Samsonite Group S.A. — Earnings Release 2004

Apr 26, 2005

RICHE MULTI-MEDIA HOLDINGS LIMITED
(Incorporated in Bermuda with limited liability)
(Stock Code: 764)

FINAL RESULTS ANNOUNCEMENT
FOR THE YEAR ENDED 31ST DECEMBER 2004

FINAL RESULTS

The board of directors (“the Board”) of Riche Multi-Media Holdings Limited (“the Company”) is pleased to present the audited consolidated results of the Company and its subsidiaries (“the Group”) for the year ended 31st December 2004 together with the comparative figures for 2003 as follows:

AUDITED CONSOLIDATED INCOME STATEMENT

For the year ended 31st December 2004

| | Notes | 2004
HK$’000 | 2003
HK$’000 |
| --- | --- | --- | --- |
| Turnover | 2 | 58,382 | 206,996 |
| Cost of sales | | (48,674) | (61,180) |
| Gross profit | | 9,708 | 145,816 |
| Other operating income | 4 | 390 | 1,849 |
| Administrative expenses | | (36,309) | (29,608) |
| Selling expenses | | (234) | (166) |
| Impairment loss recognised in respect of film rights | | (16,213) | (1,462) |
| Impairment loss recognised in respect of other asset | | (46,512) | — |
| Impairment loss recognised in respect of goodwill | | (28,072) | — |
| Impairment loss recognised in respect of
investments in securities | | (12,000) | — |
| Allowance for advances to an associate | | (138,531) | — |
| (Loss) profit from operations | 5 | (267,773) | 116,429 |
| Finance costs | 6 | (340) | (340) |
| (Loss) profit before taxation | | (268,113) | 116,089 |
| Taxation (charge) credit | 7 | (277) | 1,040 |
| Net (loss) profit for the year attributable to shareholders | | (268,390) | 117,129 |
| (Loss) earnings per share | | | |
| Basic | 8 | HK(5.65) cents | HK2.47 cents |
| Diluted | | HK(5.65) cents | HK2.41 cents |

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Notes:

1. Potential impact arising from the recently issued accounting standards

In 2004, the Hong Kong Institute of Certified Public Accountants, (the "HKICPA") issued a number of new or revised Hong Kong Accounting Standards ("HKASs") and Hong Kong Financial Reporting Standards ("HKFRSs") (herein collectively referred to as "New HKFRSs") which are effective for accounting periods beginning on or after 1st January 2005. The Group has not early adopted these new HKFRSs in the financial statements for the year ended 31st December 2004.

The Group has commenced considering the potential impact of these New HKFRSs. Based on management's preliminary assessment, the adoption of HKFRS 3 "Business Combinations" and HKAS 36 "Impairment of Assets" in the annual period beginning on 1st January 2005 will result in cessation of amortisation of goodwill to the income statement. Pursuant to HKFRS 3 "Business Combinations" and HKAS 36 "Impairment of Assets", goodwill is to be recognised as an asset and reviewed for impairment at least annually and any impairment is recognised immediately in the income statement while the Group's current policy is to amortise goodwill on a straight-line basis over its useful economic life. During the year ended 31st December 2004, the amortisation of goodwill charged to the income statement amounted to approximately HK$3,953,000.

The Group is still considering the potential impact of other New HKFRSs but is not yet in a position to determine whether other New HKFRSs would have a significant impact on how its results of operations and financial position are prepared and presented. Other New HKFRSs may result in changes in the future as to how the results and financial position are prepared and presented.

1. Turnover

	2004	2003
	HK$'000	HK$'000
Distribution of films	27,285	163,722
Sub-licensing of film rights	16,319	38,006
Proceeds from sale of securities	14,778	—
Sale of advertising rights	—	5,268
	58,382	206,996

1. Segment Information

Business segments

For management purposes, the Group is currently organised into four operating divisions, namely distribution, sub-licensing, sale of advertising rights and investments. These divisions are the basis on which the Group reports its primary segment information.

Principal activities are as follows:

Distribution
Distribution of films

Sub-licensing
Sub-licensing of film rights

Sale of advertising rights
Sale of advertising rights for advertisements placing on video products and videos

Investments
Investments in listed and unlisted equity securities

Segment information about these businesses for the years ended 31st December 2004 and 2003 is presented below.

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Consolidated income statement for the year ended 31st December 2004

| | Distribution
HK$'000 | Sub-licensing
HK$'000 | Sale of
advertising
rights
HK$'000 | Investments
HK$'000 | Consolidated
HK$'000 |
| --- | --- | --- | --- | --- | --- |
| Turnover | 27,285 | 16,319 | — | 14,778 | 58,382 |
| Segment loss before amortisation
of other asset, impairment losses
recognised in respect of film
rights, goodwill and other asset
and allowance for advances to
an associate | (3,222) | (216) | — | (1,460) | (4,898) |
| Amortisation of other asset | — | (6,644) | — | — | (6,644) |
| Impairment loss recognised
in respect of film rights | (980) | (15,233) | — | — | (16,213) |
| Impairment loss recognised
in respect of goodwill | (20,000) | (8,072) | — | — | (28,072) |
| Impairment loss recognised
in respect of other asset | — | (46,512) | — | — | (46,512) |
| Impairment loss recognised in
respect of investments in securities | — | — | — | (12,000) | (12,000) |
| Allowance for advances to
an associate | — | (138,531) | — | — | (138,531) |
| Segment loss | (24,202) | (215,208) | — | (13,460) | (252,870) |
| Unallocated corporate income | | | | | 390 |
| Unallocated corporate expenses | | | | | (15,293) |
| Loss from operations | | | | | (267,773) |
| Finance costs | | | | | (340) |
| Loss before taxation | | | | | (268,113) |
| Taxation charge | | | | | (277) |
| Net loss for the year | | | | | (268,390) |

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Consolidated income statement for the year ended 31st December 2003

| | Distribution
HK$'000 | Sub-licensing
HK$'000 | Sale of advertising
rights
HK$'000 | Consolidated
HK$'000 |
| --- | --- | --- | --- | --- |
| Turnover | 163,722 | 38,006 | 5,268 | 206,996 |
| Segment profit before amortisation
of other asset, and impairment loss
recognised in respect of film rights | 118,077 | 12,310 | 3,126 | 133,513 |
| Amortisation of other asset | — | (6,644) | — | (6,644) |
| Impairment loss recognised in
respect of film rights | (62) | (1,400) | — | (1,462) |
| Segment profit | 118,015 | 4,266 | 3,126 | 125,407 |
| Unallocated corporate income | | | | 1,849 |
| Unallocated corporate expenses | | | | (10,827) |
| Profit from operations | | | | 116,429 |
| Finance costs | | | | (340) |
| Profit before taxation | | | | 116,089 |
| Taxation credit | | | | 1,040 |
| Net profit for the year | | | | 117,129 |

Geographical segments

The Group's operations are substantially located in Hong Kong and Macau. Thus, no geographical analysis for the carrying amount of segment assets and additions to property, plant and equipment and intangible assets is presented.

The following table provides an analysis of the Group's sales by location of markets:

	Turnover
	2004	2003
	HK$'000	HK$'000
The People's Republic of China excluding Hong Kong, Macau and Taiwan (the "PRC")	42,404	203,883
Hong Kong and Macau	15,978	3,113
	58,382	206,996
4. Other operating income
	2004	2003
	HK$'000	HK$'000
Dividend income from investments in securities	315	—
Interest income on bank deposits	14	55
Sundry income	61	194
Interest income on convertible notes	—	1,600
	390	1,849

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1. (Loss) Profit from operations

| | 2004
HK$'000 | 2003
HK$'000 |
| --- | --- | --- |
| (Loss) profit from operations has been arrived at after charging (crediting): | | |
| Allowance for bad and doubtful debts (included in administrative expenses) | 1,648 | 88 |
| Allowance for film right deposits (included in administrative expenses) | 1,000 | — |
| Allowance for inventory obsolescence (included in cost of sales) | 917 | 487 |
| Amortisation of film rights (included in cost of sales) | 17,894 | 57,818 |
| Amortisation of goodwill (included in administrative expenses) | 3,953 | 3,105 |
| Amortisation of other asset (included in administrative expenses) | 6,644 | 6,644 |
| Auditors’ remuneration | 720 | 700 |
| Cost of inventories sold (included in cost of sales) | 1,904 | 4,912 |
| Depreciation of property, plant and equipment: | | |
| — owned assets | 1,269 | 1,303 |
| — leased assets | 10 | 13 |
| | 1,279 | 1,316 |
| Operating lease rental in respect of rented premises | 1,616 | 1,300 |
| Staff costs including directors’ emoluments: | | |
| — salaries, allowances and benefits in kind | 10,008 | 8,310 |
| — contributions to retirement benefits scheme | 212 | 152 |
| | 10,220 | 8,462 |
| Unrealised loss on investment in securities (included in cost of sales) | 852 | — |
| (Gain) loss on disposal of property, plant and equipment | (14) | 4 |

1. Finance cost

| | 2004
HK$'000 | 2003
HK$'000 |
| --- | --- | --- |
| Interest on borrowings wholly repayable within five years: | | |
| — convertible notes payable | 338 | 338 |
| — a finance lease | 2 | 2 |
| | 340 | 340 |

1. Taxation

| | 2004
HK$'000 | 2003
HK$'000 |
| --- | --- | --- |
| The taxation (charge) credit are as follows: | | |
| Hong Kong Profits Tax | | |
| — current year | (284) | (283) |
| — over(under)provision in prior years | 7 | (164) |
| | (277) | (447) |
| Transfer from deferred taxation | — | 1,487 |
| Taxation credit attributable to the Company and its subsidiaries | (277) | 1,040 |

Hong Kong Profits Tax is calculated at 17.5% (2003: 17.5%) on the estimated assessable profit for the year.

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The taxation (charge) credit for the year can be reconciled to the (loss) profit per the consolidated income statement as follows:

| | 2004
HK$'000 | 2003
HK$'000 |
| --- | --- | --- |
| (Loss) profit before taxation | (268,113) | 116,089 |
| Taxation at income tax rate of 17.5% | 46,920 | (20,316) |
| Tax effect of income that is not taxable in determining taxable profit | 606 | 23,641 |
| Tax effect of expenses that are not deductible in determining taxable profit | (45,640) | (444) |
| (Over)underprovision in respect of prior years | 7 | (164) |
| Tax effect of estimated tax losses for which deferred tax assets have not been recognised | (2,170) | (1,538) |
| Increase in opening deferred tax liabilities resulting from an increase in Hong Kong Profits Tax rate | — | (139) |
| Taxation (charge) credit for the year | (277) | 1,040 |

8. (Loss) Earnings per share

The calculation of the basic and diluted (loss) earnings per share is based on the following data:

| | 2004
HK$'000 | 2003
HK$'000 |
| --- | --- | --- |
| (Loss) earnings for the purposes of basic (loss) earnings per share — net (loss) profit for the year | (268,390) | 117,129 |
| Effect of dilutive potential ordinary shares: Interest on convertible notes payable | — | 338 |
| (Loss) earnings for the purposes of diluted (loss) earnings per share | (268,390) | 117,467 |
| | '000 | '000 |
| Weighted average number of ordinary shares for the purposes of basic (loss) earnings per share | 4,752,000 | 4,752,000 |
| Effect of dilutive potential ordinary shares: Share options | — | 29,717 |
| Convertible notes payable | — | 84,500 |
| Weighted average number of ordinary share for the purposes of diluted (loss) earnings per share | 4,752,000 | 4,866,217 |

Subsequent to the balance sheet date, the Company's issued and unissued shares of HK$0.10 each was subdivided into 10 new shares of HK$0.01 each. The share subdivision took effect on 17th January 2005. The weighted average number of ordinary shares for both years for the purposes of basic and diluted (loss) earning per share have been adjusted accordingly.

The computation of diluted loss per share for the year ended 31st December 2004 did not assume the exercise of the Company's warrants, convertible notes payable and share options because the effect of exercising a warrant, a convertible note payable and an option to subscribe for an additional share in the Company would result in a decrease of net loss per share.

The computation of diluted earning per share for the year ended 31st December 2003 did not assume the exercise of the Company's warrants as the exercise price of these warrants was higher than the average market price for shares.

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DIVIDEND

The Board does not recommend the payment of any dividend for the year ended 31st December 2004 (2003: Nil).

MANAGEMENT DISCUSSION AND ANALYSIS

Financial Review

The Group recorded a turnover of HK$58,382,000 for the year ended 31st December 2004, a 72% decrease from HK$206,996,000 for the previous year. The decrease was mainly attributed to a decrease in the number of films distributed and sub-licensed, and a decrease in average income per new film. Of the total turnover amount, HK$27,285,000 or 47% was generated from distribution of films, HK$16,319,000 or 28% was generated from sub-licensing of film rights and HK$14,778,000 or 25% was generated from investment in securities. The loss from operations before depreciation, amortization of other asset and goodwill, impairment losses in respect of film rights, other asset and goodwill, and allowance for advances to an associate was HK$26,569,000. The net loss attributable to shareholders for the year ended 31st December 2004 was HK$268,390,000.

The Group’s cost of sales for the year ended 31st December 2004 amounted to HK$48,674,000, out of which HK$16,238,000 was related to the investment in securities business. Cost of sales for film distribution and sub-licensing of film rights businesses decreased from HK$61,180,000 in the year ended 31st December 2003 to HK$32,436,000 in the year ended 31st December 2004. The decrease was mainly attributed to a decrease in amortization of film rights, which was the result of distributing and sub-licensing a less number of films in 2004.

The Group’s gross profit margin for film distribution and sub-licensing of film rights businesses dropped from 70% in the year ended 31st December 2003 to 26% in the year ended 31st December 2004. This was attributed to the decrease in average income per new film resulted from the rampant privacy and the decline in popularity of Hong Kong films, and the better margins the Group obtained from the distribution business through the sale of 320 old film rights in the year ended 31st December 2003, the cost of which had almost been fully amortized.

At the end of the financial year, the Group reviewed the carrying value of film rights and, in light of the decline in popularity of Hong Kong films, an impairment loss of HK$16,213,000 was recognized in the year ended 31st December 2004. The Group also reviewed the carrying value of other asset and, in light of the difficult operating environment in the PRC, an impairment loss of HK$46,512,000 was recognized in the year ended 31st December 2004.

In response to the growing popularity of “Bit Torrent” and the widespread availability of pirated video products, the Group decided to cease to sell its video products through the 27 stores operated by Carrefour in the PRC as it was anticipated that the networks would not be able to generate positive cash flow to the Group in the foreseeable future. As a result, an impairment loss in respect of the goodwill arising from the acquisition of Legend Rich Limited of HK$20,000,000 was recognized in the year ended 31st December 2004.

Due to the difficult operating environment of film exhibition business in the PRC, the Group also recognized an impairment in respect of the goodwill arising from the acquisition of World East Investments Limited of HK$8,072,000 in the year ended 31st December 2004.

At 31st December 2004, an allowance for bad and doubtful debts of HK$1,648,000 was made for long outstanding trade receivable. The directors were uncertain whether the amount would ultimately be collected and considered that it was prudent to make such an allowance.

In 2002, Gainful Fortune Limited (“Gainful”), an associate of the Group, issued the convertible notes in an aggregate amount of HK$160,000,000 to the Group for the purchase of the hotel and

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intranet distribution rights in the PRC in respect of an aggregate of up to 300 films and the entire issued share capital of Ocean Shores Licensing Limited ("OSLL"). Gainful faced the illegal broadcasting of the Group's films by hotel operators in the PRC and its business did not progress as planned. For prudence, an allowance for advances to an associate of HK$138,531,000 was made against the convertible notes and advances made to Gainful at 31st December 2004. In April 2005, the Group exercised its right to convert the outstanding principal amount of the convertible notes into shares of Gainful. Accordingly, Gainful and OSLL become subsidiaries of the Company and the Group repossesses the 300 films previously sold.

For the year ended 31st December 2004, the Group's investment in securities business recorded a loss of HK$1,460,000. The market value of the Group's listed securities amounted to HK$41,732,000 as at 31st December 2004. The Group will manage its investments in listed securities in a prudent manner in 2005.

In March 2004, the Group acquired 40% of the issued share capital of Rainbow Choice Enterprises Limited ("Rainbow Choice") by investing HK$30,000,000. Rainbow Choice engaged in the business of producing and distributing of entertainment news programmes in the PRC. The acquisition facilitated the Group's expansion into the PRC television advertising business. As the performance of Rainbow Choice was not satisfactory, the Group entered into an agreement with the other shareholder of Rainbow Choice in April 2005. Under the agreement, the Group would own the intellectual property rights of the contents produced by Rainbow Choice and the other shareholder of Rainbow Choice would pay HK$18,000,000 to the Group. As a result, the Group recognized an impairment loss of HK$12,000,000 for this investment. The carrying value of the Group's investment in Rainbow Choice was HK$18,000,000 at 31st December 2004.

At 31st December 2004, the Group employed 30 staff (2003: 26 staff) for its Hong Kong Office. Total staff costs (including directors' remuneration) amounted to HK$7,142,000 for the year ended 31st December 2004 (2003: HK$5,592,000). Employees are remunerated according to their performance and work experience. In addition to basic salaries and retirement scheme, staff benefits include medical scheme and share options.

In addition to staff costs incurred in relation to the above staff, the Group also bears the staffing costs 天津市星匯音像制品銷售有限公司 ("Tianjin Xinghui") and 上海昇平文化發展有限公司 ("Shanghai Shengping") pursuant to the Group's sub-distributor or agency arrangement (as the case may be) with them. Total staff costs for Tianjin Xinghui and Shanghai Shengping amounted to HK$3,078,000 for the year ended 31st December 2004 (2003: HK$2,870,000). To cope with the difficult operating environment, the management reviewed the headcount policy and reduced the headcount of Tianjin Xinghui and Shanghai Shengping to 15 people as at 31st December 2004 (2003: 72 people) to create a more efficient infrastructure.

Shareholders' equity decreased from HK$337,655,000 at 31st December 2003 to HK$70,824,000 at 31st December 2004. The decrease was mainly attributed to the allowance made for advances to an associate of HK$138,531,000 and the impairment losses of HK$102,797,000 in film rights, other asset, goodwill and investment in securities.

During the year, the Group funded its operations mainly from cash generated from operations. At 31st December 2004, the Group's material sources of unutilized liquidity are bank balances and cash amounting to HK$15,460,000, which were mainly denominated in Hong Kong dollars.

At 31st December 2004, the current ratio was 1.70 (2003: 2.1). The deterioration in the current ratio was attributed to the operating loss incurred for the year. The Group expresses its gearing ratio as a percentage of total borrowings over total shareholders' equity. At 31st December 2004, the Group's gearing ratio was 0.48 (2003: 0.1). The increase was due to the decrease in shareholders' equity.

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At 31st December 2004, the Group’s had outstanding borrowings of HK$33,800,000 representing the convertible notes payable to First-Up Investments Limited (“First-Up”), a wholly-owned subsidiary of China Star Entertainment Limited (“China Star”), which was unsecured, interest bearing at 1% per annum and maturing on 19th April 2005 and; HK$8,000 representing the obligations under a finance lease which was secured, interest bearing and maturing on 5th April 2005.

The convertible notes carried the right to convert the whole or any part of the outstanding principal amount of the convertible notes into ordinary shares of HK$0.10 each in the share capital of the Company at HK$4.00 per share at any time on or before 19th April 2005 and might be transferred in whole or in part of the outstanding principle amount into share capital of the Company by the holder of the convertible notes. Prior to the maturity, neither the holder of the convertible notes nor the Company had the right to redeem or request for redemption of the convertible notes. On 19th April 2005, the convertible notes matured. First-Up did not exercise the right to convert the outstanding principal amount of the convertibles notes of HK$33,800,000 into share of the Company and the Company repaid HK$33,800,000 to First-Up. On the same date. China Star granted a one-year term loan of HK$33,800,000 to the Company. The loan is unsecured, interest bearing at 1% per annum and maturing on 18th April 2006.

During the year ended 31st December 2004, the Group had not created any charge on its assets.

The Group adopts a set of treasury policies to ensure a well-balance between cash and listed securities in order to generate an adequate return on the Group’s assets.

As the majority of the Group’s transactions, assets and liabilities are denominated in Hong Kong dollars and Reminbi, the exchange risk of the Group is considered to be minimal. Accordingly, no financial instruments for hedging purposes have been used by the Group.

At 31st December 2004, the Group had no material contingent liabilities.

At 31st December 2004, the Group had approximately HK$5,070,000 worth of signed distribution agreements in its order books. Delivery of these distribution agreements is expected to be completed in 9 months.

Operations Review

In 2004, the Group witnessed the decline in popularity of Hong Kong films in the PRC. The Group believes that the decline is mainly attributed to the increasing popularity of Hollywood films, the rapid changes in consumer tastes and trends and the inability of Hong Kong film producers to develop distinctive genres. In addition to the decline in popularity of Hong Kong films, the Group faces the growing popularity of “Bit Torrent”, the widespread availability of pirated video products, the illegal broadcasting by television stations, hotels and long-distance bus operators, and the introduction of macro-economic control measures in the PRC.

For the year ended 31st December 2004, the turnover for distribution of films decreased to HK$27,285,000, an 83% decrease from HK$163,722,000 for the previous year. The significant decrease was due to the decrease in the number of films distributed and the decline in average distribution income per new film. During the year, the Group released 10 new films in video format as compared to 19 new films in the previous year. In 2003, the Group sold the video rights of 320 old film rights to the PRC distributors, whereas 32 old film rights were sold in 2004. The decline in popularity of Hong Kong films and the rampant privacy places price pressure on the Group’s films. During the year, the Group recorded a 45% decrease in the average distribution income per new film compared to the previous year. As the piracy in the PRC continues to proliferate, the Group decided to cease to sell its video products through Carrefour’s 27 stores during the year. Accordingly, the Group terminated the sub-distribution arrangement with Tianjin Xinghui in the first quarter of 2005.

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For the year ended 31st December 2004, the turnover for sub-licensing of films rights amounted to HK$16,319,000, a 57% decrease compared to HK$38,006,000 for the previous year. The decrease was mainly attributed to the unfavorable cinema locations and release period in exhibiting the Group's films and a decrease in the number of film rights sub-licensed for hotel and intranet use in the PRC.

As Chinese first-tier cinemas have strong preference for exhibiting Hollywood films, the lifting of foreign film quota restrictions intensifies the competition between Hollywood and Hong Kong. With the dominance of Hollywood films, the Group is not able to negotiate favourable cinema locations and release period in exhibiting its films. In 2004, 2 out of 7 of the Group's new films were exhibited in cinemas after their video releases. The Group's film exhibition revenue was adversely affected accordingly. In the second half of 2004, the Group worked with a PRC distributor to exhibit its films in second-tier cinemas, but the results were not satisfactory due to the illegal exhibition by the nearby cinemas. Due to the difficult operating environment, the Group recorded a 51% decrease in the average exhibition revenue per film compared to the previous year.

During the year, the Group sub-licensed the hotel and intranet distribution rights in respect of 24 films (2003: 100 films) to Gainful. As Gainful faced the illegal broadcasting of the Group's films by hotel operators in the PRC, its business did not progress as planned and no contribution was made to the Group in 2004.

Working with a PRC advertising company, the Group broadcasted its films on 21 provincial terrestrial free television stations in the PRC on every weekend under a program called "Riche's Asian Theatre". Owing to its first year operations and the rampant illegal broadcasting of the Group's films by television stations in the PRC, the business did not contributed positively to the Group's books.

The Group recorded a turnover for sale of advertising of HK$5,268,000 for the year ended 31st December 2003. No such revenue was generated in the year ended 31st December 2004. As the availability of pirated video products is widespread, the Group saw a sharp drop in demand and price for advertising placements in its video products. Having performed a cost and benefit analysis on its video advertising business, the Group decided to suspend this business in 2004.

As mentioned in the Company's 2003 annual report, the Group carried out a study for providing a "cross-media advertising service" to advertising agencies and corporate clients. Such service involved the placement of advertisements in the Group's various existing and future distribution media, such as video products, cinemas, television, transportation and hotels etc. However, the advertising service has never been launched out due to the rampant piracy and illegal broadcasting by various media.

To capture the growth on advertising spending, the Group ventured into television advertising business by acquiring 40% interest in Rainbow Choice. The distribution of television programmes is commonly conducted on a barter basis, through which television stations offer advertising spots to distributors in exchange for television programmes. Due to a flood of similar programmes in the market, Rainbow Choice failed to build up a strong television networks and obtain advertising spots at prime time within the first six months of its operations. The management team of Rainbow Choice decided to cease its business in first quarter 2005.

On 5th February 2002, the Group entered into a territory supply agreement with China Star International Distribution Limited ("CSIDL"), a wholly-owned subsidiary of China Star, whereby CSIDL granted in favour of the Group a first right of refusal to acquire the exclusive distribution rights (excluding the theatrical and internet rights) in the PRC (except Hong Kong, Macau and Taiwan) and Mongolia in respect of China Star Group's films for a period of three years from 8th April 2002 and an option to acquire the theatrical rights of such films.

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In view of the decline in popularity of Hong Kong films, the Group decided not to renew the territory supply agreement with CSIDL upon its expiry in April 2005. The Group believes that the non-renewal of the territory supply agreement provides it with a greater flexibility in acquiring film rights for distribution.

Expand Into A New Business

On 9th April 2005, the Group entered into a conditional sale and purchase agreement with Leadfirst Limited (“Leadfirst”) and Mr. Benny Ki, pursuant to which the Group would acquire 100% of the issued share capital of Best Winning Group Limited (the “Acquisition”) for a consideration of HK$600,000,000. The consideration shall be satisfied by the issue of a convertible notes of HK$500,000,000 and the payment of cash of HK$100,000,000.

Best Winning Group Limited (“Best Winning”) has been appointed as the sole and exclusive service provider for the promotion and introduction of customers to Radisson Diamond (to be renamed as Asia Star) and the provision of rolling and settlement service for customers of the gaming establishment on board Radisson Diamond for a term of 3 years with an option to renew for another 3 years. In consideration of the service provided by Best Winning, Best Winning shall be entitled to receive:

(i) a management fee of 1.7% of the rolling turnover of the gaming establishment; and
(ii) 40% of the monthly profit of the gaming establishment.

Leadfirst has agreed to procure that the annual rolling turnover of the gaming establishment on board Radisson Diamond for the first year of operations shall not be less than HK$60,000,000,000. Upon the completion of the Acquisition, Mr. Benny Ki will be engaged as the general manager of the Company.

Subject to the fulfillment of the conditions set out under the agreement, the Acquisition is expected to be completed in August 2005.

Future Prospects

The drop in license fees in the PRC is stabilized in the first quarter of 2005. Recent visits with the PRC distributors reveal that there is still a market for high quality Hong Kong films with distinctive genres and well-developed marketing and promotion plans. With the efforts being made by the industry to revitalize Hong Kong films, the directors believe that the market consolidation is nearly completed.

The directors will continue to cautiously monitor the business environment and continue to strengthen its business foundations by implementing prudent cost control and adopting a more cautious approach in acquiring film rights and exploring new distribution media to protect the interests of the Company’s shareholders.

With the downturn of Hong Kong films in the PRC, the Group has been proactively identifying suitable investment opportunities to develop its business. Given the prospects of the gaming industry, the investment in Best Winning matches with the Group’s business development strategy in diversifying its businesses. The directors believe that Best Winning will provide the Group with a more reliable revenue stream and will have a positive impact on the Group’s earning potential.

PURCHASE, SALE AND REDEMPTION OF THE COMPANY’S LISTED SECURITIES

Neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company’s listed securities during the year.

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CORPORATE GOVERNANCE

In the opinion of the directors, the Company has complied throughout the year ended 31st December 2004 with the Code of Best Practice (the "Code") as set out in Appendix 14 of the Rules Governing the Listing of Securities on the Stock Exchange (the "Listing Rules") except that the independent non-executive directors of the Company have not been appointed for specific terms as required by paragraph 7 of the Code, but are subject to retirement by rotation and re-election at the annual general meeting of the Company in accordance with the Company's bye-laws.

ADOPTION OF THE MODEL CODE

The Company has adopted the Model Code as set out in Appendix 10 to the Listing Rules as the code of conduct regarding director's securities transactions. All directors have confirmed, following specific enquiry by the Company, that they have complied with the required standard set out in the Model Code during the year.

The Company has received from each of the independent non-executive directors an annual written confirmation of his independence pursuant to Rule 3.13 of the Listing Rules. The Company considers all of the independent non-executive directors are independent.

AUDIT COMMITTEE

The written terms of reference which describe the authority and duties of the audit committee of the Company were prepared and adopted with reference to "A Guide for The Formation of An Audit Committee" published by the Hong Kong Institute of Certified Public Accountants. The audit committee provides an important link between the board of directors of the Company and the Company's auditors in matters coming within the scope of the group audit. It also reviews the effectiveness of both the external and internal audit and of internal controls and risk evaluation. The audit committee of the Company comprises all the independent non-executive directors, namely Messrs. Lai Hok Lim (resigned on 12th April 2005), Tang Chak Lam, Gilbert, Ho Wai Chi, Paul (appointed on 30th September 2004) and Lien Wai Hung (appointed on 12th April 2005). The unaudited interim report for the six months ended 30th June, 2004 and the audited results of the Company for the year ended 31st December 2004 had been reviewed and discussed the financial related matters with management by the audit committee.

BOARD OF DIRECTORS

As at the date of this announcement, the Board of Directors of the Company consists of three executive directors, Mr. Heung Wah Keung, Ms. Chen Ming Yin, Tiffany and Mr. Lei Hong Wai and three independent non-executive directors, Mr. Lien Wai Hung, Mr. Tang Chak Lam, Gilbert and Mr. Ho Wai Chi, Paul.

DISCLOSURE OF INFORMATION ON THE STOCK EXCHANGE'S WEBSITE

Information that is required by paragraphs 45(1) to 45(3) of Appendix 16 of the Listing Rules will be published on the Stock Exchange's website in due course.

By order of the Board
Heung Wah Keung
Chairman

Hong Kong, 25th April 2005
Please also refer to the published version of this announcement in The Standard.