PegBio Co., Ltd. — Capital/Financing Update 2000

Nov 3, 2000

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this announcement, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

HUNG FUNG GROUP HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

PROPOSED ISSUE OF HK$3 MILLION CONVERTIBLE NOTE RECENT MOVEMENTS IN SHARE PRICE

UPDATE ON PROGRESS OF MATTERS REFERRED TO IN

THE ANNOUNCEMENT DATED 16TH OCTOBER 2000 CHANGE IN DIRECTORSHIP

The Company has entered into the Agreement on 30th October 2000 with the Subscriber pursuant to which the Company has agreed to conditionally issue, and the Subscriber has agreed to subscribe for convertible note with a principal amount of HK$3,000,000.

The Note is convertible into Shares at an initial conversion price of HK$0.015 per Share, subject to adjustment in accordance with the terms and conditions of the Notes. Assuming that the entire principal amount of HK$3 million of the Notes is converted at the initial conversion price, a total of 200,000,000 Shares will be issued, representing approximately 8.05% and 7.45% of the existing and enlarged issued share capital of the Company respectively.

The net proceeds from the issue of the Note are estimated to be approximately HK$2.8 million which will be used as general working capital.

Completion of the subscription for the Note is conditional upon the fulfilment of the conditions described below.

This announcement is also made at the request of the Stock Exchange for the purpose of clarifying the recent movements in the price of Shares.

Since publication of the Last Announcement, the Company has not received any information from Mr. Chan Chun Hung, the previous chairman of the Company, in relation to the progress of the investigation conducted by ICAC as referred to in the Last Announcement.

Ms. Wu Ching Yan, Stina has resigned as Director and Mr. Chan Chun Hong, Thomas has been appointed as Director both with effect from 30th October 2000.

At the request of the Company, trading in shares of the Company was suspended with effect from 10:00 a.m. on 30th October 2000 pending release of this announcement. An application has been made for resumption of trading of the Shares with effect from 10:00 a.m. on 3rd November 2000.

THE AGREEMENT

Date of Agreement:

30th October 2000

Parties:

Issuer : Hung Fung Group Holdings Limited, a company incorporated in Bermuda with limited liability whose shares are listed on the Stock Exchange

Subscriber : Join Asia Enterprises Limited, a wholly owned subsidiary of Wang On Group Limited, a company incorporated in Bermuda with limited liability whose shares are listed on the Stock Exchange. The Subscriber is an independent third party not connected with the Company, the directors, chief executive and substantial shareholder of the Company or any of its subsidiaries or any of their respective associates.

The Note is neither transferable nor assignable.

Principal Terms of the Note:

The principal terms of the Note are summarised below:

Principal Amount

HK$3 million payable in full in cash on completion of the Agreement

Maturity Date

Unless previously converted, the Note will mature and will be redeemed by the Company, at par, on the 2nd anniversary of the date of issue of the Note.

Interest

The Note will bear interest from the date of issue at five (5)% per annum which will be payable on maturity of the Note.

Conversion

The outstanding principal amount of the Note may be converted at any time prior to its maturity date, at the discretion of the subscriber of the Note. Assuming that the entire principal amount of HK$3 million of the Note is converted at the initial conversion price of HK$0.015 per Share, a total of 200,000,000 Shares will be issued, representing approximately 8.05% and 7.45% of the existing and enlarged issued share capital of the Company respectively.

The Shares which may fall to be issued on conversion of the Note will be issued under the general mandate to issue Shares granted to the Directors at the annual general meeting of the Company held on 28th September 2000.

Ranking

The new Shares which may fall to be issued on conversion of the Note will rank pari passu in all respects with the Shares in issue at the time of conversion of the Note.

Conversion price

The initial conversion price of HK$0.015 per Share, subject to adjustment in accordance with the terms and conditions of the Note, has been determined after arm's length negotiations between the parties.

The initial conversion price represents a discount of approximately 31.8% to the closing price of HK$0.022 per Share as quoted on the Stock Exchange on 27th October 2000 and a discount of approximately 13.3% to the average closing price of approximately HK$0.0173 per Share for the last ten trading days up to and including 27th October 2000.

Conditions to completion:

Completion of the Agreement is conditional upon the satisfaction of the following:

1. if required, the Bermuda Monetary Authority having granted its permission for the issue of the Notes and the free transferability of the Shares which may fall to be issued on conversion of the Notes; and

2. the Listing Committee of the Stock Exchange having granted (either unconditionally or subject to conditions to which neither the Company nor the Subscriber objects) listing of and permission to deal in the Shares which may fall to be issued on conversion of the Note.

Completion:

Subject to the fulfilment of the conditions described above, completion of the Agreement will take place on the third business day following the date on which all the conditions are fulfilled.

If the conditions set out above are not fulfilled on or before 30th April 2001 or such later date as the Company and the Subscriber may agree, the Agreement will lapse and the parties will be released from all obligations under the Agreement, save for any antecedent breaches of the Agreement.

Application for Listing:

The Company will not make any application for the listing of, and permission to deal in, the Note on the Stock Exchange or any other stock exchange.

The Company will make an application to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Shares which may fall to be issued on conversion of the Notes.

Shareholdings in the Company:

As at the date of this announcement, so far as the Directors were aware, Baxter Resources S.A., a company controlled by Chan Chun Hung and Wong Kin Ching who respectively were directors of the Company until 11th October 2000, is interested in approximately 62.8% of the Company's issued share capital and there was no person who was beneficially interested in 10% or more of the existing issued share capital of the Company. Assuming that the Note is fully converted, Baxter Resources S.A. will be beneficially interested in approximately 58.12% of the issued share capital of the Company as enlarged by Shares to be issued on full conversion of the Note.

Principal Businesses of the Company and intended use of proceeds:

The Company is an investment holding company and its subsidiaries are principally engaged in the design, manufacture and sale of a wide range of toys. The net proceeds from the issue of the Note is estimated to be approximately HK$2.8 million. The Company intends to apply such net proceeds as general working capital. The Directors consider that the issue of the Note, the terms and conditions of the Agreement and the Note are fair and reasonable and in the best interest of the Company.

RECENT MOVEMENTS IN SHARE PRICE

This announcement is also made at the request of the Stock Exchange for the purpose of clarifying the recent movements in the price of Shares. The Directors have noted the increase in the price of Shares on 27th October 2000 and wish to state that save as the matters disclosed herein, the Directors are not aware of any reasons for the increase in the price of Shares on 27th October 2000.

According to a recent teletext announcement issued by the Stock Exchange, the Stock Exchange has received an initial disclosure notice from Kingston Group Holdings Limited ("Kingston Group") reporting that Kingston Group had granted a loan to Baxter Resources S.A. upon security of:

1. ordinary shares for 62.70% of the issued share capital of the Company; and

2. warrants for subscribing shares of and in the issued share capital of the Company.

The Directors also wish to state that all the banks of the Group have recently suspended or terminated their credit facilities granted to the Group and some of the banks have demanded for repayment of all outstanding debts owed by the Group to them. Based on the available information, the Directors estimate that the total bank debts and amounts due to various leasing companies as of 19th October 2000 amounted to approximately HK$126 million.

As a result of two meetings among the representatives of the Company and most of its banks on 31st October 2000, the banks have indicated that a steering committee will be formed in relation to the outstanding debts owed by the Group to the banks and an independent investigating accountants will be engaged to conduct a special investigation into the books and records including cash flow movements, and a business review, of the Group. The outcome of the special investigation will be reported to the Company and the relevant banks. The Company is currently in negotiation with its banks with a view to enter into a standstill agreement. The Company is also considering expediting collection of part of the Group's accounts receivable in an aggregate sum of approximately HK$69 million for the purpose of resolving the Group's current cash flow problems.

The Directors also confirm that save as disclosed above, there are no negotiations or agreements relating to intended acquisitions or realisations which are discloseable under paragraph 3 of the Listing Agreement, neither are the Directors aware of any matter discloseable under the general obligation imposed by paragraph 2 of the Listing Agreement, which is or may be of a price-sensitive nature.

UPDATE ON PROGRESS OF MATTERS

Since publication of the Last Announcement, the Company has not received any information from Mr. Chan Chun Hung in relation to the progress of the investigation conducted by ICAC as referred to in the Last Announcement.

The Company is in the course of preparing the Group's management accounts for the month ended on 31st August 2000. For information and reference only, extracts of the latest available unaudited consolidated management accounts of the Group for the period from 1st April 2000 to 31st July 2000 are set out below:

(Unaudited)

Management Accounts

4-month period

from 1/4/2000 to 31/7/2000

HKD'000

Turnover 84,451

Profit before Tax 2,458

Non-Current Assets 232,740

Current Assets

Inventories 21,495

Accounts Receivable 77,471

Cash and Bank 66,067

Current Liabilities

Bank Loans and Finance Lease 105,422

Accounts Payable 49,016

Non-Current Liabilities

Long Term Bank Loans 4,510

Long Term Finance Lease Payable 1,080

Deferred Tax 4,300

Save Ms. Wu Ching Yan, Stina's resignation mentioned below, senior and key personnel of various departments of the Company remain in office and the various departments and the factories in the PRC continue to be in operation. As at the date of this announcement, the Group has cash and bank balances in aggregate of approximately HK$1 million. The Directors have noted that the Group's cash and bank balances have reduced from HK$66,067,000 to approximately HK$1 million over the past three months. One of the purposes of the special investigation mentioned above will be to find out the reasons for the reduction in the Group's cash and bank balances. The Directors (including the independent non-executive Directors) will review the report of the special investigation and take appropriate actions accordingly, and such actions may include the formation of an independent board committee comprising the independent non-executive Directors to conduct any further investigation it may consider appropriate.

Having considered the Group's cash and bank balances, the net proceeds from issue of the Note, the financial position of the Group as per its management accounts up to 31st July 2000 and that the Group's various departments and factories in the PRC continue to be in operation, the Directors believe that the Company has sufficient working capital for its operation and the Company is carrying out a sufficient level of operations or has tangible assets of sufficient value to warrant the continued listing of the Company's securities.

CHANGE IN DIRECTORSHIP

The Directors announces that Ms. Wu Ching Yan, Stina has resigned as executive director of the Company with effect from 30th October 2000 but will remain as the accounting manager of the Company.

The Directors also announces that Mr. Chan Chun Hong, Thomas, a director of Wang On Group Limited, has been appointed as an executive director of the Company with effect from 30th October 2000 and is independent of and not connected with any of the substantial shareholders, Mr. Chan Chun Hung, Ms. Wong Kin Ching and Ms. Wong Wan Kuen who were the executive directors of the Company until 11th October 2000, or chief executive of the Company or any of its subsidiaries and their respective associates. Mr. Thomas Chan is not in any way connected with Mr. Chan Chun Hung.

SUSPENSION OF TRADING OF SHARES

At the request of the Company, trading in Shares was suspended with effect from 10:00 a.m. on 30th October 2000 pending release of this announcement. An application has been made for resumption of trading of the Shares with effect from 10:00 a.m. on 3rd November 2000.

Investors are strongly advised to exercise caution when dealing in securities of the Company. Further announcement will be made on the progress of the case, the special investigation and the Company's negotiation with the banks.

Definitions:

"Agreement" the conditional agreement entered into between the Company and the Subscriber on 30th October 2000 in respect of the issue of the Note

"associates" has the meaning ascribed thereto under the Listing Rules

"Company" Hung Fung Group Holdings Limited, a company incorporated in Bermuda with limited liability, the Shares of which are listed on the Stock Exchange

"Directors" the directors of the Company

"Group" the Company and its subsidiaries

"ICAC" Independent Commission Against Corruption

"Last Announcement" the Company's announcement dated 16th October 2000

"Listing Rules" Rules Governing the Listing of Securities on the Stock Exchange

"Note" the convertible loan note in the aggregate principal amount of HK$3 million to be issued by the Company subject to and in accordance with the Agreement

"PRC" the People's Republic of China

"Shares" issued ordinary shares of HK$0.01 each in the capital of the Company

"Stock Exchange" The Stock Exchange of Hong Kong Limited

By Order of the Board of

Hung Fung Group Holdings Limited

Tam Sun Wing

Chairman

Hong Kong, 2nd November 2000

Please also refer to the published version of this announcement in the Hong Kong iMail