Yuxing InfoTech Holdings Limited ( )* - :: HKEX :: HKEXnews ::

If you are in any doubt about this prospectus, you should consult your stockbroker, bank manager, solicitor,professional accountant or other professional adviser.

Yuxing InfoTech Holdings Limited( )*

(incorporated in Bermuda with limited liability)

Placing of Sharesand

Listing on the Growth Enterprise Market ofThe Stock Exchange of Hong Kong Limited

Number of Placing Shares : 100,000,000 (subject to Over-allotment Option)Issue price : HK$4.20 per SharePar value : HK$0.10 eachStock code : 8005

Global Coordinator, Sponsor and Lead Manager

Co-Lead Manager

Core Pacific-Yamaichi International (H.K.) Limited

Co-Managers

First Shanghai Capital Limited Kim Eng Securities (Hong Kong) LimitedVickers Ballas Capital Limited Worldsec Corporate Finance Limited

A copy of this prospectus, having attached thereto the documents specified in the paragraph headed “Documentsdelivered to the Registrars of Companies” in Appendix VI to this prospectus, has been registered by the Registrarof Companies in Hong Kong as required by section 342C of the Companies Ordinance. A copy of this prospectushas also been filed with the Registrar of Companies in Bermuda in accordance with section 26 of the CompaniesAct. The Registrar of Companies in Hong Kong, the Registrar of Companies in Bermuda and the Securities andFutures Commission in Hong Kong take no responsibility as to the contents of this prospectus or any of thedocuments referred to above.

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

* For identification only

IMPORTANT

25th January, 2000

CHARACTERISTICS OF THE GROWTH ENTERPRISE MARKET (“GEM”) OF THE STOCKEXCHANGE OF HONG KONG LIMITED (THE “STOCK EXCHANGE”)

GEM has been established as a market designed to accommodate companies to which a highinvestment risk may be attached. In particular, companies may list on GEM with neither a trackrecord of profitability nor any obligation to forecast future profitability. Furthermore, there maybe risks arising out of the emerging nature of companies listed on GEM and the business sectorsor countries in which the companies operate. Prospective investors should be aware of thepotential risks of investing in such companies and should make the decision to invest only afterdue and careful consideration. The greater risk profile and other characteristics of GEM meanthat it is a market more suited to professional and other sophisticated investors.

Given the emerging nature of companies listed on GEM, there is a risk that securities tradedon GEM may be more susceptible to high market volatility than securities traded on the MainBoard and no assurance is given that there will be a liquid market in the securities traded onGEM.

The principal means of information dissemination on GEM is publication on the internetwebsite operated by the Stock Exchange. Listed companies are not generally required to issuepaid announcements in gazetted newspapers. Accordingly, prospective investors should note thatthey need to have access to the GEM website in order to obtain up-to-date information onGEM-listed issuers.

IMPORTANT NOTICE

— i —

14.50

You should rely only on the information contained in this prospectus to make your investmentdecision.

Yuxing InfoTech Holdings Limited has not authorised anyone to provide you with information thatis different from what is contained in this prospectus.

Any information or representation not made in this prospectus must not be relied on by you ashaving been authorised by Yuxing InfoTech Holdings Limited, the Underwriters, the directors ofeither of them, or any other person involved in the Placing.

Page

EXPECTED TIMETABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

GLOSSARY OF TECHNICAL TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

WAIVER FROM THE COMPLIANCE WITH THE LISTING RULES ANDTHE COMPANIES ORDINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

INFORMATION ABOUT THIS PROSPECTUS AND THE PLACING . . . . . . . . . . . . . . 23

DIRECTORS, CORPORATE INFORMATION ANDPARTIES INVOLVED IN THE PLACING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

OVERVIEW OF THE INFORMATION APPLIANCE INDUSTRY . . . . . . . . . . . . . . . . . 33

GROUP STRUCTURE

Group reorganisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Shareholding structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

BUSINESS

Active business pursuits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Sales, distribution, customer support and services. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Production, supplies, inventory and quality control. . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Intellectual property rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Year 2000 issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Other disclosure under the Listing Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES . . . . . . . . . . . . . . . . . . . . 53

SHARE CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

SUBSTANTIAL SHAREHOLDERS AND INITIAL MANAGEMENT SHAREHOLDERS . 59

CONTENTS

— ii —

Page

FINANCIAL INFORMATION

Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Liquidity, financial resources and capital structure. . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Trading record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Profit estimate, dividend policy, working capital and distributable reserves. . . . . . . . 66

Adjusted net tangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

No material adverse change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

BUSINESS OBJECTIVES AND FUTURE STRATEGIES

Overall objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Future plans and prospects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Strategic alliance with renowned international IT companies. . . . . . . . . . . . . . . . . . . . 75

Principal strengths of the Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Use of proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

UNDERWRITING ARRANGEMENTS AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . 82

CONDITIONS OF THE PLACING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

APPENDICES

I — Accountants’ report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

II — Profit estimate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

III — Property valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

IV — Summary of the constitution of the Company andBermuda company law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

V — Statutory and general information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

VI — Documents delivered and available for inspection . . . . . . . . . . . . . . . . 151

CONTENTS

— iii —

Announcement of the results of the Placing

to be published on the GEM website on. . . . . . . . . . . . . . . . . . . . . . . . . . . .28th January, 2000

Share certificates available on(Note) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28th January, 2000

Dealings in the Shares on GEM to commence on. . . . . . . . . . . . . . . . . . . . . . .31st January, 2000

Note: Share certificates are expected to be issued in the name of HKSCC Nominees Limited and deposited into CCASS on

28th January, 2000 for credit to the respective CCASS participant accounts of the Underwriters.

EXPECTED TIMETABLE

— iv —

14.08(7)(b)

This summary aims to give you an overview of the information contained in this prospectus.Because this is a summary, it does not contain all the information that may be important to you.You should read the whole prospectus before you decide to invest in the Shares.

BUSINESS

The Group is principally engaged in the research and development, design, marketing and saleof information appliances in the PRC. Through independent sales agents in many parts of the PRC,the Group sells information appliances, including computer VCDs and educational computers, andsoftware applications under the “ ” brandname. The Group commenced its business throughGolden Yuxing which was established in the PRC in 1996. To date, it has already launched six modelsof computer VCD, five models of educational computer and more than 1,000 software applications.

As a result of the Group’s continuous research and development and the application ofinformation appliance technology, the Group successfully developed IAMSDP in 1998. The Directorsbelieve that IAMSDP provides a more efficient and simplified approach for developing multimediasoftware applications for information appliances than the use of programming languages. It enablesthe development of multimedia software applications which can be run on information appliancesusing different operating systems. The Directors further believe that this platform-neutral technologycan potentially provide the Group with substantial business opportunities in the information applianceindustry in the PRC.

In recent years, the Group has experienced significant growth in its businesses. In 1998, theGroup’s turnover and profit attributable to shareholders amounted to approximately HK$127.1 millionand approximately HK$34.1 million respectively, representing annual growth rates of approximately29.4% and 138.7% respectively over 1997. For the six months ended 30th June, 1999, the Group’sturnover and profit attributable to shareholders increased to approximately HK$223.1 million andHK$57.1 million respectively. The following table shows, for the periods indicated, the Group’sturnover by product category and net profit for each of the two years ended 31st December, 1997 and1998 and the six months ended 30th June, 1999. Please refer to the section headed “Financialinformation — trading record” in this prospectus for further details.

Year ended 31st December,Six months ended

30th June,1997 1998 1999

HK$’000 % HK$’000 % HK$’000 %

TurnoverComputer VCDs — — 41,094 32 203,836 91Educational computers 83,159 85 68,437 54 9,812 5

Sub-total 83,159 85 109,531 86 213,648 96Software applicationsand others 15,068 15 17,587 14 9,477 4

Total 98,227 100 127,118 100 223,125 100

Net profit 14,291 34,113 57,127

SUMMARY

— 1 —

14.08(7)(a)A1a.28(1)(a)

A1a.33(1)

14.16

A1a.33(1)

PRINCIPAL STRENGTHS OF THE GROUP

The Directors believe that the principal strengths of the Group comprise the following:

Strong research and development capability

The Directors believe that the Group’s success is primarily attributable to its ability to develop

its own information appliance technology and apply it in such a way that its products are in line with

the economic standard of and are of practical use to consumers in the PRC. The Group has successfully

integrated the technology for PC into those for television and VCD and launched its first model of

computer VCD in September 1998. The Group has also been involved in the development of software

applications for use on its computer VCDs and educational computers. To date, the Group has

launched over 1,000 software applications in the PRC market. The Group has the capability of

developing software engines that can enable the Group’s software applications to be compatible with

Windows CE and other non-PC information appliance platforms. The Directors believe that all these

accomplishments have together contributed towards making the “” brand of products one of the

most popular brands of information appliances in the PRC.

Experienced management team and culture of continuous innovation

The Group has an experienced management team comprising members who possess extensive

experience and technical expertise in the IT industry and an understanding of the information

appliance market in the PRC. The management team is of particular importance to the success of the

Group’s future business development because of its ability to anticipate and develop a wide range of

products to meet the demand driven by the emerging IT industry. The Directors believe that the Group

has a corporate culture of continuous innovation. Since its establishment, the Group has received

numerous awards for its advanced technology.

Competitive cost structure and well positioned products

The Directors believe that the Group is able to maintain a flexible cost structure that will allow

its products to withstand periods of low demand and price competition. The Group’s strategy is to

engage OEMs to manufacture its products which enables the Group to operate with minimal overheadsduring periods of low demand. Although the Group’s computer VCDs and educational computers havefewer functions than PCs, they are substantially less expensive than PCs in the PRC. The Directorsfurther believe that the relatively low level of purchasing power of consumers has limited thepopularity of PCs in the PRC.

Established market position in a rapidly developing industry

The Directors believe that the information appliance industry in the PRC will continue toexperience significant growth. Since the commencement of its business, the Group has gained publicrecognition as one of the leading manufacturers in the information appliance industry in the PRC. TheDirectors believe that this established market position enables the Group to capture future growthopportunities. The Group has a wide customer base and the “” brandname is recognised as oneof the leading brandnames in the information appliance industry in the PRC.

SUMMARY

— 2 —

Extensive and efficient distribution network

The Group has an extensive distribution network for its products in many parts of China. The

Group has entered into agreements with 32 provincial sales agents in the PRC which are responsible

for the sale of the Group’s products in their respective provinces. The Group has exercised stringent

measures to manage its sales agents. These measures are designed to ensure rapid collection of sales

proceeds and reduce competition among the Group’s sales agents.

RISK FACTORS

The Directors consider that the business of the Group is subject to a number of risks as follows:

Risks relating to the Group:

+ Computer VCD and educational computer markets in the PRC

+ Dependence on key personnel

+ Dependence on sales agents

+ Government incentive schemes

+ Material and component supplies

+ Protection of intellectual property rights of the Group

+ Infringement of intellectual property rights by the Group

+ Year 2000 issue

Risks relating to the industry

Risks relating to the PRC:

+ Political structure and economic environment in the PRC

+ Foreign exchange control and currency conversion risks

+ Legal considerations

SUMMARY

— 3 —

FUTURE PLANS AND PROSPECTS

Promoting IAMSDP as a standard for software application development in the informationappliance industry in the PRC

The Directors believe that the user-friendly feature of IAMSDP would enable a large number of

individuals with limited programming knowledge to develop multimedia software applications for the

Group’s information appliances. The Directors further believe that IAMSDP’s platform-neutral

technology (meaning that software applications developed using IAMSDP can be run on different

operating systems and hardware platforms) is able to provide significant growth opportunities for the

Group by facilitating access to other sectors of the information appliance market, since multimedia

software applications developed using IAMSDP can be run on PCs and other information appliances.

The Directors believe that once a sufficiently wide range of multimedia software applications in

the market has been developed using IAMSDP, other brands of information appliances will choose to

be compatible with the Group’s software engine in order to utilise those multimedia software

applications then available. The Directors plan to continue the development of IAMSDP in order to

keep pace with the rapid development of digital video technology. In addition, the Group intends to

develop a series of multimedia software development tools, based on IAMSDP, to meet the demand

of different types of information appliances, including those for DVB and VOD networks, virtual

reality video games and multimedia educational software applications.

Popularising the Group’s information appliances in the PRC

The Group’s computer VCDs use televisions as their basic audio-visual displaying device.

Consequently, any person who owns a television set is a potential customer of the Group, thus

providing a huge potential for market expansion. The Directors believe that the functions of computer

VCDs can also be enhanced or expanded, thereby developing a new range of products such as

computer super VCDs, computer DVDs and broadband set-top boxes. The Directors expect that the

market potential of such new products to be promising.

The objectives of the Venus Project include the promotion of the use of the Internet in the PRC

and the development of a series of information appliances which incorporate data communication,

entertainment, computation and word processing functions, through the use of Windows CE as the

operating system and television as the audio-visual displaying device. The Directors expect that the

implementation of the Venus Project will further enhance the development of the computer VCD

market and arouse public interest in related products.

The Directors plan to continuously introduce new models of computer VCD and computer super

VCD with higher processing speed and enhanced functions relating to word processing, spreadsheet,

Internet access and games. In addition, the Group intends to introduce its own models of regular DVD

and computer DVD.

SUMMARY

— 4 —

14.08(7)(a)14.19(3)

Becoming a market leader in multimedia software application development

In recent years, the software market in the PRC has experienced rapid growth. In 1990, totalsoftware sales in the PRC amounted to approximately RMB220 million. By 1997, total software salesin the PRC had increased by almost 50 times as compared to 1990 to approximately RMB12 billion.The Directors believe that the software market is an area where the Group will have a high potentialfor growth as the Group aims to provide a wide variety of software applications for end users to choosefrom.

Promoting the Group’s educational computers as popular multimedia educational tool in thePRC

The Directors believe that the Group’s educational computers have huge potential for growth inthe education sector in the PRC due to the fact that the State has placed increasing emphasis oncomputer education during recent years. Given that funding for education in the PRC is generallylimited, the Directors believe that the Group’s educational computers will be more competitive thanPCs due to their relatively low prices. By incorporating the newly developed 3097 processor in itseducational computers, the Group intends to stimulate a growth in the demand for such products bysubstantially lowering their prices.

STRATEGIC ALLIANCES WITH RENOWNED INTERNATIONAL IT COMPANIES

Proposed strategic alliance with Microsoft to promote the Venus Project

The Group plans to be actively involved in the Venus Project. The Venus Project is formulatedby Microsoft with a view to develop a series of products which have computing, entertainment andcommunication functions and which use Windows CE as their operating system. These products aretargetted to meet the increasing demand for computers and Internet access and also to be moreaffordable than PCs to the general public in the PRC.

The Directors believe that the Group’s computer VCDs should largely fulfil the goals andproduct concept of the Venus Project. In addition, multimedia software applications developed by theGroup using IAMSDP are capable of being converted so that they can be run on any Venus Computers.Accordingly, the Directors believe that the Group’s participation in the Venus Project can stimulatethe development of a wider range of applicable software applications and more sophisticated productfunctions. The Directors are of the view that the Group has a significant business opportunity arisingfrom the potential strategic relationship between the Group and Microsoft.

Strategic alliance with C-Cube

The Group has signed a memorandum of agreement on 17th January, 2000 with C-Cube regardingthe joint development of broadband set-top boxes and DVB products in the PRC. In addition, theGroup plans to launch its own models of regular DVD and computer DVD using chips provided byC-Cube and to develop other new products and software applications using a platform provided byC-Cube. The Directors believe that by combining C-Cube’s technology and the Group’s expertise inthe information appliance market and in multimedia software application development in the PRC, theGroup will be able to launch a new series of set-top boxes with functions such as DVB, Internet accessand advanced PC-level graphics. The Directors expect that the co-operation with C-Cube will bringgrowth opportunities to the Group.

SUMMARY

— 5 —

USE OF PROCEEDS

The net proceeds from the Placing (assuming that the Over-allotment Option is not exercised),after deducting related expenses, are estimated to be approximately HK$393 million. If theOver-allotment Option is exercised in full, the net proceeds from the Placing will increase toapproximately HK$454 million. The Company intends to apply the net proceeds from the Placing inthe following manner:

— approximately HK$10 million will be used for the research and development of IAMSDPin 2000 and 2001;

— approximately HK$80 million will be used for the research and development and promotionof a new series of regular DVDs and computer DVDs in 2000 and 2001;

— approximately HK$50 million will be used for the promotion of computer VCDs in 2000;

— approximately HK$10 million will be used for the co-operation with the Ministry ofEducation to specifically promote the use of the Group’s educational computers in 2000;

— approximately HK$30 million will be used for the research and development and generalpromotion of educational computers in 2000;

— approximately HK$10 million will be used by the Group in connection with the VenusProject in 2000 and 2001;

— approximately HK$10 million will be used for the research of advanced digital videographics and broadband Internet access technology in 2000;

— approximately HK$60 million will be used to purchase testing and research anddevelopment related equipments;

— approximately HK$10 million will be used for the development of software applicationsand the purchase of copyrights in 2000;

— approximately HK$50 million will be used for the expansion of the Group’s distribution andsales network;

— approximately HK$5 million will be used for the establishment of the new office by theGroup in Hong Kong;

— approximately HK$60 million will be used to meet additional working capital requirementfor the sales and marketing of the new series of regular DVDs and computer DVDs in 2000and 2001;

— the balance of approximately HK$8 million will be used as general working capital formaintaining the day-to-day operation of the Group; and

SUMMARY

— 6 —

A1a.17A1a.48

— in the event that the Over-allotment Option is exercised in full, the additional net proceeds

of approximately HK$61 million will be applied by the Company as general working

capital, out of which, approximately HK$40 million will be used to meet the additional

working capital required due to any future increase in the business volume of the Group,

and approximately HK$21 million will be used to meet the working capital requirement

arising from the Group’s participation in the Venus Project.

To the extent that the net proceeds of the Placing are not immediately used for the above

purposes, it is the present intention of the Directors that the net proceeds will be placed on short-term

deposits with banks or other financial institutions.

In this prospectus, unless otherwise specifically provided, amounts in Renminbi have been

converted into Hong Kong dollars at the rate of HK$1.00 to RMB1.0662.

TRADING RECORD

The following is a summary of the audited combined results of the Group for the two years ended

31st December, 1998 and the six months ended 30th June, 1999 (“Relevant Periods”), as extracted

from the accountants’ report, the text of which is set out in Appendix I to this prospectus. This

summary has been prepared on the assumption that the current structure of the Group was in existence

throughout the Relevant Periods.

For further details of the basis on which the audited combined results were prepared, please refer

to the section headed “Financial information — trading record” in this prospectus.

Year ended 31st December,

Six monthsended

30th June,1997 1998 1999

HK$’000 HK$’000 HK$’000

Turnover 98,227 127,118 223,125

Operating profit 12,052 31,338 63,183Other income 9,375 20,634 21,881

Profit before taxation 21,427 51,972 85,064Taxation (7,136) (17,859) (27,937)

Profit attributable to shareholders 14,291 34,113 57,127

Dividends — — 469

SUMMARY

— 7 —

14.08(7)(a)

Co Ord.3rd Sch.Para.nd 27

According to paragraph 31 of the Third Schedule of the Companies Ordinance and rules7.03(1) and 11.10 of the Listing Rules, the Company is required to include the Group’s financialresults for the year ended 31st December, 1999 in the accountants’ report. The SFC and the StockExchange have granted waivers in relation to the strict compliance with paragraph 31 of theThird Schedule of the Companies Ordinance and rules 7.03(1) and 11.10 of the Listing Rulesrespectively. The Directors are aware of the requirement of rule 11.11 of the Listing Rules whichstates that the latest financial period reported on by the reporting accountants must not haveended more than six months before the date of this prospectus. The Company has sought andobtained a waiver from compliance with such a requirement from the Stock Exchange. TheDirectors confirm that they have performed sufficient due diligence on the Group to ensure that,save as disclosed herein, up to the date of this prospectus, there has been no material adversechange in the financial position of the Group since 30th June, 1999, and there is no event whichwould materially affect the information shown in the accountants’ report set out in Appendix 1to this prospectus.

PROFIT ESTIMATE FOR THE YEAR ENDED 31ST DECEMBER, 1999

Estimated combined profit after taxation but

before extraordinary items(Note 1) . . . . . . . . . . . . . . . . . . . . . . . notless than HK$107 million

Estimated earnings per Share(Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31.7 cents

Notes:

1. The bases and assumptions on which the above profit estimate has been prepared are set out in Appendix II to this

prospectus.

2. The calculation of estimated earnings per Share is on a pro forma fully diluted basis, which is based on the estimated

combined profit after taxation but before extraordinary items of the Group for the year ended 31st December, 1999 and

on the assumption that the Company had been listed since 1st January, 1999 and a total of 400,000,000 Shares had been

in issue during that year. The Directors are not aware of any extraordinary items which have arisen in respect of the year

ended 31st December, 1999. The calculation assumes that no Shares will be issued pursuant to the Over-allotment Option.

The estimated combined profit after taxation but before extraordinary items of the Group for the year ended 31st

December, 1999 has been adjusted for the purposes of this calculation to take into account the interest income that would

have been earned if the estimated net proceeds of the Placing had been received on 1st January, 1999 and interest had

been earned thereon at a rate of 5% per annum.

SUMMARY

— 8 —

14.08(7)(a)

SHARE ISSUE STATISTICS (Note 1)

Issue price per Share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .HK$4.20

Market capitalisation(Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .HK$1,680 million

Estimated price/earnings multiples(Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13.2 times

Adjusted net tangible asset value per Share(Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .HK$1.42

Notes:

1. Except where otherwise indicated, the issue statistics have been prepared on the assumption that no Shares will be issued

pursuant to the Over-allotment Option.

2. The calculation of market capitalisation is based on the Issue Price and a total of 400,000,000 Shares in issue

immediately after the completion of the Placing but does not take into account any Shares which may be issued upon

the exercise of the Over-allotment Option. If the Over-allotment Option is exercised in full, the market capitalisation at

the Issue Price would be HK$1,743 million.

3. The calculation of estimated price/earnings multiple is on a pro forma fully diluted basis, which is based on the estimated

earnings per Share on a pro forma fully diluted basis of approximately 31.7 cents for the year ended 31st December, 1999

and on the Issue Price. The estimated combined profit after taxation but before extraordinary items of the Group for the

year ended 31st December, 1999 has been adjusted for the purposes of this calculation to take into account the interest

income that would have been earned if the estimated net proceeds of the Placing had been received on 1st January, 1999

and interest had been earned thereon at a rate of 5% per annum.

4. The adjusted net tangible asset value per Share has been arrived at after the adjustments referred to in the section headed

“Financial information — adjusted net tangible assets” in this prospectus and on the basis of a total of 400,000,000

Shares in issue immediately following the completion of the Placing at the Issue Price, but does not take into account

any Shares which may fall to be issued upon the exercise of the Over-allotment Option. If the Over-allotment Option is

exercised in full, the adjusted net tangible assets of the Group and the adjusted net tangible asset value per Share would

be approximately HK$628 million and HK$1.51 respectively.

There are risks associated with any investment. Some of the particular risks in investing in theShares are set out in the section headed “Risk factors” in this prospectus. You should read thatsection carefully before you decide to invest in the Shares.

SUMMARY

— 9 —

A1a.21

In this prospectus, unless the context otherwise requires, the following expressions have the

meanings set out below. See also “Glossary of technical terms”.

“business day” any day (excluding Saturday) on which banks generally are openfor business in Hong Kong

“BVI” British Virgin Islands

“Bye-laws” the bye-laws of the Company, as amended from time to time

“C-Cube” C-Cube Microsystems Inc.

“CCASS” the Central Clearing and Settlement System established andoperated by Hongkong Clearing

“Companies Act” the Companies Act 1981 of Bermuda

“Companies Ordinance”‘ the Companies Ordinance (Chapter 32 of the Laws of HongKong)

“Company” Yuxing InfoTech Holdings Limited, an exempted companyincorporated in Bermuda with limited liability

“Director(s)” or “Boardof Directors”

director(s) or the board of directors of the Company

“Dragon Treasure” Dragon Treasure Ltd. ( ), a company incorporated inthe BVI with limited liability and a substantial shareholder ofthe Company

“GAAP” generally accepted accounting principles

“GEM” the Growth Enterprise Market of the Stock Exchange

“GEM Listing Committee” the listing sub-committee of the Council of the Stock Exchangewith responsibility for GEM

“GEM website” the Internet website operated by the Stock Exchange for thepurposes of GEM

“Golden Yuxing” ( )(Beijing Golden Yuxing Electronics and Technology Co., Ltd.),a limited liability company incorporated in the PRC that becamea sino-foreign co-operative joint venture enterprise on 8thNovember, 1999

“Group” the Company together with its subsidiaries, or where the contextso requires, in respect of the period before the Company becamethe holding company of its present subsidiaries, suchsubsidiaries as if they were the Company’s subsidiaries at thattime

DEFINITIONS

— 10 —

“HDYEC” (Beijing Haidian District YuxingElectronics Company), a limited liability company incorporatedin the PRC and a wholly-owned subsidiary of YMERC

“HK$” and “cents” Hong Kong dollar(s) and cents, the lawful currency of HongKong

“Hong Kong” the Hong Kong Special Administrative Region of the PRC

“Hongkong Clearing” Hong Kong Securities Clearing Company Limited

“ICEA” ICEA Capital Limited

“Issue Price” the price per Placing Share (excluding brokerage and StockExchange transaction levy) of HK$4.20

“Latest Practicable Date” 14th January, 2000, being the latest practicable date for theinclusion of certain information in this prospectus prior to itspublication

“Listing Rules” the Rules Governing the Listing of Securities on GEM

“Main Board” the stock market operated by the Stock Exchange other thanGEM and the options market

“Microsoft” Microsoft Corporation

“Over-allotment Option” the option granted by the Company to ICEA under theUnderwriting Agreement, pursuant to which the Company maybe required by ICEA to issue not more than an aggregate of15,000,000 Shares at the Issue Price to cover over-allocations inthe Placing

“PBOC” the People’s Bank of China ( )

“PBOC Exchange Rate” the exchange rate for foreign exchange transactions involvingRenminbi as published daily by the PBOC on the basis of theexchange rate prevailing in the inter-bank foreign exchangemarket on the preceding day

“Placing” the conditional placing of the Placing Shares by theUnderwriters with professional and institutional investors, asfurther described in the section headed “Information about thisprospectus and the Placing” in this prospectus

“Placing Shares” the 100,000,000 new Shares being initially placed at the IssuePrice

“PRC” or “China” the People’s Republic of China (except where the contextrequires, references in this prospectus to the PRC or China donot include Hong Kong, Macau or Taiwan)

DEFINITIONS

— 11 —

A1a.15(3)(c)

“QIBs” qualified institutional buyers within the meaning of Rule 144A

“Regulation S” Regulation S under the Securities Act

“RMB” and “Renminbi” the lawful currency of the PRC

“Rule 144A” Rule 144A under the Securities Act

“SAFE” State Administration for Foreign Exchange of the PRC( )

“SAIC” State Administration of Industry and Commerce of the PRC( )

“Sallmanns” Sallmanns (Far East) Limited, an independent professionalvaluer

“Securities Act” United States Securities Act of 1933, as amended

“SFC” the Securities and Futures Commission in Hong Kong

“Shares” shares of the Company

“State” the PRC government

“Stock Exchange” The Stock Exchange of Hong Kong Limited

“Sunplus” Sunplus Technology Co., Ltd., an applied IC manufacturer inTaiwan, whose shares are listed on the Taiwan Stock Exchange

“Super Dragon” Super Dragon Co., Ltd. ( ), a company incorporatedin the BVI with limited liability and a substantial shareholder ofthe Company

“Underwriters” ICEA, Core Pacific-Yamaichi International (H.K.) Limited, FirstShanghai Capital Limited, Kim Eng Securities (Hong Kong)Limited, Vickers Ballas Capital Limited and Worldsec CorporateFinance Limited

“Underwriting Agreement” the underwriting and placing agreement dated 25th January,2000 entered into between the Company, Super Dragon, DragonTreasure, Messrs. Zhu Wei Sha, Chen Fu Rong, Shi Guang Rong,Wang An Zhong and Sun Li Jun and the Underwriters

“United States” or “US” the United States of America

“US$” United States dollars, the lawful currency of the United States

DEFINITIONS

— 12 —

“YMERC” (Beijing Yuxing Machinery andElectronics Research Centre, formerly known as

(Beijing Xicheng District Yuxing Machineryand Electronics Research Centre), a limited liability companyincorporated in the PRC

“Yongxing (PRC)” (Beijing Shi Yongxing ElectronicsCompany Limited), a limited liability company incorporated inthe PRC

“Yuxing (BVI)” Yuxing Electronics Company Limited ( ), acompany incorporated in the BVI with limited liability and awholly-owned subsidary of the Company

DEFINITIONS

— 13 —

“3088 processor” developed by Sunplus and used as the CPU of the Group’seducational computers, being a large-scale IC that combinesCPU, video processor and audio processor

“3097 processor” a new generation of the 3088 processor developed by the Groupin co-operation with Sunplus to be used in the Group’s newmodels of low-priced educational computers

“3098 processor” developed by the Group in co-operation with Sunplus and usedas the CPU of the Group’s computer VCDs, being a large scaleIC that combines the functions of the 3088 processor togetherwith an input/output circuit and a memory management unit

“3099 processor” a new generation of the 3098 processor developed by the Groupin co-operation with Sunplus to be used in the Group’s computerVCDs

“8M MASK ROM” 8 Megabyte Mask ROM

“broadband” relating to communication systems in which the medium oftransmission (such as a wire or fiber-optic cable) carriesmultiple messages at a time, each message modulated on its owncarrier frequency by means of modems

“CD” compact disc

“CD7 chips set” digital servo processor and compact disc decoder with integrateddigital-to-analog converter for VCD

“CL680 chips set” MPEG I audio and video decoder developed by C-Cube

“component-on-a-chip” a chip design architecture that integrates several computer chipfunctions into one processor

“computer VCD” a device which can be used as a set-top box and a VCD player,having an operating system together with some popularfunctions of a PC, such as Internet browsing, email exchange,and interactive games

“computer super VCD” a computer VCD with improved audio and visual quality

“computer DVD” a device which can be used as a set-top box and a DVD player,having an operating system together with some popularfunctions of a PC, such as Internet browsing, email exchange,and multimedia interactive games

“CPU” central processing unit

“DRAM” dynamic random access memory

“DVB” digital video broadcasting

GLOSSARY OF TECHNICAL TERMS

— 14 —

“DVD” digital video disk player that has MPEG II video decodingfunction

“floppy drive” 31⁄2 inches floppy disk drive

“HPC” handheld PC

“IAMSDP” information appliance multimedia software developmentplatform, a technology developed by the Group for developingmultimedia software applications to enhance the functionality ofinformation appliances

“IC” integrated circuit

“information appliance” consumer electrical appliance incorporating some PC functionssuch as Internet browsing and video games

“Internet” a global network of networks accessed by users with a computerand a modem via a service provider

“IT” information technology

“LAN” local area network, a network allowing the inter-connection andinter-communication of a group of computers

“Mask ROM” a type of ROM that can store a program or data

“MPEG” a set of standards for audio and video compression establishedby the Motion Pictures Experts Group

“MPEG I” the original MPEG standard for storing and retrieving video andaudio information, designed for CD-ROM technology

“MPEG II” an extension of the MPEG I standard designed for broadcasttelevision, including high definition television

“multimedia” a combination of different communications tools such as sound,graphics, animation and video

“OEM” original equipment manufacturer

“operating system” a software that controls the allocation and usage of hardwareresources such as memory, central processing and disk space,which is the foundation on which software applications are built

“PC” personal computer

“ROM” read only memory


— 15 —

“server” a computer that provides shared resources to network users,which typically has greater CPU power, number of CPUs,memory, cache, disk storage, and power supplies than acomputer that is used as a single-user workstation

“set-top box” a device that acts as the interface between a television set and anetwork by converting digital signals into input signals to thetelevision set

“software applications” software that allows computer to possess different functions,such as word processing, databases and games

“software engine” a type of program that simulates the operating environment ofcertain hardware device

“thin client” a computing architecture that can reduce the cost and complexityof client computers on a network while giving end-users theright level of functionality

“VCD” video compact disc

“VCD loader” optical reading device including laser lens and relatedmechanism

“Venus Computers” information appliance products using the Chinese version ofWindows CE as their operating system

“Venus Project” a development program formulated by Microsoft, and jointlyimplemented by a number of strategic alliances, which aims todevelop a series of products targeted at the consumer market inthe PRC, which use the Chinese version of Windows CE as theoperating system and television as the audio-visual displayingdevice

“VOD” video on demand

“Windows CE” a simplified version of the Microsoft Windows platformdesigned for use with HPCs and other information applianceproducts which includes scaled-down versions of severalMicrosoft application programs, including Excel, Word, InternetExplorer, Schedule+, and an e-mail client

C-Cube is the trademark or registered trademark of C-Cube Microsystems Inc.. Microsoft,

Windows and Windows CE are registered trademarks of Microsoft Corporation.


— 16 —

In evaluating an investment in the Shares, prospective investors should consider carefully all theinformation contained in this prospectus, including the considerations set out below.

RISKS RELATING TO THE GROUP

Computer VCD and educational computer markets in the PRC

The Group’s operating results depend significantly on consumer demand for its products in thePRC, which, in turn, depends on whether the Group’s products can remain competitive with othercomputer VCD and educational computer manufacturers in terms of functions, pricing and thecontinuous launching of related software applications. The IT industry is characterised by thedifficulty in business development forecasting and the rapid advances in technology. Technologicalbreakthroughs may lead to rapid development of a product while it may also lead to rapid slowdownin demand for another product and, hence, rapid price erosion. These factors make product cyclesdifficult to predict. Consumer demand for computer VCDs and educational computers is highlycyclical in nature, with periods of high demand as well as periods of oversupply. The Group’soperating results could be adversely affected if the Group fails to anticipate customer demandaccurately.

Dependence on key personnel

Like other companies in the IT industry, the Group’s success depends to a significant extent uponthe continuous service of its key senior executives and research and development, engineering andmarketing personnel. The loss of the services of any of the Group’s key personnel could have anadverse effect on the Group’s operations.

Dependence on sales agents

The five largest sales agents of the Group accounted for approximately 21.6%, 16.6% and 19.2%of the Group’s total sales for each of the two years ended 31st December, 1998 and the six monthsended 30th June, 1999 respectively. The Group exercises strict control over the geographicaldistribution boundary, retail price and service standard of its provincial sales agents. If thearrangement with the provincial sales agents of the Group is terminated, the Group’s salesperformance at that particular time may be adversely affected.

Furthermore, if there is any material decline in product sales over a long period of time, theGroup’s current policy on its distribution network may be interrupted for economic considerations,which could in turn have an adverse effect on the Group’s overall sales performance.

Government incentive schemes

The Group receives strong support from the Government of Pinggu County, Beijing, the PRCincluding significant government incentive bonuses granted to the Group, by virtue of Golden Yuxinghaving been categorised as a “high technology” company established in the Jinhaijiao TechnologyZone in Pinggu County. The government incentive bonuses recorded by Golden Yuxing comprisedamounts calculated with reference to 100%, 100% and 54.5% of the amount of income tax payable byGolden Yuxing for each of the two years ended 31st December, 1998 and the six months ended 30thJune, 1999 respectively, and certain incentive bonuses which were granted by the Government ofPinggu County on a discretionary basis. The government incentive bonuses granted with reference toincome tax and on a discretionary basis amounted to approximately HK$7.2 million and HK$2.2

RISK FACTORS

— 17 —

14.08 (5)14.22

14.22 (1)

million, HK$17.9 million and HK$4.9 million and HK$15.2 million and HK$6.7 million for each of

the two years ended 31st December, 1998 and the six months ended 30th June, 1999 respectively.

There can be no assurance that the Government of Pinggu County will continue to grant government

incentive bonuses to the Group to the same degree as before or at all. If the Government of Pinggu

County discontinues its grant of incentive bonuses to the Group, the Group’s income will be

significantly reduced.

Material and component supplies

Materials and components required by the Company are imported through import and export

trading firms. The largest supplier of the Group accounted for approximately 28.3%, 21.7% and 17.0%

of the Group’s total purchases, while the five largest suppliers of the Group accounted for

approximately 69.0%, 39.0% and 39.0% of the Group’s total purchases, for each of the two years

ended 31st December, 1998 and the six months ended 30th June, 1999 respectively. Although material

and component supplies are not dominated by a small number of suppliers and are generally

competitive, any new material or component introduced to the market could be controlled by a limited

number of suppliers for a certain period of time, which could in turn place other suppliers or the Group

in a relatively passive position.

However, there can be no assurance that shortages in components and materials required by the

Group will not occur in the future. Interruption in the supply of key components and materials could

have an adverse effect on the Group’s operations.

Protection of intellectual property rights of the Group

The Group has been granted the exclusive right to use certain registered trademarks, patents and

software copyrights in respect of a number of designs, production processes, products and software

applications which were mainly registered under the name of YMERC. For further details, please refer

to the section headed “Business — intellectual property rights” in this prospectus. However,

infringement of intellectual property rights, by way of the sale of counterfeit goods or otherwise,

occurs frequently in the PRC and there can be no assurance that infringement can be kept under control

at all times. Accordingly, any significant infringement could adversely affect the Group’s operations.

Infringement of intellectual property rights by the Group

The Group cannot be certain that its products do not or will not infringe upon valid patents,

trademarks, copyrights or other intellectual property rights held by third parties. Certain of the

Group’s products adopt technology or components either solely developed by third parties or jointly

developed by the Group in co-operation with such third parties. The Group has no control over

whether the technology adopted and the components designed by such third parties have not infringed

upon any intellectual property rights held by other third parties. Therefore, the Group may be subject

to legal proceedings and claims from time to time relating to the intellectual property rights of other

third parties in the ordinary course of its business. Furthermore, the Group may incur substantialexpenses in defending against any such third-party infringement claims, regardless of their merit, andsuccessful infringement claims against the Group may result in substantial monetary liability or maymaterially disrupt the conduct of the Group’s business.

RISK FACTORS

— 18 —

A1a.28 (4)

Year 2000 issue

The “Year 2000 issue” has arisen as a result of computer programs being written and otherautomated systems being designed using two digits (rather than four) to identify calendar years,resulting in potentially incorrect calculations or system failure in any computer or automated systemswith time-sensitive functions for the year 2000 and beyond. Accordingly, a computer programmeaffected by the Year 2000 issue may recognise a date using “00” as the year 1900 instead of the year2000. The standard for solving the issue is that computers can accurately function before, during andbeyond the year 2000 without being affected by the change of dates. The Group recognises that theYear 2000 issue, if left unresolved, could result in the Group and its business counterparts andcustomers, encountering major system failures and facing significant operating difficulties. The Grouphas not been insured for Year 2000 claims. The liabilities which the Group may incur as a result ofproblems arising from non-compliance, including the potential claims relating to product warrantiesprovided by the Group for its products, may have an adverse effect on the Group’s businesses andfinancial condition.

RISKS RELATING TO THE INDUSTRY

Rapid technological changes in the information appliance industry and the IT industry at largerequire the Group to continuously research and develop new technology based on current technologyas well as to anticipate and apply new technology on a timely and effective basis in order to meetconsumer demand arising from such changes. There can be no assurance that products adopting newtechnology developed by the Group will be accepted by the market. Furthermore, an inability of theGroup to predict market trend and technological changes could have an adverse impact on thecompetitive advantage of the Group.

RISKS RELATING TO THE PRC

Substantially all of the Group’s assets are located in the PRC and the Group’s turnover is derivedprimarily from PRC sources. Accordingly, the Group’s results of operation and financial conditionsare subject to a certain degree to the economic, political and legal developments in the PRC.

Political structure and economic environment in the PRC

Since 1978, the PRC has been carrying out economic reforms and is gradually moving from aplanned economy to a more market-oriented economy. Many of the reforms are unprecedented orexperimental in nature and may have unforeseen adverse effects on the Group’s financial prospects.Furthermore, these reforms may adversely affect the PRC’s political, economic or social conditions,particularly if unemployment, inflation and income gap between urban and rural areas and coastal andinland areas increase, and this may in turn have an adverse effect on the Group.

Notwithstanding the economic reforms, the general economic conditions in the PRC are still verydifferent from those of countries which are members of the Organisation for Economic Co-operationand Development, in particular with respect to the structure of the economy, level of development, rateof economic growth, government policy, and methods of allocating resources.

The significant growth of the PRC economy since the introduction of economic reforms has beenaccompanied by periods of high inflation. There can be no assurance that inflation will not increaseagain or that measures to combat deflation will not be implemented in a manner that may adverselyaffect the profitability of the Group over time.

RISK FACTORS

— 19 —

14.22(2)

14.22 (3)

Foreign exchange control and currency conversion risks

Renminbi currently is convertible under “current account”, which includes trade and servicerelated foreign exchange transactions, but not under “capital account”, which includes foreign directinvestment. The SAFE, under the authority of the PBOC, regulates the conversion of Renminbi intoforeign currency. On 1st January, 1994, a unitary exchange rate system was introduced in the PRC,replacing the dual-rate system previously in effect. In connection with the creation of a unitaryexchange rate, the Government announced the establishment of an inter-bank foreign exchangemarket, the PRC Foreign Exchange Trading System. Since the unification of the exchange rate system,numerous related regulations, rules and notices have been issued. Pursuant to the Regulations of thePeople’s Republic of China for the Control of Foreign Exchange ( ), effective on 1st April,1996, foreign investment enterprises (“FIEs”) are permitted to maintain accounts at designated foreignexchange banks. Under the Regulations on the Administration of Foreign Exchange Settlement,Payment and Sale ( ), effective on 1st July, 1996, foreign exchange requiredfor the payment of dividends that are payable in foreign currencies under applicable regulations, suchas dividends on Shares, may be purchased from designated foreign exchange banks upon presentationof, among other things, board resolutions authorising the distribution of profits or dividends of thecompany concerned. As a sino-foreign co-operative joint venture enterprise, Golden Yuxing would besubject to PRC Sino-foreign Joint Venture Law. Pursuant to existing regulations, the foreign shareholder of FIEs are entitled to exchange foreign currency for any Renminbi received from FIEs in formof dividend from designated foreign exchange banks.

Following completion of the Placing, the Company will need foreign currency for the paymentof dividends to holders of Shares. Currently, the Company is able to purchase foreign exchange forsettlement of “current account transactions” (as defined in the applicable regulations), includingpayment of dividends, without the approval of the SAFE. However, there can be no assurance thatshortages of foreign currency at designated foreign exchange banks will not restrict the Company’sability to obtain sufficient foreign currency to pay dividends to holders of Shares, or to meet otherforeign currency requirements.

The value of Renminbi is subject to changes in Chinese government policies and to internationaleconomic and political developments. A devaluation of approximately 50% of Renminbi against USdollars occurred on 3rd January, 1994 in connection with the adoption of the new unitary managedfloating rate exchange system. Since 1994, the official exchange rate for the conversion of Renminbito US dollars has been generally stable. However, there can be no assurance that Renminbi will notbecome volatile against other currencies. As the Company does not hedge its foreign exchange rateexposure, any devaluation of Renminbi against US dollars or other foreign currencies could have anadverse effect on the Company’s results of operations and financial condition.

Legal considerations

Since 1979, many laws and regulations dealing with economic matters in general have beenpromulgated in the PRC. The PRC is still developing a legal framework to accommodate the needs ofinvestors and to facilitate foreign investment. Since the PRC economy is undergoing development ata much faster pace than the legal system, some degree of uncertainty can be expected until legislationcatches up with the economic reforms. Much of the enacted legislation is broadly drafted and the PRCgovernment is gradually filling in the details. The Law Committee of National People’s Congress and

RISK FACTORS

— 20 —

A1a.31 (1)

A1a. 31

the State Council initiates the legislative process assisted by government departments, organisations

and other relevant institutions. The PRC legal system is based on statutes alone and decided legal

cases are without binding legal effect, although they are often followed by judges as guidance. The

interpretation of PRC laws may be subject to policy changes reflecting domestic political changes.

As the PRC legal system develops, the promulgation of new laws, changes to existing laws and

the pre-emption of local regulations by national laws may all affect foreign investors. The trend of

legislation over the past 18 years has, however, significantly enhanced the protection afforded to

foreign investors in enterprises in the PRC. Foreign parties may resolve disputes through arbitration

or litigation. Arbitration alternatives include the China International Economic and Trade Arbitration

Commission and the Maritime Arbitration Commission. The PRC is a signatory to the 1958 New York

Convention on the Recognition and Enforcement of Foreign Arbitral Awards, under which an award

rendered by a foreign arbitration tribunal should, as provided in the Convention, be enforceable.

Judicial alternatives include various levels of the People’s Courts, specialised courts (for example, the

maritime or the railway courts) and, ultimately, the Supreme Court. On 1st July, 1997, Hong Kong

became a special administrative region of the PRC. As a result, the New York Convention, which is

based on the assumption of different jurisdictions, ceased to be the basis for mutual enforcement of

arbitration awards in the PRC and Hong Kong after 1st July, 1997. On 21st June, 1999, the

governments of Hong Kong and the PRC have entered into a memorandum of understanding according

to which an agreement has been reached in principal on reciprocal enforcement of arbitration awards.

The bill for the implementation of the provisions of the memorandum was passed by the Legislative

Council of Hong Kong on 5th January, 2000 but the new legislation is not in effect as at the Latest

Practicable Date. It is still unclear that when and how one can rely on the relevant PRC domestic

procedures to enforce a Hong Kong arbitration award in the PRC.

RISK FACTORS

— 21 —

According to paragraph 31 of the Third Schedule of the Companies Ordinance and rules7.03(1) and 11.10 of the Listing Rules, the Company is required to include the Group’s financialresults for the year ended 31st December, 1999 in the accountants’ report. The SFC and the StockExchange have granted waivers in relation to the strict compliance with paragraph 31 of theThird Schedule of the Companies Ordinance and rules 7.03(1) and 11.10 of the Listing Rulesrespectively. The Directors are aware of the requirement of rule 11.11 of the Listing Rules whichstates that the latest financial period reported on by the reporting accountants must not haveended more than six months before the date of this prospectus. The Company has sought andobtained a waiver from compliance with such a requirement from the Stock Exchange. TheDirectors confirm that they have performed sufficient due diligence on the Group to ensure that,save as disclosed herein, up to the date of this prospectus, there has been no material adversechange in the financial position of the Group since 30th June, 1999, and there is no event whichwould materially affect the information shown in the accountants’ report set out in Appendix Ito this prospectus.

WAIVER FROM THE COMPLIANCE WITH THE LISTING RULESAND THE COMPANIES ORDINANCE

— 22 —

DIRECTORS’ RESPONSIBILITY FOR THE CONTENTS OF THIS PROSPECTUS

This prospectus, for which the Directors collectively and individually accept full responsibility,

includes particulars given in compliance with the Companies Ordinance and the Listing Rules for the

purpose of giving information with regard to the Company. The Directors, having made all reasonable

enquiries, confirm that, to the best of their knowledge and belief:

(a) the information contained in this prospectus is accurate and complete in all material

respects and not misleading;

(b) there are no other matters the omission of which would make any statement in this

prospectus misleading; and

(c) all opinions expressed in this prospectus have been arrived at after due and careful

consideration and are founded on bases and assumptions that are fair and reasonable.

FULLY UNDERWRITTEN

This prospectus sets out the terms and conditions of the Placing. Shares sold pursuant to the

Placing outside the United States pursuant to Regulation S and Shares offered to QIBs in the United

States in reliance on an exemption from the registration requirements of the Securities Act are being

made pursuant to an offering circular (which incorporates this prospectus).

The Placing is managed by ICEA as the global coordinator and lead manager and fully

underwritten by the Underwriters. The listing of the Shares on GEM is sponsored by ICEA.

CONSENT OF BERMUDA MONETARY AUTHORITY AND FILING WITH REGISTRAR OFCOMPANIES IN BERMUDA

Permission under the Bermuda Exchange Control Act 1972 (and regulations thereunder) has been

received from the Bermuda Monetary Authority for the issue of the Placing Shares as mentioned herein

(including the additional Shares which may be issued pursuant to the exercise of the Over-allotment

Option), the issue of Shares pursuant to the general mandate and, subject to certain conditions, the

issue by the Company of all unissued Shares within the Company’s authorised share capital. A copy

of this prospectus has also been filed with the Registrar of Companies in Bermuda. In giving such

consent and in accepting this prospectus for filing, neither the Bermuda Monetary Authority nor the

Registrar of Companies in Bermuda accepts any responsibility for the financial soundness of the

Group or any proposal or for the correctness of any of the statements made or opinions expressed in

this prospectus. None of the Placing Shares may be offered or sold in Bermuda, by means of any

documents, or to any person, firm or company regarded as a resident of Bermuda for exchange control

purposes.

INFORMATION ABOUT THIS PROSPECTUS AND THE PLACING

— 23 —

14.08 (7)(b)

14.23

A1a.2

A1a.15 (2)

A1a.15 (3)(h)

PLACING SHARES TO BE OFFERED IN CERTAIN JURISDICTIONS ONLY

Pursuant to the Placing, the Underwriters or selling agents nominated by the Underwriters on

behalf of the Company shall conditionally place the Placing Shares with professional and institutional

investors in Hong Kong and in certain other jurisdictions.

The Placing is subject to the conditions as stated in the section headed “Conditions of the

Placing” in this prospectus.

The distribution of this prospectus and the offering or sale of the Placing Shares in certain

jurisdictions is restricted by law. It may not be used for or in connection with any offer to, or

solicitation by, anyone in any jurisdiction in which it is unlawful to make such an offer or solicitation.

Persons into whose possession this prospectus may come are required by the Company and the

Underwriters to inform themselves about and to observe such restrictions.

United States

The Placing Shares have not been and will not be registered under the Securities Act, and may

not be offered or sold within the United States, or to, or for the account or benefit of, US persons

except in certain transactions exempt from the registration requirements of the Securities Act. Terms

used in this section have the meanings given to them by Regulation S or Rule 144A.

Each Underwriter has agreed that, except as permitted by the Underwriting Agreement, it will not

offer or sell any Shares (i) as part of their distribution at any time or (ii) otherwise until 40 days after

the latest of the commencement of the Placing, the closing date of the Placing or the closing date for

any exercise of the Over-allotment Option, within the United States or to, or for the account or benefit

of, US persons, and it will have sent to each dealer to which it sells Shares during the distribution

compliance period a confirmation or other notice setting forth the restrictions on offers and sales of

the Shares within the United States or to, or for the account or benefit of, US persons.

The Placing Shares are being offered and sold outside of the United States to non-US persons in

reliance on Regulation S. The Underwriting Agreement provides that certain Underwriters approved

by ICEA may through their respective US broker, dealer or affiliates arrange for the resale of thePlacing Shares within the United States only to QIBs in reliance on and in accordance with Rule 144A.

In addition, until 40 days after the commencement of the Placing, an offer or sale of Shareswithin the United States (whether or not as part of the Placing) by a dealer that is not participatingin the offering may violate the registration requirements of the Securities Act if such offer or sale ismade otherwise than in accordance with an exemption from the registration requirements of theSecurities Act or in accordance with Rule 144A.

The Placing Shares have not been approved or disapproved by the US Securities and ExchangeCommission, any state securities commission in the United States or any other US regulatoryauthority, nor have any of the foregoing authorities passed upon or endorsed the merits of the offeringof the Placing Shares or the accuracy or adequacy of this prospectus. Any representation to thecontrary is a criminal offence in the United States.


— 24 —

A1a.11

United Kingdom

This prospectus has not been approved by an authorised person in the United Kingdom and has

not been registered with the Registrar of Companies in the United Kingdom. The Placing Shares may

not be offered or sold in the United Kingdom prior to the expiry of six months from the date on which

dealings in the Shares commence on GEM except to persons whose ordinary activities involve them

in acquiring, holding, managing or disposing of investments (as principal or agent) for the purpose of

their businesses or otherwise in circumstances which have not resulted and will not result in an offer

to the public in the United Kingdom within the meaning of the Financial Services Act 1986 as

amended by the Public Offers of Securities Regulations 1995 and where the applicable provisions of

the Financial Services Act 1986 and the Public Offers of Securities Regulations 1995 have been

complied with. In addition, no person may issue or pass on to any person any document received by

it in connection with the issue of the Placing Shares unless that person is of a kind described in Article

11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is

a person to whom such document may otherwise lawfully be issued or passed on.

Japan

The Placing Shares have not been and will not be registered under the Securities and Exchange

Law of Japan and are not being offered or sold and may not be offered or sold, directly or indirectly,

in Japan or to or for the account of any resident of Japan, except (i) pursuant to an exemption from

the registration and prospectus delivery requirements of the Securities and Exchange Law of Japan,

and (ii) in compliance with any other applicable requirements of Japanese law.

Singapore

This prospectus has not been and will not be registered as a prospectus with the Registrar of

Companies and Businesses in Singapore, and the Placing Shares will be offered in Singapore pursuant

to an exemption invoked under sections 106C and 106D of the Companies Act (Chapter 50) of

Singapore (the “Singapore Companies Act”). Accordingly, this prospectus may not be issued,

circulated or distributed in Singapore, nor may any of the Placing Shares be offered for subscription

or sold, directly or indirectly, nor may any invitation or offer to subscribe for or purchase any Placing

Shares be made, directly or indirectly, to the public or any member of the public in Singapore other

than (i) to an institutional investor or other person specified in section 106C of the Singapore

Companies Act, (ii) to a sophisticated investor, and in accordance with the conditions, specified in

section 106D of the Singapore Companies Act, or (iii) otherwise pursuant to, and in accordance with

the conditions of, any other provision of the Singapore Companies Act. The Registrar of Companies

and Businesses in Singapore takes no responsibility as to the contents of this prospectus.


— 25 —

A1a.11

A1a.11

A1a.11

APPLICATION FOR LISTING ON GEM

Application has been made to the GEM Listing Committee for the listing of, and permission todeal in, the Shares in issue and the Shares to be issued pursuant to the Placing (including any Shareswhich may be issued pursuant to the exercise of the Over-allotment Option) and any Shares to beissued pursuant to the exercise of any option which may be granted under the Share Option Scheme.No part of the share or loan capital of the Company is listed or dealt in on any other stock exchangeand no such listing or permission to deal is being or is proposed to be sought as at the date of thisprospectus.

Any allotment made in respect of the Placing will be void if permission for listing of, anddealings in, the Shares on GEM has been refused before the expiration of three weeks from 28thJanuary, 2000, or such longer period not exceeding six weeks from 28th January, 2000 if the GEMListing Committee notifies the Company of that longer period within three weeks from 28th January,2000.

HONG KONG BRANCH REGISTER AND STAMP DUTY

All Shares issued pursuant to the Placing (including any Shares which may be issued pursuantto the exercise of the Over-allotment Option) will be registered on the Company’s branch register ofmembers to be maintained by Central Registration Hong Kong Limited in Hong Kong. The Company’sprincipal register of members will be maintained by The Bank of Bermuda Limited in Bermuda.

Dealings in Shares registered in the Company’s branch register of members in Hong Kong willbe subject to Hong Kong stamp duty and only Shares registered in the Company’s branch register ofmembers in Hong Kong can be traded on GEM.

PROFESSIONAL TAX ADVICE RECOMMENDED

Potential shareholders are recommended to consult their professional advisers if they are in anydoubt as to the taxation implications of subscribing for, purchasing, holding and dealing in the Shares.None of the Company, ICEA, the Underwriters, any of their respective directors, agents or advisersor any other party involved in the Placing accepts responsibility for any tax effects on, or liabilitiesof, holders of Shares resulting from the subscription, purchase, holding or disposition of Shares.

STABILISATION AND OVER-ALLOTMENT

In connection with the Placing, ICEA may over-allocate Shares and may cover such over-allocations by means of exercising the Over-allotment Option at any time up to 30 days from the dateof this prospectus, or making open market purchases in the secondary market. Any such purchases willbe made in compliance with all applicable laws and regulatory requirements. The number of Sharesover-allocated will not be greater than the number of Shares which may be issued upon the fullexercise of the Over-allotment Option, being 15,000,000 Shares, representing 15% of the PlacingShares.

In connection with the Placing, ICEA may also, on behalf of the Underwriters, effect transactionswhich stabilise or maintain the market price of the Shares at levels other than those which mightotherwise prevail in the open market. Such transactions may be effected in all jurisdictions where itis permissible to do so, in each case in compliance with all applicable laws and regulatoryrequirements. Such transactions, if commenced, may be discontinued at any time.


— 26 —

A1a.11A1a.14(1)

Stabilisation is a practice used by underwriters in some markets to facilitate the distribution of

securities. To stabilise, the underwriters may bid for, or purchase, the newly issued securities in the

secondary market, during a specified period of time, to retard and, if possible, prevent a decline in the

initial public offer prices of the securities. The stabilisation price will not exceed the initial public

offer price.

Stabilisation is not a practice commonly associated with the distribution of securities in Hong

Kong. Should stabilising transactions be effected in connection with the distribution of the Shares,

they will be done at the absolute discretion of ICEA. In Hong Kong, such stabilisation activities on

the Stock Exchange are restricted to cases where underwriters genuinely purchase shares on the

secondary market solely for the purpose of covering over-allocations in an offering. The relevant

provisions of the Securities Ordinance (Chapter 333 of the Laws of Hong Kong) prohibit market

manipulation in the form of pegging or stabilising the price of securities in certain circumstances.

COMMENCEMENT OF DEALINGS IN THE SHARES

Dealings in the Shares is expected to commence on 31st January, 2000. Shares will be traded in

board lots of 2,000 Shares each.

SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS

Subject to the granting of listing of, and permission to deal in, the Shares on GEM and the

compliance with the stock admission requirements of Hongkong Clearing, the Shares will be accepted

as eligible securities by Hongkong Clearing for deposit, clearance and settlement in CCASS with

effect from the date of commencement of dealings in the Shares on GEM or on any other date

Hongkong Clearing chooses. Settlement of transactions between members of the Stock Exchange is

required to take place in CCASS on the second business day after any trading day. All activities under

CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from

time to time. All necessary arrangements have been made for the Shares to be admitted into CCASS.

CONDITIONS OF THE PLACING

Details of the conditions of the Placing are set out under the section headed “Conditions of the

Placing” in this prospectus.


— 27 —

Name Address Nationality

Executive Directors

Zhu Wei Sha No. 1, Dong Dan San TiaoDong Cheng DistrictBeijingPRC

Chinese

Chen Fu Rong No. 6, Unit One2nd FloorNo. 20 CourtYun Gang Nan DistrictFeng Tai DistrictBeijingPRC

Chinese

Shi Guang Rong No. 6, 20 PaiChen Jia LinChao Yang DistrictBeijingPRC

Chinese

Wang An Zhong Flat No. 43, 59 HaoWai Jiao Bu JieDong Cheng DistrictBeijingPRC

Chinese

Independent non-executive Directors

Wu Jia Jun No. 1104, 22nd FloorXi Zhi MenNan Da JieXi Cheng DistrictBeijingPRC

Chinese

Zhong Peng Rong No. 8, Fu You JieXi Cheng DistrictBeijingPRC

Chinese

Chen Man Fai, Steven 26th Floor, Flat HScholastic Garden48 Lyttelton RoadHong Kong

Chinese

DIRECTORS, CORPORATE INFORMATION ANDPARTIES INVOLVED IN THE PLACING

— 28 —

5.05

Company secretaries Di Yu ZengLai Yang Chau, Eugene,Solicitor

Company secretary in Bermuda Ira Stuart Outerbridge III(Mr. Outerbridge will resign as secretary of the Companyfollowing the listing of the Shares on GEM.)

Qualified accountant Yuen Wai Man, ShirineAssociate Member of the Association of CharteredCertified Accountants

Associate Member of Hong Kong Society of Accountants

Compliance officer Shi Guang Rong

Authorised representatives Zhu Wei ShaChen Fu Rong

Bermuda resident representatives John Charles Ross CollisAnthony Devon Whalery(Deputy)

Global coordinator, sponsor andlead manager

ICEA Capital Limited43rd FloorNatWest TowerTimes SquareCauseway BayHong Kong

Underwriters ICEA Capital Limited43rd FloorNatWest TowerTimes SquareCauseway BayHong Kong

Core Pacific-Yamaichi International (H.K.) Limited30th FloorTwo Pacific Place88 QueenswayHong Kong

First Shanghai Capital Limited19th Floor, Wing On House71 Des Voeux Road CentralHong Kong

Kim Eng Securities (Hong Kong) Limited8th Floor, Alexandra House16-20 Chater RoadCentralHong Kong


— 29 —

A1a.42 (1)(a)5.09

A1a.42 (1)(b)5.14

A1a.42 (1)(c)5.19

A1a.3

A1a.3[6.016.036.046.12 to6.18 &6.19]

A1a.15 (3)(h)

Vickers Ballas Capital Limited19th Floor, Far East Finance Centre16 Harcourt RoadAdmiraltyHong Kong

Worldsec Corporate Finance LimitedRooms 3301-02Bank of American Tower12 Harcourt RoadCentralHong Kong

Internal audit committee Chen Man Fai, StevenWu Jia Jun

Legal advisers to the Company As to Hong Kong law:

Livasiri & Co.7th & 19th Floors9 Des Voeux Road WestHong Kong

As to PRC law:

Jingtian Associates15th FloorThe Union Plaza20 Chao Yang Men Wai Da JieBeijingPRC

As to Bermuda law:

Conyers Dill & Pearman3408 Two Exchange Square8 Connaught PlaceCentralHong Kong

Legal advisers to the Underwriters As to Hong Kong law:

Simmons & Simmons35th FloorCheung Kong Center2 Queen’s Road CentralHong Kong


— 30 —

A1a.15 (3)(h)

5.23

A1a.3

A1a.3

A1a.3

As to US law:

Morrison & Foerster LLP23rd FloorEntertainment Building10 Queen’s Road CentralHong Kong

Independent reporting accountants PricewaterhouseCoopers22nd FloorPrince’s BuildingCentralHong Kong

Property valuer Sallmanns (Far East) Limited15th FloorTrinity House165-171 Wanchai RoadWanchaiHong Kong

Registered office Clarendon House2 Church StreetHamilton HM11Bermuda

Place of business in the PRC No. 5, De Wai Da JieXi Cheng DistrictBeijingPRC

Place of business in Hong Kong Unit 1808, 18th FloorTower III, Enterprise Square9 Sheung Yuet RoadKowloon BayKowloonHong Kong

Principal share registrar andtransfer office

The Bank of Bermuda Limited6 Front StreetHamiltonBermuda

Hong Kong branch registrar andtransfer office

Central Registration Hong Kong Limited17th FloorHopewell Centre183 Queen’s Road EastHong Kong


— 31 —

A1a.4

A1a.6A1a.43

A1a.3A1a.43

A1a.3A1a.4324.05(3)

Principal bankers The Industrial & Commercial Bank of ChinaNo. 22, De Wai Da JieXi Cheng DistrictBeijingPRC

The Agricultural Bank of ChinaNo. 5, De Wai Da JieXi Cheng DistrictBeijingPRC


— 32 —

A1a.3

The information provided in this section and elsewhere in this prospectus relating to the industrybackground is derived in part from various official and unofficial publications. The Company and theDirectors make no representation as to the accuracy of this information, which may not be consistentwith other information compiled within and outside the PRC, and accordingly the informationcontained herein may not be accurate and should not be unduly relied upon.

Overview

Information appliance products have been gradually introduced to consumers in the PRC sincelate 1998. Traditionally, conventional consumer electrical appliances such as televisions and otheraudio-visual appliances have been regarded as having their own specific functions. Current PCtechnology allows the use of a single IC chip to integrate most of the functions of a computer, thusgiving rise to the concept of information appliance. These products combine functions of conventionalhousehold electrical appliances with IT and computer technologies.

After 20 years of rapid development, the growth of computer industry driven by the PC hasentered into a steady stage. To cope with the industry development trend, Microsoft and NationalSemiconductor Corporation presented a concept of the “Post PC Era”. This suggests that the rapiddevelopment of digital technology has made it possible to integrate household electrical applianceswith PC functions. With the advent of 21st century, the world is entering into a digital and informationage that revolves around the Internet. Information appliances with Internet access capability, audio,video, and data processing functions are becoming the products of the future.

Information appliance products

The existing applications of information appliance technologies are characterised by theintegration of different functions of traditional consumer electronic appliances. For instance, atelevision set can access the Internet and even accomplish certain PC functions with the use of aset-top box. In fact, the prospect of information appliances is more far reaching than this. In theinformation era characterised by the Internet, many innovative products may emerge from the strongdata communication capability of the Internet.

The growth of the Internet is the major driving force for the development of the informationappliance industry in China. However, the use of computers and the Internet are still not accessibleto the majority of the Chinese population as they are not well-educated or affluent. By integratingfunctions of both PC and television, information appliances are designed to facilitate the generalpublic of the PRC to enter into the information age. In addition, information appliances possess thecharacteristics of an Internet access device such as high efficiency. It is expected that informationappliances will spur the growth of the China Internet market, and the development of the Internetmarket will in turn help to expand the product range and application of information appliances.

With the wide spread use of digital and Internet technology, a convergence of datacommunication, computer and consumer-related electronic products has emerged, which providestechnological support to the development of information appliances. The PRC and international ITcompanies in general consider that information appliances with domestic access to the Internet willbecome the mainstream development of the information appliance industry in both China and aroundthe world in the future.

OVERVIEW OF THE INFORMATION APPLIANCE INDUSTRY

— 33 —

14.08(7)(a)14.18A1a.28(1)(a)

A number of internationally renowned IT companies and consumer electronic appliance

manufacturers have revised their product development strategy to produce large volumes of

information appliances since 1998. A number of such companies have already declared that

information appliances optimised for Internet access will be a key focus of their future. IT and

consumer electronic appliance corporations such as Intel, Cisco, 3 Com, Sony, Panasonic, Philips,

Samsung, Microsoft, HP, Compaq, IBM, Ericsson, Nokia are also directing their investments towards

information appliances.

According to a study conducted by International Data Corporation (“IDC”) in 1998, the

dominance of PC as an end-user access device will be over within six years as Internet appliances

become the popular commodities in the United States. Internet appliances such as set-top boxes,

web-enabled telephones, and videogame consoles will gain increasing popularity alongside the growth

of demand in Internet usages. The study also analysed the PC and information appliance market from

1997 to 2002. In 1997, although PCs accounted for 96% of Internet devices shipped into the United

States, development of other Internet access devices, such as set-top boxes, web-enabled telephones,

web-enabled personal digital assistants, and web-enabled videogame consoles began to take place.

IDC anticipated that while shipments of PCs into the United States will grow to 56 million units,

shipments of information appliances into the United States will experience a great leap to almost 42

million units by 2002. IDC also forecasted that shipments of information appliances into the United

States will surpass those of PCs by 2004 or 2005. The following graph shows the growth of shipments

of information appliances and PCs into the United States.

0

20,000

40,000

60,000

80,000

100,000

Total

Informationappliances

PCs

(In thousand units)

1997 1998 1999 2000 2001 2002

Source: International Data Corporation, 1998

Many well-known multinational companies are competing to launch their new generation of

information appliances in order to capture larger market shares. Intel has initiated a new chip

development program called “Easy PC” targetting the information appliance market. An increasing

number of innovative products, such as Internet browsing devices for use in kitchens and Internet

devices with functions of television and CD player are expected to be available in the market in the

near future.


— 34 —

National Semiconductor launched a “PC-on-a-Chip” product in July 1999 which is capable of

integrating many functions of a computer and information appliances. The chip, known as the

GeodeSC1400, can be incorporated in (i) set-top boxes that provide Internet browsing features, (ii)

“thin client” computers that use servers for processing functions, and (iii) portable Internet accessing

devices. Major functions of the chip include processing, system logic, graphics, MPEG video

decompression, audio as well as television input/output and peripheral input/output, all of which

require at least six separate chips in a conventional set-top box. It is expected that the development

of more sophisticated technology can enable manufacturers to build new information appliances that

will provide consumers with easier access to the Internet.

Future prospects of the information appliance industry

The Group is of the view that the development of information appliances matches with the

present economic level and education standard in the PRC. Information appliances would improve the

life style of consumers in the PRC by offering entertainment, education and information access

through electronic media.

In an article named “Death of the PC-centric era”, IDC forecasted that non-PC devices are

estimated to account for almost 50% of unit shipments by 2002, resulting in a dramatic decrease in

PC’s share of the market.

It is believed that the PRC will benefit in the future from the development of the information

appliance industry by virtue of having a large household appliance market: 317 million televisions, 40

million VCDs players and 20 million educational computers and with 25% of all households in the

PRC having telephones (50% in the urban areas). As the majority of the general public in the PRC

recognise the importance of education and desire to develop computer skills, it is a popular belief that

computers and the Internet is a key to their future development in the 21st century. The following table

shows the forecast of the growth of Internet users from 1999 to 2003 in China.

China Internet users market forecast

1999 2000 2001 2002 2003

PC ownership(’000) 10,820 24,200 31,660 40,510 50,880Annual growth rate(%) — 124% 31% 28% 26%PC Internet users(’000) 6,290 17,110 37,950 61,000 99,890Annual growth rate(%) — 172% 122% 61% 64%Information applianceInternet users(’000) 70 4,580 16,100 32,020 47,230

Annual growth rate(%) — 6,443% 252% 99% 48%

Source: Ministry of Information Industry — Centre of Computer Research 1999

In view of the fact that income level and basic computer knowledge of the general public in the

PRC are beneath those of developed countries such as the United States, certain European countries

and Japan, the PRC market needs information appliances which are affordable and are easy to operate.


— 35 —

According to a survey on the household ownership of computers in the PRC, in October 1997,

approximately 2.45% of all urban households in the PRC owned computers, compared to an ownership

rate of approximately 55% in the United States. Assuming an annual growth rate of 40%, the PRC

market will require more than nine years to reach the 55% ownership rate. In addition, according to

the statistics of China Internet Network Information Centre, under the Ministry of Information

Industry, there were approximately 2.1 million Internet subscribers in the PRC in 1998 which is only

equivalent to the number of subscribers of a medium-sized Internet services provider in the United

States, which therefore allows a lot of room for expansion in the information appliance industry in the

PRC.

Current television ownership rate for households in the PRC is approximately 90%. It is believed

that, by using television as the audio-visual displaying device, demand for information appliances

such as those manufactured by the Group will be fuelled by the popularity of television, which should

lead to further growth in the information appliance industry in the PRC.


— 36 —

GROUP REORGANISATION

The Group underwent a reorganisation in preparation for the listing of its Shares on GEM. In

connection with such reorganisation, the Company was incorporated in Bermuda as an exempted

company on 6th October, 1999. Further details of the reorganisation are set out in the section headed

“Group reorganisation” in Appendix V to this prospectus.

Golden Yuxing was established in December 1996, initially as a privately owned limited liability

company, and was beneficially owned by Messrs. Zhu Wei Sha, Chen Fu Rong, Sun Li Jun and Shi

Guang Rong and other shareholders. As part of the group reorganisation in preparation for the listing

of the Shares on GEM, Golden Yuxing disposed of its entire 50% interest in the registered capital of

Yongxing (PRC) to an independent third party in September 1999, and a 99% interest in the registered

capital of Golden Yuxing was transferred by Messrs. Zhu Wei Sha, Chen Fu Rong, Sun Li Jun and Shi

Guang Rong to Yuxing (BVI) pursuant to the registered capital transfer agreement dated 30th

September, 1999 (being material contract (e) referred to under the section headed “Summary of

material contracts” in Appendix V to this prospectus) while the remaining 1% interest in the registered

capital of Golden Yuxing was transferred to Yongxing (PRC). Following such transfers, Yuxing (BVI)

and Yongxing (PRC) entered into a sino-foreign co-operative joint venture agreement on 8th October,

1999 (being material contract (f) referred to under the section headed “Summary of material contracts”

in Appendix V to this prospectus) and Golden Yuxing became a sino-foreign co-operative joint venture

enterprise on 8th November, 1999. Currently, the total investment and registered capital of Golden

Yuxing are US$6,000,000 and US$3,042,000 respectively. The term of operation of Golden Yuxing is

50 years commencing from 8th November, 1999. Yuxing (BVI) is entitled to all the profits of Golden

Yuxing, while Yongxing (PRC) is only entitled to a fixed management fee of RMB50,000 per annum

if the distributable profits of Golden Yuxing exceeds RMB5,000,000 in that year. Yuxing (BVI) is

entitled to nominate five directors, while Yongxing (PRC) is not entitled to nominate any director, to

the board of Golden Yuxing. For further particulars of Golden Yuxing, please refer to the section

headed “Particulars of joint venture” in Appendix V to this prospectus.

GROUP STRUCTURE

— 37 —

14.08(7)(a)A1a, 28(1)(a)14,15

A1a.29(1)(2)

A1a.5

SHAREHOLDING STRUCTURE

The following chart illustrates the shareholding structure of the Company and its principal

subsidiaries after the completion of the group reorganisation and the Placing (assuming the

Over-allotment Option is not exercised):

100%

33.75%

100%

41.25% 25%

The Company(incorporated in Bermuda)

Public shareholders(incorporated in BVI)

(Note 1)(incorporated in BVI)

(Note 2)

(incorporated in BVI)(Note 3)

Super Dragon Dragon Treasure

Yuxing (BVI)

(a sino-foreign co-operativejoint venture enterprise

incorporated in the PRC)

Golden Yuxing

Notes:

1. Super Dragon is a nominee company, the shareholders of which are Mr. Zhu Wei Sha and Mr. Chen Fu Rong who hold

63.6% and 36.4% of the entired issued share capital of this company respectively.

2. Dragon Treasure is a nominee company, the shareholders of which are Mr. Sun Li Jun and Mr. Shi Guang Rong who hold

98% and 2% of the entire issued share capital of this company respectively. This company acts as the trustee and hold

Shares on behalf of 208 past and present employees of the Group. These employees may give directions to Dragon

Treasure to sell their Shares on their behalf. The daily operations of the trust is carried out by the board of directors and

its committee of Dragon Treasure. Immediately after the Placing, none of the beneficiaries under the trust held more than

5% of the entire issued share capital of the Company. Please refer to the section headed “Substantial shareholders and

initial management shareholders” in this prospectus for further details.

3. Golden Yuxing is a sino-foreign co-operative joint-venture enterprise established in the PRC by Yuxing (BVI) and

Yongxing (PRC) pursuant to a joint venture agreement dated 8th October, 1999. According to that agreement, Yuxing

(BVI) is entitled to the entire profit of Golden Yuxing and the interest attributable to Yuxing (BVI) is, accordingly, 100%.

GROUP STRUCTURE

— 38 —

A1a.29(1)(2)

A1a.28(2)11.2211.23(1)(2)

ACTIVE BUSINESS PURSUITS

The Group is principally engaged in the research and development, design, marketing and saleof information appliances in the PRC. Through independent sales agents in many parts of the PRC,the Group sells information appliances, including computer VCDs and educational computers, andsoftware applications under the “ ” brandname. The Group commenced its business throughGolden Yuxing which was established in the PRC in 1996. Golden Yuxing was founded by Messrs. ZhuWei Sha, Chen Fu Rong, Sun Li Jun and Shi Guang Rong and other shareholders. As a result of thecontinuous introduction of new products and a wide range of educational software applications tocomplement sales of hardware, the Group has experienced rapid growth since its establishment.

Since the commencement of its business, the Group has been focusing on the development ofsoftware and hardware products relating to the information appliance market in the PRC and hasdeveloped six models of computer VCD, five models of educational computer and more than 1,000software applications.

In January 1998, the Group successfully developed and launched its first model of educationalcomputer with Internet access capability. In September 1998, the Group launched its first model ofcomputer VCD which has become a major product of the Group with a turnover which accounted forapproximately 32% and 91% of the total turnover for 1998 and the first six months of 1999respectively.

In recent years, the Group has experienced significant growth in its businesses. In 1998, theGroup’s turnover and profit attributable to shareholders amounted to approximately HK$127.1 millionand approximately HK$34.1 million respectively, representing annual growth rates of approximately29.4% and approximately 138.7% respectively over 1997. For the six months ended 30th June, 1999,the Group’s turnover and profit attributable to shareholders increased to approximately HK$223.1million and HK$57.1 million respectively. The following table shows the Group’s turnover by productcategory and net profit for each of the two years ended 31st December, 1998 and the six months ended30th June, 1999. Please refer to the section headed “Financial information — trading record” belowfor further details.

Year ended 31st December,Six months ended

30th June,1997 1998 1999

HK$’000 % HK$’000 % HK$’000 %

TurnoverComputer VCDs — — 41,094 32 203,836 91Educationalcomputers 83,159 85 68,437 54 9,812 5

Sub-total 83,159 85 109,531 86 213,648 96Software applicationsand others 15,068 15 17,587 14 9,477 4

Total 98,227 100 127,118 100 223,125 100

Net profit 14,291 34,113 57,127

BUSINESS

— 39 —

14.08(2)14.08(7)(a)14.15A1a.28(1)(a)

14.16

A1a.33(1)

Computer VCDs

For the year ended 31st December, 1997

In October 1997, the Group began to research into component-on-a-chip technology for use incomputer VCDs and educational computers and co-operated with Sunplus on the development of the3098 processor based on the 3088 processor.


In April 1998, the Group together with Sunplus successfully developed the 3098 processor whichis a principal component of the Group’s computer VCDs. This enables the Group to lower themanufacturing cost of such products.

In August 1998, the Group’s computer VCDs were confirmed by (BeijingProduct Quality Supervision and Inspection Institute) to have attained the safety and other relevantstandards relating to computer VCDs. In subsequent months, the Group launched three models ofcomputer VCD with multimedia graphic display and Internet browsing capability. As at 31stDecember, 1998, approximately 44,000 sets of computer VCD were sold by the Group, achieving aturnover of approximately HK$41.1 million.

For the period from 1st January, 1999 to the Latest Practicable Date

In April 1999, in order to diversify its product range, the Group launched two models ofcomputer super VCD which belong to a new generation of computer VCDs. This new generation ofcomputer VCDs is designed to give an audio-visual performance which is superior to that of the firstgeneration of computer VCDs.

In June 1999, the Group successfully developed and launched a new model of computer VCDwith a built-in floppy drive which enables data downloading and saving.

During the six months ended 30th June, 1999, approximately 229,000 sets of computer VCDwere sold by the Group, achieving a turnover of approximately HK$203.8 million.

Since July 1999, the Group’s computer VCDs have been officially recognised as a type ofsuitable educational tool by the Ministry of Education of the PRC.

In September 1999, the Group successfully developed and launched its first model of widevoltage VCD player which has the special feature of operating within a range of voltage from 90 to250 volt.

Educational computers


Prior to the successful development of the 3098 processor in 1998, the Group had primarily usedthe 3088 processor in its educational computers.

In early 1997, the Group successfully developed a modem with complementary software whichenables the Group’s educational computers to access the Internet. A new model of educationalcomputer incorporating this function was launched by the Group in September 1997.

BUSINESS

— 40 —


In October 1998, the 3098 processor was successfully incorporated into the Group’s educational

computers and as a result, two new models of educational computer were launched in subsequent

months. The use of the 3098 processor in educational computers has increased the reliability and at

the same time reduced the manufacturing cost of such products.


In March 1999, the Group successfully registered under the name of Golden Yuxing the patent

for a modem specially designed by the Group for its educational computers.

In August 1999, through co-operation with Sunplus, the Group successfully developed the 3097

processor for its educational computers. The Directors believe that the 3097 processor can lower the

manufacturing cost and selling price of the Group’s educational computers even further.

Software development

Software applications


In 1997, the Group began the development of supporting software applications for use on its

educational computers.


By early 1998, the Group had made available over 1,000 different software applications under

the “ ” brandname for use on the Group’s educational computers, all of which were stored on

floppy disks. In anticipation of the launch of the Group’s computer VCDs, the Group successfully

developed a software technology which enabled software applications to be stored on optical disks for

use on the Group’s computer VCDs. By the end of 1998, over 500 software applications were available

on optical disks.

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In 1999, the Group has further developed over 150 software applications for use on itseducational computers, computer VCDs and computer super VCDs.

educational software applications

computer VCD software applications

IAMSDP


In late 1998, the Group developed a set of software application development tools that cansimplify the complexity of software application development in respect of information appliances.These tools were further integrated and enhanced to become a multimedia software applicationdevelopment platform, IAMSDP, which can be run on Windows 98. IAMSDP demonstrates theGroup’s research and development capability in multimedia software application developmenttechnology.

Instead of using programming languages to develop multimedia software applications, IAMSDPadopts a unique non-programming table format, which can replace programming languages to linkvarious pictures and sound files in multimedia software applications. Accordingly, the Directorsbelieve that IAMSDP provides a more efficient and simplified approach for developing multimediasoftware applications for information appliances than the use of programming languages. Throughintegrating MPEG and PC technology and storing data in a unique format, picture and sound files ofsuch software applications can be run by pointing and clicking on a television screen with a mouse.These software applications are similar to the multimedia CD-ROM software applications whichnormally can only be run on more powerful hardware such as Pentium PCs. With IAMSDP,information applicances can execute high-quality multimedia and interactive functions similar tothose of multimedia CD-ROM.

The Directors believe that this platform-neutral technology (meaning that software applicationsdeveloped using IAMSDP can be run on different operating systems and hardware platforms) canpotentially provide the Group with substantial business opportunities in the information appliance

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industry in the PRC. IAMSDP can be used to develop multimedia software applications for differentoperating systems that use MPEG technology. It can also potentially be used to develop softwareapplications and program contents for DVB networks, computer DVDs and other informationappliances with different operating systems. Software applications developed using IAMSDP can berun on those information appliances embedded with the Group’s software engine. IAMSDP allowspersons who undergo minimal training to develop multimedia software applications for the Group’sinformation appliances. In addition, as multimedia educational software is generally regarded as anexcellent educational tool in providing students with a more interesting and satisfying learningexperience in the classroom, it is expected that there will be a great demand for this kind ofuser-friendly multimedia software application development platform in the PRC market. Accordingly,the Group plans to invest additional resources with an aim of developing the second and thirdgenerations of IAMSDP.

In August 1998, the Group successfully developed its first multimedia software application usingIAMSDP. At present, there are close to 100 multimedia software applications offered by the Groupunder the “ ” brandname which are jointly developed by the Group and other software developers.

Certain multimedia software application design houses in the PRC have converted a number oftheir PC software applications so that they are compatible with the Group’s hardware products.IAMSDP has also attracted the attention of other multinational software application developers whointend to enter into the information appliance market in the PRC.


In April 1999, the Group entered into an agreement with nine major domestic softwaredevelopers whereby such developers have agreed in principle to develop software applications usingIAMSDP and exchange ideas and information to promote the development of IAMSDP.

Awards and recognition

Since its establishment, the Group has received numerous awards and recognition including thefollowing:

Year Name of award/recognition Issuing entity

1997 New and advanced technology enterprise Beijing Science Commission

1997 Distinguished technology enterprise Beijing Science Commission

1997 National recommended educationalcomputer products for teenagers

Chinese Computer Association

1998 Outstanding private advanced technologyenterprise

Beijing Agricultural & IndustrialDepartment

1999 Ranked No. 8 in computer brandnameawareness

China Industrial and CommercialDaily

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PRODUCTS

The Group currently markets the following models of computer VCD:

Model number Description

Model 315D Computer super VCDModel 315H Computer super VCDModel 315G Computer VCD with video games functionModel 315L Computer VCD with video games function and floppy drive

Computer super VCD model 315H

Computer VCD model 315L (with abuild-in floppy drive)

The Group currently markets the following model of multi-functional VCD:


Wide voltage super VCDplayer

Super VCD player capable of operating under a range ofvoltage from 90 to 250 volt

Wide voltage super VCD player

The Group currently markets the following models of educational computer:


Model 98 Multimedia educational computer with plug-in card andInternet browsing function

Model F Multimedia educational computer with enhanced spreadsheetand Internet browsing function

Economic model Multimedia educational computer with Internet browsingfunction

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Educational computer-model Fwith multimedia functions

Educational computer-model 98 with plug-in

card and Internet browsing function

SALES, DISTRIBUTION, CUSTOMER SUPPORT AND SERVICES

The Group has the right to revoke the distribution franchise of its sales agents if any of them failsto comply with the Group’s management policy and service standards or performs any activities thatimpair the reputation of the Group. The Directors believe that this management policy couldcontribute to the development of the Group’s management system and distribution network in the longrun.

Sales network

The Group’s computer VCDs and educational computers are distributed through a comprehensivenetwork of dealers and retail sales outlets located in major cities and regions in the PRC. At present,with the exception of Hainan Province and Tibet autonomous region, the Group’s sales network coversthe whole of the PRC. The Group has maintained business relationship for at least two years with allof its principal sales agents.

As at 30th November, 1999, the Group’s products were sold directly to 32 provincial salesagents, selected on the basis of their creditworthiness, reputation within the industry and track record.These provincial sales agents select their own network of dealers for the distribution of the Group’sproducts after taking into account the Group’s opinion regarding such dealers. The Group sets auniform price for its products for all of its provincial sales agents.

The largest sales agent of the Group accounted for approximately 8.2%, 6.4% and 4.5% of theGroup’s turnover, while the five largest sales agents of the Group accounted for approximately 21.6%,16.6% and 19.2% of the Group’s turnover, for each of the two years ended 31st December, 1998 andthe six months ended 30th June, 1999 respectively. None of the Directors, the Group or any of theirrespective associates (as defined in the Listing Rules) had any interest in any of the five largest salesagents of the Group at any time during the two years ended 31st December, 1998 and the six monthsended 30th June, 1999.

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A1a.28(1)(b)(iii)(iv)(v)

The Group places great emphasis on managing its sales network through control over its

provincial sales agents. The Group’s sales agents are prohibited from selling products beyond their

respective geographical boundaries so as to avoid competition amongst themselves. The Group’s

current policy is to sell its products either on a prepayment or on a cash-on-delivery basis.

Purchase orders and pricing

The Group normally arranges delivery of products pursuant to purchase orders placed by its sales

agents. In general, agents place orders three to five days in advance of delivery dates. The retail prices

of the Group’s products are determined by the Group after taking into account the product functions,

market conditions, manufacturing cost, purchasing power of customers and pricing of comparable

products. The sales agents are required to sell the Group’s products at retail prices fixed by the Group.

Current retail prices of the Group’s computer VCDs range from approximately RMB1,300 to

RMB2,000 per unit and the retail prices of its educational computers range from approximately

RMB360 to RMB880 per unit. The retail prices of software applications for computer VCDs and

educational computers range from RMB20 to RMB40 per unit.

Marketing

In order to promote the “ ” brandname as well as the image of its products, the Group

advertises on television, newspapers, magazines, large billboards as well as publishing periodic

promotional newsletters for its products. The advertising expenditures incurred in each of the two

years ended 31st December, 1998 and the six months ended 30th June, 1999 amounted to

approximately HK$14.4 million, HK$7.2 million and HK$18.4 million respectively. In addition, the

Group organises from time to time various product exchange activities, academic contests and product

demonstrations on television for primary and secondary school students.

After-sales services and maintenance

The Group provides free replacement of defective products within the first week of purchase and

one year warranty service for its computer VCDs and educational computers, as well as cost based

repair and maintenance services after the expiry of the warranty period. Repair and maintenance

services are provided by independent sales agents through maintenance centres run by them and

through their respective networks of retail shops at various locations, as well as the maintenance

headquarters of the Group. The Group provides the sales agents’ maintenance and repair teams with

appropriate training programme. The repair and maintenance expenses incurred in each of the two

years ended 31st December, 1998 and the six months ended 30th June, 1999 amounted to

approximately HK$300,000, HK$262,000 and HK$131,000 respectively.

In addition, the Group arranges for the exchange of the Group’s software applications for its

educational computers at nominal charges, which facilitates primary and secondary school students to

obtain upgraded version of the Group’s latest educational software applications.

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PRODUCTION, SUPPLIES, INVENTORY AND QUALITY CONTROL

Production

The Group’s products are mainly assembled on an OEM basis. The Group has entered into

separate agreements on 25th October, 1999 with two OEMs, whose production plants are located in

Shenzhen and Beijing respectively. These OEMs are engaged to assemble the Group’s products for an

indefinite term, subject to termination by any party to the agreements by six month’s notice in writing.

The production plant of one of the OEMs in Shenzhen has an annual production capacity of 1,100,000

computer VCDs and/or educational computers. The production plant of the other OEM in Beijing has

an annual production capacity of 400,000 computer VCDs and/or educational computers.

The Group’s requirements for the OEMs are relatively straightforward as they are merely

required to assemble the products based on the design specification and components provided by the

Group. In the PRC, there are a large number of competent OEMs available. Since many OEMs withsimilar manufacturing facilities are operating substantially below their capacities, the Directorsbelieve that the Group can easily find a replacement and secure its production in a short period of timein the event that either or both of the OEM agreements are terminated.

Formulation of production plans

The Group’s sales and marketing, research and development and customer service departmentsmeet regularly to review the market position and technological development of its products and setbudgets for production targets for the coming year. Opinions are sought from materials andcomponents suppliers and distribution agents before formulation of a production plan. The Directorsbelieve that the major factors to be considered in formulating a production plan of the Group include:1) current and future market development trend; 2) market competition; 3) available credit providedby raw material suppliers; 4) production costs and prices; 5) capacity of manufacturing plants; 6) cashflow of the Group; 7) distribution network and customer support of products and 8) timing and placefor launching new products.

Purchasing

The Group’s planning department is responsible for ordering the purchase of materials andcomponents for production.

The following sets out the major varieties of materials and components purchased by the Groupand the origin of their suppliers:

Material/component Origin of suppliers

VCD loader Taiwan, PRCCL680 chip Japan, TaiwanCD7 chip set Taiwan8M MASK ROM Korea, TaiwanDRAM Taiwan, Japan, KoreaFloppy drive Japan, Philippines, PRC

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Materials and components are imported through import and export trading firms. The largestsupplier of the Group accounted for approximately 28.3%, 21.7% and 17.0% of the Group’s totalpurchase, while the five largest suppliers of the Group accounted for approximately 69.0%, 39.0% and39.0% of the Group’s total purchases, for each of the two years ended 31st December, 1998 and thesix months ended 30th June, 1999 respectively. None of the Directors, the Group, or any of theirrespective associates (as defined in the Listing Rules ) had any interest in any of the five largestsuppliers of the Group at any time during the two years ended 31st December, 1998 and the six monthsended 30th June, 1999.

Normally, suppliers are required to deliver goods in the PRC and purchases are essentiallydenominated in Renminbi.

Inventory

The Group normally maintains an inventory level sufficient for approximately two to threemonths sales requirement for computer VCDs, educational computers and software applications.

Quality control

The Group places great emphasis on controlling the production process and quality of itsproducts. The Directors believe that the Group’s commitment to product quality is one of the keyfactors contributing to its success.

Prior to the commencement of production at the OEM plants in Shenzhen and Beijing, variousquality control procedures are carried out on materials and components to ensure their standards andcompatibility with other components and parts. Products then undergo a standard quality inspectionand testing procedures throughout the manufacturing and assembly process, including safety tests,function tests, burn-in tests, performance tests and other tests designed to improve product quality.Completed products are subject to full quality control checks by the OEMs before delivery to theGroup’s designated warehouse. Products are further subject to inspection by the Group’s qualitycontrol staff upon arrival at the warehouse.

RESEARCH AND DEVELOPMENT

Due to the rapid advances in technology, the Directors believe that the success of the Groupdepends on the continued introduction of new products with innovative technology, competitive pricesand value-added features. The Group’s research and development efforts focus on the combination ofin-depth study, integration, modification and application of IT and information appliance technologyto design and develop new products with innovative features, increasing manufacturing efficiency andreducing cost of production.

The Group has established a strong team of research and development professionals, includingexperienced experts in computer hardware and software, digital devices, media display and networktechnology, as well as professionals from the games production and educational software applicationsindustries. Of the 31 professionals in the research and development department, 20 obtained universitydegree or above and have an average of five years research and development experience in IT relatedfield.

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A1a.28(5)

The Directors consider the Group’s software application development ability as one of its mostvaluable intangible assets.

The research and development costs of the Group are accounted for as expenses when incurred.For each of the two years ended 31st December, 1998 and the six months ended 30th June, 1999, theGroup’s research and development expenditure amounted to approximately HK$1 million, HK$0.2million and HK$0.5 million respectively, accounting for approximately 1.06%, 0.17% and 0.22% ofthe Group’s turnover respectively and 1.6%, 0.3% and 0.4% of the Group’s cost of goods soldrespectively.

The Group’s research and development personnel increased from a total of 12 in 1996 to 31professionals as at 30th September, 1999. The breakdown by responsibility of these professionals areas follows:

Number of personnel Responsibilities

14 multimedia development including platform technology,software applications and software development for the VenusProject

5 computer graphic design and development

5 quality control including testing and improvement

7 hardware design and development

INTELLECTUAL PROPERTY RIGHTS

The Group’s computer VCDs, educational computers and software applications arepredominately marketed under the “ ” trademark, which, together with the related logo, isregistered in the PRC under the name of YMERC. Mr. Zhu Wei Sha is the legal representative ofYMERC and Mr. Zhu Wei Sha and Mr. Chen Fu Rong together are the controlling shareholders ofYMERC. Accordingly, YMERC is a connected person of the Group under the Listing Rules. The Groupalso uses certain registered patents which are held by YMERC. Details of each of the trademark,patents and software copyrights are set out in the section headed “Intellectual property rights” inAppendix V to this prospectus.

Pursuant to the patents licence agreement dated 8th August, 1999 entered into between GoldenYuxing and YMERC, Golden Yuxing was granted the exclusive rights to use certain patents for a termequal to the validity period of these intellectual properties at a consideration of RMB100,000. Also,a trademark licence agreement dated 1st September, 1999 was entered into by Golden Yuxing andYMERC where Golden Yuxing was granted the exclusive right to use the trademark for a term equalto the validity period of these intellectual properties at a consideration of RMB100,000. HDYEC has,pursuant to a patents transfer agreement dated 17th September, 1999 transferred two patents to GoldenYuxing at a consideration of RMB1. These transactions constitute connected transactions and areexempted from the reporting, announcement and shareholders’ approval requirements within themeaning of the Listing Rules. Under PRC Patents Law, utility models and design patents are protectedfor ten years from the date of application for registration. Under PRC Trademark Law, trademarks areprotected for an initial term of ten years from the date of approval of their registration renewable uponan application for a successive ten years term.

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A1a.28(4)

Each of YMERC and HDYEC (hereinafter collectively called the “Covenantors” and any one ofwhich called the “Covenantor”) gave an undertaking in writing on 20th November, 1999 to theCompany that at any time during which the Company is listed on GEM and that Messrs. Zhu Wei Shaand Chen Fu Rong together and/or Super Dragon directly or indirectly holds 35 per cent. or more ofthe issued share of the Company or are otherwise regarded as controlling shareholders of the Companyunder the rules of the relevant securities exchange or any other relevant laws, the Covenantors shallnot, and shall procure that each of their subsidiaries shall not, whether for the account of theCovenantors or through any person, firm or company other than the Group, and whether as the mediumof any company which is its associate (as defined in the Listing Rules, but excluding any companywhich is a subsidiary of the Company and for which purpose there shall be aggregated with itsshareholding or ability to exercise control over the shares held or controlled by any of its associates),directly or indirectly carry on or participate in the research, development and sales of computer VCDs,educational computers and software applications, or own any interests in any such business, and in thecase of YMERC save and except the holding of trademarks and patents the exclusive rights of use ofwhich are granted to the Company or its subsidiaries.

Although infringement of intellectual property rights occurs frequently in the PRC, the Directorsbelieve that the intellectual property rights of the Group’s software applications are protected by theGroup’s pricing policy regarding such products. The Group currently sells its software applications ataround RMB18 per unit which is sufficiently low to deter others from pirating the Group’s softwareapplications as profit margin from doing so is relatively low as compared to the level of risk involved.Furthermore, as the Group’s software applications come with free consumer support and futureupgrade capability, the Directors believe that an average consumer will choose to buy the Group’ssoftware applications rather than pirated software. The Group is not aware of any materialinfringement of its intellectual property rights to date. Please also refer to the section headed “Riskfactors — protection of intellectual property rights of the Group” above for further details.

COMPETITION

Computer VCDs

The Directors consider that competitors of the Group’s computer VCDs are mainly otherdistributors of multi-functional VCD players in the PRC and that competition mainly arises in the formof pricing, distribution capability, brand awareness, product features and quality, as well as softwareand service support. The Directors believe that the Group competes favourably in all these factors andthat its leading position in the market is built on the basis of its strong research and developmentcapability in both hardware and software products. The Directors believe that due to its engagementof OEMs for the manufacture of its products rather than making substantial capital investments inmanufacturing facilities, the Group can maintain a flexible cost structure that allows competitivepricing. The Directors further believe that the proposed alliance with Microsoft will also help theGroup to strengthen its leading position in the information appliance industry in the PRC. Please seethe section headed “Business objectives and future strategies” below for more details.

Due to the significant price difference between PCs (the price of PCs starts from approximatelyRMB5,000 per unit) and computer VCDs, the Directors believe that PCs and computer VCDs aretargetted at different spectrum of the consumer market and, therefore, PCs do not pose any directcompetition against the Group’s computer VCDs.

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Educational computers

The Directors consider that there are four principal brandnames of educational computers in thePRC, namely Yuxing educational computers, Bubugao student computers, Xiaobawang studentcomputers, and Xiaoboshi learning machines. There are currently over 1,000 different softwareapplications which can be run on the Group’s educational computers and the Directors believe that thiscomprehensive software support coupled with the Group’s well established “” brandname enablethe Group to maintain a competitive advantage in respect of its educational computers.

As in the case of the Group’s computer VCDs, the Directors believe that PCs do not pose anydirect competition against the Group’s educational computers.

Software applications

The Directors consider that competition with the Group’s software applications comes mainlyfrom domestic software developers rather than international software developers since the latterproduce English based software while the Group produces Chinese based software. The Group’ssoftware applications are developed to complement the sales of its hardware products. As suchsoftware applications can only operate on the Group’s own operating system, other domestic softwaredevelopers are unable to compete directly with the Group in this regard.

The Group has not yet entered into the PC software market. The Directors believe that in theevent that the Group either (i) enters into the PC software market; or (ii) develops software relatingto the Venus Project; or (iii) converts existing software of the Group for use on PCs or for the purposeof the Venus Project, the Group will then begin to compete directly with other domestic PC softwaredevelopers.

YEAR 2000 ISSUE

The “Year 2000 issue” has arisen as a result of computer programmes being written and otherautomated systems being designed using two digits (rather than four) to identify calendar years,resulting in potentially incorrect calculations or system failure in any computer or automated systemswith time-sensitive functions for the year 2000 and beyond. Accordingly, a computer programmeaffected by the Year 2000 issue may recognise a date using “00” as the year 1900 instead of the year2000. The standard for solving the issue, referred as “Year 2000 compliant”, is that computers canaccurately function before, during and beyond the year 2000 without being affected by the change ofdates. The Directors recognise that the Year 2000 issue, if left unresolved, could result in the Companyand its business counterparts and customers encountering major system failures and facing significantoperating difficulties.

To mitigate this risk, the Group commenced a comprehensive in-house review of Year 2000issues. Under the plan, a task force comprising the Group’s own computer experts was formed withthe aim of testing and upgrading the Group’s internal computer systems to make them Year 2000compliant. Such work has been completed and passed the relevant tests. The Directors believe theGroup’s internal computer systems are Year 2000 compliant.

The Group has assessed the Year 2000 compliance of raw materials components, parts andsupplies by acquiring information from its principal suppliers. The Group has received confirmationfrom its principal suppliers that their computer systems are Year 2000 compliant and that the rawmaterials components, parts and products supplied to the Group have been tested and are Year 2000compliant.

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The Group has taken the necessary measures to ensure the products sold to customers are Year

2000 compliant. The Group’s in-house computer experts believe that as the Group’s main products

which include computer VCDs, educational computers and software applications do not incorporate

any calendar display and calculation functions, such products will not be affected by the Year 2000

issue.

Based on the work done and assessment made by the Group’s Year 2000 internal task force, the

Directors believe that the Group’s internally installed computer systems, products and supplies, where

applicable, are Year 2000 compliant. However, due to the complexity of the Year 2000 issue and the

interdependence of organisations using computer systems, there can be no assurance that the Group’s

effort to address this problem, or those of other companies with whom the Group interacts, can

completely eliminate the Year 2000 issue. However, up to the Latest Practicable Date, the Directors

are not aware of the Group encountering any major system failures or facing significant operating

difficulties relating to the Year 2000 issue.

INSURANCE

Besides motor vehicle insurance which is already in place, the Group intends to obtain insurance

for its goods stored in the warehouse. There is no insurance for its leased buildings, plant and

machineries or equipment belonging to third parties. As regards property belonging to the Group

which mainly consists of computers and machineries, the Directors believe that most of them have a

relatively short technological life and therefore they will not require any insurance coverage.

In addition, the Group is in the process of maintaining an insurance coverage programme against

work-related deaths and injuries for the benefit of all its employees.

OTHER DISCLOSURE UNDER THE LISTING RULES

Disclosure in connection with rules 17.14 to 17.21

The Directors confirm that the Company does not have a disclosure obligation under rules 17.14

to 17.21 of the Listing Rules as at the date of this prospectus.

Connected transactions

Save for the licensing of certain intellectual property rights which is disclosed in the section

headed “Business — intellectual property rights” above, the Directors confirm that the Company does

not have other connected transactions or continuing connected transactions (within the meaning of

Rules 20.12 and 20.13 of the Listing Rules) immediately upon listing of Shares on GEM.

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Directors

The Board of Directors consists of seven Directors (four executive directors and threeindependent non-executive directors) who are accountable to the shareholders. All of the executiveDirectors have extensive experience in the computer and electronics industries. Two of the executiveDirectors have worked in the computer industry for over ten years. The following paragraphs provide,more information concerning the Directors.

Executive Directors

Mr. Zhu Wei Sha, aged 45, has been the chairman of the board and the president of the Groupsince 1996. He graduated from the Department of Automatic Control of the Beijing IndustrialUniversity with a bachelor’s degree in engineering. He has worked at the Beijing MachineryElectronic Research Institute and the Industrial Economic Research Department of the China SocialScience Institute and as the legal representative and general manager of the Beijing Xichen ShanchuanJinji Technology Company. He is a committee member of the Chinese People’s Political ConsultativeCommittee and a committee member of Democracy and Constructive Alliance. Mr. Zhu possessesstrong fundamental knowledge of business and corporate management and has 12 years’ experiencein the management of technological enterprises. He is a co-founder of the Group.

Mr. Chen Fu Rong, aged 38, has been a vice president of the Group since 1996. He graduatedfrom the Department of Automatic Control of the Beijing Industrial University with a bachelor’sdegree in engineering. He has worked at the Industrial Economic Research Department of the ChinaSocial Science Institute and Beijing Machinery Electronics Co. and has extensive experience incomputer hardware design and the management of research and development activities. He isresponsible for the development of the Group’s multimedia educational computers and supervision ofthe Group’s overall research and development activities. Mr. Chen possesses nine years’ experiencein research and development and engineering management. He is a co-founder of the Group.

Mr. Shi Guang Rong, aged 38, joined the Group in 1996. He graduated with a bachelor’s degreefrom the Department of Automatic Control of the Beijing Industrial University and has been anexecutive Director and a vice president of the Group since 1996. He has worked at the Beijing SwitchFactory and the Beijing Damei group and he has also gained management experience when he servedas the head of the engineering department in the Beijing Kunlun Hotel. He is responsible for themarketing and public relation matters of the Group. Mr. Shi has established a close relationship withthe news media and possesses 12 years’ experience in product marketing and promotion.

Mr. Wang An Zhong, aged 43, is the general manager of the research and developmentdepartment of the Group. He graduated with a bachelor’s degree from the Department of AutomaticControl of the Beijing Industrial University. He was an associate professor and has extensiveexperience in lecturing and scientific research. He also managed and was involved in a number of theState’s research projects and won several awards. Mr. Wang joined the Group in 1997 as the head ofthe research and development department.

Independent non-executive Director

Mr. Wu Jia Jun, aged 67, is currently a researcher at the Social Science Institute of China anda mentor professor for doctorate students. He was an executive vice-president of the Industrial andEconomic Research and Development Association of China and the vice-general manager of theChinese Industrial and Economic Research Institute from 1980 to 1993 and the vice-president of the

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

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14.08(7)(a)14.15A1a.41

Co. Ord.3rd Sch.Para 6

5.05

Young Entrepreneurs Association of China. Mr. Wu has extensive experience in conducting research

in the economy and industries of the PRC and also in corporate management. He is a renowned scholar

in Japanese corporate and industrial management of which has in-depth knowledge. He has published

several books and articles on corporate management and economic reform. Mr. Wu was appointed as

an independent non-executive Director in October 1999.

Mr. Zhong Peng Rong, aged 45, is a renowned Chinese economist. He worked with the central

government for many years as a chief researcher. He now serves as a professor of several famous

universities in China and as an advisor to over 20 enterprises and local governments. As the chairman

and research fellow of the Beijing Shiye Consultancy Centre, he has formulated development

strategies for enterprises in different industries and for local governments. He has in-depth

understanding of the macroeconomic environment and government administration in China. Mr. Zhong

was appointed as an independent non-executive Director in October 1999.

Mr. Chen Man Fai, Steven, aged 40, is currently a director of ICEA. Prior to joining ICEA, Mr.

Chen practised as a PRC legal consultant at Livasiri & Co. from 1988 to 1992 and at McKenna & Co.

from 1992 to 1994. He also practised as a lawyer at Wilde Sapte from 1994 to 1996. Mr. Chen has

extensive experience in corporate restructuring and overseas listing for PRC enterprises. He is a

member of both the Law Society of Hong Kong and the Attorney of Supreme Court of Hong Kong.

He is also a senior PRC lawyer. Mr. Chen was appointed as an indepedent non-executive Director in

October 1999.

The aggregate emoluments payable by the Group to the Directors for the year ended 31st

December, 1999 are estimated to be approximately HK$651,000.

In addition, under the arrangements currently in force, the aggregate emoluments payable by the

Group to the Directors for the year ending 31st December, 2000 are estimated to be approximately

HK$656,000, before discretionary bonuses and share options, if any, which are subject to the approval

of the Board of Directors.

Company secretary

Mr. Di Yu Zeng, aged 39, is the security department manager of the Group. He has a certificate

of completion from the Beijing Employee Institute of Machinery Industry Bureau. Before joining the

Group in 1997, he served as the chief secretary of the president’s office, an assistant manager of the

research department and the head of the equity securities department at Beiren Printing Machinery

Holdings Limited, a PRC company listed on the Stock Exchange, and was responsible for the

administration of securities related matters. Mr. Di was appointed as a company secretary in October

1999.

Mr. Lai Yang Chau, Eugene, aged 30, is a practising solicitor in Hong Kong and an associate of

Livasiri & Co., the legal advisers to the Company on Hong Kong law. Mr. Lai holds a bachelor of laws

degree from the University of Hong Kong, a master of laws degree from the People’s University of

the PRC and a master of laws degree from the City University of Hong Kong. Mr. Lai was appointed

as a company secretary in October 1999.


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5.09

Senior management

Mr. Sun Li Jun, aged 37, graduated with a bachelor’s degree from the Department of AutomaticControl of the Beijing Industrial University. He has worked at the Beijing Machinery group, LatheElectronics Co. and the industrial and economic research centre of the Social Science Institute ofChina. He is now a financial manager of the Group. He is a co-founder of the Group and has nineyears’ experience in financial management.

Mr. Li Zhen Huan, aged 63, is the deputy general manager and sales manager of the Group. Hewas the general manager of Xingjiang Agriculture Service Company for 20 years and has extensiveexperience in corporate management. He has made significant contribution to the establishment of theGroup’s distribution network since he joined the Group in 1996.

Mr. Zhu Jiang, aged 42, is the deputy general manager of the research and developmentdepartment of the Group. He graduated from the Department of Wireless Communication of theBeijing Industry University. He has 15 years’ research experience in computer engineering, and hasextensive experience in digital-to-analog circuits and high-level assembly language programming. Hehas participated in several important scientific research projects and has received a number of nationalawards. Mr. Zhu joined the Group in 1996.

Mr. Zheng Zhi Jian, aged 33, is a financial manager of the Group. He graduated from the GansuIndustrial University with a degree in industrial accounting. He was the financial controller of theGansu Province Electronics group and Shenzhen Dongda Electronics Company Limited. He was anassistant general manager and a finance manager of Shenzhen Huayi Telecommunication ProductsLimited. He has extensive experience in corporate financial management. Mr. Zheng joined the Groupin 1996.

Mr. Liu Feng Lai, aged 30, is the production manager of the Group. He graduated from theDepartment of Physics of the Beijing Postal and Communication Institute. He was a lecturer in MiyunNo. One High School. Since joining the Group in 1996, he has been promoted to become a managerto oversee and co-ordinate the Group’s production function.

Ms. Yuen Wai Man, Shirine, aged 27, is the finance and administration manager of the Group.She is a graduate of the Hong Kong University of Science and Technology with a bachelor’s degreein business administration. Ms. Yuen is an associate member of both the Association of CharteredCertified Accountants and the Hong Kong Society of Accountants. Ms. Yuen was an experiencedsenior staff accountant at Arthur Andersen & Co. with five years’ experience in accounting andfinance. Ms. Yuen joined the Group in December 1999.

Audit committee

The Company has established an audit committee on 20th November, 1999 with written terms ofreference in compliance with the Listing Rules. Two independent non-executive Directors of theGroup, Mr. Wu Jia Jun and Mr. Chen Man Fai, Steven, were appointed as members of the Company’saudit committee. Mr. Chen Man Fai, Steven was appointed the chairman of this committee. Theprimary duty of the audit committee is to review and supervise the financial reporting process andinternal controls of the Group.


— 55 —

A1a.42(2)

Employees

As at 30th November, 1999, the Group had a total of 155 employees. The breakdown of staff by

function is as follows:

Management 26Administration 51Research and development 31Production 38Others 9

Total 155

Remuneration of the Group’s employees includes monthly basic salaries and monthly

discretionary bonuses granted on the basis of sales performance of the Group. The Group also provides

meal and medical allowance to its employees. In addition, the Company’s subsidiary in the PRC,

Golden Yuxing, participates in a defined contribution retirement scheme organised and administered

by the Beijing Municipal Government. In the opinion of the Directors, the Group did not have any

material contingent liability relating to such retirement scheme as at 30th November, 1999.

During the two years ended 31st December, 1998 and the six months ended 30th June, 1999, the

Group had not experienced any material disruptions of its operations as a result of labour disputes or

turnover of personnel.


— 56 —

A1a.28(7)

HK$’000

Percentageof issued

share capital

Number of Shares

Authorised:

2,000,000,000 200,000,000

Issued and to be issued, fully paid or credited as fully paid:

300,000,000 Shares in issue 30,000,000 75100,000,000 to be issued under the Placing 10,000,000 25

400,000,000 40,000,000 100

The minimum public float to be maintained by the Company at all times after listing of its Shares

on GEM is 15% of the share capital in issue from time to time.

Notes:

1. Assumptions

This table assumes the Placing becomes unconditional.

It takes no account of any Shares which may be issued pursuant to the exercise of the Over-Allotment Option or which

may be issued pursuant to the exercise of options granted under the Share Option Scheme, or which may be allotted and issued

pursuant to the general mandate (see Note 4 below), or which may be repurchased by the Company pursuant to the share

repurchase mandate (see Note 5 below).

2. Ranking

The Placing Shares will rank equally with all Shares now in issue or to be issued, and will qualify for all dividends or

other distributions declared, made or paid after the date of this prospectus.

3. Share Option Scheme

The Company has conditionally adopted the Share Option Scheme. A summary of the principal terms of this scheme is

set out in the section headed “Share Option Scheme” in Appendix V to this prospectus.

Under the Share Option Scheme, executive Directors and full-time employees of the Group may be granted options which

entitle them to subscribe for Shares representing up to a maximum of 10% of the issued share capital of the Company from time

to time (excluding any Shares which may be issued pursuant to the exercise of options granted under the Share Option Scheme).

SHARE CAPITAL

— 57 —

14.08(7)(b)A1a.15(1)A1a.23(1)

4. General mandate to issue new shares

The Directors have been granted a general unconditional mandate to allot, issue and deal with Shares, otherwise than

by way of rights, scrip dividend schemes or similar arrangements in accordance with the Bye-laws or pursuant to the exercise

of any options which may be granted under the Share Option Scheme or pursuant to the Placing or to the Over-allotment Option

with a total nominal amount of not more than the sum of:

1. 20% of the total nominal amount of the share capital of the Company in issue immediately following completion

of the Placing (such share capital of the Company to include any Shares which may be issued pursuant to the

exercise of the Over-Allotment Option); and

2. the total nominal amount of the share capital of the Company repurchased by the Company pursuant to the

mandate referred to in Note 5 below.

The Directors may, in addition to Shares which they are authorised to issue under the above mandate, allot and issue

Shares under a rights issue, scrip dividend scheme or similar arrangement, or on the exercise of options granted under the

Share Option Scheme.

This mandate will expire:

+ at the end of the next annual general meeting of the Company; or

+ at the end of the period within which the Company is required by law or the Bye-laws to hold its next annual

general meeting; or

+ when varied or revoked by an ordinary resolution of the shareholders of the Company in general meeting,

whichever is the earliest.

For further details of this general mandate, see the section headed “Written resolutions of the shareholders of the

Company” in Appendix V to this prospectus.

5. General mandate to repurchase shares

The Directors have been granted a general unconditional mandate to exercise all the powers of the Company to

repurchase Shares with a total nominal value of not more than 10% of the total nominal amount of the share capital of the

Company in issue immediately following completion of the Placing (such share capital of the Company to include any Shares

which may be issued pursuant to the exercise of the Over-Allotment Option).

This mandate only relates to repurchases made on the Stock Exchange, or on any other stock exchange on which the

Shares are listed (which is recognised by the Securities and Futures Commission in Hong Kong and the Stock Exchange for this

purpose), and which are in accordance with the Listing Rules. A summary of the relevant Listing Rules is set out in the section

headed “Repurchase by the Company of its own securities” in Appendix V to this prospectus.

This mandate will expire:

+ at the end of the next annual general meeting of the Company; or

+ at the end of the period within which the Company is required by law or the Bye-laws to hold its next annual

general meeting; or

+ when varied or revoked by an ordinary resolution of the shareholders of the Company in general meeting,

whichever is the earliest.

SHARE CAPITAL

— 58 —

SUBSTANTIAL SHAREHOLDERS

The following table provides certain information regarding ownership of the Company’s sharecapital immediately following the Placing (and taking no account of any Shares which may be issuedupon the exercise of the Over-allotment Option) by all persons who are entitled to exercise, or controlthe exercise of, 10% or more of the voting power of general meetings of the Company and aresubstantial shareholders of the Group as defined in the Listing Rules:

NameNumber of

Shares

Approximatepercentage of

issued share capital

Super Dragon 165,000,000 41.25%Dragon Treasure 135,000,000 33.75%

Notes:

1. Super Dragon is a nominee company, of which Mr. Zhu Wei Sha and Mr. Chen Fu Rong are the shareholders whoown 63.6% and 36.4% of the entire issued share capital of this company respectively.

2. Dragon Treasure is a nominee company, of which Mr. Sun Li Jun and Mr. Shi Guang Rong are the shareholderswho own 98% and 2% of the entire issued share capital of this company respectively. This company acts as thetrustee and holds the Shares on behalf of 208 past and present employees of the Group. Immediately after thePlacing, none of the beneficiaries under the trust held more than 5% of the entire issued share capital of theCompany.

INITIAL MANAGEMENT SHAREHOLDERS

The following table provides certain information regarding ownership of the Company’s sharecapital immediately following the Placing (and taking no account of any Shares which may be issuedupon the exercise of the Over-allotment Option) by all persons who are entitled to exercise, or controlthe exercise of, 5% or more of the voting power at general meetings of the Company and who are able,as a practical matter, to direct or influence the management of the Company. These pesons areconsidered as initial management shareholders of the Group as defined in the Listing Rules (the“Initial Management Shareholders”). The Initial Management Shareholders comprises Super Dragon,Dragon Treasure, Messrs. Zhu Wei Sha, Chen Fu Rong, Sun Li Jun, Wang An Zhong, Shi Guang Rong,Di Yu Zeng, Li Zhen Huan, Zhu Jiang, Zheng Zhi Jian and Liu Feng Lai:

NameNumber of

Shares



Super Dragon(Note 1) 165,000,000 41.25%Dragon Treasure(Note 2) 135,000,000 33.75%Zhu Wei Sha(Note 1) 165,000,000 41.25%Chen Fu Rong(Note 1) 165,000,000 41.25%Sun Li Jun(Note 3) 16,897,806 4.22%Shi Guang Rong(Note 3) 6,000,000 1.50%Wang An Zhong(Note 3) 1,084,189 0.27%Di Yu Zeng (Note 3) 837,877 0.21%

SUBSTANTIAL SHAREHOLDERS AND INITIAL MANAGEMENT SHAREHOLDERS

— 59 —

A1a.45(3)11.22

NameNumber of

Shares



Li Zhen Huan(Note 3) 1,084,189 0.27%Zhu Jiang(Note 3) 1,084,189 0.27%Zheng Zhi Jian(Note 3) 958,423 0.24%Liu Feng Lai (Note 3) 3,175,909 0.79%

Notes:

1. Super Dragon is a nominee company, of which Mr. Zhu Wei Sha and Mr. Chen Fu Rong are the shareholders whoown 63.6% and 36.4% of the entire issued share capital of this company respectively.

2. Dragon Treasure is a nominee company, of which Mr. Sun Li Jun and Mr. Shi Guang Rong are the shareholderswho own 98% and 2% of the entire issued share capital of this company respectively. This company acts as thetrustee and holds the Shares on behalf of 208 past and present employees of the Group (the “EmployeeShareholders”). The board of directors of Dragon Treasure comprises Mr. Sun Li Jun and Mr. Shi Guang Rong,who will carry out the daily administrative operations. The obligations of Dragon Treasure are imposed by a deedof trust dated 20th November, 1999. Broadly speaking, Dragon Treasure will have to act in accordance with (a)the directions of each Employee Shareholder in the disposal of his/her Shares; and (b) on the exercise of votingrights attached to those Shares (where no such direction is given by any of the Employee Shareholders, however.Dragon Treasure may exercise the voting rights attached to his/her Shares in its discretion).

3. Dragon Treasure acted as the trustee and held the Shares on behalf of Messrs. Sun Li Jun, Wang An Zhong, ShiGuang Rong, Di Yu Zeng, Li Zhen Huan, Zhu Jiang, Zheng Zhi Jian and Liu Feng Lai.

Each of the Initial Management Shareholders, being Super Dragon, Dragon Treasure, Messrs.Zhu Wei Sha, Chen Fu Rong, Sun Li Jun, Wang An Zhong, Shi Guang Rong, Di Yu Zeng, Li ZhenHuan, Zhu Jiang, Zheng Zhi Jian and Liu Feng Lai, has undertaken to the Company and the StockExchange that from the date on which dealings in the Shares commence on GEM (the “Listing Date”)up to and including the date falling two years thereafter:

(a) he/it will place in escrow, with an escrow agent acceptable to the Stock Exchange, allrelevant securities as defined in rule 13.15(4) of the Listing Rules he/it owns as at theListing Date (the “Relevant Securities”) on terms acceptable to the Stock Exchange;

(b) he/it will not, save as provided in rule 13.17 of the Listing Rules, dispose of (or enter intoany agreement to dispose of) or permit the registered holder to dispose of (or to enter intoany agreement to dispose of) any of its direct or indirect interest in the Relevant Securities;

(c) in the event that he/it pledges or charges any direct or indirect interest in the RelevantSecurities under rule 13.17(2) of the Listing Rules or pursuant to any right or waivergranted by the Stock Exchange pursuant to rule 13.17(5) of the Listing Rules, he/it mustinform the Company immediately thereafter, disclosing the details specified in the ListingRules; and

(d) having pledged or charged any of his/its interest in the Relevant Securities undersub-paragraph (c) above, he/it must inform the Company immediately in the event that he/itbecomes aware that the pledgee or chargee has disposed of or intends to dispose of suchinterest and of the number of the Relevant Securities affected.

SUBSTANTIAL SHAREHOLDERS AND INITIAL MANAGEMENT SHAREHOLDERS

— 60 —

INDEBTEDNESS

Borrowings

As at the close of business on 30th November, 1999, being the latest practicable date prior to theprinting of this prospectus for the purpose of this indebtedness statement, the Group had noborrowings.

Contingent liabilities

As at 30th November, 1999, the Group had no material contingent liabilities.

Capital commitments

As at 30th November, 1999, the Group had outstanding capital commitments in respect of theconstruction of a warehouse of the Group amounting to approximately HK$12.2 million which wasauthorised but not contracted for. Such commitment was intended to be met by the internal resourcesof the Group.

Disclaimer

Save as aforesaid and otherwise disclosed herein, the Group did not have, at the close of businesson 30th November, 1999, any outstanding loan capital, bank overdrafts and liabilities underacceptances or other similar indebtedness, debentures, mortgages, charges or loans or acceptancecredits or hire purchase commitments, guarantees, indemnities or other material contingent liabilities.

The Directors have confirmed that, except as disclosed above, there has not been any materialchange in the indebtedness and contingent liabilities of the Group since 30th November, 1999.

LIQUIDITY, FINANCIAL RESOURCES AND CAPITAL STRUCTURE

Working capital

The Group generally finances its operations with internally generated cashflow. Taking intoconsideration the financial resources available to the Group, including internally generated funds,available banking facilities and the estimated net proceeds of the Placing, the Directors are of theopinion that the Group has sufficient working capital for its present requirement.

Directors’ opinion of the net current assets position

As at 30th November, 1999, the Group had net current assets of approximately HK$165.6 millionincluding cash and bank balance of approximately HK$33.6 million.

The Directors are of the opinion that, taking into account the financial resources available forthe Group including internally generated funds, available banking facilities and the estimated netproceeds of the Placing, the Group has sufficient net current assets to satisfy its present requirements.


— 61 —

14.08(7)(a)14.1514.16A1a.28(1)(a)

A1a.32(1)-(4)

A1a.32(5)(a)(b)

Dividend policy

On the basis of the profit estimate set out in the section headed “Profit estimate” below and in

the absence of unforeseen circumstances, the Directors do not presently intend to recommend any

dividend in respect of the year ended 31st December, 1999. The Directors expect that, in future,

interim and final dividend will be paid in or around May and November of each year, and that the

interim dividend will normally represent approximately one-third of the expected total dividend for

the full year. The amounts of dividends actually distributed to holders of Shares will be subject to the

discretion of the Directors and will depend upon the Company’s earnings, financial condition, cash

requirement and availability, the provisions of relevant laws of the PRC and all other relevant factors.

The balance of the earnings will be used to fund the Company’s continued growth and the expansion

of its businesses.


— 62 —

TRADING RECORD

General

The following is a summary of the audited combined results of the Group for each of the twoyears ended 31st December, 1997 and 1998 and the six months ended 30th June, 1999 (“RelevantPeriods”), which is prepared on the basis of presentation as set out in the section headed “Basis ofpresentation” of the accountant’s report in Appendix I to this prospectus. This summary has beenprepared on the assumption that the current structure of the Group was in existence throughout theRelevant Periods.


Six monthsended

30th June,1997 1998 1999

HK$’000 HK$’000 HK$’000

Turnover (Note 1)Computer VCDs — 41,094 203,836Educational computers 83,159 68,437 9,812

Sub-total 83,159 109,531 213,648Software applications and others 15,068 17,587 9,477

Total 98,227 127,118 223,125

Cost of goods sold (65,248) (77,690) (132,156)

Gross profit 32,979 49,428 90,969Gross profit margin 33.6% 38.9% 40.8%

Selling expenses (16,356) (10,164) (23,705)Administrative expenses (4,594) (8,008) (4,346)Finance income, net 23 82 265

Operating profit before taxation 12,052 31,338 63,183Other income(Note 2) 9,375 20,634 21,881

Profit before taxation 21,427 51,972 85,064Taxation (7,136) (17,859) (27,937)


Dividends — — 469

Earnings per share(Note 3) 4.8 cents 11.4 cents 19.0 cents


— 63 —

A1a.28(1)(a)A1a.33(1)

Notes:

1. Turnover represents sales at invoiced value to distributors and end customers and is stated net of discounts and

value-added tax, where applicable.

2. Other income represents mainly government incentive bonuses granted by the Government of Pinggu County,

Beijing, the PRC. According to the approval documents issued by the Government of Pinggu County, Golden

Yuxing, having been categorised as a “high technology” company established in the Jinhaijiao Technology Zone

of Pinggu County, was entitled to incentive bonuses granted by the Government of Pinggu County. The

government incentive bonuses recorded by Golden Yuxing during the Relevant Periods comprised amounts

calculated with reference to 100%, 100% and 54.5% of the amounts of income tax payable by Golden Yuxing for

each of the two years ended 31st December, 1998 and the six months ended 30th June, 1999 respectively, and

certain incentive bonuses which were granted by the Government of Pinggu County on a discretionary basis. The

government incentive bonuses granted with reference to income tax and on a discretionary basis amounted to

approximately HK$7.2 million and HK$2.2 million, HK$17.9 million and HK$4.9 million and HK$15.2 million

and HK$6.7 million for each of the two years ended 31st December, 1998 and the six months ended 30th June,

1999 respectively.

3. The calculation of earnings per share, which is presented for information purpose only, is based on the Group’s

profit attributable to shareholders for each of the two years ended 31st December, 1998 and the six months ended

30th June, 1999, and on the basis of 300,000,000 Shares in issue throughout the Relevant Periods.

According to paragraph 31 of the Third Schedule of the Companies Ordinance and rules7.03(1) and 11.10 of the Listing Rules, the Company is required to include the Group’s financialresults for the year ended 31st December, 1999 in the accountants’ report. The SFC and the StockExchange have granted waivers in relation to the strict compliance with paragraph 31 of theThird Schedule of the Companies Ordinance and rules 7.03(1) and 11.10 of the Listing Rulesrespectively. The Directors are aware of the requirement of rule 11.11 of the Listing Rules whichstates that the latest financial period reported on by the reporting accountants must not haveended more than six months before the date of this prospectus. The Company has sought andobtained a waiver from compliance with such a requirement from the Stock Exchange. TheDirectors confirm that they have performed sufficient due diligence on the Group to ensure that,save as disclosed herein, up to the date of this prospectus, there has been no material adversechange in the financial position of the Group since 30th June, 1999, and there is no event whichwould materially affect the information shown in the accountants’ report set out in Appendix Ito this prospectus.

Management’s discussion and analysis of results of operation

Year ended 31st December, 1997

The Group achieved a turnover and gross profit of approximately HK$98.2 million and HK$33.0million respectively for the year ended 31st December, 1997. Sales of educational computersamounted to approximately HK$83.2 million, or 84.7%, of the Group’s total sales for that year. Salesof software applications and others amounted to approximately HK$15.1 million, or 15.3%, of theGroup’s total sales for that year. The Group’s profit before taxation for the year ended 31st December,1997 amounted to approximately HK$21.4 million, and gross profit margin was approximately 33.6%.

Profit attributable to shareholders for the year ended 31st December, 1997 was approximatelyHK$14.3 million, representing a net profit margin of approximately 14.5%.


— 64 —

Year ended 31st December, 1998 compared to year ended 31st December, 1997

The Group’s turnover for the year ended 31st December, 1998 increased by 29.4% toapproximately HK$127.1 million from approximately HK$98.2 million for the year ended 31stDecember, 1997. The increase in turnover in 1998 was attributable to the sales of computer VCDswhich amounted to approximately HK$41.1 million for that year. The Group launched in September1998 model 315D computer VCD which combines the functions of a VCD player and some of thepopular functions of a PC including Internet browsing, e-mail exchange and Internet games. Thisproduct has gained rapid market recognition in the PRC since its launch. The sales of computer VCDs,educational computers and software applications and others accounted for approximately 32.3%,53.9% and 13.8% of the Group’s turnover for the year ended 31st December, 1998 as compared to 0%,approximately 84.7% and 15.3% for the year ended 31st December, 1997 respectively.

The Group’s profit before taxation for the year ended 31st December, 1998 increased by 142.6%to approximately HK$52.0 million from approximately HK$21.4 million for the year ended 31stDecember, 1997. The significant growth in profit before taxation was attributable in part to an increasein both turnover and gross profit margin, and in part to a reduction in selling expenses byapproximately HK$6.2 million since the advertising promotion for the Group’s new products,computer VCD model 315D, was deferred to the following year.

Gross profit margin for the year ended 31st December, 1998 was approximately 38.9%,representing an increase from 33.6% for the year ended 31st December, 1997. The improvement ingross profit margin in 1998 was contributed by the launch of the Group’s computer VCDs whichattained a higher profit margin than existing products.

As a result of the foregoing, profit attributable to shareholders for the year ended 31st December,1998 increased to approximately HK$34.1 million from approximately HK$14.3 million for the yearended 31st December, 1997.

Six months ended 30th June, 1999

For the six months ended 30th June, 1999, the Group recorded a turnover of approximatelyHK$223.1 million, representing approximately 1.76 times of the turnover for the year ended 31stDecember, 1998 of approximately HK$127.1 million. This significant growth in turnover wasattributable to a continued increase in sales of the Group’s computer VCDs which amounted toapproximately HK$203.8 million, which accounted for 91.4% of the Group’s turnover, for that sixmonths’ period as compared to sales of approximately HK$41.1 million, accounted for 32.3% of theGroup’s turnover, for the year ended 31st December, 1998. Model 315D computer VCD has becomethe Group’s major product since its launch in September 1998 and demand remained keen during thatperiod. In addition, following the Group’s continued development of computer VCD technology, theGroup successfully launched two new models, models 315H and 315L computer VCD in February andJune 1999 respectively. Model 315H is a computer super VCD built on the technology of model 315Dbut with improved audio and visual quality. Model 315L has the features of model 315D with theaddition of a build-in computer floppy drive for data downloading and processing. In addition, theGroup carried out promotional advertisements on various media which further strengthened the growthin sales of its computer VCDs. The sales of educational computers and software applications andothers for the six months ended 30th June, 1999 were approximately HK$9.8 million and HK$9.5million respectively, which accounted for approximately 4.4% and 4.2% of the Group’s turnover, ascompared to approximately HK$68.4 million and HK$17.6 million, which accounted for 53.9% and


— 65 —

13.8% of the Group’s turnover, for the year ended 31st December, 1998. Educational computersmanufactured by Golden Yuxing are regarded as high-end products in this product category. The salesof high-end educational computers declined as competition from low-end products of othermanufacturers have trimmed down the market share of Golden Yuxing’s products.

The Group achieved a profit before taxation of approximately HK$85.1 million for the sixmonths ended 30th June, 1999, representing approximately 1.64 times of the profit before taxation forthe year ended 31st December, 1998 of approximately HK$52.0 million.

Gross profit margin for the six months ended 30th June, 1999 was approximately 40.8% ascompared to 38.9% for the year ended 31st December, 1998. The Directors attribute this increase tothe continuous launch of new products which are able to demand higher selling prices and thereforebetter margins.

As a result of the foregoing, profit attributable to shareholders for the six months ended 30thJune, 1999 increased to approximately HK$57.1 million from approximately HK$34.1 million for theyear ended 31st December, 1998.

TAXATION

A uniform income tax rate of 33% is generally applicable to all Chinese domestic enterprises,including the Company’s subsidiary in the PRC, Golden Yuxing. Pursuant to the Income Tax Law ofthe PRC for Enterprises with Foreign Investment and Foreign Enterprises, Golden Yuxing will beexempted from PRC income tax for a period of two years from its first profit making year andthereafter will be entitled to a 50% reduction on income tax calculated at the 33% tax rate for a periodof three years, subsequent to the conversion of Golden Yuxing to a Sino-foreign co-operative jointventure enterprise.

During the Relevant Periods, Golden Yuxing also received certain government incentive bonuseswhich were calculated based on certain percentage of income tax payable by Golden Yuxing and thediscretion as exercised by the Government of Pinggu County, Beijing, the PRC.

PROFIT ESTIMATE, DIVIDEND POLICY, WORKING CAPITAL AND DISTRIBUTABLERESERVES

Profit estimate

The Directors estimate that, on the bases and assumptions set out in Appendix II to thisprospectus, the combined profit after taxation but before extraordinary items of the Group for the yearended 31st December, 1999 will be not less than HK$107 million. At present, the Directors are notaware of any extraordinary items which have arisen in respect of that year.

The profit after taxation but before extraordinary items of the Group increased substantially fromHK$34 million for the year ended 31st December, 1998 to an estimate of HK$107 million for the yearended 31st December, 1999. This increase is mainly due to profit contributed by computer VCDs, thesales of which increased substantially from HK$41 million for the year ended 31st December, 1998to an estimated sales of HK$466 million for the year ended 31st December, 1999. The Group launchedthe first model of computer VCD in September 1998 and was able to attain a substantial growth in


— 66 —

14.08(7)(a)14.29

sales through the continuous introduction of new products. The amount of government incentive

bonuses to be granted to Golden Yuxing for the year ended 31st December, 1999 is estimated to be

approximately HK$40 million, as compared to approximately HK$23 million for the year ended 31st

December, 1998.

On a pro forma fully diluted basis and on (i) the assumption that the Placing had been completed

and a total of 400,000,000 Shares were in issue throughout the year ended 31st December, 1999; and

(ii) the assumption that the estimated net proceeds of the Placing had been received on 1st January,

1999 and interest income would have been earned thereon at an interest rate of 5% per annum,

estimated earnings per Share is 31.7 cents, representing a price/earnings multiple of 13.2 times based

on the Issue Price.

Dividend policy

The Directors do not presently intend to recommend any dividend for the year ended 31st

December, 1999. Should dividends be paid in the future, the Company will pay interim and final

dividends in May and November of each year. Interim dividends will normally represent

approximately one-third of the expected total dividends for the full year. The amount of dividends

actually distributed to holders of Shares will be subject to the discretion of the Directors and will

depend upon the Company’s earnings, financial condition, cash requirement and availability, the

provisions of relevant laws of the PRC and all other relevant factors.

Pursuant to the existing regulations applicable to sino-foreign co-operative joint venture

enterprise in the PRC, the Group intends to exchange part of its Renminbi to be received from business

activities from designated foreign exchange banks for the purpose of profit distribution and dividend

payment in the future.

Working capital

Taking into consideration the financial resources available to the Group, including internally

generated funds, available banking facilities and the estimated net proceeds of the Placing, the

Directors are of the opinion that the Group has sufficient working capital for its present requirements.

Distributable reserve

The Company had not been incorporated as at 30th June, 1999 and hence there was no reserve

available for distribution to shareholders at that date.


— 67 —

A1a.12

A1a.31(1)(2)

A1a.36

ADJUSTED NET TANGIBLE ASSETS

The following pro forma statement of adjusted net assets of the Group is based on the combined

net assets of the Group as at 30th June, 1999 as set out in the accountants’ report in Appendix I to this

prospectus and adjusted as shown below:

HK$’000

Audited net assets of the Group as at 30th June, 1999 128,607

Less: Intangible assets (2,525)

Net tangible assets of the Group as at 30th June, 1999 126,082

Unaudited combined profit of the Group as shown in themanagement accounts for the five months ended 30thNovember, 1999 47,787

Estimated net proceeds of the Placing(Note 1) 393,000

Adjusted net tangible assets 566,869

Adjusted net tangible asset value per Share(Note 2) HK$1.42

Notes:

1. The estimated net proceeds of the Placing does not take into account any Shares which may be issued pursuant

to the Over-allotment Option.

2. The adjusted net tangible asset value per Share is calculated based on 400,000,000 Shares expected to be in issue

upon the completion of the Placing, but does not take into account any Shares which may be issued pursuant to

the Over-allotment Option. If the Over-allotment Option is exercised in full, the adjusted net tangible assets of

the Group and the adjusted net tangible asset value per Share would be approximately HK$628 million and

HK$1.51 respectively.

NO MATERIAL ADVERSE CHANGE

Save as disclosed in this prospectus, the Directors believe that there has been no material adverse

change in the financial or trading position or prospects of the Company or its subsidiaries since 30th

June, 1999.


— 68 —

A1a.21A1a.28(1)(a)

A1a.38

OVERALL OBJECTIVES

The Group’s primary business objective is to achieve a long-term steady growth and to maintainits position as a leading developer and provider of hardware and software products in the informationappliance market in the PRC. The Group will constantly strive to anticipate the rapidly changing needsof consumers in the PRC and to develop innovative products to meet their needs. Specifically, theGroup intends to achieve the following objectives over the next two to three years:

(1) to promote IAMSDP as a standard for software application development in the informationappliance industry in the PRC;

(2) to popularise the Group’s information appliances in the PRC;

(3) to become a market leader of multimedia software application development; and

(4) to promote the Group’s educational computers as popular multimedia educational tool inthe PRC.

The Directors intend to implement various measures for the purpose of achieving the aboveobjectives, details of which are set out below. They have made a description of such measures basedon the outlined time intervals, which the Directors consider to be appropriate having regard to therapid development of the information appliance industry and the difficulties in certain cases tosegregate into shorter time intervals. Details of the measures for the period beyond 31st December,2000 are therefore only set out on a yearly basis. In addition, details of the measures intended to beimplemented in relation to the third objective above have been stated as an overall plan since theDirectors consider such measures should be carried out on a continuous basis over a medium termrange.

FUTURE PLANS AND PROSPECTS

Promoting IAMSDP as a standard for software application development in the informationappliance industry in the PRC

Market potential

The Directors believe that the user-friendly feature of IAMSDP will enable a large number ofindividuals with limited programming knowledge to develop multimedia software applications for theGroup’s information appliances. The Directors further believe that IAMSDP’s platform-neutraltechnology (meaning that software applications developed using IAMSDP can be run on differentoperating systems and hardware platforms) is able to provide significant growth opportunities for theGroup by facilitating access to other sectors of the information appliance market. In order to providethe interface for each combination of operating system and information appliance, a specific softwareengine needs to be developed. By adopting the software engine developed by the Group, multimediasoftware applications developed using IAMSDP can be run on PCs and other information appliancesincluding Windows CE based Venus Computers.

The Directors believe that once a sufficiently wide range of multimedia software applications inthe market has been developed using IAMSDP, other brands of information appliances will choose tobe compatible with the Group’s software engine in order to utilise those multimedia software


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14.08(7)(a)14.19(3)A1a.28(1)(a)

applications then available. In addition, the Group intends to develop a series of multimedia softwaredevelopment tools, based on IAMSDP, to meet the demand of different types of informationappliances, including those for DVB and VOD networks, virtual reality video games and multimediaeducational software applications.

Projected trend

With the successful implementation of the Venus Project and the consequent popularisation ofinformation appliances, the Directors expect that there will be an increasing demand for multimediasoftware applications with diversified functions. The Group will therefore aim to develop futureversions of IAMSDP which have enhanced multimedia interactive functions and increased informationstorage capacity. This will in turn facilitate the development of more advanced multimedia softwareapplications for use on the Group’s information appliances as well as on Venus Computers.

On the other hand, assuming that there will be a rapid growth in the public recognition ofIAMSDP as an effective platform-neutral software development tool with highly diversified functions,the Directors also expect that an increasing number of software developers will use IAMSDP todevelop multimedia software applications for information appliances other than those of the Groupand Venus Computers. In this regard, the Group intends to develop more sophisticated versions ofIAMSDP which can create high quality multimedia software applications with enhanced interactiveand intelligent functions to be run on more powerful information appliances such as broadband set-topboxes.

Measures for implementation

In order to achieve the above objective, the Group plans to invest approximately HK$10 millionin the development of IAMSDP over the next two years. The Group also intends to keep pace with therapid development of digital video technology and to adopt the following steps within the proposedtime frames:

1. For the period commencing from the Latest Practicable Date and ending 30th June, 2000

The Directors consider that IAMSDP is a more efficient and simplified approach for developingmultimedia software applications than the use of programming languages and plans to license theexisting version of IAMSDP to users with limited programming skills.

The Directors also expect that the development of the second generation of IAMSDP, which hasenhanced multimedia interactive functions and increased information storage capacity, to becompleted by the first half of 2000.

The Directors plan to license the second generation of IAMSDP to domestic professionalsoftware developers for the creation of sophisticated multimedia software applications and interactivegames.

Multimedia software applications developed from IAMSDP may require the Group’s softwareengine to be run on a platform different from the one currently adopted by the Group’s computerVCDs. In this regard, the Directors intend to capitalise on the Group’s software reserve by promotingsoftware engines that can be installed in a Mask ROM and convert the Group’s computer VCD format


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so that it is recognisable by other information appliances. Assuming that the Venus Project is wellaccepted by the PRC consumers, the Directors anticipate that an opportunity will exist in the softwareengine market for the Venus Project and plans to release a Mask ROM embedded with software engineto the manufacturers of Venus Computers in the PRC during the first half of 2000.

2. For the year ending 31st December, 2000 as a whole

The Directors expect that multimedia software applications developed using IAMSDP will beadopted by a number of cable television network providers, including those for broadband networks,which can be run on more advanced set top boxes with multimedia interactive functions. Accordingly,the Directors plan to continue the Group’s promotion of IAMSDP to domestic software developers forthe creation of multimedia software applications.

3. For the year ending 31st December, 2001

The Directors expect that there will be an increasing demand from software developers to useIAMSDP to develop multimedia software applications for information appliances other than those ofthe Group and Venus Computers. In this regard, the Group intends to develop more sophisticatedversions of IAMSDP which can create high quality multimedia software applications with enhancedinteractive and intelligent functions to be run on more powerful information appliance such asbroadband set-top boxes.


The Directors consider that the Group should continue its development of IAMSDP with a viewto upgrade the technical capability of IAMSDP taking into consideration the latest trend in theinformation appliance market in the PRC. In addition, the Directors also intend to develop othermultimedia software development tools to meet the demand of different types of informationappliances, including those for DVB and VOD networks.

Popularising the Group’s information appliances in the PRC

Market potential

The Group’s computer VCDs use televisions as their basic audio-visual displaying device.Consequently, any person who owns a television is a potential customer of the Group, thus providinga huge potential for market expansion. The Directors believe that the functions of computer VCDs canalso be enhanced or expanded, thereby developing a new range of products such as computer superVCDs, computer DVDs and broadband set-top boxes. The Directors expect that the market potentialof such new products to be promising.

The objectives of the Venus Project include the promotion of the use of the Internet in the PRCand the development of a series of information appliances which incorporate data communication,entertainment, computation and word processing functions, through the use of Windows CE as theoperating system and television as the audio-visual displaying device. The Directors expect that theimplementation of the Venus Project will further enhance the development of the computer VCDmarket and arouse public interest in related products.


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Projected trend

The Directors expect that in the next one to two years, the development of the computer VCDmarket will concentrate on increasing the variety and functions of hardware and software products, aswell as improving application technology and graphic resolution. The Directors also expect that themanufacturing costs of DVDs will be lowered through product development and enhancement inproduction technology, thus allowing wider market acceptance of computer DVDs, especially thosewith new and diversified value-added functions. More specifically, the Directors expect that demandfor information appliances featuring Internet access and broadband communication capability willincrease sizably as telecommunication charges in the PRC are expected to be reduced gradually in thefuture.


In order to achieve the above objective, the Group plans to continuously introduce new modelsof computer VCD and computer super VCD with higher processing speed and enhanced functionsrelating to word processing, spreadsheet, Internet access and games. Approximately HK$50 millionwill be used by the Group for the promotion of such products in 2000. In addition, the Group intendsto introduce its own models of regular DVD and computer DVD. The projected research anddevelopment cost and promotion expenses for the new models of regular DVD and computer DVD ofapproximately HK$80 million are expected to be financed by the net proceeds of the Placing. Morespecifically, the Group intends to adopt the following steps within the proposed time frames:


The Group plans to develop and launch new models of computer VCD and computer super VCDequipped with the new 3099 processor featuring memory co-sharing technology which providesubstantially improved three-dimensional effect and interactive functions.


The Group plans to produce approximately 700,000 sets of wide voltage VCD players and superVCD players as the Directors believe that the introduction of regular VCD players will promote thepublic awareness of the “ ” brandname which will benefit the marketability of the Group’sproducts in general.

The Group intends to enter into agreements with a number of domestic multi-function VCDplayer manufacturers who have expressed interests in manufacturing and marketing computer VCDsincorporating technologies developed by the Group for the purpose of licensing of the Group’scomputer VCD hardware platform and supplying the 3098 processors to such manufacturers. TheDirectors believe that, by doing so, other manufacturers will be encouraged to help promote theGroup’s computer VCDs for educational and entertainment purposes and therefore furtherstrengthening the Group’s leading position in the information appliance industry.


The Directors believe that consumer interest in the information appliance market will be divertedby 2001 from computer VCDs to computer DVDs following the gradual increase in market awarenessof the superior functions of computer DVDs. Accordingly, the Group plans to develop and launch aseries of regular DVDs and computer DVDs in co-operation with C-Cube and to concentrate itsmarketing efforts on the promotion of such products throughout 2001.


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The Directors expect that the Group should concentrate on the sales and marketing of itscomputer DVDs as the principal products of the Group, which will be in line with the anticipateddemand of the information appliance market at that time. The Group will continue its ongoing researchand development to launch new models of computer DVDs with enhanced application technology.

Becoming a market leader in multimedia software application development

Market potential

In recent years, the software market in the PRC has experienced rapid growth. In 1990, totalsoftware sales in the PRC amounted to approximately RMB220 million. By 1997, total software salesin the PRC had increased by almost 50 times as compared to 1990 to approximately RMB12 billion.The Directors believe that the software market is an area where the Group will have a high potentialfor growth as the Group aims to provide a wide variety of software applications for end users to choosefrom.

Projected trend

The Directors expect that the PRC software market will become more brandname oriented andwill gradually establish its own market standard. In order to survive in the software industry in thefuture, domestic software developers will need to establish their own sales networks, improve theirafter-sale services and explore new markets.

The Directors further expect that the future trend will focus on the development of high speed,low cost development platform for non-PC software as well as information appliance software suchas multimedia software development tools, multimedia educational software, games, application tools,household management and electronic publishing software. The Group will focus on the followingsoftware development trend:

+ the development of software applications for Windows CE platform

+ the conversion of PC software to information appliance software

+ the continuous accumulation of software for computer VCDs

+ the development of PC software


For the period commencing from the Latest Practicable Date and ending 31st December, 2002

The Group’s objective is to develop at least 100 multimedia software applications annually tocomplement the Group’s hardware products. The Group intends to achieve this objective throughin-house software development and PC software conversion. The Directors anticipate that the wideacceptance of IAMSDP will lead to an increasing amount of compatible software for the Group’shardware products. To further encourage other software developers to provide software support for theGroup’s hardware products, the Group intends to focus its development on more complex value-addedmultimedia and interactive games software.


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If the Group is unable to achieve its target of popularising IAMSDP, the Group will continue its

development of a variety of software applications to complement its hardware products so as to ensure

a sufficient supply of supporting software applications for its computer VCDs and other information

appliances.

Developing software applications is one of the key strategies of the Group’s business. The

objective is to complement sales of the Group’s educational computers and computer VCDs. The

Group intends to develop multimedia software applications for other information appliances,

including computer VCDs and computer DVDs built on Windows CE and other established operating

systems. The Group intends to achieve this goal by forming alliances with well-known domestic OEMs

of information appliances and overseas providers of operating systems.

Through the use of IAMSDP, the Group is seeking to become a leading developer of multimedia

and educational software applications in the PRC. The Group’s leading position in developing

multimedia non-PC software tools can assist the Group in strengthening its software development

capacity and attract other independent software developers to support the Group’s hardware products.

Promoting the Group’s educational computer as popular multimedia educational tool in thePRC

Market potential

The Directors believe that the Group’s educational computers have huge potential for growth in

the education sector in the PRC due to the fact that the State has placed increasing emphasis on

computer education during recent years. Given that funding for education in the PRC is generally

limited, the Directors believe that the Group’s educational computers will be more competitive than

PCs due to their relatively low prices.

By incorporating the newly developed 3097 processor in its educational computers, the Group

intends to stimulate a growth in the demand for such products by substantially lowering their prices.

The Group also plans to invest approximately HK$10 million in a co-operative project with the

Ministry of Education to promote the use of the Group’s educational computers as primary multimedia

educational tools in the PRC. In addition, the Group will use approximately HK$30 million for the

research and development and promotion of educational computers in 2000.

Projected trend

The Group expects that educational computers will be used as primary multimedia educational

tools in schools in the PRC. The Directors believe that, as a general trend, future development in this

field will focus on the development of a larger variety of educational software applications to support

the promotion of educational computers as primary educational tools.


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In order to achieve the above objective, the Group intends to enhance the public awareness ofthe Group’s educational computers in the education sector by allocating more resources to themarketing of educational computers through, inter alia, the distribution of complimentary educationalsoftware applications. More specifically, The Group intends to take the following steps within theproposed time frames:


The Group intends to complete the development of the 3097 processor through its co-operationwith Sunplus. The Group further intends to develop and launch a new generation of educationalcomputers equipped with the 3097 processor which will substantially lower their manufacturing cost.


The Group plans to arrive at definite arrangements with the Ministry of Education to promote theuse of the Group’s educational computers as primary multimedia educational tools in China. Assumingthat the Group comes to some form of agreement with the Ministry of Education within the proposedtime frame, the Group plans to develop and launch three models of educational computers in 2000. TheGroup plans to produce approximately 300,000 to 500,000 educational computers in 2000.


Subject to the Group’s educational computers achieving the expected penetration in theeducation sector in the PRC, the Group plans to continue its market development by releasing neweducational computers with faster CPU speed and enhanced functions. The Group plans to replace theregular LAN with a thin client network for educational computers in 2001.


The Directors intend to review the latest trend in the market for educational computers in thePRC and position the Group’s development of its educational computers to fit with the demand ofconsumers at that time. The Directors consider that the Group will also continue its development ofa variety of complimentary educational software applications to support the promotion of itseducational computers. In addition, the Group will be able to offer a comprehensive range of otherinformation appliances, such as computer VCDs and computer DVDs, to strengthen its ability topenetrate into the education sector in the PRC.

STRATEGIC ALLIANCE WITH RENOWNED INTERNATIONAL IT COMPANIES

Proposed strategic alliance with Microsoft to promote the Venus Project

The Group plans to be actively involved in the Venus Project. The Venus Project is formulatedby Microsoft with a view to develop a series of products which have computing, entertainment andcommunication functions and which use Windows CE as their operating system. These products aretargetted to meet the increasing demand for computers and Internet access and also to be moreaffordable than PCs to the general public in the PRC.


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Products of the Venus Project (i.e. Venus Computers) will have the following features:

+ low prices taking into account the current income level in the PRC;

+ Internet access by using telephone line or cable TV to enable quick downloading, savingand retrieval of e-mail and contents from the Internet; and

+ use the interface of household electrical appliances.

The Directors believe that the Group’s computer VCDs should largely fulfil the goals andproduct concept of the Venus Project. In addition, multimedia software applications developed by theGroup using IAMSDP are capable of being converted so that they can be run on any Venus Computers.Accordingly, the Directors believe that the Group’s participation in the Venus Project can stimulatethe development of a wider range of applicable software and more sophisticated product functions.The Group has started to negotiate with Microsoft regarding the role of the Group in the Venus Projectin March 1999. The Directors are of the view that the Group has a significant business opportunityarising from the potential strategic relationship between the Group and Microsoft.

At present, the Group is working jointly with Microsoft and other companies on aspects such astechnology, marketing and products in relation to the Venus Project. Negotiation is also underwaybetween Microsoft and the Group on the terms and conditions of the co-operation arrangements inrelation to the Group’s participation in the Venus Project. The Group is in its last stage of developingits own brand of Venus Computers, and it plans to start commercial production in the first half of 2000.The Group plans to use approximately HK$10 million in the implementation of the Venus Project in2000 and 2001.

The success of the information appliance products depends largely on the availability of softwaresupport. Competition in the information appliance industry in future will hinge mainly on the supplyof software applications. The Directors consider that one of the principal strengths of the Group liesin its ability to develop various kinds of software applications based on Windows CE platform andother information appliance platforms, including software for education, games, householdmanagement and the Internet. Since the Group’s computer VCDs consist of education, entertainmentand Internet functions, their features will be similar to those of Venus Computers. As such, theDirectors believe that the Group’s strategic alliance with Microsoft will be beneficial to itsdevelopment of a larger variety of software applications, including Windows CE based applications,and products with enhanced computing power and audio-visual functions. It is expected that WindowsCE based hardware and software products relating to the Venus Project will be one of the majorfocuses of the Group’s intermediate to long term development.

Strategic alliance with C-Cube

In order to meet the demand of different consumer groups, the Group will continue its efforts inresearch and development with an aim of launching various kinds of value-added multi-functionalproducts including computer DVDs, broadband set-top boxes and DVB products. The Directorsbelieve that these products will facilitate the Group’s expansion into new markets for consumer groupsother than the current users of the Group’s products.

Based on the foregoing, the Group has signed a memorandum of agreement on 17th January, 2000with C-Cube regarding the joint development of broadband set-top boxes and DVB products in thePRC. In addition, the Group plans to launch its own models of regular DVD and computer DVD using


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chips provided by C-Cube and to develop other new products and software applications using aplatform provided by C-Cube. The Group also plans to use approximately HK$10 million in theresearch and development of digital video graphic and broadband Internet access technology relatingto these products. The prototypes of such DVDs and DVB products are expected to be completedwithin three months from the date of the agreement. The commercialisation of such products will takeanother three months to complete. The Directors believe that the Group has gained the necessarytechnical know-how in these areas. C-Cube has pioneered the set-top box market since 1992, and ithas already manufactured a wide range of set-top boxes and software solution for the worldwidedigital cable market. The Directors believe that by combining C-Cube’s latest set-top box technologyand the Group’s expertise in the information appliance market and in multimedia software applicationdevelopment in the PRC, the Group will be able to launch a new series of set-top boxes which candeliver a low cost hardware and software solution for the set-top box market in the PRC. The Group’sset-top boxes will be able to deliver a home theatre and virtual reality video game experience to thePRC consumers, together with other functions such as DVB, Internet access and advanced PC-levelgraphics. The Directors expect that the co-operation with C-Cube will bring growth opportunities tothe Group.

Plans on promotional activities

The Group’s promotional activities will primarily aim at achieving a wider recognition of the“ ” brandname. The Company plans to enhance the consumer awareness of the “” brandnameby launching advertisements on the central television channels. The promotional campaign at theprovincial level will address the requirements and buying motives of the consumers and emphasise themultiple functions of the Group’s products. The promotional activities will closely tie in with thelaunch of new products and will be financed by sales revenues of the Group.

In spite of all the growth it has already experienced, the Directors believe that the PRC marketfor information appliances is just beginning to develop. The success of the Group in the past wasattributable mainly to its emphasis on the enhancement of consumer awareness of the Group’sproducts. Accordingly, the Group will continue to enhance the consumer awareness of the Group’scomputer VCDs and other future products by sponsoring a series of seminars and training sessionsbroadcasted on television or by working with public schools in the PRC. To promote the Group’seducational computers as widely adopted tools for multimedia education, the Group will work closelywith the Ministry of Education to encourage the development of educational and multimedia softwareapplications using IAMSDP. This will be carried out through a nationwide campaign using varioustypes of media including television broadcast, training courses and other sponsored educationalprograms.

Plans on research and development

In future, the Group’s research and development will continuously focus on the design ofcost-effective and practical digital video-related hardware and software technology for theinformation appliance market. In order to compete successfully, the Group believes that it mustcontinuously design, develop and introduce new products that make use of the latest technology to itsfull advantage. The Group’s strategy is to make use of its expertise in hardware design and incomponent-on-a-chip and IAMSDP technologies to continuously develop set-top boxes for the Internetand information appliance market in the PRC. The Group plans to consider acquiring new technologyto enhance its own product design capability and to accelerate its new technology development. Inorder to maintain the significant price difference between PCs and computer VCDs, the Group intends


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to minimise the manufacturing cost and to upgrade the functions of its products by stepping up theresearch and development on the component-on-a-chip technology with an emphasis on enhancing theinteractive capability and the co-sharing technology of memory and computing power of CPU withMPEG II decoder chip.

The Directors expect that cable services providers in the PRC are planning to upgrade the levelof their services by adding DVB and VOD services in the near future. The development of cabletelevision in the PRC is expected to create an emerging market for end-terminal devices such asbroadband set-top boxes. In order to enhance its research and development capacity, the Group intendsto establish a research centre in Beijing in 2000 which will be equipped with state-of-the-art researchfacilities. The Group plans to invest approximately HK$60 million to purchase testing and researchand development related equipments. Another approximately HK$10 million will be used for thedevelopment of software applications and the purchase of copyrights in 2000. With enhanced researchfacilities, the Group plans to continuously expand the number of its research and development staff.The Group’s research and development team will strive to find better solutions to meet consumer’sneeds by keeping abreast of the rapidly developing technology and by encouraging innovative thinkingof its staff.

Plans on marketing and distribution

The Group’s objective for its promotional activities is to establish its “ ” brandname as arenowned and highly reputable household name in the PRC. High quality customer service andtechnical support are important elements in achieving this objective. In order to maintain the stabilityof its distribution capacity and to consolidate its distribution network, the Group intends to selectivelyacquire some qualified provincial sales agents and expand its distribution management capacity to theprovincial level. The Group’s future sales and marketing efforts will primarily focus on markets whereits products have a strong customer base. To implement its strategy, the Group plans to furtherstrengthen its country-wide distribution network and to establish a team of training professionals toassist sales agents in enhancing their product knowledge and service quality.

The Group plans to invest HK$50 million in expanding its distribution and sales network. TheGroup will step up its provision of training to its sales agents in order to enhance the quality ofcustomer service at the local level. The Directors believe that to maintain a close contact between theGroup and its customers will not only improve the level of customers’ satisfaction, but it will alsoprovide an important insight into future market direction.

PRINCIPAL STRENGTHS OF THE GROUP

The Directors believe that the principal strengths of the Group comprise the following:

Strong research and development capability

The Directors believe that the Group’s success is primarily attributable to its ability to developits own information appliance technology and apply it in such a way that its products are in line withthe economic standard of and are of practical use to consumers in the PRC. The Group has successfullyintegrated the technology for PC into those for television and VCD and launched its first model ofcomputer VCD in September 1998. The Group has also been involved in the development of softwareapplications for use on its computer VCDs and educational computers. To date, the Group haslaunched over 1,000 software applications in the PRC market. The Group has the capability of


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developing software engines that can enable the Group’s software applications to be compatible with

Windows CE and other non-PC information appliance platforms. The Directors believe that all these

accomplishments have together contributed towards making the “” brand of products one of the

most popular brands of information appliances in the PRC.

Experienced management team and culture of continuous innovation

The Group has an experienced management team comprising members who possess extensive

experience and technical expertise in the IT industry and an understanding of the information

appliance market in the PRC. The management team is of particular importance to the success of the

Group’s future business development because of its ability to anticipate and develop a wide range of

products to meet the demand driven by the emerging IT industry. The Directors believe that the Group

has a corporate culture of continuous innovation. Since its establishment, the Group has received

numerous awards for its advanced technology.

Competitive cost structure and well positioned products

The Directors believe that the Group is able to maintain a flexible cost structure that will allow

its products to withstand periods of low demand and price competition. The Group’s strategy is to

engage OEMs to manufacture its products which enables the Group to operate with minimal overheads

during periods of low demand. Although the Group’s computer VCDs and educational computers have

less functions than PCs, they are substantially less expensive than PCs in the PRC. The Directors

further believe that the relatively low level of purchasing power of consumers has limited the

popularity of PCs in the PRC.

Established market position in a rapidly developing industry

The Directors believe that the information appliance industry in the PRC will continue to

experience significant growth. Since the commencement of its business, the Group has gained public

recognition as one of the leading manufacturers in the information appliance industry in the PRC. The

Directors believe that this established market position enables the Group to capture future growth

opportunities. The Group has a wide customer base and the “” brandname is recognised as one

of the leading brandnames in the information appliance industry in the PRC.

Extensive and efficient distribution network

The Group has an extensive distribution network for its products in many parts of the PRC. The

Group has entered into agreements with 32 provincial sales agents in the PRC who are responsible for

the sale of the Group’s products in their respective provinces. The Group has exercised stringent

measures to manage its sales agents. These measures ensure rapid collection of sales proceeds and

reduce competition among the Group’s sales agents.


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USE OF PROCEEDS

The net proceeds from the Placing (assuming that the Over-allotment Option is not exercised),after deducting related expenses, are estimated to be approximately HK$393 million. If theOver-allotment Option is exercised in full, the net proceeds from the Placing will increase toapproximately HK$454 million. The Company intends to apply the net proceeds from the Placing inthe following manner:

— approximately HK$10 million will be used in the research and development of IAMSDP in2000 and 2001;

— approximately HK$80 million will be used for the research and development and promotionof a new series of regular DVDs and computer DVDs in 2000 and 2001;

— approximately HK$50 million will be used for the promotion of computer VCDs in 2000;

— approximately HK$10 million will be used for the co-operation with the Ministry ofEducation to specifically promote the use of the Group’s educational computers in 2000;

— approximately HK$30 million will be used for the research and development and generalpromotion of educational computers in 2000;

— approximately HK$10 million will be used by the Group in connection with the VenusProject in 2000 and 2001;

— approximately HK$10 million will be used in the research of advanced digitial videographic and broadband Internet access technology in 2000;

— approximately HK$60 million will be used to purchase testing and research anddevelopment related equipments;

— approximately HK$10 million will be used for the development of software applicationsand the purchase of copyrights in 2000;

— approximately HK$50 million will be used for the expansion of the Group’s distribution andsales network;

— approximately HK$5 million will be used for the establishment of the new office by theGroup in Hong Kong;

— approximately HK$60 million will be used to meet additional working capital requirementfor the sales and marketing of the new series of regular DVDs and computer DVDs in 2000and 2001;

— the balance of approximately HK$8 million will be used as general working capital formaintaining the day-to-day operation of the Group; and


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A1a.17A1a.48

— in the event that the Over-allotment Option is exercised in full, the additional net proceeds

of approximately HK$61 million will be applied by the Company as general working

capital, out of which, approximately HK$40 million will be used to meet the additional

working capital required due to any future increase in the business volume of the Group

and, approximately HK$21 million will be used to meet the working capital requirement

arising from the Group’s participation in the Venus Project.

To the extent that the net proceeds of the Placing are not immediately used for the above

purposes, it is the present intention of the Directors that the net proceeds will be placed on short-term

deposits with banks or other financial institutions.

In the event there is any material modification or change with respect to the use of proceeds as

described above, the Company will issue an announcement of such modification or change.

In this prospectus, unless otherwise specifically provided, amounts in Renminbi have been

converted into Hong Kong dollars at the rate of HK$1.00 to RMB1.0662. Such conversion is for the

purpose of convenience and for indication and reference purposes only and should not be construed

as any representation that the Renminbi amounts and the Hong Kong dollar amounts have been, could

have been or could be converted into Hong Kong dollars and Renminbi, as the case may be, at that

or any other rate or at all.


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UNDERWRITING AGREEMENT

Pursuant to the Underwriting Agreement, the Group is offering the Placing Shares on and subjectto the terms and conditions of this prospectus. Subject to the GEM Listing Committee granting listingof, and permission to deal in, the Shares in issue and to be issued as mentioned herein on or before30 days from the date of the prospectus (including any Shares which may fall to be issued pursuantto the exercise of the Over-allotment Option), and to certain other conditions set out in theUnderwriting Agreement, the Underwriters have severally agreed to subscribe or procure subscribersfor the Placing Shares on and subject to the terms and conditions of the Placing.

GROUNDS FOR TERMINATION

The obligations of the Underwriters to subscribe to or procure subscribers for the Placing Sharesare subject to termination if any of the following occurs at any time prior to 9:00 a.m. on the day onebusiness day before dealings in the Shares commence on GEM:

(A) if there has come to the notice of any of the Underwriters:

(i) any material statement contained in the prospectus or the offering circular in relationto the Placing was when any of such documents was issued, or has become, untrue,incorrect or misleading in any material respect; or

(ii) any matter has arisen or has been discovered which would, had it arisen or beendiscovered immediately before the date of the prospectus or offering circular inrelation to the Placing, constitute a material omission therefrom; or

(iii) any material breach of the warranties; or

(iv) any event, act or omission which gives or is likely to give rise to any material liabilityof the Company pursuant to the indemnities contained in the Underwriting Agreement;or

(v) any material breach of any of the obligations imposed upon any party to theUnderwriting Agreement (other than on any of the Underwriters); or

(vi) any material adverse change in the business or in the financial or trading position ofany member of the Group; or

(B) if there develops, occurs, or comes into effect:

(i) any event, or series of events, beyond the reasonable control of the Underwriters(including, without limitation, acts of government, strikes, lock-outs, fire, explosion,flooding, civil commotion, acts of war, acts of God, accident or interruption or delayin transportation); or

(ii) any change in local, international, financial, economic, political, military, industrial,fiscal, regulatory or market conditions and matters and/or disasters (including anymoratorium, suspension or material restriction on trading on the Stock Exchange); or

UNDERWRITING ARRANGEMENTS AND EXPENSES

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14.08(7)(b)

A1a.15(3)(i)

(iii) any new law or regulation or change in existing laws or regulations or any change inthe interpretation or application thereof by any court or other competent authority inthe PRC, Hong Kong or any other jurisdiction relevant to the Group or any memberthereof; or

(iv) the imposition of economic sanctions, in whatever form, directly or indirectly, by, orfor the United States or by the European Economic Community (or any memberthereof) on the PRC or Hong Kong; or

(v) a change or development occurs involving a prospective change in taxation orexchange control (or the implementation of any exchange control) in the PRC, HongKong or elsewhere; or

(vi) any litigation or claim of material importance of any third party being threatened orinstigated against any member of the Group;

which, in the sole opinion of ICEA, on behalf of itself and the other Underwriters:

(a) is or will or is likely to be materially adverse to the business, financial or otherconditions or prospects of the Group or, in the case of paragraph (B)(v) above,to any present or prospective shareholder in his capacity as such; or

(b) has or will or is likely to have a material adverse effect on the success of thePlacing or the level of Placing Shares being applied for or accepted or thedistribution of the Placing Shares; or

(c) makes it inadvisable or inexpedient to proceed with the Placing or the deliveryof the Placing Shares on the terms and in the manner contemplated by thisprospectus.

COMMISSIONS AND FEES

The Underwriters will receive a commission of 2.5% of the aggregate issue price payable for thePlacing Shares, out of which they will pay any sub-underwriting commissions, and ICEA will alsoreceive a documentation fee. Such fee and commissions, together with the Stock Exchange listing fees,legal and other professional fees, printing, and other expenses relating to the Placing, which areestimated to amount to approximately HK$27 million in aggregate (assuming the Over-AllotmentOption is not exercised), will be payable by the Company.

UNDERTAKINGS

The Company has undertaken in the Underwriting Agreement that it will not, and each of DragonTreasure, Super Dragon and Messrs. Zhu Wei Sha, Chen Fu Rong, Shi Guang Rong, Wang An Zhongand Sun Li Jun has undertaken to procure that neither the Company nor any of its subsidiaries will,except pursuant to the Placing, the exercise of the Over-allotment Option or the exercise of optionsgranted under the Share Option Scheme, allot or issue or agree to allot or issue any Shares or othersecurities or grant or agree to grant any options, warrants or other rights to subscribe for Shares orother securities or repurchase any securities of the Company, at any time during the six months afterthe date of commencement of dealings of the Shares on GEM without first having obtained the priorwritten consent of ICEA and unless in compliance with the requirements of the Listing Rules.


— 83 —

Dragon Treasure, Super Dragon and each of Messrs. Zhu Wei Sha, Chen Fu Rong, Shi Guang

Rong and Sun Li Jun has further undertaken in the Underwriting Agreement that, without the prior

written consent of ICEA, he/it will not, and shall procure that his/its associates (as defined in the

Listing Rules) or companies controlled by him/it and related trusts shall not dispose of, pledge or

charge any of his/its direct or indirect interest in all relevant securities of the Company as defined in

rule 13.15(4) of the Listing Rules (the “Relevant Securities”) within two years from the date on which

dealings in the Shares commence on GEM and that in the event of a disposal of any of his/its direct

or indirect interest in the Relevant Securities at any time within six months after the expiry of such

period, all reasonable steps will be taken to ensure that such a disposal will not create a disorderly

or false market in the Relevant Securities.

OVER-ALLOTMENT OPTION

The Company has granted to ICEA the Over-allotment Option to require the Company to allot

and issue at the Issue Price up to an aggregate of 15,000,000 additional Shares, representing 15% of

the total number of Shares initially being offered pursuant to the Placing within 30 days from the date

of this prospectus.

UNDERWRITERS’ INTERESTS IN THE COMPANY

An agreement was entered into between ICEA and the Company on 25th January, 2000 whereby

the Company has appointed ICEA to act as its sponsor for the purposes of Chapter 6 of the Listing

Rules and pursuant to which ICEA will receive a fee.

Save as disclosed in this prospectus and provided for under the Underwriting Agreement, neither

ICEA nor its associates have or may, as a result of the Placing, have any interest in any class of

securities of the Company or of any member of the Group (including options or rights to subscribe for

such securities).


— 84 —

Acceptance of all applications for the Placing Shares will be conditional upon:

(i) the GEM Listing Committee granting a listing of, and permission to deal in, the Shares in

issue and to be issued as mentioned herein (including any Shares which may fall to be

issued upon the exercise of the Over-allotment Option and any options granted under the

Share Option Scheme); and

(ii) the obligations of the Underwriters under the Underwriting Agreement becoming

unconditional (including the waiver of any condition(s) by ICEA on behalf of the

Underwriters) and not being terminated in accordance with the terms of that agreement or

otherwise;

in each case on or before 24th February, 2000.

CONDITIONS OF THE PLACING

— 85 —

A1a.15(3)(i)

The following is the text of a report, prepared for the purpose of inclusion in this prospectus,received from the auditors and reporting accountants of the Company, PricewaterhouseCoopers,Certified Public Accountants, Hong Kong.

PricewaterhouseCoopers22nd Floor Prince's BuildingCentral Hong Kong

25th January, 2000

The DirectorsYuxing InfoTech Holdings LimitedICEA Capital Limited

Dear Sirs,

We set out below our report on the financial information regarding Yuxing InfoTech HoldingsLimited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) foreach of the two years ended 31st December, 1998 and the six months ended 30th June, 1999 (the“Relevant Periods”) for inclusion in the prospectus of the Company dated 25th January, 2000 (the“Prospectus”).

The Company was incorporated in Bermuda on 6th October, 1999 as an exempted company withlimited liability under the Companies Act 1981 of Bermuda. Pursuant to a group reorganisation (the“Reorganisation”) which was completed on 20th November, 1999, the Company became the ultimateholding company of the subsidiaries set out below.

As at the date of this report, the Company has direct and indirect interests in the followingsubsidiaries, all of which are private companies or, if incorporated/established outside Hong Kong,have substantially the same characteristics as a Hong Kong incorporated private company. Details ofthese companies are as follows:

Company

Country anddate ofincorporation/establishment

Issued andfully paid up/

registeredcapital

Attributableinterest Principal activities

%

Direct subsidiary:

Yuxing ElectronicsCompany Limited(“Yuxing (BVI)”)

British Virgin Islands(“BVI”),15th September, 1999

OrdinaryUS$2,000

100 Investment holding

APPENDIX I ACCOUNTANTS’ REPORT

— 86 —

14.08(7)(a)A1a.37

Co. Ord.3rd Sch.Para.4, 31

Co. Ord.3rd Sch.Para.3A1a.4

A1a.9(3)

A1a.9(3)

Company

Country anddate ofincorporation/establishment

Issued andfully paid up/

registeredcapital

Attributableinterest Principal activities

%

Indirect subsidiary:

Beijing Golden YuxingElectronics andTechnology Co., Ltd.(“Golden Yuxing”)(Note)

The People’sRepublic of China(“PRC”),27th December, 1996

US$3,042,000 100 Design, development,distribution and saleof computer VCD andeducational computers

Note: Golden Yuxing was established on 27th December, 1996 in the form of a company with limited liability in the

PRC in which the major shareholders of the Company, Mr. Zhu Wei Sha, Mr. Chen Fu Rong, Mr. Sun Li Jun and

Mr. Shi Guang Rong have controlling interests. Pursuant to the Reorganisation, Golden Yuxing became a

Sino-foreign co-operative joint venture enterprise on 8th November, 1999. The attributable interest to the Group

represents the profit sharing ratio in accordance with the co-operative joint venture contract.

No financial statements have been prepared by the Company and Yuxing (BVI) since their

respective dates of incorporation. These companies are newly incorporated and have not carried out

any business since their incorporation, except for the transactions relating to the Reorganisation

referred to herein.

The financial statements of Golden Yuxing for the Relevant Periods were prepared in accordance

with the applicable accounting principles and relevant financial regulations in the PRC. For the

purpose of this report, we have performed an independent audit of the accounts of all companies now

comprising the Group for the Relevant Periods in accordance with Auditing Standards issued by the

Hong Kong Society of Accountants (“HKSA”). In addition, we have carried out such additional

procedures as we consider necessary in accordance with the Auditing Guideline “Prospectuses and the

Reporting Accountants” issued by the HKSA. Adjustments have been made to the accounts of Golden

Yuxing for the purposes of this report to ensure that they comply with accounting principles generally

accepted in Hong Kong and the accounting policies adopted by the Group.

The financial information in Sections 1 to 7 below, including the combined results of the Group

for the Relevant Periods and of the combined net assets of the Group as at 30th June, 1999 (the

“Financial Information”) has been prepared based on the management accounts of the companies

within the Group, on the basis set out in Section 1 below, after making such adjustments as are

appropriate.

The directors of the respective group companies are responsible for preparing the management

accounts which give a true and fair view. In preparing these management accounts, it is fundamental

that appropriate accounting policies are selected and applied consistently.

The directors of the Company are responsible for the preparation of the Financial Information.

It is our responsibility to form an independent opinion on the Financial Information.


— 87 —

In our opinion, the Financial Information, for the purpose of this report and prepared on the basis

of presentation set out in Section 1 below, gives a true and fair view, in all material respects, of the

combined results of the Group for each of the two years ended 31st December, 1998 and the six months

ended 30th June, 1999 and of the combined net assets of the Group as at 30th June, 1999.

1. BASIS OF PRESENTATION

The summary of combined results of the Group includes the results of the companies now

comprising the Group which have been prepared as if the current group structure had been in existence

throughout the Relevant Periods, or since their respective dates of establishment or incorporation,

whichever is later. The summary of the combined net assets of the Group as at 30th June, 1999 has

been prepared to present the assets and liabilities of the Group as if the current group structure had

been in existence at that date.

All significant intra-group transactions and balances have been eliminated on combination.

2. PRINCIPAL ACCOUNTING POLICIES

The principal accounting policies adopted by the Group in arriving at the financial information

included in this report, which conform with the accounting principles generally accepted in Hong

Kong, are as follows:

(a) Revenue recognition

Revenue from the sale of goods is recognised upon delivery of goods to distributors or end

customers and net of value-added tax.

Government incentive bonuses are recognised as income when the right to receive payment

is established.

Interest income is recognised on a time proportion basis, taking into account the principal

amounts outstanding and the interest rates applicable.

(b) Taxation

The charge for taxation is based on the results for the period as adjusted for items which

are non-assessable or disallowable. Timing differences arise from the recognition for tax

purposes of certain items of income and expense in a different accounting period from that in

which they are recognised in this report. The tax effect of timing differences, computed under

the liability method, is recognised in this report to the extent that it is probable a liability or an

asset will crystallise in the foreseeable future.


— 88 —

(c) Fixed assets

Tangible fixed assets are stated at cost less accumulated depreciation. Depreciation oftangible fixed assets is calculated to write-off their costs on the straight-line basis over theirexpected useful lives to the Group. The expected useful lives used for this purpose are:

Buildings 30 yearsPlant and machinery 5 yearsOffice equipment, furniture and fixtures 3 yearsMotor vehicles 5 years

Major costs incurred in restoring fixed assets to their normal working condition are chargedto the profit and loss account. Improvements are capitalised and depreciated over their expecteduseful lives to the Group.

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

(d) Intangible assets

Intangible assets represent costs of acquisition of patents which are written off over aperiod of five years.

(e) Inventories

Inventories comprise stocks and work in progress and are stated at the lower of cost and netrealisable value. Cost includes direct materials, direct labour and processing charges. In general,costs are assigned to individual items on a weighted average basis.

Net realisable value is the price at which inventories can be sold in the normal course ofbusiness after allowing for the cost of realisation and, where appropriate, the cost of conversionfrom their existing state to a finished condition.

Spare parts and consumables are stated at cost less provision for obsolescence.

(f) Short-term investments

Listed investments held on a short-term basis are carried at fair value. At each balance sheetdate, the net unrealised gains or losses arising from the changes in fair value of short-terminvestments are recognised in the profit and loss account. Gains or losses on disposal ofshort-term investments, representing the differences between the net sales proceeds and thecarrying amounts, are recognised in the profit and loss account as they arise.

(g) Trade receivables

Provision is made by the directors of the Company against trade receivables to the extentthat they are considered to be doubtful. Trade receivables in the balance sheet are stated net ofsuch provision.


— 89 —

(h) Translation of foreign currencies

Foreign currency transactions are translated into Hong Kong dollars at the rates of

exchange ruling at the dates of the transactions. Monetary assets and liabilities denominated in

foreign currencies at the balance sheet date are incorporated into the accounts by translating

foreign currencies into Hong Kong dollars at the rates of exchange ruling at the balance sheet

date. Exchange differences arising from the above translation policy are dealt with in operating

results.

The financial statements of overseas subsidiaries and subsidiaries in the PRC are translated

into Hong Kong dollars at the rates of exchange ruling at the balance sheet date. Exchange

differences arising are taken directly to the exchange fluctuation reserve.

(i) Research and development costs

Research and development costs are expensed as incurred.

(j) Advertising costs

Advertising costs are expensed as incurred.


— 90 —

3. RESULTS

The following is a summary of the combined results of the Group for the Relevant Periods

prepared on the basis set out in Section 1 above, after making such adjustments as are appropriate:


Six monthsended

30th June,1997 1998 1999

Note HK$’000 HK$’000 HK$’000

Turnover (a)&(b) 98,227 127,118 223,125Cost of goods sold (65,248) (77,690) (132,156)

Gross profit 32,979 49,428 90,969

Selling expenses (16,356) (10,164) (23,705)Administrative expenses (4,594) (8,008) (4,346)Finance income, net 23 82 265

Operating profit 12,052 31,338 63,183

Other income, net (c) 9,375 20,634 21,881

Profit before taxation (d) 21,427 51,972 85,064

Taxation (f) (7,136) (17,859) (27,937)


Dividends (g) — — 469

Notes:

(a) Turnover

Turnover represents sales at invoiced value to distributors and end customers and is stated net of discounts and

value-added tax, where applicable.


— 91 —

(b) Revenue

The amounts of each significant category of revenue recognised during the Relevant Periods are as follows:


Six monthsended

30th June,1997 1998 1999

HK$’000 HK$’000 HK$’000

Revenue from the sale of goods 98,227 127,118 223,125

Government incentive bonuses 9,356 22,785 21,913

Interest income 47 85 270

107,630 149,988 245,308

(c) Other income, net

Other income comprises:


Six monthsended

30th June,1997 1998 1999

HK$’000 HK$’000 HK$’000

Government incentive bonuses(Note) 9,356 22,785 21,913

Net realised loss on disposal of short-term investments — (2,121) —

Other income/(expenses), net 19 (30) (32)

9,375 20,634 21,881

Note: According to the approval documents issued by the Government of Pinggu County, Beijing, the PRC,

Golden Yuxing, having been categorised as a “high technology” company established in the Jinhaijiao

Technology Zone of Pinggu County, was entitled to incentive bonuses granted by the Government of

Pinggu County. The government incentive bonuses recorded by Golden Yuxing during the Relevant

Periods comprised amounts calculated with reference to 100%, 100% and 54.5% of the amounts of income

tax payable by Golden Yuxing for each of the two years ended 31st December, 1998 and the six months

ended 30th June, 1999 respectively, and certain incentive bonuses which were granted by the Government

of Pinggu County on a discretionary basis. The government incentive bonuses granted with reference to

income tax and on a discretionary basis amounted to approximately HK$7.2 million and HK$2.2 million,

HK$17.9 million and HK$4.9 million and HK$15.2 million and HK$6.7 million for each of the two years

ended 31st December, 1998 and the six months ended 30th June, 1999 respectively.


— 92 —

(d) Profit before taxation

The profit before taxation is stated after charging the following:


Six monthsended

30th June,1997 1998 1999

HK$’000 HK$’000 HK$’000

Auditors’ remuneration 33 28 —

Staff costs 1,367 3,522 1,937

Depreciation of fixed assets 148 524 306

Amortisation of intangible assets 867 867 474

Operating lease rental in respect of land andbuildings 704 1,781 1,273

Research and development expenses 1,040 222 500

Interest on short-term bank loan 22 — —

(e) Emoluments of directors and senior management

(i) Details of the emoluments paid to the directors of the Company are as follows:


Six monthsended

30th June,1997 1998 1999

HK$’000 HK$’000 HK$’000

Salaries and allowances 122 127 67

Bonuses 15 13 57

Total emoluments 137 140 124

The number of directors of the Company whose emoluments fall into the following band is as follows:


Six monthsended

30th June,1997 1998 1999

HK$Nil — HK$1,000,000 4 4 4

Each of the executive directors of the Company received emoluments of approximately HK$46,000,

HK$35,000, HK$36,000 and HK$20,000 respectively for the year ended 31st December, 1997,

approximately HK$39,000, HK$32,000, HK$39,000 and HK$30,000 respectively for the year ended 31st

December, 1998 and approximately HK$33,000, HK$31,000, HK$32,000 and HK$28,000 respectively for

the six-months ended 30th June, 1999. No emoluments had been paid to the non-executive directors of the

Company during the Relevant Periods.

No directors of the Company waived any emoluments and no incentive payment or compensation for loss

of office was paid or payable to any directors of the Company during the Relevant Periods.


— 93 —

A1a.33(2)(a)(b)(d)

(ii) The five individuals whose emoluments were the highest in the Group during the Relevant Periods included

three directors of the Company whose emoluments are detailed above. The emoluments payable to the

remaining two individuals were as follows:


Six monthsended

30th June,1997 1998 1999

HK$’000 HK$’000 HK$’000

Salaries and allowances 54 65 46

Bonuses 9 6 16

63 71 62

The emoluments of these individuals fall within the emolument band of nil to HK$1,000,000 for the

Relevant Periods.

(iii) During the Relevant Periods, no emoluments were paid by the Group to the directors’ of the Company and

the five highest paid individuals (including directors of the Company and employees) as an inducement to

join or upon joining the Group or as compensation for loss of office.

(f) Taxation

The taxation charge comprised:


Six monthsended

30th June,1997 1998 1999

HK$’000 HK$’000 HK$’000

PRC income tax(Notes (ii) and (iii)) 7,136 17,859 27,937

Notes:

(i) No provision for Hong Kong profits tax has been made in the accounts as the Group had no assessable

profits in Hong Kong for the Relevant Periods.

(ii) The PRC income tax during the Relevant Periods represented the tax charges on the assessable profits of

Golden Yuxing at a rate of 33%.

(iii) During the Relevant Periods, Golden Yuxing also received certain government incentive bonuses which

were calculated based on certain percentages of the taxation of Golden Yuxing. Details of these bonuses are

set out in note 3(c) above.


— 94 —

A1a.33(3)

(iv) Following the Reorganisation, Golden Yuxing became a Sino-foreign co-operative joint venture and is

entitled to preferential tax treatment available to foreign investment enterprises in accordance with the

relevant tax regulations in the PRC. The preferential treatment include full exemption from PRC income tax

for two years starting from its first profit-making year following by a 50% reduction of PRC income tax

for the next consecutive three years.

(v) No deferred taxation has been provided in the accounts as the effect of timing difference is not material to

the Group.

(g) Dividends

No dividends had been paid or declared by the Company up to 30th June, 1999. During the Relevant Periods,

dividends amounting to HK$469,000 were paid by Golden Yuxing to its then shareholders prior to the Reorganisation.

(h) Earnings per share

No earnings per share is presented as its inclusion, for the purpose of this report, is not considered to be

meaningful.

(i) Related party transactions

The Group had the following significant transactions with related companies in the ordinary course of business

of the Group during the Relevant Periods:


Six monthsended

30th June,1997 1998 1999

HK$’000 HK$’000 HK$’000

Processing fees payable to(Note (i)):-

* Beijing Yongxing Electronics CompanyLimited (“Yongxing (PRC)”) — 1,085 2,182

Sales made to distributors(Note (ii)):-

* Chongqing Yubei Yuxing ElectricalTechnology Co., Ltd. 1,332 2,135 967

-* Bejing Yuxing Machinery and ElectronicsResearch Centre (“YMERC”) (formerlyknown as (BeijingXicheng District Yuxing Machinery andElectronics Research Centre)) Hefei Branch 3,684 1,729 2,070

-* Tianjing Jinyuxing Electrical TechnologyCo., Ltd. 603 1,870 2,909

-* Shanghai Yuxing Electrical Technology Co.,Ltd. 113 672 109

* A direct translation of the name in Chinese.


— 95 —

Notes:

(i) Yongxing (PRC) was a PRC equity joint venture in which Golden Yuxing had a 50% interest. Pursuant to

the Reorganisation, Golden Yuxing disposed of its entire interest in Yongxing (PRC) to a third party at cost

of investment and as a result Yongxing (PRC) became an unrelated company to the Group.

(ii) These companies were beneficially owned by the major shareholders of the Company, Mr. Zhu Wei Sha, Mr.

Chen Fu Rong and Mr. Sun Li Jun. These companies, except for YMERC Hefei branch, became unrelated

companies to the Group subsequent to the Reorganisation when the major shareholders disposed of their

entire interests in these companies to third parties. With respect to YMERC Hefei branch, the directors of

the Company have confirmed that the Group will cease to trade with YMERC Hefei branch subsequent to

the successful listing of the Company’s shares on The Stock Exchange of Hong Kong Limited.

(iii) In the opinion of the directors of the Company, the above related party transactions were carried out on

normal commercial terms and in the ordinary course of business of the Group.

(j) Transfer to and from reserves


Six monthsended

30th June,1997 1998 1999

HK$’000 HK$’000 HK$’000

Exchange fluctuation reserve arising fromtranslation of financial statements of subsidiariesin the PRC 96 10 72

Appropriation of profit after taxation to:- Statutory surplus reserve 1,429 3,411 5,713- Statutory public welfare reserve 715 1,705 2,856

The Company’s subsidiary in the PRC, Golden Yuxing, is required to maintain certain statutory reserves by

appropriating from profit after taxation in accordance with the relevant laws and regulations in the PRC and the articles

of association of Golden Yuxing, where applicable, before the declaration or payment of dividends. The reserves form

part of the equity of Golden Yuxing during the Relevant Periods.

The appropriations to the statutory surplus reserve and the statutory public welfare reserve represent 10% and 5%

of the profits after taxation of Golden Yuxing during the Relevant Periods. Pursuant to the Reorganisation, Golden

Yuxing was converted from a limited company in the PRC to a Sino-foreign co-operative joint venture enterprise on 8th

November, 1999 and is thereafter required to appropriate certain percentage, as determined by the board of directors, of

the profit after taxation to the statutory reserves.


— 96 —

4. NET ASSETS

The following is a summary of the combined net assets of the Group as at 30th June, 1999

prepared on the basis set out in Section 1 above, after making such adjustments as are appropriate:

Note HK$’000 HK$’000

Fixed assets (a) 1,529

Intangible assets (b) 2,525

Current assetsInventories (c) 113,252Amounts due from related companies (d) 2,252Trade receivables 1,824Other receivables and prepayments 44,797Short-term investments 3,504Cash and bank balances 16,572

182,201

Current liabilitiesAmount due to a related company (e) 2,152Trade payables 20,701Other payables and accrued charges 2,954Taxation (f) 31,841

57,648

Net current assets 124,553

Net assets (h) 128,607

Notes:

(a) Fixed assets

CostAccumulateddepreciation Net book value

HK$’000 HK$’000 HK$’000

Buildings 66 (5) 61

Plant and machinery 126 (42) 84

Office equipment, furniture and fixtures 1,757 (774) 983

Motor vehicles 560 (159) 401

2,509 (980) 1,529


— 97 —

(b) Intangible assets

HK$’000

Acquired patents, at cost 4,733

Less: accumulated amortisation (2,208)

2,525

(c) Inventories

HK$’000

Raw materials 32,751

Semi-finished goods 42,485

Finished goods 35,929

111,165

Spare parts and consumables 2,087

113,252

(d) Amounts due from related companies

Particulars of the amounts due from related companies disclosed pursuant to Section 161B of the Hong Kong

Companies Ordinance are as follows:

Name of related company1st January,

1999

Maximumoutstandingduring the

period30th June,

1999HK$’000 HK$’000 HK$’000

Suifenhe Yuxing Electrical Property Co., Ltd. 1,259 1,259 1,259

YMERC Hefei Branch — 337 337

Yongxing (PRC) 563 656 656

1,822 2,252 2,252

The executive directors of the Company have beneficial interests in these companies. The amounts were

unsecured, interest free and have been settled subsequently. These companies became unrelated to the Group subsequent

to the Reorganisation.

(e) Amount due to a related company

The balance represents an amount due to (Beijing Haidian District Yuxing Electronics

Company), a company beneficially owned by certain major shareholders and executive directors of the Company. The

amount is unsecured, interest free and has been repaid subsequently.


— 98 —

(f) Taxation

Taxation represents PRC income tax liability of Golden Yuxing.

(g) Commitments

(i) Operating lease commitments

At 30th June, 1999, the Group had commitments under non-cancellable operating leases in respect of land

and buildings to make payments in the next financial year as follows:

HK$’000

Leases which expire

- within one year 307

- in the second to fifth years inclusive 299

- after five years 1,149

1,755

(ii) Capital commitments

At 30th June, 1999, the Group had capital commitments in respect of the construction of a warehouse

amounting to approximately HK$12,188,000 which was authorized but not contracted for.

(h) Net assets of the Company

The Company was incorporated on 6th October, 1999. On the basis set out in Section 1 above, the net assets of

the Company as at 30th June, 1999 would have been approximately HK$129 million, representing its investment in the

subsidiaries.

(i) Distributable reserve

The Company had not been incorporated as at 30th June, 1999 and hence there was no reserve available for

distribution to shareholders at that date.

5. DIRECTORS’ REMUNERATION

Save as disclosed in Section 3 note(e), no other remuneration has been paid or is payable inrespect of the Relevant Periods by the Company or any of its subsidiaries to directors of the Company.

6. SUBSEQUENT EVENTS

Subsequent to 30th June, 1999, the companies now comprising the Group underwent areorganisation in preparation for the listing of the shares of the Company on the Growth EnterpriseMarket of The Stock Exchange of Hong Kong Limited. Details of the reorganisation are set out in thesection headed “Group reorganisation” in Appendix V of the Prospectus.

Save as aforesaid, no other material events took place subsequent to 30th June, 1999.


— 99 —

7. SUBSEQUENT ACCOUNTS

No audited accounts have been prepared for the Company or any of the companies comprising

the Group in respect of any period subsequent to 30th June,1999 and, save as disclosed in this report,

no dividend or other distribution has been declared by the Company or any of its subsidiaries in

respect of any period subsequent to 30th June, 1999.

Yours faithfully,PricewaterhouseCoopers

Certified Public AccountantsHong Kong


— 100 —

A1a.4

The estimate of the combined profit after taxation but before extraordinary items of the Group

for the year ended 31st December, 1999 is set out in the section headed “Financial information —

profit estimate, dividend policy, working capital and distributable reserves” in this prospectus.

1. BASES AND ASSUMPTIONS

The Directors have prepared the estimated combined profit after taxation but before

extraordinary items of the Group for the year ended 31st December, 1999 based on the audited

combined results of the Group for the six months ended 30th June, 1999, the unaudited combined

results based on management accounts of the Group for the five months ended 30th November, 1999

and an estimate of the combined results of the Group for the remaining one month ended 31st

December, 1999. The Directors are not aware of any extraordinary items which have arisen during the

year ended 31st December, 1999. The estimate has been prepared on the basis of the accounting

policies consistent in all material respects with those adopted by the Group as summarised in the

accountants’ report, the text of which is set out in Appendix I to this prospectus.

The Directors have adopted the following assumptions in the preparation of the estimate:

(i) there will be no material changes in the existing government policies or political, legal,

fiscal, market or economic conditions in Hong Kong, the PRC or any other places in which

any member of the Group carries on business or from which it imports or exports its

materials or components;

(ii) apart from the changes in tax incentives applicable to the subsidiary of the Company in the

PRC as a result of the reorganisation as disclosed in the section headed “Financial

information — taxation” of this prospectus, there will be no material changes in the bases

or rates of taxation applicable to the activities of the Group; and

(iii) there will be no material changes in inflation, currency exchange rates or interest rates from

those currently prevailing.

APPENDIX II PROFIT ESTIMATE

— 101 —

14.08(7)(a)14.2914.31A1a.34(1)

2. Letters

Set out below are the texts of the letters received by the Directors and ICEA fromPricewaterhouseCoopers, the auditors and reporting accountants of the Company, and by the Directorsfrom ICEA, prepared for the purpose of incorporation in this prospectus, in connection with the profitestimate of the Group for the year ended 31st December, 1999.

PricewaterhouseCoopers22nd Floor Prince's BuildingCentral Hong Kong

25th January, 2000

The DirectorsYuxing InfoTech Holdings LimitedICEA Capital Limited

Dear Sirs,

We have reviewed the accounting policies and calculations adopted in arriving at the estimate ofthe combined profit after taxation but before extraordinary items of Yuxing InfoTech Holdings Limited(the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) for the yearended 31st December, 1999 (the “Estimate”) as set out in the section headed “Profit estimate, dividendpolicy, working capital and distributable reserves” in the prospectus of the Company dated 25thJanuary, 2000 (the “Prospectus”).

The Estimate, for which the Directors of the Company are solely responsible, has been preparedby the Directors of the Company based on the audited combined results of the Group for the sixmonths ended 30th June, 1999, the unaudited combined results based on management accounts of theGroup for the five months ended 30th November, 1999 and an estimate of the combined results of theGroup for the remaining one month ended 31st December, 1999 on the basis that the current groupstructure had been in existence throughout the whole financial year ended 31st December, 1999.

In our opinion, so far as the accounting policies and calculations are concerned, the Estimate hasbeen properly compiled in accordance with the bases and assumptions made by the Directors of theCompany as set out in part 1 of Appendix II of the Prospectus, and is presented on a basis consistentin all material respects with the accounting policies presently adopted by the Group as set out in ouraccountants’ report dated 25th January, 2000, the text of which is set out in Appendix I to theProspectus.

Yours faithfully,PricewaterhouseCoopers

Certified Public AccountantsHong Kong


— 102 —

14.08(7)(a)14.29A1a.34(1)

A1a.9(3)Co. Ord.3rd Sch.Para.3

A1a.9(3)

Co. Ord.3rd Sch.Para.3

43rd Floor, NatWest Tower, Times Square,Causeway Bay, Hong Kong

ICEA Capital Limited

25th January, 2000

The Directors

Yuxing InfoTech Holdings Limited

Dear Sirs,

We refer to the estimate of the combined profit after taxation but before extraordinary items of

Yuxing InfoTech Holdings Limited (the “Company”) for the year ended 31st December, 1999 (the

“Estimate”) as set out in the prospectus of the Company dated 25th January, 2000.

We have discussed with you the bases and assumptions upon which the Estimate has been made.

We have also considered the letter dated 25th January, 2000 addressed to yourselves and ourselves

from PricewaterhouseCoopers regarding the accounting policies and calculations upon which the

Estimate has been made.

On the basis of the foregoing, the bases and assumptions made by you and the accounting

policies and calculations reviewed by PricewaterhouseCoopers, we have formed the opinion that the

Estimate, for which you as directors of the Company are solely responsible, has been made after due

and careful enquiry.

Yours faithfully,For and on behalf of

ICEA Capital LimitedMeocre Li

Chief Executive


— 103 —

14.08(7)(a)14.29A1a.34(1)

A1a.9(3)

A1a.9(3)

The following is the text of a letter, summary of values and valuation certificate received fromSallmanns, prepared for the purpose of incorporation in this prospectus in connection with itsvaluations as at 30th November, 1999 of the property interests of the Group.

SallmannsCHARTERED SURVEYORS, PROPERTY CONSULTANTSLAND, BUILDING, PLANT & MACHINERY VALUERSFINANCIAL AND INTANGIBLE ASSET VALUERS

15/F Trinity House165-171 Wanchai RoadWanchaiHong Kong

25th January, 2000

The DirectorsYuxing InfoTech Holdings Limited

Dear Sirs,

In accordance with your instructions to value the properties in which Yuxing InfoTech HoldingsLimited (the “Company”) and its subsidiaries (together, the “Group”) have interests, we confirm thatwe have carried out inspections, made relevant enquiries and obtained such further information as weconsider necessary for the purpose of providing you with our opinion of the value of the relevantproperties as at 30th November, 1999.

Our valuations of the property interests are our opinion of the open market value which we woulddefine as intended to mean “the best price at which an interest in a property might reasonably beexpected to have been completed unconditionally for cash consideration on the date of the valuationassuming:

(a) a willing seller;

(b) that, prior to the date of valuation, there had been a reasonable period (having regard to thenature of the property and the state of the market) for the proper marketing of the interest,for the agreement of price and terms and for the completion of the sale;

(c) that the state of the market, level of values and other circumstances were, on any earlierassumed date of exchange of contracts, the same as on the date of valuation;

(d) that no account is taken of any additional bid by a purchaser with a special interest; and

(e) that both parties to the transaction had acted knowledgeably, prudently and withoutcompulsion.”

We have valued the interest of the properties on an open market basis assuming sale with thebenefit of vacant possession by reference to comparable market transactions. This approach rests onthe wide acceptance of market price as the best indicator of value and pre-supposes that evidence ofrecent transactions in the market place can be extrapolated to similar properties, subject to allowancesfor variable factors.

APPENDIX III PROPERTY VALUATION

— 104 —

14.08(7)(a)A1a.39

A1a.9(3)

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

The property interests in Group II, which are rented and occupied by the Group, have nocommercial value due mainly to the short term nature or the prohibition against assignment orsub-letting or otherwise due to the lack of substantial profit rents or the insufficient proof of legal titleto the properties.

In valuing the property interests in the People’s Republic of China (“the PRC”), we havecomplied with all the requirements contained in Chapter 8 to the Rules Governing the Listing ofSecurities on the Growth Enterprise Market issued by The Stock Exchange of Hong Kong Limited.

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

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

We have been shown copies of various documents relating to the properties that are rented by theGroup in the PRC. However, we have not searched the original documents to verify ownership nor toverify any lease amendments which may not appear on the copies handed to us. Due to the nature ofthe land registration system in the PRC, we are unable to search the original documents to verify theexisting title of the properties or any material encumbrances that might be attached to such properties.

We have inspected the exterior and, where possible, the interior of the properties included in theattached valuation certificate, in respect of which we have been provided with such information as wehave required for the purpose of our valuation. However, no structural survey has been made, but inthe course of our inspection we did not note any serious defects. We are not, however, able to reportthat the properties are free from rot, infestation or any other structural defects. No tests were carriedout to any of the services.

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

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

Unless otherwise stated, all monetary figures stated in this valuation certificate are in Renminbi.


— 105 —

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

Yours faithfully,for and on behalf of

SALLMANNS (FAR EAST) LIMITEDPaul L. Brown

BSc FRICS FHKISDirector

Note : Paul L. Brown is a Chartered Surveyor who has extensive experience in valuation of properties in Hong Kong, the PRC,

the United Kingdom and Asia-Pacific region.


— 106 —

SUMMARY OF VALUES

GROUP I — PROPERTY INTEREST HELD BY THE GROUP IN THE PRC

Property

Capital value inexisting state as at

30th November, 1999RMB

1. Unit 2304Block 2 of Qingzheng YuanJinhaijiao Economic Development ZonePinggu CountyBeijingThe PRC

No commercial value

GROUP II — PROPERTY INTERESTS RENTED AND OCCUPIED BY THE GROUP IN THEPRC

Property



2. Level 5 and underground bicycle storerooms ofFruit PlazaNo.5 Dewai StreetXicheng DistrictBeijingThe PRC

No commercial value

3. No.105 Xi BoulevardZhushikouXuanwu DistrictBeijingThe PRC

No commercial value

4. No.5 Nanshuencheng StreetDongzhimenDongcheng DistrictBeijingThe PRC

No commercial value

5. No.39 HouyinfangXicheng DistrictBeijingThe PRC

No commercial value

Total : Nil


— 107 —

VALUATION CERTIFICATE

GROUP I — PROPERTY INTEREST HELD BY THE GROUP IN THE PRC

Property Description Particulars of occupancy



1. Unit 2304Block 2 ofQingzheng YuanJinhaijiaoEconomicDevelopment ZonePinggu CountyBeijingThe PRC

The property comprises aresidential unit on level 2 of asix-storey residential buildingcompleted in about 1997.

The property has a gross floor areaof approximately 84 sq.m.

The property is currentlyoccupied by the Group as anoffice.

No commercial value

Notes:

(1) According to a Certificate issued by Beijing Jinhaijiao Economic Development Zone Management Committee on6th October, 1997, the property is allowed to be used by Beijing Golden Yuxing Electronics and Technology Co.,Ltd. (“Golden Yuxing”) for a term of 70 years. According to the Certificate, Golden Yuxing can use the Certificateto apply for the formal Building Ownership Certificate.

(2) We have not been provided with the Building Ownership Certificate of the property issued by the local governmentbodies.

(3) According to a Commodity Flat Pre-sale Contract entered into between Beijing Jinhaijiao Economic DevelopmentZone Management Committee (Party A) and Golden Yuxing (Party B), the property was purchased from Party Aat a price of RMB70,181 in August 1997.

(4) The opinion given by the PRC legal adviser to the Group is summarized as follows:

1. The Certificate issued by Beijing Jinhaijiao Economic Development Zone Management Committee is notsufficient to prove that the property is legally owned by Golden Yuxing because the Certificate is not legallybinding and enforceable.

2. The above Commodity Flat Pre-sale Contract has not been registered and thus it is not legally binding andenforceable.

3. No evidence or documents show that the property is legally owned by Golden Yuxing. Before the issuanceof the formal Building Ownership Certificate, the property cannot be transferred, leased, or mortgagedfreely by Golden Yuxing.

(5) As the property cannot be transferred, leased, or mortgaged freely by the Group and there is insufficient proof oftitle of the property, we have attributed no commercial value to the property.


— 108 —

GROUP II — PROPERTY INTERESTS RENTED AND OCCUPIED BY THE GROUP IN THE PRC




2. Level 5 andundergroundbicycle storeroomsof Fruit PlazaNo. 5 Dewai StreetXicheng DistrictBeijingThe PRC

The property comprises the wholeof level 5 and underground bicyclestorerooms of a seven-storeybuilding completed in about 1993.

The property has a total gross floorarea of approximately 1,135 sq.m.

The property is occupied bythe Group as offices andbicycle storerooms.

The property is rented byGolden Yuxing for a term of10 years commencing from31st May, 1997 at an annualrental of RMB1,300,000,inclusive of electricity,management and parkingfees.

No commercial value

Notes:

(1) The tenant of the property is Golden Yuxing, a wholly-owned subsidiary of the Company.

(2) According to a supplemental lease contract entered into between and Beijing Golden YuxingElectronics and Technology Co. Ltd., the annual rental was reduced temporarily to RMB1,110,000 during theperiod from 15th November, 1998 to 15th November, 1999.

3. No.105Xi BoulevardZhushikouXuanwu DistrictBeijingThe PRC

The property comprises a single-storey building, which forms partof a shopping boulevard, completedin about 1995.

The property has a total gross floorarea of approximately 60 sq.m.

The property is occupied bythe Group as a sales outlet.

The property is rented byGolden Yuxing for a term of3 years commencing from1st October, 1998 at anannual rental ofRMB120,000, inclusive of10KVA electricity fee andmaintenance fees for thepublic facilities

No commercial value

Note: The tenant of the property is Golden Yuxing, a wholly-owned subsidiary of the Company.


— 109 —




4. No. 5NanshuenchengStreetDongzhimenDongcheng DistrictBeijingThe PRC

The property comprises a single-storey building, which forms partof shopping boulevard, completedin about 1995.

The property has a gross floor areaof approximately 55 sq.m.


The property is rented byGolden Yuxing for a term of3 years commencing from1st January, 1998 at anannual rental of RMB55,000for the first year and thenincreased by 5% per yearfrom the second yearonward.

No commercial value

Note: The tenant of the property is Golden Yuxing, a wholly-owned subsidiary of the Company.

5. No. 39HouyinfangXicheng DistrictBeijingThe PRC

The property comprises two single-storey building completed in about1995.

The property has a total gross floorarea of approximately 100 sq.m.


The property is rented byGolden Yuxing for a term of5 years commencing from6th June, 1998 at an annualrental of RMB180,000,inclusive of 10KVAelectricity and water fees.

No commercial value

Notes:

(1) The tenant of the property is Golden Yuxing, a wholly-owned subsidiary of the Company.

(2) According to a supplementary lease contract entered into between (Party A) and GoldenYuxing (Party B), Party A has agreed that the rental was reduced to RMB 4 per day per sq.m., or RMB146,000per annum, commencing from 6th December, 1998.


— 110 —

Set out below is a summary of certain provisions of the memorandum of association of theCompany (the “Memorandum of Association”) and the Bye-laws and of certain aspects of Bermudacompany law.

1. MEMORANDUM OF ASSOCIATION

The Memorandum of Association states, inter alia, that the liability of members of the Companyis limited to the amount, if any, for the time being unpaid on the Shares respectively held by them andthat the Company is an exempted company as defined in the Companies Act. The Memorandum ofAssociation also sets out the objects for which the Company was formed, including acting as a holdingand investment company, and its powers, including the powers set out in the First Schedule to theCompanies Act , excluding paragraph 8 thereof. As an exempted company, the Company will becarrying on business outside Bermuda from a place of business within Bermuda.

In accordance with and subject to section 42A of the Companies Act, the Memorandum ofAssociation empowers the Company to purchase its own shares and pursuant to its Bye-laws, thispower is exercisable by the board of Directors (the “board”) upon such terms and subject to suchconditions as it thinks fit.

2. BYE-LAWS

The Bye-laws were adopted on 20th November, 1999. The following is a summary of certainprovisions of the Bye-laws:

(a) Directors

(i) Power to allot and issue shares and warrants

Subject to any special rights conferred on the holders of any shares or class of shares, any share may beissued with or have attached thereto such rights, or such restrictions, whether with regard to dividend, voting,return of capital, or otherwise, as the Company may by ordinary resolution determine (or, in the absence of anysuch determination or so far as the same may not make specific provision, as the board may determine). Subjectto the Companies Act, any preference shares may be issued or converted into shares that are liable to be redeemed,at a determinable date or at the option of the Company or, if so authorised by the Memorandum of Association,at the option of the holder, on such terms and in such manner as the Company before the issue or conversion mayby ordinary resolution determine. The board may issue warrants conferring the right upon the holders thereof tosubscribe for any class of shares or securities in the capital of the Company on such terms as it may from timeto time determine.

Subject to the provisions of the Companies Act, the Bye-laws and, where applicable, the rules of anyDesignated Stock Exchange (as defined in the Bye-laws) and without prejudice to any special rights or restrictionsfor the time being attached to any shares or any class of shares, all unissued shares in the Company shall be atthe disposal of the board, which may offer, allot, grant options over or otherwise dispose of them to such persons,at such times, for such consideration and on such terms and conditions as it in its absolute discretion thinks fit,but so that no shares shall be issued at a discount.

Neither the Company nor the board shall be obliged, when making or granting any allotment of, offer of,option over or disposal of shares, to make, or make available, any such allotment, offer, option or shares tomembers or others with registered addresses in any particular territory or territories being a territory or territorieswhere, in the absence of a registration statement or other special formalities, this would or might, in the opinionof the board, be unlawful or impracticable. Members affected as a result of the foregoing sentence shall not be,or be deemed to be, a separate class of members for any purpose whatsoever.

APPENDIX IV SUMMARY OF THE CONSTITUTION OF THECOMPANY AND BERMUDA COMPANY LAW

— 111 —

24.09(2)(3)

(ii) Power to dispose of the assets of the Company or any of its subsidiaries

There are no specific provisions in the Bye-laws relating to the disposal of the assets of the Company orany of its subsidiaries.

Note: The Directors may, however, exercise all powers and do all acts and things which may be exercisedor done or approved by the Company and which are not required by the Bye-laws or the CompaniesAct to be exercised or done by the Company in general meeting.

(iii) Compensation or payments for loss of office

Payments to any Director or past Director of any sum by way of compensation for loss of office or asconsideration for or in connection with his retirement from office (not being a payment to which the Director iscontractually entitled) must be approved by the Company in general meeting.

(iv) Loans and provision of security for loans to Directors

There are no provisions in the Bye-laws relating to the making of loans to Directors. However, theCompanies Act contains restrictions on companies making loans or providing security for loans to their directors,the relevant provisions of which are summarised in the paragraph headed “Bermuda Company Law” in thisAppendix.

(v) Financial assistance to purchase shares of the Company

Neither the Company nor any of its subsidiaries shall directly or indirectly give financial assistance to aperson who is acquiring or proposing to acquire shares in the Company for the purpose of that acquisition whetherbefore or at the same time as the acquisition takes place or afterwards, provided that the Bye-laws shall notprohibit transactions permitted under the Companies Act.

(vi) Disclosure of interests in contracts with the Company or any of its subsidiaries

A Director may hold any other office or place of profit with the Company (except that of auditor of theCompany) in conjunction with his office of Director for such period and, subject to the Companies Act, upon suchterms as the board may determine, and may be paid such extra remuneration (whether by way of salary,commission, participation in profits or otherwise) in addition to any remuneration provided for by or pursuant toany other Bye-laws. A Director may be or become a director or other officer of, or a member of, any companypromoted by the Company or any other company in which the Company may be interested, and shall not be liableto account to the Company or the members for any remuneration, profits or other benefits received by him as adirector, officer or member of, or from his interest in, such other company. Subject as otherwise provided by theBye-laws, the board may also cause the voting power conferred by the shares in any other company held or ownedby the Company to be exercised in such manner in all respects as it thinks fit, including the exercise thereof infavour of any resolution appointing the Directors or any of them to be directors or officers of such other company,or voting or providing for the payment of remuneration to the directors or officers of such other company.

Subject to the Companies Act and to the Bye-laws, no Director or proposed or intending Director shall bedisqualified by his office from contracting with the Company, either with regard to his tenure of any office or placeof profit or as vendor, purchaser or in any other manner whatsoever, nor shall any such contract or any othercontract or arrangement in which any Director is in any way interested be liable to be avoided, nor shall anyDirector so contracting or being so interested be liable to account to the Company or the members for anyremuneration, profit or other benefits realised by any such contract or arrangement by reason of such Directorholding that office or the fiduciary relationship thereby established. A Director who to his knowledge is in anyway, whether directly or indirectly, interested in a contract or arrangement or proposed contract or arrangementwith the Company shall declare the nature of his interest at the meeting of the board at which the question ofentering into the contract or arrangement is first taken into consideration, if he knows his interest then exists, orin any other case, at the first meeting of the board after he knows that he is or has become so interested.


— 112 —

A1a.7(1)(2)

A Director shall not vote (nor be counted in the quorum) on any resolution of the board in respect of anycontract or arrangement or other proposal in which he is to his knowledge materially interested but this prohibitionshall not apply to any of the following matters, namely:

(aa) any contract or arrangement for giving of any security or indemnity to the Director in respect ofmoney lent or obligations incurred or undertaken by him at the request of or for the benefit of theCompany or any of its subsidiaries;

(bb) any contract or arrangement for the giving by the Company of any security or indemnity to a thirdparty in respect of a debt or obligation of the Company or any of its subsidiaries for which theDirector has himself assumed responsibility in whole or in part whether alone or jointly under aguarantee or indemnity or by the giving of security;

(cc) any contract or arrangement concerning an offer of shares or debentures or other securities of or bythe Company or any other company which the Company may promote or be interested in forsubscription or purchase, where the Director is or is to be interested as a participant in theunderwriting or sub-underwriting of the offer;

(dd) any contract or arrangement in which the Director is interested in the same manner as other holdersof shares or debentures or other securities of the Company or any of its subsidiaries by virtue onlyof his interest in shares or debentures or other securities of the Company;

(ee) any contract or arrangement concerning any other company in which he is interested only, whetherdirectly or indirectly, as an officer or executive or a shareholder other than a company in which theDirector together with any of his associates (as defined by the rules, where applicable, of anyDesignated Stock Exchange (as defined in the Bye-laws)) is beneficially interested in 5 percent. ormore of the issued shares or of the voting rights of any class of shares of such company (or of anythird company through which his interest is derived); or

(ff) any proposal concerning the adoption, modification or operation of a share option scheme, a pensionfund or retirement, death, or disability benefits scheme or other arrangement which relates both toDirectors and employees of the Company or of any of its subsidiaries and does not provide in respectof any Director as such any privilege or advantage not accorded to the employees to which suchscheme or fund relates.

(vii) Remuneration

The ordinary remuneration of the Directors shall from time to time be determined by the Company ingeneral meeting, such remuneration (unless otherwise directed by the resolution by which it is voted) to be dividedamongst the Directors in such proportions and in such manner as the board may agree or, failing agreement,equally, except that any Director holding office for part only of the period in respect of which the remunerationis payable shall only rank in such division in proportion to the time during such period for which he held office.The Directors shall also be entitled to be prepaid or repaid all travelling, hotel and incidental expenses reasonablyincurred or expected to be incurred by them in attending any board meetings, committee meetings or generalmeetings or separate meetings of any class of shares or of debentures of the Company or otherwise in connectionwith the discharge of their duties as Directors.

Any Director who, by request, goes or resides abroad for any purpose of the Company or who performsservices which in the opinion of the board go beyond the ordinary duties of a Director may be paid such extraremuneration (whether by way of salary, commission, participation in profits or otherwise) as the board maydetermine and such extra remuneration shall be in addition to or in substitution for any ordinary remunerationprovided for by or pursuant to any other Bye-law. A Director appointed to be a managing director, joint managingdirector, deputy managing director or other executive officer shall receive such remuneration (whether by way ofsalary, commission or participation in profits or otherwise or by all or any of those modes) and such other benefits(including pension and/or gratuity and/or other benefits on retirement) and allowances as the board may from timeto time decide. Such remuneration may be either in addition to or in lieu of his remuneration as a Director.


— 113 —

A1a.7(1)(2)

A1a.7(2)A1a.46(4)

The board may establish or concur or join with other companies (being subsidiary companies of the

Company or companies with which it is associated in business) in establishing and making contributions out of

the Company’s monies to any schemes or funds for providing pensions, sickness or compassionate allowances, life

assurance or other benefits for employees (which expression as used in this and the following paragraph shall

include any Director or ex-Director who may hold or have held any executive office or any office of profit with

the Company or any of its subsidiaries) and ex-employees of the Company and their dependants or any class or

classes of such persons.

The board may pay, enter into agreements to pay or make grants of revocable or irrevocable, and either

subject or not subject to any terms or conditions, pensions or other benefits to employees and ex-employees and

their dependants, or to any of such persons, including pensions or benefits additional to those, if any, to which

such employees or ex-employees or their dependants are or may become entitled under any such scheme or fund

as is mentioned in the previous paragraph. Any such pension or benefit may, as the board considers desirable, be

granted to an employee either before and in anticipation of, or upon or at any time after, his actual retirement.

(viii) Retirement, appointment and removal

At each annual general meeting, one third of the Directors for the time being (or if their number is not a

multiple of three, then the number nearest to but not greater than one third) will retire from office by rotation

provided that no Director holding office as chairman and/or managing director shall be subject to retirement by

rotation, or be taken into account in determining the number of Directors to retire. The Directors to retire in every

year will be those who have been longest in office since their last re-election or appointment but as between

persons who became or were last re-elected Directors on the same day those to retire will (unless they otherwise

agree among themselves) be determined by lot.

Note: There are no provisions relating to retirement of Directors upon reaching any age limit.

The Directors shall have the power from time to time and at any time to appoint any person as a Director

either to fill a casual vacancy on the board or, subject to authorisation by the members in general meeting, as an

addition to the existing board but so that the number of Directors so appointed shall not exceed any maximum

number determined from time to time by the members in general meeting. Any Director so appointed shall hold

office only until the next following annual general meeting of the Company and shall then be eligible for

re-election at the meeting. Neither a Director nor an alternate Director is required to hold any shares in the

Company by way of qualification.

A Director may be removed by a special resolution of the Company before the expiration of his period of

office (but without prejudice to any claim which such Director may have for damages for any breach of any

contract between him and the Company) provided that the notice of any such meeting convened for the purpose

of removing a Director shall contain a statement of the intention to do so and be served on such Director 14 days

before the meeting and, at such meeting, such Director shall be entitled to be heard on the motion for his removal.

Unless otherwise determined by the Company in general meeting, the number of Directors shall not be less than

two. There is no maximum number of Directors unless otherwise determined from time to time by members of the

Company.

The board may from time to time appoint one or more of its body to be managing director, joint managing

director, or deputy managing director or to hold any other employment or executive office with the Company for

such period (subject to their continuance as Directors) and upon such terms as the board may determine and the

board may revoke or terminate any of such appointments (but without prejudice to any claim for damages that such

Director may have against the Company or vice versa). The board may delegate any of its powers, authorities and

discretions to committees consisting of such Director or Directors and other persons as the board thinks fit, and

it may from time to time revoke such delegation or revoke the appointment of and discharge any such committees

either wholly or in part, and either as to persons or purposes, but every committee so formed shall, in the exercise

of the powers, authorities and discretions so delegated, conform to any regulations that may from time to time be

imposed upon it by the board.


— 114 —

A1a.7(3)

A1a.7(5)

(ix) Borrowing powers

The board may from time to time at its discretion exercise all the powers of the Company to raise or borrowmoney, to mortgage or charge all or any part of the undertaking, property and assets (present and future) anduncalled capital of the Company and, subject to the Companies Act, to issue debentures, bonds and other securitiesof the Company, whether outright or as collateral security for any debt, liability or obligation of the Company orof any third party.

Note: These provisions, in common with the Bye-laws in general, can be varied with the sanction of aspecial resolution of the Company.

(b) Alterations to constitutional documents

The Bye-laws may be rescinded, altered or amended by the Directors subject to the confirmation of the Companyin general meeting. The Bye-laws state that a special resolution shall be required to alter the provisions of theMemorandum of Association, to confirm any such rescission, alteration or amendment to the Bye-laws or to change thename of the Company.

(c) Alteration of capital

The Company may from time to time by ordinary resolution in accordance with the relevant provisions of theCompanies Act:

(i) increase its capital by such sum, to be divided into shares of such amounts as the resolution shall prescribe;

(ii) consolidate and divide all or any of its capital into shares of larger amount than its existing shares;

(iii) divide its shares into several classes and without prejudice to any special rights previously conferred on theholders of existing shares as the directors may determine;

(iv) sub-divide its shares or any of them into shares of smaller amount than is fixed by the Memorandum ofAssociation;

(v) change the currency denomination of its share capital;

(vi) make provision for the issue and allotment of shares which do not carry any voting rights; and

(vii) cancel any shares which, at the date of passing of the resolution, have not been taken, or agreed to be taken,by any person, and diminish the amount of its capital by the amount of the shares so cancelled.

The Company may, by special resolution, subject to any confirmation or consent required by law, reduce itsauthorised or issued share capital or any share premium account or other undistributable reserve in any manner permittedby law.

(d) Variation of rights of existing shares or classes of shares

Subject to the Companies Act, all or any of the special rights attached to the shares or any class of shares may(unless otherwise provided for by the terms of issue of that class) be varied, modified or abrogated either with the consentin writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a specialresolution passed at a separate general meeting of the holders of the shares of that class. To every such separate generalmeeting the provisions of the Bye-laws relating to general meetings will mutatis mutandis apply, but so that the necessaryquorum (other than at an adjourned meeting) shall be two persons (or in the case of a member being a corporation, itsduly authorised representative) holding or representing by proxy not less than one-third in nominal value of the issued


— 115 —

A1.a7(3)

A1a.7(6)

A1a.25(3)

shares of that class and at any adjourned meeting two holders present in person (or in the case of a member being acorporation, its duly authorised representative) or by proxy whatever the number of shares held by them shall be aquorum. Every holder of shares of the class shall be entitled on a poll to one vote for every such share held by him, andany holder of shares of the class present in person or by proxy may demand a poll.

(e) Special resolution-majority required

A special resolution of the Company must be passed by a majority of not less than three-fourths of the votes castby such members as, being entitled so to do, vote in person or, in the case of such members as are corporations, by theirduly authorised representatives or, where proxies are allowed, by proxy at a general meeting of which not less than 21clear days’ notice, specifying the intention to propose the resolution as a special resolution, has been duly given.Provided that, except in the case of an annual general meeting, if it is so agreed by a majority in number of the membershaving a right to attend and vote at such meeting, being a majority together holding not less than 95 per cent. in nominalvalue of the shares giving that right and, in the case of an annual general meeting, if so agreed by all members entitledto attend and vote thereat, a resolution may be proposed and passed as a special resolution at a meeting of which lessthan 21 clear days’ notice has been given.

(f) Voting rights (generally and on a poll) and right to demand a poll

Subject to any special rights or restrictions as to voting for the time being attached to any shares by or inaccordance with the Bye-laws, at any general meeting on a show of hands, every member who is present in person (orbeing a corporation, is present by its duly authorised representative) or by proxy shall have one vote and on a poll everymember present in person or by proxy or, being a corporation, by its duly authorised representative shall have one votefor every fully paid share of which he is the holder but so that no amount paid up or credited as paid up on a share inadvance of calls or installments is treated for the foregoing purposes as paid up on the share.

Notwithstanding anything contained in the Bye-laws, where more than one proxy is appointed by a member whichis a clearing house (as defined in the Bye-laws) (or its nominee), each such proxy shall have one vote on a show of hands.On a poll, a member entitled to more than one vote need not use all his votes or cast all the votes he uses in the sameway.

At any general meeting a resolution put to the vote of the meeting is to be decided on a show of hands unless(before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) apoll is demanded by (i) the chairman of the meeting or (ii) at least three members present in person or, in the case ofa member being a corporation, by its duly authorised representative or by proxy for the time being entitled to vote atthe meeting or (iii) any member or members present in person or, in the case of a member being a corporation, by itsduly authorised representative or by proxy and representing not less than one-tenth of the total voting rights of all themembers having the right to vote at the meeting or (iv) a member or members present in person or, in the case of amember being a corporation, by its duly authorised representative or by proxy and holding shares in the Companyconferring a right to vote at the meeting being shares on which an aggregate sum has been paid equal to not less thanone-tenth of the total sum paid up on all the shares conferring that right.

(g) Requirements for annual general meetings

An annual general meeting of the Company must be held in each year other than the year in which its statutorymeeting is convened at such time (within a period of not more than 15 months after the holding of the last precedingannual general meeting unless a longer period would not infringe the rules of any Designated Stock Exchange (as definedin the Bye-laws)) and place as may be determined by the board.

(h) Accounts and audit

The board shall cause true accounts to be kept of the sums of money received and expended by the Company, andthe matters in respect of which such receipt and expenditure take place, and of the property, assets, credits and liabilitiesof the Company and of all other matters required by the provisions of the Companies Act or necessary to give a true andfair view of the Company’s affairs and to explain its transactions.


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A1a.25(1)

The accounting records shall be kept at the registered office or, subject to the Companies Act, at such other place

or places as the board decides and shall always be open to inspection by any Director. No member (other than a Director)

shall have any right of inspecting any accounting record or book or document of the Company except as conferred by

law or authorised by the board or the Company in general meeting.

Subject to the Companies Act, a printed copy of the Directors’ report, accompanied by the balance sheet and profit

and loss account, including every document required by law to be annexed thereto, made up to the end of the applicable

financial year and containing a summary of the assets and liabilities of the Company under convenient heads and a

statement of income and expenditure, together with a copy of the auditors’ report, shall be sent to each person entitled

thereto at least 21 days before the date of the general meeting and laid before the Company in general meeting in

accordance with the requirements of the Companies Act provided that this provision shall not require a copy of those

documents to be sent to any person whose address the Company is not aware or to more than one of the joint holders

of any shares or debentures.

Subject to the Companies Act, at the annual general meeting or at a subsequent special general meeting in each

year, the members shall appoint an auditor to audit the accounts of the Company and such auditor shall hold office until

the members appoint another auditor. Such auditor may be a member but no Director or officer or employee of the

Company shall, during his continuance in office, be eligible to act as an auditor of the Company. The remuneration of

the auditor shall be fixed by the Company in general meeting or in such manner as the members may determine.

The financial statements of the Company shall be audited by the auditor in accordance with generally accepted

auditing standards. The auditor shall make a written report thereon in accordance with generally accepted auditing

standards and the report of the auditor shall be submitted to the members in general meeting. The generally accepted

auditing standards referred to herein may be those of a country or jurisdiction other than Bermuda. If the auditing

standards of a country or jurisdiction other than Bermuda are used, the financial statements and the report of the auditor

should disclose this fact and name such country and jurisdiction.

(i) Notices of meetings and business to be conducted thereat

An annual general meeting and any special general meeting at which it is proposed to pass a special resolution

shall (save as set out in sub-paragraph (e) above) be called by at least 21 clear days’ notice in writing, and any other

special general meeting shall be called by at least 14 clear days’ notice (in each case exclusive of the day on which the

notice is given or deemed to be given and of the day for which it is given or on which it is to take effect). The notice

must specify the time and place of the meeting and, in the case of special business, the general nature of that business.

The notice convening an annual general meeting shall specify the meeting as such.

(j) Transfer of shares

All transfers of shares may be effected by an instrument of transfer in the usual or common form or in such other

form as the board may approve and which may be under hand or, if the transferor or transferee is a clearing house or

its nominees(s), by hand or by machine imprinted signature or by such other manner of execution as the board may

approve from time to time. The instrument of transfer shall be executed by or on behalf of the transferor and the

transferee provided that the board may dispense with the execution of the instrument of transfer by the transferee in any

case in which it thinks fit, in its discretion, to do so and the transferor shall be deemed to remain the holder of the share

until the name of the transferee is entered in the register of members in respect thereof. The board may also resolve either

generally or in any particular case, upon request by either the transferor or the transferee, to accept mechanically

executed transfers.

The board in so far as permitted by any applicable law may, in its absolute discretion, at any time and from time

to time transfer any share upon the principal register to any branch register or any share on any branch register to the

principal register or any other branch register.


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A1a.7(8)

Unless the board otherwise agrees, no shares on the principal register shall be transferred to any branch registernor may shares on any branch register be transferred to the principal register or any other branch register. All transfersand other documents of title shall be lodged for registration and registered, in the case of shares on a branch register,at the relevant registration office and, in the case of shares on the principal register, at the registered office in Bermudaor such other place in Bermuda at which the principal register is kept in accordance with the Companies Act.

The board may, in its absolute discretion, and without assigning any reason, refuse to register a transfer of anyshare (not being a fully paid up share) to a person of whom it does not approve or any share issued under any shareincentive scheme for employees upon which a restriction on transfer imposed thereby still subsists, and it may also refuseto register any transfer of any share to more than four joint holders or any transfer of any share (not being a fully paidup share) on which the Company has a lien.

The board may decline to recognise any instrument of transfer unless a fee of such maximum sum as anyDesignated Stock Exchange (as defined in the Bye-laws) may determine to be payable or such lesser sum as the Directorsmay from time to time require is paid to the Company in respect thereof, the instrument of transfer, if applicable, isproperly stamped, is in respect of only one class of share and is lodged at the relevant registration office or registeredoffice or such other place at which the principal register is kept accompanied by the relevant share certificate(s) and suchother evidence as the board may reasonably require to show the right of the transferor to make the transfer (and if theinstrument of transfer is executed by some other person on his behalf, the authority of that person so to do).

The registration of transfers may be suspended and the register closed on giving notice by advertisement in anappointed newspaper and, where applicable, any other newspapers in accordance with the requirements of any DesignatedStock Exchange (as defined in the Bye-laws), at such times and for such periods as the board may determine and eithergenerally or in respect of any class of shares. The register of members shall not be closed for periods exceeding in thewhole 30 days in any year.

(k) Power for the Company to purchase its own shares

The Bye-laws supplement the Company’s Memorandum of Association (which gives the Company the power topurchase its own shares) by providing that the power is exercisable by the board upon such terms and conditions as itthinks fit.

(l) Power for any subsidiary of the Company to own shares in the Company

There are no provisions in the Bye-laws relating to ownership of shares in the Company by a subsidiary.

(m) Dividends and other methods of distribution

Subject to the Companies Act, the Company in general meeting may declare dividends in any currency to be paidto the members but no dividend shall be declared in excess of the amount recommended by the board. The Company ingeneral meeting may also make a distribution to its members out of contributed surplus (as ascertained in accordancewith the Companies Act). No dividend shall be paid or distribution made out of contributed surplus if to do so wouldrender the Company unable to pay its liabilities as they become due or the realisable value of its assets would therebybecome less than the aggregate of its liabilities and its issued share capital and share premium account.

Except in so far as the rights attaching to, or the terms of issue of, any share may otherwise provide, (i) alldividends shall be declared and paid according to the amounts paid up on the shares in respect whereof the dividend ispaid but no amount paid up on a share in advance of calls shall for this purpose be treated as paid up on the share and(ii) all dividends shall be apportioned and paid pro rata according to the amount paid up on the shares during any portionor portions of the period in respect of which the dividend is paid. The Directors may deduct from any dividend or othermonies payable to a member by the Company on or in respect of any shares all sums of money (if any) presently payableby him to the Company on account of calls or otherwise.

Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared on theshare capital of the Company, the board may further resolve either (a) that such dividend be satisfied wholly or in partin the form of an allotment of shares credited as fully paid up, provided that the shareholders entitled thereto will be


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A1a.7(9)

entitled to elect to receive such dividend (or part thereof) in cash in lieu of such allotment, or (b) that shareholders

entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of

the whole or such part of the dividend as the board may think fit. The Company may also upon the recommendation of

the board by an ordinary resolution resolve in respect of any one particular dividend of the Company that it may be

satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to shareholders

to elect to receive such dividend in cash in lieu of such allotment.

Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared the board

may further resolve that such dividend be satisfied wholly or in part by the distribution of specific assets of any kind.

All dividends or bonuses unclaimed for one year after having been declared may be invested or otherwise made

use of by the board for the benefit of the Company until claimed and the Company shall not be constituted a trustee in

respect thereof. All dividends or bonuses unclaimed for six years after having been declared may be forfeited by the

board and shall revert to the Company.

(n) Proxies

Any member of the Company entitled to attend and vote at a meeting of the Company is entitled to appoint another

person as his proxy to attend and vote instead of him. A member who is the holder of two or more shares may appoint

more than one proxy to represent him and vote on his behalf at a general meeting of the Company or at a class meeting.

A proxy need not be a member of the Company. In addition, a proxy or proxies representing either a member who is an

individual or a member which is a corporation shall be entitled to exercise the same powers on behalf of the member

which he or they represent as such member could exercise.

(o) Call on shares and forfeiture of shares

Subject to the Bye-laws and to the terms of allotment, the board may from time to time make such calls upon the

members in respect of any monies unpaid on the shares held by them respectively (whether on account of the nominal

value of the shares or by way of premium). A call may be made payable either in one lump sum or by installments. If

the sum payable in respect of any call or instalment is not paid on or before the day appointed for payment thereof, the

person or persons from whom the sum is due shall pay interest on the same at such rate not exceeding 20 per cent. per

annum as the board may agree to accept from the day appointed for the payment thereof to the time of actual payment,

but the board may waive payment of such interest wholly or in part. The board may, if it thinks fit, receive from any

member willing to advance the same, either in money or money’s worth, all or any part of the monies uncalled and unpaid

or installments payable upon any shares held by him, and upon all or any of the monies so advanced the Company may

pay interest at such rate (if any) as the board may decide.

If a member fails to pay any call on the day appointed for payment thereof, the board may serve not less than 14

clear days’ notice on him requiring payment of so much of the call as is unpaid, together with any interest which may

have accrued and which may still accrue up to the date of actual payment and stating that, in the event of non-payment

at or before the time appointed, the shares in respect of which the call was made will be liable to be forfeited.

If the requirements of any such notice are not complied with, any share in respect of which the notice has been

given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution

of the board to that effect. Such forfeiture will include all dividends and bonuses declared in respect of the forfeited share

and not actually paid before the forfeiture.

A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares but shall,

notwithstanding, remain liable to pay to the Company all monies which, at the date of forfeiture, were payable by him

to the Company in respect of the shares, together with (if the board shall in its discretion so require) interest thereon

from the date of forfeiture until the date of actual payment at such rate not exceeding 20 per cent. per annum as the board

determines.


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A1a.7(7)

(p) Inspection of register of members

The register and branch register of members shall be open to inspection between 10:00 a.m. and 12:00 noon onevery business day by members without charge, or by any other person upon a maximum payment of five Bermudadollars, at the registered office or such other place in Bermuda at which the register is kept in accordance with theCompanies Act or, upon a maximum payment of $10, at the Registration Office (as defined in the Bye-laws), unless theregister is closed in accordance with the Companies Act.

(q) Quorum for meetings and separate class meetings

For all purposes the quorum for a general meeting shall be two members present in person (or, in the case of amember being a corporation, by its duly authorised representative) or by proxy and entitled to vote. In respect of aseparate class meeting (other than an adjourned meeting) convened to sanction the modification of class rights thenecessary quorum shall be two persons holding or representing by proxy not less than one-third in nominal value of theissued shares of that class.

(r) Rights of the minorities in relation to fraud or oppression

There are no provisions in the Bye-laws relating to rights of minority shareholders in relation to fraud oroppression. However, certain remedies are available to shareholders of the Company under Bermuda law, as summarisedin paragraph 4(e) of this Appendix.

(s) Procedures on liquidation

A resolution that the Company be wound up by the court or be wound up voluntarily shall be a special resolution.

If the Company shall be wound up (whether the liquidation is voluntary or by the court) the liquidator may, withthe authority of a special resolution and any other sanction required by the Companies Act, divide among the membersin specie or kind the whole or any part of the assets of the Company whether the assets shall consist of property of onekind or shall consist of properties of different kinds and the liquidator may, for such purpose, set such value as he deemsfair upon any one or more class or classes of property to be divided as aforesaid and may determine how such divisionshall be carried out as between the members or different classes of members. The liquidator may, with the like authority,vest any part of the assets in trustees upon such trusts for the benefit of members as the liquidator, with the like authority,shall think fit, but so that no contributory shall be compelled to accept any shares or other property in respect of whichthere is a liability.

(t) Untraceable members

The Company may sell any of the shares of a member who is untraceable if (i) all cheques or warrants (being notless than three in total number) for any sum payable in cash to the holder of such shares have remained uncashed fora period of 12 years; (ii) upon the expiry of the 12 year period, the Company has not during that time received anyindication of the existence of the member; and (iii) the Company has caused an advertisement to be published inaccordance with the rules of the Designated Stock Exchange (as defined in the Bye-laws) giving notice of its intentionto sell such shares and a period of three months, or such shorter period as may be permitted by the Designated StockExchange (as defined in the Bye-laws), has elapsed since such advertisement and the Designated Stock Exchange (asdefined in the Bye-laws) has been notified of such intention. The net proceeds of any such sale shall belong to theCompany and upon receipt by the Company of such net proceeds, it shall become indebted to the former member of theCompany for an amount equal to such net proceeds.

(u) Other provisions

The Bye-laws provide that to the extent that it is not prohibited by and is in compliance with the Companies Act,if warrants to subscribe for shares have been issued by the Company and the Company does any act or engages in anytransaction which would result in the subscription price of such warrants being reduced below the par value of a share,a subscription rights reserve shall be established and applied in paying up the difference between the subscription priceand the par value of a share on any exercise of the warrants.


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The Bye-laws also provide that the Company is required to maintain at its registered office a register of directorsand officers in accordance with the provisions of the Companies Act and such register is open to inspection by membersof the public without charge between 10:00 a.m. and 12:00 noon on every business day.

3. VARIATION OF MEMORANDUM OF ASSOCIATION AND BYE-LAWS

The Memorandum of Association may be altered by the Company in general meeting. In certaincircumstances, consent to the alteration must be obtained from the Minister of Finance of Bermuda.The Bye-laws may be amended by the Directors subject to the confirmation of the Company in generalmeeting. The Bye-laws state that a special resolution shall be required to alter the provisions of theMemorandum of Association or to confirm any amendment to the Bye-laws or to change the name ofthe Company. For these purposes, a resolution is a special resolution if it has been passed by amajority of not less than three-fourths of the votes cast by such members of the Company as, beingentitled to do so, vote in person or, in the case of such members as are corporations, by their respectiveduly authorised representatives or, where proxies are allowed, by proxy at a general meeting of whichnot less than 21 clear days’ notice specifying the intention to propose the resolution as a specialresolution has been duly given. Except in the case of an annual general meeting, the requirement of21 clear days’ notice may be waived by a majority in number of the members having the right to attendand vote at the relevant meeting, being a majority together holding not less than 95 percent in nominalvalue of the shares giving that right.

4. BERMUDA COMPANY LAW

The Company is incorporated in Bermuda and, therefore, operates subject to Bermuda law. Setout below is a summary of certain provisions of Bermuda company law, although this does not purportto contain all applicable qualifications and exceptions or to be a complete review of all matters ofBermuda company law and taxation, which may differ from equivalent provisions in jurisdictions withwhich interested parties may be more familiar:

(a) Share capital

The Companies Act provides that where a company issues shares at a premium, whether forcash or otherwise, a sum equal to the aggregate amount or value of the premiums on those sharesshall be transferred to an account, to be called the “share premium account”, to which theprovisions of the Companies Act relating to a reduction of share capital of a company shall applyas if the share premium account were paid up share capital of the company except that the sharepremium account may be applied by the company:

(i) in paying up unissued shares of the company to be issued to members of the companyas fully paid bonus shares;

(ii) in writing off:

(aa) the preliminary expenses of the company; or

(bb) the expenses of, or the commission paid or discount allowed on, any issue ofshares or debentures of the company; or

(iii) in providing for the premiums payable on redemption of any shares or of anydebentures of the company.


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However, only premiums arising on the same class of shares can be used to pay up bonusshares or in providing for the premiums payable on redemption of shares referred to in (i) and(iii) above respectively.

In the case of an exchange of shares the excess value of the shares acquired over thenominal value of the shares being issued may be credited to a contributed surplus account of theissuing company.

The Companies Act permits a company to issue preference shares and subject to theconditions stipulated therein to convert those preference shares into redeemable preferenceshares.

The Companies Act includes certain protections for holders of special classes of shares,requiring their consent to be obtained before their rights may be varied. Where provision is madeby the memorandum of association or bye-laws for authorising the variation of rights attachedto any class of shares in the company, the consent of the specified proportions of the holders ofthe issued shares of that class or the sanction of a resolution passed at a separate meeting of theholders of those shares is required, and where no provision for varying such rights is made inthe memorandum of association or bye-laws and nothing therein precludes a variation of suchrights, the written consent of the holders of three-fourths of the issued shares of that class or thesanction of a resolution passed as aforesaid is required.

(b) Financial assistance to purchase shares of a company or its holding company

A company is prohibited from providing financial assistance for the purpose of anacquisition of its own or its holding company’s shares unless there are reasonable grounds forbelieving that the company is, and would after the giving of such financial assistance be, ableto pay its liabilities as they become due; and the realisable value of the company’s assets, afterthe giving of such financial assistance, would not thereby be less than the aggregate of itsliabilities, issued share capital and share premium accounts. However, in certain circumstances,the prohibition from giving financial assistance may be excluded such as where the assistance isonly an incidental part of a larger purpose or the assistance is of an insignificant amount suchas the payment of minor costs. In addition, the Companies Act expressly permits the grant offinancial assistance where (i) the financial assistance does not reduce the company’s net assetsor, to the extent the net assets are reduced, such financial assistance is provided for out of fundsof the company which would otherwise be available for dividend or distribution; (ii) an affidavitof solvency is sworn by the directors of the company; and (iii) the financial assistance isapproved by resolution of shareholders of the company.

(c) Purchase of shares and warrants by a company and its subsidiaries

A company may, if authorised by its memorandum of association or bye-laws, purchase itsown shares. Such purchases may only be effected out of the capital paid up on the purchasedshares or out of the funds of the company otherwise available for dividend or distribution or outof the proceeds of a fresh issue of shares made for the purpose. Any premium payable on apurchase over the par value of the shares to be purchased must be provided for out of funds ofthe company otherwise available for dividend or distribution or out of the company’s sharepremium account. Any amount due to a shareholder on a purchase by a company of its own sharesmay (i) be paid in cash; (ii) be satisfied by the transfer of any part of the undertaking or property


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of the company having the same value; or (iii) be satisfied partly under (i) and partly under (ii).Any purchase by a company of its own shares may be authorised by its board of directors orotherwise by or in accordance with the provisions of its bye-laws. Such purchase may only bemade if at least two directors, by affidavit, declare that on the effective date of the purchase andtaking into account the purchase, the company is solvent or that all of the creditors of thecompany on that date have consented in writing to the purchase. In the case where a companyis listed on an appointed stock exchange (as defined in the Companies Act), the affidavit may,at the option of the company, be sworn within thirty days after the end of each calendar quartergiving details of the purchases made during each quarter. The shares so purchased will be treatedas cancelled and the company’s issued, but not its authorised, capital will be diminishedaccordingly.

A company is not prohibited from purchasing and may purchase its own warrants subjectto and in accordance with the terms and conditions of the relevant warrant instrument orcertificate. There is no requirement under Bermuda law that a company’s memorandum ofassociation or its bye-laws contain a specific provision enabling such purchases and the directorsof a company may rely upon the general power contained in its memorandum of association tobuy and sell and deal in personal property of all kinds.

Under Bermuda law, a subsidiary may hold shares in its holding company and in certaincircumstances, may acquire such shares. The holding company is, however, prohibited fromgiving financial assistance for the purpose of the acquisition, subject to certain circumstancesprovided by the Companies Act. A company, whether a subsidiary or a holding company, mayonly purchase its own shares for cancellation if it is authorised to do so in its memorandum ofassociation or bye-laws pursuant to section 42A of the Companies Act.

(d) Dividends and distributions

A company may not declare or pay a dividend, or make a distribution out of contributedsurplus, if there are reasonable grounds for believing that (i) the company is, or would after thepayment be, unable to pay its liabilities as they become due; or (ii) the realisable value of thecompany’s assets would thereby be less than the aggregate of its liabilities and its issued sharecapital and share premium accounts. Contributed surplus is defined for purposes of section 54of the Companies Act to include the proceeds arising from donated shares, credits resulting fromthe redemption or conversion of shares at less than the amount set up as nominal capital anddonations of cash and other assets to the company.

(e) Protection of minorities

Class actions and derivative actions are generally not available to shareholders under thelaws of Bermuda. The Bermuda courts, however, would ordinarily be expected to permit ashareholder to commence an action in the name of a company to remedy a wrong done to thecompany where the act complained of is alleged to be beyond the corporate power of thecompany or is illegal or would result in the violation of the company’s memorandum ofassociation and bye-laws. Furthermore, consideration would be given by the court to acts that arealleged to constitute a fraud against the minority shareholders or, for instance, where an actrequires the approval of a greater percentage of the company’s shareholders than actuallyapproved it.


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A1a.12

Any member of a company who complains that the affairs of the company are beingconducted or have been conducted in a manner oppressive or prejudicial to the interests of somepart of the members, including himself, may petition the court which may, if it is of the opinionthat to wind up the company would unfairly prejudice that part of the members but that otherwisethe facts would justify the making of a winding up order on just and equitable grounds, makesuch order as it thinks fit, whether for regulating the conduct of the company’s affairs in futureor for the purchase of shares of any members of the company by other members of the companyor by the company itself and in the case of a purchase by the company itself, for the reductionaccordingly of the company’s capital, or otherwise. Bermuda law also provides that the companymay be wound up by the Bermuda court, if the court is of the opinion that it is just and equitableto do so. Both these provisions are available to minority shareholders seeking relief from theoppressive conduct of the majority, and the court has wide discretion to make such orders as itthinks fit.

Except as mentioned above, claims against a company by its shareholders must be based onthe general laws of contract or tort applicable in Bermuda.

A statutory right of action is conferred on subscribers of shares in a company againstpersons, including directors and officers, responsible for the issue of a prospectus in respect ofdamage suffered by reason of an untrue statement therein, but this confers no right of actionagainst the company itself. In addition, such company, as opposed to its shareholders, may takeaction against its officers including directors, for breach of their statutory and fiduciary duty toact honestly and in good faith with a view to the best interests of the company.

(f) Management

The Companies Act contains no specific restrictions on the power of directors to disposeof assets of a company, although it specifically requires that every officer of a company, whichincludes a director, managing director and secretary, in exercising his powers and discharging hisduties must do so honestly and in good faith with a view to the best interests of the company andexercise the care, diligence and skill that a reasonably prudent person would exercise incomparable circumstances. Furthermore, the Companies Act requires that every officer shouldcomply with the Companies Act, regulations passed pursuant to the Companies Act and thebye-laws of the company.

(g) Accounting and auditing requirements

The Companies Act requires a company to cause proper records of accounts to be kept withrespect to (i) all sums of money received and expended by the company and the matters in respectof which the receipt and expenditure takes place; (ii) all sales and purchases of goods by thecompany and (iii) the assets and liabilities of the company.

Furthermore, it requires that a company keeps its records of account at the registered officeof the company or at such other place as the directors think fit and that such records shall at alltimes be open to inspection by the directors or the resident representative of the company. If therecords of account are kept at some place outside Bermuda, there shall be kept at the office ofthe company in Bermuda such records as will enable the directors or the resident representativeof the company to ascertain with reasonable accuracy the financial position of the company at


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the end of each three month period, except that where the company is listed on an appointedstock exchange, there shall be kept such records as will enable the directors or the residentrepresentative of the company to ascertain with reasonable accuracy the financial position of thecompany at the end of each six month period.

The Companies Act requires that the directors of the company must, at least once a year,lay before the company in general meeting financial statements for the relevant accountingperiod. Further, the company’s auditor must audit the financial statements so as to enable himto report to the members. Based on the results of his audit, which must be made in accordancewith generally accepted auditing standards, the auditor must then make a report to the members.The generally accepted auditing standards may be those of a country or jurisdiction other thanBermuda or such other generally accepted auditing standards as may be appointed by theMinister of Finance of Bermuda under the Companies Act; and where the generally acceptedauditing standards used are other than those of Bermuda, the report of the auditor shall identifythe generally accepted auditing standards used. All members of the company are entitled toreceive a copy of every financial statement prepared in accordance with these requirements, atleast seven days before the general meeting of the company at which the financial statements areto be tabled.

(h) Auditors

At each annual general meeting, a company must appoint an auditor to hold office until theclose of the next annual general meeting; however, this requirement may be waived if all of theshareholders and all of the directors, either in writing or at the general meeting, agree that thereshall be no auditor.

A person, other than an incumbent auditor, shall not be capable of being appointed auditorat an annual general meeting unless notice in writing of an intention to nominate that person tothe office of auditor has been given not less than 21 days before the annual general meeting. Thecompany must send a copy of such notice to the incumbent auditor and give notice thereof to themembers not less than 7 days before the annual general meeting. An incumbent auditor may,however, by notice in writing to the secretary of the company waive the requirements of theforegoing.

Where an auditor is appointed to replace another auditor, the new auditor must seek fromthe replaced auditor a written statement as to the circumstances of the latter’s replacement. If thereplaced auditor does not respond within 15 days, the new auditor may act in any event. Anappointment as auditor of a person who has not requested a written statement from the replacedauditor is voidable by a resolution of the shareholders at a general meeting. An auditor who hasresigned, been removed or whose term of office has expired or is about to expire, or who hasvacated office is entitled to attend the general meeting of the company at which he is to beremoved or his successor is to be appointed; to receive all notices of, and other communicationsrelating to, that meeting which a member is entitled to receive; and to be heard at that meetingon any part of the business of the meeting that relates to his duties as auditor or former auditor.

(i) Exchange control

An exempted company is usually designated as “non-resident” for Bermuda exchangecontrol purposes by the Bermuda Monetary Authority. Where a company is so designated, it is


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free to deal in currencies of countries outside the Bermuda exchange control area which arefreely convertible into currencies of any other country. The permission of the Bermuda MonetaryAuthority is required for the issue of shares and warrants by the company and the subsequenttransfer of such shares and warrants. In granting such permission, the Bermuda MonetaryAuthority accepts no responsibility for the financial soundness of any proposals or for thecorrectness of any statements made or opinions expressed in any document with regard to suchissue. Before the company can issue or transfer any further shares and warrants in excess of theamounts already approved, it must obtain the prior consent of the Bermuda Monetary Authority.

Permission of the Bermuda Monetary Authority will normally be granted for the issue andtransfer of shares and warrants to and between persons regarded as resident outside Bermuda forexchange control purposes without specific consent for so long as the shares and warrants arelisted on an appointed stock exchange (as defined in the Companies Act). Issues to and transfersinvolving persons regarded as “resident” for exchange control purposes in Bermuda will besubject to specific exchange control authorisation.

(j) Taxation

Under present Bermuda law, no Bermuda withholding tax on dividends or otherdistributions, nor any Bermuda tax computed on profits or income or on any capital asset, gainor appreciation will be payable by an exempted company or its operations, nor is there anyBermuda tax in the nature of estate duty or inheritance tax applicable to shares, debentures orother obligations of the company held by non-residents of Bermuda. Furthermore, a companymay apply to the Minister of Finance of Bermuda for an assurance, under the ExemptedUndertakings Tax Protection Act 1966 of Bermuda, that no such taxes shall be so applicable until28th March 2016, although this assurance will not prevent the imposition of any Bermuda taxpayable in relation to any land in Bermuda leased or let to the company or to persons ordinarilyresident in Bermuda.

(k) Stamp duty

An exempted company is exempt from all stamp duties except on transactions involving“Bermuda property”. This term relates, essentially, to real and personal property physicallysituated in Bermuda, including shares in local companies (as opposed to exempted companies).Transfers of shares and warrants in all exempted companies are exempt from Bermuda stampduty.

(l) Loans to directors

Bermuda law prohibits the making of loans by a company to any of its directors or to theirfamilies or companies in which they hold more than a 20 per cent. interest, without the consentof any member or members holding in aggregate not less than nine-tenths of the total votingrights of all members having the right to vote at any meeting of the members of the company.These prohibitions do not apply to anything done to provide a director with funds to meet theexpenditure incurred or to be incurred by him for the purposes of the company, provided that thecompany gives its prior approval at a general meeting or, if not, the loan is made on conditionthat it will be repaid within six months of the next following annual general meeting if the loanis not approved at or before such meeting. If the approval of the company is not given for a loan,the directors who authorised it will be jointly and severally liable for any loss arising therefrom.


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(m) Inspection of corporate records

Members of the general public have the right to inspect the public documents of a companyavailable at the office of the Registrar of Companies in Bermuda which will include thecompany’s certificate of incorporation, its memorandum of association (including its objects andpowers) and any alteration to the company’s memorandum of association. The members of thecompany have the additional right to inspect the bye-laws of a company, minutes of generalmeetings and the company’s audited financial statements, which must be presented to the annualgeneral meeting. Minutes of general meetings of a company are also open for inspection bydirectors of the company without charge for not less than two hours during business hours eachday. The register of members of a company is open for inspection by members without chargeand to members of the general public for a fee. The company is required to maintain its shareregister in Bermuda but may, subject to the provisions of the Companies Act, establish a branchregister outside Bermuda. Any branch register of members established by the company is subjectto the same rights of inspection as the principal register of members of the company in Bermuda.Any person may require a copy of the register of members or any part thereof which must beprovided within fourteen days of a request. Bermuda law does not, however, provide a generalright for members to inspect or obtain copies of any other corporate records.

A company is required to maintain a register of directors and officers at its registered officeand such register must be made available for inspection for not less than two hours in each dayby members of the public without charge.

(n) Winding up

A company may be wound up by the Bermuda court on application presented by thecompany itself, its creditors or its contributors. The Bermuda court also has authority to orderwinding up in a number of specified circumstances including where it is, in the opinion of theBermuda court, just and equitable that such company be wound up.

A company may be wound up voluntarily when the members so resolve in general meeting,or, in the case of a limited duration company, when the period fixed for the duration of thecompany by its memorandum expires, or the event occurs on the occurrence of which thememorandum provides that the company is to be dissolved. In the case of a voluntary windingup, such company is obliged to cease to carry on its business from the time of passing theresolution for voluntary winding up or upon the expiry of the period or the occurrence of theevent referred to above. Upon the appointment of a liquidator, the responsibility for thecompany’s affairs rests entirely in his hands and no future executive action may be carried outwithout his approval.

Where, on a voluntary winding up, a majority of directors make a statutory declaration ofsolvency, the winding up will be a members’ voluntary winding up. In any case where suchdeclaration has not been made, the winding up will be a creditors’ voluntary winding up.

In the case of a members’ voluntary winding up of a company, the company in generalmeeting must appoint one or more liquidators within the period prescribed by the Companies Actfor the purpose of winding up the affairs of the company and distributing its assets. If theliquidator at any time forms the opinion that such company will not be able to pay its debts infull, he is obliged to summon a meeting of creditors.


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As soon as the affairs of the company are fully wound up, the liquidator must make up an

account of the winding up, showing how the winding up has been conducted and the property of

the company has been disposed of, and thereupon call a general meeting of the company for the

purposes of laying before it the account and giving an explanation thereof. This final general

meeting requires at least one month’s notice published in an appointed newspaper in Bermuda.

In the case of a creditors’ voluntary winding up of a company, the company must call a

meeting of creditors of the company to be summoned on the day following the day on which the

meeting of the members at which the resolution for winding up is to be proposed is held. Notice

of such meeting of creditors must be sent at the same time as notice is sent to members. In

addition, such company must cause a notice to appear in an appointed newspaper on at least two

occasions.

The creditors and the members at their respective meetings may nominate a person to be

liquidator for the purposes of winding up the affairs of the company provided that if the creditors

nominate a different person, the person nominated by the creditors shall be the liquidator. The

creditors at the creditors’ meeting may also appoint a committee of inspection consisting of not

more than five persons.

If a creditors’ winding up continues for more than one year, the liquidator is required to

summon a general meeting of the company and a meeting of the creditors at the end of each year

to lay before such meetings an account of his acts and dealings and of the conduct of the winding

up during the preceding year. As soon as the affairs of the company are fully wound up, the

liquidator must make an account of the winding up, showing how the winding up has been

conducted and the property of the company has been disposed of, and thereupon shall call a

general meeting of the company and a meeting of the creditors for the purposes of laying the

account before such meetings and giving an explanation thereof.

5. GENERAL

Conyers Dill & Pearman, the Company’s legal advisers on Bermuda law, have sent to the

Company a letter of advice summarising certain aspects of Bermuda company law. This letter, together

with a copy of the Companies Act, is available for inspection as referred to in the paragraph headed

“Documents available for inspection” in Appendix VI. Any person wishing to have a detailed summary

of Bermuda company law or advice on the differences between it and the laws of any jurisdiction with

which he is more familiar is recommended to seek independent legal advice.


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A. FURTHER INFORMATION ABOUT THE COMPANY

1. INCORPORATION

The Company was incorporated in Bermuda under the Companies Act as an exempted companyon 6th October, 1999 under the name “Yuxing Computer & Technology Holdings Company Limited”.The name of the Company was subsequently changed to “Yuxing InfoTech Holdings Limited” witheffect from 1st November, 1999. The Company has established a place of business in Hong Kong atUnit 1808, 18th Floor, Tower III, Enterprise Square, 9 Sheung Yuet Road, Kowloon Bay, Kowloon,Hong Kong. The Company was registered with the Registrar of Companies in Hong Kong as anoverseas company under Part XI of the Companies Ordinance. Messrs. Livasiri & Co., was appointedas an agent of the Company for the acceptance of service of process in Hong Kong. As the Companyis incorporated in Bermuda, it is subject to Bermuda law. Its constitution comprises a memorandumof association and bye-laws. A summary of certain relevant parts of its constitution and certainrelevant aspects of Bermuda company law is set out in Appendix IV to this prospectus.

2. CHANGES IN SHARE CAPITAL

As at the date of incorporation of the Company, its authorised share capital was HK$100,000divided into 1,000,000 Shares, all of which were issued nil paid to Super Dragon (as to 550,000Shares) and Dragon Treasure (as to 450,000 Shares) on 7th October, 1999. These Shares weresubsequently credited as fully paid as described in the paragraph headed “Group reorganisation”below.

Pursuant to a resolution in writing of the shareholders of the Company passed on 20th November,1999, among other matters:

(i) the authorised share capital of the Company was increased from HK$100,000 toHK$30,000,000 by the creation of an additional 299,000,000 Shares to rank equally withthe then existing shares in all respects;

(ii) the Directors were authorised to (a) allot and issue, credited as fully paid, a total of299,000,000 Shares, as to 164,450,000 Shares to Super Dragon and as to 134,550,000Shares to Dragon Treasure and (b) credit as fully paid at par the 1,000,000 Shares issuednil paid on 7th October, 1999 as to 550,000 Shares to Super Dragon and as to 450,000Shares to Dragon Treasure in consideration of the transfer from Super Dragon and DragonTreasure of the entire issued share capital of Yuxing (BVI) to the Company as referred toin the paragraph headed “Group Reorganisation” below.

Immediately following the Placing becoming unconditional and the issue of Shares as mentionedin this prospectus being made (but without taking into account any Shares which may be issuedpursuant to the exercise of the Over-allotment Option and any options granted under the Share OptionScheme), the authorised share capital of the Company will be HK$200,000,000 divided into2,000,000,000 Shares. The issued share capital will be HK$40,000,000 divided into 400,000,000Shares, all fully paid or credited as fully paid, and 1,600,000,000 Shares will remain unissued. Otherthan pursuant to the Over-allotment Option or pursuant to the exercise of any options which may begranted under the Share Option Scheme, there is no present intention to issue any of the authorisedbut unissued share capital of the Company and, without the prior approval of the members in generalmeeting, no issue of Shares will be made which would effectively alter the control of the Company.

APPENDIX V STATUTORY AND GENERAL INFORMATION

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A1a.5

A1a.26

Save as disclosed herein and in the paragraphs headed “Written resolutions of the shareholdersof the Company” and “Group reorganisation” below, there has been no alteration in the share capitalof the Company since its incorporation.

3. WRITTEN RESOLUTIONS OF THE SHAREHOLDERS OF THE COMPANY

(a) Pursuant to resolutions in writing passed by the shareholders of the Company on 20thNovember, 1999, the Company adopted its current bye-laws.

(b) Pursuant to further resolutions in writing passed by the shareholders of the Company on20th November, 1999, the authorised share capital of the Company was increased fromHK$30,000,000 to HK$200,000,000 by creation of a further 1,700,000,000 Shares;

(c) Pursuant to further resolutions in writing passed by the shareholders of the Company on18th January, 2000:

(i) conditional on the same conditions as stated under “Conditions of the Placing” in thisprospectus:

(aa) the Placing and the Over-allotment Option were approved and the Directors wereauthorised to allot and issue the Placing Shares and any Shares which may beissued pursuant to the Over-allotment Options; and

(bb) the rules of the Share Option Scheme were approved and adopted and theDirectors were authorised to grant options to subscribe for Shares thereunder andto allot, issue and deal with Shares pursuant to the exercise of options grantedunder the Share Option Scheme;

(ii) a general unconditional mandate was given to the Directors to allot, issue and dealwith Shares, otherwise than by way of rights, scrip dividend schemes or similararrangements in accordance with the bye-laws of the Company, or pursuant to theexercise of any options which may be granted under the Share Option Scheme orpursuant to the Placing, or pursuant to the Over-allotment Option, with an aggregatenominal amount not exceeding the sum of (aa) 20% of the aggregate nominal amountof the share capital of the Company in issue and to be issued as mentioned in thisprospectus (including without limitation any issue of Shares pursuant to the exerciseof the Over-allotment Option) and (bb) the aggregate nominal amount of the sharecapital of the Company which may be repurchased by the Company pursuant to theauthority granted to the Directors as referred to in paragraph (iii) below, until theconclusion of the next annual general meeting of the Company or the date by whichthe next annual general meeting of the Company is required by the bye-laws of theCompany or applicable laws of Bermuda to be held or the passing of an ordinaryresolution by shareholders of the Company revoking or varying the authority given tothe Directors, whichever occurs first; and

(iii) a general unconditional mandate (the “Repurchase Mandate”) was given to theDirectors to exercise all powers of the Company to repurchase Shares with anaggregate nominal amount not exceeding 10% of the aggregate nominal amount of the


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share capital of the Company in issue and to be issued as mentioned in this prospectus

(including without limitation any issue of Shares pursuant to the exercise of the

Over-allotment Option), until the conclusion of the next annual general meeting of the

Company or the date by which the next annual general meeting of the Company is

required by the bye-laws of the Company or applicable laws of Bermuda to be held

or the passing of an ordinary resolution by shareholders of the Company revoking or

varying the authority given to the Directors, whichever occurs first.

4. GROUP REORGANISATION

On 30th September, 1999, Messrs. Zhu Wei Sha, Chen Fu Rong, Shi Guang Rong and Sun Li Jun

transferred 99% of the registered capital in Golden Yuxing to Yuxing (BVI) at a consideration of (i)

allotment and issue of 550 ordinary shares and 450 ordinary shares by Yuxing (BVI) of US$1.00 each

at par to Super Dragon and Dragon Treasure respectively (which was allotted and issued on 9th

October, 1999); and (ii) cash in the sum of US$800,000 (which was waived by them on 20th

November, 1999).

On 19th October, 1999, Golden Yuxing disposes its investments in Yongxing (PRC) as described

in note (i) to section 3 in the accountants report set out in Appendix I to this prospectus.

On 8th November, 1999, Golden Yuxing was converted from a limited liability company to a

sino-foreign co-operative joint venture company. The certificate of approval of Golden Yuxing was

issued on 28th October, 1999 by the Beijing Municipal Government while its business licence was

issued by Pinggu County Administration for Industry and Commerce on 8th November 1999.

On 20th November, 1999, pursuant to the agreement referred to in sub-paragraph (a) (and

supplemented by material contract (b)) of the paragraph headed “Summary of material contracts”

below, which was completed on that date, the Company: (i) allotted and issued, credited as fully paid,

164,450,000 and 134,550,000 new Shares to Super Dragon and Dragon Treasure respectively; and (ii)

credited as fully paid at par the 1,000,000 Shares allotted and issued nil paid on 7th October, 1999

upon organisation of the Company. As a result, the Company became the holding company of the

Group.

5. CHANGES IN SHARE CAPITAL OF SUBSIDIARIES

The subsidiaries of the Company are listed in the accountants’ report set out in Appendix I of

this prospectus. Apart from the alterations disclosed in the paragraph headed “Group reorganisation”

above, Yuxing (BVI) was incorporated on 15th September, 1999 and allotted and issued on 22nd

September, 1999, 550 shares and 450 shares of US$1.00 each at par to Super Dragon and Dragon

Treasure respectively. Such shares were subsequently transferred to the Company as mentioned in

paragraph headed “Group reorganisation” above.

Save as disclosed in this prospectus, there has been no alteration in the share capital of any of

the subsidiaries of the Company within the two years immediately preceding the date of this

prospectus.


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A1a.26

A1a.26

6. REPURCHASE BY THE COMPANY OF ITS OWN SECURITIES

This section includes information required by the Stock Exchange to be included in thisprospectus concerning the repurchase by the Company of its own securities.

(a) Provisions of the Listing Rules

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

(i) Shareholders’ approval

All proposed repurchases of securities (which must be fully paid up in the case ofshares) by a company with a primary listing on the Stock Exchange must be approved inadvance by an ordinary resolution of the shareholders, either by way of general mandate orby specific approval of a particular transaction.

Note: Pursuant to a resolution in writing passed by all shareholders of the Company on 18th January, 2000,a general unconditional mandate (the “Repurchase Mandate”) was given to the Directors authorisingany repurchase by the Company of Shares on the Stock Exchange or on any other stock exchangeon which the securities of the Company may be listed and which is recognised by the Securities andFutures Commission and the Stock Exchange for this purpose, of up to 10% of the aggregatenominal value of the share capital of the Company in issue and to be issued as mentioned herein(including any Shares issued pursuant to the exercise of the Over-allotment Option), such mandateto expire at the conclusion of the next annual general meeting of the Company, the date by whichthe next annual general meeting of the Company is required by the bye-laws of the Company orapplicable laws of Bermuda to be held or when revoked or varied by ordinary resolution ofshareholders in general meeting of the Company, whichever shall first occur.

(ii) Source of funds

Repurchases must be funded out of funds legally available for the purpose inaccordance with the Company’s memorandum of association and bye-laws and theCompanies Act. A listed company may not repurchase its own securities on the StockExchange for a consideration other than cash or for settlement otherwise than in accordancewith the trading rules of the Stock Exchange. Any repurchases by the Company may bemade out of capital paid up on the shares to be repurchased, funds of the Company whichwould otherwise be available for dividend or distribution or out of an issue of new sharesmade for the purpose of the repurchase and, in the case of any premium payable on therepurchase, out of the funds of the Company which would otherwise be available fordividend or distribution or from sums standing to the credit of the share premium accountof the Company.

(iii) Trading restrictions

The total number of shares which a company may repurchase on the Stock Exchangeis shares representing up to a maximum of 10% of the aggregate number of shares in issue.A company may not issue or announce a proposed issue of new securities for a period of30 days immediately following a repurchase (other than an issue of securities pursuant to


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an exercise of warrants, share options or similar instruments requiring the company to issue

securities which were outstanding prior to such repurchase) without the prior approval of

the Stock Exchange. In addition, a company cannot make the opening bid nor any bid in the

last 30 minutes before the close of normal trading hours. Further, the purchase price should

not be higher than the latest independent bid price or the last independent sale price quoted

on the system. The Listing Rules also prohibit a company from repurchasing its securities

on the Stock Exchange if the repurchase would result in the number of listed securities

which are in the hands of the public falling below the relevant prescribed minimum

percentage as required by the Stock Exchange. A company is required to procure that the

broker appointed by it to effect a repurchase of securities discloses to the Stock Exchange

such information with respect to the repurchase as the Stock Exchange may require.

(iv) Status of repurchased securities

All repurchased securities (whether effected on the Stock Exchange or otherwise) will

be automatically delisted and the certificates for those securities must be cancelled and

destroyed. Under Bermuda law, a company’s repurchased shares will be treated as

cancelled.

(v) Suspension of repurchase

A company may not make any repurchase of securities after a price sensitive

development has occurred or has been the subject of a decision until such time as the price

sensitive information has been made publicly available. In particular, during the period of

one month immediately preceding either the preliminary announcement of a company’s

annual results or the publication of its interim report, a company (other than an investment

company listed pursuant to the provisions of Chapter 21 of the Listing Rules) may not

repurchase its securities on the Stock Exchange unless the circumstances are exceptional.

In addition, the Stock Exchange may prohibit a repurchase of securities on the Stock

Exchange if a company has breached the Listing Rules.

(vi) Reporting requirements

Repurchases of securities on the Stock Exchange or otherwise must be reported to the

Stock Exchange not later than 9:30 a.m. (Hong Kong time) on the following business day

in accordance with the Listing Rules. In addition, a company’s annual report is required to

disclose details regarding repurchases of securities made during the year, including amonthly analysis of the number of securities repurchased and the aggregate prices paid.

(vii) Connected parties

A company is prohibited from knowingly repurchasing securities on the StockExchange from a “connected person”, that is, a director, chief executive or substantialshareholder of the Company or any of its subsidiaries or any of their associates (as definedin the Listing Rules) and a connected person shall not knowingly sell his securities to thecompany on the Stock Exchange.


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(b) Reasons for repurchases

The Directors believe that it is in the best interest of the Company and its shareholders forthe Directors to have general authority from the shareholders to enable the Company torepurchase Shares in the market. Such repurchases may, depending on market conditions andfunding arrangements at the time, lead to an enhancement of the net asset value per Share and/orearnings per Share and will only be made where the Directors believe that such repurchases willbenefit the Company and its shareholders.

(c) Funding of repurchases

In repurchasing securities, the Company may only apply funds legally available for suchpurpose in accordance with its memorandum of association and bye-laws, the Listing Rules andthe applicable laws of Bermuda.

On the basis of the current financial position of the Group as disclosed in this prospectusand taking into account the current working capital position of the Group, the Directors considerthat, if the Repurchase Mandate were to be exercised in full, it might have a material adverseeffect on the working capital and/or the gearing position of the Group as compared with theposition disclosed in this prospectus. However, the Directors do not propose to exercise theRepurchase Mandate to such an extent as would, in the circumstances, have a material adverseeffect on the working capital requirements of the Group or the gearing levels which in theopinion of the Directors are from time to time appropriate for the Group.

The exercise in full of the Repurchase Mandate, on the basis of 400,000,000 Shares in issueimmediately after the listing of the Shares (and not including any Shares which may be issuedby the Company pursuant to the exercise of the Over-allotment Option), could accordingly resultin up to 40,000,000 Shares being repurchased by the Company during the period in which theRepurchase Mandate remains in force.

(d) General

None of the Directors nor, to the best of their knowledge having made all reasonableenquiries, any of their associates (as defined in the Listing Rules) currently intends to sell anyShares to the Company or its subsidiaries.

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

If, as a result of a securities repurchase, a shareholder’s proportionate interest in the votingrights of the Company is increased, such increase will be treated as an acquisition for the purposeof the Hong Kong Code on Takeovers and Mergers (the “Takeovers Code”). Accordingly, ashareholder or a group of shareholders acting in concert could obtain or consolidate control ofthe Company and become obliged to make a mandatory offer in accordance with rule 26 of theTakeovers Code. Save as aforesaid, the Directors are not aware of any consequences which wouldarise under the Takeovers Code as a consequence of any repurchases pursuant to the RepurchaseMandate.


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13.08(1)

13.08(5)

13.08(6)

13.08(7)

Any repurchase of Shares which results in the number of Shares held by the public beingreduced below the prescribed minimum for the Company could only be implemented with theapproval of the Stock Exchange to waive the Listing Rules requirements regarding the publicshareholding referred to above. It is believed that a waiver of this provision would not normallybe given other than in exceptional circumstances.

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

B. FURTHER INFORMATION ABOUT THE BUSINESS

1. Summary of material contracts

The following contracts (not being contracts in the ordinary course of business) have beenentered into by members of the Group within the two years immediately preceding the date of thisprospectus and are or may be material:

(a) the share purchase agreement dated 20th November 1999 entered into between (i) theCompany as purchaser; (ii) Messrs. Zhu Wei Sha, Chen Fu Rong, Sun Li Jun and Shi GuangRong as warrantors; and (iii) Super Dragon and Dragon Treasure as vendors regardingacquisition of the entire issued share capital of Yuxing (BVI) and referred to in theparagraphs headed “Changes in share capital of subsidiaries” and “Group Reorganisation”above;

(b) the supplemental agreement dated 3rd January, 2000 entered into between (i) the Companyas purchaser; (ii) Messrs. Zhu Wei Sha, Chen Fu Rong, Sun Li Jun and Shi Guang Rong aswarrantors; and (iii) Super Dragon and Dragon Treasure supplementing the share purchaseagreement referred to in paragraph (a) above;

(c) the deed of indemnity dated 20th November, 1999 entered into between (i) the Company;(ii) Messrs. Zhu Wei Sha, Chen Fu Rong, Sun Li Jun and Shi Guang Rong; and (iii) SuperDragon and Dragon Treasure concerning the indemnities in respect of estate duty andtaxation referred to in the paragraph headed “Estate duty and other tax indemnities” below;

(d) the supplemental deed dated 3rd January, 2000 entered into between (i) the Company; (ii)Messrs. Zhu Wei Sha, Chen Fu Rong, Sun Li Jun and Shi Guang Rong; and (iii) SuperDragon and Dragon Treasure supplementing the deed of indemnity referred to in paragraph(c) above;

(e) the registered capital transfer agreement dated 30th September, 1999 entered into between(i) Messrs. Zhu Wei Sha, Chen Fu Rong, Sun Li Jun and Shi Guang Rong; and (ii) Yuxing(BVI) regarding acquisition of 99% of the registered capital in Golden Yuxing referred toin the paragraph headed “Group Reorganisation” above;

(f) the sino-foreign co-operative joint venture agreement dated 8th October, 1999 entered intobetween Yuxing (BVI) and Yongxing (PRC) concerning conversion and establishment ofGolden Yuxing as a sino-foreign co-operative joint venture enterprise;


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13.08(9)

A1a.47(2)

A1a.51

(g) the trademark licence agreement dated 1st September, 1999 entered into between YMERC

and Golden Yuxing pursuant to which YMERC licensed the trademark referred to in

sub-paragraph 2(a) below for the use of Golden Yuxing at a consideration of RMB100,000;

(h) the patents licence agreement dated 8th August, 1999 entered into between YMERC and

Golden Yuxing pursuant to which YMERC licensed certain patents referred to in

sub-paragraph 2(b) below for use by Golden Yuxing at a consideration of RMB100,000;

(i) the computer software assignment agreement dated 1st September, 1999 entered into

between YMERC and Golden Yuxing pursuant to which YMERC assigned the copyright of

certain software referred to in sub-paragraph 2(e) below (save and except the software

copyright of Yuxing WPS Word Processing system V.8.0) to Golden Yuxing at a

consideration of RMB1;

(j) the patents transfer contract dated 17th September, 1999 entered into between HDYEC and

Golden Yuxing pursuant to which HDYEC transferred the “Mouse for popular computer”

and “Voice generate device on LPT port” patents referred to in sub-paragraph 2(c) below

to Golden Yuxing at a consideration of RMB1;

(k) the patents transfer contract dated 2nd September, 1999 entered into between YMERC and

Golden Yuxing pursuant to which YMERC transferred the “Game computer’s appearance

design”, “Floppy driver interface for game computer” and ”Popular computer” patents

referred to in sub-paragraph 2(c) below to Golden Yuxing at a consideration of RMB1; and

(l) the Underwriting Agreement.

2. Intellectual property rights

Pursuant to the trademark licence agreement (being a material contract referred to insub-paragraph (g) above) and the patents licence agreement (being a material contract referred to insub-paragraph (h) above), Golden Yuxing has been granted an exclusive right to use the intellectualproperty referred to in sub-paragraphs (a) and (b) below respectively in the PRC for a term equal toits validity period of the intellectual property under the PRC laws and regulations and for aconsideration of RMB100,000 and RMB100,000 respectively:

(a) Trademark licensed to Golden Yuxing

The following trademark was registered under the name of YMERC. Under PRC Trademark Law,trademarks are protected for an initial term of ten years from the date of approval of their registrationrenewable upon an application for successive ten years term.

Trademark Expiry dateTerritory ofregistration Class

Registrationnumber

6th December, 2007 PRC 42 1133795


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A1a.28(4)

(b) Patent licensed to Golden Yuxing

Golden Yuxing is licensed to use these patents by YMERC. Under PRC Patents Law, utilitymodels and design patents are protected for ten years from the date of application for registration.

Patent no.Name ofutility model

Type ofpatent Inventor Date granted Patent holder

ZL 93 2 06504.X Program card withextension socket

Utilitymodel

Zhu Wei Sha 11th March, 1994 YMERC

ZL 96 3 15175.4 Electronic organ Design Zhu Wei Sha 11th October, 1997 YMERC

(c) Patents agreed to be transferred to Golden Yuxing



ZL 95 2 00896.3 Popular computer Utilitymodel

Zhu Wei ShaHan Yu Wen

30th March, 1996 YMERC

ZL 95 3 00008.7 Game computer’sappearance design

Design Chen Fu Rong 29th October, 1995 YMERC

ZL 96 2 19785.8 Voice generatedevice on LPTport

Utilitymodel

Wang Li Bin 20th June, 1998 HDYEC

ZL 97 2 00299.5 Mouse for popularcomputer

Utilitymodel

Zhang Zhong Jiang 19th June, 1999 HDYEC

ZL 95 2 00220.5 Floppy driverinterface forgame computer

Utilitymodel

Yu Chuen 19th November,1995

YMERC

(d) Patent held by Golden Yuxing



ZL 97 2 31590.X Modem forpopular computer

Utilitymodel

Zhu Jiang 18th March, 1999 Golden Yuxing

(e) Software copyright held by/to be transferred to Golden Yuxing

All the following software copyrights were registered under or in the course of being transferredto Golden Yuxing. The protection period of software copyrights under the PRC Computer SoftwareProtection Regulations is 25 years ending on 31st December of the 25th year in which the softwarewas first published. The protection period is renewable upon an application being made by thecopyright holder prior to the expiry of the first protection period for another term of 25 years, but themaximum protection period may not exceed 50 years.


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Registrationnumber Name of software

Commencing dateof copyrightprotection period

940183 Word Doctor — English-Chinese Dictionary& Study Softwares v1.1(For Short: Word Doctor)

20th September, 1993

940334 WANGMA gold bridge(For Short: gold bridge) v5.0

20th July, 1994

950199 YUXING WPS Word Processing System v8.0(For Short: YUXING WPS)

15th December, 1994

960041 DOS beginner software v2.0 1st August, 1995

960196 Study data-base software v1.0(For Short: study data-base)

25th December, 1995

970111 Standard typing tutor software v1.0(For Short: typing tutor)

5th March, 1996

970112 Family education software (the third of juniormiddle school geometry) v1.0(For Short: the third of junior middle schoolgeometry)

1st February, 1995

970529 “The English words exercise - the junior middleschool sound edition” education software v1.0(For Short: the junior middle school wordsexercise)

10th April, 1996

970530 “Word Match” education software v1.0(For Short: Word Match)

31st January, 1997

970531 Assembly language v1.0 for YX computer(For Short: YX-ASM language)

20th April, 1996

970532 Business card management software v1.0 21st December, 1995

970533 “Junior middle school English hearing test”education software v1.0(For Short: hearing test)

31st December, 1996

970534 “Learn WINDOWS 95” education software v1.0(For Short: Learn WINDOWS 95)

1st December, 1996

970535 “Learn English by picture” educationsoftware v1.0

21st March, 1996

970536 “Follow me to learn Phonetic Symbols”education software v1.0(For Short: Learn phonetic symbols)

23rd August, 1996


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3. Particulars of joint venture

Particulars of Golden Yuxing:

Nature : Sino-foreign co-operative joint venture

Date of establishment : 27th December, 1996

Date of becoming a sino-foreign :co-operative joint venture

8th November, 1999

Total investment : US$6,000,000

Registered capital : US$3,042,000(Note)

Parties to the joint venture : Party A: Yuxing (BVI)Party B: Yongxing (PRC)

Profit and loss sharing ratio : Party A: All distributable profit of the joint ventureless the amount of fixed management feeof RMB50,000 (if any) payable to Party Bin the relevant financial year.

Party B: A fixed management fee of RMB50,000per year if the distributable profit of thejoint venture exceeds RMB5,000,000 inthe relevant financial year.

Pre-emptive rights : Each party to the joint venture has pre-emptive rightover the sale of interest in the joint venture by theother joint venture partner.

Distribution of assets on expiration :or termination

Remaining assets of the joint venture after liquidationwill belong to Yuxing (BVI).

Board composition : Yuxing (BVI) is entitled to nominate five directors tothe board of this joint venture, while Yongxing (PRC)is not entitled to nominate any director to the board ofthis joint venture.

Term : 50 years commencing from 8th November, 1999.

Business : Electronic products manufacturing; communicationand transmission equipment manufacturing; computerhardware and software manufacturing; sale anddistribution of self-manufactured products; provisionof development, assignment and service oftechnology in electronics.

Address : Jin Hai Ziao Economic Development Zone, Ping GuCounty, Beijing.


— 139 —

Note: Immediately before the conversion to a sino-foreign co-operative joint venture enterprise, the registered capital

of Golden Yuxing is RMB 25,000,000 and is fully paid up. Upon conversion and acquisition of Golden Yuxing,

the fixed asset portion of its registered capital was fully contributed; while a US$800,000 cash portion of its

registered capital has to be contributed within three months from 8th November, 1999. The US$800,000 cash

portion of the registered capital of Golden Yuxing will substitute an equivalent RMB portion of the registered

capital. Under the registered capital transfer agreement dated 30th September, 1999 (being material contract (e)

referred to under the section headed “Summary of material contracts” in Appendix V to this prospectus), Yuxing

(BVI) has, among other matters, an obligation to pay Messrs. Zhu Wei Sha, Chen Fu Rong, Shi Guang Rong and

Sun Li Jun (the “Founders”) a sum of US$800,000 in cash, which was waived by the Founders on 20th November,

1999.

C. FURTHER INFORMATION ABOUT DIRECTORS, MANAGEMENT AND EXPERTS

1. Interests of Directors in the Company and its subsidiaries

Immediately following the Placing, the beneficial interest of the Directors in the share capital of

the Company and its associated corporations (within the meaning of the Securities (Disclosure of

Interests) Ordinance (Chapter 396 of the Laws of Hong Kong) (“SDI Ordinance”) which will have to

be notified to the Company and the Stock Exchange pursuant to section 28 of the SDI Ordinance

(including interests in which they are taken or deemed to have taken under section 31 of, or Part I of

the Schedule to, the SDI Ordinance) once the Shares are listed, or which will be required pursuant to

section 29 of the SDI Ordinance to be entered in the register referred to therein, once the Shares are

listed, or pursuant to rules 5.40 to 5.59 of the Listing Rules, to be notified to the Company and the

Stock Exchange once the Shares are listed will be as follows:

Name Type of interest Number of SharesPercentage ofissued capital

Mr. Zhu Wei Sha Corporate(Note 1) 165,000,000 41.25%Mr. Chen Fu Rong Corporate(Note 1) 165,000,000 41.25%Mr. Shi Guang Rong Personal(Note 2) 6,000,000 1.50%Mr. Wang An Zhong Personal(Note 2) 1,084,189 0.27%

Note 1: Mr. Zhu Wei Sha and Mr. Chen Fu Rong held these Shares through Super Dragon, a company of which Mr. Zhu

Wei Sha and Mr. Chen Fu Rong held as to 63.6% and 36.4% of the entire issued share capital in this company

respectively.

Note 2: Dragon Treasure acted as the trustee and held these Shares on behalf of Mr. Shi Guang Rong and Mr. Wang An

Zhong.

Save as disclosed in this prospectus, none of the Directors has an interest in a business which

competes or is likely to compete with the Group’s business. Mr. Chen Man Fai, Steven, an independent

non-executive Director, is currently a director of ICEA, the sponsor of the Company to the listing.


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A1a.54

A1a.45(1)(2)

2. Substantial shareholders

So far as the Directors are aware, immediately following the Placing and assuming that theOver-allotment Option is not exercised and taking no account of Shares which may be taken up underthe Placing, the following shareholder will be interested in more than 10% of the Shares then in issue:

Name Number of SharesPercentage ofissued Shares

Super Dragon 165,000,000 41.25%Dragon Treasure 135,000,000 33.75%

Note 1 Super Dragon is a nominee company, of which Mr. Zhu Wei Sha and Mr. Chen Fu Rong are the shareholderswho own 63.6% and 36.4% entire issued share capital, respectively, in this company.

Note 2 Dragon Treasure is a nominee company, of which Mr. Sun Li Jun and Mr. Shi Guang Rong are the shareholderswho own 98% and 2% entire issued share capital, respectively, in this company. This company acts as the trusteeand hold the Shares on behalf of 208 past and present employees of the Group.

3. Particulars of service contracts

Each of the executive Directors, has entered into a service contract with the Company for a termof three years from 7th October, 1999 (which is automatically renewed upon expiry for successiveterms of one year) subject to termination on or after 7th October, 2002 by either party giving not lessthan six months’ notice in writing to the other party terminating at the end of the initial term of therelevant service contract or at any time thereafter. Each of these Directors is entitled to a basic salary(subject to annual increment after 31st December, 1999 of not more than 10% of the annual salary ofthe relevant Director immediately prior to such increase).

Name of DirectorAnnual

basic salary

Mr. Zhu Wei Sha HK$262,418Mr. Chen Fu Rong HK$131,208Mr. Shi Guang Rong HK$131,208Mr. Wang An Zhong HK$131,208

In addition, the executive Directors are also entitled, on completion of every 12 months ofservice, to a management bonus of a sum at the discretion of the Directors provided that the aggregateamount of management bonuses payable to all Directors shall not be more than 5% of the auditedconsolidated or combined net profit of the Company (after taxation and minority interest but excludingextraordinary items and the payment of such bonus) in respect of each financial year of the Companyafter 31st December, 1999. The executive Directors may not vote on any resolution of the Directorsregarding the amount of the management bonus payable to them. The current basic annual salaries ofthe executive Directors under their service agreements aggregate to approximately HK$656,000 perannum.

Each of the non-executive Directors were appointed for a term of two years commencing from25th October, 1999.


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A1a.45(3)

A1a.46(1)

Save as aforesaid, none of the Directors has or is proposed to have a service contract with theCompany or any of its subsidiaries (other than contracts expiring or determinable by the employerwithin one year without the payment of compensation (other than statutory compensation)).

4. Directors’ remuneration and interests

During the year ended 31st December, 1998, the aggregate emoluments paid by the Group to theDirectors was approximately HK$140,000.

The aggregate emoluments payable by the Group to the Directors for the year ended 31stDecember, 1999 are estimated to be approximately HK$651,000 on the basis of the profit estimate asstated in the section headed “Profit estimate, dividend policy, working capital and distributablereserves” in this prospectus.

In addition, under the arrangements currently in force, the aggregate emoluments payable by theGroup to the Directors for the year ending 31st December, 2000 are estimated to be approximatelyHK$656,000 before discretionary bonuses and share options, if any, which are subject to the approvalof the Board of Directors.

Mr. Chen Man Fai, Steven, a non-executive Director, is a director of ICEA which, being theglobal coordinator, sponsor and lead manager to the Company in the Placing, will receive normalunderwriting commission and a normal documentation fee in connection with the Placing.

5. Bermuda resident representative and company secretary

Each of Mr. John Charles Ross Collis and Mr. Anthony Devon Whaley, the Bermuda residentrepresentative and deputy resident representative of the Company respectively, is a partner of ConyersDill & Pearman, the Company’s legal advisers on Bermuda law, which firm will receive normalprofessional fees in connection with the incorporation of the Company and the Placing. Mr. Ira StuartOuterbridge III, currently a joint secretary of the Company, who will resign as a secretary of theCompany after the listing of the Shares on GEM, is an employee of Codan Services Limited, acompany affiliated with Conyers Dill and Pearman.

6. Personal guarantees

The Directors have not provided personal guarantees in favour of lenders in connection withbanking facilities granted to the Group.

7. Agency fees or commissions received

Save as disclosed in this prospectus, no commissions, discounts, brokerages or other specialterms have been granted in connection with the issue or sale of any capital of the Company or any ofits subsidiaries within the two years immediately preceding the date of this prospectus.

8. Related party transactions

During the two years immediately preceding the date of this prospectus, the Group had engagedin related party transactions as described in note (i) to section 3 in the accountants’ report set out inAppendix I to this prospectus.


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A1a.46(2)

A1a.46(3)

A1a.34(2)

A1a.13

A1a.56

9. Disclaimers

Save as disclosed in this prospectus:

(a) and taking no account of any Shares which may be taken up or acquired under the Placing,the Over-allotment Option, or upon the exercise of any option which may be granted underthe Share Option Scheme, the Directors are not aware of any person who immediatelyfollowing the Placing will hold either directly or indirectly, or be beneficially interested in,Shares representing 10% or more of the share capital of the Company in issue and to beissued as mentioned herein;

(b) none of the Directors has for the purpose of section 28 of the SDI Ordinance or the ListingRules, nor is any of them taken to or deemed to have under section 31 of, or Part 1 of theSchedule to, the SDI Ordinance, any interests in the securities of the Company or anyassociated corporations (within the meaning of the SDI Ordinance) or any interests whichwill have to be entered in the register to be kept by the Company pursuant to section 29 ofthe SDI Ordinance or which will be required to be notified to the Company and the StockExchange pursuant to rules 5.40 to 5.59 of the Listing Rules once the Shares are listed onthe Stock Exchange;

(c) none of the Directors or the experts named in paragraph 8 of the section headed “Otherinformation” below has been interested in the promotion of, or has any direct or indirectinterest in any assets acquired or disposed of by or leased to, any member of the Groupwithin the two years immediately preceding the date of this prospectus, or which areproposed to be acquired or disposed of by or leased to any member of the Group nor willany Director apply for Placing Shares either in his or her own name or in the name of anominee;

(d) no Director is materially interested in any contract or arrangement subsisting at the date ofthis prospectus which is significant in relation to the business of the Group taken as awhole; and

(e) none of the experts named in the paragraph headed “Consents” below has any shareholdingin any company in the Group or the right (whether legally enforceable or not) to subscribefor or to nominate persons to subscribe for securities in any company in the Group.

D. SHARE OPTION SCHEME

The following is a summary of the principal terms of the Share Option Scheme conditionallyadopted by a resolution in writing passed by the shareholders of the Company on 18th January, 2000:

(a) Who may join

The Directors for the time being or a duly authorised committee of the Directors (includingthe independent non-executive Directors, may, at their absolute discretion, invite any full-timeemployee of the Group, including any executive Director or any such subsidiary, to take upoptions to subscribe for Shares. Provided that any grant of options under the Share OptionScheme (the “Options”) must not be made after a price sensitive development has occurred ora price sensitive matter has been the subject of a decision, until such price sensitive information


— 143 —

A1a.45(3)

A1a.45(1)(2)

A1a.47(1)A1a.54

A1a.47(2)

A1a.9(1)A1a.54

A1a.44

has been announced pursuant to the requirements of chapter 16 of the Listing Rules. Theemployee shall ensure that any exercise of options under the Share Option Scheme is valid andcomply with all law, legislation and regulations to which he is subject to. The Directors may, asa condition precedent to allotting shares upon an exercise of options, require the relevantemployee to produce such evidence as the Directors may reasonably require for such purpose.

(b) Prices of Shares

The subscription price for the Shares under the Share Option Scheme will be a pricedetermined by the Directors, but shall be not less than the higher of (i) the closing price of theshares as stated in the Stock Exchange’s daily quotations sheet on the date of grant, which mustbe a business day; (ii) the average closing price of the shares as stated in the Stock Exchange’sdaily quotations sheets for the five business days immediately preceding the date of grant and(iii) the nominal value of the Shares; and a nominal consideration of HK$1 is payable onacceptance of the grant of an option.

(c) Maximum number of Shares

The maximum number of Shares in respect of which options may be granted under the ShareOption Scheme shall not (when aggregated with Shares subject to any other employee shareoption scheme) exceed in nominal amount 10% of the issued share capital of the Company fromtime to time, excluding for this purpose Shares issued upon the exercise of any options grantedunder the Share Option Scheme (or any other employee share option scheme). On the basis of400,000,000 shares in issue immediately after listing of the Shares (and assuming that theOver-allotment option is not exercised), a full exercise of the options under the Share OptionScheme could accordingly result into 40,000,000 Shares during the period in which the ShareOption Scheme is in forced.

No option shall be granted to any one person which, if exercised in full, will result in thetotal number of Shares already issued and which may fall to be issued to him under all theoptions previously granted to him pursuant to the Share Option Scheme exceeding 25% of themaximum aggregate number of Shares for the time being issued and which may fall to be issuedunder the Share Option Scheme.

(d) Time of exercise of option

An option may be exercised in accordance with the terms of the Share Option Scheme atany time during a period to be determined and notified by the Directors to each grantee, whichperiod shall not be less than three years from the date of acceptance of the offer for the grantof options and shall end in any event not later than ten years from the date of grant of the optionsubject to the provisions for early termination thereof. A grantee may exercise the option at anytime during the option period.

(e) Rights are personal to grantee

An option is personal to the grantee and shall not be transferable or assignable save asprovided under the rules of the Share Option Scheme.


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A1a.18(1)

A1a.18(2)

A1a.18(4)

(f) Rights on ceasing employment

If the grantee of an option ceases to be an eligible employee of the Group for any reasonother than death including without limitation ill-health or retirement in accordance with hiscontract of employment or before exercising his option in full, the option (to the extent notalready exercised) will lapse on or before the date which is three months after the date ofcessation and will not be exercisable unless the Directors otherwise determine in which event thegrantee may exercise the option (to the extent not already exercised) in whole or in part withinsuch period as the Directors may determine following the date of such cessation, which will betaken to be the last day on which the grantee was at work with the Group whether salary is paidin lieu of notice or not.

(g) Rights on death

If the grantee of an option ceases to be an eligible employee of the Group by reason of hisdeath before exercising the option in full, his personal representative(s) exercise the option (tothe extent not already exercised) in whole or in part within a period of 12 months following thedate of cessation which date shall be the last day on which the grantee was at work with theGroup whether salary is paid in lieu of notice or not or such longer period as the Directors maydetermine.

(h) Rights on dismissal

If the grantee of an option ceases to be an eligible employee of the Group by reason thathe has been guilty of serious misconduct or has committed any act of bankruptcy or has becomeinsolvent or has made any arrangements or composition with his creditors generally, or has beenconvicted of any criminal offence (other than an offence which in the opinion of the Directorsdoes not bring the grantee or the Company into disrepute), his option will lapse automaticallyand will not in any event be exercisable on or after the date of cessation to be an eligibleemployee.

(i) Rights on voluntary winding up

In the event of an effective resolution being proposed for the voluntary winding-up of theCompany during the option period, the grantee may, subject to the provisions of all applicablelaws, by notice in writing to the Company, at any time prior to the date on which such resolutionis passed, exercise his option (to the extent not already exercised) either to its full extent or tothe extent specified in such notice and will accordingly be entitled to participate in thedistribution of the assets available in the liquidation pari passu with the holders of the Shares inissue on the day prior to the date of such resolution.

(j) Rights on a general offer, compromise or arrangement

If a general or partial offer, whether by way of take-over offer, share re-purchase offer, orscheme of arrangement or otherwise in like manner is made to all the holders of Shares, or allsuch holders other than the offeror and/or any person controlled by the offeror and/or any personacting in association or concert with the offeror, the Company shall use all reasonableendeavours to procure that such offer is extended to all the grantees on the same terms, mutatismutandis, and assuming that they will become, by the exercise in full of the options granted tothem, shareholders of the Company. If such offer becomes or is declared unconditional or such


— 145 —

A1a.18(5)

A1a.18(7)

scheme of arrangement is formally proposed to shareholders in the Company, a grantee shall be

entitled to exercise his option (to the extent not already exercised) to its full extent or to the

extent specified in the grantee’s notice to the Company in exercise of his option at any time

before the close of such offer (or any revised offer). Subject to the above, an option will lapse

automatically (to the extent not exercised) on the date on which such offer (or, as the case may

be, revised offer) closes.

(k) Effect of alterations to capital

In the event of any alteration in the capital structure of the Company whilst an option

remains exercisable, such corresponding alterations (if any) certified by the auditors for the time

being of the Company or an independent financial adviser will be made to the number or nominal

amount of Shares the subject matter of the Share Option Scheme and the option so far as

unexercised and/or the option price of the option concerned. The auditor or the independent

financial adviser shall further certify that such adjustments shall give a participant the same

proportion of the equity capital as that to which that person was previling entitled, but no such

adjustments shall be include to the extent that a share would be issued at less than its nominal

volume.

(l) Cancellation of options

Any cancellation of options granted but not exercised under this Share Option Scheme must

be approved by shareholders of the Company and also by shareholders of the holding company

of the Company which is also listed on the Stock Exchange, if any, in a general meeting, with

the grantee and their associates (as defined in the Listing Rules) abstaining from voting. Any

vote taken at the meeting to approve such cancellation must be taken by poll.

(m) Ranking of Shares

(i) Shares allotted upon the exercise of an option will be subject to all the provisions of

the bye-laws of the Company and will rank pari passu in all respects with the fully

paid Shares in issue on the date on which the option is duly exercised (the “Exercise

Date”) and accordingly will entitle the holders thereof to participate in all dividends

or other distributions paid or made on or after the Exercise Date other than any

dividend or other distribution previously declared or recommended or resolved to be

paid or made if the record date therefor shall be before the Exercise Date. A Share

allotted upon the exercise of an option shall not carry voting rights until thecompletion of the registration of the grantee as the holder thereof.

(ii) Reference of “Shares”

Unless the context otherwise requires, references to “Shares” in this paragraph headed“Share Option Scheme” include references to shares in the ordinary equity sharecapital of the Company of such nominal amount as shall result from a sub-division,consolidation, re-classification or re-construction of the share capital of the Companyfrom time to time.


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A1a.18(6)

(n) Period of the Scheme

The Share Option Scheme will remain in force for a period of ten years commencing on thedate on which the Share Option Scheme becomes unconditional.

(o) Alterations to the Share Option Scheme

Any alterations to the terms and conditions of the Share Option Scheme which are of amaterial nature must be approved by the Stock Exchange, except where the alterations take effectautomatically under the existing terms of the Share Option Scheme.

The terms and conditions of the Share Option Scheme shall not be altered to the advantageof grantees of options under the scheme except with the approval of the members of the Companyin general meeting.

(p) Termination of the Share Option Scheme

The Company by resolution in general meeting may at any time terminate the operation ofthe Share Option Scheme and in such event no further Options will be offered but in all otherrespects the provisions of the Share Option Scheme shall remain in force to the extent necessaryto give effect to the exercise of any Options granted prior thereto or otherwise as may be requiredin accordance with the provisions of the Share Option Scheme and Options granted prior to suchtermination shall continue to be valid and exercisable in accordance with the Share OptionScheme.

(q) Present status of the Share Option Scheme

The Share Option Scheme is conditional on the GEM Listing Committee of the StockExchange granting approval of the scheme, the subsequent grant of options by the Companypursuant thereto and listing of and permission to deal in the Shares to be issued pursuant to theexercise of any options which may be granted under the Share Option Scheme.

Application has been made to the GEM Listing Committee for the approval of the ShareOption Scheme, the subsequent grant of options under the Share Option Scheme and for thelisting of and permission to deal in the Shares to be issued pursuant to the exercise of any optionswhich may be granted under the Share Option Scheme.

As at the date of this prospectus, no options have been granted or agreed to be granted underthe Share Option Scheme.

E. OTHER INFORMATION

1. Estate duty and other tax indemnities

Each of Messrs. Zhu Wei Sha, Chen Fu Rong, Sun Li Jun and Shi Guang Rong, Super Dragonand Dragon Treasure have given indemnities on a joint and several basis (material contract (c) (andsupplemented by material contract (d)) under the paragraph headed “Summary of material contracts”above) in respect of, among other matters, any liability for Hong Kong estate duty which might be


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A1a.18(6)

A1a.27

A1a.10

incurred by any member of the Group by reason of any transfer of property to any member of the

Group on or before the date on which the Placing becomes unconditional. The Directors have been

advised that no material liability for estate duty is likely to fall on the Company or any of its

subsidiaries in Hong Kong, the BVI, the PRC and Bermuda.

Under the deed of indemnity, each of Messrs. Zhu Wei Sha, Chen Fu Rong, Shi Guang Rong and

Sun Li Jun, Super Dragon and Dragon Treasure have also given indemnities to the Group on a joint

and several basis in relation to taxation which might be payable by any member of the Group in respect

of or in consequence of any event or any income, profits or gains earned, accrued or received (or

alleged to have been earned, accrued or received) on or before the date on which the Placing becomes

unconditional, other than taxation payable in respect of profits or gains made in the ordinary course

of business.

Each of Messrs. Zhu Wei Sha, Chen Fu Rong, Sun Li Jun and Shi Guang Rong, Super Dragon

and Dragon Treasure will, however, not be liable under the indemnities in case where (i) provision or

allowance has been made for the duty or taxation in the audited accounts of any member of the Group

for the period ended 30th June, 1999; (ii) the duty or taxation arises as a result of a retrospective

change in law and/or tax rates coming into force after the date of the deed of indemnity; and (iii) the

duty or taxation arises as a result of a voluntary act, transaction, omission or delay of any member of

the Group carried out otherwise than in the ordinary course of business after the date of the deed of

indemnity.

2. Sponsor

ICEA has made an application on behalf of the Company to the GEM Listing Committee for the

listing of, and permission to deal in, the Shares in issue and to be issued as mentioned herein, and any

Shares that may be issued upon the exercise of any options which may be granted under the Share

Option Scheme. All necessary arrangements have been made enabling the Shares to be admitted into

CCASS.

3. Litigation

Neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration of

material importance and no litigation of claim of material importance is known to the Directors to be

pending or threatened against the Company or any of its subsidiaries.

4. Minimum subscription

The minimum subscription which must be raised by the Placing in order to provide the sums

required to be provided in respect of the matters referred to in section 28 of the Companies Act is nil.

5. Preliminary expenses

The estimated preliminary expenses of the Company are approximately US$6,000 and are

payable by the Company.


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A1a.40

A1a.20

6. Qualification of experts

The qualifications of the experts who have given opinions in this prospectus are as follows:

Name Qualification

ICEA Registered dealersPricewaterhouseCoopers Certified public accountantsSallmanns Professional valuers and surveyorsJingtian Associates PRC legal advisersConyers Dill & Pearman Bermuda barristers & attorneys

7. Promoters

The promoters of the Company are Messrs. Zhu Wei Sha, Chen Fu Rong, Sun Li Jun and ShiGuang Rong. Save as disclosed in this prospectus, within the two years immediately preceding the dateof this prospectus, no amount or benefit has been paid or given to the promoter named above inconnection with the Placing or the related transactions described in this prospectus.

8. Consents

ICEA, PricewaterhouseCoopers, Sallmanns, Jingtian Associates and Conyers Dill & Pearmanhave given and have not withdrawn their respective written consents to the issue of this prospectuswith the inclusion of their reports, letters, valuation, opinions and summaries of opinion (as the casemay be) and/or the references to their names included herein in the form and context in which theyrespectively appear.

9. Binding effect

This prospectus shall have the effect, if an application is made in pursuance hereof, of renderingall persons concerned bound by all of the provisions (other than the penal provisions) of sections 44Aand 44B of the Companies Ordinance so far as applicable.

10. Taxation of holders of Shares

Dealings in Shares will be subject to Hong Kong stamp duty. Intending holders of Shares arerecommended to consult their professional advisers if they are in any doubt as to the taxationimplications of subscribing for, purchasing, holding or disposing of or dealing in Shares. It isemphasised that none of the Company, the Directors or the other parties involved in the Placingaccepts responsibility for any tax effect on, or liabilities of, holders of Shares resulting from thesubscription for, purchase, holding or disposal of or dealing in Shares.

The Shares are Hong Kong property for the purposes of the Estate Duty Ordinance (Chapter 111of the Laws of Hong Kong) and, accordingly, Hong Kong estate duty may be payable in respect thereofon the death of an owner of Shares.

The sale, purchase and transfer of Shares are subject to Hong Kong stamp duty the current rateof which is HK$2.5 for every HK$1,000 (or part thereof) of the consideration or, if higher, the fairvalue of the Shares being sold or transferred.


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A1a.9(1)

A1a.8(1)(2)A1a.13

A1a.9(2)

Under present Bermuda law, transfers and other dispositions of Shares are exempt from Bermuda

stamp duty.

11. Miscellaneous

Save as disclosed herein:

(a) within two years immediately preceding the date of this prospectus:

(i) no share or loan capital of the Company or of any of its subsidiaries has been issued,

agreed to be issued or is proposed to be issued fully or partly paid either for cash or

for a consideration other than cash; and

(ii) no commissions, discounts, brokerages or other special terms have been granted in

connection with the issue or sale of any share or loan capital of the Company or any

of its subsidiaries;

(b) no share or loan capital of the Company or any of its subsidiaries is under option or is

agreed conditionally or unconditionally to be put under option;

(c) there has been no material adverse change in the financial or trading position or prospects

of the Group since 30th June, 1999 (being the date to which the latest audited financial

statements of the Group were made up); and

(d) the Company has no founder shares, management shares or deferred shares.


— 150 —

A1a.26

A1a.13

A1a.27

A1a.24

1. DOCUMENTS DELIVERED TO THE REGISTRARS OF COMPANIES

The documents attached to the copy of this prospectus delivered to the Registrar of Companies

in Hong Kong for registration were the statement of adjustments prepared by PricewaterhouseCoopers,

the written consents referred to in paragraph 8 of the section headed “Other information” in Appendix

V and copies of the material contracts referred to in paragraph 1 of the section headed “Further

information about the business” in Appendix V. A copy of this prospectus has also been filed with the

Register of Companies in Bermuda.

2. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the office of Livasiri &

Co., 19th Floor, 9 Des Voeux Road West, Hong Kong during normal business hours up to and including

9th February, 2000:

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

(b) the accountants’ report prepared by PricewaterhouseCoopers, the texts of which are set out

in Appendix I;

(c) the statement of adjustments for the accountants’ report prepared by

PricewaterhouseCoopers;

(d) the letters relating to the profit estimate, the texts of which are set out in Appendix II;

(e) the letter with valuation certificate relating to the property interests of the Group prepared

by Sallmanns, the texts of which are set out in Appendix III;

(f) the letter of advice prepared by Conyers Dill & Pearman referred to in the section headed

“General” in Appendix IV summarising certain aspects of Bermuda company law;

(g) the service contracts of the Directors referred to in paragraph 3 of the section headed

“Further information about Directors, management and experts” in Appendix V;

(h) the rules of the Share Option Scheme;

(i) the material contracts referred to in paragraph 1 of the section headed “Further information

about the business” in Appendix V including, where appropriate, certified English

translations thereof;

(j) the written consents referred to in paragraph 8 of the section headed “Other information”

in Appendix V; and

(k) the Companies Act.

APPENDIX VI DOCUMENTS DELIVERED AND AVAILABLE FOR INSPECTION

— 151 —

14.01

S.342(1)(a)(iii)

24.09(6)A1a.52(1)A53(1)

A1a.52(3)

A1a.52(4)

A1a.52(3)

A1a.52(2)

A1a.51A1a.52(2)

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