments for the Acquisition Pro forma Enlarged Group after the Acquisition and the Capital Reorganisation HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Audited) (Unaudited) Notes (Unaudited) (Unaudited) Notes (Unaudited) Note 3.1 Note 3.2 152,146 – 152,146 – 152,146 153,745 – 153,745 657,535 3.10/2.3(d) 811,280 305,891 – 305,891 657,535 963,426 4,810 – 4,810 – 4,810 106,076 – 106,076 – 106,076 196,169 – 196,169 (60,000) 3.10/2.3(a) 136,169 307,055 – 307,055 (60,000) 247,055	The Group as at 31 December 2012 Pro forma adjustments for the Capital Reorganisation Pro forma Enlarged Group after the Capital Reorganisation Pro forma adjustments for the Acquisition Pro forma Enlarged Group after the Acquisition and the Capital Reorganisation HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Audited) (Unaudited) Notes (Unaudited) (Unaudited) Notes (Unaudited) Note 3.1 Note 3.2 152,146 – 152,146 – 152,146 153,745 – 153,745 657,535 3.10/2.3(d) 811,280 305,891 – 305,891 657,535 963,426 4,810 – 4,810 – 4,810 106,076 – 106,076 – 106,076 196,169 – 196,169 (60,000) 3.10/2.3(a) 136,169 307,055 – 307,055 (60,000) 247,055
		963,426
		4,810 106,076 136,169
		247,055

– III-4 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Current liabilities Creditors and accrued charges Amounts due to directors Obligations under finance leases – due within one year Current tax liabilities Net current assets Total assets less current liabilities Non-current liabilities Obligations under finance leases – due after one year Convertible loans – due after one year Promissory note Deferred tax liabilities Net assets	The Group as at 31 December 2012 Pro forma adjustments for the Capital Reorganisation Pro forma Enlarged Group after the Capital Reorganisation Pro forma adjustments for the Acquisition Pro forma Enlarged Group after the Acquisition and the Capital Reorganisation HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Audited) (Unaudited) Notes (Unaudited) (Unaudited) Notes (Unaudited) Note 3.1 Note 3.2 84,327 – 84,327 3,914 88,241 6,364 – 6,364 – 6,364 108 – 108 – 108 13,406 – 13,406 – 13,406 104,205 – 104,205 3,914 108,119 202,850 – 202,850 (63,914) 138,936 508,741 – 508,741 593,621 1,102,362 304 – 304 – 304 86,933 – 86,933 – 86,933 – – – 117,535 3.10/2.3(b) 117,535 12,800 − 12,800 − 12,800 100,037 – 100,037 117,535 217,572 408,704 – 408,704 476,086 884,790	The Group as at 31 December 2012 Pro forma adjustments for the Capital Reorganisation Pro forma Enlarged Group after the Capital Reorganisation Pro forma adjustments for the Acquisition Pro forma Enlarged Group after the Acquisition and the Capital Reorganisation HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Audited) (Unaudited) Notes (Unaudited) (Unaudited) Notes (Unaudited) Note 3.1 Note 3.2 84,327 – 84,327 3,914 88,241 6,364 – 6,364 – 6,364 108 – 108 – 108 13,406 – 13,406 – 13,406 104,205 – 104,205 3,914 108,119 202,850 – 202,850 (63,914) 138,936 508,741 – 508,741 593,621 1,102,362 304 – 304 – 304 86,933 – 86,933 – 86,933 – – – 117,535 3.10/2.3(b) 117,535 12,800 − 12,800 − 12,800 100,037 – 100,037 117,535 217,572 408,704 – 408,704 476,086 884,790
		108,119
		138,936
		1,102,362
		304 86,933 117,535 12,800
		217,572
		884,790

– III-5 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Capital and reserves Share capital Reserves Share premium Special reserve Convertible loans reserve Option reserve Translation reserve Contributed surplus account Accumulated (losses)/ profits Equity attributable to owners of the Company Non-controlling interests Total equity	The Group as at 31 December 2012 Pro forma adjustments for the Capital Reorganisation Pro forma Enlarged Group after the Capital Reorganisation HK$’000 HK$’000 HK$’000 (Audited) (Unaudited) Notes (Unaudited) Note 3.1 284,144 (283,860) 3.4 284 581,629 (316,040) 3.5 265,589 88,643 88,643 6,235 6,235 3,787 3,787 21,257 21,257 – 283,860 3.4 316,040 3.5 (599,900) 3.6 – – (597,451) 599,900 3.6 2,449 104,100 387,960 388,244 – 388,244 20,460 – 20,460 408,704 – 408,704	The Group as at 31 December 2012 Pro forma adjustments for the Capital Reorganisation Pro forma Enlarged Group after the Capital Reorganisation HK$’000 HK$’000 HK$’000 (Audited) (Unaudited) Notes (Unaudited) Note 3.1 284,144 (283,860) 3.4 284 581,629 (316,040) 3.5 265,589 88,643 88,643 6,235 6,235 3,787 3,787 21,257 21,257 – 283,860 3.4 316,040 3.5 (599,900) 3.6 – – (597,451) 599,900 3.6 2,449 104,100 387,960 388,244 – 388,244 20,460 – 20,460 408,704 – 408,704	Pro forma adjustments for the Acquisition Pro forma Enlarged Group after the Acquisition and the Capital Reorganisation HK$’000 HK$’000 (Unaudited) Notes (Unaudited) Note 3.2 600 3.10/2.3(c) 884 479,400 3.10/2.3(c) 744,989 88,643 6,235 3,787 21,257 – (3,914) 2.5 (1,465) 863,446 476,086 864,330 – 20,460 476,086 884,790
	581,629 88,643 6,235 3,787 21,257 – (597,451)
	104,100 388,244 20,460 408,704	387,960 388,244 20,460 408,704

Notes to the unaudited pro forma consolidated statement of financial position of the Enlarged Group:

3.1 The adjustments reflect the effect of the Capital Reorganisation which involves the Share Consolidation, the Capital Reduction, the Share Premium Reduction and the Share Subdivision as if the Capital Reorganisation had been completed during the period reported on.
3.2 The adjustments reflect the effect of the Acquisition as if the Acquisition had been completed during the period reported on.
3.3 Upon the completion of the Share Consolidation, every 10 issued Existing Shares were consolidated into 1 Consolidated Share with nominal value of HK$1.00 each. The number of ordinary shares of the Company was changed but there was no effect on the unaudited pro forma consolidated statement of financial position.

– III-6 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

3.4 The adjustment represents the effect of the reduction of nominal value of each issued Consolidated Share from HK$1 to HK$0.001, by the cancellation of the paid-up capital of the Company to the extent of HK$0.999 on each of the issued Consolidated Shares. The credit arising from the Capital Reduction of approximately HK$284 million was transferred to the contributed surplus account of the Company.
3.5 As at 31 December 2012, the unaudited accumulated losses of the Company and the Group were approximately HK$600 million and HK$597 million respectively. For the purpose of the unaudited pro forma consolidated statement of financial position, the amount arising from the Share Premium Reduction and thereafter transferred to the contributed surplus account of the Company is assumed to be approximately HK$316 million. This amount and the amount of approximately HK$284 million arising from the Capital Reduction (note 3.4) had reduced the accumulated losses of the Company of approximately HK$600 million as at 31 December 2012 to zero. Accordingly, the Group’s accumulated losses after the Capital Reorganisation were reduced by the same amount and a credit balance of approximately HK$2 million maintained.
3.6 The adjustment represents the reduction of the Group’s accumulated losses after the reduction of the Company’s accumulated losses (note 3.5).
3.7 Upon the completion of the Share Subdivision, each authorised but unissued Existing Share of HK$0.10 was subdivided into 100 New Shares of HK$0.001 each. The number of authorised ordinary shares of the Company was changed but there was no effect on the unaudited pro forma consolidated statement of financial position.
3.8 The consideration for the Acquisition of HK$740 million was settled at Completion in the following manner:
(a) HK$60 million had been paid in cash by the Purchaser to the Vendor;
(b) HK$200 million had been satisfied by the Company issuing the Promissory Note in the principal amount of HK$200 million to the Vendor; and
(c) HK$480 million had been satisfied by the issue and allotment of 600,000,000 Consideration Shares by the Company to the Vendor or his designated nominee.
3.9 In accordance with Hong Kong Accounting Standard 38 “Intangible Assets” and the Group’s accounting policies, the Patents are carried at cost less accumulated amortisation and accumulated impairment losses in the pro forma consolidated statement of financial position. It is assumed that Acquisition had been completed on 31 December 2012 and no amortisation is provided.

– III-7 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

3.10 For the purpose of the unaudited pro forma consolidated statement of financial position, the cost of the Patents as at 31 December 2012 is assumed to be the same as the amount determined in note 2.3.
3.11 For the purpose of the unaudited pro forma consolidated statement of financial position, the management of the Company has performed an impairment assessment on the intangible assets of the Enlarged Group as at 31 December 2012 in accordance with Hong Kong Accounting Standard (“HKAS”) 36 “Impairment of Assets”, assuming the Acquisition and the Capital Reorganisation has been completed on 31 December 2012.

The management of the Company has reviewed the gaming business trends in Macau and the USA and carried out sensitivity analysis regarding future market shares and anticipated margins. Based on the assessment result, the management of the Company is of the opinion that there are no indications that the values of the Enlarged Group’s patents need any impairment.

The auditors of the Company will carry out review on the impairment assessment of the Enlarged Group’s intangible assets, which will be performed under the same accounting policy and principal assumptions in the future annual audit of the Group.

3.12 Since the actual dates of settlement of the consideration directly attributable to the Acquisition would be different from the assumptions used in the preparation of the unaudited pro forma consolidated statement of financial position presented above, the actual financial position arising from the Acquisition might be materially different from the financial position shown in this Appendix.

4. PRO FORMA CONSOLIDATED CASH FLOW STATEMENT OF THE ENLARGED GROUP

The following is the unaudited pro forma consolidated cash flow statement of the Enlarged Group as if the Acquisition and the Capital Reorganisation had been completed on 1 January 2012. The unaudited pro forma consolidated cash flow statement has been prepared based on the audited consolidated cash flow statement of the Group for the year ended 31 December 2012 as set out in Appendix I to this circular, after incorporating the pro forma adjustments as described in the accompanying notes to illustrate the effect of the Acquisition and the Capital Reorganisation.

The unaudited pro forma consolidated cash flow statement has been prepared for illustrative purposes only, based on the judgments and assumptions of the Directors, and, because of its hypothetical nature, it may not give a true picture of the cash flows of the Enlarged Group for the year ended 31 December 2012 or any future periods.

– III-8 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

							Pro forma
							Enlarged
							Group after
		Pro forma		Pro forma			the
	The Group	adjustments		Enlarged	Pro forma		Acquisition
	Year ended	for the		Group after	adjustments		and the
	31 December	Capital		the Capital	for the		Capital
	2012	Reorganisation		Reorganisation	Acquisition		Reorganisation
	HK$’000	HK$’000		HK$’000	HK$’000		HK$’000
	(Audited)	(Unaudited)	Notes	(Unaudited)	(Unaudited)	Notes	(Unaudited)
OPERATING
ACTIVITIES
Profit before tax:
From continuing
operations	148,422	–		148,422	(75,414)		73,008
From discontinued
operation	21,093	–		21,093	–		21,093
	169,515	–		169,515	(75,414)		94,101
Adjustments for:
Finance costs	10,495	–		10,495	16,705	2.3(b)	27,200
Bank interest income	(2)	–		(2)	–		(2)
Amortisation for
intangible assets	12,138	–		12,138	54,795	2.4	66,933
Loss on early
redemption of
promissory note	12,795	–		12,795	–		12,795
Impairment loss for
amount due from an
associate	82	–		82	–		82
Depreciation of
property, plant and
equipment	28,219	–		28,219	–		28,219
Loss on disposal of
property, plant and
equipment	34	–		34	–		34
Gain on disposal of
Disposed Group	(20,908)	–		(20,908)	–		(20,908)
Provision for bad debts	389	–		389	–		389
Operating cash flows
before movements in
working capital	212,757	–		212,757	(3,914)		208,843
Increase in inventories	(4,769)	–		(4,769)	–		(4,769)
Increase in debtors,
deposits and
prepayments	(57,517)	–		(57,517)	–		(57,517)
Increase in creditors and
accrued charges	44,972	–		44,972	–		44,972
Cash generated from
operations	195,443	–		195,443	(3,914)		191,529
Income taxes paid	(18)	–		(18)	–		(18)
NET CASH
GENERATED
FROM (USED IN)
OPERATING
ACTIVITIES	195,425	–		195,425	(3,914)		191,511

– III-9 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

							Pro forma
							Enlarged
							Group after
		Pro forma		Pro forma			the
	The Group	adjustments		Enlarged	Pro forma		Acquisition
	Year ended	for the		Group after	adjustments		and the
	31 December	Capital		the Capital	for the		Capital
	2012	Reorganisation		Reorganisation	Acquisition		Reorganisation
	HK$’000	HK$’000		HK$’000	HK$’000		HK$’000
	(Audited)	(Unaudited)	Notes	(Unaudited)	(Unaudited)	Notes	(Unaudited)
INVESTING
ACTIVITIES
Purchases of intangible
assets	–	–		–	(657,535)	2.3/4.2	(657,535)
Purchases of property,
plant and equipment	(32,351)	–		(32,351)	–		(32,351)
Net cash disposed of
Disposed Group	(2,441)	–		(2,441)	–		(2,441)
Interest received	2	–		2	–		2
NET CASH USED IN
INVESTING
ACTIVITIES	(34,790)	–		(34,790)	(657,535)		(692,325)
FINANCING
ACTIVITIES
Proceeds from issue of
promissory note	–	–		–	117,535	2.3/4.2	117,535
Interest paid	(7,104)	–		(7,104)	–		(7,104)
Issue of shares	–	–		–	480,000	2.3/4.2	480,000
Repayment of
obligations under
finance leases	(1,318)	–		(1,318)	–		(1,318)
Redemption of
promissory note	(83,722)	–		(83,722)	–		(83,722)
Interest in amounts due
to directors	1,447	–		1,447	–		1,447
Interest paid on
obligations under
finance leases	(32)	–		(32)	–		(32)
NET CASH (USED IN)
GENERATED
FROM FINANCING
ACTIVITIES	(90,729)	–		(90,729)	597,535		506,806
NET INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS	69,906	–		69,906	(63,914)	2.3/4.2	5,992
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF
THE YEAR	126,186	–		126,186	–		126,186

– III-10 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

==> picture [404 x 261] intentionally omitted <==

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

Pro forma
Enlarged
Group after
Pro forma Pro forma the
The Group adjustments Enlarged Pro forma Acquisition
Year ended for the Group after adjustments and the
31 December Capital the Capital for the Capital
2012 Reorganisation Reorganisation Acquisition Reorganisation
HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
(Audited) (Unaudited) Notes (Unaudited) (Unaudited) Notes (Unaudited)
EFFECT OF
FOREIGN
EXCHANGE RATE
CHANGES 77 – 77 – 77
CASH AND CASH
EQUIVALENTS AT
END OF THE YEAR 196,169 – 196,169 (63,914) 132,255
ANALYSIS OF THE
BALANCE OF
CASH AND CASH
EQUIVALENTS,
represented by Bank
and cash balances 196,169 – 196,169 (63,914) 132,255
----- End of picture text -----

Notes to the unaudited pro forma consolidated cash flow statement of the Enlarged Group:

4.1 The adjustments reflect the inclusion of the cash flows as if the Acquisition had been completed on 1 January 2012. The Capital Reorganisation, assumed to be completed on 1 January 2012, has no effect on the unaudited pro forma consolidated cash flow statement.
4.2 The adjustments reflect the effect of the Acquisition and Capital Reorganisation on the cash flow as if the Acquisition and Capital Reorganisation had been completed on 1 January 2012. The net cash outflow represents payment of the cash element of the consideration and estimated costs directly attributable to the Acquisition and Capital Reorganisation of approximately HK$64 million. These adjustments are not expected to have a continuing effect on the Enlarged Group.

– III-11 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

==> picture [403 x 37] intentionally omitted <==

Date: 9 May 2013

The Directors, Paradise Entertainment Limited, Unit C, 19/F, Entertainment Building, 30 Queen’s Road Central, Hong Kong

Dear Sirs,

We report on the unaudited pro forma financial information of Paradise Entertainment Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”), which has been prepared by the directors of the Company for illustrative purposes only, to provide information about how the acquisition of the patents and the capital reorganisation might have affected the financial information presented, for inclusion in Appendix III of the circular of the Company dated 9 May 2013 (the “Circular”). The basis of preparation of the unaudited pro forma financial information is set out on pages III-1 and III-11 to the Circular.

Respective responsibilities of directors of the Company and reporting accountants

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

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

Basis of opinion

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

– III-12 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

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

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

the financial position of the Group as at 31 December 2012 or any future date; or
the results and cash flows of the Group for the year ended 31 December 2012 or any future periods.

Opinion

In our opinion:

(a) the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to Rule 4.29(1) of the Listing Rules.

Yours faithfully, Pan-China (H.K.) CPA Limited Certified Public Accountants

Chan Kin Wai

Practising Certificate Number P05342

20/F., Hong Kong Trade Centre, 161-167 Des Voeux Road Central, Hong Kong

– III-13 –

APPENDIX IV(A) FIRST VALUATION REPORT OF THE PATENTS

The following is the First Valuation Report received from Ample Appraisal Limited, an independent valuer, in connection with its valuation as at 31 December 2012 of the market value of the Patents, as extracted from the Announcement.

VALUATION REPORT FROM AMPLE APPRAISAL LIMITED

==> picture [134 x 40] intentionally omitted <==

7 January 2013

Paradise Entertainment Limited Unit C, 19th Floor Entertainment Building 30 Queen’s Road Central Hong Kong

Attn: The Board of Directors

Dear Sirs,

Re: The Fair Value of the Patents (as Defined Herein)

In accordance with your instructions for us to carry out an appraisal of the fair value of the five patents granted by the United States Patent and Trademark Office (hereinafter referred to as “USPTO”) numbered 7914368, 7918723, 7922587, 8182321 and 8210920 beneficially owned by and stand or are proceeding in the name of Mr Jay Chun, together with six patents in continuations, continuations in part or division pending approval (hereinafter collectively referred to as the “Patents”), we confirm that we have made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the fair value of the Patents as at 31 December 2012 (hereinafter referred to as the “Valuation Date”).

This report states the purpose of appraisal and scope of our works, identifies the Patents appraised, describes the basis and methodology of our appraisal, investigation and analysis, assumptions and limiting conditions, and presents our opinion of value.

1.0 PURPOSE OF APPRAISAL

Ample Appraisal Limited (hereinafter referred to as “Ample Appraisal”) acknowledges that this report is being prepared solely for the use of the directors and management of Paradise Entertainment Limited (hereinafter referred to as the “Company”). The Company is a public company listed on the Stock Exchange of Hong Kong Limited (hereinafter referred to as the “Stock Exchange”).

– IV(A)-1 –

FIRST VALUATION REPORT OF THE PATENTS

APPENDIX IV(A)

Ample Appraisal acknowledges that this report may be made available to the Company for public inspection purpose and inclusion in the announcement and circular of the Company in relation to the acquisition of the Patents by the Company. This report is not to be used for any purpose other than that mentioned above, including issue to third parties, without our prior approval of the use, form and context in which it is released.

Ample Appraisal assumes no responsibility whatsoever to any person other than the Company in respect of, or arising out of, the contents of this report. If others choose to rely in any way on the contents of this report they do so entirely on their own risk.

2.0 SCOPE OF WORK

Our appraisal conclusions are based on the assumptions stated herein and on information provided by the directors and management of the Company or its representative (hereinafter referred to as the “Management”). In preparing this report, we have adopted IVS 210 for Intangible Assets and have had discussions with the Management and the Company in relation to the development and prospects of the gaming equipment industry in the United States (hereinafter referred to as the “US”), and the development, operations and other relevant information of the Company.

As part of our analysis, we have reviewed such financial information and other pertinent data concerning the Patents provided to us by the Management and the Company and have considered such information and data as attainable and reasonable. We have no reason to believe that any material facts have been withheld from us, however, we do not warrant that our investigations have revealed all of the matters which an audit or more extensive examination might disclose.

We do not express an opinion as to whether the actual results of the business expansion from the acquisition of the Patents will approximate those projected because assumptions regarding future events by their nature are not capable of independent substantiation. In applying these projections to the appraisal of the fair value of the Patents, we are making no representation that the business expansion will be successful, or that market growth and penetration will be realized.

3.0 ECONOMIC AND INDUSTRY OVERVIEW

3.1 Global Prospects

According to a recent report, World Economic Outlook , published in April 2012 by the International Monetary Fund (hereinafter referred to as the “IMF”), global prospects are gradually strengthening again after suffering a major setback during 2011, but downside risks remain elevated. Improved activity in the US during the second half of 2011 and better policies in the euro area in response to its deepening economic crisis have reduced the threat of a sharp global slowdown.

Affirmed by a recent IMF update in July 2012, weak recovery will likely resume in the major advanced economies, and activity is expected to remain solid in most emerging and developing economies. Global growth is projected to drop from about 3.9

– IV(A)-2 –

APPENDIX IV(A)

FIRST VALUATION REPORT OF THE PATENTS

percent in 2011 to about 3.5 percent in 2012 because of weak activity in the last twelve months, mainly on account of the damage caused by deteriorating sovereign and banking sector developments in the euro area.

The IMF economists expect that the euro area will go into a mild recession in 2012 as a result of the sovereign debt crisis and a general loss of confidence, the effects of bank de-leveraging on the real economy, and the impact of fiscal consolidation in response to market pressure. The spillovers from the euro area crisis will severely affect the rest of Europe; other economies will likely experience further financial volatility but no major impact on activity unless the euro area crisis intensifies once again.

According to the July 2012 update, activity will continue to disappoint for the advanced economies as a group, expanding by only about 1.4 percent in 2012 and by 1.9 percent in 2013. Real gross domestic product (“GDP”) growth in the emerging and developing economies is projected to slow from 6.2 percent in 2011 to 5.6 percent in 2012 but then to reaccelerate to 5.9 percent in 2013, helped by easier macroeconomic policies and strengthening foreign demand.

3.2 Historical Perspective and Prospects of the US Economy

GDP data provided by the IMF World Economic Outlook Database (April 2012) shows historical development and prospects of the US economy in United States Dollars (hereinafter referred to as “USD”) in Chart 3.1 follows.

==> picture [349 x 192] intentionally omitted <==

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

20,000 19,705
18,705
17,784
18,000 16,941
15,610 [16,221]
16,000
14,029 [14,292] 13,939 [14,52715,094]
14,000 13,377
12,623
11,853
12,000
9,951 [10,28610,64211,142]
10,000
8,000
6,000
4,000
2,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
USD (Billion)
----- End of picture text -----

Chart 3.1 – GDP (Current Prices) for the US (estimates for 2011-2017)

3.3 Asia Pacific Prospects

According to the IMF World Economic Outlook in April 2012, the IMF staff opined that much weaker external demand has dimmed the outlook for Asia. But resilient domestic demand in the PRC, limited financial spillovers, room for policy easing, and the capacity of Asian banks to step in as European banks de-leverage

– IV(A)-3 –

APPENDIX IV(A) FIRST VALUATION REPORT OF THE PATENTS

suggest that the soft landing under way is likely to continue. Activity across Asia slowed during the last quarter of 2011, reflecting both external and domestic developments.

The effect of spillovers from Europe can be seen in the weakness of Asia’s exports. In some economies, such as India, domestic factors also contributed to the slowdown, as a deterioration in business sentiment weakened investment and policy tightening raised borrowing costs. The historic floods that hit Thailand significantly curtailed their growth in the last quarter of 2011, shaving 2 percentage points off the annual growth, and led to negative spillovers on regional economies.

In some other Asian economies, however, robust domestic demand helped offset the drag on growth of slowing exports. Investment and private consumption remained strong in the PRC, buoyed by solid corporate profits and rising household income. Moreover, the rebound from the supply chain disruptions caused by the Japanese earthquake and tsunami was stronger than anticipated.

3.4 Gaming Equipment Industry in the US

According to the “Market Overview: The 2011 Global Gaming Bulletin” published by Ernst & Young, the market of the US gaming industry has undergone a remarkable period of growth in the past 20 years. The recession that began in late 2007 continued to make 2010 a challenging year for the US gaming industry, nationwide, gross gaming revenues for commercial casinos rose to USD 31 billion in 2010, one percent increase over 2009.

Bloomberg industry research analysts report that major gaming equipment suppliers in the US regained their growth momentum in gross revenue after a decline in 2008. If we consider the sharp increase in 2007 an exceptional year, then the industry is on a growth trend over a longer time span. The recorded gross revenue in USD million as reported by Bloomberg is shown in Chart 3.2 below.

==> picture [296 x 177] intentionally omitted <==

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

13,682
14,000
13,500
12,942
12,819
13,000
12,051 12,216
12,500
11,860
12,000
11,500
11,000
10,500
2006 2007 2008 2009 2010 2011
----- End of picture text -----

Chart 3.2 – Gross Revenue (in USD Million) for Major Suppliers

– IV(A)-4 –

APPENDIX IV(A)

FIRST VALUATION REPORT OF THE PATENTS

In the 2009 survey of American Gaming Association, the Association of Gaming Equipment Manufacturers reveals that, in 2008, the gaming equipment industry in the US directly produced USD 12.7 billion in economic output, employed 29,600 staff and paid an average annual salary of USD 68,300. Equipment manufacturers also create spillover effects in the communities where they operate as almost nine out of ten make at least some purchases from local vendors.

4.0 THE PATENTS

A patent is a set of exclusive rights granted by a state or a national government to an inventor or their assignee for a limited period of time in exchange for a public disclosure of an invention. The term patent usually refers to a right granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof.

4.1 Patent Number 7914368 Issued 29 March 2011 Expiring on or after 5 August 2025 but not later than 17 September 2026, subject to the expiration date of, as a continuation-in-part to, Application 11/198218

A method and system for playing jackpot and live baccarat game on a baccarat machine with an option for insurance betting.

4.2 Patent Number 7918723 Issued 5 April 2011 Expiring 17 September 2026

A method and system for playing jackpot and live baccarat game are provided. One feature of the jackpot method involves the use of card combinations that includes at least one zero-point card. Another feature of the jackpot method involves initial jackpot contribution from the banker who operates the baccarat game. It is also provided a software program or a set of software program for carrying out any or all the steps of the disclosed gaming method.

4.3 Patent Number 7922587 Issued 12 April 2011 Expiring 17 September 2026

At least two betting terminals for playing a game, comprising a network of terminals linked to different game tables, wherein each of the terminals comprises a mechanism to switch on a plurality of games so as to allow a player at one terminal to switch to different tables and place bets at different games at a time.

4.4 Patent Number 8182321 Issued 22 May 2012 Expiring on or after 5 August 2025 but not later than 17 September 2026, subject to the expiration date of, as a continuation-in-part to, Application 11/198218

– IV(A)-5 –

APPENDIX IV(A) FIRST VALUATION REPORT OF THE PATENTS

place a bet on jackpot and determining the outcome of the live baccarat game according to the set of conventional casino game rules, and determining the outcome of the jackpot according to a combination of cards.

4.5 Patent Number 8210920 Issued 3 July 2012 Expiring 14 February 2028

A method and system for playing jackpot and live baccarat games are provided. One feature of the jackpot method involves the use of card combinations. Another feature of the jackpot method involves initial jackpot contribution from the banker who operates the baccarat game. It is also provided a software program or a set of software program for carrying out any or all the steps of the disclosed gaming method.

4.6 Application 11/198218, Filed 5 August 2005, Patent Pending

4.7 Application 11/938733, Filed 12 November 2007, Patent Pending

A method of playing a live casino game, comprising dealing cards to a player hand and a bank hand according to a set of conventional casino game rules, allowing at least a first player to place a bet on the casino game, granting a right of first refusal to place a bet on jackpot to the first player by virtue of the first player’s bet on the casino game, allowing the first player to exercise the right of first refusal to bet on the jackpot or at least a second player to place a bet on the jackpot if the first player declines the right to place a bet on the jackpot, determining the outcome of the live casino game according to the set of conventional casino game rules, and determining the outcome of the jackpot according to a combination of cards.

4.8 Application 12/984558, Filed 4 January 2011, Patent Pending

4.9 Application 13/033543, Filed 23 February 2011, Patent Pending

– IV(A)-6 –

APPENDIX IV(A)

FIRST VALUATION REPORT OF THE PATENTS

baccarat on either the banker’s hand to win or the player’s hand to win, an insurance bet becomes available for the player to be placed on the player’s hand or the banker’s hand and various rules are set forth for winning the insurance bet.

4.10 Application 13/042633, Filed 8 March 2011, Patent Pending

A system in a casino for playing a game, the system comprising: a network of betting terminals linked to a plurality of game tables, first players playing a first game at each of the game tables, at least one first game being a live baccarat game, wherein each of the betting terminals comprises a mechanism to display a plurality of first games occurring at the game tables in the casino so as to allow a second player at each one of the betting terminals to switch to different game tables, place bets at different first games at a same time, place a separate jackpot wager bet on a jackpot game based on the first games being played live at the game tables and select betting options, wherein the system includes a display part having a screen for showing game number and respective amounts available for betting.

4.11 Application 13/483803, Filed 30 May 2012, Patent Pending

As advised by the Company’s legal adviser on US intellectual properties laws, in the unlikely event that application 11/198218 is rejected by the USPTO, the validity and the term of the patent numbers 7914368 and 8182321 would not be affected (i.e. the expiration period will be the same as set out above) but the exact expiration date cannot be ascertained now.

5.0 DEFINITION OF APPRAISAL

We have appraised the Patents on the basis of fair value. Fair value as used herein is defined as “the estimated amount for which an asset could be exchanged, or a liability settled, between willing parties in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”.

6.0 INVESTIGATION AND ANALYSIS

Our investigation included discussions with members of the management of the Company in relation to the development and prospects of the gaming equipment industry in the US, and the development, operations and other relevant information of the Company. In addition, we have made relevant inquiries and obtained such further information, statistical figures regarding the industry from external public sources, as we consider necessary for the purpose of this appraisal.

– IV(A)-7 –

FIRST VALUATION REPORT OF THE PATENTS

APPENDIX IV(A)

The appraisal of fair value of the Patents requires consideration of all pertinent factors, which may or may not affect the operation of the business and its ability to generate future investment returns. The factors considered in this appraisal include, but not necessarily limited to, the following:

The nature and prospect of the Company.
The financial condition of the Company.
The economic outlook in general and the specific economic environment and market elements affecting the business, industry and market.
Renewal of relevant leases, licenses and agreements.
The business risk of the Company such as the ability in maintaining competent technical and professional personnel.
Investment returns and market transactions of entities engaged in similar lines of business.

7.0 GENERAL APPRAISAL APPROACHES

There are three generally accepted approaches to obtain the fair value of all assets or liabilities, namely, the market approach, the income approach and the cost approach. Each of these approaches is appropriate in one or more circumstances, and sometimes, two or more approaches may be used together. Whether to adopt a particular approach will be determined by the most commonly adopted in valuing an asset or a liability that is similar in nature.

7.1 Market Approach

This approach examines the comparative characteristics of reasonably comparative properties. When there is sufficient market driven transactional data from which to estimate comparable assets or liabilities, this approach is appropriate. If the selected comparable assets or liabilities are not, indeed, comparable to the subject asset or liability, the market approach is weakened.

7.2 Income Approach

It relies on the cash flow that the subject asset or liability is expected to generate over its life. As such, this approach requires a reasonable estimate of future cash flows and their risk. Thus, quality of valuation depends on the accuracy of the estimates used in the valuation model.

– IV(A)-8 –

APPENDIX IV(A)

FIRST VALUATION REPORT OF THE PATENTS

7.3 Cost Approach

It looks at the cost to reproduce or replace the subject asset or liability. This approach is less appropriate for intangible assets or liabilities, since the cost to replace is seldom reflective of its value, except at the inception of its life.

8.0 APPRAISALS APPROACHES FOR THE PATENTS

In the process of valuing the Patents, we have taken into account of the uniqueness of the Company’s operation, the industry it is participating, and the availability of information and data. We considered that market approach is not applicable in the absence of recent and similar market transactions. The cost approach is generally considered as inappropriate for the valuation of intangible assets.

We have therefore adopted the income approach to arrive at the fair value of the Patents. For the avoidance of doubt, the Patents have not yet been put to commercial use. The fair value of the Patents is determined on the basis of expected free cash flow from operation to be generated from the selling in the US of the electronic gaming machines with the system as protected by the Patents (hereinafter referred to as the “ Electronic Gaming Machines ”).

8.1 Market Comparables

We have searched suitable market comparables (hereinafter referred to as the “Comparables”) according to Global Industry Classification Standard (“GICS”) level 4 classification, Consumer Discretionary – Consumer Services – Hotels Restaurants & Leisure – Casinos & Gaming, and selected the following companies which represent an exhaustive list, although they are not supplying identical products, they are engaged in the manufacture and supply of similar and competing products. (Note: The GICS was developed by Morgan Stanley Capital International (“MSCI”) and Standard & Poor’s (“S&P”), aim to enhance the investment research and asset management process for financial professionals worldwide. The GICS structure consists of 10 sectors, 23 industry groups, 59 industries and 122 sub-industries.)

Company Name	Stock Code	Equity Beta
Bally Technologies Inc.	(BYI US)	0.427
International Gaming Technology Inc.	(IGT US)	0.579
SHFL Entertainment Inc.	(SHFL US)	1.235
WMS Industries Inc.	(WMS US)	1.015
Average		0.814

8.1.1 Bally Technologies Inc. designs and manufactures a variety of local-area and wide-area progressive games that provide slot players with the opportunity to win jackpots ranging from hundreds of thousands to millions of dollars.

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APPENDIX IV(A) FIRST VALUATION REPORT OF THE PATENTS

8.1.2 International Gaming Technology Inc. designs and manufactures computerized casino gaming systems. The company also develops and manufactures systems that monitor slot machine play and track player activity, as well as wide area progressive systems.
8.1.3 SHFL Entertainment Inc. is a gaming supply company that provides products and services to the casino industry. SHFL Entertainment offers, among other products, electronic gaming machines on a wide variety of stand-alone and progressive slot machine titles feature stunning graphics, enticing progressive jackpots and rewarding free game features.
8.1.4 WMS Industries Inc. is a leading global innovator in the design, manufacture and distribution of electronic and digital gaming entertainment and gaming machines for the casino industry.

8.2 Discount Rate

We further retrieved 10 years market return and risk free interest rate from Bloomberg, which are 10.509 percent ( Rm ) and 1.757 percent ( Rf ) respectively as at the Valuation Date, hence, determined a market premium 8.752 percent. In accordance with the capital asset pricing model (“CAPM”), which is denoted by Re = Rf + � × ( Rm – Rf ) we have estimated the cost of equity finance to be 8.88 percent ( Re ) with reference to the average equity beta of 0.814 (�) for the Comparables.

We adjusted the cost of equity finance with a risk premium of 10.00 percent for intangible assets on the basis of business risk involved with similar class of intangible assets and a size premium of 3.89 percent according to the Ibbotson Valuation Yearbook 2012 and the size of the Business Enterprise, thus arrived at an adjusted cost of equity finance of 22.77 percent and adopted as the appropriate discount rate (hereinafter referred to as the “Discount Rate”).

The Ibbotson Valuation Yearbook 2012 is published for people involved in the valuation of businesses and is a separate version of the Ibbotson Stocks, Bonds, Bills, and Inflation (SBBI) Classic Yearbook, which has been revised and updated annually for more than 25 years.

The Ibbotson SBBI Classic Yearbook has become a standard reference publication in both the investment and business valuation communities. It was extended from the seminal study in 1976 by Professor Roger Ibbotson that analyzed the long term returns of the principal asset classes in the US economy, his findings documented the relationship between risk and return.

We further adopted a discount for lack of marketability (hereinafter referred to as the “DLOM”) of 10.80 percent as suggested by a study conducted by Bruce Johnson published in the Business Valuation Review (December 1999) according to the transaction size. To the best of our knowledge and belief, the researcher did not update his research paper with more recent data and there are no similar researches available.

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APPENDIX IV(A) FIRST VALUATION REPORT OF THE PATENTS

8.3 Financial Information

We have reviewed financial information provided to us by the Management and the Company described in this section, which formed the basis of the financial forecast prepared by the Company. The Company has been able to gather information, and gain sufficient experience and track records from the selling of the electronic gaming machines in Macau for the past few years, based on which the Management prepared the financial forecast. The source of revenue is selling of the Electronic Gaming Machines with the system as protected by the Patents in the US.

The Management has forecasted the sales according to the indication of interests from six potential clients in the US but no agreement has been signed for the time being. Such indication of interests from potential clients is generated through the marketing contacts with potential clients. Such sales orders represent over 80 percent of the sales volume projected for 2013, with the Company’s successful marketing of the electronic gaming machines in Macau and the satisfaction of the customers, the Company is confident in meeting the set sales target in 2013 and the ensuing years. On the basis of these forecast and factors and the volume that can be reliably supported by the supplier, the Management determined an expected capacity of business operation and the cost of sales.

The Electronic Gaming Machine serves as a medium for its player to play live table games of baccarat, roulette and sicbo so that casinos can be benefited from its salient features, such as saving of labor cost and overhead, reducing the risks of staff (e.g. dealers) shortage, human errors and fraud, possible increase in betting amount. Same as mahjong, baccarat, roulette and sicbo are traditional games with a very long history and are still very popular nowadays, the possibility of baccarat, roulette and sicbo becoming obsolete is relatively low. The Company has been installed similar electronic gaming machines in casinos in Macau since 2009 and the popularity of these electronic gaming machines has increased with time.

Based on the current selling price of the Company’s electronic gaming machines in Macau and the selling price of other similar and competing products in the US, the Management estimated the selling price of the Electronic Gaming Machines implementing the technologies described in the Patents, whether approved or pending approval, to enter the market and to remain competitive for the ensuing years. The Management expects to operate at approximately one-third and three-fourths of expected capacity of business operation in the first and second year of operation, and at expected capacity of business operation thereafter until the end of economic life of the Patents, such growth rate has been determined after taking into account of the size of the market, a USD 13.682 billion gross revenue was recorded in 2011 by the major suppliers (as shown in chart 3.2), in the US in gaming industry including number of casinos and availability of the supply of the machines from its supplier, which has enough rooms for the projected operation of the Company. The expected capacity will account for an insignificant market share and is unlikely to attract rivalry actions from competitors.

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FIRST VALUATION REPORT OF THE PATENTS

APPENDIX IV(A)

The Management estimated the Company’s cost of sales of the Electronic Gaming Machines to be sold in the US based on the Company’s experience and the information gathered in Macau, the existing selling price from its supplier and additional costs to be incurred for the US market. The cost for the US was budgeted in order to support the planned size of operation with increment from initial volume to the expected capacity in the first 3 years and will remain at that size after reaching the expected capacity with appropriate inflation adjustment to the operation cost. Estimation of rental costs is made on the basis of tenancy agreement signed for office space to establish a technical support centre and the staff cost is estimated with due reference made to the industrial average of gaming industry published by Bureau of Labor Statistics of US Department of Labor and the Company’s experience in manpower management in the provision of technical support to the customers.

The economic life of the Patents is assumed to be 12 years from commercial implementation, that is end of 2024, as some of the Patents may expire on 5 August 2025 (i.e. with remaining life of about 13 years) and the Management prepared the projected free cash flows from operation on the basis of sales revenue, cost of goods, and establishment cost to support the expected capacity of business operation.

As the financial forecast spans over a 12 years period, the Management applied inflation rates estimated on the basis of historical price indices from start of 2000 to end of 2011 as reported by Bloomberg. Revenue received and costs incurred in the US are subject to an inflation rate of 2.534 percent annualized on the basis of US price indices and the cost of goods exported to the US are subject to an inflation rate of 0.466 percent annualized on the basis of HK price indices.

Net change in working capital is computed on the basis of total working capital required to support the business operation with reference to the business turnover and cost of goods. As the business operation is approaching the expected capacity from 2013 to 2015, the net change in working capital is higher as compared to subsequent years when the business operation reached the expected capacity.

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APPENDIX IV(A)

FIRST VALUATION REPORT OF THE PATENTS

8.4 Discounted Cash Flow and the Fair Value

We then performed our computation on discounted cash flow on the basis of free cash flow from operation, net change in working capital, and imputed cost of working capital, which is calculated at an annual rate of 5.00 percent, with reference to the US prime lending rate as of the Valuation Date reported by Bloomberg, on the total working capital to support the business operation. The excess earnings is then arrived at by deducting the net change in working capital and imputed cost of working capital from the free cash flows from operation.

	Free Cash	Total	Net Change	Imputed Cost
Years ended	Flow from	Working	in Working	of Working
31 December	Operation	Capital	Capital	Capital
(in HKD’000)	(A)	(B)	(C)	(D) = (B × 5%)
2013	80,233	7,689	(7,689)	(384)
2014	188,783	17,475	(9,786)	(874)
2015	267,362	24,613	(7,138)	(1,230)
2016	276,050	25,418	(805)	(1,271)
2017	284,966	26,244	(826)	(1,312)
2018	294,117	27,092	(848)	(1,354)
2019	303,509	27,962	(870)	(1,398)
2020	313,149	28,855	(893)	(1,443)
2021	323,040	29,771	(916)	(1,488)
2022	333,193	30,712	(941)	(1,535)
2023	343,612	31,677	(965)	(1,584)
2024	354,303	32,667	31,677	(1,633)

( Note: The total working capital increased by HKD 0.99 million to HKD 32.667 million by the end of 2024, but the same will be released in the course of closing out the business operation.)

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APPENDIX IV(A)

FIRST VALUATION REPORT OF THE PATENTS

We then performed the following discounted cash flow computation for the excess earnings and the fair value of the Patents is therefore determined to be approximately HKD 819 million as of the Valuation Date.

Years ended 31 December
Excess
Earnings
PV Factor
(in HKD’000)
(A + C + D)
(@ 22.77%)
2013
72,160
0.815
2014
178,123
0.663
2015
258,994
0.540
2016
273,974
0.440
2017
282,828
0.359
2018
291,915
0.292
2019
301,241
0.238
2020
310,813
0.194
2021
320,636
0.158
2022
330,717
0.129
2023
341,063
0.105
2024
384,347
0.085
Fair Value before Marketability Discount
Less: DLOM
Fair Value as at the Valuation Date

Present
Values
58,810
118,096
139,856
120,549
101,535
85,239
71,695
60,298
50,660
42,662
35,812
32,669
917,881
(99,131)
818,750

( Note: The Management expects to operate at approximately one-third and three-fourths of expected capacity of business operation in the first and second year of operation, the growth rate on sales revenue adopted is 125.6% for 2014, and 39.8% for 2015. As the Company expects to operate at the expected capacity from 2015, the annual growth rate on sales revenue from 2015 is 2.534% which is the adopted inflation rate in the US, annualized on the basis of historical price indices in the US from start of 2000 to end of 2011 as reported by Bloomberg.)

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APPENDIX IV(A) FIRST VALUATION REPORT OF THE PATENTS

8.5 Sensitivity Analyses

Several parameters are adopted in preparing the financial projections and the discounted cash flow which will influence the fair value we arrived at, therefore, sensitivity analyses on these parameters are performed as below. The analysis on selling price and sales volume is performed on a relative basis and the analysis on discount rate and DLOM is performed at one and two percent upward and downward basis.

8.5.1 Sensitivity analysis on selling price and sales volume

			Sales Volume
(HKD’000) +10%		+ 5%	No Change –5%	–10%
Selling Price	+10% 1,024,392 + 5% 963,534 No Change 902,670 –5% 841,767 –10% 780,838	976,948 918,855 860,722 802,563 744,408	929,501 882,016 834,505 874,141 829,399 784,659 818,750 776,782 734,810 763,363 724,160 684,960 707,974 671,542 635,111
	_8.5.2 Sensitivity analysis _	_on discount _	rate and DLOM
			DLOM
(HKD’000) 8.8%		9.8%	10.8% 11.8%	12.8%
Discount Rate	20.77% 913,982 21.77% 874,831 22.77% 837,107 23.77% 802,048 24.77% 768,755	903,960 865,239 827,929 793,254 760,326	893,938 883,917 873,895 855,647 846,054 836,462 818,750 809,571 800,392 784,460 775,665 766,871 751,896 743,467 735,038

9.0 APPRAISAL ASSUMPTIONS

We have adopted certain specific assumptions in this appraisal and the major ones are as follows:

The future operation will be conducted as planned and the financial projections, including the expected selling prices and sales volume of the products, are realizable.
The Company will focus on potential customers in the States of Nevada, Mississippi, Connecticut, Pennsylvania, New Jersey, California, and Florida in the US (hereinafter referred to as the “Localities”).
There will be sufficient supply of technical staff and production support in the gaming equipment industry in which the Company operates.
The Company will retain competent management, key personnel and technical staff to support its ongoing operations and developments.

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APPENDIX IV(A)

FIRST VALUATION REPORT OF THE PATENTS

Interest rates and exchange rates in the Localities for the operation of the Company will not differ materially from those presently prevailing.
All relevant legal approvals and business certificates or licenses to operate the business in the Localities in which the Company operates or intends to operate would be officially obtained, and renewed upon expiry.
There will be no major changes in the current taxation laws in the Localities in which the Company operates or intends to operate, the rates of tax payable shall remain unchanged, sales tax in any localities will be borne by the end customers, and that all applicable laws and regulations will be complied with.
There will be no major changes in the political, legal, economic or financial conditions in the Localities in which the Company operates or intends to operate, which would adversely affect the revenues attributable to and profitability of the Company.

10.0 LIMITING CONDITIONS

Our conclusion of the fair value is derived from generally accepted appraisal procedures and practices that rely substantially on the use of various assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained. This appraisal reflects facts and conditions existing at the Valuation Date. Subsequent events have not been considered and we are not required to update our report for such events and conditions. To the best of our knowledge, all data set forth in this report are reasonable and accurately determined. The data, opinions, or estimates identified as being furnished by others which have been used in formulating this analysis, are gathered from reliable sources; yet, no guarantee is made nor liability assumed for their accuracy.

We have relied to a considerable extent on information provided by the Management and the Company in arriving at our opinion of value. We are not in the position to verify the accuracy of all information provided to us. However, we have had no reason to doubt the truth and accuracy of the information provided to us and to doubt that any material facts have been omitted from the information provided. No responsibilities for the operation and financial information that have not been provided to us are accepted. Save as and except for the purpose stated above, neither the whole nor any part of this report nor any reference thereto may be included in any document, circular or statement without our written approval of the form and context in which it will appear.

In accordance with our standard practice, we must state that this report is for the exclusive use of the party to whom it is addressed and for the specific purpose stated above. We assume no responsibility whatsoever to any person other than the directors and management of the Company in respect of, or arising out of, the content of this report. If others choose to rely in any way on the contents of this report, they do so entirely on their own risk.

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APPENDIX IV(A)

FIRST VALUATION REPORT OF THE PATENTS

11.0 REMARKS

Unless otherwise stated, all monetary amounts stated in this appraisal report are in Hong Kong Dollars (HKD). We hereby confirm that we have no present interests in the Company, the Patents, or the values reported herein.

12.0 OPINION OF VALUES

According to the advice of the Company’s legal adviser on US intellectual properties laws, as the Patents relate to the same system, the USPTO would require any transfer/ assignment of the Patents to cover the entire patent portfolio. In addition, the Company can utilize the Patents for commercial use in the US notwithstanding that some of the Patents are still pending approval. Therefore, no separate value is ascribed to individual patent or patent pending approval.

For the avoidance of doubt, in the event that the patents pending approval are not subsequently granted, it will not adversely affect the operation of the system as the design can still be implemented. Reverse engineering by competitors will not materially affect the sales and the selling price of the Electronic Gaming Machines in the absence of the core technologies protected by the 5 patents granted.

Based on the investigation and analysis stated above and on the appraisal methods employed, we are of the opinion that the fair value of the Patents as at 31 December 2012 is in the sum of HKD 819,000,000 (HONG KONG DOLLARS EIGHT HUNDRED NINETEEN MILLION ONLY).

Yours faithfully, For and on behalf of

Ample Appraisal Limited

Johnny Law	K. Y. Mak
CPA, CPA(Aust)	CFA, CPA
Senior Vice President	Chief Technical Advisor

Mr. Johnny Law, CPA, CPA (Aust.), possesses in excess of 10 years’ experience in the finance and business valuation industry in Hong Kong. He has involved in the appraisal and evaluation of financial structured products and intangible assets.

Mr. K. Y. Mak, AICPA, CFA, possesses over 10 years of experience in the business valuation industry in Hong Kong and gained his experience in business valuation from his previous managerial position at an international valuer. He is a member of the American Institute of Certified Public Accountants and a Chartered Financial Analyst.

– IV(A)-17 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

The following is the text of a letter prepared for the purpose of incorporation in this circular received from Ample Appraisal Limited, an independent valuer, in connection with its valuation as at 31 March 2013 of the market value of the Patents.

==> picture [134 x 40] intentionally omitted <==

9 May 2013

Paradise Entertainment Limited Unit C, 19th Floor Entertainment Building 30 Queen’s Road Central Hong Kong

Attn: The Board of Directors

Dear Sirs,

Re: The Fair Value of the Patents (as Defined Herein)

In accordance with your instructions for us to carry out an appraisal of the fair value of the five patents granted by the United States Patent and Trademark Office (hereinafter referred to as “USPTO”) numbered 7914368, 7918723, 7922587, 8182321 and 8210920 beneficially owned by and stand or are proceeding in the name of Mr Jay Chun, together with six patents in continuations, continuations in part or division pending approval (hereinafter collectively referred to as the “Patents”), we confirm that we have made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the fair value of the Patents as at 31 March 2013 (hereinafter referred to as the “Valuation Date”).

1.0 PURPOSE OF APPRAISAL

– IV(B)-1 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

2.0 SCOPE OF WORK

3.0 ECONOMIC AND INDUSTRY OVERVIEW

3.1 Global Prospects

The International Monetary Fund (hereinafter referred to as the “IMF”) opined in their recent report, World Economic Outlook, published in October 2012 that the recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook. Their forecast thus sees only a gradual strengthening of activity from the relatively disappointing pace of early 2012 and projected global growth at 3.3 and 3.6 percent in 2012 and 2013 respectively.

– IV(B)-2 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

Output is expected to remain sluggish in advanced economies but still relatively solid in many emerging market and developing economies. Unemployment is likely to stay elevated in many parts of the world. And financial conditions will remain fragile, according to their Global Financial Stability Report also released in October 2012. Activity in Europe contracted by about a quarter percent during the first half of 2012.

The main new development was a further escalation of financial stress during the second quarter in the euro area periphery, which, despite some easing, did not fully reverse in the third quarter through mid-September. The impact is most direct in these economies themselves, and all except Ireland are in recession now. But spillovers are increasingly reaching other economies in the region, given strong trade and financial linkages.

In the United States, a modest recovery with weak job creation continues amid a weak global environment, output in the United States rose above the pre-crisis peak in the second half of 2011, sooner than in many other advanced economies. The recovery in Canada has been more robust, reflecting partly the effects of favorable financing conditions with less pressure for balance sheet adjustment and the commodity boom.

3.2 Historical Perspective and Prospects of the US Economy

GDP data provided by the IMF World Economic Outlook Database (October 2012) shows historical development and prospects of the US economy in United States Dollars (hereinafter referred to as “USD”) in Chart 3.1 follows.

==> picture [347 x 192] intentionally omitted <==

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

20,000 19,745
18,717
17,768
18,000 16,913
15,653 [16,198]
16,000
14,029 [14,292] 13,974 [14,49915,076]
14,000 13,377
12,623
11,853
12,000
9,951 [10,28610,64211,142]
10,000
8,000
6,000
4,000
2,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
USD (Billion)
----- End of picture text -----

Chart 3.1 – GDP (Current Prices) for the US (estimates for 2011-2017)

– IV(B)-3 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

3.3 Asia Pacific Prospects

Growth continued to moderate in much of Asia during the first half of 2012. Slower growth in import demand in most advanced economies corresponded with weaker export growth in Asia. Growth in the PRC slowed further in the second quarter of 2012, as the economy continued to adjust to the policy tightening undertaken in last two years despite the tightening policies has been partly reversed in 2012.

In other parts of Asia, activity was boosted by recovery from natural disasters and reconstruction, notably in Japan and Thailand, but also in Australia and New Zealand. In Australia, continued strong mining activity and related investment have also supported growth. In India, growth weakened more than expected in the first half of 2012, an outcome of stalled investment caused by governance issues and red tape, and deterioration in business sentiment against the backdrop of a rising current account deficit and the recent rupee depreciation.

3.4 Gaming Equipment Industry in the US

– IV(B)-4 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

==> picture [341 x 192] intentionally omitted <==

Chart 3.2 – Gross Revenue (in USD Million) for Major Suppliers

4.0 THE PATENTS

4.1 Patent Number 7914368 Issued 29 March 2011 Expiring on or after 5 August 2025 but not later than 17 September 2026, subject to the expiration date of, as a continuation-in-part to, Application 11/198218

A method and system for playing jackpot and live baccarat game on a baccarat machine with an option for insurance betting.

4.2 Patent Number 7918723 Issued 5 April 2011 Expiring 17 September 2026

– IV(B)-5 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

4.3 Patent Number 7922587 Issued 12 April 2011 Expiring 17 September 2026

4.4 Patent Number 8182321 Issued 22 May 2012 Expiring on or after 5 August 2025 but not later than 17 September 2026, subject to the expiration date of, as a continuation-in-part to, Application 11/198218

A method and system for playing jackpot and casino games are provided. The method includes playing a baccarat or felt table game which allows a player to bet on jackpot and includes dealing cards to a player hand and a bank hand, allowing one player to place a bet on live baccarat or felt table game, allowing another player to place a bet on jackpot and determining the outcome of the live baccarat game according to the set of conventional casino game rules, and determining the outcome of the jackpot according to a combination of cards.

4.5 Patent Number 8210920 Issued 3 July 2012 Expiring 14 February 2028

4.6 Application 11/198218, Filed 5 August 2005, Patent Pending

4.7 Application 11/938733, Filed 12 November 2007, Patent Pending

– IV(B)-6 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

4.8 Application 12/984558, Filed 4 January 2011, Patent Pending

4.9 Application 13/033543, Filed 23 February 2011, Patent Pending

Methods for carrying out any or all the steps of the disclosed gaming method for playing jackpot and live baccarat games with an option for insurance betting. After first two cards are dealt to a player’s hand and a banker’s hand, according to a set of baccarat rules, and one or more of the players are allowed to place a bet on live baccarat on either the banker’s hand to win or the player’s hand to win, an insurance bet becomes available for the player to be placed on the player’s hand or the banker’s hand and various rules are set forth for winning the insurance bet.

4.10 Application 13/042633, Filed 8 March 2011, Patent Pending

4.11 Application 13/483803, Filed 30 May 2012, Patent Pending

– IV(B)-7 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

5.0 DEFINITION OF APPRAISAL

6.0 INVESTIGATION AND ANALYSIS

The nature and prospect of the Company.
The financial condition of the Company.
The economic outlook in general and the specific economic environment and market elements affecting the business, industry and market.
Renewal of relevant leases, licenses and agreements.
The business risk of the Company such as the ability in maintaining competent technical and professional personnel.
Investment returns and market transactions of entities engaged in similar lines of business.

7.0 GENERAL APPRAISAL APPROACHES

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APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

7.1 Market Approach

7.2 Income Approach

7.3 Cost Approach

8.0 APPRAISALS APPROACHES FOR THE PATENTS

8.1 Market Comparables

– IV(B)-9 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

Company Name	Stock Code	Equity Beta
Bally Technologies Inc.	(BYI US)	0.420
International Gaming Technology Inc.	(IGT US)	0.577
SHFL Entertainment Inc.	(SHFL US)	1.207
WMS Industries Inc.	(WMS US)	0.976
Average		0.795

8.1.1 Bally Technologies Inc. designs and manufactures a variety of local-area and wide-area progressive games that provide slot players with the opportunity to win jackpots ranging from hundreds of thousands to millions of dollars.
8.1.2 International Gaming Technology Inc. designs and manufactures computerized casino gaming systems. The company also develops and manufactures systems that monitor slot machine play and track player activity, as well as wide area progressive systems.
8.1.3 SHFL Entertainment Inc. is a gaming supply company that provides products and services to the casino industry. SHFL Entertainment offers, among other products, electronic gaming machines on a wide variety of stand-alone and progressive slot machine titles feature stunning graphics, enticing progressive jackpots and rewarding free game features.
8.1.4 WMS Industries Inc. is a leading global innovator in the design, manufacture and distribution of electronic and digital gaming entertainment and gaming machines for the casino industry.

8.2 Discount Rate

We further retrieved 10 years market return and risk free interest rate from Bloomberg, which are 10.1072 percent ( Rm ) and 1.8486 percent ( Rf ) respectively as at the Valuation Date, hence, determined a market premium 8.2586 percent. In accordance with the capital asset pricing model (“CAPM”), which is denoted by Re = Rf + � × ( Rm – Rf ) we have estimated the cost of equity finance to be 8.42 percent (Re) with reference to the average equity beta of 0.795 (�) for the Comparables.

We adjusted the cost of equity finance with a risk premium of 10.00 percent for intangible assets on the basis of business risk involved with similar class of intangible assets and a size premium of 3.81 percent according to the Ibbotson Valuation Yearbook 2013 and the size of the Business Enterprise, thus arrived at an adjusted cost of equity finance of 22.23 percent and adopted as the appropriate discount rate (hereinafter referred to as the “Discount Rate”).

The Ibbotson Valuation Yearbook 2013 is published for people involved in the valuation of businesses and is a separate version of the Ibbotson Stocks, Bonds, Bills, and Inflation (SBBI) Classic Yearbook, which has been revised and updated annually for more than 25 years.

– IV(B)-10 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

8.3 Financial Information

The Management has forecasted the sales according to the indication of interests from six potential clients in the US but no agreement has been signed for the time being. Such indication of interests from the potential clients is generated through the marketing contacts with potential clients. Such sales orders represent over 80 percent of the sales volume projected for 2013, with the Company’s successful marketing of the electronic gaming machines in Macau and the satisfaction of the customers, the Company is confident in meeting the set sales target in 2013 and the ensuing years. On the basis of these forecast and factors and the volume that can be reliably supported by the supplier, the Management determined an expected capacity of business operation and the cost of sales.

– IV(B)-11 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

Management expects to operate at approximately one-third of the expected capacity of business operation for nine months in 2013, at half of the expected capacity of operation in the following calendar year, and at expected capacity of business operation thereafter until the end of economic life of the Patents, such growth rate has been determined after taking into account of the size of the market, a USD 13.682 billion gross revenue was recorded in 2011 by the major suppliers (as shown in chart 3.2), in the US in gaming industry including number of casinos and availability of the supply of the machines from its supplier, which has enough rooms for the projected operation of the Company. The expected capacity will account for an insignificant market share and is unlikely to attract rivalry actions from competitors.

– IV(B)-12 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

8.4 Discounted Cash Flow and the Fair Value

	Free Cash	Total	Net Change	Imputed Cost
Years ended	Flow from	Working	in Working	of Working
31 December	Operation	Capital	Capital	Capital
(in HKD’000)	(A)	(B)	(C)	(D) = (B × 5%)
2013	36,748	3,460	(3,460)	(173)
2014	125,987	11,915	(8,455)	(596)
2015	267,362	24,614	(12,699)	(1,231)
2016	276,049	25,418	(805)	(1,271)
2017	284,966	26,244	(826)	(1,312)
2018	294,117	27,092	(848)	(1,355)
2019	303,508	27,962	(870)	(1,398)
2020	313,148	28,855	(893)	(1,443)
2021	323,040	29,771	(916)	(1,489)
2022	333,193	30,712	(941)	(1,536)
2023	343,610	31,677	(965)	(1,584)
2024	354,303	32,667	31,677	(1,633)

( Note: The total working capital increased by HKD 0.99 million to HKD 32.667 million by the end of 2024, but the same will be released in the course of closing out the business operation.)

– IV(B)-13 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

We then performed the following discounted cash flow computation for the excess earnings and the fair value of the Patents is therefore determined to be approximately HKD 810 million as of the Valuation Date.

Years ended 31 December
Excess
Earnings
PV Factor
(in HKD’000)
(A + C + D)
(@ 22.23%)
2013
33,115
0.860
2014
116,936
0.704
2015
253,432
0.576
2016
273,973
0.471
2017
282,828
0.385
2018
291,914
0.315
2019
301,240
0.258
2020
310,812
0.211
2021
320,635
0.173
2022
330,715
0.141
2023
341,061
0.116
2024
384,347
0.095
Fair Value before Marketability Discount
Less: DLOM
Fair Value as at the Valuation Date

Present
Values
28,479
82,323
145,977
129,041
108,889
91,953
77,720
65,581
55,470
46,631
39,563
36,513
908,140
(98,079)
810,061

( Note: The Management expects to operate at approximately one-third of the expected capacity of business operation for nine months in 2013 and at half of the expected capacity of operation in the following calendar year. Growth rate on sales revenue adopted is 241.8% for 2014, and 105.1% for 2015. As the Company expects to operate at the expected capacity from 2015, the annual growth rate on sales revenue from 2015 is 2.534% which is the adopted inflation rate in the US, annualized on the basis of historical price indices in the US from start of 2000 to end of 2011 as reported by Bloomberg.)

– IV(B)-14 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

8.5 Sensitivity Analyses

8.5.1 Sensitivity analysis on selling price and sales volume

	(HKD’000)	(HKD’000)	Sales Volume +10% + 5% No Change -5% -10% 1,013,076 966,162 919,247 872,333 825,418 953,024 908,841 864,654 820,467 776,225 892,974 851,517 810,061 768,553 727,022 832,921 794,195 755,415 716,620 677,781 772,867 736,814 700,746 664,643 628,534
	Selling Price	+10%
		+ 5%
		No Change
		-5%
		-10%

8.5.2 Sensitivity analysis on discount rate and DLOM

	(HKD’000)	(HKD’000)	DLOM 8.8% 9.8% 10.8% 11.8% 12.8% 906,656 896,714 886,773 876,831 866,890 866,386 856,886 847,387 837,887 828,387 828,224 819,142 810,061 800,979 791,898 792,542 783,852 775,161 766,471 757,781 759,206 750,882 742,557 734,232 725,908
	Discount Rate	20.23%
		21.23%
		22.23%
		23.23%
		24.23%

9.0 APPRAISAL ASSUMPTIONS

We have adopted certain specific assumptions in this appraisal and the major ones are as follows:

The future operation will be conducted as planned and the financial projections, including the expected selling prices and sales volume of the products, are realizable.
The Company will focus on potential customers in the States of Nevada, Mississippi, Connecticut, Pennsylvania, New Jersey, California, and Florida in the US (hereinafter referred to as the “Localities”).
There will be sufficient supply of technical staff and production support in the gaming equipment industry in which the Company operates.
The Company will retain competent management, key personnel and technical staff to support its ongoing operations and developments.

– IV(B)-15 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

Interest rates and exchange rates in the Localities for the operation of the Company will not differ materially from those presently prevailing.
All relevant legal approvals and business certificates or licenses to operate the business in the Localities in which the Company operates or intends to operate would be officially obtained, and renewed upon expiry.
There will be no major changes in the current taxation laws in the Localities in which the Company operates or intends to operate, the rates of tax payable shall remain unchanged, sales tax in any localities will be borne by the end customers, and that all applicable laws and regulations will be complied with.
There will be no major changes in the political, legal, economic or financial conditions in the Localities in which the Company operates or intends to operate, which would adversely affect the revenues attributable to and profitability of the Company.

10.0 LIMITING CONDITIONS

– IV(B)-16 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

11.0 REMARKS

12.0 OPINION OF VALUES

According to the advice of the Company’s legal adviser on US intellectual properties laws, as the Patents relate to the same system, the USPTO would require any transfer or assignment of the Patents to cover the entire patent portfolio. In addition, the Company can utilize the Patents for commercial use in the US notwithstanding that some of the Patents are still pending approval. Therefore, no separate value is ascribed to individual patent or patent pending approval.

Based on the investigation and analysis stated above and on the appraisal methods employed, we are of the opinion that the fair value of the Patents as at 31 March 2013 is in the sum of HKD 810,000,000 (HONG KONG DOLLARS EIGHT HUNDRED AND TEN MILLION ONLY) . Our opinion is determined on the basis of a valuation model which is based on parameters with reference to market data. Obviously, such market data changed, between the valuation date, 31 December 2012, of our previous report dated 7 January 2013 and the current valuation date, 31 March 2013.

The assumptions in the business plan for the first two years were changed from “one-third and three-fourths of expected capacity of business operation in the first and second year of operation” to “one-third of the expected capacity of business operation for nine months in 2013 and at half of the expected capacity of operation in the following calendar year”, which recognise the delay in marketing and the lapse of 3 months of the economic life of the Patents between the two valuation dates.

– IV(B)-17 –

APPENDIX IV(B) SECOND VALUATION REPORT OF THE PATENTS

The changes in market and reference data also caused the discount rate dropped from 22.77 percent to 22.23 percent, which is determined on the basis of market data: average beta for the Comparables changed from 0.814 to 0.795, market premium changed from 8.752 percent to 8.2586 percent, risk free interest rate changed from 1.757 percent to 1.8486 percent, and the size premium from 3.89 percent to 3.81 percent between the two valuation dates.

Yours faithfully, For and on behalf of Ample Appraisal Limited

Johnny Law K. Y. Mak CPA, CPA(Aust) CFA, CPA Senior Vice President Chief Technical Advisor

– IV(B)-18 –

APPENDIX V(A) LETTERS ON PROJECTION UNDERLYING THE FIRST VALUATION OF THE PATENTS

The following are the letters both dated 7 January 2013 from (1) PAN-CHINA (H.K.) CPA Limited to the Directors confirming it has reviewed the arithmetical accuracy of the discounted cash flow forecast for the First Valuation; and (2) Proton Capital Limited confirming that they are satisfied that the forecast has been made by the Directors with due care, consideration and objectivity and on a reasonable basis, as extracted from the Announcement.

1. LETTER FROM PAN-CHINA (H.K.) CPA LIMITED

==> picture [423 x 40] intentionally omitted <==

7 January 2013

The Board of Directors, Paradise Entertainment Limited, Unit C, 19/F, Entertainment Building, 30 Queen’s Road Central, Hong Kong

Dear Sirs,

LETTER OF COMFORT

We have examined the accounting policies adopted and calculations of the underlying profit forecast (the “Underlying Forecast”) to the business valuation dated 7 January 2013 prepared by Ample Appraisal Limited in respect of the valuation on certain patents (the “Patents”). The Underlying Forecast is regarded by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) and the Securities and Futures Commission as a profit forecast under Rule 14.61 of The Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”) and Rule 11.1(a) of the Code on Takeovers and Mergers (the “Takeovers Code”), respectively.

Responsibilities

The directors of the Company (the “Directors”) are solely responsible for the preparation of the Underlying Forecast including the assumptions, for the purpose of business valuation of the Patents based on present value method. The Underlying Forecast has been prepared using a set of assumptions (the “Assumptions”) that include hypothetical assumptions about future events and management’s actions that are not necessarily expected to occur. Even if the events anticipated occur, actual results are still likely to be different from the Underlying Forecast and the variation may be material. The Directors are responsible for the reasonableness and validity of the Assumptions.

– V(A)-1 –

APPENDIX V(A)

LETTERS ON PROJECTION UNDERLYING THE FIRST VALUATION OF THE PATENTS

It is our responsibility to form an opinion, based on our work on the Underlying Forecast and to report our opinion solely to you, as a body, solely for the purpose of reporting under Rule 14.62(2) of the Listing Rules and Rule 10 of the Takeovers Code and for no other purpose. We have not reviewed, considered or conducted any work on the reasonableness and the validity of the Assumptions and express no opinion on the reasonableness and validity of the Assumptions on which the Underlying Forecast is based. We accept no responsibility to any other person in respect of, arising out of or in connection with our work.

Summary of our work

We conducted our work in accordance with the Hong Kong Standard on Assurance Engagements 3000 “Assurance Engagements Other Than Audits or Review of Historical Financial Information” with reference to the procedures under Auditing Guideline 3.341 “Accountants’ Report on Profit Forecasts”, issued by the Hong Kong Institute of Certified Public Accountants. We examined the consistency of accounting policies adopted and the arithmetical accuracy of the Underlying Forecast. Our work has been undertaken solely to assist the Directors in evaluating whether the Underlying Forecast, so far as the accounting policies and calculations are concerned, has been properly compiled in accordance with the Assumptions made by the Directors. Our work does not constitute any valuation of the Patents.

Opinion

In our opinion, so far as the accounting policies and calculations are concerned, the Underlying Forecast has been properly compiled in accordance with the Assumptions made by the Directors as set out in the announcement of the Company dated 7 January 2013 and is presented on a basis consistent in all material aspects with the accounting policies currently adopted by the Company.

Yours faithfully, For and on behalf of Pan-China (H.K.) CPA Limited Chan Kin Wai Director

– V(A)-2 –

APPENDIX V(A) LETTERS ON PROJECTION UNDERLYING THE FIRST VALUATION OF THE PATENTS

2. LETTER FROM PROTON CAPITAL LIMITED

==> picture [148 x 35] intentionally omitted <==

7 January 2013

The Directors Paradise Entertainment Unit C, 19/F, Entertainment Building, 30 Queen’s Road Central, Hong Kong

Dear Sirs,

We refer to the valuation report dated 7 January 2013 (“ Valuation Report ”) prepared by Ample Appraisal Limited (the “ Valuer ”) in relation to the valuation of the Patents (“ Valuation ”). Unless the context requires otherwise, terms used in this letter have the same meanings as defined in the announcement of Paradise Entertainment Limited dated 7 January 2013.

According to the Valuation Report, the Valuation has been arrived at using discounted cash flow methodology based on the forecast of the future income prepared by the Directors (the “ Underlying Forecast ”). The Projection is regarded as a profit forecast under Rule 11.1(a) of the Takeovers Code and Rule 14.61 of the Listing Rules and is required to be reported on (as set out below) by us pursuant to Rule 10 of the Takeovers Code and Rule 14.62(3) of the Listing Rules. The Underlying Forecast has been compiled by and is the responsibility of the Directors solely.

Furthermore, our report on the qualifications and experience of the Valuer to prepare the Valuation Report is required under Rule 11.1(b) of the Takeovers Code and this letter also constitutes such report from us.

We have reviewed the Valuation Report and discussed with the directors and the management of the Company and the Valuer regarding the Valuation Report, including, in particular, the valuation approach, and bases and assumptions. We have also considered, and relied upon, the letter dated 7 January 2013 addressed to yourselves from Pan-China (H.K.) CPA Limited regarding the accounting policies adopted and the arithmetical accuracy of the Underlying Forecast which stated that the Underlying Forecast, so far as the accounting policies and calculations are concerned, has been properly compiled in accordance with the Assumptions made by the Directors.

– V(A)-3 –

APPENDIX V(A) LETTERS ON PROJECTION UNDERLYING THE FIRST VALUATION OF THE PATENTS

With regard to the qualifications and experience of the Valuer, based on the review work conducted by us, which include reasonableness checks to assess the relevant experience and expertise of the Valuer, review and discussion with the Valuer of the qualifications, experience, expertise and relevant track records of the Valuer, we are satisfied that the Valuer has the qualifications and experience to compile the Valuation Report.

On the basis of the foregoing, we are satisfied that the Underlying Forecast including the bases and assumptions, for which the Directors are solely responsible, have been made after due care and consideration and objectivity, and on a reasonable basis.

Yours faithfully, For and on behalf of Proton Capital Limited Josephine Lau Director – Corporate Finance

– V(A)-4 –

APPENDIX V(B) LETTERS ON PROJECTION UNDERLYING THE SECOND VALUATION OF THE PATENTS

The text of each of the letter from Pan-China, being the Auditor, to the Directors confirming it has reviewed the arithmetical accuracy of the discounted cash flow forecast for the Second Valuation and the letter from Proton Capital, being the Financial Adviser, confirming that they are satisfied that the forecast has been made by the Directors with due care, consideration and objectivity and on a reasonable basis both dated 9 May 2013, for the purpose of, among other things, inclusion in this circular are each reproduced below:

1. LETTER FROM PAN-CHINA (H.K.) CPA LIMITED

==> picture [403 x 38] intentionally omitted <==

9 May 2013

The Board of Directors, Paradise Entertainment Limited, Unit C, 19/F, Entertainment Building, 30 Queen’s Road Central, Hong Kong

Dear Sirs,

LETTER OF COMFORT

We have examined the accounting policies adopted and calculations of the underlying profit forecast (the “Underlying Forecast”) to the business valuation dated 9 May 2013 prepared by Ample Appraisal Limited in respect of the valuation on certain patents (the “Patents”). The Underlying Forecast is regarded by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) and the Securities and Futures Commission as a profit forecast under Rule 14.61 of The Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”) and Rule 11.1(a) of the Code on Takeovers and Mergers (the “Takeovers Code”), respectively.

Responsibilities

– V(B)-1 –

APPENDIX V(B) LETTERS ON PROJECTION UNDERLYING THE SECOND VALUATION OF THE PATENTS

Summary of our work

Opinion

In our opinion, so far as the accounting policies and calculations are concerned, the Underlying Forecast has been properly compiled in accordance with the Assumptions made by the Directors as set out in the circular of the Company dated 9 May 2013 and is presented on a basis consistent in all material aspects with the accounting policies currently adopted by the Company.

Yours faithfully, For and on behalf of Pan-China (H.K.) CPA Limited Chan Kin Wai Director

– V(B)-2 –

APPENDIX V(B) LETTERS ON PROJECTION UNDERLYING THE SECOND VALUATION OF THE PATENTS

2. LETTER FROM PROTON CAPITAL LIMITED

==> picture [148 x 35] intentionally omitted <==

9 May 2013

The Directors Paradise Entertainment Limited Unit C, 19/F, Entertainment Building, 30 Queen’s Road Central, Hong Kong

Dear Sirs,

We refer to the valuation report dated 9 May 2013 (“ Valuation Report ”) prepared by Ample Appraisal Limited (the “ Valuer ”) in relation to the valuation of the Patents (“ Valuation ”). Unless the context requires otherwise, terms used in this letter have the same meanings as defined in the circular of Paradise Entertainment Limited dated 9 May 2013.

We have reviewed the Valuation Report and discussed with the directors and the management of the Company and the Valuer regarding the Valuation Report, including, in particular, the valuation approach, and bases and assumptions. We have also considered, and relied upon, the letter dated 9 May 2013 addressed to yourselves from Pan-China (H.K.) CPA Limited regarding the accounting policies adopted and the arithmetical accuracy of the Underlying Forecast which stated that the Underlying Forecast, so far as the accounting policies and calculations are concerned, has been properly compiled in accordance with the Assumptions made by the Directors.

– V(B)-3 –

APPENDIX V(B) LETTERS ON PROJECTION UNDERLYING THE SECOND VALUATION OF THE PATENTS

Yours faithfully, For and on behalf of Proton Capital Limited Josephine Lau Director – Corporate Finance

– V(B)-4 –

GENERAL INFORMATION

APPENDIX VI

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and are not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

The Directors jointly and severally accept full responsibility for the accuracy of the information contained in this circular (other than those relating to the Vendor) and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular (other than those expressed by the Vendor) have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement in this circular misleading.

The Vendor accepts full responsibility for the accuracy of the information contained in this circular (other than those relating to the Group) and confirm, having made all reasonable enquiries, that to the best of his knowledge, opinions expressed in this circular (other than those expressed by the Group) have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement in this circular misleading.

2. SHARE CAPITAL

The authorised share capital of the Company as at the Latest Practicable Date and following completion of the Capital Reorganisation was and is expected to be as follows:

Authorised: 10,000,000,000 Existing Shares 1,000,000,000,000 New Shares upon completion of the Capital Reorganisation	HK$ 1,000,000,000.000

	1,000,000,000.000

– VI-1 –

GENERAL INFORMATION

APPENDIX VI

The issued share capital of the Company as at the Latest Practicable Date and following completion of Capital Reorganisation and the Acquisition was and is expected to be as follows:

Issued and fully paid: 2,841,444,778 Existing Shares in issue as at the Latest Practicable Date 284,144,477 New Shares in issue immediately upon completion of the Capital Reorganisation 600,000,000 Consideration Shares to be issued upon Completion 884,144,477	HK$ 284,144,477.800

	284,144.477 600,000.000
	884,144.477

All of the Shares, New Shares and Consideration Shares will rank pari passu in all aspects, including all rights as to dividend, voting and interest in capital, among themselves and with all other shares of the Company in issue on the date of issue.

As at the Latest Practicable Date, the Company had 66,000,000 outstanding Share Options granted under the Share Option Scheme and the Convertible Debentures with outstanding principal amount of HK$24,000,000, US$1,000,000 and HK$57,000,000, respectively. Save for the above issued Share Options and Convertible Debentures, no Share, option, warrant, conversion right or any equity or debt securities of the Company was outstanding or was proposed to be issued for cash or otherwise as at the Latest Practicable Date. The Company has not issued any new Shares since 31 December 2012, the end of the last financial year.

The Shares are listed on the Main Board of the Stock Exchange. No part of the equity or debt securities of the Company is listed or dealt in, nor is listing or permission to deal in the Shares or loan capital of the Company being, or proposed to be, sought on any other stock exchange.

– VI-2 –

GENERAL INFORMATION

APPENDIX VI

3. DISCLOSURE OF DIRECTORS’ INTERESTS IN SHARES

As at the Latest Practicable Date, the interests and short positions of each Director and the chief executive of the Company in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)) which were required to be notified to the Company and pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which any such Director or chief executive was taken or deemed to have under such provisions of the SFO) or which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein or which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 to the Listing Rules (the “Model Code”), were as follows:

(i) Long positions in the ordinary Shares of HK$0.10 each in the Company

			Interests in	Interests in
			shares	underlying	Total
	Name of		(other than	shares	interests in	Approximate
	company/		pursuant to	pursuant to	shares/	aggregate
	associated	Capacity/ Nature of	equity	equity	underlying	percentage
Directors	corporation	interests	derivatives)(1)	derivatives(1)	shares	of interests
Mr. Jay Chun	The Company	Beneficial owner/	1,241,600	–	288,208,800	10.14%
		Personal interest
	The Company	Interest of controlled	286,967,200(2)	–
		corporation/ Corporate
		interest
Mr. Shan Shiyong,	The Company	Interest of controlled	260,975,800(3)	–	260,975,800	9.18%
alias, Sin Sai Yung		corporation/ Corporate
		interest

Notes:

(1) Interests in shares and underlying shares stated above represent long positions.
(2) These shares were held by August Profit Investments Limited, a company which is wholly owned by Mr. Jay Chun.
(3) These shares were held by Best Top Offshore Limited, a company which is wholly owned by Mr. Shan Shiyong, alias, Sin Sai Yung.

Save as disclosed in this sub-section (i), as at the Latest Practicable Date, none of the Directors and chief executive of the Company had any other interests or short positions in the Shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which are recorded in the register required to be kept under Section 352 of the SFO or are otherwise notified to the Company and the Stock Exchange pursuant to the Model Code.

(ii) Share Options held by Directors

As at the Latest Practicable Date, there were no outstanding Share Options granted under the Share Option Scheme which were held by the Directors.

– VI-3 –

GENERAL INFORMATION

APPENDIX VI

(iii) Directors’ Rights to Acquire Shares or Debentures

At no time during the year ended 31 December 2012 was the Company or any of its subsidiaries a party to any arrangements which enable the Directors to acquire benefits by means of acquisition of the Shares in, or debentures of, the Company or any other body corporate. In addition, none of the Directors, or their spouse or children under the age of 18 had any right to subscribe for the securities of the Company or had exercised any such right during the year.

4. SUBSTANTIAL SHAREHOLDERS

The interests and short positions of the persons or corporations, other than the Directors and chief executive of the Company, in the Shares or underlying shares of the Company which have been disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO and as recorded in the register required to be kept by the Company under section 336 of the SFO, or who was interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any other member of the Group were as follows:

Long position in shares of the Company

			Approximate
			percentage of
	Nature of	Total interests	the issued
Name	interests	in Shares(1)	share capital
August Profit Investments	Corporate	286,967,200	10.10%
Limited(2)	interest
Best Top Offshore Limited(3)	Corporate	260,975,800	9.18%
	interest

Notes:

(1) All interests in shares stated above represent long positions.
(2) August Profit Investments Limited is a company wholly owned by Mr. Jay Chun, an executive Director and the sole director of August Profit Investments Limited.
(3) Best Top Offshore Limited is a company wholly owned by Mr. Shan Shiyong, alias, Sin Sai Yung, an executive Director and the sole director of Best Top Offshore Limited.

Save as disclosed in this section 4, as at the Latest Practicable Date, the Company had not been notified of any other person who was interested in or had a short position in the Shares or underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO and recorded in the register required to be kept by the Company under section 336 of the SFO.

– VI-4 –

GENERAL INFORMATION

APPENDIX VI

5. MARKET PRICES

The table below shows the closing prices of the Shares as quoted on the Stock Exchange on (i) the last trading day on which dealings of the Shares took place in each of the calendar months during the period commencing six months immediately preceding the date of the Announcement and ending on the Latest Practicable Date; (ii) the Last Trading Day; and (iii) the Latest Practicable Date.

	Closing
	price of
Date	Shares
	HK$
31 May 2012	0.065
29 June 2012	0.064
31 July 2012	0.070
31 August 2012	0.086
28 September 2012	0.080
31 October 2012	0.080
2 November 2012 (being the Last Trading Day)	0.078
30 November 2012	Suspended
31 December 2012	Suspended
31 January 2013	0.081
28 February 2013	0.094
28 March 2013	0.098
30 April 2013	0.097
Latest Practicable Date	0.096

The highest and lowest closing market prices of the Shares as quoted on the Stock Exchange during the period commencing on 8 July 2012 (being six months immediately prior to the date of the Announcement) and ending on the Latest Practicable Date were HK$0.109 and HK$0.065 per Share, respectively.

Trading in the Shares was suspended during the period from 5 November 2012 to 7 January 2013 pending the release of the Announcement.

6. ADDITIONAL DISCLOSURE OF INTERESTS

As at the Latest Practicable Date:

(a) none of the Directors was given any benefit as compensation for loss of office or otherwise in connection with the Acquisition and/or the Whitewash Waiver;
(b) save for the Agreement, none of the Directors has entered into any agreement or arrangement with any other person which is conditional on or dependent upon the outcome of the Acquisition and/or the Whitewash Waiver or otherwise connected with the Acquisition and/or the Whitewash Waiver; and

– VI-5 –

GENERAL INFORMATION

APPENDIX VI

(c) save for the Agreement, none of the Directors had any material personal interest in any material contract entered into by the Company or the Vendor or parties acting in concert with him.

7. SHAREHOLDINGS AND DEALINGS

As at the Latest Practicable Date:

(a) save as disclosed in the section headed “3. Disclosure of Directors’ Interests in Shares” in this appendix, no Shares, convertible securities, warrants, options and derivatives of the Company were owned, controlled, borrowed or lent by the Directors;
(b) no Shares, convertible securities, warrants, options and derivatives of the Company were owned or controlled by a subsidiary of the Company or by a pension fund of any member of the Group or by any adviser to the Company as specified in class (2) of the definition of associate under the Takeovers Code;
(c) no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Company or with any person who is an associate (as defined in the Takeovers Code) of the Company by virtue of classes (1), (2), (3) and (4) of the definition of associate under the Takeovers Code; and
(d) no Shares, convertible securities, warrants, options or derivatives of the Company was managed on a discretionary basis by fund managers connected with the Company.

During the period beginning six months immediately prior to the date of the Announcement and up to the Latest Practicable Date:

(a) none of the Directors had dealt for value in the Shares, convertible securities, warrants, options and derivatives of the Company;
(b) none of (i) the subsidiaries of the Company; (ii) the pension fund of any member of the Group; and (iii) the advisers to the Company as specified in class (2) of the definition of associate under the Takeovers Code had dealt in the Shares, convertible securities, warrants, options and derivatives of the Company; and
(c) no fund manager connected with the Company had dealt in the Shares, convertible securities, warrants, options and derivatives of the Company.

8. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered into any service contract with the Company or any of its subsidiaries or associated companies, which:

(i) (including both continuous and fixed term contracts) has been entered into or amended within 6 months before the date of the Announcement;

– VI-6 –

GENERAL INFORMATION

APPENDIX VI

(ii) is a continuous contract with a notice period of 12 months or more;
(iii) is a fixed term contract with more than 12 months to run irrespective of the notice period; or
(iv) is not determinable by the Group within one year without payment of compensation other than statutory compensation.

9. DIRECTORS’ INTERESTS IN ASSETS / CONTRACTS AND OTHER INTERESTS

Save for the Agreement, as at the Latest Practicable Date,

(i) none of the Directors had any direct or indirect interests in any assets which had been, since 31 December 2012, being the date to which the latest published audited consolidated accounts of the Group were made up, acquired or disposed of by, or leased to the Company or any member of the Group (including any company which will become a subsidiary of the Company by reason of an acquisition which has been agreed or proposed since 31 December 2012, being the date to which the latest published audited consolidated accounts of the Group were made up), or were proposed to be acquired or disposed of by, or leased to, the Company or any member of the Group (including any company which will become a subsidiary of the Company by reason of an acquisition which has been agreed or proposed since 31 December 2012, being the date to which the latest audited consolidated accounts of the Group were made up); and
(ii) none of the Directors was materially interested in any contract or arrangement entered into by the Company or any member of the Group (including any company which will become a subsidiary of the Company by reason of an acquisition which has been agreed or proposed since 31 December 2012, being the date to which the latest audited consolidated accounts of the Group were made up), which contract or arrangement was subsisting as at the Latest Practicable Date and which was significant in relation to the business of the Group (including any company which will become subsidiary of the Company by reason of an acquisition which has been agreed or proposed since 31 December 2012, being the date to which the latest audited consolidated accounts of the Group were made up).

10. COMPETING INTERESTS

As at the Latest Practicable Date, save for the Excluded Patents which details are set out in the sub-section headed “Information on the Patents” in the Letter from the Board on page 18 of this circular, none of the Directors nor their respective associates was interested in any business which competed or was likely to compete, either directly or indirectly, with the business of the Group.

– VI-7 –

GENERAL INFORMATION

APPENDIX VI

11. MATERIAL CONTRACTS

Set out below are the contracts (not being contracts entered into in the ordinary course of business carried on or intended to be carried on by the Company or any of its subsidiaries) entered into by any member of the Group within the two years immediately preceding the date of Announcement and up to the Latest Practicable Date, which are or may be material:

(a) the sale and purchase agreement entered into between LifeTec (Holdings) Limited, a direct wholly-owned subsidiary of the Company, and Shanghai MingJia Fine Chemicals Co. Ltd. on 2 April 2012, whereby LifeTec (Holdings) Limited agreed to sell and Shanghai MingJia Fine Chemicals Co. Ltd. agreed to purchase the entire issued share capital of LifeTec Pharmaceutical Limited for a nominal consideration of HK$7.80; and
(b) the Agreement.

12. LITIGATION

Save as disclosed in points (a) and (b) in this section, as at the Latest Practicable Date, none of the members of the Group was engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance was known to the Directors to be pending or threatened by or against any member of the Group:

(a) On 15 September 1999, LifeTec Enterprise Limited (“ LifeTec Enterprise ”), a subsidiary of the Company, was named as a defendant in a High Court action in respect of an alleged failure to repay a loan in an amount of HK$20,000,000. The plaintiff took out an application for summary judgement under Order 14 of the Rules of the High Court on 6 October 1999 and in the hearing of the application on 25 October 1999, LifeTec Enterprise was given unconditional leave to defend the plaintiff’s claim in the above action. LifeTec Enterprise filed its defence on 8 November 1999. The plaintiff should have filed its reply, if any, 14 days thereafter. In view that LifeTec Enterprise had not received any reply from the plaintiff and the time for the plaintiff to file the same has long expired, the Directors consider that the pleadings should be deemed to be closed. The Directors believe that there is no ground for the above claim and that it will not have any material adverse impact on the Group’s operations; and
(b) the legal proceedings between the Group and Shuffle Master in Macau in relation to Macau Patent I/150 and Macau Patent I/380, the details of which are set out on pages 19 and 20 of the “Letter from the Board” in this circular.

– VI-8 –

GENERAL INFORMATION

APPENDIX VI

13. QUALIFICATION OF EXPERTS AND CONSENTS

The following sets out the qualifications of the experts who have given opinions or advice in this circular:

Name

Proton Capital

Nuada

Qualification

a licensed corporation to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO

a licensed corporation to carry out Type 6 (advising on corporate finance) regulated activity under the SFO

Pan-China Certified Public Accountants Ample Appraisal Limited independent qualified valuer

As at the Latest Practicable Date, each of the above experts:

(a) did not have any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group;
(b) did not have any direct or indirect interest in any assets which had been acquired or disposed of by or leased to any member of the Group or were proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2012, being the date to which the latest published audited consolidated accounts of the Group were made up; and
(c) had given and had not withdrawn its written consent to the issue of this circular with the inclusion of and references to its name, letter and/or report in the form and context in which they respectively appear.

14. GENERAL

(a) The registered address of the Company is situated at Clarendon House, 2 Church Street, Hamilton HM 12, Bermuda and its principal place of business in Hong Kong is Unit C, 19/F., Entertainment Building, 30 Queen’s Road Central, Hong Kong.
(b) The address of Mr. Jay Chun is Unit C, 19/F., Entertainment Building, 30 Queen’s Road Central, Hong Kong. August Profit Investments Limited, being Mr. Jay Chun’s concert party and whose registered office is at the offices of Offshore Incorporations Limited, P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands, was a company wholly-owned by Mr. Jay Chun as at the Latest Practicable Date. Mr. Jay Chun was also the sole director of August Profit Investments Limited as at the Latest Practicable Date.

– VI-9 –

GENERAL INFORMATION

APPENDIX VI

(c) The Company’s Hong Kong share registrar and transfer office is Tricor Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(d) The Chief Financial Officer and Company Secretary of the Company is Ms. Ho Suet Man Stella who is an associate member of Hong Kong Institute of Certified Public Accountants.
(e) The registered address of Proton Capital is situated at Suites 06-07, 28th Floor, Shui On Centre, 6-8 Harbour Road, Wanchai, Hong Kong.
(f) The registered address of Nuada is at 19/F, BLINK, 111 Bonham Strand, Sheung Wan, Hong Kong.
(g) No agreement, arrangement or understanding has been entered into by the Vendor or his concert parties for the transfer, charge or pledge by any of them to any other person of any Consideration Shares to be issued under the Agreement.
(h) The English text of this circular shall prevail over the Chinese text.

15. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the Company’s head office and principal place of business in Hong Kong at Unit C, 19/F., Entertainment Building, 30 Queen’s Road Central, Hong Kong during normal business hours from 9:00 a.m. to 5:00 p.m. on any week day (except Saturdays, Sundays and public holidays), and on the website of the Company (www.hk1180.com) and the SFC (www.sfc.hk) from the date of this circular until the date of the SGM:

(a) the Agreement;
(b) the memorandum of association and bye-laws of the Company;
(c) the annual reports of the Company for each of the two financial years ended 31 December 2012;
(d) the letter from the Board, the text of which is set out on pages 9 to 52 of this circular;
(e) the letter from the Independent Board Committee to the Independent Shareholders, the text of which is set out on pages 53 to 54 of this circular;
(f) the letter of advice from the Independent Financial Adviser, the text of which is set out on pages 55 to 73 of this circular;
(g) the unaudited pro forma financial information of the Group after the Capital Reorganisation and the Acquisition as set out in Appendix III to this circular;

– VI-10 –

GENERAL INFORMATION

APPENDIX VI

(h) the First Valuation Report and the Second Valuation Report of Ample Appraisal Limited as set out in Appendices IV(A) and IV(B) to this circular;
(i) the letters in relation to the projection underlying the valuation of the Patents issued by Pan-China and Proton Capital dated 7 January 2013 and 9 May 2013, the texts of which are set out in Appendices V(A) and V(B) to this circular;
(j) the written consents referred to in the section headed “Experts and consents” in this appendix; and
(k) the material contracts referred to in the section headed “Material contracts” in this appendix.

– VI-11 –

NOTICE OF SGM

**PARADISE ENTERTAINMENT LIMITED 滙彩控股有限公司[*]**

(Incorporated in Bermuda with limited liability)

(Stock Code: 1180)

NOTICE IS HEREBY GIVEN that a special general meeting (the “Meeting”) of Paradise Entertainment Limited (the “Company”) will be held at Unit C, 19th Floor, Entertainment Building, 30 Queen’s Road Central, Hong Kong on Monday, 3 June 2013 at 10:00 a.m. for the following purposes:

SPECIAL RESOLUTION

“ THAT conditional upon (i) compliance with the relevant procedures and requirements under Bermuda laws and the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited to effect the Capital Reorganisation (as defined below); and (ii) The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) granting the listing of, and permission to deal in, the new shares (the “ New Shares ”) of the Company arising from the Capital Reorganisation (as defined below), and with effect from the business day immediately following the date on which this resolution is passed:
(a) every ten (10) issued existing shares of HK$0.10 each in the share capital of the Company be consolidated into one (1) consolidated share of HK$1.00 (the “ Consolidated Shares ”) each (the “ Share Consolidation ”);
(b) the nominal value of each of the issued Consolidated Shares be reduced from HK$1.00 to HK$0.001 by cancelling HK$0.999 paid up capital on each of the issued Consolidated Shares (the “ Capital Reduction ”);
(c) such amount as the directors of the Company (the “ Directors ”) think fit standing to the credit of the share premium account of the Company be reduced (the “ Share Premium Reduction ”);
(d) the credit arising from the Capital Reduction and the Share Premium Reduction be transferred to the contributed surplus account of the Company within the meaning of the Companies Act 1981 of Bermuda (as amended from time to time) (the “ Companies Act ”);
(e) the Directors be authorised to apply the entire amount standing to the credit of the contributed surplus account of the Company within the meaning of the Companies Act in such manner as they consider appropriate (including but not limited to setting off against the accumulated losses of the Company, subject to compliance with the Companies Act and the bye-laws of the Company) (the “ Authorisation ”);

* for identification purposes only

– SGM-1 –

NOTICE OF SGM

(f) each authorised but unissued existing share of HK$0.10 in the share capital of the Company be subdivided into 100 new shares of HK$0.001 each (the “ Share Subdivision ”, together with the Share Consolidation, Capital Reduction and Share Premium Reduction, the “ Capital Reorganisation ”); and
(g) any one Director be and is authorised generally to do all such acts, deeds and things as they shall, in their absolute discretion, deem appropriate to effect and implement the Capital Reorganisation and the Authorisation.”

ORDINARY RESOLUTIONS

“ THAT :
(a) subject to the passing of special resolution number 1 above, the sale and purchase agreement (the “ Agreement ”) dated 2 November 2012 (as supplemented by two supplemental agreements dated 7 January 2013 and 18 March 2013, respectively) entered into between Solution Champion Limited, a wholly-owned subsidiary of the Company (the “ Purchaser ”) and Mr. Jay Chun (the “ Vendor ”) in relation to the sale and purchase (the “ Acquisition ”) of five approved patents and six patents applications pending approval in the United States of America in relation to a betting terminal system (the particulars of which are set out in the Company’s circular dated 9 May 2013), at a consideration of HK$740,000,000, to be satisfied by cash, the issue of the Promissory Note (as defined below) and the issue and allotment of 600,000,000 New Shares (the “ Consideration Shares ”), and the transactions contemplated thereunder, be and is hereby approved, confirmed and ratified;
(b) subject to completion of the Acquisition, the issue of the promissory note (the “ Promissory Note ”) in the principal amount of HK$200,000,000 by the Company to the Vendor in accordance with the terms of the Agreement be and is hereby approved;
(c) subject to completion of the Acquisition and the Listing Committee of the Stock Exchange having granted the listing of, and permission to deal in, the Consideration Shares, the issue and allotment of the Consideration Shares to the Vendor or his nominee (the “ Specific Mandate ”) be and is hereby approved. The Specific Mandate is in addition to, and shall not prejudice nor revoke any general or specific mandate(s) which has/have been granted or may from time to time be granted to the Directors prior to the passing of this resolution; and
(d) any one Director be and is authorised generally to do all such acts, deeds and things as they shall, in their absolute discretion, deem appropriate to give effect to the Agreement and the transactions contemplated thereunder.”

– SGM-2 –

NOTICE OF SGM

3. “ THAT :

(a) the whitewash waiver to be granted by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission (or any of his delegates) pursuant to Note 1 on Dispensations from Rule 26 of the Hong Kong Code on Takeovers and Mergers (the “ Whitewash Waiver ”) to waive the obligation of the Vendor and parties acting in concert with him to make a mandatory general offer for all the shares of the Company not already owned or agreed to be acquired by them pursuant to Rule 26 of the Hong Kong Code on Takeovers and Mergers as a result of the issue and allotment of the Consideration Shares to the Vendor be and is hereby approved; and
(b) any one Director be and is authorised generally to do all such acts, deeds and things as they shall, in their absolute discretion, deem appropriate to give effect to any matters relating to or in connection with the Whitewash Waiver.”

By the Order of the Board Paradise Entertainment Limited Stella Ho Company Secretary

Hong Kong, 9 May 2013

Notes:

A form of proxy to be used for the meeting is enclosed.
A shareholder entitled to attend and vote at the Meeting is entitled to appoint one or more proxies to attend and, on a poll, vote on his/her behalf.
In order to be valid, the form of proxy together with the power of attorney or other authority (if any) under which it is signed or a notarially certified copy of that power or authority, must be deposited at the branch share registrar of the Company in Hong Kong, Tricor Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding the meeting or any adjournment thereof. Completion and return of a form of proxy will not preclude shareholders from attending the Meeting and voting in person should they so desire.
In the case of joint holders of any share, any one of such persons may vote at the Meeting, either personally or by proxy, in respect of such share as if he was solely entitled thereto, but if more than one of such joint holders is present at the Meeting, personally or by proxy, that one of the said persons so present whose name stands first on the register of members in respect of such share shall alone be entitled to vote in respect thereof.
A proxy need not be a shareholder of the Company but must attend the Meeting in person to represent the shareholder.

– SGM-3 –

AI assistant

Paradise Entertainment Limited — Proxy Solicitation & Information Statement 2013

49748_rns_2013-05-08_53e2258d-ca16-4498-8a2a-18790a4e0641.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

PARADISE ENTERTAINMENT LIMITED 滙彩控股有限公司[*]

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF THE PATENTS INVOLVING ISSUE OF CONSIDERATION SHARES AND PROMISSORY NOTE;

Financial Adviser to the Company

CONTENTS

EXPECTED TIMETABLE

EXPECTED TIMETABLE

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

PARADISE ENTERTAINMENT LIMITED 滙彩控股有限公司[*]

(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

IN RELATION TO THE ACQUISITION OF THE PATENTS INVOLVING ISSUE OF CONSIDERATION SHARES AND PROMISSORY NOTE;

(2) APPLICATION FOR WHITEWASH WAIVER; (3) PROPOSED CAPITAL REORGANISATION AND CHANGE OF BOARD LOT SIZE; AND (4) NOTICE OF SGM

INTRODUCTION

LETTER FROM THE BOARD

1. THE AGREEMENT

Date

Parties

Assets to be acquired

Consideration

LETTER FROM THE BOARD

Terms of the Promissory Note

LETTER FROM THE BOARD

Conditions Precedent

Completion

Consideration Shares

Mandate to issue the Consideration Shares

Application for Listing

INFORMATION ON THE PATENTS

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

REASONS FOR THE ACQUISITION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

DUE DILIGENCE

INFORMATION ON THE GROUP

BUSINESS MODEL

Stage one: Product design and customization

LETTER FROM THE BOARD

Stage two: Production process

Stage 3: Selling and distribution process

Human resources

Revenue

LETTER FROM THE BOARD

Costs

BUSINESS PLAN

(iv) Building up of its US sales and marketing team

FINANCIAL EFFECTS OF THE ACQUISITION

FINANCIAL AND TRADING PROSPECT OF THE ENLARGED GROUP

INDUSTRY OVERVIEW

Historical Perspective and Prospects of the US Economy

Gaming Equipment Industry in the US

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Opportunities and Challenges

Competition in the US

Entry Barriers

Major Market Suppliers/Competitors

Customers

Future Trends

LETTER FROM THE BOARD

RISK FACTORS

The approved Patents may be subject to infringement by competitors and third parties

The Electronic Gaming Machine is a new product with no track record in the US

Changes in economic conditions of the US may adversely affect the Group

Competition in the US market is intense

The Group is dependent on a limited number of suppliers, which in turn exposes it to risks associated with product quality, delivery schedules and production capacity availability

The business model which is to be adopted in the US is a replication of the business model in Macau and may not perform

Changes in technology may result in additional demand on the hardware and technical features of the Electronic Gaming Machines

Other risks in relation to the Electronic Gaming Machines and the Systems include hacking, software and hardware errors and fraudulent manipulation

Changes in government regulations or policies in the industry may affect the business and the business plan of the Group

Failure to attract, retain and motivate key employees may adversely affect the Group’s ability to compete

Paradise Entertainment Limited Proxy Solicitation & Information Statement 2013

**PARADISE ENTERTAINMENT LIMITED 滙彩控股有限公司[*]**

**PARADISE ENTERTAINMENT LIMITED 滙彩控股有限公司[*]**

**PARADISE ENTERTAINMENT LIMITED 滙彩控股有限公司[*]**