PegBio Co., Ltd. — Capital/Financing Update 2003

Aug 18, 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular, you should consult a stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold all your shares in Xin Corporation Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser.

The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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(Incorporated in Bermuda with limited liability)
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PROPOSED OPEN OFFER IN THE PROPORTION OF FOUR OFFER SHARES FOR EVERY SHARE HELD

CONNECTED TRANSACTION INVOLVING SUBSCRIPTION OF NEW SHARES

INCREASE IN AUTHORISED SHARE CAPITAL AND GENERAL MANDATE TO ISSUE SECURITIES AND REPURCHASE SHARES

Financial adviser to the Company

Somerley Limited

Independent financial adviser to the Independent Board Committee

A letter of advice from Dao Heng Securities Limited, the independent financial adviser to the independent board committee, containing its opinion regarding the Open Offer and the Subscription is set out on pages 21 to 35 of this circular.

A notice convening a special general meeting of Xin Corporation Limited to be held at Plaza I – III, Lower Lobby, Novotel Century Hong Kong, 238 Jaffe Road, Wanchai, Hong Kong on Wednesday, 3 September 2003 at 10:00 a.m. (or so soon thereafter the annual general meeting of the Company convened on the same date at the same place shall have concluded or adjourned) is set out on pages 83 to 86 of this circular. Whether or not you are able to attend the meeting, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return it to the Company’s principal place of business in Hong Kong at Room 3A03-06, 3/F., New Mandarin Plaza, 14 Science Museum Road, Tsim Sha Tsui East, Kowloon, Hong Kong as soon as possible and in any event not less than 48 hours before the time for holding the meeting or any adjourned meeting. Completion and return of the form of proxy will not preclude you from attending and voting at the meeting should you so wish.

18 August 2003

* For identification purpose only

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Expected Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Open Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
The Underwriting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Reasons for the Open Offer and use of proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Closure of register of members, listings and dealings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
The Subscription . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Increase in authorised share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
Shareholding in the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
General Mandates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Adjustment to the conversion prices of the Convertible Bonds
and the Convertible Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Letter from Dao Heng Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
Appendix I – Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36
Appendix II – Explanatory Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	76
Appendix III – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	79
Notice of Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	83

DEFINITIONS

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

“Application Form(s)”

application form(s) for the Offer Shares

• “associate(s)”

the meaning given to it in the Listing Rules

• “Board”

the board of directors of the Company

• “CCASS”

the Central Clearing and Settlement System established and operated by HKSCC

• “Companies Act”

The Companies Act 1981 of Bermuda

• “Companies Ordinance”

the Companies Ordinance (Chapter 32 of the Laws of Hong Kong)

• “Company”

Xin Corporation Limited, a company incorporated in Bermuda with its shares listed on the Stock Exchange

• “Convertible Bonds”

• 5% convertible bonds of the Company in the aggregate outstanding principal amount of HK$4,333,333, which are repayable by two remaining equal installments over two years up to May 2005 or convertible into Shares at a conversion price of HK$0.50 per Share, subject to adjustment

• “Convertible Note”

• 3% convertible note of the Company in the aggregate principal amount of HK$16 million, which is repayable in July 2004 or convertible into Shares at a conversion price of HK$0.50 per Share, subject to adjustment

• “Dao Heng Securities”

Dao Heng Securities Limited, a deemed licensed corporation under the SFO and the independent financial adviser to the Independent Board Committee in respect of the Open Offer and the Subscription

• “Directors”

• directors of the Company

• “Excluded Shareholder(s)” Shareholder(s) other than the Qualifying Holder(s)

• “General Mandates”

the securities repurchase mandate and the general mandate to issue securities (including the extension of such mandate to cover the number of Shares purchased under the Repurchase Mandate) to be proposed at the Special General Meeting each as described in this circular

• “Group”

the Company and its subsidiaries

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DEFINITIONS

“HK$” Hong Kong dollars “HKSCC” Hong Kong Securities Clearing Company Limited “Independent Board Committee” an independent board committee constituted by Messrs. Wu Wing Kit, Wong Kwok Tai, Wystan and Lau Pok Lam, the independent non-executive Directors, formed for the purpose of advising the Independent Shareholders and the Subscription Independent Shareholders in respect of the Open Offer and the Subscription respectively

• “Independent Shareholders” Shareholders other than Vision Century and its associates “Latest Practicable Date” 15 August 2003, being the latest practicable date for ascertaining certain information for inclusion in this circular

• “Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange

• “Mr. Lo” Mr. Lo Ming Chi, Charles, the Chairman of the Company and an executive Director

• “Mr. Yu” Mr. Yu Wai Man, an executive Director “New Shares” 25,092,000 Shares (if the Open Offer is completed or 12,640,000 Shares if the Open Offer does not proceed) to be issued pursuant to the Subscription Agreement

• “Offer Price” the subscription price of HK$0.06 per Offer Share pursuant to the Open Offer

• “Offer Share(s)” the new Share(s) proposed to be offered to the Qualifying Holders for subscription pursuant to the Open Offer

• “Open Offer” the proposed issue of the Offer Shares by way of open offer to the Qualifying Holders on the terms to be set out in the open offer prospectus and the Application Form and summarised herein

• “Qualifying Holder(s)” Shareholder(s) who, at the close of business on the Record Date, have addresses in Hong Kong on the register of members of the Company

• “Record Date” 3 September 2003, being the date by reference to which entitlements under the Open Offer will be determined

• “Registrar” the Company’s branch share registrar in Hong Kong

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DEFINITIONS

• “Repurchase Mandate”

• “SFO”

• “Shareholder(s)”

• “Share(s)”

• “Special General Meeting”

• “Stock Exchange”

• “Subscribers”

• “Subscription”

• “Subscription Agreement”

• “Subscription Independent Shareholders”

• “Subscription Price”

• “Underwriter”

a general and unconditional mandate proposed to be granted to the Directors to exercise the powers of the Company to repurchase Shares up to a maximum of 10% of the aggregate nominal amount of the issued share capital of the Company as at the date of passing the relevant resolution to grant such mandate as enlarged (subject to the Open Offer becoming unconditional and being completed in accordance with its terms) by the allotment and issue of the Offer Shares pursuant to the Open Offer

the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) as amended from time to time

holder(s) of Shares

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

the special general meeting of the Company convened to approve, among others, the Open Offer, the Subscription, the increase in authorised share capital of the Company and the General Mandates, notice of which is set out herein

The Stock Exchange of Hong Kong Limited

• Mr. Lo and Mr. Yu

the subscription by the Subscribers of the New Shares pursuant to the Subscription Agreement

the subscription agreement dated 28 July 2003 entered into between the Company and the Subscribers, whereby the Company agreed to allot and issue, and the Subscribers agreed to subscribe for, the New Shares

Shareholders who are independent of and not connected with the Subscribers and their respective associates

HK$0.0796 per Share (if the Open Offer is completed or HK$0.158 per Share if the Open Offer does not proceed) pursuant to the Subscription Agreement

Kingston Securities Limited, a licensed corporation to carry on business in types 1, 4, 6, 7 and 9 regulated activities (dealing in securities, advising on securities and corporate finance, providing automated trading services and asset management) under the SFO

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DEFINITIONS

the underwriting agreement dated 15 July 2003 entered into between the Underwriter, the Company and Vision Century in relation to the underwriting of the Open Offer

“Underwriting Agreement” the underwriting agreement dated 15 July 2003 entered into between the Underwriter, the Company and Vision Century in relation to the underwriting of the Open Offer “Vision Century” Vision Century Group Limited, a company incorporated in the British Virgin Islands, the controlling shareholder of the Company

“%”

Percentage

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EXPECTED TIMETABLE

2003

Last day of dealings in Shares cum-entitlements to the Open Offer . . . . . . . . . . . . .Wednesday, 27 August

Commencement of dealings in Shares ex-entitlements to the Open Offer . . . . . . . . . Thursday, 28 August

Latest time for lodging transfers of Shares in order to . . . . . . . . . . . . . . . . 4:00 p.m. on Friday, 29 August be entitled to the Open Offer

Latest time for lodging forms of proxy for the purpose . . . . . . . . . . . 10:00 a.m. on Monday, 1 September of the Special General Meeting

Book closure period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monday, 1 September to

Wednesday, 3 September

Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Wednesday, 3 September

Annual General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9:30 a.m. on Wednesday, 3 September

Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10:00 a.m. on Wednesday, 3 September

(or so soon thereafter the annual general meeting of the Company convened for the same date at the same place shall have concluded or adjourned)

Open Offer prospectus and the Application Forms to be posted . . . . . . . . . . . . . .Wednesday, 3 September Register of members to be reopened . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thursday, 4 September Latest time for application for Offer Shares and payment . . . . . . . . 4:00 p.m. on Thursday, 18 September

Underwriting Agreement becomes unconditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 23 September

Subscription Agreement becomes unconditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 23 September

Announcement of the results of the Open Offer . . . . . . . . . . . . . . . . . . . . . . . . . . .Wednesday, 24 September

Share certificates for Offer Shares to be posted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Friday, 26 September

Long stop date for the completion of the Subscription Agreement . . . . . . . . . . . . . Tuesday, 30 September

Dates stated in this circular for events in the timetable for (or otherwise in relation to) the Open Offer and the Subscription are indicative only and may be extended or varied by agreement between the Company and the Underwriter, or the Subscribers (as the case may be). Any changes to the anticipated timetable for the Open Offer and the Subscription will be announced as appropriate.

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LETTER FROM THE BOARD

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(Incorporated in Bermuda with limited liability)

Executive Directors: Mr. Lo Ming Chi, Charles (Chairman) Mr. Yu Wai Man Mr. Wilson Ng Mr. Ng Wee Keat Mr. Ng Teow Leng Mr. Ng Eng Leng

Independent Non-executive Directors: Mr. Wu Wing Kit Mr. Wong Kwok Tai, Wystan Mr. Lau Pok Lam

Registered Office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Head Office and Principal Place of Business: Room 3A03-06, 3/F. New Mandarin Plaza 14 Science Museum Road Tsim Sha Tsui East Hong Kong

18 August 2003

• To Shareholders and, for information only,

holders of the Convertible Bonds and the Convertible Note

Dear Sir or Madam,

PROPOSED OPEN OFFER IN THE PROPORTION OF FOUR OFFER SHARES FOR EVERY SHARE HELD

CONNECTED TRANSACTION INVOLVING SUBSCRIPTION OF NEW SHARES

INCREASE IN AUTHORISED SHARE CAPITAL AND GENERAL MANDATE TO ISSUE SECURITIES AND REPURCHASE SHARES

INTRODUCTION

The Directors announced on 15 July 2003 that the Board proposes to raise approximately HK$51 million by way of the Open Offer. Pursuant to the Open Offer, the Qualifying Holders will be entitled to apply for, on an assured basis, four Offer Shares for every Share held on the Record Date.

Under the Listing Rules, the Open Offer is required to be conditional on the approval of the Shareholders, other than Vision Century, the controlling shareholder of the Company and its associates. Vision Century and its associates will abstain from voting at the Special General Meeting in respect of the resolution to approve the Open Offer.

* For identification purpose only

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LETTER FROM THE BOARD

On 28 July 2003, the Company announced the proposed Subscription whereby the Subscribers will subscribe from the Company an aggregate of 25,092,000 Shares at a price of HK$0.0796 per Share. The issue of the New Shares under the Subscription will be in full and final settlement of all outstanding balances as at 31 March 2003 owed by the Group to the Subscribers, in the aggregate amount of HK$1,997,774.19. The Subscribers are connected persons of the Company under the Listing Rules and the Subscription therefore constitutes a connected transaction under the Listing Rules and is subject to, inter alia, approval by the Subscription Independent Shareholders in the Special General Meeting of the Company.

The Independent Board Committee has been established to advise the Independent Shareholders and the Subscription Independent Shareholders in relation to the Open Offer and the Subscription, respectively. Dao Heng Securities has been appointed as the independent financial adviser to advise the Independent Board Committee. The purpose of this circular is to provide you with further information regarding, among other things, the Open Offer and the Subscription, and to set out the recommendation of the Independent Board Committee to the Independent Shareholders as regards the Open Offer and to the Subscription Independent Shareholders as regards the Subscription, based on the advice of Dao Heng Securities and to give you notice of the Special General Meeting convened for the purpose of considering, and if thought fit, approving the Open Offer, the Subscription, the increase in authorised share capital and the General Mandates.

OPEN OFFER

Issue statistics

– Basis of the Open Offer 4 Offer Shares for every Share held on the Record Date – Number of existing Shares in issue 215,525,638 Shares Minimum number of Offer Shares – 862,102,552 Offer Shares – Outstanding Convertible Note the existing outstanding Convertible Note and and Convertible Bonds Convertible Bonds which are convertible into 40,666,666 Shares in aggregate at a conversion price of HK$0.50 per Share, subject to adjustment Maximum number of Offer Shares – assuming full conversion of the Convertible Note and the Convertible Bonds on or before the Record Date, a total of 40,666,666 Shares may fall to be issued and thus an additional 162,666,664 Offer Shares would be issued. As such, the maximum number of Offer Shares that may be issued by the Company is 1,024,769,216 Offer Shares

• Enlarged issued share capital upon 1,077,628,190 Shares completion of the Open Offer (1,102,720,190 Shares) assuming no conversion of the Convertible Note and the Convertible Bonds (and with the issue of the New Shares)

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LETTER FROM THE BOARD

• Enlarged issued share capital upon completion of the Open Offer assuming full conversion of the Convertible Note and the Convertible Bonds (and with the issue of the New Shares)

–

1,280,961,520 Shares (1,306,053,520 Shares)

Offer Price

The Offer Price is HK$0.06 per Offer Share, payable in full on application. The Offer Price represents:

• (i) a discount of approximately 62.0% to the closing price of HK$0.158 per Share as quoted on the Stock Exchange on 14 July 2003 (being the last trading day before the date of the announcement of the Open Offer);

• (ii) a discount of approximately 24.6% to the theoretical ex-entitlement price of HK$0.0796 per Share based on the aforesaid closing price per Share as quoted on the Stock Exchange;

• (iii) a discount of approximately 64.5% to the average of the closing prices of the Shares for the 10 trading days ended on 14 July 2003 of approximately HK$0.1688 per Share as quoted on the Stock Exchange;

• (iv) a premium of approximately 62.2% to the pro forma adjusted consolidated net asset value of the Group of HK$0.037 per Share; and

• (v) a discount of approximately 53.8% to the closing price of HK$0.130 per Share as quoted on the Stock Exchange as at the Latest Practicable Date.

The Offer Price for the Offer Shares has been determined based on arm’s length negotiations between the Company and the Underwriter with reference to prevailing market prices of the Shares. The Directors consider that the terms of the Underwriting Agreement are fair and reasonable and the discount of the Offer Price as compared to the recent market prices would encourage Shareholders to participate in the Open Offer and the future growth of the Company.

Status of the Offer Shares

When allotted and issued fully paid, the Offer Shares will rank pari passu in all respects with the existing Shares. Holders of the Offer Shares will be entitled to receive all future dividends and distributions which are declared, made or paid on or after the date of issue of the Offer Shares.

Share Certificates

Subject to fulfillment of the conditions of the Open Offer, share certificates for fully-paid Offer Shares are expected to be posted at the risk of the Shareholders on or before Friday, 26 September 2003. No fractional entitlements or allotments are expected to arise as a result of the Open Offer.

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LETTER FROM THE BOARD

Rights of the Excluded Shareholders

If at the close of business on the Record Date a Shareholder’s address on the Company’s register of members is in a place outside Hong Kong, that Shareholder cannot take part in the Open Offer as 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 and Bermuda. The invitation to apply for the Offer Shares to an Excluded Shareholder may, without compliance with specific formalities in the place of residence of such Excluded Shareholder, be unlawful or impracticable. Accordingly, the Excluded Shareholders will not be entitled to participate in the Open Offer. The Company will send the Open Offer prospectus to the Excluded Shareholders for their information only. The Company will not send the Application Forms for the Offer Shares to the Excluded Shareholders. The Excluded Shareholders will be entitled to vote at the Special General Meeting to consider, among other things, the Open Offer.

Application for listing

The Company has applied to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Offer Shares. Dealings in the Offer Shares will be subject to the payment of stamp duty in Hong Kong.

THE UNDERWRITING AGREEMENT

Undertaking of the controlling shareholder of the Company

As at the Latest Practicable Date, Vision Century, the controlling shareholder of the Company, is interested in 156,419,190 Shares representing approximately 72.6% of the existing issued share capital of the Company. Vision Century has irrevocably undertaken to the Company that it will subscribe for the 625,676,760 Offer Shares that it will be entitled to apply for on an assured basis under the Open Offer. Save for the above and pursuant to the Subscription, none of the Directors or connected persons of the Company (as defined in the Listing Rules) is interested in any Shares as at the Latest Practicable Date.

Underwriting Agreement

Pursuant to the Underwriting Agreement, the Underwriter has agreed to fully underwrite the Offer Shares not taken up by Vision Century, which will amount to a minimum of 236,425,792 Offer Shares and a maximum of 399,092,456 Offer Shares.

The Underwriter is independent of, and not connected with the Company, the directors, chief executive or substantial shareholders of the Company, its subsidiaries or their respective associates.

Commission and other payment

The Company will pay to the Underwriter an underwriting commission at 2.5% of the aggregate Offer Price of the actual number of the Offer Shares to be underwritten by the Underwriter as determined on the Record Date. The underwriting commission will range from approximately HK$0.35 million to approximately HK$0.60 million.

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LETTER FROM THE BOARD

Termination of the Underwriting Agreement

Shareholders should note that the Underwriting Agreement contains provisions granting the Underwriter the right, which may be exercised at any time prior to 4:00 p.m. on the third business day after 18 September 2003, to terminate its obligations thereunder on the occurrence of certain events, including force majeure, or where there is a material breach of any of the obligations and undertakings by the Company contained in the Underwriting Agreement, or the representations or warranties by the Company contained in the Underwriting Agreement being untrue or inaccurate, which, in each case, will have a material and adverse effect on the business, financial or trading position or prospects of the Group, or is otherwise likely to have a materially prejudicial effect on the Open Offer or where the Company fail to clarify any information at the Underwriter’s request for the purpose of preventing the creation of a false market in the securities of the Company, on or before 4:00 p.m. on the third business day following the last day for application and payment for the Offer Shares under the Open Offer. For this purpose, force majeure refers to the introduction of any new law or regulation or any change in existing law or regulation (or the judicial interpretation thereof); or the occurrence of any local, national, international event or change (whether or not forming part of a series of events or changes occurring or continuing before, and/or after the date of the Underwriting Agreement) of a political, military, financial, economic or currency (including a change in the system under which the value of the Hong Kong currency is linked to the currency of the United States of America) or other nature (whether ejusdem generis with any of the foregoing), or of the nature of any local, national or international outbreak or escalation of hostilities or armed conflict, or affecting local securities market which may, in the reasonable opinion of the Underwriter, materially and adversely affect the business or the financial or trading position or prospects of the Group as a whole or the success of the Open Offer or make it inadvisable or inexpedient to proceed with the Open Offer. If the Underwriter exercises such right to terminate its obligations under the Underwriting Agreement, the Open Offer will not proceed.

Conditions of the Underwriting Agreement

The Underwriting Agreement is conditional, among other things, on the following conditions being fulfilled:

• (i) the Independent Shareholders approving the Open Offer at the Special General Meeting;

• (ii) the Listing Committee of the Stock Exchange granting or agreeing to grant (subject to allotment) and not having withdrawn or revoked listing of, and permission to deal in, the Offer Shares;

• (iii) the delivery to the Stock Exchange and the registration by the Registrar of Companies in Hong Kong of one copy of the Open Offer prospectus and the Application Form each duly certified in compliance with section 342C of the Companies Ordinance (and all other documents required to be attached thereto) and otherwise complying with the requirements of the Companies Ordinance and the Listing Rules and the filing of one copy of the Open Offer prospectus and the Application Form each duly signed by or on behalf of the Directors with the Registrar of Companies in Bermuda in compliance with requirements of the Companies Act; and

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LETTER FROM THE BOARD

• (iv) the Open Offer prospectus and the Application Forms being duly approved by the Directors, delivered to the Underwriter and despatched to the Shareholders.

If the conditions to the Underwriting Agreement are not fulfilled or waived on the dates as specified in the Underwriting Agreement (or such later date or dates as the Underwriter may agree with the Company in accordance with its terms), or if the Underwriting Agreement shall be terminated as described above, the obligations and liabilities of the parties shall cease and determine. The Open Offer is subject to the Underwriting Agreement becoming unconditional and not being terminated in accordance with its terms.

Warning of the risks of dealing in shares

Shareholders should note that the Shares will be dealt with on an ex-entitlements basis commencing from Thursday, 28 August 2003 and that dealings in such Shares will take place whilst the conditions to which the Underwriting Agreement is subject remain unfulfilled. Any Shareholder or other person dealing in such Shares up to the date on which all conditions to which the Open Offer is subject are fulfilled (which is expected to be Tuesday, 23 September 2003), will accordingly bear the risk that the Open Offer cannot become unconditional and may not proceed. Any Shareholders or other persons contemplating selling or purchasing Shares who is in any doubt about his/her position is recommended to consult his/her own professional adviser.

REASONS FOR THE OPEN OFFER AND USE OF PROCEEDS

The principal activities of the Group are the design, manufacture and sale of a wide range of toys. For the year ended 31 March 2002, the Group incurred an audited consolidated net loss of approximately HK$59.3 million. For the year ended 31 March 2003, the Group recorded net profit attributable to Shareholders of approximately HK$37.4 million mainly representing the gain arising from the waiving of debts by various banks and financial institutions of approximately HK$77.0 million and a number of other creditors of the Group through a debt restructuring completed in May 2002. In May 2002, the Group completed a restructuring proposal involving, among others (i) the issue of new Shares to Vision Century to raise approximately HK$30 million; and (ii) a three for two open offer to raise approximately HK$40.3 million. The Directors are of the view that with the recently improving equity market conditions, it is in the interest of the Company to raise equity capital to strengthen the Group’s financial position and enlarge its capital base.

Net proceeds of the Open Offer of approximately HK$49.7 million is intended to be applied as to approximately HK$32.0 million for the repayment of the liabilities outstanding (including the Convertible Note, the Convertible Bonds and other liabilities of the Group) and as to the remainder of approximately HK$17.7 million for general working capital of the Group. The Group has yet to decide the proportion for the repayment of the Convertible Note, the Convertible Bonds and other liabilities of the Group. The Directors believe that the Open Offer is in the interests of the Group and the Shareholders given that the Open Offer will increase the asset base of the Group and provide it with additional working capital.

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LETTER FROM THE BOARD

Business prospects of the Group

During the year, the Group has successfully implemented the debt restructuring which gave the Group significant improvement to its capital base and restored the on-going support from the business partners for daily operation. In view of the global economy persisted to shrink by deflation, terrorists’ attacks and in particular the Iraq war, the overall sales performance fell below the Group’s expectation. In order to maintain the competitiveness of the Group’s products and to reduce the operating expenses, the Group have implemented various marketing strategies such as early bird program, adopting new pricing policy and scaling down the production.

With the uncertainties about the global economy and shrinkage in toys demand, most of the Group’s customers were pessimistic and cautious in their buying patterns as compared to previous year. This caused a decrease in turnover generated from most of the major geographical regions.

With the Iraq war, heavy price fluctuations occurred in the by-products of petroleum such as plastic material, one of the primary raw materials utilized for the Group’s manufacturing operations, especially for the core product item – toddler cars. This in turn caused a rise to the cost of the Group’s products and affected the new pricing policy.

The prolonged adverse effect from terrorists’ attacks and labour strike in the harbour terminals of the United States led to the cancellation and postponement of certain orders so that the Group had scaled down its production to reduce its fixed operating expenses in late 2002. At the same time, an effective internal control system has been implemented by the Group to streamline its operation process with an aim to increasing its production efficiency.

In order to ensure the Group places itself in more promising future, the management has taken several measures to manage the business of the Group through reduction of fixed operating and administrative expenses, cost control, establishment of a product design department in Hong Kong office together with the recruitment of well experienced sales and marketing staff to assist in formulating its sales strategies.

Prospects

The management believes that during the global recession and the downturn in toy’s industries, it is appropriate for the Group to re-engineer its production capacity, to reset its sales and marketing strategies, to review its long term mission and to penetrate its products into new markets. The Group will continue to focus on enhancing its original design manufacture products and expanding its business into key markets. In the forthcoming recovery of the global economy, the Group can ride on the upswings to achieve the long term growth.

– 12 –

LETTER FROM THE BOARD

Fund raising activities in 2002

In May 2002, the Group completed a restructuring proposal involving:

• (i) the subscription of an equivalent of 60,000,000 Shares at HK$0.50 per Share by Vision Century at an aggregate subscription price of HK$30 million;

• (ii) the three for two open offer of an equivalent of 80,518,102 Shares at HK$0.50 per Share to raise HK$40.3 million; and

• (iii) the release and discharge by certain banks of all claims and other monies owed by the Group.

The number of Shares and the share price as mentioned above have been adjusted for the 50 to 1 share consolidation completed in December 2002.

The net proceeds raised for the Company from the restructuring proposal as mentioned above were approximately HK$63.5 million. As stated in the circular of the Company dated 26 April 2002 in relation to the restructuring proposal, the intended use of proceeds was as to approximately HK$20 million to repay bank loans and as to the remainder as working capital and/or repay outstanding liabilities of the Group. Such proceeds has been applied in accordance with their intended use as detailed above.

CLOSURE OF REGISTER OF MEMBERS, LISTINGS AND DEALINGS

Qualifying Holders

The Company will send the Application Forms for Offer Shares to the Qualifying Holders only. To qualify for the Open Offer, Shareholders must at the close of business on the Record Date:

• (i) be registered on the register of members of the Company; and

• (ii) have addresses in Hong Kong on the register of members of the Company.

In order to be registered as members on the Record Date, Shareholders must lodge any transfers of Shares (with the relevant share certificates) with the Company’s branch share registrar in Hong Kong, Tengis Limited, at Ground Floor, BEA Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong on Friday, 29 August 2003 by 4:00 p.m..

The invitation to apply for the Offer Shares will not be transferable and there will be no trading in nil-paid entitlements on the Stock Exchange.

Closure of register of members

The register of members of the Company will be closed from Monday, 1 September 2003 to Wednesday, 3 September 2003, both dates inclusive. No transfer of Shares will be registered during this period.

– 13 –

LETTER FROM THE BOARD

Subject to the granting of the listing of, and permission to deal in, the Offer Shares on the Stock Exchange, the Offer Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the commencement date of dealing in the Offer Shares or 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.

Share certificates for all Offer Shares are expected to be posted on or before 26 September 2003, at the risk of the Shareholders.

THE SUBSCRIPTION

On 28 July 2003, the Company and the Subscribers entered into the Subscription Agreement pursuant to which the Subscribers agreed to subscribe for, 25,092,000 Shares at a price of HK$0.0796 per Share if the Open Offer is completed or 12,640,000 Shares at a price of HK$0.158 if the Open Offer does not proceed. The issue of the New Shares under the Subscription will be in full and final settlement of all outstanding balances as at 31 March 2003 owed by the Group to the Subscribers, in the aggregate amount of HK$1,997,774.19. Mr. Lo is the chairman and executive director of the Company and Mr. Yu is an executive Director. Therefore, both Mr. Lo and Mr. Yu are connected persons of the Company. The Subscribers and their respective associates held no Shares prior to the date of the Subscription Agreement.

1. Subscription Shares

The Company agreed to issue, and the Subscribers agreed to subscribe for, 25,092,000 Shares, on the basis that the Open Offer is completed. Such New Shares represent approximately 11.6% of the existing issued share capital of the Company or approximately 10.4% of the issued share capital of the Company as enlarged by the New Shares. On the basis of the existing issued Shares and assuming that the number of Shares in issue will not change prior to the Record Date and the Open Offer is completed, the Subscription will enlarge its issued share capital to a minimum of 1,102,720,190 Shares, and the New Shares represent 2.3% of such enlarged share capital. In the event the Open Offer does not proceed, the number of New Shares to be issued will be adjusted as described in the paragraph headed “Adjustment” below.

2. Subscription Price

Assuming the Open Offer proceeds, the Subscription Price is equal to HK$0.0796 per Share. Pursuant to the Open Offer, Offer Shares will be offered at the price of HK$0.06 per Share on the basis of 4 offer Shares for every Share held on the Record Date. The Subscription Price has been determined to be equal to the theoretical ex-entitlement price of the Shares based on the average of the closing prices of the Shares for the 10 business days ended on 25 July 2003, of approximately HK$0.158 per Share. The Subscription Price represents a discount of approximately 51.8% to the closing price of HK$0.165 per Share as quoted on the Stock Exchange on 28 July 2003 (being the last trading day of the Shares prior to the release of the announcement of the Subscription). The Subscription Price also represent a discount of 49.9% to the average of the closing prices of the Shares for the ten trading days ended on 28 July 2003 of HK$0.159. In the event the Open Offer does not proceed, the Subscription Price will be adjusted to HK$0.158 per Share.

– 14 –

LETTER FROM THE BOARD

The issue of the New Shares under the Subscription will be in full and final settlement of all outstanding balances as at 31 March 2003 owed by the Group to the Subscribers, in the aggregate amount of HK$1,997,774.19.

3. Conditions

The Subscription Agreement is conditional upon the following:

• (i) the approval of Shareholders that are independent of the Subscribers at the Special General Meeting;

• (ii) the granting of the listing of and permission to deal in the New Shares by the Listing Committee of the Stock Exchange; and

• (iii) the Bermuda Monetary Authority granting permission to allot and issue the New Shares, if required.

All but not part of the above conditions shall be fulfilled on or before 30 September 2003, or such other date as may be agreed by the parties to the Subscription Agreement. Otherwise the Subscription Agreement shall cease and determine and none of the parties shall have any claim against any other in respect of the Subscription.

4. Completion

Completion shall take place on the third business day after fulfillment of all the conditions stated above or the completion of the proposed Open Offer (or if the Open Offer does not proceed, upon the announcement by the Company of such event) (whichever is the later). The Subscription is not conditional on the Open Offer and vice versa.

As the allotment of the New Shares will take place after completion of the Open Offer, completion of the Subscription will not affect the offering of the Shares under the Open Offer. As the allotment of the New Shares is expected to take place after the Record Date, the Subscribers will not be entitled to vote at the Special General Meeting to approve the Open Offer in respect of the New Shares.

5. Adjustment

The terms of the Subscription Agreement were agreed between the Subscribers and the Company based on arm’s length negotiations taking into consideration the prevailing market prices of the Shares and the issue price of the Shares pursuant to the Open Offer. If the Open Offer does not become unconditional, the Subscription Price of the New Shares will be adjusted to be equal to the average of the closing prices of the Shares for the ten days ended 25 July 2003 of HK$0.158, in which event the aggregate number of the New Shares will be adjusted to 12,640,000 Shares. Such adjusted number of the New Shares represent 5.9% of the existing issued Shares and 5.5% of the issued Shares as enlarged only by the Subscription. Further announcement will be made if an adjustment to the Subscription Price is required in the event of a termination of the Open Offer.

– 15 –

LETTER FROM THE BOARD

The Directors consider that the terms of the Subscription Agreement, including the Subscription Price, are fair and reasonable and the Subscription is in the interest of the Company and the Shareholders. Mr. Lo and Mr. Yu took no part in approving the Subscription Agreement.

6. Rights of the New Shares

The New Shares will rank pari passu in all respects among themselves and with the Shares in issue on the date of the allotment and issue of the New Shares, including but not limited to, the right to receive all dividends and distributions, which may be declared, made or paid on or after such date. The New Shares will be issued after the Record Date and will not be entitled to participate in the Open Offer.

7. Application for listing

Application has been made to the Stock Exchange for the listing of and permission to deal in the New Shares. The New Shares will be allotted and issued pursuant to the approval by the Subscription Independent Shareholders at the Special General Meeting. At the Special General Meeting, resolution numbered 2 will be proposed to approve the Subscription.

8. Reasons for the Subscription

The Subscription serves to encourage senior management equity participation in the Group while capitalizing liabilities of the Group. In 2001, the Group was operating under financial difficulty and the Group has undergone a successful restructuring of its liabilities in May 2002 involving the issue of shares, the Convertible Bonds, the Convertible Note and compromise of bank debts and creditor settlements. The Board considers that the contribution of Mr. Lo and Mr. Yu in negotiating agreements leading to, and managing the operations of the Group during the debt and capital restructuring of the Group has been extremely valuable. The Board considers that the Subscription will enable Mr. Lo and Mr. Yu to participate in the recovery of the Group in the future by equity investment. The agreement of the Subscribers to convert amounts owed by the Group into equity also reflects the confidence of the Subscribers in the future prospects of the Group, which the Board considers will foster confidence of Shareholders as well as the suppliers and creditors of the Group.

The Directors consider the Subscription to be in the interest of the Company and the Shareholders in that it would enhance the capital base of the Company and at the same time preserve available financial resources of the Group by capitalizing the outstanding amount owed by the Group to the Subscribers. Since the completion of the abovementioned debt restructuring, the Group has been operating under strict control in terms of use of financial resources. The Group owed to the Subscribers an aggregate amount of HK$1,997,774.19 as at 31 March 2003, representing salary payable to the Subscribers for the period from December 2000 to March 2003.

The Directors consider that the Subscription Agreement has been agreed after the release of the annual results of the Group for the year ended 31 March 2003 but prior to completion of the Open Offer so that Shareholders will have sufficient time to assess the effect of the Subscription Agreement and the Open Offer in the light of latest financial information.

– 16 –

LETTER FROM THE BOARD

INCREASE IN AUTHORISED SHARE CAPITAL

The Directors further propose to increase the authorised share capital of the Company from HK$15 million to HK$100 million by the creation of 8,500,000,000 Shares. The increase in authorised share capital of the Company is not interconditional with the Open Offer or the Subscription. The increase in authorised share capital is conditional on the approval of Shareholders at the Special General Meeting.

SHAREHOLDING IN THE COMPANY

The following is a summary of the shareholding of the Company before and after the completion of the Open Offer and the Subscription:

Shareholder Vision Century Mr. Lo Mr. Yu Underwriter Public Total	Existing Shares 156,419,190 72.58% – – – – – – 59,106,448 27.42% 215,525,638	Immediately after the completion of the Subscription	Immediately after the completion of the Subscription	Immediately after the completion of the Subscription
		After Open Offer (Note: a, c, e) 782,095,950 70.92% 18,068,000 1.64% 7,024,000 0.64% – – 295,532,240 26.80% 1,102,720,190	After Open Offer (Note: b, c, e) 782,095,950 70.92% 18,068,000 1.64% 7,024,000 0.64% 236,425,792 21.44% 59,106,448 5.36% 1,102,720,190	If Open Offer does not proceed (Note: d, e) 156,419,190 68.56% 9,104,000 3.99% 3,536,000 1.55% – – 59,106,448 25.90% 228,165,638

Notes:

• (a) Assuming the Shareholders take up all the Offer Shares under the Open Offer.

• (b) Assuming that no Shareholders (except for Vision Century) take up their entitlement to Offer Shares and the Underwriter takes up its underwriting commitment under the Open Offer as underwriter.

• (c) If the Open Offer proceeds, 25,092,000 Shares will be issued at HK$0.0796 per Share pursuant to the Subscription.

• (d) In the event the Open Offer does not proceed, 12,640,000 Shares will be issued at HK$0.158 per Share pursuant to the Subscription.

• (e) All scenarios presented on the basis of the existing issued Shares and assuming that all convertible securities of the Company in issue will not be exercised prior to the Record Date.

Pursuant to the Underwriting Agreement, the Underwriter has undertaken to the Company to procure independent placees to purchase Shares as may be necessary to ensure that at completion of the Open Offer not less than 25% of Shares are held by the public as required under the Listing Rules.

In addition, the Underwriter has stated that any independent placees procured will be selected on the basis that they are not acting in concert with the Company, Vision Century, the Underwriter (and parties acting in concert with it) and their respective associates, so as to ensure that the Underwriter and its associates will not incur any obligation under the Hong Kong Code on Takeovers and Mergers to make a general offer for the Shares as a result of fulfilling its obligations under the Underwriting Agreement.

– 17 –

LETTER FROM THE BOARD

Depending on the extent to which the entitlements under the Open Offer are taken up by the Shareholders and the procurement of independent placees by the Underwriter as mentioned above, new substantial shareholders of the Company may arise. Further announcement will be made if any new substantial shareholder arises as a result of the Open Offer.

GENERAL MANDATES

The Directors have also taken the opportunity afforded by the necessity of convening a meeting of Shareholders to propose resolutions to renew the Directors’ General Mandates to issue Shares not exceeding 20% of the enlarged issued share capital of the Company and to repurchase Shares not exceeding 10% of the enlarged issued share capital of the Company.

The reason for the renewal of the General Mandates is to ensure that the enlarged issued Shares as a result of the Open Offer in the aggregate number of 1,077,628,190 Shares are used in the calculation of the number of Shares which are permitted to be issued or repurchased by the Company under the General Mandates. On this basis, an aggregate of 215,525,638 Shares are issuable under the general mandate to issue securities and an aggregate of 107,762,819 Shares can be repurchased under the Repurchase Mandate. The Directors believe that it is in the interests of the Company and the Shareholders as a whole if the General Mandates were to be granted at the Special General Meeting. An explanatory statement to provide Shareholders with all the information reasonably necessary to enable them to make an informed decision on whether to vote for or against the resolution concerning the Repurchase Mandate is set out in Appendix II of this circular.

ADJUSTMENT TO THE CONVERSION PRICES OF THE CONVERTIBLE BONDS AND THE CONVERTIBLE NOTE

Subject to the Open Offer and/or the Subscription becoming unconditional, the conversion price of the Convertible Bonds and the Convertible Note may be adjusted as a result of the Open Offer and/or the Subscription. However, the adjustments to the conversion price of the Convertible Bonds and the Convertible Note cannot be determined until the total number of Offer Shares and/or the New Shares can be ascertained. An announcement will be made by the Company relating to the adjustments following the approval of the Open Offer and/or the Subscription.

SPECIAL GENERAL MEETING

Set out in this circular is a notice convening the Special General Meeting which will be held at Plaza I – III, Lower Lobby, Novotel Century Hong Kong, 238 Jaffe Road, Wanchai, Hong Kong on Wednesday, 3 September 2003 at 10:00 a.m. (or so soon thereafter the annual general meeting of the Company convened for the same date at the same place shall have concluded or adjourned), at which resolutions will be proposed to approve the Open Offer, the Subscription, the increase in authorised share capital and the General Mandates.

– 18 –

LETTER FROM THE BOARD

A form of proxy for use at the Special General Meeting is enclosed with this circular. Whether or not you intend to attend the meeting, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it as soon as possible to the Company’s principal place of business in Hong Kong not less than 48 hours before the time appointed for the holding of the meeting. Delivery of a form of proxy will not preclude you from attending and voting in person at the meeting or any adjourned meeting should you so desire.

RECOMMENDATIONS

The Independent Board Committee, after taking into account the opinion from Dao Heng Securities considers that the Open Offer and the Subscription are in the interest of the Company and its Shareholders as a whole and that the terms of the Open Offer and the Subscription are fair and reasonable so far as the Independent Shareholders and the Subscription Independent Shareholders, respectively, are concerned. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the resolutions to approve the Open Offer and recommends the Subscription Independent Shareholders to vote in favour of the Subscription. The text of a letter from the Independent Board Committee is set out on page 20 of this circular and the text of a letter from Dao Heng Securities containing its opinion and the principal factors and reasons it has taken into account in arriving at its opinion as regards the Open Offer and the Subscription is set out on pages 21 to 35 of this circular.

Vision Century, holding in aggregate 156,419,190 Shares, representing approximately 72.6% of the existing issued Shares and its associates, will abstain from voting in respect of the resolution to consider the Open Offer. As the Subscribers (and their associates) are not existing Shareholders, no Shareholder will be required to abstain from voting in respect of the resolution to be proposed at the Special General Meeting to approve the Subscription.

The Directors consider the increase in authorised share capital and the General Mandates are in the interest of the Company and the Shareholders. Accordingly, the Directors recommend Shareholders to vote in favour of the resolutions to approve the increase in authorised share capital and the General Mandates.

GENERAL

Your attention is drawn to the texts of the letters form the Independent Board Committee and from Dao Heng Securities respectively containing their recommendations and opinions regarding the Open Offer and the Subscription, and to the information set out in the Appendices.

On behalf of the Board Lo Ming Chi, Charles Chairman

– 19 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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(Incorporated in Bermuda with limited liability)
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18 August 2003
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To the Independent Shareholders

and the Subscription Independent Shareholders

Dear Sir or Madam,

PROPOSED OPEN OFFER OF NEW SHARES ON THE BASIS OF FOUR OFFER SHARES FOR EVERY SHARE HELD

CONNECTED TRANSACTION INVOLVING SUBSCRIPTION OF NEW SHARES

As the Independent Board Committee, we have been appointed to advise you in connection with the Open Offer and the Subscription, details of which are set out in the letter from the Board contained in the circular to the Shareholders dated 18 August 2003 (the “Circular”), of which this letter forms part. Terms defined in the Circular shall have the same meanings when used herein unless the context otherwise requires.

Having considered the terms of the Open Offer and the Subscription and the advice of Dao Heng Securities in relation thereto as set out on pages 21 to 35 of the Circular, we are of the opinion that the terms of the Open Offer and the Subscription are fair and reasonable so far as the Shareholders are concerned. We therefore recommend that you vote in favour of the ordinary resolutions to be proposed at the Special General Meeting to approve the Open Offer and the Subscription.

Yours faithfully,

Independent Board Committee Wu Wing Kit Wong Kwok Tai, Wystan Lau Pok Lam

* For identification purpose only

– 20 –

LETTER FROM DAO HENG SECURITIES

The following is the text of the letter of advice to the Independent Board Committee from Dao Heng Securities in connection with the Open Offer and the Subscription, which has been prepared for the purpose of inclusion in this circular.

To the Independent Board Committee

18 August 2003

Dear Sirs,

PROPOSED OPEN OFFER OF NEW SHARES ON THE BASIS OF FOUR OFFER SHARES FOR EVERY SHARE HELD

CONNECTED TRANSACTION INVOLVING SUBSCRIPTION OF NEW SHARES

INTRODUCTION

We refer to our engagement by the Company as independent financial adviser to advise the Independent Board Committee with respect to the terms of the Open Offer and the Subscription Agreement, details of which are contained in the letter from the Board in the circular dated 18 August 2003 to the Shareholders (the “Circular”), of which this letter forms part. Terms defined in the Circular bear the same meanings herein unless the context otherwise requires.

On 15 July 2003, the Company proposed to raise approximately HK$51.7 million before expenses by issuing not less than 862,102,552 (based on the number of existing Shares in issue of 215,525,638) and not more than 1,024,769,216 Offer Shares (based on the assumption that the Convertible Bonds and the Convertible Note are fully converted on or before the Record Date, a total of 40,666,666 Shares may fall to be issued and thus an additional 162,666,664 Offer Shares would be issued) at a price of HK$0.06 per Offer Share by way of the Open Offer, payable in full on application. As the Open Offer would increase the Company’s issued share capital by more than 50%, in compliance with Rule 7.24(5) of the Listing Rules, the Open Offer will be conditional on the approval by the Independent Shareholders at the Special General Meeting. Vision Century, the controlling Shareholder, and its associates will abstain from voting in the Special General Meeting in respect of the resolution to approve the Open Offer.

On 28 July 2003, the Company entered into the Subscription Agreement with the Subscribers whereby they agreed to subscribe for 25,092,000 Shares at a price of HK$0.0796 per Share. Since the Subscribers are connected persons as defined under the Listing Rules of the Company, the Subscription Agreement constitutes a connected transaction of the Company and is subject to, inter alia, approval by the Subscription Independent Shareholders at the Special General Meeting.

– 21 –

LETTER FROM DAO HENG SECURITIES

Messrs. Wu Wing Kit, Wong Kwok Tai, Wystan and Lau Pok Lam have been appointed as the members of the Independent Board Committee to advise the Independent Shareholders and the Subscription Independent Shareholders in respect of the Open Offer and the Subscription respectively.

Our role as the independent financial adviser to the Independent Board Committee is to give our opinion as to (i) whether the terms of the Open Offer are fair and reasonable so far as the interests of the Independent Shareholders as a whole are concerned; and (ii) whether the terms of the Subscription are fair and reasonable as far as the interest of the Subscription Independent Shareholders as a whole are concerned.

In formulating our recommendations, we have relied on the accuracy of the information and representations contained in the Circular, which have been provided by the Directors and have assumed that all information and representations made or referred to in the Circular are true and accurate in all material respects. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and have been advised by the Directors that no material facts have been omitted from the information provided and referred to in the Circular. We consider that we have reviewed sufficient information to reach an informed view and to justify relying on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have not, however, conducted any independent investigation into the business and affairs or the future prospects of the Group.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our advice, we have considered the following principal factors and reasons.

PART ONE – THE OPEN OFFER

A. Reasons for and benefits of the Open Offer

The principal activities of the Group are the design, manufacture and sale of a wide range of toys.

The Directors believe that the Open Offer is in the interests of the Group and the Shareholders given that the Open Offer will increase the asset base of the Group and provide it with additional working capital. The estimated net proceeds of the Open Offer is approximately HK$49.7 million, which is intended to be applied as to approximately HK$32.0 million for the repayment of liabilities outstanding (including the Convertible Note, the Convertible Bonds and other liabilities of the Group) and as to the remainder of HK$17.7 million as general working capital of the Group. The Group has yet to decide the proportion as to the repayment of the Convertible Note, the Convertible Bonds and other liabilities of the Group.

In late May 2002, the Group had completed a debt restructuring exercise (the “Debt Restructuring Exercise”). As stated in the Company’s circular dated 26 April 2002 issued to the Shareholders, as a result of an investigation by the Independent Commission Against Corruption against the former chairman of the Group, an incident of wide publicity in the press, the Group’s reputation was severely impaired. All its 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. According to the annual report of the Group for the year ended 31 March 2002, the Group recorded an audited consolidated net current liabilities of approximately HK$182.8 million and HK$238.5 million as at 31 March 2001 and 31 March 2002 respectively.

– 22 –

LETTER FROM DAO HENG SECURITIES

At the same time, the Group experienced a decline in profit margins attributable to keen competition in the toys industry and provisions made for trade receivables and inventories resulting from overexpansion of trading in the first half of 2000. As stated in its annual report for the year ended 31 March 2002, the Group had operated under financial difficulties whereby financial creditors either suspended or terminated the credit facilities granted to the Group and some of them further demanded for the repayment of all outstanding debt. Under such situation, for the year ended 31 March 2002, the Group found it difficult to carry on its normal operations with its tight working capital position. Together with the composition of stringent credit control by the Group on sales, the Group recorded a significant drop in turnover of approximately 76.6% from that of the year ended 31 March 2001 (FY2001: approximately HK$202.7 million and FY2002: approximately HK$47.4 million). As a result, the Group’s turnover could not reach a scale that could recover the Group’s fixed costs and the Group recorded a consolidated net loss of approximately HK$59.3 million for the year ended 31 March 2002 (FY2001: consolidated net loss of approximately HK$279.3 million).

In order to restore the Group to positive net assets and to open up possibilities for future diversification, the Group underwent the Debt Restructuring Exercise in May 2002 and as a result, the Group has significantly improved its financial position and enlarged its capital base. According to the Company’s annual report for the year ended 31 March 2003, although turnover for the year ended 31 March 2003 dropped by approximately 20% from that of the year ended 31 March 2002, the Group recorded an audited consolidated net profits attributable to shareholders of approximately HK$37.4 million (FY 2002: consolidated net loss of approximately HK$59.3 million). The profits for the period were mainly contributed by the gain from the Debt Restructuring Exercise of approximately HK$77.0 million. Moreover, the Group’s net current liabilities reduced significantly to approximately HK$91.3 million as at 31 March 2003 from approximately HK$238.5 million as at 31 March 2002 and the Group’s net deficiency in assets also slashed from approximately HK$128.4 million as at 31 March 2002 to approximately HK$11.0 million as at 31 March 2003.

According to the Company’s annual report for the year ended 31 March 2003, as at 31 March 2003, the cash and bank balances of the Group were approximately HK$2.9 million. It is further stated that, in respect of the Company’s future development, the Group will continue to focus on enhancing its original design manufacture products and expanding its business into key markets. As advised by the Directors, these key markets include North America, Europe together with Central and South America.

Given the recent financial position and performance of the Group and based on the Company’s intention to apply a majority of the net proceeds from the Open Offer in settling the Group’s outstanding liabilities, we are of the opinion that it is prudent for the Company to finance by way of equity and the Open Offer may further improve the capital position of the Group. As a result of the Open Offer, the asset position of the Group will be improved from a net deficiency in assets of approximately HK$11.0 million as at 31 March 2003 to a net asset value of approximately HK$38.7 million assuming no conversion of the Convertible Bonds and the Convertible Note before the Record Date, and approximately HK$68.8 million, assuming full conversion of the Convertible Bonds and the Convertible Note before the Record Date, respectively. As such, we also consider that the enlarged capital base will enhance the financial capability of the Group to expand its business into key markets.

In addition, as at 31 March 2003, the Group had interest-bearing bank and other borrowings of approximately HK$48.2 million, loans from a Shareholder of approximately HK$12.0 million and the Convertible Note and the Convertible Bonds of approximately HK$22.5 million. According to the

– 23 –

LETTER FROM DAO HENG SECURITIES

Company’s annual reports for the year ended 31 March 2002 and 31 March 2003, the Group’s finance costs, representing interest on bank loans, overdrafts and other loans wholly repayable within five years, interest on the Convertible Note and the Convertible Bonds and interest on finance leases, amounted to approximately HK$15.8 million and HK$5.4 million for the years ended 31 March 2002 and 31 March 2003 respectively.

According to the Company’s annual report for the year ended 31 March 2003 and as advised by the Directors, the average interest rate of the Group’s bank and other borrowings, including (i) the interest-bearing loans from a Shareholder and an independent third party to the Company at 3% over the prime lending rate in Hong Kong per annum; (ii) the Convertible Bonds and the Convertible Note at 5% and 3% per annum respectively; and (iii) two interest-bearing bank borrowings at 5.8% and 6.4% per annum respectively, is approximately 6.1% per annum. Based on the Group’s total debt other than accounts payable, tax payable, other payables and accruals and deferred tax as at 31 March 2003 of approximately HK$82.7 million and the average rate of the Group’s indebtedness of approximately 6.1%, the estimated annual interest expenses for the Group’s indebtedness amounted to approximately HK$5.0 million. We consider that the Open Offer is in the interest of the Group as the Open Offer would provide funding of at least approximately HK$49.7 million with no interest expense to the Group. Furthermore, it is stated in the letter from the Board that the Company intends to apply as for approximately HK$32 million of the net proceeds from the Open Offer to repayment of outstanding liabilities. As advised by the Directors, the average interest rate for the liabilities to be settled by the proceeds from the Open Offer is approximately 4.0%. Based on this, the Group may enjoy an interest saving of approximately HK$1.3 million per year as a result of the reduction of the liabilities by utilizing part of the proceeds from the Open Offer.

B. Other financing alternatives

The Directors advised us that they have considered various methods of financing other than the Open Offer, such as placing of new Shares, rights issue and debt financing. However, the Directors consider that placing of new Shares may not be appropriate as private placement by its nature deprives the rights of the existing Shareholders to subscribe for new Shares, resulting in significant dilution in the interests of existing Shareholders. The Directors also consider that although a rights issue offers all the Shareholders an equal opportunity to participate in the fund raising exercise and maintain their proportionate interests in the Company, it may incur extra administrative costs for trading in nil-paid rights for the Group, which is not appropriate and not in the interests of the Group. Alternatively, the Directors consider that debt financing through issue of convertible bonds or bank borrowings will increase the finance costs and dampen the indebtedness of the Group which are not in the interest of the Group.

The Open Offer will offer all Qualifying Shareholders an equal opportunity to participate in the enlargement of the capital base of the Company and enable the Qualifying Shareholders to maintain their proportionate interests in the Company should they wish to do so. The Directors are of the view that the Open Offer, which provides all the Qualifying Shareholders with equal opportunity to subscribe for the Offer Shares at the Offer Price, is presently an appropriate and equitable means for the Company to raise fund.

Having considered the above factors and given that the Open Offer is fully underwritten (apart from those Offer Shares to be taken up by Vision Century) by the Underwriter and the Offer Price has been determined based on arm’s length negotiations between the Company and the Underwriter with reference to prevailing market prices of the Shares, we consider that the Open Offer offers all the Qualifying Shareholders an equal opportunity to participate in the equity increase of the Company rather

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LETTER FROM DAO HENG SECURITIES

than a private placement which would result in dilution of existing Shareholders interest in the Company or a rights issue which would incur extra administration costs for the Group or debt financing which would increase its finance cost and dampen its indebtedness, and therefore is a fair method of equity fund raising as far as the Independent Shareholders are concerned.

C. Principal terms of the Open Offer

(i) The Offer Price

Subject to the fulfillment of the conditions of the Open Offer, Qualifying Shareholders will be offered four Offer Shares for every existing Share held on the Record Date at an Offer Price of HK$0.06 per Offer Shares, payable in full on application. The Offer Price represents:

		Premium/(Discount)
		of the Offer Price
		to respective
		average Share
		price during
	Share price	different periods
	HK$	(%)
Closing price per Share as quoted on the
Stock Exchange on 14 July 2003
(being the last trading day of the
Shares preceding the date of the
announcement of the Open Offer)	0.1580	(62.0)
Average closing price of the Shares for the
10 trading days ended 14 July 2003	0.1688	(64.5)
Average closing price of the Shares for the
one month ended 14 July 2003	0.1704	(64.8)
Average closing price of the Shares for the
three months ended 14 July 2003	0.1598	(62.5)
Average closing price of the Shares for the
six months ended 14 July 2003	0.1697	(64.6)
Theoretical ex-entitlement price per Share
based on the closing price per Share
on 14 July 2003	0.0796	(24.6)
Closing Share price quoted on the Stock
Exchange on the Latest Practicable Date	0.1300	(53.8)
Pro forma consolidated net tangible
asset value per Share upon completion of
the Open Offer, assuming no conversion
of the Convertible Bonds and the
Convertible Note prior to the Record Date
and that the Subscription has not taken place	0.0359	67.1
Pro forma consolidated net tangible
asset value per Share upon completion of
the Open Offer, assuming full conversion
of the Convertible Bonds and the
Convertible Note prior to the Record Date
and that the Subscription has not taken place	0.0537	11.7

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LETTER FROM DAO HENG SECURITIES

As stated in the letter from the Board, the Offer Price for the Offer Shares has been determined based on arm’s length negotiations between the Company and the Underwriter with reference to prevailing market prices of the Shares. It is further stated that the Directors consider the terms of the Underwriting Agreement to be fair and reasonable and the discount of the Offer Price as compared to the recent market prices would encourage Shareholders to participate in the Open Offer and the future growth of the Company.

In order to assess the fairness of the terms of the Open Offer, we have reviewed the terms of 14 open offers announced by companies listed on the main board and the Growth Enterprise Market of the Stock Exchange from 1 January 2002 to 14 July 2003, being the last trading day prior to the announcement of the Open Offer. In addition to these 14 open offers, we also reviewed the terms of 49 rights issues announced during the said period as we consider that open offers and rights issues are broadly comparable fund raising exercises, except that the rights to take up shares under an open offer is not transferable and sellable while that of rights issue is transferable and sellable.

Completion of the Open Offer would increase the issued share capital of the Company by four times. Among the 49 rights issues and 14 open offers announced during the period from 1 January 2002 to 14 July 2003, we have chosen for comparison 10 rights issues and 5 open offers (the “Open Offer Comparables”) which we consider relevant to our analysis as these rights issues and open offers are similar to the Open Offer in that they have the effect in increasing the respective company’s issued share capital by two times or more. The respective offer price of the Open Offer Comparables represents discount to their respective closing price on the last trading day prior to the press announcement, ranging from discount of approximately 5.2% to 96.2% (the “Closing Prices Range”) with an average discount of approximately 63.9%. The respective offer price also demonstrates a discount to their respective theoretical ex-rights/ex-entitlements prices per share based on the last trading day prior to the press announcement, ranging from a discount of approximately 3.5% to 80.7% (the “Theoretical Ex-rights/Ex-entitlements Price Range”) with an average discount of approximately 38.1%.

We note that the discount of the Offer Price to the closing Share price on the last trading day prior to the announcement of the Open Offer of approximately 64.7% falls within the Closing Prices Range and is close to the average of the Closing Prices Range. Besides, the discount of the Offer Price to the theoretical ex-entitlements price based on the closing Share price on the last trading day prior to the announcement of the Open Offer of approximately 26.8% also falls within the Theoretical Ex-rights/Ex-entitlements Price Range and is lower than the average of the Theoretical Ex-rights/Ex-entitlements Price Range.

Taking into account the comparison between the Open Offer and the Open Offer Comparables, we consider that the Offer Price is in line with the market and is fair and reasonable so far as the Shareholders are concerned.

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LETTER FROM DAO HENG SECURITIES

(ii) Underwriting arrangement for the Open Offer

As at the Latest Practicable Date, the Company has (i) a 5% Convertible Bonds in outstanding aggregate principal amount of HK$4,333,333 issued to the bankers in May 2002 as part of the settlement of loans due to them, which are repayable by two remaining equal instalments over two years up to May 2005 or convertible into Shares at conversion price of HK$0.50 per Share; and (ii) a 3% Convertible Note in principal amount of HK$16 million issued to a creditor as partial settlement of debts, which is repayable in July 2004 or convertible into Shares at conversion price of HK$0.50 per Share. Assuming no Convertible Bonds and Convertible Note are converted before the Record Date, 862,102,552 Offer Shares will be issued pursuant to the Open Offer.

Vision Century, the controlling Shareholder, is interested in 156,419,190 Shares representing approximately 72.6% of the existing issued share capital of the Company. Vision Century has irrevocably undertaken to the Company that it will subscribe for the 625,676,760 Offer Shares that it will be entitled to apply for on an assured basis under the Open Offer. Excluding the 625,676,760 Offer Shares which Vision Century has irrevocably undertaken to subscribe for, the remaining balance of the Offer Shares, which will amount to a minimum of 236,425,792 Offer Shares (based on the number of existing Shares in issue of 215,525,638) and a maximum of 399,092,456 Offer Shares (based on the assumption that the Convertible Bonds and the Convertible Note are fully converted on or before the Record Date, a total of 40,666,666 Shares may fall to be issued and thus an additional 162,666,664 Offer Shares would be issued), will be underwritten by the Underwriter pursuant to the Underwriting Agreement, details of which are set out in the letter from the Board in this Circular. Shareholders should note that Vision Century and their respective associates will abstain from voting at the Special General Meeting. Shareholders should also

note that the Underwriting Agreement contains provisions granting the Underwriter the right to terminate the Underwriting Agreement, details of which have been set out in the paragraph headed “Termination of the Underwriting Agreement” in the letter from the Board in this Circular.

We consider that the entering into of an underwriting agreement in respect of an open offer is a common practice in the market to safeguard interests of such company as well as its shareholders. We concur with the Directors’ view that the provisions in the Underwriting Agreement are normal commercial terms and in line with the market practice.

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LETTER FROM DAO HENG SECURITIES

D. Financial effects of the Open Offer

(i) Net asset value

The following is a statement of pro forma consolidated net tangible assets of the Group based on the audited consolidated net deficiency in assets as at 31 March 2003, after making the following adjustments:

	Assuming no	Assuming full
	conversion in the	conversion in the
	Convertible Bonds	Convertible Bonds
	and the	and the
	Convertible Note	Convertible Note
	before the	before the
	Record Date	Record Date
	and that the	and that the
	Subscription	Subscription
	has not	has not
	taken place	taken place
	HK$ million	HK$ million
Audited consolidated net deficiency in assets
of the Group as at 31 March 2003	(11.0)	(11.0)
Proceeds received from the full conversion
of the Convertible Bonds and the
Convertible Note before the Record Date	N/A	20.3
Pro forma adjusted consolidated net asset
value/(net deficiency in assets)
of the Group before the Open Offer	(11.0)	9.3
Estimated net proceeds of the Open Offer	49.7	59.5
Pro forma adjusted consolidated net asset
value of the Group after the Open Offer	38.7	68.8
Pro forma adjusted consolidated net asset
value per Share after the Open Offer	0.0359	0.0537
	(1)	(2)

• (1) based on 1,077,628,190 Shares which represent 215,525,638 Shares in issue as at the Latest Practicable Date and the 862,102,552 Offer Shares to be issued upon completion of the Open Offer

• (2) based on 1,280,961,520 Shares which represent 215,525,638 Shares in issue as at the Latest Practicable Date, the 40,666,666 Shares to be issued upon full conversion of the Convertible Bonds and the Convertible Note before the Record Date and the 1,024,769,216 Offer Shares to be issued upon the completion of the Open Offer

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LETTER FROM DAO HENG SECURITIES

The asset position of the Group will be improved (i) from a net deficiency in assets of approximately HK$(11.0) million before the Open Offer to a pro forma adjusted consolidated net asset value of approximately HK$38.7 million after the Open Offer assuming no conversion of the Convertible Bonds and the Convertible Notes before the Record Date and that the Subscription has not taken place; and (ii) from a pro forma adjusted consolidated net assets of approximately HK$9.3 million before the Open Offer to HK$68.8 million after the Open Offer assuming full conversion of the Convertible Bonds and the Convertible Note before the Record Date and that the Subscription has not taken place.

(ii) Gearing ratio

Assuming no conversion of the Convertible Bonds and the Convertible Note before the Record Date and that the Subscription has not taken place, the asset position of the Group will be improved from a net deficiency in assets of approximately HK$11.0 million to a pro forma adjusted consolidated net assets of approximately HK$38.7 million upon completion of the Open Offer. Upon completion of the Open Offer, based on the Group’s total debt (other than accounts payable, tax payable, other payables and accruals and deferred tax) as at 31 March 2003 of approximately HK$82.7 million, the gearing ratio is approximately 213.7%. As stated in the letter from the Board, the Company intends to apply the estimated net proceeds from the Open Offer of approximately HK$49.7 million as to approximately HK$32 million for the repayment of the Group’s liabilities outstanding. Taking into account the effect of the repayment of liabilities, the Group’s gearing ratio will be improved to approximately 131.1%.

Assuming that the Convertible Bonds and the Convertible Note are fully converted before the Record Date and that the Subscription has not taken place, the Group’s gearing ratio will be approximately 87.6% upon the completion of the Open Offer and will be further improved to approximately 41.1% having taken into account the application of part of the net proceeds from the Open Offer to repayment of outstanding liabilities.

(iii) Possible interest saving

As mentioned in the paragraph headed “A. Reasons for and benefits of the Open Offer”, upon completion of the Open Offer and the repayment of liabilities by the proceeds from the Open Offer, the Group may enjoy an interest saving of approximately HK$1.3 million per year. We consider that the interest saving as a result of the Open Offer would lessen the Group’s burden of finance costs (FY2002: approximately HK$15.8 million; FY2003: approximately HK$5.4 million).

Given the abovementioned improvement in the Group’s pro forma consolidated net asset value, the gearing ratio and the possible interest saving upon completion of the Open Offer and settlement of outstanding liabilities, we consider that the Open Offer will enhance the financial position of the Group and enlarge the capital base of the Group, which are in the interest of the Company and the Shareholders.

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LETTER FROM DAO HENG SECURITIES

E. Possible dilution effect on Independent Shareholders

A summary of the shareholding of the Company before and after completion of the Open Offer under different scenarios has been set out in the paragraph headed “Shareholding in the Company” in the letter from the Board in this Circular.

For those Independent Shareholders who do not take up in full their entitlements under the Open Offer, depending on the extent to which they take up the Offer Shares, their attributable interests in the Company will be diluted after completion of the Open Offer. The maximum dilution in shareholding for those Independent Shareholders who do not take up any of their entitlements under the Open Offer is approximately 80% which is substantial. However, unlike other equity fund raising exercises involving the enlargement base such as private placing, an issue of Shares under the Open Offer allows all the Qualifying Shareholders to maintain their proportionate interests in the Company should they wish to do so. As such, we consider that the possible dilution effect on those Independent Shareholders who do not take up in full their entitlements under the Open Offer is fair and reasonable so far as the Independent Shareholders are concerned.

F. Recommendation

Having taken into account the above factors and reasons, we consider that the Open Offer is fair and reasonable so far as the interest of the Independent Shareholders are concerned. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote at the Special General Meeting in favour of the resolution in relation to the Open Offer.

PART TWO – THE SUBSCRIPTION

A. Background

On 28 July 2003, the Company entered into the Subscription Agreement with the Subscribers whereby they agreed to subscribe for 25,092,000 Shares at a price of HK$0.0796 per Share. As stated in the letter from the Board, the subscription price of the New Shares has been determined to be equal to the theoretical ex-entitlement price of the Shares based on the average of the closing prices of the Shares for the 10 trading days ended on 25 July 2003. The New Shares represent approximately 2.3% of the issued share capital as enlarged by the Open Offer and approximately 2.3% as enlarged by the Open Offer as well as the Subscription. If the Open Offer does not become unconditional, the subscription price of the New Shares will be adjusted to be equal to the average of the closing prices of the Shares for the 10 trading days ended 25 July 2003 of HK$0.158, in which event the aggregate number of New Shares will be adjusted to 12,640,000 Shares. Such adjusted number of the New Shares represents approximately 5.9% of the existing issued Shares and approximately 5.5% of the issued Shares as enlarged only by the Subscription.

The consideration for the Subscription will be the full and final settlement of outstanding balances as at 31 March 2003 owed by the Group to the Subscribers in the aggregate amount of HK$1,997,774.19. The Subscribers, namely Mr. Lo and Mr. Yu, are connected persons of the Company as defined under the Listing Rules due to the fact that Mr. Lo is the chairman of the Company and an executive Director, while Mr. Yu is an executive Director. Therefore, the Subscription Agreement constitutes a connected transaction of the Company and is subject to, inter alia, approval by the Shareholders.

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LETTER FROM DAO HENG SECURITIES

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

• (i) the approval of the Shareholders that are independent of the Subscribers at the Special General Meeting;

• (ii) the granting of the listing of and permission to deal in the New Shares by the Listing Committee of the Stock Exchange; and

• (iii) the Bermuda Monetary Authority granting permission to allot and issue the New Shares, if required.

Shareholders should note that all but not part of the above conditions shall be fulfilled on or before 30 September 2003, or such other date as may be agreed by the parties to the Subscription Agreement. Otherwise the Subscription Agreement shall cease and determine and none of the parties shall have any claim against any other in respect of the Subscription.

B. Reasons for the Subscription Agreement

As advised by the Directors, the Group owed to the Subscribers of an aggregate amount of HK$1,997,774.19 as at 31 March 2003, representing salary payable to the Subscribers for the period from December 2000 to March 2003. As stated in the letter from the Board, the Group has undergone a successful restructuring of its liabilities in May 2002. The Board considers that the contribution of Mr. Lo and Mr. Yu in negotiating the agreements leading to, and managing the operations of the Group during the debt and capital restructuring of the Group has been extremely valuable. The Board considers that the Subscription will enable Mr. Lo and Mr. Yu to participate in the recovery of the Group in the future by equity investment. The agreement of the Subscribers to convert amounts owing by the Group into equity reflects the confidence of the Subscribers in the future prospects of the Group.

As mentioned in the paragraph headed “A. Reasons for and benefits of the Open Offer” under Part One in this letter, the Group had experienced financial difficulties during the past two financial years and was operated under shortage of working capital. According to the annual report of the Group for the year ended 31 March 2002, the Group recorded an audited consolidated net current liabilities of approximately HK$182.8 million and HK$238.5 million as at 31 March 2001 and 31 March 2002 respectively. In May 2002, the Group has undergone the Debt Restructuring Exercise and as a result, the Group has significantly improved its financial position. As stated in the Company’s annual report for the year ended 31 March 2003, the Group’s net current liabilities reduced significantly to approximately HK$91.3 million as at 31 March 2003 and the Group’s net deficiency in assets also dropped from approximately HK$128.4 million as at 31 March 2002 to approximately HK$11.0 million as at 31 March 2003.

As stated in the Company’s annual report for the year ended 31 March 2001, Mr. Lo, who joined the Group in December 2000 as an executive Director, has over 24 years of professional and business experience in financial and investment services in Australia, Hong Kong and other Asian countries. Mr. Yu, who joined the Group in December 2000 as a company secretary and was appointed as an executive Director in April 2001, is an associate member of the Association of Chartered Certified Accountants and the Hong Kong Society of Accountants and has over 16 years of experience in the accounting field.

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LETTER FROM DAO HENG SECURITIES

Given the recent improvement in the Group’s financial position and the experience of Mr. Lo and Mr. Yu, we concur with the Board’s view that the contribution of Mr. Lo and Mr. Yu to the debt and capital restructuring of the Group are valuable to the Group. We consider that the Subscription, which converts amounts owed by the Group into equity and turns the Subscribers into Shareholders, may enable them to have greater commitment to the Group and may serve as an incentive for the Subscribers to continue to contribute to the growth of the Group. Moreover, given the cash and bank balances of the Group of approximately HK$2.9 million as at 31 March 2003, we consider that it is appropriate for the Group to convert its outstanding liabilities owing to the Subscribers into equity in that it would alleviate the cash flow position and reduce the indebtedness of the Group and enhance the capital base of the Company. Taking into account the above, we concur with the Directors’ view that the Subscription is in the interest of the Company and the Shareholders.

C. The subscription price of the New Shares

As stated in the letter from the Board, the subscription price of the New Shares has been determined to be equal to the theoretical ex-entitlement price of the Shares under the Open Offer, based on the average of the closing prices of the Shares for the 10 trading days ended 25 July 2003, of approximately HK$0.158 per Share. The subscription price of the New Shares of HK$0.0796 per Share:

• represents a discount of approximately 51.8% to the closing price of HK$0.165 per Share as quoted on the Stock Exchange on 28 July 2003 (being the last trading day of the Shares prior to the announcement regarding the Subscription);

• represents a discount of approximately 49.9% to the average of the closing prices of the Shares for the 10 trading days ended 28 July 2003 of approximately HK$0.159 per Share;

• represents a discount of approximately 49.6% to the average of closing prices for the 10 trading days ended 25 July 2003 of approximately HK$0.158 per Share;

• represents a premium of approximately 32.7% to the Offer Price of HK$0.06 per Share under the Open Offer;

• equals to the theoretical ex-entitlement price of the Shares, under the Open Offer, based on the average of the closing prices of the Shares for the 10 trading days ended 25 July 2003 of approximately HK$0.158 per Share;

• represents a discount of approximately 38.8% to the closing price of HK$0.130 per Share on the Latest Practicable Date

The issue of the New Shares under the Subscription will be in full and final settlement of all outstanding balances as at 31 March 2003 owed by the Group to the Subscribers, in the aggregate amount of HK$1,997,774.19. As stated in the letter from the Board, the terms of the Subscription Agreement were agreed between the Subscribers and the Company based on arm’s length negotiations taking into consideration the prevailing market price of the Shares and the issue price of the Shares pursuant to the Open Offer. It is further stated that if the Open Offer does not become unconditional, the subscription price of the New Shares will be adjusted to be equal to the average of the closing prices of the Shares for the 10 days ended 25 July 2003 of HK$0.158, in which event the aggregate number of the New Shares to be issued under the Subscription will be adjusted to 12,640,000 Shares.

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LETTER FROM DAO HENG SECURITIES

In order to assess the reasonableness of the subscription price of the New Shares, we have reviewed 66 placements of shares by other Hong Kong listed companies since 1 January 2003. Since the consideration of the Subscription amounts to approximately HK$2.0 million, we consider those placements with their respective fund-raise size of less than HK$10.0 million are broadly comparable to the Subscription. Among the 66 placements, 18 placements (the “Subscription Comparables”) had their respective fund raised less than HK$10 million. 13 of the Subscription Comparables had their respective subscription price set at a discount to their closing price (“Closing Price”) as quoted on the Stock Exchange on the last trading date prior to the announcement regarding the placement, ranging from approximately 3.23% to 40.00%. Two of the Subscription Comparables had their respective subscription price set equal to the Closing Price, while three of the Subscription Comparables had their respective subscription price set at a premium over the Closing Price, ranging from approximately 19.12% to 138.1%. Based on the Closing Price of the Shares of HK$0.165 per Share, the theoretical ex-entitlement price of the Shares under the Open Offer is approximately HK$0.081 per Share, to which, the subscription price of the New Shares represents a discount of approximately 1.73%. As compared to those of the Subscription Comparables, the slight discount of the Subscription Price to the theoretical ex-entitlement price of the Shares under the Open Offer, based on the Closing Price of the Shares, falls within the range of those of the Subscription Comparables.

Having considered that (i) the subscription price of the New Shares was determined to be equal to the theoretical ex-entitlement price of the Shares, pursuant to the Open Offer, based on the average of the closing prices of the Shares for the 10 trading days ended 25 July 2003; (ii) the adjustment mechanism of the number of New Shares to be issued under the Subscription if the Open Offer does not proceed; and (iii) the discount of the subscription price of the New Shares to the theoretical ex-entitlement price of the Shares under the Open Offer, based on the Closing Price of the Shares, falls within the range of those of the Subscription Comparables, we consider that the subscription price of the New Shares is fair and reasonable as far as the interests of the Subscription Independent Shareholders as a whole are concerned.

D. Financial effects

(i) Net deficiency in assets

According to the Company’s annual report for the year ended 31 March 2003, the audited consolidated net liabilities of the Group amounted to approximately HK$11.0 million as at 31 March 2003. Upon completion of the Subscription Agreement and assuming that the Open Offer does not proceed, the Group’s net deficiency in assets will be reduced by approximately HK$2.0 million to approximately HK$9.0 million, representing a drop of approximately 18.1%. In the event that the Open Offer proceeds and as a result of the Subscription, the asset position of the Group will be improved to a net asset value of approximately HK$40.7 million, assuming no conversion of the Convertible Bonds and the Convertible Note before the Record Date.

(ii) Profit and loss

Based on the audited consolidated net profit of the Company for the year ended 31 March 2003 of approximately HK$37.4 million and 215,525,638 Shares in issue as at the Latest Practicable Date, the earnings per Share is approximately HK$0.174. Upon completion of the Subscription Agreement, the earnings per Share will be decreased to approximately HK$0.164 based on

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LETTER FROM DAO HENG SECURITIES

215,525,638 Shares in issue as at the Latest Practicable Date and 12,640,000 Shares to be issued pursuant to the Subscription Agreement with the assumption that the Open Offer does not proceed, representing a drop of approximately 5.7%. Should the Open Offer proceed, the earnings per Share will be decreased to approximately HK$0.034 based on 215,525,638 Shares in issue as at the Latest Practicable Date, 25,092,000 shares to be issued pursuant to the Subscription Agreement and 862,102,552 Shares to be issued under the Open Offer (assuming no conversion of the Convertible Bonds and the Convertible Note before the Record Date).

(iii) Working capital

The Group is operated under a tight cash flow position and its net current liabilities amounted to approximately HK$91.3 million with cash and bank balances of approximately HK$2.9 million as at 31 March 2003. Therefore, should the Group be requested to pay the Subscribers’ outstanding salaries amounting to approximately HK$2.0 million, its cash position would be adversely affected and its cash and bank balances would amount to approximately HK$1.0 million based on the Company’s balance sheet as at 31 March 2003. Upon completion of the Subscription Agreement, the Group’s cash flow position may be alleviated and its net current liabilities will be reduced by approximately HK$2.0 million to approximately HK$89.3 million assuming that the Open Offer does not proceed, which represents a drop of approximately 2.2%. In the event that the Open Offer proceeds, the Company intends to apply as to approximately HK$32.0 million of the net proceeds for repaying its outstanding liabilities, but the Group has yet to decide the proportion as to the repayment of the Convertible Note, the Convertible Bonds and other liabilities. Subscription Independent Shareholders should note that such repayment of liabilities may further improve the Group’s working capital and cash flow position.

(iv) Dilution effect

The following table summarises the shareholding structure of the Company as at the date of the Subscription Agreement and immediately upon completion of the Subscription Agreement:

Shareholder Vision Century Public Existing Shareholders Mr. Lo Mr. Yu Underwriter Total	As at the date of the Subscription Agreement Shares % 156,419,190 72.58 59,106,448 27.42 215,525,638 100.00 – – – – – – 215,525,638 100.00	Immediately after completion of the Subscription Agreement If the Open Offer After the Open Offer does not proceed Scenario I Scenario II Scenario III (Notes a, c, e) (Notes b, c, e) (Notes d, e) Shares % Shares % Shares % 782,095,950 70.92 782,095,950 70.92 156,419,190 68.56 295,532,240 26.80 59,106,448 5.36 59,106,448 25.90 1,077,628,190 97.72 841,202,398 76.28 215,525,638 94.46 18,068,000 1.64 18,068,000 1.64 9,104,000 3.99 7,024,000 0.64 7,024,000 0.64 3,536,000 1.55 – – 236,425,792 21.44 – – 1,102,720,190 100.00 1,102,720,190 100.00 228,165,638 100.00	Immediately after completion of the Subscription Agreement If the Open Offer After the Open Offer does not proceed Scenario I Scenario II Scenario III (Notes a, c, e) (Notes b, c, e) (Notes d, e) Shares % Shares % Shares % 782,095,950 70.92 782,095,950 70.92 156,419,190 68.56 295,532,240 26.80 59,106,448 5.36 59,106,448 25.90 1,077,628,190 97.72 841,202,398 76.28 215,525,638 94.46 18,068,000 1.64 18,068,000 1.64 9,104,000 3.99 7,024,000 0.64 7,024,000 0.64 3,536,000 1.55 – – 236,425,792 21.44 – – 1,102,720,190 100.00 1,102,720,190 100.00 228,165,638 100.00
			94.46 3.99 1.55 –
			100.00

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LETTER FROM DAO HENG SECURITIES

Notes:

• (a) Assuming the Shareholders take up all the Offer Shares.

• (b) Assuming that no Shareholders, except Vision Century, take up their entitlement to the Offer Shares and the Underwriter takes up its underwriting commitment under the Open Offer.

• (c) Assuming that the Open Offer proceeds and 25,092,000 Shares will be issued at HK$0.0796 per Share.

• (d) Assuming that the Open Offer does not proceed and the 12,640,000 Shares will be issued at HK$0.158 per Share.

• (e) All scenarios are presented on the basis of the existing issued Shares in issue and none of the Convertible Note or the Convertible Bonds will not be exercised prior to the Record Date.

As shown in the table above, upon completion of the Subscription Agreement, the shareholding interest of the existing Shareholders in the Company would be diluted from 100.00% to (i) approximately 97.72% under Scenario I; (ii) approximately 76.28% under Scenario II; and (iii) approximately 94.46% under Scenario III.

Although earnings per Share and shareholding of the existing Shareholders would be diluted as a result of the Subscription, the Subscription would slightly improve the net tangible asset value per Share and alleviate the cash flow position of the Group. Taking into account that the Subscription may serve as an incentive for the Subscribers to continue to contribute to the growth of the Group and the conversion of outstanding debt to equity may enhance the capital base of the Company, we consider that the dilution effect in the shareholding interests of the existing Shareholders under Scenario I and III are acceptable. Under Scenario II, notwithstanding the dilution effect in the shareholding interests of the existing Shareholders is substantial, the Open Offer allows all the Qualifying Shareholders to maintain their proportionate interests in the Company should they wish to do so and therefore we consider that such dilution effect is fair and reasonable so far as the Independent Shareholders are concerned. Having considered the overall financial effects of the Subscription on the Company and the Shareholders, we consider that the Subscription is in the interest of the Company and the Shareholders.

E. Recommendation

Having taken into account the above principal factors and reasons, we are of the opinion that the terms of the Subscription Agreement are fair and reasonable so far as the Company and the Shareholders are concerned and are in the interest of the Company and the Shareholders. Accordingly, we advise the Independent Board Committee to recommend the Shareholders to vote in favour of the resolution to approve the Subscription Agreement.

Yours faithfully, For and on behalf of

Dao Heng Securities Limited

Stella Fung Venus Choi

Executive Director and General Manager

Executive Director

– 35 –

FINANCIAL INFORMATION

APPENDIX I

1. SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date and following completion of the Open Offer, the Subscription and the increase in authorised share capital of the Company are as follows:

HK$

Authorised:

1,500,000,000 Shares as at the Latest Practicable Date Shares to be created pursuant to the increase 8,500,000,000 in authorised share capital 10,000,000,000 Issued and fully paid: 215,525,638 Shares in issue as at the Latest Practicable Date 862,102,552 Offer Shares to be issued 25,092,000 New Shares to be issued 1,102,720,190	15,000,000.00 85,000,000.00
	100,000,000.00
	2,155,256.38 8,621,025.52 250,920.00
	11,027,201.90

All the Shares in issue and to be issued rank and will rank pari passu in all respects with each other including as regards to dividends, voting and return of capital. The Company has not issued any Shares since 31 March 2003 and up to the Latest Practicable Date.

As at the Latest Practicable Date, the Company has outstanding Convertible Bonds and Convertible Note which are convertible into an aggregate of 40,666,666 Shares at the current exercise price of HK$0.50.

Save as disclosed in this circular, no share or loan capital of the Company has been put under option or agreed conditionally or unconditionally to be put under option and no warrant or conversion right affecting the Shares has been issued or granted or agreed conditionally, or unconditionally to be issued or granted.

Save as disclosed in this circular, the Company has no options, warrants and conversion rights convertible into Shares and no share or loan capital of the Company has been issued or is proposed to be issued for cash or otherwise and no commissions, discounts, brokerages or other special terms have been granted in connection with the issue or sale of any such capital.

The Shares are listed on the Stock Exchange. Save as disclosed herein, no part of the securities of the Company is listed or dealt in, nor is listing or permission to deal in the securities of the Company being or proposed to be sought, on any other stock exchange.

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FINANCIAL INFORMATION

APPENDIX I

2. FIVE YEAR SUMMARY

The following information has been extracted from the audited consolidated financial statements of the Group for each of the five years ended 31 March 2003:

Results

2003 HK$’000 Turnover 38,092 Profit/(loss) before tax 38,268 Tax (836) Net profit/(loss) from ordinary activities attributable to shareholders 37,432 Assets and Liabilities 2003 HK$’000 Total assets 108,951 Total liabilities (119,965) (11,014)	Year ended 31 March 2002 2001 2000 HK$’000 HK$’000 HK$’000 47,408 202,682 290,600 (59,284) (283,689) 30,286 – 4,354 (4,091) (59,284) (279,335) 26,195 31 March 2002 2001 2000 HK$’000 HK$’000 HK$’000 127,116 141,004 392,552 (255,512) (210,576) (163,841) (128,396) (69,572) 228,711	1999 HK$’000 241,254 32,029 11,328 43,357 1999 HK$’000 259,855 (114,032) 145,823

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FINANCIAL INFORMATION

APPENDIX I

3. AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Set out below is the reproduction of the report of the auditors and the audited financial statements of the Group for the year ended 31 March 2003 as extracted from the Company’s 2003 annual report:

==> picture [155 x 39] intentionally omitted <==

To the members

Xin Corporation Limited (Formerly Hung Fung Group Holdings Limited)

(Incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 40 to 72 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you.

BASIS OF OPINION

We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes an examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s and the Group’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

FUNDAMENTAL UNCERTAINTY RELATING TO THE GOING CONCERN BASIS

In forming our opinion, we have considered the adequacy of the disclosures made in note 4 to the financial statements concerning the basis of their preparation adopted by the directors. As explained in note 4 to the financial statements, the financial statements of the Group have been prepared on a going concern basis, notwithstanding that the Group had net current liabilities and a deficiency in assets of HK$91,336,000 and HK$11,014,000, respectively, as at 31 March 2003. The Group also incurred a loss

– 38 –

FINANCIAL INFORMATION

APPENDIX I

from operating activities of HK$33,383,000 during the year and reported a net cash outflow from operating activities of HK$33,239,000. Subsequent to the balance sheet date, the directors have initiated a number of measures to improve the Group’s financial/liquidity position and relieve the Group’s liquidity pressure for the immediate foreseeable future. In particular, the Group successfully negotiated to effect an open offer (the “Open Offer”) of shares of the Company with expected proceeds, before related expenses, of HK$51,726,000 (see note 4 to the financial statements). Vision Century Group Limited, the immediate holding company of the Company, has irrevocably undertaken to subscribe for the shares offered under the Open Offer and is entitled to apply for on an assured basis. The remaining offer shares are fully underwritten by an independent third party pursuant to an underwriting agreement. In addition, Huang Worldwide Holding Limited (“Huang Worldwide”), an intermediate holding company of the Company, has undertaken to provide continuing financial support to the Group to enable it to continue its day-today operations as a viable going concern notwithstanding any present or future financial difficulties experienced by the Group (the “Financial Support”).

The financial statements have been prepared on a going concern basis, the validity of which depends upon the successful outcome of the Open Offer, the ability of Huang Worldwide to provide the Financial Support and other measures currently undertaken by the Group as detailed in note 4 to the financial statements. The financial statements do not include any adjustments that may be necessary should the implementation of such measures become unsuccessful. We consider that appropriate estimates and disclosures regarding the above fundamental uncertainty have been made and our opinion is not qualified in this respect.

OPINION

In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and of the Group at 31 March 2003 and of the profit and cash flows of the Group for the year then ended and have been property prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

EMPHASIS OF MATTER

Without qualifying our opinion, we draw attention to the fact that because our opinion dated 19 July 2002 on the loss and cash flows of the Group for the year ended 31 March 2002 was qualified for the scope limitation reasons summarised in the basis of opinion section therein, any adjustments in respect of the scope limitations found to be necessary to the opening net liabilities of the Company and of the Group as at 1 April 2001 would have had a consequential effect on the results of the Company and of the Group for the year ended 31 March 2002. Accordingly, the comparatives of the consolidated profit and loss account and cash flow statement shown in these financial statements may not be comparable with the amounts for the current year.

Ernst & Young Certified Public Accountants

Hong Kong

24 July 2003

– 39 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated Profit and Loss Account

Notes TURNOVER 7 Cost of sales Gross loss Other revenue and gains 7 Selling and distribution costs Administrative expenses Other operating expenses LOSS FROM OPERATING ACTIVITIES 8 Finance costs 9 Gain on debt restructuring, net of expenses 3 PROFIT/(LOSS) BEFORE TAX Tax 12 NET PROFIT/(LOSS) FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS 13 EARNINGS/(LOSS) PER SHARE 14 Basic Diluted	2003 HK$’000 38,092 (50,182) (12,090) 5,076 (3,077) (18,856) (4,436) (33,383) (5,380) 77,031 38,268 (836) 37,432 HK$0.20 N/A	2002 HK$’000 47,408 (57,759) (10,351) 1,751 (2,164) (24,330) (8,355) (43,449) (15,835) – (59,284) – (59,284) (HK$1.15) N/A

– 40 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated Balance Sheet

Notes NON-CURRENT ASSETS Fixed assets 15 CURRENT ASSETS Inventories 17 Accounts receivable 18 Prepayments, deposits and other receivables Cash and bank balances CURRENT LIABILITIES Accounts payable 19 Tax payable Interest-bearing bank and other borrowings 20 Other payables and accruals Loans from a director 21 Loans from a shareholder 22 Convertible note and bonds 24 NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Finance lease payables 23 Convertible note 24 Deferred tax 25 CAPITAL AND RESERVES Issued capital 26 Reserves 28(a)	2003 HK$’000 97,158 6,391 1,576 938 2,888 11,793 12,637 5 48,235 23,752 – 12,000 6,500 103,129 (91,336) 5,822 – 16,000 836 16,836 (11,014) 2,155 (13,169) (11,014)	2002 HK$’000 111,003 7,005 4,164 4,498 446 16,113 23,727 5 148,384 75,478 4,000 – 3,000 254,594 (238,481) (127,478) 918 – – 918 (128,396) 24,839 (153,235) (128,396)

– 41 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated Statement of Changes in Equity

Notes At 1 April 2001 Net loss for the year Revaluation surplus and net gain not recognised in the profit and loss account At 31 March and 1 April 2002 Shares issued on conversion of a convertible note 26(i) Shares issued on share subscription 26(iii) Shares issued on open offer 26(iv) Shares issued on settlement of certain trade and other creditors 26(v) Share issue expense Capital reduction 26(vi)(b), 28(a) Share premium cancellation 26(vi)(c), 28(a) Elimination of accumulated losses 28(a) Revaluation deficit and net loss not recognised in the profit and loss account Net profit for the year At 31 March 2003	Issued share capital HK$’000 24,839 – – 24,839 2,000 30,000 40,259 10,664 – (105,607) – – – – 2,155	Share premium account HK$’000 44,397 – – 44,397 1,000 – – 342 (4,273) – (41,466) – – – –	Contributed surplus HK$’000 10 – – 10 – – – – – – 41,466 (41,476) – – –	Fixed asset revaluation Accumulated reserve losses HK$’000 HK$’000 18,024 (156,842) – (59,284) 460 – 18,484 (216,126) – – – – – – – – – – – 105,607 – – – 41,476 (42) – – 37,432 18,442 (31,611)	Total HK$’000 (69,572) (59,284) 460
					(128,396) 3,000 30,000 40,259 11,006 (4,273) – – – (42) 37,432
					(11,014)

• These reserve accounts comprise the consolidated reserves of HK$13,169,000 (2002: HK$153,235,000) in the consolidated balance sheet.

– 42 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated Cash Flow Statement

Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) before tax Adjustments for: Finance costs 9 Interest income 7 Gain on disposal of fixed assets 7, 8 Provision for bad and doubtful debts 8 Provision for inventories 8 Provision for other receivables 8 Depreciation 8 Revaluation deficit/(surplus) on land and buildings 7, 8 Write back of provision for doubtful debts 7 Gain on debt restructuring, before related expenses 3 Waiver of director’s remuneration accrued 7 Waiver of accounts payable 7 Waiver of interest accrued on finance leases 7 Operating loss before working capital changes Decrease in inventories Decrease/(increase) in accounts receivable Decrease/(increase) in prepayments, deposits and other receivables Decrease in accounts payable Increase/(decrease) in other payables and accruals Cash used in operations Interest elements on finance lease rental payments Net cash outflow from operating activities	2003 HK$’000 38,268 5,380 (78) – 1,556 528 307 14,796 (82) (435) (81,587) (1,405) (1,922) (109) (24,783) 86 1,467 3,253 (8,113) (5,044) (33,134) (105) (33,239)	2002 HK$’000 (restated) (59,284) 15,835 (14) (204) 690 – – 14,750 2,638 – – – – – (25,589) 4,564 (747) (2,754) (2,497) 12,579 (14,444) (397) (14,841)

– 43 –

FINANCIAL INFORMATION

APPENDIX I

Consolidated Cash Flow Statement (Continued)

Net cash outflow from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Interest received Purchases of fixed assets Proceeds from disposal of fixed assets Net cash outflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of share capital Share issue expense Loans from a director Repayment of bank loans Drawdown/(repayment) of other loans Loans from a shareholder Capital element of finance lease rental payments Interest paid Net cash inflow from financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Bank overdrafts	2003 HK$’000 (33,239) 78 (924) 13 (833) 70,259 (4,273) – (15,470) (6,000) 8,000 (2,833) (5,275) 44,408 10,336 (7,448) 2,888 2,888 – 2,888	2002 HK$’000 (restated) (14,841) 14 (902) 487 (401) – – 7,000 (926) 14,400 – (2,815) (4,376) 13,283 (1,959) (5,489) (7,448) 446 (7,894) (7,448)

– 44 –

FINANCIAL INFORMATION

APPENDIX I

Balance Sheet

Notes NON-CURRENT ASSETS Fixed assets 15 Interests in subsidiaries 16 CURRENT ASSETS Due from a subsidiary 16 Prepayments, deposits and other receivables Cash and bank balances CURRENT LIABILITIES Other payables and accruals Interest-bearing bank and other borrowings 20 Loans from a director 21 Loans from a shareholder 22 Convertible note and bonds 24 NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Convertible note 24 CAPITAL AND RESERVES Issued capital 26 Reserves 28(b)	2003 HK$’000 234 – 234 22,092 – 5 22,097 5,908 20,400 – 12,000 6,500 44,808 (22,711) (22,477) 16,000 (38,477) 2,155 (40,632) (38,477)	2002 HK$’000 539 – 539 – 2,944 88 3,032 38,978 26,400 4,000 – 3,000 72,378 (69,346) (68,807) – (68,807) 24,839 (93,646) (68,807)

Lo Ming Chi, Charles Director

Yu Wai Man

Director

– 45 –

FINANCIAL INFORMATION

APPENDIX I

Notes to the Financial Statements

1. CORPORATE INFORMATION

The registered office of the Company is located at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda.

During the year, the Group was principally engaged in the design, manufacture and sale of a wide range of toys. There were no significant changes in the nature of the Group’s principal activities during the year.

Vision Century Group Limited (“Vision Century”), a company incorporated in the British Virgin Islands, is the immediate holding company of the Company. In the opinion of the directors, the ultimate holding company of the Company is Huang Group (BVI) Limited, a company incorporated in the British Virgin Islands which is ultimately held by a discretionary trust.

2. IMPACT OF NEW AND REVISED HONG KONG STATEMENTS OF STANDARD ACCOUNTING PRACTICE

The following new and revised Hong Kong Statements of Standard Accounting Practice (“SSAPs”) are effective for the first time for the current year’s financial statements:

• SSAP 1 (Revised): “Presentation of financial statements” • SSAP 11 (Revised): “Foreign currency translation” • SSAP 15 (Revised): “Cash flow statements” • SSAP 34: “Employee benefits”

These SSAPs prescribe new accounting measurement and disclosure practices. The major effects on the Group’s accounting policies and on the amounts disclosed in these financial statements of these SSAPs are summarised as follows:

SSAP 1 prescribes the basis for the presentation of financial statements and sets out guidelines for their structure and minimum requirements for the content thereof. The principal impact of the revision of this SSAP is that a consolidated statement of changes in equity is now presented on page 42 of this circular in place of the consolidated statement of recognised gains and losses that was previously required and in place of the Group’s reserves note.

SSAP 11 prescribes the basis for the translation of foreign currency transactions and financial statements. The principal impact of the revision to this SSAP on the consolidated financial statements is that the profit and loss accounts of overseas subsidiaries are now translated into Hong Kong dollars at the weighted average exchange rates for the year, whereas previously they were translated at the exchange rates ruling as at the balance sheet date. The adoption of the revised SSAP 11 has had no material effect on the financial statements.

SSAP 15 prescribes the revised format for the cash flow statement. The principal impact of the revision of this SSAP is that the consolidated cash flow statement now presents cash flows under three headings, cash flows from operating, investing and financing activities, rather than the five headings previously required. In addition, cash flows from overseas subsidiaries arising during the year are now translated to Hong Kong dollars at the exchange rates as at the dates of the transactions, or at an approximation thereto, whereas previously they were translated at the exchange rates as at the balance sheet date, and the definition of cash equivalents for the purpose of the consolidated cash flow statement has been revised. Further details of these changes and the prior year adjustments that have resulted from them are included in the accounting policies for “Cash and cash equivalents” in note 5 and in note 29(a) to the financial statements.

SSAP 34 prescribes the recognition and measurement criteria to apply to employee benefits, together with the required disclosures in respect thereof. The adoption of this SSAP has resulted in no material change to the previously adopted accounting treatments for employee benefits. In addition, disclosures are now required in respect of the Company’s share option schemes, as detailed in note 27 to the financial statements. These share option scheme disclosures are similar to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) disclosures previously included in the Report of the Directors, which are now required to be included in the notes to the financial statements as a consequence of the adoption of this SSAP.

– 46 –

FINANCIAL INFORMATION

APPENDIX I

3. RESTRUCTURING, OPEN OFFER AND CAPITAL REORGANISATION

During the year, the Group (a) implemented a restructuring, involving a subscription of new shares of the Company and the entering into of various compromise agreements with the Group’s bankers and creditors; (b) effected an open offer; and (c) undertook a capital reorganisation, as further explained below:

(a) Restructuring

During the year, the Group entered into a subscription agreement with Vision Century and various compromise agreements with the Group’s Hong Kong bankers (the “Bank Group”) and certain creditors of the Group related to a restructuring plan (the “Restructuring”). Summary particulars of the Restructuring are set out below:

(i) Subscription agreement with Vision Century

On 1 February 2002, the Company entered into a subscription agreement for the subscription of 3,000,000,000 ordinary shares of HK$0.01 each at par by Vision Century. The subscription agreement was completed on 16 May 2002. Upon completion of the subscription agreement, the Company received cash proceeds of HK$30,000,000, before related expenses (note 26(iii)).

(ii) Compromise agreement with the Bank Group

Pursuant to a bank compromise agreement (the “Bank Compromise Agreement”) entered into by the Group and the Bank Group on 1 February 2002, the Bank Group released and discharged the Group from all of its obligations and liabilities in respect of its bank borrowings advanced by the Bank Group (including principal and interest) outstanding as at the completion date of the Bank Compromise Agreement and released the guarantees given by the Group in favour of the Bank Group, subject to and on the terms and conditions stated therein. In consideration of this, the Bank Group (i) received a payment in cash by the Company of approximately HK$20,000,000; and (ii) was issued eight convertible bonds with an aggregate principal amount of HK$6,500,000 repayable by three equal annual instalments over three years by the Company. The first instalment was settled by the Company on 16 May 2003. On the basis of the total borrowings owed by the Group to the Bank Group of approximately HK$103,105,000 (including accrued bank interest of HK$14,235,000), an aggregate amount of approximately HK$76,605,000 of the bank indebtedness has been waived by the Bank Group.

In addition, the Bank Group withdrew their legal proceedings against the Group to demand for immediate repayment of overdue borrowings and interest thereon, and their winding-up petitions against the Group.

(iii) Compromise agreement with the trade and other creditors

The Group entered into a compromise agreement with an entity (the “PRC Entity”) owned by the local government in Mainland China in respect of the settlement of a claim of approximately HK$23,038,000 by way of (i) a cash payment by the Company of approximately HK$2,056,000; and (ii) the issue by the Company of a convertible note on or before 31 July 2002 in the principal amount of HK$16,000,000 repayable on the second anniversary of its issuance. On the basis of the total amount payable of HK$23,038,000, an aggregate amount of approximately HK$4,982,000 has been waived by the PRC Entity.

In addition, the Group entered into compromise agreements with various creditors who are primarily trade and other creditors of the Group to settle approximately HK$11,886,000 in aggregate owed by the Group to those creditors by way of (i) cash payments by the Group of HK$880,000; and (ii) the issue by the Company of 1,066,440,000 ordinary shares of HK$0.01 each at HK$0.010 to HK$0.015 per share for a total consideration of HK$11,006,000. The excess consideration for the issue of the Company’s shares above over the nominal value of the shares issued, amounting to approximately HK$342,000, has been credited to the share premium account.

Upon completion of the compromise agreements with the Bank Group and creditors, the Group’s indebtedness was reduced by HK$115,529,000 by way of waivers of HK$81,587,000, capitalisation of HK$11,006,000 and cash settlement of HK$22,936,000. The amounts of debts waived, net of related restructuring expenses of HK$4,556,000, has been credited to the profit and loss account of the Group for the year.

On 13 May 2002, the Restructuring was approved by the Company’s shareholders at a special general meeting. The subscription agreement with Vision Century and the compromise agreements with the Bank Group, and trade and other creditors became unconditional and were completed during the year.

– 47 –

FINANCIAL INFORMATION

APPENDIX I

3. RESTRUCTURING, OPEN OFFER AND CAPITAL REORGANISATION (Continued)

(b) Open offer

Immediately after the completion of the Restructuring, the Company effected an open offer with assured allotments of three offer shares for every two shares of HK$0.01 each in the Company held by the shareholders whose names appeared on the register of members of the Company on 13 May 2002.

The open offer was completed on 29 May 2002 and resulted in the issue of 4,025,905,140 new ordinary shares of HK$0.01 each in the Company at a price of HK$0.01 per offer share. The Company received cash proceeds of approximately HK$40,259,000, before the related open offer expenses, for the issue of shares under the open offer.

(c) Capital reorganisation

On 5 December 2002, the Company proposed to effect a capital reorganisation scheme, which involved a consolidation of every fifty issued and unissued shares of HK$0.01 each into one consolidated share of HK$0.50 each and the reduction of the par value of the ordinary share capital of the Company from HK$0.50 each to HK$0.01 each and the cancellation of the share premium account of the Company. The capital reorganisation scheme was approved by the Company’s shareholders on 30 December 2002 at a special general meeting.

On 30 December 2002, the capital reorganisation scheme became effective. Further details of the capital reorganisation are set out in note 26(vi).

4. BASIS OF PRESENTATION

As at 31 March 2003, the Group had significant net current liabilities and a deficiency in assets of approximately HK$91,336,000 and HK$11,014,000, respectively. The Group also incurred a loss from operating activities of HK$33,383,000 and reported a net cash outflow from operating activities of HK$33,239,000 for the year ended 31 March 2003.

In order to strengthen the capital base of the Group and to improve the Group’s financial position, immediate liquidity and cash flow and otherwise to sustain the Group as a going concern, the directors of the Company (the “Directors”) have adopted the following measures:

• (a) The Directors successfully negotiated to effect an open offer with assured allotments of four offer shares for every one shares of HK$0.01 each in the Company held by the shareholders whose names appeared on the register of members of the Company on 29 August 2003.

The open offer is expected to be completed on 23 September 2003 and will result in the issue of a minimum of 862,102,552 new ordinary shares (assuming no granting or exercise of convertible note and bonds (note 24) of the Company are exercised before the open offer) and a maximum of 1,024,769,216 new ordinary shares (assuming full conversion of the outstanding convertible note and bonds before the open offer), of HK$0.01 each in the Company at a price of HK$0.06 per offer share based on the number of issued shares of 215,525,638 as at 31 March 2003. Upon completion of the open offer, cash proceeds of a minimum of approximately HK$51,726,000 and a maximum of HK$61,486,000, before the related open offer expenses, will be received by the Company.

Vision Century has irrevocably undertaken to subscribe for the shares offered under the open offer and is entitled to apply on an assured basis. Based on the shareholding position of Vision Century in the Company of 156,419,190 shares as at 31 March 2003, Vision Century will apply for 625,676,760 new ordinary shares of the Company. The remaining offer shares will be fully underwritten by Kingston Securities Limited, an independent third party, pursuant to an underwriting agreement dated 15 July 2003, subject to certain terms and conditions. Further details of the open offer are also set out in the Company’s announcement dated 16 July 2003.

• (b) Further to the open offer set out above, subsequent to the balance sheet date, the Directors have succeeded to reschedule the repayment terms of certain of the Group’s indebtednesses in order to improve its immediate liquidity position.

• (i) The Group has obtained written consent from one of the Group’s Mainland China bankers to reschedule and extend the repayment period, subject to a repayment of the principal amount of approximately HK$841,000 and the settlement of interest payable of HK$671,000 by the Group, of its bank borrowings as at 31 March 2003 of approximately HK$23,458,000 for a further one year upon their original maturity in the second half of 2003.

– 48 –

FINANCIAL INFORMATION

APPENDIX I

4. BASIS OF PRESENTATION (Continued)

• (ii) Speed Up Developments Limited (“Speed Up”), an independent loan provider to the Group, has assigned its entire interest in other loans of HK$20,400,000 together with the accrued interest of HK$1,578,000, (the “Assigned Loans”) owed by the Group as at 31 March 2003 to Vision Century subsequent to the balance sheet date. On 2 July 2003, Vision Century granted a credit facility (the “Credit Facility”) to the Company amounting to HK$50,000,000 to surrogate the amount due from the Company as at that date, which covered the Assigned Loans and the loan balance of HK$12,000,000 (note 22) due to it as at 31 March 2003, additional loan balances of HK$11,000,000 granted to the Company subsequent to 31 March 2003 and the accrued interest thereon as at that date. Vision Century has undertaken that it will not demand the Group to repay partly or wholly of any advance made to the Group under the Credit Facility before 31 October 2004.

• (iii) Certain directors have agreed that they would not demand for the Group to repay partly or wholly of a total sum of approximately HK$1,998,000 outstanding as at 31 March 2003 in respect of their accrued emoluments unless the Group has sufficient working capital for its normal operational requirements.

• (c) The Directors have taken action to tighten cost controls over factory overheads and various general and administrative expenses.

A summary pro forma consolidated net asset statement of the Group as at 31 March 2003, which is prepared based on the audited consolidated net deficiency in assets of the Group as at 31 March 2003, adjusted as if the financing measures as set out in (a) and (b) above had taken place on 31 March 2003, is presented below.

Non-current assets Current assets Current liabilities Net current assets/(liabilities) Non-current liabilities Net assets/(deficiency in assets) Issued capital Reserves	Audited consolidated net deficiency in assets as at 31 March 2003 HK$’000 97,158 11,793 (103,129) (91,336) (16,836) (11,014) 2,155 (13,169) (11,014)	Pro forma adjustments Reschedule the repayment terms of the Group’s Open offer indebtedness (note a) (note b) HK$’000 HK$’000 – – 49,735* – – 59,434 49,735 59,434 – (59,434) 49,735 – 8,621 – 41,114 – 49,735 –	Pro forma adjusted consolidated net assets at 31 March 2003 HK$’000 97,158 61,528 (43,695)
			17,833
			(76,270)
			38,721
			10,776 27,945
			38,721

• Adjusted for related expenses of HK$1,991,000 to be paid in connection with the open offer and assumed no conversion of convertible note and bonds of the Company is exercised before the open offer.

In the opinion of the Directors, in light of the measures taken to date, together with the expected results of other measures in progress, the Group will substantially improve its financial position and has net current assets and net assets including substantial cash resources as reflected in the above pro forma consolidated net asset statement of the Group as at 31 March 2003. In addition, Huang Worldwide Holding Limited (“Huang Worldwide”), the immediate holding company of Vision Century and incorporated in the British Virgin Islands, has undertaken to the Company, during the period up to 31 October 2004, to provide continuing financial support to the Group so as to enable the Group to continue its day-today operations as a viable going concern notwithstanding any present or future financial difficulties experienced by the Group.

– 49 –

FINANCIAL INFORMATION

APPENDIX I

4. BASIS OF PRESENTATION (Continued)

Having regard to the above measures, the Directors of the Company are satisfied that the Group will be able to meet its financial obligations as and when they fall due in the foreseeable future and be able to operate as a commercially viable concern. Accordingly, these financial statements have been prepared on a going concern basis.

The financial statements have not incorporated any adjustments that may be required if the above measures are not successful. Should the Group be unable to continue as a going concern, adjustments would have to be made to restate the value of all assets to their recoverable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities, respectively. The effects of these adjustments have not been reflected in the financial statements.

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

These financial statements have been prepared in accordance with Hong Kong Statements of Standard Accounting Practice, accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, except for the periodic remeasurement of certain fixed assets as further explained below.

Basis of consolidation

The consolidated financial statements include the audited financial statements of the Company and its subsidiaries for the year ended 31 March 2003. The results of subsidiaries acquired or disposed of during the year are consolidated from or to their effective dates of acquisition or disposal, respectively. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Subsidiaries

A subsidiary is a company whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits from its activities.

The results of subsidiaries are included in the Company’s profit and loss account to the extent of dividends received and receivable. The Company’s interests in subsidiaries are stated at cost less any impairment losses.

Related parties

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases:

• (a) from the sale of goods, recognised when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold; and

• (b) interest income, on a time proportion basis taking into account the principal outstanding and the effective interest rate applicable.

Impairment of assets

An assessment is made at each balance sheet date of whether there is any indication of impairment of any asset, or whether there is any indication that an impairment loss previously recognised for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s value in use or its net selling price.

– 50 –

FINANCIAL INFORMATION

APPENDIX I

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to the profit and loss account in the period in which it arises, unless the asset is carried at a revalued amount, when the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however not to an amount higher than the carrying amount that would have been determined (net of depreciation/amortisation) had no impairment loss been recognised for the asset in prior years.

A reversal of an impairment loss is credited to the profit and loss account in the period in which it arises, unless the asset is carried at a revalued amount, when the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

Fixed assets and depreciation

Fixed assets, other than construction in progress, are stated at cost or valuation less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after fixed assets have been put into operation, such as repairs and maintenance, is normally charged to the profit and loss account in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the fixed asset, the expenditure is capitalised as an additional cost of that asset.

Changes in the values of fixed assets are dealt with as movements in the fixed asset revaluation reserve. If the total of this reserve is insufficient to cover a deficit, on an individual asset basis, the excess of the deficit is charged to the profit and loss account. Any subsequent revaluation surplus is credited to the profit and loss account to the extent of the deficit previously charged. On disposal of a revalued asset, the relevant portion of the fixed asset revaluation reserve realised in respect of previous valuations is transferred to accumulated losses as a movement in reserves.

Depreciation is calculated on the straight-line basis to write off the cost or valuation of each asset over its estimated useful life. The principal annual rates used for this purpose are as follows:

Medium term leasehold land Over the lease terms Buildings 2% to 5%, or over the lease terms, whichever is shorter Leasehold improvements 20% or over the lease terms, whichever is shorter Moulds, plant and machinery 12.5% to 15% Furniture, fixtures, equipment and motor vehicles 20%

The gain or loss on disposal or retirement of a fixed asset recognised in the profit and loss account is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents buildings under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction during the period of construction. Construction in progress is reclassified to the appropriate category of fixed assets when completed and ready for use.

Leased assets

Leases that transfer substantially all the rewards and risks of ownership of assets to the Group, other than legal title, are accounted for as finance leases. At the inception of a finance lease, the cost of the leased asset is capitalised at the present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Assets held under capitalised finance leases are included in fixed assets and depreciated over the shorter of the lease terms and the estimated useful lives of the assets. The finance costs of such leases are charged to the profit and loss account so as to provide a constant periodic rate of charge over the lease terms.

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Group is the lessee, rentals payable under the operating leases are charged to the profit and loss account on the straight-line basis over the lease terms.

– 51 –

FINANCIAL INFORMATION

APPENDIX I

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the first-in, first-out basis and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.

Deferred tax

Deferred tax is provided, using the liability method, on all significant timing differences in the recognition of revenue and expense for tax and for financial reporting purpose, to the extent it is probable that the liability will crystallise in the foreseeable future. A deferred tax asset is not recognised unless its realisation is assured beyond reasonable doubt.

Employee benefits

Paid leave carried forward

The Group provides paid annual leave to its employees under their employment contracts on a calendar year basis. Under certain circumstances, such leave which remains untaken as at the balance sheet date is permitted to be carried forward and utilised by the respective employees in the following year. An accrual is made at the balance sheet date for the expected future cost of such paid leave earned during the year by the employees and carried forward.

Employment Ordinance long service payments

Certain of the Group’s employees have completed the required number of years of service to the Group in order to be eligible for long service payments under the Hong Kong Employment Ordinance in the event of the termination of their employment. The Group is liable to make such payments in the event that such a termination of employment meets the circumstances specified in the Employment Ordinance.

A provision is recognised in respect of the probable future long service payments expected to be made. The provision is based on the best estimate of the probable future payments which have been earned by the employees from their services to the Group to the balance sheet date.

Retirement benefits scheme

The Group operates a defined contribution Mandatory Provident Fund retirement benefits scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance for those employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the profit and loss account as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme, except for the Group’s employer voluntary contributions, which are refunded to the Group when an employee leaves employment prior to the contributions vesting fully, in accordance with the rules of the MPF Scheme.

Share option scheme

The Company operates share option schemes for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. The financial impact of share options granted under the share option scheme is not recorded in the Company’s or the Group’s balance sheet until such time as the options are exercised, and no charge is recorded in the profit and loss account or balance sheet for their cost. Upon the exercise of share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Options which are cancelled prior to their exercise date, or which lapse, are deleted from the register of outstanding options.

Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

– 52 –

FINANCIAL INFORMATION

APPENDIX I

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Prior to the adoption of the revised SSAP 15 during the year, as explained in note 2 to the financial statements, cash equivalents in the consolidated cash flow statement also included advances from banks repayable within three months from the date of the advance, in addition to bank overdrafts. This change in definition has resulted in a prior year adjustment relating to trust receipt loans, further details of which are included in note 29(a) to the financial statements.

For the purpose of the balance sheet, cash and cash equivalents comprise cash on hand and at banks, including term deposits, and assets similar in nature to cash, which are not restricted as to use.

Provisions

A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

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

Foreign Currencies

Foreign currency transactions are recorded at the applicable exchange rates ruling as at the transaction dates. Monetary assets and liabilities denominated in foreign currencies as at the balance sheet date are translated at the applicable exchange rates ruling as at that date. Exchange differences are dealt with in the profit and loss account.

On consolidation, the financial statements of overseas subsidiaries are translated into Hong Kong dollars using the net investment method. The profit and loss accounts of overseas subsidiaries are translated into Hong Kong dollars at the weighted average exchange rates for the year, and their balance sheets are translated into Hong Kong dollars at the exchange rates ruling as at the balance sheet date. The resulting translation differences are included in the exchange fluctuation reserve.

For the purpose of the consolidated cash flow statement, the cash flows of overseas subsidiaries are translated into Hong Kong dollars at the exchange rates ruling as at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the year are translated into Hong Kong dollars at the weighted average exchange rates for the year.

Prior to the adoption of the revised SSAPs 11 and 15 during the year, as explained in note 2 to the financial statements, the profit and loss accounts of overseas subsidiaries and the cash flows of overseas subsidiaries were translated into Hong Kong dollars at the exchange rates ruling as at the balance sheet date. The adoption of the revised SSAP 11 has had no material effect on the financial statements. The adoption of the revised SSAP 15 has had no material effect on the amounts of the previously reported cash flows of the prior year.

6. SEGMENT INFORMATION

Segment information is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment; and (ii) on a secondary segment reporting basis, by geographical segment.

The Group’s operating businesses are structured and managed separately, according to the nature of their operations and the products they provide. Each of the Group’s business segment represents a strategic business unit that offers products which are subject to risks and returns that are different from those of the other business segments. Summary details of business segments are as follows:

• (a) the toddler cars segment manufactures and trades children’s ride-on cars featuring working horns and turning wheels;

• (b) the cycling segment manufactures and trades children’s bicycles, tricycles and scooters; and

• (c) the other toys segment comprises the manufacture and the trading of pre-school toys, plastic utensils and other fashionable toys.

– 53 –

FINANCIAL INFORMATION

APPENDIX I

6. SEGMENT INFORMATION (Continued)

In determining the Group’s geographical segments, revenues and results are attributed to the segments based on the location of the customers, which are North America, Europe, Central and South America, Asia Pacific region, Middle East and other regions. Assets are attributed to the segments based on the location of the assets.

There are no intersegment sales and transfers among the business segments.

(a) Business segments

The following tables present revenue, loss and certain asset, liability and expenditure information for the Group’s business segments.

Group Segment revenue: Sales to external customers Other revenue Segment results Interest income and unallocated gains Unallocated expenses Loss from operating activities Finance costs Gain on debt restructuring, net of expenses Profit/(loss) before tax Tax Net profit/(loss) from ordinary activities attributable to shareholders	Toddler cars 2003 2002 HK$’000 HK$’000 15,355 16,670 274 487 15,629 17,157 (5,779) (9,950)	Cycling Other toys 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 12,176 17,002 10,561 13,736 218 495 179 405 12,394 17,497 10,740 14,141 (5,091) (11,436) (9,518) (10,099)	Consolidated 2003 2002 HK$’000 HK$’000 38,092 47,408 671 1,387 38,763 48,795 (20,388) (31,485) 4,405 364 (17,400) (12,328) (33,383) (43,449) (5,380) (15,835) 77,031 – 38,268 (59,284) (836) – 37,432 (59,284)	Consolidated 2003 2002 HK$’000 HK$’000 38,092 47,408 671 1,387 38,763 48,795 (20,388) (31,485) 4,405 364 (17,400) (12,328) (33,383) (43,449) (5,380) (15,835) 77,031 – 38,268 (59,284) (836) – 37,432 (59,284)
				48,795
				(31,485) 364 (12,328)
				(43,449) (15,835) –
				(59,284) –
				(59,284)

– 54 –

FINANCIAL INFORMATION

APPENDIX I

6. SEGMENT INFORMATION (Continued)

(a) Business segments (Continued)

Group Toddler cars Cycling Other toys 2003 2002 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Segment assets 7,291 9,781 7,799 11,360 7,694 9,263 Unallocated assets Total assets Segment liabilities 6,277 18,196 6,127 13,492 6,044 9,075 Unallocated liabilities Total liabilities Other segment information: Depreciation 928 912 1,670 1,701 1,235 1,226 Unallocated amounts Other non-cash expenses 702 417 947 126 742 147 Unallocated amounts Capital expenditure – 228 27 150 4 114 Unallocated amounts	Consolidated 2003 2002 HK$’000 HK$’000 22,784 30,404 86,167 96,712 108,951 127,116 18,448 40,763 101,517 214,749 119,965 255,512 3,833 3,839 10,963 10,911 14,796 14,750 2,391 690 – 6,838 2,391 7,528 31 492 893 4,920 924 5,412	Consolidated 2003 2002 HK$’000 HK$’000 22,784 30,404 86,167 96,712 108,951 127,116 18,448 40,763 101,517 214,749 119,965 255,512 3,833 3,839 10,963 10,911 14,796 14,750 2,391 690 – 6,838 2,391 7,528 31 492 893 4,920 924 5,412
		127,116
		40,763 214,749
		255,512
		3,839 10,911
		14,750
		690 6,838
		7,528
		492 4,920
		5,412

(b) Geographical segments

The following tables present revenue and certain asset and expenditure information for the Group’s geographical segments.

Group Asia Pacific region Central and (including Hong Kong Middle East North America Europe South America and Mainland China) and other regions Consolidated 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Segment revenue: Sales to external customers 5,441 11,204 13,958 14,060 7,051 11,640 9,308 7,942 2,334 2,562 38,092 47,408 Group Asia Pacific region Central and (including Hong Kong Middle East North America Europe South America and Mainland China) and other regions Consolidated 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Other segment information: Segment assets 295 1,979 269 557 – 48 108,297 124,062 90 470 108,951 127,116 Capital expenditure – – – – – – 924 5,412 – – 924 5,412

– 55 –

FINANCIAL INFORMATION

APPENDIX I

7. TURNOVER AND REVENUE

Turnover represents the net invoiced value of goods sold, after allowances for returns and trade discounts.

An analysis of turnover, other revenue and gains is as follows:

Turnover Sale of goods Other revenue Interest income Others Gains Gain on disposal of fixed assets Revaluation surplus on land and buildings Exchange gains, net Write back of provision for bad and doubtful debts Waiver of accounts payable Waiver of interest accrued on finance leases Waiver of a director’s remuneration accrued_(note 10)_	2003 HK$’000 38,092 78 921 999 – 82 124 435 1,922 109 1,405 4,077 5,076	2002 HK$’000 47,408
		14 466
		480
		243 – 16 – 1,012 – –
		1,271
		1,751

8. LOSS FROM OPERATING ACTIVITIES

The Group’s loss from operating activities is arrived at after charging/(crediting):

Cost of inventories sold Depreciation Provision for bad and doubtful debts: Accounts receivable Other receivables Minimum lease payments under operating leases in respect of land and buildings Auditors’ remuneration Staff costs (excluding directors’ remuneration –note 10): Salaries and wages Retirement benefits scheme contributions Revaluation deficit/(surplus) on land and buildings Provision for inventories Loss on disposal of fixed assets	2003 HK$’000 22,657 14,796 1,556 307 1,863 407 750 10,841 153 10,994 (82) 528 –	2002 HK$’000 30,008 14,750 690 –
		690
		971 750 12,028 137
		12,165
		2,638 – 39

– 56 –

FINANCIAL INFORMATION

APPENDIX I

8. LOSS FROM OPERATING ACTIVITIES (Continued)

Cost of sales includes approximately HK$18,145,000 (2002: HK$18,092,000) relating to staff costs and depreciation which are also included in the respective total amounts disclosed separately above for each of these types of expenses.

As at 31 March 2003, the Group had no forfeited contributions available to reduce its contributions to retirement benefits schemes in future years (2002: Nil).

9. FINANCE COSTS

Interest on bank loans, overdrafts and other loans wholly repayable within five years Interest on convertible notes and bonds Interest on finance leases	Group 2003 HK$’000 4,701 574 105 5,380	2002 HK$’000 15,268 150 417
		15,835

10. DIRECTORS’ REMUNERATION

Particulars of directors’ remuneration, disclosed pursuant to the Listing Rules and Section 161 of the Hong Kong Companies Ordinance, are as follows:

Fees: Executive directors Independent non-executive directors Other emoluments of executive directors: Basic salaries, other allowances and benefits in kind Retirement benefits scheme contributions	Group 2003 HK$’000 – 220 220 1,500 72 1,572 1,792	2002 HK$’000 – 323
		323
		1,624 90
		1,714
		2,037

The number of directors whose remuneration fell within the following bands is as follows:

Nil to HK$1,000,000 HK$1,000,001 to HK$1,500,000	Group 2003 Number of directors 6 – 6	2002 Number of directors 6 1
		7

During the year, a director of the Company waived remuneration of HK$1,405,000 payable to him (2002: Nil).

During the year, no emoluments were paid by the Group to any of the directors as an inducement to join, or upon joining the Group, or as a compensation for loss of office (2002: Nil).

– 57 –

FINANCIAL INFORMATION

APPENDIX I

11. FIVE HIGHEST PAID INDIVIDUALS

The five highest paid individuals during the year included two (2002: two) directors, details of whose remuneration are set out in note 10 above. Details of the remuneration of the remaining three (2002: three) non-director, highest paid individuals are as follows:

Basic salaries, other allowances and benefits in kind Retirement benefits scheme contributions	Group 2003 HK$’000 833 42 875	2002 HK$’000 878 44
		922

The remuneration of all non-director, highest paid individuals fell within the band of nil to HK$1,000,000 for the years ended 31 March 2003 and 2002.

During the year, there were no bonuses paid to or receivable by any of the five highest paid individuals of the Group (2002: Nil). No emoluments were paid by the Group to any of the five highest paid individuals as an inducement to join, or upon joining the Group, or as compensation for loss of office (2002: Nil).

12. TAX

No Hong Kong profits tax has been provided as the Group did not generate any assessable profits arising in Hong Kong during the year. Taxes on profits assessable elsewhere have been calculated at the rates of tax prevailing in the countries in which the Group operates, based on existing legislation, interpretations and practices in respect thereof.

The current year’s tax charge of HK$836,000 represents the provision for deferred tax in respect of accelerated depreciation allowance (note 25).

There was no unprovided deferred tax for the Company and the Group in respect of the year (2002: Nil).

13. NET PROFIT/(LOSS) FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO SHAREHOLDERS

The net loss from ordinary activities attributable to shareholders for the year ended 31 March 2003 dealt with in the financial statements of the Company is HK$49,662,000 (2002: net profit of HK$37,461,000).

14. EARNINGS/(LOSS) PER SHARE

The calculation of basic earnings per share is based on the net profit attributable to shareholders for the year of HK$37,432,000 (2002: net loss of HK$59,284,000) and the weighted average of 189,063,902 (2002: 51,551,624, restated to reflect the share consolidation during the year (note 26(vi)(a))) ordinary shares in issue during the year.

Diluted earnings/(loss) per share amounts for the years ended 31 March 2003 and 2002 have not been disclosed, as the exercise prices of the outstanding share options of the Company were greater than the average market prices of the Company’s shares during those years, and therefore the share options had no dilutive effect on the basic earnings/(loss) per share for the years ended 31 March 2003 and 2002.

– 58 –

FINANCIAL INFORMATION

APPENDIX I

15. FIXED ASSETS

Group

Medium term leasehold land and buildings HK$’000 Cost or valuation: At beginning of year 94,950 Additions – Disposals – Deficit on revaluation (10,200) Write off (8,600) At 31 March 2003 76,150 Accumulated depreciation and impairment: At beginning of year 16,046 Provided during the year 2,794 Reversal upon revaluation (10,240) Write off (8,600) At 31 March 2003 – Net book value: At 31 March 2003 76,150 At 31 March 2002 78,904 Analysis of cost or valuation: At cost – At 31 March 2003 valuation 76,150 76,150 Company Cost: At beginning of year and at 31 March 2003 Accumulated depreciation: At beginning of year Provided during the year At 31 March 2003 Net book value: At 31 March 2003 At 31 March 2002	Leasehold improvements HK$’000 22,508 66 – – – 22,574 17,456 4,490 – – 21,946 628 5,052 22,574 – 22,574	Moulds, plant and machinery HK$’000 88,051 137 (13) – – 88,175 62,016 6,908 – – 68,924 19,251 26,035 88,175 – 88,175	Furniture, fixtures, equipment and motor vehicles HK$’000 3,909 721 – – – 4,630 2,897 604 – – 3,501 1,129 1,012 4,630 – 4,630	Construction in progress HK$’000 32,288 – – – – 32,288 32,288 – – – 32,288 – – 32,288 – 32,288	Total HK$’000 241,706 924 (13) (10,200) (8,600)
					223,817
					130,703 14,796 (10,240) (8,600)
					126,659
					97,158
					111,003
					147,667 76,150
					223,817
					Furniture, fixtures, equipment and motor vehicles HK$’000 615
					76 305
					381
					234
					539

– 59 –

FINANCIAL INFORMATION

APPENDIX I

15. FIXED ASSETS (Continued)

All the Group’s medium term leasehold land and buildings are situated outside Hong Kong. All the Group’s leasehold land and buildings were revalued by Knight Frank Hong Kong Limited, independent professionally qualified valuers, on a depreciated replacement cost basis as at 31 March 2003 at HK$76,150,000.

A total revaluation surplus of HK$82,000 arising therefrom and representing the surplus of the revalued amounts over the then carrying values of the revalued assets, on an individual asset basis, has been credited to the profit and loss account.

A total revaluation deficit of HK$42,000 arising therefrom and representing the shortfall of the revalued amount under the then carrying value of a revalued asset, on an individual asset basis, has been debited to the fixed asset revaluation reserve to the extent that the corresponding reserve brought forward is sufficient to cover the deficit.

Had the Group’s revalued leasehold land and buildings been stated at cost less accumulated depreciation, their carrying amounts would have been approximately HK$60,665,000 (2002: HK$63,596,000).

Certain leasehold land and buildings, plant and machinery and equipment with an aggregate carrying value of HK$45,400,000 (2002: HK$47,500,000) as at 31 March 2003 were pledged to secure bank borrowings advanced to the Group as set out in note 20 to the financial statements.

Pursuant to various sale and purchase agreements (the “S&P Agreements”) entered into between the Group and an independent third party, during the years 1998 and 1999, the Group acquired certain leasehold land (the “Land”) in Mainland China with a carrying value of HK$29,000,000, as at 31 March 2003. Pursuant to the S&P Agreements, the Group is required to pay annual fees of HK$118,000 in respect of the Land commencing from 2008 up to 2048 with a 20% increment for every five years.

The Group has not yet obtained the land-use rights certificate for the Land. As confirmed by the legal opinion issued by the Group’s Mainland China lawyers, subject to the payment of a land premium of approximately HK$9.8 million, which has been fully provided for in these financial statements, there is no legal barrier or otherwise for the Group to obtain a land-use rights certificate for the Land from the relevant Mainland China authority.

The net book value of the Group’s fixed assets held under finance leases included in the total amount of plant and machinery as at 31 March 2003 amounted to HK$2,354,000 (2002: HK$6,833,000).

16. INTERESTS IN SUBSIDIARIES

Unlisted shares, at cost Less: Provision for impairment Due from a subsidiary Less: Provision	Company 2003 2002 HK$’000 HK$’000 68,709 68,709 (68,709) (68,709) – – 189,618 100,555 (167,526) (100,555) 22,092 – 22,092 –	Company 2003 2002 HK$’000 HK$’000 68,709 68,709 (68,709) (68,709) – – 189,618 100,555 (167,526) (100,555) 22,092 – 22,092 –
		–
		100,555 (100,555)
		–
		–

The amounts due from a subsidiary included in the Company’s current assets are unsecured, interest-free and have no fixed terms of repayment.

– 60 –

FINANCIAL INFORMATION

APPENDIX I

16. INTERESTS IN SUBSIDIARIES (Continued)

Particulars of the Company’s principal subsidiaries are as follows:

	Place of	Nominal
	incorporation/	value of issued	Percentage of
	registration	ordinary	equity attributable		Principal
Name	and operations	share capital	to the	Company	activities
			Direct	Indirect
Hung Cheong	British Virgin	Ordinary	100	–	Investment
Holdings Limited	Islands (“BVI”)/	US$2,004			holding
	Hong Kong
Hung Cheong Toys	BVI/	Ordinary	100	–	Manufacturing
Factory Limited	Hong Kong	US$4			and trading of
					toy products
Able Market Profits	BVI	Ordinary	100	–	Investment
Limited		US$1			holding
Hung Cheong Toys	Hong Kong	Ordinary	–	100	Dormant
International Limited		HK$1,000
(“HCT”)		Non-voting
		deferred
		HK$200,000*
Xin Toys International	Hong Kong	Ordinary	–	100	Trading of
Limited		HK$2			toy products
(Formerly H&C
International Toys
Limited)
Huang Chiang Chen	Hong Kong	Ordinary	–	100	Property
Hung Cheong Plastics		HK$1,000			holding
Factory Company		Non-voting
Limited		deferred
		HK$10,000*

• The non-voting deferred shares carry no rights to dividends other than a fixed non-cumulative dividend at the rate of 5% per annum on the excess of the net profit over HK$1,000,000,000,000 that the company may determine to distribute in respect of any financial year. On a winding-up, the holders of the nonvoting deferred shares are entitled, out of the surplus assets of the company, to a return of the capital paid up on the non-voting deferred shares held by them respectively, after a total sum of HK$1,000,000,000,000 has been distributed in such a winding-up in respect of each of the ordinary shares of the company. Save as described above, the holders of the non-voting deferred shares are not entitled to any participation in the profit or surplus assets of the company and shall not be entitled to receive notice of or to attend or vote at any general meeting of the company.

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for the year or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

– 61 –

FINANCIAL INFORMATION

APPENDIX I

17. INVENTORIES

Raw materials Work in progress Finished goods	Group 2003 HK$’000 1,943 432 4,016 6,391	2002 HK$’000 2,524 599 3,882
		7,005

The carrying amount of inventories carried at net realisable value included in the above balance was approximately HK$67,000 (2002: HK$89,000) as at the balance sheet date.

18. ACCOUNTS RECEIVABLE

The Group’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally for a period of one month, extending up to three months for major customers. Each customer has a maximum credit limit. Overdue balances are reviewed regularly by senior management.

An aged analysis of the accounts receivable as at the balance sheet date, based on invoice date, and net of provisions, is as follows:

Within 30 days 31 to 60 days 61 to 90 days 91 to 180 days Over 180 days	Group 2003 HK$’000 1,018 106 1 436 15 1,576	2002 HK$’000 2,464 360 305 1,003 32
		4,164

19. ACCOUNTS PAYABLE

An aged analysis of the accounts payable as at the balance sheet date, based on invoice date, is as follows:

Within 30 days 31 to 60 days 61 to 90 days 91 to 180 days Over 180 days	Group 2003 HK$’000 336 404 247 206 11,444 12,637	2002 HK$’000 1,947 834 703 2,361 17,882
		23,727

– 62 –

FINANCIAL INFORMATION

APPENDIX I

20.

INTEREST-BEARING BANK AND OTHER BORROWINGS

Bank overdrafts: Secured Unsecured Bank loans: Trust receipt loans – secured – unsecured Other bank loans – secured – unsecured Total bank loans Other loans – unsecured Current portion of finance lease payables_(note 23)_	Group 2003 2002 HK$’000 HK$’000 – 1,481 – 6,413 – 7,894 – 18,098 – 54,480 – 72,578 26,869 30,233 – 8,398 26,869 38,631 26,869 111,209 20,400 26,400 47,269 145,503 966 2,881 48,235 148,384	Company 2003 2002 HK$’000 HK$’000 – – – – – – – – – – – – – – – – – – – – 20,400 26,400 20,400 26,400 – – 20,400 26,400	Company 2003 2002 HK$’000 HK$’000 – – – – – – – – – – – – – – – – – – – – 20,400 26,400 20,400 26,400 – – 20,400 26,400
			–
			– –
			–
			– –
			–
			–
			26,400
			26,400 –
			26,400

All the Group’s bank overdrafts, bank loans, trust receipt loans and other loans as at 31 March 2003 are repayable within one year or on demand.

At 31 March 2003, the banking facilities of the Group were supported by:

• (i) certain leasehold land and buildings of the Group in Mainland China with an aggregate carrying value of approximately HK$45,400,000 (2002: HK$47,500,000); and

• (ii) corporate guarantees executed by certain subsidiaries of the Company.

21. LOANS FROM A DIRECTOR

The loans from a director were unsecured, bore interest at the prime lending rate in Hong Kong plus 3% per annum and were assigned to a shareholder during the year (note 29(b)(v)).

22. LOANS FROM A SHAREHOLDER

The loans from a shareholder are unsecured, bear interest at the prime lending rate in Hong Kong plus 3% per annum and are repayable on demand.

Subsequent to the balance sheet date, the shareholder has undertaken that it will not demand the Group to repay partly or wholly of the loans advanced to the Group before 31 October 2004 (note 4).

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FINANCIAL INFORMATION

APPENDIX I

23. FINANCE LEASE PAYABLES

The Group leased certain of its plant and machinery, and motor vehicles during the year. These leases are classified as finance leases and have remaining lease terms of less than one year.

As at 31 March 2003, the total future minimum lease payments under finance leases and their present values were as follows:

Group

Amounts payable: Within one year In the second year Total minimum finance lease payments Future finance charges Total net finance lease payables Portion classified as current liabilities_(note 20)_ Long term portion	Minimum lease payments 2003 2002 HK$’000 HK$’000 990 3,025 – 1,186 990 4,211 (24) (412) 966 3,799 (966) (2,881) – 918	Present value of minimum lease payments 2003 2002 HK$’000 HK$’000 966 2,881 – 918 966 3,799	Present value of minimum lease payments 2003 2002 HK$’000 HK$’000 966 2,881 – 918 966 3,799
			3,799

24. CONVERTIBLE NOTES AND BONDS

The Company has issued the following convertible notes and bonds:

• (i) Pursuant to the Bank Compromise Agreement, the Bank Group was issued convertible bonds with an aggregate principal amount of HK$6,500,000 by the Company on 16 May 2002. The convertible bonds bear interest at the rate of 5% per annum and are repayable by three equal instalments on each anniversary of the issue of convertible bonds. The interests are payable semi-annually. The first instalment was settled by the Company on 16 May 2003. The second and third instalment of the convertible bonds are repayable on 16 May 2004 and 16 May 2005, respectively, subject to terms and conditions pursuant to the convertible bonds instruments which the Company is presently unable to meet. Accordingly, the convertible bonds have been considered by the directors to be repayable on demand and have been classified as current liabilities in the balance sheet as at 31 March 2003. Pursuant to the convertible bonds instruments, the convertible bonds are convertible to the shares of the Company at a conversion price of HK$0.01 per share, which was adjusted to HK$0.50 per share as a result of a share consolidation implemented by the Company on 30 December 2002 (note 26(vi)(a)), at any time during the period from the issue date up to and including 16 May 2005. The Company may at any time, after the issue of the convertible bonds, redeem all or part of the convertible bonds at a value equivalent to 105% of the outstanding principal amounts of the convertible bonds. Further details of the Bank Compromise Agreement are set out in note 3(a)(ii) to the financial statements.

• (ii) Pursuant to a compromise agreement entered into between the Company and the PRC Entity in respect of the settlement of its claim, the PRC Entity was issued a convertible note in the principal amount of HK$16,000,000 by the Company on 30 July 2002. The convertible note is repayable on the second anniversary of its issuance and bears interest at 3% per annum, payable semi-annually. The convertible note is convertible to shares of the Company at a conversion price of HK$0.01 per share at any time, which was adjusted to HK$0.50 per share as a result of a share consolidation implemented by the Company on 30 December 2002 (note 26(vi)(a)), during the period from the issue date up to and including 30 July 2004. The Company may at any time, after the date of issue of the convertible note, redeem the whole or any part of the convertible note at par value. Further details of the compromise agreement entered into between the Company and the PRC Entity are set out in note 3(a)(iii) to the financial statements.

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FINANCIAL INFORMATION

APPENDIX I

24. CONVERTIBLE NOTES AND BONDS (Continued)

• (iii) On 30 October 2000, the Company entered into a conditional subscription agreement with Join Asia Enterprises Limited (“Join Asia”), which is an independent third party not connected with the Group. Pursuant to the conditional subscription agreement, the Company issued a convertible note of HK$3,000,000 to Join Asia. The convertible note was issued at 100% of its principal amount, bore interest at the rate of 5% per annum and was payable on 16 November 2002. On 6 May 2002, Join Asia converted in full the convertible note at the conversion price of HK$0.015 per share which resulted in the issuance of 200,000,000 shares (note 26(i)) of HK$0.01 each in the Company.

Convertible bonds issued to the Bank Group repayable on demand Convertible note issued to the PRC Entity repayable in the second year Convertible note issued to Join Asia Portion classified as current liabilities Non-current portion	2003 HK$’000 6,500 16,000 – 22,500 (6,500) 16,000	2002 HK$’000 – – 3,000
		3,000 (3,000
		–

25. DEFERRED TAX

At beginning of year Charge for the year_(note 12)_ At end of year	Group 2003 HK$’000 – 836 836	2002 HK$’000 – –
		–

The principal amounts of the Group’s deferred tax assets not recognised for in the financial statements as at the balance sheet date were as follows:

Tax losses carried forward	Not provided 2003 2002 HK$’000 HK$’000 5,283 17,404

No deferred tax has been provided on the revaluation surplus of the Group’s leasehold land and buildings situated in Mainland China as the Group presently does not have any intention to dispose of its leasehold land and buildings.

The Company and the Group had no unprovided deferred tax as at the balance sheet date (2002: Nil).

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FINANCIAL INFORMATION

APPENDIX I

26. SHARE CAPITAL

Authorised: 1,500,000,000 (2002: 10,000,000,000) ordinary shares of HK$0.01 each Issued and fully paid: 215,525,638 (2002: 2,483,936,760) ordinary shares of HK$0.01 each During the year, the movements in share capital were as follows:	Group 2003 HK$’000 15,000 2,155	2002 HK$’000 100,000
		24,839

• (i) On 6 May 2002, the convertible note of HK$3,000,000 issued to Join Asia was converted into 200,000,000 ordinary shares of HK$0.01 each in the Company at a conversion price of HK$0.015 per share. The excess of the principal amount of the convertible note upon conversion over the nominal value of the shares issued, amounted to HK$1,000,000, was credited to the share premium account.

• (ii) Pursuant to an ordinary resolution passed at a special general meeting held on 13 May 2002, the authorised share capital of the Company was increased from HK$100,000,000 to HK$300,000,000 by the creation of an additional 20,000,000,000 shares of HK$0.01 each.

• (iii) On 16 May 2002, the subscription agreement entered into by the Company and Vision Century was completed which resulted in the issue of 3,000,000,000 ordinary shares of HK$0.01 each in the Company at a price of HK$0.01 per share. Cash proceeds of HK$30,000,000, before related expenses, were received by the Company.

• (iv) On 29 May 2002, the open offer detailed in note 3(b) was completed. A total of 4,025,905,140 new ordinary shares of HK$0.01 each in the Company were issued. Cash proceeds of approximately HK$40,259,000, before the related expenses, were received by the Company.

• (v) Pursuant to various compromise agreements entered into by the Group with certain trade and other creditors detailed in 3(a)(iii), the Company issued 1,066,440,000 ordinary shares of HK$0.01 each at prices ranging from HK$0.01 to HK$0.015 each to the trade and other creditors. The excess of the debt amounts settled by way of the Company’s shares issued over the nominal value of the shares issued, amounting to approximately HK$342,000, was credited to the share premium account.

• (vi) Pursuant to special and ordinary resolutions passed at a special general meeting of the Company held on 30 December 2002, a capital reorganisation (the “Capital Reorganisation”) involving, inter alia, the following was implemented:

• (a) a consolidation of every fifty issued and unissued shares of HK$0.01 each into one consolidated share (the “Consolidated Share”) of HK$0.50 each;

• (b) a reduction of the nominal value of each issued Consolidated Share from HK$0.50 each to HK$0.01 each by the cancellation of HK$0.49 per share and the credit arising therefrom amounting to HK$105,607,000 (the “Capital Reduction”);

• (c) the cancellation of the entire amount standing to the credit of the share premium account of the Company and a transfer of the credit arising therefrom to the contributed surplus account of the Company (note 28(b));

• (d) the cancellation of the existing authorised and unissued share capital of the Company to HK$15,000,000 comprising 1,500,000,000 consolidated shares of HK$0.01 each, ranking pari passu in all respects with the existing share capital of the Company; and

• (e) the application of the credit arising from the Capital Reduction and the credit arising from the share premium cancellation were applied in full, together with the amount standing in the contributed surplus to eliminate the accumulated losses of the Company.

Further details of the Capital Reorganisation are also set out in the circular of the Company dated 5 December 2002.

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FINANCIAL INFORMATION

APPENDIX I

26. SHARE CAPITAL (Continued)

A summary of the transactions during the year with reference to the above movements in the Company’s authorised and issued ordinary share capital is as follows:

Authorised share capital Number of authorised shares Notes ’000 At 1 April 2001 and 1 April 2002 10,000,000 Increase in authorised share capital (ii) 20,000,000 Share cancellation (vi)(d) (28,500,000) At 31 March 2003 1,500,000 Issued share capital	HK$’000 100,000 200,000 (285,000)
	15,000

Notes At 1 April 2001 and 1 April 2002 Shares issued on conversion of convertible note (i) Shares issued on share subscription (iii) Shares issued on open offer (iv) Shares issued on settlement of certain trade and other creditors (v) Share consolidation (vi)(a) Capital reduction (vi)(b) Share issue expense Share premium cancellation (vi)(c) At 31 March 2003 Share options	Number of shares in issue 2,483,936,760 200,000,000 3,000,000,000 4,025,905,140 1,066,440,000 (10,560,756,262) – – – 215,525,638	Issued share capital HK$’000 24,839 2,000 30,000 40,259 10,664 – (105,607) – – 2,155	Share premium account HK$’000 44,397 1,000 – – 342 – – (4,273 ) (41,466) –	Total HK$’000 69,236 3,000 30,000 40,259 11,006 – (105,607) (4,273) (41,466)
				2,155

Details of the Company’s share option schemes and the share options issued under the schemes are included in note 27 below.

27. SHARE OPTION SCHEMES

SSAP 34 was adopted during the year, as explained in note 2 and under the heading “Employee benefits” in note 5 to the financial statements. As a result, the following detailed disclosures relating to the Company’s share option schemes are now included in notes to the financial statements. In the prior year, these disclosures were included in the Report of the Directors, as their disclosure is also a requirement of the Listing Rules.

The Company operates the share option schemes for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations.

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FINANCIAL INFORMATION

APPENDIX I

27. SHARE OPTION SCHEMES (Continued)

Pursuant to the share option scheme adopted by the Company on 17 February 1998 (the “Old Scheme”), the directors of the Company were authorised, on or before 16 February 2008, at their discretion to invite any employees, including executive directors of the Company or any of its subsidiaries, to take up options to subscribe for shares of the Company. The subscription price was the higher of the nominal value of the shares of the Company and 80% of the average of the closing prices per share of the Company’s share on The Stock Exchange of Hong Kong Limited on the five trading days immediately preceding the date of offer of the share options. The maximum number of shares in respect of which options were granted under the Old Scheme might not exceed, in nominal value, 10% of the issued share capital of the Company from time to time which had been duly allotted and issued. The maximum number of shares in respect of which options might be granted to any one employee or director might not exceed 25% of the aggregate number of shares in respect of which options were issued and issuable under the Old Scheme. There was no share option granted under the Old Scheme which remained outstanding as at 31 March 2003.

In order to comply with the new requirements of Chapter 17 of the Listing Rules on granting options under share option schemes, which took effect from 1 September 2001, the Old Scheme was terminated and a new share option scheme (the “New Scheme”) was adopted pursuant to the ordinary resolutions passed by the shareholders at the special general meeting of the Company held on 30 December 2002. Upon adoption of the New Scheme, no options will be granted under the Old Scheme from 30 December 2002.

Under the New Scheme, eligible participants include the Company’s directors, including independent non-executive directors, other employees of the Group, suppliers of goods or services to the Group, customers of the Group, and any minority shareholders in the Company’s subsidiaries. The New Scheme became effective on 30 December 2002 and, unless otherwise cancelled or amended, will remain in force for 10 years from that date.

The maximum number of unexercised share options currently permitted to be granted under the New Scheme is an amount equivalent, upon their exercise, to 10% of the shares of the Company in issue at any time. As at 31 March 2003, no share options were granted under the New Scheme. The maximum number of shares issuable under share options to each eligible participant in the New Scheme within any 12-month period, is limited to 1% of the shares of the Company in issue at any time. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.

Under the New Scheme, 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$5,000,000, within any 12month period, are subject to shareholders’ approval in advance in a general meeting.

The offer of a grant of share options under the New Scheme may be accepted within 30 days from the date of the offer, upon payment of a nominal consideration of HK$1.0 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 five 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 higher of (i) the Stock Exchange closing price of the Company’s shares on the date of the offer of the share options; and (ii) the average Stock Exchange closing price of the Company’s shares for the five trading days immediately preceding the date of the offer.

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

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FINANCIAL INFORMATION

APPENDIX I

27. SHARE OPTION SCHEMES (Continued)

The movements of the share options granted under the Old Scheme during the year are set out below:

Name or category of participant Other employees: In aggregate	Number of share options At Cancelled At Date of grant Exercise Exercise Share price of 1 April during 31 March of share period of price of the Company 2002 the year 2003 options share options share options at grant date * * **** 13,700,000 (13,700,000) – 20-July-1999 21-July-1999 to 0.046 0.05 16-February-2008

• The vesting period of the share options is from the date of the grant until the commencement of the exercise period.

• ** The exercise price of the share options is subject to adjustment in the case of rights or bonus issues, or other similar changes in the Company’s share capital.

• *** The price of the Company’s shares disclosed as at the date of the grant of the share options is the Stock Exchange closing price on the trading day immediately prior to the date of the grant of the share options.

28. RESERVES

(a) Group

The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity on page 42 of this circular.

The Group’s contributed surplus originally represents the difference between the nominal value of the shares of the subsidiaries acquired pursuant to the Group’s reorganisation on 17 February 1998, over the nominal value of the Company’s shares issued in exchange therefor.

Pursuant to the Capital Reorganisation implemented during the year, the credits arising from the Capital Reduction and share premium cancellation and the amount standing in the contribution surplus account were applied to eliminate the accumulated losses of the Group.

(b) Company

Notes At 1 April 2001 Net profit for the year At 31 March and 1 April 2002 Shares issued on conversion of a convertible note 26(i) Shares issued on settlement of certain trade and other creditors 26(v) Share issue expense Share premiu cancellation 26(vi)(c) Elimination of accumulated losses 26(vi)(e) Net loss for the year At 31 March 2003	Share premium Contributed Accumulated account surplus losses HK$’000 HK$’000 HK$’000 44,397 68,509 (244,013) – – 37,461 44,397 68,509 (206,552) 1,000 – – 342 – – (4,273) – – (41,466) 41,466 – – (109,975) 215,582 – – (49,662) – – (40,632)	Total HK$’000 (131,107 37,461
		(93,646 1,000 342 (4,273 – 105,607 (49,662
		(40,632

– 69 –

FINANCIAL INFORMATION

APPENDIX I

28. RESERVES (Continued)

The contributed surplus of the Company originally represents the excess of the then combined net asset value of the subsidiaries acquired pursuant to the Group’s reorganisation referred to in (a) above, over the nominal value of the Company’s shares issued in exchange therefor.

29. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a) Prior year adjustments

SSAP 15 (Revised) was adopted during the current year, as detailed in note 2 to the financial statements, which has resulted in a change to the layout of the consolidated cash flow statement. The consolidated cash flow statement is now presented under three headings: cash flows from operating activities, investing activities and financing activities. Previously five headings were used, comprising the three headings listed above, together with cash flows from returns on investments and servicing of finance and from taxes paid. The significant reclassifications resulting from the change in presentation are that interest received is now included in cash flows from investing activities and interest paid is now included in cash flow from financing activities. The presentation of the 2002 comparative consolidated cash flow statement has been changed to accord with the new layout.

Also, the definition of “cash equivalents” under the SSAP 15 (Revised) has been revised as explained under the heading “Cash and cash equivalents” in note 5 to the financial statements. This has resulted in trust receipt loans no longer qualifying as cash equivalents. The amount of cash equivalents in the consolidated cash flow statement as at 31 March 2002 has been adjusted to remove trust receipt loans amounting to HK$72,578,000, previously included as at that date. The current year’s movement in trust receipt loans is now included in cash flows from financing activities and the comparative consolidated cash flow statement has been changed accordingly.

(b) Major non-cash transactions

The Group had the following major non-cash transactions during the year:

• (i) Join Asia converted in full the convertible note of HK$3,000,000 issued by the Company at the conversion price of HK$0.015 per share into 200,000,000 shares of HK$0.01 each in the Company which did not result in any cash flow (note 24(iii)).

• (ii) Pursuant to the Bank Compromise Agreement, the Bank Group was issued convertible bonds with an aggregate principal amount of HK$6,500,000 by the Company as part of the consideration for releasing and discharging the Group from all its obligations and liabilities in respect of the Group’s borrowings advanced by the Bank Group (notes 3(a)(ii) and 24(i)). The issue of these convertible bonds did not result in any cash flow.

• (iii) Pursuant to a compromise agreement between the Company and the PRC Entity in respect of the settlement of its claims, the PRC Entity was issued by the Company a convertible note in the principal amount of HK$16,000,000 (notes 3(a)(iii) and 24(ii)). The issue of this convertible note did not result in any cash flow.

• (iv) Pursuant to various compromise agreements entered into by the Group with certain trade and other creditors, the Company issued 1,066,440,000 shares of HK$0.01 each for an aggregate amount of HK$11,006,000 in respect of the settlement of debts owed to trade creditors of HK$1,055,000 and other creditors of HK$9,951,000 (notes 3(a)(iii) and 26(v)). The issue of shares by the Company did not result in any cash flow.

• (v) During the year, the principal amount of the loans from a director of HK$4,000,000 was assigned to a shareholder which did not result in any cash flow (note 35(iii)).

• (vi) The Capital Reorganisation as detailed in note 26(vi) implemented during the year did not result in any cash flow.

30. PLEDGE OF ASSETS

Details of the Group’s bank and other borrowings, which are secured by assets of the Group, are included in notes 15 and 20 to the financial statements.

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FINANCIAL INFORMATION

APPENDIX I

31. OPERATING LEASE ARRANGEMENTS

The Group leases certain of its office properties under operating lease arrangements. Leases for properties are negotiated for a term of two years.

As at 31 March 2003, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

Within one year In the second to fifth years, inclusive	Group 2003 HK$’000 248 – 248	2002 HK$’000 398 248
		646

In addition, pursuant to various agreements entered into between the Group and an unrelated party in Mainland China, the Group is required to pay annual fees of HK$118,000 in respect of certain leasehold land of the Group in Mainland China, with a carrying value of HK$29,000,000 as at 31 March 2003, commencing from the year 2008 up to the year 2048 with a 20% increment for every five years (note 15).

32. COMMITMENTS

Neither the Company nor the Group had any significant capital commitments as at the balance sheet date (2002:

Nil).

33. PENDING LITIGATIONS

• (i) Claims for outstanding trade debts were brought by several suppliers against HCT during the year in respect of goods supplied and services provided for, together with interest, costs and/or other relief, of approximately HK$2,592,000 in aggregate. The Group subsequently filed defences. No further action has been taken by the suppliers. A full provision for HK$2,592,000 has been made in these financial statements.

• (ii) As at the date of the 2003 annual report, writs of summons had been issued by other miscellaneous creditors, together with claims for interest thereon, in respect of purchases of goods and provision of services, aggregating approximately HK$1,095,000. A full provision for HK$1,095,000 has been made in these financial statements.

In the opinion of the directors, adequate provisions have been made by the Group in respect of all the above claims in the Group’s financial statements as at 31 March 2003.

34. POST BALANCE SHEET EVENTS

• (i) On 15 May 2003, the Company settled the first instalment of the convertible bonds issued to the Bank Group of approximately HK$2,167,000.

• (ii) On 15 July 2003, the Company entered into an underwriting agreement with Kingston Securities Limited in respect of an open offer with assured allotment of four offer shares for every one share of HK$0.01 each in the Company.

The open offer is expected to be completed on 23 September 2003 and will result in the issue of 862,102,552 new ordinary shares of HK$0.01 each in the Company at a price of HK$0.06 per share based on the number of issued shares of 215,525,638 as at 31 March 2003. Cash proceeds of approximately HK$51,726,000, before related open offer expenses, will be received by the Company (note 4(a)).

• (iii) Subsequent to the balance sheet date, Vision Century advanced addition loans of HK$11,000,000 to the Group. The advance from Vision Century bears interest at the prime lending rate in Hong Kong plus 3% per annum.

• (iv) Subsequent to the balance sheet date, in July 2003, Speed Up has assigned its entire interest in other loans of HK$20,400,000 together with the accrued interest, which were advanced to the Group to Vision Century (note 4(b)(ii)).

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FINANCIAL INFORMATION

APPENDIX I

34. POST BALANCE SHEET EVENTS (Continued)

• (v) Subsequent to the balance sheet date, the Group agreed with, or obtained written consent from, certain creditors to reschedule the repayment terms of the Group’s indebtedness. Further details of such agreements are set out in note 4(b) to the financial statements.

• (vi) Pursuant to a board resolution passed by the directors on 16 July 2003, the authorised share capital of the Company was proposed to be increased from HK$15,000,000 to HK$100,000,000 by the creation of additional 8,500,000,000 shares of HK$0.01 each in the Company.

35. RELATED PARTY TRANSACTIONS

• (i) During the year, Vision Century subscribed for 3,000,000,000 ordinary shares of HK$0.01 each in the Company pursuant to a subscription agreement dated 1 February 2002 entered into with the Company. Further details of the share subscription are set out in note 3(a)(i).

• (ii) The Company entered into an underwriting agreement with Vision Century on 1 February 2002 in respect of underwriting an aggregate of 4,025,905,140 shares by Vision Century under an open offer with assumed allotment of three offer shares for every two shares of HK$0.01 each in the Company. The open offer completed on 29 May 2002 and resulted in the issuance of 2,300,299,500 shares of HK$0.01 each in the Company to Vision Century.

• (iii) Mr. Lo Ming Chi (“Mr. Lo”), a director of the Company, advanced loans of HK$4,000,000 (2002: HK$7,000,000) to the Group during the year. The loans were unsecured, bore interest at the prime lending rate in Hong Kong plus 3% per annum and were repayable on demand. During the year, the loans advanced from Mr. Lo were assigned in full to Vision Century (note 29(b)(v)). Accordingly, the outstanding balance of the loans advanced by Mr. Lo was nil as at 31 March 2003. The interest expenses incurred by the Group during the year in respect of the loans from Mr. Lo amounted to HK$415,000.

• (iv) Vision Century advanced loans of HK$8,000,000 (2002: Nil) to the Group during the year. The loans are unsecured, bear interest at the prime lending rate in Hong Kong plus 3% per annum and are repayable on demand. Together with the loans assigned from Mr. Lo as mentioned in (iii) above to Vision Century, the Group owed Vision Century HK$12,000,000 in aggregate as at 31 March 2003 (2002: Nil). The interest expenses incurred by the Group during the year in respect of the loans from Vision Century amounted to HK$127,000.

• (v) Get Start Holdings Limited, the former immediate holding company of Vision Century, had undertaken to the Company, during the period up to 31 May 2003, to provide continuing financial support to the Group so as to enable the Group to continue its day-to-day operations as a viable going concern notwithstanding any present or future financial difficulties experienced by the Group.

36. COMPARATIVE AMOUNTS

As further explained in note 2 to the financial statements, due to the adoption of certain new and revised SSAPs during the current year, the accounting treatment and presentation of certain items and balances in the financial statements have been revised to comply with the new requirements. Accordingly, certain comparative amounts have been restated to conform with the current year’s presentation.

37. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 24 July 2003.

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FINANCIAL INFORMATION

APPENDIX I

4. PRO FORMA STATEMENT OF UNAUDITED ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS

Set out below is the pro forma statement of the unaudited adjusted consolidated net tangible assets of the Group based on the audited consolidated deficiency in assets of the Group as at 31 March 2003 and adjusted as follows:

Audited consolidated deficiency in assets of the Group as at 31 March 2003 Add: Issue of New Shares under the Subscription Net proceeds from the Open Offer Unaudited adjusted consolidated net tangible assets of the Group after completion of the Subscription and Open Offer Audited consolidated deficiency in assets per Share prior to completion of the Subscription and Open Offer_(Note 2) Pro forma unaudited adjusted consolidated net tangible assets per Share upon completion of the Subscription and Open Offer(Note 3)_

HK$’000 (11,014) 1,998 49,735 40,719 HK cents (5.1) 3.7

Notes:

1. The pro forma statement of unaudited adjusted consolidated net tangible assets prepared above does not take into account the effect upon conversion of the outstanding Convertible Note and the Convertible Bonds.

2. Based on the existing issued share capital of 215,525,638 Shares.

3. Based on the enlarged issued share capital of 1,102,720,190 Shares after the completion of the Subscription and Open Offer.

5. MATERIAL ADVERSE CHANGE

Save as disclosed in this circular, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 March 2003, the date to which the latest audited financial statements of the Company were made up.

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FINANCIAL INFORMATION

APPENDIX I

6. INDEBTEDNESS

At the close of business on 30 June 2003, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had outstanding borrowings of approximately HK$90.1 million comprising secured bank loans of approximately HK$26.3 million, unsecured other loans (the “Unsecured Other Loans”) of approximately HK$20.4 million, unsecured loans from the immediate holding company of the Company (the “Immediate Holding Company”) of approximately HK$20.0 million, convertible note payable of approximately HK$16.0 million, convertible bonds payable of approximately HK$4.3 million and accrued interest payable of aforesaid indebtedness of approximately HK$3.1 million.

As at 30 June 2003, the Group’s bank loans were secured by legal charges on certain of the Group’s medium term leasehold land and buildings situated outside Hong Kong and corporate guarantee executed by a subsidiary of the Company.

In addition to the above, as at 30 June 2003, the Group had outstanding claims in respect of pending litigations as detailed in note 5 of Appendix III to this circular.

Save as aforesaid and apart from intra-group liabilities, none of the companies comprising the Group had outstanding at the close of business on 30 June 2003, any mortgage, charges or debentures, loan capital issued and outstanding or agree to be issued, bank overdrafts and loans, debt security or other similar indebtedness, liabilities under acceptances (other than normal trade bills) or acceptance credits or any hire purchase commitments, finance lease commitments, guarantees or other material contingent liabilities.

Subsequent to 30 June 2003, the loan provider of the Unsecured Other Loans has assigned its entire interest in the Unsecured Other Loans together with the accrued interest of HK$2.3 million (the “Assigned Loans”) owed by the Group as at 30 June 2003 to the Immediate Holding Company on 2 July 2003. On the same day, the Immediate Holding Company granted a credit facility (the “Credit Facility”) to the Company amounting to HK$50.0 million to surrogate the amount due from the Company as at that date, which included the Assigned Loans of a total of HK$22.7 million, and the loan balance of HK$20.0 million due to it as at 30 June 2003 and the accrued interest thereon of HK$0.5 million as at that date. The Immediate Holding Company has undertaken that it will not demand the Group to repay partly or wholly of any advances made to the Group under the Credit Facility before 31 October 2004. Up to the latest practicable date, additional loan of HK$3.0 million has been granted to the Company by the Immediate Holding Company under the Credit Facility.

Save as disclosed above, the Directors confirmed that there had been no material change in indebtedness and contingent liabilities of the Group since 30 June 2003.

For the purpose of this indebtedness statement, foreign currency amounts have been translated into Hong Kong dollars at the applicable rates of exchange prevailing at the close of business on 30 June 2003.

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FINANCIAL INFORMATION

APPENDIX I

7. WORKING CAPITAL

Subject to the completion of the Open Offer, the Group will raise net proceeds of approximately HK$49.7 million. In addition, Huang Worldwide Holding Limited (“Huang Worldwide”), an intermediate holding company of the Company, has undertaken to the Company to provide continuing financial support to the Group so as to enable the Group to continue its day-to-day operation as a viable concern notwithstanding any present or future financial difficulties experienced by the Group up to 31 October 2004. At present, the Group has undertaken a number of other measures in order to further relieve its current liquidity pressure.

The Group has obtained written consent from one of the Group’s Mainland China bankers to reschedule and extend the repayment period, subject to a repayment of the principal amount of approximately HK$0.8 million and the settlement of interest payable of HK$0.7 million by the Group, of its bank borrowings at 31 March 2003 of approximately HK$23.5 million for another one year upon their original maturity in the second half of 2003.

The Immediate Holding Company granted a credit facility (the “Credit Facility”) to the Company amounting to HK$50 million of which HK$46.2 million was utilised at the Latest Practicable Date. The Immediate Holding Company has undertaken that it will not demand the Group to repay partly or wholly of any advance made to the Group under the Credit Facility before 31 October 2004.

Hung Cheong Toys International Limited (“HCT”), a wholly-owned subsidiary of the Company, had a deficiency in assets of approximately HK$94.2 million as at 31 March 2003 and remained dormant since June 2001. As at 31 March 2003, HCT had total liabilities of approximately HK$94.2 million which comprised intra group liabilities of approximately HK$83.0 million, other liabilities of HK$1.5 million guaranteed by the Company and unsecured liabilities of approximately HK$9.7 million. Having considered the legal counsels’ advice, the Directors had withdrawn all the Company’s financial support provided to HCT and intend to dispose of the entire interest in HCT held by the Company in order to improve the Group’s current liquidity which is in the interest of the Shareholders. In this regard, the Group has no intention to settle the unsecured liabilities of HCT amounted to approximately HK$9.7 million.

The Company and the Subscribers entered into the Subscription Agreement in respect of the issue of the New Shares in settlement of all outstanding balances of HK$2.0 million owed to the Subscribers.

The Directors are of the opinion that, in the absence of unforeseen circumstances and subject to the completion of the Open Offer; the ability of Huang Worldwide to provide continuing financial support to the Group; the successful rescheduling and extension of the repayment period for the Group’s borrowings owned to one of its bankers in Mainland China to after 30 September 2004; the intention of the Directors in relation to the disposition of HCT of which the Company had withdrawn all its financial support and the issue of the New Shares under the Subscription in settlement of all outstanding balances owed to the Subscribers, the Group, which includes the Company and its subsidiaries other than HCT, will have sufficient working capital up to 30 September 2004. Should the Subscription, Open Offer and other measures abovementioned be unsuccessful, the Directors are of the opinion that the Group would not have adequate fund to enable it to operate as a going concern in the foreseeable future.

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EXPLANATORY STATEMENT

APPENDIX II

This Appendix serves as an explanatory statement as required, pursuant to Rule 10.06(1)(b) of the Listing Rules, to be given to Shareholders in order for them to consider the Repurchase Mandate.

(a) Stock Exchange Rules

The Listing Rules permit companies with a primary listing on the Stock Exchange to repurchase their securities on the Stock Exchange subject to certain restrictions, the more important of which are summarised below:

(a) Share capital

The Company has in issue an aggregate of 215,525,638 Shares as at the Latest Practicable Date. Based on this number, the Open Offer will involve the issue of 862,102,552 Offer Shares. The exercise in full of the Repurchase Mandate, on the basis of 1,077,628,190 Shares in issue immediately after the issue of the Offer Shares, would result in up to 107,762,819 Shares being repurchased by the Company during the period in which the Repurchase Mandate remains in force. If the Open Offer is not completed, the number of Shares subject to the Repurchase Mandate will not be increased to reflect the Offer Shares issued. If the Convertible Note and the Convertible Bonds are fully converted prior to the Record Date, a maximum of 1,280,961,520 Shares will be in issue upon the completion of the Open Offer and a total of 128,096,152 Shares can be repurchased pursuant to the Repurchase Mandate.

(b) Reasons for repurchases

The Directors believe that it is in the best interest of the Company and its shareholders for the Directors to have general authority from the Shareholders to enable the Company to repurchase Shares in the market. Such repurchases may, depending on market conditions and funding arrangements at the time, lead to an enhancement of the net asset value per Share and will only be made if the Directors believe that such repurchases will benefit the Company and its shareholders.

(c) Funding of repurchases

In repurchasing Shares, the Company may only apply funds legally available for such purpose in accordance with its memorandum of association and Bye-laws, the Listing Rules and the applicable laws of Bermuda.

On the basis of the current financial position of the Group as disclosed in this circular and taking into account the current working capital position of the Group, the Directors consider that, if the Repurchase Mandate were to be exercised in full, it might have a material adverse effect on the working capital and/or the gearing position of the Group as compared with the position disclosed in this circular. However, the Directors do not propose to exercise the Repurchase Mandate to such an extent as would, in the circumstances, have a material adverse effect on the working capital requirements of the Group or the gearing level which in the opinion of the Directors are from time to time appropriate for the Group.

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EXPLANATORY STATEMENT

APPENDIX II

(d) Share prices

The highest and lowest prices at which the Shares have traded on the Stock Exchange in each of the twelve months ended 31 July 2003, respectively, were as follows:

	Per	Share(Note)
	Highest	Lowest
	HK$	HK$
2002
August	0.010	0.010
September	–	–
October	0.010	0.010
November	–	–
December	–	–
2003
January	0.370	0.153
February	0.187	0.160
March	0.190	0.110
April	0.160	0.160
May	0.150	0.080
June	0.180	0.130
July	0.168	0.155

Note: The Company effected a reorganization of its share capital which became effective on 31 December 2002 and accordingly, prices of the Shares prior to such date represented Shares prior to the 50 to 1 share consolidation and prices of the Shares after such date represented Shares after the aforesaid share consolidation having become effective.

(e) General

None of the Directors nor, to the best of their knowledge having made all reasonable enquiries, any of their associates currently intends to sell any Shares to the Company or its subsidiaries.

The Directors have undertaken to the Stock Exchange that, so far as the same may be applicable, they will exercise the Repurchase Mandate in accordance with the Listing Rules and the applicable laws of Bermuda.

If, as a result of a securities repurchase, a Shareholder’s proportionate interest in the voting rights of the Company is increased, such increase will be treated as an acquisition for the purpose of the Hong Kong Code on Takeovers and Mergers (the “Code”). Accordingly, a Shareholder or a group of Shareholders acting in concert could obtain or consolidate control of the Company and become obliged to make a mandatory offer in accordance with Rule 26 of the Code. The Directors are not aware of any consequences which would arise under the Code as a consequence of any repurchases pursuant to the Repurchase Mandate.

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EXPLANATORY STATEMENT

APPENDIX II

Any purchase of Shares which results in the number of Shares held by the public being reduced to less than 25% of the Shares then in issue could only be implemented with the agreement of the Stock Exchange to waive the Listing Rules requirements regarding the public shareholding referred to above. It is believed that a waiver of this provision would not normally be given other than in exceptional circumstances. The Directors have no intention to exercise the Repurchase Mandate to such an extent that will result in the Company not having sufficient Shares in the public hands.

No connected person (as defined in the Listing Rules) has notified the Company that he has a present intention to sell Shares to the Company, or has undertaken not to do so if the Repurchase Mandate is exercised.

The Company had not purchased any Shares (whether on the Stock Exchange or otherwise) in the six months preceding the date of this circular.

– 78 –

GENERAL INFORMATION

APPENDIX III

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular, and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement herein misleading.

2. DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, the interests and short positions of the Directors in the equity and debt securities of the Company or its associated corporations (within the meaning of Part XV of the SFO) which require notification to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which any such Director is deemed or taken to have under such provisions of the SFO) or which are required, pursuant to Section 352 of the SFO to be entered into the register maintained by the Company or which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to be notified to the Company and the Stock Exchange were as follows:

		Number of Shares held	Number of Shares held
	Personal	Family	Corporate	Other
Name of director	interests	interests	interests	interests
Mr. Wilson Ng	–	–	–	156,419,190
Mr. Ng Kee Weat	–	–	–	156,419,190
				(Note)

Note: These Shares are held by Vision Century. Vision Century is ultimately owned by a discretionary trust, the beneficiaries under the discretionary trust include Mr. Wilson Ng and Mr. Ng Kee Weat.

Save as disclosed herein, as at the Latest Practicable Date, no Directors had interests or short positions in the equity or debt securities of the Company or its associated corporations (within the meaning of Part XV of the SFO) which require notification to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests which any such Director is deemed or taken to have under such provisions of the SFO) or which are required to be entered into the register maintained by the Company, pursuant to Section 352 of the SFO, or which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to be notified to the Company and the Stock Exchange.

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GENERAL INFORMATION

APPENDIX III

3. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, the following persons have an interest or a short position in Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, who will, directly or indirectly, be interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group:

			Percentage of
		Number of	the Company’s
Name	of substantial shareholders	Shares held	issued share capital
Huang	Group (BVI) Limited*	156,414,190	73
Huang	Worldwide Holding Limited*	156,419,190	73
Vision	Century*	156,419,190	73

• Vision Century is a wholly-owned subsidiary of Huang Worldwide Holding Limited. Huang Worldwide Holding Limited is a wholly-owned subsidiary of Huang Group (BVI) Limited which is in turn wholly-owned by a discretionary trust.

4. EXPERT

Each of Dao Heng Securities (a registered investment adviser) and Ernst and Young (Certified Public Accountants) has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter or opinion as set out in this circular and reference to its name in the form and context in which they appear respectively.

As at the Latest Practicable Date, each of Dao Heng Securities and Ernst and Young, was not beneficially interested in the share capital of any member of the Group nor did it have any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group nor did it have any interest, either direct or indirect, in any assets which have been, since the date to which the latest published audited financial statements of the Company were made up, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group.

5. LITIGATION

The following are particulars of litigation or arbitration of material importance in which the Company or any of its subsidiaries are engaged and litigation or claims of material importance which are pending or threatened by or against the Company or any of its subsidiaries:

• (i) Claims for outstanding trade debts were brought by several suppliers against Hung Cheong Toys International Limited in respect of goods supplied and services provided for, together with interest, costs and/or other relief, of approximately HK$2,465,000 in aggregate. The Group subsequently filed defences and no further action has been taken by the suppliers.

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GENERAL INFORMATION

APPENDIX III

• (ii) Writs of summons had been issued by other miscellaneous creditors, together with claims for interest thereon, in respect of purchases of goods and provision of services, aggregating approximately HK$1,095,000.

Save as disclosed herein, neither the Company nor any of its subsidiaries is engaged in litigation or arbitration of material importance and so far as the Directors are aware, no litigation or claims of material importance are pending or threatened by or against the Company or any of its subsidiaries.

6. MATERIAL CONTRACTS

The following contracts have been entered into by the Company and its subsidiaries (not being contracts entered into in the ordinary course of business) within the two years immediately preceding the date of this circular and are or may be material:

• the subscription agreement dated 1 February 2002 entered into between the Company and Vision Century relating to the subscription of an equivalent of 60,000,000 Shares at HK$0.50 each.

• the agreement dated 1 February 2002 entered into between the Group, Vision Century and certain bank creditors, among others, relating to the restructuring of the bank debts.

• an underwriting agreement dated 1 February 2002 between the Company and Vision Century relating to an open offer.

• a settlement agreement dated 27 March 2002 entered into between Dongguan Shi Huangjiang Zhen Hung Cheong Toys Factory and Dongguan Shi Huangjiang Zhan Importing Company.

• an aggregate of 30 share settlement agreements all dated 27 March 2002 entered into between certain creditors of the Group and Dongguan Shi Huangjiang Zhen Hung Cheong Toys Factory in respect of settlement of its debts.

• a total of 10 share settlement agreements all dated 25 September 2002 entered into between certain creditors of the Group and Dongguan Shi Huangjiang Zhen Hung Cheong Toys Factory and H&C International Toys Limited.

• a credit facility in the amount of HK$50,000,000 dated 2 July 2003 granted by Vision Century in favour of the Company.

• the underwriting agreement dated 15 July 2003 entered into between the Company, Vision Century and the Underwriter in relation to the Open Offer.

• the subscription agreement dated 28 July 2003 entered between the Company, Mr. Lo Ming Chi, Charles and Mr. Yu Wai Man relating to the Subscription.

Save as aforesaid, no material contracts (not being contracts entered into in the ordinary course of business carried on by the Group) have been entered into by any member of the Group within the two years preceding the date of this circular.

– 81 –

GENERAL INFORMATION

APPENDIX III

7. MISCELLANEOUS

• (a) None of the Directors has any existing or proposed service contract with any member of the Group which does not expire or is not determinable by the Group within one year without payment of compensation (other than statutory compensation).

• (b) Save as disclosed in this circular, there is no contract or arrangement entered into by any member of the Group subsisting at the date thereof in which any Director is materially interested and which is significant in relation to the business of the Group.

• (c) Save as disclosed in this circular, none of the Directors has, or has had, any direct or indirect interest in any assets which have been acquired, disposed of or leased to, or which are proposed to be acquired, disposed of or leased to, the Company or any of its subsidiaries since 31 March 2003, the date to which the latest published audited financial statements of the Group were made up.

• (d) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.

• (e) The secretary of the Company is Mr. Yu Wai Man, A.H.K.S.A., F.C.C.A.

• (f) The English texts of this circular and the accompanying form of proxy shall prevail over their respective Chinese texts.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours (Saturdays and public holidays excepted) at the head office of the Company at Room 3A03-06, 3/F., New Mandarin Plaza, 14 Science Museum Road, Tsim Sha Tsui East, Hong Kong from the date of this circular up to and including 3 September 2003 and at the Special General Meeting:

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

• (b) the annual reports of the Company for the two years ended 31 March 2002 and 2003;

• (c) the letter of advice from Dao Heng Securities, the text of which is set out on pages 21 to 35 of this circular;

• (d) the audit opinion of Ernst & Young for the audited financial statements of the Company for the year ended 31 March 2003;

• (e) the written consent referred to in the paragraph headed “Expert” in this appendix; and

• (f) all material contracts referred to in the paragraph headed “Material Contracts” in this appendix.

– 82 –

NOTICE OF SPECIAL GENERAL MEETING

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(Incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a special general meeting of Xin Corporation Limited (the “Company”) will be held at Plaza I – III, Lower Lobby, Novotel Century Hong Kong, 238 Jaffe Road, Wanchai, Hong Kong on Wednesday, 3 September 2003 at 10:00 a.m. (or so soon thereafter the annual general meeting of the Company convened for the same date at the same place shall have concluded or adjourned) for the purpose of considering and, if thought fit, passing the following resolutions, as ordinary resolutions:

ORDINARY RESOLUTIONS

1. “ THAT , subject to the fulfilment of the conditions in respect of the Open Offer (as defined below) as set out in the circular dated 18 August 2003 (the “Circular”) a copy of which has been tabled at the meeting and initialled by the Chairman for the purpose of identification:

2. (a) the offer (the “Open Offer”) of ordinary shares of HK$0.01 each in the capital of the Company (the “Share(s)”) to the holders of Shares whose names appeared on the register of members of the Company at the close of business on 3 September 2003 on the basis of assured allotments of four Offer Shares for every Share then held at the subscription price of HK$0.06 per Offer Share and otherwise on the terms of the Open Offer as set out in the Circular be and is hereby approved, and the directors of the Company be and are hereby authorised to allot and issue the Offer Shares pursuant to or in connection with applications in the Open Offer;

3. (b) the Underwriting Agreement (as defined in the Circular), be and is hereby approved and any director of the Company be and is hereby authorised to do such acts or execute such other documents which may be necessary, desirable or expedient in his opinion to carry into effect or to give effect to the terms of the Underwriting Agreement; and

4. (c) the directors of the Company (the “Directors”) be and are hereby authorised to make such other exclusions or other arrangements as they may deem necessary or expedient and generally to do such things and make such arrangements as they may think fit to give effect to the Open Offer.”

5. “ THAT the conditional subscription agreement (“Subscription Agreement”) dated 28 July 2003 entered into between the Company as issuer, Mr. Lo Ming Chi, Charles and Mr. Yu Wai Man as subscribers (“Subscribers”) relating to the subscription of 25,092,000 Shares at the subscription price of HK$0.0796 per Share if the Open Offer is completed or 12,640,000 Shares at a subscription price of HK$0.158 per Share if the Open Offer does not proceed (a copy of the Subscription Agreement having been produced at the meeting marked “A” and signed by the Chairman for the purpose of identification), be and is hereby approved and that the transactions contemplated therein be and are hereby approved and that the board of

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NOTICE OF SPECIAL GENERAL MEETING

directors of the Company (the “Board”) be and is hereby authorised to take such action as may in the opinion of the Board be necessary or desirable to give effect to that agreement.”

1. “ THAT , the authorised share capital of the Company be and is hereby increased from HK$15,000,000 to HK$100,000,000 by the creation of 8,500,000,000 shares of HK$0.01 each in the Company.”

“ THAT ,

• (a) subject to paragraph (b) below, the Directors be hereby generally and unconditionally authorised to exercise during the Relevant Period (as that term is defined below) all the powers of the Company to allot, issue and deal with additional shares of the Company and to make or grant offers, agreements, and options (including warrants, bonds and debentures, notes and any securities which carry rights to subscribe for or are convertible into ordinary shares of the Company) which would or might require the exercise of any of such powers during or after the end of the Relevant Period;

• (b) the approval in paragraph (a) above shall be in addition to any other authorisation given to the Directors;

• (c) the aggregate nominal amount of the shares allotted, issued or otherwise dealt with or agreed conditionally or unconditionally to be allotted, issued or otherwise dealt with (whether pursuant to an option or otherwise) by the Directors pursuant to the approval in paragraph (a) above, other than pursuant to (i) a Rights Issue (as that term is defined below); or (ii) an issue of ordinary shares of the Company upon the exercise of rights of subscription or conversion under the terms of any warrants of the Company or any securities which are convertible into ordinary shares of the Company; or (iii) an issue of ordinary shares of the Company by way of scrip dividend pursuant to the Bye-laws of the Company from time to time; or (iv) the exercise of any option granted under any option scheme or similar arrangement for the time being adopted for the grant or issue to employees of the Company and/or its subsidiaries, of options to subscribe for, or rights to acquire, shares of the Company, shall not in total exceed either:

• (i) 20% of the aggregate nominal amount of the share capital of the Company in issue immediately following completion of the Open Offer (as defined in the Circular dated 18 August 2003, a copy of which has been tabled at the meeting and initialled by the Chairman for the purpose of identification); or

• (ii) in the event that the Open Offer lapses or fails to be completed in accordance with their respective terms, 20% of the aggregate nominal amount of the share capital of the Company in issue on the date of this resolution; and

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NOTICE OF SPECIAL GENERAL MEETING

• (d) for the purpose of this resolution, “Relevant Period” means the period from the passing of this resolution until whichever is the earliest of:

• (i) the conclusion of the next annual general meeting of the Company;

• (ii) the revocation or variation of the authority given under this resolution by ordinary resolution of the shareholders in general meeting; or

• (iii) the expiration of the period within which the next annual general meeting of the Company is required by the Bye-laws of the Company, or any applicable laws, to be held; and

“Rights Issue” means an offer of shares for subscription open for a fixed period by the Company to holders of shares on the register of members of the Company on a fixed record date in proportion to their then holdings of shares (subject to such exclusion or other arrangements as the directors may deem necessary or expedient in relation to fractional entitlements or having regard to any restrictions or obligations under the laws of, or the requirements of any recognised regulatory body or any stock exchange in, any territory outside Hong Kong).”

1. “ THAT ,

2. (a) the Directors be and are hereby generally and unconditionally authorised to exercise during the Relevant Period (as that term is defined below) all the powers of the Company to purchase shares in the capital of the Company, subject to and in accordance with applicable laws;

3. (b) the approval in paragraph (a) above shall be in addition to any other authorisation given to the Directors;

4. (c) the aggregate nominal amount of the shares which may be purchased pursuant to the approval in paragraph (a) above shall not in total exceed either:

   • (i) 10% of the aggregate nominal amount of the share capital of the Company in issue immediately following completion of the Open Offer (as defined in the Circular dated 18 August 2003, a copy of which has been tabled at the meeting and initialled by the Chairman for the purpose of identification); or

   • (ii) in the event that the Open Offer does not take place, lapses or fails to be completed in accordance with its terms, 10% of the aggregate nominal amount of the share capital of the Company in issue on the date of this resolution; and

5. (d) for the purpose of this resolution, “Relevant Period” means the period from the passing of this resolution until whichever is the earliest of:

   • (i) the conclusion of the next annual general meeting of the Company;

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NOTICE OF SPECIAL GENERAL MEETING

• (ii) the revocation or variation of the authority given under this resolution by ordinary resolution of the shareholders in general meeting; or

• (iii) the expiration of the period within which the next annual general meeting of the Company is required by the Bye-laws of the Company, or any applicable laws, to be held.”

• “ THAT , conditional upon the ordinary resolution nos. 4 and 5 contained in the notice of the Special General Meeting dated 18 August 2003 being approved, the aggregate nominal amount of the shares in the capital of the Company which are repurchased by the Company pursuant to and in accordance with ordinary resolution no. 5 set out in that Notice shall be added to the aggregate nominal amount of the share capital of the Company that may be allotted or agreed conditionally or unconditionally to be allotted by the Directors pursuant to and in accordance with ordinary resolution no. 4 set out in that Notice.”

By Order of the Board Yu Wai Man Company Secretary

Hong Kong, 18 August 2003

Head Office and Principal Place of Business:

Room 3A03-06, 3/F. New Mandarin Plaza 14 Science Museum Road Tsim Sha Tsui East Hong Kong

Notes:

1. Any member of the Company entitled to attend and vote at the meeting convened by the above notice is entitled to appoint one or more than one proxy to attend and vote instead of him/her. A proxy need not be a member of the Company.

2. The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed, or a notarially certified copy of such power or authority shall be deposited at the principal place of business in Hong Kong of the Company not less than 48 hours before the time appointed for holding the meeting or adjourned meeting.

3. For identification purpose only

– 86 –