Summi (Group) Holdings Limited — Proxy Solicitation & Information Statement 2007

Aug 22, 2007

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in PME Group Limited (the “Company”), you should at once hand this circular together with the enclosed form of proxy to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected, for transmission to the purchaser or transferee.

This circular is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities.

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

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(Stock Code: 379)

(1) VERY SUBSTANTIAL ACQUISITION INVOLVING ACQUISITION OF SHAREHOLDINGS IN PROACTIVE TECHNOLOGY HOLDINGS LIMITED, (2) REFRESHMENT OF GENERAL MANDATE, (3) PROPOSED CHANGE OF NAME AND (4) RE-ELECTION OF A DIRECTOR

Independent financial adviser to the Independent Board Committee and Independent Shareholders

A notice convening an extraordinary general meeting of the Company to be held at 5th Floor, Unison Industrial Centre, Nos. 27-31 Au Pui Wan Street, Fo Tan, Shatin, Hong Kong on Tuesday, 18 September 2007 at 10:00 a.m. is set out on pages 206 to 209 of this circular. Whether or not you are able to attend the extraordinary general meeting, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the head office and principal place of business in Hong Kong of the Company at 5th Floor, Unison Industrial Centre, Nos. 27-31 Au Pui Wan Street, Fo Tan, Shatin, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the special general meeting or any adjourned meeting. Completion and delivery of the form of proxy will not preclude you from attending and voting in person at the extraordinary general meeting if you so wish.

• for identification purposes only

22 August 2007

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Letter from Veda Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Appendix I – Valuation report on the property interests of the Group . . . . .	28
Appendix II – Financial information of the Group . . . . . . . . . . . . . . . . . . . . .	38
Appendix III – Financial information of Proactive . . . . . . . . . . . . . . . . . . . . . .	75
Appendix IV – Pro forma financial information of the Group . . . . . . . . . . . . .	188
Appendix V – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	197
Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	206

– i –

DEFINITIONS

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

“Acquisition”	the acquisition by the Purchaser of the Sale Shares
	subject to and upon the terms and conditions of the Sale
	and Purchase Agreement
“AGM”	the annual general meeting of the Company held on 5
	June 2007 for the Shareholders to approve, among other
	matters, the Current General Mandate
“associates”	has the meaning ascribed to this term under the Listing
	Rules
“Board”	the board of Directors
“Business Day”	a day (other than a Saturday, Sunday or public holiday)
	on which licensed banks are generally open for business
	in Hong Kong throughout their normal business hours
“Code” or “Takeovers Code”	the Hong Kong Code on Takeovers and Mergers
“Company”	PME Group Limited, a company incorporated in the
	Cayman Islands with limited liability and the issued
	Shares of which are listed on the main board of the Stock
	Exchange
“Completion”	completion of the sale and purchase of the Sale Shares in
	accordance with the terms and conditions of the Sale and
	Purchase Agreement
“connected person(s)”	has the meaning ascribed to this term under the Listing
	Rules
“Consideration”	the aggregate consideration of HK$928,802,057.70 for
	the Acquisition
“Consideration Share(s)”	the 282,000,000 new Share(s) to be allotted and issued to
	the Vendor, credited as fully paid at the Issue Price in
	accordance with the terms of the Sale and Purchase
	Agreement

– 1 –

DEFINITIONS

“Conversion Share(s)”	the Share(s) falling to be allotted and issued upon the
	exercise of the conversion right attaching to the
	Convertible Bonds
“Convertible Bonds”	the non-listed convertible bonds on the aggregate
	principal amount of HK$618,602,057.70 to be issued by
	the Company to the Vendor to satisfy part of the
	consideration under the Acquisition
“Current General Mandate”	the general mandate approved at the AGM to grant to the
	Directors to allot and issue Shares of up to 20% of the
	issued share capital of the Company as at the date of
	passing the relevant resolutions
“Directors”	the directors of the Company
“EGM”	the extraordinary general meeting of the Company to be
	held and convened to consider and, if thought fit, approve
	the Sale and Purchase Agreement and the transactions
	contemplated thereunder, including but not limited to the
	allotment and issue of the Consideration Shares and the
	issue of the Convertible Bonds, the Proposed Change of
	Name, the proposed grant of New General Mandate and
	the re-election of Mr. Chow as an independent non-
	executive Director
“Enlarged Group”	the Group immediately after the Completion
“GEM”	the Growth Enterprise Market of the Stock Exchange
“Group”	the Company and its subsidiaries
“Hong Kong”	the Hong Kong Special Administrative Region of the
	PRC
“Independent Board Committee”	an independent committee of the Board, comprising the
	independent non-executive Directors, to advise the
	Independent Shareholders as to the fairness and
	reasonableness of the granting of the New General
	Mandate, the voting at the EGM and whether the granting
	of the New General Mandate is in the interests of the
	Company and the Shareholders as a whole

– 2 –

DEFINITIONS

“Independent Shareholder(s)”	Shareholders other than PME Investments (BVI) Co.,
	Limited, Mr. Cheng Kwok Woo, Mr. Cheng Kwong
	Cheong, Ms. Cheng Wai Ying and Ms. Chan Yim Fan and
	the other Directors (excluding the independent non-
	executive Directors) and their respective associates
“Independent Third Party”	any person or company and their respective ultimate
	beneficial owner(s), to the best of the Directors’
	knowledge, information and belief having made all
	reasonable enquiries, are third parties independent of the
	Company and its connected persons
“Issue Price”	the issue price of HK$1.10 per Consideration Share
“Latest Practicable Date”	20 August 2007, being the latest practicable date prior to
	the printing of this circular for the purpose of
	ascertaining certain information contained herein
“Listing Rules”	the Rules Governing the Listing of Securities on the
	Stock Exchange
“Mr. Chow”	Mr. Chow Fu Kit Edward, an independent non-executive
	Director
“Mr. Liu”	Mr. Liu Yi Dong, his family trust being the beneficial
	owner of the entire issued share capital of the Vendor
“New General Mandate”	the general mandate proposed to be granted to the
	Directors at the EGM to allot, issue and otherwise deal
	with additional Shares not exceeding 20% of the issued
	share capital of the Company as at the date of the EGM
	and any additional Shares repurchased by the Company
	pursuant to the general repurchase mandate granted to the
	Directors at the AGM
“PRC”	the People’s Republic of China
“Proactive”	China Railway Logistics Limited (formerly known as
	Proactive Technology Holdings Limited), a company
	incorporated in Bermuda and the issued Proactive Shares
	of which are listed on GEM
“Proactive Share(s)”	share(s) of HK$0.001 each in the capital of Proactive

– 3 –

DEFINITIONS

“Proposed Change of Name”	the proposed change of name of the Company from “PME	the proposed change of name of the Company from “PME	the proposed change of name of the Company from “PME	the proposed change of name of the Company from “PME	the proposed change of name of the Company from “PME
	Group Limited” to “CR Investment (Holdings) Company
	Limited”, and the new Chinese name “ ” to be adopted to replace “ ” for identification purpose only
“Purchaser”	Gainyear Worldwide Limited, being the purchaser named
	in the Sale and Purchase Agreement, a company
	incorporated in the British Virgin Islands and a wholly
	owned subsidiary of the Company
“Sale and Purchase Agreement”	the conditional sale and purchase agreement dated		25
	June 2007 and entered into between the Vendor,	the
	Purchaser for the sale and purchase of the Sale Shares
“Sale Shares”	52,415,466 issued Proactive Shares, which are fully paid
	up or credited as fully paid and are beneficially owned		by
	the Vendor
“SFC”	Securities and Futures Commission of Hong Kong
“SFO”	Securities and Futures Ordinance (Chapter 571 of	the
	Laws of Hong Kong)
“Share(s)”	ordinary share(s) of HK$0.01 each in the capital of	the
	Company
“Shareholder(s)”	holder(s) of the Share(s)
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Veda Capital”	Veda Capital Limited, a licensed corporation to conduct
	type 6 (advising on corporate finance) regulated activity
	under the SFO and the independent financial adviser
	appointed to advise the Independent Board Committee
	and the Independent Shareholders in relation to the New
	General Mandate
“Vendor”	Well Support Limited, a company incorporated in	the
	British Virgin Islands with limited liability and the entire
	issued share capital of which is wholly and beneficially
	owned by the family trust of Mr. Liu
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“%”	per cent.

– 4 –

LETTER FROM THE BOARD

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(Stock Code: 379)

Executive Directors:

Mr. Cheng Kwok Woo Mr. Cheng Kwong Cheong Ms. Cheng Wai Ying Mr. Chow Yin Kwang Ms. Chan Yim Fan Ms. Yeung Sau Han Agnes Ms. Chan Shui Sheung Ivy

Independent non-executive Directors: Mr. Anthony Francis Martin Conway Mr. Leung Yuen Wing Mr. Soong Kok Meng Mr. Chow Fu Kit Edward

Registered office: Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands

Head office and principal place of business in Hong Kong: 5th Floor, Unison Industrial Centre Nos. 27-31 Au Pui Wan Street Fo Tan Shatin Hong Kong

22 August 2007

To the Shareholders

Dear Sir or Madam

(1) VERY SUBSTANTIAL ACQUISITION INVOLVING ACQUISITION OF SHAREHOLDINGS IN PROACTIVE TECHNOLOGY HOLDINGS LIMITED, (2) REFRESHMENT OF GENERAL MANDATE, (3) PROPOSED CHANGE OF NAME AND (4) RE-ELECTION OF A DIRECTOR

INTRODUCTION

Reference is made to the announcement of the Company dated 4 July 2007 in which the Board announced that on 25 June 2007, the Purchaser entered into the Sale and Purchase Agreement with the Vendor in relation to the acquisition of the Sale Shares by the Purchaser from the Vendor for the total Consideration of HK$928,802,057.70.

• for identification purposes only

– 5 –

LETTER FROM THE BOARD

The Acquisition constitutes a very substantial acquisition on the part of the Company under the Listing Rules and is subject to the approval of Shareholders at the EGM.

Reference is also made to the announcement of the Company dated 30 July 2007 in which the Board announced that a special resolution will be proposed at the EGM to approve the proposed change of the Company’s name from “PME Group Limited” to “CR Investment (Holdings) Company Limited” and upon the name change becoming effective, the new Chinese name “ ” will be adopted to replace “ ” for identification purpose only.

The purpose of this circular is to provide you with further information regarding (i) the Acquisition; (ii) the Proposed Change of Name; (iii) the proposed granting of the New General Mandate; (iv) the recommendation from the Independent Board Committee and the Independent Shareholders on the proposed granting of the New General Mandate; (v) the recommendation from Veda Capital to the Independent Board Committee and the Independent Shareholders on the proposed granting of the New General Mandate; (vi) the re-election of Mr. Chow as an independent non-executive Director; and (vii) the notice of EGM.

SALE AND PURCHASE AGREEMENT

Date:

25 June 2007

Parties:

• (1) the Vendor as the vendor. The entire issued share capital of the Vendor is wholly and beneficially owned by the family trust of Mr. Liu; and

• (2) the Purchaser as the purchaser.

The Vendor is incorporated in the British Virgin Islands with limited liability and is principally engaged in investment holdings. To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, each of the Vendor and Mr. Liu and their associates are Independent Third Parties. To the best of Directors’ knowledge, information and belief having made all reasonable enquiries, each of the Vendor and Mr. Liu and their associates did not hold any Shares or other securities in the Company and is not party acting in concert with any Shareholder in respect of the Company as at the Latest Practicable Date.

The Purchaser, a wholly owned subsidiary of the Company, is incorporated in the British Virgin Islands and is principally engaged in investment holdings.

Asset to be acquired:

Pursuant to the Sale and Purchase Agreement, the Purchaser has agreed to acquire the Sale Shares comprising an aggregate of 52,415,466 Proactive Shares of HK$0.001 each in the share capital of Proactive, representing about 13.29% of the entire issued share capital of Proactive as at the date of the Sale and Purchase Agreement and the entire shareholding interest held by the Vendor in Proactive.

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LETTER FROM THE BOARD

Proactive is incorporated in Bermuda with limited liability and the issued Proactive Shares (including the Sale Shares) are listed on GEM.

Under the Sale and Purchase Agreement, the Purchaser is not subject to any restriction on further sale of the Sale Shares.

Consideration:

The total Consideration for the Acquisition is HK$928,802,057.70, which shall be satisfied by the Purchaser at Completion in the following manner:

• (a) HK$310,200,000 of the Consideration shall be satisfied by the Purchaser procuring the Company to allot and issue the Consideration Shares to the Vendor credited as fully paid at the Issue Price; and

• (b) HK$618,602,057.70 of the Consideration shall be satisfied by the Purchaser procuring the Company to issue the Convertible Bonds to the Vendor.

The Sale Shares

The consideration payable for each Sale Share is equivalent to approximately HK$17.72 per Sale Share, representing:

• (a) a discount of approximately 3.70% to the closing price of HK$18.40 per Proactive Share as quoted on the Stock Exchange on 22 June 2007, being the last trading day of the Shares immediately before the date of the Sale and Purchase Agreement;

• (b) a discount of approximately 0.02% to the average of the closing prices of HK$17.724 per Proactive Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including 22 June 2007, being the last trading day of the Shares immediately before the date of the Sale and Purchase Agreement; and

• (c) a premium of approximately 66.22% over the closing price of HK$10.66 per Proactive Share as quoted on the Stock Exchange on the Latest Practicable Date.

Based on the closing price of HK$18.4 per Proactive Share as quoted on the Stock Exchange on 22 June 2007, being the last trading day of the Shares immediately before the entering into of the Sale and Purchase Agreement, the market capitalisation of the Sale Shares amounts to approximately HK$964,444,574.40.

The Sale Shares represent approximately 13.29% of the issued share capital of Proactive as at the date of the Sale and Purchase Agreement and the entire shareholding interest held by the Vendor in Proactive. Immediately following Completion, the Company will become a substantial shareholder of Proactive based on the existing issued share capital of Proactive.

The Consideration Shares

The Issue Price represents:

• (a) a discount of approximately 35.67% to the closing price of HK$1.71 per Share as quoted on the Stock Exchange on 22 June 2007, being the last trading day of the Shares immediately before the date of the Sale and Purchase Agreement;

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LETTER FROM THE BOARD

• (b) a premium of approximately 0.36% over the average of the closing prices of HK$1.096 per Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including 22 June 2007, being the last trading day of the Shares immediately before the date of the Sale and Purchase Agreement;

• (c) a discount of approximately 38.55% to the closing price of approximately HK$1.79 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and

• (d) a premium of approximately 633.33% over the net asset value per Share of approximately HK$0.15 based on the audited consolidated accounts of the Group for the financial year ended 31 December 2006.

Based on the closing price of HK$1.71 per Share as quoted on the Stock Exchange on 22 June 2007, being the last trading day of the Shares before the entering into of the Sale and Purchase Agreement, the market capitalisation of the Consideration Shares amounts to approximately HK$482,220,000.

The allotment and issue of the Consideration Shares and the issue of the Convertible Bonds are subject to the passing of the ordinary resolutions by the Shareholders at the EGM approving and authorising the Sale and Purchase Agreement and the transactions contemplated thereby, including but not limited to the allotment and issue of the Consideration Shares and the issue of the Convertible Bonds.

The Consideration Shares represent:

• (a) approximately 17.64% of the existing issued share capital of the Company;

• (b) approximately 15.00% of the issued share capital of the Company as enlarged by the allotment and issue of the Consideration Shares; and

• (c) approximately 11.54% of the issued share capital of the Company as enlarged by the allotment and issue of the Consideration Shares and allotment and issue of the Conversion Shares upon the exercise in full of the conversion rights attaching to the Convertible Bonds.

The Consideration Shares, when allotted and issued, will rank pari passu in all respects with each other and with the Shares in issue on the date of allotment and issue of the Consideration Shares. There are no restrictions on the transfer or subsequent sale of the Consideration Shares upon their issue.

Application will be made by the Company to the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares.

The Consideration and the Issue Price was arrived at after arm’s length negotiations between the Purchaser and the Vendor with reference, mainly, to the five days average price per Share. The Directors (including the independent non-executive Directors) consider that the Consideration and the Issue Price is fair and reasonable and in the interests of the Shareholders as a whole.

– 8 –

LETTER FROM THE BOARD

Principal terms of the Convertible Bonds

Principal amount: HK$618,602,057.70, which will be issued by the Company at its full face value. Interest rate: The Convertible Bonds shall carry interest at the rate of 8% per annum. Maturity date: Unless previously redeemed, repurchased and cancelled or converted, any outstanding Convertible Bonds shall be redeemed on the date falling on the third anniversary of the date of issue of the Convertible Bonds. Ranking: The Convertible Bonds constitute general and unsecured obligations of the Company and rank equally among themselves and pari passu with all other present and future unsecured and unsubordinated obligations of the Company. Early redemption: The Company shall be entitled at any time while the Convertible Bonds are outstanding to redeem the Convertible Bonds or any part thereof at the principal amount of the Convertible Bonds (in multiples of HK$5,000,000). Conversion: Provided that any conversion of the Convertible Bonds does not trigger off a mandatory offer under rule 26.1 of the Code on the part of the Vendor, the Vendor will have the right to convert the whole or part of the principal amount of the Convertible Bonds into Conversion Shares at any time and from time to time, from the date of issue of the Convertible Bonds up to and including their maturity date in amounts of not less than a whole multiple of HK$5,000,000 on each conversion.

Pursuant to the Convertible Bonds, the Vendor will not exercise the conversion rights attaching to the Convertible Bonds if, immediately after the allotment and issue of the relevant Conversion Shares, a mandatory offer is triggered off under rule 26.1 of the Code as a result of Vendor holding an aggregate of 20% or more of voting rights in the Company and being deemed to act in concert with other parties in accordance with the Code. The Company will also not facilitate the issue of the Conversion Shares if any conversion under the Convertible Bonds triggers the 20% threshold and initiates a mandatory offer obligation as a result of the Vendor holding an aggregate of 20% or more of voting rights in the Company and being deemed to act in concert with other parties in accordance with the Code.

The restriction regarding the conversion under the Convertible Bonds remains valid throughout the terms of the Convertible Bonds.

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LETTER FROM THE BOARD

Conversion price:

The conversion price is initially HK$1.10 per Conversion Share, subject to adjustment for adjustment events as set out below. The initial conversion price represents:

• (a) a discount of approximately 35.67% to the closing price of HK$1.71 per Share as quoted on the Stock Exchange on 22 June 2007, being the last trading day of the Shares immediately before the date of the Sale and Purchase Agreement;

• (b) a premium of approximately 0.36% over the average of the closing prices of HK$1.096 per Share as quoted on the Stock Exchange for the last five consecutive trading days up to and including 22 June 2007, being the last trading day of the Shares immediately before the date of the Sale and Purchase Agreement;

• (c) a discount of approximately 38.55% to the closing price of approximately HK$1.79 per Share as quoted on the Stock Exchange on the Latest Practicable Date; and

• (d) a premium of approximately 633.33% over the net asset value per Share of approximately HK$0.15 based on the audited consolidated accounts of the Group for the financial year ended 31 December 2006.

• Adjustment to the conversion price:

• The conversion price is subject to adjustment based on the prescribed formulas as set out in the instrument forming the Convertible Bonds for the happening of the adjustment events, include but not limited:

• (i) an alteration of the nominal amount of each Share by reason of any consolidation or subdivision;

• (ii) an issue (other than in lieu of a cash dividend) by the Company of any Shares credited as fully paid by way of capitalisation of profits or reserves (including any share premium account or capital redemption reserve fund);

• (iii) a capital distribution (in cash or in specie) to Shareholders (whether on a reduction of capital or otherwise);

• (iv) an offer of new Shares for subscription by way of rights, or shall grant to holders of Shares any options or warrants to subscribe for new Shares at a price which is less than 80% of the market price of the Shares of the date of the announcement of the terms and offer or grant being made; and

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LETTER FROM THE BOARD

• (v) an issue of Shares being made wholly for cash at a price less than 80% of the market price of the Shares on the date of announcement of the issue (whether or not such issue is subject to the approval of the Shareholders).

Every adjustment to the conversion price shall be certified (at the option of the Company) either by the auditors of the Company for the time being or by an approved merchant bank.

An “approved merchant bank” means a merchant bank of repute holding banking license in Hong Kong selected by the Company for the purpose of providing a specific opinion or calculation or determination for adjustment under the Convertible Bonds.

Voting:

The Vendor will not be entitled to attend or vote at any general meeting of the Company by reason only of it being the holder of the Convertible Bonds.

Transfer:

With the prior written consent of the Company, the Convertible Bonds may be transferable provided always that no transfer or assignment of the Convertible Bonds shall be made to any connected person of the Company.

Based on the conversion price of HK$1.10 per Conversion Share, a maximum number of 562,365,507 Conversion Shares will be allotted and issued upon exercise of the conversion rights attached to the Convertible Bonds in full, which represent: (i) approximately 43.27% of the issued share capital of the Company as at the date of the Sale and Purchase Agreement; (ii) approximately 26.02% of the issued share capital of the Company as enlarged by the allotment and issue of the Conversion Shares; and (iii) approximately 23.02% of the issued share capital of the Company as enlarged by the allotment and issue of the Consideration Shares and the Conversion shares. There are no restrictions on the transfer or subsequent sale of the Conversion Shares upon their issue.

Conditions:

Completion of the Sale and Purchase Agreement is conditional upon the satisfaction of the following:

• (a) the warranties given by the Vendor under the Sale and Purchase Agreement in relation to, among other matters, the ownership of the Sale Shares, remaining true, accurate and complete in all material respects;

• (b) the Listing Committee of the Stock Exchange granting the listing of and permission to deal in the Consideration Shares and the Conversion Shares;

• (c) all necessary consents and approvals required to be obtained on the part of the Vendor and Mr. Liu in respect of the Sale and Purchase Agreement and the transactions contemplated hereby having been obtained;

• (d) if necessary, the Listing Committee of the Stock Exchange approving the issue of the Convertible Bonds; and

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LETTER FROM THE BOARD

• (e) the passing by the Shareholders at the EGM of the necessary resolutions to approve the Sale and Purchase Agreement and the transactions contemplated thereby, including but not limited to the allotment and issue of the Consideration Shares and the issue of the Convertible Bonds.

Save for conditions (b), (c), (d) and (e), which are incapable of being waived, the Purchaser may at any time waive in writing the condition (a) set out above. If the conditions are not fulfilled (or as the case may be, waived by the Purchaser) on or before 4:00 p.m. on 31 August 2007 (or such later date as the parties to the Sale and Purchase Agreement may agree), the Sale and Purchase Agreement shall cease and determine and thereafter neither party to the Sale and Purchase Agreement shall have any obligations and liabilities towards each other hereunder save for any antecedent breaches of the terms hereof. The Purchaser does not have any current intention to waive the condition (a).

Application will be made by the Company to the Stock Exchange for the listing of, and permission to deal in, the Consideration Shares and the Conversion Shares. No application will, however, be made for the listing of the Convertible Bonds on any stock exchanges.

Completion:

Completion is expected to take place on the second Business Day after the fulfillment (or waiver) of the conditions (or such later date as the parties to the Sale and Purchase Agreement may agree) mentioned above.

Upon Completion, the Company will be interested in 52,415,466 Proactive Shares. The Company has no intention to nominate any director to the board of directors of Proactive upon Completion and will treat the Sale Shares as long term investment. The investment in the Sale Shares will be accounted for as “Available-for-sale investments” as part of non-current assets of the Group.

INFORMATION ON PROACTIVE

Proactive is a company incorporated in Bermuda with limited liability which together with its subsidiaries engaged principally in the design, development and sale of value-added telecommunication products and computer telephony products focusing on business applications.

Proactive’s telecommunications products target telecommunications carriers and services providers while its computer telephony products are marketed mostly to corporate customers in different industries. Proactive is a company listed on GEM of the Stock Exchange.

Reference is also made to the announcement and the circular of Proactive dated 22 March 2007 and 25 May 2007 respectively, in which Proactive announced that it would tap into the field of the logistic transportation in the PRC through the acquisition of Eternity Profit Investments Limited. Upon completion of the acquisition, Proactive intends to enter into logistic business that involves purchases of cargo trains and management and operation of railway transportation and related logistics business in the PRC. As disclosed in the 2007 first quarterly report of Proactive, in view of the ongoing reforms and consolidation in the IT and telecom industry, Proactive has decided to gradually exit the IT and telecom market to focus on the existing opportunities in the field of logistics transportation.

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LETTER FROM THE BOARD

As disclosed in the audited consolidated financial statements of Proactive, the turnover, net loss before taxation and net loss after taxation for the financial year ended 31 December 2005 were approximately HK$20,982,000, HK$1,764,000 and HK$1,764,000 respectively. As disclosed in the audited consolidated financial statements of Proactive, the turnover, net loss before taxation and net loss after taxation for the year ended 31 December 2006 was approximately HK$11,880,000, HK$3,611,000 and HK$3,611,000 respectively.

The audited consolidated total assets and net assets of Proactive as at 31 December 2006 were approximately HK$19,526,000 and HK$15,984,000 respectively.

REASONS FOR THE ACQUISITION

The Group is principally engaged in manufacturing and trading of polishing materials and equipments.

Reference is made to the announcement and the circular of Proactive dated 22 March 2007 and 25 May 2007 respectively, in which Proactive announced that it would tap into the field of the logistic transportation in the PRC through its acquisition of Eternity Profit Investments Limited. As the economy in the PRC has undergone a continuous growth over the past few years, the Directors believe that there are great potentials in various areas of business in the PRC, including the logistic transportation business in the PRC. In this regard, the Directors are of the opinion that there are huge growth potentials in the logistic business of Proactive in the PRC.

The Group intends to hold the Sale Shares as long term investment. As the Proactive Shares are listed on the GEM of the Stock Exchange, the Group is able to realise the investments in the Sale Shares in the open market, which represents an efficient mean for the realisation of the investments in the Sale Shares.

The Directors consider that the value of investments in a company lies in its future potential growth, which in turn depends on the future prospects and potential of the underlying company. Given that it is an unprecedented opportunity for Proactive, a non-PRC party, to enter into the railway transportation and logistic business in the PRC, Proactive has demonstrated its growing potential with the successful fund raising exercises in which various institutional investors have invested for more than HK$1 billion in Proactive since the beginning of this year. Based on above, the Directors believed that the upside potential for the investment in Proactive will be promising. In addition, given that the consideration of the Acquisition shall be satisfied by the Company with Consideration Shares and the Convertible Bonds, the Directors are of the view that the Acquisition provides the Company the opportunity to acquire an investment with good potential without depleting the cash resources of the Group which is to the interests of the Shareholders and the Company.

Although the Company will only hold approximately over 10% of shareholdings in Proactive immediately upon completion of the Acquisition, the Directors consider that the value of the Sale Shares will steadily grow in parallel with the development of the railway logistic transport business of Proactive in future.

– 13 –

LETTER FROM THE BOARD

In view of the growing potential of Proactive, the Directors (including the independent non-executive Directors) consider that the terms and conditions of the Acquisition, including but not limited to the allotment and issue of Consideration Shares and the issue of Convertible Bonds, are fair and reasonable and are in the interests of the Company and the Shareholders as a whole.

EFFECTS ON SHAREHOLDING STRUCTURE OF THE COMPANY

As at the Latest Practicable Date, the Company has 1,598,600,000 Shares in issue. The shareholding structure of the Company before and after the allotment and issue of Consideration Shares and the full exercise of the conversion rights under the Convertible Bonds are as follows:

Shareholder PME Investments (BVI) Co. Ltd. and its associates (Note 1) Ms. Chan Yim Fan (Note 2) The Vendor (Note 3) Public Shareholders Total	At the Latest Practicable Date No. of Shares Approximate percentage 461,638,000 28.88% 2,705,333 0.17% – – 1,134,256,667 70.95% 1,598,600,000 100%	Immediately after the allotment and issue of the Consideration Shares but before the exercise of conversion rights under the Convertible Bonds No. of Shares Approximate percentage 461,638,000 24.55% 2,705,333 0.14% 282,000,000 15.00% 1,134,256,667 60.31% 1,880,600,000 100%	Immediately after the allotment and issue of the Consideration Shares and the exercise of conversion rights under the Convertible Bonds to 19.99% No. of Shares Approximate percentage 461,638,000 23.11% 2,705,333 0.14% 399,400,250 19.99% 1,134,256,667 56.76% 1,998,000,250 100%	Immediately after the allotment and issue of the Consideration Shares and the full exercise of conversion rights under the Convertible Bonds No. of Shares Approximate percentage 461,638,000 18.90% 2,705,333 0.11% 844,365,507 34.56% 1,134,256,667 46.43% 2,442,965,507 100%	Immediately after the allotment and issue of the Consideration Shares and the full exercise of conversion rights under the Convertible Bonds No. of Shares Approximate percentage 461,638,000 18.90% 2,705,333 0.11% 844,365,507 34.56% 1,134,256,667 46.43% 2,442,965,507 100%
					100%

Notes:

1. PME Investments (BVI) Co., Ltd. (“PME Investments”), a company incorporated in the British Virgin Islands, is the beneficial owner of 318,438,000 Shares. The entire issued share capital of PME Investments is beneficially owned as to one-third by each of Mr. Cheng Kwok Woo, Mr. Cheng Kwong Cheong and Ms. Cheng Wai Ying, all are Directors. In addition, each of Mr. Cheng Kwok Woo and Mr. Cheng Kwong Cheong personally holds 54,400,000 Shares and Ms Cheng Wai Ying personally holds 34,400,000 Shares.

2. Ms. Chan Yim Fan is an executive Director.

3. The Vendor cannot exercise the conversion rights attaching to the Convertible Bonds if such conversion will trigger off a mandatory offer under Rule 26.1 of the Code, which includes but not limited to the circumstances that (i) the Vendor acquire control (i.e. 30% of voting rights) in the Company; and (ii) the Vendor will become parties acting in concert, whether deemed or actual, with others to form a concert group which will take control (as defined in the Code) of the Company.

To the best belief, information and knowledge of the Directors, neither the Vendor nor its ultimate beneficial owner is a party acting in concert with any Shareholders and none of the Company or its connected persons (as defined in the Listing Rules) is a party acting in concert with any shareholders of Proactive. There will not be a change of control in the Company as a result of the Acquisition.

– 14 –

LETTER FROM THE BOARD

FINANCIAL EFFECTS ON THE GROUP

Assets and liabilities

Set out in Appendix IV to this circular is the unaudited pro forma consolidated financial information of the Enlarged Group. Upon Completion, the consolidated total assets of the Enlarged Group would be increased by approximately 231% from approximately HK$275 million to approximately HK$912 million and the consolidated total liabilities of the Group would be increased by approximately 1,785% from approximately HK$34 million to approximately HK$650 million assuming the completion of the Acquisition, including the allotment and issue of the Consideration Shares, had taken place on 31 December 2006.

Earnings

The Group recorded an audited consolidated net profits attributable to the equity holders of the Company of approximately HK$5,504,000 for the year ended 31 December 2006. Based on the unaudited pro forma financial statements of the Enlarged Group set out in Appendix IV to this circular, the unaudited consolidated net loss attributable to the equity holders of the Company would be approximately HK$44,284,000, assuming the completion of the Acquisition, including the allotment and issue of the Consideration Shares, had taken place on 1 January 2006.

PROSPECTS OF THE ENLARGED GROUP

Prospect of the Group

As an enterprise where PRC is its major market, the Directors are filled with hope for the future as the PRC economy continues to grow. In 2007, it shall be the 50th anniversary of the setup of the polishing business and the Directors will continue to bring new elements and environment to create a new future of the Group. Through the establishment of Shanghai PME-XINHUA Polishing Materials Systems, a joint venture in Shanghai, which commenced operations in March 2007, the pace of expanding to the Yangtze River Delta market will accelerate. In addition, more new products will be developed to cater for different market needs. The Group is endeavor to capture the market through improved distribution network as it would be the most effective and economical way to obtain higher market shares.

Prospect of Proactive

A subsidiary of Proactive has been approved to conduct in PRC, railway cargo transportation agency services, logistics and transportation management and consultancy services, equipment rental, project investment and consultancy, storage services and technology import and export (separate applications in accordance with relevant State regulations required for business(es) falling under specific regulations). It is believed and hoped that as the logistics transportation network of the PRC become more firmly established, it will primarily be used as one of the principal means for transporting basic raw materials providing a much needed supporting service to some of the country’s pillar industries, namely, the coal, metal ores and oil industries.

– 15 –

LETTER FROM THE BOARD

LISTING RULES IMPLICATIONS

The Acquisition constitutes a very substantial acquisition on the part of the Company under the Listing Rules and is subject to the approval of the Shareholders at the EGM. To the best of the Directors’ knowledge, no Shareholder have a material interest in the Acquisition and will be required to abstain from voting for the relevant resolution to approve the Acquisition at the EGM.

CURRENT GENERAL MANDATE

At the AGM, the Shareholders approved, among other things, an ordinary resolution to grant to the Directors the Current General Mandate to allot and issue not more than 229,920,000 Shares, being 20% of the entire issued share capital of the Company of 1,149,600,000 Shares as at the date of passing of the resolution. During the period from the granting of the Current General Mandate to the Latest Practicable Date, the Current General Mandate had been utilised as to 229,000,000 Shares being placed out by CCB International Capital Limited as placing agent of the Company pursuant to a placing agreement dated 5 July 2007, being approximately 99.60% of the entire number of Shares which may be allotted and issued under the Current General Mandate. Please refer to the announcement of the Company dated 6 July 2007 for further details regarding the above matter.

PROPOSED GRANT OF NEW GENERAL MANDATE

The Company will convene the EGM at which ordinary resolutions will be proposed to the Independent Shareholders that:

• (i) the Directors be granted the New General Mandate to allot and issue Shares not exceeding 20% of the issued share capital of the Company as at the date of passing the relevant ordinary resolution; and

• (ii) the New General Mandate be extended to Shares repurchased by the Company pursuant to the general mandate granted to the Directors at the AGM.

As at the Latest Practicable Date, the Company had an aggregate of 1,598,600,000 Shares in issue. Subject to the passing of the ordinary resolutions for the approval of the New General Mandate and on the basis that no further Shares are issued and/or repurchased by the Company between the Latest Practicable Date and the date of the EGM, the Company would be allowed under the New General Mandate to allot and issue up to 319,720,000 Shares, being 20% of the total number of Shares in issue as at the Latest Practicable Date.

REASONS FOR THE NEW GENERAL MANDATE

As explained in the paragraph headed “Current General Mandate” above, the Current General Mandate had been utilised as to 229,000,000 placing Shares having been issued and allotted under, being approximately 99.60% of the entire number of Shares which may be allotted and issued under the Current General Mandate.

– 16 –

LETTER FROM THE BOARD

The Board believes that granting of the New General Mandate is in the best interests of the Company and the Shareholders as a whole by maintaining the financial flexibility necessary for the Group’s future business development. The Board considers equity financing to be an important avenue of resources to the Group since it does not create any interest paying obligations on the Group. In appropriate circumstances, the Group will also consider other financing methods such as debt financing or internal cash resources to fund its future business development. While the Board considers that there is no immediate funding need for the Group’s current operations and that there is currently no concrete proposal presented by potential investors for investment in the Shares, the Board is now proposing to seek the approval of Independent Shareholders at the EGM of the New General Mandate such that should future funding needs arise or attractive terms for investment in the Shares become available from potential investors, the Board will be able to respond to the market promptly.

There has not been any refreshment of the Current General Mandate since the AGM. The following table summarises the use of the Current General Mandate since the AGM:

				Actual use of
				proceeds as at the
Date of initial			Intended use	Latest Practicable
announcement	Event	Net proceeds	of proceeds	Date
6 July 2007	Placing of	HK$563 million	General working	The net proceeds
	229,000,000 placing		capital	have not been
	Shares by the			utilised and is
	Company with CCB			deposited in the
	International Capital			bank accounts of the
	Limited being the			Company. It is
	placing agent			expected that the net
				proceeds will be
				utilised towards the
				general working
				capital of the Group
				as intended

INDEPENDENT BOARD COMMITTEE

The Independent Board Committee comprises Mr. Anthony Francis Martin Conway, Mr. Leung Yuen Wing, Mr. Soong Kok Meng and Mr. Chow Fu Kit Edward, all being the independent non-executive Directors. It has been established to advise the Independent Shareholders on the granting of the New General Mandate.

Veda Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the granting of the New General Mandate.

– 17 –

LETTER FROM THE BOARD

The Independent Board Committee and the Directors, having taken into account the advice of Veda Capital, consider that the granting of the New General Mandate is in the interests of the Company and the Shareholders as a whole and is fair and reasonable so far as the Independent Shareholders are concerned and accordingly recommends the Independent Shareholders to vote in favour of the ordinary resolutions which will be proposed at the EGM for approving the granting of the New General Mandate.

The text of the letter from the Independent Board Committee is set out on page 22 of this circular and the text of the letter from Veda Capital containing its advice is set out on pages 23 to 27 of this circular.

PROPOSED CHANGE OF COMPANY NAME

Reference is made to the announcement of the Company dated 30 July 2007. The Board proposes to change the name of the Company from “PME Group Limited” to “CR Investment (Holdings) Company Limited” and upon the name change becoming effective, the new Chinese name “ ” will be adopted to replace “ ” for identification purpose only, subject to the conditions set out below being fulfilled. Due to the diversification in the scope of business of the Company, the Board considers that the proposed new name will reflect the corporate nature of the Company more accurately. The proposed new name can also refresh the corporate image and identity of the Company.

The Proposed Change of Name will be subject to the following:

1. the passing of a special resolution by the Shareholders at the EGM approving the change of the Company’s name; and

2. the Registrar of Companies in the Cayman Islands approving the change of the Company’s name.

The new name of the Company will take effect from the date of entry of the new name on the register maintained by the Registrar of Companies in the Cayman Islands. The Company will then carry out all necessary filing procedures with the Companies Registry in Hong Kong.

Effects of change of Company’s name

The Proposed Change of Name will not affect any rights of the holders of securities of the Company. All existing certificates of securities in issue bearing the present name of the Company shall, after the Proposed Change of Name becoming effective, continue to be evidence of title to such securities and the existing share certificates will continue to be valid for trading, settlement, registration and delivery purposes. There will not be any arrangement for exchange of the existing certificates of securities. Once the change of the Company’s name becomes effective, new share certificates will be issued only in the new name of the Company.

– 18 –

LETTER FROM THE BOARD

The Company will make further announcements as and when appropriate on the results of the EGM, the arrangement relating to the change of Company name, the trading and dealings in the securities of the Company on the Stock Exchange under the new name of the Company and as to when the new name of the Company will become effective.

RE-ELECTION OF A DIRECTOR

Reference is made to the announcement of the Company dated 17 August 2007 in relation to, among other matters, the appointment of Mr. Chow as an independent non-executive Director.

In accordance with the articles of association of the Company, Mr. Chow will retire at the EGM and being eligible, offer himself for re-election. A resolution for re-electing Mr. Chow as a Director will be proposed at the EGM. Disclosure required under the Listing Rules pursuant to such re-election is included in the paragraph headed “Details of the Director to be re-elected” in appendix V to this circular.

EGM

Set out on pages 206 to 209 is a notice convening the EGM to be held at 5th Floor, Unison Industrial Centre, Nos. 27-31 Au Pui Wan Street, Fo Tan, Shatin, Hong Kong on Tuesday, 18 September 2007 at 10:00 a.m.. Relevant resolution(s) will be proposed to the Shareholders at the EGM to consider and, if thought fit, approve the Acquisition and the transactions contemplated thereunder, including but not limited to the allotment and issue of the Consideration Shares, the issue of the Convertible Bonds and the allotment and issue of the Conversion Shares upon exercise of the convertible rights under the Convertible Bonds.

Pursuant to Rule 13.36(4)(a) of the Listing Rules, the New General Mandate requires the approval of the Independent Shareholders at the EGM at which any of the controlling Shareholders and their associates or, where there are no controlling Shareholders, Directors (excluding independent non-executive Directors) and the chief executive of the Company and their respective associates shall abstain from voting in favour of the relevant resolutions. As at the Latest Practicable Date, PME Investments (BVI) Co., Ltd. is the beneficial owner of 318,438,000 Shares and PME Investments (BVI) Co., Ltd. is beneficially owned as to one-third by each of Mr. Cheng Kwok Woo, Mr. Cheng Kwong Cheong and Ms. Cheng Wai Ying, all being Directors. In addition, each of Mr. Cheng Kwok Woo and Mr. Cheng Kwong Cheong personally holds 54,400,000 Shares and Ms. Cheng Wai Ying personally holds 34,400,000 Shares. Ms. Chan Yim Fan personally holds 2,705,333 Shares. Each of the other three executive Directors, Mr. Chow Yin Kwang, Ms. Yeung Sau Han Agnes and Ms. Chan Shui Sheung Ivy, does not hold any Shares as at the Latest Practicable Date. Each of Mr. Cheng Kwok Woo, Mr. Cheng Kwong Cheong, Ms. Cheng Wai Ying and Ms. Chan Yim Fan are executive Directors. There is no controlling Shareholder (as defined under the Code) as at the Latest Practicable Date and thus the Directors (excluding the independent non-executive Directors) are required to abstain from voting in favour of the grant of New General Mandate. Accordingly, each of PME Investments (BVI) Co., Ltd., Mr. Cheng Kwok Woo, Mr. Cheng Kwong Cheong, Ms. Cheng Wai Ying, Ms. Chan Yim Fan and their respective associates are required to abstain from voting in favour of the resolutions to approve the granting of the New

– 19 –

LETTER FROM THE BOARD

General Mandate at the EGM. The Board was advised that each of PME Investments (BVI) Co., Ltd., Mr. Cheng Kwok Woo, Mr. Cheng Kwong Cheong, Ms. Cheng Wai Ying and Ms. Chan Yim Fan have no intention to vote against the granting of the New General Mandate. Further, pursuant to Rule 13.39(4)(b) of the Listing Rules, any vote of the Independent Shareholders at the EGM will be taken by poll.

To the best of the Directors’ information, knowledge and belief, no Shareholders is required to abstain from voting at the EGM in respect of the special resolution approving the Proposed Change of Name and the ordinary resolution approving the re-election of Mr. Chow as an independent non-executive Director.

A form of proxy for use at the EGM is enclosed with this circular. Whether or not you are able to attend the EGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the head office and principal place of business in Hong Kong of the Company at 5th Floor, Unison Industrial Centre, Nos. 27-31 Au Pui Wan Street, Fo Tan, Shatin, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjourned meeting. Completion and delivery of the form of proxy will not preclude you from attending and voting in person at the EGM if you so wish.

PROCEDURE FOR DEMANDING A POLL AT GENERAL MEETING

According to Article 66 of the Articles of Association of the Company, at any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) demanded. A poll may be demanded by:

• (a) the chairman of the meeting; or

• (b) at least three Shareholders present in person (or, in the case of a Shareholder being a corporation, by its duly authorised representative) or by proxy for the time being entitled to vote at the meeting; or

• (c) any Shareholder or Shareholders present in person (or, in the case of a Shareholder being a corporation, by its duly authorised representative) or by proxy and representing not less than one-tenth of the total voting rights of all Shareholders having the right to vote at the meeting; or

• (d) any Shareholder or Shareholders present in person (or, in the case of a Shareholder being a corporation, by its duly authorised representative) or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right; or

• (e) if required by the Listing Rules, by any Director or Directors who, individually or collectively, hold proxies in respect of shares representing 5% or more of the total voting rights at the meeting.

– 20 –

LETTER FROM THE BOARD

RECOMMENDATION

The Board considers that the terms of the Acquisition are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, the Board recommends the Shareholders to vote in favour of the ordinary resolution approving the Acquisition as set out in the notice of the EGM.

The Directors are also of the view that the Proposed Change of Name is in the interests of the Company and the Shareholders as a whole and accordingly recommend the Shareholders to vote in favour of the special resolution to be sought at the EGM for the approval of the Proposed Change of Name.

The Directors are also of the view that the re-election of Mr. Chow as an independent non-executive Director is in the interests of the Company and the Shareholders as a whole and accordingly recommend the Shareholders to vote in favour of the relevant resolution at the EGM in respect of the re-election.

Your attention is drawn to the letter of advice from Veda Capital set out on pages 23 to 27 of this circular which contains its advice to the Independent Board Committee and the Independent Shareholders in connection with the granting of the New General Mandate and the letter from the Independent Board Committee set out on page 22 of this circular which contains its recommendation to the Independent Shareholders in relation to the granting of the New General Mandate. The Independent Board Committee, having taken into account the advice of Veda Capital in relation to the New General Mandate, is of the opinion that the New General Mandate is in the best interest of the Company and is fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, the Board also recommends the Independent Shareholders to vote in favour of the ordinary resolutions for the grant of New General Mandate at the EGM.

ADDITIONAL INFORMATION

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

Yours faithfully,

For and on behalf of the Board PME Group Limited Cheng Kwok Woo

Chairman

– 21 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [244 x 129] intentionally omitted <==

---

(Stock Code: 379)

22 August 2007

To the Independent Shareholders

Dear Sir or Madam,

REFRESHMENT OF GENERAL MANDATE TO ALLOT AND ISSUE SHARES

We refer to the circular of the Company dated 22 August 2007 (the “Circular”) of which this letter forms part. Unless the context requires otherwise, capitalised terms used herein shall have the same meanings as defined in the Circular.

We have been appointed by the Board to advise the Independent Shareholders as to whether the terms of the proposed grant of the New General Mandate are fair and reasonable so far as the Independent Shareholders are concerned. Veda Capital has been appointed as the independent financial adviser to advise us in this respect.

Having considered the principal reasons and factors considered by, and the advice of, Veda Capital as set out in its letter of advice to us on pages 23 to 27 of the Circular, we are of the opinion that the granting of the New General Mandate is in the interests of the Company and the Shareholders as a whole and is fair and reasonable so far as the Company and the Independent Shareholders are concerned. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the granting of the New General Mandate. Independent Shareholders are however advised to take note of the possible dilution effect on their shareholding interests in the Company when and if the New General Mandate is utilised.

Yours faithfully,

For and on behalf of the Independent Board Committee

Mr. Anthony Francis Martin Conway Mr. Leung Yuen Wing Mr. Soong Kok Meng Independent non-executive Independent non-executive Independent non-executive Director Director Director Mr. Chow Fu Kit Edward Independent non-executive Director

• for identification purposes only

– 22 –

LETTER FROM VEDA CAPITAL

The following is the full text of the letter from Veda Capital setting out the advice to the Independent Board Committee and the Independent Shareholders in relation to the refreshment of the Current General Mandate for inclusion in this circular.

Veda Capital Limited

Suite 11-12, 13/F, Nam Fung Tower 173 Des Voeux Road Central, Hong Kong

22 August 2007

To the Independent Board Committee and the Independent Shareholders of PME Group Limited

Dear Sirs and Madams,

REFRESHMENT OF GENERAL MANDATE TO ALLOT AND ISSUE SHARES

INTRODUCTION

We refer to the circular dated 22 August 2007 issued by the Company to the Shareholders of which this letter forms part (the “ Circular ”) and our appointment as independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the proposed grant of the New General Mandate, details of which are set out in the letter from the Board contained in the Circular (the “ Board Letter ”). Capitalised terms used in this letter, unless the context otherwise requires, shall have the same meaning ascribed to them in the Circular.

Pursuant to Rule 13.36(4) of the Listing Rules, the proposed grant of the New General Mandate requires the approval of the Independent Shareholders at the EGM at which any of the controlling Shareholders (as defined in the Listing Rules) and their associates or, where there are no controlling Shareholders, the Directors (excluding the independent non-executive Directors) and the chief executive of the Company and their respective associates are required to abstain from voting in favour of the resolutions proposed for the approval of such refreshment and under Rule 13.39(4)(b) of the Listing Rules, any vote of the Independent Shareholders will be taken by way of poll.

– 23 –

LETTER FROM VEDA CAPITAL

We understand that, as at the Latest Practicable Date and to the best of the knowledge and belief of the Directors having made all reasonable enquiries, PME Investments (BVI) Co., Ltd., being the controlling Shareholder, is the beneficial owner of 318,438,000 Shares and PME Investments (BVI) Co. Ltd. is beneficially owned as to one-third by each of Mr. Cheng Kwok Woo, Mr. Cheng Kwong Cheong and Ms. Cheng Wai Ying, all being executive Directors. In addition, each of Mr. Cheng Kwok Woo and Mr. Cheng Kwong Cheong personally holds 54,400,000 Shares and Ms. Cheng Wai Ying personally holds 34,400,000 Shares. Ms. Chan Yim Fan, also an executive Director, personally holds 2,705,333 Shares. Each of the other three executive Directors, Mr. Chow Yin Kwang, Ms. Yeung Sau Han Agnes and Ms. Chan Shui Sheung Ivy, does not hold any Shares as at the Latest Practicable Date. There is no controlling Shareholder (as defined under the Code) as at the Latest Practicable Date. Accordingly, each of PME Investments (BVI) Co., Ltd., Mr. Cheng Kwok Woo, Mr. Cheng Kwong Cheong, Ms. Cheng Wai Ying, and Ms. Chan Yim Fan and the other Directors (excluding the independent non-executive Directors) and their respective associates are required to abstain from voting in favour of the resolutions in respect of the grant of the New General Mandate to be proposed at the EGM.

The Independent Board Committee, comprises Mr. Anthony Francis Martin Conway, Mr. Leung Yuen Wing, Mr. Soong Kok Meng and Mr. Chow Fu Kit Edward, all being independent non-executive Directors, has been established to advise the Independent Shareholders on the proposed grant of the New General Mandate.

BASIS OF OUR ADVICE

In formulating our opinion, we have relied on the information, facts and representations contained or referred to in the Circular and the information, facts and representations provided by, and the opinions expressed by the Directors, the Company and its management. We have assumed that all statements, information, facts, opinions and representations made to us or referred to in the Circular were true, accurate and complete at the time when they were made and continued to be true, accurate and complete as at the date of the Circular. We have relied on such information and opinions and have not, however, conducted any independent investigation into the business, financial conditions and affairs or the future prospects of the Group. We have no reason to doubt the truth, accuracy and completeness of the statements, information, facts, opinions and representations provided to us by the Directors, the Company and its management. The Directors have confirmed to us that no material facts have been omitted from the information supplied and opinions expressed. We consider that we have been provided with sufficient information to reach an informed view to provide a reasonable basis for our opinion.

All the Directors jointly and severally accept full responsibility for the accuracy of the information contained in the Circular and confirm, having made all reasonable enquiries, that, to the best of their knowledge, opinions expressed in the Circular have been arrived at after due and careful consideration and that there are no other facts not contained in the Circular the omission of which would make any statement in the Circular misleading.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion in respect of the proposed grant of the New General Mandate, we have taken the following principal factors and reasons into consideration:

Background

The Group is principally engaged in manufacturing and trading of polishing materials and equipment.

– 24 –

LETTER FROM VEDA CAPITAL

At the AGM, the Directors were granted the Current General Mandate to allot and issue up to 229,920,000 new Shares, representing 20% of the entire issued share capital of the Company of 1,149,600,000 Shares as at the date of passing the resolution.

Subsequent to the AGM and as at the Latest Practicable Date, the Current General Mandate has been nearly fully utilised as to 229,000,000 Shares placed out by CCB International Capital Limited as placing agent of the Company pursuant to a placing agreement dated 5 July 2007, details of which were disclosed in the announcement of the Company dated 6 July 2007.

In order to maintain the financial flexibility necessary for the Group’s future business development, the Board proposes to seek the approval of the Independent Shareholders at the EGM for the grant of the New General Mandate. The Company had an aggregate of 1,598,600,000 Shares in issue as at the Latest Practicable Date. Subject to the passing of the ordinary resolutions for the approval of the grant of the New General Mandate and assuming that no Shares are issued and/or repurchased by the Company between the Latest Practicable Date and the date of the EGM, the Company would be allowed under the New General Mandate to allot and issue up to 319,720,000 Shares, representing 20% of the total number of Shares in issue as at the date of the EGM.

Reasons for the New General Mandate

With reference to the announcement of the Company dated 6 July 2007, a total of 229,000,000 new Shares were issued and allotted pursuant to the relevant placing agreement. Since all of such new Shares were issued and allotted under the authority of the Current General Mandate, the Current General Mandate has been utilised as to 229,000,000 Shares, representing approximately 99.60% of the Current General Mandate.

As referred to in the Board Letter, the Board believes that the granting of the New General Mandate is in the best interests of the Company and the Shareholders as a whole by maintaining the financial flexibility necessary for the Group’s future business development. The Board also considers equity financing to be an important avenue of resources to the Group since it does not create any interest paying obligations on the Group.

In light of the above, we are of the opinion that the New General Mandate would provide the Company with the necessary flexibility essential for fulfilling any possible funding needs for future business development and/or investment decisions in a timely manner. As such, we are of the view that the granting of the New General Mandate will be in the interest of the Company and the Independent Shareholders as a whole.

– 25 –

LETTER FROM VEDA CAPITAL

Other financing alternatives

As debt financing may incur interest burden to the Group, equity financing such as issuance of new Shares for cash or equity swaps may be an appropriate mean to fund such investments and/or acquisitions and provide additional working capital for the future development and expansion of the Group, given the Group’s financial position, capital structure, cost of funding and the then financial market condition. Other financing methods such as debt financing or internal cash resources to fund future business development of the Company shall be taken into consideration in appropriate circumstances.

We consider that the grant of the New General Mandate will provide the Company with an additional alternative and it is reasonable for the Company to have the flexibility in deciding the financing methods for its future development, including equity issuance. As such, we are of the view that the grant of the New General Mandate will be in the interests of the Company and the Independent Shareholders as a whole.

Potential dilution to shareholdings of the Independent Shareholders

Set out below is a table showing the shareholdings of the Company as at the Latest Practicable Date and; for illustrative purpose, the potential dilution effect on the shareholdings upon full utilisation of the New General Mandate, assuming no Shares are issued or repurchased during the period between the Latest Practicable Date and the date of the EGM:

PME Investments (BVI) Co. Ltd. and its associates (Note) Public Shareholders Shares to be issued under the New General Mandate Total	As at the Latest Practicable Date No. of Shares % 461,638,000 28.88 1,136,962,000 71.12 – – 1,598,600,000 100.00	Upon full utilisation of the New General Mandate No. of Shares % 461,638,000 24.06 1,136,962,000 59.27 319,720,000 16.67 1,918,320,000 100.00	Upon full utilisation of the New General Mandate No. of Shares % 461,638,000 24.06 1,136,962,000 59.27 319,720,000 16.67 1,918,320,000 100.00
			100.00

Note: PME Investments (BVI) Co., Ltd. (“PME Investments”), a company incorporated in the British Virgin Islands, is the beneficial owner of 318,438,000 Shares. The entire issued share capital of PME Investments is beneficially owned as to one-third by each of Mr. Cheng Kwok Woo, Mr. Cheng Kwong Cheong and Ms. Cheng Wai Ying, all are Directors. In addition, each of Mr. Cheng Kwok Woo and Mr. Cheng Kwong Cheong personally holds 54,400,000 Shares and Ms Cheng Wai Ying personally holds 34,400,000 Shares.

– 26 –

LETTER FROM VEDA CAPITAL

As illustrated in the table above, the existing aggregate shareholding of the public Shareholders will decrease from approximately 71.12% as at the Latest Practicable Date to approximately 59.27% upon full utilisation of the New General Mandate. Taking into account the benefits of the New General Mandate as discussed above and the fact that the shareholdings of all Shareholders will be diluted proportionately, we consider such dilution or potential dilution of shareholding to be acceptable.

RECOMMENDATION

Having considered the factors and reasons as stated above, we are of the view that the grant of the New General Mandate is in the interests of the Company and Independent Shareholders as a whole, and is fair and reasonable. Accordingly, we recommend the Independent Shareholders and advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolutions in relation to the grant of the New General Mandate to be proposed at the EGM. Independent Shareholders are however advised to take note of the possible dilution effect on their shareholding interests in the Company when and if the New General Mandate is utilised.

Yours faithfully, For and on behalf of Veda Capital Limited Hans Wong Julisa Fong Managing Director Director

– 27 –

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

APPENDIX I

==> picture [155 x 51] intentionally omitted <==

Unit B, 23rd Floor

China Insurance Group Building 141 Des Voeux Road Central Hong Kong

22nd August, 2007

The Directors

PME Group Limited

5th Floor, Unison Industrial Centre

Nos. 27-31 Au Pui Wan Street

Fo Tan, Shatin Hong Kong.

Dear Sirs,

In accordance with your instructions to value the properties in which PME Group Limited (the “Company”) and its subsidiaries (together the “Group”) have interests, we confirm that we have carried out inspections, made relevant enquiries and searches and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the values of the relevant properties as at 31st July, 2007 (“date of valuation”).

Our valuations of the properties in Group I are on the basis of Market Value which we would define as “The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.” Market Value is understood as the value of an asset estimated without regard to costs of sale or purchase and without offset for associated taxes.

Our valuations of the property interests in Group I have been made on the assumption that the owner sells the properties on the open market in their existing state without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any other similar arrangement which would serve to increase the value of the properties.

The property interests in Group I have been valued on a market basis by reference to comparable market transactions. This approach rests on the wide acceptance of market price as the best indicator of value and pre-supposes that evidence of recent transactions in the market place can be extrapolated to similar properties, subject to allowances for variable factors.

– 28 –

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

APPENDIX I

In valuing the property interests in Group I in which the Government Leases expire before 30th June, 1997, we have taken into account the provisions of Annex III of the Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China (the “PRC”) on the question of Hong Kong and the New Territories Leases (Extension) Ordinance (Chapter 150 of the Laws of Hong Kong) stipulating that such leases may be extended without premium until 30th June, 2047, and that an annual rent at three per cent. of the rateable value of the property will be charged from the date of extension.

In accordance with International Valuation Guidance Note No. 8 published by The International Valuation Standards Committee, the buildings and structures of the property in Group II belong to the category of specialized properties, which are rarely if ever sold on the open market, except by way of sale of the business or entity of which they are a part, due to their uniqueness, which arises from the specialized nature and design of the buildings, their configuration, size, location or otherwise. Consequently, reliable sale comparables cannot generally be identified for specialized properties.

Our valuation of the property in Group II is on the basis of Depreciated Replacement Cost which is used for the valuation of specialized properties. It is a method used in financial reporting to arrive at a surrogate for the market value of specialized and limited market properties, for which market evidence is unavailable. Depreciated Replacement Cost is based on an estimate of the Market Value for the existing use of the land, plus the current gross replacement (reproduction) costs of the improvements, less allowance for physical deterioration and all relevant forms of obsolescence and optimization.

In valuing the capital value of the property in Group II, we have made the summation of the market value of the land use rights and the depreciated replacement cost of the buildings and structures as at the date of valuation.

In valuing the property interests, we have adopted the basis of valuation and have made the valuation assumptions in accordance with the HKIS Valuation Standards on Properties (First Edition 2005) published by the Hong Kong Institute of Surveyors.

In our valuations, we have complied with all the requirements contained in Chapter 5 and the Practice Note No. 12 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.

The current status of the property in Group II regarding major approvals, consents or licences required in the PRC is as follows:

Property 1 Document/Approval in Group II State-owned Land Use Rights Certificate Yes Realty Title Certificates Yes

– 29 –

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

APPENDIX I

We have relied to a considerable extent on the information provided by the Group and have accepted advice given to us on such matters as planning approvals or statutory notices, easements, tenure, occupation, lettings, rental, site and floor areas and all other relevant matters.

We have not carried out detailed site measurements to verify the correctness of the site areas in respect of the relevant properties but have assumed that the site areas shown on the documents and official site plans handed to us are correct. Based on our valuation experience of similar properties in the PRC, we consider the assumptions so made to be reasonable. All documents and contracts have been used as reference only and all dimensions, measurements and areas are approximations. No on-site measurements have been taken.

We have inspected the exterior and, where possible, the interior of the properties, in respect of which we have been provided with such information as we have required for the purpose of our valuations. However, no structural survey, investigation or examinations have been made, but in the course of our inspections we did not note any serious defects. We are not, however, able to report that the properties are free from rot, infestation or any other structural defects. No tests were carried out to any of the services.

No allowance has been made in our report for any charges, mortgages or amounts owing on the properties valued nor for any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the properties are free from encumbrances, restrictions, and outgoings of an onerous nature which could affect their values.

We have been shown copies of various documents relating to the properties and have caused searches to be made at the Land Registry regarding the properties in Hong Kong. However, we have not searched the original documents to verify any amendments which may not appear on the copies handed to us. Due to restrictions of the land registration system in the PRC, we are unable to search the original documents to verify the existing title of the property in Group II or any material encumbrances that might be attached to the property. We are not in a position to advise on the Group’s title to the property in Group II. However, we have made reference to the opinion given by the Company’s legal advisers on PRC laws in respect of the Group’s title to the property in Group II.

The scope of valuations has been determined with reference to the property list provided by the Group. All properties on the list have been included in this valuation certificate.

We have had no reason to doubt the authenticity and accuracy of the information provided to us by the Group. We have also sought and received confirmation from the Group that no material factors have been omitted from the information supplied. We consider that we have been provided with sufficient information to reach an informed view, and have no reason to suspect that any material information has been withheld.

Unless otherwise stated, all monetary amounts stated are in Hong Kong Dollars. The adopted exchange rate for the valuation of property interests is the prevailing rate as at the date of valuation, being HK$1 to RMB0.97 and no significant fluctuation in exchange rate has been found between that date and the date of this letter.

– 30 –

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

APPENDIX I

The conclusion of values is based on generally accepted valuation procedures and practices that rely extensively on assumptions and considerations, not all of which can be easily quantified or ascertained exactly. While we have exercise our professional judgment in arriving at the valuation, you are urged to consider carefully the nature of such assumptions which are disclosed in this report and should exercise caution when interpreting this report.

We hereby certify that we have neither present nor prospective interest in the Company or the value reported.

Our valuations are summarized below and the valuation certificate is attached.

Yours faithfully,

For and on behalf of

Castores Magi (Hong Kong) Limited

Ernest Cheung Wah Fu

Member of China Institute of Real Estate Appraisers China Registered Real Estate Appraiser B.Sc. MRICS MHKIS RPS(GP) MCIArb Director

Note: Ernest Cheung Wah Fu is a Registered Professional Surveyor who has over 14 years of experience in valuing properties in Hong Kong and the PRC. His name is included in the List of Property Valuers for Undertaking Valuations for Incorporation or Reference in Listing Particulars and Circulars and Valuations in Connection with Takeovers and Mergers set forth by the Hong Kong Institute of Surveyors.

– 31 –

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

APPENDIX I

SUMMARY OF VALUES

Group I – Property interests owned and occupied by the Group in Hong Kong

Property 1. Units A, B and D on 5th Floor and Lorry Parking Space 23 on 1st Floor, Unison Industrial Centre, Nos. 27-31 Au Pui Wan Street, Fo Tan, Shatin, New Territories, Hong Kong. 2. Unit C on 5th Floor, Van Parking Space 1 on 1st Floor and Lorry Parking Space 29 on 1st Floor, Unison Industrial Centre, Nos. 27-31 Au Pui Wan Street, Fo Tan, Shatin, New Territories, Hong Kong. 3. Van Parking Space 8 on 1st Floor, Unison Industrial Centre, Nos. 27-31 Au Pui Wan Street, Fo Tan, Shatin, New Territories, Hong Kong. Sub-total:

Capital value in existing state as at 31st July, 2007 HK$ 13,770,000 5,270,000 300,000

19,340,000

– 32 –

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

APPENDIX I

Group II – Property interest held by the Group in Guangdong Province, the PRC

Property 1. Various buildings erected on two adjoining parcels of land located at No. 18 First High-Tech Road, High-Tech Industrial Zone, Xinlian Zhen, Humen Town, Dongguan City, Guangdong Povince, The PRC. Sub-total: Grand total:	Capital value in existing state as at 31st July, 2007 HK$ 84,650,000
	84,650,000
	103,990,000

– 33 –

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

APPENDIX I

VALUATION CERTIFICATE

Group I – Property interests owned and occupied by the Group in Hong Kong

				Capital value in
			Particulars of	existing state as at
	Property	Description and tenure	occupancy	31st July, 2007
				HK$
1.	Units A, B and D	The property comprises three	Units A and D on 5th	13,770,000
	on 5th Floor and	adjoining workshop units on the	Floor and Lorry
	Lorry Parking	5th Floor and one lorry parking	Parking Space 23 on
	Space 23 on	space on 1st Floor of a 16-storey	1st Floor are currently
	1st Floor,	industrial building which was	occupied by the
	Unison Industrial	completed in about 1983.	Group for warehouse,
	Centre,		ancillary office and
	Nos. 27-31 Au Pui	The property (excluding the lorry	lorry parking
	Wan Street,	parking space) has a total	purposes.
	Fo Tan,	saleable area of approximately
	Shatin,	13,657 sq. ft. (approximately	Unit B on 5th Floor is
	New Territories,	1,268.8 sq. m.).	currently leased to a
	Hong Kong.		third party.
		The Lot is held under a
	36/920th shares of	Government Lease for a term of
	and in Sha Tin	99 years commencing from 1st
	Town Lot No. 67	July, 1898 which was extended
	(the “Lot”)	until 30th June, 2047 under
		Section 6 of the New Territories
		Leases (Extension) Ordinance
		(Cap. 150 of the Laws of Hong
		Kong).

The current annual Government Rent payable for the Lot is equal to 3% of the rateable value for the time being of the Lot.

Note: The registered owner of the property is PME International (BVI) Company Limited, a wholly-owned subsidiary of the Company.

– 34 –

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

APPENDIX I

				Capital value in
			Particulars of	existing state as at
	Property	Description and tenure	occupancy	31st July, 2007
				HK$
2.	Unit C on	The property comprises a	The property is	5,270,000
	5th Floor,	workshop unit on the 5th Floor,	currently occupied by
	Van Parking Space	one van parking space and one	the Group for
	1 on 1st Floor and	lorry parking space on 1st Floor	warehouse and
	Lorry Parking	of a 16-storey industrial building	van/lorry parking
	Space 29 on	which was completed in about	purposes.
	1st Floor,	1983.
	Unison Industrial
	Centre,	The property (excluding the van
	Nos. 27-31 Au Pui	and the lorry parking spaces) has
	Wan Street,	a saleable area of approximately
	Fo Tan,	4,620 sq. ft. (approximately
	Shatin,	429.2 sq. m.).
	New Territories,
	Hong Kong.	The Lot is held under a
		Government Lease for a term of
	15/920th shares of	99 years commencing from 1st
	and in Sha Tin	July, 1898 which was extended
	Town Lot No. 67	until 30th June, 2047 under
	(the “Lot”)	Section 6 of the New Territories
		Leases (Extension) Ordinance
		(Cap. 150 of the Laws of Hong
		Kong).
		The current annual Government
		Rent payable for the Lot is equal
		to 3% of the rateable value for
		the time being of the Lot.

Note: The registered owner of the property is Fook Cheong Ho International Limited, a wholly-owned subsidiary of the Company.

– 35 –

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

APPENDIX I

	Property	Description and tenure
3.	Van Parking Space	The property comprises one van
	8 on 1st Floor,	parking space on 1st Floor of a
	Unison Industrial	16-storey industrial building
	Centre,	which was completed in about
	Nos. 27-31 Au Pui	1983.
	Wan Street,
	Fo Tan,	The Lot is held under a
	Shatin,	Government Lease for a term of
	New Territories,	99 years commencing from 1st
	Hong Kong.	July, 1898 which was extended
		until 30th June, 2047 under
	1/920th share of	Section 6 of the New Territories
	and in Sha Tin	Leases (Extension) Ordinance
	Town Lo No. 67	(Cap. 150 of the Laws of Hong
	(the “Lot”)	Kong).
		The current annual Government
		Rent payable for the Lot is equal
		to 3% of the rateable value for
		the time being of the Lot.

	Capital value in
Particulars of	existing state as at
occupancy	31st July, 2007
	HK$
The property is	300,000
currently occupied by
the Group for van
parking purpose.

Note: The registered owner of the property is Unison Base Investment Limited, a wholly-owned subsidiary of the Company.

– 36 –

VALUATION REPORT ON THE PROPERTY INTERESTS OF THE GROUP

APPENDIX I

Group II – Property interest held by the Group in Guangdong Province, the PRC

				Capital value in
			Particulars of	existing state as at
	Property	Description and tenure	occupancy	31st July, 2007
				HK$
1.	Various buildings	The property comprises five	The property is	84,650,000
	erected on two	various buildings erected on two	currently occupied by
	adjoining parcels	adjoining parcels of land having	the Group for
	of land located at	a total site area of 61,561 sq. m.	production, storage,
	No. 18 First High-		office and dormitory
	Tech Road,	The buildings erected thereon	purposes.
	High-Tech	have a total gross floor area of
	Industrial Zone,	approximately 44,981.4 sq. m.
	Xinlian Zhen,	and were completed in 1996.
	Humen Town,
	Dongguan City,	The property is subject to two
	Guangdong	land use rights each for a term of
	Province,	50 years commencing from July,
	The PRC.	1994 to July, 2044 for industrial
		purpose.

Notes:

1. Pursuant to a State-owned Land Use Rights Certificate – Dong Fu Guo Yong (1994) Zi Di Te No. 617 ( – 617 ) dated 30th August, 1995 issued by the People’s Government of Dongguan Shi ( ), the land use rights of a parcel of land was granted to “ ” for a land use term of 50 years commencing from July, 1994 to July, 2044. This parcel of land has a site area of 44,581 sq. m. and was designated for industrial purpose.

2. Pursuant to another State-owned Land Use Rights Certificate – Dong Fu Guo Yong (1994) Zi Di Te No. 618 ( – 618 ) dated 30th August, 1995 issued by the People’s Government of Dongguan Shi ( ), the land use rights of a parcel of land was granted to “ ” for a land use term of 50 years commencing from July, 1994 to July, 2044. This parcel of land has a site area of 16,980 sq. m. and was designated for industrial purpose.

3. According to five Realty Title Certificates – Yue Fang Di Zheng Zi Di Nos. C0374339, C0374340, C0374350, C0374352 and C0374357 ( – C0374339, C0374340, C0374350, C0374352 C0374357 ) all dated 21st November, 2001 and issued by the People’s Government of Guangdong Province ( ), the realty title of three workshop buildings, one administration building and one dormitory building was granted to “ ”. These buildings have a total gross floor area of 44,981.4 sq. m.

4. According to the legal opinion provided by the Company’s PRC legal advisers, Guangdong Kingda Attorneys & Counselors, the followings, inter alia, were noted:

5. “ ” is the unique legal holder of the land use rights and the unique owner of the buildings;

6. “ ” can transfer, let and mortgage the property without any consent from a third party;

7. the property is pledged to .

– 37 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

1. SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

An unqualified opinion in respect of the audit of the financial statements of the Group has been issued for each of the three years ended 31 December 2006. A summary of the audited results, assets and liabilities of the Group as extracted from the annual reports of the Company is set out below.

RESULTS Turnover Cost of sales Gross profit Other income Selling and distribution expenses Administrative expenses Reversal of revaluation decrease on leasehold land and buildings previously charged to the consolidated income statement Finance costs Profit before taxation Taxation Profit for the year ASSETS AND LIABILITIES Total assets Total liabilities Equity	For the year ended 31st December, 2004 2005 2006 HK$’000 HK$’000 HK$’000 163,640 191,964 235,226 (105,287) (151,113) (191,859) 58,353 40,851 43,367 866 4,037 2,597 (7,886) (12,879) (12,367) (26,584) (25,242) (25,902) 554 895 320 (896) (750) (1,348) 24,407 6,912 6,667 (3,169) (1,754) (1,165) 21,238 5,158 5,502 At 31st December, 2004 2005 2006 HK$’000 HK$’000 HK$’000 258,224 264,031 275,319 (25,517) (28,031) (34,485) 232,707 236,000 240,834	For the year ended 31st December, 2004 2005 2006 HK$’000 HK$’000 HK$’000 163,640 191,964 235,226 (105,287) (151,113) (191,859) 58,353 40,851 43,367 866 4,037 2,597 (7,886) (12,879) (12,367) (26,584) (25,242) (25,902) 554 895 320 (896) (750) (1,348) 24,407 6,912 6,667 (3,169) (1,754) (1,165) 21,238 5,158 5,502 At 31st December, 2004 2005 2006 HK$’000 HK$’000 HK$’000 258,224 264,031 275,319 (25,517) (28,031) (34,485) 232,707 236,000 240,834	For the year ended 31st December, 2004 2005 2006 HK$’000 HK$’000 HK$’000 163,640 191,964 235,226 (105,287) (151,113) (191,859) 58,353 40,851 43,367 866 4,037 2,597 (7,886) (12,879) (12,367) (26,584) (25,242) (25,902) 554 895 320 (896) (750) (1,348) 24,407 6,912 6,667 (3,169) (1,754) (1,165) 21,238 5,158 5,502 At 31st December, 2004 2005 2006 HK$’000 HK$’000 HK$’000 258,224 264,031 275,319 (25,517) (28,031) (34,485) 232,707 236,000 240,834
	58,353 866 (7,886) (26,584) 554 (896) 24,407 (3,169)	40,851 4,037 (12,879) (25,242) 895 (750) 6,912 (1,754)	43,367 2,597 (12,367 (25,902 320 (1,348
			6,667 (1,165
	21,238 At 2004 HK$’000 258,224 (25,517) 232,707

– 38 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

2. AUDITED FINANCIAL STATEMENTS OF THE GROUP

The following is the audited financial statements of the Group together with accompanying notes as extracted from the annual report of the Company for the year ended 31 December 2006.

Consolidated Income Statement

For the year ended 31st December, 2006

Notes Turnover 6 Cost of sales Gross profit Other income 8 Selling and distribution expenses Administrative expenses Reversal of revaluation decrease on leasehold land and buildings previously charged to the consolidated income statement Finance costs 9 Profit before taxation Taxation 12 Profit for the year 13 Attributable to: Equity holders of the Company Minority interests Dividends 14 Earnings per share 15 Basic	2006 HK$’000 235,226 (191,859)	2005 HK$’000 191,964 (151,113) 40,851 4,037 (12,879) (25,242) 895 (750) 6,912 (1,754) 5,158 5,112 46 5,158 1,629 HK0.53 cents
	43,367 2,597 (12,367) (25,902) 320 (1,348) 6,667 (1,165)	40,851 4,037 (12,879 (25,242 895 (750
		6,912 (1,754
	5,502
	5,504 (2)	5,112 46
	5,502 1,274 HK0.57 cents

– 39 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Balance Sheet

At 31st December, 2006

Notes Non-current assets Property, plant and equipment 16 Prepaid lease payments 17 Available-for-sale investments 18 Deposits placed with an insurer 19 Club debentures Current assets Inventories 20 Debtors, deposits and prepayments 21 Loan receivables 22 Prepaid lease payments 17 Taxation recoverable Bank balances and cash 21 Current liabilities Creditors and accruals 23 Taxation payable Obligations under a finance lease 24 Bank loans 25 Bank overdraft, unsecured 25 Net current assets Total assets less current liabilities Non-current liabilities Obligations under a finance lease 24 Deferred taxation 26 Capital and reserves Share capital 27 Share premium and reserves Equity attributable to equity holders of the Company Minority interests	2006 HK$’000 122,499 10,214 – 3,559 350	2005 HK$’000 119,172 10,012 1,379 3,903 350
	136,622 27,672 76,732 7,400 249 940 25,704 138,697 10,671 682 61 19,467 – 30,881 107,816 244,438 – 3,604 3,604	134,816
		31,586 64,707 6,105 244 1,487 25,086
		129,215
		10,312 765 175 12,232 185
		23,669
		105,546
		240,362
		60 4,302
		4,362
	240,834	236,000
	9,580 230,999 240,579 255	9,580 226,172
		235,752 248
	240,834	236,000

– 40 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Statement of Changes in Equity

For the year ended 31st December, 2006

At 1st January, 2005 Exchange difference arising on translation of foreign operations Revaluation decrease on buildings Reversal of deferred tax arising on revaluation on buildings Loss on fair value changes of available- for-sale investments Net income (expense) recognised directly in equity Profit for the year Total recognised income and expense for the year Dividends paid Acquisition of a subsidiary At 31st December, 2005 Exchange difference arising on translation of foreign operations Revaluation decrease on building Reversal of deferred tax arising on revaluation on buildings Transfer to gain on disposal of available- for-sale investments Net income (expense) recognised directly in equity Profit (loss) for the year Total recognised income and expense for the year Dividends paid At 31st December, 2006			Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company	Attributable to equity holders of the Company
	Share capital HK$’000 9,580 – – – – – – – – – 9,580 – – – – – – – –	Share premium HK$’000 202,296 – – – – – – – – – 202,296 – – – – – – – –	Special reserve Translation reserve Property revaluation reserve Investment revaluation reserve HK$’000 HK$’000 HK$’000 HK$’000 (Note) (38,581) – 6,641 633 – 1,022 – – – – (253) – – – 68 – – – – (1,275) – 1,022 (185) (1,275) – – – – – 1,022 (185) (1,275) – – – – – – – – (38,581) 1,022 6,456 (642) – 1,938 – – – – (3,129) – – – 1,146 – – – – 642 – 1,938 (1,983) 642 – – – – – 1,938 (1,983) 642 – – – –				Retained profits HK$’000 52,138 – – – – – 5,112 5,112 (1,629) – 55,621 – – – – – 5,504 5,504 (1,274)	Total HK$’000 232,707 1,022 (253) 68 (1,275) (438) 5,112 4,674 (1,629) – 235,752 1,938 (3,129) 1,146 642 597 5,504 6,101 (1,274)	Minority interests HK$’000 – (20) – – – (20) 46 26 – 222 248 9 – – – 9 (2) 7 –	Total HK$’000 232,707
										1,002 (253) 68 (1,275)
										(458)
										5,158
										4,700
										(1,629) 222
										236,000
										1,947 (3,129) 1,146 642
										606
										5,502
										6,108
										(1,274)
	9,580	202,296	(38,581)	2,960	4,473	–	59,851	240,579	255	240,834

Note: Special reserve represented the difference between the nominal amount of the share capital issued by PME International (BVI) Company Limited, the then holding company of the Group, and the aggregate of the nominal amount of the issued share capital and other reserves accounts of the subsidiaries which was acquired by PME International (BVI) Company Limited pursuant to the group reorganisation carried out in 1997.

– 41 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Consolidated Cash Flow Statement

For the year ended 31st December, 2006

Notes Operating activities Profit before taxation Adjustments for: Discount on acquisition of a subsidiary Interest income Imputed interest income on other assets Dividend income from listed investments Depreciation of property, plant and equipment Release of prepaid lease payment Finance costs Loss on disposals of property, plant and equipment Gain on derecognition of available-for-sale investments Reversal of revaluation decrease on leasehold land and buildings previously charged to income statement Allowance for doubtful debts Allowance for obsolete inventories Operating cash flows before movements in working capital Decrease (increase) in inventories Increase in debtors, deposits and prepayments Increase in creditors and accruals Effect of foreign exchange Cash generated from (used in) operations Income tax refunded Income tax paid Net cash generated from (used in) operating activities Investing activities Interest received Dividend income from listed investments Proceeds on derecognition of available-for-sale investments Purchases of property, plant and equipment Purchases of available-for-sale investments Advances of loan receivables Repayments of loan receivables Proceeds from disposal of property, plant and equipment Acquisition of a subsidiary 29 Disposal of a subsidiary 30 Net cash used in investing activities	2006 HK$’000 6,667 – (579) (485) – 6,937 249 1,348 248 (83) (320) 1,003 –	2005 HK$’000 6,912 (28) (686) – (144) 6,082 238 750 – (250) (895) 1,758 546 14,283 (3,448) (18,957) 4,209 – (3,913) – (6) (3,919) 686 144 3,740 (12,040) – (7,957) 9,712 – 382 7 (5,326)
	14,985 4,199 (12,005) 263 (2,229) 5,213 318 (580) 4,951 579 – 5,014 (10,620) (2,910) (7,400) 6,105 652 – – (8,580)	14,283 (3,448 (18,957 4,209 –
		(3,913 – (6
		(3,919
		686 144 3,740 (12,040 – (7,957 9,712 – 382 7
		(5,326

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Financing activities New bank loans raised Repayments of bank loans Repayments of obligations under a finance lease Interest paid Finance lease charges paid Dividends paid Net cash generated from (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of foreign exchange rate changes Cash and cash equivalents at end of the year, represented by Bank balances and cash Bank overdrafts	2006 HK$’000 21,502 (14,474) (174) (1,340) (8) (1,274) 4,232 603 24,901 200 25,704 25,704 – 25,704	2005 HK$’000 30,908 (31,073) (165) (733) (17) (1,629) (2,709) (11,954) 36,800 55 24,901 25,086 (185) 24,901

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Notes to the Financial Statements

For the year ended 31st December, 2006

1. GENERAL

The Company was incorporated in the Cayman Islands as an exempted company with limited liability and its shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). The address of the registered office and principal place of business of the Company are disclosed in the corporate information on the annual report.

The consolidated financial statements are presented in Hong Kong dollars, which is also the functional currency of the Company.

The Company acts as an investment holding company. Details of the principal activities of the subsidiaries are set out in note 36.

2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”)

In the current year, the Group has applied, for the first time, a number of new standard, amendments and interpretations (“new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), which are either effective for accounting periods beginning on or after 1st December, 2005 or 1st January, 2006. The adoption of the new HKFRSs had no material effect on how the results for the current or prior accounting periods have been prepared and presented. Accordingly, no prior period adjustment has been required.

The Group has not early applied the following new standards, amendment or interpretations that have been issued but are not yet effective. The directors of the Company anticipate that the application of these standards, amendment or interpretations will have no material impact on the results and the financial position of the Group.

HKAS 1 (Amendment)	Capital Disclosures1
HKFRS 7	Financial Instruments: Disclosures1
HKFRS 8	Operating Segments2
HK(IFRIC)-Int 7	Applying the Restatement Approach under HKAS 29 “Financial
	Reporting in Hyperinflationary Economies”3
HK(IFRIC)-Int 8	Scope of HKFRS 24
HK(IFRIC)-Int 9	Reassessment of Embedded Derivatives5
HK(IFRIC)-Int 10	Interim Financial Reporting and Impairment6
HK(IFRIC)-Int 11	HKFRS 2 – Group and Treasury Share Transactions7
HK(IFRIC)-Int 12	Service Concession Arrangements8

• 1 Effective for annual periods beginning on or after 1st January, 2007 2 Effective for annual periods beginning on or after 1st January, 2009 3 Effective for annual periods beginning on or after 1st March, 2006 4 Effective for annual periods beginning on or after 1st May, 2006 5 Effective for annual periods beginning on or after 1st June, 2006 6 Effective for annual periods beginning on or after 1st November, 2006 7 Effective for annual periods beginning on or after 1st March, 2007 8 Effective for annual periods beginning on or after 1st January, 2008

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

3. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared under the historical cost basis except for certain leasehold properties and financial instruments, which are measured at revalued amounts or fair values, as explained in the accounting policies set out below.

The consolidated financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards issued by the HKICPA. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange and by the Hong Kong Companies Ordinance.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

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

Where necessary, adjustments are made to the consolidated financial statements of subsidiaries to bring their accounting policies in line with those used by other members of the Group.

All significant intercompany transactions and balances within the Group have been eliminated on consolidation.

Minority interests in the net assets of consolidated subsidiaries are presented separately from the Group’s equity therein. Minority interests in the net assets consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes.

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

Service income is recognised when services are rendered.

Interest income from a financial asset is accrued on a time basis by reference to the principal outstanding and at the effective interest rates applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s carrying amount.

Dividend income from investments is recognised when the Group rights to receive payment have been established.

Property, plant and equipment

Property, plant and equipment other than leasehold land and buildings are stated at cost less accumulated depreciation and any accumulated impairment losses.

Leasehold land and buildings are stated in the balance sheet at their revalued amounts, being the fair value at the date of revaluation less any subsequent accumulated depreciation and any subsequent impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Any revaluation increase arising on revaluation of land and buildings is credited to the property revaluation reserve, except to the extent that it reverses a revaluation decrease of the same asset previously recognised as an expense, in which case the increase is credited to the income statement to the extent of the decrease previously charged. A decrease in net carrying amount arising on revaluation of an asset is dealt with as an expense to the extent that it exceeds the balance, if any, on the revaluation reserve relating to a previous revaluation of that asset. On the subsequent sale or retirement of a revalued asset, the attributable revaluation increase is transferred to retained profits.

Depreciation is provided to write off the cost or valuation of property, plant and equipment over their estimated useful lives and after taking into account their estimated residual value, using the straight line method, as follows:

Leasehold land and building Over the shorter of the term of leases or 50 years Plant and machinery 10 years Other property, plant and equipment 3 to 5 years

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the assets. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net sale proceeds and the carrying amount of the item) is included in the consolidated income statement in the year in which the item is derecognised.

Prepaid lease payments

Prepaid lease payments are stated at cost less subsequent accumulated amortisation and any accumulated impairment losses. The costs of prepaid lease payments are amortised on a straight-line basis over the relevant lease terms.

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the leasee. All other leases are classified as operating leases.

The Group as lessor

Rental income from operating leases is recognised in the consolidated income statement on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense on a straight-line basis over the lease term.

The Group as lessee

Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant periodic rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss.

Leasehold land and building

The land and building elements of a lease of land and building are considered separately for the purpose of lease classification, leasehold land which title is not expected to pass to the lessee by the end of the lease term is classified as an operating lease unless the lease payments cannot be allocated reliably between the land and building elements, in which case, the entire lease is classified as finance lease.

Financial instruments

Financial assets and financial liabilities are recognised on the consolidated balance sheet when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

Financial assets

The Group’s financial assets comprise of loans and receivable and available-for-sale financial assets.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables including debtors, deposits placed with an insurer, loan receivables and bank balances are carried at amortised cost using the effective interest method, less any identified impairment losses. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated or not classified as financial assets at fair value through profit or loss, loans and receivables or held-to-maturity investments. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets are measured at fair value. Changes in fair value are recognised in equity, until the financial asset is disposed of or is determined to be impaired, at which time, the cumulative gain or loss previously recognised in equity is removed from equity and recognised in profit or loss. Any impairment losses on available-for-sale financial assets are recognised in profit or loss. Impairment losses on available-for-sale equity investments will not reverse in profit or loss in subsequent periods.

Financial liabilities and equity

Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definition of a financial liability and a equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted in respect of financial liabilities are set out below.

Financial liabilities

Financial liabilities including creditors, bank borrowings and bank overdraft are subsequently measured at amortised cost, using the effective interest method.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue

costs.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and the cumulative gain or loss that had been recognised directly in equity is recognised in profit or loss.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Financial liabilities are removed when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration received or receivable is recognised in profit or loss.

Club debentures

Club debentures are stated at cost less any identified impairment loss.

Impairment

At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those 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 loss is recognised as an expense immediately, unless the relevant asset is carried a revalued amount under another HKFRS, in which case the impairment loss is treated as revaluation decrease under that HKFRS.

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, unless the relevant asset is carried a revalued amount under another HKFRS, in which case the reversal of the impairment loss is treated as a revaluation increase under that other HKFRS.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the first-in, first-out method. Net realisable value represents the estimated selling prices less all estimated costs to completion and costs to be incurred in marketing, selling and distribution.

Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the period in which they arise. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which cases, the exchange differences are also recognised directly in equity.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Group at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised as a separate component of equity (the translation reserve). Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed of.

Taxation

Taxation represents the sum of the tax currently payable and deferred tax.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years, and it further excludes income statement items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

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

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

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

Retirement benefit costs

Payments to the defined contribution retirement benefits schemes are charged as an expense as when employees have rendered service entitling them to the contribution.

4. KEY SOURCES OF ESTIMATION UNCERTAINTY

The Group makes estimates and assumptions concerning the future in preparing accounting estimates. The resulting accounting estimates may not equal to the actual results. The estimates and assumptions that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed as below.

Useful lives of property, plant and equipment

In applying the accounting policy on property, plant and equipment with respect to depreciation, management estimates the useful lives of various categories of property, plant and equipment according to the industrial experiences over the usage of property, plant and equipment and also by reference to the relevant industrial norm. When the actual useful lives of property, plant and equipment due to the change of commercial environment are different from their estimated useful lives, such difference will impact the deprecation charges and the amounts of assets written down for future periods.

Estimated allowance of doubtful debts

The Group makes allowance for doubtful debts based on an assessment of the recoverability of trade and other debtors. Allowances are applied to trade and other debtors where events or change in circumstances indicate that the balances may not be collectible. The identification of doubtful debts requires the use of judgment and estimates. Where the present value of estimated future cash flows discounted at the original effective interest rate is lower than the carrying amount, such difference represents allowance for doubtful debts recognised as expense in the consolidated income statement. When the actual future cash flows are less than the expected, a material impairment loss may arise.

5. FINANCIAL INSTRUMENTS

5a. Financial risk management objectives and policies

The Group’s major financial instruments include available-for-sale investments, loans receivables, bank balances, bank borrowings, debtors and creditors. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Currency risk

The Group operates mainly in Hong Kong and the Mainland China. Several subsidiaries of the Company have sales and purchases and the relevant debtors and creditors denominated in currencies other than the functional currency of the relevant group companies, which expose the Group to foreign currency risk. The management manages and monitors the currency risk exposure and would consider the use of forward contract to mitigate the risk.

Interest rate risk

The Group was exposed to interest rate risk through the impact of rate changes on bank balances, loan receivables, bank borrowings and obligations under a finance lease. The management manages and monitors the interest rates exposures and would consider the use of interest rate swap to mitigate the risk. The interest rates and terms of bank balances, loan receivables, obligations under a finance lease and bank borrowings were disclosed in notes 21, 22, 24 and 25 respectively.

Credit risk

The Group’s maximum exposure to credit risk in the event of the counterparties’ failure to perform their obligations as at 31st December, 2006 in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the consolidated balance sheet. In order to minimise the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced.

The Group has no significant concentration of credit risk, with exposure spread over a number of counterparties and customers.

The credit risk for bank balances is considered minimal as such amounts are placed with banks with good credit ratings.

5b. Fair value

The fair value of financial assets and financial liabilities are determined as follows:

• the fair value of financial assets with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market bid prices; and

• the fair value of other financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions.

The directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate their fair values.

6. TURNOVER

Turnover represents the amounts received and receivable from the manufacture of abrasive products, polishing compounds and polishing wheels, trading of polishing materials and polishing equipment and provision of technical consultancy service, net of allowances and returns, during the year.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

7. BUSINESS AND GEOGRAPHICAL SEGMENTS

Business segments

For management purposes, the Group is currently organised into three operating divisions. These divisions are the basis on which the Group reports its primary segment information.

Principal activities are as follows:

Manufacturing	–	manufacture of abrasive products, polishing compounds and
		polishing wheels
Trading	–	trading of polishing materials and polishing equipment
Technical service	–	provision of technical consultancy service

Segment information about these businesses is presented below.

Income statement for the year ended 31st December, 2006

Manufacturing HK$’000 Turnover External sales 122,314 Result Segment result 5,708 Unallocated corporate expenses Other income Reversal of revaluation decrease in leasehold land and buildings previously charged to the consolidated income statement Finance costs Profit before taxation Taxation Profit for the year	Technical HK$’000 106,398 3,862	Trading service HK$’000 6,514 891	Consolidated HK$’000 235,226 10,461 (5,363) 2,597 320 (1,348) 6,667 (1,165) 5,502
			(5,363 2,597 320 (1,348
			6,667 (1,165

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Balance sheet at 31st December, 2006

Manufacturing Technical Trading service HK$’000 HK$’000 HK$’000 Assets Segment assets 177,512 55,291 2,393 Unallocated corporate assets Consolidated total assets Liabilities Segment liabilities 6,299 4,120 252 Unallocated corporate liabilities Consolidated total liabilities Other information Manufacturing Trading Technical service HK$’000 HK$’000 HK$’000 Capital expenditure 6,736 3,661 223 Depreciation of property, plant and equipment 5,309 1,484 144 Release of prepaid lease payment 249 – – Allowance for doubtful debts 522 451 30	Consolidated HK$’000 235,196 40,123
	275,319
	10,671 23,814
	34,485
	Consolidated HK$’000 10,620 6,937 249 1,003

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Income statement for the year ended 31st December, 2005

Manufacturing HK$’000 Turnover External sales 98,666 Result Segment result 2,918 Unallocated corporate expenses Other income Reversal of revaluation decrease in leasehold land and buildings previously charged to the consolidated income statement Finance costs Profit before taxation Taxation Profit for the year	Trading HK$’000 85,689 2,524	Technical service HK$’000 7,609 2,915	Consolidated HK$’000 191,964
			8,357
			(5,627 4,037 895 (750
			6,912 (1,754
			5,158

Balance sheet at 31st December, 2005

Manufacturing Trading Technical service HK$’000 HK$’000 HK$’000 Assets Segment assets 164,888 51,984 3,386 Unallocated corporate assets Consolidated total assets Liabilities Segment liabilities 5,276 4,463 573 Unallocated corporate liabilities Consolidated total liabilities	Consolidated HK$’000 220,258 43,773
	264,031
	10,312 17,719
	28,031

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Other information

			Technical
	Manufacturing	Trading	service	Consolidated
	HK$’000	HK$’000	HK$’000	HK$’000
Capital expenditure	8,155	3,568	317	12,040
Depreciation of property,
plant and equipment	4,753	1,219	110	6,082
Release of prepaid lease
payment	238	–	–	238
Allowance for doubtful debts	903	785	70	1,758
Allowance for obsolete
inventories	546	–	–	546

Geographical segments

The Group’s operations are located in Hong Kong and Mainland China. The Group’s trading divisions are mainly located in Hong Kong and Mainland China. Manufacturing and technical service are carried out in Mainland China.

The following table provides an analysis of the Group’s sales by geographical market, irrespective of the origin of customers:

Hong Kong Mainland China Other Asian region North America and Europe Other countries	Turnover 2006 2005 HK$ HK$ 97,316 83,622 118,367 95,762 15,462 8,383 1,159 1,400 2,922 2,797 235,226 191,964	Turnover 2006 2005 HK$ HK$ 97,316 83,622 118,367 95,762 15,462 8,383 1,159 1,400 2,922 2,797 235,226 191,964
		191,964

The following is an analysis of the carrying amount of segment assets, and additions to property, plant and equipment, analysed by the geographical area in which the assets are located:

Hong Kong Mainland China	Carrying amount of segment assets 2006 2005 HK$ HK$ 127,622 115,056 107,574 105,202 235,196 220,258	Additions to property, plant and equipment 2006 2005 HK$ HK$ 254 1,534 10,366 10,506 10,620 12,040	Additions to property, plant and equipment 2006 2005 HK$ HK$ 254 1,534 10,366 10,506 10,620 12,040
			12,040

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

8. OTHER INCOME

Other income comprises: Discount on acquisition of a subsidiary Gain on disposal of available-for-sale investments Interest income from banks Other interest income Imputed interest income on deposits placed with an insurer Net foreign exchange gains Dividend income from listed investments Rental income Sundry income	2006 HK$’000 – 83 35 544 485 558 – 127 765 2,597	2005 HK$’000 28 250 322 364 – 2,218 144 – 711
		4,037

9. FINANCE COSTS

Finance costs comprise: Interests on bank borrowings wholly repayable within five years Finance lease charges	2006 HK$’000 1,340 8 1,348	2005 HK$’000 733 17
		750

10. DIRECTORS’ EMOLUMENTS

The emoluments paid or payable to each of the nine (2005: ten) directors were as follows:

Name of Director Cheng Kwok Woo Cheng Kwong Cheong Chow Yin Kwang Cheng Wai Ying Chan Yim Fan Zheng Jin Hong Anthony Francis Martin Conway Leung Yuen Wing Lam Hon Ming, Edward Total for the year 2006	Fees HK$’000 – – – – – 50 120 120 60 350	Salaries and other benefits HK$’000 1,071 1,055 752 501 367 – – – – 3,746	Performance related incentive payments Retirement benefit scheme contributions HK$’000 HK$’000 – 48 – 48 – 35 – 24 – 17 – – – – – – – – – 172	Total HK$’000 1,119 1,103 787 525 384 50 120 120 60
				4,268

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Name of Director Cheng Kwok Woo Cheng Kwong Cheong Chow Yin Kwang Cheng Wai Ying Chan Yim Fan Chung Kam Fai, Raymond Zheng Jin Hong Anthony Francis Martin Conway Leung Yuen Wing Lam Hon Ming, Edward Total for the year 2005	Fees HK$’000 – – – – – – 50 120 120 60 350	Salaries and other benefits HK$’000 1,063 1,063 739 607 358 57 – – – – 3,887	Performance related incentive payments Retirement benefit scheme contributions HK$’000 HK$’000 – 84 – 84 – 33 – 42 – 16 – 1 – – – – – – – – – 260	Total HK$’000 1,147 1,147 772 649 374 58 50 120 120 60
				4,497

No directors waived any emoluments in the year ended 31st December, 2006 and 2005.

11. EMPLOYEES’ EMOLUMENTS

Of the five individuals with the highest emoluments in the Group, four (2005: four) were directors of the Company whose emoluments are included in the disclosures in note 10 above. The emoluments of the remaining one highest paid individual in 2006 were as follows:

Salaries and other benefits Retirement benefit scheme contributions	2006 HK$’000 420 19 439	2005 HK$’000 401 18
		419

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

12. TAXATION

The charge comprises: Current tax Hong Kong Other regions in the PRC Other jurisdictions Overprovision in prior year Hong Kong Deferred taxation (note 26) Current year	2006 HK$’000 590 122 5	2005 HK$’000 572 348 60 980 (70) 910 844 1,754
	717 – 717 448	980 (70
		910 844
	1,165

Hong Kong Profits Tax is calculated at 17.5% of the estimated assessable profits for the year.

In accordance with the relevant tax laws and regulations of The People’s Republic of China (“PRC”), the PRC subsidiary is exempted from Enterprise Income Tax (“EIT”) for two years starting from its first profit making year after utilisation of carried forward tax losses and is eligible for a 50% relief on the EIT in the following three years. 2003 is the first profit marking year.

Taxation arising in other jurisdiction is calculated at the rates prevailing in the relevant jurisdiction.

The tax charge for the year can be reconciled to the profit before taxation as follows:

Profit before taxation Tax at Hong Kong Profits Tax rate of 17.5% Tax effect of expenses not deductible for tax purpose Tax effect of income not taxable for tax purpose Tax effect of tax loss not recognised Tax effect of utilisation of tax losses previously not recognised Tax effect of income tax on concessionary rate granted to the PRC subsidiary Effect of different tax rate of subsidiaries operating in other jurisdictions Overprovision in respect of prior year Others Tax charge for the year	2006 HK$’000 6,667	2005 HK$’000 6,912 1,210 527 (134) 155 – (68) 116 (70) 18 1,754
	1,167 196 (82) 1 (83) (36) 42 – (40)	1,210 527 (134 155 – (68 116 (70 18
	1,165

The domestic tax rate in Hong Kong is used as it is where the operation of the Group is substantially based.

– 57 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

13. PROFIT FOR THE YEAR

Profit for the year has been arrived at after charging (crediting): Depreciation of property, plant and equipment Release of prepaid lease payment Staff costs, including directors’ remuneration Auditors’ remuneration Allowance for doubtful debts Allowance for obsolete inventories Loss on disposal of property, plant and equipment Cost of inventories recognise as expenses Rental income Less: Direct expenses that generated rental income	2006 HK$’000 6,937 249 17,170 930 1,003 – 248 191,859 (127) 24 (103)	2005 HK$’000 6,082 238 17,603 830 1,758 546 – 151,113 – –
		–

Contributions to retirement benefits schemes of HK$520,000 (2005: HK$662,000) are included in staff costs.

14. DIVIDENDS

Interim dividend of HK0.033 cent (2005: HK0.17 cent) per share Final dividend in respect of the year ended 31st December, 2005 – HK0.1 cent (year ended 31st December, 2004: Nil) per share	2006 HK$’000 316 958 1,274	2005 HK$’000 1,629 –
		1,629

The directors do not recommend payment of final dividend for the year ended 31st December 2006.

15. EARNINGS PER SHARE

The calculation of the basic earnings per share is based on the following data:

Earnings attributable to equity holders of the Company for the purposes of basic earnings per share Number of ordinary shares for the purpose of basic earnings per share	2006 2005 HK$’000 HK$’000 5,504 5,112 Number of shares 2006 2005 ’000 ’000 958,000 958,000	2005 HK$’000 5,112

No diluted earnings per share was presented for both years as the Company has no potential dilutive ordinary shares during both years.

– 58 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

16. PROPERTY, PLANT AND EQUIPMENT

AT COST OR VALUATION At 1st January, 2005 Effect on exchange adjustments Additions Disposals Decrease in revaluation At 31st December, 2005 Effect on exchange adjustments Additions Disposals Decrease in revaluation At 31st December, 2006 Comprising: At cost At valuation 2006 ACCUMULATED DEPRECIATION At 1st January, 2005 Effect on exchanges adjustments Provided for the year Eliminated on disposals Eliminated on revaluation At 31st December, 2005 Effect on exchanges adjustments Provided for the year Eliminated on disposals Eliminated on revaluation At 31st December, 2006 CARRYING VALUES At 31st December, 2006 At 31st December, 2005	Leasehold land and buildings HK$’000 88,320 1,773 – – (1,613)	Plant and machinery Leasehold improvements, furniture and fixtures HK$’000 HK$’000 34,343 11,253 382 57 11,265 488 (244) – – –	Plant and machinery Leasehold improvements, furniture and fixtures HK$’000 HK$’000 34,343 11,253 382 57 11,265 488 (244) – – –	Motor vehicles HK$’000 4,466 23 287 – –	Yachts HK$’000 1,317 – – – –	Total HK$’000 139,699 2,235 12,040 (244) (1,613) 152,117 4,484 10,620 (2,410) (5,405) 159,406 72,916 86,490 159,406 28,907 455 6,082 (244) (2,255) 32,945 1,131 6,937 (1,510) (2,596) 36,907 122,499 119,172
	88,480 3,415 – – (5,405) 86,490 – 86,490 86,490 – 203 2,052 – (2,255) – 512 2,084 – (2,596) –	45,746 899 10,274 (1,297) – 55,622 55,622 – 55,622 14,299 180 3,173 (244) – 17,408 464 3,984 (423) – 21,433	11,798 114 224 (49) – 12,087 12,087 – 12,087 9,210 50 639 – – 9,899 106 609 (49) – 10,565	4,776 56 122 (1,064) – 3,890 3,890 – 3,890 4,081 22 218 – – 4,321 49 260 (1,038) – 3,592	1,317 – – – – 1,317 1,317 – 1,317 1,317 – – – – 1,317 – – – – 1,317	152,117 4,484 10,620 (2,410 (5,405
						159,406
						72,916 86,490
						159,406
						28,907 455 6,082 (244 (2,255
						32,945 1,131 6,937 (1,510 (2,596
						36,907
	86,490 88,480	34,189 28,338	1,522 1,899	298 455	– –

– 59 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

At 31st December, 2006, leasehold land and buildings of HK$86,490,000 (2005: HK$88,480,000) were held under medium term lease.

The leasehold land and buildings of the Group were revalued by Castores Magi (Hong Kong) Limited, an independent firm of registered professional surveyors, at 31st December, 2006 by reference to market evidence of recent transactions for similar properties. The valuation conforms to International Valuation Standards. The revaluation gave rise to a net revaluation deficit of HK$2,809,000 (2005: surplus of HK$642,000) of which HK$3,129,000 (2005: HK$253,000) has been charged to the property revaluation reserve and HK$320,000 (2005: HK$895,000) has been credited to the consolidated income statement.

If the leasehold land and buildings of the Group had not been revalued, they would have been included on a historical cost basis at the following amounts:

Cost Accumulated depreciation Carrying values	2006 HK$’000 99,678 (17,322) 82,356	2005 HK$’000 94,493 (14,764
		79,729

Motor vehicles include an amount of HK$15,000 (2005: HK$199,000) in respect of asset held under a finance lease.

At 31st December, 2006, leasehold land and buildings with an aggregate carrying value of HK$79,063,000 (2005: HK$83,996,000) was pledged to banks to secure banking facilities granted to the Group.

17. PREPAID LEASE PAYMENTS

The leasehold land outside Hong Kong was held under medium-term lease.

Analysed for reporting purposes as: Non-current asset Current asset	2006 HK$’000 10,214 249 10,463	2005 HK$’000 10,012 244
		10,256

At 31st December, 2005 and 2006, the leasehold land was pledged to a bank to secure a banking facility granted to the Group.

18. AVAILABLE-FOR-SALE INVESTMENTS

	2006	2005
	HK$’000	HK$’000
Equity securities:
Listed in Hong Kong, at market value	–	1,379

All available-for-sale investments were stated at fair value and disposed of during the year. Fair value of those investments have been determined by reference to bid prices quoted in active market.

– 60 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

19. DEPOSITS PLACED WITH AN INSURER

The deposits are attached to life insurance policies. Upon initial recognition, the premium relating to the insurance policies are recognised separately. The deposits are carried at amortised cost at the effective interest rate of 5%. The initial premium for the insurance policies are included in debtors, deposits and prepayments and amortised over the insurance period.

The insured persons are the directors of the Company and the Company is the beneficiary of the life insurance policies. The life insurance funds have guaranteed returns over the respective policy periods.

During 2006, deposits were pledged to a bank to secure a banking facility granted to the Group.

20. INVENTORIES

Raw materials Work in progress Finished goods	2006 HK$’000 5,678 45 21,949 27,672	2005 HK$’000 5,947 176 25,463
		31,586

21. OTHER FINANCIAL ASSETS

Debtors, deposits and prepayments

The Group has a policy of allowing average credit period of 60 to 90 days to its trade debtors. In addition, for certain customers with long-established relationship and good past repayment histories, a longer credit period may be granted.

The aged analysis of the trade debtors of HK$64,115,000 (2005: HK$54,587,000) which are included in the Group’s debtors, deposits and prepayments is as follows:

Within 30 days Between 31 to 60 days Between 61 to 90 days Over 90 days Other debtors, deposits and prepayments	2006 HK$’000 20,797 20,802 15,181 7,335	2005 HK$’000 20,555 15,748 11,186 7,098
	64,115 12,617	54,587 10,120
	76,732	64,707

Bank balances and cash

Bank balances carry interest at market rates which range from 2.25% to 2.5% (2005: 0.01% to 2.5%).

– 61 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

22. LOAN RECEIVABLES

The loans were made to independent third parties and were repayable within one year. Interests were charged at prime rate plus 3% to 5% (2005: prime rate plus 3% to 5%) on the outstanding balances of the loans.

The effective interest rates on the Group’s loan receivables were ranging from 10.75% to 17.5% (2005: 10.00% to 12.75%).

At 31st December, 2006, loan receivables with an aggregate carrying amount of HK$6,800,000 (2005: HK$4,805,000) were secured by personal guarantees.

23. CREDITORS AND ACCRUALS

The aged analysis of the trade creditors of HK$5,396,000 (2005: HK$6,780,000) which are included in the Group’s creditors and accruals is as follows:

Within 30 days 31 to 60 days 61 to 90 days Over 90 days Other creditors and accruals	2006 HK$’000 1,994 2,423 777 202	2005 HK$’000 2,686 984 1,615 1,495
	5,396 5,275	6,780 3,532
	10,671	10,312

24. OBLIGATIONS UNDER A FINANCE LEASE

The lease term of the finance lease was five years. Interest rate is fixed at 2.28% at the contract date. No arrangements have been entered into for contingent rental payments.

Amounts payable under a finance lease: Within one year More than one year, but not exceeding two years Less: future finance charges Present value of lease obligations Less: Amount due within one year shown under current liabilities Amount due after one year	Minimum lease payments 2006 2005 HK$’000 HK$’000 62 183 – 61	Minimum lease payments 2006 2005 HK$’000 HK$’000 62 183 – 61	Present value of minimum lease payments 2006 2005 HK$’000 HK$’000 61 175 – 60	Present value of minimum lease payments 2006 2005 HK$’000 HK$’000 61 175 – 60
	62 (1)	244 (9)	61 –	235 –
	61	235	61	235
			(61)	(175
			–	60

– 62 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

25. BANK LOANS AND OVERDRAFT

Bank loans comprise: Trust receipt loans Other bank loans Analysed as: Secured Unsecured Bank overdraft, unsecured	2006 HK$’000 6,381 13,086	2005 HK$’000 5,876 6,356
	19,467 8,010 11,457	12,232
		4,593 7,639
	19,467 –	12,232
		185

All bank loans are due for repayment within one year.

Bank loans and overdraft included bank loans of HK$4,800,000 (2005: HK$4,593,000) was fixed-rate loans which carried interest at 5.85% (2005: 5.58%). The remaining bank loans and bank overdraft were variable-rate borrowings and their effective interest rates were ranging from 6.00% to 7.13% (2005: 2.56% to 5.13%).

26. DEFERRED TAXATION

The following are the major deferred tax liabilities and assets recognised and movements thereon during the current and prior reporting periods:

At 1st January, 2005 Charge (credit) to consolidated income statement for the year Credit to equity for the year At 31st December, 2005 Charge (credit) to consolidated income statement for the year Credit to equity for the year At 31st December, 2006	Accelerated tax depreciation HK$’000 1,601 733 –	Revaluation of properties HK$’000 2,456 157 (68)	Tax losses HK$’000 – (335) –	Others HK$’000 (531) 289 –	Total HK$’000 3,526 844 (68
	2,334 610 –	2,545 56 (1,146)	(335) (250) –	(242) 32 –	4,302 448 (1,146
	2,944	1,455	(585)	(210)	3,604

– 63 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

At the balance sheet date, the Group has unused tax losses of HK$4,913,000 (2005: HK$3,962,000) available for offset against future profits. A deferred tax asset has been recognised in respect of HK$3,331,000 (2005: HK$1,914,000) of such losses. No deferred tax asset has been recognised in respect of the remaining HK$1,582,000 (2005: HK$2,048,000) due to the unpredictability of future profit streams.

27. SHARE CAPITAL

Authorised: At 31st December, 2005 and 31st December, 2006 Issue and fully paid: At 31st December, 2005 and 31st December, 2006	Number of ordinary shares of HK$0.01 each 2006 2005 ’000 ’000 10,000,000 10,000,000 958,000 958,000	Nominal value 2006 2005 HK$’000 HK$’000 100,000 100,000 9,580 9,580	Nominal value 2006 2005 HK$’000 HK$’000 100,000 100,000 9,580 9,580
			9,580

28. SHARE OPTIONS

Pursuant to the Company’s share options scheme adopted on 23rd October, 2002, the board of directors of the Company may, at its discretion, grant options to full-times employees (including executive directors, non-executive directors and independent non-executive directors) of the Company or any of its subsidiaries to subscribe for shares in the Company at a price not less than the highest of: (i) the closing price of the shares as stated in the daily quotations sheet of the Stock Exchange on the date of grant; (ii) the average closing price of the shares as stated in the daily quotations sheets of the Stock Exchange for the five business days immediately preceding the date of grant; and (iii) the nominal value of the shares on the date of grant.

The maximum number of shares which may be in issue upon exercise of options granted and yet to be exercised under the share option scheme and any other scheme of the Company shall not exceed 30% of the total issued share capital of the Company from time to time.

The maximum number of shares issued and to be issued on the exercise of options granted and to be granted (included both exercised and outstanding options) in any 12 months period up to the date of grant to each eligible person shall not exceed 1% of the total issued share capital of the Company in issue, unless (i) a shareholders’ circular is dispatched to the shareholders; (ii) the shareholders approve the grant of the options in excess of the limit referred to herein; and (iii) the relevant eligible person and its associates abstain from the voting on the resolution.

A nominal consideration of HK$1 is payable on acceptance of each grant.

No share options have been granted under the scheme since its adoption.

– 64 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

29. ACQUISITION OF SUBSIDIARY

On 1st May, 2005, the Group acquired 71% of the issued share capital of Wels International Company Limited for consideration of HK$517,000. This acquisition has been accounted for using the purchase method. The directors of the Company determined that the fair value of the assets and liabilities of the subsidiary acquired approximated to their carrying amounts before combination, accordingly no fair value adjustments have been put through.

The net assets acquired in 2005 were as follows:

Net assets acquired: Inventories Debtors, deposits and prepayments Bank balances and cash Creditors and accruals Taxation payable Net assets acquired Minority interest Discount on acquisition Satisfied by: Cash consideration Net cash inflow arising on acquisition: Cash consideration paid Cash and cash equivalents acquired	HK$’000 295 743 899 (1,130) (40) 767 (222) (28) 517 517 517 (899) (382)

Wels International Company Limited contributed HK$6,556,000 to the Group’s turnover and HK$159,000 to the Group’s profit for the period between the date of acquisition and 31st December, 2005.

If the acquisition had been completed on 1st January, 2005, total group revenue for the year ended 31st December, 2005 would have been HK$193,859,000, and profit for the year ended 31st December, 2005 would have been HK$5,206,000. The proforma information is for illustrative purposes only and is not necessarily an indication of revenue and results of operations of the Group that actually would have been achieved had the acquisition been completed on 1st January, 2005, nor is it intended to be a projection of future results.

– 65 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

30. DISPOSAL OF A SUBSIDIARY

The Group disposed of a subsidiary in 2005. The net assets of this subsidiary disposed in 2005 were as follows:

Debtors, deposits and prepayments Bank balances and cash Creditors and accruals Taxation payable Satisfied by: Cash consideration Net cash inflow (outflow) arising on disposal: Cash consideration Bank balances and cash disposed of	HK$’000 4,282 1 (3,243 (1,032
	8
	8
	8 (1
	7

31. CAPITAL COMMITMENTS

On 29th September, 2006, the Group entered a joint venture agreement with a third party to establish a joint venture in which the Group will invest approximately HK$5,830,000 to develop manufacturing facilities in the PRC. The Group’s commitment for contribution of HK$5,830,000 has not been provided in the consolidated financial statements.

There was no (2005: HK$29,000) capital commitment in respect of acquisition of property, plant and equipment contracted for but not provided in the consolidated financial statements.

32. OPERATING LEASES

The Group as lessor

Property rental income earned during the year was HK$127,000 (2005: nil). The property has committed tenants for the next 2 years.

At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments:

Within one year In the second to fifth year inclusive	2006 HK$’000 382 254 636	2005 HK$’000 – –
		–

33. EMPLOYEE RETIREMENT BENEFITS

The operating subsidiaries in Hong Kong joined the mandatory provident fund scheme (“MPF Scheme”) for all employees in Hong Kong. The MPF Scheme is registered with the Mandatory Provident Fund Scheme Authority under the Mandatory Provident Scheme Ordinance. The assets of the scheme are held separately from those of the Group in funds under the control of an independent trustee. Under the rule of the MPF Scheme, the employer and its employees are each required to make contribution to the MPF Scheme at rates specified in the rules of the MPF Scheme. The obligation of the Group with respect of MPF Scheme is to make the required contribution under the MPF Scheme. The retirement benefits cost charged to the consolidated income statement represents contributions payable to the MPF Scheme by the Group.

– 66 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

The PRC employees of the subsidiary in the PRC are members of the pension scheme operated by the PRC local government. The subsidiary is required to contribute a certain percentage of the relevant payroll of these employees to the pension scheme to fund the benefits. The only obligation for the Group with respect of the pension scheme is the required contributions under the pension scheme.

34. RELATED PARTY TRANSACTIONS

Compensation of key management personnel of the Group:

Short-term benefits Post-employment benefits	2006 HK$’000 4,096 172 4,268	2005 HK$’000 4,237 260
		4,497

Details of Directors’ remuneration (being the compensation of key management personnel) are set out in note

35. POST BALANCE SHEET EVENT

On 2nd April, 2007, the Company entered into a placing agreement to place 191,600,000 new shares of the Company at HK$0.172 per share. The placing was completed on 16th April, 2007.

On 12th April, 2007, the Company entered into a placing agreement to place 220,000,000 unlisted warrants of the Company at issue price of HK$0.046 per warrant. The placing of the unlisted warrants is not yet completed.

36. PARTICULARS OF PRINCIPAL SUBSIDIARIES

Particulars of the principal subsidiaries which are wholly-owned by the Company as at 31st December, 2006 are as follows:

Issued and fully paid Place of share capital/ incorporation/ registered capital Name of subsidiary registration (notes a and b)

(notes a and b) Principal activities

• Fook Cheong Ho Hong Kong International Limited

• 5% non-voting deferred shares HK$300,000 (note c)

• Ordinary shares HK$10,000

• Trading of polishing materials and equipment

• PME International (BVI) British Virgin Ordinary shares Company Limited Islands US$30,000

• Investment holding

• PME International Hong Kong Company Limited

• 5% non-voting deferred Investment holding and shares HK$19,200,000 trading of polishing (note c) materials and

• Ordinary shares equipment HK$1,000

• Shun Tien (H.K.) Hong Kong Ordinary shares Mechanical Co. Limited HK$60,000

• Trading of polishing equipment

– 67 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Place of incorporation/ registration

Name of subsidiary

• Dongguan PME Polishing PRC Materials & Equipments Co., Ltd.

Issued and fully paid share capital/ registered capital (notes a and b) Principal activities Registered capital Manufacturing and (note d) trading of polishing HK$40,000,000 materials

Notes:

• (a) The Company directly holds the entire interest in PME International (BVI) Company Limited. The interests of all other subsidiaries are indirectly held by the Company.

• (b) Except for Dongguan PME Polishing Materials & Equipments Co., Ltd. which operates in the PRC, all the principal subsidiaries operate principally in Hong Kong.

• (c) The 5% non-voting deferred shares of HK$1 each are not held by the Group and practically carrying no right to dividend or to receive notice of or to attend or vote at any annual general meeting of the companies. On winding up, the holders of the deferred shares are entitled to distribution out of the remaining asset of the companies only after the distribution of HK$1,000,000 million, as specified in the articles of association, to holders of ordinary shares.

• (d) Established as a wholly foreign owned enterprises.

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

None of the subsidiaries had any debt securities subsisting at 31st December, 2006 or at any time during the year.

3. INDEBTEDNESS FOR THE GROUP

As at the close of business on 31 July 2007, the Group did not have contingent liability and capital commitment. As at 31 July 2007, save as aforesaid and apart from intra-group liabilities and normal trade payables, the Group had bank borrowings of approximately HK$15,110,000.

4. WORKING CAPITAL

Taking into account the internally generated funds and the presently available credit facilities, the Directors are of the opinion that the Enlarged Group will, following the completion of the Sale and Purchase Agreement, have sufficient working capital for its present requirements, that is for at least 12 months from the date of this circular, in the absence of unforeseeable circumstances.

– 68 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

5. MANAGEMENT DISCUSSION AND ANALYSIS

Management Discussion and Analysis for the year ended 31 December 2006

Business Review and Financial Performance

The Group is principally engaged in the manufacturing of polishing compounds and polishing wheels in Mainland China under its own brand name Pme and the trading of various branded industrial abrasive products. Over 90% of the Group’s turnover and profits was contributed from the markets in Hong Kong and the Pearl River Delta in Mainland China.

The Group’s turnover for the year 2006 has increased by 22.5% from approximately HK$191.9 million in 2005 to approximately HK$235.2 million. The net profit for the year under review was slightly increased from approximately HK$5.2 million in 2005 to approximately HK$5.5 million.

The increase in turnover is mainly due to increase in sales to wholesale distributors in Mainland China market. During the year, the price of raw materials were slightly increased and being kept at high level, therefore the gross profit margin was slightly decreased. Due to effectiveness cost control enhanced, selling and administrative expenses were steadily kept in the same level as compared with last year, led the Group’s profit slightly improved in 2006 as compared with last year.

Liquidity and Financial Resources

At 31 December 2006, the Group had interest-bearing bank borrowings of approximately HK$19.5 million (31 December 2005: HK$12.3 million), which were of maturity within one year. The directors expect that all the bank borrowings will be repaid by internal generated funds or rolled over upon the maturity and continue to provide funding to the Group’s operations. At 31 December 2006, the Group’s leasehold land and buildings with aggregate carrying value of approximately HK$83.1 million (31 December 2005: HK$98.8 million) have been pledged to banks to secure the banking facilities granted to the Group.

At 31 December 2006, current assets of the Group amounted to approximately HK$138.7 million (31 December 2005: HK$129.2 million). The Group’s current ratio was approximately 4.49 as at 31 December 2006 as compared with 5.46 as at 31 December 2005. At 31 December 2006, the Group had total assets of approximately HK$275.3 million (31 December 2005: HK$264.0 million) and total liabilities of approximately HK$34.5 million (31 December 2005: HK$28.0 million), representing a gearing ratio (measured as total liabilities to total assets) of 12.5% as at 31 December 2006 as compared with 10.6% as at 31 December 2005.

– 69 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Foreign Exchange Exposures

The Group’s purchases and sales are mainly denominated in US dollars, Hong Kong dollars and Renminbi. The operating expenses of the Group are either in Hong Kong dollars or Renminbi. As Hong Kong dollars have been pledged with US dollars, and the exchange rate of Renminbi against Hong Kong dollars is relatively stable, the directors consider that the Group has no material currency exchange risk exposures.

Contingent Liabilities

The Group had no material contingent liabilities as at 31 December 2006 and 31 December 2005.

Capital Commitments

At 29 September 2006, the Group has entered a joint venture agreement with a third party to establish a joint venture in which the Group will invest approximately HK$5,830,000 to develop manufacturing facilities in the PRC.

Apart from the above mentioned, there was no (2005: HK$29,000) capital commitment in respect of acquisition of property, plant and equipment contracted for but not provided in the consolidated financial statements.

Outlook

As an enterprise where PRC is its major market, we are filled with hope for the future as the PRC economy continues to grow.

In 2007, we are celebrating the 50th anniversary of the setup of the polishing business. We will bring new elements and environment to create a new future of the Group: (1) Shanghai PME-XINHUA Polishing Materials Systems, a joint venture in Shanghai, has been formally established and commenced operations in March 2007. It is expected that the pace of expanding to the Yangtze River Delta market will accelerate; (2) Except for sales of high-end products, we will develop more and more products to suit the market needs. We will capture the market through distribution network as we believe that it is the most effective and economical way to obtain higher market shares.

The placement of new shares in April 2007 has increased the capital base of the Company and improved the financial position of the Group. Proceeds from the placement enable the Group to further expand its distribution network in the PRC and also to explore new business opportunity.

– 70 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Employees and Remuneration

At 31 December 2006, the Group had approximately 238 employees in Hong Kong and Mainland China. The employees are remunerated with basic salary, bonus and other benefits in kind with reference to industry practice and their individual performance. The Group also operates a share option scheme of which the Directors may, at its discretion, grant options to employees of the Group. No option has been granted since the adoption of the share option scheme.

Management Discussion and Analysis for the year ended 31 December 2005

Business Review and Financial Performance

The Group is principally engaged in the manufacturing of polishing compounds and polishing wheels in Mainland China under its own brand name Pme and the trading of various branded industrial abrasive products. Over 90% of the Group’s turnover and profits was contributed from the markets in Hong Kong and the Pearl River Delta in Mainland China.

The Group’s turnover for the year 2005 has increased by 17.3% from approximately HK$163.6 million in 2004 to approximately HK$192.0 million. The net profit for the year under review decreased from approximately HK$21.2 million in 2004 to approximately HK$5.1 million. The increase in turnover is mainly due to increase in sales of trading products and increase in sales to Mainland China market. However, the continued increase in raw materials costs, manufacturing overheads and the costs of trading products, which have not been able to fully transfer to our customers due to keen competition in market, reduced the Group’s profit margin. The increase in marketing expenses to promote the Group’s products to Mainland market and bad debt provisions made during the year also resulted in a decrease in net profit.

Liquidity and Financial Resources

At 31 December 2005, the Group had interest-bearing bank borrowings of approximately HK$12.2 million (31 December 2004: HK$12.3 million), which were of maturity within one year. The directors expect that all the bank borrowings will be repaid by internal generated funds or rolled over upon the maturity and continue to provide funding to the Group’s operations. At 31 December 2005, the Group’s leasehold land and buildings and prepaid lease payments with aggregate carrying value of approximately HK$94.3 million (31 December 2004: HK$94.6 million) have been pledged to banks to secure the banking facilities granted to the Group.

At 31 December 2005, current assets of the Group amounted to approximately HK$129.2 million (31 December 2004: HK$127.0 million). The Group’s current ratio was approximately 5.46 as at 31 December 2005 as compared with 5.84 as at 31 December 2004. At 31 December 2005, the Group had total assets of approximately HK$264.0 million (31 December 2004: HK$258.2 million) and total liabilities of approximately HK$28.0 million (31 December 2004: HK$25.5 million), representing a gearing ratio

– 71 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

(measured as total liabilities to total assets) of 10.6% as at 31 December 2005 as compared with 9.9% as at 31 December 2004.

Foreign Exchange Exposures

The Group’s purchases and sales are mainly denominated in US dollars, Hong Kong dollars and Renminbi. The operating expenses of the Group are either in Hong Kong dollars or Renminbi. As Hong Kong dollars have been pledged with US dollars, and the exchange rate of Renminbi against Hong Kong dollars is relatively stable, the directors consider that the Group has no material currency exchange risk exposures.

Contingent Liabilities

The Group had no material contingent liabilities as at 31 December 2005 and 31 December 2004.

Capital Commitments

At 31 December 2005, the Group had capital commitment of HK$29,000 (2004: HK$96,000) in respect of acquisition of property, plant and equipment contracted for but not provided in financial statements.

Future Prospect

Taking a macro-view of the economic environment, the growth of Mainland China, as in previous years, will continue; Hong Kong also has a positive economic outlook. As an enterprise where the PRC is its major market, we will try our best to grasp market opportunities so as to maximize shareholders’ return. In 2006, in the areas of market and product development, we will continue to develop the distribution network so as to widen our sales channels; actively introduce new products which suit the market needs; increase the market value of Pme brand. Following the positive progress in the negotiations with the Mainland joint venture partner, it is expected that our development in the market among the Yangtze River Delta region will be accelerated. Cost control remains our top issue this year. The organisational restructuring will be undergone to increase operational effectiveness.

Employees and Remuneration

At 31 December 2005, the Group had approximately 260 employees in Hong Kong and Mainland China. The employees are remunerated with basic salary, bonus and other benefits in kind with reference to industry practice and their individual performance. The Group also operates a share option scheme of which the Directors may, at its discretion, grant options to employees of the Group. No option has been granted since the adoption of the share option scheme.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Management Discussion and Analysis for the year ended 31 December 2004

Business Review and Financial Performance

The Group is principally engaged in the manufacturing of polishing compounds and polishing wheels in Mainland China under its own brand name Pme and the trading of various branded industrial abrasive products. Over 90% of the Group’s turnover and profits was contributed from the markets in Hong Kong and Pearl River Delta in Mainland China.

Despite of the continued increase in the prices of raw materials during the second half of 2004, the Group has achieved moderate results for the financial year ended 31 December 2004. The Group’s turnover for the year 2004 increased by 5.5% from approximately HK$155.1 million in 2003 to approximately HK$163.6 million in 2004. The net profit for the year under review was approximately HK$21.2 million, representing a decrease of 30.7% as compared with the net profit of approximately HK$30.6 million last year. The increase in turnover was mainly due to the increased demand of the Group’s products and technical services from the customers in Mainland China. However, the substantial increase in the prices of raw materials has reduced the gross profit margin by around 11% from 46.6% in 2003 to 35.7% in 2004 and thus resulting a decrease of net profit from HK$30.6 million in 2003 to HK$21.2 million in 2004. During the year, the Group has implemented effective cost control measures to reduce the selling and administrative expenses.

Liquidity and Financial Resources

At 31 December 2004, the Group had interest-bearing bank borrowings of approximately HK$12.3 million (31 December 2003: HK$22.2 million), which were of maturity within one year. The Directors expect that all the bank borrowings will be repaid by internal generated funds or rolled over upon the maturity and continue to provide funding to the Group’s operations. At 31 December 2004, the Group’s leasehold land and buildings with aggregate carrying value of approximately HK$88.7 million (31 December 2003: HK$104.4 million) were pledged to banks to secure the banking facilities granted to the Group.

At 31 December 2004, current assets of the Group amounted to approximately HK$126.8 million (31 December 2003: HK$82.8 million). The Group’s current ratio was approximately 5.83 as at 31 December 2004 as compared with 2.19 as at 31 December 2003. At 31 December 2004, the Group had total assets of approximately HK$262.5 million (31 December 2003: HK$204.2 million) and total liabilities of approximately HK$26.7 million (31 December 2003: HK$42.8 million), representing a gearing ratio (measured as total liabilities to total assets) of 10.2% as at 31 December 2004 as compared with 21.0% as at 31 December 2003.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX II

Foreign Exchange Exposures

The Group’s purchases and sales are mainly denominated in US dollars, Hong Kong dollars and Renminbi. The operating expenses of the Group are either in Hong Kong dollars or Renminbi. As Hong Kong dollars have been pledged with US dollars, and the exchange rate of Renminbi against Hong Kong dollars is relatively stable, the Directors consider that the Group has no material currency exchange risk exposures.

Contingent Liabilities

The Group had no material contingent liabilities as at 31 December 2003 and 2004.

Capital Commitments

At 31 December 2004, the Group had capital commitment of HK$96,000 (2003: HK$1,957,000) in respect of acquisition of property, plant and equipment contracted for but not provided in financial statements.

Employees and Remuneration

At 31 December 2004, the Group had approximately 310 employees in Hong Kong and Mainland China. The employees are remunerated with basic salary, bonus and other benefits in kind with reference to industry practice and their individual performance. The Group also operates a share option scheme of which the Directors may, at its discretion, grant options to employees of the Group. No option has been granted since the adoption of the share option scheme.

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

1. SUMMARY OF FINANCIAL INFORMATION FOR THE THREE YEARS ENDED 31 DECEMBER 2006

The following financial information has been extracted from the unqualified audited consolidated financial statements of the Proactive Group for each of the three years ended 31 December 2006 as shown in the annual report of the Proactive.

RESULTS

Turnover Cost of sales Gross profit Other operating income Distribution and selling expenses General and administrative expenses Finance costs Share of result of an associate Loss before tax Income tax expenses Loss for the year Attributable to: Equity holders of the parent Minority interests ASSETS AND LIABILITIES Total non-current assets Total current assets Total current liabilities Equity attributable to equity holders of the parent Minority interests	2006 HK$’000 11,880 (5,049)	2005 HK$’000 20,982 (11,524)	2004 HK$’000 17,515 (9,386) 8,129 46% 14 (20) (15,479) (39) 198 (7,197) (51) (7,248) (7,248) – (7,248) 2004 HK$’000 2,475 15,274 (7,347) 10,402 –
	6,831 58% 1,249 (23) (11,656) (12) – (3,611) –	9,458 45% 633 (34) (11,536) (87) (198) (1,764) –	8,129 46% 14 (20 (15,479 (39 198
			(7,197 (51
	(3,611)	(1,764)
	(3,611) –	(1,764) –	(7,248 –
	(3,611) 2006 HK$’000 1,522 18,004 (3,542) 15,984 –	(1,764) 2005 HK$’000 1,155 12,196 (4,616) 8,735 –

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APPENDIX III

2. THE UNAUDITED CONSOLIDATED RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2007

The following information has been extracted from the interim results announcement of Proactive for the six months ended 30 June 2007.

Condensed Consolidated Income Statement

Notes Turnover 3.a Cost of sales Gross profit Other operating income Distribution and selling expenses General and administrative expenses Loss from operations Finance costs Loss before tax 4 Income tax expenses 5 Loss attributable to equity holders of the parent 3.b Dividends 6 Loss per share – Basic 7	(Unaudited) Six months ended 30 June 2007 2006 HK$’000 HK$’000 5,322 5,744 (2,516) (2,239)	(Unaudited) Six months ended 30 June 2007 2006 HK$’000 HK$’000 5,322 5,744 (2,516) (2,239)	(Unaudited) Three months ended 30 June 2007 2006 HK$’000 HK$’000 2,664 2,666 (1,319) (930) 1,345 1,736 5,189 58 (7) (4) (30,702) (1,845) (24,175) (55) (318) (3) (24,493) (58) – – (24,493) (58) – – HK(6.97 cents) HK(0.03 cents)	(Unaudited) Three months ended 30 June 2007 2006 HK$’000 HK$’000 2,664 2,666 (1,319) (930) 1,345 1,736 5,189 58 (7) (4) (30,702) (1,845) (24,175) (55) (318) (3) (24,493) (58) – – (24,493) (58) – – HK(6.97 cents) HK(0.03 cents)
	2,806 5,784 (13) (51,835) (43,258) (318) (43,576) –	3,505 70 (11) (4,091) (527) (11) (538) –	1,345 5,189 (7) (30,702) (24,175) (318) (24,493) –	1,736 58 (4 (1,845
				(55 (3
				(58 –
	(43,576) – HK(13.83 cents)	(538) – HK(0.23 cents)	(24,493) – HK(6.97 cents)

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

Condensed Consolidated Balance Sheet

Notes NON-CURRENT ASSETS Property, plant and equipment 8 Available-for-sale financial asset 9 Deposit for acquisition in an investment 10 CURRENT ASSETS Inventories 11 Trade receivables 12 Amount due from an associate 13 Prepayments, deposits and other receivables Cash and other bank deposits CURRENT LIABILITIES Trade payables 14 Accruals and other payables Receipts in advance Obligations under finance lease 15 Net current assets Total assets less current liabilities Non-current liabilities Obligations under finance lease 15 CAPITAL AND RESERVES Share capital 16 Reserves Equity attributable to equity holders of the parent	(Unaudited) As at 30 June 2007 HK$’000 3,092 298 201,020 204,410	(Audited) As at 31 December 2006 HK$’000 1,236 286 –
		1,522
	295 1,222 – 24,663 919,478	210 1,982 17 11,022 4,773
	945,658	18,004
	1,123 2,640 1,052 180 4,995 940,663 1,145,073 720	878 2,112 552 –
		3,542
		14,462
		15,984 –
	1,144,353	15,984
	489 1,143,864	278 15,706
	1,144,353	15,984

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APPENDIX III

Condensed Consolidated Cash Flow Statements

NET CASH USED IN OPERATING ACTIVITIES NET CASH USED IN INVESTING ACTIVITIES NET CASH GENERATED FROM FINANCING ACTIVITIES INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of period CASH AND CASH EQUIVALENTS, end of period	(Unaudited) Six months ended 30 June 2007 2006 HK$’000 HK$’000 (37,355) (122) (198,007) (107) 1,150,067 – 914,705 (229) 4,773 5,463 919,478 5,234

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

Condensed Consolidated Statement of Change in Equity

As at 1 January 2006 Loss attributable to equity holders of the parent Translation adjustments As at 30 June 2006 As at 1 January 2007 Issue of new shares, net of share issued expenses Equity-settled share based payment expenses Loss attributable to equity holders of the parent Translation adjustments As at 30 June 2007	(Unaudited) Share capital HK$’000 23,200 – – 23,200	(Unaudited) Share premium HK$’000 29,135 – – 29,135	(Unaudited) Contributed surplus HK$’000 – – – –	(Unaudited) Share options reserve HK$’000 – – – –	(Unaudited) (Unaudited) Cumulative translation adjustment Accumulated deficits HK$’000 HK$’000 51 (43,651) – (538) (9) – 42 (44,189)	(Unaudited) (Unaudited) Cumulative translation adjustment Accumulated deficits HK$’000 HK$’000 51 (43,651) – (538) (9) – 42 (44,189)	(Unaudited) Total HK$’000 8,735 (538) (9) 8,188 15,984 1,150,067 21,851 (43,576) 27 1,144,353
	278 211 – – –	10,719 1,149,856 – – –	7,914 – – – –	– – 21,851 – –	146 – – – 27	(3,073) – – (43,576) –	15,984 1,150,067 21,851 (43,576 27
	489	1,160,575	7,914	21,851	173	(46,649)

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

Notes to the Interim Financial Statements

1. COMPANY INFORMATION

The Company was incorporated in Bermuda on 25 February 2000 as an exempted company with limited liability under the Companies Act 1981 of Bermuda. Its shares have been listed on the GEM of the Stock Exchange since 18 May 2000.

2. BASIS OF PREPARATION AND PRINCIPAL ACCOUNTING POLICIES

The Group’s unaudited condensed consolidated results have been prepared in accordance with the new Hong Kong Financial Reporting Standards (“HKFRSs”) and Hong Kong Accounting Standards (“HKASs”) and interpretations issued by the Hong Kong Institute of Certified Public Accountants. The unaudited condensed consolidated results have been prepared on the historical cost basis. The accounting policies adopted in preparing the unaudited condensed consolidated results for the Half-Yearly Period and the Last Corresponding Period are consistent with those followed in the preparation of Group’s annual audited consolidated financial statements for the year ended 31 December 2006.

3. SEGMENT INFORMATION

a. Turnover

Turnover represents (i) net invoiced value for the supply, development and integration of telecommunications, computer telephony systems and other computer products, after allowances for return and discounts; (ii) rental income from leasing telecommunications and computer telephony equipment; and (iii) fees for consulting and maintenance services. Turnover by business segments is as follows:

Telecommunications Computer telephony Total turnover	(Unaudited) Six months ended 30 June 2007 2006 HK$’000 HK$’000 1,730 1,779 3,592 3,965 5,322 5,744	(Unaudited) Three months ended 30 June 2007 2006 HK$’000 HK$’000 871 884 1,793 1,782 2,664 2,666	(Unaudited) Three months ended 30 June 2007 2006 HK$’000 HK$’000 871 884 1,793 1,782 2,664 2,666
			2,666

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

b. Loss attributable to equity holders of the parent

Loss attributable to equity holders of the parent by business segments is as follows:

Telecommunications Computer telephony Segment profit Other operating income Unallocated expenses Loss from operations Finance costs Loss before tax Income tax expenses Loss attributable to equity holders of the parent	(Unaudited) Six months ended 30 June 2007 2006 HK$’000 HK$’000 1,228 973 2,271 2,605 3,499 3,578 5,784 70 (52,541) (4,175) (43,258) (597) (318) (11) (43,576) (538) – – (43,576) (538)	(Unaudited) Three months ended 30 June 2007 2006 HK$’000 HK$’000 609 424 1,138 1,356 1,747 1,780 5,189 58 (31,111) (1,893) (24,175) (113) (318) (3) (24,493) (58) – – (24,493) (58)

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

4. LOSS BEFORE TAX

Loss before tax was determined after charging and crediting the following items:

After charging: Staff costs (including directors’ emoluments) – Salaries and allowances – Equity-settled shared based payment expenses – Retirement benefits scheme costs Cost of inventories Operating lease rentals of premises Interest expenses – bank borrowings wholly repayable within five years Provision for and write-off of bad and doubtful receivables Provision for and write-off of obsolete and slow-moving inventories Depreciation of machinery and equipment Net exchange (gain)/loss After crediting: Rental income – leasing of telecommunications and computer telephony equipment Interest income – bank deposits	(Unaudited) Six months ended 30 June 2007 2006 HK$’000 HK$’000 6,796 2,109 21,851 – 136 80 28,783 2,189 2,387 2,042 923 322 318 11 1,726 (231) 110 240 267 168 (296) 29 1,116 476 4,274 70	(Unaudited) Three months ended 30 June 2007 2006 HK$’000 HK$’000 2,914 984 21,851 – 74 40 2,988 1,024 1,252 848 452 80 318 3 1,726 (231) 110 240 175 74 295 25 607 79 4,145 58

5. INCOME TAX EXPENSES

The Company is not subject to taxation in Bermuda on its profit or capital gains until March 2016. Hong Kong profits tax has not been provided for the Second Quarter and the Last Corresponding Period as the Group did not generate any assessable profits in Hong Kong during these periods. No provision for overseas income tax has been provided for the Half-Yearly Period and the Last Corresponding Period as the Group did not generate any assessable profits in other jurisdictions during these periods.

As at 30 June 2007, there were no significant deferred tax liabilities for which a recognition or provision would have been required (2006: Nil).

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APPENDIX III

6. INTERIM DIVIDENDS

The Directors do not recommend the payment of interim dividends for the Half-Yearly Period (2006: Nil).

7. LOSS PER SHARE

The calculation of the basic loss per share for the Half-Yearly Period is based on the unaudited consolidated loss attributable to equity holders of the parent of approximately HK$43,576,000 (2006: HK$538,000) and on the weighted average number of 314,970,422 (2006: 232,000,000) shares.

Diluted loss per share is not presented because the effect is anti-dilutive.

8. PROPERTY, PLANT & EQUIPMENT

For the Half-Yearly Period, property, plant and equipment amounting to approximately HK$2,793,000 were acquired (2006: HK$72,000).

9. AVAILABLE-FOR-SALE FINANCIAL ASSET

The assets represents a nominee membership in a golf club in the People’s Republic of China (“PRC”). They are measured at cost less impairment at each balance sheet date. The fair value was approximated to the corresponding carrying amount.

10. DEPOSIT FOR ACQUISITION IN AN INVESTMENT

The assets represents the deposit of the capital contribution for China Railway Television Freight and Logistics Transport Co. Ltd and the acquisition was completed in July 2007.

11. INVENTORIES

Inventories consisted of:

Telecommunications and computer telephony hardware products Less: Provision for obsolete and slow-moving inventories	(Unaudited) As at 30 June 2007 HK$’000 404 (110) 294	(Audited) Year ended 31 December 2006 HK$’000 873 (300) 573

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

12. TRADE RECEIVABLES

Trade receivables consisted of:

Account receivables Retention receivables Less: Accumulated impairment	(Unaudited) As at 30 June 2007 HK$’000 2,326 622 2,948 (1,726) 1,222	(Audited) Year ended 31 December 2006 HK$’000 2,181 1,342
		3,523 (1,696)
		1,827

The Group normally grants to its customers credit periods ranging from 30 days to 60 days. Aging analysis of trade receivables is as follows:

0 to 1 month 1 to 2 months 2 to 3 months 3 to 6 months 6 to 9 months 9 to 12 months Over 12 months	(Unaudited) As at 30 June 2007 HK$’000 1,136 191 69 18 92 – 1,442 2,948	(Audited) Year ended 31 December 2006 HK$’000 1,222 243 398 67 106 640 847
		3,523

13. AMOUNT DUE FROM AN ASSOCIATE

The amount is unsecured, non-interest bearing and repayable on demand.

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

14. TRADE PAYABLES

The Group is normally granted by its vendor credit periods ranging from 0 day to 30 days. Aging analysis of trade payables (consolidated) is as follows:

0 to 1 month 1 to 2 months 2 to 3 months 3 to 6 months 6 to 12 months Over 12 months	(Unaudited) As at 30 June 2007 HK$’000 667 202 12 20 170 52 1,123	(Audited) Year ended 31 December 2006 HK$’000 441 218 36 132 – 51
		878

15. OBLIGATIONS UNDER FINANCE LEASE

Within one year In the second to fifth year inclusive	(Unaudited) As at 30 June 2007 HK$’000 180 720 900	(Audited) Year ended 31 December 2006 HK$’000 – –
		–

16. SHARE CAPITAL

AUTHORISED End of period/year ISSUED AND FULLY PAID End of period/year	(Unaudited) Six months ended 30 June 2007 No. of shares Nominal value ’000 HK$’000 100,000,000 100,000 489,314 489	(Audited) Year ended 31 December 2006 No. of shares Nominal value ’000 HK$’000 100,000,000 100,000 278,400 278	(Audited) Year ended 31 December 2006 No. of shares Nominal value ’000 HK$’000 100,000,000 100,000 278,400 278
			278

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

17. OPERATING LEASE COMMITMENTS

At the balance sheet date, the Group had future minimum lease payments under non-cancellable operating leases which fall due as follows:

Within one year In the second to fifth year inclusive	(Unaudited) As at 30 June 2007 HK$’000 1,658 1,468 3,126	(Audited) Year ended 31 December 2006 HK$’000 1,412 1,073
		2,485

MANAGEMENT DISCUSSION AND ANALYSIS

FINANCIAL REVIEW

The Group recorded a turnover of approximately HK$5,322,000 in the Half-Yearly Period, representing a decrease of approximately 7% from HK$5,744,000 of Last Corresponding Period.

Turnover attributable to our telecommunication business decreased by approximately 3% to HK$1,730,000 (2006: HK$1,779,000), representing approximately 33% of the total turnover. On the other hand, turnover attributable to our computer telephony business decreased by approximately 9% to HK$3,592,000 (2006: HK$3,965,000), representing approximately 67% of the total turnover.

The gross profit and gross profit margin for the Half-Yearly Period were HK$2,806,000 and 53% respectively (2006: HK$3,505,000 and 61% respectively).

The unaudited consolidated loss attributable to equity holders of the parent for the Half-Yearly Period amounted to HK$43,576,000 (2006: HK$538,000), which is mainly due to the substantial general and administrative expenses amounted to approximately HK$51,835,000, in which approximately HK$21,851,000 and HK$10,661,000 were attributed by the share-based employee compensation and the legal and professional services for the recent substantial capital fund raising activities respectively during the Half-Yearly Period.

BUSINESS REVIEW AND FUTURE PROSPECTS

In 2006, the Directors and senior management undertook a comprehensive reassessment of its existing business model to ascertain whether it should continue to operate as an IT and telecommunications company. The Directors believed it is in the shareholders’ best interest that the Company stems its losses and exits the market as and when appropriate, although the Company will continue to operate its existing IT and telecom business in a pragmatic way. The Company instead would, and has already commenced to, focus on a new and exciting

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

opportunity in the growing field of logistics transportation in the PRC. Through the acquisition, the Group will conduct the railway cargo transportation agency services, logistics and transportation management and consultancy services, equipment rental, project investment and consultancy, storage services and technology import and export (separate applications in accordance with relevant State regulations required for business(es) falling under specific regulations) in PRC. Details of the acquisition were set out in the circular of the Company dated 25 May 2007.

LIQUIDITY AND FINANCIAL RESOURCES

The Group was principally financed by cash flow generated internally together with the balance of proceeds from the recent substantial capital fund raising activities.

As at 30 June 2007, the Group’s working capital and net assets were approximately HK$940,663,000 and HK$1,145,073,000 respectively. Cash balance as at 30 June 2007 stood at approximately HK$919,478,000 or cash per share HK$1.88. The debt-equity ratio and gearing ratio were 0.0049 times and 0.06% respectively.

The Directors are of opinion that, the Group has sufficient working capital for its present requirement.

CAPITAL STRUCTURE

On 26 March 2007, 13 June 2007 and 25 June 2007, the Company issued a total of 55,000,000, 49,766,000 and 11,148,000 ordinary shares of the Company (“Shares”) to raise approximately HK$383 million, HK$630 million and HK$155 million respectively. The intended use of proceeds from the fund raising was to be used for financing future operation costs and expenses for the acquisition of the sale shares and sale loan of Eternity Profit Investments Limited (the “Acquisition”).

In addition, on 28 June 2007, the Company had issued 95,000,000 new Shares and allotment to Shellybeach Investments Limited (“Shellybeach”) as the consideration shares for the Acquisition.

As a result, the total number of issued share capital was 489,314,000 shares as at 30 June 2007.

CHARGES ON GROUP ASSETS

As at 30 June 2007, property, plant and equipment of the Group with net book value of approximately HK$1,185,000 (2006: NIL) was held under finance lease.

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

SIGNIFICANT INVESTMENT HELD, MATERIAL ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES

On 12 March 2007, Dragon Billion Limited (“Dragon Billion”), a wholly owned subsidiary of the Company entered into an agreement to acquire from Shellybeach, the Sale Shares of 50,000 ordinary shares of US$1.00 each in the issued share capital of Eternity Profit Investments Limited (“Eternity Profit”), representing the entire issued share capital of Eternity Profit and the all obligations, liabilities and debts owing or incurred by the all obligations, liabilities and debts owing or incurred by Eternity Profit to Shellybeach, for a total consideration of HK$681,450,000. Dragon Billion has satisfied the consideration for the acquisition by cash of HK$6,000,000 and procured the Company to allot and issue to Shellybeach the Shares of 95,000,000 at HK$7.11 of each Share. This acquisition constitutes a very substantial acquisition on the part of the Company under the GEM Listing Rules and is subject to the approval of the shareholders at the special general meeting of the Company. The respective resolution was passed by the shareholders on 20 June 2007 and the completion of the Acquisition has taken place. Details of the Acquisition were set out in the circular of the Company dated 25 May 2007.

Save as disclosed above, there were no significant investments held, material acquisitions or disposals of subsidiaries during the Half-Yearly Period.

EXPOSURE TO FLUCTUATION IN EXCHANGE RATES

The reporting currency adopted by the Group was Hong Kong dollars. Majority of the Group’s sales, receivables, bank borrowings and expenditures were dominated in Hong Kong dollars and United States dollars. As Hong Kong dollars is closely linked with United States dollars, therefore foreign currency exposure to the Group shall be minimal.

CONTINGENT LIABILITIES

As at 30 June 2007, the Group did not have any contingent liabilities.

EMPLOYEE INFORMATION, SHARE OPTIONS AND REMUNERATION POLICIES

The Group had approximately 35 full-time employees (30 June 2006: 20) in Hong Kong and PRC as at 30 June 2007. As an equal opportunity employer, the Group’s remuneration and bonus policies are determined with reference to the performance and experience of individual employees. During the Half-Yearly Period, the Group had incurred staff costs (including directors’ emoluments) of approximately HK$28,783,000 (30 June 2006: HK$2,189,000).

The Company has adopted a share option scheme pursuant to which options may be granted to full time employees (including executive directors) of the Group to subscribe for shares in the Company. As at 30 June 2007, 13,390,000 share options have been granted under the existing share option scheme of the Company.

The fair value of the share options granted during the Half-Yearly Period was approximately HK$21,851,000.

– 88 –

FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

As at 30 June 2007, 9 employees (30 June 2006: 9) had completed the required number of years of service under the Employment Ordinance to be eligible for long service payments on termination of their employment with the Group. The Group is only liable to make such payments where termination meets the required circumstances specified in the Employment Ordinance. As at 30 June 2007, the estimated amount provided for such purpose amounted to approximately HK$250,000 (30 June 2006: HK$250,000).

DIRECTORS’ INTEREST IN SHARES

As at 30 June 2007, the interests and short positions of the Directors and their respective associates in the shares and underlying shares of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the “SFO”)), which were notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO), or which were recorded in the register required to be kept by the Company under Section 352 of the SFO, or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies (the “Model Code”) adopted by the Company, or to be notified to the Company and the Stock Exchange, were as follows:

Long position in shares

			Number of		Total
			underlying		approximate
		Number of	shares held		percentage
		issued	pursuant to		of the
		ordinary	share	Total	issued share
Name of directors	Type of interests	shares held	options	interests	capital
Mr. Zeng Bangjian	Beneficial owner	–	3,330,000	3,330,000	0.68%
Mr. Ng Kam Wing	Beneficial owner	–	3,330,000	3,330,000	0.68%
Mr. Koh Tat Lee,
Michael	Beneficial owner	–	3,330,000	3,330,000	0.68%
Mr. Lim Kwok Choi	Beneficial owner	–	600,000	600,000	0.12%

Save as disclosed above, as at 30 June 2007, none of the directors or chief executives of the Company or their respective associates (as defined in the GEM Listing Rules) had any interests or short positions in the shares and underlying shares of the Company or any of its associated corporation (within the meaning of Part XV of the SFO) as recorded in the register required to be kept by the Company under section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to Rule 5.46 of the GEM Listing Rules.

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

DIRECTORS’ RIGHTS TO ACQUIRE SHARES OR DEBENTURES

Save as disclosed above sections headed “Directors’ Interest in Shares”, at no time during the Half-Yearly Period was the Company or any of its subsidiaries or holding companies a party to any arrangements to enable any of the Company’s directors or members of its management to acquire benefits by means of the acquisition of shares in, or debt securities (including debentures) of, the Company or any other body corporate and none of the directors, their spouse or their children under the age 18, had any right to subscribe for the securities of the Company, or had exercised any such right during the Half-Yearly Period.

DIRECTORS’ INTERESTS IN CONTRACTS

No contracts of significance in relation to the Group’s business to which the Company or any of its subsidiaries was a party and in which any of the Company’s directors or members of its management had a material interests, whether directly or indirectly, subsisted at 30 June 2007 or at any time during the Half-Yearly Period.

SUBSTANTIAL SHAREHOLDERS

As at 30 June 2007, persons who had an interest or a short position in the shares or underlying shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Division 2 and 3 of Part XV of the SFO or was, directly or indirectly, interested in 5% or more of the nominal value of the issued share capital carrying rights to vote in all circumstances at general meeting of any other member of the Group were as follows:

Long position in shares

	Number of		Type of	Percentage
Name	shares	Capacity	interests	of interests
Well Support Limited (Note 1)	52,415,466	Beneficial owner	Corporation	10.71%
Credit Suisse Group (Note 2)	30,446,000	Interest of controlled	Corporation	6.22%
		corporation
Century Dragon Development	27,000,000	Beneficial owner	Corporation	5.52%
Limited (Note 3)

Notes:

1. Well Support Limited is beneficially owned by Liu Yi Dong Family Trust and the beneficiaries of which are Liu Yi Dong and his family members.

2. Credit Suisse Group is wholly-owned by Credit Suisse.

3. Century Dragon Development Limited is wholly-owned by Wu Wai Leung.

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APPENDIX III

FINANCIAL INFORMATION OF PROACTIVE

Save as disclosed above, no other shareholders or other persons had an interest or a short position in the shares or underlying shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Division 2 and 3 of Part XV of the SFO, or was directly or indirectly, interested in 5% or more of the nominal value of the issued share capital carrying rights to vote in all circumstances at general meeting of any other members of the Group as at 30 June 2007.

COMPETING INTERESTS

Mr. Tsang Chi Hin is the chairman of the Company and a director of Beijing Teletron Systems Integration Company Limited which is also engaged in the provision of telecommunications and computer telephony solutions. The Directors believe that there is a risk that such business may compete with those of the Group. However, the Directors are also of the view that the invaluable experience of Mr. Tsang in the telecommunications and computer telephony industry will complement the development of the Group’s business. As at 30 June 2007, save as disclosed above, none of the directors or the management shareholders of the Company (as defined in the GEM Listing Rules) or any of their respective associates had an interest in business which competes or may compete with the business of the Group or has any other conflict of interest which any such person has or may have with the Group.

MANAGEMENT CONTRACTS

No contract concerning the management and administration of the whole or any substantial part of the business of the Company was entered into or existed during the Half-Yearly Period.

CORPORATE GOVERNANCE

The Board considers that the Company has complied with the code provisions of Code on Corporate Governance Practices (“CG Code”) set out in Appendix 15 of the GEM Listing Rules throughout the Half-Yearly Period, except that there is no division of roles of chairman and chief executive officer that they are performed by Mr. Tsang Chi Hin. The reasons for such deviation from the code provisions had been stated in the Company’s 2006 annual report.

AUDIT COMMITTEE

The Company has established an audit committee on 3 May 2000. The previous terms of reference of the audit committee were established with reference to Rule 5.29 of the GEM Listing Rules. New written terms of reference were adopted on 12 August 2005 in compliance with code provision C.3.3 of the CG Code. The primary duties of the audit committee are to review the Company’s annual report and financial statements, half-yearly reports and quarterly reports and to provide advices and comments with respect to internal control of the Board.

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APPENDIX III

The members of the audit committee, all being independent non-executive directors, throughout the Half-Yearly Period are Mr. Leung Lok Ming, Mr. Chan Ho Wah, Terence, Mr. Chong Cha Hwa and Mr. Lok Shing Kwan, Sunny. The audit committee has reviewed the Company’s interim results for the six months ended 30 June 2007.

OTHER BOARD COMMITTEES

In addition to the audit committee, the Company has established a remuneration committee and a nomination committee on 12 August 2005.

These board committees were formed to ensure maintenance of high corporate governance standards.

SECURITIES TRANSACTIONS BY DIRECTORS

The Company has adopted a code of conduct regarding securities transactions by directors on terms no less exacting than the required standard of dealings as set out in Rules 5.48 to 5.67 of the GEM Listing Rules throughout the Half-Yearly Period. Having made specific enquiry of all Directors, the Directors have complied with the required standard of dealings and its code of conduct regarding securities transactions by directors.

INTERNAL CONTROL

The Board believes that the system of internal controls maintained by the Company is sufficient to provide reasonable assurances that assets are adequately safeguarded against loss from unauthorized use; all transactions are proper authorized and proper accounting records are maintained.

PURCHASE, SALE OR REDEMPTION OF SHARES

Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company’s shares during the Half-Yearly Period.

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APPENDIX III

3. THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2006

The following information has been extracted from the annual report of Proactive for the year ended 31st December 2006.

Consolidated Income Statement

For the year ended 31st December 2006

Notes Turnover (6) Cost of sales Gross profit Other operating income Distribution and selling expenses General and administrative expenses Finance costs (8) Share of result of an associate Loss for the year attributable to equity holders of the parent (9) Loss per share Basic (14)	2006 HK$’000 11,880 (5,049) 6,831 1,249 (23) (11,656) (12) – (3,611) 1.5 cent	2005 HK$’000 20,982 (11,524) 9,458 633 (34) (11,536) (87) (198) (1,764) 0.8 cent

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Consolidated Balance Sheet

As at 31st December 2006

Notes Non-current assets Machinery and equipment (15) Interest in an associate (16) Available-for-sale financial asset (17) Current assets Inventories (18) Trade receivables (19) Amount due from an associate (20) Prepayments, deposits and other receivables (21) Pledged bank deposits (22) Bank balances and cash Current liabilities Trade payables (23) Accruals and other payables Receipts in advance Short-term bank borrowings (24) Net current assets Net assets Capital and reserves Share capital (25) Reserves Equity attributable to equity holders of the parent	2006 HK$’000 1,236 – 286	2006 HK$’000 1,236 – 286
	1,522 210 1,982 17 11,022 – 4,773 18,004 878 2,112 552 – 3,542 14,462	1,155 293 1,940 706 708 2,000 6,549 12,196
		741 2,153 636 1,086
		4,616 7,580
	15,984
	278 15,706	23,200 (14,465
	15,984

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Consolidated Statement of Changes in Equity

For the year ended 31st December 2006

At 1st January 2005 Loss for the year Release of translation reserve on deregistered subsidiaries Exchange differences arising on translation of foreign operations At 31st December 2005 and 1st January 2006 Capital Reduction Share Premium Reduction Elimination of accumulated losses of the Company Issue of shares during the year, net of shares issued expenses Loss for the year Exchange differences arising on translation of foreign operations At 31st December 2006		**Attributable to equity **	**Attributable to equity **	holders of the parent	holders of the parent	Total HK$’000 10,402 (1,764) 94 3 8,735 – – – 10,765 (3,611) 95 15,984
	Share capital (Note 25) HK$’000 23,200 – – – 23,200 (22,968) – – 46 – –	Share premium HK$’000 29,135 – – – 29,135 – (29,135) – 10,719 – –	Contributed surplus HK$’000 – – – – – 22,968 29,135 (44,189) – – –	Exchange translation reserve Accumulated losses HK$’000 HK$’000 (24) (41,909) – (1,764) 72 22 3 – 51 (43,651) – – – – – 44,189 – – – (3,611) 95 –		Total HK$’000 10,402 (1,764 94 3
						8,735 – – – 10,765 (3,611 95
	278	10,719	7,914	146	(3,073)

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APPENDIX III

Consolidated Cash Flow Statement

For the year ended 31st December 2006

Operating activities Loss for the year Adjustments for: Interest income Finance costs Depreciation of machinery and equipment Net loss on disposal of machinery and equipment Allowance for amount due from an associate Share of result of an associate (Recovery of)/allowance for bad and doubtful receivables Allowance for obsolete and slow-moving inventories Operating cash flows before movements in working capital Decrease in inventories Decrease/(increase) in trade receivables (Increase)/decrease in prepayments, deposits and other receivables Decrease/(increase) in amount due from an associate Increase/(decrease) in trade payables Decrease in accruals and other payables Decrease in receipts in advance Cash used in operations Interest paid Net cash used in operating activities Investing activities Decrease in pledged bank deposits Purchase of machinery and equipment Interest received Proceeds on disposal of machinery and equipment Net cash from investing activities Financing activities Proceeds from issue of shares, net of shares issued expenses (Decrease)/increase in trust receipts bank loans Net cash from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of changes in foreign exchange rate Cash and cash equivalents at the end of the year Cash and cash equivalents at 31st December, represented by: Bank balances and cash Bank overdrafts	2006 HK$’000 (3,611) (148) 12 296 179 234 – (201) 249	2005 HK$’000 (1,764) (144) 87 627 22 – 198 698 1,159 883 229 (177) 511 (43) (363) (974) (1,606) (1,540) (87) (1,627) 3,002 (45) 144 5 3,106 – 95 95 1,574 4,368 97 6,039 6,549 (510) 6,039
	(2,990) 50 159 (10,314) 455 137 (41) (84) (12,628) (12) (12,640) 2,000 (1,057) 148 – 1,091 10,765 (576) 10,189 (1,360) 6,039 94 4,773 4,773 –	883 229 (177 511 (43 (363 (974 (1,606
		(1,540 (87
		(1,627 3,002 (45 144 5
		3,106
		– 95
		95
		1,574 4,368 97
		6,039 6,549 (510
	4,773

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APPENDIX III

Notes to the Consolidated Financial Statements

For the year ended 31st December 2006

1. GENERAL

Proactive Technology Holdings Limited (the “Company”) was incorporated in Bermuda on 25th February 2000 as an exempted company with limited liability under the Companies Act 1981 of Bermuda. Its shares are listed on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited since 18th May 2000.

The addresses of registered office and principal place of business of the Company are disclosed in the section of “Corporate Information” to the annual report.

The consolidated financial statements are presented in Hong Kong dollars, which is the same as the functional currency of the Company.

The Company is an investment holding company. Its subsidiaries are principally engaged in investment holding, design, development and sale of value-added telecommunications products and computer telephony products.

2. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS

In the current year, the Group has applied, for the first time, a number of new standards, amendments and interpretations (“new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), which are either effective for accounting periods beginning on or after 1st December 2005 or 1st January 2006. The adoption of the new HKFRSs had no material effect on how the results for the current or prior accounting periods have been prepared and presented. Accordingly, no prior period adjustment has been required.

The Group has not early applied the following new standard, amendment and interpretations that have been issued but are not yet effective as at 31st December 2006. The directors of the Company anticipate that the application of these standard, amendment or interpretations will have no material impact on the results and the financial position of the Group.

Hong Kong Accounting Standard Capital Disclosures[1] (“HKAS”) 1 (Amendment) HKFRS 7 Financial Instruments: Disclosures[1] HK(IFRIC)-Int 7 Applying the Restatement Approach under HKAS 29 Financial Reporting in Hyperinflationary Economies[2] HK(IFRIC)-Int 8 Scope of HKFRS 2[3] HK(IFRIC)-Int 9 Reassessment of Embedded Derivatives[4] HK(IFRIC)-Int 10 Interim Financial Reporting and Impairment[5] HK(IFRIC)-Int 11 HKFRS 2 – Group and Treasury Share Transactions[6]

• 1 Effective for annual periods beginning on or after 1st January 2007.

2 Effective for annual periods beginning on or after 1st March 2006.

• 3 Effective for annual periods beginning on or after 1st May 2006.

• 4 Effective for annual periods beginning on or after 1st June 2006.

• 5 Effective for annual periods beginning on or after 1st November 2006.

• 6 Effective for annual periods beginning on or after 1st March 2007.

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APPENDIX III

3. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments, which are measured at fair values, as explained in the accounting policies set out below.

The consolidated financial statements have been prepared in accordance with HKFRSs. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance.

(a) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

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.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

(b) Investments in associates

The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the profit or loss and of changes in equity of the associate, less any identified impairment loss. When the Group’s share of losses of an associate equals or exceeds its interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognising its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate.

Where a group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate.

(c) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes.

• (i) Revenue from the supply, development and integration of telecommunication and computer telephony systems

Revenue from the supply, development and integration of telecommunication and computer telephony systems is recognised when the merchandise is delivered and the significant risks and rewards of ownership are transferred to buyers; and the related development and integration services are completed.

• (ii) Rental income from leasing of telecommunication and computer telephony equipment

Rental income from leasing of telecommunication and computer telephony equipment is recognised on a straight-line basis over the respective period of the leases.

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APPENDIX III

(iii) Consulting and maintenance service fees

Consulting and maintenance service fees are recognised when the services are rendered.

(iv) Interest income from a financial asset

Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

(d) Taxation

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

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

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

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and an associate, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

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

(e) Borrowing costs

All borrowing costs are recognised as and included in finance costs in the consolidated income statement in the year in which they are incurred.

(f) Retirement benefit costs

Payments to the Mandatory Provident Fund Scheme and state-managed retirement benefit scheme are charged as expense when employees have rendered service entitling them to the contributions.

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APPENDIX III

(g) Machinery and equipment

Machinery and equipment are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.

Depreciation is provided to write off the cost of items of machinery and equipment over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method, at the following rates per annum:

Furniture, fixtures and office equipment	20%
Computer equipment	30%
Equipment on lease to customers	30%
Equipment for development	30%

An item of machinery and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated income statement in the year in which the item is derecognised.

(h) Financial instruments

Financial assets and financial liabilities are recognised on the balance sheet when a group entity becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

Financial assets

The Group’s financial assets are mainly loans and receivables and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of each category of financial assets are set out below.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables including trade receivables, amount due from an associate and other receivables are carried at amortised cost using the effective interest method, less any identified impairment losses. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Available-for-sale financial assets

Available-for-sale financial assets are investments in unlisted equity securities which are intended to be held for a continuing strategic or long term purpose and are stated at fair value, except for those equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, when they are measured at cost less any accumulated impairment losses.

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APPENDIX III

In respect of available-for-sale financial assets carried at cost less any accumulated impairment losses, when there is objective evidence that an impairment loss has been incurred on an investment, the carrying amount of the investment should be reduced to the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset and the amount of the impairment is charged to the consolidated income statement in the year in which it arises. Any impairment losses recognised shall not be reversed in the subsequent periods.

Financial liabilities and equity

Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. The Group’s financial liabilities are generally classified into financial liabilities at fair value through profit or loss and other financial liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

Other financial liabilities

Other financial liabilities including bank borrowings, trade payables, accruals and other payables and receipts in advance are subsequently measured at amortised cost, using the effective interest method.

Equity investments

Equity investments issued by the Company are recorded at the proceeds received, net of direct issue costs.

(i) Share-based payment transactions

Equity-settled share-based payment transactions

Share options granted to employee of the Company

The fair value of services received determined by reference to the fair value of share options granted at the grant date is expensed on a straight-line basis over the vesting period, with a corresponding increase in equity (share option reserve).

At the time when the share options are exercised, the amount previously recognised in share option reserve will be transferred to share premium. When the share options are forfeited or are still not exercised at the expiry date, the amount previously recognised in share option reserve will continue to be held in share option reserve.

(j) Inventories

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

(k) Impairment

At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered 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. An impairment loss is recognised as 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.

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APPENDIX III

(l) Provisions

Provision are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material.

(m) Leases

Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straight-line basis.

(n) Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the year in which they arise, except for exchange differences arising on a monetary item that forms part of the Group’s net investment in a foreign operation, in which case, such exchange differences are recognised in equity in the consolidated financial statements. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the year except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which cases, the exchange differences are also recognised directly in equity.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Company (i.e. Hong Kong dollars) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the year, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised as a separate component of equity (the exchange translation reserve). Such exchange differences are recognised in profit or loss in the year in which the foreign operating is disposed of.

4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the process of applying the Group’s accounting policies which are described in note 3, management has made the following judgments that have significant effect on the amounts recognised in the consolidated financial statements. The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are also discussed below.

Depreciation

The Group’s net book value of machinery and equipment as at 31st December 2006 was approximately HK$1,236,000 (2005: HK$869,000). The Group depreciates the machinery and equipment on a straight-line basis over the estimated useful life of three to five years, and after taking into account of their estimated residual value, using the straight-line method, at the rate of 20 – 30% per annum, commencing from the date the equipment is placed into productive use. The estimated useful life and dates that the Group places the equipment into productive use reflects the directors’ estimate of the periods that the Group intend to derive future economic benefits from the use of the Group’s machinery and equipment.

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Allowance for bad and doubtful debts

The policy for allowance for bad and doubtful debts of the Group is based on the evaluation of collectability and aging analysis of accounts and on management’s judgment. A considerable amount of judgment is required in assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of each customer. If the financial conditions of customers of the Group were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Allowance for inventories

The management of the Group reviews an aging analysis at each balance sheet date, and makes allowance for obsolete and slow-moving inventory items identified that are no longer suitable for sales. The management estimates the net realisable value for such finished goods based primarily on the latest invoice prices and current market conditions. The Group carries out an inventory review on a product-by-product basis at each balance sheet date and makes allowance for obsolete and slow-moving items.

5. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s major financial instruments include trade receivables, amount due from an associate, other receivables, bank borrowings, trade payables, accruals and other payables and receipts in advance. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Currency risk

Certain receivables and payables of the Group are denominated in foreign currencies. The Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arises.

Interest rate risk

The Group is exposed to interest rate risk through the impact of rate changes on interest bearing bank borrowings.

Credit risk

The Group’s maximum exposure to credit risk in the event of the counterparties failure to perform their obligations as at 31st December 2006 in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the consolidated balance sheet. In order to minimise the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade receivables at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced.

6. TURNOVER

Turnover comprises:

Sales of goods Rental income from leasing of telecommunication and computer telephony equipment Service fees income	2006 HK$’000 4,703 1,177 6,000 11,880	2005 HK$’000 9,690 1,294 9,998
		20,982

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APPENDIX III

7. SEGMENT INFORMATION

The primary segment is defined by major product and operational units, while secondary segment is defined by geographical location of customers.

(a) Primary segment

The Group is organised into two products and operational units – telecommunications products and computer telephony products. The telecommunications products and computer telephony products units derive revenue from supply, development and integration of telecommunications and computer telephony system and solutions, respectively. They also earn rental income from leasing telecommunications equipments and computer telephony systems and earn fees for consulting and maintenance services.

Analysis by business segment is as follows:

Turnover – Telecommunications – Computer telephony Segment results – Telecommunications – Computer telephony Unallocated corporate expenses Interest income Finance costs Net loss on write-off of deregistered subsidiaries Share of result of an associate Allowance for amount due from an associate Loss for the year	2006 HK$’000 3,404 8,476	2005 HK$’000 7,228 13,754 20,982 2,242 4,034 6,276 (7,805) (1,529) 144 (87) (94) (198) – (1,764)
	11,880 1,108 4,496 5,604 (9,117) (3,513) 148 (12) – – (234)	20,982
		2,242 4,034
		6,276 (7,805
		(1,529 144 (87 (94 (198 –
	(3,611)

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APPENDIX III

Other information: Depreciation of machinery and equipment – Telecommunications – Computer telephony – Unallocated Capital expenditures of machinery and equipment – Telecommunications – Computer telephony – Unallocated (Recovery of)/allowance for bad and doubtful receivables – Telecommunications – Computer telephony – Unallocated Allowance for obsolete and slow-moving inventories – Telecommunications – Computer telephony – Unallocated Net loss on disposal of machinery and equipment – Telecommunications – Computer telephony – Unallocated	2006 HK$’000 98 174 24 296 88 147 822 1,057 123 (330) 6 (201)	2005 HK$’000 388 80 159
		627
		21 – 24
		45
		255 433 10
		698
	195 54 –	335 97 727
	249	1,159
	179 – –	11 11 –
	179	22

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APPENDIX III

Segment assets – Telecommunications – Computer telephony Unallocated corporate assets Consolidated total assets Segment liabilities – Telecommunications – Computer telephony Unallocated corporate liabilities Consolidated total liabilities	2006 HK$’000 184 2,721 16,621 19,526 472 1,610 1,460 3,542	2005 HK$’000 1,389 2,549 9,413
		13,351
		1,134 1,406 2,076
		4,616

(b) Secondary segment

Analysis by geographical location is as follows:

Turnover – Hong Kong – The People’s Republic of China (“PRC”) Segment assets – Hong Kong – PRC Additions to machinery and equipment – Hong Kong – PRC	2006 HK$’000 11,346 534 11,880	2005 HK$’000 20,796 186
		20,982
	18,076 1,450	11,212 2,139
	19,526	13,351
	969 88	24 21
	1,057	45

8. FINANCE COSTS

The amount represents interest on bank overdrafts and trust receipt bank loans wholly repayable within five

years.

– 106 –

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APPENDIX III

9. LOSS FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

Loss for the year has been arrived at after charging/(crediting): Staff costs including directors’ emoluments (Note 10): Salaries and allowances Contributions to retirement benefits scheme Auditors’ remuneration – current year – over-provision in previous year Depreciation of machinery and equipment (Recovery of)/allowance for bad and doubtful receivables Allowance for amount due from an associate Minimum lease payments under operating leases Net loss on disposal of machinery and equipment Allowance for obsolete and slow-moving inventories Cost of inventories recognised as an expense Net exchange loss Net loss on write-off of deregistered subsidiaries Interest income Rental income from leasing of telecommunication and computer telephony equipment	2006 HK$’000 4,003 160	2005 HK$’000 5,800 212
	4,163	6,012
	203 – 296 (201) 234 880 179 249 4,505 25 – (148) (1,177)	153 (47 627 698 – 622 22 1,159 10,934 8 94 (144 (1,294

10. DIRECTORS’ EMOLUMENTS

The emoluments paid or payable to each of the 12 (2005: 11) directors were as follows:

Executive Directors: Fees Salaries and other benefits (Note (i)) Contributions to retirement benefits scheme Independent Non-Executive Directors: Fees	2006 HK$’000 – 736 24	2005 HK$’000 – 1,933 52
	760 60	1,985 74
	820	2,059

Note:

• (i) Other benefits include housing allowance.

One director (2005: One director) waived his emoluments in the years ended 31st December 2006 and 2005. No incentive payment for joining the Group or compensation for loss of office was paid or payable to any director for the year.

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The details of directors’ remuneration of each director for the years ended 31st December 2006 and 2005 are set out below:

Name of director Tsang Chi Hin Li Siu Ming (Note 8) Zeng Bangjian (Note 7) Ng Kam Wing (Note 7) Lam Kim Chau (Note 4) Wong Wai Ho (Note 5) Leung Lok Ming (Note 9) Chong Cha Hwa (Notes 6 & 9) Chan Ho Wah, Terence (Note 9) Chow Dah Jen, David (Notes 1 & 9) Lo Wa Kei, Roy (Notes 3 & 9) Szeto Yat Kong (Notes 2 & 9)	Non- executive directors’ fees HK$’000 – – – – – – 20 4 20 – 5 11 60	Executive directors’ salaries HK$’000 264 60 30 30 100 60 – – – – – – 544	2006 Housing allowance Contributions to retirement scheme HK$’000 HK$’000 192 12 – 3 – 1 – 1 – 4 – 3 – – – – – – – – – – – – 192 24	Total HK$’000 468 63 31 31 104 63 20 4 20 – 5 11
				820

Notes:

1. Resigned on 17th February 2006.

2. Appointed on 1st April 2006 and resigned on 26th October 2006.

3. Resigned on 1st April 2006.

4. Resigned on 30th April 2006.

5. Resigned on 10th May 2006.

6. Appointed on 26th October 2006.

7. Appointed on 1st December 2006.

8. Resigned on 1st January 2007.

9. The employees are independent non-executive directors.

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Name of director Tsang Chi Hin Lam Kim Chau Lau Kai Shun, Barry (Note 3) Wong Wai Ho Pong Kam Wah (Note 3) Li Siu Ming (Note 1) Yang Zhenhan (Notes 2 & 3) Robert Brainin Issenman (Notes 2 & 3) Chan Ho Wah, Terence (Notes 1 & 2) Leung Lok Ming (Note 2) Lo Wa Kei, Roy (Note 2) Chow Dah Jen, David (Note 4)	Non- executive directors’ fees HK$’000 – – – – – – 12 14 8 20 20 – 74	Executive directors’ salaries HK$’000 264 487 196 270 478 40 – – – – – – 1,735	2005 Housing allowance Contributions to retirement scheme HK$’000 HK$’000 198 12 – 12 – 8 – 11 – 7 – 2 – – – – – – – – – – – – 198 52	Total HK$’000 474 499 204 281 485 42 12 14 8 20 20 –
				2,059

Notes:

1. Appointed on 12th August 2005.

2. The employees are independent non-executive directors.

3. Resigned on 12th August 2005.

4. Resigned on 17th February 2006.

11. EMPLOYEES’ EMOLUMENTS

During the year, the five highest paid individuals included one director (2005: three directors) of the Company, whose emoluments have been included in Note 10 above. However, one of the three highest paid executive directors of the Company resigned and remained as an employee of the Group during the year 2005, whose emoluments as directors are set out in Note 10 above. The emoluments of the four (2005: three (including the resigned director)) individuals were as follows:

Salaries and allowances Contributions to retirement benefits scheme	2006 HK$’000 1,326 46 1,372	2005 HK$’000 1,386 34
		1,420

During the year, no emoluments were paid to the five highest paid individuals (including directors and other employees) as inducement to join or upon joining the Group or as compensation for loss of office.

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Their emoluments were within the following bands:

				No. of employees
				2006	2005
–	Nil	to	HK$1,000,000	4	3

12. INCOME TAX EXPENSES

• (a) The Company is not subject to tax in Bermuda on its assessable profits or capital gains until March 2016. Hong Kong Profits tax has not been provided as the Group had no assessable profit arising in nor derived from Hong Kong. Overseas income tax has been provided by subsidiaries based on their estimated taxable profits at the rates of taxation applicable in the respective jurisdictions in which they operate.

• (b) The tax charge for the years can be reconciled to the loss per the consolidated income statement as follows:

Loss for the year Tax at the domestic income tax rate of 17.5% Tax effect of expenses not deductible for tax purpose Tax effect of income not taxable for tax purpose Tax effect of tax losses and other temporary differences not recognised Effect of different tax rates of subsidiaries operating in other jurisdictions Tax charge for the year	2006 HK$’000 (3,611)	2005 HK$’000 (1,764)
	(632) 485 (15) 146 16	(309) 1,182 (916) 38 5
	–	–

• (c) The principal components of the Group’s deferred tax assets not provided for, on the cumulative temporary differences at the balance sheet date are as follows:

At 1st January 2005 Movement for the year At 31st December 2005 and 1st January 2006 Overprovision in prior years Movement for the year At 31st December 2006	Other temporary differences HK$’000 291 34	Estimated tax losses HK$’000 6,266 4	Total HK$’000 6,557 38
	325 – (15)	6,270 (17) 161	6,595 (17) 146
	310	6,414	6,724

No potential tax benefit and other temporary differences attributable to tax losses of the Group has been recognised due to unpredictability of future profit streams (2005: Nil).

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13. DIVIDEND

No dividend was paid or proposed during the years ended 31st December 2006 and 2005, nor has any dividend been proposed since the balance sheet date.

14. LOSS PER SHARE

The calculation of basic loss per share for the year is based on the loss for the year attributable to equity holders of the parent of approximately HK$3,611,000 (2005: HK$1,764,000) and the weighted average of 235,432,329 (2005: 232,000,000) ordinary shares in issue during the year.

No diluted loss per share have been presented for two years ended 31st December 2006 and 2005 as there were no diluting events existed during those years.

15. MACHINERY AND EQUIPMENT

Cost At 1st January 2005 Additions Disposals Transferred from inventories Transferred to inventories Reclassification At 31st December 2005 and 1st January 2006 Exchange adjustments Additions Disposals Transferred to inventories At 31st December 2006 Accumulated depreciation At 1st January 2005 Charge for the year Written back on disposals Transferred to inventories Reclassification At 31st December 2005 and 1st January 2006 Charge for the year Written back on disposals Transferred to inventories At 31st December 2006 Carrying values At 31st December 2006 At 31st December 2005	Furniture, fixtures and office equipment HK$’000 1,050 32 – – – –	Computer equipment HK$’000 3,387 13 – 114 (8) 36	Equipment on leased to customers HK$’000 2,264 – (271) 112 (1,258) –	Equipment for development HK$’000 1,674 – – 377 (728) (36)	Total HK$’000 8,375 45 (271) 603 (1,994) – 6,758 1 1,057 (274) (464) 7,078 7,047 627 (244) (1,541) – 5,889 296 (95) (248) 5,842 1,236 869
	1,082 1 894 – – 1,977 980 72 – – – 1,052 38 – – 1,090	3,542 – 37 – – 3,579 3,211 152 – – 1 3,364 99 – – 3,463	847 – 120 (274) (464) 229 1,388 256 (244) (1,036) – 364 81 (95) (248) 102	1,287 – 6 – – 1,293 1,468 147 – (505) (1) 1,109 78 – – 1,187	6,758 1 1,057 (274 (464
					7,078
					7,047 627 (244 (1,541 –
					5,889 296 (95 (248
					5,842
	887 30	116 178	127 483	106 178

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APPENDIX III

16. INTEREST IN AN ASSOCIATE

Cost of investment in an associate – unlisted in PRC Share of post-acquisition losses and reserves, net of dividends received	2006 HK$’000 377 (377) –	2005 HK$’000 377 (377) –

Details of the associate are as follow:

				Percentage
				of equity
				interest
	Form of	Place of		attributable
	business	incorporation/	Class of	to the
Name	structure	operations	share held	Group	Principal activity
Beijing Teletron System	Incorporated	PRC	Ordinary	40%	Provision of
Integration Company Limited					telecommunications
(“Beijing Teletron”)					and computer
					telephony
					solutions

There were no other associate held by the Group as at 31st December 2006.

The summarised financial information in respect of the Group’s associate is set out below:

Total assets Total liabilities Net liabilities Group’s share of net asset of the associate Revenue Loss for the year Group’s share of result of the associate for the year	2006 HK$’000 514 (3,038) (2,524) – 1,559 (826) –	2005 HK$’000 1,670 (3,368) (1,698) – 2,789 (474) (198)

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APPENDIX III

FINANCIAL INFORMATION OF PROACTIVE

The Group has discontinued recognising of its share of loss of an associate since the Group’s share of loss of Beijing Teletron in the year equals or exceeds its interest in this associate. The amounts of unrecognised share of an associate, extracted from the summarised financial information in respect of the Group’s associate is set out below:

Unrecognised share of loss of an associate for the year Accumulated unrecognised share of loss of an associate	2006 HK$’000 330 1,009	2005 HK$’000 276
		679

17. AVAILABLE-FOR-SALE FINANCIAL ASSET

The asset represents a nominee membership in a golf club in the PRC. It is measured at cost less impairment at each balance sheet date. In the opinion of the directors, the fair value was approximated to the corresponding carrying amount.

18. INVENTORIES

Inventories consisted of: Telecommunication and computer telephony hardware products Less: Allowance for obsolete and slow-moving inventories	2006 HK$’000 320 (110) 210	2005 HK$’000 1,999 (1,706)
		293

As at 31st December 2006, inventories of approximately HK$192,000 (2005: HK$143,000) were stated at net realisable value.

19. TRADE RECEIVABLES

Trade receivables consisted of:

Account receivables Retention receivables Less: Accumulated impairment	2006 HK$’000 2,513 1,195	2005 HK$’000 3,087 1,355
	3,708 (1,726)	4,442 (2,502)
	1,982	1,940

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APPENDIX III

FINANCIAL INFORMATION OF PROACTIVE

The Group normally grants to its customers credit period ranging from 30 days to 60 days. Aging analysis of trade receivables is as follows:

0 to 1 month 1 to 2 months 2 to 3 months 3 to 6 months 6 to 9 months 9 to 12 months Over 12 months	2006 HK$’000 1,771 114 46 26 50 219 1,482 3,708	2005 HK$’000 1,597 391 197 747 65 32 1,413
		4,442

The fair value of the Group’s trade receivables at the balance sheet date approximates the corresponding carrying amount.

20. AMOUNT DUE FROM AN ASSOCIATE

The amount is unsecured, non-interest bearing and repayable on demand. The directors consider that the carrying value of the amount at the balance sheet date approximates its fair value.

21. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Prepayments, deposits and other receivables consisted of: Prepayments Rental and utility deposits Other receivables Other deposit (note a)	2006 HK$’000 1,549 327 3,146 6,000 11,022	2005 HK$’000 203 260 245 –
		708

Note a: Other deposit represents deposit paid by a wholly-owned subsidiary of the Company which entered into a non-legally binding memorandum of understanding (“MOU”) on 5th December 2006 with an independent third party in relation to the possible acquisition of a subsidiary. According to the MOU, if no formal sales and purchases agreement has been entered into within 120 days from the date of the MOU (or such date to be agreed by the parties thereto), the deposit will be refunded to the Group in full. Details of the MOU are set out in the Circulars of the Company dated 6th December 2006 and 15th February 2007.

The fair values of the Group’s prepayments, deposits and other receivables at the balance sheet date approximate the corresponding carrying amounts.

22. PLEDGED BANK DEPOSITS

The amount represents deposits pledged to banks to secure bank overdrafts and undrawn facilities granted to the Group. The deposits carry variable interest rates. The pledged bank deposits had been released during the year as the Group has repaid the bank borrowings in full and cancelled all banking facilities as at 31st December 2006.

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23. TRADE PAYABLES

The Group is normally granted by its vendors credit periods ranging from 0 day to 30 days. Aging analysis of trade payables is as follows:

0 to 1 month 1 to 2 months 2 to 3 months 3 to 6 months 6 to 12 months Over 12 months	2006 HK$’000 178 351 297 – – 52 878	2005 HK$’000 362 161 82 – 90 46
		741

The fair value of the Group’s trade payables at the balance sheet date approximates the corresponding carrying amount.

24. SHORT-TERM BANK BORROWINGS

Short-term bank borrowings consisted of:

Bank overdrafts – secured Trust receipts bank loans – secured	2006 HK$’000 – – –	2005 HK$’000 510 576
		1,086

At 31st December 2006 and 2005, all short-term bank borrowings are variable-rate borrowings which carry interest per annum as follows:

2005 and 2006

Bank overdrafts – secured Trust receipts bank loans – secured

Hong Kong Prime-rate Standard bills rate plus 1.25%

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APPENDIX III

25. SHARE CAPITAL

Authorised: Ordinary shares of HK$0.1 each at 1st January 2005 and 31st December 2005 Shares sub-divided upon capital reduction (note a) Ordinary shares of HK$0.001 each at 31st December 2006 Issued and fully paid: Ordinary shares of HK$0.1 each at 1st January 2005 and 31st December 2005 Capital reduction (note a) Issue of new shares of HK$0.001 each (note b) Ordinary shares of HK$0.001 each at 31st December 2006	Number of shares ’000 1,000,000 99,000,000 100,000,000	Nominal value HK$’000 100,000 – 100,000 23,200 (22,968) 46 278
	232,000 – 46,400	23,200 (22,968 46
	278,400

The movements in the ordinary share capital for the year ended 31st December 2006 are as follows:

• (a) By a resolution passed at the special general meeting of the Company held on 31st October 2006, it was resolved that with effect from 1st November 2006:

• (i) the nominal value of the shares in issue was reduced from HK$0.10 each to HK$0.001 each by canceling the issued share capital to the extent of HK$0.099 paid up on each of the issued shares (“Capital Reduction”);

• (ii) all the authorised share capital of the Company of HK$100,000,000 will be divided into 100,000,000,000 shares of HK$0.001 each in the share capital of the Company upon the Capital Reduction which rank pari passu with the then existing shares of the Company;

• (iii) the credit arising from the Capital Reduction was entirely transferred to the contributed surplus account of the Company;

• (iv) the entire amount standing to the credit of the share premium account of the Company as at 30th June 2006 was cancelled (“Share Premium Reduction”) and the credit arising from the Share Premium Reduction was entirely transferred to the contributed surplus account of the Company; and

• (v) an amount equivalent to the amount of the accumulated losses of the Company as at 30th June 2006 was applied from the contributed surplus account against such accumulated losses in full.

Details of the above are set out in the Circular of the Company dated 6th October 2006.

• (b) 46,400,000 shares of HK$0.001 each were issued and allotted to a third party at HK$0.241 per share, representing a discount of approximately 19.67% on the closing price of HK$0.30 per share on 20th November 2006 under a private share placement. The shares issued expenses amounting to HK$417,000 had been deducted from the share premium account.

Shares were issued under the general mandate granted to the directors on 28th April 2006.

All the new ordinary shares issued during the year ended 31st December 2006 rank pari passu in all respects with the existing ordinary shares of the Company.

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APPENDIX III

26. SHARE OPTION SCHEME

The Company has adopted a Share Option Scheme on 3rd May 2000 (“Share Option Scheme”), pursuant to which it may grant options to employees (including executive directors) of the Group to subscribe for shares in the Company. Pursuant to the Share Option Scheme, options were granted on 30th June 2000 to executive directors and other employees of the Group to subscribe for an aggregate of 19,420,000 shares in the Company at a price of HK$1.30 per share, during the exercise period from 1st July 2003 to 30th June 2010. No options were granted during the year ended 31st December 2006 under the Share Option Scheme.

Pursuant to resolutions passed at a special general meeting of the shareholders held on 13th November 2002, the Company terminated the Share Option Scheme and adopted a new share option scheme (“New Share Option Scheme”) in order to comply with the new requirements of Chapter 23 of GEM Listing Rules effected on 1st October 2001. Under the terms of the New Share Option Scheme, the board of directors of the Company may, at their discretion, grant options to the participants fall within the definition prescribed in the New Share Option Scheme including the employees, non-executive directors of the Company or its subsidiaries, etc., to subscribe for shares in the Company at a price determined by the Company’s board of directors, and will not be less than the highest of (i) the nominal value of the shares; (ii) the average closing price of the shares quoted on the GEM on the five trading days immediately preceding the date of grant; and (iii) the closing price of the shares quoted on the GEM on the date of grant, subject to a maximum of 10% of the issued share capital of the Company from time to time. 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 in issue and with an aggregate value (based on the closing price of the shares on the date of grant) in excess of HK$5 million must be approved by the Company’s shareholders.

The New Share Option Scheme will remain in force for a period of 10 years from 13th November 2002. A nominal consideration of HK$1 is payable on acceptance of the grant of an option.

There were no options granted to any directors and employees of the Group under the New Share Option Scheme in respect of services provided to the Group for the two years ended 31st December 2005 and 2006. There is no effect to the Group’s results and financial position upon the adoption of HKFRS 2.

Movements of employee share options during the two years ended 31st December 2006 and 2005, were:

2006

Date of grant Exercisable period Subscription Price per share Outstanding at 1st January 2006 HK$ Directors 30/6/2000 1/7/2003 to 30/6/2010 1.30 3,000,000 Employees 30/6/2000 1/7/2003 to 30/6/2010 1.30 660,000 3,660,000	Number of share options Granted during the year Exercised during the year Cancelled/ lapsed during the year Outstanding at 31st December 2006 – – (3,000,000) – – – (660,000) – – – (3,660,000) –	Number of share options Granted during the year Exercised during the year Cancelled/ lapsed during the year Outstanding at 31st December 2006 – – (3,000,000) – – – (660,000) – – – (3,660,000) –
		–

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APPENDIX III

2005

Date of grant Exercisable period Subscription Price per share Outstanding at 1st January 2005 HK$ Directors 30/6/2000 1/7/2003 to 30/6/2010 1.30 9,800,000 Employees 30/6/2000 1/7/2003 to 30/6/2010 1.30 760,000 10,560,000	Number of share options Granted during the year Exercised during the year Cancelled/ lapsed during the year Outstanding at 31st December 2005 – – (6,800,000) 3,000,000 – – (100,000) 660,000 – – (6,900,000) 3,660,000	Number of share options Granted during the year Exercised during the year Cancelled/ lapsed during the year Outstanding at 31st December 2005 – – (6,800,000) 3,000,000 – – (100,000) 660,000 – – (6,900,000) 3,660,000
		3,660,000

27. BALANCE SHEET OF THE COMPANY

Non-current asset Interests in subsidiaries Current assets Amounts due from subsidiaries Prepayments Bank balances Current liability Accruals Net current assets Net assets Capital and reserves Share capital Reserves (Note 28) Shareholders’ fund	2006 HK$’000 8,801	2005 HK$’000 8,791
	18,143 173 39 18,355 809 17,546	7,756 173 53
		7,982
		342
		7,640
	26,347	16,431
	278 26,069	23,200 (6,769
	26,347	16,431

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APPENDIX III

28. RESERVES OF THE COMPANY

At 1st January 2005 Loss for the year At 31st December 2005 and 1st January 2006 Capital Reduction Share Premium Reduction Elimination of accumulated losses of the Company Issue of shares during the year Loss for the year At 31st December 2006	Share premium HK$’000 29,135 –	Contributed surplus HK$’000 8,585 –	Accumulated loss HK$’000 (43,890) (599)	Total HK$’000 (6,170 (599
	29,135 – (29,135) – 10,719 –	8,585 22,968 29,135 (44,189) – –	(44,489) – – 44,189 – (849)	(6,769 22,968 – – 10,719 (849
	10,719	16,499	(1,149)	26,069

Note:

Under the Companies Act 1981 of Bermuda, the contributed surplus account of the Company is available for distribution. 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 account.

In the opinion of the directors, no reserves are available for distribution to shareholders at 31st December 2006 and 2005.

29. OPERATING LEASE COMMITMENTS

The Group had commitments for future minimum lease payments in respect of premises under various noncancellable operating leases which fall due as follows:

Within one year In the second to fifth year inclusive	2006 HK$’000 1,412 1,073 2,485	2005 HK$’000 511 102
		613

Operating lease payments represent rentals payable by the Group for certain of its office properties and staff quarters. Both leases are negotiated and rental are fixed for an average of 2 years.

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30. RETIREMENT BENEFITS SCHEMES

The Group maintains various retirement schemes for its employees. The retirement scheme for employees of PRC representative office is a mandatory central pension scheme organised by the PRC government, the assets of which are held separatively from those of the Group. Contributions made are based on a percentage of the eligible employees’ salaries and are charged to the income statement as they became payable, in accordance with the rules of the scheme. The employer contributions vest fully once they are made. The Group’s Hong Kong employees are covered by the mandatory provident fund, which is managed by an independent trustee. The Group and its Hong Kong employees each make monthly contributions to the scheme at 5% of the employees’ cash income with the maximum contribution by each of the Group and the employees limited to HK$1,000 per month.

During the year, the aggregate contributions made by the Group to the retirement schemes were approximately HK$160,000 (2005: HK$212,000). During the year, there were no material forfeitures available to offset the Group’s future contributions (2005: Nil).

31. BANKING FACILITIES AND PLEDGE OF ASSETS

As at 31st December 2005, the Group had aggregate banking facilities of approximately HK$7,000,000 from several banks for overdrafts, loans, and trade financing. Unused facilities as at the balance sheet date amounted to approximately HK$5,914,000. These facilities were secured by the Group’s bank deposits of approximately HK$2,000,000.

The Group did not have any charges on other assets as at 31st December 2006 and 2005.

32. RELATED PARTY TRANSACTIONS

(a) Compensation of directors and key management personnel

The remuneration of directors and other members of key management during the year was as follows:

Short-term benefits Other long-term benefits	2006 HK$’000 796 24 820	2005 HK$’000 2,007 52
		2,059

The remuneration of directors and key executives is determined by the Remuneration Committee having regard to the performance of individuals and market trends.

(b) Amount due from an associate

The amount due from an associate is set out in the consolidated balance sheet on page 41. The term is set out in note 20.

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APPENDIX III

33. SUBSIDIARIES

Details of the Company’s subsidiaries as at 31st December 2006 are as follows:

				Proportion of	Proportion of
	Place of	Class of	Issued and	ownership interest
	incorporation/	shares	fully paid	**held **	by the		Principal
Name	operations	held	share capital	Company			activity
				Directly	Indirectly
CentreWorld Holding Limited	British Virgin	Ordinary	US$1,029	100%		–	Investment
	Islands						holding
	(“BVI”)
Interworth, Inc	BVI	Ordinary	US$100	–	100%		Investment
							holding
Proactive Technology Limited	Hong Kong	Ordinary	HK$1,000,000	–	100%		Provision of
							telecommunications
							and computer
							telephony
							solutions
Proactive International Limited	Hong Kong	Ordinary	HK$100,000	–	100%		Trading of
							telecommunications
							products and
							provision of
							management
							consultancy
							services
Netwin Worldwide Limited	BVI	Ordinary	US$100	–	100%		Investment
							holding
Proactive Technology	PRC	Ordinary	RMB5,000,000	–	100%		Trading of
Development (Beijing)							telecommunications
Limited (Note a)							products and
							provision of
							tele-commerce
							services
Proactive Multimedia Marketing	Hong Kong	Ordinary	HK$2	–	100%		Provision of
Agency Limited							telecommunications
							and computer
							telephony
							solutions
Money Holder Limited	Hong Kong	Ordinary	HK$10,000	100%		–	Not yet
							commenced
							business
Dragon Billion Limited	Hong Kong	Ordinary	HK$1	100%		–	Not yet
							commenced
							business
China Railway Logistic Limited	Hong Kong	Ordinary	HK$1	100%		–	Not yet
							commenced
							business

Note a: The Company is a wholly foreign owned enterprise in the PRC.

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

– 121 –

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APPENDIX III

4. THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2005

The following financial information has been extracted from the annual report of Proactive for the year ended 31st December 2005.

Consolidated Income Statement

For the year ended 31st December 2005

Notes Turnover (7) Cost of sales Gross profit Other operating income Distribution and selling expenses General and administrative expenses Finance costs (9) Share of result of an associate Loss before tax (10) Income tax expenses (13) Loss for the year attributable to equity holders of the parent Loss per share Basic (14)	2005 HK$’000 20,982 (11,524)	2004 HK$’000 17,515 (9,386) 8,129 14 (20) (15,479) (39) 198 (7,197) (51) (7,248) 3.1 cents
	9,458 633 (34) (11,536) (87) (198) (1,764) –	8,129 14 (20 (15,479 (39 198
		(7,197 (51
	(1,764) 0.8 cents

– 122 –

FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

Consolidated Balance Sheet

As at 31st December 2005

Notes Non-current assets Machinery and equipment (15) Development expenditures (16) Interest in an associate (17) Available-for-sale financial asset (18) Other investment (19) Current assets Inventories (20) Trade receivables (21) Amount due from an associate (22) Prepayments, deposits and other receivables (23) Pledged bank deposits (24) Bank balances and cash Current liabilities Short-term bank borrowings (25) Trade payables (26) Accruals and other payables Receipts in advance Net current assets Net assets Capital and reserves Share capital (27) Reserves Equity attributable to equity holders of the parent	2005 HK$’000 869 – – 286 –	2005 HK$’000 869 – – 286 –
	1,155 293 1,940 706 708 2,000 6,549 12,196 1,086 741 2,153 636 4,616 7,580	2,475 1,831 2,461 – 1,219 5,002 4,761 15,274
		874 1,104 3,127 2,242
		7,347 7,927
	8,735
	23,200 (14,465)	23,200 (12,798
	8,735

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Consolidated Statement of Changes in Equity

For the year ended 31st December 2005

At 1st January 2004 Exchange differences arising on translation of foreign operations Loss for the year At 31st December 2004 and 1st January 2005 As originally stated Effect of changes in accounting policies (see Note 3) As restated Loss for the year Release of translation reserve on dissolve of subsidiaries Exchange differences arising on translation of foreign operations At 31st December 2005	Share capital HK$’000 23,200 – –	Attributable to equity holders of the parent Share premium Capital reserve Exchange translation reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 (Note 29) 29,135 3,530 (37) (38,191) – – 13 – – – – (7,248)	Attributable to equity holders of the parent Share premium Capital reserve Exchange translation reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 (Note 29) 29,135 3,530 (37) (38,191) – – 13 – – – – (7,248)	Attributable to equity holders of the parent Share premium Capital reserve Exchange translation reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 (Note 29) 29,135 3,530 (37) (38,191) – – 13 – – – – (7,248)	Attributable to equity holders of the parent Share premium Capital reserve Exchange translation reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 (Note 29) 29,135 3,530 (37) (38,191) – – 13 – – – – (7,248)	Total HK$’000 17,637 13 (7,248) 10,402 – 10,402 (1,764) 94 3 8,735
	23,200 – 23,200 – – –	29,135 – 29,135 – – –	3,530 (3,530) – – – –	(24) – (24) – 72 3	(45,439) 3,530 (41,909) (1,764) 22 –	10,402 –
						10,402 (1,764 94 3
	23,200	29,135	–	51	(43,651)

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Consolidated Cash Flow Statement

For the year ended 31st December 2005

Operating activities Loss before tax Adjustments for: Interest income Finance costs Depreciation of machinery and equipment Net loss on disposal of machinery and equipment Write off of development expenditures Share of result of an associate Allowance for bad and doubtful receivables Allowance for obsolete and slow-moving inventories Operating cash flows before movements in working capital Decrease/(increase) in inventories (Increase)/decrease in trade receivables Decrease in prepayments, deposits and other receivables Increase in amount due from an associate Decrease in trade payables (Decrease)/increase in accruals and other payables (Decrease)/increase in receipts in advance Cash used in operations Interest paid Overseas taxes paid Net cash used in operating activities Investing activities Decrease in pledged bank deposits Purchase of machinery and equipment Proceeds on disposal of machinery and equipments Interest received Net cash from/(used in) investing activities Cash from financing activity Increase in trust receipts bank loans Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of changes in foreign exchange rate Cash and cash equivalents at the end of the year Cash and cash equivalents at 31st December, represented by: Bank balances and cash Bank overdrafts	2005 HK$’000 (1,764) (144) 87 627 22 – 198 698 1,159	2004 HK$’000 (7,197) (14) 39 1,469 75 292 (198) 161 1,894 (3,479) (1,510) 527 31 (429) (53) 63 1,009 (3,841) (39) (51) (3,931) – (19) – 14 (5) 167 (3,769) 8,124 13 4,368 4,761 (393) 4,368
	883 229 (177) 511 (43) (363) (974) (1,606) (1,540) (87) – (1,627) 3,002 (45) 5 144 3,106 95 1,574 4,368 97	(3,479 (1,510 527 31 (429 (53 63 1,009
		(3,841 (39 (51
		(3,931
		– (19 – 14
		(5
		167
		(3,769 8,124 13
	6,039
	6,549 (510)	4,761 (393
	6,039

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Notes to the Consolidated Financial Statements

For the year ended 31st December 2005

1. GENERAL

Proactive Technology Holdings Limited (“the Company”) was incorporated in Bermuda on 25th February 2000 as an exempted company with limited liability under the Companies Act 1981 of Bermuda. Its shares are listed on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited since 18th May 2000.

The financial statements are presented in Hong Kong dollar, which is the same as the functional currency of the Company.

The Company is an investment holding company. Its subsidiaries are principally engaged in investment holding, design, development and sale of value-added telecommunications products and computer telephony products.

2. APPLICATION OF HONG KONG FINANCIAL REPORTING STANDARDS

In the current year, the Group has applied, for the first time, a number of new Hong Kong Financial Reporting Standards (“HKFRSs”), Hong Kong Accounting Standards (“HKASs”) and Interpretations (hereinafter collectively referred to as “new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) that are effective for accounting periods beginning on or after 1st January 2005. The application of the new HKFRSs has resulted in a change in the presentation of the consolidated income statement, consolidated balance sheet, and consolidated statement of changes in equity. In particular, the presentation of minority interests and share of tax of an associate have been changed. The changes in presentation have been applied retrospectively. The adoption of the new HKFRSs has resulted in changes to the Group’s accounting policies in the following areas that have an effect on how the results for the current and prior accounting years are prepared and presented:

Business combinations

In the current year, the Group has applied HKFRS 3 “Business Combinations” which is effective for business combinations for which the agreement date is on or after 1st January 2005. The principal effects of the application of HKFRS 3 to the Group are summarised below:

Excess of the Group’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost (previously known as “negative goodwill”)

In accordance with HKFRS 3, any excess of the Group’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of acquisition (“discount on acquisition”) is recognised immediately in profit or loss in the year in which the acquisition takes place. In previous years, negative goodwill arising on acquisitions prior to 1st January 2001 was held in reserves. In accordance with the relevant transitional provisions in HKFRS 3, the Group derecognised all negative goodwill on 1st January 2005, of which HK$3,530,000 was previously recorded in reserves. A corresponding decrease to the Group’s accumulated losses has been made (see Note 3 for the financial impact).

Financial instruments

In the current year, the Group has applied HKAS 32 “ Financial Instruments: Disclosure and Presentation” and HKAS 39 “Financial Instruments: Recognition and Measurement”. HKAS 32 requires retrospective application. HKAS 39, which is effective for accounting periods beginning on or after 1st January 2005, generally does not permit the recognition, derecognition or measurement of financial assets and liabilities on a retrospective basis. The application of HKAS 32 has had no material impact on how financial instruments of the Group are presented for current and prior accounting periods. The principal effects resulting from the implementation of HKAS 39 are summarised below:

Classification and measurement of financial assets and financial liabilities

The Group has applied the relevant transitional provisions in HKAS 39 with respect to classification and measurement of financial assets and financial liabilities that are within the scope of HKAS 39.

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By 31st December 2004, the Group classified and measured its debt and equity securities in accordance with the benchmark treatment of Statement of Standard Accounting Practice 24 (“SSAP 24”). Under SSAP 24, investments in debt or equity securities are classified as “investment securities”, “other investments” or “held-to-maturity investments” as appropriate. “Investment securities” are carried at cost less impairment losses (if any) while “other investments” are measured at fair value, with unrealised gains or losses included in profit or loss. Held-to-maturity investments are carried at amortised cost less impairment losses (if any). From 1st January 2005 onwards, the Group has classified and measured its debt and equity securities in accordance with HKAS 39. Under HKAS 39, financial assets are classified as “financial assets at fair value through profit or loss”, “available-for-sale financial assets”, “loans and receivables”, or “held-to-maturity financial assets”. The classification depends on the purpose for which the assets are acquired. “Financial assets at fair value through profit or loss” and “available-for-sale financial assets” are carried at fair value, with changes in fair values recognised in profit or loss and equity respectively. Available-for-sale equity investments that do not have quoted market prices in an active market and whose fair value cannot be reliably measured and derivates that are linked to and must be settled by delivery of such unquoted equity instruments are measured at cost less impairment after initial recognition. “Loans and receivables” and “held-to-maturity financial assets” are measured at amortised cost using the effective interest method after initial recognition.

On 1st January 2005, the Group classified and measured its debt and equity securities in accordance with the transitional provisions of HKAS 39. As a result, “other investment” amounted to HK$286,000 has been classified as available-for-sale financial assets on 1st January 2005 (see Note 3 for the financial impact).

Financial assets and financial liabilities other than debt and equity securities

From 1st January 2005 onwards, the Group has classified and measured its financial assets and financial liabilities other than debt and equity securities (which were previously outside the scope of SSAP 24) in accordance with the requirements of HKAS 39. As mentioned above, financial assets under HKAS 39 are classified as “financial assets at fair value through profit or loss”, “available-for-sale financial assets”, “loans and receivables” or “held-to-maturity financial assets”. Financial liabilities are generally classified as “financial liabilities at fair value through profit or loss” or “other financial liabilities”. Financial liabilities at fair value through profit or loss are measured at fair value, with changes in fair value being recognised in profit or loss directly. “Other financial liabilities” are carried at amortised cost using the effective interest method after initial recognition. The Group has applied the relevant transitional provisions in HKAS 39. However, there has been no material effect on how the results for the current accounting year are prepared and presented.

Share-based payments

In the current year, the Group has applied HKFRS 2 “Share-based Payment” which requires an expense to be recognised where the Group buys goods or obtains services in exchange for shares or rights over shares (“equity-settled transactions”), or in exchange for other assets equivalent in value to a given number of shares or rights over shares (“cash-settled transactions”). The principal impact of HKFRS 2 on the Group is in relation to the expensing of the fair value of share options granted to directors and employees of the Company, determined at the date of grant of the share options, over the vesting period. Prior to the application of HKFRS 2, the Group did not recognise the financial effect of these share options until they were exercised. The Group has applied HKFRS 2 to share options granted on or after 1st January 2005. In relation to share options granted before 1st January 2005, the Group chooses not to apply HKFRS 2 with respect to share options granted on or before 7th November 2002 and vested before 1st January 2005. The application of HKFRS 2 has had no material impact on how financial instruments of the Group are presented for current and prior accounting years.

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3. SUMMARY OF THE EFFECTS OF THE CHANGES IN ACCOUNTING POLICIES

The cumulative effects of the application of the new HKFRSs on 31st December 2004 and 1st January 2005 are summarised below:

Other investment Available-for-sale financial asset Other assets/liabilities Total effects on assets and liabilities Share capital Accumulated losses Capital reserve Other reserves Total effects on equity	As at 31st December 2004 (originally stated) HK$’000 286 – 10,116 10,402	Prospective adjustments HK$’000 HK$’000 HKFRS 3 HKAS 39 – (286) – 286 – – – –	Prospective adjustments HK$’000 HK$’000 HKFRS 3 HKAS 39 – (286) – 286 – – – –	As at 1st January 2005 (restated) HK$’000 – 286 10,116
				10,402
	23,200 (45,439) 3,530 29,111	– 3,530 (3,530) –	– – – –	23,200 (41,909 – 29,111
	10,402	–	–	10,402

The Group has not early applied the following new standards and interpretations that have been issued but are not yet effective. The directors of the Company anticipate that the application of these standards or interpretations will have no or any material impact on the financial statements of the Group.

HKAS 1 (Amendment)	Capital Disclosures1
HKAS 19 (Amendment)	Actuarial Gains or Losses, Group Plans and Disclosures2
HKAS 21 (Amendment)	Net Investment in a Foreign Operation2
HKAS 39 (Amendment)	Cash Flow Hedge Accounting of Forecast Intragroup
	Transactions2
HKAS 39 (Amendment)	The Fair Value Option2
HKAS 39 & HKFRS 4 (Amendments)	Financial Guarantee Contracts2
HKFRS 6	Exploration for and Evaluation of Mineral Resources2
HKFRS 7	Financial Instruments: Disclosures1
HK(IFRIC)-Int 4	Determining whether an Arrangement Contains a Lease2
HK(IFRIC)-Int 5	Rights to Interests arising from Decommissioning, Restoration
	and Environmental Rehabilitation Funds2
HK(IFRIC)-Int 6	Liabilities arising from Participating in a Specific Market, Waste
	Electrical and Electronic Equipment3
HK(IFRIC)-Int 7	Applying the Restatement Approach under HKAS 29 Financial
	Reporting in Hyperinflationary Economies4

• 1 Effective for annual periods beginning on or after 1st January 2007.

• 2 Effective for annual periods beginning on or after 1st January 2006.

• 3 Effective for annual periods beginning on or after 1st December 2005.

• 4 Effective for annual periods beginning on or after 1st March 2006.

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4. PRINCIPAL ACCOUNTING POLICIES

The consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments, which are measured at fair values, as explained in the accounting policies set out below.

The consolidated financial statements have been prepared in accordance with HKFRSs. In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance.

(a) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries.

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.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

(b) Excess of an acquirer’s interest in the net fair value of an acquiree’s identifiable assets, liabilities and contingent liabilities over cost (“discount on acquisitions”)

A discount on acquisition arising on an acquisition of a subsidiary or an associate for which an agreement date is on or after 1st January 2005 represents the excess of the net fair value of an acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of the business combination. Discount on acquisition is recognised immediately in profit or loss. A discount on acquisition arising on an acquisition of an associate (which is accounted for using the equity method) is included as income in the determination of the investor’s share of results of the associate in the year in which the investment is acquired.

As explained in note 3 above, all negative goodwill as at 1st January 2005 has been derecognised with a corresponding adjustment to the Group’s accumulated losses.

(c) Investments in associates

The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the profit or loss and of changes in equity of the associate, less any identified impairment loss. When the Group’s share of losses of an associate equals or exceeds its interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognising its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate.

Where a group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate.

(d) Revenue recognition

• (i) Revenue from the supply, development and integration of telecommunication and computer telephony systems

Revenue from the supply, development and integration of telecommunication and computer telephony systems is recognised when the merchandise is delivered and the related development and integration services are completed.

• (ii) Rental income from leasing of telecommunication and computer telephony equipment

Rental income from leasing of telecommunication and computer telephony equipment is recognised on a straight-line basis over the respective period of the leases.

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• (iii) Consulting and maintenance service fees

Consulting and maintenance service fees are recognised when the services are rendered.

(iv) Interest income from a financial asset

Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

(e) Taxation

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

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

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

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and an associate, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

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

(f) Borrowing costs

All borrowing costs are recognised as and included in finance costs in the income statement in the year in which they are incurred.

(g) Retirement benefit costs

Payments to the Mandatory Provident Fund Scheme and state-managed retirement benefit scheme are charged as expense as they fall due.

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(h) Machinery and equipment

Machinery and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.

Depreciation is provided to write off the cost of items of machinery and equipment over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method, at the following rates per annum:

Furniture, fixtures and office equipment	20%
Computer equipment	30%
Equipment on lease to customers	30%
Equipment for development	30%

An item of machinery and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year in which the item is derecognised.

(i) Research and development expenditures

Expenditure on research activities is recognised as expense in the year in which it is incurred.

An internally-generated intangible asset arising from development expenditure is recognsied only if it is anticipated that the development costs incurred on a clearly-defined project will be recovered through future commercial activity. The resultant asset is amortised on a straight-line basis over its useful life, and carried at cost less accumulated amortisation and any accumulated impairment losses.

Where no internally-generated intangible asset can be recognised, development expenditure is charged to profit or loss in the year in which it is incurred.

Intangible assets with finite useful lives are tested for impairment when there is an indication that an asset may be impaired.

(j) Financial instruments

Financial assets and financial liabilities are recognised on the balance sheet when a group entity becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

Financial assets

The Group’s financial assets are classified into one of the four categories, including financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of each category of financial assets are set out below.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables including trade receivables, prepayments, deposits and other receivables are carried at amortised cost using the effective interest method, less any identified impairment losses. An

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impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Impairment losses are reversed in subsequent periods when an increase in the asset’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to a restriction that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Available-for-sale financial assets

Available-for-sale financial assets are investments in unlisted equity securities which are intended to be held for a continuing strategic or long term purpose and are stated at fair value, except for those equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, when they are measured at cost less any accumulated impairment losses.

In respect of available-for-sale financial assets carried at cost less any accumulated impairment losses, when there is objective evidence that an impairment loss has been incurred on an investment, the carrying amount of the investment should be reduced to the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset and the amount of the impairment is charged to the income statement in the year in which it arises. Any impairment losses recognised shall not be reversed.

Financial liabilities and equity

Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities. The Group’s financial liabilities are generally classified into financial liabilities at fair value through profit or loss and other financial liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

Other financial liabilities

Other financial liabilities including bank borrowings, trade payables, accruals and other payables and receipts in advance are subsequently measured at amortised cost, using the effective interest rate method.

Equity investments

Equity investments issued by the Company are recorded at the proceeds received, net of direct issue costs.

(k) Share-based payment transactions

Equity-settled share-based payment transactions

Share options granted to employee of the Company

The fair value of services received determined by reference to the fair value of share options granted at the grant date is expensed on a straight-line basis over the vesting period, with a corresponding increase in equity (share option reserve).

At the time when the share options are exercised, the amount previously recognised in share option reserve will be transferred to share premium. When the share options are forfeited or are still not exercised at the expiry date, the amount previously recognised in share option reserve will continue to be held in share option reserve.

(l) Inventories

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

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(m) Impairment

At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered 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. An impairment loss is recognised as 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.

(n) Provisions

Provision are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material.

(o) Leases

Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straight-line basis.

(p) Foreign currencies

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profit or loss in the year in which they arise, except for exchange differences arising on a monetary item that forms part of the Group’s net investment in a foreign operation, in which case, such exchange differences are recognised in equity in the consolidated financials statements. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the year except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity, in which cases, the exchange differences are also recognised directly in equity.

For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Company (i.e. Hong Kong dollars) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the year, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised as a separate component of equity (the translation reserve). Such exchange differences are recognised in profit or loss in the year in which the foreign operating is disposed of.

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5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the process of applying the entity’s accounting policies which are described in note 4, management has made the following judgments that have significant effect on the amounts recognised in the financial statements. The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are also discussed below.

Depreciation

The Group’s net book value of machinery and equipment as at 31st December 2005 was approximately HK$869,000. The Group depreciates the machinery and equipment on a straight-line basis over the estimated useful life of three to five years, and after taking into account of their estimated residual value, using the straight-line method, at the rate of 20 – 30% per annum, commencing from the date the equipment is placed into productive use. The estimated useful life and dates that the Group places the equipment into productive use reflects the directors’ estimate of the periods that the Group intend to derive future economic benefits from the use of the Group’s machinery and equipment.

Allowances for bad and doubtful debts

The policy for allowance of bad and doubtful debts of the Group is based on the evaluation of collectability and aging analysis of accounts and on management’s judgment. A considerable amount of judgment is required in assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of each customer. If the financial conditions of customers of the Group were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Allowances for inventories

The management of the Group reviews an aging analysis at each balance sheet date, and makes allowance for obsolete and slow-moving inventory items identified that are no longer suitable for sales. The management estimates the net realisable value for such finished goods based primarily on the latest invoice prices and current market conditions. The Group carries out an inventory review on a product-by-product basis at each balance sheet date and makes allowance for obsolete items.

6. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s major financial instruments include trade receivables, prepayments, deposits and other receivables, bank borrowings, trade payables, accruals and other payables and receipts in advance. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Currency risk

Certain receivables and payables of the Group are denominated in foreign currencies. The Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arises.

Interest rate risk

The Group is exposed to interest rate risk through the impact of rate changes on interest bearing bank borrowings.

Credit risk

The Group’s maximum exposure to credit risk in the event of the counterparties failure to perform their obligations as at 31st December 2005 in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the consolidated balance sheet. In order to minimise the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade receivables at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Company consider that the Group’s credit risk is significantly reduced.

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7. TURNOVER

Turnover comprises:

Sales of goods Rental income from leasing of telecommunication and computer telephony equipment Service fees income	2005 HK$’000 9,690 1,294 9,998 20,982	2004 HK$’000 4,441 2,692 10,382
		17,515

8. SEGMENT INFORMATION

The primary segment is defined by major product and operational units, while secondary segment is defined by geographical location of customers.

(a) Primary segment

The Group is organised into two products and operational units – telecommunications products and computer telephony products. The telecommunications products and computer telephony products units derive revenue from supply, development and integration of telecommunications and computer telephony system and solutions, respectively. They also earn rental income from leasing telecommunications equipments and computer telephony systems and earn fees for consulting and maintenance services.

Analysis by business segment is as follows:

Turnover – Telecommunications – Computer telephony Segment results – Telecommunications – Computer telephony Unallocated corporate expenses Interest income Finance costs Net loss on write-off of deregistered subsidiaries Share of result of an associate Loss before tax Income tax expenses Loss for the year	2005 HK$’000 7,228 13,754	2004 HK$’000 6,961 10,554
	20,982 2,242 4,034 6,276 (7,805) (1,529) 144 (87) (94) (198) (1,764) –	17,515
		545 2,852
		3,397 (10,767
		(7,370 14 (39 – 198
		(7,197 (51
	(1,764)	(7,248

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Other information: Depreciation of machinery and equipment – Telecommunications – Computer telephony – Unallocated Capital expenditures of machinery and equipment – Telecommunications – Computer telephony – Unallocated Allowance for bad and doubtful receivables – Telecommunications – Computer telephony – Unallocated Allowance for obsolete and slow-moving inventories – Telecommunications – Computer telephony – Unallocated Net loss on disposal of machinery and equipment – Telecommunications – Computer telephony – Unallocated Segment assets – Telecommunications – Computer telephony Interest in an associate Unallocated corporate assets Consolidated total assets Segment liabilities – Telecommunications – Computer telephony Unallocated corporate liabilities Consolidated total liabilities	2005 HK$’000 388 80 159 627	2004 HK$’000 754 184 531 1,469 – – 19 19 6 415 (260) 161 (16) 573 1,337 1,894 75 – – 75 3,863 1,772 861 11,253 17,749 3,337 1,892 2,118 7,347
	21 – 24	– – 19
	45
	255 433 10	6 415 (260
	698
	335 97 727	(16 573 1,337
	1,159
	11 11 –	75 – –
	22
	1,389 2,549 – 9,413	3,863 1,772 861 11,253
	13,351
	1,134 1,406 2,076	3,337 1,892 2,118
	4,616

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(b) Secondary segment

Analysis by geographical location is as follows:

Turnover – Hong Kong – The People’s Republic of China (“PRC”) – Taiwan Segment assets – Hong Kong – PRC Additions to machinery and equipment – Hong Kong – PRC	2005 HK$’000 20,796 186 – 20,982 11,212 2,139 13,351 24 21 45	2004 HK$’000 17,228 171 116
		17,515
		14,803 2,946
		17,749
		17 2
		19

9. FINANCE COSTS

The amount represents interest on bank overdrafts and trust receipt bank loans wholly repayable within five

years.

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10. LOSS BEFORE TAX

Loss before tax has been arrived at after charging/(crediting): Staff costs including directors’ emoluments (Note 11): Salaries and allowances Contributions to retirement benefits scheme Less: Amount included in research and development expenditures Auditors’ remuneration – current year – over-provision in previous year Research and development expenditures Depreciation of machinery and equipment Allowance for bad and doubtful receivables Minimum lease payments under operating leases Net loss on disposal of machinery and equipment Allowance for obsolete and slow-moving inventories Cost of inventories recognised as an expense Write off of development expenditures Net exchange loss Net loss on write off of deregistered subsidiaries Interest income Rental income from leasing of telecommunication and computer telephony equipment	2005 HK$’000 5,800 212 – 6,012 153 (47) – 627 698 622 22 1,159 10,934 – 8 94 (144) (1,294)	2004 HK$’000 7,950 293 (557
		7,686
		190 – 849 1,469 161 1,205 75 1,894 8,246 292 18 – (14 (2,692

11. DIRECTORS’ EMOLUMENTS

The emoluments paid or payable to each of the 11 (2004: 10) directors were as follows:

Executive Directors: Fees Salaries and other benefits (Note (i)) Contributions to retirement benefits scheme Independent Non-Executive Directors: Fees	2005 HK$’000 – 1,933 52	2004 HK$’000 – 2,428 60
	1,985 74	2,488 70
	2,059	2,558

Note:

(i) Other benefits include housing allowance.

One director (2004: One director) waived his emoluments in the years ended 31st December 2005 and 2004. No incentive payment for joining the Group or compensation for loss of office was paid or payable to any director for the year.

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The details of directors’ remuneration of each director for the years ended 31st December 2005 and 2004 are set out below:

Name of director Non-executive directors’ fees HK$’000 Tsang Chi Hin – Lam Kim Chau – Lau Kai Shun, Barry (Note 3) – Wong Wai Ho – Pong Kam Wah (Note 3) – Li Siu Ming (Note 1) – Yang Zhenan (Note 2 & 3) 12 Robert Brainin Issenman (Note 2 & 3) 14 Chan Ho Wah, Terence (Note 1 & 2) 8 Leung Lok Ming (Note 2) 20 Lo Wa Kei, Roy (Note 2) 20 Chow Dah Jen, David (Note 4) – 74	Executive directors’ salaries HK$’000 264 487 196 270 478 40 – – – – – – 1,735	2005 Housing allowance Contributions to retirement benefits scheme HK$’000 HK$’000 198 12 – 12 – 8 – 11 – 7 – 2 – – – – – – – – – – – – 198 52	Total HK$’000 474 499 204 281 485 42 12 14 8 20 20 –
			2,059

Notes:

1. Appointed on 12th August 2005.

2. The employees are independent non-executive directors.

3. Resigned on 12th August 2005.

4. Resigned on 17th February 2006.

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Name of director Non-executive directors’ fees HK$’000 Tsang Chi Hin – Lam Kim Chau – Lau Kai Shun, Barry – Wong Wai Ho – Pong Kam Wah – Yang Zhenan (Note 1) 20 Robert Brainin Issenman (Note 1) 20 Wu Suk Ching, Annie (Note 1 & 2) 10 Leung Lok Ming (Note 1) 10 Lo Wa Kei, Roy (Note 1) 10 Chow Dah Jen, David – 70	Executive directors’ salaries HK$’000 264 549 320 300 780 – – – – – – 2,213	2004 Housing allowance Contributions to retirement benefits scheme HK$’000 HK$’000 215 12 – 12 – 12 – 12 – 12 – – – – – – – – – – – – 215 60	Total HK$’000 491 561 332 312 792 20 20 10 10 10 –
			2,558

Notes:

1. The employees are independent non-executive directors.

2. Resigned on 12th May 2004.

12. EMPLOYEES’ EMOLUMENTS

During the year, the five highest paid individuals included three directors (2004: four directors) of the Company, whose emoluments have been included in note (11) above. However, one of the three highest paid executive directors of the Company resigned and remained as an employee of the Group during the year, whose emoluments as directors are set out in note (11) above. The emoluments of the three (including the resigned directors) (2004: one) individuals were as follows:

Salaries and allowances Contributions to retirement benefits scheme	2005 HK$’000 1,386 34 1,420	2004 HK$’000 397 12
		409

During the year, no emoluments were paid to the five highest paid individuals (including directors and other employees) as inducement to join or upon joining the Group or as compensation for loss of office.

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Their emoluments were within the following bands:

– Nil to HK$1,000,000 – HK$1,000,001 to HK$1,500,000	No. of employees 2005 2004 3 1 – – 3 1	No. of employees 2005 2004 3 1 – – 3 1
		1

13. INCOME TAX EXPENSES

(a) Income tax expenses consisted of:

2005 2004 HK$’000 HK$’000 PRC income tax – 51

The Company is not subject to tax in Bermuda on its assessable profits or capital gains until March 2016. Hong Kong profits tax has not been provided as the Group had no assessable profits arising in nor derived from Hong Kong. Overseas income tax has been provided by subsidiaries based on their estimated taxable profits at the rates of taxation applicable in the respective jurisdictions in which they operate.

(b) The tax charge for the years can be reconciled to the loss per the consolidated income statement as follows:

Loss before tax Tax at the domestic income tax rate of 17.5% Tax effect of expenses not deductible for tax purpose Tax effect of income not taxable for tax purpose Tax effect of tax losses and other temporary differences not recognised Effect of different tax rates of subsidiaries operating in other jurisdictions Tax charge for the year	2005 HK$’000 (1,764)	2004 HK$’000 (7,197
	(309) 1,182 (916) 38 5	(1,259 – – 1,259 51
	–	51

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(c) The principal components of the Group’s deferred tax assets not provided for, on the cumulative temporary differences at the balance sheet date are as follows:

At 1st January 2004 Movement for the year At 31st December 2004 and 1st January 2005 Movement for the year At 31st December 2005	Other temporary differences HK$’000 457 (166) 291 34 325	Estimated tax losses HK$’000 5,254 1,012 6,266 4 6,270	Total HK$’000 5,711 846
			6,557 38
			6,595

No potential tax benefit and other temporary differences attributable to tax losses of the Group has been recognised due to unpredictability of future profit streams (2004: Nil).

14. LOSS PER SHARE

The calculation of basic loss per share for the year is based on the loss for the year attributable to equity holders of the parent of approximately HK$1,764,000 (2004: HK$7,248,000) and the weighted average of 232,000,000 (2004: 232,000,000) ordinary shares in issue during the year.

No diluted loss per share have been presented for two years ended 31st December 2005 and 2004 as there were no diluting events existed during those years.

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15. MACHINERY AND EQUIPMENT

Cost At 1st January 2004 Additions Disposals Transferred from inventories Transferred to inventories At 31st December 2004 and 1st January 2005 Additions Disposals Transferred from inventories Transferred to inventories Reclassification At 31st December 2005 Accumulated depreciation At 1st January 2004 Charge for the year Written back on disposals Transferred to inventories At 31st December 2004 and 1st January 2005 Charge for the year Written back on disposals Transferred to inventories Reclassification At 31st December 2005 Carrying values At 31st December 2005 At 31st December 2004	Furniture, fixtures and office equipment HK$’000 1,190 2 (142) – –	Computer equipment HK$’000 3,382 11 (14) 203 (195)	Equipment on lease to customers HK$’000 3,233 6 (366) 1,023 (1,632)	Equipment for development HK$’000 2,390 – (377) 24 (363)	Total HK$’000 10,195 19 (899) 1,250 (2,190) 8,375 45 (271) 603 (1,994) – 6,758 7,668 1,469 (824) (1,266) 7,047 627 (244) (1,541) – 5,889 869 1,328
	1,050 32 – – – – 1,082 840 216 (76) – 980 72 – – – 1,052	3,387 13 – 114 (8) 36 3,542 2,825 401 (6) (9) 3,211 152 – – 1 3,364	2,264 – (271) 112 (1,258) – 847 2,193 506 (366) (945) 1,388 256 (244) (1,036) – 364	1,674 – – 377 (728) (36) 1,287 1,810 346 (376) (312) 1,468 147 – (505) (1) 1,109	8,375 45 (271 603 (1,994 –
					6,758
					7,668 1,469 (824 (1,266
					7,047 627 (244 (1,541 –
					5,889
	30 70	178 176	483 876	178 206

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16. DEVELOPMENT EXPENDITURES

Movements of development expenditures were as follows:

Beginning of the year Write off End of the year	2005 HK$’000 – – –	2004 HK$’000 292 (292) –

17. INTEREST IN AN ASSOCIATE

Cost of investment in an associate – unlisted in PRC Share of post-acquisition losses and reserves, net of dividends received Amount due therefrom Less: Impairment loss recognised	2005 HK$’000 377 (377)	2004 HK$’000 377 (179) 198 2,433 (1,770) 861
	– – –	198 2,433 (1,770
	–

In 2004, in the opinion of directors, the amount due from would not repaid within next twelve months. Thus, it was classified as non-current.

The summarised financial information in respect of the Group’s associate is set out below:

Total assets Total liabilities Net assets Group’s share of net asset of the associate Revenue (Loss)/profit for the year Group’s share of result of the associate for the year	2005 HK$’000 1,670 (3,368) (1,698) – 2,789 (474) (198)	2004 HK$’000 1,275 (2,504) (1,229) 198 3,603 564 198

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Details of the associate are as follow:

				Percentage
				of equity
	Form of	Place of		interest
	business	incorporation/	Class of	attributable
Name	structure	operations	share held	to the Group	Principal activity
Beijing Teletron System	Incorporated	PRC	Ordinary	40%	Provision of
integration Company limited					telecommunications
					and computer
					telephony solutions

There were no other associate held by the Group as at 31st December 2005.

18. AVAILABLE-FOR-SALE FINANCIAL ASSET

The asset represents a nominee membership in a Golf Club in the PRC. They are measured at cost less impairment at each balance sheet date. The fair value was approximated to the corresponding carrying amount.

19. OTHER INVESTMENT

Other investment as at 31st December 2004 represents the cost of a nominee membership in a Golf Club in the PRC. Upon the application of HKAS 39 on 1st January 2005, other investment was reclassified to available-for-sale financial asset under HKAS 39 (see notes 2 and 3 for details).

20. INVENTORIES

Inventories consisted of: Telecommunication and computer telephony hardware products Less: Allowance for obsolete and slow-moving inventories	2005 HK$’000 1,999 (1,706) 293	2004 HK$’000 3,507 (1,676) 1,831

As at 31st December 2005, inventories of approximately HK$143,000 (2004: HK$1,831,000) were stated at net realisable value.

21. TRADE RECEIVABLES

Trade receivables consisted of:

Account receivables Retention receivables Less: Accumulated impairment	2005 HK$’000 3,087 1,355 4,442 (2,502) 1,940	2004 HK$’000 3,130 1,203 4,333 (1,872) 2,461

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APPENDIX III

FINANCIAL INFORMATION OF PROACTIVE

The Group normally grants to its customers credit period ranging from 30 days to 60 days. Aging analysis of trade receivables is as follows:

0 to 1 month 1 to 2 months 2 to 3 months 3 to 6 months 6 to 9 months 9 to 12 months Over 12 months	2005 HK$’000 1,597 391 197 747 65 32 1,413 4,442	2004 HK$’000 876 303 322 567 80 51 2,134
		4,333

The fair value of the Group’s trade receivables at 31st December 2005 was approximate to the corresponding carrying amount.

22. AMOUNT DUE FROM AN ASSOCIATE

The amount is unsecured, non-interest bearing and repayable on demand.

23. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

Prepayments, deposits and other receivables consisted of: Prepayments Rental and utility deposits Others	2005 HK$’000 203 260 245 708	2004 HK$’000 406 503 310
		1,219

The fair value of the Group’s prepayments, deposits and other receivables at 31st December 2005 was approximate to the corresponding carrying amount.

24. PLEDGED BANK DEPOSITS

The amount represents deposits pledged to banks to secure bank overdrafts and undrawn facilities granted to the Group.

The deposits carry variable interest rate. The pledged bank deposits will be released upon the settlement of relevant bank borrowings. The fair value of bank deposits at 31st December 2005 approximates to the corresponding carrying amount.

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25. SHORT-TERM BANK BORROWINGS

Short-term bank borrowings consisted of:

Bank overdrafts – secured Trust receipts bank loans – secured	2005 HK$’000 510 576 1,086	2004 HK$’000 393 481
		874

At 31st December 2005, all short-term bank borrowings are variable-rate borrowings which carry interest per annum as follows:

		2005	2004
Bank	overdrafts – secured	Prime-rate	Prime-rate plus 1.25%
Trust	receipts bank loans – secured	Standard bills rate	Standard bills rate
		plus 1.25%	plus 0.25%/1.25%

The directors consider that the carrying amount of short-term bank borrowings approximates their fair value.

Refer to Note (32) for details of the Group’s banking facilities.

26. TRADE PAYABLES

The Group is normally granted by its vendors credit periods ranging from 0 day to 30 days. Aging analysis of trade payables is as follows:

0 to 1 month 1 to 2 months 2 to 3 months 3 to 6 months 6 to 12 months Over 12 months	2005 HK$’000 362 161 82 – 90 46 741	2004 HK$’000 418 236 – – – 450
		1,104

The fair value of the Group’s trade payables at 31st December 2005 approximates to the corresponding carrying amount.

27. SHARE CAPITAL

Ordinary shares of HK$0.10 each Authorised Issued and fully paid	2005 and 2004 Number of shares Nominal value ’000 HK$’000 1,000,000 100,000 232,000 23,200	2005 and 2004 Number of shares Nominal value ’000 HK$’000 1,000,000 100,000 232,000 23,200
		23,200

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

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28. SHARE OPTION SCHEME

The Company has adopted a Share Option Scheme on 3rd May 2000 (“Share Option Scheme”), pursuant to which it may grant options to employees (including executive directors) of the Group to subscribe for shares in the Company. Pursuant to the Share Option Scheme, options were granted on 30th June 2000 to executive directors and other employees of the Group to subscribe for an aggregate of 19,420,000 shares in the Company at a price of HK$1.30 per share, during the exercise period from 1st July 2003 to 30th June 2010. No options were granted during the year ended 31st December 2005 under the Share Option Scheme.

Pursuant to resolutions passed at a special general meeting of the shareholders held on 13th November 2002, the Company terminated the Share Option Scheme and adopted a new share option scheme (“New Share Option Scheme”) in order to comply with the new requirements of Chapter 23 of GEM Listing Rules effected on 1st October 2001. Under the terms of the New Share Option Scheme, the board of directors of the Company may, at their discretion, grant options to the participants fall within the definition prescribed in the New Share Option Scheme including the employees, non-executive directors of the Company or its subsidiaries, etc., to subscribe for shares in the Company at a price determined by the Company’s Board of Directors, and will not be less than the highest of (i) the nominal value of the shares; (ii) the average closing price of the shares quoted on the GEM on the five trading days immediately preceding the date of grant; and (iii) the closing price of the shares quoted on the GEM on the date of grant, subject to a maximum of 10% of the issued share capital of the Company from time to time. 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 in issue and with an aggregate value (based on the closing price of the shares on the date of grant) in excess of HK$5 million must be approved by the Company’s shareholders.

The New Share Option Scheme will remain in force for a period of 10 years from 13th November 2002. A nominal consideration of HK$1 is payable on acceptance of the grant of an option.

During the year ended 31st December 2005, no share option has been granted under the New Share Option Scheme. The options already granted under the Share Option Scheme are unaffected.

Movements of employee share options during the two years ended 31st December 2005 and 2004, were:

2005 Date of grant Exercisable period Subscription price per share Outstanding at 1st January 2005 (HK$) Directors 30/6/2000 1/7/2003 to 30/6/2010 1.30 9,800,000 Employees 30/6/2000 1/7/2003 to 30/6/2010 1.30 760,000 10,560,000	Number of share options Granted during the year Exercised during the year Cancelled/ lapsed during the year Outstanding at 31st December 2005 – – (6,800,000) 3,000,000 – – (100,000) 660,000 – – (6,900,000) 3,660,000	Number of share options Granted during the year Exercised during the year Cancelled/ lapsed during the year Outstanding at 31st December 2005 – – (6,800,000) 3,000,000 – – (100,000) 660,000 – – (6,900,000) 3,660,000
		3,660,000

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2004

Date of grant Exercisable period Subscription price per share Outstanding at 1st January 2004 (HK$) Directors 30/6/2000 1/7/2003 to 30/6/2010 1.30 9,800,000 Employees 30/6/2000 1/7/2003 to 30/6/2010 1.30 2,960,000 12,760,000	Number of share options Granted during the year Exercised during the year Cancelled/ lapsed during the year Outstanding at 31st December 2004 – – – 9,800,000 – – (2,200,000) 760,000 – – (2,200,000) 10,560,000	Number of share options Granted during the year Exercised during the year Cancelled/ lapsed during the year Outstanding at 31st December 2004 – – – 9,800,000 – – (2,200,000) 760,000 – – (2,200,000) 10,560,000
		10,560,000

All share options granted before 7th November 2002 and fully vested before 1st January 2005, the application of HKFRS 2 has had no material effect on how the share-based payments of the Group are presented for current and prior accounting years.

29. RESERVES

Capital reserve represents the negative goodwill arising from the acquisition of Proactive Technology Limited, a wholly-owned subsidiary, by CentreWorld Holding Limited, another wholly-owned subsidiary, in January 1998. The Group has adopted HKFRS 3 to derecognise all negative goodwill at 1st January 2005. Details are set out in notes (2) and (3).

30. COMMITMENTS AND CONTINGENT LIABILITIES

(a) Operating lease commitments

The Group had commitments for future minimum lease payments in respect of premises under various non-cancellable operating leases which fall due as follows:

Within one year In the second to fifth years inclusive	2005 HK$’000 511 102 613	2004 HK$’000 407 284
		691

Operating lease payments represent rentals payable by the Group for certain of its office properties and staff quarters. Both leases are negotiated and rental are fixed for an average of 1.5 year.

(b) Contingent liabilities

		2005	2004
		HK$’000	HK$’000
Performance	bond	–	177

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31. RETIREMENT BENEFITS SCHEMES

The Group maintains various retirement schemes for its employees. The retirement scheme for employees of PRC representative office is a mandatory central pension scheme organised by the PRC government, the assets of which are held separatively from those of the Group. Contributions made are based on a percentage of the eligible employees’ salaries and are charged to the income statement as they became payable, in accordance with the rules of the scheme. The employer contributions vest fully once they are made. The Group’s Hong Kong employees are covered by the mandatory provident fund, which is managed by an independent trustee. The Group and its Hong Kong employees each make monthly contributions to the scheme at 5% of the employees’ cash income with the maximum contribution by each of the Group and the employees limited to HK$1,000 per month.

During the year, the aggregate contributions made by the Group to the retirement schemes were approximately HK$212,000 (2004: HK$293,000). During the year, there were no material forfeitures available to offset the Group’s future contributions (2004: Nil).

32. BANKING FACILITIES AND PLEDGE OF ASSETS

As at 31st December 2005, the Group had aggregate banking facilities of approximately HK$7,000,000 (2004: HK$6,200,000) from several banks for overdrafts, loans, and trade financing. Unused facilities as at the balance sheet date amounted to approximately HK$5,914,000 (2004: HK$5,148,000). These facilities were secured by the Group’s bank deposits of approximately HK$2,000,000 (2004: HK$5,002,000). The Group did not have any charges on other assets as at 31st December 2005 and 2004.

33. RELATED PARTY TRANSACTIONS

(a) Compensation of directors and key management personnel

The remuneration of directors and other members of key management during the year was as follows:

Short-term benefits Other long-term benefits	2005 HK$’000 2,007 52 2,059	2004 HK$’000 2,498 60
		2,558

The remuneration of directors and key executives is determined by the Remuneration Committee having regard to the performance of individuals and market trends.

(b) Amount due from an associate

The amount due from an associate is set out in the balance sheet on page 3. The term is set out in note

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34. SUBSIDIARIES

Details of the subsidiaries as at 31st December 2005 are as follows:

				Percentage of
	Place of		Issued and	equity interest
	incorporation/	Class of	fully paid	attributable to
Name	operations	shares held	share capital	the Group	Principal activities
CentreWorld Holding Limited	British Virgin	Ordinary	US$1,029	100%	Investment holding
	Islands
	(“BVI”)
Interworth, Inc	BVI	Ordinary	US$100	100%	Investment holding
Proactive Technology Limited	Hong Kong	Ordinary	HK$1,000,000	100%	Provision of
					telecommunications
					and computer
					telephony solutions
Proactive International Limited	Hong Kong	Ordinary	HK$100,000	100%	Trading of
					telecommunication
					products and
					provision of
					management
					consultancy
Netwin Worldwide Limited	BVI	Ordinary	U$100	100%	Investment holding
Proactive Technology	PRC	Ordinary	RMB5,000,000	100%	Trading of
Development (Beijing)					telecommunication
Limited					products and
					provision of tele-
					commerce services
Proactive Multimedia	Hong Kong	Ordinary	HK$2	100%	Provision of
Marketing Agency Limited					telecommunication
					and computer
					telephony solutions

The shares of CentreWorld Holdings Limited are held directly be the Company. The shares of other subsidiaries are held indirectly.

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

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5. THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST DECEMBER 2004

The following financial information has been extracted from the annual report of Proactive for the year ended 31st December 2004:

Consolidated Income Statement

For the year ended 31 December 2004 (Expressed in Hong Kong dollars)

Note Turnover 4 Cost of sales Gross profit Distribution and selling expenses General and administrative expenses Loss from operations Interest income 4 Interest expense Provision for impairment in value of investment in an associate Share of profit (loss) of an associate Loss before taxation 5 Taxation 7 Loss attributable to shareholders 8 Loss per share – Basic 9	2004 $’000 17,515 (9,386)	2003 $’000 30,459 (12,297) 18,162 (63) (21,692) (3,593) 64 (105) (770) (377) (4,781) (81) (4,862) 2.1 cents
	8,129 (20) (15,479) (7,370) 14 (39) – 198 (7,197) (51)	18,162 (63 (21,692
		(3,593 64 (105 (770 (377
		(4,781 (81
	(7,248) 3.1 cents

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Balance Sheets

As at 31 December 2004

(Expressed in Hong Kong dollars)

Note NON-CURRENT ASSETS Machinery and equipment 10 Development expenditures 11 Investment in subsidiaries 12 Investment in an associate 13 Other investment 14 Total non-current assets CURRENT ASSETS Inventories 15 Trade receivables 16 Prepayments, deposits and other current assets 17 Pledged bank deposits Cash and other bank deposits Total current assets CURRENT LIABILITIES Short-term bank borrowings 18 Trade payables 19 Accruals and other payables Receipts in advance Total current liabilities Net current assets Net assets Represented by: SHARE CAPITAL 20 RESERVES 22 Shareholders’ equity	Consolidated 2004 2003 $’000 $’000 1,328 2,527 – 292 – – 861 234 286 286	Consolidated 2004 2003 $’000 $’000 1,328 2,527 – 292 – – 861 234 286 286	Company 2004 2003 $’000 $’000 – – – – 16,992 16,206 – – – – 16,992 16,206 – – – – 100 100 – – 300 1,763 400 1,863 – – – – (362) (432) – – (362) (432) 38 1,431 17,030 17,637 23,200 23,200 (6,170) (5,563) 17,030 17,637	Company 2004 2003 $’000 $’000 – – – – 16,992 16,206 – – – – 16,992 16,206 – – – – 100 100 – – 300 1,763 400 1,863 – – – – (362) (432) – – (362) (432) 38 1,431 17,030 17,637 23,200 23,200 (6,170) (5,563) 17,030 17,637
	2,475 1,831 2,461 1,219 5,002 4,761 15,274 (874) (1,104) (3,127) (2,242) (7,347) 7,927	3,339 2,541 3,149 1,250 5,002 8,306 20,248 (496) (1,157) (3,064) (1,233) (5,950) 14,298	16,992 – – 100 – 300 400 – – (362) – (362) 38	16,206
				– – 100 – 1,763
				1,863
				– – (432 –
				(432
				1,431
	10,402	17,637	17,030
	23,200 (12,798)	23,200 (5,563)	23,200 (6,170)	23,200 (5,563
	10,402	17,637	17,030

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APPENDIX III

Consolidated Cashflow Statement

For the year ended 31 December 2004 (Expressed in Hong Kong dollars)

Note CASH (USED IN) GENERATED FROM OPERATIONS 23.a Interest paid Overseas taxation paid NET CASH (USED IN) GENERATED FROM OPERATING ACTIVITIES INVESTING ACTIVITIES Increase in pledged deposits Purchase of machinery and equipment Proceeds from disposal of machinery and equipment Purchase of other investment Acquisition of interest in an associate Translation adjustments Interest received Net cash generated from (used in) investing activities (Decrease) increase in cash and cash equivalents CASH AND CASH EQUIVALENTS, beginning of year CASH AND CASH EQUIVALENTS, end of year 23.b	2004 $’000 (3,841) (39) (51)	2003 $’000 1,004 (105) (72) 827 (2) (156) 18 (286) (377) 68 64 (671) 156 7,654 7,810
	(3,931) – (19) – – – 13 14 8 (3,923) 7,810	827
		(2 (156 18 (286 (377 68 64
		(671
		156 7,654
	3,887

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Consolidated Statement of Changes in Equity

For the year ended 31 December 2004 (Expressed in Hong Kong dollars)

Consolidated As at 1 January 2003 Loss attributable to shareholders Translation adjustments As at 1 January 2004 Loss attributable to shareholders Translation adjustments As at 31 December 2004	Share capital $’000 23,200 – – 23,200 – – 23,200	Share premium $’000 29,135 – – 29,135 – – 29,135	Capital reserve $’000 (Note 22) 3,530 – – 3,530 – – 3,530	Cumulative translation adjustments Accumulated deficit $’000 $’000 (105) (33,329) – (4,862) 68 – (37) (38,191) – (7,248) 13 – (24) (45,439)	Total $’000 22,431 (4,862) 68 17,637 (7,248) 13 10,402

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APPENDIX III

Notes to the Financial Statements

(Amounts expressed in Hong Kong dollars unless otherwise stated)

1. COMPANY INFORMATION

Proactive Technology Holdings Limited (“the Company”) was incorporated in Bermuda on 25 February 2000 as an exempted company with limited liability under the Companies Act 1981 of Bermuda. Its shares have been listed on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited since 18 May 2000.

The Company is an investment holding company. Its subsidiaries are principally engaged in investment holding, design, development and sale of value-added telecommunications products and computer telephony products. Inherent in the Group’s business are various risks and uncertainties, including changes in technology, the ability to raise additional capital and financing when necessary, and the fact that the Group has reported losses for the past three years.

2. IMPACT OF RECENTLY ISSUED HONG KONG FINANCIAL REPORTING STANDARDS

The Hong Kong Institute of Certified Public Accountants has issued a number of new Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards, herein collectively referred to as the new HKFRS, which are generally effective for accounting periods beginning on or after 1 January 2005. The Group has not early adopted these new HKFRS in the financial statements for the year ended 31 December 2004. The new HKFRS may result in changes in the future as to how the Group’s financial performance and financial position are prepared and presented.

3. PRINCIPAL ACCOUNTING POLICIES

The financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (which also include Statements of Standard Accounting Practice and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants, accounting principles generally accepted in Hong Kong, and the disclosure requirements of the Hong Kong Companies Ordinance and the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM Listing Rules”). Principal accounting policies are summarised below:

a. Basis of measurement

The financial statements have been prepared on the historical cost basis.

b. Basis of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries (together “the Group”). The results of subsidiaries acquired or disposed of during the year are recorded from or to their effective dates of acquisition or disposal. Significant intra-group transactions and balances have been eliminated on consolidation.

c. Subsidiaries

A subsidiary is a company in which the Company controls, which is normally evidenced when the Group has the power to govern the financial and operating policies of that company so as to benefit from its activities. In the Company’s financial statements, investment in subsidiaries is stated at cost less provision for any impairment in value, while income from subsidiaries is recorded to the extent of dividends received and receivable.

d. Goodwill

Goodwill represents the difference between the fair value of the consideration given and the Group’s share of the aggregate fair values of the identifiable net assets of subsidiaries acquired. Goodwill is capitalised in the balance sheet and is amortised to the income statement on a straight-line basis over its estimated useful economic life. This represents a change from prior years where goodwill was eliminated immediately against reserves. The Group has adopted the transitional provision allowed in SSAP 30, and goodwill arising from acquisitions before 1 January 2001 will continue to be held in reserves and no reinstatement has been made.

e. Associates

An associate is a company, not being a subsidiary, in which the Group holds 20% or more of its issued voting share capital as a long-term investment and can exercise significant influence over its management. In

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FINANCIAL INFORMATION OF PROACTIVE

the consolidated financial statements, investment in associate is stated at the Group’s share of the fair value of the separate net assets of the associates at the time of acquisition, adjusted for the Group’s share of undistributed post-acquisition profits/losses and reserves of the associates, distributions received from the associates and other necessary alterations in the Group’s proportionate interest in the associates arising from changes in the equity of the associates that have not been included in the income statement. In the Company’s financial statements, investment in associates is stated at cost less provision for an impairment in value, while income from associates is recorded to the extent of dividends received and receivable.

f. Turnover and revenue recognition

Turnover represents (i) the net invoiced value for the supply, development and integration of telecommunication, computer telephony systems and other computer products, after allowances for returns and discounts; (ii) rental income from leasing of telecommunication and computer telephony equipment; and (iii) fees for consulting and maintenance services.

Revenue is recognised when the outcome of a transaction can be measured reliably and when it is probable that the economic benefits associated with the transaction will flow to the Group. Revenue from the supply, development and integration of telecommunication and computer telephony systems is recognised when the merchandise is delivered and the related development and integration services are completed. Rental income from leasing of telecommunication and computer telephony equipment is recognised on a straight-line basis over the respective period of the leases. Consulting and maintenance service fees are recognised when the services are rendered. Interest income is recognised on a time-proportion basis on the principal outstanding and at the rate applicable.

Advance payments received from customers prior to delivery of merchandise and completion of the related development and integration services or rendering of other services are recorded as receipts in advance.

g. Taxation

Individual companies within the Group provide for profits tax on the basis of their profits for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for profits tax purposes.

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

Deferred taxation is provided for on temporary differences arising on investments in subsidiaries and associated companies except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

h. Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that takes a substantial period of time to bring to its intended use or sale are capitalised as part of the cost of that asset based on the cost of the specific borrowings. All other borrowing costs are recognised as an expense as incurred.

i. Employee retirement benefits

Costs of employee retirement benefits are recognised as an expense in the period in which they are incurred.

j. Machinery and equipment and depreciation

Machinery and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Major expenditures on modifications and betterments of machinery and equipment which will result in future economic benefits are capitalised, while expenditures on maintenance and repairs are expensed

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APPENDIX III

when incurred. Depreciation is provided on a straight-line basis to write off the cost less estimated residual value of each asset after considering its residual value over its estimated useful life. The annual rates of depreciation are as follows:

Furniture, fixtures and office equipment	20%
Computer equipment	30%
Equipment on lease to customers	30%
Equipment for development	30%

Gains and losses on disposal of machinery and equipment are recognised in the income statement based on the net disposal proceeds less the carrying amount of the assets.

k. Research and development expenditures

Research expenditures are written off as incurred. Development expenditures are charged against income in the period incurred except for those incurred for specific projects which are deferred where recoverability can be foreseen with reasonable assurance and comply with the following criteria: (i) the costs attributable to the product or process can be separately identified and measured reliably; (ii) the technical feasibility of the product or process can be demonstrated; (iii) it is intended to produce and market, or use, the product or process; (iv) the ability to produce or use the product or process can be demonstrated; (v) the existence of a market for the product or process or, if it is to be used internally rather than sold, its usefulness can be demonstrated; and (vi) adequate resources exists, or their availability can be demonstrated, to complete the project and market or use the product or process. Capitalised development expenditures are amortised on a straight-line basis over the period in which the related product or process is expected to be sold or utilised, starting from the time when the product or process is available for use.

l. Long-term investment

Long-term investment is stated at cost less provision for any impairment in value. Income from long-term investment is accounted for to the extent of dividends received or receivable.

m. Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the first-in, first-out method of costing and includes costs of purchase and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is based on estimated selling prices in the ordinary course of business, less further costs expected to be incurred to completion and disposal. Provision is made for obsolete, slow-moving or defective items where appropriate.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

n. Impairment of assets

Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of one of these assets may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss representing the difference between the carrying amount and the recoverable amount, is recognised in the income statement. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction less the costs of the disposal, while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

Reversal of an impairment loss of an asset recognised in prior years is recorded when there is an indication that the impairment loss recognised for the asset no longer exist or has decreased. The reversal is recorded in the income statement.

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o. Provisions and contingencies

A provision is recognised when there is a present obligation, legal or constructive, as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligations, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed regularly and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of a provision is the present value of the expenditure expected to be required to settle the obligation.

Contingent liabilities are not recognised in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements but disclosed when an inflow of economic benefits is probable.

p. Subsequent events

Post-year-end events that provide additional information about a company’s position at the balance sheet date or those that indicate the going concern assumption is not appropriate, (adjusting events), are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes when material.

q. Leases

Operating leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets remain with the lessors. Rental payments under operating leases are charged to the income statement on a straight-line basis over the period of the relevant leases.

r. Foreign currency translation

Individual companies within the Group maintain their books and records in the primary currencies of their respective operations (“functional currencies”). In the accounts of the individual companies, transactions in other currencies during the year are translated into the respective functional currencies at the applicable rates of exchange prevailing at the time of the transactions; monetary assets and liabilities denominated in other currencies are translated into the respective functional currencies at the applicable rates of exchange in effect at the balance sheet date. Exchange gains and losses are dealt with in the income statements of the individual companies.

The Group prepares consolidated financial statements in Hong Kong dollars. For the purpose of consolidation, income and expense items of subsidiaries with functional currencies other than Hong Kong dollars are translated into Hong Kong dollars at the average applicable exchange rates during the year; assets and liabilities of subsidiaries with functional currencies other than Hong Kong dollars are translated into Hong Kong dollars at the applicable rates of exchange in effect at the balance sheet date. Exchange differences arising from such translations are dealt with as movements of cumulative translation adjustments.

s. Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in Hong Kong requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

t. Employee benefits

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

Employee entitlements to sick leave and maternity or paternity leave are not recognised until the time of leave.

u. Cash equivalents

Cash equivalents are short-term, highly liquid investments which are readily convertible into known amounts of cash without notice and which were within three months of maturity when acquired; less advances from banks repayable within three months from the date of the advance. Cash equivalents include investments and advances denominated in foreign currencies provided that they fulfil the above criteria.

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APPENDIX III

4. TURNOVER AND REVENUE

Turnover and revenue consisted of:

Telecommunications Computer telephony Others Total turnover Interest income from bank deposits Total revenue	2004 $’000 6,961 10,554 – 17,515 14 17,529	2003 $’000 18,379 11,174 906
		30,459 64
		30,523

5. LOSS BEFORE TAXATION

Loss before taxation was determined after charging and crediting the following items:

After charging: Staff costs (including directors’ emoluments) – Salaries and allowances – Retirement benefits scheme costs – Less: Amount included in research and development expenditures Research and development expenditures Write-off of development expenditures Cost of inventories Operating lease rentals of premises Interest expense – bank borrowings wholly repayable within five years Provision for and write-off of bad and doubtful receivables Provision for and write-off of obsolete and slow-moving inventories Depreciation of machinery and equipment Net loss on disposal of machinery and equipment Net exchange loss Auditors’ remuneration After crediting: Rental income – leasing of telecommunication and computer telephony equipment Interest income – bank deposits	2004 $’000 7,950 293 (557)	2003 $’000 11,338 429 (1,486
	7,686	10,281
	849 292 8,246 1,205 39 161 1,894 1,469 75 18 190 2,692 14	1,744 259 10,464 2,358 105 834 1,194 3,406 401 5 217
		5,896 64

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APPENDIX III

6. DIRECTORS’ AND SENIOR EXECUTIVES’ EMOLUMENTS

• a. Details of emoluments paid/payable to directors of the Company are:

Fees for executive directors Fees for non-executive directors Other emoluments for executive directors – Salaries and allowances – Pension scheme contributions	2004 $’000 – 70 2,428 60 2,558	2003 $’000 – 60 3,260 60
		3,380

During the year, no (2003: five) executive director waived emoluments (2003: $701,000). No incentive payment for joining the Group or compensation for loss of office was paid or payable to any director for the year.

The number of directors whose emolument falls within the following bands is as follows:

Executive directors – Nil to $1,000,000 – $1,000,001 to $1,500,000 Non-executive directors – Nil to $1,000,000	2004 5 – 5 10	2003 4 1 4
		9

During the year ended 31 December 2004, the five executive directors received individual emoluments of approximately $792,000 (2003: $1,043,000), $312,000 (2003: $511,000), $561,000 (2003: $612,000), $491,000 (2003: $626,000) and $332,000 (2003: $528,000). The five non- executive directors received individual fees of approximately $20,000 (2003: $20,000), $20,000 (2003: $20,000), $10,000 (2003: $20,000), $10,000 (2003: Nil), and $10,000 (2003: Nil).

• b. Details of emoluments paid/payable to the five highest paid individuals (including directors and other employees) are:

Salaries and allowances Pension scheme contributions	2004 $’000 2,525 60 2,585	2003 $’000 3,361 60
		3,421

Four (2003: Four) of the highest paid individuals were executive directors of the Company, whose emoluments have been included in Note 6.a above.

During the year, no emoluments were paid to the five highest paid individuals (including directors and other employees) as inducement to join or upon joining the Group or as compensation for loss of office.

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APPENDIX III

The number of the five highest paid individuals (including directors and other employees) falls within the following bands:

– Nil to $1,000,000 – $1,000,001 to $1,500,000	2004 5 – 5	2003 4 1
		5

7. TAXATION

a.	Taxation	consisted of:
			2004	2003
			$’000	$’000
	Overseas	income tax	51	81

The Company is not subject to tax in Bermuda on its profit or capital gains until March 2016. No Hong Kong profits tax has been provided as the Group had no assessable profit arising in or derived from Hong Kong. Overseas income tax has been provided by subsidiaries, branches or representative offices based on their estimated taxable profits at the rates of taxation applicable in the respective jurisdictions in which they operate.

b. The taxation charge for the year can be reconciled to the loss as stated in the financial statements as follows:

Loss before taxation Taxation calculated at Hong Kong profits tax of 17.5% (2003: 17.5%) Utilisation of previously unrecognised tax losses Deferred tax assets not recognised Effect of different tax rates of operation in other jurisdictions Taxation for the year	2004 $’000 (7,197)	2003 $’000 (4,781
	(1,259) – 1,259 51	(837 84 753 81
	51	81

c. The principal components of the Group’s and Company’s deferred tax assets not provided for, calculated at 17.5% (2003: 17.5%) on the cumulative timing differences at the balance sheet date are as follows:

Tax losses Other timing differences	Consolidated 2004 2003 $’000 $’000 6,183 5,254 317 457 6,500 5,711	Company 2004 2003 $’000 $’000 – – – – – –	Company 2004 2003 $’000 $’000 – – – – – –
			–

The potential tax benefits attributable to tax losses of the Group and the Company have not been recognised due to unpredictability of future profit streams (2003: Nil).

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APPENDIX III

8. LOSS ATTRIBUTABLE TO SHAREHOLDERS

During the year ended 31 December 2004, the consolidated loss attributable to shareholders included a loss of approximately $607,000 (2003: $11,520,000) dealt with in the financial statements of the Company.

9. LOSS PER SHARE

The calculation of basic loss per share is based on the consolidated loss attributable to shareholders of approximately $7,248,000 (2003: $4,862,000) and on the weighted average number of 232,000,000 shares (2003: 232,000,000 shares) in issue during the year.

Diluted loss per share is not presented because the effect is anti-dilutive.

10. MACHINERY AND EQUIPMENT

Movements of machinery and equipment (consolidated) were:

Cost Beginning of year Additions Disposals Transferred from inventories Transferred to inventories End of year Accumulated depreciation Beginning of year Provision for the year Disposals Transferred to inventories End of year Net book value End of year Beginning of year	Furniture, fixtures and office equipment $’000 1,190 2 (142) – –	Computer equipment $’000 3,382 11 (14) 203 (195)	2004 Equipment on lease to customers $’000 3,233 6 (366) 1,023 (1,632)	Equipment for development $’000 2,390 – (377) 24 (363)	Total $’000 10,195 19 (899) 1,250 (2,190)	2003 Total $’000 18,126 156 (6,244) 974 (2,817)
	1,050 840 216 (76) – 980	3,387 2,825 401 (6) (9) 3,211	2,264 2,193 506 (366) (945) 1,388	1,674 1,810 346 (376) (312) 1,468	8,375 7,668 1,469 (824) (1,266) 7,047	10,195
						11,538 3,406 (5,825) (1,451)
						7,668
	70 350	176 557	876 1,040	206 580	1,328 2,527	2,527
						6,588

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APPENDIX III

11. DEVELOPMENT EXPENDITURES

Movements of development expenditures (consolidated) were:

Beginning of year Written-off End of year	2004 $’000 292 (292) –	2003 $’000 551 (259) 292

12. INVESTMENT IN SUBSIDIARIES

In the Company’s balance sheet, investment in subsidiaries consisted of:

Unlisted shares, at cost Due from subsidiaries Less: Provision for impairment in value	2004 $’000 8,791 52,654	2003 $’000 8,791 51,868 60,659 (44,453) 16,206
	61,445 (44,453)	60,659 (44,453
	16,992

The amount due from subsidiaries are unsecured, non-interest bearing and not repayable until the subsidiaries are financially capable to do so.

The underlying value of the investment in subsidiaries was, in the opinion of the Company’s Directors, not less than its carrying value as at 31 December 2004.

Details of the subsidiaries as at 31 December 2004 were:

	Place of		Percentage of equity
	incorporation/	Issued and fully paid	interest attributable
Name	operations	share capital	to the Group	Principal activities
CentreWorld Holding	British Virgin Islands	US$1,029	100%	Investment holding
Limited
Interworth, Inc	British Virgin Islands	US$100	100%	Investment holding
Proactive Technology	Singapore	SG$100,000	100%	Dormant
(Asia) Pte. Ltd.
Proactive Technology	Hong Kong	HK$1,000,000	100%	Provision of
Limited				telecommunications
				and computer
				telephony solutions
Proactive	Hong Kong	HK$100,000	100%	Trading of
International				telecommunication
Limited				products and
				provision of
				management
				consultancy

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FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

	Place of		Percentage of equity	Percentage of equity
	incorporation/	Issued and fully paid	interest attributable
Name	operations	share capital		to the Group	Principal activities
Netwin Worldwide	British Virgin Islands	US$100		100%	Investment holding
Limited
Proactive Technology	PRC	RMB5,000,000		100%	Provision of
Development					telecommunication
(Beijing) Limited					products and
					provision of tele-
					commerce services
Proactive Multimedia	Hong Kong	HK$2		100%	Provision of
Marketing Agency					telecommunication
Limited					and computer
					telephony solutions

The shares of CentreWorld Holdings Limited are held directly by the Company. The shares of other subsidiaries are held indirectly.

None of the subsidiaries had any loan capital in issue at any time during the year ended 31 December 2004.

13. INVESTMENT IN AN ASSOCIATE

Investment in an associate (consolidated) consisted of:

Share of net assets Amount due from an associate Less: Provision for impairment in value	2004 $’000 198 2,433	2003 $’000 – 2,004 2,004 (1,770) 234
	2,631 (1,770)	2,004 (1,770
	861

The amount due from an associate is unsecured, non-interest bearing and has no fixed repayment terms.

Details of the associate were:

			Percentage of
	Place and date	Issued and	equity interest
	of incorporation/	fully paid	attributable
Name	operations	share capital	to the Group	Principal activities
			2004 2003
Beijing Teletron	PRC	RMB1,000,000	40% 40%	Provision of
System				telecommunications
Integration				and computer
Company Limited				telephony solutions

There were no other associate held by the Group as at 31 December 2004.

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APPENDIX III

14. OTHER INVESTMENT

Other investment represents the cost of a nominee membership in a Golf Club in the People’s Republic of China.

15. INVENTORIES

Inventories (consolidated) consisted of:

Telecommunication and computer telephony hardware products Less: Provision for obsolete and slow-moving inventories	2004 $’000 3,507 (1,676) 1,831	2003 $’000 5,367 (2,826)
		2,541

As at 31 December 2004, inventories of approximately $1,831,000 (2003: $1,001,000) were stated at net realisable value.

16. TRADE RECEIVABLES

Trade receivables (consolidated) consisted of:

Accounts receivable Retentions receivable Less: Provision for doubtful receivables	2004 $’000 3,130 1,203	2003 $’000 3,443 1,528
	4,333 (1,872)	4,971 (1,822)
	2,461	3,149

The Group normally grants to its customers credit periods ranging from 30 days to 60 days. Aging analysis of trade receivables (consolidated) is as follows:

0 to 1 month 1 to 2 months 2 to 3 months 3 to 6 months 6 to 9 months 9 to 12 months Over 12 months	2004 $’000 876 303 322 567 80 51 2,134 4,333	2003 $’000 838 1,060 207 620 3 154 2,089
		4,971

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APPENDIX III

17. PREPAYMENTS, DEPOSITS AND OTHER CURRENT ASSETS

Prepayments, deposits and other current assets (consolidated) consisted of:

Prepayments Rental and utility deposits Others 18. SHORT-TERM BANK BORROWINGS	2004 $’000 406 503 310 1,219	2003 $’000 185 439 626
		1,250

Short-term bank borrowings (consolidated) consisted of:

Bank overdrafts Trust receipts bank loans	2004 $’000 393 481 874	2003 $’000 182 314
		496

Refer to Note 27 for details of the Group’s banking facilities.

19. TRADE PAYABLES

The Group is normally granted by its vendors credit periods ranging from 0 day to 30 days. Aging analysis of trade payables (consolidated) is as follows:

0 to 1 month 1 to 2 months 2 to 3 months 3 to 6 months 6 to 12 months Over 12 months	2004 $’000 418 236 – – – 450 1,104	2003 $’000 443 111 110 1 – 492
		1,157

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APPENDIX III

20. SHARE CAPITAL

AUTHORISED (ordinary shares of $0.10 each) Beginning of year and at end of year ISSUED AND FULLY PAID (ordinary shares of $0.10 each) Beginning of year and at end of year	2004 Number of shares Nominal value ’000 $’000 1,000,000 100,000 232,000 23,200	2003 Number of shares Nominal value ’000 $’000 1,000,000 100,000 232,000 23,200	2003 Number of shares Nominal value ’000 $’000 1,000,000 100,000 232,000 23,200
			23,200

21. SHARE OPTIONS

The Company has adopted a Share Option Scheme on 3 May 2000 (“Share Option Scheme”), pursuant to which it may grant options to employees (including executive directors) of the Group to subscribe for shares in the Company. Pursuant to the Share Option Scheme, options were granted on 30 June 2000 to executive directors and other employees of the Group to subscribe for an aggregate of 19,420,000 shares in the Company at a price of $1.30 per share, during the exercise period from 1 July 2003 to 30 June 2010. No options were granted during the year ended 31 December 2004 under the Share Option Scheme.

Pursuant to resolutions passed at a special general meeting of the shareholders held on 13 November 2002, the Company terminated the Share Option Scheme and adopted a new share option scheme (“New Share Option Scheme”) in order to comply with the new requirements of Chapter 23 of GEM Listing Rules effected on 1 October 2001. Under the terms of the New Share Option Scheme, the board of directors of the Company may, at their discretion, grant options to the participants fall within the definition prescribed in the New Share Option Scheme including the employees, non- executive directors of the Company or its subsidiaries, etc, to subscribe for shares in the Company at a price determined by the Company’s Board of Directors, and will not be less than the highest of (i) the nominal value of the shares; (ii) the average closing price of the shares quoted on the GEM on the five trading days immediately preceding the date of grant; and (iii) the closing price of the shares quoted on the GEM on the date of grant, subject to a maximum of 10% of the issued share capital of the Company from time to time. 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 in issue and with an aggregate value (based on the closing price of the shares on the date of grant) in excess of $5 million must be approved by the Company’s shareholders.

The New Share Option Scheme will remain in force for a period of 10 years from 13 November 2002. A nominal consideration of $1 is payable on acceptance of the grant of an option.

During the year ended 31 December 2004, no share option has been granted under the New Share Option Scheme. The options already granted under the Share Option Scheme are unaffected.

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Movements of employee share options during the year ended 31 December 2004 were:

					Number of shares	Number of shares
			Subscription		Granted	Lapsed	Exercised
			price	Beginning	during	during	during	End
**Date **	of grant	Exercise period	per share	of year	the year	the year	the year	of year
				’000	’000	’000	’000	’000
30th	June 2000	1st July 2003 to	$1.30	12,760	–	(2,200)	–	10,560
		30th June, 2010

22. RESERVES

(a) Group

Capital reserve (consolidated) represents the negative goodwill arising from the acquisition of Proactive Technology Limited, a wholly-owned subsidiary, by CentreWorld Holding Limited, another wholly-owned subsidiary, in January, 1998. The Group has adopted the transitional provisions allowed in SSAP 30, such that the negative goodwill arising from acquisition before 1 January 2001 will continue to be held in reserves and no reinstatement has been made.

(b) Company

Company As at 1 January 2003 Loss attributable to shareholders As at 1 January 2004 Loss attributable to shareholders As at 31 December 2004	Share capital $’000 23,200 –	Share premium $’000 29,135 –	Contributed reserve Accumulated deficits $’000 $’000 8,586 (31,764) – (11,520)	Contributed reserve Accumulated deficits $’000 $’000 8,586 (31,764) – (11,520)	Total $’000 29,157 (11,520
	23,200 –	29,135 –	8,586 –	(43,284) (607)	17,637 (607
	23,200	29,135	8,586	(43,891)	17,030

Under the Companies Act 1981 of Bermuda, contributed surplus is distributable to shareholders, subject to the condition that the Company cannot declare or pay a dividend, or make a distribution out of contributed surplus if (i) it is, or would after the payment be, unable to pay its liabilities as they become due, or (ii) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium account.

The Company had no reserves available for distribution to shareholders as at 31 December 2004 (2003:

Nil).

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23. NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS

• a. Reconciliation of loss before taxation to cash (used in) generated from operations:

Loss before taxation Interest income Interest expense Depreciation of machinery and equipment Net loss on disposal of machinery and equipment Write off of development expenditures Share of (gain) loss of an associate Provision for impairment in value of an associate Operating (loss) profit before working capital changes Decrease in inventories Decrease (increase) in trade receivables Decrease in prepayments, deposits and other current assets Increase in amount due from an associate (Decrease) increase in trade payables Increase (decrease) in accruals and other payables Increase (decrease) in receipts in advance Cash (used in) generated from operations Analysis of cash and cash equivalents is: Cash and bank deposits Bank overdrafts Trust receipts bank loans	2004 $’000 (7,197) (14) 39 1,469 75 292 (198) – (5,534) 384 688 31 (429) (53) 63 1,009 (3,841) 2004 $’000 4,761 (393) (481) 3,887	2003 $’000 (4,781) (64) 105 3,406 401 259 377 770 473 2,396 (275) 1,365 (1,004) 191 (1,715) (427) 1,004 2003 $’000 8,306 (182) (314) 7,810

• b. Analysis of cash and cash equivalents is:

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24. SEGMENT INFORMATION

The primary segment is defined by major product and operational units, while secondary segment is defined by geographical location of customers.

a. Primary segment

The Group is organised into three products and operational units – telecommunications products, computer telephony and other products. The telecommunications products and computer telephony products units derive revenue from supply, development and integration of telecommunications and computer telephony system and solutions, respectively. They also earn rental income from leasing telecommunications equipments and computer telephony systems and earn fees for consulting and maintenance services. The other products unit derives sales revenue from sale of Wireless LAN products.

Analysis by business segment is as follows:

Turnover – Telecommunications – Computer telephony – Others Loss attributable to shareholders – Telecommunications – Computer telephony – Others Segment profit Unallocated expenses Loss from operations Interest income Interest expense Provision for impairment in value of investment in an associate Share of gain (loss) of an associate Loss before taxation Taxation Depreciation – Telecommunications – Computer telephony – Unallocated	2004 $’000 6,961 10,554 – 17,515	2003 $’000 18,379 11,174 906 30,459 8,890 3,375 (249) 12,016 (15,609) (3,593) 64 (105) (770) (377) (4,781) (81) (4,862) 1,363 558 1,485 3,406
	545 2,852 – 3,397 (10,767) (7,370) 14 (39) – 198 (7,197) (51)	8,890 3,375 (249
		12,016 (15,609
		(3,593 64 (105 (770 (377
		(4,781 (81
	(7,248)
	754 184 531	1,363 558 1,485
	1,469

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Capital expenditures – Telecommunications – Computer telephony – Unallocated Assets – Telecommunications – Computer telephony – Others – Unallocated Liabilities – Telecommunications – Computer telephony – Unallocated	2004 $’000 – – 19 19 3,863 2,633 – 11,253 17,749	2003 $’000 86 – 70
		156
		5,018 3,101 51 15,417
		23,587
	3,337 1,892 2,118	1,454 2,894 1,602
	7,347	5,950

b. Secondary segment

Analysis by geographical location is as follows:

Turnover – Hong Kong – China – Taiwan Loss attributable to shareholders – Hong Kong – China – Taiwan – Australia – Singapore	2004 $’000 17,228 171 116 17,515	2003 $’000 27,410 2,468 581
		30,459
	5,884 1,254 35 47 28	3,051 1,828 (81 33 31
	7,248	4,862

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Assets – Hong Kong – China – Taiwan – Australia – Singapore Liabilities – Hong Kong – China – Taiwan – Australia – Singapore	2004 $’000 14,803 2,946 – – – 17,749	2003 $’000 18,536 4,950 38 46 17
		23,587
	7,300 47 – – –	5,896 29 9 12 4
	7,347	5,950

25. COMMITMENTS AND CONTINGENT LIABILITIES

a. Operating lease commitments

The Group had operating lease commitments in respect of premises under various non-cancellable operating lease agreements. The commitments payable under these agreements are analysed as follows:

Amounts payable within a period of – within one year – between one and two years – between two and five years	Consolidated 2004 2003 $’000 $’000 407 908 262 90 22 – 691 998	Company 2004 2003 $’000 $’000 – – – – – – – –	Company 2004 2003 $’000 $’000 – – – – – – – –
			–

The commitments payable within the next twelve months are analysed as follows:

Leases expiring within a period – not exceeding one year – within one and five years	Consolidated 2004 2003 $’000 $’000 167 338 240 570 407 908	Company 2004 2003 $’000 $’000 – – – – – –	Company 2004 2003 $’000 $’000 – – – – – –
			–

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b. Contingent liabilities

Performance bond Guarantee provided to banks for banking facilities granted to subsidiaries	Consolidated 2004 2003 $’000 $’000 177 177 – – 177 177	Company 2004 2003 $’000 $’000 – – 6,200 6,200 6,200 6,200	Company 2004 2003 $’000 $’000 – – 6,200 6,200 6,200 6,200
			6,200

26. PENSIONS SCHEMES

The Group maintains various retirement schemes for its employees. The retirement scheme for employees of PRC representative office is a mandatory central pension scheme organized by the PRC government, the assets of which are held separatively from those of the Group. Contributions made are based on a percentage of the eligible employees’ salaries and are charged to the income statement as they became payable, in accordance with the rules of the scheme. The employer contributions vest fully once they are made. The Group’s Hong Kong employees are covered by the mandatory provident fund, which is managed by an independent trustee. The Group and its Hong Kong employees each make monthly contributions to the scheme at 5% of the employees’ cash income with the maximum contribution by each of the Group and the employees limited to $1,000 per month.

During the year, the aggregate contributions made by the Group to the retirement schemes were approximately $293,000 (2003: $429,000). During the year, there were no material forfeitures available to offset the Group’s future contributions (2003: Nil).

27. BANKING FACILITIES AND PLEDGE OF ASSETS

As at 31 December 2004, the Group had aggregate banking facilities of approximately $6,200,000 (2003: $6,200,000) from several banks for overdrafts, loans, and trade financing. Unused facilities as at the same date amounted to approximately $5,148,000 (2003: $5,536,000). These facilities were secured by pledges of the Group’s bank deposits of approximately $5,002,000 (2003: $5,002,000). The Group did not have any charges on other assets as at 31 December 2004 and 2003.

MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 DECEMBER 2006

FINANCIAL REVIEW

Turnover of the Proactive Group for the year ended 31st December 2006 was approximately HK$11,880,000 (2005: HK$20,982,000), which represents a decrease of 43% as compared with the previous financial year.

Turnover from telecommunications business decreased by 53% to HK$3,404,000 (2005: HK$7,228,000), representing 29% (2005: 34%) of the Proactive Group’s total turnover. Turnover attributable to their computer telephony business decreased by 38% to HK$8,476,000 (2005: HK$13,754,000), accounting for 71% (2005: 66%) of the Proactive Group’s total turnover.

The gross profit for the year under review was HK$6,831,000 which was decreased by 28% comparing with last year (2005: HK$9,458,000), while the gross profit margin was increased to 58% (2005: 45%).

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Operating costs for the year ended 31st December 2006 was approximately HK$11,656,000 (2005: HK$11,536,000), representing a 1% increase.

The audited consolidated loss for the year attributable to equity holders of the parents also increased by 105% to approximately HK$3,611,000 (2005: HK$1,764,000). Loss per share was HK1.5 cent for the year under review (2005: HK0.8 cent).

BUSINESS REVIEW

During this recent couple of years, the overall market performance tended to improve to certain extent. However, the progress of the recovery, especially in the IT and telecom market, was still in a slow and sluggish pace. The market was in a process of reformation and consolidation.

The management of Proactive have initiated the streamlining of their operations, especially in Mainland China, and created business dynamics to cope with the changes in business needs. The management of Proactive successfully developed a cost-effective local engineering team.

The difficult operating environment of recent years for the IT and telecom industry continues to persist. In the absence or the introduction of any new or more advance technology, the products and services offered by the telecom industry is now very much price driven. There were at times marked improvements, albeit sporadic, in various regional market segments and sub-markets. However, the pace at which reforms are progressing and the rate at which the overall market is recovering are far from optimistic. These negative implications and the direct impact it has had on the Proactive’s Hong Kong operations was even more apparent during the financial year ended 2006.

In view of the prevailing situation where the market continues to compete on price, the management of Proactive believe it will become increasingly difficult for a majority part of the market to stay afloat. With profit margins eroding, it will only be a matter of time before the management of Proactive see a large scale consolidation with smaller players being acquired while others have no avail but to exit. Ultimately those companies with the resources, capability and greater market share will emerge to become the leaders and/or giants of the industry. Undoubtedly, the evolution process is a painstaking event which can be very time consuming.

In 2006, the senior management undertook a comprehensive reassessment of its existing business model to ascertain whether it still made sense to continue operating as an IT and telecom company. In the aftermath, despite of its initial success, the Proactive simply does not have the capital nor the human resources needed to compete at the next level with the larger domestic and/or international players. In retrospect, the senior management adopted a very pragmatic perspective. It was believed it is in the minority shareholders’ best interest that the Proactive stems its losses and exits the market. The Proactive instead would, and has already commenced to, focus on a new and exciting opportunity in the growing field of logistic transportation.

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FUTURE PROSPECTS

For the business outlook, the overall IT and telecom market environment is still obscure and is facing some sorts of uncertainty. However it would appear to the management of Proactive that the speed of the recovery is expediting especially while the market expected the advent of 3G in PRC in 2007. With their establishment in Beijing, the management of Proactive are able to capture more businesses in PRC.

The Proactive, in 2007, intends to acquire the entire equity shareholding interest of a company which has already entered into a Sino-Foreign joint venture (the “JV”) with a wholly-owned subsidiary of the Ministry of Railways of the People’s Republic of China (the “MOR”). The JV has been established for the purpose of owning, developing, and operating a logistics transportation network nationwide for the promotion and facilitation of domestic trade. In due course, it is believed and hoped that the logistic transportation network, when firmly established, will primarily be used as one of the principal means for transporting basic raw materials providing a much needed supporting service to some of the country’s pillar industries, namely, the coal, metal ores and oil industries.

The JV is the holder of an exclusive trackage right for a 50 year period, granted by the MOR, to operate rail freight trains on the MOR’s existing railway infrastructure network. The operational right extends the entitlement to cover upgraded tracks as well as all new tracks which has already been built, in the process of being built or will be additionally built in the future. In defining what is meant by the exclusivity nature of the right, pursuant to the agreement, it is construed to mean that the JV has the first right of refusal to undertake all potential future expansions in relation to this business activity. The language as stipulated has the effect of being a de-facto non-competitive clause.

The proposed logistic transportation business is a pilot project and the first-of-its-kind in China’s railway history. It will also serve to form an integral part of the MOR’s commitment to reform the country’s railway transportation industry to be more in line with developments undertaken by other governments and countries around the world.

During the first phase of development, the plan requires the JV to purchase 300 trains over a 15 to 18 month period to kick start the business. Each of the trains will comprise of 55 wagons and be able to travel at a maximum speed of not less than 90 kilometers per hour; while each of the wagons will have a minimum uploading capacity of 70 tons per wagon. In addition, the JV will need to set up the relevant operations including the sales network. Based on the proposed allocated track routes on which the trains will be traveling on, the Proactive estimates that at least 4 offices (near the major railway bureaus) in the People’s Republic of China will have to be set up to facilitate operations. The team in the Hong Kong office will oversee and manage the business as well as being responsible for all aspects relating to financial matters.

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FINANCIAL INFORMATION OF PROACTIVE

The JV, operating in accordance with all laws and regulations governing the railway industry in the People’s Republic of China, is required to pay a fixed but significant portion of its gross revenues to the MOR in the form of a fee for having access and for using its railway network. The fee payment also covers most, if not all, of the costs associated with the daily operations of the trains. This Light Assets Business Model is an extremely favorable arrangement for two principal reasons: (1) the JV/Proactive’s requirement capital expenditures for development of the infrastructure needed in effect has been kept at a bare minimum; and (2) the JV/Proactive can leverage off of MOR’s wealth of experience in the actual management and operations (particularly in terms of train scheduling on the world’s busiest railway network) of the trains.

China’s Railway Industry

China’s railway industry has undergone more than a century of development. Railways in the country, at the end of 2004, consist of railways owned by the MOR (82.1%), railways owned by various local governments (6.4%) and railways owned through joint venture companies (11.5%). As at the year ended 2005, the total operational track length of China’s railway network was 75,438 kilometers. The country has the busiest railway system in the world and has been operating at near capacity for years. It currently uses 6% of the world’s total track length to handle over 23% of the world’s total passenger volume and freight traffic.

Conscious and strong efforts have been made to increase existing capacity by relaxing speed restrictions and by adding new tracks. Since 1997, China has raised its train speed 5 times and a 6th is being tabled for April 2006. The last speed raising alone in 2004 increased the freight transportation capacity of the railway networks by 15.0%. Moreover, under the 15th 5-year plan, there is also an ambitious plan to increase the total track length of its railway network to 100,000 km by 2010. China intends to build 19,800 kilometers of new railway lines, modernize 15,000 kilometers of existing railway lines, boost passenger train speed to 200 km per hour with faster trains traveling at more than 300 kilometers an hour, and increase the load of freight trains with a single engine hauling over 5,000 tons.

Under the railway development plan approved by the Chinese government, every year 4,000 kilometers of new tracks will be laid, 3,000 kilometers of existing tracks electrified, and faster passenger trains, including the maglev trains, and large capacity freight trains will be introduced.

Existing Large Gap between Demand and Supply

The railway system plays a fundamental role in China’s economy by being a costefficient, long haul transportation mode for bulk commodities (e.g. coal, petroleum, timber, and steel mineral ores) particularly from the interior regions of the country to the coastal areas. It is safe, reliable and immune to environmental impacts such as poor weather conditions.

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FINANCIAL INFORMATION OF PROACTIVE

Consistent high economic growth rates and increasing urbanization are the two major drivers for the increasing demand in freight transportation. At present, it is estimated that the country is in need of at least 280,000 wagons per day to satisfy existing and growing daily demand. There is however less than 140,000 wagons per day available. The existing fleet of wagons is also inadequate to service the contractual obligations previously undertaken by the State in respect of what are viewed as vital and key strategic projects. With limited alternatives, private companies often had to rely on more costly modes of transport for their delivery needs.

According to the MOR, the large gap between supply and demand will further exasperate commencing in 2007 once the anticipated wagon retirement plan is being implemented. An estimated 70,000 wagons, mostly wagons with an upload capacity of less than 60 tons, has been slated for retirement in 2007. A further 270,000 wagons have been targeted for 2008 and 2009. The proposed project’s 300 trains will only be replacing 23.6% (or 16,500) of the 70,000 wagons expected to be retired during 2007 or 11.8% of the operational wagons and 5.9% of the estimated current market demand.

As such, it comes as no surprise China’s railway industry is the envy of many transport companies around the world.

LIQUIDITY AND FINANCIAL RESOURCES

	2005	2006	Change
	HK$’000	HK$’000
Total assets	13,351	19,526	46%
Total liabilities	4,616	3,542	-23%
Working capital	7,580	14,462	91%
Cash and bank deposit	8,549	4,773	-44%
Short-term bank borrowings	1,086	–	-100%
Debt to equity ratio	0.53x	0.22x
Gearing ratio	0.000x	0.000x

During 2006, the Proactive Group was principally financed by cash flow generated internally together with the short-term bank borrowings and placing of existing shares and subscription of new shares in November and December 2006.

As at 31st December 2006, the Proactive Group had consolidated net current assets of approximately HK$14,462,000 (2005: HK$7,580,000). Cash and bank deposits stood at approximately HK$4.8 million on 31st December 2006, or cash per share of HK$0.02, of which approximately HK$4.4 million and HK$0.4 million was denominated in Hong Kong dollars and United States dollars respectively. The total short-term bank borrowings was Nil (2005: HK$1,086,000) and the gearing ratio, measured on the basic of total non-current liabilities to total assets less current liabilities, was 0 times (2005: 0 times).

As at 31st December 2006, the Proactive Group had no capital commitment (2005: Nil).

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CAPITAL STRUCTURE

The capital of the Proactive comprises only ordinary shares. Details of movements in the share capital of the Proactive during the year ended 31st December 2006 are set out in note 25 of this annual report.

CHARGES ON ASSETS

As at 31st December 2006, the Proactive Group did not have any charges on its assets.

As at 31st December 2005, the Proactive Group had aggregate banking facilities of approximately HK$7,000,000 from several banks for overdrafts, loans, and trade financing. Unused facilities as at 31st December 2005 amounted to approximately HK$5,914,000. These facilities were secured by the Proactive Group’s bank deposits of approximately HK$2,000,000. The Proactive Group did not have any charges on other assets as at 31st December 2005.

SIGNIFICANT INVESTMENT HELD, MATERIAL ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES

Save as disclosed in this report, there were no significant investment held, material acquisitions or disposals of subsidiaries during the year under review.

EXPOSURE TO FLUCTUATION IN EXCHANGE RATES

The reporting currency adopted by the Proactive Group was Hong Kong dollars. Majority of the Proactive Group’s sales, receivables, bank borrowings and expenditures were denominated in Hong Kong dollars and United States dollars. As Hong Kong dollars is closely linked with United States dollars, therefore, foreign currency exposure to the Proactive Group shall be minimal.

CONTINGENT LIABILITIES

As at 31st December 2006, the Proactive Group had no contingent liabilities (2005: Nil).

EMPLOYEE INFORMATION

The Proactive Group (excluding its associate) had approximately 26 full-time employees (2005: 22) in Hong Kong and PRC as at 31st December 2006. During the year ended 31st December 2006, the Proactive Group had incurred staff costs (including directors’ emoluments) of approximately HK$4,163,000 (2005: HK$6,012,000).

The Proactive has adopted a Share Option Scheme pursuant to which options may be granted to full time employees (including executive directors) of the Proactive Group to subscribe for share in the Proactive. As at 31st December 2006, no share option has been granted under the existing Share Option Scheme of the Proactive.

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FINANCIAL INFORMATION OF PROACTIVE

As at 31st December 2006, 6 employees (2005: 9) had completed the required number of years of service under the Employment Ordinance to be eligible for long service payments on termination of their employment with the Proactive Group. The Proactive Group is only liable to make such payments where termination meets the required circumstances specified in the Employment Ordinance. As at 31st December 2006, the estimated amount provided for such purpose amounted to approximately HK$79,000 (2005: HK$250,000).

MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 DECEMBER 2005

FINANCIAL REVIEW

Turnover of the Proactive Group for the year ended 31st December 2005 was approximately HK$20,982,000 (2004: HK$17,515,000), which represented an increase of 20% as compared with the previous financial year. Turnover from telecommunication business increased by 4% to HK$7,228,000 (2004: HK$6,961,000), representing 34% (2004: 40%) of the Proactive Group’s total turnover. Turnover attributable to their computer telephony business increased by 30% to HK$13,754,000 (2004: HK$10,554,000), accounting for 66% (2004: 60%) of the Proactive Group’s total turnover.

The gross profit for the year under review was approximately HK$9,458,000 which was increased by 16% comparing with last year (2004: HK$8,129,000), while the gross profit margin was maintained at 45% (2004: 46%).

Operating costs for the year ended 31st December 2005 was approximately HK$11,536,000 (2004: HK$15,479,000), representing a 25% decrease.

The audited consolidated loss for the year attributable to equity holders of the parents also decreased by 76% to approximately HK$1,764,000 (2004: HK$7,248,000). Loss per share was HK0.8 cent for the year under review (2004: HK3.1 cents).

BUSINESS REVIEW

Adverse economical environment persisting within these past few years has been making the Hong Kong operations suffer from unprecedented difficulties. Though during this recent couple of years the overall market performance tends to be improved to certain extent, the progress of the recovery, especially in the IT and telecom market, is still in a sluggish pace. Such an intense and over-throat competitive situation in the telecom field brings about the scenario that the merging and acquisition throughout telecom market are being taken place. The market reformation and consolidation might evolve a profitable phenomenon eventually but the process is prolonged and time-consuming.

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FINANCIAL INFORMATION OF PROACTIVE

Regardless to what extent the IT and telecom market is evolving, the Proactive Group keeps on controlling the cost and expenses of operation and implementing effective management on controlling the company. Their endeavor upon cost control and operation enhancement has contributed to decrease the operating administration cost by approximately 25% to HK$11,536,000 (2004: HK$15,479,000) when compared with the previous financial year.

The management of Proactive have initiated the streamlining of their operations, especially in Mainland China, and created business dynamics to cope with the changes in business needs. The management of Proactive successfully developed a cost-effective local engineering team. The relocation of their Hong Kong office in early 2005 to right-sized premises helped further reducing the administration expenses as compared with last year.

Their Joint Venture entity in Beijing, the Beijing Teletron System Integration (BJTSI) has completed the Phase III call center project for Beijing Labor Bureau. The project was first established in Beijing in 2003 and is a web-based multi-media contact center with advanced features. This call center technology is proven to be successfully utilized in Labor Bureau and forms a benchmark project. Beyond that, the management of Proactive have built some more call center projects in Beijing such as for Police and Environment Protection Bureau, etc. The management of Proactive have also completed the installation of the automatic fare collection (AFC) systems for various tourist spots such as the Great Wall, etc, which allows tourists to use e-payment as a means for entry ticketing. The similar project will extend to other famous tourist spots within the coming few years.

FUTURE PROSPECTS

The massive increasing amount of Internet users is overwhelming various applications across the areas of voice, data and video. Though this trend inevitably brings about some negative impacts to traditional fixed network operators such as the use of Voice Over IP (VoIP) over the basic voice and IDD applications, the upsurge use of Internet is evolving tremendous opportunities and creating gigantic market places. The wide spread of mobile phone users and the advent of 3G, on the other hand, creates synergy effect and generates a large demand upon value-added services. These combined factors do pull out a powerful momentum for deriving and accelerating the needs upon utilizing mobile and IP and thus become a driving force for market reformation and consolidation. The advanced development of IP and mobile technology reforms and revolutionizes the IT and telecom applications in a way that tends to adopt a single hand-held device to integrate various applications within the appliance. The IT market upsurge in 2000 has already been identified as a phenomenon of “bubble”. However, the management of Proactive may deem that the recent development is a kind of “genuine” influence to their actual daily living which will in turn create a real and vast market place eventually.

Since their well establishment in Beijing, the management of Proactive are able to capture more businesses in PRC. Their Joint Venture entity in Beijing is building on the automatic fare collection (AFC) system for the tourist spots. Within these few years, all famous tourist spots including Palace and Summer Palace will be utilized the advanced e-payment card for entry.

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APPENDIX III

This is a must-do project for implementing the Digital Beijing for facing the upcoming 2008 Olympics Games in Beijing. In fact, the e-payment (or so-called electronic purse) is deemed to be an effective and convenient way for traveling and petty cash spending.

For the business outlook, the overall IT and telecom market environment is still obscure and is facing some sorts of uncertainty. However it would appear that the reformation of the IT and telecom is regulated in a way that severe cut-throat competition will no longer exist. Through merging and acquisition, the remaining few survivors will still capture certain market share and become profitable somehow. The market will generate a number of value-added services providers and the market will treasure those with creativity and inventive power. Proactive, with their well-equipped power for technological exploration, will fully match with the trend of future market development. The management of Proactive will still keep on scrutinizing cost control of the operation and adjust promptly to capture more business opportunities.

LIQUIDITY AND FINANCIAL RESOURCES

	2004	2005	Change
	HK$’000	HK$’000
Total assets	17,749	13,351	-25%
Total liabilities	7,347	4,616	-37%
Working capital	7,927	7,580	-4%
Cash and bank deposit	9,763	8,549	-12%
Short-term bank borrowings	874	1,086	24%
Debt to equity ratio	0.71x	0.53x
Gearing ratio	0.000x	0.000x

During 2005, the Proactive Group was principally financed by cash flow generated internally together with the balance of proceeds from IPO and short-term bank borrowings.

As at 31st December 2005, the Proactive Group had consolidated net current assets of approximately HK$7,580,000 (2004: HK$7,927,000). Cash and bank deposits stood at approximately HK$8,500,000 as at 31st December 2005, or cash per share of HK$0.04, of which approximately HK$7,900,000 and HK$600,000 was denominated in Hong Kong dollars and United States dollars respectively. The total short-term bank borrowings was approximately HK$1,086,000 (2004: HK$874,000) and the gearing ratio, measured on the basic of total non-current liabilities to total assets less current liabilities, was 0 times (2004: 0 times).

As at 31st December 2005, the Proactive Group had no capital commitment (2004: nil).

The Directors are of opinion that, the Proactive Group has sufficient working capital for its present requirements.

– 182 –

FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

CHARGES ON ASSETS

As at 31st December 2005, the Proactive Group had aggregate banking facilities of approximately HK$7,000,000 (2004: HK$6,200,000) from several banks for overdrafts, loans and trade financing, which were secured by pledges of the Proactive Group’s time deposits of approximately HK$2,000,000 (2004: HK$5,002,000) at banks. Unused facilities as at the same date amounted to approximately HK$5,914,000 (2004: HK$5,148,000). The Proactive Group did not have any charges on other assets as at 31st December 2005 and 2004.

SIGNIFICANT INVESTMENT HELD, MATERIAL ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES

There were no significant investment held, material acquisitions or disposals of subsidiaries during the year under review.

EXPOSURE TO FLUCTUATION IN EXCHANGE RATES

The reporting currency adopted by the Proactive Group was Hong Kong dollars. Majority of the Proactive Group’s sales, receivables, bank borrowings and expenditures were denominated in Hong Kong dollars and United States dollars. As Hong Kong dollars is closely linked with United States dollars, therefore foreign currency exposure to the Proactive Group shall be minimal.

CONTINGENT LIABILITIES

As at 31st December 2005, the Proactive Group had no contingent liabilities (2004: HK$177,000).

EMPLOYEE INFORMATION

The Proactive Group (excluding its associate) had approximately 22 full-time employees (2004: 24 employees) in Hong Kong and PRC as at 31st December 2005. During the year ended 31st December 2005, the Proactive Group had incurred staff costs (including directors’ emoluments) of approximately HK$6,012,000 (2004: HK$7,686,000).

Pursuant to an ordinary resolution passed on 3rd May 2000 by all shareholders of the Proactive, the Proactive has adopted a Share Option Scheme pursuant to which options may be granted to full time employees (including executive directors) of the Proactive Group to subscribe for share in the Proactive.

Termination to the Share Option Scheme and adoption of a new share option scheme (“New Share Option Scheme”) were approved by the shareholders of the Proactive at a special general meeting held on 13th November 2002 in order to comply with the new requirement of Chapter 23 of the GEM Listing Rules effected on 1st October 2001. No share option has been granted under the New Share Option Scheme as at 31st December 2005. The options already granted under the Share Option Scheme are unaffected.

– 183 –

APPENDIX III

FINANCIAL INFORMATION OF PROACTIVE

As at 31st December 2005, 9 employees (2004: 7 employees) had completed the required number of years of service under the Employment Ordinance to be eligible for long service payments on termination of their employment with the Proactive Group. The Proactive Group is only liable to make such payments where termination meets the required circumstances specified in the Employment Ordinance. As at 31st December 2005, the estimated amount provided for such purpose amounted to approximately HK$250,000 (2004: HK$450,000).

MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 DECEMBER 2004

FINANCIAL REVIEW

Turnover of the Proactive Group for the year ended 31 December 2004 was approximately HK$17,515,000 (2003: HK$30,459,000), which represented a decrease of 42% as compared with the previous financial year.

Turnover from telecommunication business decreased by 62% to HK$6,961,000 (2003: HK$18,379,000), representing 40% (2003: 60%) of the Proactive Group’s total. Turnover attributable to their computer telephony business slightly decreased by 6% to HK$10,544,000 (2003: HK$11,174,000), accounting for 60% (2003: 37%) of the Proactive Group’s total turnover.

The gross profit for the year under review was approximately HK$8,129,000 which was decreased 55% comparing with last year (2003: HK$18,162,000), while the gross profit margin was maintained at 46% (2003: 60%).

Operating costs for the year ended 31 December 2004 was approximately HK$15,479,000 (2003: HK$21,692,000), representing a 29% decrease.

The audited consolidated loss attributable to shareholders increased by 49% to approximately HK$7,248,000 (2003: HK$4,862,000). Loss per share was HK3.1 cents for the year under review (2003: HK$2.1 cents).

BUSINESS REVIEW

Hong Kong

During recent years, the telecom market situation is still very tough and sluggish. The intense competition among various fixed and mobile service operators makes their operation in a way of strict cost controlling and too much price concerned for system development and expansion. This brings about unfavorable and adverse impact to the Proactive Group and the revenue derived from the telecom market was still in a downturn trend in 2004. It is expected that the dominated adoption of IP and Internet application in telecom will cause further negative impact to the fixed telecom industry. Such an unprecedented adverse market situation will sustain in future since the problems such as over-competition and technology evolvement are classified as structural problems in nature, which are not easy to be solved.

– 184 –

FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

To handle such an adverse situation, the Proactive Group keeps adopting strict cost control and further strategically scales down the dimension of the operation. On the other hand, the Proactive Group is diversifying their team to the areas of network storage and security. Such applications are deemed to be the essential integral portions for an impeccable network. The management of Proactive will reinforce their technological team to explore this market and develop various applications to meet the market needs.

Beijing, PRC

Since the establishment of the joint venture company in Beijing, “Beijing Teletron Systems Integration Company Limited” (“BJTSI”) in early 2003, BJTSI was profitable in 2004 and completed some influential projects including the call center of Beijing Labor and Social Security Bureau and the Automatic Fare Collection (“AFC”) system of Beijing Municipal Administration and Communication Card Company Limited (“BMACC”). The call center is a fully integrated web based system comprising nearly 100 seats connecting 4 remote agent sites, which will be enlarged to cover 20 agent sites in the future. The AFC system is classified as a future project for the Olympics Games in Beijing, which adopts electronic medium, the e-purse (the contactless IC card) to provide an easy and convenient payment throughout the whole Beijing metropolitan. BJTSI has completed the AFC System for Badaling Great Wall and will expand to other regions.

Looking Forward

To increase their competitive edge, the Proactive Group will further implement a series of strategic actions to streamline their operations. The management of Proactive will move to a new office in March 2005, which also serves as a cost-saving action to lessen the operating cost. The management of Proactive will also reinforce the technological team in developing various applications on storage and management of data network.

The call center project in Beijing is the first of that kind in PRC and will be spreading to other provinces, which is one of the largest call centers for this purpose. The Beijing call center will then act as a benchmarking project and will help the management of Proactive to extend their call center business to other regions in PRC. Their participation in the development of AFC project, which is crucial for Olympics Games in Beijing, opens another critical path for their future business expansion in PRC. Beijing municipal government has instructed the development of AFC System and use of One Card in transportation (similar to HK Octopus) in future Olympics. The initial applications are in buses and some tourists spots and will extend to subway, taxis, entry ticket in Olympics stadium and will act as a means for small amount spending. The desired system allows millions of tourists during the Olympics to use one single card for transportation, sightseeing, identity authentication for Stadium and also for consumption. The upcoming four years are very critical and their involvement in the project in 2004 is very crucial and important for their future business development in PRC.

– 185 –

FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

LIQUIDITY AND FINANCIAL RESOURCES

	2003	2004	Change
	HK$’000	HK$’000
Total assets	23,587	17,749	-25%
Total liabilities	5,950	7,347	23%
Working capital	14,298	7,927	-45%
Cash and bank deposit	13,308	9,763	-27%
Short-term bank borrowings	496	874	76%
Debt to equity ratio	0.34x	0.71x
Gearing ratio	0.000x	0.000x

During 2004, the Proactive Group was principally financed by cash flow generated internally together with the balance of proceeds from IPO and short-term bank borrowings.

As at 31 December 2004, the Proactive Group had consolidated net current assets of approximately HK$7,927,000 (2003: HK$14,298,000). Cash and bank deposits stood at approximately HK$9.8 million as at 31 December 2004, or cash per share of HK$0.04, of which approximately HK$7.6 million and HK$1.9 million was denominated in Hong Kong dollars and United States dollars respectively. The remaining HK$0.3 million were denominated in other currencies. The total short-term bank borrowings was approximately HK$874,000 and the gearing ratio, measured on the basic of total non-current liabilities to total assets less current liabilities, was 0 times (2003: 0 times).

As at 31 December 2004, the Proactive Group had no capital commitment (2003: nil).

The Directors are of opinion that, the Proactive Group has sufficient working capital for its present requirements.

CHARGES ON ASSETS

As at 31 December 2004, the Proactive Group had aggregate banking facilities of approximately HK$6,200,000 (2003: HK$6,200,000) from several banks for overdrafts, loans and trade financing, which were secured by pledges of the Proactive Group’s time deposits of approximately HK$5,002,000 (2003: HK$5,002,000) at banks. Unused facilities as at the same date amounted to approximately HK$5,148,000 (2003: HK$5,536,000). The Proactive Group did not have any charges on other assets as at 31 December 2003 and 2004.

SIGNIFICANT INVESTMENT HELD, MATERIAL ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES

There were no significant investment held, material acquisitions or disposals of subsidiaries during the year under review.

– 186 –

FINANCIAL INFORMATION OF PROACTIVE

APPENDIX III

EXPOSURE TO FLUCTUATION IN EXCHANGE RATES

The reporting currency adopted by the Proactive Group was Hong Kong dollars. Majority of the Proactive Group’s sales, receivables, bank borrowings and expenditures were denominated in Hong Kong dollars and United States dollars. As Hong Kong dollars is closely linked with United States dollars, foreign currency exposure to the Proactive Group shall be minimal.

CONTINGENT LIABILITIES

As at 31 December 2004, the Proactive Group had contingent liabilities of HK$177,000 (2003: HK$177,000).

STAFF

The Proactive Group (excluding its associate) had approximately 24 full-time employees in Hong Kong and PRC at 31 December 2004. During the year, the Proactive Group had incurred staff costs (including directors’ emoluments) of approximately HK$8,243,000 (2003: HK$11,767,000).

Pursuant to an ordinary resolution passed on 3 May 2000 by all shareholders of the Proactive, the Proactive has adopted a Share Option Scheme pursuant to which options may be granted to full time employees (including executive directors) of the Proactive Group to subscribe for share in the Proactive.

Termination to the Share Option Scheme and adoption of New Share Option Scheme were approved by the shareholders of the Proactive at a special general meeting held on 13 November 2002 in order to comply with the new requirement of Chapter 23 of the GEM Listing Rules effected on 1 October 2001. No share option has been granted under the New Share Option Scheme as at 31 December 2004. The options already granted under the Share Option Scheme are unaffected.

As at 31 December 2004, seven employees had completed the required number of years of service under the Employment Ordinance to be eligible for long service payments on termination of their employment with the Proactive Group. The Proactive Group is only liable to make such payments where termination meets the required circumstances specified in the Employment Ordinance. As at 31 December 2004, the estimated amount provided for such purpose amounted to approximately HK$450,000 (2003: HK$670,000).

– 187 –

APPENDIX IV PRO FORMA FINANCIAL INFORMATION OF THE GROUP

INTRODUCTION TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following unaudited pro forma consolidated balance sheet, unaudited pro forma consolidated income statement and unaudited pro forma consolidated cash flow statement of the Enlarged Group (collectively referred to as the “Unaudited Pro Forma Financial Information”) have been prepared based on the notes set out below for the purpose of illustrating the effect of the proposed acquisition of 13.29% of the issued share capital of China Railway Logistics Limited (formerly known as Proactive Technology Holdings Limited) (“Acquisition”) as if it had taken place on 31 December 2006 for the unaudited pro forma consolidated balance sheet and on 1 January 2006 for the unaudited pro forma consolidated income statement and unaudited pro forma consolidated cash flow statement.

The Unaudited Pro Forma Financial Information has been prepared for illustrative purposes only and because of its nature, it may not give a true picture of the financial position of the Group as at 31 December 2006 or at any future date, and results and cash flows of the Group for the year ended 31 December 2006 or any future period had the Acquisition been completed.

– 188 –

APPENDIX IV PRO FORMA FINANCIAL INFORMATION OF THE GROUP

(1) Unaudited pro forma consolidated balance sheet of the Enlarged Group

Non-current assets Property, plant and equipment Prepaid lease payments Available-for-sale investments Deposits placed with an insurer Club debentures Current assets Inventories Debtors, deposits and prepayments Loan receivables Prepaid lease payments Taxation recoverable Bank balances and cash Current liabilities Creditors and accruals Taxation payable Obligations under a finance lease Bank loans Net current assets Total assets less current liabilities Non-current liabilities Convertible bonds Deferred taxation Capital and reserves Share capital Share premium and reserves Equity attributable to equity holders of the Company Minority interests	Audited Consolidated Balance Sheet of the Group As at 31 December 2006 Pro forma adjustments (Note B1) HK$’000 HK$’000 122,499 10,214 – 636,932 3,559 350 136,622	Audited Consolidated Balance Sheet of the Group As at 31 December 2006 Pro forma adjustments (Note B1) HK$’000 HK$’000 122,499 10,214 – 636,932 3,559 350 136,622
	27,672 76,732 7,400 249 940 25,704 138,697 10,671 682 61 19,467 30,881 107,816 244,438 – 615,700 3,604 3,604
		27,672 76,732 7,400 249 940 25,704
		138,697
		10,671 682 61 19,467
		30,881 107,816 881,370
		615,700 3,604
		619,304
	240,834 9,580 2,820 230,999 18,412 240,579 255 240,834

– 189 –

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX IV

(2) Unaudited pro forma consolidated income statement of the Enlarged Group

Turnover Cost of sales Gross profit Other income Selling and distribution expenses Administrative expenses Reversal of revaluation decrease on leasehold land and buildings previously charged to the consolidated income statement Finance costs Profit (loss) before taxation Taxation Profit (loss) for the year Attributable to: Equity holders of the Company Minority interests	Audited Consolidated Income Statement of the Group for the year ended 31 December 2006 Pro forma adjustments (Note B2) HK$’000 HK$’000 235,226 (191,859)	Pro Forma Consolidated Income Statement of the Enlarged Group HK$’000 235,226 (191,859) 43,367 2,597 (12,367) (25,902) 320 (51,136) (43,121) (1,165) (44,286) (44,284) (2) (44,286)
	43,367 2,597 (12,367) (25,902) 320 (1,348) (49,788) 6,667 (1,165)	43,367 2,597 (12,367 (25,902 320 (51,136
		(43,121 (1,165
	5,502
	5,504 (49,788) (2)	(44,284 (2
	5,502

– 190 –

APPENDIX IV PRO FORMA FINANCIAL INFORMATION OF THE GROUP

(3) Unaudited pro forma consolidated cash flow statement of the Enlarged Group

	Audited
	Consolidated
	Cash Flow		Pro Forma
	Statement of the	Pro forma	Consolidated
	Group	adjustments	Cash Flow
	for the year ended	(Notes B2	Statement of the
	31 December 2006	and B3)	Enlarged Group
	HK$’000	HK$’000	HK$’000
Operating activities
Profit (loss) before taxation	6,667	(49,788)	(43,121)
Adjustments for:
Interest income	(579)		(579)
Imputed interest income
on deposits placed
with an insurer	(485)		(485)
Depreciation of property,
plant and equipment	6,937		6,937
Release of prepaid lease
payment	249		249
Finance costs	1,348	49,788	51,136
Loss on disposal of
property, plant
and equipment	248		248
Gain on derecognition of
available-for-sale
investments	(83)		(83)
Release of revaluation
decrease on leasehold
land and buildings
previously charged
to the consolidated
income statement	(320)		(320)
Allowance for doubtful
debts	1,003		1,003

– 191 –

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX IV

Operating cash flows before movements in working capital Decrease in inventories Increase in debtors, deposits and prepayments Increase in creditors and accruals Effect of foreign exchange Cash generated from operations Income tax refunded Income tax paid Net cash generated from operating activities Investing activities Interest received Proceeds on derecognition of available-for-sale investments Purchases of property, plant and equipment Purchases of available-for- sale investments Advances of loan receivables Repayments of loan receivables Proceeds from disposal of property, plant and equipment	Audited Consolidated Cash Flow Statement of the Group for the year ended 31 December 2006 Pro forma adjustments (Notes B2 and B3) HK$’000 HK$’000 14,985 4,199 (12,005) 263 (2,229)	Pro Forma Consolidated Cash Flow Statement of the Enlarged Group HK$’000 14,985 4,199 (12,005) 263 (2,229) 5,213 318 (580) 4,951 579 5,014 (10,620) (2,910) (7,400) 6,105 652
	5,213 318 (580) 4,951 579 5,014 (10,620) (2,910) (7,400) 6,105 652	5,213 318 (580
		4,951
		579 5,014 (10,620 (2,910 (7,400 6,105 652

– 192 –

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX IV

Net cash used in investing activities Financing activities New bank loans raised Repayments of bank loans Repayments of obligations under a finance lease Interest paid Finance lease charged paid Dividends paid Net cash generated from (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of foreign exchange rate changes Cash and cash equivalents at end of the year Represented by: Bank balances and cash (bank overdrafts)	Audited Consolidated Cash Flow Statement of the Group for the year ended 31 December 2006 Pro forma adjustments (Notes B2 and B3) HK$’000 HK$’000 (8,580)	Pro Forma Consolidated Cash Flow Statement of the Enlarged Group HK$’000 (8,580) 21,502 (14,474) (174) (50,828) (8) (1,274) (45,256) (48,885) 24,901 200 (23,784) (23,784)
	21,502 (14,474) (174) (1,340) (49,488) (8) (1,274) 4,232 603 24,901 200	21,502 (14,474 (174 (50,828 (8 (1,274
		(45,256
		(48,885 24,901 200
	25,704 25,704

– 193 –

PRO FORMA FINANCIAL INFORMATION OF THE GROUP

APPENDIX IV

• (4) Notes to the Unaudited Pro Forma Financial Information of the Enlarged Group

A. Basis of Preparation

The unaudited pro forma consolidated balance sheet of the Enlarged Group is prepared based on the audited consolidated balance sheet of the Group as at 31 December 2006, which has been extracted from the annual report of the Group for the year ended 31 December 2006 as extracted set out in Appendix II to this circular.

The unaudited pro forma consolidated income statement and cash flow statement of the Enlarged Group are prepared based on the audited consolidated income statement and cash flow statement of the Group as extracted from the annual report of the Group for the year ended 31 December 2006, set out in Appendix II to this circular.

For the purpose of preparation of Unaudited Pro Forma Financial Information of the Enlarged Group, the fair value of the consideration was assumed to be the same as the fair value of available-for-sale investments acquired upon the Acquisition.

B. Pro forma adjustments

The adjustments reflect the followings:

1. Being the Acquisition at a consideration of HK$636,932,000 comprising the fair value of the shares of the Company amounting to HK$18,330,000 and the fair value of convertible bonds amounting to HK$618,602,000 issued for the Acquisition. Details of this pro forma adjustment are as followings:

2. (a) settlement of consideration by issue of 282,000,000 shares of the Company with market price as at 31 December 2006 of HK$0.065 per share; and

3. (b) settlement of consideration by issue of the convertible bonds. The convertible bonds of principal amount of HK$618,602,000 shall carry interest at the rate of 8% per annum and shall be redeemed on the date falling on the third anniversary of the date of issue of the convertible bonds. The convertible bonds, being a compound financial instrument (that contains both financial liability and equity components), is split between the equity component of HK$2,902,000 and the liability component of HK$615,700,000.

4. Being the interest expenses charged to consolidated income statement assuming that the convertible bonds had been issued as at 1 January 2006 and outstanding for a full year.

5. Being the cash outflow of interest expenses arising from issuing the convertible bonds.

– 194 –

APPENDIX IV PRO FORMA FINANCIAL INFORMATION OF THE GROUP

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following is the text of a report received from the reporting accountants of the Company, Deloitte Touche Tohmatsu, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.

==> picture [66 x 50] intentionally omitted <==

==> picture [70 x 35] intentionally omitted <==

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF PME GROUP LIMITED

We report on the unaudited pro forma financial information of PME Group Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”), which has been prepared by the directors of the Company for illustrative purposes only, to provide information about how the proposed acquisition of 13.29% of the issued share capital of China Railway Logistics Limited (formerly known as Proactive Technology Holdings Limited) might have affected the financial information presented, for inclusion in Appendix IV to the circular dated 22 August 2007 (the “Circular”). The basis of preparation of the unaudited pro forma financial information is set out on pages 193 and 194 to the Circular.

Respective Responsibilities of Directors of the Company and Reporting Accountants

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants.

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants. Our work consisted primarily of comparing the unadjusted financial information

– 195 –

APPENDIX IV PRO FORMA FINANCIAL INFORMATION OF THE GROUP

with source documents, considering the evidence supporting the adjustments and discussing the unaudited pro forma financial information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purpose of the unaudited pro forma financial information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

The unaudited pro forma financial information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of:

• the financial position of the Group as at 31 December 2006 or any future date; or

• the results and cash flows of the Group for the year ended 31 December 2006 or any future period.

Opinion

In our opinion:

• a. the unaudited pro forma financial information has been properly compiled by the directors of the Company on the basis stated;

• b. such basis is consistent with the accounting policies of the Group; and

• c. the adjustments are appropriate for the purpose of the unaudited pro forma financial information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Deloitte Touche Tohmatsu

Certified Public Accountants

Hong Kong

22 August 2007

– 196 –

GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

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

2. SHARE CAPITAL

Authorised 10,000,000,000 Shares	HK$ 100,000,000
Issued and to be issued, fully paid or credited as fully paid 1,598,600,000 Shares in issue as at the Latest Practicable Date 282,000,000 Consideration Shares to be allotted and issued upon Completion 562,365,507 Shares to be allotted and issued upon the exercise of the conversion rights attaching to the Convertible Bonds	15,986,000 2,820,000 5,623,655.07
2,442,965,507 Shares	24,429,655.07

3. DISCLOSURE OF INTERESTS

(a) Director’s interests and short positions in the securities of the Company and its associated corporations

As at the Latest Practicable Date, the interests and short positions of the Directors and the chief executive 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) (i) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) which were required, pursuant to section 352 of the SFO, to be entered in the register referred to

– 197 –

GENERAL INFORMATION

APPENDIX V

therein; or (iii) which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules, were as follows:

	Number or			Approximate
	attributable	**Nature of **	interests	percentage or
	number of	Interest of		attributable
	Shares held or	controlled	Beneficial	percentage of
Name of Director	short positions	corporation	owner	shareholding
				(%)
Mr. Cheng Kwok	372,838,000 (L)	318,438,000	54,400,000	23.32
Woo		(Note 1)
Mr. Cheng Kwong	372,838,000 (L)	318,438,000	54,400,000	23.32
Cheong
Ms. Cheng Wai	352,838,000 (L)	318,438,000	34,400,000	22.07
Ying
Ms. Chan Yim Fan	2,705,333 (L)	–	2,705,333	0.17
Mr. Anthony	70,000 (L)	–	70,000	0.004
Francis Martin			(Note 2)
Conway

L: Long Position

Note 1: These Shares are held by PME Investments (BVI) Co., Ltd. (“PME Investments”), a company incorporated in the British Virgin Islands. The entire issued share capital of PME Investment is beneficially owned as to one-third by each of Mr. Cheng Kwok Woo, Mr. Cheng Kwong Cheong and Ms Cheng Wai Ying.

Note 2: These 70,000 Shares are beneficially owned by the spouse of Mr. Anthony Francis Martin Conway. As such, Mr. Anthony Francis Martin Conway is deemed to be interested in these 70,000 Shares.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors nor the chief executive of the Company had or was deemed to have any interests or short positions in the shares, underlying shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) (i) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (iii) which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules.

– 198 –

GENERAL INFORMATION

APPENDIX V

(b) Persons who have an interest or short position which is discloseable under Divisions 2 and 3 of Part XV of the SFO and substantial Shareholders

So far as is known to the Directors and the chief executive of the Company, as at the Latest Practicable Date, the following persons (not being Directors or chief executive of the Company) had, or were deemed to have, interests or short positions in the Shares or underlying Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Enlarged Group:

	Number or		Approximate
	attributable		percentage or
	number of		attributable
Name of	Shares held or	Nature of	percentage of
Shareholder	short positions	interests	shareholding
			(%)
PME Investments	318,438,000 (L)	Beneficial owner	19.92
(Note 1)
Ms. Tsang Sui Tuen	372,838,000 (L)	Interest of spouse	23.32
(Note 2)
Ms. Wan Kam Ping	372,838,000 (L)	Interest of spouse	23.32
(Note 3)
Mr. Cheng Yau Kuen	352,838,000 (L)	Interest of spouse	22.07
(Note 4)
L: Long Position

Notes:

1. PME Investments is an investment holding company incorporated in the British Virgin Islands and its entire issued share capital is beneficially owned as to one-third by each of Mr. Cheng Kwok Woo, Mr. Cheng Kwong Cheong and Ms. Cheng Wai Ying, all being Directors.

2. Ms. Tsang Sui Tuen is the spouse of Mr. Cheng Kwok Woo and is accordingly deemed to have interests in these Shares that Mr. Cheng Kwok Woo has interests in.

3. Ms. Wan Kam Ping is the spouse of Mr. Cheng Kwong Cheong and is accordingly deemed to have interests in these Shares that Mr. Cheng Kwong Cheong has interests in.

4. Mr. Cheng Yau Kuen is the spouse of Ms. Cheng Wai Ying and is accordingly deemed to have interests in these Shares that Ms. Cheng Wai Ying has interests in.

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GENERAL INFORMATION

APPENDIX V

Save as disclosed above, as at the Latest Practicable Date, the Directors and the chief executive of the Company were not aware of any other person (other than the Directors and the chief executive of the Company) who had, or was deemed to have, interests or short positions in the Shares or underlying Shares, which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Enlarged Group.

As at the Latest Practicable Date, none of the Directors was a director or employee of a company which had, or was deemed to have, an interest or short position in the Shares or underlying Shares which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO.

4. MATERIAL CONTRACTS

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

• (i) the sino-foreign equity joint venture agreement dated 29 September 2006 entered into between (Shanghai Xin Hua Chemical Factory[#] ) and PME International Company Limited, a wholly-owned subsidiary of the Company with respect to the set up of a joint venture company, the registered capital of which was RMB10,000,000 and PME International Company Limited contributed 60% (equivalent to RMB6,000,000) of the registered capital in cash;

• (ii) the sale and purchase agreement dated 5 January 2007 and entered into between PME International (BVI) Company Limited, a wholly-owned subsidiary of the Company and Standard Jackson Development Limited in relation to the disposal of a property for a consideration of HK$5,200,000 and the cancellation agreement dated 8 February 2007 entered into between PME International (BVI) Company Limited and Standard Jackson Development Limited in relation to the termination of the said sale and purchase agreement;

• (iii) the placing agreement dated 2 April 2007 and made between the Company and Get Nice Investment Limited as placing agent for the placing of 191,600,000 Shares at a price of HK$0.172 per Share;

• (iv) the placing agreement dated 12 April 2007 entered into between the Company and Kingston Securities Limited as placing agent for the placing of a total number of 220,000,000 unlisted warrants at the initial subscription price of HK$0.25 per subscription Share;

• The English translation of Chinese name is included for information purpose only, and should not be regarded as the official English translation of such Chinese names or words

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GENERAL INFORMATION

APPENDIX V

• (v) the Sale and Purchase Agreement;

• (vi) the placing agreement dated 5 July 2007 and entered into between the Company and CCB International Capital Limited as placing agent for the placing of 229,000,000 Shares at the placing price of HK$2.49 per Share; and

• (vii) the sale and purchase agreement dated 5 July 2007 entered into between Peaknice Investment Limited, a wholly owned subsidiary of the Company, and Mr. Tang Ho Wen for the acquisition of the entire share capital of Best Time Far East Limited at a consideration of HK$100.

5. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

6. EXPERTS

The following are the qualification of the experts who have given opinions or advice which are contained in this circular:

Name Qualifications Castores Magi (Hong Kong) Limited Professional valuer Deloitte Touche Tohmatsu Certified Public Accountants Veda Capital a licensed corporation to carry on regulated activities under the SFO

Each of Castores Magi (Hong Kong) Limited, Deloitte Touche Tohmatsu and Veda Capital has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter and report and references to its name in the form and context in which it appears.

As at the Latest Practicable Date, each of Castores Magi (Hong Kong) Limited, Deloitte Touche Tohmatsu and Veda Capital does not have any shareholding in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

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GENERAL INFORMATION

APPENDIX V

7. LITIGATION

No member of the Group is engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance is known to the Directors to be pending or threatened against any member of the Group as at the Latest Practicable Date.

8. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial position or trading position of the Group since 31 December 2006, being the date to which the latest published audited financial statements of the Group was made up.

9. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors nor their respective associates had any business which competes or is likely to compete, either directly or indirectly, with the business of the Group.

10. MISCELLANEOUS

• (a) There is no contract or arrangement entered into by any member of the Group subsisting at the date of this circular in which any Director is materially interested and which is significant to the business of the Enlarged Group.

• (b) As at the Latest Practicable Date, neither Castores Magi (Hong Kong) Limited, Deloitte Touche Tohmatsu, Veda Capital nor any Directors had any direct or indirect interest in any assets which had been acquired, disposed of by or leased to, or which were proposed to be acquired, disposed of by or leased to, any member of the Enlarged Group since 31 December 2006, the date to which the latest published audited consolidated financial statements of the Group were made up.

• (c) The principal share registrar and transfer office of the Company is The Bank of Bermuda (Cayman) Limited at P.O. Box 513 GT, Strathvale House, North Church Street, George Town, Grand Cayman, Cayman Islands, British West Indies.

• (d) Tricor Secretaries Limited, the Hong Kong branch registrar and the transfer office of the Company is located at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.

• (e) The company secretary of the Company is Mr. Li Chak Hung, CPA, FCCA. The qualified accountant of the Company is Ms. Yip Chui Ling, CPA, FCCA.

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GENERAL INFORMATION

APPENDIX V

11. DETAILS OF THE DIRECTOR TO BE RE-ELECTED

As shown below is the details of Mr. Chow, who is to be re-elected as an independent non-executive Director:

Mr. Chow, aged 40, has 14-year experience in power industry and is specialised in business strategy development and change management for power company. Mr. Chow holds a Master degree of Engineering in Mechanical Engineering from The University of Hong Kong and a Master degree of Business Administration from The Chinese University of Hong Kong. Mr. Chow is a Chartered Engineer, member of Institution of Mechanical Engineers and The Hong Kong Institution of Engineers. Mr. Chow did not hold any directorship in public listed companies during the past three years.

Mr. Chow does not have any relationship with other directors, senior management or substantial shareholders or controlling shareholders of the Company. Mr. Chow does not have any interests in the shares of the Company within the meaning of Part XV of the Securities and Futures Ordinance.

Mr. Chow shall enter into a service contract with the Company for a term of two years subject to retirement by rotation and re-election at the general meetings of the Company in accordance with the articles of association of the Company. Mr. Chow will be entitled to a director’s fee of HK$120,000 per annum as determined by the Board with reference to his position, his level of responsibilities, remuneration policy of the Company and prevailing market conditions.

Save as disclosed above, there is no further information to be disclosed pursuant to the requirements of Rule 13.51(2) of the Listing Rules, nor there are other matters relating to the appointment of Mr. Chow that need to be brought to the attention of the Shareholders.

12. INFORMATION ABOUT DIRECTORS

As set out below is the information in relation to the background and experience of the Directors.

Executive Directors

Mr. Cheng Kwok Woo is the Chairman of the Group. He joined the Group in 1990 and is responsible for strategic planning, business development and Board issues of the Group. He has over 20 years of experience in the trading and manufacturing of abrasive products. Mr. K.W. Cheng is the brother of Mr. Cheng Kwong Cheong and Ms. Cheng Wai Ying.

Mr. Cheng Kwong Cheong is the Vice-Chairman and Chief Executive Officer of the Group. He joined the Group in 1990 and is responsible for overall operations and development of the Group. He has over 20 years of experience in the trading and manufacturing of abrasive products. Mr. K.C. Cheng is the brother of Mr. Cheng Kwok Woo and Ms. Cheng Wai Ying.

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GENERAL INFORMATION

APPENDIX V

Mr. Chow Yin Kwang joined the Group in 1995. He is responsible for the project development and quality management of the Group. He has over 10 years of experience in the Group’s project development, operation and quality management. Before joining the Group, Mr. Chow had more than 30 years of experience in operation management.

Ms. Cheng Wai Ying joined the Group in 1990. She is responsible for the financial management of the Group. She has over 20 years of experience in financial management and business operation management. Ms. Cheng is the sister of Mr. Cheng Kwok Woo and Mr. Cheng Kwong Cheong.

Ms. Chan Yim Fan joined the Group in 1990. She is responsible for the logistics of the Group including product supply, delivery, storage, and raw materials as well as trading product procurement. She has over 20 years of experience in logistics management.

Ms. Yeung Sau Han Agnes joined the Group in May 2007. She is responsible for the business development of the Group. She graduated from Hong Kong Polytechnic (now known as Hong Kong Polytechnic University) with a higher diploma in fashion design.

Ms. Chan Shui Sheung Ivy joined the Group in May 2007. She is responsible for the business development of the Group. She holds a Master of Business Administration degree from the University of South Australia. She has over 15 years experience in investment.

Independent Non-executive Directors

Mr. Anthony Francis Martin Conway was appointed as an independent non-executive Director in May 2003. He has over 40 years of experience in information technology and telecommunications, having held director and senior management positions in various renowned telecoms and information technology companies. He is currently the chairman of I.Tel (Holdings) Limited, and a fellow member of the Hong Kong Institute of Directors, the Hong Kong Management Association, the British Computer Society and The Hong Kong Institution of Engineers. Mr. Conway is also an independent non-executive director of Armitage Technologies Holding Limited, Polytec Asset Holdings Limited and Wing On Company International Limited, all are listed on the Stock Exchange.

Mr. Leung Yuen Wing was appointed as an independent non-executive Director in September 2004. He had held managerial positions in various renowned accounting firms and an investment bank. He is currently the Financial Controller and Company Secretary of iMerchants Limited, and a certified public accountant of the Hong Kong Institute of Certified Public Accountants and a fellow member of the Association of Chartered Certified Accountants.

Mr. Soong Kok Meng was appointed as an independent non-executive Director in July 2007. He graduated from Singapore Polytechnic with an advanced diploma in plastic technology and holds a Master degree of Science from University of Manchester Institute of Science and Technology. He has over 15 years sales and marketing experience and is now a Technical Marketing Manager of a European company.

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GENERAL INFORMATION

APPENDIX V

Mr. Chow was appointed as an independent non-executive Director in August 2007. He has 14-year experience in power industry and is specialised in business strategy development and change management for power company. He holds a Master degree of Engineering in Mechanical Engineering from The University of Hong Kong and a Master degree of Business Administration from The Chinese University of Hong Kong. He is a Chartered Engineer, member of Institution of Mechanical Engineers and The Hong Kong Institution of Engineers.

13. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be made available for inspection during normal business hours on Business Days at the office of the Company at 5th Floor, Unison Industrial Centre, 27-31 Au Pui Wan Street, Fo Tan, Shatin, Hong Kong from the date of this circular up to and including 18 September 2007 and at the EGM:

• (a) the memorandum and articles of association of the Company;

• (b) the material contracts referred to in the paragraph headed “Material contracts” in this Appendix;

• (c) the written consents of the experts referred to in the paragraph headed “Experts” in this Appendix;

• (d) the valuation report on the property interests of the Enlarged Group, the text of which is set out in Appendix I to this circular;

• (e) the accountants’ report from Deloitte Touche Tohmatsu in respect of the unaudited pro forma financial information of the Enlarged Group as set out in Appendix IV to this circular; and

• (f) the annual reports of the Company for each of the two financial years ended 31 December 2005 and 31 December 2006.

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NOTICE OF EGM

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(Stock Code: 379)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “EGM”) of the shareholders of PME Group Limited (the “Company”) will be held at 5th Floor, Unison Industrial Centre, Nos. 27-31 Au Pui Wan Street, Fo Tan, Shatin, Hong Kong on Tuesday, 18 September 2007 at 10:00 a.m. for the purpose of considering and, if thought fit, passing with or without amendments, the following resolutions of the Company:

ORDINARY RESOLUTIONS

1. “ THAT

2. (a) the conditional sale and purchase agreement (the “Agreement”) (a copy of which has been produced to the EGM marked “A” and signed by the chairman of the EGM for the purpose of identification) dated 25 June 2007 and entered into between Gainyear Worldwide Limited, a wholly owned subsidiary of the Company, as purchaser and Well Support Limited as vendor in relation to the sale and purchase of 52,415,466 shares (each a “Share”) of HK$0.001 each in the share capital of China Railway Logistics Limited (formerly known as Proactive Technology Holdings Limited) for a total consideration of HK$928,802,057.70 and the transactions contemplated thereunder, be and are hereby approved, confirmed and ratified;

3. (b) any one or more of the directors (the “Directors”) of the Company be and is/are hereby authorised to do all such acts and things and execute all such documents which he/they consider necessary, desirable or expedient for the purpose of, or in connection with, the implementation of and giving effect to the Agreement and the transactions contemplated thereunder; and

4. (c) the allotment and issue of an aggregate of an aggregate of 282,000,000 shares (the “Consideration Shares” and each a “Consideration Share”) of HK$0.01 each in the share capital of the Company credited as fully paid at an issue price of HK$1.10 per Consideration Share to the Vendor in accordance with the Agreement be and is hereby approved.

5. (d) any one or more Directors be and is/are hereby authorised to allot and issue the Consideration Shares in accordance with the terms of the Agreement and to take all steps necessary or expedient in his/their opinion to implement and/or give effect to the allotment and issue of the Consideration Shares;

6. for identification purposes only

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NOTICE OF EGM

• (e) the issue of the convertible bonds (the “Convertible Bonds”) in the principal amount of HK$$618,602,057.70 by the Company in accordance with the terms and conditions of the Agreement and the transactions contemplated thereunder be and are hereby approved; and

• (f) any one or more Directors be and is/are hereby authorised to take all steps necessary, desirable or expedient in his/their opinion to implement and/or give effect to the issue of the Convertible Bonds including but not limited to the allotment and issue of ordinary shares of HK$0.01 each in the share capital of the Company of which may fall to be issued upon the exercise of the conversion rights attaching to the Convertible Bonds.”

• “ THAT , to the extent not already exercised, the mandate to allot and issue shares of the Company given to the Directors at the annual general meeting (the “AGM”) of the Company held on 5 June 2007 be and is hereby revoked and replaced by the mandate THAT:

• (a) subject to paragraph (c) below, pursuant to the Rules (the “Listing Rules”) Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”), the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to allot, issue and deal with unissued shares of HK$0.01 each (the “Shares”) in the capital of the Company and to make or grant offers, agreements and options, including warrants to subscribe for Shares, which might require the exercise of such powers be and the same is hereby generally and unconditionally approved;

• (b) the approval in paragraph (a) above shall authorise the Directors during the Relevant Period to make or grant offers, agreements and options which might require the exercise of such powers after the end of the Relevant Period;

• (c) the aggregate nominal amount of share capital allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to options or otherwise), issued or dealt with by the Directors pursuant to the approval in paragraph (a) above, otherwise than pursuant to (i) a Rights Issue (as hereinafter defined); or (ii) the exercise of any options granted under the share option scheme of the Company; or (iii) any scrip dividend or similar arrangements providing for the allotment and issue of Shares in lieu of the whole or part of a dividend on Shares in accordance with the articles of association of the Company in force from time to time; or (iv) any issue of Shares upon the exercise of rights of subscription or conversion under the terms of any warrants of the Company or any securities which are convertible into Shares, shall not exceed the aggregate of:

  • (aa) 20 per cent. of the aggregate nominal amount of the share capital of the Company in issue on the date of the passing of this resolution; and

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NOTICE OF EGM

• (bb) (if the Directors are so authorised by a separate ordinary resolution of the shareholders of the Company) the nominal amount of any share capital of the Company repurchased by the Company subsequent to the passing of this resolution (up to a maximum equivalent to 10 per cent. of the aggregate nominal amount of the share capital of the Company in issue on the date of the passing of such resolution),

and the authority pursuant to paragraph (a) of this resolution shall be limited accordingly; and

• (d) for the purpose of this resolution:

“Relevant Period” means the period from the date of the passing of this resolution until whichever is the earliest of:

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

• (ii) the expiration of the period within which the next annual general meeting of the Company is required by the articles of association of the Company or any applicable law of the Cayman Islands to be held; or

• (iii) the passing of an ordinary resolution by the shareholders of the Company in general meeting revoking or varying the authority given to the Directors by this resolution;

“Rights Issue” means an offer of Shares, or offer or issue of warrants, options or other securities giving rights to subscribe for Shares open for a period fixed by the Directors to holders of Shares on the register on a fixed record date in proportion to their then holdings of Shares (subject to such exclusion or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements, or having regard to any restrictions or obligations under the laws of, or the requirements of, or the expense or delay which may be involved in determining the existence or extent of any restrictions or obligations under the laws of, or the requirements of, any jurisdiction outside Hong Kong or any recognised regulatory body or any stock exchange outside Hong Kong).”

1. “ THAT conditional upon the passing of resolution no. 2 above, the mandate granted to the Directors at the AGM to extend the general mandate to allot and issue Shares to Shares repurchased by the Company be and is hereby revoked and replaced by the mandate THAT the Directors be and they are hereby authorised to exercise the authority referred to in paragraph (a) of resolution no. 2 above in respect of the share capital of the Company referred to in sub-paragraph (bb) of paragraph (c) of such resolution.”

2. “ THAT Mr. Chow Fu Kit Edward be re-elected as an independent non-executive Director of the Company and that the board of directors of the Company be authorised to fix his remuneration.”

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NOTICE OF EGM

SPECIAL RESOLUTION

1. “ THAT subject to and conditional upon the approval of the Registrar of Companies in the Cayman Islands being obtained, the name of the Company be and is hereby changed from “PME Group Limited” to “CR Investment (Holdings) Company Limited” and upon the name change becoming effective, the new Chinese name “ ” will be adopted to replace “ ” for identification purpose only with effect from the date of entry of the new name of the register maintained by the Registrar of Companies in the Cayman Islands and that the Directors be and are hereby authorised to do all such acts and things and execute all such documents they consider necessary, desirable or expedient to give effect to the aforesaid change of name of the Company.”

By order of the Board PME Group Limited Cheng Kwok Woo Chairman

Hong Kong, 22 August 2007

Registered office: Head office and principal place Cricket Square of business in Hong Kong: Hutchins Drive 5th Floor P.O. Box 2681 Unison Industrial Centre Grand Cayman KY1-1111 Nos. 27-31 Au Pui Wan Street Cayman Islands Fo Tan Shatin Hong Kong

Notes:

1. A member entitled to attend and vote at the EGM is entitled to appoint one or more than one proxy to attend and, subject to the provisions of the articles of association of the Company, to vote on his behalf. A proxy need not be a member of the Company but must be present in person at the EGM to represent the member. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed.

2. A form of proxy for use at the EGM is enclosed. Whether or not you intend to attend the EGM in person, you are encouraged to complete and return the enclosed form of proxy in accordance with the instructions printed thereon. Completion and return of a form of proxy will not preclude a member from attending in person and voting at the EGM or any adjournment thereof, should he so wish.

3. In order to be valid, the form of proxy, together with a power of attorney or other authority, if any, under which it is signed, or a certified copy of such power or authority must be deposited at the head office and principal place of business in Hong Kong of the Company at 5th Floor, Unison Industrial Centre, Nos. 27 – 31 Au Pui Wan Street, Fo Tan, Shatin, Hong Kong not less than 48 hours before the time appointed for holding the EGM or any adjournment thereof.

4. In the case of joint holders of shares, any one of such holders may vote at the EGM, either personally or by proxy, in respect of such share as if he was solely entitled thereto, but if more than one of such joint holder are present at the EGM personally or by proxy, that one of the said persons so present whose name stands first on the register of members of the Company in respect of such shares shall alone be entitled to vote in respect thereof.

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