PegBio Co., Ltd. — Capital/Financing Update 2002

Feb 25, 2002

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 Vision Century Group Limited

(incorporated in Bermuda with limited liability) (incorporated in the British Virgin Islands with limited liability)

PROPOSED DEBT RESTRUCTURING OF

HUNG FUNG GROUP HOLDINGS LIMITED

INVOLVING A SUBSCRIPTION OF NEW SHARES,

AN OPEN OFFER WITH ASSURED ALLOTMENTS OF THREE OFFER SHARES

FOR EVERY TWO EXISTING SHARES HELD,

COMPROMISE OF DEBTS,

APPLICATION FOR A WHITEWASH WAIVER

AND

INCREASE IN AUTHORISED SHARE CAPITAL

• The Group, the Investor, the Bank Group, the Coordinating Agent, Huang Worldwide and the Guarantor executed the Compromise Agreement on 1st February, 2002 to effect the Restructuring Proposal. The Company and the Investor have also entered into the Subscription Agreement and the Underwriting Agreement as part of the Restructuring Proposal. • Pursuant to the Restructuring Proposal: (i) approximately HK$67.3 million of new capital in the form of cash will be injected into the Company by the Investor and Qualifying Shareholders; (ii) the Total Compromised Debt owed by the Group to the Bank Group outstanding as at Completion will be discharged and the Guarantees given by the Group in favour of the Bank Group in respect of the Total Compromised Debt will be discharged and released upon Completion, in consideration of (1) the repayment in cash of approximately HK$20.0 million by the Group to the Bank Group; and (2) issue by the Company to the Bank Group of the 3-year Convertible Bonds in the principal amount of HK$6.5 million; (iii) the Investor will acquire control of the Company; (iv) the financial position of the Group will be significantly improved; (v) trading in the Shares on the Stock Exchange will be resumed; and (vi) Qualifying Shareholders will have an opportunity to participate in the recovery of the Group through the Open Offer. The Investor intends that the Group should maintain its existing toys manufacturing and distribution business. The Group will endeavour to develop and strengthen its core business if suitable opportunities arise.

WARNING: THE RESTRUCTURING PROPOSAL IS CONDITIONAL The Restructuring Proposal is conditional upon, among others, (i) passing of ordinary resolutions at a general meeting of Shareholders to approve the Open Offer, the issue of the Convertible Bonds (including issue of Conversion Shares pursuant to conversion of the Convertible Bonds), the Subscription, the Waiver and the Creeper Authorisation as well as increase in authorised share capital; (ii) the grant of the Waiver by the Executive to the Investor; (iii) resumption of trading of the Shares on the Stock Exchange; and (iv) listing approval being obtained for the Subscription Shares, the Conversion Shares and the Offer Shares. The Investor and the Company's controlling shareholder who is currently Baxter Resources S.A. ("Baxter") and their respective associates and concert parties are required to abstain from voting on the ordinary resolutions in respect of the Subscription, the Compromise Agreement, the Open Offer, the Waiver and the Creeper Authorisation. The ordinary resolution as regards the Waiver and the Creeper Authorisation will be taken by poll in accordance with the Code. Trading of Shares has been suspended since 22nd January, 2001 and will remain so in the meantime. The Company will submit to the Stock Exchange a Resumption Proposal, which is subject to approval by the Listing Committee of the Stock Exchange, as soon as possible following publication of this announcement. Further announcement will be made as and when appropriate. The release of this announcement does not indicate that the Restructuring Proposal will be successfully implemented and completed or the Resumption Proposal will be approved by the Listing Committee of the Stock Exchange. In the event that the Resumption Proposal to be submitted is not approved by the Listing Committee of the Stock Exchange, the Restructuring Proposal will not be completed.

THE RESTRUCTURING PROPOSAL

On 1st February, 2002, the Group, the Investor, the Bank Group, the Coordinating Agent, Huang Worldwide and the Guarantor executed the Compromise Agreement and the Company and the Investor executed the Subscription Agreement and the Underwriting Agreement to effect the Restructuring Proposal. The Restructuring Proposal involves:

(i) the subscription of 3,000,000,000 Subscription Shares at HK$0.01 per Subscription Share by the Investor, at an aggregate subscription price of HK$30.0 million;

(ii) the Open Offer, by way of assured allotments to Qualifying Shareholders, of a minimum of 3,725,905,140 Offer Shares at HK$0.01 per Offer Share on the basis of three Offer Shares for every two Shares held by the Qualifying Shareholders on the Record Date. The Open Offer will raise a total of approximately HK$37.3 million (before expenses) and is underwritten by the Investor; and

(iii) release and discharge by the Bank Group of all of the Group's obligations to repay the Total Compromised Debt outstanding as at Completion, and the release by the Bank Group of any liabilities of the Group under the Guarantees in consideration for the payment of approximately HK$20.0 million in cash and the issue of the Convertible Bonds in the principal amount of HK$6.5 million by the Company to the Bank Group.

THE COMPROMISE AGREEMENT DATED 1ST FEBRUARY, 2002

I. Parties

(i) the Group;

(ii) the Investor;

(iii) the Bank Group;

(iv) the Coordinating Agent;

(v) Mr. Huang, the Investor's guarantor, who has guaranteed the due performance of all the Investor's obligations under the Compromise Agreement, the Subscription Agreement and the Underwriting Agreement; and

(vi) Huang Worldwide, which has deposited HK$2.0 million as escrow money with the legal adviser of the Bank Group.

II. Bank Compromise

As at 17th December, 2001, the Total Compromised Debt amounted to approximately HK$99.7 million. Pursuant to the Compromise Agreement, the Bank Group will release and discharge all of the Group's obligations and liabilities to repay the Total Compromised Debt outstanding as at Completion and to release the Guarantees given by the Group in favour of the Bank Group in respect of the Total Compromised Debt. In consideration for this, the Bank Group will receive (1) the payment in cash of approximately HK$20.0 million by the Company; and (2) the issue by the Company of the Convertible Bonds in the principal amount of HK$6.5 million.

1. Cash payment

The Bank Group will, upon Completion, receive approximately HK$20.0 million in cash, equivalent to approximately 20.1% of the Total Compromised Debt outstanding as at 17th December, 2001. An amount of HK$2.0 million has been deposited by Huang Worldwide as escrow money with the legal adviser of the Bank Group, which sum (together with interest thereon) shall be credited as partial settlement of the approximately HK$20.0 million receivable by the Bank Group upon Completion. The Company will also bear legal costs in the sum of HK$38,795 incurred by a member of the Bank Group.

2. Convertible Bonds

The Company will issue to the Bank Group 3-year 5% interest bearing Convertible Bonds in the principal amount of HK$6.5 million. The principal amount of the Convertible Bonds is equivalent to approximately 6.5% of the Total Compromised Debt outstanding as at 17th December, 2001.

The principal terms of the Convertible Bonds are as follows:

(i) Interest : 5% per annum on the principal amount outstanding from time to time, payable semi-annually in arrears.

(ii) Conversion and : Unless previously redeemed on the basis

redemption referred to below, the outstanding amount of Convertible Bonds from time to time is convertible at any time over the three-year term of the Convertible Bonds at a conversion price of HK$0.01 per Conversion Share (subject to adjustment). If not previously converted, the Company shall redeem in cash the Convertible Bonds in accordance with the following schedule:

Redemption Date Redemption Amount

(a) First anniversary HK$2,166,667

date from issue or the whole

of the Convertible outstanding amount,

Bonds whichever is less

(together with

accrued interest

thereon)

(b) Second A further

anniversary date HK$2,166,667 or the

from issue of whole outstanding

the Convertible amount, whichever is

Bonds less (together with

accrued interest

thereon)

(c) Third anniversary The remaining

date from issue balance of the

of the Convertible outstanding amount

Bonds (together with

accrued interest

thereon)

(iii) Early Redemption : Early redemption of all or some of the Convertible Bonds by the Company is permitted at any time after their date of issue, at a value equal to 105% of the outstanding principal amount (together with accrued interest thereon).

(iv) Listing : No application will be made for the listing of the Convertible Bonds on any stock exchange. Application will be made for the listing of and permission to deal in the Conversion Shares on the Stock Exchange.

(v) Conversion Shares : On the basis of the initial conversion price of HK$0.01 per Conversion Share, a total of 650,000,000 Conversion Shares will be issued upon full conversion of the Convertible Bonds. The Conversion Shares shall upon issue rank pari passu in all respects with the then issued Shares. The Convertible Bonds will be issued after the Record Date for the Open Offer. Accordingly, the Conversion Shares (if any) to be issued upon conversion of the Convertible Bonds will not carry rights to participate in the Open Offer.

(vi) Transferability : The Convertible Bonds are not assignable or transferable except to another holder of the Convertible Bonds or with the prior written consent of the Company. The Company has undertaken to notify the Stock Exchange promptly if it becomes aware of any dealings in the Convertible Bonds by the Connected Persons.

III. Conditions to the Compromise Agreement

Completion of the Compromise Agreement is subject to the following conditions being fulfilled:-

(a) passing at a duly convened and held general meeting of Shareholders each of the following:-

(i) an ordinary resolution approving an increase in the authorised share capital of the Company and authorising the Directors to effect the Subscription, the Open Offer and the issue of the Convertible Bonds;

(ii) an ordinary resolution by the Independent Shareholders approving the Compromise Agreement and the transactions contemplated thereunder (to the extent that such approval is required by law, regulation or the Company's constitutional documents), including:-

(I) the Open Offer;

(II) the Convertible Bonds and their issue (including issue of Conversion Shares pursuant to conversion of the Convertible Bonds);

(III) the Subscription; and

(iii) an ordinary resolution of Independent Shareholders approving the Waiver and the Creeper Authorisation;

(b) Bermuda Monetary Authority giving its approval of any matters requiring its approval including, without limitation, the issue of the Offer Shares, the Subscription Shares, the Conversion Shares and the Convertible Bonds;

(c) the Executive granting the Waiver to the Investor;

(d) the Stock Exchange granting listing of and permission to deal in the Subscription Shares, the Offer Shares and the Conversion Shares;

(e) the Shares remaining listed on the Stock Exchange and the Stock Exchange not having notified the Company that its listing will or may be withdrawn; and

(f) trading in the Shares on the Stock Exchange will be resumed.

The Investor and the Company's controlling shareholder who is currently Baxter and their respective associates and concert parties are required to abstain from voting on the ordinary resolutions as referred to in items (a)(ii) and (a)(iii) above. The ordinary resolution as referred to in item (a)(iii) above will be taken by poll in accordance with the Code.

Conditions (a) (iii) and (c) above can be waived by the Investor. The Investor has confirmed that it will not waive the Waiver and the Creeper Authorisation as conditions precedent to the Compromise Agreement. Consequent upon the recent change of the Code, it is now no longer necessary for the Investor to seek prior consent from Independent Shareholders for further acquisition of a 2% Shares following completion of the Restructuring Proposal. Nevertheless, according to the legal advice, the Investor cannot waive the Creeper Authorisation without waiving the Waiver which is part and parcel of the same clause in the Compromise Agreement referring to the Creeper Authorisation. Accordingly, an ordinary resolution will be proposed to seek the Waiver and the Creeper Authorisation from the Independent Shareholders.

IV. Resumption of trading of Shares

As mentioned above, completion of the Compromise Agreement is conditional on, among others, resumption of trading of Shares on the Stock Exchange. Trading of Shares on the Stock Exchange has been suspended since 22nd January, 2001. On 15th January, 2002, the Stock Exchange informed that the Company on 15th January, 2002 entered into the second stage of delisting procedures under Practice Note 17 of the Listing Rules and the Company is required to submit a Resumption Proposal within six months from 15th January, 2002. The Restructuring Proposal would significantly reduce the Group's indebtedness level and strengthen its capital base and on this basis, the Company will submit the Resumption Proposal to the Stock Exchange as soon as possible following publication of this announcement.

The Resumption Proposal is subject to approval by the Listing Committee of the Stock Exchange. Completion of the Restructuring Proposal is conditional upon, among others, resumption of trading of Shares on the Stock Exchange. The release of this announcement does not indicate that the Resumption Proposal will be approved by the Listing Committee of the Stock Exchange and that trading of Shares will be resumed. In the meantime, trading of Shares on the Stock Exchange will remain suspended.

V. Completion

The parties to the Compromise Agreement have agreed that each of them will use all reasonable endeavours to ensure that the conditions to the Compromise Agreement shall be satisfied prior to 30th April, 2002. Completion of the Compromise Agreement shall take place on the second business day after all the conditions to the Compromise Agreement as set out in paragraph (III) above have been satisfied. If the conditions are not fulfilled by 1st June, 2002, being four months after the date of the Compromise Agreement, or such later date as may be agreed among the Investor, the Company and the Coordinating Agent, the Compromise Agreement will lapse and none of the parties shall have any claim against each other for costs, damages, compensation or otherwise (save in respect of any prior breach of the Compromise Agreement).

THE SUBSCRIPTION AGREEMENT DATED 1ST FEBRUARY, 2002

I. Parties

(i) the Company; and

(ii) the Investor

II. The Subscription

The Investor has agreed to subscribe in cash for 3,000,000,000 Subscription Shares at the price of HK$0.01 per Subscription Share. The Subscription Shares represent 120.8% of the existing share capital and 54.7% of the Company's issued share capital as enlarged by the Subscription. The Subscription Shares shall upon issue rank pari passu in all respects with the then issued Shares. Completion of the Subscription Agreement will take place after the Record Date for the Open Offer. Accordingly, the Subscription Shares will not carry rights to participate in the Open Offer.

III. Conditions Precedent to the Subscription Agreement

The Subscription Agreement is conditional upon the conditions to the Compromise Agreement as more fully set out under paragraph (III) under the section headed "The Compromise Agreement dated 1st February, 2002" above and completion of the Compromise Agreement.

If the Compromise Agreement is terminated, the Subscription Agreement shall terminate and none of the parties shall have any claim against each other for costs, damages, compensation or otherwise (save in respect of any prior breach of the Subscription Agreement).

IV. Completion

The Subscription Agreement and the Compromise Agreement will be completed on the same day. Please refer to paragraph (V) under the section headed "The Compromise Agreement dated 1st February 2002" for further details.

THE OPEN OFFER

I. Basis of Open Offer : Assured allotments of three Offer Shares for

every two Shares held by the Qualifying

Shareholders on the Record Date

Existing number of issued

Shares : 2,483,936,760 Shares

Number of Shares to be issued

assuming full exercise of

outstanding Options : 13,700,000 Shares

Number of Shares to be issued

assuming full conversion of

all Existing Convertible

Bonds : 200,000,000 Shares

Enlarged issued Shares upon

exercise of Options and the

Existing Convertible Bonds : 2,697,636,760 Shares

Minimum Maximum

Number of Offer Shares : 3,725,905,140 4,046,455,140

Offer Shares Offer Shares

Subscription price : HK$0.01 per Offer Share

II. Timetable

The detailed timetable for the Open Offer (including the Record Date) will be announced by the Company as soon as practicable.

III. Status of the Offer Shares

The Offer Shares when issued will rank pari passu in all respects with the then issued Shares. Holders of the Offer Shares will be entitled to receive all future dividends and distributions which are declared, made or paid after the date of allotment of the Offer Shares.

IV. Rights of Overseas Shareholders

Documents to be issued in connection with the Open Offer will not be registered under the applicable securities legislation of any jurisdiction other than Hong Kong. Accordingly, no offer of Offer Shares will be made to Overseas Shareholders. The Company will send the Open Offer prospectus to the Overseas Shareholders for their information only, but will not send the Application Form to the Overseas Shareholders.

THE UNDERWRITING AGREEMENT DATED 1ST FEBRUARY, 2002

I. Parties

(i) Issuer : the Company; and

(ii) Underwriter : the Investor

II. The Underwriting Arrangement

Pursuant to the Underwriting Agreement, the Investor will underwrite the entire Open Offer of a maximum of 4,046,455,140 Offer Shares. The businesses of the Investor do not include the underwriting of security issues. The Underwriting Agreement is not subject to any termination clauses including force majeure.

III. Sub-underwriting Arrangements

The Investor has entered into two sub-underwriting agreements with each of Somerley and Kingston whereby they have agreed to sub-underwrite 1 billion Offer Shares in the case of Somerley and 400 million Offer Shares in the case of Kingston. The sub-underwriting arrangements are subject to termination clauses. In the event that the termination clauses are exercised by the sub-underwriters, the Investor will under the Underwriting Agreement take up all Offer Shares not taken up pursuant to the Open Offer.

IV. Conditions of the Underwriting Agreement:

Completion of the Underwriting Agreement is conditional on, inter alia, the following conditions:

(a) completion of the Compromise Agreement;

(b) the passing at a general meeting of the Company by the Independent Shareholders of an ordinary resolution to approve the Open Offer;

(c) the Listing Committee of the Stock Exchange agreeing to grant listing of, and permission to deal in, the Offer Shares either unconditionally or subject to such conditions which the Company accepts and the satisfaction of such conditions (if any) by no later than the date on which the prospectus regarding the Open Offer are posted and not having withdrawn or revoked such listing and permission on or before 4:00 p.m. on the second business day following the final application day of the Offer Shares; and

(d) the Company obtaining all relevant consents and approvals to the Open Offer, including approval by Shareholders and approval by the Bermuda Monetary Authority (if required).

The Investor and the Company's controlling shareholder who is currently Baxter and their respective associates and concert parties are required to abstain from voting on the ordinary resolution as referred above.

LISTING AND DEALINGS

The Subscription Shares, the Conversion Shares and the Offer Shares will, when issued, rank pari passu with the then issued Shares.

Application will be made to the Stock Exchange for the listing of and permission to deal in the Subscription Shares, the Conversion Shares and the Offer Shares.

THE INVESTOR

The Investor is an investment holding company incorporated in the British Virgin Islands, having its registered office at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands, and is wholly and beneficially owned by Huang Group. Huang Group is in turn wholly and beneficially owned by Mr. Kan Ka Chong, Frederick as trustee of a discretionary trust, the discretionary objects of which are Mr. Huang, his family members and the unspecified charities. Mr. Huang is engaged in tour business, cruise liner management, hotel and property investment in Southeast Asia.

None of the Investor or its concert parties (including Mr. Huang) is at present interested directly or indirectly in any Shares or convertible securities of the Company. The Investor and its beneficial owner and their respective associates are not Connected Persons of the Company. The Investor confirmed that neither it nor any of its concert parties (including Mr. Huang) has dealt in the Shares or any convertible securities of the Company during the six-month period preceding the date of this announcement.

EFFECTS OF THE RESTRUCTURING PROPOSAL

I. Shareholding structure

The following table sets out the shareholding structure of the Company prior to and immediately following completion of the Restructuring Proposal. The table depicts the shareholding structures under 4 scenarios as follows:-

Scenario 1: Assuming applications by the Shareholders for all the Offer Shares pro rata to their existing shareholding and before conversion of any Convertible Bonds by the Bank Group

Scenario 2: Assuming no applications by the Shareholders for any of the Offer Shares and before conversion of any Convertible Bonds by the Bank Group

Scenario 3: Assuming applications by the Shareholders for all the Offer Shares pro rata to their existing shareholding and after full conversion of the Convertible Bonds by the Bank Group

Scenario 4: Assuming no applications by the Shareholders for any of the Offer Shares and after full conversion of the Convertible Bonds by the Bank Group

In scenarios 2 and 4, it is assumed that all Offer Shares would be taken up by the Investor and the sub-underwriters in accordance with their underwriting or sub-underwriting obligations on their own accounts but without taking account of any further sub-underwriting or placing arrangements by any of them.

After

completion of

the Subscription

At present Agreement Upon completion of the Open Offer (Note 1)

Scenario 1 Scenario 2 Scenario 3 Scenario 4

Million Million Million Million Million Million

shares % shares % shares % shares % shares % shares %

Baxter (Note 2) 1,595.1 64.2 1,595.1 29.1 3,987.8 43.3 1,595.1 17.3 3,987.8 40.5 1,595.1 16.2

The Investor - - 3,000.0 54.7 3,000.0 32.6 5,325.9 57.8 3,000.0 30.4 5,325.9 54.0

Somerley (Note 3) - - - - - - 1,000.0 10.9 - - 1,000.0 10.1

Kingston - - - - - - 400.0 4.3 - - 400.0 4.1

Bank Group - - - - - - - - 650.0 6.6 650.0 6.6

Other Shareholders 888.8 35.8 888.8 16.2 2,222.0 24.1 888.8 9.7 2,222.0 22.5 888.8 9.0

2,483.9 100.0 5,483.9 100.0 9,209.8 100.0 9,209.8 100.0 9,859.8 100.0 9,859.8 100.0

Public

Shareholders

(Note 3) 888.8 35.8 888.8 16.2 2,222.0 24.1 1,288.8 14.0 2,872.0 29.1 1,938.8 19.7

Notes:

1. The shareholding structure is prepared on the basis of the existing issued Shares as enlarged by the Subscription Shares and/or Conversion Shares, and does not take into account any additional Offer Shares that may be issued upon conversion of the outstanding Options and the Existing Convertible Bonds.

2. On 24th November, 2000, Baxter pledged 1,565,140,000 Shares to E-Bigger Investments Limited ("E-Bigger") to secure loan facilities granted by E-Bigger to Baxter. Baxter is beneficially owned as to 75% by Mr. Chan Chun Hung and as to the remaining 25% by Ms. Wong Kin Ching. They were former directors of the Company. As far as the Directors are aware, E-Bigger is not a Connected Person of the Company and is not connected with the Investor and its associates.

3. Public Shareholders include "Kingston", "Bank Group" and "Other Shareholders". Depending on the level of applications for the Open Offer by the Qualifying Shareholders and subject to any further sub-underwriting or placing arrangement by Somerley, the shareholding in the Company held by Somerley upon completion of the Restructuring Proposal may fall below 10% and hence be counted as part of the public float.

II. The Waiver

Immediately upon completion of the Restructuring Proposal (including the Open Offer), the Investor will be interested in between approximately 32.6% and 57.8% of the enlarged issued share capital of the Company (depending on the level of applications for the Open Offer by the Shareholders and before conversion of any Convertible Bonds by the Bank Group). Accordingly, the Investor will in the absence of the Waiver be required under Rule 26 of the Code to make a general offer for the Shares, Options and the Existing Convertible Bonds other than those held by the Investor and parties acting in concert with it. The Investor will make an application to the Executive under the Code for the Waiver.

The granting of the Waiver by the Executive is a condition of the Compromise Agreement, which condition is waivable by the Investor. However, the Investor has advised that it will not waive such condition. In the event that the Waiver is not granted on or before 1st June, 2002, i.e. end of four months from the date of the Compromise Agreement (or such later date as may be agreed by the parties), the Compromise Agreement will lapse.

Upon completion of the Restructuring Proposal and depending on the level of application for the Offer Shares by the Shareholders, the Investor and its concert parties may hold more than 50% of the Shares then in issue. In such event, the Investor may purchase additional Shares without triggering any further obligation for a general offer under the Code. On the other hand, if the aggregate interests of the Investor and its concert parties immediately upon completion of the whitewashed Restructuring Proposal are between 30% and 50%, they will be allowed to acquire a further 2% Shares in the 12 months immediately following completion of the Restructuring Proposal.

Completion of the Compromise Agreement is conditional, among others, on the grant of the Waiver.

III. Financial position

The principal financial effects of the Restructuring Proposal are to reduce the indebtedness level of the Group and strengthen its capital base with the issue of new Shares pursuant to the Subscription and the Open Offer. The expected reduction of interest costs arising from the decrease of the indebtedness level will also bring positive effect on the Group's earnings and cash flow.

Upon completion of the Restructuring Proposal, the total liabilities of the Group would be reduced by approximately HK$93.2 million (being the amount of the Total Compromised Debt after netting off the principal amount of the Convertible Bonds of HK$6.5 million). In addition to the Total Compromised Debt, the Group had other liabilities (the "Other Liabilities"), which sum as at 30th September, 2001 was approximately HK$134.1 million. The Other Liabilities comprised (i) financial indebtedness mainly due to PRC banks and convertible bondholders of approximately HK$70.4 million; and (ii) liabilities due mainly to trade creditors of approximately HK$63.7 million, both as at 30th September, 2001.

The Company on 19th January, 2002 received a winding-up petition (the "Petition") filed by Midas Printing Limited ("Midas") which has provided printing services to the Group. It was alleged in the Petition that a sum of HK$2,135,529 together with interest thereon was due and owing to Midas. The Petition is scheduled to be heard on 17th April, 2002 at the High Court of the Hong Kong Special Administrative Region. The Company is negotiating with Midas with a view to reaching settlement before the scheduled hearing date of the Petition.

Save as disclosed herein, there is currently no pending legal actions against the Group in respect of the Other Liabilities for which judgement has not been or is not being obtained.

The Group will be restored to a positive net asset position with pro forma unaudited adjusted consolidated net tangible assets of approximately HK$36.0 million.

HK$ 'million

Audited consolidated deficiency in assets of the Group as

at 31st March, 2001 (69.6 )

Unaudited consolidated loss of the Group for the six

months ended 30th September, 2001 (25.1 )

Unaudited consolidated deficiency in assets of the Group

as at 30th September, 2001 (94.7 )

Reduction of indebtedness (Note 2) 70.4

Proceeds from the Open Offer 37.3

Proceeds from the Subscription 30.0

Estimated professional fees and expenses in connection

with the Restructuring Proposal (7.0 )

Pro forma unaudited adjusted consolidated net tangible

assets of the Group after completion of the Restructuring

Proposal 36.0

Notes:

1. The pro forma unaudited adjusted consolidated net tangible assets prepared above does not take into account the effect upon conversion of the outstanding Options, Existing Convertible Bonds and the Convertible Bonds to be issued.

2. Being the Total Compromised Debt of HK$99.7 million after netting off the principal amount of the Convertible Bonds of HK$6.5 million to be issued, HK$20.0 million to be repaid to the Bank Group by cash and the interest accrued by the Group in respect of the Total Compromised Debt of HK$2.8 million for the period from 1st October, 2001 to 17th December, 2001.

Further information on the financial position of the Group will be included in the circular to the Shareholders.

REASONS FOR THE RESTRUCTURING PROPOSAL

The principal activities of the Group are the design, manufacture and sale of a wide range of toys. As a result of an investigation by the Independent Commission Against Corruption against the former Chairman of the Group, which incident was the subject of wide spread publicity in the press, the Group's reputation was severely impaired. All bankers and suppliers either suspended or terminated their credit facilities granted to the Group and some of them demanded repayment of outstanding balances. Such actions created a shortage in the working capital of the Group. At the same time, the Group experienced a decline in profit margin attributable to keen competition in the toys industry and provisions made for trade receivables and inventories resulting from over-expansion of trading in the first half of 2000. According to the annual report of the Group for the year ended 31st March, 2001, the Group had audited net current liabilities of approximately HK$182.8 million as at 31st March, 2001. The Group also incurred an audited consolidated net loss from ordinary activities attributable to shareholders of approximately HK$279.3 million and reported a significant audited net cash outflow from operating activities of approximately HK$80.1 million for the year ended 31st March, 2001. According to the interim report of the Group for the six months ended 30th September, 2001, the Group had unaudited net current liabilities of approximately HK$207.2 million. The Group also incurred an unaudited consolidated net loss from ordinary activities attributable to shareholders of approximately HK$25.1 million and reported an unaudited net cash outflow from operating activities of approximately HK$7.0 million for the six months ended 30th September, 2001. The Group continues to experience financial difficulties and currently has no unutilised banking facilities available to support its normal operating requirements. The Group has defaulted in repayments of bank borrowings, which sum amounted to approximately HK$99.7 million as at 17th December, 2001. Certain suppliers and bankers of the Group had filed writs of summons seeking repayment of the outstanding amounts due by the Group as well as winding-up petitions against the Company and one of its subsidiaries.

The Group has held negotiations with various potential new equity investors including the Investor and has also explored the possibility of a self-rescue scheme. However, difficulties were encountered in such negotiations, including the need for investors to perform due diligence, particularly as regards the financial position of the Group's subsidiaries operating in PRC. The Investor is prepared to proceed without making its Restructuring Proposal subject to formal due diligence. Consequently, the Directors consider it is in the best interests of the Company to proceed with the Restructuring Proposal in order to restore the Group to positive net assets and to open up possibilities for future diversification.

USE OF PROCEEDS

It is estimated that the net proceeds raised for the Company from the Restructuring Proposal will be approximately HK$60.3 million. The Company intends to apply the net proceeds as to approximately HK$20.0 million to repay the Bank Group pursuant to the Compromise Agreement; and the remainder as working capital and/or to repay outstanding liabilities of the Group.

FUTURE INTENTION OF THE INVESTOR REGARDING THE GROUP

The Investor intends that the Group will continue its existing toy manufacturing and distribution business. The Group will endeavour to develop and strengthen its core business if suitable opportunities arise. However, no specific targets has been identified and the Investor at present does not have any plan to inject any assets into the Company. After completion of the Restructuring Proposal, the Group will continue to restructure its liabilities.

The management of the Group will manage the operations of the Group along the following principles:

• applying stringent control over capital expenditure and bank borrowings with the primary objective to generate positive cashflow for the Group as soon as possible;

• retain the existing management to manage the core business of the Group; and

• identify suitable investment targets which can enrich the Group's revenue stream.

MANAGEMENT

The current executive Directors are Mr. Lo Ming Chi, Charles and Mr. Yu Wai Man. The non-executive Directors are Mr. Wu Wing Kit and Mr. Wong Kwok Tai. It is the intention of the Investor that all these Directors will be invited to remain on the Board and the Investor has no present intention to appoint further Directors to the Board. The Investor intends that all existing senior management and employees will remain in the Group in order to ensure a smooth continuation of the Group's business following completion of the Restructuring Proposal.

LISTING

The Stock Exchange has stated that it will closely monitor trading in the Shares after trading resumes if, at completion of the Restructuring Proposal, less than 25% of the Shares are held by the public. If the Stock Exchange believes that a false market exists or may exist in the Shares; or there are too few Shares in public hands to maintain an orderly market, then it will consider exercising its discretion to suspend trading in the Shares.

The Company and the Investor are aware that the public float of the Company may fall below the Listing Rules requirement of 25% immediately upon completion of the Restructuring Proposal. The Investor and the Company have undertaken to the Stock Exchange to take appropriate steps (which may include further issue of new Shares or arranging for sale of Shares by Shareholders) to ensure that as soon as possible following completion of the Restructuring Proposal, not less than 25% of the Company's issued securities will be held by the public.

The Stock Exchange has stated that, if the Company remains a listed company, any future injections into or disposals by the Company will be subject to the provisions of the Listing Rules. Pursuant to the Listing Rules, the Stock Exchange has the discretion to require the Company to issue a circular to the Shareholders irrespective of the size of the proposed transaction, particularly when such proposed transaction represents a departure from the principal activities of the Group following completion of the Restructuring Proposal. The Stock Exchange also has the power, pursuant to the Listing Rules, to aggregate a series of acquisitions, or disposals by the Company and any such acquisitions or disposals may, in any event, result in the Company being treated as a new applicant for listing and subject to the requirement for new applicants as set out in the Listing Rules.

INCREASE IN AUTHORISED SHARE CAPITAL

The authorised share capital of the Company consists of 10,000,000,000 Shares, of which 2,483,936,760 Shares were in issue as at the date of this announcement. In order to facilitate the issue of the new Shares pursuant to the Restructuring Proposal and in the future, the Directors propose to increase the authorised share capital of the Company from HK$100 million to HK$300 million by the creation of an additional 20 billion Shares. The proposed increase in authorised share capital of the Company is subject to approval by the Shareholders at the special general meeting of the Company.

GENERAL

WARNING: THE RESTRUCTURING PROPOSAL IS CONDITIONAL UPON, AMONG OTHERS, THE APPROVAL OF THE RESUMPTION PROPOSAL BY THE LISTING COMMITTEE OF THE STOCK EXCHANGE. THE RELEASE OF THIS ANNOUNCEMENT DOES NOT INDICATE THAT THE RESTRUCTURING PROPOSAL WILL BE SUCCESSFULLY IMPLEMENTED AND COMPLETED OR THAT THE RESUMPTION PROPOSAL WILL BE APPROVED BY THE LISTING COMMITTEE. Shareholders and potential investors should therefore exercise caution when dealing in the Shares.

An Independent Board Committee has been established to consider (i) the Subscription Agreement; (ii) the Compromise Agreement; (iii) the Open Offer; (iv) the Waiver; and (v) the Creeper Authorisation. Equitas Capital Limited has been appointed to advise the Independent Board Committee as regards the aforesaid. A composite document containing, among others, details of the Restructuring Proposal, the Waiver and the Creeper Authorisation, the financial information of the Group, the advice from Equitas Capital Limited as the independent financial adviser and the notice of the special general meeting will be despatched to the Shareholders as soon as practicable.

TERMS USED IN THIS ANNOUNCEMENT

"Application Form" the application form for the Offer Shares proposed to be issued to the Qualifying Shareholders as mentioned herein

"associate(s)" has the meaning ascribed to it under the Listing Rules

"Bank Group" the creditor banks and financial institutions of the Group, including Dao Heng Bank Limited, DBS Kwong On Bank Limited, Citic Ka Wah Bank Limited, Equitable PCI Bank, Inc., HSBC, Jian Sing Bank Limited, Bank of China (HK) Limited and Chiyu Banking Corporation Limited

"Board" board of Directors

"Code" The Hong Kong Code on Takeovers and Mergers

"Company" Hung Fung Group Holdings Limited, a company incorporated in Bermuda with limited liability and registered in Hong Kong under Part XI of the Companies Ordinance, the securities of which are listed on the Stock Exchange

"Completion" completion of the Compromise Agreement and the Subscription Agreement

"Compromise Agreement" the conditional agreement dated 1st February, 2002 entered into between the Group and, among others, the Bank Group, Coordinating Agent and the Investor in respect of the Restructuring Proposal

"Connected Person(s)" a director, chief executive or substantial shareholder of the Company or any of its subsidiaries or an associate of any of them as defined under the Listing Rules

"Conversion Shares" the Shares which may fall to be issued upon conversion of the Convertible Bonds

"Convertible Bonds" the 3-year 5% interest bearing convertible bonds in the principal amount of HK$6.5 million to be issued to the Bank Group pursuant to the Compromise Agreement

"Coordinating Agent" The Hongkong and Shanghai Banking Corporation

or "HSBC" Limited, or such other entity as may be appointed as agent under the Compromise Agreement

"Creeper Authorisation" the approval to be sought from the Independent Shareholders permitting the Investor and parties acting in concert with it to acquire additional voting rights in the Company in the 12 months period following Completion

"Director(s)" director(s) of the Company

"Executive" the Executive Director of the Corporate Finance Division of the SFC and any delegate of the Executive Director

"Existing Convertible Bonds" the existing HK$3.0 million convertible bonds of the Company issued at 100% of their principal amount and carrying interest at the rate of 5% per annum, repayable on 16th November, 2002. The holder of the convertible bonds has the right to convert the whole or any part of the principal amount into Shares at a conversion price of HK$0.015 per Share

"Group" the Company and its subsidiaries

"Guarantees" guarantees given by members of the Group in favour of certain members of the Bank Group in respect of the Total Compromised Debt

"Huang Group" Huang Group (BVI) Limited, a company incorporated in the British Virgin Islands with limited liability and wholly and beneficially owned by Mr. Kan Ka Chong, Frederick as trustee of a discretionary trust, the discretionary objects of which are Mr. Huang, his family members and the unspecified charities.

"Huang Worldwide" Huang Worldwide Holding Limited, a company incorporated in the British Virgin Islands and wholly and beneficially owned by Huang Group

"Independent Board an independent committee of the Board

Committee" constituted to consider (i) the Subscription Agreement; (ii) the Compromise Agreement; (iii) the Open Offer; (iv) the Waiver; and (v) the Creeper Authorisation

"Independent Shareholders" Shareholders other than the Investor and the controlling shareholder of the Company who currently is Baxter and their respective associates and concert parties

"Investor" Vision Century Group Limited, an investment holding company incorporated in the British Virgin Islands and wholly and beneficially owned by Huang Group

"Kingston" Kingston Securities Limited, a dealer registered under the Securities Ordinance (Chapter 333 of the Laws of Hong Kong)

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

"Mr. Huang" or "Guarantor" Mr. Huang Cheow Leng

"PRC" the People's Republic of China

"Offer Shares" Shares to be offered to the Qualifying Shareholders pursuant to the Open Offer

"Open Offer" the proposed issue of Offer Shares to the Qualifying Shareholders with assured allotments of three Offer Shares for every two Shares held on the Record Date

"Options" share options in respect of 13,700,000 Shares, exercisable on or before 16th February, 2008 at an exercise price of HK$0.046 per Share

"Overseas Shareholders" Shareholders whose addresses as shown on the branch register of members on the Record Date are outside Hong Kong

"Qualifying Shareholders" Shareholders whose names appear on the register of members of the Company on the Record Date and who are not Overseas Shareholders

"Record Date" the date by reference to which assured allotments under the proposed Open Offer will be determined

"Restructuring Proposal" the proposed restructuring of the Total Compromised Debt pursuant to the Compromise Agreement, the placing of new Shares pursuant to the Subscription Agreement and the Open Offer

"Resumption Proposal" a proposal to be made for the resumption of trading in the Shares which is subject to the approval by the Listing Committee of the Stock Exchange

"SFC" The Securities and Futures Commission

"Share(s)" share(s) of HK$0.01 each in the share capital of the Company

"Shareholders" holder(s) of the Shares

"Somerley" Somerley Limited, an investment adviser and exempt dealer registered under the Securities Ordinance (Chapter 333 of the Laws of Hong Kong)

"Stock Exchange" The Stock Exchange of Hong Kong Limited

"Subscription" the proposed subscription of the Shares by the Investor pursuant to the Subscription Agreement

"Subscription Agreement" the subscription agreement between the Investor and the Company with respect to the subscription of the Subscription Shares

"Subscription Shares" 3,000,000,000 new Shares to be subscribed by the Investor pursuant to the Subscription Agreement

"Total Compromised Debt" claims and other monies (including principal, interest and expenses) owed by the Group to the Bank Group and their related companies as at Completion which are the subject matters of the Compromise Agreement. The Total Compromise Debt outstanding as at 17th December, 2001 was HK$99.7 million, which sum was included in the Group's accounts under the balance sheet items headed current liabilities. Of the HK$99.7 million, approximately HK$88.1 million was included under "Interest-bearing bank loans and other borrowings" while the remaining approximately HK$11.6 million was included under "other payables and accruals"

"Underwriting Agreement" the underwriting agreement dated 1st February, 2002 entered into between the Investor and the Company regarding the underwriting of the Open Offer

"Waiver" a waiver from the obligation to make a mandatory offer under Rule 26 of the Code pursuant to Note 1 to the Notes on Dispensations from Rule 26 of the Code

By Order of the Board By Order of the Board

Hung Fung Group Holdings Limited Vision Century Group Limited

Lo Ming Chi, Charles Lilian Ng

Chairman Director

Hong Kong, 22nd February, 2002

The directors of the Company jointly and severally accept full responsibility for the accuracy of the information contained in this announcement (other than that relating to the Investor) and confirm, having made all reasonable enquiries, that to the best of their knowledge, the opinions expressed in this announcement (other than that relating to the Investor) have been arrived at after due and careful consideration and there are no other facts not contained in this announcement, the omission of which would make any (other than that relating to the Investor) in this announcement misleading.

The directors of the Investor jointly and severally accept full responsibility for the accuracy of the information contained in this announcement in so far as it relates the Investor and confirm, having made all reasonable enquiries, that to the best of their knowledge, the opinions expressed in this announcement so far as it relates to the Investor have been arrived at after due and careful consideration and there are no other facts not contained in this announcement, the omission of which would make any statement in so far as it relates to the Investor in this announcement misleading.

"Please also refer to the published version of this announcement in the Hong Kong i-mail"