Persistence Gold Group Ltd - M&A Activity 2003

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ACTION

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

If you have sold or transferred all your shares in Shanghai Merchants Holdings Limited (Receivers and Managers Appointed), you should at once pass this document to the purchaser(s) or transferee(s) or to the bank, licensed securities dealer or other agent through whom the sale was effected for transmission to the purchaser(s) or transferee(s).

The Stock Exchange of Hong Kong Limited and/or the Securities and Futures Commission of Hong Kong takes no responsibility for the contents of this document, makes no representation as to the accuracy or completeness of this document 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 document.

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SHANGHAI MERCHANTS HOLDINGS LIMITED

(Receivers and Managers Appointed)

(incorporated in Bermuda with limited liability)

MANDATORY UNCONDITIONAL CASH OFFERS BY

SUN HUNG KAI INTERNATIONAL LIMITED ON BEHALF OF PROFIT HARBOUR INVESTMENTS LIMITED TO ACQUIRE ALL THE ISSUED SHARES OF HK$0.10 EACH AND OUTSTANDING OPTIONS TO SUBSCRIBE FOR SHARES IN SHANGHAI MERCHANTS HOLDINGS LIMITED (RECEIVERS AND MANAGERS APPOINTED) OTHER THAN THOSE ALREADY ACQUIRED BY PROFIT HARBOUR INVESTMENTS LIMITED AND PARTIES ACTING IN CONCERT WITH IT

Financial Adviser

Henco & Associates

Henco Capital Limited

Independent Financial Adviser to Independent Shareholders of Shanghai Merchants Holdings Limited

(Receivers and Managers Appointed)

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First Shanghai Capital Limited

A letter from First Shanghai Capital Limited, the independent financial adviser, containing its advice and recommendations to the Independent Shareholders of Shanghai Merchants Holdings Limited (Receivers and Managers Appointed) is set out in pages 26 to 36 of this document.

7 October 2003

	Page
Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2
Letter from the Receivers
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Inability to form independent board committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Appointment of the Receivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Role of the Receivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Validity of the sale of the Sale Shares by Angel Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Actions taken by the Receivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Material findings of the Receivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Legal proceedings brought by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Responsibility for, and accuracy and completeness of, this document . . . . . . . . . . . . . . . . . .	17
The Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Information on the Offeror . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Offeror’s intention regarding the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Directors and management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Maintaining the listing status of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Letter of advice from First Shanghai. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
Appendix I – Financial information on the Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	37
Appendix II – General and other information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	67

2003

TIMETABLE

Commencement of the Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 23 September

Despatch of this document . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 7 October

Latest time for acceptance of the Offers . . . . . . . . . . . . . . . . . . . . . . . . . . 4:00 p.m. on Tuesday, 21 October

Closing of the Offers (Note 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tuesday, 21 October

Publication of announcement in respect of the close of the Offers . . . . . . . . . . . . . . . Tuesday, 21 October

Latest date of posting of remittances

for the amounts due under the Offers in respect

of valid acceptances received on or before 4:00 p.m.

on 21 October 2003 (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Friday, 31 October

Notes:

The Offers will be closed at 4:00 p.m. on Tuesday, 21 October 2003 unless the Offeror revises or extends the Offers in accordance with the Takeovers Code. Following the close of the Offers, a teletext announcement on the result of the Offers will be made through the website of Hong Kong Exchanges and Clearing Limited by 7:00 p.m. on the closing date as to whether the Offers have been revised, extended or have expired.
The consideration payable for the Shares and the Options tendered under the Offers will be paid as soon as possible but in any event within 10 days of the date of receipt by the Registrar, from a Shareholder and/or an Optionholder (as the case may be) accepting the Share Offer and/or the Option Offer (as the case may be), of the requisite documents. Please refer to the paragraph headed “Acceptance and Settlement” in the letter from SHKIL in the Offer Document.
Although the Offeror does not intend to extend the Offers, it reserves the right to do so.
Acceptance of Offers shall be irrevocable and not capable of being withdrawn, except as permitted under the Takeovers Code.

– 1 –

DEFINITIONS

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

“AGM” the annual general meeting of the Company convened to be held on 18 June 2003 which was adjourned to 25 June 2003 and which finally dissolved due to a lack of quorum
“Angel Field” or “Vendor” Angel Field Limited, a company incorporated in the BVI with limited liability which, according to the Offer Announcement and the Offer Document, held an approximately 63.19% shareholding interest in the Company prior to the completion of the Sale and Purchase Agreement
“Assets” money, books, records, documents, properties, things in action and other assets, movable or immovable property of every nature and kind of the Company and its subsidiaries
“associate(s)” has the same meaning ascribed to it in the Listing Rules “BVI” the British Virgin Islands “BVI Counterparties” Great Center, Modern Shine, Smartway and Regent Roll, each of which is a company incorporated in the BVI
“BVI Trades” the trading activities amongst Merchants HK and Gold HK and the BVI Counterparties for the period from 1 January 2003 to 30 April 2003
“Chaoyang Hua Long” Chaoyang Hua Long Textiles and Dyeing Limited, a foreign enterprise incorporated in the PRC and an indirect wholly-owned subsidiary of Park Well
“Closing Date” 4:00 p.m. on Tuesday, 21 October 2003 or if the Offers is extended, the closing of the Offers as extended by the Offeror in accordance with the Takeovers Code
“Company” Shanghai Merchants Holdings Limited (Receivers and Managers Appointed), a company incorporated in Bermuda with limited liability whose shares are listed on the Stock Exchange
“Director(s)” director(s) of the Company “Executive” the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director

– 2 –

DEFINITIONS

“First Shanghai”	First Shanghai Capital Limited, the independent financial adviser
	to the Independent Shareholders in relation to the Offers and a
	deemed licensed corporation licensed to perform type 6 regulated
	activity (i.e. advising on corporate finance) under the SFO
“Gold HK”	Gold (Hong Kong) Limited, a company incorporated in Hong Kong
	with limited liability and an indirect wholly-owned subsidiary of
	the Company
“Great Center”	Great Center Limited, a company incorporated in the BVI
“Group”	the Company and its subsidiaries
“Henco”	Henco Capital Limited, the financial adviser to the Company in
	relation to the Offers and a deemed licensed corporation licensed
	to perform type 6 regulated activity (i.e. advising on corporate
	finance) under the SFO
“High Court”	the High Court of Hong Kong
“HK$”	Hong Kong dollars
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“ICAC”	the Independent Commission Against Corruption
“Independent Shareholders”	shareholders other than the Vendor or the Offeror and their
	respective associates and parties acting in concert with the Vendor
	or the Offeror
“Latest Practicable Date”	3 October 2003, being the latest practicable date prior to the
	printing of this document for the purpose of ascertaining certain
	information contained herein
“Listing Rules”	The Rules Governing the Listing of Securities on the Stock
	Exchange
“Merchants HK”	Merchants (Hong Kong) Limited, a company incorporated in Hong
	Kong with limited liability and an indirect wholly-owned
	subsidiary of the Company
“Modern Shine”	Modern Shine Enterprises Limited, a company incorporated in
	the BVI

– 3 –

DEFINITIONS

“Mr. Chau” Mr. Chau Ching Ngai, who, according to the 2002 annual report of the Company, is the beneficial owner of the entire issued share capital of Angel Field. Mr. Chau is also the spouse of Ms. Mo (as stated in the circular of the Company dated 18 March 2003)
“Mr. Yue” Mr. Yue Jialin（岳家霖先生）, the sole shareholder and director of the Offeror
“Ms. Mo” Ms. Mo Yuk Ping, the chairperson of the Company and executive Director, and the spouse of Mr. Chau
“Offeror” Profit Harbour Investments Limited, a company incorporated in the BVI with limited liability and beneficially owned as to 100% by Mr. Yue
“Offers” the Share Offer and the Option Offer
“Offer Announcement” the announcement dated 3 September 2003 made by the Offeror regarding the terms and conditions of the Offers
“Offer Document” the offer document dated 23 September 2003 issued by or on behalf of the Offeror to all Shareholders in accordance with the Takeovers Code containing, among other things, details of the Offers, information on the Offeror and the acceptance and transfer forms in relation to the Offers
“Offer Price” HK$0.0441 per Share
“Offer Share(s)” all issued Shares other than the Sale Shares and any other Shares owned by the Offeror or parties acting in concert with it and/or agreed to be acquired by the Offeror or parties acting in concert with it
“Option(s)” the outstanding option(s) granted by the Company to Directors and employees of the Company to subscribe for Shares pursuant to the share option scheme of the Company adopted on 7 June 2002
“Optionholder(s)” holder(s) of the Option(s)
“Option Offer”
the mandatory unconditional cash offer made by SHKIL, on behalf of the Offeror, in accordance with the Takeovers Code to all the Optionholders to surrender their Options for cancellation at HK$0.0001 for each Option
“Option Offer Price” HK$0.0001 per Option

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DEFINITIONS

“Park Well”

Park Well International Group Limited, a company incorporated in the BVI and was a wholly-owned subsidiary of the Company prior to the completion of the Park Well Disposal

“Park Well Disposal”
the disposal of the Company’s entire shareholding interest in Park Well Group on 12 April 2003
“Park Well Group”

Park Well and its subsidiaries

“PRC”

People’s Republic of China

“Receivers”
Mr. Alan Chung Wah Tang and Ms. Alison Wong Lee Fung Ying, both from Grant Thornton, Certified Public Accountants
“Regent Roll”

Regent Roll Limited, a company incorporated in the BVI

“Registrar” Secretaries Limited, the branch share registrar of the Company in Hong Kong
“Relevant Period” the period commencing from 3 March 2003, being the date falling six months prior to 3 September 2003 (the date of the Offer Announcement) and ending on the Latest Practicable Date
“Sale and Purchase Agreement”
the sale and purchase agreement dated 26 August 2003 made between the Vendor and the Offeror relating to the sale and purchase of 260,986,000 Shares
“Sale Shares” a total of 260,986,000 Shares, representing approximately 63.19% of the total issued share capital of the Company, sold to the Offeror by the Vendor pursuant to the Sale and Purchase Agreement
“SFC”

the Securities and Futures Commission of Hong Kong

“SFO”
the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“Share(s)”
share(s) of HK$0.10 each in the share capital of the Company
“Shareholder(s)”
registered holder(s) of the Shares
“Share Offer”

the mandatory unconditional cash offer made by SHKIL, on behalf of the Offeror, in accordance with the Takeovers Code to all the Shareholders to acquire all the Shares other than those already acquired by the Offeror and parties acting in concert with it

– 5 –

DEFINITIONS

“SHKIL”

Sun Hung Kai International Limited, financial adviser to the Offeror in relation to the Offers and an investment adviser and a licensed corporation under the SFO (Chapter 571 of the Laws of Hong Kong)

“Smartway”

Smartway Trading Limited, a company incorporated in the BVI

“Stock Exchange”

The Stock Exchange of Hong Kong Limited

“Takeovers Code”

the Hong Kong Code on Takeovers and Mergers

“Variation Order”

the order granted by the High Court on 29 August 2003 to vary the 17 June Order as more particularly described in the section headed “Role of the Receivers” in the “Letter from the Receivers”

“Win Victory”
Win Victory Holdings Limited, a company incorporated in Hong Kong with limited liability and Ms. Mo and Mr. Chau are the registered shareholders as to 49% and 51% respectively of its entire issued share capital
“17 June Order”
the order granted by the High Court on 17 June 2003 that Mr. Alan Chung Wah Tang and Ms. Alison Wong Lee Fung Ying, both from Grant Thornton, Certified Public Accountants, be appointed the joint and several receivers and managers of the Company as more particularly described in the section headed “Role of the Receivers” in the “Letter from the Receivers”
“2002 Financial Statements” the audited consolidated financial statements of the Group for the year ended 31 December 2002
“%”

per cent

– 6 –

LETTER FROM THE RECEIVERS

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SHANGHAI MERCHANTS HOLDINGS LIMITED

(Receivers and Managers Appointed)

(incorporated in Bermuda with limited liability)

Executive Directors: Mo Yuk Ping (Chairman) Gong Bei Ying

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

Principal place of business in Hong Kong: 13th Floor Gloucester Tower The Landmark 11 Pedder Street Central Hong Kong

7 October 2003

To the Shareholders and the Optionholders for information only

Dear Sir or Madam,

MANDATORY UNCONDITIONAL CASH OFFERS BY SUN HUNG KAI INTERNATIONAL LIMITED ON BEHALF OF PROFIT HARBOUR INVESTMENTS LIMITED TO ACQUIRE ALL THE ISSUED SHARES OF HK$0.10 EACH AND OUTSTANDING OPTIONS TO SUBSCRIBE FOR SHARES IN SHANGHAI MERCHANTS HOLDINGS LIMITED (RECEIVERS AND MANAGERS APPOINTED) OTHER THAN THOSE ALREADY ACQUIRED BY PROFIT HARBOUR INVESTMENTS LIMITED AND PARTIES ACTING IN CONCERT WITH IT

BACKGROUND

As announced by the Offeror on 3 September 2003, the Offeror entered into the Sale and Purchase Agreement with the Vendor on 26 August 2003 to acquire from the Vendor 260,986,000 Shares, representing approximately 63.19% of the total issued share capital of the Company and of the voting rights which may be exercised at the general meeting of the Company as at the Latest Practicable Date, at a total consideration of HK$11,500,000, equivalent to approximately HK$0.0441 per Sale Share. As stated in the Offer Announcement and the Offer Document, the Sale and Purchase Agreement was completed on 26 August 2003.

– 7 –

LETTER FROM THE RECEIVERS

Shareholders and Optionholders should note that the Receivers were not involved in any way in the sale and purchase transaction between the Offeror and the Vendor and were not aware that such a transaction was contemplated until they were informed by the Offeror’s legal advisers in the evening of 26 August 2003 that the Sale and Purchase Agreement had been completed.

According to the Offer Announcement and the Offer Document, the Offeror became interested in approximately 63.19% of the total issued share capital of the Company following completion of the Sale and Purchase Agreement. As required by Rule 26 of the Takeovers Code, the Offeror is obligated to make a mandatory unconditional cash offer to acquire all the issued Shares and the Options other than the Sale Shares. As at the Latest Practicable Date, there were 413,000,000 Shares in issue. Accordingly, apart from the aforesaid Sale Shares, the remaining 152,014,000 Shares (including 46,000,000 Shares disposed of by Angel Field on 25 August and 26 August 2003), representing approximately 36.81% of the entire issued share capital of the Company as at the Latest Practicable Date, are subject to the Share Offer at HK$0.0441 each.

As set out in the Company’s 2002 annual report, as at 31 December 2002, there were outstanding Options to subscribe for 24,000,000 Shares which are exercisable from 2 July 2002 to 1 July 2007 at an exercise price of HK$0.556 per Share. Save as those disclosed in Appendix II of this document, there are no other warrants or options convertible into Shares as at the Latest Practicable Date. Under the Takeovers Code, the Offeror has also made the Option Offer to all Optionholders to cancel the Options held by them.

INABILITY TO FORM INDEPENDENT BOARD COMMITTEE

Following the appointment of the Receivers, except for Ms. Mo and Ms. Gong Bei Ying, all executive and independent non-executive Directors resigned. Although Ms. Mo and Ms. Gong Bei Ying remain on record as Directors, as explained below, the 17 June Order provides that the powers of all Directors shall cease forthwith. Therefore, the Directors are not in a position to advise the Independent Shareholders in relation to the Offers. In the circumstances, no independent board committee of the Company can be formed to advise the Independent Shareholders in respect of the Offers.

Henco has been appointed as the financial adviser of the Company in relation to the Offers. First Shanghai has been appointed as the independent financial adviser to advise the Independent Shareholders in relation to the fairness and reasonableness of the terms of the Offers.

The purpose of this document is to give you further information about the Offers and the Company. In addition, there is set out in this document in pages 26 to 36 a separate letter of advice from First Shanghai setting out their recommendations in respect of the Offers.

APPOINTMENT OF THE RECEIVERS

According to press reports on 3 June and 4 June 2003, Ms. Mo, the chairperson of the Company was arrested by the ICAC on 2 June 2003 for suspected corruption relating to bank loans, and conspiracy to defraud and was subsequently released on a reported HK$10 million bail. At that time approximately 74.33% of the Company’s issued share capital were beneficially held by Angel Field, a company which is wholly owned by Mr. Chau (as stated in the 2002 annual report of the Company), the spouse of Ms. Mo. Since May 2003, the media has reported various possible charges of fraud and other possible criminal misconduct in relation to the groups of companies controlled by Mr. Chau and Ms. Mo.

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LETTER FROM THE RECEIVERS

The books and records of the Group were seized by the ICAC on or around 1 June 2003. Dealing in the Shares on the Stock Exchange was suspended at the request of the Company on 2 June 2003 and remains suspended until further notice.

A board meeting was held on 14 June 2003 at which the two independent non-executive Directors resolved, among other things, to make an application to the High Court for the appointment of receivers and managers of the Company.

On 17 June 2003, the Honourable Madam Justice Kwan of the High Court granted the 17 June Order that Mr. Alan Chung Wah Tang and Ms. Alison Wong Lee Fung Ying, both from Grant Thornton, Certified Public Accountants, be appointed the joint and several receivers and managers of the Company. The appointment of the Receivers was confirmed by the Bermudan Court on 11 July 2003.

ROLE OF THE RECEIVERS

As referred to in the Company’s announcement dated 17 June 2003, pursuant to the 17 June Order, the Receivers were appointed, jointly and severally, as the receivers and managers of the Company until further order. The Receivers’ powers are limited and restricted by the terms of the 17 June Order. The Receivers’ powers include, among other matters: taking action to ascertain, take possession of, collect, give valid receipts for and protect the Assets and to demand and receive all debts due or which may fall due to the Company but not to distribute or part with them save for the exercise of the powers under the 17 June Order or until further order; and to take action to carry on the business of the Company as far as is necessary for the protection and preservation of the Assets. The 17 June Order further provided that the powers of all Directors shall cease forthwith. The Receivers do not have the general powers of the Directors and do not act in place of the Directors.

At the time of the appointment of the Receivers, substantially all the Group’s employees have either been dismissed or resigned and the Group’s business operations had practically ceased.

Since their appointment on 17 June 2003, the Receivers have taken such actions as they have considered appropriate in their capacity as receivers and managers of the Company and have, among other matters, commenced legal proceedings against certain third parties to recover monies paid by the Group, and against certain of the Directors and ex-Directors and other third parties to obtain additional information on the affairs of the Group. Shareholders and other investors are referred to the sections headed “Actions taken by the Receivers”, “Material findings of the Receivers” and “Legal proceedings brought by the Company” below and the Company’s announcements dated 2 July, 15 July, 27 August and 26 September 2003 in relation to the actions taken by the Receivers.

On receipt of notice of the Offers, the Receivers were advised by their legal advisers that the 17 June Order did not permit them to apply the funds and assets of the Company to deal with the Offers. As none of the Directors have the power to deal with the Offers, the Receivers applied and obtained from the High Court on 29 August 2003 the Variation Order pursuant to which the Receivers were granted ancillary powers to conduct and to manage transactions subject to the Takeovers Code and/or the Listing Rules (including to issue press announcements and Shareholders circulars, to engage legal, financial and other professional advisers and to provide Shareholders with relevant information to enable the Shareholders to reach a properly informed decision on the terms of any such transaction). In exercising their powers, the Receivers are to have regard, among other things, to the purposes set out in the 17 June Order, including

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LETTER FROM THE RECEIVERS

the duty to protect and preserve the Assets. The effect of the Variation Order is that, as appropriate in the context of their wider duties and responsibilities, the Receivers can incur time and costs on the Company’s behalf in appointing advisers and providing information to Shareholders in relation to the Offers.

In the exercise of their powers, the Receivers have appointed Henco as the financial adviser to the Company and First Shanghai as the independent financial adviser to the Independent Shareholders in relation to the Offers and have caused the publication of this document.

The Receivers issue this document and report to the Shareholders on the Offers in the context of their professional appointment and are not acting in place of the Directors. The Receivers accept full responsibility for the accuracy of the information contained in this document (other than information relating to the Offers and the Offeror) on the basis of the information available to the Receivers as at the date of this document. However, the Receivers are not in a position to verify the truthfulness or completeness of information compiled from the records of the Company, as the records in their possession are incomplete and may not be reliable. Time and costs in making enquiries to verify information compiled from the Company’s records would, in the present circumstances of the Company, be unduly burdensome. In the circumstances, it is not reasonably practicable to provide Independent Shareholders with all the information normally contained in an offeree board circular pursuant to the Takeovers Code. Qualifications to the information contained in this document have been made where necessary. The Receivers believe it is not in the interests of the Company or the Shareholders to disclose to the public, actions intended or contemplated by the Receivers pursuant to the 17 June Order. In addition, given that the Receivers’ enquiries into the affairs of the Group are on-going and are not complete, the Receivers believe it is inappropriate at this time to publish certain information within the knowledge or belief of the Receivers relating to possible misconduct in relation to the affairs of the Company. However, the Receivers have kept, and will continue to keep, Shareholders and other investors informed by way of press announcements at the appropriate times during their enquiries into the affairs of the Group when meaningful information can be provided.

VALIDITY OF THE SALE OF THE SALE SHARES BY ANGEL FIELD

The circumstances of the Offers are of concern to the Receivers. In particular, the Receivers are concerned as to the validity of the sale of the Sale Shares by Angel Field which led to the Offers. Given that the Receivers are the only persons who can carry out an investigation into the circumstances of the sale and purchase transaction, the Receivers have sought additional information from the Offeror in relation to the sale and purchase transaction (such as documents evidencing the authority of Angel Field to enter into the Sale and Purchase Agreement) but have not, as at the Latest Practicable Date, received such information. However, the Receivers are not able to ascertain, at this stage, the impact, if any, on the Offers if the validity of the sale of the Sale Shares by Angel Field is successfully challenged. If such event occurs during the appointment of the Receivers, the Receivers will immediately consult with the Executive and will make further announcement(s) as and when appropriate.

ACTIONS TAKEN BY THE RECEIVERS

Since their appointment, the Receivers have taken various actions in accordance with their appointment to preserve and protect the Assets, including:

• freezing all known bank accounts of the Group and realizing balances of bank accounts;

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LETTER FROM THE RECEIVERS

reporting major events to the Shareholders by way of public announcements;
securing the office premises of the Group and the Group’s assets and attending the office premises to administer the day-to-day management of the Group’s affairs;
attending meetings and corresponding with the ICAC in order to access and inspect the books and records of the Group seized by the ICAC;
submitting a report to the High Court dated 17 July 2003 pursuant to the 17 June Order which summarises the work performed by the Receivers and sets out the key findings of the Receivers’ investigation into the affairs of the Group for the period from 17 June 2003 to 16 July 2003;
attending the annual general meeting and the adjourned annual general meeting of the Company;
conducting interviews and corresponding with all available executive and independent nonexecutive directors and/or management and former employees of the Group;
securing the books and records of the Group held at the Group’s office premises;
taking steps to produce back-ups of relevant available computer records of the Group;
investigating the Park Well Disposal;
investigating possible connected parties transactions and misappropriation of funds;
corresponding with the auditors of the Group to discuss the audited accounts of the Group for the year ended 31 December 2002 in view of the material findings of the Receivers as more particularly described in the section headed “Material findings of the Receivers” below; and
taking actions and commencing legal proceedings to trace and preserve funds remitted by the Group to bank accounts of certain companies incorporated in the BVI and Hong Kong as more particularly described in the sections headed “Material findings of the Receivers” and “Legal proceedings brought by the Company” below.

MATERIAL FINDINGS OF THE RECEIVERS

1. Related parties trading activities

During the course of investigation, the Receivers discovered that the turnover of the Group for the period from 1 January 2003 to 30 April 2003 was mainly attributable to the trading of commodities (predominantly copper) and that approximately 80% of such trading activities were conducted with a number of companies incorporated in the BVI (the “BVI Trades”).

– 11 –

LETTER FROM THE RECEIVERS

In general terms, the BVI Trades involved the purchase by Merchants HK or Gold HK, both wholly-owned subsidiaries of the Company, of commodities from Great Center and Modern Shine, and the resale of such commodities to Smartway and to Regent Roll. Great Center, Modern Shine, Smartway and Regent Roll are all BVI companies (collectively, they are referred to as the “BVI Counterparties”). Almost all of the sales are “back to back” sale and purchase transactions.

Based on the existing information available to the Receivers, the Receivers cannot ascertain the beneficial ownership of the BVI Counterparties and their relationship with the Group, but the investigation by the Receivers has revealed that the BVI Counterparties may not be independent third parties and the BVI Trades are questionable and do not appear to be genuine trades.

An analysis of the sale and purchase transactions of the Group for the period from 1 January 2003 to 30 April 2003 are set out below:–

For the Period from 1 Jan 2003 to 30 Apr 2003 Sales Purchases No. HK$’M % No. HK$’M 8 105.3 39.4% – – 9 106.8 40.0% 8 7.5 – – – 10 123.7 – – – 5 71.1 17 212.1 79.4% 23 202.3 14 55.1 20.6% 8 62.5 31 267.2 100.0% 31 264.8	For the Period from 1 Jan 2003 to 30 Apr 2003 Sales Purchases No. HK$’M % No. HK$’M 8 105.3 39.4% – – 9 106.8 40.0% 8 7.5 – – – 10 123.7 – – – 5 71.1 17 212.1 79.4% 23 202.3 14 55.1 20.6% 8 62.5 31 267.2 100.0% 31 264.8	For the Period from 1 Jan 2003 to 30 Apr 2003 Sales Purchases No. HK$’M % No. HK$’M 8 105.3 39.4% – – 9 106.8 40.0% 8 7.5 – – – 10 123.7 – – – 5 71.1 17 212.1 79.4% 23 202.3 14 55.1 20.6% 8 62.5 31 267.2 100.0% 31 264.8	For the Period from 1 Jan 2003 to 30 Apr 2003 Sales Purchases No. HK$’M % No. HK$’M 8 105.3 39.4% – – 9 106.8 40.0% 8 7.5 – – – 10 123.7 – – – 5 71.1 17 212.1 79.4% 23 202.3 14 55.1 20.6% 8 62.5 31 267.2 100.0% 31 264.8
No. 8 9 – – 17 14 31	HK$’M 105.3 106.8 – – 212.1 55.1 267.2	No. – 8 10 5 23 8 31	HK$’M – 7.5 123.7 71.1
			202.3 62.5
			264.8

No. = number of transactions

While the Receivers have not carried out any detailed review of the affairs of the Group for the year ended 31 December 2002, they note from a sample check on the trading activities of the Group in the year ended 31 December 2002 that the Group has conducted similar trading activities with the BVI Counterparties.

Based on the information available to the Receivers, and with advice from the Company’s legal advisers, the Receivers are unable to conclusively determine the ownership and/or control of the BVI Counterparties and therefore are unable to clarify as to whether the BVI Counterparties are connected person of the Company for the purposes of the Listing Rules.

As of 30 April 2003, Smartway and Regent Roll were recorded in the books of the Company as debtors for HK$13.2 million and HK$2.0 million respectively. Demands were sent for the repayment of these sums but no payment has been made up to the Latest Practicable Date. The Receivers consider the recoverability of these debts to be doubtful.

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LETTER FROM THE RECEIVERS

2. Misappropriation of funds

As at 17 June 2003, the Group had approximately HK$19.2 million in cash at bank. Upon further investigation on the financial status of the Group, the Receivers discovered that four transfers, all in relation to the BVI Trades, appeared questionable. These transfers include:

(i) two sums totaling US$4.5 million (or approximately HK$35.1 million) remitted on or about 21 May 2003 with no apparent justification out of the bank accounts of Merchants HK, a wholly-owned subsidiary of the Company, to a bank account maintained in name of Great Center with a bank in Hong Kong;
(ii) two sums totaling US$2.25 million (equivalent to approximately HK$17.6 million), being the aggregate of US$1.4 million (equivalent to approximately HK$10.9 million) and US$0.85 million (equivalent to approximately HK$6.7 million), remitted from the bank accounts of the Company and Merchants HK respectively to a bank account in the name of Great Center on or about 4 February 2003 and 6 February 2003 respectively. Despite the above, a sum of US$2.6 million (equivalent to approximately HK$20.3 million) was subsequently deposited to a bank account of Merchants HK on 3 May 2003 with the payee being unknown. This payment appears to relate to the US$2.25 million that was paid to Great Center;
(iii) a sum of approximately HK$12.8 million was remitted from the bank account of the Company to a bank account in the name of Great Center on or about 17 April 2003; and
(iv) a sum of HK$22.0 million was remitted from the bank account of the Company to a bank account in the name of Modern Shine on or about 22 April 2003.

The Receivers further discovered that, together with certain funds out of the HK$69.9 million being claimed under the Great Center Claim (as defined below), amounts totaling approximately HK$37 million were transferred, by a series of transfers, by Great Center and Modern Shine to Win Victory without apparent legitimate commercial reason. Win Victory was incorporated on 10 May 2000 in Hong Kong with limited liability and Ms. Mo and Mr. Chau are the registered shareholders of 49% and 51% respectively of the issued share capital of Win Victory. Ms. Mo is the executive Director and the chairman of the Company and Mr. Chau is the spouse of Ms. Mo as disclosed in the Company’s 2002 annual report.

Based on the information available to the Receivers, and with advice from the Company’s legal advisers, the Receivers are unable to conclusively determine the ownership and/or control of Great Center or Modern Shine and therefore are unable to clarify as to whether Great Center or Modern Shine is a connected person of the Company for the purposes of the Listing Rules.

In relation to Win Victory, as the results from the search at the Companies Registry of Hong Kong reveal that Win Victory is a company wholly-owned by Mr. Chau and Ms. Mo, Win Victory is a connected person of the Company for the purposes of the Listing Rules.

The Receivers have commenced legal proceedings against, among others, Great Center, Modern Shine and Win Victory and further details of such proceedings are set out in the section headed “Legal proceedings brought by the Company” below.

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LETTER FROM THE RECEIVERS

3. Disposal of Park Well

A sale and purchase agreement for the entire issued share capital of Park Well dated 12 April 2003 was entered into between the Company and Show Good Inc., a company incorporated in the BVI. Show Good Inc. as the purchaser acquired and the Company as the beneficial owner of Park Well sold 6 shares of US$1.00 each, being the entire issued share capital of Park Well, to Show Good Inc. at a consideration of RMB15 million (equivalent to approximately HK$14.1million). Through the Park Well Disposal, the Company disposed of its entire shareholding in Park Well and its subsidiaries, namely Ying Wing (H.K.) Limited, Hua Loong Textiles Limited, Hua Loong Textiles Trading (Korea) Co., Ltd. and Chaoyang Hua Long.

According to the minutes of a meeting of the board of Directors dated 12 April 2003 and signed by Ms. Mo and Ms. Gong Bei Ying (the “Minutes”), the net worth of Park Well Group was approximately HK$14.2 million (with reference to the consolidated balance sheet of Park Well Group as at 31 December 2002). The Directors then noted in the Minutes, the consideration for the Park Well Disposal of RMB15 million represented approximately 13.2% of the net asset value of the Group at that time (based on the consolidated net asset value of approximately HK$106.7 million of the Group at that time, being the total of the audited consolidated net asset value of HK$56.7 million of the Group as at 31 December 2002 and the subscription money of HK$49.9 million received from Angel Field as a result of the completion of the subscription agreement dated 6 March 2003, net of expenses). According to the Minutes, the Directors considered that the Stock Exchange would not treat the Park Well Disposal of RMB15 million as either a (i) discloseable transaction since the consideration represented only 13.2% of the net assets of the Group, which was less than the benchmark of 15% for categorizing a transaction as a discloseable transaction nor a (ii) connected transaction since Show Good Inc. was independent of and not connected with the Company or the directors, chief executive or substantial shareholders of the Company. Therefore, the Company had not disclosed any details of the Park Well Disposal by way of any announcement.

The investigation of the Receivers reveals that the Park Well Disposal is questionable on the following grounds:

(i) it appears that no valuation has been conducted by an independent valuer on or before the execution of the sale and purchase agreement dated 12 April 2003;
(ii) it appears that no lawyers have been involved in the drafting or executing of the sale and purchase agreement and any other transfer documents;
(iii) amongst the documents the Receivers obtained from the ICAC, the Receivers found a copy of a fax from the then Company Secretary, to all Directors dated 12 May 2003 requesting the Directors to sign the written resolutions in respect of the Park Well Disposal. The Receivers note that these written resolutions were signed by one executive Director and one of the then independent non-executive Directors. During the Receivers’ enquiries with the independent non-executive Directors, one of them commented that he did not sign the written resolutions as the Park Well Disposal had already taken place prior to the execution of the written resolutions;

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LETTER FROM THE RECEIVERS

(iv) the Minutes were only signed by Ms. Mo and Ms. Gong Bei Ying. During the Receivers’ enquiries with the remaining two executive Directors and the two independent non-executive Directors, all of them advised that they had not given any approval on the Park Well Disposal by 12 April 2003 or received notice of any meeting of the board on that date;
(v) the Park Well Disposal apparently took place on 12 April 2003, approximately one month before the Directors were asked to sign the relevant written resolutions;
(vi) the annual report of the Company for the year ended 31 December 2002 reveals that the Group recognized impairment loss on assets relating to Chaoyang Hua Long amounting to HK$29.6 million for that year. The Receivers have not been able to find any documents to support any assessment of the impairment loss;
(vii) the Park Well Disposal constituted a complete disinvestment from the Group’s traditional line of business;
(viii) during a visit to the factory (Chaoyang Hua Long) in Chaoyang, the PRC on 25 June 2003, the Receivers were met by representatives of both the former chairman of the Group, Mr. Tsoi Hon Chung（蔡漢忠）, and the owner of Show Good Inc., Mr. Tsoi Chun Tao（蔡鎮濤）. It appeared to the Receivers that both parties were known to and closely related to each other;
(ix) the net asset value of Chaoyang Hua Long was RMB30.7 million (or approximately HK$28.9 million), according to the financial statements of Chaoyang Hua Long for the year ended 31 December 2002 audited by a certified public accountant firm in the PRC;
(x) the net book value of Park Well, after the write-down in value of approximately HK$30 million for the year ended 31 December 2002 (which the Receivers cannot substantiate), was approximately HK$14 million. The Receivers discovered that there is a PRC tax provision of HK$10 million in the consolidated financial statements of Park Well shown as outstanding since year 1998/1999. However, according to the information available to the Receivers, no related tax assessment has been received from the PRC tax authorities. Accordingly, if an assumption is made that the tax provision has been over-provided, the net asset value of Park Well Group would have been HK$24 million. Accordingly, the Receivers do not understand the justification of the Directors in deriving the net book value of the Park Well Group of approximately HK$14 million, which represented approximately 13.2% of the net asset value of the Group at that time, as a result of which no announcement was necessary to be made in accordance with the Listing Rules.

In light of the above, the Receivers are of the view that the Park Well Disposal is questionable. The Receivers are looking into whether Show Good Inc. is related to any connected person of the Company as defined under the Listing Rules and are seeking advice from its advisers on this matter. In addition, the Receivers have arranged for an independent valuation of the land and buildings of Chaoyang Hua Long as at 12 April 2003 in order to investigate whether the Park Well Disposal had been at an undervalued and whether the consideration of RMB15 million was a fair consideration. In any event, the Receivers consider that the Park Well Disposal had not been duly approved and authorized by the board of Directors.

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LETTER FROM THE RECEIVERS

LEGAL PROCEEDINGS BROUGHT BY THE COMPANY

Since their appointment on 17 June 2003, the Receivers have caused the following legal proceedings to be brought by the Company:

Having obtained legal advice, the Receivers commenced legal proceedings on 2 July 2003 against Great Center (“the Great Center Action”) for the repayment of two sums totaling US$4.5 million (or approximately HK$35.1 million), remitted on or about 21 May 2003 with no apparent justification, out of the bank accounts of Merchants HK, a wholly-owned subsidiary of the Company, to a bank account maintained in the name of Great Center, and interest thereon, damages and costs of the legal proceedings. In order to prevent the dissipation of Great Center’s assets, an injunction order was applied for and successfully obtained on 30 June 2003 from the High Court to restrict Great Center from, inter alia, disposing of or otherwise dealing with or diminishing assets of Great Center up to the value of US$4.5 million (the “Injunction Order”). The relevant bank, the lawyers of Great Center and other relevant persons have been notified of the Injunction Order. The Injunction Order remained valid up to and including 11 July 2003 on which date the Injunction Order was continued until further order or final determination of the Great Center Action;
The writ of summons issued on 2 July 2003 in relation to the claim against Great Center for the repayment of US$4.5 million was amended on 10 July 2003 (the “Amended Writ”) to include the claims for (i) the repayment of HK$12.8 million remitted from the bank account of the Company to a bank account in the name of Great Center on or about 17 April 2003; and (ii) the repayment of HK$22.0 million remitted from the bank account of the Company to a bank account in the name of Modern Shine on or about 22 April 2003, interest thereon, damages and costs of legal proceedings. The sum of claims under the Amended Writ amounts to approximately HK$69.9 million (the “Great Center Claim”). The Amended Writ also includes a bank in Hong Kong, Modern Shine, certain executive directors, officers and employees of the Group, and all directors or authorized signatories of Great Center and Modern Shine as defendants (the “Defendants”) for the purposes of seeking orders against them for the disclosure of documents and/or information. An application was made on 10 July 2003 to the High Court for an order (the “Disclosure Order”) that the Defendants disclose to the Company and Merchants HK all relevant information and documents relating to the transfers of the amounts comprising the Great Center Claim. The Disclosure Order was granted by the High Court on 18 July 2003;
In a separate action, Shanghai Land Holdings Limited (Receivers Appointed) (“Shanghai Land”) has commenced legal proceedings against Great Center. A writ of summons was issued by the High Court on 17 July 2003 claiming approximately HK$53.2 million from Great Center, being money received by Great Center on 4 April 2003 for which Shanghai Land claims rightfully belongs to Shanghai Land. Great Center failed to file any notice of intention to defend the legal proceedings within the time for doing so. Shanghai Land obtained judgment in default against Great Center on 5 August 2003 in the amount of approximately HK$53.2 million plus interest. On 5 August 2003, the High Court of the BVI ordered that (inter alia) Mr. Stephen Liu Yiu Keung and Mr. Yeo Boon Ann, the joint and several receivers of Shanghai Land, be appointed jointly and severally as provisional liquidators of Great Center.

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LETTER FROM THE RECEIVERS

As a result of the information provided to the Company and Merchants HK under the Disclosure Order, the Receivers have discovered that, together with certain funds out of the Great Center Claim, an aggregate amount of approximately HK$37 million was transferred, by a series of transfers, by Great Center and Modern Shine to Win Victory without apparent legitimate commercial reason. Ms. Mo and Mr. Chau are the registered shareholders of 49% and 51% respectively of the issued share capital of Win Victory. Ms. Mo is the executive director and the chairman of the Company. Having obtained legal advice, the Receivers commenced legal proceedings on 23 August 2003 against Win Victory (the “Win Victory Action”) for the repayment of the HK$37 million, interest thereon, damages and costs of legal proceedings (the “Win Victory Claim”). It should be noted that should any of the amount claimed against Win Victory be recovered from Great Center and/or Modern Shine in the Great Center Claim such amounts will be taken into account in the Win Victory Action. In order to prevent the dissipation of Win Victory’s assets, the Company applied for and obtained on 22 August 2003 from the High Court an injunction order against Win Victory (the “Win Victory Injunction Order”) to restrict Win Victory from, among other things, disposing of or otherwise dealing with or diminishing the value of its assets up to the value of HK$37 million. On 29 August 2003, the Win Victory Injunction Order was continued until further order or final determination of the Win Victory Action;
Having obtained legal advice, the Receivers, on behalf of the Company, petitioned for the winding-up of Win Victory on the grounds that Win Victory is unable to pay its debts and/or it is just and equitable for Win Victory to be wound up and obtained an order from the High Court on 24 September 2003, among other things, appointing Messrs Desmond Chung Seng Chiong and Roderick John Sutton of Ferrier Hodgson Limited of 14th Floor, Hong Kong Club Building, 3A Chater Road, Hong Kong as the provisional liquidators of Win Victory. In the first instance, this order will remain valid up to and including 7 October 2003, on which date the matter will be heard again by the High Court.

Shareholders and Optionholders should also be aware of the uncertainties surrounding legal proceedings in general and that even if the Company is successful in the legal proceedings set out above to recover funds paid by the Group, given that the defendants in question (other than Great Center) may not have any material assets, the Company may not be able to recover its claims in full or at all.

Shareholders and Optionholders should also be aware that as a result of the legal proceedings brought by the Company set out above, the Company may be subject to claims by third parties.

RESPONSIBILITY FOR, AND ACCURACY AND COMPLETENESS OF, THIS DOCUMENT

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LETTER FROM THE RECEIVERS

the information on the Group to which the Receivers had access, on the basis of the information available to the Receivers as at the Latest Practicable Date, the Receivers confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this document have been arrived at after careful consideration and there are no other material facts not contained in this document the omission of which would make any statement in this document misleading.

Shareholders and other investors should be aware that the Receivers are not satisfied, on the basis of their enquiries into the affairs of the Group, which are ongoing and are not complete, that information in relation to the Group which has been made available to the Receivers and which has been ascertained by the Receivers is in all respects true, complete or accurate.

Shareholders and other investors are drawn to the information on the Group set out in the sections headed “Appointment of the Receivers”, “Role of the Receivers”, “Validity of the sale of the Sale Shares by Angel Field”, “Actions taken by the Receivers”, “Material findings of the Receivers” and “Legal proceedings brought by the Company” and “Recent events of the Group” in this document.

THE OFFERS

SHKIL, on behalf of the Offeror, has made the Offers on the following basis:

For each Share: HK$0.0441 in cash For offer to cancel each Option: HK$0.0001 for each of the outstanding Option

Other details of the Offers are contained in the Offer Document.

The Offer Price per Offer Share represents:

(a) a discount of approximately 83% to the closing price of the Shares as quoted on the Stock Exchange of HK$0.26 per Share on 30 May 2003, being the last trading day prior to the suspension of the trading of the Shares on the Stock Exchange on 2 June 2003;
(b) a discount of approximately 83.66% to the average closing price of approximately HK$0.27 per Share for the 10 trading days up to and including 30 May 2003; and
(c) a discount of approximately 83% to the Group’s pro forma adjusted consolidated net asset value of approximately HK$0.26 per Share after subscription pursuant to the subscription agreement dated 6 March 2003 (based on the Group’s audited net asset value of approximately HK$56,695,000 as at 31 December 2002 which is adjusted by the net proceeds of HK$49.9 million from the said subscription as stated in the Company’s circular dated 18 March 2003 and 413,000,000 Shares outstanding after the said subscription).

As at the Latest Practicable Date, the Company has an aggregate of 413,000,000 Shares in issue. Based on the Offer Price, the entire issued share capital of the Company is valued at approximately HK$18.2 million.

– 18 –

LETTER FROM THE RECEIVERS

As disclosed in the 2002 annual report of the Company, there are 9,840,000 Options which are exercisable from 2 July 2002 to 1 July 2007 and entitle the Optionholders thereof to subscribe for 24,000,000 Shares at an exercise price of HK$0.556 per Share. Based on the offer price of HK$0.0001 for each of the Options, the Option Offer values the Options at approximately HK$984.

INFORMATION ON THE GROUP

Recent events of the Group

The following is a summary of recent events which have occurred in relation to the Company and its subsidiaries:

According to press reports on 3 June 2003 and 4 June 2003, Ms. Mo, the chairperson of the Company was arrested by the ICAC on 2 June 2003 for suspected corruption relating to bank loans, and conspiracy to defraud and was subsequently released on a reported HK$10 million bail. At that time approximately 74.33% of the Company’s issued share capital were beneficially held by Angel Field, a company which is wholly owned by Mr. Chau (as stated in the 2002 annual report of the Company), the spouse of Ms. Mo. Since May 2003, the media has reported various possible charges of fraud and other possible criminal misconduct in relation to the groups of companies controlled by Mr. Chau and Ms. Mo.
The books and records of the Group were seized by the ICAC on or around 1 June 2003. Dealing in the Shares on the Stock Exchange was suspended at the request of the Company on 2 June 2003 and remains suspended until further notice.
A board meeting of the Company was held on 14 June 2003 at which the two independent nonexecutive Directors, namely Mr. Gordon Ng and Mr. Lau Siu, resolved to make an application to the High Court for the appointment of receivers and managers of the Company. It was also resolved in the same board meeting that the AGM of the Company convened to be held on 18 June 2003 be postponed to a later date until further notice. However, the Company was advised by its legal adviser that, for legal reasons under Bermudan Law, the AGM should be held as scheduled on 18 June 2003 for the purpose of seeking shareholders’ approval to adjourn the AGM. The Receivers would like to state that on 18 June 2003 no quorum was present at the AGM which was then adjourned to 25 June 2003 in accordance with the bye-laws of the Company. The adjourned AGM was dissolved due also to a lack of quorum. Details are set out in the announcements of the Company dated 16 June 2003 and 2 July 2003.
Due to the adjournment of the AGM, the published 2002 Financial Statements have not been approved by the Shareholders.
On 17 June 2003, the Honourable Madam Justice Kwan of the High Court granted the 17 June Order that Mr. Alan Chung Wah Tang and Ms. Alison Wong Lee Fung Ying, both from Grant Thornton, Certified Public Accountants, be appointed the joint and several receivers and managers of the Company. The 17 June Order ordered that the powers of all Directors shall cease forthwith. Details are set out in the announcement of the Company dated 17 June 2003.

– 19 –

LETTER FROM THE RECEIVERS

On 17 June 2003, the auditors of the Company, Deloitte Touche Tohmatsu, wrote to the board of Directors and indicated that if the board of Directors did not respond to their questions on the truth and fairness of the 2002 Financial Statements in relation to the recent events of the Company or otherwise, they would consider taking independent steps to prevent any continuing reliance on their auditors’ report on the 2002 Financial Statements. The Receivers replied on 25 July 2003 stating that additional time was required to ascertain the reliability of the 2002 Financial Statements as a result of the recent events or otherwise.
At the time of the appointment of the Receivers on 17 June 2003, all employees of the Group have either been dismissed or resigned. Ms. Mo and Ms. Gong Bei Ying remain on record as Directors. Unless a specific further order is made, these Directors are unable to act in connection with the Offers.
Prior to the appointment of the Receivers, the books and records of the Group were seized by the ICAC. The Receivers have been allowed access to some of the Group’s papers and records now kept with the ICAC and their investigations of these records for the period from January 2003 to June 2003 are continuing. Since their appointment on 17 June 2003, the Receivers have taken such actions as they have considered appropriate in their capacity as receivers and managers of the Company and have, among other matters, commenced legal proceedings against certain third parties to recover monies paid by the Group, and against certain of the Directors and ex-Directors and other third parties to obtain additional information on the affairs of the Group. Shareholders and other investors are referred to the sections headed “Actions taken by the Receivers”, “Material findings of the Receivers” and “Legal proceedings brought by the Company” below and the Company’s announcements dated 2 July, 15 July, 27 August and 26 September 2003 in relation to the actions taken by the Receivers.
The Company sold its entire shareholding in Park Well to Show Good Inc. on 12 April 2003 at a consideration of RMB15 million. No announcement was made by the Company in respect of the Park Well Disposal. Details are set out under subtitle of “Disposal of Park Well” under the heading “Material findings of the Receivers” in this document.
Having obtained legal advice, the Receivers commenced legal proceedings on 2 July 2003 against Great Center for the repayment of two sums totaling US$4.5 million in relation to the Great Center Action and obtained on 30 June 2003 from the High Court the Injunction Order. Details are set out under the heading “Legal proceedings brought by the Company” in this document and the Company’s announcement dated 2 July 2003.
After consultation with the Company’s legal advisers, the writ of summons issued on 2 July 2003 in relation to the claim against Great Center for the repayment of US$4.5 million was amended on 10 July 2003 and the Disclosure Order was granted by the High Court on 18 July 2003. At the hearing on 11 July 2003, an order was granted that the Injunction Order over the US$4.5 million be continued until further order or final determination of the Great Center Action by the High Court. Details are set out under the heading “Legal proceedings brought by the Company” in this document and the Company’s announcement dated 15 July 2003.

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LETTER FROM THE RECEIVERS

Having obtained legal advice, the Company and Merchants HK commenced legal proceedings against Win Victory for, among other things, the repayment of the Win Victory Claim of approximately HK$37 million. The Win Victory Injunction Order in respect of the assets of Win Victory up to the value of HK$37 million was also granted by the High Court on 22 August 2003. Details are set out under the heading “Legal proceedings brought by the Company” in this document and the Company’s announcement dated 27 August 2003.
In the evening on 26 August 2003, the Company and the Receivers received a letter from the legal advisers to the Offeror and SHKIL informing them that SHKIL will, on behalf of the Offeror, make the Offers.
On 29 August, 2003, the Variation Order was granted by the High Court which provides the Receivers the ability to deal with the Offers in a manner as they deem appropriate having regard, inter alia, to the purposes set out in the Order (including the duty to protect and preserve the Assets). The effect of the Variation Order is that, as appropriate in the context of their wider duties and responsibilities, the Receivers can incur time and costs on the Company’s behalf in appointing advisers and providing information to Shareholders in relation to the Offers.
Having obtained the Variation Order, the Receivers appointed Henco as their financial adviser and First Shanghai as the independent financial adviser to the Independent Shareholders in relation to the Offers.
The release of the Group’s interim results for the six months ended 30 June 2003 was delayed. Details are set out under the heading “Material changes” in Appendix I and the Company’s announcement dated 26 September 2003.
Having obtained legal advice, the Receivers petitioned for the winding-up of Win Victory and obtained an order from the High Court on 24 September 2003, among other things, appointing the provisional liquidators of Win Victory. Details are set out under the heading “Legal proceedings brought by the Company” in this document and the Company’s announcement dated 26 September 2003.
The Receivers issued a letter dated 26 September 2003 to the Company’s auditors, Deloitte Touche Tohmatsu (“DTT”), to request for a confirmation by DTT as to whether the BVI Trades would have any impact on the truth and fairness of the 2002 Financial Statements. DTT replied on 2 October 2003 with reference to its previous fax dated 23 September 2003 to the Receivers and stated that, they have no objection to the extraction of the financial information from the Company’s 2000, 2001 and 2002 annual reports for the purpose of this document, however, if the auditors’ report on these financial statements is reproduced in this document, DTT required disclosures in this document in relation to the 2002 Financial Statements including that (i) with reference to the Company’s announcement dated 16 June 2003, the executive Directors required extra time to consider whether the recent events as defined in such announcement would affect the truth and fairness of the 2002 Financial Statements; and (ii) until such time as the effect of the recent events, as defined in such announcement, on the 2002 Financial Statements can be determined, reliance should not be placed on the 2002 Financial Statements or on the auditors’ report thereon.

– 21 –

LETTER FROM THE RECEIVERS

The Receivers received a letter on 30 September 2003 from the legal advisors of the Offeror (the “30 September Letter”) informing them that the Offeror wishes to assume management and control of the Company as soon as possible, and in that regard the Offeror intends to appoint new Directors and to discharge the Receivers as court-appointed receivers and managers of the Company.

In the 30 September Letter, the legal advisors of the Offeror also requested the Receivers, among other things, to appoint Mr. Yue and Mr. Lau Yau Cheung, Brent as Directors or to convene a special general meeting of the Company to consider the appointment of Mr. Yue and Mr. Lau Yau Cheung, Brent as Directors.

On 3 October 2003, the Receivers, through their legal advisors, responded to the 30 September Letter and informed the legal advisors to the Offeror, among other things, that the Receivers do not have the power to appoint additional Directors and that the Offeror should apply to the High Court for directions as they see fit.

Financial information

On the basis of the 2002 annual report of the Company, the Company is an investment holding company and the activities of its principal subsidiaries are trading of base metals and fabrics in Hong Kong.

A summary of the audited consolidated results of the Group for each of the three years ended 31 December 2002, the audited financial statements of the Group for the year ended 31 December 2002 and the statement of proforma unaudited adjusted consolidated net asset value of the Group are set out in Appendix I to this document.

The Company has received no indication from any Directors regarding their intentions on whether to accept or reject the Offers.

INFORMATION ON THE OFFEROR

Reference is made to the Offer Announcement and the Offer Document. The Offeror is a private company which was incorporated in the BVI on 18 July 2003 and is wholly-owned by Mr. Yue. The Offeror is a special purpose vehicle formed to hold the Sale Shares. Mr. Yue is an independent third party who is not connected with the directors, chief executive or substantial shareholders of the Company or its subsidiaries or their respective associates (as defined in the Listing Rules) other than the Offeror who is a connected person by virtue only of its substantial shareholding in the Company after completion of the Sale and Purchase Agreement. Mr. Yue is the director of the Offeror. Other than the appointment of SHKIL as the financial adviser to the Offeror, Mr. Yue or any of his close relatives or related trust or companies controlled by him has no other relationship, financial or otherwise, with Sun Hung Kai & Co. Limited or any party acting in concert with Sun Hung Kai & Co. Limited.

– 22 –

LETTER FROM THE RECEIVERS

OFFEROR’S INTENTION REGARDING THE COMPANY

Reference is made to the Offer Announcement and the Offer Document which stated that:

“It is the intention of the Offeror to maintain the existing principal activities of the Company and the Offeror has no intention to inject any material assets of businesses into the Company or any of its subsidiaries immediately after the Offers. The Offeror has no intention to dispose of or re-deploy any material assets of the Company or any of its subsidiaries. The Offeror will also assist the board of the Company to review the business and operations of the Group after the closing of the Offers with a view to rationalizing and increasing the business activities and performance of the Group.”

With reference to the Offeror’s intention as stated above, Shareholders and Optionholders should be aware that at the time of the appointment of the Receivers, substantially all the Group’s employees have either been dismissed or resigned and the Group’s business operations had practically ceased.

Shareholders and Optionholders are referred to the information provided in the section headed “Role of the Receivers” above.

DIRECTORS AND MANAGEMENT

As disclosed in the Offer Document, the Offeror intends to appoint a majority of the Directors (the “New Board”). The daily operation and management will be carried out by the New Board after the close of the Offers. As at 19 September 2003, being the latest practicable date of the Offer Document, the Offeror intends to nominate the following persons as executive directors to the New Board upon closing of the Offers.

Mr. Yue , age 35, graduated at 深圳市司法學院 (Shenzhen College of Laws) in 1989. Mr. Yue was a magistrate of 深圳市羅湖區人民法院經濟審判庭 (Magistrates’ courts for economic affairs of the people’s court of Luohu District, Shenzhen) from 1989 to 1993. Mr. Yue worked for the 深圳市人民政府貿易發展局 (Trade Development Council of the people’s government of Shenzhen) from January 1993 to December 1995. His major duty was to scrutinize the Shenzhen branch offices of foreign investors. Since 1998, Mr. Yue has been working as the director of 深圳市海佳華諮詢有限公司 (Shenzhen Hai Jia Hua Consulting Company Limited), which is principally engaged in trading, provision of consultancy service to state-owned enterprises and investment management in the PRC.

Mr. Lau Yau Cheung , Brent , age 42, graduated from the University of Toronto in Canada with a bachelor’s degree in commerce in 1984. Mr. Lau has over 18 years’ experience in securities industry in Hong Kong. Since 1999, Mr. Lau is the managing director of BH Capitalink Development Limited, a money lending company in Hong Kong.

As disclosed in the Offer Document, the aforesaid nominated persons do not have expertise in the existing business of the Group. The Offer Document also stated that they have extensive experience in administration and management of corporations. The Offeror may nominate new Directors, including independent non-executive Directors, to the New Board in compliance with the Takeovers Code, subject to any further order of the High Court, if appropriate.

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LETTER FROM THE RECEIVERS

As disclosed in the Offer Document, the Offeror intends that there will not be material changes to the employees of the Company (of which there are none for the time being) and of its subsidiaries following completion of the Offers.

The Receivers received a letter on 30 September 2003 from the legal advisors of the Offeror informing them that the Offeror wishes to assume the management and control of the Company as soon as possible, and in that regard they intend to appoint new directors and to discharge the Receivers as court-appointed receivers and managers of the Company.

MAINTAINING THE LISTING STATUS OF THE COMPANY

As stated in the Offer Announcement and the Offer Document, it is the intention of the Offeror that the listing of the Shares on the Stock Exchange should be maintained. Accordingly, the Offeror will take appropriate steps as soon as possible following the close of the Offers to ensure the trading of the Shares on the Stock Exchange is resumed and that such number of Shares as may be required by the Stock Exchange are held by public.

The Stock Exchange has stated that, in the event that less than 25% of the Shares are in public hands following the closing of the Offers or if the Stock Exchange believes that a false market exists or may exist in the Shares or that there are insufficient Shares in public hands to maintain an orderly market, then it will consider exercising its discretion to suspend trading in the Shares.

The Stock Exchange will also closely monitor all future injections into or disposals of assets by the Company will be subject to the provisions of the Listing Rules. Pursuant to the Listing Rules, the Stock Exchange has the discretion to require the Company to issue a circular to the Shareholders where any acquisition or disposal by the Company is proposed, irrespective of the size of such acquisition or disposal and in particular where such acquisition or disposal represents a departure from the principal activities of the Company. The Stock Exchange also has the power, pursuant to the Listing Rules, to aggregate a series of acquisitions or disposals by the Company and any such acquisitions or disposals may, in any event, result in the Company being treated as a new applicant for listing and subject to the requirements for new applicants as set out in the Listing Rules.

Your attention is drawn to the letter of advice from First Shanghai, the independent financial adviser to the Independent Shareholders, which sets out their recommendations in relation to the Offers and the principal factors considered by them in arriving at their recommendations.

WAIVER APPLICATION

The Company has applied to the SFC for, and the SFC has indicated it will grant to the Company, waivers from strict compliance with the relevant requirements under Rule 10.11 and paragraphs 7 and 9 of Schedule II of the Takeovers Code, having regard, inter alia, to the following facts (with reference to details as set out in the “Letter from the Receivers”):

(a) although the Receivers have been provided with access to some of the books and records that have been seized by the ICAC, the Receivers are not aware if those records are complete

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LETTER FROM THE RECEIVERS

and they are unable to determine if they have reviewed all relevant documents and information in relation to the Group which may have any adverse effect on the latest financial position of the Group;

(b) the Receivers have investigated into the affairs of the Group without meaningful cooperation from the previous executive directors or employees of the Group and, as a result, they do not have full knowledge of the affairs of the Group which may have significant effect on the financial and trading position of the Group. What they have ascertained leads them to the belief that the available records of the Group are unreliable and questionable;
(c) the Receivers suspect the information available to them in relation to the Group is incomplete and expect to continue with their enquiries and actions directed at tracing and recovering the Assets of the Group;
(d) as the investigation by the Receivers in relation to, among other things, the BVI Trades, the misappropriation of funds and the Park Well Disposal is not complete and is on-going, any further findings may have a substantial effect on the financial and trading position of the Group. Details regarding these matters are set out in the section headed “Material findings of the Receivers” of the Circular;
(e) no unaudited management accounts of the Group have been prepared and maintained by the Company since May 2003, being the time when the Group’s operations had practically ceased following the occurrence of the recent events of the Company and the dismissal/ resignation of the Group’s employees/ Directors; and
(f) as the records in the Receivers’ possession are incomplete and may not be reliable, the Receivers are not in a position to provide details (including particulars of dates, parties, principal terms and conditions and any consideration passing to or from the Company or any of its subsidiaries) of every material contract as referred to in paragraph 9 of the Schedule II to the Takeovers Code entered into after the date two years before the commencement of the Offers.

ADDITIONAL INFORMATION

In considering what action to take in connection with the Offers, Shareholders should consider their own tax positions and, if they are in any doubt, they should consult their professional advisers.

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

For and on behalf of

Shanghai Merchants Holdings Limited (Receivers and Managers Appointed)

Alan Chung Wah Tang and Alison Wong Lee Fung Ying

Joint and Several Receivers and Managers

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LETTER OF ADVICE FROM FIRST SHANGHAI

The following is the text of a letter of advice to the Independent Shareholders and the Optionholders from First Shanghai in respect of the Offers prepared for the purpose of incorporation in this document.

==> picture [127 x 36] intentionally omitted <==

First Shanghai Capital Limited

19th Floor Wing On House 71 Des Voeux Road Central Hong Kong

7 October, 2003

To the Independent Shareholders and the Optionholders

Dear Sirs,

INTRODUCTION

We refer to our engagement as the independent financial adviser to advise you in respect of the Offers, details of which are contained in the “Letter from the Receivers” as set out on pages 26 to 36 of a document to the Shareholders dated 7 October, 2003 (the “Document”), of which this letter forms part. Unless the context otherwise requires, terms used in this letter shall have the same meanings as in the Document.

According to the Offer Announcement and the Offer Document, the Offeror entered into the Sale and Purchase Agreement with the Vendor to acquire from the Vendor 260,986,000 Shares, representing approximately 63.19% of the issued share capital of the Company and of the voting rights which may be exercised at the general meeting of the Company at a total consideration of HK$11.5 million, or approximately HK$0.0441 per Share. Upon completion of the Sale and Purchase Agreement, the Offeror became interested in approximately 63.19% of the total issued share capital of the Company. Under Rule

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LETTER OF ADVICE FROM FIRST SHANGHAI

26 of the Code, the Offeror is required to make mandatory unconditional cash offers for all the Shares and all outstanding Options other than those already acquired by the Offeror and parties acting in concert with it. Particulars of the Offers are set out in the “Letter from Sun Hung Kai” as contained in the Offer Document.

As set out in the “Letter from the Receivers” of the Document, there have been a series of events relating to Mr. Chau, Ms. Mo and the Group in 2003 which substantially affected the operations of the Group. The Company is currently under receivership and the Group’s assets are managed by the Receivers and the trading in the Shares has been suspended at the request of the Company since 2 June, 2003 until further notice. Prior to and following the appointment of the Receivers, except for Ms. Mo and Ms. Gong Bei Ying, all Directors resigned from the board of Directors. Although Ms. Mo and Ms. Gong Bei Ying remain on record as Directors, the 17 June Order provides that the powers of all Directors shall cease forthwith. Accordingly, no independent board committee of the Company can be formed to advise the Independent Shareholders and Optionholders in respect of the Offers.

In formulating our opinion, we have relied on information available in the public domain and the statements, information, opinions and representations contained or referred to in the Document and the information provided to us by the Receivers. The Receivers accept full responsibility for the accuracy of the information contained in the Document (other than information relating to the Offers or the Offeror) on the basis of the information available to them as at the date of the Document. We have relied on the statement by the Receivers that taking into account the powers, duties and responsibilities of the Receivers, the length of their appointment and the Receivers’ concerns on the truthfulness, accuracy or completeness of the information on the Group to which the Receivers had access, on the basis of the information available to the Receivers as at the Latest Practicable Date, the Receivers confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in the Document have been arrived at after careful consideration and there are no other material facts not contained in the Document the omission of which would make any statement in the Document misleading. We have not conducted any independent in-depth investigation into the business and affairs of the Group nor have we carried out any independent verification of the information supplied. However, Independent Shareholders and Optionholders should be aware that the Receivers are not satisfied, on the basis of their enquiries into the affairs of the Group, which are ongoing and are not complete, that information in relation to the Group which has been made available to the Receivers and which has been ascertained by the Receivers is in all respects true, complete or accurate. It may not be in the interests of the Company or the Shareholders to disclose to the public, actions intended or contemplated by the Receivers pursuant to the 17 June Order. In addition, given that the Receivers’ enquiries into the affairs of the Group are ongoing and are not complete, the Receivers believe it is inappropriate at this time to publish certain information within the knowledge or belief of the Receivers relating to possible misconduct in relation to the affairs of the Company. Even though we consider that the information provided to us are sufficient to form a reasonable basis of our opinion, Independent Shareholders and Optionholders should, nonetheless, exercise extreme caution in considering the Offers.

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LETTER OF ADVICE FROM FIRST SHANGHAI

THE SHARE OFFER

In arriving at our recommendation in respect of the terms of the Share Offer, we have taken into consideration the following principal factors and reasons:

Background of the Company

The Group is principally engaged in the trading of base metals in the PRC. Mr. Chau, through the Vendor, became the controlling shareholder of the Company in around April 2002.

According to the paragraph headed “Recent events of the Group” under the section headed “Information on the Group” in the “Letter from the Receivers” of the Document, there were allegations made in the media concerning the possible criminal misconduct in relation to the group of companies controlled by Mr. Chau, the ultimate controlling shareholder of the Company prior to the completion of the Sale and Purchase Agreement, and an investigation was conducted by the ICAC on Ms. Mo, the chairman of the Company. On 16 June, 2003, the Company announced that as (i) no executive Directors were involved in the daily operations of the Company and (ii) nearly all the employees of the Company had been dismissed, the Company was no longer being properly managed and no protection was being afforded to the Company’s assets, and an application (the “Application”) was made to the High Court for the appointment of the Receivers of the Company to take all proper actions to preserve the assets of the Company, to carry on the business of the Company and to do all such things as ancillary and necessary for the purpose of protecting the value and assets of the Company. The Honourable Madam Justice Kwan of the High Court heard the Application on 17 June, 2003 and granted on the same day the 17 June Order that Mr. Alan Chung Wah Tang and Ms. Alison Wong Lee Fung Ying, both of Grant Thornton Hong Kong, be appointed jointly and severally as the receivers and managers of the Company. The 17 June Order provides that the powers of all Directors shall cease forthwith.

Trading in the Shares on the Stock Exchange has been suspended at the request of the Company since 9:30 a.m. on Monday, 2 June, 2003 and will remain suspended until further notice.

Principal terms of the Share Offer

SHKIL, on behalf of the Offeror, is making mandatory unconditional cash offers on the following basis:

For each Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HK$0.0441 in cash

As at the Latest Practicable Date, there were 413,000,000 Shares in issue. At the Offer Price of HK$0.0441 per Share, the entire issued share capital of the Company was valued at approximately HK$18,213,300.

Independent Shareholders should note that the Offer Price of HK$0.0441 per Share is equivalent to the consideration paid by the Offeror for each Share pursuant to the Sale and Purchase Agreement.

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LETTER OF ADVICE FROM FIRST SHANGHAI

Share price performance

The following sets out the monthly highest, lowest, average closing prices and the closing prices of the Shares traded on the Stock Exchange on the last trading day of each month for the period commencing from 2 December, 2002 to 30 May, 2003 (i.e. approximately six months prior to the suspension of the trading in the Shares on 2 June, 2003) and up to and including the Latest Practicable Date:

		Closing price per Share (HK$)	Closing price per Share (HK$)
				Last trading
				day of that
Month/period	Highest	Lowest	Average	month/period
2002
December	0.410	0.395	0.403	0.410
2003
January	0.405	0.395	0.401	0.405
February	0.405	0.380	0.396	0.390
March	0.380	0.300	0.366	0.350
April	0.355	0.320	0.344	0.345
May	0.325	0.230	0.260	0.260
2 June, 2003
to the Latest Practicable Date		Trading suspended

Source: Bloomberg

As illustrated above, the highest and lowest closing price per Share during the six months period prior to the suspension of trading in the Shares on 2 June, 2003 were HK$0.410 and HK$0.230 per Share, respectively. The Offer Price of HK$0.0441 per Share represents a discount of approximately 89.24% to the highest closing price per Share and a discount of approximately 80.83% to the lowest closing price per Share respectively.

In addition, the Offer Price of HK$0.0441 per Share represents:

a discount of approximately 83% to the closing price of HK$0.26 per Share as quoted on the Stock Exchange on 30 May, 2003, being the last trading day prior to the suspension of the trading of the Shares on 2 June, 2003;
a discount of approximately 83.66% to the average closing price of approximately HK$0.27 per Share for the 10 trading days up to and including 30 May, 2003;
a discount of approximately 84.61% to the average closing price of approximately HK$0.2866 per Share for the 30 trading days up to and including 30 May, 2003;
a discount of approximately 86.34% to the average closing price of approximately HK$0.3228 per Share for the 60 trading days up to and including 30 May, 2003; and

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LETTER OF ADVICE FROM FIRST SHANGHAI

a discount of approximately 83% to the Group’s pro forma adjusted consolidated net asset value of approximately HK$0.26 per Share after adjusting for the net proceeds of HK$49.9 million from the subscription agreement dated 6 March, 2003.

The following chart sets out the daily closing price of the Shares as quoted on the Stock Exchange from 2 December, 2002 and up to 30 May, 2003 (both dates inclusive):

==> picture [426 x 211] intentionally omitted <==

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

0.45
0.40
0.35
0.30
0.25
0.20
0.15
Offer price = HK$0.0441
0.10
0.05
0
December 2002 January 2003 February 2003 March 2003 April 2003 May 2003
Source: Bloomberg
Closing price per Share (HK$)
----- End of picture text -----

As illustrated in the above chart, the closing prices of the Shares were in the range from HK$0.30 to HK$0.40 per Share most of the time during the period from 2 December, 2002 to 30 April, 2003. Since 2 May, 2003 to 30 May, 2003, the closing prices of the Shares fell to the range from HK$0.23 to HK$0.325 per Share. We have not identified any conclusive reason for the decrease in the closing price of the Shares during the period from 2 May, 2003 to 30 May, 2003 but, according to an announcement of the Company dated 28 May, 2003, there were certain allegations made in the media regarding the financial position of Mr. Chau. Although the closing price of the Shares had been decreased to HK$0.23 per Share, being the lowest closing price during the period under review, the Offer Price still represents a discount of approximately 80.83% to that price. Given that the historical closing price of the Shares was substantially higher than the Offer Price, we consider that the Offer Price is at a level which is neither fair nor reasonable to the Independent Shareholders.

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LETTER OF ADVICE FROM FIRST SHANGHAI

Liquidity of the Shares

The following table sets out the average daily trading volume, the average daily trading volume as a percentage to the total issued share capital and the average daily trading volume as a percentage to the Shares held by the public for the period commencing from 2 December, 2002 to 30 May, 2003 (approximately six months prior to the suspension of the trading of the Shares on 2 June, 2003):

			Percentage to
Month/	Average daily	Percentage to total	Shares held
period	trading volume	issued share capital	by the public
	(Number of Shares)	(%)	(%)
2002
December	111,143	0.0386	0.1048
2003
January	151,000	0.0524	0.1424
February	770,667	0.2676	0.7269
March	443,000	0.1073	0.4179
April	16,333	0.0040	0.0154
May	722,000	0.1748	0.6810

Source: Bloomberg and www.hkex.com.hk

The trading volume of the Shares during the period from 2 December, 2002 to 30 May, 2003 was very thin. During the period under review, May 2003 recorded the highest average daily trading volume of 722,000 Shares or approximately 0.17% of the total issued share capital of the Company, whilst April 2003 recorded the lowest average daily trading volume of 16,333 Shares or approximately 0.004% of the total issued share capital of the Company. Given the above trading data of the Shares, we consider that the Shares have been illiquid. Independent Shareholders should note that they may not be able to dispose of their Shares in the market without exerting downward pressure to the price of the Shares. In addition, Independent Shareholders should note that the trading in the Shares has been suspended since 2 June, 2003 and it is uncertain as to the timing of the resumption of the trading in the Shares. We are, therefore, of the view that the Share Offer represents an alternative exit for Independent Shareholders.

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LETTER OF ADVICE FROM FIRST SHANGHAI

Financial information

(i) Net asset value

As disclosed in Appendix I to the Document, the audited consolidated net asset value (“NAV”) of the Group as at 31 December, 2002 was approximately HK$56,695,000 or approximately HK$0.137 per Share (based on 413,000,000 Shares outstanding as at the Latest Practicable Date), while the pro forma unaudited adjusted consolidated NAV of the Group as at the Latest Practicable Date after adjusting for certain events as set out in the paragraph headed “Statement of proforma unaudited adjusted consolidated net asset value of the Group” in Appendix I to the Document, amounted to approximately HK$10,925,000 or approximately HK$0.0265 per Share (based on 413,000,000 Shares outstanding as at the Latest Practicable Date). The following table summarises the discount/premium of the Offer Price to the audited consolidated NAV of the Group per Share as at 31 December, 2002 and the pro forma unaudited adjusted consolidated NAV of the Group per Share as at the Latest Practicable Date:

			(Discount)/Premium	(Discount)/Premium
			of the Offer Price
			to the amount
	Amount	Amount per Share		per Share
	(HK$)	(HK$)		(%)
Audited NAV as
at 31 December, 2002	56,695,000	0.137		(67.81)
Pro forma unaudited NAV as
at the Latest Practicable Date	10,925,000	0.0265		66.42

As illustrated above, the Offer Price represents a significant discount of approximately 67.81% to the audited consolidated NAV of the Group as at 31 December, 2002, whilst it represents a premium of approximately 66.42% to the pro forma unaudited adjusted consolidated NAV of the Group as at the Latest Practicable Date. However, the pro forma unaudited adjusted consolidated NAV of the Group as at the Latest Practicable Date has not taken into account the estimated recoverable amount under the Great Center Action of approximately HK$35.1 million. As stated in the paragraph headed “Statement of proforma unaudited adjusted consolidated net asset value of the Group” in Appendix I to the Document, the Receivers, having obtained legal advice, consider having strong grounds to obtain recovery of HK$35.1 million from the Great Center Action. On that basis, we consider that such amount should be taken into account in assessing the value of the Company. Should the HK$35.1 million from the Great Center Action be included, the pro forma unaudited adjusted consolidated NAV of the Group will become approximately HK$46,025,000 or approximately HK$0.1114 per Share. The Offer Price represents a discount of approximately 60.41% to such pro forma unaudited adjusted consolidated NAV per Share. On this basis, we consider that the Offer Price is neither fair nor reasonable to the Independent Shareholders.

Based on the Offer Price of HK$0.0441 per Share, the Company is valued at approximately HK$18.2 million which is approximately equal to the remaining cash and bank balances of the Group of approximately HK$18 million as at the Latest Practicable Date. Accordingly, the Share Offer in effect attaches minimal value to estimated recoverable amount under the Great Center Action of approximately HK$35.1 million, and the listing status of the Company. We are of the view that the Offer Price is not attractive and neither fair nor reasonable so far as the Independent Shareholders are concerned.

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LETTER OF ADVICE FROM FIRST SHANGHAI

(ii) Earnings

The Group recorded a net loss of approximately HK$49,994,000 for the year ended 31 December, 2002. We are, therefore, unable to value the Company based on price/earnings multiple represented by the Offer Price, another commonly used valuation method.

(iii) Dividends

The Group have incurred losses for the past two years. Accordingly, the Company has not declared any dividends to the Shareholders in the past two years. As such, there is no basis for us to appraise the value of the Company and the fairness and reasonableness of the Offer Price based on historical dividend yield of the Company.

Operating results for the year ended 31 December, 2002

The audited consolidated financial statements of the Group for the year ended 31 December, 2002 are set out in Appendix I to the Document. For the year ended 31 December, 2002, the turnover of the Group increased by approximately 9.6 times to HK$403,749,000 when compared with the previous year. We note from the Company’s 2002 annual report that there was a shift in major business of the Group since the acquisition of the controlling interests in the Company by the Vendor in 2002. Prior to 2002, most of the turnover of the Group was derived from the trading of fabrics. After the acquisition by the Vendor in 2002 and the resulting change in management, approximately 85.7% of the Group’s turnover was derived from the trading of base metals. Thus, it was clear that the Group had a change in business mix of its activities from fabrics trading business to base metals trading business.

The segmental profit of the base metals trading business amounted to approximately HK$4,505,000 for the year ended 31 December, 2002, while the fabrics trading business recorded a segmental loss of approximately HK$11,442,000. As there was a significant segmental loss from the Group’s discontinued operation, fabrics processing operation, which was ceased in 2002, the Group recorded a net loss of approximately HK$49,994,000 for the year ended 31 December, 2002.

Taking into account of the continued losses incurred by the Group, the short operating history of the Group in base metals trading business and the intention of the Offeror to continue the existing operations of the Group as described in the paragraph headed “Intention of the Offeror with respect to the Group” below, we are of the view that the prospects of the Group are subject to uncertainties and risks and would (i) urge Independent Shareholders to exercise caution in appraising the prospects of the Company and (ii) advise the Independent Shareholders that there is no assurance as to when the Group will return to profitability.

Other considerations

(i) Recent events and contingency of the Group

Given the recent events (the “Events”) of the Group as set out in the “Letter from the Receivers” of the Document, the Company is currently under receivership and the trading in the Shares has been

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LETTER OF ADVICE FROM FIRST SHANGHAI

suspended until further notice. The Events have not only affected the proper operations of the Group, but certain assets of the Group may also not be recovered. As discussed with the Receivers, it is uncertain as to whether there will be any undisclosed claims, liens or encumbrances on the assets of the Group. In addition, the Group is currently involved in a number of legal proceedings, the outcome of which are uncertain and the amount of legal and professional fees to be incurred is uncertain as well. Should there be any material undisclosed claim, liens or encumbrances on the Group’s assets, or if the final judgements on the legal proceedings are unfavourable to the Group, or the legal and professional fees are higher than expected, the results of the Group would be adversely affected. Independent Shareholders are advised to note the aforementioned uncertainties.

(ii) Intention of the Offeror with respect to the Group

As stated in the Offer Document, the Offeror intends to maintain the listing of the Shares on the Stock Exchange after the close of the Offers. Although the Offeror has stated in the Offer Document that it will take appropriate steps following the close of the Offers to ensure that the trading of the Shares on the Stock Exchange is resumed and that such number of Shares as may be required by the Stock Exchange are held by the public, Independent Shareholders should note that there is no assurance on the timing of the resumption in trading of the Shares on the Exchange following the close of the Offers.

In addition, as stated in the Offer Document, it is the intention of the Offeror to maintain the existing principal activities of the Company and the Offeror has no intention to inject any material assets or businesses into the Group or dispose of or re-deploy any material assets of the Group. The Offeror will also assist the board of directors of the Company to review the business and operations of the Group with a view to rationalizing and increasing the business activities and performance of the Group.

The Offeror has not stated its intention to treat the interest in the Company as long-term or shortterm investment. We are not aware of any undertaking or commitment made by the Offeror or Mr. Yue in the Offer Document regarding how long it will retain its interests in the Company upon the close of the Offers. We have not been able to obtain further information from the Offeror in this regard.

Given the losses incurred by the Group, as discussed under the paragraph headed “Operating results for the year ended 31 December, 2002” above, and the apparent lack of relevant experience in the management of the operations of the Group of the new directors to be appointed to the board of directors of the Company by the Offeror, as discussed under the paragraph headed “Directors and management of the Company” below, we consider that there is uncertainty as to the outlook and prospects of the Group’s performance in the short term.

(iii) Directors and management of the Company

The Offeror has stated its intention to nominate a majority of the directors of the Company. As stated in the Offer Document, the Offeror intends to nominate two executive directors, namely Mr. Yue and Mr. Lau Yau Cheung, Brent, to the board of directors of the Company. Although the Offeror has stated in the Offer Document that it also intends that there will not be any material changes to the employees of the Group following the completion of the Offers, we note from the “Letter from the Receivers” of the Document that at the time of the appointment of the Receivers, substantially all the

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LETTER OF ADVICE FROM FIRST SHANGHAI

Group’s employees have either been dismissed or resigned and the operations of the Group had practically ceased. Thus, we are uncertain as to the feasibility of such intention of the Offeror. In addition, based on the information as stated in the Offer Document, Mr. Yue previously worked in the Magistrates’ court for economic affairs of the people’s court of Luohu District, Shenzhen, the Trade Development Council of the people’s government of Shenzhen, and in a company principally engaged in trading, provision of consultancy service to state-owned enterprises and investment management in the PRC, while Mr. Lau Yau Cheung, Brent has over 18 years of experience in securities industry and is the managing director of a money lending company in Hong Kong. Based on the above, we consider that the working experiences of Mr. Yue and Mr. Lau Yau Cheung, Brent do not directly relate to the existing business of the Group. We are of the view that there is no assurance on the effectiveness of the new management of the Company.

Recommendation

In formulating our opinion and recommendation, we have considered the above principal factors and reasons, in particular:

the Shares traded substantially above the Offer Price at all time during the last six months immediately preceding the suspension of trading in the Shares on 2 June, 2003;
the trading volume of the Shares were thin during the last six months immediately preceding the suspension of trading in the Shares on 2 June, 2003;
based on the Offer Price of HK$0.0441 per Share, the Company is valued at approximately HK$18.2 million which is approximately equal to the remaining cash and bank balances of the Group of approximately HK$18 million as at the Latest Practicable Date. Thus, the Share Offer in effect attaches minimal value to the estimated recoverable amount under the Great Center Action of approximately HK$35.1 million (which the Receivers, having obtained legal advice, consider having strong grounds to obtain recovery) and the listing status of the Company;
the Group recorded operating losses for the last two financial years and there is no assurance on when the Group will return to profitability;
it is uncertain as to whether there will be undisclosed any claims, liens or encumbrances on the assets of the Group. In addition, the Group is currently under several legal proceedings, the outcome of which are uncertain and the amount of legal and professional fees to be incurred is uncertain; and
the directors whom the Offeror intends to appoint to the board of directors of the Company do not seem to have the relevant expertise in the operations of the existing business of the Group.

We, after balancing the above factors, do not consider the terms of the Share Offer are fair and reasonable so far as the Independent Shareholders are concerned primarily due to the fact that the Offer Price represents significant discounts to (i) the historical trading price per Share at all

– 35 –

LETTER OF ADVICE FROM FIRST SHANGHAI

time during the last six months prior to the suspension of trading in the Shares and (ii) the last reported NAV; and that the Share Offer attaches minimal value to the estimated recoverable amount under the Great Center Action of approximately HK$35.1 million (which the Receivers, having obtained legal advice, consider having strong grounds to obtain recovery) and the listing status of the Company. Accordingly, we recommend that the Independent Shareholders should consider not to accept the Share Offer.

Independent Shareholders should, however, note that (i) the trading in the Shares had been suspended since 2 June, 2003 and it is uncertain as to the timing of the resumption in the trading in the Shares; (ii) the historical trading volume of the Shares was thin; (iii) the Group had experienced net losses for the last two financial years; (iv) there may be undisclosed claims, liens or encumbrances on the assets of the Group and the amount of legal and professional fees to be incurred in relation to current legal proceedings of the Group is uncertain; and (v) the Offeror and the directors whom it intends to appoint to the board of directors of the Company do not seem to have the relevant expertise to operate the business of the Group. Given the above, those Independent Shareholders who do not wish to risk these uncertainties may consider to sell part or all of their investments in the Shares.

Independent Shareholders who wish to accept the Share Offer should read carefully the procedures for accepting the Share Offer as detailed in the Offer Document and are strongly advised that the decision to realise or retain their investments in the Shares is subject to individual circumstances and investment objectives.

THE OPTION OFFER

As stated in the Letter from the Receivers of the Document, there are 9,840,000 Options which are exercisable from 2 July, 2002 to 1 July, 2007 to subscribe for 24,000,000 Shares at an exercise price of HK$0.556 per Share. Based on the Option Offer Price of HK$0.0001 per Option, the Option Offer values the outstanding options at approximately HK$984.

The exercise price of the Option of HK$0.556 is approximately 113.85% higher than the closing price per Share of HK$0.26 on 30 May, 2003 (being the last trading day immediately preceding the suspension of the trading in the Shares on 2 June, 2003). The Options are, therefore, currently substantially out-of-the-money. In addition, in view of the uncertainty of the Group’s profitability and prospects as discussed above, we consider that the Option Offer is fair and reasonable so far as the Optionholders are concerned and recommend the Optionholders to accept the Option Offer.

However, as the expiry date of the Options is 1 July, 2007 which is over three and a half years before expiration, those Optionholders, who consider the Option Offer is not attractive and would like to await a re-rating of the Shares to a level higher than the exercise price of the Options, may consider not to accept the Option Offer.

Yours faithfully,

For and on behalf of

First Shanghai Capital Limited Helen Zee Byron Tan Managing Director Executive Director

– 36 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Reference is made to the Company’s announcement dated 16 June 2003 which stated that, among other things, at a meeting of the board of Directors on 14 June 2003, it was resolved that, among other things (i) the executive Directors required extra time to consider whether the recent events (as defined in such announcement) would affect the truth and fairness of the 2002 Financial Statements and (ii) the holding of the AGM on 18 June 2003 for the purpose of, among others, receiving and considering the 2002 Financial Statements and the reports of the Directors and auditors for the year ended 31 December 2002 be postponed to a later date until further notice. The 2002 Financial Statements, therefore, have not been laid before the Shareholders in general meeting for their receipt and consideration.

Shareholders and other investors should be aware that, until such time as the effect of the recent events (as defined in the Company’s announcement dated 16 June 2003) on the 2002 Financial Statements can be determined, they should exercise extreme caution when reviewing the 2002 Financial Statements.

Reference is also made to the information set out in the section headed “Material Changes” of Appendix I.

The Receivers have not investigated or carried out any detailed review on the historical financial records for the periods comprised in the Group’s audited accounts, including but not limited to, the 2002 Financial Statements.

– 37 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

1. FINANCIAL SUMMARY

The following is a summary of the audited consolidated results of the Group for each of the three financial years ended 31 December 2002, extracted from the Company’s annual reports.

Results

Turnover Loss before taxation Taxation Loss after taxation Extraordinary/Exceptional item Minority interests Net loss for the year Dividend Dividend per share Earning per share Basic	For the 2002 HK$’000 403,749 (50,069) (24) (50,093) – 99 (49,994) – – (20.74 cents)	year ended 31 December 2001 2000 HK$’000 HK$’000 38,140 124,742 (47,049) (14,531) 52 – (46,997) (14,531) – – 1,439 930 (45,558) (13,601) – – – – (22.78 cents) (6.80 cents)

– 38 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

2. FINANCIAL INFORMATION

Set out below are the audited financial statements of the Group as extracted from the Company’s annual report for the year ended 31 December 2002.

Consolidated income statement

For the year ended 31 December 2002

Notes Turnover 4 Cost of sales Gross profit (loss) Other operating income Distribution costs Administrative expenses Impairment loss recognised in respect of property, plant and equipment 13 Other operating expenses 6 Loss from operations 7 Interest on bank borrowings wholly repayable within five years Gain on disposal of subsidiaries Loss before taxation Taxation 11 Loss after taxation Minority interests Loss for the year Loss per share 12	2002 HK$’000 403,749 (395,433) 8,316 3,130 (104) (13,733) (29,623) (17,734) (49,748) (582) 261 (50,069) (24) (50,093) 99 (49,994) (20.74 cents)	2001 HK$’000 38,140 (46,145) (8,005) 989 (7,635) (11,599) – (19,177) (45,427) (1,622) – (47,049) 52 (46,997) 1,439 (45,558) (22.78 cents)

– 39 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated balance sheet

At 31 December 2002

Notes Non-current assets Property, plant and equipment 13 Current assets Inventories 15 Trade and other receivables 16 Pledged bank deposits 17 Bank balances and cash Current liabilities Trade and other payables 18 Amount due to a director 19 Taxation payable Bank borrowings 20 Net current assets (liabilities) Total assets less current liabilities Minority interests Capital and reserves Share capital 21 Reserves	2002 HK$’000 23,970 6,435 38,982 3,003 23,072 71,492 15,827 – 10,070 12,870 38,767 32,725 56,695 – 56,695 28,800 27,895 56,695	2001 HK$’000 100,294 2,968 22,784 – 74 25,826 22,483 53 12,656 19,917 55,109 (29,283) 71,011 5,496 65,515 20,000 45,515 65,515

– 40 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Balance sheet

At 31 December 2002

Notes Non-current asset Interests in subsidiaries 14 Current assets Other receivables Bank balances Current liabilities Other payables Net current assets (liabilities) Capital and reserves Share capital 21 Reserves	2002 HK$’000 43,194 113 12,900 13,013 434 12,579 55,773 28,800 26,973 55,773	2001 HK$’000 68,140 – 1 1 968 (967) 67,173 20,000 47,173 67,173

– 41 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Statements of changes in equity

For the year ended 31 December 2002

THE GROUP At 1 January 2001 Loss for the year At 31 December 2001 Shares issued at premium Share issue expenses Loss for the year At 31 December 2002 THE COMPANY At 1 January 2001 Loss for the year At 31 December 2001 Shares issued at premium Share issue expenses Loss for the year At 31 December 2002	Share capital HK$’000 20,000 – 20,000 8,800 – – 28,800 20,000 – 20,000 8,800 – – 28,800	Share premium Contributed account surplus HK$’000 HK$’000 37,164 – – – 37,164 – 33,022 – (648) – – – 69,538 – 37,164 60,274 – – 37,164 60,274 33,022 – (648) – – – 69,538 60,274	Accumulated Special profits reserve (losses) HK$’000 HK$’000 (14,980) 68,889 – (45,558) (14,980) 23,331 – – – – – (49,994) (14,980) (26,663) – 1,119 – (51,384) – (50,265) – – – – – (52,574) – (102,839)	Total HK$’000 111,073 (45,558) 65,515 41,822 (648) (49,994) 56,695 118,557 (51,384) 67,173 41,822 (648) (52,574) 55,773

The special reserve represents the difference between the nominal value of the shares of the subsidiaries acquired and the nominal value of the Company’s shares issued for the acquisition at the time of a group reorganisation in 1998.

The contributed surplus represents the difference between the consolidated shareholders’ funds of the subsidiaries and the nominal value of the Company’s shares issued for the acquisition at the time of a group reorganisation in 1998.

In addition to accumulated profits, under the Companies Act 1981 of Bermuda (as amended), contributed surplus is also available for distribution to shareholders. However, the Company cannot declare or pay a dividend, or make a distribution out of contributed surplus, if:

(a) it is, or would after the payment be, unable to pay its liabilities as they become due; or
(b) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts.

In the opinion of the Directors, the Company has no reserve available for distribution to shareholders at 31 December 2002. As at 31 December 2001, the Company’s reserves available for distribution to shareholders consisted of contributed surplus and accumulated losses totalling HK$10,009,000.

– 42 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Consolidated cash flow statement

For the year ended 31 December 2002

Notes OPERATING ACTIVITIES Loss from operations Adjustments for: Depreciation and amortisation of property, plant and equipment Impairment loss recognised in respect of intangible assets Impairment loss recognised in respect of property, plant and equipment Amortisation of intangible assets Loss on disposal of property, plant and equipment Allowance for doubtful debts Interest income Operating cash flows before movements in working capital (Increase) decrease in inventories Increase in trade and other receivables Increase in trade and other payables Cash used in operations Income taxes refunded Interest paid NET CASH USED IN OPERATING ACTIVITIES INVESTING ACTIVITIES Interest received Net cash outflow arising on disposal of subsidiaries 22 Proceeds on disposal of property, plant and equipment Purchase of property, plant and equipment NET CASH USED IN INVESTING ACTIVITIES	2002 HK$’000 (49,748) 4,765 – 29,623 – 5,363 12,371 (30) 2,344 (6,636) (37,297) 15,103 (26,486) – (582) (27,068) 30 (84) 230 (1,185) (1,009)	2001 HK$’000 (45,427) 10,839 1,188 – 395 10,685 8,492 (898) (14,726) 13,360 (22,622) 11,007 (12,981) 107 (1,622) (14,496) 898 – 3,953 (13,190) (8,339)

– 43 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

FINANCING ACTIVITIES Increase in pledged bank deposits Repayment of amount due to a director Repayment of bank loans Repayment of loan from minority shareholder of a subsidiary New bank loans raised Net increase (decrease) in trust receipt loans Net proceeds on issue of shares NET CASH FROM (USED IN) FINANCING ACTIVITIES NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT 1 JANUARY CASH AND CASH EQUIVALENTS AT 31 DECEMBER ANALYSIS OF THE BALANCE OF CASH AND CASH EQUIVALENTS Cash and cash equivalents as previously reported Effect of reclassification of trust receipt loans Cash and cash equivalents as restated Being: Bank balances and cash Bank overdrafts	2002 HK$’000 (3,003) (53) (2,950) – – 15,919 41,174 51,087 23,010 62 23,072 23,072 – 23,072 23,072 – 23,072	2001 HK$’000 – (5,409) (4,198) (3,595) 13,152 (6) – (56) (22,891) 22,953 62 (2,889) 2,951 62 74 (12) 62

– 44 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements

1. GENERAL

The Company is incorporated as an exempted company with limited liability in Bermuda under the Companies Act 1981 of Bermuda (as amended) and its shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). Its ultimate holding company is Angel Field Limited (“Angel Field”), a company which is incorporated in the BVI. The activities of the Company’s principal subsidiaries are set out in note 31.

2. ADOPTION OF NEW AND REVISED STATEMENTS OF STANDARD ACCOUNTING PRACTICE

In the current year, the Group has adopted, for the first time, a number of new and revised Statements of Standard Accounting Practice (SSAPs) issued by the Hong Kong Society of Accountants. The adoption of these Standards has resulted in a change in the format of presentation of the cash flow statement and the statement of changes in equity, and in the adoption of the following new and revised accounting policies. Further details of the effect on the adoption of these SSAPs are as follows:

Foreign currencies

The revisions to SSAP 11 “Foreign Currency Translation” have eliminated the choice of translating the income statements of overseas subsidiaries at the closing rate for the year, the policy previously followed by the Group. They are now required to be translated at an average rate. This change in accounting policy has not had any material effect on the results for the current or prior accounting periods.

Cash flow statements

Under SSAP 15 (Revised) “Cash Flow Statements”, cash flows are classified under three headings – operating, investing and financing, rather than the previous five headings. Interest received, which was previously presented under a separate heading is classified as investing cash flows. Interest paid which was previously presented under a separate heading is classified as operating cash flows, cash flow arising from taxes on income are classified as operating activities unless they can be separately identified with investing or financing activities. In addition, the amounts presented for cash and cash equivalents have been amended to exclude short-term loans that are financing in nature. The re-definition of cash and cash equivalents has resulted in a restatement of the comparative amounts shown in the cash flow statement.

Employee benefits

SSAP 34 “Employee Benefits” introduces measurement rules for employee benefits, including retirement benefit plans. Because the Group participates only in defined contribution retirement benefit schemes, the adoption of SSAP 34 has not had any material impact on the financial statements.

3. SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared under the historical cost convention and in accordance with accounting principles generally accepted in Hong Kong. The principal accounting policies adopted are set out below:

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 December each year.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Investment in subsidiaries

Investments in subsidiaries are included in the Company’s balance sheet at cost less any identified impairment loss.

Revenue recognition

Sales of goods are recognised when goods are delivered and title has passed.

Service income is recognised when services are provided.

Interest income from bank deposits is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable.

– 45 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

Property, plant and equipment

Property, plant and equipment is stated at cost less depreciation, amortisation and accumulated impairment losses.

Depreciation is provided to write off the cost of items of property, plant and equipment over their estimated useful lives, using the straight-line method, at the following rates per annum:

Leasehold land Over the shorter of the term of the lease, or 50 years Leasehold buildings Over the shorter of the term of the lease, or 50 years Leasehold improvements Over the shorter of the term of the lease, or 20% Plant and machinery 12% Furniture, fixtures and equipment 20 – 33[1] /3% Motor vehicles 20 – 25%

Construction in progress is carried at cost, less any identified impairment loss. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.

Inventories

Inventories are sated at the lower of cost and net realisable value. Cost is calculated using the first-in, first-out method.

Impairment

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that these assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately.

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

Foreign currencies

Transactions in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are re-translated at the rates prevailing on the balance sheet date. Profits and losses arising on exchange are included in net profit or loss for the year.

On consolidation, the assets and liabilities of the Group’s operations outside Hong Kong are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.

Taxation

The charge for taxation is based on the results for the year after adjusting for items which are non-assessable or disallowed. Timing differences arise from the recognition for tax purposes of certain items of income and expense in a different accounting period from that in which they are recognised in the financial statements. The tax effect of the resulting timing differences, computed using the liability method, is recognised as deferred taxation in the financial statements to the extent that it is probable that a liability or an asset will crystallise in the foreseeable future.

Retirement benefit costs

Payments to the Mandatory Provident Fund Scheme are charged as an expense as they fall due.

– 46 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

4. TURNOVER

Turnover represents the amount received and receivable for goods sold to outside customers, less returns and allowances for the year, and is analysed as follows:

Continuing operations: Trading – base metals – fabric Others Discontinuing operations: Fabric processing Manufacture and sale of snack food	2002 HK$’000 346,072 52,567 3,129 401,768 1,632 349 403,749	2001 HK$’000 – 13,540 –
		13,540 6,164 18,436
		38,140

5. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

For management purposes, the Group is currently organised into two operating divisions – trading of base metals and trading of fabric, trading of base metal being a new business line commenced during the year. These divisions are the basis on which the Group report its primary segment information.

Principal activities are as follows:

Continuing operations:

– Trading of base metals trading of base metals – Trading of fabric trading of fabric Discontinuing operations: – Fabric processing processing of raw fabric and the sale of finished fabric Snack food – manufacture and sale of potato chips

Segment information about these businesses is presented below.

– 47 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

5. BUSINESS AND GEOGRAPHICAL SEGMENTS (continued)

Business segments (continued)

2002

Continuing operations
Trading of
Trading of
RESULTS
base metals
fabric
HK$’000
HK$’000
TURNOVER
External sales
346,072
52,567
RESULTS
Segment profit (loss)
4,505
(11,442)
Unallocated corporate expenses
Interest on bank borrowings
wholly repayable within five years
Gain on disposal of subsidiaries
Loss before taxation
Taxation
Loss after taxation
BALANCE SHEET
ASSETS
Segment assets
51,744
4,056
Unallocated corporate assets
Consolidated total assets
LIABILITIES
Segment liabilities
13,170
24
Unallocated corporate liabilities
Consolidated total liabilities
OTHER INFORMATION
Capital additions
145
–
Depreciation and amortisation
23
–
Impairment loss recognised in respect
of property, plant and equipment
–
–
Non-cash expenses
–
12,371

Discontinuing operations
(note 8)
Fabric
Others
processing
Snack food
Consolidated
HK$’000
HK$’000
HK$’000
HK$’000
3,129
1,632
349
403,749
(2)
(36,095)
(361)
(43,395)
(6,353)
(582)
261
(50,069)
(24)
(50,093)
1,069
24,803
–
81,672
13,790
95,462
1,069
10,562
–
24,825
13,942
38,767
1,040
–
–
1,185
54
3,991
697
4,765
–
29,623
–
29,623
926
4,437
–
17,734

More than 90% of the assets and liabilities of the Group were located in the People’s Republic of China (“PRC”) and more than 90% of the Group’s turnover and operating results were derived from the PRC.

– 48 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

5. BUSINESS AND GEOGRAPHICAL SEGMENTS (continued)

Business segments (continued)

2001
RESULTS
TURNOVER
External sales
Segment loss
Unallocated corporate expenses
Interest on bank borrowings wholly
repayable within five years
Loss before taxation
Taxation
Loss after taxation
BALANCE SHEET
ASSETS
Segment assets
Unallocated corporate assets
Consolidated total assets
LIABILITIES
Segment liabilities
Unallocated corporate liabilities
Consolidated total liabilities
OTHER INFORMATION
Capital additions
Depreciation and amortisation
Impairment loss recognised in
respect of intangible assets
Non-cash expenses

Continuing
operation
Discontinuing operations_(note 8)
Trading
Fabric
of fabric
processing
Snack food
Consolidated
_HK$’000
HK$’000
HK$’000
HK$’000
13,540
6,164
18,436
38,140
(2,642)
(19,505)
(19,802)
(41,949)
(3,478)
(1,622)
(47,049)
52
(46,997)
13,535
57,969
54,611
126,115
5
126,120
15,974
14,288
1,033
31,295
23,814
55,109
–
10,094
3,096
13,190
184
6,604
4,446
11,234
–
–
1,188
1,188
88
10,597
8,492
19,177

All the assets and liabilities of the Group were located in the People’s Republic of China (“PRC”) and more than 90% of the Group’s turnover and operating results were derived from the PRC.

– 49 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

6. OTHER OPERATING EXPENSES

Other operating expenses comprise the followings:

Loss on disposal of property, plant and equipment Allowance for doubtful debts 7. LOSS FROM OPERATIONS Loss from operations has been arrived at after charging: Amortisation of intangible assets (included within cost of sales) Auditors’ remuneration Staff costs, including directors’ emoluments Retirement benefits scheme contributions, net of forfeited contributions Depreciation and amortisation of property, plant and equipment Impairment loss recognised in respect of intangible assets (included within cost of sales) and after crediting: Interest income from bank deposits	2002 HK$’000 5,363 12,371 17,734 2002 HK$’000 – 350 3,145 66 4,765 – 30	2001 HK$’000 10,685 8,492
		19,177

		2001 HK$’000 395 440 8,122 137 10,839 1,188 898

8. DISCONTINUING OPERATION

(i) During the year, the directors determined to phase out the Group’s fabric processing operation. It is anticipated that the operation will be permanently ceased during 2003.

The results of the fabric processing operation for the year were as follows:

Turnover Operating costs Loss on disposal of property, plant and equipment Impairment loss recognised in respect of property, plant and equipment Loss from ordinary activities	2002 HK$’000 1,632 (3,667) (4,437) (29,623) (36,095)	2001 HK$’000 6,164 (25,669) – –
		(19,505)

During the year, the fabric processing operation utilised HK$1,486,000 of the Group’s net operating cash flows, received HK$248,000 in respect of investing activities and received HK$2,365,000 in respect of financing activities.

– 50 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

8. DISCONTINUING OPERATION (continued)

At the balance sheet date, the carrying amounts of the assets and liabilities of the fabric processing operation are as follows:

Total assets Total liabilities	2002 HK$’000 24,803 10,562	2001 HK$’000 57,969

		14,288

There is no material movement on the carrying amounts of the assets and liabilities of the fabric processing operation subsequent to the balance sheet date.

During the year, the Group recognised impairment loss on assets relating to the fabric processing operation amounting to HK$29,623,000.

(ii) Pursuant to a conditional sales and purchase agreement dated 22 January 2002, the Group agreed to dispose of certain of its subsidiaries, which were engaged in the snack food operations, to Feng Lin Holdings Limited, a then substantial shareholder of the Company, for a consideration of HK$24,600,000. The transaction was completed on 12 March 2002 (note 22).

The results of the snack food operation for the year, which have been included in the consolidated financial statements, are as follows:

Turnover Operating costs Loss from ordinary activities	2002 HK$’000 349 (710) (361)	2001 HK$’000 18,436 (38,238
		(19,802

9. DIRECTORS’ EMOLUMENTS

Fees: Executive directors Independent non-executive directors Other emoluments of executive directors: Basic salaries and allowances Retirement benefits scheme contribution	2002 HK$’000 208 101 256 7 263 572	2001 HK$’000 – 90 2,613 85
		2,698
		2,788

The emoluments of each of the Company’s directors were below HK$1,000,000 for each of the two years ended 31 December 2002.

– 51 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

10. EMPLOYEES’ EMOLUMENTS

During the year, the five highest paid individuals did not include any director of the Company.

During the year ended 31 December 2001, the five highest paid individuals included four executive directors, details of whose emoluments are set out in note 9 above.

The following emolument disclosed are related to the five highest paid individuals (none of them are director of the Company) for the year ended 31 December 2002 and the remaining one individual who was among the five highest paid individuals for the year ended 31 December 2001.

Basic salaries and allowances Retirement benefits scheme contribution	2002 HK$’000 1,280 35 1,315	2001 HK$’000 442 12
		454

The emoluments of each of the Company’s five highest paid individual were below HK$1,000,000 for each of the two years ended 31 December 2002.

During the year, no emoluments were paid by the Group to the five highest paid individuals, including directors, as an inducement to join or upon joining the Group or as compensation for loss of office. In addition, none of the directors has waived any emoluments during the year.

11. TAXATION

Hong Kong Profits Tax is calculated at 16% of the assessable profit for the year.

In the opinion of the directors, a substantial portion of the Group’s income is not subject to taxation in the jurisdiction in which the Group operates.

In 2001, the taxation credit represented the overprovision for Hong Kong Profits Tax in prior year.

Pursuant to the relevant laws and regulations in PRC, the Company’s PRC subsidiary is entitled to exemption from PRC enterprise income tax for two years commencing from its first profit-making year of operation, followed by a 50 per cent reduction in PRC enterprise income tax for the next three years. No provision for PRC enterprise income tax has been made in the financial statements as the Company’s PRC subsidiary had no assessable profit for the current year.

The Group and the Company had no significant unprovided deferred taxation for the year or at the balance sheet date.

– 52 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

12. LOSS PER SHARE

The calculation of the loss per share is based on the loss for the year of HK$49,994,000 (2001: HK$45,558,000) and on the weighted average number of 241,014,247 (2001: 200,000,000) shares in issue during the year.

No diluted loss per share has been presented as the share options outstanding during the year would have an anti-dilutive effect on the basic loss per share for the year.

13. PROPERTY, PLANT AND EQUIPMENT

THE GROUP COST At 1 January 2002 Additions Disposals Disposal of subsidiaries At 31 December 2002 DEPRECIATION AND AMORTISATION At 1 January 2002 Provided for the year Impairment losses recognised Eliminated on disposals Eliminated on disposal of subsidiaries At 31 December 2002 NET BOOK VALUE At 31 December 2002 At 31 December 2001	Leasehold land and Leasehold buildings improvements HK$’000 HK$’000 54,709 387 – 926 (4,114) (926) (3,017) (387) 47,578 – 6,378 387 1,069 – 26,524 – (466) – (475) (387) 33,030 – 14,548 – 48,331 –	Plant and machinery HK$’000 64,215 – (1,288) (37,942) 24,985 14,750 3,536 3,052 (538) (5,010) 15,790 9,195 49,465	Furniture, fixtures and equipment HK$’000 1,558 259 (32) (770) 1,015 894 159 47 (31) (281) 788 227 664	Motor vehicles HK$’000 2,158 – (420) (1,738) – 1,887 1 – (152) (1,736) – – 271	Construction in process HK$’000 1,563 – – (1,563) – – – – – – – – 1,563	Total HK$’000 124,590 1,185 (6,780) (45,417) 73,578 24,296 4,765 29,623 (1,187) (7,889) 49,608 23,970 100,294

The leasehold land and buildings of the Group are situated in the PRC and are held under medium term leases.

During the year, the directors determined to gradually phase out the Group’s fabric processing operation. The directors conducted a review of the Group’s assets which were used for the fabric processing operation, and determined that a number of those assets were impaired, due to physical damage and technical obsolescence. Accordingly, impairment losses of approximately HK$26,524,000 and HK$3,052,000, were recognised in respect of buildings and plant and machinery, respectively.

In 2001, the Group pledged leasehold land and buildings having a net book value of approximately HK$48,331,000 to secure banking facilities granted to the Group. This pledge was released during the year following the repayment of the related bank borrowings.

– 53 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

14. INTERESTS IN SUBSIDIARIES

Unlisted shares Amounts due from subsidiaries Provision for impairment loss	2002 HK$’000 75,274 65,920 141,194 (98,000) 43,194	2001 HK$’000 75,274 40,866
		116,140 (48,000
		68,140

In the opinion of the directors, impairment loss of the subsidiaries are recognised up to their net assets value as at the balance sheet date.

The amounts due from subsidiaries are unsecured, non-interest bearing and are repayable after one year.

Particulars of the Company’s principal subsidiaries at 31 December 2002 are set out in note 31.

15. INVENTORIES

Raw materials Work in progress Finished goods	THE GROUP 2002 2001 HK$’000 HK$’000 – 2,784 – 61 6,435 123 6,435 2,968	THE GROUP 2002 2001 HK$’000 HK$’000 – 2,784 – 61 6,435 123 6,435 2,968
		2,968

At 31 December 2002, all the inventories were carried at cost. At 31 December 2001, all inventories were carried at net realisable value.

16. TRADE AND OTHER RECEIVABLES

The Group allows an average credit period of 0 – 90 days (2001: 90 days) to its trade customers.

The following is an aged analysis of trade receivables at the balance sheet date:

Trade receivables – 0 to 30 days Other receivables	THE GROUP 2002 2001 HK$’000 HK$’000 26,722 16,948 12,260 5,836 38,982 22,784	THE GROUP 2002 2001 HK$’000 HK$’000 26,722 16,948 12,260 5,836 38,982 22,784
		22,784

17. PLEDGED BANK DEPOSITS

The amount represents deposits pledged to a bank to secure general banking facilities granted to the Group.

– 54 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

18. TRADE AND OTHER PAYABLES

The following is an aged analysis of trade payables at the balance sheet date:

Trade payables 0 to 30 days 31 to 60 days Over 60 days Other payables	THE GROUP 2002 2001 HK$’000 HK$’000 14,046 13,031 – 198 – 949 14,046 14,178 1,781 8,305 15,827 22,483	THE GROUP 2002 2001 HK$’000 HK$’000 14,046 13,031 – 198 – 949 14,046 14,178 1,781 8,305 15,827 22,483
		14,178 8,305
		22,483

19. AMOUNT DUE TO A DIRECTOR

The amount was unsecured, non-interest bearing and was fully repaid during the year.

20. BANK BORROWINGS

Bank loans Trust receipt loans Bank overdrafts Secured Unsecured	THE GROUP 2002 2001 HK$’000 HK$’000 – 16,954 12,870 2,951 – 12 12,870 19,917 12,870 19,905 – 12 12,870 19,917	THE GROUP 2002 2001 HK$’000 HK$’000 – 16,954 12,870 2,951 – 12 12,870 19,917 12,870 19,905 – 12 12,870 19,917
		19,917

		19,905 12
		19,917

The borrowings are repayable on demand or within one year.

– 55 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

21. SHARE CAPITAL AND SHARE PREMIUM

Number of ordinary shares Ordinary shares of HK$0.10 each Authorised: At 1 January 2001, 31 December 2001 and 31 December 2002 1,000,000,000 Issued and fully paid: At 1 January 2001 and 31 December 2001 200,000,000 Shares issued during the year: In April 2002_(note i) 33,800,000 In May 2002(note ii) 6,200,000 In September 2002(note iii) 48,000,000 88,000,000 Share issue expenses – At 31 December 2002 288,000,000 _Notes:	Share capital HK$’000 100,000 20,000 3,380 620 4,800 8,800 – 28,800	Share premium HK$’000 37,164 14,534 3,224 15,264 33,022 (648) 69,538

(i) Pursuant to a subscription agreement dated 16 April 2002, Angel Field, the substantial shareholder of the Company, subscribed for 33,800,000 shares of HK$0.10 each in the Company at a price of HK$0.53 per share. These new shares were issued under the general mandate granted to the Directors at the annual general meeting of the Company held on 15 May 2001 and ranked pari passu with other shares in issue in all respects. The issue price of HK$0.53 represented a premium of approximately 14.22% to the average closing price of HK$0.464 per share as quoted on the Stock Exchange for the last 10 trading days up to and including 15 April 2002.
(ii) Pursuant to a placing agreement dated 7 May 2002 entered into between the Company and the placing agent, 6,200,000 shares of HK$0.10 each in the Company at a price of HK$0.62 per share were issued to independent investors. These shares were issued under the general mandate granted to the Directors at the annual general meeting of the Company held on 15 May 2001 and ranked pari passu with other shares in issue in all respects. The issue price of HK$0.62 represented a discount of approximately 6.06% to the closing price of HK$0.66 per share as quoted on the Stock Exchange on 7 May 2002.
(iii) Pursuant to a subscription agreement dated 29 July 2002, Angel Field subscribed for 48,000,000 shares of HK$0.10 each in the Company at a price of HK$0.418 per share. These new shares were approved by shareholders of the Company at the special general meeting of the Company held on 10 September 2002 and ranked pari passu with other shares in issue in all respects. The issue price of HK$0.418 represented a discount of approximately 8.10% to the average closing price of HK$0.455 per share as quoted on the Stock Exchange for the last 10 trading days up to and including 29 July 2002.

– 56 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

22. DISPOSAL OF SUBSIDIARIES

As referred to in note 8, on 12 March 2002 the Group discontinued its snack food operation at the time of disposal of certain subsidiaries. The net assets of these subsidiaries at the date of disposal were as follows:

NET ASSETS DISPOSED OF Property, plant and equipment Inventories Trade and other receivables Bank balances and cash Trade and other payables Taxation payable Bank borrowings Minority interests Gain on disposal of subsidiaries Total consideration satisfied by assumption of the following liabilities of the Group by the buyer_(see note 29(i))_: Trade and other payables Bank borrowings Net cash outflow arising on disposal: Bank balances and cash disposed of	2002 HK$’000 37,528 3,169 8,728 84 (3,159) (2,610) (14,004) (5,397) 24,339 261 18,600 6,000 (84)	2001 HK$’000 – – – – – – – –
		– –
		– –

		–

The subsidiaries disposed of during the year contributed HK$349,000 to the Group’s turnover and HK$361,000 to the Group’s loss.

23. MAJOR NON-CASH TRANSACTION

As settlement of the consideration for the disposal of subsidiaries set out in note 22, the buyer assumed certain liabilities and obligations of the Group in the same amount. Further details of the disposal are set out in note 29(i).

24. OPERATING LEASE COMMITMENTS

The Group as lessee	2002			2001
	HK$’000		HK$’000
Minimum lease payments under operating leases
in respect of rented premises during the year	2,157			1,969

At the balance sheet date, the Group had commitments for future minimum lease payments under non-cancellable operating
leases in respect of rented premises, which fall due as follows:
		THE GROUP
	2002			2001
	HK$’000		HK$’000
Within one year	2,443			1,768
In the second to fifth year inclusive	1,376			877
	3,819			2,645

Operating lease payments represent rental payable by the Group for certain of its office premises and staff quarters. Leases are negotiated for an average term of three years.

The Company had no operating lease commitment at the balance sheet date.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

25. CAPITAL COMMITMENTS

THE GROUP Capital expenditure in respect of acquisition of property, plant and equipment contracted for but not provided in the financial statements THE COMPANY Capital investment in respect of capital contribution to a subsidiary	2002 HK$’000 – –	2001 HK$’000 78
		3,920

26. SHARE OPTION SCHEMES

The Company has the following share option schemes:

(i) The 1998 scheme

A share option scheme was adopted by the Company pursuant to a resolution passed on 10 December 1998 for the primary purpose of providing incentives to directors and eligible employees (the “1998 Scheme”), and it was for a period of 10 years ending on 9 December 2008. However, on 7 June 2002, the 1998 Scheme was terminated by shareholders of the Company pursuant to a resolution passed on that date.

Under the 1998 Scheme, the Board of Directors of the Company could grant options to eligible employees, including directors of the Company and its subsidiaries, to subscribe for shares in the Company.

The total number of shares in respect of which options could be granted under the 1998 Scheme was not permitted to exceed 10% of the shares of the Company in issue at any point in time, without prior approval from the Company’s shareholders.

Options granted had to be taken up within 28 days from the date of grant, upon payment of HK$1 per grant. Options could be exercised at any time from the date of grant of the share option to the 10th anniversary of the date of grant. The exercise price was to be determined by the directors of the Company, and would not be less than the higher of the nominal value of the Company’s shares, and 80% of the average closing price of the shares for the five business days immediately preceding the date of grant.

No option was granted under the 1998 Scheme during the period of operation.

(ii) The 2002 scheme

A new share option scheme was adopted by the Company pursuant to a resolution passed on 7 June 2002 for the primary purpose of providing incentives to directors and eligible employees, and will expire on 6 June 2012 (the “2002 Scheme”). Under the 2002 Scheme, the Board of Directors of the Company may grant options to eligible employees, including directors of the Company and its subsidiaries, to subscribe for shares in the Company.

During the year, the Company granted 9,840,000 share options under the 2002 Scheme to the directors and employees. The share options are exercisable for a period from 2 July 2002 to 1 July 2007 at an exercise price of HK$0.556 per option. Among the 9,840,000 share options granted, 7,440,000 share options were granted to the directors of the Company.

Options granted must be taken up within 28 days of the date of grant, upon payment of HK$1 per grant. Options may be exercised at any time from the date of grant of the share option to the 10th anniversary of the date of grant. The exercise price is determined by the directors of the Company, and will not be less than the highest of the closing price of the Company’s shares on the date of grant, the nominal value of the Company’s share and the average closing price of the shares for the five business days immediately preceding the date of grant.

At 31 December 2002, the number of shares in respect of which options had been granted and remained outstanding under the 2002 Scheme was 9,840,000, representing 3.42% of the shares of the Company in issue at that date. The total number of shares in respect of which options may be granted under the 2002 Scheme is not permitted to exceed 10% of the shares of the Company in issue as at 7 June 2002, being the date of the passing the resolution regarding the 2002 Scheme, without prior approval from the Company’s shareholders. The number of shares in respect of which options may be granted to any individual in any one year is not permitted to exceed 1% of the shares of the Company in issue at any point in time, without prior approval from the Company’s shareholders. Options granted to substantial shareholders or independent non-executive directors in excess of 0.1% of the Company’s share capital or with a value in excess of HK$5 million must be approved in advance by the Company’s shareholders.

– 58 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

26. SHARE OPTION SCHEMES (continued)

(ii) The 2002 scheme (continued)

No option was exercised, cancelled or lapsed during the year.

The financial impact of share options granted is not recorded in the Company’s or the Group’s balance sheet until such time as the share options are exercised, and no charge is recorded in the income statement or balance sheet for their cost. Upon the exercise of the share options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares, and the excess of the exercise price per share over the nominal value of the shares is recorded by the Company in the share premium account. Share options which are cancelled prior to their exercise are deleted from the register of outstanding options.

27. CONTINGENT LIABILITIES

At the balance sheet date, the Group had discounted bills with recourse of approximately HK$26,529,000 (2001: Nil).

At the balance sheet date, the Company had no material contingent liability.

28. RETIREMENT BENEFITS SCHEME

The Group operates Mandatory Provident Fund (MPF) scheme for all qualifying employees of its Hong Kong subsidiaries. The assets of the scheme are held separately from those of the Group in funds under the control of trustees. The Group contributed 5% of the relevant payroll costs to the scheme, which contribution is matched by employees.

The retirement benefits cost charged to income statement represents contributions payable to the scheme by the Group at rates specified in the rules of the scheme.

The employees of the Group’s PRC subsidiary are members of a state-managed retirement benefits scheme operated by the PRC government. The subsidiary is required to contribute a specified percentage of their payroll costs to the retirement benefit scheme. The only obligation of the Group with respect to the retirement benefit scheme is to make the specified contributions.

The total cost charged to the income statement of HK$66,000 (2001: HK$137,000) represents contributions payable to these schemes by the Group at rates specified in the rules of the schemes.

At the balance sheet date, there was no significant forfeited contribution, which arose upon employees leaving the retirement benefits scheme and which was available to reduce the contribution payable in the future years.

29. RELATED PARTY TRANSACTIONS/DISCLOSURE

(i) Pursuant to a disposal agreement (the “Disposal Agreement”) the Group disposed of its entire interest in certain subsidiaries which are principally engaged in the snack food business, to Feng Lin Holdings Limited (“Feng Lin”), a then substantial shareholder of the Company which was beneficially interested in approximately 74.48% of the issued share capital of the Company, for a consideration of HK$24,600,000. As settlement of the consideration, Feng Lin assumed certain liabilities and obligations of the Group in the same amount. Certain former directors of the Company, namely Tsoi Hon Chung, Tsoi Chun Bun and Tsoi Chun Hung have beneficial interest in Feng Lin. Details of the Disposal Agreement were set out in the circular of the Company dated 22 February 2002. The resolution in relation to the Disposal Agreement was unanimously passed by way of a poll at the special general meeting of the Company held on 11 March 2002. Completion of the Disposal Agreement took place on 12 March 2002.

Simultaneously with the entering into of the Disposal Agreement, a sale and purchase agreement (the “Sale and Purchase Agreement”) was entered into between, amongst others, Feng Lin and Angel Field, pursuant to which Feng Lin sold 148,000,000 shares in the Company, representing 74% of the then issued share capital of the Company, to Angel Field at a consideration of approximately HK$0.418 per share. Completion of the Sale and Purchase Agreement took place on 12 March 2002.

(ii) Subscription of shares in the Company by Angel Field during the year are set out in note 21.

– 59 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

29. RELATED PARTY TRANSACTIONS/DISCLOSURE (continued)

(iii) On 21 November 2002, a sub-tenancy agreement (the “Sub-tenancy Agreement”) was entered into between Worldmark (Far East) Limited (“Worldmark”), a wholly-owned subsidiary of the Company, and Profitex Investments Limited (“Profitex”), a whollyowned subsidiary of Shanghai Land Holdings Limited (“Shanghai Land”), in respect of the sub-leasing of 2,487 square feet of the office premises located at 67th Floor, The Center, 99 Queen’s Road Central, Hong Kong, by Profitex to Worldmark for a term commencing on 4 August 2002 and expiring on 19 June 2005 inclusive at the following rentals:

	Monthly rent
Period	(approximate HK$)
4 August 2002 – 31 May 2004	74,610
1 June 2004 – 30 June 2004	63,667
1 July 2004 – 31 May 2005	44,766
1 June 2005 – 19 June 2005	28,352

A rent free period (the “Rent Free Period”) in total of 6 months by stages in an aggregate amount of HK$447,660 had been granted by Profitex to Worldmark pursuant to a supplemental agreement to the Sub-tenancy Agreement dated 17 January 2003. The first 3 months of the Rent Free Period shall be granted and ratified for the period from 1 September 2002 to 30 November 2002 and the remaining 3 months of Rent Free Period shall be granted for the period from 1 June 2003 to 31 August 2003.

The respective substantial shareholders of Shanghai Land and the Company are New Nongkai Global Investments Limited (formerly known as Global Town Limited) and Angel Field, which are both 100% beneficially owned by Mr. Chau Ching Ngai, the chairman of Shanghai Land and the spouse of Ms. Mo Yuk Ping, chairman of the Company.

The rent paid for the year amounted to approximately HK$142,000. The rent charged to the income statement for the year amounted to approximately HK$256,000 after taking into account of the Rent Free Period. Worldmark, Profitex and the landlord had also entered into a guarantee and indemnity (“Guarantee and Indemnity”) whereby, inter alia, Worldmark and Profitex agreed jointly and severally to observe and perform all the terms, covenants and conditions of the Tenancy Agreement entered into between the landlord and Profitex, and to guarantee the performance and observance of the Guarantee and Indemnity.

(iv) Worldmark and Profitex has also entered into a management agreement for a term of three years commencing on 1 August 2002. Pursuant to the agreement, Profitex has agreed to provide management service to Worldmark for a fee. The management fee paid for the year amounted to HK$166,000.
(v) During the year ended 31 December 2001, the Group paid an agency fee of approximately HK$30,000 to Sunico (H.K.) Limited (“Sunico”) in return for agency and letter of credit handling services. The fees were calculated at 1% of the value of transactions handled by Sunico. Mr. Tsoi Hon Chung, a then director of the Company, has beneficial interest in Sunico. The Group had no such transaction during the year ended 31 December 2002.
(vi) At 31 December 2001, certain then directors of the Company had given personal guarantees to banks to secure general banking facilities granted to the Group. The guarantees were released during the year.
(vii) Details of balances with related parties are set out in note 19.

30. POST BALANCE SHEET EVENT

Pursuant to a subscription agreement dated 6 March 2003, Angel Field subscribed for 125,000,000 new shares of HK$0.10 each (the “Subscription Shares”) in the Company at a subscription price of HK$0.40 per share. The allotment and issue of the Subscription Shares were approved by the independent shareholders of the Company by way of an ordinary resolution passed on 2 April 2003. The Subscription Shares would rank pari passu in all respects with the existing issued shares of the Company. The Subscription Shares represented approximately 43.40% of the existing issued share capital of the Company and approximately 30.27% of the Company’s issued share capital as enlarged by the issue of the Subscription Shares.

– 60 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Notes to the financial statements (continued)

31. PARTICULARS OF PRINCIPAL SUBSIDIARIES

The following table lists the subsidiaries of the Group as at 31 December 2002 which, in the opinion of the directors, principally affected the results or assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

		Issued and	Proportion of	Proportion of
	Place of	fully	nominal	value of
	incorporation/	paid up	issued capital/
	establishment	share capital/	registered capital held
Name of subsidiary	and operations	registered capital	by the Company		Principal activities
			Directly	Indirectly
			%	%
Chaoyang Hua Long	PRC	US$6,000,000	–	100	Fabric processing and
Textiles and Dyeing		registered capital			manufacturing
Limited*
Chinawell Holdings	British Virgin	US$1	100	–	Investment holding
Limited	Islands	ordinary share
First Landmark Limited	British Virgin	US$1	100	–	Investment holding
	Islands	ordinary share
Gold (Hong Kong)	Hong Kong/	HK$2	–	100	Trading
Limited	the PRC	ordinary shares
Hua Loong Textiles	Hong Kong	HK$10,000	–	100	Investment holding
Limited		ordinary shares
Merchants (Hong Kong)	Hong Kong	HK$2	–	100	Trading
Limited		ordinary shares
Park Well International	British Virgin	US$6	100	–	Investment holding
Group Limited	Islands	ordinary shares
V-Win Limited	Hong Kong	HK$2	100	–	Provision of secretarial
		ordinary shares			and nominee services
Worldmark (Far East)	Hong Kong	HK$2	–	100	Provision of
Limited		ordinary shares			management services
Ying Wing (HK) Limited	Hong Kong	HK$10	–	100	Trading of fabric
		ordinary shares

The company is a wholly-owned foreign enterprise established in the PRC.

None of the subsidiaries had any debt securities outstanding at the end of the year, or at any time during the year.

– 61 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

3. STATEMENT OF INDEBTEDNESS

Reference is made to the sections headed “Appointment of the Receivers”, “Role of the Receivers”, “Material findings of the Receivers” and “Responsibility for, and accuracy and completeness of, this document” in the “Letter from the Receivers” which set out the circumstances leading to the appointment of the Receivers.

In view of the circumstances, save as disclosed below, the Receivers are unable to provide details of the Group’s bank overdrafts or loans, or other similar indebtedness, mortgages, charges or guarantees or other material contingent liabilities, if any.

As at the Latest Practicable Date, the Group has a cash and bank balance of approximately HK$18 million, which have been secured by the Receivers and the provision for professional fees and expenses amounts to approximately HK$9.7 million.

– 62 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

4. STATEMENT OF PROFORMA UNAUDITED ADJUSTED CONSOLIDATED NET ASSET VALUE OF THE GROUP

The Receivers wish to emphasise that the analysis provided below has been prepared on the basis of information which is available to the Receivers as at the Latest Practicable Date and such information may not be true or complete. Accordingly, this analysis does not set out as a typical statement of the proforma unaudited adjusted consolidated net asset value of the Group.

The following statement is a statement of the proforma unaudited adjusted consolidated net asset value of the Group as at the Latest Practicable Date, based on the audited consolidated net asset value of the Group as at 31 December 2002 and excluding the operating results for the period from 1 January 2003 to the Latest Practicable Date and information available to the Receivers, as at the Latest Practicable Date and subject to the reference made in the section headed “Responsibility for, and accuracy and completeness of, this document” of the “Letter from the Receivers”:

Notes Audited consolidated net asset value of the Group as at 31 December 2002 _Add:_Proceeds from issuance of new share capital 1 _Add:_Consideration received upon completion of Park Well Disposal 2 _Less:_Net asset value of Park Well at the date of disposal 2 _Less:_Misappropriation of funds 3 _Less:_Provision for bad debts, i.e. due from Smartway, Regent Roll and others 4 _Less:_Provision for professional fees and expenses up to 30 September 2003 Estimated unaudited consolidated net asset value of the Group as at the Latest Practicable Date Net asset value per Share (based on 413,000,000 Shares as at the Latest Practicable Date)	HK$’000 14,134 (14,146)	HK$’000 56,695 49,900 (12) (69,900) (16,058) (9,700) 10,925 HK$0.0265

Note 1: For details please refer to note 1 under section “Material changes” of Appendix I.

Note 2: For details please refer to note 3 under section “Material findings of the Receivers” of the “Letter from the Receivers”.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

Note 3: For details please refer to note 2 under section “Material findings of the Receivers” of the “Letter from the Receivers”.
Note 4: For details please refer to note 1 under section “Material findings of the Receivers” of the “Letter from the Receivers”.
Note 5: For the purpose of this proforma statement, the Receivers have not assumed recoveries from all legal proceedings. However, having obtained legal advice, the Receivers consider that they have proper and sufficient legal grounds to obtain full recovery of US$4.5 million (or approximately HK$35.1 million) from the Great Center Action, in which case the estimated unaudited consolidated net asset value of the Group as at the Latest Practicable Date would be approximately HK$46 million and the corresponding net asset value per Share would be approximately HK$0.1114.
For details please refer to notes 1, 2 and 3 under section “Legal proceedings brought by the Company” of the “Letter from the Receivers”.

5. MATERIAL CHANGES

Save as disclosed above, the proforma unaudited consolidated net asset value of the Group, set out below are the material changes in the financial and trading position of the Group subsequent to the published audited accounts of the Company for the year ended 31 December 2002.

Pursuant to a subscription agreement dated 6 March 2003, Angel Field subscribed 125,000,000 new shares of the Company of HK$0.10 each at a subscription price of HK$0.40 per share that lead to an increase in net assets value by the amount of the net proceeds of HK$49.9 million.
Angel Field was the controlling shareholder of the Company prior to the completion of the Sale and Purchase Agreement. Angel Field previously owned 74.33% of the Company’s issued share capital, representing 306,986,000 shares prior to 2 June 2003. According to the 2002 annual report of the Company, Mr Chau is the beneficial owner of the entire issued share capital of Angel Field. As at the Latest Practicable Date, so far as is known to the Receivers on the basis of information available to them and as shown in the list of registered shareholders and records provided by the Registrar, Angel Field is currently the registered holder of only 46,000,000 Shares, representing approximately 11.14% of the total issued Shares, while the balance of 260,986,000 Shares, representing approximately 63.19% of the total issued Shares are currently registered under the name of Sun Hung Kai (Nominees) Limited, which is holding such Shares on trust for Angel Field.

However, according to the Offer Announcement and the Offer Document and as shown in the disclosure of interests filings made pursuant to Part XV of the SFO, the Offeror, which is beneficially and wholly-owned by Mr. Yue, acquired 260,986,000 Shares from Angel Field pursuant to the Sale and Purchase Agreement and became interested in such Shares upon completion of the Sale and Purchase Agreement. Also according to the Offer Announcement and Offer Document, the 46,000,000 Shares held by Angel Field were disposed of on 25 August and 26 August 2003.

As set out under the heading of “Material findings of the Receivers” in the “Letter from the Receivers”, the investigation by the Receivers reveals that most of the BVI Trades are questionable. It is noted that the BVI Trades amounted for approximately 80% of the turnover, representing an aggregate amount of approximately HK$212 million for the period from 1

– 64 –

FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

January 2003 to 30 April 2003 and accordingly may have adverse impact on the cost of sales and gross profit for the same period by approximately HK$203.3 million and HK$8.7 million respectively, if the BVI Trades are proven to have been conducted with connected parties and would, therefore, be regarded as connected transactions.

The Group had approximately HK$19.2 million of cash at bank as at 17 June 2003. As set out under the heading of “Material findings of the Receivers” in the “Letter from the Receivers“, the Receivers have discovered various questionable transfers of funds from the Group’s bank accounts in the period between 1 January 2003 and 17 June 2003 through four suspicious transfers in relation to the BVI Trades, resulting in a net “loss” of approximately HK$69.9 million. The Receivers have commenced legal proceedings and successfully obtained injunction orders on certain bank accounts. Details are set out under the heading of “Legal proceedings brought by the Company” in the “Letter from the Receivers”.
As set out under the heading of “Material findings of the Receivers” in the “Letter from the Receivers”, the Company sold its entire shareholding in Park Well to Show Good Inc., a company incorporated in the BVI, on 12 April 2003 at a consideration of RMB15 million. No announcement has been made by the Company in respect of the Park Well Disposal. The Receivers are of the view that the Park Well Disposal is questionable. Details are set out under the heading of “Material findings of the Receivers” in the “Letter from the Receivers”.
Reference is made to the announcement of the Company dated 16 June 2003. It was resolved that as the executive Directors required extra time to consider whether the recent events would affect the truth and fairness of the 2002 Financial Statements, and that the holding of the AGM on 18 June 2003 for the purpose of, among others, receiving and considering the 2002 Financial Statements and the reports of the Directors and auditors for the year ended 31 December 2002 be proposed to a later date until further notice.
Reference is made to the announcement of the Company dated 2 July 2003. The Company was advised by its legal adviser that, for legal reasons under Bermudan Law, the AGM should be held as scheduled on 18 June 2003 for the purpose of seeking Shareholders’ approval to adjourn the AGM. On 18 June 2003 no quorum was present at the AGM which was then adjourned to 25 June 2003 in accordance with the bye-laws of the Company. The adjourned AGM was dissolved due also to a lack of quorum. The 2002 Financial Statements, therefore, have not been approved by the Shareholders at the AGM.
The Company’s auditors, Deloitte Touche Tohmatsu (“DTT”) wrote to the Receivers on 23 September and 2 October 2003 and stated that, they have no objection to the extraction of the financial information from the Company’s 2000, 2001 and 2002 annual reports for the purpose of this document, however, if auditors’ report on these financial statements is reproduced in this document, DTT required disclosures in this document in relation to the 2002 Financial Statements including that (i) with reference to the Company’s announcement dated 16 June 2003, the executive Directors required extra time to consider whether the recent events as defined in such announcement would affect the truth and fairness of the 2002 Financial Statements; and (ii) until such time as the effect of the recent events, as defined in such announcement, on the 2002 Financial Statements can be determined, reliance should not be placed on the 2002 Financial Statements or on the auditors’ report thereon.

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FINANCIAL INFORMATION ON THE GROUP

APPENDIX I

6. INTERIM RESULTS

Reference is made to the announcement of the Company dated 26 September 2003. Following the appointment of the Receivers on 17 June 2003, the Receivers are still reviewing the books and records of the Group and are unable at this time to ascertain when the interim results of the Group will be released. Accordingly, the release of the Group’s interim results will be delayed. As investigation and review of the books and records of the Group are still being carried on by the Receivers, they are unable to anticipate when the aforesaid results can be released and, therefore, no expected time in relation to the release of the Group’s interim results can be offered at this stage.

– 66 –

GENERAL AND OTHER INFORMATION

APPENDIX II

1. RESPONSIBILITY STATEMENT

The Receivers have caused the issue of this document on behalf of the Company and accept full responsibility for the accuracy of the information contained in this document (other than information relating to the Offers and the Offeror) on the basis of the information available to the Receivers as at the date of this document. Taking into account the powers, duties and responsibilities of the Receivers, the length of their appointment and the Receivers’ concerns on the truthfulness, accuracy or completeness of the information on the Group to which the Receivers had access, on the basis of the information available to the Receivers as at the Latest Practicable Date, the Receivers confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this document have been arrived at after careful consideration and there are no other material facts not contained in this document the omission of which would make any statement in this document misleading.

2. RELIABILITY OF INFORMATION

The Receivers wish to emphasise that the information and/or confirmations provided in this document are based only on information which are available to the Receivers (including those available to their advisers) as at the Latest Practicable Date and such information may not be true or complete and the Receivers have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information and/or confirmations.

3. SHARE CAPITAL

The authorized and issued share capital of the Company as at the Latest Practicable Date were as follows:

Authorized capital: 1,000,000,000 Shares of HK$0.10 each Issued capital: 288,000,000 Shares of HK$0.10 each (as at 31 December 2002) 125,000,000 Shares of HK$0.10 each_(Note)_ 413,000,000 Shares of HK$0.10 each (as at the Latest Practicable Date)	HK$’000 100,000

	28,800 12,500
	41,300

Note: An issue of 125,000,000 new Shares by the Company to Angel Field took place in March 2003 at a subscription price of HK$0.40 per share amounting to approximately HK$49.9 million pursuant to a subscription agreement dated 6 March 2003 entered into between the Company and Angel Field as detailed in the Company’s circular dated 18 March 2003.

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GENERAL AND OTHER INFORMATION

APPENDIX II

All the Shares rank pari passu in all respects including as to dividends, voting and return of capital.

The Shares are listed and traded on the Stock Exchange. The Shares are not listed, or dealt in, on any other stock exchange, nor is any listing of or permission to deal in the Shares being, or proposed to be sought, on any other stock exchange.

4. MARKET PRICES

The highest and lowest closing price of the Shares quoted on the Stock Exchange during the Relevant Period were respectively HK$0.380 per Share on 3 March 2003 and HK$0.230 per Share on 9 May 2003.

The table below sets out the closing prices of the Shares quoted on the Stock Exchange on the last trading day of each of the six calendar months immediately preceding 3 September 2003, the date of the Offer Announcement.

Date	Closing price per Share
	HK$
31 March 2003	0.350
30 April 2003	0.345
30 May 2003	0.260
30 June 2003	Suspended
31 July 2003	Suspended
29 August 2003	Suspended
2 September 2003 (Last business day immediately preceding
the date of the Offer Announcement)	Suspended
Latest Practicable Date	Suspended

The closing price of the Shares on the Stock Exchange on 30 May 2003, being the last full trading day prior to the suspension of trading of the Shares on 2 June 2003 was HK$0.260.

5. DISCLOSURE OF INTERESTS

(i) Interests of the Directors

As at the Latest Practicable Date, on the basis of the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, the interests and short positions of the Directors and chief executives of the Company in the Shares, underlying Shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which were required (a) to be notified to the Company or the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which he was taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) pursuant to the Model Code for Securities Transactions by Directors of Listed Companies to be notified to the Company and the Stock Exchange; or (d) pursuant to the requirements of the Takeovers Code, were as follows:

Number of Shares Name of Director Personal Interests Corporate Interests Family Interests

307,226,000

Mo Yuk Ping (Note)

– –

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GENERAL AND OTHER INFORMATION

APPENDIX II

Note:

As at the Latest Practicable Date, so far as is known to the Receivers on the basis of the information available to them who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, and as shown in the disclosure of interests filings made pursuant to Part XV of the SFO, Ms. Mo is interested in 307,226,000 Shares, representing approximately 74.39% of the total issued Shares and such interest comprise of:

(a) the interest of her spouse, Mr. Chau, who is deemed to be interested in 306,986,000 Shares by virtue of his beneficial interest in Angel Field. However, according to the Offer Announcement and the Offer Document, Angel Field disposed of 46,000,000 Shares on 25 and 26 August 2003 and sold 260,986,000 Shares to the Offeror pursuant to the Sale and Purchase Agreement (as referred to in paragraph 5(iii) below); and
(b) her interest in 240,000 Options (as referred to in paragraph 5(ii) below).

(ii) Interest in Options granted under the share option scheme

Name of Director	Number of Options	Exercise price	Exercise period
		HK$
Mo Yuk Ping	240,000	0.556	2 July 2002 to
			1 July 2007
Shi Zhi Hong	2,400,000	0.556	2 July 2002 to
			1 July 2007
Shan Zhenglin	2,400,000	0.556	2 July 2002 to
			1 July 2007
Gong Bei Ying	2,400,000	0.556	2 July 2002 to
			1 July 2007

Save as disclosed above and on the basis of information available to the Receivers, as at the Latest Practicable Date, there were no other options, warrants and conversion rights affecting the Shares.

The Company has received no indication from any Directors regarding their intentions on whether to accept or reject the Offers.

(iii) Interests of substantial Shareholders

As at the Latest Practicable Date, so far as is known to the Receivers on the basis of information available to them, the following persons had an interest or short position in the Shares or underlying Shares which would fall to be disclosed to the Company under the provision of Divisions 2 and 3 of Part XV of the SFO, or who is expected, directly or indirectly, to be interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company:

	Attributable	Approximate percentage
Name	number of Shares	of total issued Shares
The Offeror_(Note 1)_	260,986,000	63.19%
Yue Jialin_(Note 2)_	260,986,000	63.19%
Chau Ching Ngai_(Note 1 and the note_
to paragraph 5(i) above)	306,986,000	74.33%
Innovation Assets Limited	19,800,000	6.88%
SW Kingsway Capital Group Limited	19,800,000	6.88%
World Developments Limited	19,800,000	6.88%

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GENERAL AND OTHER INFORMATION

APPENDIX II

Notes:

As at the Latest Practicable Date, so far as is known to the Receivers on the basis of information available to them who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, and as shown in the list of registered shareholders and records provided by the Registrar (a) Sun Hung Kai (Nominees) Limited is the registered shareholder of and holds on trust for Angel Field a total of 260,986,000 Shares, representing approximately 63.19% of the total issued Shares and (b) Angel Field is the registered holder of 46,000,000 Shares, representing approximately 11.14% of the total issued Shares. However, according to the Offer Announcement and the Offer Document and as shown in the disclosure of interests filings made pursuant to Part XV of the SFO, the Offeror acquired 260,986,000 Shares from Angel Field pursuant to the Sale and Purchase Agreement and became interested in such Shares, representing approximately 63.19% of the total issued Shares, on completion of the Sale and Purchase Agreement. Also according to the Offer Announcement and Offer Document, the 46,000,000 Shares held by Angel Field were disposed of on 25 and 26 August 2003 respectively. The Receivers have no information on the identity (identities) of the party (parties) who purchased the 46,000,000 Shares from Angel Field.
According to the Offer Announcement and the Offer Document, the Offeror is beneficially and whollyowned by Mr. Yue.

(iv) Interests in the Company

(a) On the basis of information available to the Receivers, as at the Latest Practicable Date, the Offeror held the Sale Shares, representing approximately 63.19% of the issued share capital of the Company;
(b) As at 19 September 2003, being the latest practicable date of the Offer Document and save as disclosed in the preceding paragraph and in the Offer Document, there were no other securities of the Company being held by the Offeror, the Offeror directors and parties acting in concert with them;
(c) Based on the Offer Document and as at 19 September 2003, being the latest practicable date of the Offer Document, there was no agreement or arrangement between the Offeror or any Director or any other person which was conditional on or dependent upon the outcome of the Offers or otherwise connected with the Offers;
(d) Based on the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, as at the Latest Practicable Date, no person, who had an arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Company or with any person who is an associate of the Company, owned or controlled any Shares;
(e) Based on the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, as at the Latest Practicable Date, no subsidiary or associate of the Company, nor any pension fund of the Group, owned or controlled any Shares;
(f) Based on the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, as at the Latest Practicable Date, no fund manager connected with the Company had managed any Shares on a discretionary basis; and

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GENERAL AND OTHER INFORMATION

APPENDIX II

(g) As at the Latest Practicable Date, neither Henco, First Shanghai nor any other advisers to the Receivers and the Company owned or controlled any Shares.

(v) Interests in the Offeror

(a) Based on the Offer Document, as at 19 September 2003, being the latest practicable date of the Offer Document, neither the Company nor any Directors owned any shares in the Offeror; and
(b) Based on the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, as at the Latest Practicable Date, neither the Company nor any Directors has dealt for value in any shares in the Offeror.

(vi) Other interests

Based on the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, as at the Latest Practicable Date:

(a) there are no payment or other benefit has been made or given to any Directors by the Company or any of its subsidiaries as compensation for loss of office or otherwise in connection with the Offers; and
(b) there are no material contracts entered into by the Offeror in which any Director has a material personal interest, save for the Sale and Purchase Agreement.

6. DEALINGS IN SECURITIES

During the Relevant Period,

(i) as disclosed in the Offer Document and save for the acquisition of the Sale Shares pursuant to the Sale and Purchase Agreement, none of the Offeror nor parties acting in concert with it had dealt in the Shares;
(ii) as disclosed in the Offer Announcement, Angel Field had disposed of in aggregate 46,000,000 Shares, other than the Sale Shares, on 25 and 26 August 2003. The Receivers have no information on the consideration, the date of each transaction and the number of Shares disposed of under each transaction in relation to the disposal of the 46,000,000 Shares by Angel Field;
(iii) based on the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, as at the Latest Practicable Date, there are no dealings for value in the Shares in which the Directors are interested during the Relevant Period;

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GENERAL AND OTHER INFORMATION

APPENDIX II

(iv) based on the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, as at the Latest Practicable Date, no person, who had an arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Company or with any person who is an associate of the Company, has dealt for value in the Shares;
(v) based on the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, as at the Latest Practicable Date, no subsidiary or associate of the Company, nor any pension fund of the Group, has dealt for value in the Shares;
(vi) based on the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, as at the Latest Practicable Date, no fund manager connected with the Company has dealt for value in the Shares; and
(vii) neither Henco, First Shanghai nor other advisers to the Company had dealt for value in any securities of the Company.

7. MATERIAL CONTRACTS

The Receivers were appointed the joint and several receivers and manager of the Company on 17 June 2003. Prior to their appointment, the books and records of the Group were seized by the ICAC. Since their appointment on 17 June 2003, the Receivers have been allowed access to the Group’s papers and records now kept with the ICAC and their investigations of these records for the period from January 2003 to June 2003 are continuing.

As the records in the Receivers’ possession are incomplete and may not be reliable and based on the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information, as at the Latest Practicable Date, the Receivers are not in a position to provide details (including particulars of dates, parties, principal terms and conditions and any consideration passing to or from the Company or any of its subsidiaries) of every material contracts as referred to in paragraph 9 of Schedule II to the Takeovers Code entered into not after the date two years before the commencement of the Offers.

8. SERVICE CONTRACTS

Based on the information available to the Receivers who have not made any enquiries with the former management of the Company to ascertain the truthfulness or completeness of such information:

as at the latest practicable date of the circular of the Company dated 18 March 2003, there are no existing directors’ service contracts with any member of the Group; and
(ii) as at the Latest Practicable Date, the Receivers are not aware of any directors’ service contracts with any member of the Group having been replaced or amended within six months before the commencement of the Offers.

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GENERAL AND OTHER INFORMATION

APPENDIX II

9. LITIGATION PROCEEDINGS

Since their appointment on 17 June 2003, the Receivers have caused the following legal proceedings to be brought by the Company:

Having obtained legal advice, the Receivers commenced legal proceedings on 2 July 2003 against Great Center (“the Great Center Action”) for the repayment of two sums totaling US$4.5 million (or approximately HK$35.1 million), remitted on or about 21 May 2003 with no apparent justification, out of the bank accounts of Merchants HK, a wholly-owned subsidiary of the Company, to a bank account maintained in the name of Great Center, and interest thereon, damages and costs of the legal proceedings. In order to prevent the dissipation of Great Center’s assets, an injunction order was applied for and successfully obtained on 30 June 2003 from the High Court to restrict Great Center from, inter alia, disposing of or otherwise dealing with or diminishing assets of Great Center up to the value of US$4.5 million (the “Injunction Order”). The relevant bank, the lawyers of Great Center and other relevant persons have been notified of the Injunction Order. The Injunction Order remained valid up to and including 11 July 2003 on which date the Injunction Order was continued until further order or final determination of the Great Center Action;
The writ of summons issued on 2 July 2003 in relation to the claim against Great Center for the repayment of US$4.5 million was amended on 10 July 2003 (the “Amended Writ”) to include the claims for (i) the repayment of HK$12.8 million remitted from the bank account of the Company to a bank account in the name of Great Center on or about 17 April 2003; and (ii) the repayment of HK$22.0 million remitted from the bank account of the Company to a bank account in the name of Modern Shine on or about 22 April 2003, interest thereon, damages and costs of legal proceedings. The sum of claims under the Amended Writ amounts to approximately HK$69.9 million (the “Great Center Claim”). The Amended Writ also includes a bank in Hong Kong, Modern Shine, certain executive directors, officers and employees of the Group, and all directors or authorized signatories of Great Center and Modern Shine as defendants (the “Defendants”) for the purposes of seeking orders against them for the disclosure of documents and/or information. An application was made on 10 July 2003 to the High Court for an order (the “Disclosure Order”) that the Defendants disclose to the Company and Merchants HK all relevant information and documents relating to the transfers of the amounts comprising the Great Center Claim. The Disclosure Order was granted by the High Court on 18 July 2003;
In a separate action, Shanghai Land Holdings Limited (Receivers Appointed) (“Shanghai Land”) has commenced legal proceedings against Great Center. A writ of summons was issued by the High Court on 17 July 2003 claiming approximately HK$53.2 million from Great Center, being money received by Great Center on 4 April 2003 for which Shanghai Land claims rightfully belongs to Shanghai Land. Great Center failed to file any notice of intention to defend the legal proceedings within the time for doing so. Shanghai Land obtained judgment in default against Great Center on 5 August 2003 in the amount of approximately HK$53.2 million plus interest. On 5 August 2003, the High Court of the BVI ordered that (inter alia) Mr. Stephen Liu Yiu Keung and Mr. Yeo Boon Ann, the joint and several receivers of Shanghai Land, be appointed jointly and severally as provisional liquidators of Great Center;

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GENERAL AND OTHER INFORMATION

APPENDIX II

As a result of the information provided to the Company and Merchants HK under the Disclosure Order, the Receivers have discovered that, together with certain funds out of the Great Center Claim, an aggregate amount of approximately HK$37 million was transferred, by a series of transfers, by Great Center and Modern Shine to Win Victory without apparent legitimate commercial reason. Ms. Mo and Mr. Chau are the registered shareholders of 49% and 51% respectively of the issued share capital of Win Victory. Ms. Mo is the executive director and the chairman of the Company. Having obtained legal advice, the Receivers commenced legal proceedings on 23 August 2003 against Win Victory (the “Win Victory Action”) for the repayment of the HK$37 million, interest thereon, damages and costs of legal proceedings (the “Win Victory Claim”). It should be noted that should any of the amount claimed against Win Victory be recovered from Great Center and/or Modern Shine in the Great Center Action, such amounts will be taken into account in the Win Victory Action. In order to prevent the dissipation of Win Victory’s assets, the Company applied for and obtained on 22 August 2003 from the High Court an injunction order against Win Victory (the “Win Victory Injunction Order”) to restrict Win Victory from, among other things, disposing of or otherwise dealing with or diminishing the value of its assets up to the value of HK$37 million. On 29 August 2003, the Win Victory Injunction Order was continued until further order or final determination of the Win Victory Action;
Having obtained legal advice, the Receivers, on behalf of the Company, petitioned for the winding-up of Win Victory on the grounds that Win Victory is unable to pay its debts and/or it is just and equitable for Win Victory to be wound up and obtained an order from the High Court on 24 September 2003, among other things, appointing Messrs Desmond Chung Seng Chiong and Roderick John Sutton of Ferrier Hodgson Limited of 14th Floor, Hong Kong Club Building, 3A Chater Road, Hong Kong as the provisional liquidators of Win Victory. In the first instance, this order will remain valid up to and including 7 October 2003, on which date the matter will be heard again by the High Court.

10. QUALIFICATIONS

The qualifications of the expert who has given opinion in this document and whose name is included in this document are as follows:

Name Qualification

First Shanghai deemed licensed corporation licensed to perform type 6 regulated activity (i.e. advising on corporate finance) under the SFO

As at the Latest Practicable Date, Henco and First Shanghai were not beneficially interested in the share capital of any member of the Group nor 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.

11. CONSENTS

First Shanghai has given and has not withdrawn its written consent to the issue of this document with the inclusion of and references to its name and letter or report in the form and context in which they respectively appear.

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GENERAL AND OTHER INFORMATION

APPENDIX II

12. MISCELLANEOUS

(a) The English text of this document shall prevail over the Chinese text.
(b) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.
(c) The branch share registrar of the Company in Hong Kong is Secretaries Limited, at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong.
(d) The company secretary of the Company is Ma Sau Kuen Gloria who is a fellow member of the Institute of Chartered Secretaries and Administrators and the Hong Kong Institute of Company Secretaries.

13. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours at the principal place of business in Hong Kong of the Company at Grant Thornton, 13th Floor, Gloucester Tower, The Landmark, 11 Pedder Street, Central, Hong Kong up to and including the Closing Date:

(a) the bye-laws of the Company;
(b) the letter of advice from First Shanghai;
(c) copies of the 17 June Order and the Variation Order referred to in the paragraph headed “Role of the Receivers” in the “Letter from the Receivers”;
(d) the written consent referred to in the paragraph headed “Consents” in this Appendix; and
(e) the 2002 annual report of the Company.

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AI assistant

Persistence Gold Group Ltd — M&A Activity 2003

50623_rns_2003-10-08_b6486341-05b6-439a-97ac-ff1072162012.pdf

SHANGHAI MERCHANTS HOLDINGS LIMITED

MANDATORY UNCONDITIONAL CASH OFFERS BY

Financial Adviser

Henco & Associates

Henco Capital Limited

First Shanghai Capital Limited

CONTENTS

TIMETABLE

Notes:

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

“SHKIL”

SHANGHAI MERCHANTS HOLDINGS LIMITED

BACKGROUND

LETTER FROM THE RECEIVERS

INABILITY TO FORM INDEPENDENT BOARD COMMITTEE

APPOINTMENT OF THE RECEIVERS

LETTER FROM THE RECEIVERS

ROLE OF THE RECEIVERS

LETTER FROM THE RECEIVERS

VALIDITY OF THE SALE OF THE SALE SHARES BY ANGEL FIELD

ACTIONS TAKEN BY THE RECEIVERS

MATERIAL FINDINGS OF THE RECEIVERS

1. Related parties trading activities

LETTER FROM THE RECEIVERS

2. Misappropriation of funds

LETTER FROM THE RECEIVERS

3. Disposal of Park Well

LEGAL PROCEEDINGS BROUGHT BY THE COMPANY

LETTER FROM THE RECEIVERS

RESPONSIBILITY FOR, AND ACCURACY AND COMPLETENESS OF, THIS DOCUMENT

THE OFFERS

LETTER FROM THE RECEIVERS

INFORMATION ON THE GROUP

Recent events of the Group

LETTER FROM THE RECEIVERS

LETTER FROM THE RECEIVERS

Financial information

INFORMATION ON THE OFFEROR

OFFEROR’S INTENTION REGARDING THE COMPANY

DIRECTORS AND MANAGEMENT

MAINTAINING THE LISTING STATUS OF THE COMPANY

WAIVER APPLICATION

ADDITIONAL INFORMATION

Alan Chung Wah Tang and Alison Wong Lee Fung Ying

First Shanghai Capital Limited

INTRODUCTION

THE SHARE OFFER

Background of the Company

Principal terms of the Share Offer

Share price performance

Liquidity of the Shares

Financial information

(i) Net asset value

(ii) Earnings

(iii) Dividends

Operating results for the year ended 31 December, 2002

Other considerations

(ii) Intention of the Offeror with respect to the Group

(iii) Directors and management of the Company

LETTER OF ADVICE FROM FIRST SHANGHAI

Recommendation

THE OPTION OFFER

1. FINANCIAL SUMMARY

Results

2. FINANCIAL INFORMATION

Consolidated income statement

Consolidated balance sheet

Balance sheet

Statements of changes in equity

Consolidated cash flow statement

APPENDIX I

Notes to the financial statements

1. GENERAL

Persistence Gold Group Ltd M&A Activity 2003