PegBio Co., Ltd. - Proxy Solicitation & Information Statement 2007

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

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

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(Incorporated in Bermuda with limited liability)
(Stock Code: 1141)
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VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

Financial adviser to Xin Corporation Limited

SOMERLEY LIMITED

Independent financial adviser to the independent board committee and the independent shareholders of Xin Corporation Limited

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Goldbond Capital (Asia) Limited

A letter from the board of directors of the Company is set out on pages 5 to 18 of this circular. A letter from the independent board committee of the Company containing its recommendation to the independent shareholders of the Company in connection with the Acquisition (as defined herein) is set out on page 19 of this circular. A letter from Goldbond Capital (Asia) Limited, the independent financial adviser to the independent board committee and the independent shareholders of the Company, containing its advice in connection with the Acquisition (as defined herein), is set out on pages 20 to 34 of this circular.

A notice convening a special general meeting of the Company to be held at Plaza I-III, Lower Lobby, Novotel Century Hong Kong, 238 Jaffe Road, Wanchai, Hong Kong on Thursday, 15 February 2007 at 9:30 a.m., is set out on pages 158 to 159 of this circular. If you are not able to attend the meeting of the Company, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return it to the principal place of business of the Company at Room 2107, 21st Floor, Nan Fung Tower, 173 Des Voeux Road Central, Hong Kong as soon as possible and in any event not later than forty-eight (48) hours before the time appointed for holding the meeting of the Company. Completion and return of the form of proxy will not preclude you from attending and voting in person at the meeting of the Company or any adjournment thereof if you so wish.

* For identification only

29 January 2007

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
The Agreement dated 22 November 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Shareholding structure of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Financial effects of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Reasons for the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Management discussion and analysis on Xin Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Prospects of the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Fund raising activities in the past twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Compliance with the Listing Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Procedures for demanding a poll by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
Independent Financial Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Letter from Goldbond Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Appendix I – Financial information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	35
Appendix II – Accountants’ report on Xin Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	123
Appendix III – Pro forma financial information on the Enlarged Group . . . . . . . . . . . . . . .	142
Appendix IV – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	152
Notice of Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	158

DEFINITIONS

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

“Acquisition”

the proposed acquisition of (i) the Sale Shares representing 24% of the entire issued share capital of Xin Procurement; and (ii) the rights of and benefits in the Sale Loan of S$120,000 pursuant to the Agreement

“Agreement”

the sale and purchase agreement dated 22 November 2006 entered into between the Vendor, the Purchaser and Xin Procurement in relation to the Acquisition

“Announcement”

the announcement of the Company dated 24 November 2006 in relation to the Acquisition

“associate”

the meaning given to it under the Listing Rules

“Board”

the board of Directors

“Company”

Xin Corporation Limited, a company incorporated in Bermuda with limited liability and the issued ordinary shares of which are listed on the main board of the Stock Exchange

“Completion”

completion of the Agreement

“Consideration”
HK$7,126,560, the consideration for the Acquisition pursuant to the Agreement
“Conversion Shares”
41,920,941 new Shares which will be issued upon full conversion of 100% of the principal amount of the New Convertible Note at the initial conversion price of HK$0.170 per Share (subject to adjustments)
“Directors”

the directors of the Company

“Discretionary Trust”
a discretionary trust of which Mr. Kan Ka Chong, Frederick is the trustee, Mr. Ng (Huang) Cheow Leng is the settlor of the Discretionary Trust and Mr. Ng (Huang) Cheow Leng and his family members and unspecified charities are the discretionary beneficiaries
“Enlarged Group”

the Group immediately after Completion

“Existing Convertible Note”
a 1% convertible note of the Company in the aggregate principal amount of HK$37 million, which is repayable in March 2009 or convertible into new Shares at a conversion price of HK$0.141 per Share, subject to adjustments

DEFINITIONS

“Goldbond Capital”
“Group”
“Huang Group”
“Huang Worldwide”
“Independent Board Committee”
“Independent Shareholders”
“Latest Practicable Date”
“Listing Rules”
“Maturity Date”
“New Convertible Note”
“Open Offer”

Goldbond Capital (Asia) Limited, being a corporation licensed under the SFO to conduct type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO and the independent financial adviser to the Independent Board Committee and the Independent Shareholders in connection with the terms of the Acquisition

the Company and its subsidiaries

Huang Group (BVI) Limited, a company incorporated in the British Virgin Islands with limited liability and held by Mr. Kan Ka Chong, Frederick, as the trustee of the Discretionary Trust

Huang Worldwide Holding Limited, a wholly-owned subsidiary of Huang Group
an independent board committee of the Company constituted by the three independent non-executive Directors, comprising Mr. Wong Kwok Tai, Mr. Lau Pok Lam and Mr. Ko Kwong Woon, Ivan
Shareholders other than Vision Century, Mr. Wilson Ng and Mr. Ng Wee Keat, Ms. Sio Ion Kuan, Ms. Ng Siew Lang, Linda, Ms. Lilian Ng and their respective associates
25 January 2007, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information for inclusion in this circular
the Rules Governing the Listing of Securities on the Stock Exchange
the day last preceding the third anniversary of the date of issue of the New Convertible Note
the 1% convertible note of the Company in the principal amount of HK$7,126,560 to be issued to the Vendor or its nominee as consideration for the Acquisition pursuant to the Agreement
a three for one open offer involving the issue of 248,112,042 new Shares at a price of HK$0.12 per Share completed in October 2006, details of which were set out in the announcement of the Company dated 17 August 2006, the circular of the Company dated 8 September 2006 and the prospectus of the Company dated 26 September 2006

DEFINITIONS

“Purchaser” “Sale Loan”

“Sale Shares”

“SFO”
“Share(s)”

“Share Options”

“Shareholder(s)”

“Shareholders’ Loans”

“Special General Meeting”

“Subsidiary”
“Supply Agreement”

Able Market Profits Limited, a company incorporated in the British Virgin Islands with limited liability and wholly owned by the Company

S$120,000, representing 24% of the Shareholders’ Loans, to be assigned by the Vendor to the Purchaser upon Completion
2,400 ordinary shares of S$1.00 each in the capital of Xin Procurement beneficially owned by the Vendor, representing 24% of the entire issued share capital of Xin Procurement
the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
the ordinary share(s) of HK$0.01 each in the share capital of the Company
6,144,000 share options granted to eligible participants and outstanding under the share option scheme of the Company adopted on 30 December 2002 conferring on the holders thereof rights to subscribe in cash for new Shares at exercise price determined in accordance with the scheme

holder(s) of the Share(s)

the unsecured interest-free loans in the total principal amount of S$500,000 advanced by the Vendor and the Purchaser to Xin Procurement pro rata to their respective shareholdings in Xin Procurement
the special general meeting of the Company to be held at Plaza I-III, Lower Lobby, Novotel Century Hong Kong, 238 Jaffe Road, Wanchai, Hong Kong on Thursday, 15 February 2007 at 9:30 a.m. for the purpose of considering, and if thought fit, approving the Acquisition (including the issue of the New Convertible Note and the Conversion Shares), notice of which is set out herein

the meaning given to it under the Listing Rules

an agreement dated 20 February 2004 entered into between Xin Procurement and the Vendor in relation to the supply and the procurement of goods and services provided by Xin Procurement to the Vendor, details of which were set out in the announcement of the Company dated 20 February 2004 and the circular of the Company dated 12 March 2004

DEFINITIONS

“Stock Exchange”

The Stock Exchange of Hong Kong Limited

“Vendor” Huang & Co (Singapore) Pte. Ltd., a company incorporated in the Republic of Singapore with limited liability

“Vision Century” Vision Century Group Limited, a company incorporated in the British Virgin Islands with limited liability, the controlling shareholder of the Company and a wholly-owned subsidiary of Huang Group
“Xin Procurement” Xin Procurement & Trading Pte. Ltd., a company incorporated in the Republic of Singapore with limited liability which is beneficially owned as to 51% by the Purchaser and as to 49% by the Vendor as at the Latest Practicable Date
“HK$” Hong Kong dollars “S$” Singapore dollars

For illustration only, in this circular (excluding the accountants’ report and pro forma financial information set out in Appendix II and Appendix III respectively to this circular), amounts stated in S$ have been translated into HK$ at the exchange rate of S$1.0 = HK$5.0. Amounts stated in S$ have been translated into HK$ at the exchange rate of S$1.0 = HK$4.9 for illustration in both Appendix II and Appendix III to this circular.

LETTER FROM THE BOARD

(Incorporated in Bermuda with limited liability)

(Stock Code: 1141)

Executive Directors:

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

Independent Non-executive Directors:

Mr. Wong Kwok Tai Mr. Lau Pok Lam Mr. Ko Kwong Woon, Ivan

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

Head Office and Principal Place of Business: Room 2107, 21st Floor Nan Fung Tower 173 Des Voeux Road Central Hong Kong

29 January 2007

To Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

INTRODUCTION

On 24 November 2006, the Directors announced that the Purchaser, a wholly-owned subsidiary of the Company, has conditionally agreed to acquire from the Vendor (i) the Sale Shares representing 24% of the entire issued share capital of Xin Procurement; and (ii) the rights of and benefits in the Sale Loan of S$120,000 (equivalent to HK$600,000) at an aggregate consideration of HK$7,126,560. The Consideration is to be satisfied by the Purchaser by procuring the Company to issue the New Convertible Note in such principal amount to the Vendor or its nominee at Completion. Xin Procurement is principally engaged in the supply and procurement business in the Asia Pacific Region. As at the Latest Practicable Date, Xin Procurement is held as to 51% by the Purchaser and as to 49% by the Vendor. Immediately after Completion, the Purchaser will hold a 75% interest in Xin Procurement and the remaining 25% interest in Xin Procurement will be held by the Vendor.

The Acquisition constitutes a very substantial acquisition of the Company under the Listing Rules. By virtue of Mr. Wilson Ng’s and Mr. Ng Wee Keat’s parents’ interests in the Vendor, the Agreement and the transactions contemplated thereunder also constitute a connected transaction of the Company under the Listing Rules. Accordingly, the Acquisition, including the issue of the New Convertible Note and the Conversion Shares to be issued under the New Convertible Note, is subject to the approval of the Independent Shareholders in a general meeting of the Company.

* For identification only

LETTER FROM THE BOARD

The purpose of this circular is to provide you with, among other things, (i) further details of the Acquisition; (ii) the recommendation from the Independent Board Committee to the Independent Shareholders; (iii) the advice from Goldbond Capital to the Independent Board Committee and the Independent Shareholders; (iv) the financial information of the Group; (v) the accountants’ report on Xin Procurement; (vi) pro forma financial information on the Enlarged Group; and (vii) notice of the Special General Meeting.

THE AGREEMENT DATED 22 NOVEMBER 2006

Parties to the Agreement:

Vendor: Huang & Co (Singapore) Pte. Ltd., indirectly wholly owned by the parents of Mr. Wilson Ng and Mr. Ng Wee Keat, both of whom are executive Directors

Purchaser: Able Market Profits Limited, a wholly-owned subsidiary of the Company Target company: Xin Procurement & Trading Pte. Ltd., which is held as to 51% by the Purchaser and as to 49% by the Vendor as at the Latest Practicable Date

The Directors have been informed that the Vendor is principally an investment holding company. It also provides administrative and accounting services for vessels, hotels and property investment and other businesses. Mr. Wilson Ng and Mr. Ng Wee Keat, both of whom are executive Directors, are also directors of the Vendor.

Assets to be acquired:

(i) the Sale Shares, being 2,400 ordinary shares of S$1.00 each in the share capital of Xin Procurement, representing 24% of the entire issued share capital of Xin Procurement; and
(ii) the rights of and benefits in the Sale Loan of S$120,000 (equivalent to HK$600,000), representing 24% of the Shareholders’ Loans of S$500,000 (equivalent to HK$2,500,000) owed by Xin Procurement to the Vendor.

As at the Latest Practicable Date, Xin Procurement was held as to 51% by the Purchaser and as to 49% by the Vendor. The Shareholders’ Loans were advanced to Xin Procurement by each of the Purchaser and the Vendor pro rata to their existing shareholdings in Xin Procurement. Upon Completion, the Purchaser will hold a 75% equity interest in Xin Procurement and the remaining 25% equity interest in Xin Procurement will be held by the Vendor. The Shareholders’ Loans owed to Xin Procurement by the Purchaser and the Vendor will remain proportionate to their respective shareholdings in Xin Procurement upon Completion.

LETTER FROM THE BOARD

Information on Xin Procurement:

Xin Procurement is a joint venture formed by the Purchaser and the Vendor in April 2004. The initial investment in Xin Procurement was S$10,000 (equivalent to HK$50,000), representing its entire issued share capital on incorporation, of which S$5,100 (equivalent to HK$25,500) was provided by the Purchaser and S$4,900 (equivalent to HK$24,500) was provided by the Vendor. Subsequent to the incorporation of Xin Procurement, the Purchaser and the Vendor had also advanced the Shareholders’ Loans of a total of S$500,000 (equivalent to HK$2,500,000) to Xin Procurement. Xin Procurement is principally engaged in the supply and procurement business in the Asia Pacific Region. Xin Procurement is a supplier of certain goods and services, including but not limited to, office equipment, office supplies, machinery, machinery parts, lubricating oil and bunkerage for vessels. Pursuant to the Supply Agreement, Xin Procurement was appointed by the Vendor as supplier for the efficient and timely supply of certain items. For the year ended 31 March 2006, the turnover of Xin Procurement generated from the Supply Agreement represented approximately 11.4% of the total turnover of Xin Procurement.

According to the accountants’ report on Xin Procurement set out in Appendix II to this circular, for the period from 30 January 2004 (date of incorporation) to 31 March 2005, it recorded an audited turnover of approximately HK$144.7 million, an audited profit before taxation of approximately HK$8.9 million and an audited profit after taxation of approximately HK$7.3 million. For the year ended 31 March 2006, it recorded an audited turnover of approximately HK$155.6 million, an audited profit before taxation of approximately HK$15.5 million and an audited profit after taxation of approximately HK$12.3 million. For the six months ended 30 September 2006, it recorded an audited turnover of approximately HK$93.2 million, an audited profit before taxation of approximately HK$10.5 million and an audited profit after taxation of approximately HK$8.4 million. As at 30 September 2006, audited net assets of Xin Procurement amounted to approximately HK$29.3 million.

Consideration:

The Consideration of HK$7,126,560 for the Acquisition is based on (i) a historical price/earnings multiple of 2 times the audited net profit of Xin Procurement S$2,719,399 (equivalent to HK$13,596,995 at the exchange rate prevailing before entering into the Agreement) for the year ended 31 March 2006; and (ii) the amount of the Sale Loan of S$120,000 (equivalent to HK$600,000 at the exchange rate prevailing before entering into the Agreement.).

The Consideration is to be satisfied by the Purchaser by procuring the Company to issue the New Convertible Note to the Vendor or its nominee on Completion.

The principal terms of the New Convertible Note to be issued by the Company will be as follows:

Principal amount: HK$7,126,560

Maturity date: Unless previously converted or repaid, the New Convertible Note will mature on the date preceding the third anniversary of the date of its issue.

Interest: 1% per annum on the principal amount of the New Convertible Note outstanding from time to time, payable semi-annually in arrears on 31 March and 30 September each year.

LETTER FROM THE BOARD

Conversion:

Subject to the terms of the New Convertible Note, holder(s) of the New Convertible Note will have the right to convert on any business day (prior to the earlier of (1) the date on which a notice is given by the Company exercising its rights attached to the New Convertible Note to redeem the whole or a part of the principal amount of the New Convertible Note, or (2) five business days prior to the Maturity Date) the whole or part of the outstanding principal amount of the New Convertible Note (in an amount or integral multiple of HK$500,000) into new Shares at any time and from time to time at an initial conversion price of HK$0.170 per Share (subject to adjustments as detailed below).

The conversion price of the New Convertible Note will be subject to adjustment provisions which are standard terms for convertible securities of similar type. The adjustment events will arise as a result of certain changes in the share capital of the Company including consolidation or sub-division of shares, capitalisation of profits or reserves, capital distributions in cash or specie or subsequent issues of securities by the Company.

The initial conversion price of the New Convertible Note of HK$0.170 per Share, which was determined after arms’ length negotiation between the Purchaser and the Vendor with reference to the recent market price of Shares prior to the date of the Agreement, represents:

(i) the closing price of HK$0.170 per Share as quoted on the Stock Exchange on 22 November 2006, being the last trading day prior to the suspension of trading in the Shares pending the release of the Announcement;
(ii) a premium of approximately 3.7% over the average closing price of HK$0.164 per Share as quoted on the Stock Exchange over the last 10 trading days up to and including 22 November 2006;
(iii) a premium of approximately 15.6% over the average closing price of HK$0.147 per Share as quoted on the Stock Exchange over the last 30 trading days up to and including 22 November 2006;
(iv) a premium of approximately 6.3% over the closing price of HK$0.160 per Share as quoted on the Stock Exchange as at the Latest Practicable Date; and
(v) a premium of approximately 117.3% over the unaudited pro forma adjusted consolidated net tangible assets of the Company of HK$0.07822 per Share upon completion of the Open Offer as set out in the prospectus of the Company dated 26 September 2006.

No fraction of a Share will be issued on conversion of the New Convertible Note. Fractional entitlements shall be ignored and any sum in respect thereof shall be retained by the Company for its own benefit.

LETTER FROM THE BOARD

Early redemption: The Company may at any time prior to the Maturity Date, by giving not less than 5 business days’ prior notice to the holder of the New Convertible Note, repay the whole or part only (in an amount or integral multiple of HK$500,000) of the principal outstanding amount of the New Convertible Note together with the outstanding interest accrued thereon in accordance with the terms of the New Convertible Note.
Conversion Shares: The Conversion Shares shall, when issued, rank pari passu in all respects with all other issued share capital of the Company on the date of conversion including the right to all dividends or other distributions.

On the basis of the initial conversion price of HK$0.170 per Share, a total of 41,920,941 new Shares will be issued upon full conversion of the New Convertible Note representing approximately 12.7% of the existing issued share capital of the Company and approximately 11.2% of the share capital of the Company as enlarged by the New Convertible Note.

Transferability: The New Convertible Note may be assigned or transferred in respect of the whole or any part (in an amount or integral multiple of HK$500,000) subject to the conditions, approvals, requirements and any other provisions of or under (i) the Stock Exchange (and any stock exchange on which Shares may be listed at the relevant time) or their rules and regulations; (ii) the approval for listing in respect of the Conversion Shares; and (iii) all applicable laws and regulations.

Save with the prior written approval of the Company, neither the New Convertible Note nor any part thereof may be transferred to a connected person of the Company.

Voting: The holder of the New Convertible Note will not be entitled to receive notices of, attend or vote at any general meetings of the Company by reason only of it being a holder of the New Convertible Note.

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

Conditions:

The Agreement is subject to and conditional upon the fulfilment of following conditions precedent on or before 28 February 2007 (or such later date as shall be agreed between the Vendor and the Purchaser in writing):

(i) all consents and approvals (if any) of the Stock Exchange, any relevant governmental or regulatory authorities and other relevant third parties which are necessary and essential for the entering into and the implementation of the Agreement and all transactions contemplated under the Agreement having been obtained;

LETTER FROM THE BOARD

(ii) the approval of the Agreement by the Independent Shareholders at the Special General Meeting by resolution passed in accordance with the Listing Rules; and
(iii) listing of and permission to deal in the Conversion Shares to be issued pursuant to the conversion of the New Convertible Note having been granted by the Stock Exchange.

In the event that any of the conditions shall not be fulfilled on or before 28 February 2007, the Agreement shall be void and of no effect and no party shall have any rights or claims whether for loss or damages or other reliefs whatsoever against either of the other parties on any ground save for antecedent breaches.

Completion:

Completion is to take place within 7 business days (or such later date as shall be agreed in writing between parties to the Agreement) after fulfilment of the conditions referred to above. Upon Completion, the Vendor, the Purchaser and Xin Procurement shall enter into a new shareholders’ agreement to replace the existing shareholders’ agreement to reflect the changes in the shareholding structure of Xin Procurement between the Purchaser and the Vendor. In accordance with the Agreement, the Purchaser and the Vendor will procure Xin Procurement to declare a dividend regarding all retained earnings as at the date of Completion (the “Dividend”) to be paid to the Purchaser and the Vendor based on their respective shareholding in Xin Procurement before Completion. Subsequent to the Agreement, it has been agreed that the Dividend will be paid out of the internal resources of Xin Procurement if and when such payment of the Dividend will not lead to insufficient working capital for Xin Procurement. The Group has no further capital commitment to Xin Procurement.

SHAREHOLDING STRUCTURE OF THE COMPANY

The following is a summary of the shareholding structure of the Company (i) as at the Latest Practicable Date and immediately after Completion; (ii) upon full conversion of the Existing Convertible Note; (iii) upon full conversion of the New Convertible Note; and (iv) upon full conversion of the Existing Convertible Note and the New Convertible Note (assuming no other changes in shareholding before then):

							Upon full conversion	Upon full conversion
	As at the Latest						of the Existing
	Practicable Date		Upon full conversion		Upon full conversion		Convertible Note
	and immediately		of the Existing		of the New		and the New
Shareholders	after Completion		Convertible	Note	Convertible	Note	Convertible Note
	Number of		Number of		Number of		Number of
	Shares	%	Shares	%	Shares	%	Shares	%
Vision Century_(Note 1)_	180,548,784	54.6	442,960,131	74.7	180,548,784	48.5	442,960,131	69.8
Vendor_(Note 2)_	–	–	–	–	41,920,941	11.2	41,920,941	6.6
Mr. Wilson Ng_(Note 3)_	5,000,000	1.5	5,000,000	0.8	5,000,000	1.3	5,000,000	0.8
Mr. Ng Wee Keat_(Note 3)_	5,000,000	1.5	5,000,000	0.8	5,000,000	1.3	5,000,000	0.8
Other discretionary beneficiaries
of the Discretionary Trust
(Note 4)	20,000,000	6.0	20,000,000	3.4	20,000,000	5.4	20,000,000	3.1
Public	120,267,272	36.4	120,267,272	20.3	120,267,272	32.3	120,267,272	18.9
Total	330,816,056	100.00	593,227,403	100.00	372,736,997	100.00	635,148,344	100.00

LETTER FROM THE BOARD

Notes:

Vision Century is a wholly-owned subsidiary of Huang Group which is held by Mr. Kan Ka Chong, Frederick as the trustee of the Discretionary Trust.
The Vendor is wholly owned by New Century International Pte. Ltd. which is owned by Mr. Ng (Huang) Cheow Leng, Ms. Pea Baby and Ms. Loong Swee Choo respectively. Mr. Ng (Huang) Cheow Leng is the settlor of the Discretionary Trust, while Mr. Ng (Huang) Cheow Leng, Ms. Pea Baby and Ms. Loong Swee Choo are discretionary beneficiaries of the Discretionary Trust.
Mr. Wilson Ng and Mr. Ng Wee Keat are executive Directors and discretionary beneficiaries of the Discretionary Trust.
Ms. Sio Ion Kuan, who is a discretionary beneficiary of the Discretionary Trust, was interested in 10,000,000 Shares as at the Latest Practicable Date. Each of Ms. Ng Siew Lang, Linda and Ms. Lilian Ng, both are directors of Vendor and discretionary beneficiaries of the Discretionary Trust, was interested in 5,000,000 Shares as at the Latest Practicable Date.

The Vendor has undertaken that it will not cause or procure all or any part of the Existing Convertible Note and/or the New Convertible Note to be converted into new Shares if by doing so the minimum public float of the Company will be less than 25%. The Company has also undertaken to the Stock Exchange that it will ensure that there will not be insufficient public float on the date of the issue of the new Shares arising from the conversion of the Existing Convertible Note and/or the New Convertible Note. The issue of the New Convertible Note and the Conversion Shares will not result in a change of control of the Company.

FINANCIAL EFFECTS OF THE ACQUISITION

The Group’s interest in Xin Procurement will increase from 51% as at the date of the Agreement to 75% following Completion. Xin Procurement will continue to be a subsidiary of the Group and its accounts will continue to be consolidated in the accounts of the Group. By increasing its stake in Xin Procurement, the Group will have a greater sharing of the profits and net assets of Xin Procurement. According to Appendix II to this circular, Xin Procurement recorded audited turnover of approximately HK$155.6 million and HK$93.2 million and audited profit of HK$12.3 million and HK$8.4 million for the year ended 31 March 2006 and the six months ended 30 September 2006 respectively. Notwithstanding that the issue of the New Convertible Note will increase the liability of the Enlarged Group, given the proven historical record of Xin Procurement, it is expected that the Acquisition will enhance the earning base of the Enlarged Group. As set out in Appendix III to this circular, it is expected that a goodwill of approximately HK$6.2 million will arise upon Completion. It should be noted that the amount of goodwill to be recorded on the accounts of the Enlarged Group will depend on the fair value of the net assets attributable to the Sale Shares and the Sale Loan to be determined on Completion.

REASONS FOR THE ACQUISITION

The Group is principally engaged in the supply and procurement business in the Asia Pacific Region including, but not limited to, the supply of office equipment and office supplies, machinery, machinery parts, lubricating oil and bunkerage for vessels.

Xin Procurement is a joint venture formed by the Purchaser and the Vendor in April 2004. Since its formation, Xin Procurement has been owned as to 51% by the Purchaser and as to 49% by the Vendor. Upon Completion, the Purchaser’s interests in Xin Procurement will be increased to 75%. Xin Procurement will continue to be a subsidiary of the Company and its accounts will continue to be consolidated into the accounts of the Group. Xin Procurement commenced its operation in April 2004.

LETTER FROM THE BOARD

Since the Group diversified into the supply and procurement business, the results of the Group have been improving. As set out in the 2006 annual report of the Company, the loss for the year from continuing operation of the Group was reduced from approximately HK$7.4 million for the year ended 31 March 2005 to approximately HK$2.5 million for the year ended 31 March 2006. The supply and procurement segment contributed net profits of approximately HK$7.3 million and HK$12.3 million for the two years ended 31 March 2005 and 2006, which showed a growth rate of approximately 68.5%.

There will be dilution effect on the shareholding in the Company of the existing Shareholders in the event that Conversion Shares are to be issued upon the conversion of the New Convertible Note. However, given the past promising performance of Xin Procurement and the prospects of the Asia Pacific tourism industry, the Directors believe that it is in the best interests of the Group to increase its stake in Xin Procurement. By increasing the attributable interest in Xin Procurement, the Group can strengthen its assets and earnings base. The Directors have confidence in the business prospects of Xin Procurement and believe that the supply and procurement business will continue to generate promising returns to the Group.

Taken into account the aforesaid, the Directors believe that the terms of the Acquisition are fair and reasonable and in the interest of the Company and its Shareholders as a whole.

MANAGEMENT DISCUSSION AND ANALYSIS ON XIN PROCUREMENT

Set out below is a summary of the key financial data of Xin Procurement which are extracted from the accountants’ report contained in Appendix II to this circular:

				Six months
	30 January 2004	Year ended		ended
	to	31 March	30 September
	31 March 2005	2006		2006
	HK$’000	HK$’000		HK$’000
Results
Turnover	144,687	155,550		93,237
Gross profit	12,464	18,827		12,266
Profit before tax	8,884	15,457		10,472
Profit for the period/year	7,276	12,285		8,378

				As at
	As at 31 March		30 September
	2005	2006		2006
	HK$’000	HK$’000		HK$’000
Assets and liabilities
Non-current assets	81	249		211
Current assets	40,548	63,096		82,219
Current liabilities	(31,007)	(41,438)		(50,718)
Non-current liabilities	(2,300)	(2,300)		(2,374)
Net assets	7,322	19,607		29,338

LETTER FROM THE BOARD

Financial and business performance

Period from 30 January 2004 (date of incorporation) to 31 March 2005

Xin Procurement was incorporated on 30 January 2004 and commenced its operation in April 2004. Xin Procurement generated turnover of approximately HK$144.7 million during its first fiscal period, with gross profit of HK$12.5 million. It incurred approximately HK$3.6 million of administrative expenses which were mainly related to the setting up of the company. Of the administrative expenses, about HK$2.1 million were staff costs mainly for management personnels involved in the start-up stage of Xin Procurement. After deducting a taxation charge of approximately HK$1.6 million, a profit after tax of HK$7.3 million resulted.

Year ended 31 March 2006

For the year ended 31 March 2006, Xin Procurement achieved a turnover of approximately HK$155.6 million with gross profit of approximately HK$18.8 million, representing growth of approximately 7.5% and 50.4% respectively as compared with the fourteen-month period from 30 January 2004 (date of incorporation) to 31 March 2005. Gross profit margin also increased from 8.6% to 12.1%. The growth in sales was due to that, firstly, new customers were solicited, and secondly, the existing customers placed more orders. Furthermore, due to the smoother operation after its first year of operation, Xin Procurement was able to save administrative expenses, which decreased from approximately HK$3.6 million in 2005 to HK$2.4 million in 2006. On the other hand, owing to the exchange rate fluctuations between Singapore dollars, United States dollars and Malaysian Ringgit during the year, Xin Procurement suffered a foreign exchange loss of approximately HK$1.5 million. Profit after tax for the year was approximately HK$12.3 million, representing a growth of approximately 68.5% as compared with that for the fiscal period 2005.

Six months ended 30 September 2006

For the six months ended 30 September 2006, Xin Procurement achieved a turnover of approximately HK$93.2 million with gross profit of approximately HK$12.3 million, representing growth of approximately 27.8% and 42.8% respectively as compared with turnover and profit of the same period in 2005. Gross profit margin also increased, from 11.8% to 13.2%, as more high-margin goods were sold such as machinery, machinery parts, lubricating oil and bunkerage for vessels. The growth in sales and the increase in gross profit margin were mainly driven by the improvement in the economy of the Southeast Asia Region as well as the tourism industry. Owing to the appreciation of the Singapore dollar, exchange loss for the six months ended 30 September 2006 decreased by about 52.4% to approximately HK$877,000. Together with the ongoing cost control measures, Xin Procurement recorded a profit after tax of approximately HK$8.4 million for the six months ended 30 September 2006, representing a 94.4% growth as compared to the corresponding period in 2005.

LETTER FROM THE BOARD

Financial resources and liquidity

Xin Procurement did not have bank borrowings as at 31 March 2005, 31 March 2006 and 30 September 2006. Its only borrowings were the Shareholders’ Loans, which amounted to S$500,000 (equivalent to approximately HK$2.3 million) as at 31 March 2005, 31 March 2006 and 30 September 2006. Total shareholders’ equity of Xin Procurement amounted to approximately HK$7.3 million, HK$19.6 million and HK$29.3 million as at 31 March 2005, 31 March 2006 and 30 September 2006, respectively.

Xin Procurement used net cash of approximately HK$274,000 and HK$165,000 in operating activities during the period from 30 January 2004 to 31 March 2005 and the six months ended 30 September 2006. It generated net cash inflow from operating activities of approximately HK$1.3 million for the year ended 31 March 2006.

Property, plant and equipment amounted to approximately HK$211,000 as at 30 September 2006 with additions of approximately HK$14,000 during the year which were funded by internal resources.

Cash and cash equivalents

As at 30 September 2006, Xin Procurement had bank balances and cash of approximately HK$2.0 million and deposits of approximately HK$1.0 million pledged for banking facilities.

Investments

Xin Procurement did not have any investments as at 30 September 2006.

Foreign currency exposure

The sales revenues of Xin Procurement are mainly denominated in Singapore dollars while its purchases are mainly denominated in United States dollars and Malaysian Ringgit. Xin Procurement has been closely monitoring the foreign currency exchange rate movements to ensure that the exposure is within an acceptable level.

Number of employees and remuneration policies

Xin Procurement had 7 full-time employees as at 30 September 2006. Total staff cost incurred during the six months ended 30 September 2006 amounted to approximately HK$517,000, compared to approximately HK$975,000 incurred during the year ended 31 March 2006 .

LETTER FROM THE BOARD

PROSPECTS OF THE ENLARGED GROUP

The Group’s strategy is to exit from unsound businesses and to strengthen investments with stable revenue generating power. Following the completion of the disposal of the group of subsidiaries engaged in the toy business in August 2005, the Group has been concentrating on the supply and procurement business. In October 2006, the Company completed the Open Offer with net proceeds of approximately HK$28.0 million which is expected to strengthen the financial position of the Group.

Given that the proven track record of Xin Procurement, its existing sourcing and sales network with suppliers and customers, the Directors believe that the supply and procurement business will continue to do well with sustainable growth. By increasing the Group’s stake in Xin Procurement through the Acquisition, the Enlarged Group will benefit from the future growth and development of the supply and procurement business.

The Directors are of the view that, in the long term, the Asia Pacific Region’s economic performance remains promising and continues to have a positive effect on the local economy, such that the Group’s supply and procurement business will benefit accordingly. The Directors are optimistic about the prospects of the Enlarged Group and will continue to look for new investment opportunities and to diversify its business.

FUND RAISING ACTIVITIES IN THE PAST TWELVE MONTHS

In March 2006, the Company completed the issue of a 1% convertible note in the principal amount of HK$37 million to Vision Century. Details of the Existing Convertible Note were set out in the announcement of the Company dated 17 February 2006 and the circular of the Company dated 10 March 2006. The proceeds of HK$37 million were used to release and discharge the Company from part of its obligations and liabilities in respect of a loan advanced by Vision Century. Vision Century has the right to convert the outstanding principal amount of the Existing Convertible Note into new Shares at any time before 29 March 2009 at the adjusted conversion price of HK$0.141 per Share, subject to adjustments.

In October 2006, the Company completed a three for one open offer which involved the issue of 248,112,042 new Shares at a price of HK$0.12 per Share. Details of the Open Offer were set out in the announcement of the Company dated 17 August 2006, the circular of the Company dated 8 September 2006 and the prospectus of the Company dated 26 September 2006. Net proceeds of the Open Offer of approximately HK$28.0 million are intended to be applied as to approximately HK$18.5 million for repayment of the Group’s liabilities and as to the remainder of approximately HK$9.5 million for general working capital of the Group.

Save for the issue of the Existing Convertible Note and the Open Offer as mentioned above, the Company has not conducted any other fund raising activities in the past twelve months before the date of the Announcement.

LETTER FROM THE BOARD

COMPLIANCE WITH THE LISTING RULES

The transactions contemplated under the Agreement constitute a very substantial acquisition and a connected transaction for the Company under the Listing Rules.

The Vendor is wholly owned by New Century International Pte. Ltd., a company incorporated in the Republic of Singapore with limited liability. New Century International Pte. Ltd. is wholly owned by the parents of Mr. Wilson Ng and Mr. Ng Wee Keat, both of whom are executive Directors and also directors of the Vendor.

As at the Latest Practicable Date, Vision Century, the controlling shareholder of the Company, was interested in approximately 54.6% of the entire issued share capital of the Company. Vision Century is wholly owned by Huang Worldwide, which is in turn wholly owned by Huang Group. Huang Group is held by Mr. Kan Ka Chong, Frederick in the capacity of trustee of the Discretionary Trust, the discretionary beneficiaries of which include, among others, Mr. Wilson Ng, Mr. Ng Wee Keat, Ms. Sio Ion Kuan, Ms. Ng Siew Lang, Linda and Ms. Lilian Ng.

By virtue of Mr. Wilson Ng’s and Mr. Ng Wee Keat’s parents’ interests in the Vendor, the Acquisition and the transactions contemplated under the Agreement constitute a connected transaction for the Company under the Listing Rules. Vision Century, Mr. Wilson Ng, Mr. Ng Wee Keat, Ms. Sio Ion Kuan, Ms. Ng Siew Lang, Linda, Ms. Lilian Ng and their respective associates will abstain from voting on the resolution to be proposed in the Special General Meeting to approve the Acquisition (including the issue of the New Convertible Note and the Conversion Shares).

SPECIAL GENERAL MEETING

A notice convening the Special General Meeting, at which an ordinary resolution will be proposed to consider and, if thought fit, to approve, among other things, the Acquisition is set out on pages 158 to 159 of this circular. At the Special General Meeting, the vote will be taken by poll on which Vision Century, Mr. Wilson Ng, Mr. Ng Wee Keat, Ms. Sio Ion Kuan, Ms. Ng Siew Lang, Linda, Ms. Lilian Ng and their respective associates will abstain from voting.

A form of proxy for use at the Special General Meeting is accompanied with this circular. If you are not able to attend the Special General Meeting, you are requested to complete the accompanied 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 2107, 21st Floor, Nan Fung Tower, 173 Des Voeux Road Central, Hong Kong as soon as possible and in any event not later than forty-eight (48) hours before the time appointed for holding the Special General Meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the Special General Meeting or any adjournment thereof if you so wish.

An announcement will be made by the Company following the conclusion of the Special General Meeting to inform you of the results thereof.

LETTER FROM THE BOARD

PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

Pursuant to Bye-law 66 of the Bye-laws of the Company, a resolution put to the vote of a general meeting shall be decided on a show of hands unless voting by way of a poll is required by the rules of the designated Stock Exchange or (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:

(i) by the chairman of such meeting; or
(ii) by at least three members present in person (or in the case of a member being a corporation by its duly authorised representative) or by proxy for the time being entitled to vote at the meeting; or
(iii) by a member or members present in person (or in the case of a member being a corporation by its duly authorised representative) or by proxy and representing not less than one-tenth of the total voting rights of all members having the right to vote at the meeting; or
(iv) by a member or members present in person (or in the case of a member being a corporation by its duly authorised representative) or by proxy and holding Shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right; or
(v) if required by the rules of the designated Stock Exchange, by any Director or Directors who, individually or collectively, hold proxies in respect of Shares representing five per cent. (5%) or more of the total voting rights at such meeting.

A demand by a person as proxy for a member or in the case of a member being a corporation by its duly authorised representative shall be deemed to be the same as a demand by a member.

INDEPENDENT BOARD COMMITTEE

The Independent Board Committee, comprising Mr. Wong Kwok Tai, Mr. Lau Pok Lam and Mr. Ko Kwok Woon, Ivan has been appointed to give recommendation to the Independent Shareholders in respect of the Acquisition (including the issue of the New Convertible Note and the Conversion Shares). Your attention is drawn to the recommendation of the Independent Board Committee set out in its letter on page 19 of this circular.

INDEPENDENT FINANCIAL ADVISER

Goldbond Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Acquisition (including the issue of the New Convertible Note and the Conversion Shares). Your attention is drawn to its letter to the Independent Board Committee and the Independent Shareholders set out on pages 20 to 34 of this circular.

LETTER FROM THE BOARD

RECOMMENDATION

The Directors consider that the terms of the Acquisition are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the Special General Meeting to approve the Acquisition, including the issue of the New Convertible Note and the Conversion Shares.

GENERAL

Your attention is drawn to the additional information set out in the appendices to this circular, including the recommendation of the Independent Board Committee and advice of Goldbond Capital regarding the Acquisition (including the issue of the New Convertible Note and the Conversion Shares), the financial information of the Group, the accountants’ report on Xin Procurement and the pro forma financial information of the Enlarged Group.

Yours faithfully, For and on behalf of the Board Lo Ming Chi, Charles Chairman

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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(Incorporated in Bermuda with limited liability)
(Stock Code: 1141)
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29 January 2007
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To the Independent Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

We refer to the circular of the Company dated 29 January 2007 (the “Circular”), of which this letter forms part. Terms used herein have the same meanings as those defined in the Circular unless the context otherwise requires.

We have been appointed as the Independent Board Committee to consider the terms of the Acquisition (including the issue of the New Convertible Note and the Conversion Shares), and to advise you as to whether, in our opinion, such terms are fair and reasonable so far as the Company and the Independent Shareholders are concerned and the Acquisition (including the issue of the New Convertible Note and the Conversion Shares) are in the interests of the Company and the Shareholders as a whole.

Goldbond Capital has been appointed as the independent financial adviser to advise us and you regarding the terms of the Acquisition (including the issue of the New Convertible Note and the Conversion Shares). Details of its advice, together with the principal factors and reasons it has taken into consideration in giving its advice, are set out in its letter on pages 20 to 34 of the Circular. Your attention is also drawn to the letter from the Board and the additional information set out in the appendices to the Circular.

Having considered the terms of the Acquisition (including the issue of the New Convertible Note and the Conversion Shares) together with the independent advice of Goldbond Capital, we consider that the terms of the Acquisition (including the issue of the New Convertible Note and the Conversion Shares) are fair and reasonable so far as the Company and the Independent Shareholders are concerned, and the Acquisition (including the issue of the New Convertible Note and the Conversion Shares) are in the interests of the Company and the Shareholders as a whole. On this basis, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the Special General Meeting to approve the Acquisition (including the issue of the New Convertible Note and the Conversion Shares).

Yours faithfully,

Independent Board Committee Wong Kwok Tai Lau Pok Lam Ko Kwong Woon, Ivan

Independent non-executive Directors

* For identification only

LETTER FROM GOLDBOND CAPITAL

The following is the text of the letter of advice from Goldbond Capital (Asia) Limited to the Independent Board Committee and the Independent Shareholders prepared for the purpose of inclusion in this circular:

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GOLDBOND CAPITAL (ASIA) LIMITED
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39th Floor, Tower 1 Lippo Centre 89 Queensway Hong Kong

29 January 2007

The Independent Board Committee and the Independent Shareholders

Dear Sirs,

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in respect of the terms and conditions of the Agreement. Details of the terms and conditions of the Agreement are set out in the circular dated 29 January 2007 issued by the Company (the “ Circular ”) to the Shareholders, of which this letter forms part. This letter contains our advice to the Independent Board Committee and the Independent Shareholders as to whether the terms of the Agreement are fair and reasonable and whether the Agreement is in the interests of the Company and the Shareholders as a whole. Unless the context requires otherwise, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

In formulating our opinions and recommendations, we have relied on the statements, information, opinions, and representations contained or referred to in the Circular, which have been provided to us by the Directors. We have assumed that all statements, information, opinions and representations contained or referred to in the Circular were true, complete and accurate in all aspects at the time they were made and given and continue to be so in all respects at the date of despatch of the Circular. We have also assumed that all statements of belief, opinion, assumptions and intention made by the Directors in the Circular were reasonably made after due and careful enquiry and were based on honestly-held opinions. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and we have been advised by the Directors that no material fact has been omitted from the information and representations provided and referred to in the Circular.

We consider that we have been provided with sufficient information to enable us to reach an independent view to justify our reliance on the accuracy of the information and representations contained in the Circular and to provide a reasonable basis for our recommendations. We have no reason to suspect that any relevant information has been withheld, nor are we aware of any facts or circumstances which

LETTER FROM GOLDBOND CAPITAL

would render the information provided and the representations made to us untrue, inaccurate, or misleading. In addition, we have taken all reasonable steps as required under Rule 13.80 of the Listing Rules to satisfy ourselves that there is a reasonable basis for our advice as stated herein. We have not, however, carried out any independent verification of the information provided to us by the Directors, nor have we conducted any independent investigation into any transactions referred to in the Circular, or into the businesses, affairs and prospects of the Group.

We are a licensed securities dealer and corporate finance adviser under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and together with our affiliates provide a full range of financial advisory and broking services. In the course of normal trading activities, we and our affiliates may from time to time effect transactions and hold securities, including derivative securities, of the Company for our own account or the accounts of our customers.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion regarding the terms and conditions of the Agreement, and giving our independent financial advice to the Independent Board Committee and the Independent Shareholders, we have considered the following principal factors and reasons:

1. Background of the Acquisition

On 24 November 2006, the Directors announced that the Purchaser, a wholly-owned subsidiary of the Company, had conditionally agreed to acquire from the Vendor (i) the Sale Shares representing 24% of the entire issued share capital of Xin Procurement; and (ii) the rights of and benefits in the Sale Loan of S$120,000 (equivalent to HK$600,000) at an aggregate consideration of HK$7,126,560. The Consideration is to be satisfied by the Purchaser by procuring the Company to issue the New Convertible Note in such principal amount to the Vendor or its nominee on Completion. Xin Procurement is principally engaged in the supply and procurement business in the Asia Pacific Region. As at the Latest Practicable Date, Xin Procurement was held as to 51% by the Purchaser and as to 49% by the Vendor. Immediately after Completion, the Purchaser will hold a 75% interest in Xin Procurement and the remaining 25% interest in Xin Procurement will be held by the Vendor.

The Acquisition constitutes a very substantial acquisition of the Company under the Listing Rules. By virtue of the interests in the Vendor owned by the parents of Mr. Wilson Ng and Mr. Ng Wee Keat, both being Directors, the Agreement and the transactions contemplated thereunder also constitute a connected transaction of the Company under the Listing Rules. Accordingly, the Acquisition, including the issue of the New Convertible Note and the Conversion Shares to be issued under the New Convertible Note, is subject to the approval of the Independent Shareholders in a general meeting of the Company.

2. Reasons for and benefits of the Acquisition

The principal activities of the Group are the supply and procurement business in the Asia Pacific Region including, but not limited to, the supply of office equipment and office supplies, machinery, machinery parts, lubricating oil and bunkerage for vessels, following the disposal of the Group’s lossmaking toy business in August 2005.

LETTER FROM GOLDBOND CAPITAL

Xin Procurement is a joint venture formed by the Purchaser and the Vendor with its existing shareholding structure in April 2004 and has been the major income source of the Group since its establishment. Since the Group diversified into the supply and procurement business through Xin Procurement, the results of the Group have been improving. As set out in the 2006 annual report of the Company, the loss for the year from continuing operations of the Group has been reduced from approximately HK$7.4 million for the year ended 31 March 2005 to approximately HK$2.5 million for the year ended 31 March 2006.

Before the disposal of the Group’s discontinued toy business, Xin Procurement generated a turnover of approximately HK$144.7 million and contributed a profit after tax of HK$7.3 million to the Group compared to a consolidated loss after tax of HK$9.1 million of the Group for the year ended 31 March 2005. After the disposal of the Group’s toy business, supply and procurement became the only source of revenue of the Group. For the year ended 31 March 2006, Xin Procurement contributed the entire revenue and net profit of the continuing operations of the Group. As a result, the supply and procurement segment contributed net profit of HK$12.3 million for the year ended 31 March 2006, which demonstrated a growth rate of approximately 68.5% as compared with its contribution in net profit of approximately HK$7.3 million for the year ended 31 March 2005.

The Acquisition represents a further step for the Group to strengthen its foothold in the supply and procurement business. Upon Completion, the Group’s interests in Xin Procurement will be increased to 75%. Xin Procurement will continue to be accounted as a subsidiary of the Company and its accounts will continue to be consolidated into the accounts of the Group. The increase in the attributable interests in Xin Procurement is expected to strengthen the Group’s assets and earnings base.

3. Consideration for the Acquisition

(a) Basis of the Consideration

As stated in the letter from the Board in the Circular (the “ Letter from the Board ”), the consideration of HK$7,126,560 for the Acquisition is based on (i) a historical price/earnings multiple of 2 times the audited net profit of Xin Procurement of S$2,719,399 (equivalent to HK$13,596,995 at the exchange rate prevailing before entering into the Agreement) for the year ended 31 March 2006; and (ii) the amount of the Sale Loan of S$120,000 (equivalent to HK$600,000 at the exchange rate prevailing before entering into the Agreement).

As advised by the Company, the consideration of the Sale Loan equals to its fair value, which was S$120,000 (equivalent to HK$600,000 at the exchange rate prevailing before entering into the Agreement). Based on the accountants’ report of Xin Procurement prepared in accordance with Hong Kong Financial Reporting Standards as set out in Appendix II to the Circular, Xin Procurement recorded an audited net profit after taxation of approximately HK$12.3 million for the year ended 31 March 2006. As such, the remaining balance of the Consideration of approximately HK$6.5 million (excluding HK$600,000 being consideration for the Sale Loan) represents a historical price/earnings multiple of approximately 2.21 times the audited net profit of Xin Procurement of approximately HK$12.3 million for the year ended 31 March 2006 as set out in Appendix II to the Circular.

LETTER FROM GOLDBOND CAPITAL

Equity interest in Xin Procurement

In forming our opinion on the consideration for the acquisition of the 24% equity interest in Xin Procurement, we have based our opinion on the price-to-earnings (“ PE ”) approach, which is commonly adopted in the evaluation of a company.

As we were unable to find reliable financial data of private companies that engage in business similar to that of Xin Procurement for comparison purposes, we have considered the companies which (a) are currently listed on the Stock Exchange; (b) are engaged in distribution and trading businesses; and (c) had a market capitalisation of less than HK$100.0 million as at 22 November 2006, being the date of the Agreement. As the Company is a trading company with a market capitalisation of approximately HK$56.2 million as at 22 November 2006, we consider trading companies with a market capitalisation below HK$100.0 million as comparable trading companies of similar market size (the “ Comparable Companies ”) for comparison purposes. The following table sets out the PE ratios of the Comparable Companies.

			Market
			capitalisation
			(as at
		Stock	22 November
Company name	Principal business	code	2006)	P/E(1)
			(HK million)
Wo Kee Hong (Holdings)	Distribution and installation of air-conditioning	720	87.5	2.47
Limited	products, distribution of audio-visual
	equipment, trading of cars and related
	accessories and retailing of consumer
	electronic products and home appliances
Yardway Group Limited	Sale and distribution of vehicles and	646	57.4	6.76
	equipment covering most major
	transport sectors including railway
	maintenance equipment, airport ground
	support equipment, coaches and trucks
Sunlink International	Distribution of semiconductors for consumer	2336	60.1	6.25
Holdings Limited	electronic and telecommunication products,
	computer, and peripheral devices and
	development of electronic turnkey device
	solutions for customers in Hong Kong and China
G. A. Holdings Limited	Distribution of passenger vehicles to resellers	8126	63.2	3.44
	in Hong Kong and China, and provides
	marketing and technical assistance to business
	alliance in China
Average				4.73
Xin Procurement			27.2(2)	2.21(3)

Source: Bloomberg

LETTER FROM GOLDBOND CAPITAL

Note:

(1) Earnings are extracted from the respective companies’ latest published audited financial statements.
(2) Calculation is based on the Consideration net of the amount for the Sale Loan.
(3) Calculation is based on the audited net profit after taxation of Xin Procurement for the year ended 31 March 2006.

As set out in Appendix II to the Circular, Xin Procurement recorded an audited net profit after taxation of approximately HK$12.3 million for the year ended 31 March 2006, and thus the consideration for the acquisition of the 24% equity interest in Xin Procurement represents a PE ratio of approximately 2.21. The PE ratios of the Comparable Companies in the above table range from 2.47 to 6.76 with an average PE ratio of 4.73. As such, the PE ratio of the consideration for the acquisition of the 24% equity interest in Xin Procurement is lower than the bottom end of the range of PE ratios of the Comparable Companies. It also represents a discount of 53.3% to the average PE ratio of the Comparable Companies.

We also note that as at 30 September 2006, the audited net asset value of Xin Procurement was approximately HK$29.3 million. However, subsequent to Completion, the Purchaser and the Vendor will procure Xin Procurement to declare a dividend (the payment of which will be on the basis if and to the extent it will not lead to insufficient working capital for Xin Procurement) of all retained earnings of Xin Procurement as at the date of Completion, the amount of which will be based on audited accounts of Xin Procurement as at the date of Completion. Such dividend is expected to comprise substantially all of its net asset value and to be paid in accordance with the respective interests in Xin Procurement of the Vendor and the Purchaser before Completion according to the terms of the Agreement. As such, the net asset value of Xin Procurement subsequent to the declaration of such dividend is expected to be minimal.

As stated in the Letter from the Board, the Directors consider that Xin Procurement has an established trading record and existing sourcing and sales network with its suppliers and customers. As such, we consider that the consideration for the acquisition of the 24% equity interest in Xin Procurement representing a historical price/earnings multiple of approximately 2.21 times is acceptable despite the expected decrease in net asset value of Xin Procurement as a result of the declaration of the abovementioned dividend.

Sale Loan

As advised by the Company, the consideration for the Sale Loan is equal to the fair value of the 24% interest of the Shareholders’ Loans of S$500,000 (equivalent to approximately HK$2.5 million at the exchange rate prevailing before entering into the Agreement). Based on the accountants’ report of Xin Procurement as set out in Appendix II to the Circular, the book value of the Shareholders’ Loans as at 30 September 2006 was approximately HK$2.4 million. Such difference in the value of the Shareholders’ Loans when denominated in Hong Kong dollars is due to the different exchange rates used. We consider that such difference is not material.

Having taken into account the fact that (i) the PE ratio of Xin Procurement based on the consideration for the acquisition of the 24% equity interest in Xin Procurement is below the range of that of the Comparable Companies; and (ii) the consideration for the Sale Loan is priced at its then prevailing fair value, we consider that the Acquisition at the Consideration is on normal commercial terms and is fair and reasonable so far as the interests of the Independent Shareholders are concerned.

LETTER FROM GOLDBOND CAPITAL

(b) Principal terms of the New Convertible Note to be issued

As stated in the Letter from the Board, the Consideration is to be satisfied by the Purchaser by procuring the Company to issue the New Convertible Note in such principal amount to the Vendor or its nominee on Completion.

The principal terms of the New Convertible Note to be issued by the Company will be as follows:

Principal amount:

HK$7,126,560

Maturity date:

Unless previously converted or repaid, the New Convertible Note will mature on the date preceding the third anniversary of the date of its issue.

Interest:

1% per annum on the principal amount of the New Convertible Note outstanding from time to time, payable semi-annually in arrears on 31 March and 30 September each year.

Conversion price:

HK$0.170 per Share, subject to adjustment provisions which are standard terms for convertible securities of similar type. The adjustment events will arise as a result of certain changes in the share capital of the Company including consolidation or sub-division of shares, capitalisation of profits or reserves, capital distributions in cash or specie or subsequent issues of securities in the Company.

The initial conversion price of the New Convertible Note of HK$0.170 per Share was determined after arms’ length negotiation between the Purchaser and the Vendor with reference to the recent market prices of Shares prior to the date of the Agreement.

Early redemption:

The Company may at any time prior to the Maturity Date, by giving not less than 5 business days’ prior notice to the holder of the New Convertible Note, repay the whole or part only (in an amount or integral multiple of HK$500,000) of the principal outstanding amount of the New Convertible Note together with the outstanding interest accrued thereon in accordance with the terms of the New Convertible Note.

Conversion Shares:

The Conversion Shares shall, when issued, rank pari passu in all respects with all other issued share capital of the Company on the date of conversion including the right to all dividends or other distributions.

LETTER FROM GOLDBOND CAPITAL

Transferability:

The New Convertible Note may be assigned or transferred in respect of the whole or any part (in an amount or integral multiple of HK$500,000) subject to the conditions, approvals, requirements and any other provisions of or under (i) the Stock Exchange (and any stock exchange on which Shares may be listed at the relevant time) or their rules and regulations; (ii) the approval for listing in respect of the Conversion Shares; and (iii) all applicable laws and regulations.

Save with the prior written approval of the Company, neither the New Convertible Note nor any part thereof may be transferred to a connected person of the Company.

Voting:

The holder of the New Convertible Note will not be entitled to receive notices of, attend or vote at any general meetings of the Company by reason only of it being a holder of the New Convertible Note.

Listing:

No application will be made for the listing of the New Convertible Note on any stock exchange. Application will be made for the listing of and permission to deal in the Conversion Shares on the Stock Exchange.

In giving our opinion as to the fairness and reasonableness of the principal terms of the New Convertible Note, we have identified acquisition transactions by companies listed in Hong Kong which involved the issue of convertible notes/bonds to satisfy all or part of the consideration since 23 November 2005, being one year prior to the date of the Agreement, up to the date of the Agreement. Among such transactions, there were ten issues that have maturities of three years or more (where applicable) and were approved by its relevant shareholders (the “Comparable Note Issues”), which we consider to be comparable to the New Convertible Note. As the terms of

LETTER FROM GOLDBOND CAPITAL

convertible notes/bonds including their interest rates and term to maturity are usually determined by reference to the prevailing market conditions, we consider that the selected time frame and the relevant parameters in respect of the Comparable Note Issues are appropriate for the purposes of our comparison. The following table sets out the key terms of these Comparable Note Issues:

						Premium/(discount) of	Premium/(discount) of
						conversion price over/to
						the average closing
						price quoted on the
					Premium/(discount) of	Stock Exchange over
					conversion price over/to	the last 10 trading days
					closing price immediately	up to and including the
					before the date of	day before the date of
					announcement or the	announcement or the
					suspension of trading in	suspension of trading in		Interest
		Stock	Date of	Principal	the shares pending the	the	shares pending the	rate
No	Issuer	code	announcement	amount	release of announcement	release of announcement		(p.a.)	Term
			_(yyyy/mm/dd) _	(HK$ million)	(%)		(%)	(%)	(years)
1	139 HOLDINGS LIMITED	139	2006/10/19	110.0	54.93		56.47	0.00	4
2	WING SHAN INTERNATIONAL	570	2006/08/22	282.4	6.25		1.02	3.00	3.5
	LIMITED
3	YANION INTERNATIONAL	82	2006/07/13	66.3	(30.00)		(22.10)	0.00	3
	HOLDINGS LIMITED
4	EVERBEST CENTURY HOLDINGS	578	2006/07/04	20.0	27.27		10.06	1.00	3
	LIMITED
5	DAIDO GROUP LIMITED	544	2006/06/07	104.4	(3.33 )		(3.33 )	0.00	5
6	CCT TELECOM HOLDINGS	138	2006/04/28	30.0	(2.60 )		(8.70 )	0.00	3
	LIMITED
7	YUE DA HOLDINGS LIMITED	629	2006/04/07	75.0	1st yr: (11.11 )		1st yr: (6.32)	3.50	3
					2nd yr: 11.11		2nd yr: 17.10
					3rd yr: 33.33		3rd yr: 40.52
8	HONESTY TREASURE	600	2006/03/17	94.0	(15.91)		(25.10)	2.50	5
	INTERNATIONAL HOLDINGS
	LIMITED
9	MACAU PRIME PROPERTIES	199	2006/02/07	60.0	12.82		13.70	0.00	4
	HOLDINGS LIMITED
10	GOOD FELLOW GROUP	910	2006/01/20	210.4	(21.57)		(22.33)	1.50	4
	LIMITED
	High				54.93		56.47	3.50
	Low				(30.00)		(25.10)	0.00
	Average				3.89		1.68	1.15
	The Company	1141	2006/11/24	7.1	0.00		3.70	1.00	3

LETTER FROM GOLDBOND CAPITAL

Interest rate

The interest rates of the Comparable Note Issues in the table above range from zero to 3.50% per annum, with an average interest rate of approximately 1.15% per annum. The interest rate carried by the New Convertible Note of 1.00% per annum falls within the range of the Comparable Note Issues and is lower than the average interest rate of 1.15% of the Comparable Note Issues.

We note from the Company’s 2006 annual report that as at 31 March 2006 the Group had secured bank loans of approximately HK$15.9 million which had an interest rate of 6.3% per annum. The Group also had other unsecured borrowing amounting to approximately HK$2.0 million as at 31 March 2006 which had an interest rate of 4.0% per annum. We also note from the Company’s unaudited interim report for the six months ended 30 September 2006 that the abovementioned secured bank loan of the Group had decreased to approximately HK$12.3 million, bearing an interest rate of 6.1% per annum while the other unsecured borrowings of the Company had all been settled as at 30 September 2006, except for the Existing Convertible Note of the Company issued to a connected person in March 2006, which had an interest rate of 1.0% per annum with other terms similar to those under the New Convertible Note. To sum up, all the interest-bearing bank loans and other unsecured borrowing received from independent third parties by the Group had interest rates that are higher than that of the New Convertible Note.

As illustrated above, we have considered all the existing interest-bearing bank loans and other unsecured borrowings of the Group from both independent third parties and connected person and conclude that the proposed interest rate to be charged under the New Convertible Note is lower than or equal to the interest rates on all of the existing financing arrangements of the Company.

Having considered that the fixed interest rate of the New Convertible Note of 1% per annum (i) falls within the lower range of the interest rates of the Comparable Note Issues; and (ii) is lower than or equal to the rates under other existing financing arrangements of the Group, we consider that the interest rate of the New Convertible Note is fair and reasonable so far as the interests of the Company and the Independent Shareholders are concerned.

Conversion price

The initial conversion price of the New Convertible Note of HK$0.170 per Share represents:

the closing price of HK$0.170 per Share as quoted on the Stock Exchange on 22 November 2006, being the last trading day prior to the suspension of trading in the Shares pending the release of the Announcement;
a premium of approximately 3.7% over the average closing price of HK$0.164 per Share as quoted on the Stock Exchange over the last 10 trading days up to and including 22 November 2006;

LETTER FROM GOLDBOND CAPITAL

a premium of approximately 15.6% over the average closing price of HK$0.147 per Share as quoted on the Stock Exchange over the last 30 trading days up to and including 22 November 2006;
a premium of approximately 6.3% over the closing price of HK$0.160 per Share as quoted on the Stock Exchange as at the Latest Practicable Date; and
a premium of approximately 117.3% over the unaudited pro forma adjusted consolidated net tangible assets of the Company of HK$0.07822 per Share upon completion of the Open Offer as set out in the Open Offer prospectus of the Company dated 26 September 2006.

In addition, based on the pro forma financial information of the Company as set out in Appendix III to this Circular, assuming Completion took place on 30 September 2006, the Group would have a deficiency in net assets attributable to equity holder of the Company of approximately HK$1.6 million. As such, no meaningful percentage of premium/discount can be calculated for the comparison of the initial conversion price and the pro forma consolidated net asset value of the Company.

The conversion prices of the ten Comparable Note Issues were set at (i) a range from a discount of approximately 30.0% to a premium of approximately 54.9% over their respective closing price of the relevant company immediately before the date of announcement or the suspension of trading in the shares pending the release of the announcement; and (ii) a range from a discount of approximately 25.1% to a premium of approximately 56.5% over their average closing price quoted on the Stock Exchange over the last 10 trading days up to and including the day before the date of announcement or the suspension of trading in the shares pending for the release of announcement respectively. Given that the premium/discount of the conversion price of the New Convertible Note falls within the range of those of the Comparable Note Issues, we consider that the conversion price as stipulated under the New Convertible Note is fair and reasonable so far as the interests of the Company and the Independent Shareholders are concerned.

4. Effects on the financial position of the Group

The following discussion on the effect on the financial position of the Group is based on pro forma information set out in Appendix III to the Circular. Shareholders are advised to refer to such appendix for details and should note that, as stated in Appendix III, the unaudited pro forma consolidated balance sheet, unaudited pro forma consolidated income statement and unaudited pro forma cash flow statement of the Enlarged Group are based on a number of assumptions, estimates and uncertainties. Accordingly, the unaudited pro forma consolidated balance sheet of the Enlarged Group does not purport to describe the actual financial position of the Enlarged Group that would have been attained had the Acquisition been completed on 30 September 2006. The unaudited pro forma consolidated balance sheet does not purport to predict the future financial position of the Enlarged Group. Also, the unaudited pro forma consolidated income statement and unaudited pro forma cash flow statement of the Enlarged Group do not purport to describe the actual results and cash flow of the Enlarged Group that would have been attained had the Acquisition been completed at the beginning of the year ended 31 March 2006 or to predict the future results and cash flow of the Enlarged Group.

LETTER FROM GOLDBOND CAPITAL

(a) Net asset value

Based on the financial information of the Group set out in Appendix I to the Circular, the Group had an unaudited consolidated deficiency in net assets attributable to equity holders of the Company of approximately HK$3.2 million or equivalent to approximately HK$0.01 per Share as at 30 September 2006 (based on the then Shares in issue of 330,816,056 Shares as at the Latest Practicable Date). As shown in the pro forma financial information on the Enlarged Group set out in Appendix III to the Circular, assuming Completion took place on 30 September 2006, the pro forma consolidated deficiency in net assets attributable to equity holders of the Company will be approximately HK$1.6 million or equivalent to approximately HK$0.005 per Share (based on the then Shares in issue of 330,816,056 Shares as at the Latest Practicable Date), which represents an improvement of approximately 50.0% to the unaudited consolidated deficiency in net assets attributable to equity holders of the Company per Share as at 30 September 2006.

Assuming full conversion of the New Convertible Note at the conversion price of HK$0.170 per Conversion Share but before the conversion of the Existing Convertible Note, the unaudited consolidated net asset value of the Enlarged Group would be approximately HK$3.9 million or equivalent to approximately HK$0.0106 per Share (based on 330,816,056 Shares in issue as at the Latest Practicable Date and 41,920,941 Shares to be issued upon full conversion of the New Convertible Note), which represents an increase of approximately HK$0.0206 to the unaudited consolidated net asset value per Share as at 30 September 2006.

Based on the pro forma financial information of the Enlarged Group set out in Appendix III to the Circular, as a result of the Acquisition, the Enlarged Group would record a consolidated net asset value of approximately HK$3.9 million instead of a deficiency in net assets attributable to equity holders of the Company of approximately HK$1.9 million. Such improvement of deficiency in net assets is principally due to the adjustments of (i) recognition of the goodwill arising from the acquisition of 24% equity interest in Xin Procurement; and (ii) the equity component of the New Convertible Note. Shareholders are advised to refer to notes to the pro forma financial information of the Enlarged Group as set out to in Appendix III to the Circular for details of the adjustments.

(b) Earnings

The Group recorded an audited consolidated loss attributable to equity holders of the Company of approximately HK$16.0 million for the year ended 31 March 2006. According to the pro forma financial information on the Enlarged Group set out in Appendix III to the Circular, assuming Completion took place at the beginning of the year ended 31 March 2006, the pro forma consolidated loss attributable to equity holders of the Company would be approximately HK$13.6 million. Such decrease in the loss mainly results from a pro forma adjustment of approximately HK$2.9 million for the reduction in minority interests’ share of profit in Xin Procurement from 49% to 24% for the year ended 31 March 2006. However, such increase in the pro forma results of the Enlarged Group is partly offset by the interest expense imputed based on the effective interest rate at 9.77% per annum for the liability component of the New Convertible Note, which is expected to be recurred until the full settlement of the New Convertible Note. Shareholders are advised to refer to the pro forma financial information on the Enlarged Group set out in Appendix III to the Circular for further details.

LETTER FROM GOLDBOND CAPITAL

(c) Gearing ratio

Based on the audited consolidated balance sheet of the Group as at 31 March 2006, the gearing ratio, which is calculated as the total loans (including interest-bearing bank loans and other unsecured borrowings, loan from minority shareholders, amounts due to a minority shareholder and a related company, and the liability component of the Existing Convertible Note) of approximately HK$71.9 million divided by the total assets of approximately HK$118.0 million, is approximately 60.9%.

Based on the unaudited interim figures of the Company as set out in Appendix I to this Circular, as the total assets of the Group increased to approximately HK$125.0 million while the total loans (including interest-bearing bank loan and other unsecured borrowing, loan from a minority shareholder, amounts due to a minority shareholder and a related company and the liability component of the Existing Convertible Note) decreased slightly to approximately HK$70.9 million as at 30 September 2006, the gearing ratio of the Group had improved to approximately 56.7% as at 30 September 2006.

Assuming Completion took place on 30 September 2006, based on the pro forma consolidated balance sheet of the Enlarged Group as set out in Appendix III to the Circular, the amount of total loans (including interest-bearing bank loan and other unsecured borrowing, loan from a minority shareholder, amounts due to a minority shareholder and a related company and the liability component of convertible notes) of the Enlarged Group would become approximately HK$89.5 million whereas the total assets would be approximately HK$131.3 million. Therefore, the gearing ratio would increase to approximately 68.2%. Upon full conversion of the New Convertible Note, the total loans of the Enlarged Group would reduce from approximately HK$89.5 million to approximately HK$84.0 million while its total assets would remain the same at approximately HK$131.3 million, representing an improvement in the gearing ratio to approximately 64.0%. Having considered (i) the potential benefit of a larger share of the results of Xin Procurement brought by the Acquisition to the Group; and (ii) the possible further reduction in the gearing ratio of the Enlarged Group as a result of the conversion of the New Convertible Note, we consider that the increase in gearing ratio as a result of the Acquisition is acceptable.

(d) Working capital

Given that the Consideration will be satisfied by the issue of the New Convertible Note, there is no immediate cash outflow from the Group for satisfying the Consideration. Based on the unaudited consolidated balance sheet of the Group as at 30 September 2006, the cash and bank balances of the Group amounted to approximately HK$5.2 million according to the unaudited interim report of the Company. Based on the pro forma consolidated balance sheet of the Enlarged Group (assuming Completion took place on 30 September 2006) as set out in Appendix III to the Circular, the pro forma cash and bank balances of the Enlarged Group would be the same as that of the Group as at 30 September 2006 as set out in its interim report for the six months ended 30

LETTER FROM GOLDBOND CAPITAL

September 2006. The impact of the New Convertible Note on the cash flow of the Group, assuming there is no conversion and no early redemption of the New Convertible Note, is the semi-annual interest payments to be paid to the Vendor each year and the full settlement of the New Convertible Note upon its maturity which is on the date preceding the third anniversary of the date of its issue.

As regards the declaration of the dividend as mentioned before, based on the retained earnings of Xin Procurement as at 30 September 2006 as set out in Appendix II to the Circular, assuming Completion took place on 30 September 2006, the amount of such dividend to be distributed would be approximately HK$27.9 million, of which approximately HK$14.2 million and approximately HK$13.7 million would be distributed to the Purchaser and the Vendor respectively. In addition, as advised by the Company, both the Purchaser and the Vendor have agreed subsequent to the Agreement that Xin Procurement would only pay out such dividend if and when such payment of the dividend will not lead to insufficient working capital for Xin Procurement. However, the actual magnitude of the dividend to be declared by Xin Procurement will have to be subject to the result of the audit of Xin Procurement as at the date of Completion, which serves as a basis to ascertain the amount of retained earnings available for such purpose.

Based on the above, we consider that the issue of the New Convertible Note will have no material effect on the working capital position of the Group.

5. Possible dilution effect to the Shareholders

The following table shows the shareholding structure of the Company (i) as at the Latest Practicable Date and immediately after Completion; (ii) upon full conversion of the Existing Convertible Note; (iii) upon full conversion of the New Convertible Note; and (iv) upon full conversion of both the Existing Convertible Note and the New Convertible Note (assuming no other changes in shareholding before then):

Shareholders Vision Century_(Note 1) Vendor(Note 2) Mr. Wilson Ng(Note 3) Mr. Ng Wee Keat(Note 3) Other discretionary beneficiaries of the Discretionary Trust (Note 4)_ Public Total	As at the Latest Practicable Date and immediately after Completion Number of Shares % 180,548,784 54.6 – – 5,000,000 1.5 5,000,000 1.5 20,000,000 6.0 120,267,272 36.4 330,816,056 100.0	Upon full conversion of the Existing Convertible Note Number of Shares % 442,960,131 74.7 – – 5,000,000 0.8 5,000,000 0.8 20,000,000 3.4 120,267,272 20.3 593,227,403 100.0	Upon full conversion of the New Convertible Note Number of Shares % 180,548,784 48.5 41,920,941 11.2 5,000,000 1.3 5,000,000 1.3 20,000,000 5.4 120,267,272 32.3 372,736,997 100.0	Upon full conversion of the Existing Convertible Note and the New Convertible Note Number of Shares % 442,960,131 69.8 41,920,941 6.6 5,000,000 0.8 5,000,000 0.8 20,000,000 3.1 120,267,272 18.9 635,148,344 100.0	Upon full conversion of the Existing Convertible Note and the New Convertible Note Number of Shares % 442,960,131 69.8 41,920,941 6.6 5,000,000 0.8 5,000,000 0.8 20,000,000 3.1 120,267,272 18.9 635,148,344 100.0
					100.0

LETTER FROM GOLDBOND CAPITAL

Notes:

Vision Century is a wholly-owned subsidiary of Huang Group which is held by Mr. Kan Ka Chong, Frederick as the trustee of the Discretionary Trust.
The Vendor is wholly owned by New Century International Pte Ltd. and New Century International Pte Ltd. is owned by Mr. Ng (Huang) Cheow Leng, Ms. Pea Baby and Ms. Loong Swee Choo respectively. Mr. Ng (Huang) Cheow Leng is the settlor of the Discretionary Trust, while Mr. Ng (Huang) Cheow Leng, Ms. Pea Baby and Ms. Loong Swee Choo are discretionary beneficiaries of the Discretionary Trust.
Mr. Wilson Ng and Mr. Ng Wee Keat are executive Directors and discretionary beneficiaries of the Discretionary Trust.
Ms. Sio Ion Kuan, who is a discretionary beneficiary of the Discretionary Trust, was interested in 10,000,000 Shares as at the Latest Practicable Date. Each of Ms. Ng Siew Lang, Linda and Ms. Lilian Ng, both are directors of Vendor and discretionary beneficiaries of the Discretionary Trust, is interested in 5,000,000 Shares as at the Latest Practicable Date.

Upon full conversion of the New Convertible Note only, the Vendor, Huang & Co (Singapore) Pte. Ltd., will increase its shareholdings in the Company by approximately 11.2% and the shareholding of public Shareholders in the Company will be diluted from approximately 36.4% to 32.3%. The Company will still be able to meet the minimum public float requirement under Rule 8.08 and Rule 13.32 of the Listing Rules as a result thereof. On the other hand, in the event that both the Existing Convertible Note and the New Convertible Note are fully exercised, the shareholding of public Shareholders in the Company will be diluted to 18.9%. However, the Vendor has undertaken that it will not cause or procure all or any part of the Existing Convertible Note and/or the New Convertible Note to be converted into new Shares if by doing so the minimum public float of the Company will be less than 25%. As stated in the Letter from the Board, the Company has also undertaken to the Stock Exchange that it will ensure there will not be insufficient public float on the date of the issue of the new Shares arising from the conversion of the Existing Convertible Note and/or the New Convertible Note.

In view of the above analysis and the reasons for and benefits of the Acquisition and the Vendor has undertaken to maintain the public float of the Shares, we consider that the potential dilution effect on the shareholding interest of the public Shareholders as a result of full conversion of the New Convertible Note is acceptable.

RECOMMENDATION

Having considered:

that by increasing the attributable interests in Xin Procurement, the Group can strengthen its assets and earnings base;
that the PE ratio of 2.21 used as the basis of the consideration for the acquisition of the 24% equity interest in Xin Procurement is much lower than the average PE ratio of the Comparable Companies;
that the consideration for the Sale Loan is priced at its then prevailing fair value;
that the fixed interest rate of the Convertible Note of 1% per annum (i) falls within the lower range of those of the Comparable Note Issues; and (ii) is lower than the rates under other financing alternatives from independent third parties available to the Group;

LETTER FROM GOLDBOND CAPITAL

that the premium/discount of the conversion price of the New Convertible Note falls within the range of those of the Comparable Note Issues; and
all of the abovementioned analyses, reasons and factors,

we consider that the terms of the Agreement are fair and reasonable so far as the interests of the Independent Shareholders are concerned and it is in the interests of the Company and the Shareholders as a whole. Accordingly, we advise the Independent Board Committee and the Independent Shareholders to vote in favour of the resolution to be proposed at the special general meeting of the Company to approve the Agreement.

Yours faithfully, For and on behalf of

Goldbond Capital (Asia) Limited Venus Choi Managing Director

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date and following the issue of the New Convertible Note were and are expected to be as follows:

HK$

Authorised:

10,000,000,000 Shares as at the Latest Practicable Date Issued and fully paid: 330,816,056 Shares in issue as at the Latest Practicable Date 41,920,941 Conversion Shares to be issued upon conversion of the New Convertible Note 372,736,997	100,000,000.00

	3,308,160.56 419,209.41
	3,727,369.97

All Shares in issue and to be issued rank and will rank pari passu in all respects with each other including as regards dividends, voting and return of capital.

As at the Latest Practicable Date, the Company had outstanding (i) 6,144,000 Share Options entitling the holders thereof to subscribe for an aggregate of 6,144,000 Shares at the adjusted exercise price of HK$0.23; and (ii) Existing Convertible Note of a principal amount of HK$37 million, which is convertible into an aggregate of 262,411,347 Shares at the adjusted conversion price of HK$0.141. Save for the aforesaid Share Options and Existing Convertible Note, the Company has no other options, warrants, derivatives, convertible notes or other securities of the Company convertible into or giving rights to subscribe for Shares.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. SUMMARY OF FINANCIAL INFORMATION

The following information has been extracted from the audited consolidated financial statements of the Group for each of the three years ended 31 March 2006:

Results
CONTINUING OPERATIONS
Revenue
Profit/(loss) before tax
Tax
LOSS FOR THE YEAR FROM
CONTINUING OPERATIONS
DISCONTINUED OPERATIONS
Loss for the year from discontinued operations
LOSS FOR THE YEAR
Attributable to:
Equity holders of the Company
Minority interests
ASSETS, LIABILITIES AND
MINORITY INTERESTS
Total assets
Total liabilities
Minority interests

Year ended 31 March
2004
2005
2006
HK$’000
HK$’000
HK$’000
(Restated)
(Restated)
–
144,687
155,550
(13,182)
(5,807)
693
–
(1,608)
(3,172)
(13,182)
(7,415)
(2,479)
(16,868)
(1,717)
(7,855)
(30,050)
(9,132)
(10,334)
(30,575)
(12,047)
(15,994)
525
2,915
5,660
(30,050)
(9,132)
(10,334)
As at 31 March
2004
2005
2006
HK$’000
HK$’000
HK$’000
(Restated)
(Restated)
89,383
139,472
118,007
(95,696)
(134,027)
(110,524)
520
(2,395)
(9,607)
(5,793)
3,050
(2,124)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Set out below is the reproduction of the report of the auditors for the financial statements of the Group for the year ended 31 March 2006 as extracted from the 2006 annual report of the Company (the references to pages and note numbers set out below are the pages and note numbers of the annual report of the Company for the year ended 31 March 2006):

“

To the members

Xin Corporation Limited

(Incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 33 to 132 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 financial statements and to report our opinion solely to you, as a body, in accordance with Section 90 of the Bermuda Companies Act 1981, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

BASIS OF OPINION

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public 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.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

FUNDAMENTAL UNCERTAINTY RELATING TO THE GOING CONCERN BASIS

The Group recorded net current liabilities of HK$17,364,000 and deficiency in assets of HK$2,124,000 as at 31 March 2006. In forming our opinion, we have considered the adequacy of the disclosures made in note 2 to the financial statements concerning the adoption of the going concern basis on which the financial statements have been prepared. As explained in note 2 to the financial statements, the Group is currently undertaking a number of measures to improve its financial and current liquidity position. The financial statements have been prepared on a going concern basis, the validity of which depends upon the ongoing support by the Group’s holding companies, bankers and other creditors, the availability of additional external funding and the attainment of profitable and positive cash flow operations to meet the Group’s future working capital and financial requirements. The financial statements do not include any adjustment that may be necessary should the implementation of such measures be unsuccessful. We consider that appropriate disclosures have been made in the financial statements concerning this situation, but we consider that this fundamental uncertainty relating to whether the going concern basis is appropriate is so extreme that we have disclaimed our opinion.

DISCLAIMER OF OPINION

Because of the significance of the fundamental uncertainty relating to the going concern basis, we are unable to form an opinion as to whether the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 March 2006 and of the loss and cash flows of the Group for the year then ended and as to whether the financial statements have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

Ernst & Young Hong Kong

25 July 2006”

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Set out below is the audited consolidated income statement, consolidated balance sheet, consolidated statement of changes in equity and consolidated cash flow statement of the Group and the balance sheet of the Company together with the notes to the financial statements of the Group as extracted from pages 33 to 132 of the annual report of the Company for the year ended 31 March 2006.

“Consolidated Income Statement

Year ended 31 March 2006

Notes CONTINUING OPERATIONS REVENUE 5 Cost of sales Gross profit Other income and gains 5 Selling and distribution costs Administrative expenses Other expenses Finance costs 6 PROFIT/(LOSS) BEFORE TAX 7 Tax 10 LOSS FOR THE YEAR FROM CONTINUING OPERATIONS DISCONTINUED OPERATIONS Loss for the year from discontinued operations 11 LOSS FOR THE YEAR Attributable to: Equity holders of the Company 12 Minority interests LOSS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE COMPANY 13 Basic – For loss for the year – For loss from continuing operations Diluted – For loss for the year – For loss from continuing operations	2006 HK$’000 155,550 (136,723) 18,827 1,431 (296) (12,989) (1,660) (4,620) 693 (3,172) (2,479) (7,855) (10,334) (15,994) 5,660 (10,334) (HK19.3 cents) (HK10.2 cents) N/A N/A	2005 HK$’000 (Restated) 144,687 (132,223) 12,464 446 (187) (13,355) (389) (4,786) (5,807) (1,608) (7,415) (1,717) (9,132) (12,047) 2,915 (9,132) (HK14.6 cents) (HK13.3 cents) N/A N/A

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

31 March 2006

Notes NON-CURRENT ASSETS Property, plant and equipment 14 Investment properties 15 Prepaid land lease payments 16 Total non-current assets CURRENT ASSETS Inventories 18 Accounts receivable 19 Prepaid land lease payments 16 Prepayments, deposits and other receivables Cash and bank balances Total current assets CURRENT LIABILITIES Accounts payable 20 Tax payable Other payables and accruals Interest-bearing bank and other borrowings 21 Loans from minority shareholders 23 Due to a minority shareholder 24 Due to a related company 24 Convertible bonds 25 Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES	2006 HK$’000 268 21,437 29,816 51,521 2,073 57,691 728 871 5,123 66,486 12,925 3,172 22,495 17,884 1,127 25,704 543 – 83,850 (17,364) 34,157	2005 HK$’000 (Restated) 30,671 – 30,544 61,215 9,902 41,463 728 2,164 24,000 78,257 21,964 1,608 25,325 26,797 7,007 12,643 – 2,155 97,499 (19,242) 41,973

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

31 March 2006

Notes NON-CURRENT LIABILITIES Other loan 21 Loans from the immediate holding company 22 Convertible note 25 Total non-current liabilities Net assets EQUITY Equity/(deficiency in assets) attributable to equity holders of the Company Issued capital 27 Equity component of convertible note and bonds 25 Deficits 29(a) Minority interests Total equity	2006 HK$’000 – – 26,674 26,674 7,483 827 10,344 (13,295) (2,124) 9,607 7,483	2005 HK$’000 (Restated) 2,000 34,528 – 36,528 5,445 16,541 517 (14,008) 3,050 2,395 5,445

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

Year ended 31 March 2006

Notes At 1 April 2004 As previously reported Prior year adjustments 2.5(b) As restated Net loss for the year (as restated) Total income and expense for the year Share issued on open offer 27(a) Share issue expenses Redemption of convertible note At 31 March 2005			Attributable to equity	Attributable to equity	holders of the Company	holders of the Company	Total HK$’000 9,858 (15,651 ) (5,793 ) (12,047 ) (12,047 ) 22,055 (1,165 ) – 3,050	Minority interests HK$’000 (520 ) – (520 ) 2,915 2,915 – – – 2,395	Total equity HK$’000 9,338 (15,651 ) (6,313 ) (9,132 ) (9,132 ) 22,055 (1,165 ) – 5,445
		Issued capital HK$’000 11,027 – 11,027 – – 5,514 – – 16,541	Share premium account HK$’000 43,303 351 43,654 – – 16,541 (1,165 ) – 59,030*	Equity component of convertible note and bonds HK$’000 (note 25) – 2,640 2,640 – – – – (2,123 ) 517	Asset revaluation reserve HK$’000 18,037 (18,037 ) – – – – – – –*	Accumulated losses HK$’000 (62,509 ) (605 ) (63,114 ) (12,047 ) (12,047 ) – – 2,123 (73,038)*

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Statement of Changes in Equity

Year ended 31 March 2006

	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company		Total equity HK$’000 22,561 (17,116)
Issued capital HK$’000 16,541 – 16,541 – – – – (15,714) – – – – – – – 827	Share of premium Contributed account surplus HK$’000 HK$’000 58,679 – 351 – 59,030 – – – – – – – – – – 15,714 (59,030) 59,030 – (71,659) – – – – – – – – – – – 3,085	Equity component convertible note and bonds HK$’000 (note 25) – 517 517 – – – – – – – – – – (517) 10,344 10,344	Asset revaluation reserve HK$’000 18,534 (18,534) – – – – – – – – – – – – – –	Exchange fluctuation reserve HK$’000 – – – 10 10 – 10 – – – – – – – – 10	Share option Accumulated reserve losses HK$’000 HK$’000 – (73,588) – 550 – (73,038) – – – – – (15,994) – (15,994) – – – – – 71,659 466 – (9) 9 – – – 517 – – 457 (16,847)
						5,445 10
						10 (10,334)
						(10,324) – – – 466 – 1,552 – 10,344
						7,483

These reserve accounts comprise the consolidated deficits of HK$13,295,000 (2005: HK$14,008,000 (restated)) in the consolidated balance sheet.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

Year ended 31 March 2006

Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) before tax From continuing operations From discontinued operations Adjustments for: Finance costs 6 Interest income 5 Gains on disposal of items of property, plant and equipment 5 Waiver of accounts payable 5 Share option expenses 7 Impairment of items of property, plant and equipment 7 Provision/(write-back of provision) against inventories 7 Depreciation of items of property, plant and equipment 7 Depreciation of investment properties 7 Recognition of prepaid land lease payments 7 Revaluation surplus on leasehold buildings 7 Provision for impairment of accounts receivable 7 Gain on disposal of subsidiaries 30(b) Operating profit/(loss) before working capital changes Increase in inventories Increase in accounts receivable Decrease/(increase) in prepayments, deposits and other receivables Increase/(decrease) in accounts payable Increase in other payables and accruals Increase in an amount due to a related company Cash used in operations Overseas taxes paid Net cash outflow from operating activities	2006 HK$’000 693 (7,855) 4,649 (267) (23) – 466 3,873 (485) 4,285 430 728 – – (66) 6,428 (824) (20,540) 596 (6,246) 864 543 (19,179) (1,608) (20,787)	2005 HK$’000 (Restated) (5,807) (1,717) 4,786 (25) – (294) – 111 828 8,892 – 728 (1,164) 290 (8,030) (1,402) (5,695) (40,328) (1,025) 17,321 3,640 – (27,489) – (27,489)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Cash Flow Statement

Year ended 31 March 2006

Notes CASH FLOWS FROM INVESTING ACTIVITIES Interest received Purchases of items of property, plant and equipment 14 Proceeds from disposal of items of property, plant and equipment Disposal of subsidiaries 30(b) Net cash inflow/(outflow) from investing activities Net cash outflow from operating activities and investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares 27(a) Share issue expenses 27 Repayment of bank loans Repayment of an other loan Drawdown/(repayment) of loans from the immediate holding company Drawdown of a loan from a minority shareholder Drawdown of a loan from a director of a subsidiary Increase in an amount due to a minority shareholder Redemption of convertible bonds 25 Interest paid Net cash inflow/(outflow) from financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Effect of foreign exchange rate change CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances	2006 HK$’000 267 (481) 23 2,707 2,516 (18,271) – – (4,413) (6,500) (3,150) – 4,650 13,061 (2,167) (2,097) (616) (18,887) 24,000 10 5,123 5,123	2005 HK$’000 (Restated) 25 (681) – 9 (647) (28,136) 22,055 (1,165) (4,002) (1,500) 21,150 1,127 – 12,643 (8,166) (1,943) 40,199 12,063 11,937 – 24,000 24,000

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Balance Sheet

31 March 2006

Notes NON-CURRENT ASSETS Property, plant and equipment 14 Investments in subsidiaries 17 Total non-current assets CURRENT ASSETS Due from a subsidiary 17 Prepayments, deposits and other receivables Cash and bank balances Total current assets CURRENT LIABILITIES Other payables and accruals Interest-bearing bank and other borrowings 21 Convertible bonds 25 Total current liabilities NET CURRENT ASSETS/(LIABILITIES) TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Other loan 21 Loans from the immediate holding company 22 Convertible note 25 Total non-current liabilities DEFICIENCY IN ASSETS Issued capital 27 Equity component of convertible note and bonds 25 Deficits 29(b)	2006 HK$’000 12 – 12 – 231 796 1,027 2,349 2,000 – 4,349 (3,322) (3,310) – – 26,674 26,674 (29,984) 827 10,344 (41,155) (29,984)	2005 HK$’000 (Restated) 21 – 21 – 231 18,393 18,624 5,413 6,500 2,155 14,068 4,556 4,577 2,000 34,528 – 36,528 (31,951) 16,541 517 (49,009) (31,951)

FINANCIAL INFORMATION OF THE GROUP

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 HM 11, Bermuda.

The Group is principally engaged in supply and procurement business operations. During the year, following the disposal of Gadgets Yard Limited (“Gadgets Yard”), a previously 51% owned subsidiary of the Company, the Group ceased the operations of design, manufacture and sale of a wide range of toys. There were no other 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.

2.1 BASIS OF PRESENTATION

At 31 March 2006, the Group had net current liabilities of HK$17,364,000 and deficiency in assets of HK$2,124,000. The Group incurred a loss attributable to equity holders of the Company of HK$15,994,000 and reported a net cash outflow from operating activities of HK$20,787,000 for the year ended 31 March 2006.

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

(a) Huang Worldwide Holding Limited, the immediate holding company of Vision Century, which was incorporated in the British Virgin Islands, has undertaken to the Company, during the period up to 31 October 2007, 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.
(b) The directors of the Company are in ongoing negotiations with the Group’s bankers and other creditors to reschedule the repayment of certain borrowings due from the Group and to seek their ongoing support to the Group. In particular, the Group has successfully obtained from a Group’s banker in Mainland China a new borrowing of RMB12,750,000 (equivalent to HK$12,260,000), repayable on 26 April 2007 (the “New Loan”), after the year end date. The New Loan was utilised to partially repay a bank loan of HK$15,884,000 outstanding as at 31 March 2006.
(c) Vision Century has granted a credit facility of HK$50,000,000 to the Company since 2 July 2003. On 15 February 2006, the Company entered into a subscription agreement with Vision Century, for issuance of a convertible note in the principal amount of HK$37,000,000 as part of the consideration for the release and discharge of the Group from all of its obligations and liabilities in respect of the loan from Vision Century. On 30 March 2006, the date the convertible note being issued, HK$37,856,000 (being the principal amount of a loan of HK$31,378,000 and accrued interest of HK$6,478,000) was owed by the Company to Vision Century. The Company settled the remaining accrued interest of HK$856,000 by cash from internal resources. The convertible note is repayable on 29 March 2009 while the credit facility of HK$50,000,000 granted by Vision Century is still valid and should be expired on 31 October 2007.
(d) The directors of the Company are considering various alternatives to strengthen the capital base of the Company through various fund raising exercises, including but not limited to, a private placement, an open offer or a rights issue of new shares of the Company.
(e) The directors of the Company continue to take action to tighten cost controls over various general and administrative expenses, and are actively seeking new investment and business opportunities with an aim to attain profitable and positive cash flow operations.

In the opinion of the directors of the Company, in light of the measures taken to date, together with the expected results of other measures in progress, the Group will have sufficient working capital for its current requirements and it is reasonable to expect the Group to return to a commercially viable going concern. Accordingly, the directors of the Company are satisfied that it is appropriate to prepare the financial statements on a going concern basis, notwithstanding the Group’s financial and liquidity position at 31 March 2006.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.1 BASIS OF PRESENTATION (Continued)

Should the Group be unable to continue as a going concern, adjustments would have to be made to restate the values of 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 potential adjustments have not been reflected in the financial statements.

2.2 BASIS OF PREPARATION

These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) (which also include Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, 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 buildings as further explained below. These financial statements are presented in Hong Kong dollars and all values are rounded to the nearest thousand (HK$’000) except when otherwise indicated.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries for the year ended 31 March 2006. The results of subsidiaries acquired or disposed of during the year are consolidated from the date on which the Group obtains control, and continued to be consolidated until the date that such control ceases. All significant intercompany transactions and balances within the Group are eliminated on consolidation.

Minority interests represent the interests of outside shareholders in the results and net assets of the Company’s subsidiaries.

2.3 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

The following new and revised HKFRSs affect the Group and are adopted for the first time for the current year’s financial statements:

HKAS 1	Presentation of Financial Statements
HKAS 2	Inventories
HKAS 7	Cash Flow Statements
HKAS 8	Accounting Policies, Changes in Accounting Estimates and Errors
HKAS 10	Events after the Balance Sheet Date
HKAS 12	Income Taxes
HKAS 14	Segment Reporting
HKAS 16	Property, Plant and Equipment
HKAS 17	Leases
HKAS 18	Revenue
HKAS 19	Employee Benefits
HKAS 21	The Effects of Changes in Foreign Exchange Rates
HKAS 23	Borrowing Costs
HKAS 24	Related Party Disclosures
HKAS 27	Consolidated and Separate Financial Statements
HKAS 32	Financial Instruments: Disclosure and Presentation
HKAS 33	Earnings per Share
HKAS 36	Impairment of Assets
HKAS 37	Provisions, Contingent Liabilities and Contingent Assets
HKAS 38	Intangible assets
HKAS 39	Financial Instruments: Recognition and Measurement
HKAS 39 Amendment	Transition and Initial Recognition of Financial Assets and Financial Liabilities
HKAS 40	Investment Property
HKFRS 2	Share-based Payment
HKFRS 3	Business Combinations
HKFRS 5	Non-current Assets Held for Sale and Discontinued Operations
HK(SIC)-Int 21	Income Taxes – Recovery of Revalued Non-depreciable Assets
HK-Int 4	Leases – Determination of the Length of Lease Term in respect of
	Hong Kong Land Leases

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.3 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (Continued)

The adoption of HKASs 2, 7, 8, 10, 12, 14, 16, 18, 19, 21, 23, 27, 33, 36, 37, 38, 40, HKFRS 3, HK(SIC)-Int 21 and HK-Int 4 has had no material impact on the accounting policies of the Group and the Company and the methods of computation in the Group’s and the Company’s financial statements.

HKAS 1 has affected the presentation of minority interests on the face of the consolidated balance sheet, consolidated income statement, consolidated statement of changes in equity and other disclosures.

HKAS 24 has expanded the definition of related parties and affected the Group’s related party disclosures.

The impact of adopting the other HKFRSs is summarised as follows:

(a) HKAS 17 – Leases

In prior years, leasehold land and buildings held for own use were stated at valuation less accumulated depreciation and any impairment losses.

Upon the adoption of HKAS 17, the Group’s leasehold interest in land and buildings is separated into leasehold land and leasehold buildings. The Group’s leasehold land is classified as an operating lease, because the title of the land is not expected to pass to the Group by the end of the lease term, and is classified as prepaid land lease payments, while leasehold buildings are classified as part of property, plant and equipment. Prepaid land lease payments under operating leases are initially stated at cost and subsequently amortised on the straight-line basis over the lease term. When the lease payments cannot be allocated reliably between the land and buildings elements, the entire lease payments are included in the cost of the land and buildings as a finance lease in property, plant and equipment.

The comparative amounts for the year ended 31 March 2005 have been restated to reflect the reclassification of the leasehold land.

(b) HKAS 32 and HKAS 39 – Financial Instruments

Upon the adoption of HKAS 32, convertible note and bonds are split into liability and equity components. The effects of the above changes are summarised in note 2.5 to the financial statements. In accordance with HKAS 32, comparative amounts have been restated.

(c) HKFRS 2 – Share-based Payment

In prior years, no recognition and measurement of share-based payment transactions in which employees (including directors) were granted share options over shares in the Company were required until such options were exercised by employees, at which time the share capital and share premium account were credited with the proceeds received.

Upon the adoption of HKFRS 2, when employees (including directors) render services as consideration for equity instruments (“equity-settled transactions”), the cost of the equity-settled transactions with employees is measured by reference to the fair value at the date at which the instruments are granted.

The main impact of HKFRS 2 on the Group is the recognition of the cost of these transactions and a corresponding entry to equity for employee share options. The revised accounting policy for share-based payment transactions is described in more detail in note 2.6 “Summary of significant accounting policies” below.

The effects of adopting HKFRS 2 are summarised in note 2.5 to the financial statements.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.3 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (Continued)

(d) HKFRS 5 – Non-current Assets Held for Sale and Discontinued Operations

The Group has applied HKFRS 5 prospectively in accordance with the transitional provisions of HKFRS 5, which has resulted in a change in accounting policy on the recognition of a discontinued operation. Under Statement of Standard Accounting Practice (“SSAP”) 33 “Discontinuing Operations”, the Group would have recognised a discontinued operation at the earlier of:

the date the Group enters into a binding sale agreement; and
the date the board of directors have approved and announced a formal disposal plan.

HKFRS 5 requires a component of the Group to be classified as discontinued when the criteria to be reclassified as held for sale have been met or when that component of the Group has been recovered principally through a sale transaction rather than through continuing use. The principal impact of this change in accounting policy is that the results for the year ended 31 March 2005 attributable to the discontinued operations have been reclassified to the “Loss for the year from discontinued operations” on the face of the consolidated income statement of the Group.

2.4 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

The Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial statements. Unless otherwise stated, these HKFRSs are effective for accounting periods beginning on or after 1 April 2006:

HKAS 1 Amendment	Capital Disclosures
HKAS 21 Amendment	Net Investment in a Foreign Operation
HKAS 39 Amendment	Cash Flow Hedge Accounting of Forecast Intragroup Transactions
HKAS 39 Amendment	The Fair Value Option
HKAS 39 & HKFRS 4 Amendments	Financial Guarantee Contracts
HKFRS 7	Financial Instruments: Disclosures
HK(IFRIC)-Int 4	Determining whether an Arrangement contains a Lease
HK(IFRIC)-Int 8	Scope of HKFRS 2
HK(IFRIC)-Int 9	Reassessment of Embedded Derivatives

HKAS 1 Amendment shall be applied for accounting periods beginning on or after 1 April 2007. The revised standard will affect the disclosures about qualitative information about the Group’s objective, policies and processes for managing capital; quantitative data about what the Company regards as capital; and compliance with any capital requirements and the consequences of any non-compliance.

HKFRS 7 incorporates and further extends the disclosure requirements of HKAS 32 relating to financial instruments. This HKFRS shall be applied for accounting periods beginning on or after 1 April 2007.

In accordance with the amendments to HKAS 39 regarding financial guarantee contracts, financial guarantee contracts are initially recognised at fair value and are subsequently measured at the higher of (i) the amount determined in accordance with HKAS 37 and (ii) the amount initially recognised, less, when appropriate, cumulative amortisation recognised in accordance with HKAS 18.

Except as stated above, the Group expects that the adoption of the pronouncements listed above will not have any significant impact on the Group’s financial statements in the period of initial application.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.5 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES

Group

(a) Effect on the consolidated balance sheets

At 1 April 2005

Effect of adopting
HKAS 17
HKAS 32
Prepaid
Convertible
land lease
note
Effect of new policies
payments
and bonds
HK$’000
HK$’000
Assets
Decrease in property, plant and
equipment
(48,400)
–
Increase in prepaid land
lease payments
31,272
–
Liabilities/equity
Decrease in convertible bonds
–
(12)
Decrease in asset revaluation
reserve
(18,534)
–
Increase in share premium account
–
351
Increase in equity component of
convertible bonds
–
517
Decrease/(increase) in
accumulated losses
1,406
(856)

Total
HK$’000
(48,400)
31,272
(17,128)
(12)
(18,534)
351
517
550
(17,128)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.5 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES (Continued)

Group (Continued)

(a) Effect on the consolidated balance sheets (Continued)

At 31 March 2006

Effect of adopting
HKAS 17
HKAS 32
HKFRS 2
Equity-
Prepaid
Convertible
settled
land lease
note
share option
Effect of new policies
payments
and bonds
arrangements
HK$’000
HK$’000
HK$’000
Assets
Decrease in property, plant
and equipment
(49,700)
–
–
Increase in prepaid land lease
payments
30,544
–
–
Liabilities/equity
Decrease in convertible note
–
(10,326)
–
Decrease in asset revaluation
reserve
(19,653)
–
–
Increase in share option reserve
–
–
457
Increase in equity component of
convertible note
–
10,344
–
Decrease/(increase) in
accumulated losses
497
(18)
(457)

Total
HK$’000
(49,700)
30,544
(19,156)
(10,326)
(19,653)
457
10,344
22
(19,156)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.5 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES (Continued)

Group (Continued)

(b) Effect on the balances of equity at 1 April 2004 and at 1 April 2005

Effect of adopting
HKAS 17
HKAS 32
Prepaid
Convertible
land lease
note
Effect of new policies
payments
and bonds
HK$’000
HK$’000
1 April 2004
Decrease in asset revaluation reserve
(18,037)
–
Increase in share premium account
–
351
Increase in equity component
of convertible note and bonds
–
2,640
Decrease/(increase) in accumulated
losses
1,637
(2,242)
1 April 2005
Decrease in asset revaluation reserve
(18,534)
–
Increase in share premium account
–
351
Increase in equity component
of convertible bonds
–
517
Decrease/(increase) in accumulated
losses
1,406
(856)

Total
HK$’000
(18,037)
351
2,640
(605)
(15,651)
(18,534)
351
517
550
(17,116)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.5 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES (Continued)

Group (Continued)

(c) Effect on the consolidated income statements for the years ended 31 March 2006 and 2005

Effect of new policies Year ended 31 March 2006 Decrease in revenue Decrease in cost of sales Decrease in other income and gains Loss on disposal of a subsidiary Decrease in selling and distribution costs Decrease/(increase) in administrative expenses Decrease/(increase) in other operating expenses Decrease/(increase) in finance costs Increase in loss for the year from discontinued operations Total increase in loss Increase in basic loss per share	HKAS 17 Prepaid land lease payments HK$’000 – – – – – 438 (1,347) – – (909) (HK1.1 cents)	Effect of adopting HKAS 32 HKFRS 2 HKFRS 5 Equity- Convertible settled note share option Discontinued and bonds arrangements operations HK$’000 HK$’000 HK$’000 – – (10,795) – – 13,459 – – (441) – – 34 – – 334 – (466) 1,404 – – 3,831 (30) – 29 – – (7,855) (30) (466) – – (HK0.6 cent) –	Total HK$’000 (10,795) 13,459 (441 ) 34 334 1,376 2,484 (1 ) (7,855 ) (1,405 ) (HK1.7 cents )

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.5 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES (Continued)

Group (Continued)

(c) Effect on the consolidated income statements for the years ended 31 March 2006 and 2005 (Continued)

Effect of adopting HKAS 17 HKAS 32 Prepaid Convertible land lease note Effect of new policies payments and bonds HK$’000 HK$’000 Year ended 31 March 2005 Decrease in revenue – – Decrease in cost of sales – – Decrease in other income and gains – – Gain on disposal of a subsidiary – – Decrease in selling and distribution costs – – Decrease in administrative expenses 385 – Increase in other operating expenses (616) – Increase in finance costs – (737) Increase in loss for the year from discontinued operations – – Total increase in loss (231) (737) Increase in basic loss per share (HK0.3 cent) (HK0.9 cent)	HKFRS 5 Discontinued operations HK$’000 (36,205) 39,379 (944) (8,030) 1,106 7,199 (788) – (1,717) – –	Total HK$’000 (36,205) 39,379 (944) (8,030) 1,106 7,584 (1,404) (737) (1,717) (968) (HK1.2 cents)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.5 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES (Continued)

Company

(a) Effect on the balance sheets

(b)	At 1 April 2005 Effect of new policy Liabilities/equity Decrease in convertible bonds Increase in share premium account Increase in equity component of convertible bonds Increase in accumulated losses At 31 March 2006 Effect of new policies Liabilities/equity Decrease in convertible bonds Increase in share option reserve Increase in equity component of convertible bonds Increase in accumulated losses Effect on the balances of equity Effect of new policies Increase in share premium account Increase in equity component of convertible note and bonds Increase in accumulated losses	Effect of adopting HKAS 32 Convertible note and bonds HK$’000 (12) 351 517 (856) Effect of adopting HKFRS 2 HKAS 32 Equity- Convertible settled note share option and bonds arrangements Total HK$’000 HK$’000 HK$’000 (10,326) – (10,326) – 457 457 10,344 – 10,344 (18) (457) (475) Effect of adopting HKAS 32 Convertible note and bonds 1 April 1 April 2005 2004 HK$’000 HK$’000 351 351 517 2,640 (856) (2,242)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.5 SUMMARY OF THE IMPACT OF CHANGES IN ACCOUNTING POLICIES (Continued)

Company (Continued)

(c) Effect on the income statements

At 31 March 2006

==> picture [373 x 228] intentionally omitted <==

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

Effect of adopting
HKFRS 2
HKAS 32 Equity-
Convertible settled
note share option
Effect of new policies and bonds arrangements Total
HK$’000 HK$’000 HK$’000
–
Increase in administrative expenses (466) (466)
Increase in finance costs (30) – (30)
Total increase in loss (30) (466) (496)
At 31 March 2005
Effect of adopting
HKAS 32
Convertible
Effect of new policies note and bonds
HK$’000
Increase in finance costs (737)
----- End of picture text -----

2.6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Subsidiaries

A subsidiary is an entity 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 income statement to the extent of dividends received and receivable. The Company’s interests in subsidiaries are stated at cost less any impairment losses.

Impairment of assets

Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, financial assets and investment properties), the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in which it arises, unless the asset is carried at a revalued amount, in which case the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation), had no impairment loss been recognised for the asset in prior years. A reversal of such impairment loss is credited to the income statement in the period in which it arises, unless the asset is carried at a revalued amount, in which case the reversal of the impairment loss is accounted for in accordance with the relevant accounting policy for that revalued asset.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Related parties

A party is considered to be related to the Group if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Group; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control over the Group;
(b) the party is a member of the key management personnel of the Group or its holding companies;
(c) the party is a close member of the family of any individual referred to in (a) or (b);
(d) the party is an entity that is controlled, jointly-controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (b) or (c); or
(e) the party is a post-employment benefit plan for the benefit of the employees of the Group, or of any entity that is related party of the Group.

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, are stated at cost or valuation less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment 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 items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement 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 an item of property, plant and equipment, and where the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement.

Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Changes in the values of property, plant and equipment are dealt with as movements in the 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 income statement. Any subsequent revaluation surplus is credited to the income statement to the extent of the deficit previously charged. On disposal of a revalued asset, the relevant portion of the 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 of each item of property, plant and equipment to its residual value over its estimated useful life, after taking into account its estimated residual value. The principal annual rates used for this purpose are as follows:

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% – 15%
Furniture, fixtures and equipment
and motor vehicles	20%

Where parts of an item of property, plant and equipment have different useful lives, the cost or valuation of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

Residual values, useful lives and depreciation method are reviewed, and adjusted if appropriate, at each balance sheet date.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement of an item of property, plant and equipment recognised in the income statement in the year the asset is derecognised is the difference between the net sale 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 items of property, plant and equipment when completed and ready for use.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investment properties

Investment properties are interests in buildings held to earn rental income and/or for capital appreciation, rather than for use in the production or supply of goods or services or for administrative purposes; or for sale in the ordinary course of business. Such properties are stated at cost less accumulated depreciation and any impairment losses.

Any gains or losses on the retirement or disposal of an investment property are recognised in the income statement in the year of the retirement or disposal.

Leases

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.

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 lessor, assets leased by the Group under operating leases are included in non-current assets, and rentals receivable under the operating leases are credited to the income statement on the straight-line basis over the lease terms. Where the Group is the lessee, rentals payable under the operating leases are charged to the income statement on the straight-line basis over the lease terms.

Prepaid land lease payments under operating leases are initially stated at cost and subsequently recognised on the straight-line basis over the lease terms.

Investments and other financial assets (applicable to the year ended 31 March 2006)

Financial assets in the scope of HKAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the balance sheet date.

All regular way purchases and sales of financial assets are recognised on the trade date, i.e., the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Impairment of financial assets (applicable to the year ended 31 March 2006)

The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impairment of financial assets (applicable to the year ended 31 March 2006) (Continued)

Assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through the use of an allowance account. The amount of the impairment loss is recognised in the income statement.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

Derecognition of financial assets (applicable to the year ended 31 March 2006)

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where:

the rights to receive cash flows from the asset have expired;
the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay in full without material delay to a third party under a “pass-through” arrangement; or
the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.

Gains and losses are recognised in net profit or loss when the liabilities are derecognised as well as through the amortisation process.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Convertible note and bonds

The component of convertible note and bonds that exhibits characteristics of a liability is recognised as a liability in the balance sheet, net of transaction costs. On issuance of convertible note and bonds, the fair value of the liability component is determined using a market rate for an equivalent non-convertible note and bond; and this amount is carried as a long term liability on the amortised cost basis until extinguished on conversion or redemption. The remainder of the proceeds is allocated to the conversion option that is recognised and included in shareholders’ equity, net of transaction costs. The carrying amount of the conversion option is not remeasured in subsequent years.

Transaction costs are apportioned between the liability and equity components of the convertible note and bonds based on the allocation of proceeds to the liability and equity components when the instruments are first recognised.

Derecognition of financial liabilities (applicable to the year ended 31 March 2006)

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in the income statement.

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 cost to be incurred to completion and disposal.

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.

For the purpose of the balance sheets, cash and bank balances 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 income statement.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income tax

Income tax comprises current and deferred tax. Income tax is recognised in the income statement, or in equity if it relates to items that are recognised in the same or a different period directly in equity.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities.

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilised except:

where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, 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;
(b) rental income, on the straight-line basis over the lease terms; and
(c) interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset.

Employee benefits

Share-based payment transactions

The Company operates a share option scheme for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Employees (including directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (“equity-settled transactions”).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company (“market conditions”), if applicable.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the “vesting date”). The cumulative expense recognised for equitysettled transactions at each balance sheet date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the income statement for a period represents the movement in the cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and is designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.

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.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2.6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Employee benefits (Continued)

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 (the “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 service 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 income statement 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.

Foreign currencies

These financial statements are presented in Hong Kong dollars, which is the Company’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The functional currencies of certain overseas subsidiaries are currencies other than the Hong Kong dollar. As at the balance sheet date, the assets and liabilities of these entities are translated into the presentation currency of the Company at the exchange rates ruling at the balance sheet date and, their income statements are translated into Hong Kong dollars at the weighted average exchange rates for the year. The resulting exchange differences are included in the exchange fluctuation reserve. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

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 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.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. SIGNIFICANT ACCOUNTING JUDGEMENTS

Judgements

In the process of applying the Group’s accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the financial statements:

Impairment test of assets

In determining whether an asset is impaired or whether the event previously causing the impairment no longer exists, the Company has to exercise judgement in the area of asset impairment, particularly in assessing: (1) whether an event has occurred that may affect the asset value, or such an event affecting the asset value has not been in existence; (2) whether the carrying value of an asset can be supported by the net present value of future cash flows, which are estimated based upon the continued use of the asset; and (3) the appropriate key assumptions to be applied in preparing cash flow projections including whether these cash flow projections are discounted using an appropriate rate. Changing the assumptions selected by management to determine the level of impairment, including the discount rates or the growth rate assumptions in the cash flow projections, could have a material effect on the net present value used in the impairment test.

4. 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 segments 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:

Continuing operations:

the supply and procurement segment supplies office equipment and office supplies, machinery, machinery parts, lubricating oil and bunkerage for vessels; and
the corporate and other segments consists of corporate income and expense items and holding of property.

Discontinued operations:

the toddler cars segment manufactures and trades children’s ride-on cars featuring working horns and turning wheels;
the cycling segment manufactures and trades children’s bicycles, tricycles and scooters; and
the other toys segment comprises the manufacture and the trading of pre-school toys, plastic utensils and other fashionable toys.

In determining the Group’s geographical segments, revenues are attributed to the segments based on the location of the customers, which are North America, Europe, Singapore and the Asia Pacific Region 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.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. SEGMENT INFORMATION (Continued)

(a) Business segments

The following tables present revenue, profit/(loss) and certain asset, liability and expenditure information for the Group’s business segments for the years ended 31 March 2005 and 2006.

Segment revenue: Sales to external customers Other revenue and gains Segment results Interest income and unallocated revenue and gains Unallocated expenses Finance costs Profit/(loss) before tax Tax Profit/(loss) for the year Assets and liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities	Continuing operations Supply and Corporate and procurement others Sub-total 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Restated) (Restated) 155,550 144,687 – – 155,550 144,687 91 34 – – 91 34 155,641 144,721 – – 155,641 144,721 15,494 8,884 – – 15,494 8,884 – – 1,340 412 1,340 412 – – (11,521) (10,317) (11,521) (10,317) – – (4,620) (4,786) (4,620) (4,786) 15,494 8,884 (14,801) (14,691) 693 (5,807) (3,172 ) (1,608) – – (3,172) (1,608) 12,322 7,276 (14,801) (14,691) (2,479) (7,415) 60,400 38,641 52,484 55,113 112,884 93,754 43,738 33,310 22,228 26,375 65,966 59,685	Discontinued operations Toddler cars Cycling Other toys Sub-total Consolidated 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Restated) (Restated) (Restated) (Restated) (Restated) 4,501 25,874 2,519 5,360 3,775 4,971 10,795 36,205 166,345 180,892 184 663 103 146 154 135 441 944 532 978 4,685 26,537 2,622 5,506 3,929 5,106 11,236 37,149 166,877 181,870 (3,274) (7,452) (1,724) (1,365) (2,828) (930) (7,826) (9,747) 7,668 (863 – 8,030 1,340 8,442 – – (11,521) (10,317 (29) – (4,649) (4,786 (7,855) (1,717) (7,162) (7,524 – – (3,172) (1,608 (7,855) (1,717) (10,334) (9,132 – 13,428 – 4,746 – 3,544 – 21,718 112,884 115,472 5,123 24,000 118,007 139,472 – 2,692 – 717 – 5,453 – 8,862 65,966 68,547 44,558 65,480 110,524 134,027

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. SEGMENT INFORMATION (Continued)

(a) Business segments (Continued)

Other segment information: Depreciation and recognition of prepaid land lease payments Impairment of items of property, plant and equipment Provision/(write-back of provision) against inventories Provision for impairment of accounts receivable Equity settled share option expenses Capital expenditure	Continuing operations Supply and Corporate and procurement others Sub-total 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Restated) (Restated) 126 – 2,660 5,843 2,786 5,843 – – – – – – (485 ) 485 – – (485) 485 – – – – – – – – 466 – 466 – 296 – – 182 296 182	Discontinued operations Toddler cars Cycling Other toys Sub-total Consolidated 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Restated) (Restated) (Restated) (Restated) (Restated) 1,109 950 620 1,569 928 1,258 2,657 3,777 5,443 9,620 1,624 60 892 28 1,357 23 3,873 111 3,873 111 – 175 – 96 – 72 – 343 (485) 828 – 207 – 43 – 40 – 290 – 290 – – – – – – – – 466 – 185 323 – 130 – 46 185 499 481 681

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. SEGMENT INFORMATION (Continued)

(b) Geographical segments

The following tables present revenue and certain asset and expenditure information for the Group’s geographical segments for the years ended 31 March 2006 and 2005.

Group

Group
							Asia Pacific Region
							(including Hong Kong
							and Mainland China
							but excluding
	North America		Europe		Singapore		Singapore)	Others		Consolidated
	2006	2005	2006	2005	2006	2005	2006 2005	2006	2005	2006	2005
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000 HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
							(Restated)				(Restated)
Segment revenue:
Sales to external
customers	1,141	2,037	6,248	25,172	155,550	144,687	3,406 5,100	–	3,896	166,345	180,892
Attributable to
discontinued operations	(1,141)	(2,037)	(6,248)	(25,172)	–	–	(3,406) (5,100)	–	(3,896)	(10,795)	(36,205)
Revenue from:
continuing operations	–	–	–	–	155,550	144,687	– –	–	–	155,550	144,687

Other segment
information:
Segment assets	–	8	–	5,210	63,344	40,547	54,663 93,707	–	–	118,007	139,472
Capital expenditure	–	–	–	–	296	–	185 681	–	–	481	681

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. REVENUE, OTHER INCOME AND GAINS

Revenue, which is also the Group’s turnover represents the net invoiced value of goods sold, after allowances for returns and trade discounts during the year.

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

Continuing Discontinued operations operations Total 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Revenue Sale of goods 155,550 144,687 10,795 36,205 166,345 180,892 Other income	Continuing Discontinued operations operations Total 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Revenue Sale of goods 155,550 144,687 10,795 36,205 166,345 180,892 Other income	Continuing Discontinued operations operations Total 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Revenue Sale of goods 155,550 144,687 10,795 36,205 166,345 180,892 Other income	Continuing Discontinued operations operations Total 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Revenue Sale of goods 155,550 144,687 10,795 36,205 166,345 180,892 Other income	Continuing Discontinued operations operations Total 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Revenue Sale of goods 155,550 144,687 10,795 36,205 166,345 180,892 Other income	Continuing Discontinued operations operations Total 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Revenue Sale of goods 155,550 144,687 10,795 36,205 166,345 180,892 Other income	Continuing Discontinued operations operations Total 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Revenue Sale of goods 155,550 144,687 10,795 36,205 166,345 180,892 Other income	Continuing Discontinued operations operations Total 2006 2005 2006 2005 2006 2005 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 Revenue Sale of goods 155,550 144,687 10,795 36,205 166,345 180,892 Other income


Interest income Rental income Others Gains	267 654 487 1,408	24 – 301 325	– – 441 441	1 – 562 563	267 654 928 1,849		25 – 863
							888

Waiver of accounts payables Gain on disposal of items of property, plant and equipment Exchange gain, net FINANCE COSTS Interest on: Bank loans, overdrafts and other loans wholly repayable within five years Convertible note and bonds Attributable to discontinued operations Attributable to continuing operations reported in the consolidated income statement	– 23 – 23 1,431	81 – 40 121 446	– – – – 441	213 – 294 – 23 – 168 – 208 381 23 502 944 1,872 1,390 Group 2006 2005 HK$’000 HK$’000 (Restated) 4,619 3,618 30 1,168 4,649 4,786 29 – 4,620 4,786 4,649 4,786			294 – 208
							502
							1,390


						4,786

						– 4,786
						4,786

6. FINANCE COSTS

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

7. PROFIT/(LOSS) BEFORE TAX

The Group’s profit/(loss) before tax is arrived at after charging/(crediting):

Cost of inventories sold Depreciation of items of property, plant and equipment_(note 14) Depreciation of investment properties(note 15) Recognition of prepaid land lease payments (note 16) Provision for impairment of accounts receivable Minimum lease payments in respect of land and buildings Auditors’ remuneration Employee benefits expense (excluding directors’ remuneration –_note 8): Wages and salaries Equity-settled share option expenses Pension scheme contributions Foreign exchange differences, net Impairment of items of property, plant and equipment Provision/(write-back of provision) against inventories Revaluation surplus on leasehold buildings Gross and net rental income	Continuing operations 2006 2005 HK$’000 HK$’000 (Restated) 136,723 132,223 1,665 2,146 430 – 728 728 – 290 450 633 1,180 1,080 2,951 2,859 466 – 124 251 3,541 3,110 2,194 (40) – – (485) 485 – – 654 –	Discontinued operations 2006 2005 HK$’000 HK$’000 (Restated) 6,726 23,729 2,620 6,746 – – – – – – 155 108 – – 1,732 5,412 – – 21 53 1,753 5,465 (43) (168) 3,873 111 – 343 – (1,164) – –	Total 2006 2005 HK$’000 HK$’000 (Restated) 143,449 155,952 4,285 8,892 430 – 728 728 – 290 605 741 1,180 1,080 4,683 8,271 466 – 145 304 5,294 8,575 2,151 (208) 3,873 111 (485) 828 – (1,164) 654 –

At 31 March 2006 the Group had no forfeited contributions available to reduce its contributions to pension schemes in future years (2005: Nil).

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

8. DIRECTORS’ REMUNERATION

Directors’ remuneration for the year, disclosed pursuant to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and Section 161 of the Hong Kong Companies Ordinance, is as follows:

Fees: Executive directors Independent non-executive directors Other emoluments of executive directors: Salaries, other allowances and benefits in kind Equity-settled share option expenses Pension scheme contributions	Group 2006 HK$’000 – 300 300 1,040 380 52 1,472 1,772	2005 HK$’000 – 240
		240
		1,279 – 64
		1,343
		1,583

During the year, certain directors were granted share options, in respect of their services to the Group, under the share option scheme of the Company, further details of which are set out in note 28 to the financial statements. The fair value of such options, which has been amortised to the income statement, was determined as at the date of the grant and included in the above directors’ remuneration disclosures.

(a) Independent non-executive directors

The fees paid to independent non-executive directors during the year were as follows:

Mr. Wong Kwok Tai Mr. Lau Pok Lam Mr. Ko Kwong Woon, Ivan Mr. Wu Wing Kit	Group 2006 HK$’000 100 100 100 – 300	2005 HK$’000 80 80 42 38
		240

There were no other emoluments payable to the independent non-executive directors during the year (2005: Nil)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

8. DIRECTORS’ REMUNERATION (Continued)

(b) Executive directors

	Salaries, other	Equity-
	allowances	settled	Pension
	and benefits	share option	scheme	Total
	in kind	expenses	contribution	remuneration
	HK$’000	HK$’000	HK$’000	HK$’000
2006
Executive directors:
Mr. Lo Ming Chi, Charles	520	76	26	622
Mr. Yu Wai Man	260	76	13	349
Mr. Ng Eng Leng	260	76	13	349
Mr. Wilson Ng	–	76	–	76
Mr. Ng Wee Keat	–	76	–	76
	1,040	380	52	1,472
2005
Executive directors:
Mr. Lo Ming Chi, Charles	520	–	26	546
Mr. Yu Wai Man	250	–	13	263
Mr. Ng Eng Leng	260	–	13	273
Mr. Wilson Ng	–	–	–	–
Mr. Ng Wee Keat	–	–	–	–
Mr. Ng Teow Leng	249	–	12	261
	1,279	–	64	1,343

There was no arrangement under which a director waived or agreed to waive any remuneration during the year.

9. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees during the year included three (2005: four) directors, details of whose remuneration are set out in note 8 above. Details of the remuneration of the remaining two (2005: one) non-director, highest paid employees for the year are as follows:

Basic salaries, other allowances and benefits in kind Equity-settled share option expenses Pension scheme contributions	Group 2006 HK$’000 436 56 22 514	2005 HK$’000 252 – 13
		265

The remuneration of all non-director, highest paid employees fell within the band of nil to HK$1,000,000 for the years ended 31 March 2006 and 2005.

During the year, there were no bonuses paid to or receivable by any of the five highest paid employees of the Group (2005: Nil). No emoluments were paid by the Group to any of the five highest paid employees as an inducement to join, or upon joining the Group, or as compensation for loss of office (2005: Nil).

During the year, share options were granted to a non-director, highest paid employee in respect of his services to the Group, further details of which are included in the disclosures in note 28 to the financial statements. The fair value of such options, which has been charged to the income statement, was determined as at the date of the grant and was included in the above non-director, highest paid employees’ remuneration disclosures.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10. 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 (2005: Nil). 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.

Group: Current – elsewhere and tax charge for the year	2006 HK$’000 (3,172)	2005 HK$’000 (1,608)

A reconciliation of the tax credit/(expense) applicable to the profit/(loss) before tax using the statutory rates for the locations in which the Company and its subsidiaries are domiciled to the tax credit/(expense) at the effective tax rates is as follows:

Group – 2006

Profit/(loss) before tax (including loss from discontinued operations) Tax at the applicable tax rate Income not subject to tax Expenses not deductible for tax Tax losses not recognised Tax charge at the Group’s effective rate Tax charge attributable to discontinued operations_(note 11) Tax charge attributable to continuing operations reported in the consolidated income statement Group – 2005 Profit/(loss) before tax (including loss from discontinued operations) Tax at the applicable tax rate Income not subject to tax Expenses not deductible for tax Tax losses not recognised Tax charge at the Group’s effective rate Tax charge attributable to discontinued operations(note 11)_ Tax charge attributable to continuing operations reported in the consolidated income statement	Hong Kong HK$’000 (22,619) 3,958 349 (655) (3,652) – Hong Kong HK$’000 (Restated) (16,405) 2,871 1,721 (326) (4,266) –	Singapore HK$’000 15,457 (3,091) 114 (195) – (3,172) Singapore HK$’000 (Restated) 8,881 (1,776) 168 – – (1,608)	Total HK$’000 (7,162) 867 463 (850) (3,652) (3,172) – (3,172) Total HK$’000 (Restated) (7,524) 1,095 1,889 (326) (4,266) (1,608) – (1,608)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

11. DISCONTINUED OPERATIONS

On 31 August 2005, pursuant to a sale and purchase agreement entered into between the Group and an independent third party, the Group agreed to dispose of its entire equity interest in Gadgets Yard Limited and its subsidiary (together known as the “GY Group”) together with the relevant shareholder’s loan. The GY Group is engaged in the design, manufacture and sale of a wide range of toys.

The results of the discontinued operations for the year are presented below:

Revenue Expenses Finance costs Loss before tax Tax Loss for the year from the discontinued operations	2006 HK$’000 10,795 (18,621) (29) (7,855) – (7,855)	2005 HK$’000 36,205 (37,922) – (1,717) – (1,717)

The net cash flows incurred by the discontinued operations are as follows:

		2006	2005
		HK$’000	HK$’000
Operating activities		(5,696)	(2,495)
Investing activities		(189)	(569)
Financing activities		4,650	6,120
Net cash inflow/(outflow)		(1,235)	3,056

Loss per share:
Basic, from the discontinued operations	HK9.1 cents		HK1.3 cents
Diluted, from the discontinued operations		N/A	N/A

The calculations of basic loss per share from the discontinued operations are based on:
		2006	2005
Net loss attributable to ordinary equity
holders of the Company
from the discontinued operations	HK$7,495,000		HK$1,046,000
Weighted average number of ordinary
shares in issue during the year
used in the basic loss
per share calculation		82,704,014	82,704,014

Diluted loss per share amounts for the years ended 31 March 2006 and 2005 have not been disclosed as the convertible note and bonds and share options outstanding during the year had an anti-dilutive effect on the basic loss per share from the discontinued operations.

12. NET LOSS FROM ORDINARY ACTIVITIES ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY

The net loss from ordinary activities attributable to equity holders of the Company for the year ended 31 March 2006 dealt with in the financial statements of the Company was HK$8,843,000 (2005: HK$59,434,000 (restated)) (note 29(b)).

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

13. LOSS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE COMPANY

The calculation of basic loss per share amounts is based on the net loss for the year attributable to equity holders of the Company for the year of HK$15,994,000 (2005: HK$12,047,000 (restated)), and the weighted average of 82,704,014 (2005: 82,704,014, restated to reflect the share consolidation as set out in note 27(b)(iv)) ordinary shares in issue during the year, as adjusted to reflect the capital reorganisation during the year.

14. PROPERTY, PLANT AND EQUIPMENT

Group

31 March 2006 At 31 March 2005 and at 1 April 2005: Cost or valuation Accumulated depreciation and impairment Net carrying amount At 1 April 2005, net of accumulated depreciation and impairment Additions Disposals Impairment Depreciation provided during the year Transfer to investment properties_(note 15)_ At 31 March 2006, net of accumulated depreciation and impairment At 31 March 2006: Cost Accumulated depreciation and impairment Net carrying amount	Leasehold Buildings improvements HK$’000 HK$’000 23,170 22,544 – (22,438) 23,170 106 23,170 106 – – – (5) – (46) (1,303) (39) (21,867) – – 16 – 24 – (8) – 16	Moulds, plant and machinery HK$’000 89,023 (82,315) 6,708 6,708 185 (772) (3,501)# (2,620) – – 88,302 (88,302) –	Furniture, fixtures, equipment and motor Construction vehicles in progress HK$’000 HK$’000 5,043 32,288 (4,356) (32,288) 687 – 687 – 296 – (82) – (326) – (323) – – – 252 – 1,592 32,288 (1,340) (32,288) 252 –	Total HK$’000 172,068 (141,397)
				30,671

				30,671 481 (859) (3,873) (4,285) (21,867)
				268

				122,206 (121,938)
				268

The Group has discontinued its toddler cars segment, cycling segment and other toys segment after the disposal of the GY Group during the year. As a result, the directors are of the opinion that the recoverable value of the relevant moulds, plant and machinery for manufacturing of toys is minimal. Accordingly, a full provision for impairment was made for these moulds, plant and machinery.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14. PROPERTY, PLANT AND EQUIPMENT (Continued)

Group (Continued)

31 March 2005 At 31 March 2004 and at 1 April 2004: Cost or valuation Accumulated depreciation and impairment Net carrying amount At 1 April 2004, net of accumulated depreciation and impairment Additions Write-off Revaluation Depreciation provided during the year At 31 March 2005, net of accumulated depreciation and impairment At 31 March 2005: Cost or valuation Accumulated depreciation and impairment Net carrying amount Analysis of cost or valuation: At cost At 31 March 2005 valuation	Leasehold Buildings improvements HK$’000 HK$’000 (Restated) 23,790 22,620 – (22,411) 23,790 209 23,790 209 – 24 – (72) 1,164 – (1,784) (55) 23,170 106 23,170 22,544 – (22,438) 23,170 106 – 22,544 23,170 – 23,170 22,544	Moulds, plant and machinery HK$’000 88,512 (75,569) 12,943 12,943 511 – – (6,746) 6,708 89,023 (82,315) 6,708 89,023 – 89,023	Furniture, fixtures, equipment and motor Construction vehicles in progress HK$’000 HK$’000 4,976 32,288 (4,089) (32,288) 887 – 887 – 146 – (39) – – – (307) – 687 – 5,043 32,288 (4,356) (32,288) 687 – 5,043 32,288 – – 5,043 32,288	Total HK$’000 172,186 (134,357)
				37,829

				37,829 681 (111) 1,164 (8,892)
				30,671

				172,068 (141,397)
				30,671

				148,898 23,170
				172,068

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14. PROPERTY, PLANT AND EQUIPMENT (Continued)

Company

At 31 March: Cost or valuation Accumulated depreciation and impairment Net carrying amount At 1 April, net of accumulated depreciation and impairment Additions Depreciation provided during the year At 31 March, net of accumulated depreciation and impairment At 31 March: Cost Accumulated depreciation and impairment Net carrying amount	Furniture, fixtures equipment and motor vehicles 2006 2005 HK$’000 HK$’000 631 615 (610) (574) 21 41 21 41 – 16 (9) (36) 12 21 631 631 (619) (610) 12 21	Furniture, fixtures equipment and motor vehicles 2006 2005 HK$’000 HK$’000 631 615 (610) (574) 21 41 21 41 – 16 (9) (36) 12 21 631 631 (619) (610) 12 21
		41

		41 16 (36)
		21

		631 (610)
		21

Had the Group’s leasehold buildings been stated at cost less accumulated depreciation, their carrying amounts would have been approximately HK$23,170,000 as at 31 March 2005.

15. INVESTMENT PROPERTIES

Cost: Transfer from owner-occupied properties_(note 14)_ Accumulated depreciation: Provided for the year Net book value: At end of year	Group 2006 HK$’000 21,867 (430) 21,437	2005 HK$’000 – –
		–

The fair value of the Group’s investment properties as at 31 March 2006 was HK$21,560,000 based on valuation performed by Knight Frank Petty Limited, a firm of independent professionally qualified valuers, on a depreciated replacement cost basis at 31 March 2006.

At 31 March 2006, all of the Group’s investment properties were pledged to secure general banking facilities granted to the Group (note 21).

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. PREPAID LAND LEASE PAYMENTS

Carrying amount at 1 April As previously reported Effect of adopting HKAS 17_(note 2.3(a))_ Recognised during the year Carrying amount at 31 March Current portion Non-current portion	Group 2006 HK$’000 – 31,272 31,272 (728) 30,544 (728) 29,816	2005 HK$’000 – 32,000 32,000 (728) 31,272 (728) 30,544

The prepaid land lease payments are paid for the right to use certain lands under long term leases in Mainland China.

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 land use rights (the “Land”) in Mainland China with a carrying value of HK$26,416,000 as at 31 March 2006 (2005: HK$27,041,000). 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 starting from 2008 (note 32).

The Group has not yet obtained the land use rights certificate for the Land. Having consulted with the Group’s Mainland China lawyers, the director’s considered that the Group has the right to use the Land and after the payment of a premium of approximately HK$13,400,000 and attending the necessary administrative procedures, the Group should be able to obtain the land use rights certificate for the Land.

At 31 March 2006, the Group’s prepaid land lease payments with a value of HK$4,128,000 were pledged to secure general banking facilities granted to the Group (note 21).

17. INVESTMENTS IN SUBSIDIARIES

Unlisted shares, at cost Less: Provision for impairment Due from a subsidiary Less: Provision for impairment	Company 2006 2005 HK$’000 HK$’000 68,709 68,709 (68,709) (68,709) – – 212,467 217,922 (212,467) (217,922) – – – –

The amount due from a subsidiary included in the Company’s current assets is unsecured, interest-free, and has no fixed terms of repayment. The carrying amount of this amount due from a subsidiary, after provision for impairment, approximates to its fair value.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. INVESTMENTS IN SUBSIDIARIES (Continued)

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

	Place of	Nominal	Percentage of	Percentage of
	incorporation/	value of issued	equity attributable
	registration	ordinary	to the Company		Principal
Name	and operations	share capital	Direct	Indirect	activities
Hung Cheong Holdings	British Virgin Islands	Ordinary US$2,004	100	–	Investment holding
Limited	(“BVI”)/Hong Kong
Able Market Profits Limited	BVI	Ordinary US$1	100	–	Investment holding
Xin Toys Factory Limited	BVI/Hong Kong	Ordinary US$4	–	100	Ceased business
					during the year
Xin Toys International	Hong Kong	Ordinary HK$2	–	100	Ceased business
Limited					during the year
Huang Chiang Chen Hung	Hong Kong	Ordinary HK$1,000	–	100	Property holding
Cheong Plastics Factory		Non-voting deferred
Company Limited		HK$10,000*
Xin Procurement &	Singapore	Ordinary S$10,000	–	51	Supply and
Trading Pte. Ltd.					procurement of
(“Xin Procurement”)					equipment, goods
					and services for
					vessels

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, after a total sum of HK$1 trillion had 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.

18. INVENTORIES

Raw materials Work in progress Finished goods Goods held for resale	Group 2006 HK$’000 – – – 2,073 2,073	2005 HK$’000 3,313 656 3,303 2,630
		9,902

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

19. 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 to six months for major customers. Each customer has a maximum credit limit. Overdue balances are reviewed regularly by senior management. Account receivables are non-interest-bearing. The carrying amounts of the accounts receivable approximate to their fair values.

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

Within 30 days 31 to 60 days 61 to 90 days 91 to 180 days Over 180 days	Group 2006 HK$’000 13,138 10,629 13,083 17,046 3,795 57,691	2005 HK$’000 13,299 9,625 7,962 5,495 5,082
		41,463

20. ACCOUNTS PAYABLE

An aged analysis of the accounts payable 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 2006 HK$’000 6,848 2,868 372 591 2,246 12,925	2005 HK$’000 12,148 3,453 1,676 2,779 1,908
		21,964

The accounts payable are non-interest-bearing and are normally settled on 60 day terms. The carrying amounts of the accounts payable approximate to their fair values.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

21. INTEREST-BEARING BANK AND OTHER BORROWINGS

Effective interest rate (%) Maturity Bank loans – secured 6.3% 1 year Other loan – unsecured 4.0% 1 year Bank loans repayable within one year Other loan repayable: Within one year In the second year Total Portion classified as current liabilities Long term portion	Group 2006 2005 HK$’000 HK$’000 15,884 20,297 2,000 8,500 17,884 28,797 15,884 20,297 2,000 6,500 – 2,000 2,000 8,500 17,884 28,797 (17,884) (26,797) – 2,000	Company 2006 2005 HK$’000 HK$’000 – – 2,000 8,500 2,000 8,500 – – 2,000 6,500 – 2,000 2,000 8,500 2,000 8,500 (2,000) (6,500 – 2,000	Company 2006 2005 HK$’000 HK$’000 – – 2,000 8,500 2,000 8,500 – – 2,000 6,500 – 2,000 2,000 8,500 2,000 8,500 (2,000) (6,500 – 2,000
			8,500

			– 6,500 2,000
			8,500
			8,500 (6,500
			2,000

At 31 March 2006, the banking facilities of the Group were supported by:

(a) certain investment properties and prepaid land lease payments of the Group in Mainland China with an aggregate carrying value of approximately HK$25,565,000 (2005: HK$43,200,000) (notes 15 and 16); and

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

During the year ended 31 March 2005, a loan of HK$10,000,000 was granted by the holder of convertible note (the “Note Holder”) to surrogate the outstanding principal amount of the convertible note due to the Note Holder. The loan is unsecured, bears interest at 4% per annum and is repayable by six quarterly instalments from March 2005 onwards.

All the interest-bearing bank and other borrowings bear interest at fixed rates.

The carrying amounts of the Group’s and the Company’s current borrowings approximate their fair values. The carrying amounts and fair value of the Group’s non-current borrowings are as follows:

Other loan	Carrying amounts 2006 2005 HK$’000 HK$’000 – 2,000	Fair value 2006 2005 HK$’000 HK$’000 – 1,905

22. LOANS FROM THE IMMEDIATE HOLDING COMPANY

The loans from the immediate holding company were unsecured and bore interest at the rate of 3% per annum above the prime lending rate offered from time to time by The Hongkong and Shanghai Banking Corporation Limited. The amount was fully settled in current year.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

23. LOANS FROM MINORITY SHAREHOLDERS

The loans were advanced by certain minority shareholders of the Group’s subsidiaries. The loans are unsecured and interest-free. Pursuant to the shareholders’ agreements entered into between the Group and the minority shareholders of the respective subsidiaries, the minority shareholders have agreed not to demand the repayment of the loans until the respective subsidiaries have the ability to do so and have obtained prior consent from the Group for the repayment of the loans. The carrying amounts of the loans from minority shareholders approximate to their fair values.

24. DUE TO A MINORITY SHAREHOLDER AND A RELATED COMPANY

The amounts due to a minority shareholder and a related company are unsecured, interest-free and have no fixed terms of repayment. The carrying amounts of the amounts due to a minority shareholder and a related company approximate to their fair values.

25. CONVERTIBLE NOTE AND BONDS

Note Convertible note issued to Vision Century (a) Convertible bonds issued to the Bank Group (as defined below) (b)	Group and Company 2006 2005 HK$’000 HK$’000 (Restated) 26,674 – – 2,155 26,674 2,155	Group and Company 2006 2005 HK$’000 HK$’000 (Restated) 26,674 – – 2,155 26,674 2,155
		2,155

(a) On 30 March 2006, the Company issued a convertible note in the principal amount of HK$37,000,000, as part of the consideration for the release and discharge of the Group from all of its obligations and liabilities in respect of a loan advanced by Vision Century. Vision Century will have the right to convert the outstanding principal amount of the convertible note into shares at any time before 29 March 2009 at the initial conversion price of HK$0.205 per conversion share. The convertible note carry interest at a rate of 1% per annum, which is payable semi-annually in arrears on 31 March and 30 September.
(b) On 1 February 2002, the Group has entered into a bank compromise agreement with the Group’s Hong Kong bankers (the “Bank Group”). 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, as part of the consideration for the release and discharge of the Group from all of its obligations and liabilities in respect of bank borrowings advanced by the Bank Group. The convertible bonds bear interest at the rate of 5% per annum and are repayable by three instalments on each anniversary of issue. Interest is payable semi-annually. The convertible bonds would be convertible into the Company’s ordinary price of HK$0.2228 per share, as adjusted.

The fair value of the liability component was estimated at the issuance date using an equivalent market interest rate for a similar bond without a conversion option. The residual amount is assigned as the equity component and is included in shareholders’ equity.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25. CONVERTIBLE NOTE AND BONDS (Continued)

The net proceeds received from the issue of the convertible note and bonds have been split between the liability and equity components, as follows:

	Convertible	Convertible	Convertible	Convertible	Convertible
	note issued	bonds issued			note issued
	to Vision	to the Bank		to	Wise Wind
	Century		Group		Limited
	HK$’000		HK$’000		HK$’000
Nominal values of the convertible note
and bonds issued in prior years	–		6,500		16,000
Equity component	–		(517)		(2,123)
Interest expenses in prior years	–		918		2,292
Interest paid in prior years	–		(516)		(803)
Repayment made in prior years	–		(2,167)		–
Liability component at 1 April 2004	–		4,218		15,366
Interest expenses for the year
ended 31 March 2005	–		224		944
Interest paid for the year
ended 31 March 2005	–		(121)		(310)
Repayment made during the year
ended 31 March 2005	–		(2,166)		(6,000)
Loan granted by Note Holder
(note 21)	–		–		(10,000)
Liability component at 1 April 2005	–		2,155		–
Nominal values of the convertible note
issued in current year	37,000		–		–
Equity component	(10,344)		–		–
Interest expenses for the year	18		12		–
Repayment made in current year	–		(2,167)		–
Liability component at
31 March 2006	26,674		–		–

26. DEFERRED TAX

The Group has tax losses arising in Hong Kong of HK$25,100,000 (2005: HK$24,406,000) that are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as they have arisen in companies that have been lossmaking for some time.

The Group and the Company had no unprovided deferred tax at 31 March 2006.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

27. SHARE CAPITAL

Authorised: 10,000,000,000 (2005: 10,000,000,000) ordinary shares of HK$0.01 each Issued and fully paid: 82,704,014 (2005: 1,654,080,285) ordinary shares of HK$0.01 each	2006 HK$’000 100,000 827	2005 HK$’000 100,000

		16,541

The following changes in the Company’s issued share capital took place during the years ended 31 March 2005 and 2006:

(a) On 23 February 2005, the Company effected an open offer with assured allotments of one offer share for every two shares of HK$0.01 each held by shareholders as at 4 February 2005 and issued a total of 551,360,095 new ordinary shares of HK$0.01 each at an issue price of HK$0.04 per share. Cash proceeds of approximately HK$22,055,000, before the related expenses, were received by the Company. The excess of the offer price over the nominal value of the shares issued amounting to approximately HK$16,541,000 was credited to the share premium account.
(b) Pursuant to a special resolutions passed at a special general meeting of the Company held on 23 May 2005, a capital reorganisation (the “Capital Reorganisation”) involving, inter alia, the following steps was implemented:
(i) a reduction of the nominal value of each issued share from HK$0.01 each to HK$0.0005 each by the cancellation of HK$0.0095 per share (the “Capital Reduction”);
(ii) the cancellation of the entire amount standing to the credit of the share premium account of the Company (the “Share Premium Cancellation”);
(iii) the credit arising from the Capital Reduction and the Share Premium Cancellation were transferred to the contributed surplus account of the Company where they had utilised to eliminate the accumulated losses of the Company as at 30 September 2004; and
(iv) subject to the forthwith upon the Capital Reduction and Share Premium Cancellation, a consolidation of every 20 issued shares of HK$0.0005 each into one consolidated share of HK$0.01 each.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

27. SHARE CAPITAL (Continued)

A summary of the transactions during the years ended 31 March 2005 and 2006 with reference to the above movements in the Company’s issued ordinary share capital is set out below:

Issued capital

Notes At 1 April 2004 As previously reported Prior period adjustment in respect of convertible bonds_(note 2.5(b))_ As restated Issued on open offer (a) Share issue expenses At 31 March 2005 and 1 April 2005 (as restated) Capital Reorganisation (b) At 31 March 2006	Number of shares in issue 1,102,720,190 – 1,102,720,190 551,360,095 – 1,654,080,285 (1,571,376,271) 82,704,014	Issued share capital HK$’000 11,027 – 11,027 5,514 – 16,541 (15,714) 827	Share premium account HK$’000 43,303 351 43,654 16,541 (1,165) 59,030 (59,030) –	Total HK$’000 54,330 351 54,681 22,055 (1,165) 75,571 (74,744) 827

28. SHARE OPTION SCHEME

The Company operates a share option scheme (the “Scheme”) for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group’s operations. Eligible participants of the Scheme 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, the Company’s shareholders, and any minority shareholders in the Company’s subsidiaries. The 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 shares in respect of which options may be granted under the Scheme shall not exceed 10%, in nominal amount of the issued share capital of the Company on the adoption date of the Scheme (the “Scheme Mandate Limit”). Options which lapsed in accordance with the terms of this Scheme will not be counted for the purpose of calculating the Scheme Mandate Limit. The maximum number of shares issuable under share options to each eligible participant in the Scheme within any 12-month period, is limited to 1% of the shares of the Company in issue. Any further grant of share options in excess of this limit is subject to shareholders’ approval in a general meeting.

Share options granted to any director, chief executive, substantial shareholder of the Company, or to any of their associates, are subject to approval in advance by the independent non-executive directors of the Company. In addition, any grant of share options 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 closing price of the Company’s shares as stated in the daily quotations sheets issued by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) at the date of the grant) in excess of HK$5,000,000, within any 12-month period, are subject to shareholders’ approval in advance in a general meeting.

The offer of a grant of share options may be accepted within 30 days from the date of the offer, upon payment of a nominal consideration of HK$1 in total by the grantee. The exercise period of the share options granted is determinable by the directors or the expiry date of the Scheme, if earlier.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. SHARE OPTION SCHEME (Continued)

The exercise price of the share options is determinable by the directors in their absolute discretion, but in any event shall not be less than the greater of (i) the closing price of the Company’s shares as stated in the daily quotations sheet issued by the Stock Exchange on the date of the grant of the share options; (ii) the average Stock Exchange closing price of the Company’s shares as stated in the daily quotations sheets issued by the Stock Exchange for the five business days immediately preceding the date of grant of share options; and (iii) the nominal value of the Company’s share.

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

		Number of share options	Number of share options				Price of Company’s	shares***
							Exercisable
					Date of grant		price of	At grant
Name or category	Granted	Lapsed		At	of share	Exercisable period	share	date of
of participant	during the year	during the year	31	March 2006	options*	of share options	options**	options
							HK$	HK$
Directors
Mr. Lo Ming Chi,	800,000	–		800,000	29-07-05	29-07-05 to	0.295	0.295
Charles						28-07-07
Mr. Yu Wai Man	800,000	–		800,000	29-07-05	29-07-05 to	0.295	0.295
						28-07-07
Mr. Wilson Ng	800,000	–		800,000	29-07-05	29-07-05 to	0.295	0.295
						28-07-07
Mr. Ng Wee Keat	800,000	–		800,000	29-07-05	29-07-05 to	0.295	0.295
						28-07-07
Mr. Ng Eng Leng	800,000	–		800,000	29-07-05	29-07-05 to	0.295	0.295
						28-07-07
	4,000,000	–		4,000,000
Other employees	900,000	(100,000)		800,000	29-07-05	29-07-05 to	0.295	0.295
						28-07-07
Total	4,900,000	(100,000)		4,800,000

Notes to the reconciliation of share options outstanding during the year:

The share options granted to directors and other employees are vested upon granted.
** The exercise price of the share options is subject to adjustments in the case of capitalisation of profit and reserve, right or bonus issues, consolidation, subdivision or reduction of the share capital or other alternative in the capital structure of the Company.
*** The price of the Company’s shares disclosed as at the date of the grant of the share options is the closing price as stated in the daily quotations sheets issued by the Stock Exchange on the trading day immediately prior to the date of the grant of the options.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. SHARE OPTION SCHEME (Continued)

At the balance sheet date, the Company had 4,800,000 share options outstanding under the Scheme. The exercise in full of the remaining share options would, under the present capital structure of the Company, result in the issue of 4,800,000 additional ordinary shares of the Company and additional share capital of HK$48,000 and share premium of HK$1,368,000 (before issue expenses).

Pursuant to the passing of an ordinary resolution by shareholders at the special general meeting held on 23 May 2005, the Scheme Mandate Limit was refreshed. As at the date of the special general meeting held on 23 May 2005, there was an aggregate of 82,704,014 shares in issue. Upon the refreshment of the Scheme Mandate Limit, the Company may grant options entitling holders thereof to subscribe for 8,270,401 shares. Further details of the refreshment were disclosed in the circular dated 29 April 2005.

At the date of approval of these financial statements, the Company had 4,800,000 share options outstanding under the Scheme, which represented approximately 5.8% of the Company’s shares in issue as at that date.

The fair value of the share options granted during the year was HK$466,000.

The fair value of equity-settled share options granted during the year was estimated as at the date of grant, using a binomial model, taking into account the terms and conditions upon which the options were granted. The following table lists the inputs to the model used for the year ended 31 March 2006:

Expected	volatility (%)	55.00
Historical	volatility (%)	55.00
Risk-free	interest rate (%)	3.35
Expected	life of option (year)	2.00

The expected life of the options is based on the historical data over the past two years and is not necessarily indicative of the exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome.

No other feature of the options granted was incorporated into the measurement of fair value.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

29. DEFICITS

(a) Group

The amounts of the Group’s deficits and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity of the financial statements.

(b) Company

Share premium Contributed account surplus HK$’000 HK$’000 At 1 April 2004 43,303 – Prior year adjustment in respect of convertible note and bonds_(note 2.5(b)) 351 – As restated 43,654 – Issued on open offer (note 27(a)) 16,541 – Share issue expenses (1,165) – Loss for the year (as restated) – – At 31 March 2005 (as restated) 59,030 – At 1 April 2005 As previously reported 58,679 – Prior year adjustment in respect of convertible bond (note 2.5(b)) 351 – As restated 59,030 – Capital Reorganisation (note 27(b)(iv))_ (59,030) 3,085 Redemption of convertible bonds – – Equity-settled share option arrangement – – Share option lapsed during the year – – Loss for the year – – At 31 March 2006 – 3,085	Share option Accumulated reserve losses HK$’000 HK$’000 – (48,485) – (120) – (48,605) – – – – – (59,434) – (108,039) – (107,183) – (856) – (108,039) – 71,659 – 517 466 – (9) 9 – (8,843) 457 (44,697)	Total HK$’000 (5,182) 231 (4,951) 16,541 (1,165) (59,434) (49,009) (48,504) (505) (49,009) 15,714 517 466 – (8,843) (41,155)

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

30. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

(a) Major non-cash transactions

The Group had the following major non-cash transactions during the year ended 31 March 2005 and 2006:

(i) During the year ended 31 March 2005, a holder of convertible note granted a loan to the Group of HK$10,000,000 to surrogate the then outstanding principal amount of the convertible note which did not result in any cash flow.
(ii) At 30 March 2006, HK$37,856,000 (being the principal amount of a loan of HK$31,378,000 and accrued interest of HK$6,478,000) was owed by the Company to Vision Century. On the same date, the Company issued to Vision Century a convertible note in the principal amount of HK$37,000,000 as part of the consideration for the release and discharge of the Group from all of its obligations and liabilities in respect of the loan advanced by Vision Century. The Company settled the remaining accrued interest of HK$856,000 by cash from internal resources (note 25(a)).

(b) Disposal of subsidiaries

Net assets/(liabilities) disposed of: Property, plant and equipment Inventories Accounts receivable Prepayments, deposits and other receivables Cash and bank balances Accounts payable Other payables and accruals Loans from a minority shareholder Amount due to a director of a subsidiary Tax payable Minority interests Gain on disposal of subsidiaries Satisfied by: Cash	2006 HK$’000 859 9,138 4,312 697 1,861 (2,793) (594) (5,880) (4,650) – 1,552 4,502 66 4,568 4,568	2005 HK$’000 – – – 17 1 (6,602) (1,431) – – (5) – (8,020) 8,030 10 10

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

30. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (Continued)

(b) Disposal of subsidiaries (Continued)

An analysis of the net inflow of cash and cash equivalents in respect of the disposal of subsidiaries is as follows:

Cash consideration Cash and bank balances disposed of Net inflow of cash and cash equivalents in respect of the disposal of subsidiaries	2006 HK$’000 4,568 (1,861) 2,707	2005 HK$’000 10 (1
		9

The results of the subsidiaries disposed of in the year ended 31 March 2005 had no significant impact on the Group’s consolidated turnover or loss before tax for that year.

31. 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, 16 and 21 to the financial statements.

32. OPERATING LEASE ARRANGEMENTS

(a) As lessor

The Group leases its investment properties (note 15) under operating lease arrangements, with leases negotiated for terms of one year.

At 31 March 2006, the Group had total future minimum lease receivables under non-cancellable operating leases with its tenants falling due as follows:


	2006	2005
	HK$’000	HK$’000
Within one year	467	–

(b) As lessee

The Group leases certain of its office properties under operating lease arrangements. Leases for the properties are negotiated for terms of one year.

At 31 March 2006, 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 2006 HK$’000 312 – 312	2005 HK$’000 570 312
		882

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

32. OPERATING LEASE ARRANGEMENTS (Continued)

(b) As lessee (Continued)

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 fee of HK$118,000 in respect of the Land classified as prepaid land lease payments of the Group in Mainland China, with a carrying value of HK$26,416,000 at 31 March 2006, commencing from calendar year 2008 up to calendar year 2048 with a 20% increment for every five years (note 16).

33. COMMITMENTS

In addition to the operating lease commitments detailed in note 32, the Group had the following commitments at the balance sheet date:

Contracted, but not provided for: Machinery	Group 2006 HK$’000 –	2005 HK$’000 558

At the balance sheet date, the Company had no significant commitment.

34. RELATED PARTY TRANSACTIONS

Save as disclosed elsewhere, the Group also had the following related party transactions:

(a) On 12 May 2005, Gadgets Yard entered into a loan agreement with one of its director for a loan facility of HK$10,000,000. During the year, Gadgets Yard has drawn down HK$4,650,000 for its operation. In August 2005, Gadgets Yard and its subsidiary, as further set out in note 11, were disposed of to an unrelated third party of the Group.
(b) Pursuant to a shareholders’ agreement entered with the Group on 20 December 2003, a minority shareholder of Gadgets Yard advanced HK$5,880,000 to Gadgets Yard as its initial working capital. The terms of the advance are set out in note 23 to the financial statements. In August 2005, Gadgets Yard and its subsidiary, as further set out in note 11, were disposed of to an unrelated third party by the Group.
(c) On 20 February 2004, the Group entered into a shareholders’ agreement (the “Xin Procurement Agreement”) with Huang & Co (Singapore) Pte. Ltd. (“HCSPL”), a company incorporated in Singapore with limited liability, to form Xin Procurement in Singapore with limited liability. HCSPL is wholly-owned by New Century International Pte. Ltd. (“New Century”), a company incorporated in Singapore with limited liability. New Century is in turn wholly-owned by the parents of Mr. Wilson Ng and Mr. Ng Wee Keat, both of whom are executive directors of the Company and also directors of HCSPL. Pursuant to the Xin Procurement Agreement, the Group and HCSPL owned 51% and 49% of equity interests in Xin Procurement, respectively. On 20 February 2004, Xin Procurement entered into a supply agreement (the “Supply Agreement”) with HCSPL whereby Xin Procurement was appointed as a supplier of HCSPL for the supply of certain office equipment and office supplies, machinery, machinery parts, lubricating oil and bunkerage for vessels. By virtue of the interests of the parents of Mr. Wilson Ng and Mr. Ng Wee Keat in HCSPL, the formation of Xin Procurement and the transactions contemplated under the Supply Agreement constitute connected transactions or continuing connected transactions of the Company under Chapter 14A of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. These connected transactions were approved by the Company’s shareholders on a special general meeting held on 29 March 2004. Further details of the above transactions are set out in the Company’s circular dated 12 March 2004. During the current year, Xin Procurement made sales to HCSPL amounting to HK$17,688,000 (2005: HK$32,973,000).

Sale of office equipment and office supplies were made at the price equivalent to 10/9 times the cost incurred by the Group. Sale of machinery, parts, stores for the upkeeping of vessels, necessary victuals for the crew, lubricating oil and bunkerage for the operation of the vessels and appointment of surveyors and technical consultants for the vessels were made at the price equivalent to 100/98 times the cost incurred by the Group.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

34. RELATED PARTY TRANSACTIONS (Continued)

(d) Pursuant to the Xin Procurement Agreement, HCSPL advanced HK$1,127,000 to Xin Procurement as the initial working capital. The terms of the advance are set out in note 23 to the financial statements.
(e) During the year, HCSPL made advances of HK$27,850,000 (2005: HK$33,317,000) to Xin Procurement. At 31 March 2006, the outstanding balance owed by Xin Procurement to HCSPL amounted to HK$25,704,000 (2005: HK$12,643,000) which is unsecured, interest-free and have no fixed terms of repayment.
(f) As further set out in note 2.1(a) to the financial statements, Huang Worldwide Holding Limited, the immediate holding company of Vision Century, 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 operations as a viable going concern notwithstanding any present or future financial difficulties experienced by the Group up to 31 October 2007.
(g) During the year ended 31 March 2005, HK$275,000 were charged to the Group by HCSPL in respect of certain of the office premises leased to the Group. The rental expenses were determined between the Group and HCSPL.
(h) During the year, a management fee of HK$580,000 (2005: HK$370,000) was charged by HCSPL in respect of certain administrative services rendered to the Group. The management fee was determined between the Group and HCSPL.
(i) During the year, HCSPL reimbursed HK$100,000 (2005: HK$859,000) to the Group in respect of certain administrative expenses paid by the Group on behalf of HCSPL.
(j) During the year, the Group reimbursed expenses of HK$188,000 (2005: HK$795,000) to HCSPL in respect of certain administrative expenses paid by HCSPL on behalf of the Group.
(k) During the year ended 31 March 2005, the Group purchased from Huang Procurement Pte. Ltd. (“Huang Procurement”), a wholly-owned subsidiary of HCSPL, certain office equipment and office supplies, machinery, machinery parts, lubricants and bunkerage of HK$15,219,000 at cost.
(l) During the year, HCSPL paid HK$2,255,000 to certain of the Group’s suppliers on behalf of the Group in respect of its purchases of office equipment and office supplies, machinery, machinery parts, lubricants and bunkerage.
(m) During the year, Huang Procurement paid HK$29,283,000 to certain of the Group’s suppliers on behalf of the Group in respect of its purchases of office equipment and office suppliers, machinery, machinery parts, lubricants and bunkerage (2005: Nil).

35. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s principal financial instruments comprise cash and bank balances and short term time deposits, interest-bearing bank and other borrowings, loans from minority shareholders and the immediate holding company, amount due to minority shareholders and convertible note. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as accounts receivable and accounts payable, which arise directly from its operations.

It is, and has been, throughout the year under review, the Group’s policy that no trading in financial instruments shall be undertaken.

The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below.

Interest rate risk

The Group’s exposure to the risk of changes in market interest rates is minimal since the interest rate of all of the Group’s borrowings are fixed.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

35. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)

Foreign currency risk

The Group has transactional currency exposures in United States dollars, Singapore dollars and Malaysia Ringgit. Such exposures arise from the Group’s procurement business. During the year under review, the Group did not issue any financial instruments for hedging purposes.

Credit risk

The Group trades only with recognised and creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and the Group’s exposure to bad debts is not significant. For transactions that are not denominated in the functional currency of the relevant operating unit, the Group does not offer credit terms without the specific approval of the Head of Credit Control.

The credit risk of the Group’s other financial assets, which comprise cash and cash equivalents, arises from default of the counterparty, with a maximum exposure equal to the carrying amount of the instrument.

Since the Group trades only with recognised and creditworthy third parties, there is no requirement for collateral.

Liquidity risk

The Group’s objective is to ensure adequate funds to meet commitments associated with its financial liabilities. Cash flows are closely monitored on an ongoing basis.

36. COMPARATIVE AMOUNTS

As further explained in notes 2.3 and 2.5 to the financial statements, due to the adoption of new and revised HKFRSs 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 prior year adjustments have been made and certain comparative amounts have been reclassified and restated to conform with the current year’s presentation and accounting treatment.

37. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 25 July 2006. ”

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

4. MANAGEMENT DISCUSSION AND ANALYSIS

Set out below is the management discussion and analysis of the Group as extracted from the respective annual reports of the Company for the three years ended 31 March 2004, 2005 and 2006:

For the year ended 31 March 2004

BUSINESS OVERVIEW

The financial year of 2003/2004 continued to be a difficult year for the Group and also witnessed the worldwide economy dramatically hit by the Iraq war and the outbreak of Severe Acute Respiratory Syndrome (“SARS”). In the year under review, the Group was principally engaged in the design manufacture and sale of a wide range of toys. The Group recorded a turnover of HK$22,531,000, dropped by 40.9% from HK$38,092,000 recorded last year. Net loss from ordinary activities attributable to shareholders for the year was HK$30,898,000 as compared with a net profit of HK$37,432,000 for 2002/2003, which was mainly contributed from the gain of debt restructuring of HK$77,031,000. During the year under review, in view of the decrease in turnover and significantly smaller scale of operations, the Group’s turnover could not reach a scale that could recover the Group’s fixed cost.

To serve for the Group with a stable revenue income source and to diversify its business, the Group entered into with connected party on 20 February 2004 (1) a shareholders’ agreement for formation of a joint venture company namely as “Xin Procurement and Trading Pte. Ltd.” (“Xin Procurement”) for the provision of the supply and procurement business in which the Group and the connected party own 51% and 49% equity interest in Xin Procurement respectively; and (2) a supply agreement for the efficient and timely supply of certain office equipment and office supplies, machinery, parts, lubricating oil and bunker for vessels. The above transactions were approved by the independent shareholders at the special general meeting held on 29 March 2004.

RESULTS

For the year under review, the Group recorded its turnover of HK$22,531,000 (2003: HK$38,092,000) representing a decrease of 40.9% and its net loss attributable to shareholders of approximately HK$30,898,000 as compared to a profit of approximately HK$37,432,000 in 2003. The profit in 2003 was mainly contributed from the gain of debt restructuring of HK$77,031,000.

CHARGE ON GROUP’S ASSETS

Certain leasehold land and buildings with an aggregate carrying amount of HK$43,700,000 (2003: HK$45,400,000) as at 31 March 2004 were pledged to secure bank borrowings advanced to the Group.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

PENDING LITIGATIONS

Claims for outstanding trade debts were brought by several suppliers and other miscellaneous creditors against the Group in prior years in respect of goods supplied and services provided for, together with interests, costs and/or other relief, of approximately HK$2,129,000 in aggregate. A full provision thereof 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 at 31 March 2004.

CONTINGENT LIABILITIES

In the opinion of the directors, there is no significant contingent liabilities noted as at 31 March 2004.

LIQUIDITY AND FINANCIAL RESOURCES

As at 31 March 2004, the Group had neither unutilized banking facilities nor any hedging financial instruments. All borrowings of the Group were denominated either in Hong Kong dollars or Renminbi. HK$44,632,000 was at fixed interest rate, HK$13,378,000 was at floating interest rate and HK$5,880,000 was interest-free. The total indebtedness of the Group (representing the aggregate amounts of interest bearing loans from banks, financial institutions and loan providers) was approximately HK$63,890,000 and all the indebtedness was due within one to two years. The Group had net current liabilities of approximately HK$76,891,000 and shareholders’ fund of approximately HK$9,858,000. The Group’s gearing ratio was 6.5 for the year ended 31 March 2004.

FOREIGN CURRENCY EXPOSURE

Significant foreign currency exposure was not expected by the Group as sales to foreign customers were settled in US dollars and purchases of materials were in Hong Kong dollars or Renminbi.

HUMAN RESOURCES

As at 31 March 2004, the total number of employees of the Group was 531, among which 510 staff were based in PRC and 21 staff in Hong Kong. Apart from competitive remuneration package offered to the employees, share options may be granted by the Group to attract and retain talented employees. During the year, no share options has been granted.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

PROSPECTS

To promote the strength of the factory’s facilities, to build a pool of anchor clients with reliable business relationship and to penetrate the largest market of toys industry through new partnerships are the Group’s major objectives in toys business. The formation of the joint venture company and the entering into the supply agreement with the connected party not only enables the Group to diversify into the supply and procurement business but also provides the Group with a reliable and trustworthy client. With the growth in the supply and procurement business, the Directors believe that the joint venture company will enjoy better efficiency and economies of scale that would enable the Group to improve its profit margins and turnover. In the forthcoming years, the management will also strengthen the Group’s investments with stable revenue generating power.

For the year ended 31 March 2005

BUSINESS OVERVIEW

In the early 2004, the Group made a big step in its business development by setting up a non-wholly owned subsidiary named as Xin Procurement and Trading Pte. Ltd. (“Xin Procurement”) for the supply and procurement business in Asia Pacific region in which the Group and the connected person own 51% and 49% equity interest respectively. Xin Procurement commenced its business in April 2004 and has already made contribution to the Group. For the year ended 31 March 2005, Xin Procurement recorded a turnover of HK$144,687,000 and a profit of HK$7,273,000. Leveraging on our sourcing network, diverse customer base and the gradual recovery of the global economy, the management is confident that the Group is well equipped to diversify its business into the supply and procurement business which will serve to provide a stable revenue income source for the Group.

The year under review was a difficult year for the Group’s operation in toys business. Through the business partnership in a non-wholly owned subsidiary named as Gadgets Yard Limited, the Group has successfully broadened its clientele network and developed reliable relationship with customers. There was an increase of approximately 60.7% in toys business as compared with that of last year. However, the Group’s profitability was adversely affected by the surge in raw material costs and production overheads. Oil price increased significantly and hit a historical high in the second half of 2004. Price of plastic materials, the primary raw material utilized for the Group’s core product item – toddler cars, recorded a steep rise accordingly. In addition, labour shortage problem prevailed in Pearl River Delta region as well as the rise in statutory minimum wages of workers further added immense pressure on the profit margin of products. That affected the profitability of the Group in return and further aggravated the business environment in toys industry.

RESULTS

For the year under review, the Group recorded its turnover of HK$180,892,000 (2004: HK$22,531,000) representing an increase of approximately 702.9% and its loss attributable to shareholders of HK$11,079,000 (2004: HK$30,898,000).

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CHARGE ON GROUP’S ASSETS

Certain leasehold land and buildings with an aggregate carrying amount of HK$43,200,000 as at 31 March 2005 (2004: HK$43,700,000) were pledged to secure bank borrowings advanced to the Group.

CONTINGENT LIABILITIES

The Group’s design, manufacturing and sales of toys business is carried out by Xin Toys Factory Limited and Gadgets Yard Limited, two subsidiaries of the Company (the “Subsidiaries”), which have engaged a subcontractor in Dongguan, Mainland China, for the manufacturing process. The factory premises of the Group are located in Dongguan, Mainland China.

In May 2005, the Customs and Excise of Dongguan, Mainland China (the “Customs”) conducted an inspection at the factory premises of the Subsidiaries and took away certain documents belonging to the Group. The outcome of the inspection is still pending at the date of these financial statements.

The directors of the Company are satisfied that the business and operations of the Subsidiaries have been properly conducted and that there have been no irregularities in the operations of the Subsidiaries or by any of their management or staff.

As at the date of this report, the directors are not aware of any further action taken by the Customs against the Subsidiaries and there is no indication of any adverse actions will be taken against the Subsidiaries. Accordingly, in the opinion of the directors, based on current available information, no provision for any penalties or claims is required to be made in the financial statements.

Save as disclosed above, in the opinion of the directors, there is no significant contingent liabilities noted as at 31 March 2005.

PENDING LITIGATIONS

Claims for outstanding trade debts were brought by several suppliers and other miscellaneous creditors against the Group in prior years in respect of goods supplied and services provided, together with interest, costs and/or other relief, of approximately HK$392,000 (2004: HK$2,129,000) in aggregate.

In the opinion of the directors, adequate provisions have been made by the Group in respect of all these claims in the Group’s financial statements at 31 March 2005.

LIQUIDITY AND FINANCIAL RESOURCES

As at 31 March 2005, the Group had neither unutilized banking facilities nor any hedging financial instruments. All borrowings of the Group are denominated either in Hong Kong dollars or Renminbi or Singaporean dollars. HK$30,964,000 is at fixed interest rate, HK$34,528,000 is at

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

floating interest rate and HK$7,007,000 is interest-free. The total indebtedness of the Group (representing the aggregate amounts of loans from banks, financial institutions and loan providers) was HK$72,499,000. Among which, HK$35,971,000 will be repayable within one year and the remaining of HK$36,528,000 will be repayable within the second year. The Group had net current liabilities of HK$19,982,000 and shareholders’ fund of HK$20,166,000. The Group’s gearing ratio was approximately 3.6 for the year ended 31 March 2005.

During the year, the financial position of the Group has been improved. As at 31 March 2005, the Group’s aggregate cash on hand was HK$24,000,000. The improvement was mainly due to net proceed of HK$20,900,000 received by the Group following an allotment of 551,360,095 ordinary shares at HK$0.01 each on 23 February 2005 at a subscription price of HK$0.04 each at the basis of one right share for every two shares held.

CAPITAL REORGANIZATION

Subsequent to the balance sheet date, the directors proposed to effect a capital reorganization scheme on 13 April 2005, which involved the capital reduction of par value of the ordinary share capital of the Company from HK$0.01 each to HK$0.0005 each, the cancellation of the share premium account of the Company and the consolidation of every twenty shares of HK$0.0005 each resulting from the capital reduction into one consolidated share of HK$0.01 each. The capital reorganization was approved by the Company’s shareholders on 23 May 2005.

FOREIGN CURRENCY EXPOSURE

Significant foreign currency exposure was not expected by the Group as sales to foreign customers were settled in US dollars and purchases of materials were in Hong Kong dollars or Renminbi or Singaporean dollars.

HUMAN RESOURCES

As at 31 March 2005, the total number of employees of the Group was about 355, among which about 7 staff were based in Singapore, 333 staff were based in PRC and 15 staff in Hong Kong. Apart from competitive remuneration package offered to the employees, share option may be granted by the Group to attract and retain talented employees. During the year, no share options have been granted.

PROSPECTS

To summarize, the Group will continue to strive for cost saving measures to improve its profitability and to consider various alternatives to strengthen its capital base. One of the Group’s key strategies in the forthcoming year is to monitor and evaluate the toys business. The supply and procurement business is expected to be one of major engines for the Group’s growth. In addition, the Group will continue to explore other investment opportunities that have earning potentials to expand its existing operations and to diversify its business.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

For the year ended 31 March 2006

BUSINESS OVERVIEW

Since April 2004, the Group has been commencing its supply and procurement business in Asia Pacific Region for the supply of office equipment and office supplies, machinery, machinery parts, lubricating oil and bunkerage for vessels. With improvement in the economy of Southeast Asia Region and tight cost control, the Group recorded growth in both its turnover and results of the supply and procurement business. For the year ended 31 March 2006, the turnover and profit before tax of the supply and procurement business were HK$155,550,000 and HK$15,494,000, representing a significant increment of 7.5% and 74.4% respectively as compared with turnover of HK$144,687,000 and profit before tax of HK$8,884,000 for the year earlier.

Due to the persistent high level of price of plastic materials and production overheads, the toys business of the Group has operated at loss for several years. In order to exit the loss-making toys business and to focus on the profit-making supply and procurement business, the Group, during the year under review, disposed its entire interest in a group of subsidiaries, which is engaged in the design, manufacture and sale of a wide range of toys. Upon the completion of the disposal, the Group ceased its business in the design, manufacture and sale of a wide range of toys and made an one-off provision for impairment of HK$3,873,000, mainly in respect of moulds previously used in its toys business.

RESULTS

For the year ended 31 March 2006, the Group’s turnover amounted to HK$166,345,000 (2005: HK$180,892,000) and net loss attributable to equity holders of the Company was HK$15,994,000 (2005 restated: HK$12,047,000).

CAPITAL REORGANISATION

On 13 April 2005, the Company proposed to effect a capital reorganisation scheme, which involved (i) a reduction of the nominal value of each issued share from HK$0.01 each to HK$0.0005 each by the cancellation of HK$0.0095 per share; (ii) the cancellation of the entire amount standing to the credit of the share premium account of the Company; (iii) the credit arising from (i) and (ii) were transferred to the contributed surplus account of the Company where they had been utilized to eliminate the accumulated losses of the Company as at 30 September 2004; and (iv) a consolidation of every 20 issued shares of HK$0.0005 each into one consolidated share of HK$0.01 each. The capital reorganisation scheme was approved by the Company’s shareholders on 23 May 2005 at a special general meeting.

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CHARGE ON GROUP’S ASSETS

Certain investment properties and prepaid land lease payments of the Group in Mainland China with an aggregate carrying value of approximately HK$25,565,000 as at 31 March 2006 (31 March 2005: HK$43,200,000) were pledged to secure bank borrowings advanced to the Group.

CONTINGENT LIABILITIES

In the opinion of the directors, there was no significant contingent liabilities noted as at 31 March 2006.

PENDING LITIGATIONS

As at 31 March 2006, there was no pending litigations (31 March 2005: HK$392,000).

LIQUIDITY AND FINANCIAL RESOURCES

As at 31 March 2006, the Group had neither unutilized banking facilities nor any hedging financial statements. The Group’s net current liabilities were HK$17,364,000. Since there was a negative equity attributable to equity holders of the Company of HK$2,124,000 at the balance sheet, calculation of gearing ratio is not applicable.

As at 31 March 2006, the Group’s total indebtedness (representing the total interest-bearing loans and convertible note from banks, financial institutions and loan providers) was approximately HK$44,558,000 (31 March 2005 restated: HK$65,480,000) will be repayable within one to three years. All borrowings of the Group are at fixed interest rate and mainly denominated either in Hong Kong dollars or Renminbi.

On 30 March 2006, pursuant to the subscription agreement entered on 15 February 2006 between the Group and Vision Century Group Limited (“Vision Century”), the controlling shareholder of the Company, a 1% per annum convertible note in principal amount of HK$37,000,000 was issued to Vision Century as settlement of debts owed by the Group to Vision Century. The 1% convertible note is repayable in three years or convertible into the Company’s ordinary share of HK$0.01 at an initial conversion price of HK$0.205 each (subject to adjustment).

In order to strengthen the capital base of the Group and to improve the Group’s financial position, the directors have been considering various alternatives to strengthen the capital base of the Company through various fund-raising exercises.

FOREIGN CURRENCY EXPOSURE

All borrowings of the Group are denominated either in Hong Kong dollars or Renminbi or Singapore dollars or Malaysia Ringgit. The Group currently does not have a foreign currency hedging policy. However, management closely monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arise.

100

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

HUMAN RESOURCES

As at 31 March 2006, the Group employed a total of 16 employees, among which, 7 staff were based in Hong Kong and 9 were in Singapore. Apart from competitive remuneration package offered to the employees, discretionary bonuses and share options are granted to eligible staff based on individual performance.

PROSPECTS

In the past few years, the management adopted strategies to exit from unsound businesses and to strengthen the Group’s investments with stable revenue generating power. Going forward, the management is confident that the supply and procurement business should continue to do well with a sustainable growth. In addition, we remain optimistic about the prospects of further growth and explore new investment opportunities that having earning potentials to expand its existing operations and to diversify its business.

101

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

5. UNAUDITED INTERIM FINANCIAL STATEMENTS OF THE GROUP

Set out below are the unaudited financial statements together with the relevant notes to the financial statements extracted from the interim report of the Company for the six months ended 30 September 2006:

“Condensed Consolidated Income Statement

For the six months ended 30 September 2006

Notes
CONTINUING OPERATIONS
REVENUE
3
Cost of sales
Gross profit
Other income and gains
Selling and distribution costs
Administrative expenses
Other expenses
Finance costs
PROFIT/(LOSS) BEFORE TAX
4
Tax
5
PROFIT/(LOSS) FOR THE PERIOD
FROM CONTINUING OPERATIONS
DISCONTINUED OPERATIONS
6
Loss for the period from
discontinued operations
PROFIT/(LOSS) FOR THE PERIOD
Attributable to:
Equity holders of the Company
Minority interests
LOSS PER SHARE ATTRIBUTABLE TO
ORDINARY EQUITY HOLDERS
OF THE COMPANY
7
Basic
– For loss for the period
– For loss from continuing operations
Diluted
– For loss for the period
– For loss from continuing operations
DIVIDEND
8

Six months ended
30 September
2006
2005
(Unaudited)
(Unaudited)
HK$’000
HK$’000
93,237
72,942
(80,971)
(64,352)
12,266
8,590
877
609
(653)
(153)
(5,820)
(7,898)
(466)
(535)
(2,191)
(2,253)
4,013
(1,640)
(2,094)
(1,428)
1,919
(3,068)
–
(775)
1,919
(3,843)
(2,186)
(6,281)
4,105
2,438
1,919
(3,843)
(HK2.6 cents)
(HK7.6 cents)
(HK2.6 cents)
(HK7.1 cents)
N/A
N/A
N/A
N/A
NIL
NIL

102

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Condensed Consolidated Balance Sheet

As at 30 September 2006

Notes NON-CURRENT ASSETS Property, plant and equipment Investment properties Prepaid land lease payments Total non-current assets CURRENT ASSETS Inventories Accounts receivable 9 Prepaid land lease payments Prepayments, deposits and other receivables Cash and bank balances Total current assets CURRENT LIABILITIES Accounts payable 10 Tax payable Other payables and accruals Interest-bearing bank and other borrowings 11 Loan from a minority shareholder 12 Due to a minority shareholder 13 Due to a related company Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITY Convertible note 14 Net assets EQUITY Deficiency in assets attributable to equity holders of the Company Issued capital 15 Equity component of convertible note Deficits 17 Minority interests 17 Total equity	30 September 2006 (Unaudited) HK$’000 228 21,161 30,323 51,712 826 64,849 728 1,735 5,199 73,337 17,628 5,473 19,876 12,260 1,201 29,175 83 85,696 (12,359) 39,353 28,154 11,199 827 10,344 (14,348) (3,177) 14,376 11,199	31 March 2006 (Audited) HK$’000 268 21,437 29,816 51,521 2,073 57,691 728 871 5,123 66,486 12,925 3,172 22,495 17,884 1,127 25,704 543 83,850 (17,364) 34,157 26,674 7,483 827 10,344 (13,295) (2,124) 9,607 7,483

103

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Condensed Consolidated Statement of Changes in Equity

For the six months ended 30 September 2006

Total shareholders’ equity at 1 April
Exchange difference on translation
of the financial statements of foreign
entities and income recognised
directly in equity
Profit/(loss) for the period
Total recognised income and expense
for the period
Capital reduction
Share premium cancellation
Transfer of contributed surplus
Elimination of accumulated losses
Disinvestment of minority interests
in subsidiaries
Recognition of equity-settled share
based payments
Total shareholders’ equity at 30 September
Total recognised income and expense
for the period attributable to:
Equity holders of the Company
Minority interests

Six months ended
30 September
2006
2005
(Unaudited)
(Unaudited)
HK$’000
HK$’000
7,483
5,445
1,797
–
1,919
(3,843)
3,716
(3,843)
–
(15,714)
–
(59,030)
–
3,085
–
71,659
–
1,552
–
466
11,199
3,620
(2,186)
(6,281)
4,105
2,438
1,919
(3,843)

104

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Condensed Consolidated Cash Flow Statement

For the six months ended 30 September 2006

NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES NET CASH INFLOW/(OUTFLOW) FROM INVESTING ACTIVITIES NET CASH OUTFLOW FROM FINANCING ACTIVITIES NET DECREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of period Effect of foreign exchange rate changes, net Cash and cash equivalents at end of period ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances	Six months ended 30 September 2006 2005 (Unaudited) (Unaudited) HK$’000 HK$’000 4,853 (3,797) (4) 2,555 (4,998) (9,013) (149) (10,255) 5,123 24,000 225 – 5,199 13,745 5,199 13,745

105

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes to Condensed Consolidated Interim Financial Statements

For the six months ended 30 September 2006

1. ACCOUNTING POLICIES AND BASIS OF PRESENTATION

The unaudited condensed consolidated interim financial statements of the Group for the six months ended 30 September 2006 are prepared in accordance with the Hong Kong Accounting Standard (“HKAS”) No. 34 “Interim Financial Reporting” issued by the Hong Kong Institute of Certified Public Accountants and Appendix 16 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”). The accounting policies and basis of preparation adopted in the preparation of these unaudited condensed consolidated interim financial statements are the same as those used in the audited consolidated financial statements for the year ended 31 March 2006, except for the adoption of the following Hong Kong Financial Reporting Standards (“HKFRSs”) mandatory for accounting periods beginning on or after 1 April 2006.

HKAS 21 Amendment Net Investment in a Foreign Operation HKAS 39 Amendment The Fair Value Option HKAS 39 & HKFRS 4 Amendments Financial Guarantee Contracts HK (IFRIC) – Int 4 Determining whether an Arrangement contains a Lease

The adoption of the above HKFRSs has had no material impact on the Group’s results of operations for the current period or financial position at 30 September 2006 in the Group’s condensed consolidated interim financial statements.

2. SEGMENT INFORMATION

Segment information is presented by way of business segment, which is the primary reporting segment of the Group.

Continuing operations:

the supply and procurement segment supplies office equipment and office supplies, machinery, machinery parts, lubricating oil and bunkerage for vessels; and
the corporate and other segments consists of corporate income and expense items and holding of property.

Discontinued operations:

the toddler cars segment manufactures and trades children’s ride-on cars featuring working horns and turning wheels;
the cycling segment manufactures and trades children’s bicycles, tricycles and scooters; and
the other toys segment comprises the manufacture and the trading of pre-school toys, plastic utensils and other fashionable toys.

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

106

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

2. SEGMENT INFORMATION (Continued)

Business segments

The following tables present revenue and profit/(loss) for the Group’s business segments.

Six months ended 30 September 2006 (Unaudited)	Six months ended 30 September 2006 (Unaudited)	Six months ended 30 September 2006 (Unaudited)	Six months ended 30 September 2006 (Unaudited)	Six months ended 30 September 2006 (Unaudited)
Continuing operations			Discontinued	operations
Supply and procurement HK$’000 93,237 286 93,523 10,472 – – – 10,472 (2,094) 8,378	Corporate and others HK$’000 – – – – 591 (4,859 ) (2,191 ) (6,459 ) – (6,459 )	Sub-total HK’000 93,237 286	Cycling HK$’000 – – – –	Other toys HK$’000 – – – –
		93,523

Six months ended 30 September 2005 (Unaudited)	Six months ended 30 September 2005 (Unaudited)	Six months ended 30 September 2005 (Unaudited)	Six months ended 30 September 2005 (Unaudited)	Six months ended 30 September 2005 (Unaudited)
Continuing operations			Discontinued	operations
Supply and procurement HK$’000 72,942 57 72,999 7,163 – – – 7,163 (1,428) 5,735	Corporate and others HK$’000 – – – – 552 (7,102 ) (2,253 ) (8,803 ) – (8,803 )	Sub-total HK’000 72,942 57	Cycling HK$’000 2,555 74 2,629 (62 )	Other toys HK$’000 3,778 111 3,889 (390)
		72,999

107

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. REVENUE

Revenue, which is also the Group’s turnover, represents the net invoiced value of goods sold, after allowances for returns and trade discounts during the period.

4. PROFIT/(LOSS) BEFORE TAX

The Group’s profit/(loss) before tax is arrived at after charging:

Depreciation Amortisation of prepaid land lease payments Staff costs	Six months ended 30 September 2006 2005 (Unaudited) (Unaudited) HK$’000 HK$’000 965 2,361 375 364 862 2,604

5. TAX

No Hong Kong profits tax has been provided as the Group did not generate any assessable profits arising in Hong Kong during both periods. 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.

	Six months ended	Six months ended	Six months ended
	30	September
	2006			2005
	(Unaudited)	(Unaudited)
	HK$’000		HK$’000
Current – elsewhere and tax charge for the period	2,094			1,428

6. DISCONTINUED OPERATIONS

On 31 August 2005, pursuant to a sale and purchase agreement entered into between the Group and an independent third party, the Group agreed to dispose of its entire equity interest in Gadgets Yard Limited (“Gadgets Yard”) and its subsidiary (together known as “GY Group”) together with the relevant shareholder’s loan. GY Group is engaged in the design, manufacture and sale of a wide range of toys.

The loss for the period from the discontinued operations is analysed as follows:

Loss of the discontinued operations for the period Loss on disposal of GY Group	Six months ended 30 September 2006 2005 (Unaudited) (Unaudited) HK$’000 HK$’000 – (735 – (40 – (775	Six months ended 30 September 2006 2005 (Unaudited) (Unaudited) HK$’000 HK$’000 – (735 – (40 – (775
		(775

108

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6. DISCONTINUED OPERATIONS (Continued)

The results of the discontinued operations for the period are as follows:

Revenue
Cost of sales
Gross profit
Other income and gains
Selling and distribution costs
Administrative expenses
Finance costs
Loss before tax from discontinued operations
Tax
Loss for the period from discontinued operations
Attributable to:
Equity holders of the Company
Minority interests
Loss per share from discontinued operations:
– Basic
– Diluted
The net assets of GY Group at the date of disposal were as follows:
Net assets disposed of
Disinvestment of minority interests in subsidiaries
Loss on disposal
Total consideration, satisfied by cash
Net cash inflow arising on disposal:
Cash consideration
Cash and bank balances disposed of
Total consideration, satisfied by cash

Six months ended
30 September
2006
2005
(Unaudited)
(Unaudited)
HK$’000
HK$’000
–
10,946
–
(10,858)
–
88
–
317
–
(276)
–
(835)
–
(29)
–
(735)
–
–
–
(735)
–
(375)
–
(360)
–
(735)
–
(HK0.5 cent)
–
N/A
31 August 2005
(Unaudited)
HK$’000
2,955
1,552
(40)
4,467
4,467
(1,860)
2,607

109

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

6. DISCONTINUED OPERATIONS (Continued)

The net cash flows incurred by the discontinued operations are as follows:

	Six months ended	Six months ended	Six months ended
	30	September
	2006			2005
	(Unaudited)	(Unaudited)
	HK$’000		HK$’000
Net operating cash outflow	–			5,696

7. LOSS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE COMPANY

The calculation of basic loss per share amounts is based on the unaudited net loss for the period attributable to equity holders of the Company for the six months ended 30 September 2006 of HK$2,186,000 (Six months ended 30 September 2005: HK$6,281,000) and 82,704,014 (Six months ended 30 September 2005: 82,704,014) ordinary shares in issue during the period.

Diluted loss per share amounts for the six months ended 30 September 2006 and 2005 have not been disclosed as the convertible note and share options outstanding during the period had anti-dilutive effect on the basic loss per share for both periods.

8. DIVIDEND

The directors do not recommend the payment of any interim dividend for the six months ended 30 September 2006 (Six months ended 30 September 2005: Nil).

9. 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 to six months for major customers. Each customer has a maximum credit limit. Overdue balances are reviewed regularly by senior management. Accounts receivable are non-interest bearing. The carrying amounts of the accounts receivable approximate to their fair values.

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

30 September 2006 (Unaudited) HK$’000 Within 30 days 15,291 31 to 60 days 13,104 61 to 90 days 14,377 91 to 180 days 18,886 Over 180 days 3,191 64,849	31 March 2006 (Audited) HK$’000 13,138 10,629 13,083 17,046 3,795
	57,691

110

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10. ACCOUNTS PAYABLE

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

30 September 2006 (Unaudited) HK$’000 Within 30 days 9,977 31 to 60 days 4,449 61 to 90 days 426 91 to 180 days 222 Over 180 days 2,554 17,628	31 March 2006 (Audited) HK$’000 6,848 2,868 372 591 2,246
	12,925

The accounts payable are non-interest bearing and are normally settled on 60 day terms. The carrying amounts of the accounts payable approximate to their fair values.

11. INTEREST-BEARING BANK AND OTHER BORROWINGS

Effective 30 September interest 2006 rate Maturity (Unaudited) HK$’000 Bank loans – secured 6.1% 1 year 12,260 Other loan – unsecured 4.0% 1 year – 12,260	31 March 2006 (Audited) HK$’000 15,884 2,000
	17,884

All the interest-bearing bank and other borrowings bear interest at fixed rates. The carrying amounts of the Group’s borrowings approximate to their fair values.

12. LOAN FROM A MINORITY SHAREHOLDER

The loan was advanced by a minority shareholder of a subsidiary of the Group operates in Singapore. The loan is unsecured and interest-free. Pursuant to the shareholders’ agreement entered into between the Group and the minority shareholder of the subsidiary, the minority shareholder has agreed not to demand the repayment of the loan until the subsidiary has the ability to do so and has obtained prior consent from the Group for the repayment of the loan. The carrying amount of the loan from the minority shareholder approximates to the fair value.

13. DUE TO A MINORITY SHAREHOLDER

The amount due to a minority shareholder is unsecured, interest-free and has no fixed terms of repayment. The carrying amount of the amount due to a minority shareholder approximates to the fair value.

14. CONVERTIBLE NOTE

On 30 March 2006, the Company issued a convertible note in the principle amount of HK$37,000,000 (the “Convertible Note”), as part of the consideration for the release and discharge of the Group from all of its obligations and liabilities in respect of a loan advanced by Vision Century Group Limited (“Vision Century”). Vision Century will have the right to convert the outstanding principle amount of the Convertible Note into shares at any time before 29 March 2009 at the initial conversion price of HK$0.205 per conversion share (subject to adjustments), which was subsequently adjusted to HK$0.141 per conversion share as a result of the open offer as set out in note 20. The Convertible Note carries interest at a rate of 1% per annum, which is payable semiannually in arrears on 31 March and 30 September.

111

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

14. CONVERTIBLE NOTE (Continued)

The net proceeds received from the issue of the Convertible Note has been split between the liability and equity components, as follows:

30 September
2006
(Unaudited)
HK$’000
Liability component at beginning of period/year
26,674
Nominal values of the Convertible Note issued in the period/year
–
Equity component
–
Interest expenses for the period/year
1,665
Repayment of interest expenses made in the period/year
(185)
Liability component at end of period/year
28,154
SHARE CAPITAL
30 September
2006
(Unaudited)
HK$’000
Authorised:
10,000,000,000
(31 March 2006: 10,000,000,000)
ordinary shares of HK$0.01 each
100,000
Issued and fully paid:
82,704,014
(31 March 2006: 82,704,014)
ordinary shares of HK$0.01 each
827

31 March
2006
(Audited)
HK$’000
–
37,000
(10,344)
18
–
26,674
31 March
2006
(Audited)
HK$’000
100,000
827

15. SHARE CAPITAL

Pursuant to an ordinary resolution passed at a special general meeting of the Company held on 26 September 2006, the Company, on 16 October 2006, effected an open offer with assured allotment of three offer shares for every one share of HK$0.01 each held by shareholders as at 26 September 2006 and issued a total of 248,112,042 new ordinary shares of HK$0.01 each at an issue price of HK$0.12 per share. Cash proceeds of approximately HK$29,773,000, before the related expenses, were received by the Company. The excess of the offer price over the nominal value of the shares issued amounting to approximately HK$27,292,000 was credited to the share premium account.

112

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

16. SHARE OPTIONS

The following share options were outstanding under the share option scheme during the period:

Number of share options Granted/ Exercisable Exercise At 1 (Exercised) At 30 period of price of April during the September Date of grant of share share 2006 period 2006 share options options options*** HK$ 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 4,000,000 – 4,000,000 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 4,800,000 – 4,800,000	Number of share options Granted/ Exercisable Exercise At 1 (Exercised) At 30 period of price of April during the September Date of grant of share share 2006 period 2006 share options options options*** HK$ 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 4,000,000 – 4,000,000 800,000 – 800,000 29 July 2005 29-07-05 to 0.295 28-07-07 4,800,000 – 4,800,000	Price of Company’s shares***
At 1 April 2006 800,000 800,000 800,000 800,000 800,000 4,000,000 800,000 4,800,000	Granted/ (Exercised) during the period – – – – – – – –	At grant At exercise date of date of options options HK$ HK$ 0.295 N/A 0.295 N/A 0.295 N/A 0.295 N/A 0.295 N/A 0.295 N/A

The share options granted to directors and other employees are vested upon granted.
** The exercise price of the share options is subject to adjustments in the case of capitalisation of profit and reserve, right or bonus issues, consolidation, subdivision or reduction of the share capital or other alternative in the capital structure of the Company.
*** The price of the Company’s shares disclosed as at the date of the grant of the share options is the closing price as stated in the daily quotations sheets issued by The Stock Exchange of Hong Kong Limited on the trading day immediately prior to the date of the grant of the options.

At the balance sheet date, the Company had 4,800,000 share options outstanding under the share option scheme. The exercise in full of the remaining share options would, under the present capital structure of the Company, result in the issue of additional 4,800,000 ordinary shares of the Company and additional share capital of HK$48,000 and share premium of HK$1,368,000 (before issue expenses).

Subsequent to the balance sheet date, the exercise price of the share options was adjusted from HK$0.295 to HK$0.230 and the aggregate number of share options was adjusted from 4,800,000 to 6,144,000 as a result of the open offer as set out in note 20.

Accordingly, each of the number of share options granted to Mr. Lo Ming Chi, Charles, Mr. Yu Wai Man, Mr. Wilson Ng, Mr. Ng Wee Keat and Mr. Ng Eng Leng was adjusted from 800,000 to 1,024,000; and the aggregate number of share options granted to other employees was adjusted from 800,000 to 1,024,000.

113

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. DEFICITS

Share premium account HK$’000 At 1 April 2006 – Exchange difference on translation of the financial statements of foreign entities – Profit/(Loss) for the period – At 30 September 2006 – * At 1 April 2005 59,030 Exchange difference on translation of the financial statements of foreign entities – Total income and expense for the year recognised directly in equity – Net profit/(loss) for the year – Total income and expense for the year Capital reduction – Share premium cancellation (59,030 ) Elimination of accumulated losses – Equity settled share option arrangements – Share options lapsed during the year – Disposal of subsidiaries – Redemption of convertible bonds – Issue of convertible note – At 31 March 2006 – *	Contributed surplus HK$’000 3,085 – – 3,085 * – – – – – 15,714 59,030 (71,659 ) – – – – – 3,085 *	Equity component of convertible note and bonds HK$’000 10,344 – – 10,344 517 – – – – – – – – – – (517 ) 10,344 10,344	Asset revaluation reserve HK$’000 – – – – * – – – – – – – – – – – – – – *	Exchange fluctuation reserve HK$’000 10 1,133 – 1,143 * – 10 10 – 10 – – – – – – – – 10 *	Share option reserve HK$’000 457 – – 457 – – – – – – – – 466 (9 ) – – – 457	Accumulated Sub- losses total HK$’000 HK$’000 (16,847 ) (2,951 ) – 1,133 (2,186 ) (2,186 ) (19,033) (4,004 ) (73,038 ) (13,491 ) – 10 – 10 (15,994 ) (15,994 ) (15,994 ) (15,984 ) – 15,714 – – 71,659 – – 466 9 – – – 517 – – 10,344 (16,847) (2,951 )	Minority interests HK$’000 9,607 664 4,105 14,376 2,395 – – 5,660 5,660 – – – – – 1,552 – – 9,607	Total HK$’000 6,656 1,797 1,919 10,372 (11,096 ) 10 10 (10,334 ) (10,324 ) 15,714 – – 466 – 1,552 – 10,344 6,656

These deficit accounts comprise the consolidated deficits of HK$14,348,000 (31 March 2006: HK$13,295,000) in the condensed consolidated balance sheet.

114

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. OPERATING LEASE ARRANGEMENTS

(a) As lessor

The Group leases its investment properties under operating lease arrangements, with leases negotiated for terms of one year.

At 30 September 2006, the Group had total future minimum lease receivables under non-cancellable operating leases with its tenant fallings due as follows:

30 September 2006 (Unaudited) HK$’000 Within one year 577	31 March 2006 (Audited) HK$’000 467

(b) As lessee

The Group leases certain of its office properties under operating lease arrangements. Leases for the properties are negotiated for terms of one to two years.

As at the balance sheet date, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

30 September 2006 (Unaudited) HK$’000 Within one year 280 In the second to fifth years, inclusive 243 523	31 March 2006 (Audited) HK$’000 312 –
	312

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 fee of HK$118,000 in respect of several land use rights classified as prepaid land lease payments of the Group in Mainland China, with a carrying value of HK$26,860,000 at 30 September 2006, commencing from calendar year 2008 up to calendar year 2048 with a 20% increment for every five years.

19. RELATED PARTY TRANSACTIONS

(a) On 12 May 2005, Gadgets Yard entered into a loan agreement with one of its director for a loan facility of HK$10,000,000. During the six months ended 30 September 2005, Gadgets Yard has drawn down HK$4,650,000 for its operation. In August 2005, Gadgets Yard and its subsidiary, as further set out in note 6, were disposed of to an unrelated third party of the Group.
(b) Pursuant to a shareholders’ agreement entered with the Group on 20 December 2003, a minority shareholder of Gadgets Yard advanced HK$5,880,000 to Gadgets Yard as its initial working capital. The advance was unsecured and interest-free. In August 2005, Gadget Yard and its subsidiary, as further set out in note 6, were disposed of to an unrelated third party by the Group.

115

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

19. RELATED PARTY TRANSACTIONS (Continued)

(c) On 20 February 2004, the Group entered into a shareholders’ agreement (the “Xin Procurement Agreement”) with Huang & Co (Singapore) Pte. Ltd. (“HCSPL”), a company incorporated in Singapore with limited liability, to form Xin Procurement & Trading Pte. Ltd. (“Xin Procurement”) in Singapore with limited liability. HCSPL is wholly-owned by New Century International Pte. Ltd. (“New Century”), a company incorporated in Singapore with limited liability. New Century is in turn wholly-owned by the parents of Mr. Wilson Ng and Mr. Ng Wee Keat, both of whom are executive directors of the Company and also directors of HCSPL. Pursuant to the Xin Procurement Agreement, the Group and HCSPL owned 51% and 49% of equity interests in Xin Procurement, respectively. On 20 February 2004, Xin Procurement entered into a supply agreement (the “Supply Agreement”) with HCSPL whereby Xin Procurement was appointed as a supplier of HCSPL for the supply of certain office equipment and office supplies, machinery, machinery parts, lubricating oil and bunkerage for vessels. By virtue of the interests of the parents of Mr. Wilson Ng and Mr. Ng Wee Keat in HCSPL, the formation of Xin Procurement and the transactions contemplated under the Supply Agreement constitute connected transactions and continuing connected transactions of the Company under Chapter 14A of the Listing Rules. These connected transactions were approved by the Company’s shareholders on a special general meeting held on 29 March 2004. Further details of the above transactions were set out in the Company’s circular dated 12 March 2004. During the period, Xin Procurement made sales to HCSPL amounting to HK$1,561,000 (Six months ended 30 September 2005: HK$8,338,000).

(d) Pursuant to the Xin Procurement Agreement, HCSPL advanced HK$1,201,000 to Xin Procurement as the initial working capital. The terms of the advance are set out in note 13.
(e) During the period, HCSPL made further advances of HK$1,980,000 (Six months ended 30 September 2005: HK$966,000) to Xin Procurement. At 30 September 2006, the outstanding balance owed by Xin Procurement to HCSPL amounted to HK$29,175,000 (31 March 2006: HK$25,704,000) which is unsecured, interest-free and have no fixed terms of repayment.
(f) Huang Worldwide Holding Limited, the immediate holding company of Vision Century, 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 operations as a viable going concern notwithstanding any present or future financial difficulties experienced by the Group up to 31 October 2007.
(g) During the period, a management fee of HK$294,000 (Six months ended 30 September 2005: HK$276,000) was charged by HCSPL in respect of certain administrative services rendered to the Group. The management fee was determined between the Group and HCSPL.
(h) During the period, the Group purchased from HCSPL certain office equipment and office supplies, machinery, machinery parts, lubricating oil and bunkerage of HK$1,099,000 at cost.
(i) During the six months ended 30 September 2005, the Group purchased from Huang Procurement Pte. Ltd., a wholly-owned subsidiary of HCSPL, certain office equipment and office supplies, machinery, machinery parts, lubricating oil and bunkerage of HK$538,000 at cost.
(j) During the period, Huang Procurement Sdn. Bhd. (“Huang Procurement”) an indirect wholly-owned subsidiary of HCSPL paid HK$17,732,000 (Six months ended 30 September 2005: HK$12,815,000) to certain of the Group’s suppliers on behalf of the Group in respect of its purchases of office equipment and office supplies, machinery, machinery parts, lubricants and bunkerage. At 30 September 2006, the outstanding balance owed by Xin Procurement to Huang Procurement amounted to HK$83,000 (31 March 2006: HK$543,000) which is unsecured, interest-free and have no fixed terms of repayment.

116

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

20. POST BALANCE SHEET EVENTS

On 16 October 2006, the Company effected an open offer with assured allotment of three offer shares for every share of HK$0.01 each held by shareholders as at 26 September 2006. The open offer resulted in the issue of 248,112,042 new ordinary shares of HK$0.01 each in the Company at a price of HK$0.12 per share. Cash proceeds of approximately HK$29,773,000, before the related expenses, were received by the Company. As a result of the open offer, the conversion price of the Convertible Note was adjusted (note 14). In addition, pursuant to the terms of the share option scheme, the exercise price and the aggregate number of the share options were adjusted (note 16).

On 22 November 2006, the Group entered into a conditional sale and purchase agreement to acquire from HCSPL (i) a 24% equity interest in the entire issued share capital of Xin Procurement (the “Sale Shares”); and (ii) the rights of and benefit in a loan of S$120,000 (equivalent to HK$600,000) advanced from HCSPL to Xin Procurement, representing 24% of the total principal amount of the shareholders’ loans in Xin Procurement (the “Sale Loan”) at an aggregate consideration of HK$7,126,560. The consideration is to be satisfied by the Company to issue a convertible note of HK$7,126,560 on completion. The convertible note carries interest at a rate of 1% per annum and will mature on the date preceding the third anniversary of the date of its issue, the initial conversion price will be HK$0.170. The transactions under the agreement, including the issue of the convertible note, constitute a very substantial acquisition and a connected transaction of the Company under the Listing Rules and are subject to the approval of the independent shareholders in a general meeting of the Company. For details, please refer to the Company’s announcement dated 24 November 2006.

21. APPROVAL OF THE INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated interim financial statements were approved and authorised for issue by the board of directors on 27 December 2006.”

117

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Following is the management discussion and analysis extracted from the interim report of the Company for the six months ended 30 September 2006:

Results

For the six months ended 30 September 2006, the Group’s turnover was approximately HK$93,237,000 which was about 11.1% greater than that of the corresponding period last year (30 September 2005: HK$83,888,000). Unaudited loss attributable to equity holders of the Company for the period was HK$2,186,000 (30 September 2005: HK$6,281,000), recording an improvement of 65.2%. Basic loss per share was HK2.6 cents (2005: HK7.6 cents).

Following the disposal of a loss-making group of subsidiaries engaged in the toys business in August 2005, the Group has been concentrating on the profit-making supply and procurement business. For the period under review, the performance by the supply and procurement business was satisfactory. It recorded a turnover HK$93,237,000 (2005: HK$72,942,000), representing an increase of 27.8% and a profit of HK$10,472,000, representing an increase of 46.2% as compared to HK$7,163,000 for the same period last year.

Since April 2004, the Group has been commencing its supply and procurement business in Asia Pacific Region by formation of a joint venture company namely as “Xin Procurement and Trading Pte. Ltd.” in which the Group and HCSPL own 51% and 49% equity interest respectively. With the improvement in the economy of Southeast Asia Region, tight cost control and the appreciation of Singapore dollars, the Group recorded double-digit growth in both turnover and results of the supply and procurement business. In order to strengthen the Group’s investment with stable revenue-generating power, on 22 November 2006, the Group entered into a conditional sale and purchase agreement to acquire from HCSPL (i) the Sale Shares; and (ii) the Sale Loan. Upon completion, the Group’s interests in Xin Procurement will be increased to 75%. The transactions under the agreement are subject to the approval of the independent shareholders in a forthcoming general meeting of the Company.

Charge on the Group’s Assets

Certain investment properties and prepaid land lease payments of the Group in Mainland China with an aggregate carrying value of HK$18,131,000 as at 30 September 2006 (31 March 2006: HK$25,565,000) were pledged to secure bank borrowings advanced to the Group.

Contingent Liabilities

In the opinion of the directors, there was no material contingent liability under the Group at the period end.

118

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Liquidity and Financial Resources

As at 30 September 2006, the Group had neither unutilized banking facilities nor any hedging financial statements. The Group’s net current liabilities were HK$12,359,000. Since there was a negative equity attributable to equity holders of the Company of HK$3,177,000 at the balance sheet date, calculation of gearing ratio is not applicable.

As at 30 September 2006, the Group’s total indebtedness (representing the total interest-bearing borrowing and convertible note from bank and loan provider) was approximately HK$40,414,000 (31 March 2006: HK$44,558,000) which will be repayable within one to three years. All borrowings of the Group are at fixed interest rate and mainly denominated either in Hong Kong dollars or Renminbi. As at 30 September 2006, the Group has current ratio of 0.86 (31 March 2006: 0.79) based on current assets of HK$73,337,000 and current liabilities of HK$85,696,000.

On 30 March 2006, pursuant to the subscription agreement entered on 15 February 2006 between the Group and Vision Century, the controlling shareholder of the Company, a 1% per annum convertible note in principal amount of HK$37,000,000 was issued to Vision Century as settlement of debts owed by the Group to Vision Century. The Convertible Note is repayable in three years or convertible into the Company’s ordinary share of HK$0.01 at an initial conversion price of HK$0.205 each (subject to adjustments), which was subsequently adjusted to HK$0.141 per conversion share as result of the open offer on 16 October 2006.

Post Balance Sheet Events

In order to strengthen the capital base of the Group and to improve the Group’s financial position, on 16 October 2006, the Company effected an open offer with assured allotment of three offer shares for every share of HK$0.01 each held by shareholders as at 26 September 2006. The open offer resulted in the issue of 248,112,042 new ordinary shares of HK$0.01 each in the Company at a price of HK$0.12 per share. Cash proceeds of approximately HK$29,773,000, before the related expenses, were received by the Company. As a result of the open offer, the conversion price of the Convertible Note was adjusted. In addition, pursuant to the terms of the share option scheme, the exercise price and the aggregate number of the share options were also adjusted.

On 22 November 2006, the Group entered into a conditional sale and purchase agreement to acquire from HCSPL (i) the Sale Shares; and (ii) the Sale Loan at an aggregate consideration of HK$7,126,560. The consideration is to be satisfied by the Company issuing a convertible note of HK$7,126,560. Upon completion, the Group’s interests in Xin Procurement will be increased to 75%. The transactions under the agreement, including the issue of the convertible note, constitute a very substantial acquisition and a connected transaction of the Company under the Listing Rules and are subject to the approval of the independent shareholders in a forthcoming general meeting of the Company. For details, please refer to the Company’s announcement dated 24 November 2006.

119

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Foreign Currency Exposure

All borrowings of the Group are denominated either in Hong Kong dollars or Renminbi or Singapore dollars. The Group currently does not have a foreign currency hedging policy. However, management closely monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arise.

Human Resources

As at 30 September 2006, the Group employed a total of 14 employees, among which, 6 staff were based in Hong Kong and 8 were in Singapore. Apart from competitive remuneration package offered to the employees, discretionary bonuses and share options are granted to eligible staff based on individual performance.

Prospects

In the long term, Asia Pacific Region’s economic performance remains promising and continues to have a positive effect on the local economy. The management is confident that the supply and procurement business will continue to be benefited from the improving economic prospects. To strengthen the prospects of further growth, we will continue to expand its existing operations, to look for new investment opportunities and to diversify its business.

6. STATEMENT OF INDEBTEDNESS

Borrowings

As at the close of business on 30 November 2006, 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$81.8 million comprising the following:

(a) secured bank loan of approximately HK$12.7 million;
(b) an unsecured loan from a minority shareholder of approximately HK$1.2 million;
(c) an unsecured payable to a minority shareholder of approximately HK$28.8 million;
(d) an unsecured payable to a related company of approximately HK$0.1 million;
(e) an unsecured Convertible Note of approximately HK$39.0 million (comprising liability component of approximately HK$28.7 million and equity component of approximately HK$10.3 million).

120

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Mortgages, charges and securities

As at 30 November 2006, the Group’s bank loan was supported by legal charges on certain of the Group’s investment properties and prepaid land lease payments in Mainland China with net book value of approximately HK$18.5 million and corporate guarantees executed by certain subsidiaries of the Company.

Disclaimer

Save as aforesaid and apart from intra-Group liabilities, none of the companies comprising the Group, as at the close of business on 30 November 2006, had any outstanding mortgages, charges or debentures, loan capital issued 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.

There has been no material change in indebtedness and contingent liabilities of the Group since 30 November 2006.

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 November 2006.

7. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 March 2006 (the date to which the latest audited financial statements of the Company were made up).

8. WORKING CAPITAL

On 16 October 2006, the Company effected an open offer with assured allotment of three offer shares for every share of HK$0.01 each held by shareholders as at 26 September 2006 to raise net proceeds of approximately HK$28.0 million. In addition, 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 2007. At present, the Group has undertaken a number of other measures in order to further relieve its current liquidity pressure.

The Group has obtained from a bank in Mainland China (the “Banker”) a new borrowing of RMB 12.8 million (equivalent to approximately HK$12.7 million), repayable on 26 April 2007 but the Group has also obtained written consent from the Banker agreeing to rollover this new borrowing for another one year from its original maturity date in April 2007, with monthly repayments of the principal in instalments of approximately HK$0.4 million from January 2007.

121

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Vision Century granted a credit facility of HK$50.0 million (the “Credit Facility”) to the Company on 2 July 2003. On 15 February 2006, the Company entered into a subscription agreement with Vision Century, for issuance of a convertible note in the principal amount of HK$37.0 million as part of the consideration for the release and discharge of the Group from all of its obligations and liabilities in respect of the loan from Vision Century. On 30 March 2006, the date the Existing Convertible Note was issued, approximately HK$37.9 million (being the principal amount of a loan of approximately HK$31.4 million and accrued interest of HK$6.5 million) was owed by the Company to Vision Century. The Company settled the remaining accrued interest of approximately HK$0.9 million by cash from internal resources. The Existing Convertible Note is repayable on 29 March 2009 while the credit facility of HK$50.0 million granted by Vision Century is still outstanding and is available until 31 October 2007.

The Directors are of the opinion that, in the absence of unforeseen circumstances and subject to the ability of Vision Century to honour the Credit Facility granted to the Group; the ability of Huang Worldwide to provide continuing financial support to the Group; and the rollover of the new borrowing of approximately HK$12.7 million granted by the Banker for another year from its original maturity date in April 2007, the Group will have sufficient working capital up to 31 January 2008. Otherwise, the Directors are of the opinion that the Group would not have adequate funds to enable it to operate as a going concern in the foreseeable future.

122

ACCOUNTANTS’ REPORT ON XIN PROCUREMENT

APPENDIX II

The following is the text of an accountants’ report on Xin Procurement, prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, Moore Stephens, Certified Public Accountants, Hong Kong.

==> picture [151 x 126] intentionally omitted <==

29 January 2007

The Directors

Xin Corporation Limited Xin Procurement & Trading Pte. Ltd.

Dear Sirs,

We set out below our report on the financial information regarding Xin Procurement & Trading Pte. Ltd. (“Xin Procurement”) for the period from 30 January 2004 (date of incorporation) to 31 March 2005, the year ended 31 March 2006 and the six-month periods ended 30 September 2005 and 2006 (the “Relevant Periods”) for inclusion in the circular of Xin Corporation Limited (the “Company”) dated 29 January 2007 (the “Circular”), in connection with the Company’s proposed acquisition of an additional 24% interest in Xin Procurement.

Xin Procurement was incorporated as a limited liability company in Singapore on 30 January 2004. During the Relevant Periods, the principal activity of Xin Procurement was a supplier of certain goods and services, including but not limited to, office equipment, office supplies, machinery, machinery parts, lubricating oil and bunkerage for vessels.

The financial information of Xin Procurement for the Relevant Periods (“Financial Information”) as set out in Sections I to VII below has been prepared from the audited financial statements of Xin Procurement for the Relevant Periods (the “Underlying Financial Statements”). The directors of Xin Procurement are responsible for preparing these financial statements which give a true and fair view. In preparing these financial statements, it is fundamental that appropriate accounting policies are selected and applied consistently.

The Underlying Financial Statements were audited by Moore Stephens, Singapore and have been prepared in accordance with Singapore Financial Reporting Standards.

123

ACCOUNTANTS’ REPORT ON XIN PROCUREMENT

APPENDIX II

For the purpose of this report, adjustments have been made where necessary to conform with Hong Kong Financial Reporting Standards. We have examined the Underlying Financial Statements and have carried out such additional procedures as are necessary in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants.

The directors of Xin Procurement and the Company are responsible for the preparation of the Financial Information. It is our responsibility to form an independent opinion, based on our examination, on the Financial Information and to report our opinion.

In our opinion, the Financial Information together with the notes thereto give, for the purpose of this report, a true and fair view of the state of affairs of Xin Procurement as at 31 March 2005 and 2006 and 30 September 2005 and 2006, and of the results and cash flows of Xin Procurement for each of the Relevant Periods.

FINANCIAL INFORMATION

I. Income Statement

For the period from 30 January 2004 (date of incorporation) to 31 March 2005, year ended 31 March 2006 and six months ended 30 September 2005 and 2006

30 January 2004 to 31 March 2005 Note HK$’000 Turnover 3 144,687 Cost of sales (132,223) Gross profit 12,464 Other revenue 3 34 Administrative expenses (3,603) Other expenses (11) Profit from operating activities 4 8,884 Finance costs 6 – Profit before taxation 8,884 Taxation 7 (1,608) Profit for the period/year 7,276	Year ended 31 March 2006 HK$’000 155,550 (136,723) 18,827 586 (2,372) (1,535) 15,506 (49) 15,457 (3,172) 12,285	Six months ended 30 September 2005 2006 HK$’000 HK$’000 72,942 93,237 (64,352) (80,971) 8,590 12,266 57 286 (1,043) (1,196) (1,842) (877) 5,762 10,479 (24) (7) 5,738 10,472 (1,428) (2,094) 4,310 8,378

124

ACCOUNTANTS’ REPORT ON XIN PROCUREMENT

APPENDIX II

II. Balance Sheet

31 March 2005, 2006 and 30 September 2005 and 2006

Note Non-current assets Property, plant and equipment 8 Current assets Inventories 9 Trade receivables 10 Prepayments, deposits and other receivables Due from holding company 11 Pledged deposits 12 Bank balances and cash 12 Current liabilities Trade payables 13 Accruals and other payables Due to shareholders 14 Due to related companies 14 Current tax payable Net current assets Total assets less current liabilities Non-current liabilities Loans from shareholders 15 Net assets Capital and reserves Share capital 16 Reserves Total equity	31 March 2005 2006 HK$’000 HK$’000 81 249 2,630 2,073 35,430 57,691 500 388 – – – 928 1,988 2,016 40,548 63,096 16,736 11,288 20 731 12,643 25,704 – 543 1,608 3,172 31,007 41,438 9,541 21,658 9,622 21,907 2,300 2,300 7,322 19,607 46 46 7,276 19,561 7,322 19,607	30 September 2005 2006 HK$’000 HK$’000 67 211 1,854 826 39,046 64,849 1,245 549 – 13,035 920 997 1,267 1,963 44,332 82,219 16,497 15,947 21 40 11,823 29,175 96 83 2,030 5,473 30,467 50,718 13,865 31,501 13,932 31,712 2,300 2,374 11,632 29,338 46 46 11,586 29,292 11,632 29,338	30 September 2005 2006 HK$’000 HK$’000 67 211 1,854 826 39,046 64,849 1,245 549 – 13,035 920 997 1,267 1,963 44,332 82,219 16,497 15,947 21 40 11,823 29,175 96 83 2,030 5,473 30,467 50,718 13,865 31,501 13,932 31,712 2,300 2,374 11,632 29,338 46 46 11,586 29,292 11,632 29,338
			82,219
			15,947 40 29,175 83 5,473
			50,718
			31,501
			31,712 2,374
			29,338

			46 29,292
			29,338

125

ACCOUNTANTS’ REPORT ON XIN PROCUREMENT

APPENDIX II

III. Statement of Changes in Equity

For the period from 30 January 2004 (date of incorporation) to 31 March 2005, year ended 31 March 2006 and six months ended 30 September 2005 and 2006

On incorporation - Issue of capital (2 shares of S$1 each) Issue of shares during the period (9,998 shares of S$1 each) Profit for the period 31 March 2005 and 1 April 2005 Profit for the year 31 March 2006 and 1 April 2006 Exchange differences on translation of financial statements Profit for the period 30 September 2006 1 April 2005 Profit for the period 30 September 2005	Share capital HK$’000 – 46 – 46 – 46 – – 46 46 – 46	Exchange reserve HK$’000 – – – – – – 1,353 – 1,353 – – –	Retained profits HK$’000 – – 7,276 7,276 12,285 19,561 – 8,378 27,939 7,276 4,310 11,586	Total HK$’000 – 46 7,276
				7,322 12,285
				19,607 1,353 8,378
				29,338

				7,322 4,310
				11,632

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IV. Cash Flow Statement

For the period from 30 January 2004 (date of incorporation) to 31 March 2005, year ended 31 March 2006 and six months ended 30 September 2005 and 2006

30 January 2004 to 31 March 2005 HK$’000 Cash flows from operating activities Profit before taxation 8,884 Adjustments for: Finance costs – Depreciation 3 Interest income – Provision for inventories/ (write back of provision for inventories) 485 Operating profit before changes in working capital 9,372 (Increase)/decrease in inventories (3,115) Increase in trade receivables (35,430) (Increase)/decrease in prepayments, deposits and other receivables (500) Increase in due from holding company – Increase/(decrease) in trade payables 16,736 Increase/(decrease) in accruals and other payables 20 Increase/(decrease) in due to shareholders 12,643 Increase/(decrease) in due to related companies – Cash (used in)/generated from operating activities (274) Singapore income tax paid –	Year ended 31 March 2006 HK$’000 15,457 49 126 (10) (485) 15,137 1,042 (22,261) 112 – (5,448) 711 13,061 543 2,897 (1,608)	Six months ended 30 September 2005 2006 HK$’000 HK$’000 5,738 10,472 24 7 14 68 – (9) – – 5,776 10,538 776 1,383 (3,616) (3,396) (745) (137) – (13,035) (239) 3,923 1 (740) (820) 1,795 96 (496) 1,229 (165) (1,006) –

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30 January 2004 to 31 March 2005 HK$’000 Net cash (used in)/generated from operating activities (274) Investing activities Interest received – Payments to acquire property, plant and equipment (84) Net cash used in investing activities (84) Financing activities Interest paid – Issue of shares 46 Loan from shareholders 2,300 Increase in pledged deposits – Net cash generated from/(used in) financing activities 2,346 Increase/(decrease) in cash and cash equivalents 1,988 Cash and cash equivalents at beginning of year/period – Effect of foreign exchange rate change – Cash and cash equivalents at end of year/period 1,988 Analysis of the balances of cash and cash equivalents Bank balances and cash 1,988	Year ended 31 March 2006 HK$’000 1,289 10 (294) (284) (49) – – (928) (977) 28 1,988 – 2,016 2,016	Six months ended 30 September 2005 2006 HK$’000 HK$’000 223 (165) – 9 – (14) – (5) (24) (7) – – – – (920) (69) (944) (76) (721) (246) 1,988 2,016 – 193 1,267 1,963 1,267 1,963

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V. Notes to the Financial Information

31 March 2005, 2006 and 30 September 2005 and 2006

1. General

Xin Procurement was incorporated on 30 January 2004 in Singapore, as a limited liability company incorporated in Singapore. It is a supplier of certain goods and services, including but not limited to, office equipment, office supplies, machinery, machinery parts, lubricating oil and bunkerage for vessels, throughout the Relevant Periods.

2. Significant accounting policies

a) Statement of compliance

The Financial Information has been prepared in accordance with accounting principles generally accepted in Hong Kong, which include all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), such term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). A summary of the significant accounting policies adopted by Xin Procurement is set out below.

b) Basis of preparation of financial information

The Financial Information has been prepared under the historical cost convention. The Financial Information is presented in Hong Kong dollars and all values are rounded to nearest thousand except when otherwise indicated.

c) Adoption of new and revised Hong Kong Financial Reporting Standards

During the six months ended 30 September 2006, Xin Procurement has adopted the following new and revised HKFRSs which are effective for accounting periods commencing on or after 1 April 2006:-

HKAS 21 Amendment	The Effects of Changes in Foreign Exchange Rates
HKAS 39 Amendment	Financial Instruments: Recognition and Measurement
HKFRS 4 Amendment	Insurance Contracts
HK(IFRC) – Int 4	Determining whether an Arrangement Contains a Lease

The adoption of the above HKFRSs has had no material impact on the accounting policies of Xin Procurement and the methods of computation in its financial information.

Xin Procurement has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial information. These HKFRSs are effective for accounting periods beginning on or after 1 April 2007.

HKAS 1 Amendment	Presentation of Financial Statements - Capital Disclosures
HKFRS 7	Financial Instruments: Disclosures
HK(IFRC) – Int 8	Scope of HKFRS 2
HK(IFRC) – Int 9	Reassessment of Embedded Derivatives
HK(IFRC) – Int 10	Interim Financial Reporting and Impairment

The directors are in the process of making an assessment of the impact of these new standards, amendments and interpretations to existing standards.

d) Judgment and estimates

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

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

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e) Impairment of assets

At each balance sheet date, Xin Procurement reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, Xin Procurement estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately, unless the relevant asset is land or buildings other than investment property carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years/periods. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

f) Segment reporting

Business segments

A business segment is a distinguishable component of an entity that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments.

Geographical segments

A geographical segment is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments.

No segmental information is presented as Xin Procurement is principally engaged in the supply and procurement of certain goods and services in Singapore.

g) Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost, less provisions for depreciation and any impairment losses. Details are set out in note 8. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable cost of bringing the asset to its working condition and location for its intended use. Expenditure incurred after the item has been put into operation, such as repairs and maintenance and overhaul costs, is normally charged to the income statement in the year/ 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 item, the expenditure is capitalised as an additional cost of the item. When an item of property, plant and equipment is sold, its cost and accumulated depreciation are removed from the financial statements and any gain or loss resulting from the disposal, being the difference between the net disposal proceeds and the carrying amount of the asset, is included in the income statement.

Depreciation is provided on the straight-line method, based on the estimated economic useful lives of the individual assets, as follows:

Office equipment 3 years Leasehold improvements over lease term

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h)

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Rentals payable under operating leases are charged to income statement on the straight-line basis over the lease terms.

i)

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first-in, firstout basis and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

j) Foreign currencies

Foreign currency transactions are initially translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the balance sheet date. Foreign exchange gains and losses are recognised in the income statement.

The functional currency of Xin Procurement is Singapore dollars. For the purpose of this report, the assets and liabilities of Xin Procurement are translated into Hong Kong dollars at the exchange rates ruling at the respective balance sheet dates and, the income statements are translated into Hong Kong dollars at the weighted average exchanges rates for the respective year/period. The resulting exchange differences are included in the exchange reserve.

k) Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at cost less allowance for bad and doubtful debts.

l) Trade and other payables

Trade and other payables are initially recognised at fair value and thereafter stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

m) Provisions

Provisions are recognised for liabilities of uncertain timing or amount when Xin Procurement has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

n)

Employee benefits

(i) Defined contribution plans are post-employment benefit plans under which Xin Procurement pays fixed contributions into separate entities such as the Central Provident Fund, and will have no legal or constructive obligation to pay further contributions if any of the funds do not hold sufficient assets to pay all employee benefits relating to employee services in the current and preceding financial years/periods. Xin Procurement’s contribution to defined contribution plans are recognised in the year/period to which they relate.

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(ii) Employee entitlements to annual leave and long service are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long-service leave as a result of services rendered by employees up to the balance sheet date.

o)

Taxation

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

The tax currently payable is based on taxable profit for the year/period. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years/periods, and it further excludes items that are never taxable or deductible.

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

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

p) Revenue recognition

Income from sale of goods is recognised when the significant risks and rewards of ownership have been transferred to the buyer, and Xin Procurement maintains neither managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.

Interest income is recognised on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.

q) Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition, less advances from banks repayable within three months from the date of the advance, if any.

r) Related parties

A party is considered to be related to Xin Procurement if:

(i) the party has the ability, directly or indirectly through one or more intermediaries, to control Xin Procurement or exercise significant influence over Xin Procurement in making financial and operating decisions, or vice versa, or where Xin Procurement and the party are subject to common control or common significant influence;
(ii) the party is a member of the key management personnel of Xin Procurement;
(iii) the party is a close member of the family of any individual referred to in (i) or (ii);
(iv) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (ii) or (iii); or

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(v) the party is a post-employment benefit plan for the benefit of employees of Xin Procurement, or of any entity that is a related party of Xin Procurement.

3. Turnover and revenue

Turnover represents the net invoiced value of goods sold, after allowances for returns and trade discounts during the year/period. An analysis of turnover and revenue is as follows:

Turnover - sales of goods Other revenue Bank interest income Foreign exchange gain Sundry income Write-back of provision for inventories Total revenue recognised during the year/period	30 January 2004 to 31 March 2005 HK$’000 144,687 – 33 1 – 34 144,721	Year ended 31 March 2006 HK$’000 155,550 10 – 91 485 586 156,136	Six months ended 30 September 2005 2006 HK$’000 HK$’000 72,942 93,237 – 9 – – 57 277 – – 57 286 72,999 93,523	Six months ended 30 September 2005 2006 HK$’000 HK$’000 72,942 93,237 – 9 – – 57 277 – – 57 286 72,999 93,523
				286
				93,523

4. Profit from operating activities

Profit from operating activities is arrived at after charging/(crediting):

	30 January
	2004	Year
	to	ended	Six	months ended
	31 March	31 March	30 September
	2005	2006	2005	2006
	HK$’000	HK$’000	HK$’000	HK$’000
Auditors’ remuneration
– current year/period provision	–	–	–	–
– prior year/period under provision	–	39	–	–
Cost of inventories	132,223	136,723	64,352	80,971
Depreciation	3	126	14	68
Foreign exchange loss/(gain)	(33)	1,535	1,842	877
Operating lease charges
– land and building	339	295	151	119
Provident fund contributions
(included in staff costs below)	201	85	40	42
Provision for inventories	485	–	–	–
Staff costs
– directors’ emoluments_(note 5)_	–	–	–	–
– other	2,078	975	454	517

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5. Directors’ remuneration and five highest paid individuals

(i) Directors’ remuneration

No remuneration has been paid or is payable in respect of any of the Relevant Periods by Xin Procurement to the directors of Xin Procurement.

No directors of Xin Procurement waived or agreed to waive any remuneration during the Relevant Periods.

(ii) Five highest paid individuals

During the Relevant Periods, none of the five highest paid individuals is director of Xin Procurement. The remuneration of each of the non-director highest paid employees for each of the Relevant Periods fell within the range of nil to HK$1,000,000 and an analysis of which is as follows:

30 January 2004 to 31 March 2005 HK$’000 Salaries, bonuses and allowances and benefits in kind 1,226 Provident fund contributions 127 1,353	Year ended 31 March 2006 HK$’000 744 69 813	Six months ended 30 September 2005 2006 HK$’000 HK$’000 346 378 33 32 379 410	Six months ended 30 September 2005 2006 HK$’000 HK$’000 346 378 33 32 379 410
			410

(iii) During the Relevant Periods, no emoluments were paid by Xin Procurement to the directors or any of the five highest paid individuals as an inducement to join or upon joining Xin Procurement or as compensation for loss of office.

6. Finance costs

		30 January
		2004	Year
		to	ended	Six	months ended
		31 March	31 March	30 September
		2005	2006	2005	2006
		HK$’000	HK$’000	HK$’000	HK$’000
Interest	on overdrafts and
trust	receipt loans	–	49	24	7

7. Taxation

The provision for Singapore Income Tax is calculated at 20% of the estimated assessable profits for the year/ period.

Taxation in the income statement represents:

	30 January
	2004	Year
	to	ended	Six	months ended
	31 March	31 March	30 September
	2005	2006	2005	2006
	HK$’000	HK$’000	HK$’000	HK$’000
Current tax	1,608	3,172	1,428	2,094

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The reconciliation between accounting profit and taxation at applicable tax rate is as follows:

30 January 2004 to 31 March 2005 HK$’000 Profit before taxation 8,884 Income tax at statutory rate of 20% 1,776 Tax effect of expenses that are not deductible in determining taxable profits – Tax effect of income that is not taxable in determining taxable profits (124) Singapore statutory stepped exemption (44) Taxation 1,608	Year ended 31 March 2006 HK$’000 15,457 3,091 125 – (44) 3,172	Six months ended 30 September 2005 2006 HK$’000 HK$’000 5,738 10,472 1,148 2,094 280 – – – – – 1,428 2,094	Six months ended 30 September 2005 2006 HK$’000 HK$’000 5,738 10,472 1,148 2,094 280 – – – – – 1,428 2,094

			2,094 – – –
			2,094

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8. Property, plant and equipment

Leasehold improvements HK$’000 Cost Additions and at 31 March 2005 and 30 September 2005 16 Additions – 31 March 2006 and 1 April 2006 16 Exchange realignment 1 Additions – 30 September 2006 17 Accumulated depreciation Charge for the period and at 31 March 2005 1 Charge for the year 5 31 March 2006 and 1 April 2006 6 Exchange adjustments 1 Charge for the period 3 30 September 2006 10 31 March 2005 and 1 April 2005 1 Charge for the period 3 30 September 2005 4 Net book value 31 March 2005 15 31 March 2006 10 30 September 2005 12 30 September 2006 7	Office equipment HK$’000 68 294 362 23 14 399 2 121 123 7 65 195 2 11 13 66 239 55 204	Total HK$’000 84 294
		378 24 14
		416
		3 126
		129 8 68
		205
		3 14
		17
		81

		249

		67

		211

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9. Inventories

Finished goods, at cost Less: Provision for obsolescence	31 March 2005 2006 HK$’000 HK$’000 3,115 2,073 (485) – 2,630 2,073	30 September 2005 2006 HK$’000 HK$’000 1,854 826 – – 1,854 826	30 September 2005 2006 HK$’000 HK$’000 1,854 826 – – 1,854 826
			826

10. Trade receivables

The 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 to six months for major customers. Each customer has a maximum credit limit. Overdue balances are reviewed regularly by senior management. Trade receivables are non-interest-bearing. The carrying amounts of the trade receivables approximate to their fair values.

An aged analysis of the trade receivables at the balance sheet date, based on invoice date, and net of allowance is as follows:

Within 30 days 31 to 60 days 61 to 90 days 91 to 180 days Over 180 days Total trade receivables	31 March 2005 2006 HK$’000 HK$’000 10,522 13,138 8,726 10,629 5,639 13,083 5,491 17,046 5,052 3,795 35,430 57,691	30 September 2005 2006 HK$’000 HK$’000 13,457 15,291 13,354 13,104 6,338 14,377 5,897 18,886 – 3,191 39,046 64,849	30 September 2005 2006 HK$’000 HK$’000 13,457 15,291 13,354 13,104 6,338 14,377 5,897 18,886 – 3,191 39,046 64,849
			64,849

All trade receivables are denominated in Singapore dollars.

11. Due from holding company

The amount due from Xin Corporation Limited is unsecured, interest-free and there are no fixed terms for repayment. The carrying amount approximates its fair value.

12. Bank balances and cash and pledged deposits

Details of bank balances and cash denominated in different currencies are as follows:

Bank balances and cash Pledged deposits Euro dollars Singapore dollars United States dollars	31 March 2005 2006 HK$’000 HK$’000 1,988 2,016 – 928 1,988 2,944 – 374 1,953 2,516 35 54 1,988 2,944	30 September 2005 2006 HK$’000 HK$’000 1,267 1,963 920 997 2,187 2,960 984 184 286 600 917 2,176 2,187 2,960	30 September 2005 2006 HK$’000 HK$’000 1,267 1,963 920 997 2,187 2,960 984 184 286 600 917 2,176 2,187 2,960
			2,960

			184 600 2,176
			2,960

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Cash at banks earns interest at floating rates based on daily bank deposit rates. Time deposits are made for varying periods of between three months and three years depending on the immediate cash requirements of Xin Procurement, and earn interest at the respective time deposit rates. The carrying amounts of the bank balances and cash and the pledged deposits approximate to their fair values.

The deposits are pledged to a bank for banking facilities granted to Xin Procurement.

13. Trade payables

An aged analysis of the trade payables at the balance sheet date is as follows:

Within 30 days 31 to 60 days 61 to 90 days 91 to 180 days Over 180 days Total trade payables	31 March 2005 2006 HK$’000 HK$’000 10,905 6,848 2,267 2,868 553 371 2,753 591 258 610 16,736 11,288	30 September 2005 2006 HK$’000 HK$’000 8,882 9,977 5,305 4,449 1,582 426 161 222 567 873 16,497 15,947	30 September 2005 2006 HK$’000 HK$’000 8,882 9,977 5,305 4,449 1,582 426 161 222 567 873 16,497 15,947
			15,947

Details of trade payables denominated in different currencies are as follows:

Australian dollars Euro dollars Malaysian ringgits Singapore dollars United States dollars Others	31 March 2005 2006 HK$’000 HK$’000 3,212 55 390 892 2,390 3,981 5,900 4,864 4,588 1,441 256 55 16,736 11,288	30 September 2005 2006 HK$’000 HK$’000 139 124 1,150 816 3,830 3,404 6,000 8,583 5,363 2,992 15 28 16,497 15,947	30 September 2005 2006 HK$’000 HK$’000 139 124 1,150 816 3,830 3,404 6,000 8,583 5,363 2,992 15 28 16,497 15,947
			15,947

The trade payables are non-interest-bearing and are normally settled on 60 day terms. The carrying amounts of the trade payables approximate to their fair values.

14. Due to shareholders/related companies

The amounts due to shareholders and related companies are unsecured, interest-free and there are no fixed terms for repayment. The carrying amounts approximate their fair values.

15. Loans from shareholders

The loans are unsecured and interest-free. Pursuant to the shareholders’ agreements entered into between Xin Procurement and the shareholders, the shareholders have agreed not to demand the repayment of the loans until Xin Procurement has the ability to do so and has obtained consent from Xin Procurement for the repayment of the loans. The carrying amounts of the loans approximate their fair values.

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16. Share capital

Authorised: 500,000 ordinary shares of S$1 each Issued and fully paid: 10,000 ordinary shares	31 March 2005 2006 HK$’000 HK$’000 2,300 2,300 46 46	30 September 2005 2006 HK$’000 HK$’000 2,300 2,300 46 46	30 September 2005 2006 HK$’000 HK$’000 2,300 2,300 46 46

			46

17. Operating Lease Commitments

At each of the balance sheet dates during the Relevant Periods, the total future minimum lease payments under non-cancellable operating leases in respect of land and buildings falling due as follows:

Leases which expire: Within one year In the second and fifth years inclusive	31 March 2005 2006 HK$’000 HK$’000 287 183 183 – 470 183	30 September 2005 2006 HK$’000 HK$’000 301 233 42 243 343 476	30 September 2005 2006 HK$’000 HK$’000 301 233 42 243 343 476
			476

18. Related party transactions

Transactions with related companies during the Relevant Periods not disclosed elsewhere in the financial information are summarised as follows:

	30 January
	2004	Year
	to	ended	Six	months ended
	31 March	31 March	30 September
	2005	2006	2005	2006
	HK$’000	HK$’000	HK$’000	HK$’000
With a related company with
common shareholder
Sales_(note a)_	32,973	17,688	8,338	1,560
Management fees_(note b)_	368	552	276	294
Rental expenses_(note b)_	276	–	–	–
With a related company with
common directors
Management fees_(note b)_	–	12	6	6

(a) Sales of office equipment and office supplies to a related company were made at the price equivalent to 10/9 times the cost incurred. Sales of machinery, parts, stores for the upkeeping of vessels, necessary victuals for the crew, lubricating oil and bunkerage for the operation of vessels and appointment of surveyors and technical consultants for the vessels to a related company were made at the price equivalent to 100/98 times the cost incurred.

(b) The management fees and rental expenses were determined between Xin Procurement and the related companies in the normal course of business.

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19. Financial instruments

a) Financial risk management

Xin Procurement is exposed to a variety of risks including foreign currency risk, credit risk, liquidity risk and cash flow interest rate risk arising in the normal course of the business activities.

Xin Procurement does not have any written risk management policies and guidelines. The directors monitor the financial risk management and take such measures as considered necessary from time to time to minimise such financial risks.

i) Foreign currency risk

Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

Xin Procurement is exposed to foreign currency risk primarily through sales and purchases that are denominated in a currency other than the functional currency of the operations to which they relate. The currencies giving rise to this risk are primarily United States dollars and Malaysian ringgits. Xin Procurement does not hold or issue any derivative financial instruments for trading purposes or to hedge against fluctuations in foreign exchange rates. Xin Procurement mitigates this risk by conducting the sales and purchases transactions in the same currency, whenever possible.

ii) Credit risk

Credit risk arises from the possibility that customers may not be able to settle obligations within the normal terms of transactions. Xin Procurement has a significant concentration of credit risk from trade receivables as more than 70% of the trade debts are owing from one customer. It performs ongoing credit evaluation of the debtors’ financial condition and maintains an account for allowance for doubtful trade and other accounts receivable based upon the expected collectibles of all trade and other accounts receivable. Xin Procurement’s policy is to enter into transactions with creditworthy counterparties so as to mitigate any significant credit risk from its small customer base.

iii) Liquidity risk

Liquidity risk is the risk that an enterprise will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value.

Prudent liquidity risk management implies maintaining sufficient cash. Xin Procurement monitors and maintains a level of bank balances deemed adequate to finance its operations and mitigate the effects of fluctuations in cash flows.

iv) Cash flow and fair value interest rate risk

Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates.

As Xin Procurement has no significant interest-bearing assets, its income and operating cash flows are substantially independent of changes in market interest rates.

b) Estimation of fair values

The notional amounts of financial assets and liabilities with a maturity of less than one year (including trade and other receivables, bank balances and cash, trade and other payables) are assumed to approximate their fair values.

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The fair value of non-trade balances due from/to shareholders and related companies has not been determined as the timing of the expected cash flows of these balances cannot be reasonably determined because of the relationship.

20. Parent and ultimate holding company

The immediate holding company is Xin Corporation Limited, a company incorporated in Bermuda. The ultimate holding company is Huang Group (BVI) Limited, a company incorporated in the British Virgin Islands, which is ultimately held by a discretionary trust.

VI. SUBSEQUENT EVENTS

No subsequent events took place subsequent to 30 September 2006.

VII. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by Xin Procurement in respect of any period subsequent to 30 September 2006.

Yours faithfully, Moore Stephens Certified Public Accountants Hong Kong

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APPENDIX III

The following is the text of a report, prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, Moore Stephens, Certified Public Accountants.

==> picture [151 x 126] intentionally omitted <==

29 January 2007

The Directors

Xin Corporation Limited Xin Procurement & Trading Pte. Ltd.

Dear Sirs,

We report on the unaudited pro forma financial information of Xin Corporation Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”), which has been prepared by the directors for illustrative purposes only, to provide information about how the proposed acquisition of an additional 24% interest in Xin Procurement by the Group, might have affected the historical financial information presented, for inclusion as Appendix III to the Circular of the Company dated 29 January 2007 (the “Circular”). The basis of preparation of the unaudited pro forma financial information is set out on pages 144 to 151 to the Circular.

RESPONSIBILITIES

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

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

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APPENDIX III

BASIS OF OPINION

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

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

The unaudited pro forma financial information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, it does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Enlarged Group had the transaction actually occurred as at 30 September 2006 or at any future date; or the results and cash flows of the Enlarged Group for the year ended 31 March 2006 or any future periods.

OPINION

In our opinion:

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

Yours faithfully, Moore Stephens

Certified Public Accountants Hong Kong

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APPENDIX III PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF THE ENLARGED GROUP

The unaudited pro forma consolidated balance sheet of the Enlarged Group has been prepared to illustrate the effect of the Acquisition.

The unaudited pro forma consolidated balance sheet of the Enlarged Group has been prepared in accordance with Rule 4.29 of the Listing Rules for the purpose of illustrating the effect of the Acquisition as if the Acquisition took place on 30 September 2006.

The unaudited pro forma balance sheet of the Enlarged Group is based upon the unaudited consolidated balance sheet of the Group as at 30 September 2006, which has been extracted from the unaudited interim consolidated balance sheet of the Group as of 30 September 2006 as set out in Appendix I to this circular, after making pro forma adjustments relating to the Acquisition that are (i) directly attributable to the transaction; and (ii) factually supportable.

The unaudited pro forma consolidated balance sheet of the Enlarged Group is based on a number of assumptions, estimates and uncertainties. Accordingly, the accompanying unaudited pro forma consolidated balance sheet of the Enlarged Group does not purport to describe the actual financial position of the Enlarged Group that would have been attained had the Acquisition been completed on 30 September 2006. The unaudited pro forma consolidated balance sheet does not purport to predict the future financial position of the Enlarged Group.

The unaudited pro forma consolidated balance sheet of the Enlarged Group should be read in conjunction with the historical information of the Group as set out in Appendix I to this circular and other financial information included elsewhere in this circular.

The statement has been prepared by the Directors for illustrative purposes only and because of its nature, it may not give a true picture of the financial position of the Enlarged Group following completion of the Acquisition.

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APPENDIX III

At 30 September 2006

Non-Current Assets Property, plant and equipment Investment properties Prepaid land lease payments Goodwill Total non-current assets Current Assets Inventories Accounts receivables Prepaid land lease payments Prepayments, deposits and other receivables Cash and bank balances Total current assets Current Liabilities Accounts payable Tax payable Other payables and accruals Interest-bearing bank and other borrowings Loan from a minority shareholder Due to a minority shareholder Due to a related company Total current liabilities Net Current Liabilities Total Assets Less Current Liabilities Non-Current Liabilities Convertible note Net assets /(deficiency)	The Group Pro forma adjustments (Unaudited) (Note 1) (Note 2) HK$’000 HK$’000 HK$’000 228 21,161 30,323 – 6,202(a) 51,712 826 64,849 728 1,735 5,199 73,337 17,628 5,473 19,876 12,260 1,201 (588)(b) 29,175 13,689 83 85,696 (12,359) 39,353 28,154 5,570 (c) 11,199	Pro forma Enlarged Group (Unaudited) HK$’000 228 21,161 30,323 6,202 57,914 826 64,849 728 1,735 5,199 73,337 17,628 5,473 19,876 12,260 613 42,864 83 98,797 (25,460) 32,454 33,724 (1,270)

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APPENDIX III

Capital and Reserves Issued capital Equity component of convertible note Accumulated losses Minority Interests	The Group Pro forma adjustments (Unaudited) (Note 1) (Note 2) HK$’000 HK$’000 HK$’000 827 10,344 1,556(c) (14,348) (3,177) 14,376 (336)(d) (13,689) 11,199	Pro forma Enlarged Group (Unaudited) HK$’000 827 11,900 (14,348) (1,621) 351 (1,270)

Note:

The adjustment represents the price of acquisition of an additional 24% interest in Xin Procurement and the shareholders’ loan of S$120,000 (equivalent to approximately HK$588,000), which will be satisfied by the issuance of the New Convertible Note of HK$7,126,000.
(a) The adjustment represents the recognition of the goodwill arising from the acquisition of the additional 24% interest in Xin Procurement for a total consideration of HK$7,126,000. The net asset value of Xin Procurement used in the calculation of goodwill has already reflected the dividend (see note 2) to be declared immediately after the completion of the Acquisition pursuant to the terms of the Agreement.
(b) The adjustment represents the acquisition of the shareholders’ loan of S$120,000 (equivalent to approximately HK$588,000).
(c) The New Convertible Note, being a compound financial instrument, contains both financial liability and equity components, is split between the equity component of HK$1,556,000 and a liability component of HK$5,570,000. The liability component was determined based on the present value of estimated future cash outflows discounted at the prevailing market rate for an equivalent non-convertible loan on 22 November 2006, the date of the Agreement, based on a valuation report issued by Vigers Appraisal & Consulting Limited, a firm of independent valuers, dated 21 December 2006.
(d) The adjustment represents reduction of minority interest’s share of the net assets of Xin Procurement by 24%.
The adjustment reflects the dividend payable to the Vendor pursuant to the Agreement.

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APPENDIX III

UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT AND UNAUDITED PRO FORMA CASH FLOW STATEMENT OF THE ENLARGED GROUP

The unaudited pro forma consolidated income statement and unaudited pro forma cash flow statement of the Enlarged Group have been prepared to illustrate the effect of the Acquisition.

The unaudited pro forma consolidated income statement and unaudited pro forma cash flow statement of the Enlarged Group have been prepared in accordance with Rule 4.29 of the Listing Rules for the purpose of illustrating the effect of the Acquisition as if the Acquisition had taken place at the beginning of the year ended 31 March 2006.

The unaudited pro forma consolidated income statement and unaudited pro forma cash flow statement of the Enlarged Group are based upon the audited consolidated income statement and audited consolidated cash flow statement of the Group for the year ended 31 March 2006, which has been extracted from the audited consolidated financial statements of the Group for the year ended 31 March 2006 as set out in Appendix I to this circular, after making pro forma adjustments relating to the Acquisition that are (i) directly attributable to the transaction; (ii) expected to have a continuing impact on the Enlarged Group; and (iii) factually supportable.

The unaudited pro forma consolidated income statement and unaudited pro forma cash flow statement of the Enlarged Group are based on a number of assumptions, estimates and uncertainties. Accordingly, the accompanying unaudited pro forma consolidated income statement and unaudited pro forma cash flow statement of the Enlarged Group do not purport to describe the actual results and cash flow of the Enlarged Group that would have been attained had the Acquisition been completed at the beginning of the year ended 31 March 2006 or to predict the future results and cash flow of the Enlarged Group.

The unaudited pro forma consolidated income statement and unaudited pro forma cash flow statement of the Enlarged Group should be read in conjunction with the audited consolidated financial statements of the Group for the year ended 31 March 2006 as set out in Appendix I to this circular and other financial information included elsewhere in this circular.

These statements have been prepared by the Directors for illustrative purposes only and because of their nature, they may not give a true picture of the results and the cash flow of the Enlarged Group had the Acquisition actually occurred at the beginning of the year ended 31 March 2006 or for any future period.

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APPENDIX III

Unaudited Pro Forma Consolidated Income Statement for the year ended 31 March 2006

CONTINUING OPERATIONS Revenue Cost of sales Gross profit Other income and gains Selling and distribution costs Administrative expenses Other expenses Finance costs PROFIT BEFORE TAX Tax LOSS FOR THE YEAR FROM CONTINUING OPERATIONS DISCONTINUED OPERATIONS Loss for the year from discontinued operations LOSS FOR THE YEAR Attributable to: Equity holders of the Company Minority interests	The Group Pro forma adjustments (Audited) (Note 1) (Note 2) HK$’000 HK$’000 HK$’000 155,550 (136,723) 18,827 1,431 (296) (12,989) (1,660) (4,620) (544) 693 (3,172) (2,479) (7,855) (10,334) (15,994) (544) 2,948 5,660 (2,948) (10,334)	Pro forma Enlarged Group (Unaudited) HK$’000 155,550 (136,723) 18,827 1,431 (296) (12,989) (1,660) (5,164) 149 (3,172) (3,023) (7,855) (10,878) (13,590) 2,712 (10,878)

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PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Unaudited Pro Forma Consolidated Cash Flow Statement for the year ended 31 March 2006

The Group
Pro forma adjustments
(Audited)
(Note 1)
(Note 3)
HK$’000
HK$’000
HK$’000
CASH FLOWS FROM OPERATING
ACTIVITIES
Profit/(loss) before tax
From continuing operations
693
(544)
From discontinuing operations
(7,855)
Adjustments for:
Finance costs
4,649
544
Interest income
(267)
Gains on disposal of items of property,
plant and Equipment
(23)
Share option expenses
466
Impairment of items of property,
plant and equipment
3,873
Write-back of provision against inventories
(485)
Depreciation of items of property,
plant and equipment
4,285
Depreciation of investment properties
430
Recognition of prepaid land lease payments
728
Gain on disposal of subsidiaries
(66)
Operating profit before working
capital changes
6,428
Increase in inventories
(824)
Increase in accounts receivable
(20,540)
Decrease in prepayments, deposits and
other receivables
596
Decrease in accounts payable
(6,246)
Increase in other payables and accruals
864
Increase in amount due to a related company
543
Cash used in operating activities
(19,179)
Overseas taxes paid
(1,608)
Net cash outflow from operating activities
(20,787)

Pro forma
Enlarged
Group
(Unaudited)
HK$’000
149
(7,855)
5,193
(267)
(23)
466
3,873
(485)
4,285
430
728
(66)
6,428
(824)
(20,540)
596
(6,246)
864
543
(19,179)
(1,608)
(20,787)

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APPENDIX III

CASH FLOWS FROM INVESTING ACTIVITIES Interest received Purchase of items of property, plant and equipment Proceeds from disposal of items of property, plant and equipment Disposal of subsidiaries Net cash inflow from investing activities Net cash outflow from operating activities and investing activities CASH FLOWS FROM FINANCING ACTIVITIES Repayment of bank loans Repayment of other loan Repayment of loans from the immediate holding company Drawdown of a loan from a director of a subsidiary Increase in amount due to a minority shareholder Redemption of convertible bonds Interest paid Net cash outflow from financing activities NET DECREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Effect of foreign exchange rate change ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances	The Group Pro forma adjustments (Audited) (Note 1) (Note 3) HK$’000 HK$’000 HK$’000 267 (481) 23 2,707 2,516 (18,271) (4,413) (6,500) (3,150) 4,650 13,061 (2,167) (2,097) (71) (616) (18,887) 24,000 10 5,123 5,123 (71)	Pro forma Enlarged Group (Unaudited) HK$’000 267 (481) 23 2,707 2,516 (18,271) (4,413) (6,500) (3,150) 4,650 13,061 (2,167) (2,168) (687) (18,958) 24,000 10 5,052 5,052

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APPENDIX III

Notes:

The adjustment represents the imputed interest expenses on the New Convertible Note at 9.77% per annum, as if the New Convertible Note was issued on 1 April 2005. The effective interest rate of the New Convertible Note is determined by reference to the assessment made by Vigers Appraisal & Consulting Limited, a firm of independent valuers.
The adjustment represents reduction of minority interest’s share of the profits of Xin Procurement by 24% for the year ended 31 March 2006.
The adjustment represents the payment of interest at 1% per annum on the New Convertible Note to the Vendor for the year ended 31 March 2006.
The unaudited pro forma consolidated income statement has been prepared assuming that neither any goodwill nor discount on acquisition arises from the Acquisition.

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APPENDIX IV

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 OF DIRECTORS AND CHIEF EXECUTIVE

As at the Latest Practicable Date, the interests and short positions of each Director and chief executive of the Company in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which required notification to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he was deemed or taken to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or which were required pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers to be notified to the Company and the Stock Exchange were as follows:

Nature of Name of Directors interests Mr. Lo Ming Chi, Personal interest Charles Mr. Yu Wai Man Personal interest Mr. Wilson Ng Personal interest Other interest Mr. Ng Wee Keat Personal interest Other interest Mr. Ng Eng Leng Personal interest	Approximate Number of Shares percentage of the Long Short existing issued position position share capital 1,024,000 (Note 1) – 0.31% 1,024,000 (Note 1) – 0.31% 6,024,000 (Note 1) – 1.82% 442,960,131 (Note 2) – 133.90% 448,984,131 135.72% 6,024,000 (Note 1) – 1.82% 442,960,131 (Note 2) – 133.90% 448,984,131 135.72% 1,024,000 (Note 1) – 0.31%	Approximate Number of Shares percentage of the Long Short existing issued position position share capital 1,024,000 (Note 1) – 0.31% 1,024,000 (Note 1) – 0.31% 6,024,000 (Note 1) – 1.82% 442,960,131 (Note 2) – 133.90% 448,984,131 135.72% 6,024,000 (Note 1) – 1.82% 442,960,131 (Note 2) – 133.90% 448,984,131 135.72% 1,024,000 (Note 1) – 0.31%
		135.72% 1.82% 133.90%
		135.72% 0.31%

Notes:

Each of the personal interests of Mr. Lo Ming Chi, Charles, Mr. Yu Wai Man, Mr. Wilson Ng, Mr. Ng Wee Keat and Mr. Ng Eng Leng comprised 1,024,000 underlying Shares in respect of share options granted by the Company under the share option scheme of the Company adopted on 30 December 2002.
Vision Century is ultimately owned by the discretionary trust of which Mr. Wilson Ng and Mr. Ng Wee Keat are discretionary beneficiaries and thus was deemed to be interested in 442,960,131 Shares under the SFO. Details of such 442,960,131 Shares in which Vision Century is interested for the purposes of the SFO are set out in point 3 of this appendix under the heading “Substantial Shareholders”.

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APPENDIX IV

Save as disclosed above, as at the Latest Practicable Date none of the Directors or chief executive of the Company had any interests or short positions in the Shares, underlying shares and debentures of the Company or any of its associated corporations which required 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 he was deemed or taken to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein or which were required pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers to be notified to the Company and the Stock Exchange; and none of the Directors was a director or employee of a company which had an interest or short position in the Shares and underlying shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO.

3. SUBSTANTIAL SHAREHOLDERS

So far as is known to any Director or chief executive of the Company, and as at the Latest Practicable Date the following persons, other than the Directors or chief executive of the Company as disclosed above, had interests or short positions in the Shares or underlying 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 was, directly or indirectly, interested in 10% 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 and the amount of each such person’s interest in such securities, together with particulars of any options in respect of such capital:

				Approximate
		Number of Shares		percentage of the
	Long		Short	existing issued
Name of substantial Shareholders	position		position	share capital
Vision Century	442,960,131	(Note 1)	–	133.90%
Huang Worldwide	442,960,131	(Note 1)	–	133.90%
Huang Group	442,960,131	(Notes 1 and 2)	–	133.90%
Mr. Kan Ka Chong, Frederick	442,960,131	(Notes 2 and 3)	–	133.90%
Mr. Ng (Huang) Cheow Leng	484,881,072	(Notes 2, 4 and 5)	–	146.57%
Ms. Pea Baby	41,920,941	(Notes 4)	–	12.67%
Ms. Loong Swee Choo	41,920,941	(Notes 4)	–	12.67%
New Century International	41,920,941	(Notes 4 and 5)	–	12.67%
Pte. Ltd.

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Notes:

Huang Group is the ultimate holding company of Huang Worldwide and Vision Century. Huang Worldwide is the immediate holding company of Vision Century. Huang Worldwide and Vision Century were deemed to be interested in 442,960,131 Shares representing 180,548,784 Shares held by Vision Century as at the Latest Practicable Date and a maximum of 262,411,347 conversion shares of the Existing Convertible Note (subject to adjustments) to be issued to Vision Century upon full conversion of the Existing Convertible Note.
Huang Group is held by Mr. Kan Ka Chong, Frederick in the capacity of the trustee of the Discretionary Trust, the settlor of which is Mr. Ng (Huang) Cheow Leng.
Mr. Kan Ka Chong, Frederick was deemed to be interested in 442,960,131 Shares under the SFO since he is the trustee of the Discretionary Trust.
The Vendor is wholly owned by New Century International Pte. Ltd. and New Century International Pte. Ltd. is owned by Mr. Ng (Huang) Cheow Leng, Ms. Pea Baby and Ms. Loong Swee Choo respectively.
In capacity of the settlor of the Discretionary Trust and because of his shareholding in New Century International Pte. Ltd., Mr. Ng (Huang) Cheow Leng was deemed to be interested in 484,881,072 Shares under the SFO.

Save as disclosed above, so far is known to any Directors or Chief Executive of the Company, as at the Latest Practicable Date no other person had interests or short positions in the Shares or underlying 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 was, directly or indirectly, interested in 10% 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 members of the Group, or in any options in respect of such capital.

4. EXPERTS AND CONSENTS

The following is the qualifications of the experts who have given opinion or advice contained in this circular:

Name Qualification Ernst & Young Certified Public Accountants Moore Stephens Certified Public Accountants Goldbond Capital Corporation licensed under the SFO to conduct type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO

Ernst & Young, Moore Stephens and Goldbond Capital have given and have not withdrawn their written consents to the issue of this circular with the inclusion of their letters, reports and opinion (as the case may be) as set out in this circular and references to their names in the form and context in which they appear respectively.

As at the Latest Practicable Date, none of Ernst & Young, Moore Stephens or Goldbond Capital was beneficially interested in the share capital of any member of the Group, nor did they 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 they have any interest, either direct or indirect, in any assets which had been since 31 March 2006 (being the date to which the latest published audited financial statements

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APPENDIX IV

of the Company were made up) acquired or disposed of by or leased to or were proposed to be acquired or disposed of by or leased to any member of the Group.

5. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors or their respective associates was considered to have an interest in a business which competes or is likely to compete, either directly or indirectly, with the business of the Group pursuant to Rule 8.10 of the Listing Rules.

6. LITIGATION

As at the Latest Practicable Date, no litigation or claim of material importance was known to the Directors to be pending or threatened against any members of the Group.

7. 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 supplemental agreements dated 29 October 2004 and 14 July 2006 respectively relating to a credit facility in the amount of HK$50.0 million dated 2 July 2003 granted by Vision Century in favour of the Company;
a sale and purchase agreement dated 31 August 2005 entered with Trimanage Limited, a third party independent of the Group, in relation to the disposal of the Group’s entire equity interest in a group of subsidiaries engaged in the toys business, and a related shareholders’ loan;
a subscription agreement dated 15 February 2006 (as supplemented on 17 February 2006) entered into between the Company and Vision Century in relation to the issue of the Existing Convertible Note;
an underwriting agreement dated 17 August 2006 entered into between Kingston Securities Limited and the Company in relation to the underwriting of the Open Offer; and
the Agreement.

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

8. 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).

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APPENDIX IV

(b) As at the Latest Practicable Date, save for (i) a shareholders’ agreement dated 20 February 2004 entered into between the Purchaser, the Vendor and Xin Procurement; (ii) a supply agreement dated 20 February 2004 entered into between the Vendor and Xin Procurement; (iii) a loan facility agreement dated 2 July 2003 (as supplemented on 29 October 2004 and 14 July 2006) relating to a credit facility for the amount of HK$50.0 million granted to the Group by Vision Century; and (iv) a subscription agreement dated 15 February 2006 (as supplemented on 17 February 2006) entered into between the Company and Vision Century in relation to the Existing Convertible Note, there was no contract or arrangement entered into by any member of the Group subsisting at the Latest Practicable Date in which any Director was materially interested and which was significant in relation to the business of the Group.
(c) None of the Directors has any direct or indirect interest in any assets which had 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 2006 (the date to which the latest published audited financial statements of the Company were made up).
(d) The secretary and qualified accountant of the Company is Mr. Yu Wai Man, who is a fellow member of the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants.
(e) The registered office of the Company is located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.
(f) The head office and principal place of business of the Company in Hong Kong is located at Room 2107, 21st Floor, Nan Fung Tower, 173 Des Voeux Road Central, Hong Kong.
(g) The branch share registrar of the Company in Hong Kong is Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(h) The English texts of this circular and the accompanying form of proxy shall prevail over their respective Chinese texts.

9. 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 and principal place of business of the Company in Hong Kong at Room 2107, 21st Floor, Nan Fung Tower, 173 Des Voeux Road Central, Hong Kong from the date of this circular up to and including 15 February 2007:

(a) the memorandum of association and Bye-laws of the Company;
(b) the annual reports of the Company for each of the two years ended 31 March 2005 and 2006 and the interim report of the Company for the six months ended 30 September 2006;

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(c) the accountants’ report on Xin Procurement, the text of which are set out in Appendix II to this circular;
(d) the letter from the Independent Board Committee, the text of which is set out on page 19 of this circular;
(e) the letter from Goldbond Capital, the text of which is set out on pages 20 to 34 of this circular;
(f) the written consents referred to in the paragraph headed “Experts and consents” in this appendix;
(g) the report issued by Moore Stephens in connection with the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix III to this circular;
(h) all material contracts referred to in the paragraph headed “Material contracts” in this appendix;
(i) the prospectus of the Company dated 26 September 2006 in relation to the Open Offer; and
(j) a copy of each circular issued by the Company pursuant to the requirements set out in Chapters 14 and/or 14A of the Listing Rules which has been issued since the date of the latest published audited accounts of the Company.

157

NOTICE OF SPECIAL GENERAL MEETING

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

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(Incorporated in Bermuda with limited liability) (Stock Code: 1141)

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 Thursday, 15 February 2007 at 9:30 a.m. for the purpose of considering and, if thought fit, passing the following resolution, with or without amendments, as an ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT :

(a) the sale and purchase agreement dated 22 November 2006 entered into between Huang & Co (Singapore) Pte. Ltd. (the “Vendor”), Able Market Profits Limited (the “Purchaser”), a wholly-owned subsidiary of the Company, and Xin Procurement & Trading Pte. Ltd. (“Xin Procurement”), in relation to the sale and purchase of 2,400 shares in Xin Procurement and the rights of and benefits in the shareholders’ loan of S$120,000 (the “S&P Agreement”), a copy of which has been produced to this meeting marked “A” and signed by the chairman of this meeting for the purpose of identification, be and is hereby approved, confirmed and ratified;
(b) the convertible note to be issued by the Company to the Vendor or its nominee pursuant to the S&P Agreement and on terms and conditions as set out in the S&P Agreement (the “New Convertible Note”), a draft of which has been produced to this meeting marked “B” and signed by the chairman of this meeting for the purpose of identification, and the issue of the shares of the Company upon exercise of the conversion rights attaching to the New Convertible Note be and are hereby approved;
(c) the sale loan assignment to be entered into by the Purchaser, the Vendor and Xin Procurement pursuant to the S&P Agreement (the “Sale Loan Assignment”), a draft of which has been produced to this meeting marked “C” and signed by the chairman of this meeting for the purpose of identification, be and is hereby approved;
(d) the shareholders’ agreement to be entered into between the Purchaser, the Vendor and Xin Procurement pursuant to the S&P Agreement (the “New Shareholders’ Agreement”), a draft of which has been produced to this meeting marked “D” and signed by the chairman of this meeting for the purpose of identification, be and is hereby approved; and

* For identification only

158

NOTICE OF SPECIAL GENERAL MEETING

(e) the directors of the Company be and are hereby authorised to do all things and acts and sign all documents which they may consider necessary, desirable or expedient to implement and/ or give effect to any matters relating to or in connection with the S&P Agreement, the New Convertible Note, the Sale Loan Assignment and the New Shareholders’ Agreement.”

By order of the Board Yu Wai Man Company Secretary

Hong Kong, 29 January 2007

Registered Office:

Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Head Office and Principal Place of Business in Hong Kong:

Room 2107, 21st Floor Nan Fung Tower 173 Des Voeux Road Central Hong Kong

Notes:

Any member of the Company entitled to attend and vote at a meeting of the Company is entitled to appoint another person as his proxy to attend and vote instead of him. A member of the Company who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at a general meeting of the Company or at a class meeting. A proxy need not be a member of the Company. In addition, a proxy or proxies representing either a member of the Company who is an individual or a member of the Company which is a corporation is entitled to exercise the same powers on behalf of the member of the Company which he or they represent as such member of the Company could exercise.
The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorised in writing or, if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person authorised to sign the same. In the case of an instrument of proxy purporting to be signed on behalf of a corporation by an officer thereof it shall be assumed, unless the contrary appears, that such officer was duly authorised to sign such instrument of proxy on behalf of the corporation without further evidence of the fact.
The instrument appointing a proxy and (if required by the board) the power of attorney or other authority (if any) under which it is signed, or a certified copy of such power or authority, shall be delivered to the principal place of business of the Company in Hong Kong at Room 2107, 21st Floor, Nan Fung Tower, 173 Des Voeux Road Central, Hong Kong not later than forty-eight (48) hours before the time appointed for holding the meeting at which the person named in the instrument proposes to vote and in default the instrument of proxy shall not be treated as valid.
Delivery of an instrument appointing a proxy shall not preclude a member from attending and voting in person at the meeting convened and in such event, the instrument appointing a proxy shall be deemed to be revoked.
Where there are joint holders of any share, any one of such joint holders may vote, either in person or by proxy, in respect of such share as if he were solely entitled thereto, but if more than one of such joint holders be present at any meeting the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register of members of the Company in respect of the joint holding.
The votes of members at the above meeting to approve the ordinary resolution will be taken on a poll.

159

AI assistant

PegBio Co., Ltd. — Proxy Solicitation & Information Statement 2007

50676_rns_2007-01-29_0082b9b0-94cc-4b93-af34-ef48aa381973.pdf

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

SOMERLEY LIMITED

Goldbond Capital (Asia) Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

Executive Directors:

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

INTRODUCTION

LETTER FROM THE BOARD

THE AGREEMENT DATED 22 NOVEMBER 2006

Parties to the Agreement:

Assets to be acquired:

LETTER FROM THE BOARD

Information on Xin Procurement:

Consideration:

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Conditions:

LETTER FROM THE BOARD

Completion:

SHAREHOLDING STRUCTURE OF THE COMPANY

LETTER FROM THE BOARD

FINANCIAL EFFECTS OF THE ACQUISITION

REASONS FOR THE ACQUISITION

LETTER FROM THE BOARD

MANAGEMENT DISCUSSION AND ANALYSIS ON XIN PROCUREMENT

LETTER FROM THE BOARD

Financial and business performance

Period from 30 January 2004 (date of incorporation) to 31 March 2005

Year ended 31 March 2006

Six months ended 30 September 2006

Financial resources and liquidity

Cash and cash equivalents

Investments

Foreign currency exposure

Number of employees and remuneration policies

PROSPECTS OF THE ENLARGED GROUP

FUND RAISING ACTIVITIES IN THE PAST TWELVE MONTHS

COMPLIANCE WITH THE LISTING RULES

SPECIAL GENERAL MEETING

PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS

INDEPENDENT BOARD COMMITTEE

INDEPENDENT FINANCIAL ADVISER

RECOMMENDATION

GENERAL

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION

INTRODUCTION

LETTER FROM GOLDBOND CAPITAL

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Background of the Acquisition

2. Reasons for and benefits of the Acquisition

3. Consideration for the Acquisition

Sale Loan

LETTER FROM GOLDBOND CAPITAL

LETTER FROM GOLDBOND CAPITAL

LETTER FROM GOLDBOND CAPITAL

Interest rate

Conversion price

4. Effects on the financial position of the Group

LETTER FROM GOLDBOND CAPITAL

(a) Net asset value

(b) Earnings

LETTER FROM GOLDBOND CAPITAL

(c) Gearing ratio

(d) Working capital

5. Possible dilution effect to the Shareholders

LETTER FROM GOLDBOND CAPITAL

RECOMMENDATION

Goldbond Capital (Asia) Limited Venus Choi Managing Director

1. SHARE CAPITAL

2. SUMMARY OF FINANCIAL INFORMATION

3. AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Xin Corporation Limited

PegBio Co., Ltd. Proxy Solicitation & Information Statement 2007