TSE SUI LUEN JEWELLERY (INTERNATIONAL) LIMITEDir.tslj.com/eng/news/circulars/c060807.pdf · arising...

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should

consult your stockbroker or other registered dealer in securities, bank manager, solicitor,

professional accountant or other professional adviser.

If you have sold or transferred all your shares in Tse Sui Luen Jewellery (International) Limited,

you should at once hand this circular and the accompanying form of proxy to the purchaser or the

transferee, or to the bank, stockbroker or other agent through whom the sale or the transfer was

effected for transmission to the purchaser or the transferee.

The Stock Exchange of Hong Kong Limited and Hong Kong and Securities Clearing Company

Limited take no responsibility for the contents of this circular, make no representation as to its

accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever

arising from or in reliance upon the whole or any part of the contents of this circular.

TSE SUI LUEN JEWELLERY (INTERNATIONAL) LIMITED*

(Incorporated in Bermuda with limited liability)

(Stock Code: 417)

Advised by

MAJOR AND CONNECTED TRANSACTION

ACQUISITION OF A SUBSTANTIAL INTEREST IN

TSE SUI LUEN INVESTMENT (CHINA) LIMITED

Independent financial adviser to the Independent Board Committee of

Tse Sui Luen Jewellery (International) Limited

A letter from the Independent Board Committee containing its recommendations in respect of the

proposed transaction is set out on page 13 of this circular.

A letter from Quam Capital Limited, the independent financial adviser to the Independent Board

Committee and the shareholders of the Company, containing its recommendations in respect of the

proposed transaction is set out on pages 14 to 19 of this circular.

* For identification purpose only

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

7 August, 2006

Page

Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Letter from the Board

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

The Share Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Information on the Company and TSL China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Financial effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Views of the board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Letter from Quam Capital Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Appendix I — Financial Information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Appendix II — Accountants’ Report on TSL China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Appendix III — Unaudited pro forma financial information on the Enlarged Group . . 99

Appendix IV — General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

CONTENTS

— i —

‘‘A Shares’’ the ‘‘A’’ ordinary shares of US$1.00 each in nominal value in the share

capital of TSL China

‘‘B Shares’’ the ‘‘B’’ ordinary shares of US$1.00 each in nominal value in the share

capital of TSL China

‘‘associates’’ has the meaning ascribed thereto under the Listing Rules

‘‘Best Accurate’’ Best Accurate International Limited, a company incorporated in the

British Virgin Islands and wholly owned by Mr. Qi Jian Hong, a

director of TSL China

‘‘Company’’ and ‘‘TSL’’ Tse Sui Luen Jewellery (International) Limited, a company

incorporated in Bermuda with limited liability, the ordinary shares of

which are listed on the Stock Exchange

‘‘Completion’’ completion of the Share Acquisition, which was expected to take place

on or before the seventh day from the date which TSL China notified

The China Retail Fund, LDC (in its capacity as the vendor of the Sale

Shares) of the acquirers of the Sale Shares and which, for the purpose

of the Share Acquisition, was expected to be on or before 24 July, 2006

‘‘Director(s)’’ the director(s) of the Company

‘‘Enlarged Group’’ for the purposes of the pro forma financial information in appendix III

of this circular, the Group and additional interest in TSL China Group

together

‘‘Group’’ the Company and its subsidiaries

‘‘HK$’’ and ‘‘cents’’ Hong Kong dollars and cents, the lawful currency of Hong Kong

‘‘Hong Kong’’ the Hong Kong Special Administrative Region of the People’s Republic

of China

‘‘Independent Board

Committee’’

an independent committee of the board of directors of the Company,

comprising the independent non-executive Directors, namely Mr. Chui

Chi Yun, Robert and Mr. Gerald Clive Dobby

‘‘Latest Practicable Date’’ 4 August, 2006, being the latest practicable date for ascertaining

certain information for inclusion in this circular

‘‘Liberty Mark’’ Liberty Mark Limited, a company incorporated in the British Virgin

Islands and a wholly owned subsidiary of the Company, which owns

5.46% equity interests in TSL China prior to Completion

‘‘Listing Rules’’ the Rules Governing the Listing of Securities on the Stock Exchange

‘‘Mainland China’’ the People’s Republic of China which, for the purpose for this circular,

excludes Hong Kong, Macau (being Macau Special Administration

Region of the People’s Republic of China) and Taiwan

DEFINITIONS

— 1 —

‘‘Sale Shares’’ from a minimum of 1,223 B Shares up to a maximum of 1,647 B

Shares, representing a minimum and maximum of 17.8% and 24% of

the issued shares in TSL China, respectively

‘‘SFO’’ the Securities and Futures Ordinance, Chapter 571 of the Laws of Hong

Kong, as amended, supplemented or otherwise modified from time to

time

‘‘Share Acquisition’’ acquisition by Liberty Mark and TSLJ of the Sale Shares (being up to

1,647 B Shares, representing 24% of the issued shares in TSL China)

currently owned by The China Retail Fund, LDC by way of an exercise

of pre-emption rights under the TSL China Shareholders’ Agreement

‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited

‘‘TSL China’’ Tse Sui Luen Investment (China) Limited, a company incorporated in

the British Virgin Islands, which is owned as to 24% by The China

Retail Fund, LDC, 56.46% indirectly by the Company and 19.54% by

Best Accurate prior to Completion

‘‘TSL China Shareholders’

Agreement’’

the shareholders’ agreement dated 31 August, 2002 and entered into

between the Company, TSLJ, TSL China, Liberty Mark, Best Accurate,

Mr. Qi Jian Hong and The China Retail Fund, LDC by which TSLJ,

Liberty Mark, Best Accurate and The China Retail Fund, LDC agree to

conduct their relationship as shareholders of TSL China in accordance

with such agreement

‘‘TSL China Group’’ TSL China and its subsidiaries

‘‘TSLJ’’ Tse Sui Luen Jewellery Company Limited, a company incorporated in

Hong Kong and a wholly owned subsidiary of the Company, which

owns 51% equity interests in TSL China prior to Completion

‘‘US$’’ United States dollars, the lawful currency of the United States of

America

DEFINITIONS

— 2 —



(Stock Code: 417)

Executive Directors:

Mr. Tse Tat Fung, Tommy (Chairman)

Mr. Peter Gerardus Van Weerdenburg

(Deputy Chairman and Chief Executive Officer)

Mr. Erwin Steve Huang (Deputy Chairman)

Mr. Alex Chan

Mr. Cheung Tse Kin, Michael

Ms. Yau On Yee, Annie

Independent non-executive Directors:

Mr. Chui Chi Yun, Robert

Mr. Gerald Clive Dobby

Registered office:

Clarendon House

Church Street

Hamilton HM 11

Bermuda

Head office and

principal place of business:

G/F, Block B

Summit Building

30 Man Yue Street

Hunghom,

Kowloon,

Hong Kong

7 August, 2006

To the shareholders of the Company

Dear Sir or Madam,


ACQUISITION OF A SUBSTANTIAL INTEREST INTSE SUI LUEN INVESTMENT (CHINA) LIMITED

INTRODUCTION

On 17 July, 2006, the Company announced that, through its two wholly owned subsidiaries

Liberty Mark and TSLJ, the Company had exercised its pre-emption rights to acquire from The

China Retail Fund, LDC the Sale Shares, representing a maximum of 24% shareholding interest in

TSL China (or such lesser number of shares in TSL China as is allocated to it by TSL China if other

shareholders of TSL China also accept the offer being made to them under the terms of the TSL

China Shareholders’ Agreement). On 17 July, 2006, the Company, through Liberty Mark and TSLJ,

was allocated 17.8% shareholding interest in TSL China. Under the TSL China Shareholders’

Agreement, the acquirer of the shares in TSL China is required to complete the Share Acquisition

within 7 days from the date on which TSL China notifies the selling shareholder of the acquirers of

the shares.


LETTER FROM THE BOARD

— 3 —

Under the Listing Rules, the Share Acquisition constitutes a major and connected transaction of

the Company within the meaning of the Listing Rules. The China Retail Fund, LDC, the vendor of

the Sale Shares, is a connected person within the meaning of the Listing Rules as it is a substantial

shareholder of TSL China, a subsidiary of the Company. The Share Acquisition is subject to the

announcement, reporting and independent shareholders’ approval requirements under Chapters 14

and 14A of the Listing Rules.

As the Share Acquisition is made pursuant to an exercise of a pre-emption rights under the TSL

China Shareholders’ Agreement entered into amongst shareholders of TSL China, none of the

shareholders of the Company has an interest that is different from other shareholders and no

shareholder of the Company is required to abstain from voting in respect of the Share Acquisition.

The TSL China Shareholders’ Agreement was duly approved by the independent shareholders of the

Company at a special general meeting of the Company on 31 August, 2002.

On 29 June, 2006, Partner Logistics Limited, which owns 152,960,914 shares in the Company,

representing 73.87% of the issued shares in the Company gave the Company its written approval for

the Share Acquisition. Partner Logistics Limited is a company controlled by Mr. Tse Tat Fung,

Tommy, the Chairman of the board of Directors and who has no relationship with The China Retail

Fund, LDC, a financial investor in TSL China.

The Company applied to the Stock Exchange for, and was granted, a waiver under 14A.43 of

the Listing Rules from the requirement to hold a shareholders’ meeting to consider and approve the

Share Acquisition. The waiver was granted on the basis that (i) no shareholder of the Company is

required to abstain from voting if the Company were to convene a general meeting to approve the

Share Acquisition; and (ii) a written approval has been obtained from Partner Logistics Limited

which holds more than 50% in nominal value of the securities giving the right to attend and vote at

the general meeting of the Company to approve the Share Acquisition.

The Independent Board Committee comprising Mr. Chui Chi Yun, Robert and Mr. Gerald Clive

Dobby was formed to consider and, if appropriate, make a recommendation to the shareholders of

the Company in relation to the Share Acquisition. Quam Capital Limited was appointed as the

independent financial adviser to the Independent Board Committee in this respect.

The purpose of this circular is to provide you with, inter alia, information relating to the Share

Acquisition and to set out the recommendation of the Independent Board Committee, based on the

advice from Quam Capital Limited, in respect of the Share Acquisition and the letter from Quam

Capital Limited to the Independent Board Committee and the shareholders of the Company.


— 4 —

THE SHARE ACQUISITION

Parties: Liberty Mark and TSLJ, as acquirers

The China Retail Fund, LDC, as vendor

The China Retail Fund, LDC is a limited duration company

incorporated in the Cayman Islands and a direct investment fund.

The duration of The China Retail Fund, LDC is limited to a period of

fifteen years from the date of its incorporation on 13 May, 1996. It is a

substantial shareholder of TSL China and Infinite Assets Corp., which

are both subsidiaries of the Company. The China Retail Fund, LDC and

the Company are parties to two shareholders’ agreements both dated 31

August, 2002 under which the parties agree to conduct their

relationships as respective shareholders of TSL China and Infinite

Assets Corp., in accordance with such agreements. Save as disclosed,

The China Retail Fund, LDC does not have any other relationship with

the Company and, or its subsidiaries.

Sale Shares: From a minimum of 1,223 B Shares up to a maximum of 1,647 B

Shares, representing a minimum and maximum of 17.8% and 24% of

the issued shares in TSL China, respectively. On 17 July, 2006, the

Company, through Liberty Mark and TSLJ, was allocated 1,223 B

Shares.

Consideration: From US$1.56 million for a total of 1,223 B Shares up to a total of

US$2.1 million for a total of 1,647 B Shares, based on a price of

US$1,275 per B Share. The consideration is based on the price

specified in the offer for sale, being the price at which The China

Retail Fund, LDC has found a third party purchaser to acquire the B

Shares held by it, subject to the pre-emption rights of the existing

shareholders of TSL China under the TSL China Shareholders’

Agreement.

Terms of payment: The consideration will be payable in cash upon Completion.

Upon Completion, the Company will increase its shareholding interest in TSL China from

56.46% to a minimum of 74.28% or up to 80.46% if no other shareholders of TSL China exercise

the pre-emption rights under the TSL China Shareholders’ Agreement.

Background to the Share Acquisition

On 17 May, 2006, The China Retail Fund, LDC served a notice on TSL China advising that it

would like to sell its shares in TSL China to a third party. On 26 May, 2006, Liberty Mark and TSLJ

in their respective capacities as shareholders of TSL China received an offer from TSL China, on

behalf of The China Retail Fund, LDC, offering for sale to the shareholders of TSL China the Sale

Shares that The China Retail Fund, LDC currently holds in TSL China. The Sale Shares represent

24% of the issued shares in TSL China. The offer is made in accordance with the TSL China

Shareholders’ Agreement which requires that a shareholder of TSL China wishing to dispose of its

shares in TSL China must first offer such shares to the existing shareholders of TSL China. The

consideration under the offer is US$2.1 million.


— 5 —

Financing of the Share Acquisition

The Share Acquisition will be financed from external borrowings of the Company. The

Company’s gearing ratio (which is the ratio of net borrowings to total equity) will increase from

23% to 31% due to increased borrowings to finance the Share Acquisition. The external borrowings

together with related interest expenses will have no material impact on the Company’s working

capital position.

Completion of the Share Acquisition

On 17 July, 2006, Liberty Mark and TSLJ accepted the offer from TSL China, on behalf of The

China Retail Fund, LDC, to acquire the Sale Shares owned by The China Retail Fund, LDC. Under

the TSL China Shareholders’ Agreement, the acquirer of the shares in TSL China is required to

complete the share acquisition within 7 days from the date which TSL China notifies the selling

shareholder of the acquirers of the shares.

It was initially expected that completion of the acquisition of the Sale Shares from The China

Retail Fund, LDC by TSLJ and Liberty Mark would take place on or before 24 July, 2006. On 27

July, 2006, the Company announced that the Completion did not take place at the completion

meeting held on 24 July, 2006. Liberty Mark and TSLJ, which pursuant to the terms of the TSL

China Shareholders’ Agreement had been allocated the Sale Shares by TSL China on behalf of The

China Retail Fund, LDC, delivered to TSL China cashier orders for the amounts due to The China

Retail Fund, LDC in respect of the Sale Shares. The China Retail Fund, LDC declined to deliver

executed transfers of the Sale Shares to TSLJ and Liberty Mark. Best Accurate, who had also

accepted the offer made by TSL China on behalf of The China Retail Fund, LDC, did not attend the

completion meeting on 24 July, 2006 and therefore did not present payment for the 424 B Shares in

TSL China it had been allocated by TSL China on behalf of The China Retail Fund, LDC. In

addition, The China Retail Fund, LDC offered for sale 66,521 shares in Infinite Assets Corp. at the

same time as it offered the shares in TSL China. TSLJ and Liberty Mark did not accept the offer to

acquire the shares in Infinite Assets Corp. Best Accurate accepted in full the 66,521 shares offered

in Infinite Assets Corp. However, the Company understands that Best Accurate did not attend the

completion meeting on 24 July, 2006 in respect of shares in Infinite Assets Corp.

The China Retail Fund, LDC claimed that it was not obliged to complete the transfers of the

shares in TSL China unless all of the shares in both TSL China and Infinite Assets Corp. held by it

were transferred and it received the total consideration of US$4.2 million for the transfer of all such

shares. TSLJ and Liberty Mark consider that they have complied with the provisions of the notice as

stated in the TSL China Shareholders’ Agreement and are therefore entitled to require transfer of the

shares in TSL China. TSLJ and Liberty Mark intend to rely on the default provisions in the TSL

China Shareholders’ Agreement in order to complete the Share Acquisition for an aggregate of 1,647

B Shares at US$2.1 million and are taking legal advice as to the necessary action to be taken.

As at the Latest Practicable Date, the Directors are not aware of any new developments on the

Share Acquisition save for those disclosed in the Company’s announcement dated 27 July 2006. The

Company will notify the shareholders of the Company on any further developments relating the

Share Acquisition as and when appropriate.


— 6 —

Reasons for, and benefits of, the Share Acquisition

The Directors believe that the jewellery retail market in China offers good growth potential. As

part of its plan to expand into China, the Company believes that it is in its interest to increase its

shareholding interest in TSL China by way of the Share Acquisition. The Company currently has 112

retail outlets in China, and 17 in Hong Kong. The Directors believe that the Share Acquisition will

complement the Company’s plan to expand its retail business in China. For the year ended 28

February, 2006, TSL China posted an audited consolidated net profit after taxation attributable to

equity holders of some HK$41.8 million. Consolidated net assets attributable to equity holders as at

that date amount to some HK$83.4 million. The consideration of US$2.1 million for a 24% stake in

TSL China represents a price to earnings multiple of 1.6 times, or a price to book ratio of 0.8 times.

Given the discount to book value implied under the consideration of the Share Acquisition, the Share

Acquisition will result in an overall increase in the net asset value of the Company.

Shareholding structure of TSL China prior to and following Completion

The following is a summary of the shareholding structure of TSL China, in terms of percentage

of share capital, before and following Completion:

Prior to

Completion

Following Completion

(assuming TSLJ, Liberty

Mark and Best Accurate

exercised the pre-emption

rights under the TSL

China Shareholders’

Agreement)

Following Completion

(assuming only TSLJ and

Liberty Mark exercised

the pre-emption rights

under the TSL China

Shareholders’ Agreement)

% of

voting

rights No. of shares

% of

voting


% of

voting


The Company, indirectly

through TSLJ and Liberty

Mark

56.46% 3,875

B Shares

74.28% 5,098

B Shares

80.46% 5,522

B Shares

Best Accurate 19.54% 1,341

A Shares

25.72% 1,341

A Shares and

424 B Shares

19.54% 1,341

A Shares

The China Retail Fund, LDC 24.00% 1,647

B Shares

0 0 0 0

Total 100.00% 6,863 100.00% 6,863 100.00% 6,863

As mentioned above, Best Accurate failed to attend the completion meeting in respect of the

Share Acquisition on 24 July, 2006. TSLJ and Liberty Mark intend to rely on the default provisions

in the TSL China Shareholders’ Agreement in order to complete the Share Acquisition in respect of

the total aggregate 1,647 B Shares. This would increase the number of B Shares held by the

Company indirectly through TSLJ and Liberty Mark to 5,522, being 80.46% of the voting rights.

INFORMATION ON THE COMPANY AND TSL CHINA

The Company and its subsidiaries are principally engaged in the manufacturing, design, export

and retailing of jewellery products. TSL China is the main operating subsidiary of the Company

through which the Company conducts its business in China. TSL China is engaged in the sale of


— 7 —

platinum and gemstone jewellery via retail outlets in Mainland China under the license of the

Company and, or its subsidiaries. In addition, TSL China and its subsidiaries also process platinum

and gemstone jewellery for sale in Mainland China.

TSL China is a company incorporated in the British Virgin Islands on 8 February, 2000. It has

an issued share capital of US$6,863 divided into 1,341 A Shares and 5,522 B Shares. Prior to

Completion, the Company through Liberty Mark and TSLJ, its two wholly owned subsidiaries, holds

in aggregate 3,875 B Shares, representing 56.46% of the issued shares in TSL China. The China

Retail Fund, LDC is a financial investor holding, prior to Completion, 1,647 B Shares, representing

24% of the issued shares in TSL China. The other shareholder of TSL China is Best Accurate which

owns 1,341 A Shares, representing 19.54% of the issued shares in TSL China. Best Accurate is a

private company wholly owned by Mr. Qi Jian Hong who is a director of TSL China and Infinite

Assets Corp., a subsidiary of the Company. Best Accurate is also a substantial shareholder of

Infinite Assets Corp. Mr. Qi is a business partner of the Company where certain subsidiaries of the

Company sold and consigned finished goods to Mr. Qi and companies controlled by him (the details

of which are set out in the circular dated 6 November, 2003 issued by the Company). Save as

disclosed, Best Accurate does not have any other relationships with the Company and, or its

subsidiaries.

In 2002, The China Retail Fund, LDC purchased 24% equity interest in each of TSL China and

Infinite Assets Corp., (which was a 77.5%-owned subsidiary of TSL before such purchase) for a total

consideration of HK$276 million which represented the aggregate of the face value of the 22,220

6.5% convertible non-voting redeemable preference shares in the Company held by The China Retail

Fund, LDC and related accrued liabilities. (Please refer to the circular issued by the Company on 8

August, 2002 for further details.)

The following table summarises certain audited financial information of TSL China:

For the year ended

28 February,

2006 2005

HK$’000 HK$’000

100.0% shareholding interest in TSL China

Net assets attributable to equity holders 83,372 Note 1Profits before taxation and extraordinary items 64,939 24,825

Profits after taxation and extraordinary items 45,656 12,628







Note 1 : Not required to be disclosed under the Listing Rules


— 8 —

Management Analysis of TSL China Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Turnover 139,455 281,708 444,649

Cost of sales (98,700) (162,907) (191,306)

Gross profit 40,755 118,801 253,343

Other revenue 395 235 1,029

Selling expenses — (62,249) (145,756)

Administrative expenses (10,514) (31,963) (43,677)

Profit from operating activities before taxation 30,636 24,824 64,939

Taxation (1,965) (12,196) (19,283)

Profit for the year 28,671 12,628 45,656

Attributable to:

Equity holders of the Company 26,480 12,486 41,753

Minority interests 2,191 142 3,903


Financial results for the years ended 28 February, 2006 and 2005

Turnover for the year ended 28 February, 2006 amounted to HK$444.6 million representing an

increase of approximately 58% from HK$281.7 million for the year ended 28 February, 2005. Profit

attributable to shareholders of TSL China amounted HK$41.8 million representing an increase of 2.3

times from HK$12.5 million for the year ended 28 February, 2005. The improvement in financial

results were attributable to the increase in number of stores under TSL China Group and the

improvement of gross margin through better merchandising.

Financial results for the years ended 28 February, 2005 and 29 February, 2004

Turnover for the year ended 28 February, 2005 amounted to HK$281.7 million representing an

increase of approximately 1 times from HK$139.5 million for the year ended 29 February, 2004.

Profit attributable to shareholders of TSL China amounted HK$12.5 million representing a decrease

of 53% from HK$26.5 million for the year ended 29 February, 2004. The increase in turnover was

because TSL China commenced to expand the retail stores and it benefited from the increasing

demand for jewellery products in Mainland China. However, the profitability declined because the

initial increase in selling expenses were more than offset by the increase in turnover.

Liquidity, financial resources, funding and treasury policy

TSL China Group is mainly financed by internally generated cash flows and intra-group

financing from the Group. The balances due to immediate holding company and fellow subsidiaries

were HK$110.3 million, HK$160.4 million and HK$185.5 million as at 29 February, 2004, 28

February, 2005 and 28 February, 2006, respectively.


— 9 —

Balances of cash at bank and in hand were HK$6.2 million, HK$28.4 million and HK$60.5

million as at 29 February, 2004, 28 February, 2005 and 28 February, 2006, respectively.

The assets and liabilities of TSL China Group are mainly denominated in Renminbi and Hong

Kong Dollars. The impact of fluctuation of foreign exchange rates in insignificant to the Group.

Employees and remuneration policies

At 28 February, 2006, the total number of employees of TSL China Group was approximately

1,300. The human resources policy, in general, follows the Group’s human resources policy and the

mainland’s legal and regulatory requirements

Pledge of assets

As at 29 February, 2004, 28 February, 2005 and 28 February, 2006, the TSL China Group has

pledged the capital contribution amounting to US$235,000, US$235,000 and US$235,000,

respectively, and all the benefits accruing to the pledged equity interest of 11.625%, 11.625% and

11.625%, respectively, of a subsidiary, Beijing Tse Sui Luen Jewellery Company Limited, to the

Group’s bankers and financial creditors as security for, inter alia, all obligations and liabilities,

actual or contingent from time to time owing by the Group to the bankers and financial creditors.

Contingent liabilities

At 29 February, 2004, 28 February, 2005 and 28 February, 2006, there were contingent

liabilities in respect of the following:

Guarantees given to banks by TSL China in respect of banking facilities extended to the Group

with maximum liability amounting to HK$278,427,000, HK$125,371,000 and HK$180,096,000,

respectively.

Guarantees given to TSLJ, an immediate holding company, by TSL China in respect of

outstanding balance, obligations and liabilities owing by Infinite Assets Corp., a fellow subsidiary,

to TSLJ. At 29 February, 2004, 28 February, 2005 and 28 February, 2006, the outstanding balance

owing by Infinite Assets Corp. to TSLJ amounted to HK$120,409,000, HK$115,129,000 and

HK$123,241,000, respectively.

FINANCIAL EFFECT

Set out in appendix III to this circular is an unaudited pro forma statement prepared based upon

the audited consolidated balance sheet of the Group as at 28 February, 2006 as if the Share

Acquisition was completed on 28 February, 2006. On the basis of acquiring a maximum of 24%

additional interest in TSL China, after completion of the Share Acquisition, except for the increase

in liabilities of HK$16.4 million (or HK$12.2 million if acquiring a minimum of 17.8% additional

interest in TSL China) as a result of the borrowing to finance such an acquisition, there would be no

other change in the assets and liabilities of the Enlarged Group as TSL China has been a subsidiary

and has been consolidated into the financial statements of the Group. The total equity attributable to

the equity holders of the Group will be increased by approximately HK$3.6 million (or HK$2.7

million if acquiring a minimum of 17.8% additional interest in TSL China). There would be no

change in the earnings of the Enlarged Group as TSL China has been a subsidiary and has been

consolidated into the financial statements of the Group.


— 10 —

The Share Acquisition will be financed from external borrowings of the Company. The

Company’s gearing ratio will increase from 23% to 31% (or 29% if acquiring a minimum of 17.8%

additional interest in TSL China) for this reason.

VIEWS OF THE BOARD

Based on the net asset value of TSL China as at 28 February, 2006, the consideration under the

Share Acquisition represents a price to book ratio of 0.8 times which is in line with the average

prevailing price to book ratios of all jewellery companies, including the Company, listed on the

Stock Exchange (calculated based on their respective closing share price on 17 July, 2006 and the

latest published annual report of the comparable companies). Taking into account this factor and the

benefits of the Share Acquisition described above, the Directors believe the terms of the Share

Acquisition to be fair and reasonable and are in the interests of the Company and its shareholders as

a whole.

Your attention is drawn to: (a) the letter from the Independent Board Committee set out on

page 13 of this circular which contains its views in relation to the Share Acquisition, based on the

advice from Quam Capital Limited in respect of the Share Acquisition; and (b) the letter from Quam

Capital Limited on pages 14 to 19 of this circular which contains its views in relation to the Share

Acquisition as well as the principal factors and reasons considered by Quam Capital Limited in

arriving at its conclusion.

GENERAL

The Stock Exchange had granted to the Company a waiver from the requirement to hold a

shareholders’ general meeting to consider and approve the Share Acquisition. If a shareholders’

meeting is to be held, a resolution put to vote at the shareholders’ meeting shall be decided on a

show of hands unless a poll is required by the Listing Rules or (before or on the declaration of the

result of the show of hands or on withdrawal of any other demand for a poll) is duly demanded by:

(a) the chairman of the meeting; or

(b) at least three members present in person or by proxy and entitled to vote; or

(c) any member or members present in person or by proxy and representing in the aggregate

not less than one-tenth of the total voting rights of all members having the right to attend

and vote at the meeting;

(d) any member or members present in person or by proxy and holding shares conferring a

right to attend and vote at the meeting on which there have been paid up sums in the

aggregate equal to not less than one-tenth of the total sum paid up on all shares

conferring that right; or

(e) any of the directors who individually or collectively (including the chairman of the

relevant meeting of the Company) hold proxies in respect of shares holding 5% or more

of the total voting rights at a particular meeting of the Company, and if on a show of

hands such meeting votes in the opposite manner to that instructed in those proxies, such

directors shall have the right to demand a poll.


— 11 —

At the request of the Company the shares in the Company were suspended from trading from

9 : 30 a.m. on Thursday, 19 January, 2006. Trading in the shares in the Company will remain

suspended pending the release of a further announcement in respect of the investigation by the

Independent Commission Against Corruption into the affairs of the Company as announced by the

Company on 15 July, 2005, 1 February, 2006 and 20 April, 2006.

Please refer to the appendices to this circular for additional information.

By order of the Board


Tse Tat Fung, Tommy

Chairman


— 12 —



(Stock Code: 417)

7 August, 2006

To the shareholders of the Company

Dear Sir or Madam,


ACQUISITION OF A SUBSTANTIAL INTEREST INTSE SUI LUEN INVESTMENT (CHINA) LIMITED

We refer to the circular to the shareholders of the Company dated 7 August, 2006 (the‘‘Circular’’) issued by the Company, of which this letter forms part. Capitalised terms used in thisletter shall have the same meanings as defined in the Circular unless the context otherwise requires.

As we have no interest in the Share Acquisition, we have been appointed by the board ofDirectors as the Independent Board Committee to consider the terms of the Share Acquisition.

Quam Capital Limited has been appointed by the Company to advise the Independent BoardCommittee and the independent shareholders of the Company as to whether the terms of the ShareAcquisition are fair and reasonable so far as the shareholders of the Company are concerned. Detailsof its advice, together with the principal factors taken into consideration in arriving at such advice,are set out on pages 14 to 19 of the Circular.

Your attention is also drawn to the letter from the board set out on pages 3 to 12 of theCircular and the additional information set out in the appendices to the Circular.

Having considered the terms of the Share Acquisition and the advice of Quam Capital Limited,we consider the terms of the Share Acquisition to be fair and reasonable as far as the shareholders ofthe Company are concerned and that the Share Acquisition is in the interests of the Company andthe shareholders of the Company.

We understand that Partner Logistics Limited had on 29 June, 2006 given its approval inrelation to the Share Acquisition. As the Stock Exchange had granted to the Company a waiver fromthe requirement to hold a shareholders general meeting to consider and approve the ShareAcquisition, it will not be necessary for the shareholders of the Company to vote on the ShareAcquisition.

Yours faithfully,Independent Board Committee of


Chiu Chi Yun, Robert Gerald Clive DobbyIndependent Independent

Non-Executive Director Non-Executive Director


LETTER FROM THE INDEPENDENT BOARD COMMITTEE

— 13 —

The following is the full text of the letter of advice from Quam Capital Limited, the

independent financial adviser to the Independent Board Committee and the shareholders of the

Company, which has been prepared for the purpose of incorporation into this circular, setting out its

advice to the Independent Board Committee and the shareholders of the Company in respect of the

Share Acquisition.

7 August, 2006

To the Independent Board Committee and the shareholders of the Company


G/F, Block B

Summit Building, 30 Man Yue Street

Hunghom, Kowloon

Hong Kong

Dear Sir or Madam,


ACQUISITION OF A SUBSTANTIAL INTEREST IN

TSE SUI LUEN INVESTMENT (CHINA) LIMITED

We refer to our appointment as the independent financial adviser to the Independent Board

Committee and the shareholders of the Company in respect of the Share Acquisition. Details of the

Share Acquisition are set out in the ‘‘Letter from the Board’’ contained in the circular issued by the

Company to its shareholders dated 7 August, 2006 (the ‘‘Circular’’), of which this letter forms part.

Terms used in this letter shall have the same meaning as defined in the Circular unless the context

otherwise requires.

Messrs. Chui Chi Yun, Robert and Gerald Clive Dobby, the independent non-executive

Directors of TSL, have been appointed as members of the Independent Board Committee to advise

the shareholders of the Company as to whether the Share Acquisition is on normal commercial

terms, in the ordinary and usual course of business of the Group, fair and reasonable and in the

interest of the Company and its shareholders as a whole. As the independent financial adviser, our

role is to give an independent opinion to the Independent Board Committee and the shareholders of

the Company.

Quam Capital Limited is independent of and not connected with any members of the Group or

any of their substantial shareholders, directors or chief executives, or any of their respective

associates, and is accordingly qualified to give an independent advice in respect of the Share

Acquisition.

In formulating our recommendation, we have relied on the information, facts supplied by the

Company and its advisers, and the opinions expressed by and the representations of the Directors

and management. We have assumed that all the information and representations contained or referred

to in the Circular were true and accurate in all respects at the date thereof and may be relied upon.

We have also assumed that all statements and representations made or referred to in the Circular are

LETTER FROM QUAM CAPITAL LIMITED

— 14 —

true at the time that they were made and continue to be true at the date thereof. We have no reason

to doubt the truth, accuracy and completeness of the information and representations provided to us

by the Directors and the Directors have confirmed to us that no material facts have been withheld or

omitted from the information provided and referred to in the Circular, which would make any

statement in the Circular misleading.

We consider that we have reviewed sufficient information currently available to reach an

informed view and to justify our reliance on the accuracy of the information contained in the

Circular so as to provide a reasonable basis for our recommendation. We have not, however, carried

out any independent verification of the information, nor have we conducted any form of in-depth

investigation into the business, affairs, operations, financial position or future prospects of any

member of the Group.

TSL CHINA AND THE SHARE ACQUISITION

TSL China is the main operating subsidiary of the Company through which the Company

conducts its business in Mainland China. Prior to Completion, Liberty Mark together with TSLJ

(both being wholly owned subsidiaries of the Company) held an aggregate 56.46% interests in TSL

China in form of ‘‘B’’ shares. The balance of the shareholding interests in TSL China were owned as

to 24% and 19.54% by The China Retail Fund, LDC (in form of ‘‘B’’ shares’’) and Best Accurate

International Limited (in form of ‘‘A’’ shares) respectively. It is noted that under the TSL China

Shareholders’ Agreement, there are provisions and undertaking given by the shareholders of TSL

China, which restrict any dividend payout and other distribution to the ‘‘B’’ shares in the issued

share capital of TSL China until certain existing loans due to the creditors of the Group are fully

repaid or refinanced (the ‘‘Distribution Restrictions’’).

On 26 May, 2006, Liberty Mark and TSLJ, in their respective capacities as shareholders of TSL

China received an offer from TSL China, on behalf of The China Retail Fund, LDC, offering for sale

to all the other shareholders of TSL China, its 24% shareholding interest in TSL China for an

aggregate cash consideration of US$2.1 million (equivalent to around HK$16.4 million) (the

‘‘Offer’’). The Offer was made after The China Retail Fund, LDC received an offer of effectively

the same terms from an independent third party (the ‘‘Third Party Offer’’) which, in accordance

with the TSL China Shareholders’ Agreement, requires pre-emption rights to be given to all the

other shareholders if any shareholder intends to dispose of its stake in TSL China.

On 17 July, 2006, the Company announced that it had accepted the Offer and would proceed to

acquire a maximum of 24% shareholding interest in TSL China or its entitlement if the other

shareholder of TSL China does not accept the Offer.

As The China Retail Fund, LDC is a substantial shareholder of TSL China and hence a

‘‘connected person’’ of the Company, the Share Acquisition constitutes a ‘‘major and connected

transaction’’ for the Company under the Listing Rules.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our recommendation, we have taken into consideration the following principal

factors and reasons:


— 15 —

1. Reasons for the Share Acquisition

The Group is principally engaged in the design, retail, export and manufacture of

jewellery products. For each of the two financial years ended 28 February, 2005 and 28

February, 2006, the Group has recorded an operating profit of around HK$80.1 million and

HK$48.6 million respectively. It is noted that sales derived from Mainland China have been

one of the major profit contributors, representing around 22% and 33% of the Group’s total

sales respectively during the two years ended 28 February, 2006.

It is stated in the ‘‘Letter from the Board’’ in the Circular that the Directors believe that

the jewellery retail market in Mainland China offers good growth potential and the Share

Acquisition will complement the Company’s plan to expand its jewellery retail business in

Mainland China. Upon Completion, the aggregate percentage shareholding interests of the

Group in TSL China’s ‘‘B’’ Shares will increase from 56.46% to a minimum of 74.28% or up

to 80.46% if the other shareholder of TSL China does not accept the Offer.

We were advised by the Company that prior to the financial year ended 28 February, 2006

(the ‘‘Financial Year 2006’’), its business operations in Mainland China had been conducted

through TSL China as well as Infinite Assets Corp., a non-wholly owned subsidiary of the

Company. Since the beginning of the Financial Year 2006, TSL China has become the sole

holding company for the Group’s operating subsidiaries in Mainland China. Its audited

consolidated turnover and net profit attributable to equity holders for the Financial Year 2006

amounted to around HK$444.6 million and HK$41.8 million respectively, with its turnover

representing around 33% of the Group’s total sales for the same period. It should also be noted

that the Group had recorded a net loss of around HK$28.1 million for the same period.

Given that jewellery business is the Group’s core operation, the Share Acquisition is

undoubtedly conducted within its ordinary and usual course of business. Furthermore, as

discussed above, the Mainland China operation has been one of the major profit contributors to

the Group with TSL China being the sole holding company for the Group’s operating

subsidiaries in Mainland China. In this regard, we concur with the Directors’ view that the

Share Acquisition is in the interest of the Company and its shareholders as a whole as it will

increase the Company’s participation in its Mainland China business operations.

2. Consideration for the Share Acquisition

(a) Basis of determining the consideration

We have reviewed the terms and conditions of the Third Party Offer, it is noted that

the total consideration for the Share Acquisition of US$1.56 million (equivalent to around

HK$12.2 million) or US$2.1 million (equivalent to around HK$16.4 million) if the other

shareholder of TSL China does not accept the Offer (the ‘‘Consideration’’) is based on

and the same as the Third Party Offer in accordance with the provisions of the TSL China

Shareholders’ Agreement. It should also be noted that the Third Party Offer to The China

Retail Fund, LDC was made by an independent third party unconnected with any members

of the Group or any of their substantial shareholders, directors or chief executives, or any

of their respective associates, as confirmed by the Directors.

In light of the above, we consider that the aggregate consideration payable for the

Share Acquisition has been determined on normal commercial terms and is fair and

reasonable.


— 16 —

(b) Price-to-earnings ratio and price-to-book ratio analysis

Price-to-earnings ratio (‘‘PER’’) and price-to-book ratio (‘‘PBR’’) are the two most

commonly used valuation benchmarks for retail and manufacturing enterprises. As such,

we consider it appropriate to appraise the reasonableness and fairness of the Consideration

with a PER and PBR analysis.

It is noted that at present there are no companies engaged in the exactly the same

business as that of TSL China, i.e. retail and manufacture of jewellery product with the

Mainland China (excluding Hong Kong) being the only market, listed on the Stock

Exchange. In light of this, we have reviewed all the Hong Kong listed companies with

their principal activities similar to that of TSL but with China including Hong Kong as

their major markets except for the Company (the ‘‘Comparable Companies’’), the closest

comparables the information of which are publicly available currently, for the purposes of

the aforementioned analysis.

Set out below are the PERs and the PBRs for each of these Comparable Companies

based on the respective closing price of their shares as at the Latest Practicable Date and

that of TSL China represented by the Consideration for a maximum of 24% interest in

TSL China under the Offer.

Company

Year

Ended

Market

Capitalisation

Latest audited

net profit/(loss)

attributable to

equity holders

Latest audited

net asset value

attributable to

equity holders PER PBR

HK$’million HK$’million HK$’million Times Times

Chow Sang Sang Holdings

International Limited

(Stock code: 116) 31/12/2005 1,811.8 187.3 2,092.5 9.7 0.9

King Fook Holdings Limited

(Stock code: 280) 31/3/2006 178.4 17.9 576.4 10.0 0.3

Luk Fook Holdings

(International) Limited

(Stock code: 590) 31/3/2006 624.6 95.7 715.2 6.5 0.9

Hang Fung Gold Technology

Limited

(Stock code: 870) 31/3/2006 717.3 129.6 1,127.8 5.5 0.6

TSL China 68.3 41.8 83.4 1.6 0.8

Sources: Bloomberg, website of the Stock Exchange and the latest published annual reports of the Comparable

Companies.

As illustrated above, the PER of TSL China under the Offer of 1.6 times is

substantially lower than those of the profitable Comparable Companies, while the PBR

represented by the Consideration for a maximum of 24% interest in TSL China under the

Offer of 0.8 times is within range of those of the Comparable Companies from 0.3 times

to 0.9 times.


— 17 —

It is noted that the PER that may be commanded by TSL China in respect of the

‘‘B’’ shares in its issued share capital will inevitably be adversely affected by the

Distribution Restrictions as discussed in the section headed ‘‘TSL CHINA AND THE

SHARE ACQUISITION’’ above. Furthermore, in general the PER of a private company,

such as TSL China will be lower than that of a publicly listed company, as its securities

are not freely tradable on the Stock Exchange. Notwithstanding the aforementioned, given

that the PER represented by the Consideration is at a substantial discount to and the PBR

is in line with those of the Comparable Companies, we consider the Consideration to be

fair and reasonable and in the interest of the Company and its shareholders.

3. Financial impacts of the Share Acquisition on the financial position of the Group

(a) Net asset value

The audited net asset value attributable to equity holders of TSL China as at 28

February, 2006 was around HK$83.4 million, and therefore, the net asset value of the

17.8% or 24% interest stake under the Offer amounts to around HK$14.8 million or

HK$20.0 million respectively. As the Consideration represents a discount to such net asset

value, there will be an increase in the net asset value of the Enlarged Group following

Completion.

(b) Working capital position

We have reviewed the cash flow projections of the Group for the period from 1 July,

2006 to 31 August, 2007 prepared by the Company and considered the letter addressed to

the Company from Moore Stephens regarding the accounting policies and calculations

upon the cash flow projections have been made. We concur with the Directors’ opinion

that the additional external borrowings for financing the Share Acquisition together with

the related interest expenses will have no material impact on the Company’s working

capital position and that the Group will have sufficient working capital for its present

requirements for at least the twelve months following Completion.

(c) Gearing position

The Share Acquisition will be financed by external borrowings of the Company.

Based on the unaudited pro forma financial information on the Enlarged Group set out in

Appendix III to this circular, the gearing ratio (which is calculated as the ratio of net

borrowings to total equity attributable to equity holders of the Company) of the Group

after the Share Acquisition of a maximum of 24% interest in TSL China will increase

from around 23% to 31%, as a result of the increase in borrowings for funding the Share

Acquisition.

The gearing ratio of the Comparable Companies, calculated on the same basis with

their latest published audited financial information, ranges from a negative value to 64%.

As such, we are of the view that the gearing ratio of the Company following Completion,

is on an acceptable level and therefore, is not expected to have any adverse impact on its

business operations.


— 18 —

RECOMMENDATION

Having taken into account the principal factors and reasons as discussed above and in

particular the followings (which should be read in conjunction with and interpreted in the full

context of this letter):

. The Mainland China operation has been one of the major profit contributors to the Group

and the Share Acquisition will increase the Company’s percentage shareholding interests

in TSL China, the sole holding company for the Group’s operating subsidiaries in

Mainland China;

. The Consideration is based on and the same as the Third Party Offer, which was made by

an independent third party unconnected with any members of the Group or any of their

substantial shareholders, directors or chief executives, or any of their respective

associates;

. The PER represented by the Consideration for a maximum of 24% interest in TSL China

under the Offer of 1.6 times is substantially lower than those of the profitable Comparable

Companies, while the PBR represented by the Consideration for a maximum of 24%

interest in TSL China under the Offer of 0.8 times is within range of those of the

Comparable Companies from 0.3 times to 0.9 times; and

. The net asset value of the Group will increase following Completion and there will be no

material adverse impact on either the gearing or working capital position of the Group as

a result of the Share Acquisition,

we are of the view that the Share Acquisition is conducted in the ordinary and usual course of

business of the Group and based on normal commercial terms, and it is fair and reasonable and in

the interests of the Company and its shareholders as a whole.

The Company has obtained from Partner Logistics Limited the written approval of the Share

Acquisition and has applied for a waiver from the Stock Exchange to approve the Share Acquisition

by way of a written independent shareholders’ approval in lieu of holding a shareholders general

meeting. If a shareholders general meeting was to be held for the purpose of considering and, if

thought fit, approving the Share Acquisition, we would recommend the independent shareholders to

vote in favour of the resolution to approve the Share Acquisition.

Yours faithfully,

For and on behalf of

Quam Capital Limited

Karen C. Wong

Director


— 19 —

SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

The following is a summary of the audited financial results of the Group for each of the three financial

years ended 28 February, 2006 as extracted from the audited consolidated financial statements of the Group

for the relevant periods respectively.

Results

Year ended 28/29 February,

2006 2005 2004

HK$’000 HK$’000 HK$’000

Turnover 1,324,132 1,275,996 955,625

Profit/(loss) from ordinary activities before taxation 42,433 78,418 32,830

Taxation (70,551) (35,223) (17,012)

(Loss)/profit for the year (28,118) 43,195 15,818

Attributable to:

Equity holders of the company (47,977) 35,813 4,194

Minority interests 19,859 7,382 11,624


APPENDIX I FINANCIAL INFORMATION ON THE GROUP

— 20 —

Assets and liabilities


2006 2005 2004

HK$’000 HK$’000 HK$’000

Property, plant and equipment (including investment

properties) 117,691 105,684 76,571

Deferred tax assets 20,834 17,684 3,143

Interest in associates — — —

Investments in securities and non-current assets 603 600 597

Current assets 712,673 674,266 550,655

Current liabilities (484,605) (445,712) (553,453)

367,196 352,522 77,513

Obligation under Finance lease (614) (876) —

Bank and other loans

— secured (110,867) (74,433) —

Amounts due to minority shareholders — — (1,497)

Employee benefit obligations (8,759) (10,190) (9,570)

Deferred tax liabilities (46) (15) (189)

NET ASSETS 246,910 267,008 66,257

Capital and reserves

Share capital 51,766 51,766 97,972

Reserves 155,186 197,594 (44,316)

Total equity attributable to equity shareholders of the

company 206,952 249,360 53,656


TOTAL EQUITY 246,910 267,008 66,257


— 21 —

AUDITED FINANCIAL INFORMATION OF THE GROUP

The following financial information includes the financial statements of the Group for the two

financial years ended 28 February, 2006 together with the notes thereto as extracted from the annual report

of the Company for the year ended 28 February, 2006.

Consolidated Income Statement

2006 2005

Note HK$’000 HK$’000

(restated)

Turnover 2 & 10 1,324,132 1,275,996

Cost of sales (657,896) (693,496)

Gross profit 666,236 582,500

Other revenue 3 & 10 2,744 9,035

Selling expenses (510,587) (424,816)

Administrative expenses (109,754) (86,311)

Other operating expenses (47) (280)

Profit from operations 48,592 80,128

Finance costs 4(a) (6,159) (5,037)

Cost of financial restructuring — (1,142)

Loss on disposal of properties — (68)

Recovery of debts written off in prior years — 4,537

Profit from ordinary activities before taxation 4 42,433 78,418

Taxation 5(a) (70,551) (35,223)

(Loss)/profit for the year (28,118) 43,195

Attributable to:

Equity holders of the Company (47,977) 35,813

Minority interests 19,859 7,382

(Loss)/profit for the year 8 (28,118) 43,195

(Loss)/earnings per share

Basic 9 (23.2) cents 47.7 cents


— 22 —

Consolidated Balance Sheet

2006 2005

Note HK$’000 HK$’000 HK$’000 HK$’000

(restated) (restated)

Non-current assets

Property, plant and equipment

— Investment properties 11(a) — 1,420

— Other property, plant and

equipment 11(a) 117,691 104,264

117,691 105,684

Other financial asset 13 500 500

Club debenture 103 100

Deferred tax assets 22(b) 20,834 17,684

Current assets 139,128 123,968

Investments in securities 1 38

Inventories 14 500,723 494,557

Trade and other receivables 15 109,680 97,194

Current tax recoverable 22(a) 1,020 652

Cash at bank and in hand 16 101,249 81,825

712,673 674,266- - - - - - - - - - - - - - - - - - - - - - - -

Current liabilities

Trade and other payables 17 (355,019) (367,902)

Bank overdrafts — secured 18 (18,550) —

Bank loans — secured 18 (4,000) (18,656)

Other loans — secured 19 (14,500) —

Obligations under finance leases 20(a) (660) (508)

Current tax payable 22(a) (91,876) (58,646)

(484,605) (445,712)- - - - - - - - - - - - - - - - - - - - - - - -

Net current assets 228,068 228,554

Total assets less current

liabilities carried forward 367,196 352,522


— 23 —

2006 2005

Note HK$’000 HK$’000 HK$’000 HK$’000



liabilities brought forward 367,196 352,522

Non-current liabilities

Bank loans — secured 18 (53,000) (2,066)

Other loans — secured 19 (57,867) (72,367)

Obligations under finance leases 20(a) (614) (876)

Employee benefit obligations 21(a) (8,759) (10,190)

Deferred tax liabilities 22(b) (46) (15)

(120,286) (85,514)

NET ASSETS 246,910 267,008

CAPITAL AND RESERVES

Share capital 23 51,766 51,766

Reserves 155,186 197,594

Total equity attributable to

equity holders of the

Company 206,952 249,360

Minority interests 39,958 17,648

TOTAL EQUITY 246,910 267,008


— 24 —

Balance Sheet

2006 2005

Note HK$’000 HK$’000 HK$’000 HK$’000


Non-current assets

Property, plant and equipment 11(b) 235 —

Interests in subsidiaries 12 206,270 243,842

206,505 243,842

Current assets

Other receivables, deposits and

prepayments 6,042 5,635

Cash at bank and in hand 2 172

6,044 5,807- - - - - - - - - - - - - - - - - - - - - - - -

Current liabilities

Other payables and accruals (4,685) (6,378)

Obligations under finance leases 20(b) (446) (305)

(5,131) (6,683)- - - - - - - - - - - - - - - - - - - - - - - -

Net current assets/(liabilities) 913 (876)


liabilities 207,418 242,966

Non-current liability

Obligations under finance leases 20(b) (466) (515)

NET ASSETS 206,952 242,451

CAPITAL AND RESERVES

Share capital 23 51,766 51,766

Reserves 24 155,186 190,685

TOTAL EQUITY 206,952 242,451


— 25 —

Consolidated Statement of Changes in Equity

Share

capital

Share

premium

Special

reserve

Capital

reserve

Land and

buildings

revaluation

reserve

Share-based

compensation

reserve

Exchange

reserve

Capital

redemption

reserve

Accumulated

losses Total

Minority

Interests

Total

equity

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

1 March, 2004

— as previously reported 97,972 86,037 336,362 97,992 21,412 — (7,486) 170,873 (762,632) 40,530 12,601 53,131

— prior year adjustments

in respect of leasehold

land and buildings

held for own use — — — — (21,412) — — — 34,538 13,126 — 13,126

— As restated 97,972 86,037 336,362 97,992 — — (7,486) 170,873 (728,094) 53,656 12,601 66,257

Capital reorganisation (88,175) (86,037) (336,362) — — — — (170,873) 681,447 — — —

Shares issued under loan

conversion 33,341 104,024 — — — — — — — 137,365 — 137,365

Shares issued under open offer 8,628 26,918 — — — — — — — 35,546 — 35,546

Capital reorganisation and

share issue expenses — (14,308) — — — — — — — (14,308) — (14,308)

Exchange difference on

translation of financial

statements of subsidiaries — — — — — — 2,491 — — 2,491 (3,538) (1,047)

Share of exchange reserve by

minority shareholders — — — — — — (1,203) — — (1,203) 1,203 —

Profit for the year (restated) — — — — — — — — 35,813 35,813 7,382 43,195

28 February, 2005 (restated) 51,766 116,634 — 97,992 — — (6,198) — (10,834) 249,360 17,648 267,008


— 26 —

Share

capital

Share

premium

Special

reserve

Capital

reserve

Land and

buildings

revaluation

reserve

Share-based

compensation

reserve

Exchange

reserve

Capital

redemption

reserve

Accumulated

losses Total

Minority

Interests

Total

equity

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

1 March, 2005 as previously

reported 51,766 116,634 — 97,992 24,997 — (6,198) — (42,740) 242,451 17,648 260,099

Prior year adjustments in

respect of leasehold land

and buildings held for own

use — — — — (24,997) — — — 31,906 6,909 — 6,909

1 March, 2005 (restated) 51,766 116,634 — 97,992 — — (6,198) — (10,834) 249,360 17,648 267,008

Issue of share options — — — — — 2,332 — — — 2,332 — 2,332

Exchange difference on

translation of financial

statements of subsidiaries — — — — — — 3,237 — — 3,237 2,451 5,688

Loss for the year — — — — — — — — (47,977) (47,977) 19,859 (28,118)

28 February, 2006 51,766 116,634 — 97,992 — 2,332 (2,961) — (58,811) 206,952 39,958 246,910


— 27 —

Consolidated Cash Flow Statement

2006 2005

HK$’000 HK$’000

(restated)

Operating activities

Profit from ordinary activities before taxation 42,433 78,418

Adjustments for:

— Finance costs 6,159 5,037

— Cost of financial restructuring — 1,142

— Loss on disposal of properties — 68

— Write back of provision for properties held for sale — (913)

— Loss on disposal of property, plant and equipment 47 197

— Depreciation 24,225 15,378

— Interest income (279) (132)

— Equity-settled share option expenses 2,332 —

— Foreign exchange loss 4,322 2,300

Operating profit before changes in working capital 79,239 101,495

Increase in inventories (6,166) (84,561)

Increase in trade and other receivables (12,079) (18,052)

(Decrease)/increase in trade and other payables (12,896) 75,665

(Decrease)/increase in employee benefit obligations (1,431) 620

Cash generated from operations 46,667 75,167

Tax paid

— Hong Kong Profits Tax (21,008) (6,715)

— Overseas tax (19,800) (5,261)

Net cash generated from operating activities 5,859 63,191- - - - - - - - - - - - - - - - - - - - - - - -

Investing activities

Payment to acquire property, plant and equipment (36,107) (22,139)

Proceeds from disposal of property, plant and equipment 13 163

Net proceeds from sale of properties held for sale — 1,276

Decrease in pledged bank deposits — 792

Interest received 279 132

Net cash used in investing activities (35,815) (19,776)- - - - - - - - - - - - - - - - - - - - - - - -


— 28 —

2006 2005

HK$’000 HK$’000

(restated)

Financing activities

Capital element of finance lease rentals paid (516) (475)

Repayment to minority interests — (1,497)

Proceeds from new bank loan 77,000 —

Repayment of bank loans (40,722) (16,955)

Proceeds from shares issued under open offer — 35,546

Capital reorganisation and share issue expenses paid — (5,391)

Interest element of finance lease rentals paid (60) (47)

Other borrowing costs paid (6,087) (5,020)

Payment of cost of financial restructuring — (3,660)

Dividend paid to a minority shareholder — (3,538)

Net cash generated from/(used in) financing activities 29,615 (1,037)- - - - - - - - - - - - - - - - - - - - - - - -

Net (decrease)/increase in cash and cash equivalents (341) 42,378

Cash and cash equivalents at beginning of year 81,825 39,277

Effect of foreign exchange rates changes 1,215 170

Cash and cash equivalents at end of year 82,699 81,825

Analysis of balances of cash and cash equivalents

Cash at bank and in hand 101,249 81,825

Bank overdrafts (18,550) —

82,699 81,825


— 29 —

Notes to the Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

These financial statements have been prepared in accordance with accounting principles generally accepted in

Hong Kong, which include all applicable Hong Kong Financial Reporting Standards (‘‘HKFRSs’’), such term includes all

applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (‘‘HKASs’’) and

Interpretations issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’) and the disclosure

requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable

disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited

(‘‘Listing Rules’’). A summary of the significant accounting policies adopted by the Group is set out below.

(b) Basis of preparation of financial statements

The measurement basis used in the preparation of the financial statements is historical cost modified by the

marking to market of certain investments in securities as explained in the accounting policies set out below.

The principal accounting policies and methods of computation used in the preparation of the financial statements

for the year ended 28 February, 2006 are consistent with those adopted in the financial statements for the year ended 28

February, 2005, except for the adoption of the new and revised HKFRSs as explained in (c) below.

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

During the current year, the Group has adopted new and revised HKFRSs which are effective for accounting

periods commencing on or after 1 January, 2005. The new and revised HKFRSs which are relevant to the Group’s

operations are:

HKAS 1 Presentation of Financial Statements

HKAS 2 Inventories

HKAS 7 Cash Flow Statements

HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

HKAS 10 Events after the Balance Sheet Date

HKAS 12 Income Taxes

HKAS 14 Segment Reporting

HKAS 16 Property, Plant and Equipment

HKAS 17 Leases

HKAS 18 Revenue

HKAS 19 Employee Benefits

HKAS 21 The Effects of Changes in Foreign Exchange Rates

HKAS 23 Borrowing Costs

HKAS 24 Related Party Disclosures

HKAS 26 Accounting and Reporting by Retirement Benefit Plans

HKAS 27 Consolidated and Separate Financial Statements

HKAS 32 Financial Instruments: Disclosure and Presentation

HKAS 33 Earnings Per Share

HKAS 36 Impairment of Assets

HKAS 37 Provisions, Contingent Liabilities and Contingent Assets

HKAS 39 Financial Instruments: Recognition and Measurement

HKAS 40 Investment Property

HKFRS 2 Share-based Payment

HKFRS 3 Business Combinations

The adoption of HKASs 2, 7, 8, 10, 12, 14, 16, 18, 19, 23, 26, 32, 33, 37, 39 and 40 has had no material impact on

the accounting policies of the Group and the Company and the methods of computation in the Group’s and the

Company’s financial statements.


— 30 —

The impact of the adoption of the other HKFRSs on the financial statements is as follows:

(i) Share option scheme (HKFRS 2 ‘‘Share-based Payment’’)

In prior years, no amounts were recognised when option holders were granted share options over shares in

the Company. If the option holders chose to exercise the options, the nominal amount of share capital and share

premium were credited only to the extent of the option’s exercise price receivable.

With effect from 1 March, 2005, in order to comply with HKFRS 2, the Group recognises the fair value of

such share options as an expense in the income statement, or as an asset, if the cost qualifies for recognition as an

asset under the Group’s accounting policies. A corresponding increase is recognised in a share-based

compensation reserve within equity.

Where the option holders are required to meet vesting conditions before they become entitled to the

options, the Group recognises the fair value of the options granted over the vesting period. Otherwise, the Group

recognises the fair value in the period in which the options are granted.

If an option holder chooses to exercise options, the related share-based compensation reserve is transferred

to share capital and share premium, together with the exercise price. If the options lapse unexercised the related

share-based compensation reserve is transferred directly to retained earnings.

The new accounting policy has been applied retrospectively with comparatives restated in accordance with

HKFRS 2, except that the Group has taken advantage of the transitional provisions set out in paragraph 53 of

HKFRS 2 under which the new recognition and measurement policies have not been applied to the following

grants of options:

(a) all options granted to option holders on or before 7 November, 2002; and

(b) all options granted to option holders after 7 November, 2002 but which had vested before 1 March,

2005.

As all the Group’s options were granted to option holders either before 7 November, 2002 or after 1 March,

2005, the adoption of HKFRS 2 has no impact on the Group’s net assets and results for the prior years.

The amount charged to the income statement as a result of the change of policy increased cost of sales,

selling expenses and administrative expenses for the year ended 28 February, 2006 by HK$185,000,

HK$1,829,000 and HK$318,000 respectively (year ended 28 February, 2005 : Nil), with the corresponding

amounts credited to the share-based compensation reserve.

Details of the share option scheme are set out in note 26.

(ii) Leasehold land and buildings held for own use (HKAS 17 ‘‘Leases’’)

In prior years, leasehold land and buildings held for own use were stated at revalued amounts less

accumulated depreciation and accumulated impairment losses. Movements of revaluation surpluses or deficits

were normally taken to the land and buildings revaluation reserve.

With the adoption of HKAS 17 as from 1 March, 2005, the leasehold interest in the land held for own use is

accounted for as being held under an operating lease where the fair value of the interest in any buildings situated

on the leasehold land could be separately identified from the fair value of the leasehold interest in the land at the

time the lease was first entered into by the Group, or taken over from the previous lessee, or at the date of

construction of those buildings, if later. In case the two elements cannot be allocated reliably, the entire lease is

classified as a finance lease and carried at cost less accumulated depreciation and accumulated impairment losses.

As from 1 March, 2005, the buildings are also stated at cost less accumulated depreciation, rather than at

fair value, to be consistent with the new policy required to be adopted for the land element which should be

classified as operating lease and cannot be revalued.


— 31 —

The new accounting policies have been adopted retrospectively with the opening balances of accumulated

losses, land and buildings, land and buildings revaluation reserve, deferred tax assets, deferred tax liabilities and

the comparative information adjusted as follows:

As at 1 March,

2006 2005

HK$’000 HK$’000

Effect of new policy (increase/(decrease))

Accumulated losses (31,906) (34,537)

Land and buildings revaluation reserve (24,997) (21,412)

Land and buildings 6,143 13,014

Deferred tax liabilities (766) (111)

In respect of the year ended 28 February, 2006, it is not practicable to estimate the extent to which the loss

for the year, or the income or expenses taken directly to equity, are higher or lower than they would have been had

the previous policy still been applied in the current year.

(iii) Amortisation of positive and negative goodwill (HKFRS 3 ‘‘Business Combinations’’ and HKAS 36

‘‘Impairment of Assets’’)

In prior periods:

. positive or negative goodwill which arose prior to 1 March, 2001 was taken directly to reserves at

the time it arose, and was not recognised in the income statement until disposal or impairment of the

acquired business;

. positive goodwill which arose on or after 1 March, 2001 was amortised on a straight line basis over

its useful life and was subject to impairment testing when there were indications of impairment; and

. negative goodwill which arose on or after 1 March, 2001 was amortised over the weighted average

useful life of the depreciable/amortisable non-monetary assets acquired, except to the extent it

related to identified expected future losses as at the date of acquisition. In such cases it was

recognised in the income statement as those expected losses were incurred.

With effect from 1 March, 2005, in accordance with HKFRS 3 and HKAS 36, the Group no longer

amortises positive goodwill. Such goodwill is tested annually for impairment, including in the year of its initial

recognition, as well as when there are indications of impairment. Impairment losses are recognised when the

carrying amount of the cash generating unit to which the goodwill had been allocated exceeds its recoverable

amount.

Also with effect from 1 March, 2005 and in accordance with HKFRS 3 and HKAS 36, if the fair value of

the net assets acquired in a business combination exceeds the consideration paid (i.e. an amount arises which

would have been known as negative goodwill under the previous accounting policy), the excess is recognised

immediately in the income statement as it arises.

In accordance with the transitional arrangements under HKFRS 3, goodwill which had previously been

taken directly to reserves (i.e. goodwill which arose before 1 March, 2001) will not be recognised in the income

statement on disposal or impairment of the acquired business, or under any other circumstances.

The change in policy relating to negative goodwill had no effect on these financial statements as there was

no negative goodwill deferred as at 28 February, 2005.


— 32 —

(iv) Retranslation of goodwill relating to a net investment in a foreign operation (HKAS 21 ‘‘The Effects of

Changes in Foreign Exchange Rates’’)

In prior years, goodwill was recognised directly in equity or carried at cost less amortisation and

impairment.

With effect from 1 March, 2005, in order to comply with HKAS 21, any goodwill arising on the acquisition

of a foreign operation is treated as an asset of the foreign operation. Thus it is expressed in the functional currency

of that foreign operation and is retranslated at the closing rate at each balance sheet date. Any resulting exchange

difference is taken directly to the exchange reserves, together with any other differences arising from the re-

translation of the net assets of the foreign operation.

In accordance with the transitional provisions in HKAS 21, this new policy has not been adopted

retrospectively and will only be applied to acquisitions occurring on or after 1 March, 2005. As the Group has not

acquired any new foreign operations since that date, the change in policy has had no impact on these financial

statements.

(v) Minority interests (HKAS 1 ‘‘Presentation of Financial Statements’’ and HKAS 27 ‘‘Consolidated and

Separate Financial Statements’’)

In prior years, minority interests at the balance sheet date were presented in the consolidated balance sheet

separately from liabilities and as deduction from net assets. Minority interests in the results of the Group for the

year were also separately presented in the income statement as a deduction before arriving at the profit attributable

to shareholders.

With effect from 1 March, 2005, in order to comply with HKAS 1 and HKAS 27, minority interests at the

balance sheet date are presented in the consolidated balance sheet within equity, separately from the equity

attributable to the equity holders of the Company, and minority interests in the results of the Group for the year

are presented on the face of the consolidated income statement as an allocation of the total profit or loss for the

year between the minority interests and the equity holders of the Company.

The presentation of minority interests in the consolidated balance sheet, income statement and statement of

changes in equity for the previous year has been restated accordingly.

(d) Judgement and estimates

The preparation of financial statements in conformity with HKFRSs requires management to make judgments,

estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and

expenses. The estimates and associated assumptions are based on historical experience and various other factors that are

believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about

carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from

these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates

are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the

revision and future periods if the revision affects both current and future periods.

(e) Basis of consolidation

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

made up to 28 February, 2006. Where necessary, adjustments are made to the financial statements of subsidiaries to bring

the accounting policies used into line with those used by other members of the Group.

A subsidiary, in accordance with the Hong Kong Companies Ordinance, is a company in which the Group, directly

or indirectly, holds more than half of the issued share capital or controls more than half the voting power or controls the

composition of the board of directors. Subsidiaries are considered to be controlled if the Company has the power, directly

or indirectly, to govern the financial and operating policies, so as to obtain benefits from their activities.


— 33 —

The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group

obtains control, and continue to be consolidated until the date that such control ceases. Intra-group balances and

transactions, and any unrealised profits arising from intra-group transactions, are eliminated in full on consolidation.

Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains, but only to

the extent that there is no evidence of impairment.

The acquisition of subsidiaries during the year has been accounted for using the purchase method of accounting.

This method involves allocating the cost of the business combinations to fair values of the assets acquired, and liabilities

and contingent liabilities assumed at the date of acquisition. The cost of the acquisition is measured at the aggregate of

the fair values of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange,

plus costs directly attributable to the acquisition.

Any excess of the cost of the acquisition over the fair values of the identifiable net assets acquired is recognised as

goodwill. Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units

and is tested annually for impairment. Any excess of the Group’s interest in fair values of the acquiree’s identifiable

assets, liabilities and contingent liabilities over the cost of a business combination is recognised immediately in the

income statement.

Minority interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity

interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the

consolidated balance sheet and statement of changes in equity within equity, separately from equity attributable to the

equity shareholders of the Company. Minority interests in the results of the Group are presented on the face of the

consolidated income statement as an allocation of the total profit or loss for the year between minority interests and the

equity shareholders of the Company.

Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and

any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the

minority has a binding obligation to, and is able to, make good the losses. If the subsidiary subsequently reports profits,

the Group’s interest is allocated all such profits until the minority’s share of losses previously absorbed by the Group has

been recovered.

(f) Impairment of assets

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to

determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists,

the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it

is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of

the cash-generating unit to which the asset belongs.

Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated

future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market

assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cash- generating unit) is estimated to be less than its carrying amount, the

carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment losses are

recognised as an expense immediately, unless the relevant asset is land or buildings other than investment property

carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is

increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the

carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating

unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is

carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.


— 34 —

(g) Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost, less provisions for depreciation and any impairment losses.

Details are set out in note 11. The cost of an item of property, plant and equipment comprises its purchase price and any

directly attributable cost of bringing the asset to its working condition and location for its intended use. Expenditure

incurred after the item has been put into operation, such as repairs and maintenance and overhaul costs, is normally

charged to the income statement in the year in which it is incurred. In situations where it can be clearly demonstrated that

the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the

item, the expenditure is capitalised as an additional cost of the item. When an item of property, plant and equipment is

sold, its cost and accumulated depreciation are removed from the financial statements and any gain or loss resulting from

the disposal, being the difference between the net disposal proceeds and the carrying amount of the asset, is included in

the income statement.

Depreciation is provided on the straight-line method, based on the estimated economic useful lives of the

individual assets, as follows:

Leasehold land and buildings 55 years from the date of purchase

Furniture, fixtures and equipment 1 to 10 years

Plant and machinery 3 to 7 years

Motor vehicles 4 to 10 years

(h) Leased assets

(i) Classification of assets leased to the Group

Assets that are held by the Group under leases which transfer to the Group substantially all the risks and

rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially

all the risks and rewards of ownership to the Group are classified as operating leases.

(ii) Assets acquired under finance leases

Where the Group acquires the use of assets under finance leases, the amounts representing the fair value of

the leased assets, or, if lower, the present value of the minimum lease payments of such assets, are included in

property, plant and equipment and the corresponding liabilities, net of finance charges, are recorded as obligations

under finance leases. Depreciation is provided at rates which write off the cost or valuation of assets over the term

of the relevant leases or, where it is likely the Group or the Company will obtain ownership of the assets, the life

of the assets, as set out in note 1(g) above. Impairment losses are accounted for in accordance with the accounting

policy as set out in note 1(f) above. Finance charges implicit in the lease payments are charged to income

statement over the period of the leases so as to produce an approximately constant periodic rate of charge on the

remaining balance of the obligations for each accounting period. Contingent rentals, if any, are charged to income

statement in the accounting period in which they are incurred.

(iii) Operating lease charges

Where the Group has the use of assets held under operating leases, payments made under the leases are

charged to income statement in equal instalments over the accounting periods covered by the lease term, except

where an alternative basis is more representative of the pattern of benefits to be derived from the leased assets.

Lease incentives received are recognised in income statement as an integral part of the aggregate net lease

payments made. Contingent rentals, if any, are charged to income statement in the accounting period in which

they are incurred.

(i) Investments in subsidiaries

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

losses. Results of the subsidiaries are accounted for by the Company on the basis of dividends received and receivable.


— 35 —

(j) Investments in securities

From 1 March, 2005 onwards, the Group classifies and measures its debt and equity securities in accordance with

HKAS 39 ‘‘Financial Instruments: Recognition and Measurement’’. Under HKAS 39, financial assets are classified as

‘‘financial assets at fair value through profit or loss’’, ‘‘available-for- sale financial assets’’, ‘‘loans and receivables’’, or ‘‘

held-to-maturity financial assets’’. ‘‘Financial assets at fair value through profit or loss’’ that are not part of a hedging

relationship and ‘‘available-for-sale financial assets’’ are carried at fair value, with changes in fair values recognised in

profit or loss and equity respectively. ‘‘Loans and receivables’’ and ‘‘held-to-maturity financial assets’’ are measured at

amortised cost using the effective interest method.

The fair value of investments that are actively traded in organised financial markets is determined by reference to

quoted market bid prices at the close of business on the balance sheet date. For investments where there is no active

market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market

transactions; reference to current market value of another instrument, which is substantially the same; a discounted cash

flow analysis and option pricing models. When the fair value of unlisted equity securities cannot be reliably measured

because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the

probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value,

such securities are stated at cost less any impairment losses.

(k) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average

cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories

to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of

completion and the estimated costs necessary to make the sale.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in

which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all

losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal

of any write-down of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the

period in which the reversal occurs.

(l) Foreign currency translation

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction

dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling

at the balance sheet date. Foreign exchange gains and losses are recognised in the income statement.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are

translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities

denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates ruling at the

dates the fair value was determined.

The results of foreign operations are translated into Hong Kong dollars at the exchange rates approximating the

foreign exchange rates ruling at the dates of the transactions. Balance sheet items, including goodwill arising on

consolidation of foreign operations acquired on or after 1 January, 2005, are translated into Hong Kong dollars at the

foreign exchange rates ruling at the balance sheet date. The resulting exchange differences are recognised directly in a

separate component of equity. Goodwill arising on consolidation of a foreign operation acquired before 1 January, 2005

is translated at the foreign exchange rate that applied at the date of acquisition of the foreign operation.

On disposal of a foreign operation, the cumulative amount of the exchange differences recognised in equity which

relate to that foreign operation is included in the calculation of the profit or loss on disposal.


— 36 —

(m) Trade and other receivables

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

bad and doubtful debts.

(n) Trade and other payables

Trade and other payables are initially recognised at fair value and thereafter stated at amortised cost unless the

effect of discounting would be immaterial, in which case they are stated at cost.

(o) Provisions

Provisions are recognised for liabilities of uncertain timing or amount when the Company or Group has a legal or

constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be

required to settle the obligation and a reliable estimate can be made. Where the time value of money is material,

provisions are stated at the present value of the expenditures expected to settle the obligation.

When the effect of discounting is material, the amount recognised for a provision is the present value at the

balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the

discounted present value amount arising from the passage of time is included in finance costs in the income statement.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated

reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is

remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more

future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

(p) Employee benefits

(i) Salaries, annual bonuses, paid annual leave, leave passage and the cost to the Group of non-monetary

benefits are accrued in the year in which the associated services are rendered by employees of the Group.

Where payment or settlement is deferred and the effect would be material, these amounts are stated at their

present values.

(ii) Contributions to Mandatory Provident Funds as required under the Hong Kong Mandatory Provident Fund

Schemes Ordinance and contributions to the retirement schemes operated by the relevant authorities for

employees of the subsidiaries in the People’s Republic of China (‘‘PRC’’) and Malaysia are recognised as

an expense in the income statement as incurred, except to the extent that they are included in the cost of

inventories not yet recognised as an expense.

(iii) The Group’s net obligation in respect of lump sum long service amounts payable on cessation of

employment in certain circumstances under the Hong Kong Employment Ordinance is the amount of future

benefit that employees have earned in return for their service in the current and prior periods. The

obligation is calculated using the projected unit credit method by a qualified actuary, discounted to its

present value, and the fair value of any related plan assets is deducted. The discount rate is the yield at

balance sheet date on Exchange Fund Notes that have maturity dates approximating the terms of the

Group’s obligations.

(q) Income tax

(i) Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current

tax and movements in deferred tax assets and liabilities are recognised in the income statement except to

the extent that they relate to items recognised directly in equity, in which case they are recognised in

equity.

(ii) Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or

substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous

years.


— 37 —

(iii) Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively,

being the differences between the carrying amounts of assets and liabilities for financial reporting purposes

and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent

that it is probable that future taxable profits will be available against which the asset can be utilised, are

recognised. Future taxable profits that may support the recognition of deferred tax assets arising from

deductible temporary differences include those that will arise from the reversal of existing taxable

temporary differences, provided those differences relate to the same taxation authority and the same

taxable entity, and are expected to reverse either in the same period as the expected reversal of the

deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can

be carried back or forward. The same criteria are adopted when determining whether existing taxable

temporary differences support the recognition of deferred tax assets arising from unused tax losses and

credits, that is, those differences are taken into account if they relate to the same taxation authority and the

same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can

be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences

arising from goodwill not deductible for tax purposes, negative goodwill treated as deferred income, the

initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are

not part of a business combination).

The amount of deferred tax recognised is measured based on the expected manner of realisation or

settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively

enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced to the

extent that it is no longer probable that sufficient taxable profit will be available to allow the related tax

benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient

taxable profit will be available.

(iv) Current tax balances and deferred tax balances, and movements therein, are presented separately from each

other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets

against deferred tax liabilities if, and only if, the Company or the Group has the legally enforceable right to

set off current tax assets against current tax liabilities and the following additional conditions are met:

. in the case of current tax assets and liabilities, the Company or the Group intends either to settle on

a net basis, or to realise the asset and settle the liability simultaneously; or

. in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same

taxation authority on either:

. the same taxable entity; or

. different taxable entities, which, in each future period in which significant amounts of

deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the

current tax assets and settle the current tax liabilities on a net basis or realise and settle

simultaneously.


— 38 —

(r) Revenue recognition

Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable,

can be measured reliably, revenue is recognised in the income statement as follows:

(i) Sale of goods

Revenue is recognised when the customer has accepted the goods and the related risks and rewards of

ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts and

returns.

(ii) Commission and consultancy service income

Commission and consultancy service income are recognised when the related services are rendered.

(iii) Rental income from operating leases

Rental income receivable under operating leases is recognised in the income statement in equal instalments

over the accounting periods covered by the lease term, except where an alternative basis is more representative of

the pattern of benefits to be derived from the leased asset. Lease incentives granted are recognised in the income

statement as an integral part of the aggregate net lease payments receivable. Contingent rental are recognised as

income in the accounting period in which they are earned.

(iv) Dividends

. Dividend income from unlisted investments is recognised when the shareholder’s right to receive

payment is established.

. Dividend income from listed investments is recognised when the share price of the investment goes

ex-dividend.

(v) Interest income

Interest income from bank deposits is accrued on a time-apportioned basis by reference to the principal

outstanding and at the rate applicable.

(s) Borrowing costs

Borrowing costs are expensed as incurred except where they relate to the financing of major capital projects where

they are capitalised up to the date that the assets are brought into a working condition for their intended use.

(t) Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash at bank and on

hand, demand deposits with banks and other financial institutions, and short term highly liquid investments that are

readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having

been within three months of maturity at acquisition, less advances from banks repayable within three months from the

date of the advance. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash

management are also included as a component of cash and cash equivalents.

(u) Related parties

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

(i) the party has the ability, directly or indirectly through one or more intermediaries, to control the Group or

exercise significant influence over the Group in making financial and operating decisions, or vice versa, or

where the Group and the party are subject to common control or common significant influence;


— 39 —

(ii) the party is a member of the key management personnel of the Group;

(iii) the party is a close member of the family of any individual referred to in (i) or (ii);

(iv) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which

significant voting power in such entity resides with, directly or indirectly, any individual referred to in (ii)

or (iii); or

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

is a related party of the Group.

(v) Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing products or services

(business segment), or in providing products or services within a particular economic environment (geographical

segment), which is subject to risks and rewards that are different from those of other segments.

In accordance with the Group’s internal financial reporting, the Group has chosen geographical segment

information as the primary reporting format. No business segments analysis of the Group is presented as all the Group’s

turnover and trading result are generated from the manufacture, sale and marketing of jewellery products and provision of

related agency services.

Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as

those that can be allocated on a reasonable basis to that segment. For example, segment assets may include inventories,

trade receivables and fixed assets. Segment revenue, expenses, assets and liabilities are determined before intra-group

balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such

intra-group balances and transactions are between group enterprises within a single segment.

Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected

to be used for more than one year.

Unallocated items mainly comprise financial and corporate assets, interest-bearing loans, borrowings, corporate

and financing expenses.

2. TURNOVER

The principal activities of the Group are the manufacture, sale and marketing of jewellery products and provision of

related agency services.

Turnover represents the sales value of jewellery products sold to customers and commission income. The amount of each

significant category of revenue recognised in turnover during the year is as follows:

2006 2005

HK$’000 HK$’000

Sales of jewellery products 1,323,678 1,253,603

Commission income 454 22,393

1,324,132 1,275,996


— 40 —

3. OTHER REVENUE

2006 2005

HK$’000 HK$’000

Rental income 32 161

Interest income 279 132

Foreign exchange gain 908 2,755

Consultancy service income — 256

Others 1,525 5,731

2,744 9,035

4. PROFIT FROM ORDINARY ACTIVITIES BEFORE TAXATION

Profit from ordinary activities before taxation is arrived at after charging/(crediting):

2006 2005

HK$’000 HK$’000

(a) Finance costs

Interest on bank loans and overdraft 2,049 739

Interest on other loans 4,050 4,189

Interest on amount due to a minority shareholder — 62

Finance charges on obligations under finance leases 60 47

6,159 5,037

2006 2005

HK$’000 HK$’000

(b) Staff costs

Contribution to defined contribution retirement plan 4,814 4,518

Expense recognised in respect of long service payments

(note 21(a)(ii) and (iii)) (1,431) 844

Retirement costs 3,383 5,362

Equity-settled share option expenses 2,332 —

Salaries, wages and other benefits 190,876 144,742

196,591 150,104


— 41 —

2006 2005

HK$’000 HK$’000

(restated)

(c) Other items

Auditors’ remuneration

— current year provision 3,250 3,218

— prior year under provision 1,077 1,114

Cost of inventories sold 657,896 693,496

Depreciation 24,225 15,378

Operating leases charges

— land and buildings situated in Hong Kong 66,512 48,662

— land and buildings situated other than in Hong Kong 9,830 4,476

Loss on disposal of property, plant and equipment 47 197

Write back of provision for properties held for sale — (913)

Reversal of provision for inventories (2,701) (350)

Rentals receivable from properties less direct outgoings of HK$12,000

(2005 : HK$48,000) (20) (113)

Cost of inventories sold includes HK$37,829,000 (2005 : HK$26,324,000) relating to staff costs, depreciation expenses,

operating lease charges and reversal of provision for inventories, which amount is also included in the respective total amounts

disclosed separately above in note 4(b) and 4(c) for each of these types of expenses.

5. TAXATION

(a) Income tax in the consolidated income statement represents:

2006 2005

HK$’000 HK$’000

(restated)

Current tax — Provision for Hong Kong Profits Tax

Tax for the year 815 9,683

Underprovision in respect of prior years 50,964 26,005

51,779 35,688

Current tax — overseas

Tax for the year 22,948 14,249

Overprovision in respect of prior years (1,107) —

21,841 14,249

Deferred tax

Origination and reversal of temporary differences (3,069) (14,714)

70,551 35,223

(i) The provision for Hong Kong Profits Tax is calculated at 17.5% (2005 : 17.5%) of the estimated assessable

profits for the year. Taxation for overseas subsidiaries is similarly charged at the appropriate current rate of

taxation ruling in the relevant countries.


— 42 —

(ii) Since the end of the last financial year and up to the date of these financial statements, certain subsidiaries

of the Group received from the Inland Revenue Department (‘‘IRD’’) additional assessments amounting to

approximately HK$51,000,000 relating to certain offshore income and agents commission payments and

promoter fees essentially for all prior years under dispute in respect of which the IRD has been challenging

the tax treatments adopted by the subsidiaries.

The subsidiaries are in the process of gathering relevant information to support the tax treatments adopted.

The directors consider it prudent to establish a full provision of HK$51,000,000 in respect of the above

which has been charged to the consolidated income statement for the year.

(b) Reconciliation between taxation and accounting profit at applicable tax rates:

2006 2005

HK$’000 HK$’000

(restated)

Profit before taxation 42,433 78,418

Notional tax on profit before tax, calculated at the rates applicable to profits in

the countries concerned 4,810 20,495

Tax effect of profits entitled to tax exemption (811) (700)

Tax effect of non-deductible expenses 21,414 4,233

Tax effect of non-taxable revenue (10,733) (1,624)

Tax effect of prior year’s tax losses utilised this year (1,197) (360)

Tax effect of temporary differences not recognised 2,328 342

Tax effect of prior year’s temporary difference recognised this year (1,808) (15,373)

Tax effect of unused tax losses not recognised 6,691 2,205

Underprovision in respect of prior years 49,857 26,005

Actual tax expense 70,551 35,223

6. DIRECTORS’ REMUNERATION

Directors’ remuneration disclosed pursuant to section 161 of the Hong Kong Companies Ordinance is as follows:

2006 2005

HK$’000 HK$’000

(restated)

Fees 1,260 1,440

Salaries and other emoluments 7,128 6,480

Performance related incentives 3,784 4,114

Share-based payments 1,139 —

Contributions to retirement benefits scheme 25 36

13,336 12,070

Included in the directors’ remuneration were fees of HK$1,260,000 (2005 : HK$1,440,000) paid to the non-executive

directors during the year.


— 43 —

Fees

Salaries and

other

emoluments

Performance

related

incentives

Contributions

to retirement

benefits

scheme

Share-based

payments Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

2006

Executive directors:

Tse Tat Fung, Tommy — 3,078 3,001 12 530 6,621

Peter Gerardus Van

Weerdenburg — 1,765 156 — 530 2,451

Leung Yit Kuen, Raymond — 195 92 1 — 288

Alex Chan — 830 35 12 53 930

Erwin Steve Huang — 1,260 500 — 26 1,786

— 7,128 3,784 25 1,139 12,076

Non-executive directors:

Hong Po Kui, Martin 180 — — — — 180

Chui Chi Yun, Robert* 360 — — — — 360

Gerald Clive Dobby* 360 — — — — 360

Lui Pui Kee, Francis* 360 — — — — 360

1,260 — — — — 1,260

1,260 7,128 3,784 25 1,139 13,336

* Independent non-executive directors.

Fees

Salaries and

other

emoluments

Performance

related

incentives

Contributions

to retirement

benefits

scheme

Share-based

payments Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

2005

Executive directors:

Tse Tat Fung, Tommy — 2,999 3,000 12 — 6,011

Peter Gerardus Van

Weerdenburg — 1,765 600 — — 2,365

Leung Yit Kuen, Raymond — 1,041 214 12 — 1,267

Alex Chan — 675 300 12 — 987

— 6,480 4,114 36 — 10,630

Non-executive directors:

Hong Po Kui, Martin 360 — — — — 360

Chui Chi Yun, Robert* 360 — — — — 360

Gerald Clive Dobby* 360 — — — — 360

Lui Pui Kee, Francis* 360 — — — — 360

1,440 — — — — 1,440

1,440 6,480 4,114 36 — 12,070

* Independent non-executive directors.


— 44 —

7. INDIVIDUALS WITH HIGHEST EMOLUMENTS

Of the five individuals with the highest emoluments, three (2005 : three) are directors whose emoluments are disclosed in

note 6. The aggregate of the emoluments in respect of the other two (2005 : two) individuals are as follows:

2006 2005

HK$’000 HK$’000

(restated)

Salaries and other emoluments 2,408 1,296

Performance related incentives 2,456 4,167

Contributions to retirement benefits scheme 24 24

Share-based payments 86 —

4,974 5,487

The emoluments of the two (2005 : two) individuals with the highest emoluments are within the following bands:

2006 2005

Number of

individuals

Number of

individuals

HK$1,000,001 to HK$1,500,000 1 1

HK$3,500,001 to HK$4,000,000 1 —

HK$4,000,001 to HK$4,500,000 — 1

8. LOSS ATTRIBUTABLE TO SHAREHOLDERS

The consolidated loss attributable to shareholders includes a loss of HK$37,831,000 (2005 : profit of HK$59,281,000)

which has been dealt with in the financial statements of the Company.

9. (LOSS)/EARNINGS PER SHARE

(a) Basic (loss)/earnings per share

The calculation of basic (loss)/earnings per share is based on the loss attributable to shareholders of

HK$47,977,000 (2005 : profit attributable to shareholders of HK$35,813,000 — restated) and the weighted average of

207,063,221 ordinary shares (2005 : 75,063,433 ordinary shares after adjusting for the capital reorganisation in 2005) in

issue during the year.

(b) Diluted (loss)/earnings per share

Diluted loss per share is not shown for the year ended 28 February, 2006 as all the potential ordinary shares (i.e.

the share options) are anti-dilutive.

There were no dilutive potential ordinary shares in existence during the year ended 28 February, 2005.


— 45 —

10. SEGMENT REPORTING

Segment information is presented in respect of the Group’s geographical segments. Information relating to geographical

segments based on the location of assets is chosen because this is more relevant to the Group in making operating and financial

decisions. No business segments analysis of the Group is presented as all the Group’s turnover and trading result are generated

from the manufacture, sale and marketing of jewellery products and provision of related agency services.

PRC (including

Hong Kong) Others

Inter-segment

elimination Consolidated

2006 2005 2006 2005 2006 2005 2006 2005

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

(restated)

Revenue from external customers 1,297,568 1,249,624 26,564 26,372 — — 1,324,132 1,275,996

Inter-segment revenue 10,254 11,134 — — (10,254) (11,134) — —

Other revenue from

externalcustomers

2,397 8,688 347 347 — — 2,744 9,035

Total 1,310,219 1,269,446 26,911 26,719 (10,254) (11,134) 1,326,876 1,285,031

Segment results 48,144 79,252 448 876 48,592 80,128

Finance costs (6,159) (5,037)

Cost of financial restructuring — (1,142)

Loss on disposal of properties — (68)

Recovery of debts written off

in prior years — 4,537

Income tax (70,551) (35,223)

(Loss)/profit for the year (28,118) 43,195

Depreciation for the year 24,193 14,786 32 592

Significant non-cash expenses

(other than depreciation) 47 374 — —

Segment assets 921,814 870,602 16,699 18,891 (108,565) (109,595) 829,948 779,898

Unallocated assets 21,853 18,336

Total assets 851,801 798,234

Segment liabilities 420,662 374,309 110,190 112,612 (108,565) (109,595) 422,287 377,326

Unallocated liabilities 182,604 153,900

Total liabilities 604,891 531,226

Capital expenditure incurred

during the year 36,014 23,987 93 11


— 46 —

11. PROPERTY, PLANT AND EQUIPMENT

(a) The Group

Land and

buildings

Furniture,

fixtures

and

equipment

Plant and

machinery

Motor

vehicles Sub-total

Investment

properties Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

(restated) (restated) (restated)

Cost or valuation:

1 March, 2004 76,469 112,605 19,527 3,718 212,319 530 212,849

Exchange adjustments — 110 9 6 125 — 125

Additions — 19,662 3,337 999 23,998 — 23,998

Transfer from properties

held for sale 19,906 — — — 19,906 850 20,756

Disposals — (6,235) (1,322) (935) (8,492) — (8,492)

Surplus on revaluation — — — — — 40 40

28 February, 2005 96,375 126,142 21,551 3,788 247,856 1,420 249,276


Additions — 33,785 1,887 435 36,107 — 36,107

Transfer from investment

properties 1,420 — — — 1,420 (1,420) —

Disposals — (4,926) (496) (1,318) (6,740) — (6,740)

28 February, 2006 — at cost 97,795 155,518 22,970 2,911 279,194 — 279,194

Accumulated

depreciation:

1 March, 2004 18,377 98,017 16,358 3,527 136,279 — 136,279


Charge for the year 1,391 12,142 1,409 436 15,378 — 15,378

On disposals — (5,946) (1,251) (935) (8,132) — (8,132)

28 February, 2005 19,768 104,274 16,518 3,032 143,592 — 143,592


Charge for the year 1,910 20,121 1,827 367 24,225 — 24,225

On disposals — (4,875) (496) (1,310) (6,681) — (6,681)

28 February, 2006 21,678 119,873 17,860 2,092 161,503 — 161,503

Net book value:

28 February, 2006 76,117 35,645 5,110 819 117,691 — 117,691

28 February, 2005 76,607 21,868 5,033 756 104,264 1,420 105,684


— 47 —

(b) The Company

Furniture,

fixtures and

equipment

HK$’000

Cost:

1 March, 2004 and 28 February, 2005 207

Additions 240

Disposals (3)

At 28 February, 2006 444

Accumulated depreciation:

1 March, 2004 and 28 February, 2005 207

Charge for the year 5

On disposals (3)

28 February, 2006 209

Net book value:

28 February, 2006 235

28 February, 2005 —

(c) The analysis of net book value of properties is as follows:

The Group

2006 2005

HK$’000 HK$’000

(restated)

In Hong Kong

— Long leases 7,292 7,462

— Medium-term leases 64,877 66,530

72,169 73,992- - - - - - - - - - - - - - - - - - - - - - - - - -

Other parts of the PRC

— Long leases 1,909 1,951

— Medium-term leases 2,039 2,084

3,948 4,035- - - - - - - - - - - - - - - - - - - - - - - - - -

76,117 78,027

At the balance sheet date, the property ownership certificates in respect of the property interests held in other parts

of the PRC of HK$1,909,000 as stated above have not been issued by the relevant PRC government authority.

(d) The net book value of machinery and motor vehicle held under finance leases of the Group and the Company was

HK$499,000 (2005 : HK$715,000).


— 48 —

12. INTERESTS IN SUBSIDIARIES

The Company

2006 2005

HK$’000 HK$’000

Unlisted shares/capital contributions, at cost 708,072 708,072

Due from subsidiaries 426,274 300,236

1,134,346 1,008,308

Less: Impairment loss (928,076) (764,466)

206,270 243,842

The following list contains only the particulars of subsidiaries which principally affected the results, assets or liabilities

of the Group. The class of shares held is ordinary unless otherwise stated.

Name of company

Place of

establishment/

incorporation

and operation

Particulars of

issued and

paid up capital

Proportion of ownership interest

Principal activity

Group’s

effective

interest

held

by the

Company

held by

subsidiary

Beijing Tse Sui Luen Jewellery

Company Limited#/*

(‘‘BTSL’’)

PRC Rmb1,750,000

and

US$1,800,000

56.46% — 56.46% Jewellery manufacturing

and trading

Excellent Ford Development

Limited (‘‘EF’’)

Hong Kong HK$10,000 56.46% — 56.46% Jewellery trading

Foyer Investment Limited Hong Kong HK$10,000 100% — 100% Property holding and

investment

Guangzhou Xi Yun Jewellery

Company Limited#/***

PRC Rmb2,000,000 56.46% — 56.46% Jewellery retailing

Guangzhou Xiang Yun Jewellery

Company Limited

(‘‘GZ Xiang Yun’’)#/***

PRC Rmb3,000,000 56.46% — 56.46% Jewellery trading and

retailing

Ho Loong Jewellery Casting

Company Limited

Hong Kong/

PRC

HK$2 100% — 100% Jewellery retailing

Impromptus Asia Pacific Limited Hong Kong HK$10,000 100% — 100% Goldsmith and jewellery

trading

Infinite Assets Corp. (‘‘IAC’’) British Virgin

Islands

(‘‘BVI’’)

HK$275,254 56.46% — 56.46% Investment holding

Queen Busy Limited Hong Kong HK$2 100% — 100% Property holding

Shanghai Fu Yun Jewellery

Company Limited#/**

PRC Rmb1,000,000 56.46% — 56.46% Jewellery retailing

( )

PRC US$140,000 56.46% — 100% Provision of consultancy

services

Tse Sui Luen Investment (China)

Limited (‘‘TSL China’’)

BVI US$6,863 56.46% — 56.46% Investment holding


— 49 —

Name of company

Place of

establishment/

incorporation

and operation

Particulars of

issued and

paid up capital

Proportion of ownership interest

Principal activity

Group’s

effective

interest

held

by the

Company

held by

subsidiary

Tse Sui Luen Jewellery Company

Limited (‘‘TSLJ’’)

Hong Kong HK$34,000 100% — 100% Jewellery

manufacturing,

trading and retailing

Tse Sui Luen Jewellery (Malaysia)

Limited

Hong Kong/

Malaysia

HK$3,000,000 100% — 100% Jewellery retailing

Tse Sui Luen Jewellery Trading &

Distribution Limited (‘‘TSL

Trading’’)

Samoa US$1 56.46% — 56.46% Jewellery trading and

provision of related

agency services

TSL Investment (B.V.I.) Limited BVI HK$1,000 100% 100% — Investment holding

TSL Jewellery (H.K.) Company

Limited

Hong Kong HK$490 100% — 100% Jewellery retailing

TSL Properties Management

Limited

Hong Kong HK$1,000 100% — 100% Property holding and

investment

# Unofficial translation

* Registered under the laws of the PRC as sino-foreign joint venture

** Registered under the laws of the PRC as limited liability company

*** Registered under the laws of the PRC as foreign enterprise

13. OTHER FINANCIAL ASSET

The Group

2006 2005

HK$’000 HK$’000

Investment security, at cost less provision

— Membership and seat in the Chinese Gold and Silver Exchange Society 500 500

14. INVENTORIES

The Group

2006 2005

HK$’000 HK$’000

Raw materials 80,776 76,283

Work in progress 54,422 56,337

Finished goods 365,525 333,340

Finished goods — consigned outward — 28,597

500,723 494,557


— 50 —

15. TRADE AND OTHER RECEIVABLES

Included in trade and other receivables are trade debtors (net of provision for bad and doubtful debts) with the following

ageing analysis:

The Group

2006 2005

HK$’000 HK$’000

0 to 30 days 41,983 30,348

31 to 60 days 3,117 1,675

61 to 90 days 2 3,966

Over 90 days 20,386 10,437

Total trade debtors 65,488 46,426

Other receivables, deposits and prepayments 44,192 50,768

109,680 97,194

Details of trade and other receivables denominated in different currencies are as follows:

2006 2005

HK$’000 HK$’000

Hong Kong dollars 52,235 35,694

Chinese Renminbi 52,576 57,467

United States dollars 4,169 3,626

Others 700 407

109,680 97,194

The directors consider that trade and other receivables approximate their fair value.

Apart from retail customers, the Group allows an average credit period from 30 to 75 days to other customers.

16. CASH AT BANK AND IN HAND

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

The Group

2006 2005

HK$’000 HK$’000



Malaysian Ringgits 2,125 2,363


Others 294 322

101,249 81,825


— 51 —

17. TRADE AND OTHER PAYABLES

Included in trade and other payables are trade creditors with the following ageing analysis:

The Group

2006 2005

HK$’000 HK$’000

0 to 30 days 34,603 28,147

31 to 60 days 31,713 32,582

61 to 90 days 19,209 28,757

Over 90 days 97,461 124,270

Total trade creditors 182,986 213,756

Other payables and accruals 172,033 154,146

355,019 367,902

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

2006 2005

HK$’000 HK$’000




Others 3,645 3,683

355,019 367,902

The directors consider that trade and other payables approximate their fair values.

18. BANK LOANS AND OVERDRAFTS — SECURED

At 28 February, 2006, the secured bank loans were repayable as follows:

The Group

2006 2005

HK$’000 HK$’000

Within 1 year or on demand 4,000 18,656- - - - - - - - - - - - - - - - - - - - - - - - - -

After 1 year but within 2 years 12,800 1,907

After 2 years but within 5 years 40,200 159

53,000 2,066- - - - - - - - - - - - - - - - - - - - - - - - - -

57,000 20,722

Details of the securities for the bank loans and overdrafts are set out in note 28 to the financial statements.


— 52 —

19. OTHER LOANS — SECURED

At 28 February, 2006, the other loans were repayable as follows:

The Group

2006 2005

HK$’000 HK$’000

Within 1 year or on demand 14,500 —- - - - - - - - - - - - - - - - - - - - - - - - - -

After 1 year but within 2 years 21,800 22,000

After 2 years but within 5 years 36,067 50,367

57,867 72,367- - - - - - - - - - - - - - - - - - - - - - - - - -

72,367 72,367

(a) Other loans represent the secured loans from Partner Logistics Limited. At 28 February, 2006, the other loans are

secured, interest bearing at Hong Kong Interbank Offering Rate plus 2%.

(b) Details of the securities for other loans are set out in note 28 to the financial statements.

20. OBLIGATIONS UNDER FINANCE LEASES

The Group leases office equipment and a motor vehicle under finance leases expiring in two years (note 11(d)). The

Group also leases computer equipment of HK$1,349,000 (2005 : HK$943,000) under finance leases expiring in three years. The

computer equipment was included in prepayments. At the end of the lease term, the Group has the option to purchase the assets

at a price deemed to be a bargain purchase option. None of the leases included contingent rentals.

At 28 February, 2006, the Group and the Company had obligations under finance leases repayable as follows:

(a) The Group

2006 2005

Present

value of the

minimum

lease

payments

Interest

expense

relating to

future

periods

Total

minimum

lease

payments

Present

value of the

minimum

lease

payments

Interest

expense

relating to

future

periods

Total

minimum

lease

payments

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Within 1 year 660 60 720 508 57 565- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

After 1 year but within 2

years 479 24 503 534 31 565

After 2 years but within 5

years 135 6 141 342 6 348

614 30 644 876 37 913- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

1,274 90 1,364 1,384 94 1,478


— 53 —

(b) The Company

2006 2005

Present

value of the

minimum

lease

payments

Interest

expense

relating to

future

periods

Total

minimum

lease

payments

Present

value of the

minimum

lease

payments

Interest

expense

relating to

future

periods

Total

minimum

lease

payments

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Within 1 year 446 47 493 305 34 339- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

After 1 year but within

2 years 331 21 352 320 19 339

After 2 years but within

5 years 135 6 141 195 3 198

466 27 493 515 22 537- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

912 74 986 820 56 876

21. EMPLOYEE BENEFIT OBLIGATIONS

(a) Long service payments

Under the Hong Kong Employment Ordinance, the Group is obliged to make lump sum payments on cessation of

employment in certain circumstances to certain employees who have completed at least five years of service with the

Group. The amount payable is dependent on the employees’ final salary and years of service, and is reduced by

entitlements accrued under the Group’s retirement plan that are attributable to contributions made by the Group. The

Group does not set aside any assets to fund any remaining obligations.

(i) The amount recognised in the consolidated balance sheet is as follows:

The Group

2006 2005

HK$’000 HK$’000

Present value of unfunded obligations 8,759 10,190

(ii) Movements in the net liability recognised in the consolidated balance sheet are as follows:

The Group

2006 2005

HK$’000 HK$’000

At beginning of the year 10,190 9,570

Expense recognised in the income statement (note 4(b)) (1,431) 844

Employer contributions/benefit payments — (224)

At end of the year 8,759 10,190


— 54 —

(iii) Expense recognised in the consolidated income statement is as follows:

The Group

2006 2005

HK$’000 HK$’000

Current service cost 13 99

Interest cost 427 522

Net actuarial (gains)/losses recognised (1,871) 223

(1,431) 844

(iv) The expense is recognised in the following line items in the consolidated income statement:

The Group

2006 2005

HK$’000 HK$’000

Cost of sales (289) 96

Selling expenses (854) 553

Administrative expenses (288) 195

(1,431) 844

(v) The principal actuarial assumptions used as at 28 February, 2006 (expressed as weighted average) are as

follows:

The Group

2006 2005

Discount rate 4.25% 4.25%

Future salary increases

Year 2006 4% 3%

Year 2007 and thereafter 3% 3%

(b) Defined contribution retirement plan

The Group operates a Mandatory Provident Fund Scheme (‘‘the MPF Scheme’’) under the Hong Kong Mandatory

Provident Fund Schemes Ordinance for employees employed under the jurisdiction of the Hong Kong Employment

Ordinance. The MPF Scheme is a defined contribution retirement scheme administered by independent trustees. Under

the MPF Scheme, the employer and its employees are each required to make contributions to the scheme at 5% of the

employees’ relevant income, subject to a cap of monthly relevant income of HK$20,000. Contributions to the scheme

vest immediately.

The Group also operates defined contribution retirement benefits schemes for all qualifying employees in the PRC

and Malaysia with contributions to the schemes at 7% and 12% of the gross salaries respectively. The assets of the

schemes are held separately from those of the Group in funds under the control of independent trustees.


— 55 —

22. CURRENT TAX (RECOVERABLE)/PAYABLE

(a) Current taxation in the balance sheet represents:

The Group

2006 2005

HK$’000 HK$’000

Provision for Hong Kong Profits Tax for the year 815 9,683

Provisional Profits Tax paid (1,353) (2,226)

(538) 7,457

Overseas taxation 9,553 10,418

Balance of profits tax provision relating to prior years 81,841 40,119

90,856 57,994

Representing:

Tax recoverable (1,020) (652)

Tax payable 91,876 58,646

90,856 57,994

(b) Deferred tax assets and liabilities recognised:

The Group

The components of deferred tax (assets)/ liabilities recognised in the consolidated balance sheet and

movements during the year are as follows:

Depreciation

allowances in

excess of

related

depreciation

Revaluation

of properties

Employee

benefit

obligations

Provision

for

inventories Tax losses Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Deferred tax arising From:

1 March, 2004

As previously reported 252 221 — — (3,316) (2,843)

Prior year adjustments 110 (221) — — — (111)

As restated 362 — — — (3,316) (2,954)

(Charged)/credited to

consolidated income

statement — restated (3,328) — (1,783) (10,052) 448 (14,715)

28 February, 2005 and 1 March,

2005 — restated (2,966) — (1,783) (10,052) (2,868) (17,669)

(Charged)/credited to

consolidated income

statement (1,278) — 250 43 (2,084) (3,069)

Exchange difference (11) — — (39) — (50)

28 February, 2006 (4,255) — (1,533) (10,048) (4,952) (20,788)


— 56 —

2006 2005

HK$’000 HK$’000

(restated)

Net deferred tax asset recognised on the consolidated balance sheet (20,834) (17,684)

Net deferred tax liability recognised on the consolidated balance sheet 46 15

(20,788) (17,669)

(c) Deferred tax assets and liabilities not recognised

The components of unrecognised deferred tax (assets)/liabilities at the balance sheet date are as follows:

2006 2005

HK$’000 HK$’000

(restated)

Depreciation allowances in excess of related depreciation 4,156 3,997

Tax losses (107,617) (81,959)

Net deferred tax assets not recognised (103,461) (77,962)

The net deferred tax assets have not been recognised in the financial statements in view of the uncertainty of the

recoverability.

23. SHARE CAPITAL

2006 2005

No. of shares Amount No. of shares Amount

’000 HK$’000 ’000 HK$’000

Authorised:

Ordinary shares of HK$0.25 each 1,500,000 375,000 1,500,000 375,000

Issued and fully paid:

Ordinary shares

At beginning of the year 207,063 51,766 391,889 97,972

Capital reorganisation (note (a)) — — (352,700) (88,175)

Shares issued under loan conversion (note (b)) — — 133,364 33,341

Shares issued under open offer (note (c)) — — 34,510 8,628

At end of the year 207,063 51,766 207,063 51,766

Notes:

(a) By a special resolution passed at the special general meeting held on 18 November, 2004, a capital reorganisation

was approved and details of which are as follows:

(i) Every 100 issued ordinary shares of HK$0.25 each in the capital of the Company was consolidated into one

issued consolidated ordinary share of HK$25 (‘‘Consolidated Share’’);

(ii) The nominal value of each issued Consolidated Share was reduced from HK$25 to HK$2.5 by cancelling

paid-up capital to the extent of HK$22.5 on each issued Consolidated Share (‘‘Capital Reduction’’);

(iii) The amount standing to the credit of the share premium account of the Company as at 29 February, 2004,

being HK$86,037,000, was cancelled (‘‘Share Premium Cancellation’’);


— 57 —

(iv) The amount standing to the credit of the contributed surplus account and the capital redemption reserve

account of the Company as at 29 February, 2004, being HK$532,336,000 and HK$173,969,000

respectively, was released from such accounts;

(v) Each issued Consolidated Share of HK$2.5 was subdivided into ten adjusted shares of HK$0.25 each

(‘‘Adjusted Share’’);

(vi) The credit arising from the Capital Reduction and the Share Premium Cancellation in the amount of

HK$174,212,000, together with the amount of HK$173,969,000 released from the capital redemption

reserve account of the Company (as referred to (iv) above), totalling together HK$348,181,000, was

transferred to the contributed surplus account of the Company;

(vii) The directors authorised the set-off of the aggregate amount of HK$348,181,000 transferred to the

contributed surplus account of the Company (as referred to (vi) above), together with the amount of

HK$532,336,000 already standing to the credit of the contributed surplus account of the Company, against

all of the accumulated losses of the Company as at 29 February, 2004, being HK$865,747,000; and

(viii) The authorised share capital of the Company was increased from HK$270,000,000 to HK$375,000,000 by

the creation of 420,000,000 new Adjusted Shares.

(b) Partner Logistics Limited converted secured other loans of HK$137,365,000 into 133,364,000 Adjusted Shares at

a conversion price of HK$1.03 per Adjusted Share. The share capital and share premium account have been

increased by HK$33,341,000 and HK$104,024,000 respectively.

(c) Pursuant to an open offer in 2005 34,510,000 Adjusted Shares were issued at a subscription price of HK$1.03 per

Adjusted Share. The share capital and share premium account were increased by HK$8,628,000 and

HK$26,918,000 respectively.

24. RESERVES

The Company

Share

premium

Contributed

surplus

Share-based

compensation

reserve

Capital

redemption

reserve

(Accumulated

losses)/retained

profits Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

1 March, 2004 86,037 532,336 — 173,969 (865,747) (73,405)

Capital reorganisation

(note 23) (86,037) (517,566) — (173,969) 865,747 88,175

Shares issued under loan

conversion (note 23) 104,024 — — — — 104,024

Shares issued under open

offer (note 23) 26,918 — — — — 26,918

Share issue expenses (14,308) — — — — (14,308)

Profit for the year — — — — 59,281 59,281

28 February, 2005 116,634 14,770 — — 59,281 190,685

1 March, 2005 116,634 14,770 — — 59,281 190,685

Issue of share options — — 2,332 — — 2,332

Loss for the year — — — — (37,831) (37,831)

28 February, 2006 116,634 14,770 2,332 — 21,450 155,186


— 58 —

(i) The contributed surplus of the Company arose from the difference between the consolidated net assets of the

Group’s subsidiaries acquired pursuant to a group reorganisation at the date on which the reorganisation became

effective, and the nominal amount of the Company’s ordinary shares issued under the reorganisation; less the set-

off of the accumulated losses of the Company amounting to HK$865,747,000 as at 29 February, 2004 pursuant to

a capital reorganisation.

Under the Companies Act 1981 of Bermuda (as amended), the contributed surplus account of the Company is

available for distribution.

However, the Company cannot declare or pay a dividend or make a distribution out of contributed surplus if:

(a) it is, or would after the payment be, unable to pay its liabilities as they become due; or

(b) the realisable value of its assets would thereby be less than the aggregate of its liabilities and its issued

share capital and share premium accounts.

(ii) The aggregate amount of reserves available for distribution to shareholders of the Company at 28 February, 2006

was HK$155,186,000 (2005 : HK$190,685,000).

25. COMMITMENTS

(a) Capital commitments outstanding at 28 February, 2006 not provided for in the financial statements were as

follows:

The Group The Company

2006 2005 2006 2005

HK$’000 HK$’000 HK$’000 HK$’000

Contracted for 3,017 1,267 — —

(b) At 28 February, 2006, the total future minimum lease payments under non-cancellable operating leases are

payable as follows:

The Group The Company

2006 2005 2006 2005

HK$’000 HK$’000 HK$’000 HK$’000

Within 1 year 57,444 46,164 3,174 2,520

After 1 year but within 5 years 56,829 45,147 — 1,050

After 5 years — 701 — —

114,273 92,012 3,174 3,570

The Group leases a number of properties under operating leases. The leases typically run for an initial period of

one to three years, with an option to renew the lease when all terms are renegotiated. Lease payments are usually adjusted

to reflect market rentals upon renegotiation of the terms of the lease.

26. SHARE OPTIONS

As disclosed under the heading of Share Option Scheme, 8,825,000 options were granted in 2005 to the directors,

employees and service providers of the Company and its subsidiaries pursuant to the 2003 Share Option Scheme. 20% options

granted are exercisable from 22 August, 2005. The next 40% options granted are exercisable from 18 months from the date of

grant and the remaining 40% options granted are exercisable from 24 months from the date of grant.


— 59 —

The fair value of options granted, was determined by using the Binomial valuation model. The significant inputs into the

model were share price of $1.71 at the grant date, exercise price of $1.76, expected volatility of the Company’s share price: 60%

p.a., expected life of options of 4 years, expected nil dividend, annual risk-free interest rate of 3.38% p.a., rate of leaving service

of 15% p.a. and assume option holders will exercise their options when the share price is at least 180% of the exercise price. The

fair value of options granted are as follows:

Exercise period

Fair value

per option

No. of vested

options granted

22 August, 2005 – 25 July, 2009 $0.56 1,765,000

22 January, 2007 – 25 July, 2009 $0.69 3,530,000

25 July, 2007 – 25 July, 2009 $0.73 3,530,000

Given the above assumptions and the inherent limitations of the Binomial valuation model, shareholders and other

investors are hereby warned of the subjectivity and uncertainty of the aforementioned values of the options.

27. CONTINGENT LIABILITIES

(a) At 28 February, 2006, the Company has issued guarantees to banks and financial creditors in respect of general

banking and other credit facilities extended to certain subsidiaries of the Company amounting to HK$150,096,000

(2005 : HK$95,346,000).

(b) As set out in the announcements of the Company dated 1 February, 2006 and 20 , 2006, the Company was

informed that two directors, a consultant and an employee (collectively ‘‘the Officers’’) were charged by the

Independent Commission Against Corruption (‘‘ICAC’’) relating to the alleged offences under the Prevention of

Bribery Ordinance, the Crime Ordinance and the Theft Ordinance (‘‘the ICAC Charges’’). It is alleged that the

Officers were involved in a scheme to offer illegal commissions to employees of a number of travel agencies and

to help them to evade tax.

Under the Company’s Bye-Laws, the Company may be required to indemnify its directors from and against all

actions, costs, charges, losses, damages and expenses which they or any of them may incur in execution of their

duty, provided that such indemnity shall not be extended to any matter in respect of, among other things, fraud and

dishonesty.

The directors have consulted with the Company’s legal advisers as to what legal implication the ICAC Charges

may have, if any, for the Group as a whole. In view of the discussions with the legal advisers, the directors are of

the view that they are not in a position to conclude whether and/or to what extent the Company may be required to

indemnify the directors involved in relation to the ICAC Charges.

(c) As explained in note 5(a)(ii), the outcome of the challenges by the IRD on the tax treatments adopted by the Group

relating to certain offshore income and agent commission payments and promoter fees arising in prior years is

undetermined as at 28 February, 2006. The Group has established a provision of approximately HK$91,000,000 in

respect of such disputes. In the event that the Group is not successful in defending the tax treatments adopted, the

Group may be subject to significant additional tax liabilities and possibly penalties which, under the provisions of

the current tax legislation, may be up to three times any tax under-reported as assessed by the IRD. Furthermore,

the ICAC’s allegations as mentioned in (b) above and the ongoing investigation may or may not have impact on

the IRD’s challenges on the tax treatments adopted by the Group relating to agents commission payments and

promoter fees arising in prior years. The directors consider that it is impractical to estimate the potential amount

of additional tax liabilities arising if the IRD’s challenge in respect of the agent commission payments and

promoter fees is successful.

28. PLEDGE OF ASSETS

(a) At 28 February, 2006, debentures were executed by the Group in favour of its bankers and financial creditors

charging, by way of fixed and floating charges, all of the undertakings, properties and assets of the Company and

of its 17 subsidiaries as security for, inter alia, all obligations and liabilities, actual or contingent, from time to

time owing by the Group to the bankers and financial creditors. Rental revenue of the Group is also charged in

favour of the Group’s bankers.


— 60 —

(b) At 28 February, 2006, the Group pledged the capital contribution to a subsidiary of the Group amounting to

US$235,000 and all the benefits accruing to the pledged equity interest of 11.625% of the subsidiary to the

Group’s bankers and financial creditors as security for, inter alia, all obligations and liabilities, actual or

contingent, from time to time owing by the Group to the bankers and financial creditors.

(c) At 28 February, 2006, the Group pledged all rights, titles and interests in 56.46% of the entire share capital of IAC

and TSL China and all benefits accruing to the pledged equity interest to the Group’s bankers and financial

creditors as security for, inter alia, all obligations and liabilities, actual or contingent, from time to time owing by

the Group to the bankers and financial creditors.

29. CONNECTED AND RELATED PARTY TRANSACTIONS

(a) During the year ended 28 February, 2006, four subsidiaries of the Company, BTSL, EF, GZ Xiang Yun and TSL

Trading sold and consigned finished goods to Hua Long amounting to HK$9,480,000 (2005 : HK$128,417,000)

and Rui Feng amounting to HK$684,000 (2005 : HK$16,852,000) and Mr. Qi Jian Hong (‘‘Mr. Qi’’) amounting to

HK$2,888,000. The transactions were carried out by way of cost- plus pricing arrangements in the normal course

of business of the subsidiaries.

Hua Long and Rui Feng were licensees of Tse Sui Luen Jewellery (China) Limited and distributed the consigned

finished goods to shop outlets operating under the trade names of ‘‘Tse Sui Luen’’ in the Mainland China. There

was no monetary consideration paid by the licensees in respect of using the trademark licenses.

During the year ended 28 February, 2006, TSL Trading received commission, depending on the nature of the

products, amounting to HK$372,000 (2005 : HK$19,515,000) and HK$82,000 (2005 : HK$2,878,000) from Hua

Long and Rui Feng for their respective confirmed purchases from BTSL.

During the year ended 28 February, 2006, Tse Sui Luen Jewellery Consultancy Service Limited (‘‘TSLJCS’’) paid

Hua Long consultation fee amounting to HK$605,000 (2005 : HK$558,000) for Hua Long’s advice of public

relation matters to TSLJCS.

In March, and , 2004, (formerly, Shanghai Tse Sui Luen Consultancy Service Limited) received

consultancy fees of HK$226,000 and HK$30,000 from Hua Long and Rui Feng, respectively. No consultancy fees

have been charged to Hua Long and Rui Feng since 1 May, 2004.

At 28 February, 2006, the amount due to Hua Long was HK$2,461,000 (2005 : due from Hua Long of

HK$15,183,000) and the amount due from Mr. Qi was HK$2,888,000 (2005 : Nil). At 28 February, 2005, the

amount due from Rui Feng was HK$17,000.

Hua Long and Rui Feng are companies controlled by Mr. Qi who is a substantial shareholder and a director of the

two subsidiaries of the Company, IAC and TSL China, and is also a director of a subsidiary of TSL China, BTSL.

The licensing, sales, consignment, commission and consultancy service arrangements therefore constituted

connected transactions under the Listing Rules.

The independent non-executive directors of the Company have reviewed these connected transactions and

confirmed that such transactions were:

— entered into the ordinary and usual course of business of the Group;

— conducted either on normal commercial terms or, if there is no available comparison, on terms that are fair

and reasonable so far as the shareholders of the Company are concerned;

— in accordance with the Licensing and Consignment Terms (as defined in the circular dated November

2003), master supply agreement, comprehensive services agreement, and other terms governing the

continuing connected transactions that are fair and reasonable and in the interests of the shareholders of the

Company as a whole; and

— within the respective limits as set out in the circular dated 6 November, 2003.


— 61 —

(b) Partner Logistics Limited acquired all the rights, title and interests in the indebtedness due to certain of the bank

lenders by the Group amounting to HK$195,731,000 and HK$14,000,000 on 11 February, 2004 and 2 April, 2004,

respectively. Partner Logistics Limited is a company controlled by Mr. Tse Tat Fung, Tommy, the substantial

shareholder and a director of the Company.

On 16 December, 2004, Partner Logistics Limited converted HK$137,365,000 of the loans owned by the Group

into ordinary shares of HK$0.25 each in the capital of the Company.

The outstanding loans due to Partner Logistics Limited amounted to HK$72,367,000 (2005 : HK$72,367,000) are

secured and interest bearing at Hong Kong Interbank Offering Rate plus 2%. During the year ended 28 February,

2006, interest expenses paid to Partner Logistics Limited amounted to HK$3,880,000 (2005 : HK$4,189,000).

(c) During the year ended 28 February, 2006, TSLJ, a subsidiary of the Company, purchased raw materials and

finished goods from Rosy Blue Hong Kong Limited (‘‘Rosy Blue HK’’) amounting to HK$144,782,000 (2005 :

HK$122,000,000) and sold raw materials to Rosy Blue HK amounting to HK$2,020,000 (2005 : Nil). As at 28

February, 2006, the amount due to Rosy Blue HK was HK$78,987,000 (2005 : HK$67,000,000).

During the year ended 28 February, 2006, TSLJ sold raw materials to Rosy Blue Japan Limited (‘‘Rosy Blue

Japan’’) amounting to HK$184,000 (2005 : Nil), sold raw materials to Rosy Blue Inc. amounting to HK$100,000

(2005 : Nil) and sold raw materials to Rosy Blue Fine Inc. amounting to HK$375,000 (2005 : Nil). As at 28

February, 2006, the amount due from Rosy Blue Fine Inc. was HK$134,000.

TSLJ borrowed HK$15,600,000 (US$2,000,000) from Rosy Blue HK on 2 September, 2005. The loan is

unsecured, bears interest at London Interbank Offering Rate plus 3% per annum and was fully repaid on 14

October, 2005. Interest expenses paid to Rosy Blue HK amounted to HK$170,000 for the year ended 28 February,

2006 (2005 : Nil).

During the year ended 28 February, 2006, EF sold raw materials to BTSL through Rosy Blue (Shanghai) Diamond

Company Limited (‘‘Rosy Blue SH’’), an authorised diamond trading company in the PRC, amounting to

HK$48,433,000 (2005 : HK$71,000,000). As at 28 February, 2006, the amount due from Rosy Blue SH was

HK$665,000 (2005 : HK$5,000,000).

Rosy Blue HK, Rosy Blue Japan, Rosy Blue Fine Inc., Rosy Blue Inc. and Rosy Blue SH are subsidiaries of Rosy

Blue Investments S.a.R.L., a preference shareholder of Partner Logistics Limited. In the opinion of the Directors

of the Company, the transactions were carried out on normal commercial terms and in the ordinary course of

business.

(d) TSLJ has entered into a Consultancy Agreement on 11 April, 2005 with Mr. Tse Sui Luen (‘‘Mr. Tse’’) for the

provision of consultancy service. Mr. Tse is the father of Mr. Tse Tat Fung, Tommy, the substantial shareholder

and a director of the Company. During the year ended 28 February, 2006, consultancy fees of HK$2,080,000 and

share-based payments of HK$40,000 were paid to Mr. Tse.

(e) The Group paid key management personnel compensation as follows:

2006 2005

HK$’000 HK$’000

Short-term employee benefits 12,980 13,844

Post-employment benefits 37 48

Equity compensation benefits 1,165 —

14,182 13,892


— 62 —

30. FINANCIAL RISK MANAGEMENT AND ESTIMATION OF FAIR VALUES

(a) Financial risk management

The Group is exposed to a variety of risks including foreign currency risk, credit risk, liquidity risk and cash flow

interest rate risk arising in the normal course of the Group’s business activities.

The Group does not have any written risk management policies and guidelines. The directors monitor the financial

risk management of the Group and take such measures as considered necessary from time to time to minimise such

financial risks.

(i) Foreign currency risk

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

foreign exchange rates.

The Group is exposed to foreign currency risk primarily through sales and purchases that are denominated

in a currency other than the functional currency of the operations to which they relate. The currencies giving rise

to this risk are primarily United States dollars, Malaysian Ringgits and Chinese Renminbi. The Group does not

hold or issue any derivative financial instruments for trading purposes or to hedge against fluctuations in foreign

exchange rates. The Group mitigates this risk by conducting the sales and purchases transactions in the same

currency, whenever possible.

(ii) Credit risk

Credit risk arises from the possibility that customers may not be able to settle obligations within the normal

terms of transactions. The Group performs ongoing credit evaluation of the debtors’ financial condition and

maintains an account for allowance for doubtful trade and other accounts receivable based upon the expected

collectibles of all trade and other accounts receivable.

At the balance sheet date, there were no major concentrations of credit risk.

The maximum exposure to credit risk is therefore represented by the carrying amount of each financial

asset as stated in the balance sheet.

Cash is held with financial institutions of good standing.

(iii) Liquidity risk

Liquidity risk is the risk that an enterprise will encounter difficulty in raising funds to meet commitments

associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at

close to its fair value.

Prudent liquidity risk management implies maintaining sufficient cash. The Group monitors and maintains

a level of bank balances deemed adequate to finance the Group’s operations.

(iv) Cash flow and fair value interest rate risk

Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because

of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument

will fluctuate due to changes in market interest rates.

As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are

substantially independent of changes in market interest rates.


— 63 —

(b) Estimation of fair values

The notional amounts of financial assets and liabilities with a maturity of less than one year (including trade and

other receivables, cash at bank, trade and other payables) are assumed to approximate their fair values. The fair value of

finance lease liabilities is estimated as the present value of future cash flows, discounted at current market interest rates

for similar financial instruments.

The fair value of non-trade balances due from/to group and related companies has not been determined as the

timing of the expected cash flows of these balances cannot be reasonably determined because of the relationship.

31. RECENT ACCOUNTING AND FINANCIAL REPORTING PRONOUNCEMENTS

The HKICPA has issued the following amendments, new standards and interpretations which may be/ are relevant to the

preparation of the Group’s financial statements after 31 December, 2005 :

Effective for

accounting periods

beginning on or

after

HKAS 1 (Amendment) Presentation of Financial Statements: Capital Disclosures 1 January, 2007

HKAS 19 (Amendment) Employee Benefits — Actuarial Gains and Losses,

Group Plans and Disclosures

1 January, 2006

HKAS 21 (Amendment) The Effects of Changes in Foreign Exchange Rate 1 January, 2006

HKAS 39 (Amendment) Financial Instruments: Recognition and Measurement 1 January, 2006

HKFRS 1 (Amendment) First-time Adoption of Hong Kong Financial Reporting

Standards

1 January, 2006

HKFRS 6 Exploration for and Evaluation of Mineral Resources 1 January, 2006

HKFRS 7 Financial Instruments: Disclosures 1 January, 2007

HKFRS-Int 4 Determining whether an Arrangement contains a Lease 1 January, 2006

HKFRS-Int 5 Rights to Interests arising from Decommissioning,

Restoration and Environmental Rehabilitation Funds

1 January, 2006

HK(IFRIC)-Int 6 Liabilities arising from Participating in a Specific Market —

Waste Electrical and Electronic Equipment

1 December, 2005

HK(IFRIC)-Int 7 Applying the Restatement Approach under HKAS 29 Financial

Reporting in Hyperinflationary Economics

1 March, 2006

HK(IFRIC)-Int 8 Scope of HKFRS 2 1 May, 2006

HK(IFRIC)-Int 9 Reassessment of Embedded Derivatives 1 June, 2006

In addition, the Hong Kong Companies (Amendment) Ordinance 2005 came into effect on 1 December, 2005 and will be

first applicable to the Group’s financial statements for the year beginning 1 March, 2006.

The Group is in the process of making an assessment of what the impact of these amendments, new standards and

interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of these

amendments, new standards and interpretations is unlikely to have a significant impact on the Group’s results of operations and

financial position.

32. ULTIMATE CONTROLLING PARTY

At 28 February, 2006, the Directors consider the ultimate holding company to be Blink Technology Limited, which is

incorporated in the British Virgin Islands, and the ultimate controlling party to be Mr. Tse Tat Fung, Tommy.


— 64 —

MANAGEMENT ANALYSIS OF THE GROUP

Financial results for the years ended 28 February, 2006, 2005, and 29 February, 2004

Consolidated profit and loss account


2006 2005 2004

HK$’000 HK$’000 HK$’000

Turnover 1,324,132 1,275,996 955,625

Profit/(loss) from ordinary activities before taxation 42,433 78,418 32,830

Taxation (70,551) (35,223) (17,012)


Attributable to:

Equity holders of the company (47,977) 35,813 4,194



Financial year ended 28 February, 2006 (‘‘financial year 2006’’) compared with the financial year

ended 28 February, 2005 (‘‘financial year 2005’’)

Operating results

During the financial year ended 28 February, 2006, the Group achieved an overall increase of 3.8% in

its consolidated turnover as compared to 2005. Consolidated turnover for the year was HK$1,324 million

(2005 : HK$1,276 million). Gross profit ratio for the 2006 improved to about 50.3% from about 45.6% in

2005.

The Group reported an overall loss attributable to equity holders of the Company for the year of

HK$48 million (2005 : Profit of HK$36 million after adjusting for changes in accounting policies). Of this

loss, HK$51 million relates to provisions that have been made by the Group in respect of the assessments

issued by IRD during the period relating to prior years. Loss per share for the year was HK$0.232 (2005 :

earning per share of HK$0.477 as restated).

Business review

The Group experienced a slow start to the year due to a marked slowdown that occurred in the retail

jewellery market in Hong Kong between April and November 2005 as compared to the same period last

year. This slowdown was mainly attributable to lower spending by tourists from the Mainland China which

trend appears to be more specific to the retail jewellery sector in Hong Kong than to the overall retail market

in general.


— 65 —

Retail and showroom operations in Hong Kong

During the period under review, the Group opened three new stores in Hong Kong comprising (i) two

new stores in Mongkok which were opened in April, 2005 and July, 2005 and (ii) a new flagship store in

Tsim Sha Tsui which was opened in late July, 2005. This new flagship store launches the next generation of

the Group’s store image which will be applied to future store opening by the Group both in Hong Kong and

the Mainland China. These new stores and image have been very well received by our customers.

The Group’s showroom business continues to trade well with a pleasing increase in the overall number

of non-Mainland tourists visiting its showrooms during the period which has helped to offset a reduction in

the overall spending by Mainland tourists during the first half of the year. The Group expects that this

business will continue to prosper albeit that competition for Mainland tourists remains fierce.

Retail operations in Mainland China

The Group also opened a net 6 new stores in the Mainland China. Sales from the Group’s business in

the Mainland China have remained steady with growth being achieved from the new store openings. About

90% of the mainland outlets have now been upgraded to the new brand image and we expect the balance to

be completed this year. The outlook for the Mainland China remains positive for next financial year.

Retail operations in overseas

The Group’s Malaysian business remained stable in the period under review. The Group’s export

business has continued to grow steadily and become one of the major sources of growth of the Group during

the period under review.

Liquidity, capital structure and gearing

At 28 February, 2006, the Group’s total borrowings were HK$149.2 million, an increase of HK$54.7

million since 28 February, 2005 following new facilities of HK$77 million being made available and being

drawn down by the Group in November 2005. The debt to equity ratio (ratio of net borrowings to net assets)

has increased from 5.1% to 23.2% mainly because of the decrease in net assets value resulting from the loss

incurred during the year and the increase in bank borrowings. As at 28 February, 2006, the Group had cash

balances of HK$101.2 million which is sufficient for the present working capital requirements.


As at 28 February, 2006, the total number of employees of the Group was approximately 2,500. The

increase in head count was mainly in sales and marketing in the Mainland China. Employees are rewarded

on a performance basis with reference to market rates. Other employee benefits include medical cover and

subsidies for job-related continuing education.


— 66 —

Financial year ended 28 February, 2005 compared with the financial year ended 29 February, 2004

(‘‘financial year 2004’’)

Operating results

Turnover for the year ended 28 February, 2005 was HK$1,276 million (2004 : HK$956 million), a

33.5% increase on that achieved last year. Gross profit ratio improved to 45.6% from 38.3% in 2004. The

profit for the year was HK$38 million (2004 : HK$7.5 million), an improvement of HK$30.5 million on that

achieved last year. Earnings per share was HK$0.506 as compared to HK$0.191 (after adjusting for capital

reorganisation in 2004/05) in last financial year.

Business review

During this year the retail market in Hong Kong and Mainland China showed great improvement over

that of the last financial year. This, when combined with new store openings in Hong Kong and Mainland

China, allowed the Group to record a much improved turnover and profit for the year.

Retail and showroom operations in Hong Kong

Both if the Group’s retail and showroom operations in Hong Kong improved as a result of the

continuing relaxation of restrictions on Individual Visitor Scheme from Mainland China and the overall

rebound of the economy of Hong Kong.

Retail operations in Mainland China

Turnover and profitability of the business in the Mainland China grew satisfactorily. The increasing

affluent population of the Mainland China creates a large demand for quality jewellery products. Number of

outlets in the Mainland China has increased from 86 of last year to 103 by the end of February, 2005 to tap

the growth potential of the market.

The Group has also introduced the new brand I Saxx to the Mainland China market to better

serve the different segments of the market. The increasing number of outlets helps to increase turnover and

profitability and to capture the gains from the economies of scale.

Retail operations in overseas

The Malaysian operation remains stable in the year under review. The Group resumed its export

business a few years ago and has attained encouraging growth both in turnover and profitability during the

year.

Liquidity, capital structure and gearing

As at 28 February, 2005, the Group had total borrowings from banks and financial creditors of

HK$94.5 million. Of this, HK$72.4 million was due to Partner Logistics Limited, a company controlled by

Mr. Tse Tat Fung, Tommy, the substantial shareholder and a director of the Group and HK$20.7 million was

due to three banks, which together are secured by all the assets and undertakings of the Group (collectively

‘‘the Lenders’’). A new loan agreement was entered into with the Lenders on 27 September, 2004 pursuant

to which the repayment of this debt was rescheduled out over two to three years. There was also a balance of

HK$1.4 million of obligations under finance leases.


— 67 —

The capital reorganisation, the open offer and the profit for the year increased the shareholders fund

from HK$40.5 million to HK$242.5 million. The gearing (ratio of interest bearing borrowings less cash and

bank balances to net asset value) was reduced from 5.1 times to 0.05 times.


At the end of the financial year ended 2005, the Group had approximately 1,860 employees.

Employees are rewarded on a performance basis with reference to market rates. Other employee benefits

include medical cover and subsidies for job-related continuing education.

Future plan and prospects

Despite the retail environment in Hong Kong remaining very competitive and patchy, the Directors

believe that i) the commitment to provide quality services and products to customers across the Group; ii)

the benefits emerging from the brand building and positioning exercises undertaken by the Group in Hong

Kong and the Mainland China during the year and planned for next year; iii) the new product lineup and

releases during the year and planned for next year; iv) the benefits that are emerging (and are yet to emerge)

from the reinvestment program; and v) the increasing strength and growth of other businesses outside Hong

Kong, can all lead the Group through the less favourable retail environment in Hong Kong.

The Group sees the reinvestment program, including the IT project, opening of new factory, store

renovations and expansion, as critical to its future competitiveness and expect to complete the same within

2007. Such initiatives are important steps to lead the Group to growth and to our mission to become the

leading, most innovative, efficient and profitable jewellery retailer in Asia.

Exposure to exchange rate fluctuation and any related hedges

The transactions of the Group were mainly denominated in local currencies, Renminbi and US dollars.

The impact of the fluctuation of foreign exchange rates of these currencies is insignificant to the Group.

Charges on assets

1. At 28 February, 2006, debentures were executed by the Group in favour of its bankers and financial

creditors charging, by way of fixed and floating charges, all of the undertakings, properties and assets

of the Company and 17 of its subsidiaries as security for, inter alia, all obligations and liabilities,

actual or contingent, from time to time owing by the Group to the bankers and financial creditors.

2. At 28 February, 2006, the Group pledged the capital contribution to a subsidiary of the Group

amounting to US$235,000 and all the benefits accruing to the pledged equity interest of 11.625% of

the subsidiary to the Group’s bankers and financial creditors as security for, inter alia, all obligations

and liabilities, actual or contingent, from time to time owing by the Group to the bankers and financial

creditors.

3. At 28 February, 2006, the Group pledged all rights, titles and interest in 56.46% of the entire share

capital of Infinite Assets Corp. and TSL China and all benefits accruing to the pledged equity interest

to the Group’s bankers and financial creditors as security for, inter alia, all obligations and liabilities,

actual or contingent, from time to time owing by the Group to the bankers and financial creditors.


— 68 —

INDEBTEDNESS

As at the close of business on 30 June, 2006, being the latest practicable date for the purpose of

ascertaining certain information relating to this indebtedness statement prior to the printing of this circular,

the Group had outstanding borrowings of approximately HK$155.5 million comprising the following:

HK$ million

Secured bank loans 57.0

Secured bank overdrafts 18.5

Secured other loans 72.4

Finance lease obligations 7.6

155.5

The Group’s secured bank loans, overdrafts and other loans are secured by (a) all of the undertakings,

properties and assets of TSL and 17 of its subsidiaries by way of fixed and floating charges; (b) the capital

contribution to a subsidiary of the Group amounting to US$235,000 and all the benefits accruing to the

pledged equity interest of 11.625% and (c) all rights, titles and interests in 56.46% of the entire share capital

of two subsidiaries of the Group and all benefits accruing to the pledged equity interest.

Other Commitments

The Group had outstanding capital commitments as of 30 June, 2006. The amount contracted for was

approximately HK$1,988,000. As at 30 June, 2006, the Group had outstanding minimum commitments

under non-cancellable operating leases in respect of land and buildings which fall due within one year, in

the second to fifth years inclusive and over five years of approximately HK$58,341,000, HK$56,564,000

and nil respectively.

Contingent Liabilities

At 30 June, 2006, the Company has issued guarantees to banks and financial creditors in respect of

general banking and other credit facilities extended to certain subsidiaries of the Company amounting to

HK$149,250,000.

As set out in the announcements of the Company dated 1 February, 2006 and 20 April, 2006, the

Company was informed that two directors, a consultant and an employee (collectively ‘‘the Officers’’) were

charged by the Independent Commission Against Corruption (‘‘ICAC’’) relating to the alleged offences

under the Prevention of Bribery Ordinance, the Crime Ordinance and the Theft Ordinance (‘‘the ICAC

Charges’’). It is alleged that the Officers were involved in a scheme to offer illegal commissions to

employees of a number of travel agencies and to help them to evade tax.

Under the Company’s Bye-Laws, the Company may be required to indemnify its directors from and

against all actions, costs, charges, losses, damages and expenses which they or any of them may incur in

execution of their duty, provided that such indemnity shall not be extended to any matter in respect of,

among other things, fraud and dishonesty.

The Directors have consulted with the Company’s legal advisers as to what legal implication the ICAC

Charges may have, if any, for the Group as a whole. In view of the discussions with the legal advisers, the

Directors are of the view that they are not in a position to conclude whether and/or to what extent the

Company may be required to indemnify the Directors involved in relation to the ICAC Charges.


— 69 —

The outcome of the challenges by the IRD on the tax treatments adopted by the Group relating to

certain offshore income and agent commission payments and promoter fees arising in prior years is

undetermined as at 30 June, 2006. The Group has established a provision of approximately HK$91,000,000

in respect of such disputes. In the event that the Group is not successful in defending the tax treatments

adopted, the Group may be subject to significant additional tax liabilities and possibly penalties which,

under the provisions of the current tax legislation, may be up to three times any tax under-reported as

assessed by the IRD. Furthermore, the ICAC’s allegations as mentioned above and the ongoing investigation

may or may not have impact on the IRD’s challenges on the tax treatments adopted by the Group relating to

agents commission payments and promoter fees arising in prior years. The Directors consider that it is

impractical to estimate the potential amount of additional tax liabilities arising if the IRD’s challenge in

respect of the agent commission payments and promoter fees is successful.

Disclaimer

Save as disclosed above or otherwise disclosed herein, and apart from intra-group liabilities, the

Group did not, as at the close of business on 30 June, 2006, have any outstanding loan capital issued or

agreed to be issued, shares or debentures, mortgage loans, or other similar indebtedness or any finance lease

commitments, hire purchase commitments, liabilities under acceptance, acceptance credits, guarantees or

other material contingent liabilities.

The Directors have confirmed that there had not been any material change in the Group’s indebtedness

subsequent to 30 June, 2006.

WORKING CAPITAL

The Directors are of the opinion that, upon Completion, taking into account of the expected cash flow,

the present internal financial resources and the bank and other facilities available to the Group, the Group

will have sufficient working capital for its present requirements for the next twelve months from the date of

this circular.

MATERIAL CHANGE

The Directors are not aware of any material adverse changes in the financial or trading position of the

Group since 28 February, 2006, the date to which the latest published audited financial statements of the

Group were made up.


— 70 —

7 August 2006

The Directors


Tse Sui Luen Investment (China) Limited

Dear Sirs,

We set out below our report relating to the financial information (‘‘Financial Information’’) of

Tse Sui Luen Investment (China) Limited (the ‘‘Company’’) and its subsidiaries (hereinafter

collectively referred to as the ‘‘Group’’) for the years ended 29 February 2004, 28 February 2005

and 28 February 2006 respectively (the ‘‘Relevant Periods’’) for inclusion in the circular of Tse Sui

Luen Jewellery (International) Limited dated 7 August 2006 (the ‘‘Circular’’), in connection with its

acquisition of a substantial interest in the Company.

The Company was incorporated as a limited liability company under the International Business

Companies Act in the British Virgin Islands on 8 February 2000. During the Relevant Periods, the

principal activity of the Company was investment holding. The principal activities of the Company’s

subsidiaries consisted of jewellery manufacturing, trading and retailing.

The companies which were in existence as of 28 February 2006 and were subsidiaries of the

Company are as follows:

Name of company

Place of

incorporation/

establishment

Proportion of

ownership

interest

Principal

activities

Excellent Ford Development

Limited

Hong Kong 100% Jewellery trading


Company Limited#

( )

The People’s

Republic of

China (‘‘PRC’’)

*90% Jewellery

manufacturing

and trading

Beijing Qi Li Yun Jewellery

Company Limited

( )

PRC *100% Jewellery retailing


Company Limited#

( )

PRC *100% Jewellery trading

and retailing

APPENDIX II ACCOUNTANTS’ REPORT ON TSL CHINA

— 71 —

Name of company

Place of

incorporation/

establishment

Proportion of

ownership

interest

Principal

activities

Guangzhou Hong Yun Jewellery

Company Limited

( )


Guangzhou Xi Yun Jewellery

Company Limited#

( )


Shanghai Fu Yun Jewellery

Company Limited#

( )


* Interest indirectly held by the Company


The Financial Information of the Group for the Relevant Periods set out in this report has been

prepared from the audited consolidated financial statements of the Group for the Relevant Periods

(the ‘‘Underlying Financial Statements’’), on the basis set out in note 2 to the Financial Information

below.

We have acted as auditors of the Company and its subsidiaries for the year ended 28 February

2006. We have examined the Underlying Financial Statements for the year ended 28 February 2006

in accordance with the Auditing Guideline ‘‘Prospectuses and the Reporting Accountant’’ issued by

the Hong Kong Institute of Certified Public Accountants.

The Underlying Financial Statements for the years ended 29 February 2004 and 28 February

2005 were audited by KPMG. The Financial Information of the Group for the years ended 29

February 2004 and 28 February 2005 was extracted and reproduced from the Underlying Financial

Statements for the years ended 29 February 2004 and 28 February 2005 respectively and is presented

in this report for illustrative purposes only. We have not carried out any audit procedures on the

Underlying Financial Statements for the years ended 29 February 2004 and 28 February 2005

respectively.

We have not audited any financial statements of the Company, its subsidiaries or the Group in

respect of any period subsequent to 28 February 2006.

The preparation of the Financial Information is the responsibility of the directors of the

Company who approve the issue. The directors of Tse Sui Luen Jewellery (International) Limited are

responsible for the contents of the Circular in which this report is included. It is our responsibility to

form an independent opinion, based on our examination, on the Financial Information and to report

our opinion to you.

In our opinion, the Financial Information of the Group for the year ended 28 February 2006,

for the purpose of this report and on the basis of presentation set out in note 2 to the Financial

Information below, gives a true and fair view of the state of affairs of the Group as at 28 February

2006 and of the results and cash flows of the Group for the year then ended.


— 72 —

FINANCIAL INFORMATION

I. Consolidated Income Statement

For the years ended 29 February 2004, 28 February 2005 and 28 February 2006

2004 2005 2006

Note HK$’000 HK$’000 HK$’000

Turnover 3 139,455 281,708 444,649

Cost of sales (98,700) (162,907) (191,306)

Gross profit 40,755 118,801 253,343

Other revenue 3 395 235 1,029

Selling expenses — (62,249) (145,756)

Administrative expenses (10,514) (31,963) (43,677)

Profit from operating activities

before taxation 4 30,636 24,824 64,939

Taxation 8 (1,965) (12,196) (19,283)


Attributable to:

Equity holders of the Company 26,480 12,486 41,753

Minority interests 2,191 142 3,903



— 73 —

II. Consolidated Balance Sheet

29 February 2004, 28 February 2005 and 28 February 2006

2004 2005 2006

Note HK$’000 HK$’000 HK$’000

Non-current assets

Property, plant and equipment 9 2,186 9,038 13,676

Deferred tax assets 10 — 340 3,165

2,186 9,378 16,841

Current assets

Inventories 11 102,006 152,310 171,332

Trade and other receivables 12 28,629 50,679 64,505

Due from fellow subsidiaries 13 — 825 4,166

Current tax recoverable — 509 —

Cash at bank and in hand 14 6,231 28,421 60,503

136,866 232,744 300,506

Current liabilities

Trade and other payables 15 1,566 33,729 31,341

Due to immediate holding company 13 — 15,481 13,869

Due to fellow subsidiaries 13 110,300 144,918 171,643

Current tax payable 1,965 7,462 8,675

113,831 201,590 225,528

Net current assets 23,035 31,154 74,978

Total assets less current liabilities 25,221 40,532 91,819


Deferred tax liabilities 10 — — 46

Net assets 25,221 40,532 91,773


Share capital 16 54 54 54

Reserves 21,385 36,534 83,319

Total equity attributable to equity

holders of the Company 21,439 36,588 83,373


Total equity 25,221 40,532 91,773


— 74 —

III. Consolidated Statement of Changes in Equity


Share

capital

Exchange

reserve

Retained

profits Total

Minority

interests

Total

equity

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

1 March 2003 54 (288) (4,521) (4,755) 1,591 (3,164)

Exchange differences

on translation of

financial statements

of subsidiaries — (286) — (286) — (286)

Profit for the year — — 26,480 26,480 2,191 28,671

28 February 2004 and

1 March 2004 54 (574) 21,959 21,439 3,782 25,221


on translation of


of subsidiaries — 2,663 — 2,663 20 2,683

Profit for the year — — 12,486 12,486 142 12,628

28 February 2005 and

1 March 2005 54 2,089 34,445 36,588 3,944 40,532


on translation of


of subsidiaries — 5,032 — 5,032 553 5,585

Profit for the year — — 41,753 41,753 3,903 45,656

28 February 2006 54 7,121 76,198 83,373 8,400 91,773


— 75 —

IV. Consolidated Cash Flow Statement


2004 2005 2006

HK$’000 HK$’000 HK$’000

Cash flows from operating activities

Profit from operating activities before taxation 30,636 24,824 64,939

Adjustments for:

Depreciation 555 4,366 11,234

Loss on disposal of property, plant and equipment 6 35 —

Operating profit before changes in working

capital 31,197 29,225 76,173

Increase in inventories (71,509) (50,304) (19,022)

Increase in trade and other receivables (26,808) (22,050) (13,826)

Increase in amounts due from fellow subsidiaries — (825) (3,341)

Increase/(decrease) in trade and other payables 548 32,163 (2,388)

Increase/(decrease) in amount due to immediate

holding company — 15,481 (1,612)

Increase in amounts due to fellow subsidiaries 54,244 34,618 26,725

Cash (used in)/generated from operating activities (12,328) 38,308 62,709

Tax paid

Hong Kong Profits Tax — (3,582) (539)

Overseas tax — (3,966) (19,800)

Net cash (used in)/generated from operating

activities (12,328) 30,760 42,370

Investing activities

Proceeds from disposal of property, plant and

equipment 1 153 —

Payments to acquire of property, plant and

equipment (724) (11,357) (15,728)

Net cash used in investing activities (723) (11,204) (15,728)

(Decrease)/increase in cash and cash equivalents (13,051) 19,556 26,642

Cash and cash equivalents at beginning of year 19,568 6,231 28,421

Effect of foreign exchange rate changes (286) 2,634 5,440

Cash and cash equivalents at end of year 6,231 28,421 60,503

Analysis of the balances of cash and cash

equivalents

Cash at bank and in hand 6,231 28,421 60,503


— 76 —

V. Notes to the Financial Information

29 February 2004, 28 February 2005 and 28 February 2006

1. General

The Company is a limited liability company incorporated in the British Virgin Islands. The Company’s principal

activity is investment holding. Particulars of the principal activities of its direct and indirect subsidiaries are set out in

note 22.

2. Significant accounting policies

(a) Statement of compliance

These financial statements have been prepared in accordance with accounting principles generally

accepted in Hong Kong, which include all applicable Hong Kong Financial Reporting Standards (‘‘HKFRSs’’),

such term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting

Standards (‘‘HKASs’’) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants

(‘‘HKICPA’’). A summary of the significant accounting policies adopted by the Group is set out below.

(b) Basis of preparation of financial statements

The measurement basis used in the preparation of the financial statements is historical cost modified by

the marking to market of certain investments in securities as explained in the accounting policies set out below.

The principal accounting policies and methods of computation used in the preparation of the financial

statements for the year ended 28 February 2006 are consistent with those adopted in the financial statements for

the years ended 29 February 2004 and 28 February 2005, except for the adoption of the new and revised

HKFRSs as explained in c) below.

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

During the year ended 28 February 2006, the Group has adopted new and revised HKFRSs which are

effective for accounting periods commencing on or after 1 January 2005. The new and revised HKFRSs which

are relevant to the Group’s operations are:

HKAS 1 Presentation of Financial Statements

HKAS 2 Inventories

HKAS 7 Cash Flow Statements

HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

HKAS 10 Events after the Balance Sheet Date

HKAS 12 Income Taxes

HKAS 16 Property, Plant and Equipment

HKAS 18 Revenue

HKAS 19 Employee Benefits

HKAS 21 The Effects of Changes in Foreign Exchange Rates

HKAS 24 Related Party Disclosures

HKAS 26 Accounting and Reporting by Retirement Benefit Plans

HKAS 27 Consolidated and Separate Financial Statements

HKAS 32 Financial Instruments: Disclosure and Presentation

HKAS 36 Impairment of Assets

HKAS 37 Provisions, Contingent Liabilities and Contingent Assets

HKAS 39 Financial Instruments: Recognition and Measurement

HKFRS 2 Share-based Payment

The adoption of HKASs 2, 7, 8, 10, 12, 16, 18, 19, 24, 26, 32, 36, 37 and 39 has had no material impact

on the accounting policies of the Group and the Company and the methods of computation in the Group’s

financial statements.


— 77 —

The impact of the adoption of the other HKFRSs on the financial statements is as follows:

(i) Minority interests (HKAS 1 ‘‘Presentation of Financial Statements’’ and HKAS 27 ‘‘Consolidated

and Separate Financial Statements’’)

In prior years, minority interests at the balance sheet date were presented in the consolidated

balance sheet separately from liabilities and as deduction from net assets. Minority interests in the results

of the Group for the year were also separately presented in the income statement as a deduction before

arriving at the profit attributable to shareholders.

With effect from 1 March 2005, in order to comply with HKAS 1 and HKAS 27, minority interests

at the balance sheet date are presented in the consolidated balance sheet within equity, separately from the

equity attributable to the equity holders of the Company, and minority interests in the results of the Group

for the year are presented on the face of the consolidated income statement as an allocation of the total

profit or loss for the year between the minority interests and the equity holders of the Company.

The presentation of minority interests in the consolidated balance sheet, income statement and

statement of changes in equity for the two years ended 28 February 2005 has been restated accordingly.

(ii) Retranslation of goodwill relating to a net investment in a foreign operation (HKAS 21 ‘‘The

Effects of Changes in Foreign Exchange Rates’’)

In prior years, goodwill was recognised directly in equity or carried at cost less amortisation and

impairment.

With effect from 1 March 2005, in order to comply with HKAS 21, any goodwill arising on the

acquisition of a foreign operation is treated as an asset of the foreign operation. Thus it is expressed in the

functional currency of that foreign operation and is retranslated at the closing rate at each balance sheet

date. Any resulting exchange difference is taken directly to the exchange reserves, together with any other

differences arising from the re-translation of the net assets of the foreign operation.

In accordance with the transitional provisions in HKAS 21, this new policy has not been adopted

retrospectively and will only be applied to acquisitions occurring on or after 1 March 2005. As the Group

has not acquired any new foreign operations since that date, the change in policy has had no impact on

these financial statements.

(iii) Share option scheme (HKFRS 2 ‘‘Share-based Payment’’)

In prior years, no amounts were recognised when option holders were granted share options over

shares in the Company. If the option holders chose to exercise the options, the nominal amount of share

capital and share premium were credited only to the extent of the option’s exercise price receivable.

With effect from 1 March 2005, in order to comply with HKFRS 2, the Group recognises the fair

value of such share options as an expense in the income statement, or as an asset, if the cost qualifies for

recognition as an asset under the Group’s accounting policies. A corresponding increase is recognised in a

share-based compensation reserve within equity.

Where the option holders are required to meet vesting conditions before they become entitled to the

options, the Group recognises the fair value of the options granted over the vesting period. Otherwise, the

Group recognises the fair value in the period in which the options are granted.

If an option holder chooses to exercise options, the related share-based compensation reserve is

transferred to share capital and share premium, together with the exercise price. If the options lapse

unexercised the related share-based compensation reserve is transferred directly to retained earnings.


— 78 —

The new accounting policy has been applied retrospectively with comparatives restated in

accordance with HKFRS 2, except that the Group has taken advantage of the transitional provisions set

out in paragraph 53 of HKFRS 2 under which the new recognition and measurement policies have not

been applied to the following grants of options:

(a) all options granted to option holders on or before 7 November 2002; and

(b) all options granted to option holders after 7 November 2002 but which had vested before 1

March 2005.

As all the Group’s options were granted to option holders either before 7 November 2002 or after 1

March 2005, the adoption of HKFRS 2 has no impact on the Group’s net assets and results for the prior

years.

The amount charged to the income statement as a result of the change of policy increased

administrative expenses for the years ended 29 February 2004, 28 February 2005 and 28 February 2006 by

nil, nil and HK$226,000, respectively, with the corresponding amount credited to amount due to

immediate holding company.

Details of the share option scheme are set out in note 17.

(d) Judgment and estimates

The preparation of financial statements in conformity with HKFRSs requires management to make

judgments, estimates and assumptions that affect the application of policies and reported amounts of assets,

liabilities, income and expense. The estimates and associated assumptions are based on historical experience and

various other factors that are believed to be reasonable under the circumstances, the results of which form the

basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from

other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting

estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or

in the period of the revision and future periods if the revision affects both current and future periods.

(e) Basis of consolidation

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

subsidiaries made up to the balance sheet dates. Where necessary, adjustments are made to the financial

statements of subsidiaries to bring the accounting policies used into line with those used by other members of the

Group.

A subsidiary, in accordance with the Hong Kong Companies Ordinance, is a company in which the Group,

directly or indirectly, holds more than half of the issued share capital or controls more than half the voting

power or controls the composition of the board of directors. Subsidiaries are considered to be controlled if the

Company has the power, directly or indirectly, to govern the financial and operating policies, so as to obtain

benefits from their activities.

The results of subsidiaries are consolidated from the date of acquisition, being the date on which the

Group obtains control, and continue to be consolidated until the date that such control ceases. Intra-group

balances and transactions, and any unrealised profits arising from intra-group transactions, are eliminated in full

on consolidation. Unrealised losses resulting from intra-group transactions are eliminated in the same way as

unrealised gains, but only to the extent that there is no evidence of impairment.

The acquisition of subsidiaries during the year has been accounted for using the purchase method of

accounting. This method involves allocating the cost of the business combinations to fair values of the assets

acquired, and liabilities and contingent liabilities assumed at the date of acquisition. The cost of the acquisition

is measured at the aggregate of the fair values of the assets given, equity instruments issued and liabilities

incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.


— 79 —

Any excess of the cost of the acquisition over the fair values of the identifiable net assets acquired is

recognised as goodwill. Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to

cash-generating units and is tested annually for impairment. Any excess of the Group’s interest in fair values of

the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of a business combination is

recognised immediately in the income statement.

Minority interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable

to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are

presented in the consolidated balance sheet and statement of changes in equity within equity, separately from

equity attributable to the equity shareholders of the Company. Minority interests in the results of the Group are

presented on the face of the consolidated income statement as an allocation of the total profit or loss for the year

between minority interests and the equity shareholders of the Company.

Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the

excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the

extent that the minority has a binding obligation to, and is able to, make good the losses. If the subsidiary

subsequently reports profits, the Group’s interest is allocated all such profits until the minority’s share of losses

previously absorbed by the Group has been recovered.

(f) Impairment of assets

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to

determine whether there is any indication that those assets have suffered an impairment loss. If any such

indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the

impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the

Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the greater of net selling price and value in use. In assessing value in use, the

estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects

current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying

amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Impairment

losses are recognised as an expense immediately, unless the relevant asset is land or buildings other than

investment property carried at a revalued amount, in which case the impairment loss is treated as a revaluation

decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is

increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not

exceed the carrying amount that would have been determined had no impairment loss been recognised for the

asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income

immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the

impairment loss is treated as a revaluation increase.

(g) Property, plant and equipment and depreciation

Property, plant and equipment are stated at cost, less provisions for depreciation and any impairment

losses. Details are set out in note 9. The cost of an item of property, plant and equipment comprises its purchase

price and any directly attributable cost of bringing the asset to its working condition and location for its intended

use. Expenditure incurred after the item has been put into operation, such as repairs and maintenance and

overhaul costs, is normally charged to the income statement in the year in which it is incurred. In situations

where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic

benefits expected to be obtained from the use of the item, the expenditure is capitalised as an additional cost of

the item. When an item of property, plant and equipment is sold, its cost and accumulated depreciation are

removed from the financial statements and any gain or loss resulting from the disposal, being the difference

between the net disposal proceeds and the carrying amount of the asset, is included in the income statement.


— 80 —

Depreciation is provided on the straight-line method, based on the estimated economic useful lives of the

individual assets, as follows:

Plant and machinery 3 to 7 years

Furniture and fixtures 1 to 10 years

Motor vehicles 4 to 10 years

(h) Leased assets

Operating lease charges

Where the Group has the use of assets held under operating leases, payments made under the leases

are charged to income statement in equal instalments over the accounting periods covered by the lease

term, except where an alternative basis is more representative of the pattern of benefits to be derived from

the leased assets. Lease incentives received are recognised in income statement as an integral part of the

aggregate net lease payments made. Contingent rentals, if any, are charged to income statement in the

accounting period in which they are incurred.

(i) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted

average cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in

bringing the inventories to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated

costs of completion and the estimated costs necessary to make the sale.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the

period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable

value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The

amount of any reversal of any write-down of inventories is recognised as a reduction in the amount of

inventories recognised as an expense in the period in which the reversal occurs.

(j) Foreign currency translation

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the

transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign

exchange rates ruling at the balance sheet date. Foreign exchange gains and losses are recognised in the income

statement.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are

translated using the foreign exchange rates ruling at the transaction dates. Non-monetary assets and liabilities

denominated in foreign currencies that are stated at fair value are translated using the foreign exchange rates

ruling at the dates the fair value was determined.

The results of foreign operations are translated into Hong Kong dollars at the exchange rates

approximating the foreign exchange rates ruling at the dates of the transactions. Balance sheet items,

including goodwill arising on consolidation of foreign operations acquired on or after 1 January 2005, are

translated into Hong Kong dollars at the foreign exchange rates ruling at the balance sheet date. The resulting

exchange differences are recognised directly in a separate component of equity.

(k) Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at cost less

allowance for bad and doubtful debts.


— 81 —

(l) Trade and other payables

Trade and other payables are initially recognised at fair value and thereafter stated at amortised cost

unless the effect of discounting would be immaterial, in which case they are stated at cost.

(m) Provisions

Provisions are recognised for liabilities of uncertain timing or amount when the Group has a legal or

constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will

be required to settle the obligation and a reliable estimate can be made. Where the time value of money is

material, provisions are stated at the present value of the expenditures expected to settle the obligation.

When the effect of discounting is material, the amount recognised for a provision is the present value at

the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in

the discounted present value amount arising from the passage of time is included in finance costs in the income

statement.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be

estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of

economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or

non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of

outflow of economic benefits is remote.

(n) Employee benefits

(i) Salaries, annual bonuses, paid annual leave, leave passage and the cost to the Group of non-

monetary benefits are accrued in the year in which the associated services are rendered by

employees of the Group. Where payment or settlement is deferred and the effect would be material,

these amounts are stated at their present values.

(ii) Contributions to Mandatory Provident Funds as required under the Hong Kong Mandatory Provident

Fund Schemes Ordinance and contributions to the retirement schemes operated by the relevant

authorities for employees of the subsidiaries in the People’s Republic of China (‘‘PRC’’) are

recognised as an expense in the income statement as incurred, except to the extent that they are

included in the cost of inventories not yet recognised as an expense.

(iii) The Group’s net obligation in respect of lump sum long service amounts payable on cessation of

employment in certain circumstances under the Hong Kong Employment Ordinance is the amount of

future benefit that employees have earned in return for their service in the current and prior

periods. The obligation is calculated using the projected unit credit method by a qualified actuary,

discounted to its present value, and the fair value of any related plan assets is deducted. The

discount rate is the yield at balance sheet date on Exchange Fund Notes that have maturity dates

approximating the terms of the Group’s obligations.

(o) Taxation

(i) Taxation for the year comprises current tax and movements in deferred tax assets and liabilities.

Current tax and movements in deferred tax assets and liabilities are recognised in the income

statement except to the extent that they relate to items recognised directly in equity, in which case

they are recognised in equity.

(ii) Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted

or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of

previous years.


— 82 —

(iii) Deferred tax assets and liabilities arise from deductible and taxable temporary differences

respectively, being the differences between the carrying amounts of assets and liabilities for

financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax

losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the

extent that it is probable that future taxable profits will be available against which the asset can be

utilised, are recognised. Future taxable profits that may support the recognition of deferred tax

assets arising from deductible temporary differences include those that will arise from the reversal

of existing taxable temporary differences, provided those differences relate to the same taxation

authority and the same taxable entity, and are expected to reverse either in the same period as the

expected reversal of the deductible temporary difference or in periods into which a tax loss arising

from the deferred tax asset can be carried back or forward. The same criteria are adopted when

determining whether existing taxable temporary differences support the recognition of deferred tax

assets arising from unused tax losses and credits, that is, those differences are taken into account if

they relate to the same taxation authority and the same taxable entity, and are expected to reverse

in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary

differences arising from goodwill not deductible for tax purposes, negative goodwill treated as

deferred income, the initial recognition of assets or liabilities that affect neither accounting nor

taxable profit (provided they are not part of a business combination).

The amount of deferred tax recognised is measured based on the expected manner of realisation or

settlement of the carrying amount of the assets and liabilities, using tax rates enacted or

substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not

discounted.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date and is reduced

to the extent that it is no longer probable that sufficient taxable profit will be available to allow the

related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes

probable that sufficient taxable profit will be available.

(iv) Current tax balances and deferred tax balances, and movements therein, are presented separately

from each other and are not offset. Current tax assets are offset against current tax liabilities, and

deferred tax assets against deferred tax liabilities if, and only if, the Company or the Group has the

legally enforceable right to set off current tax assets against current tax liabilities and the following

additional conditions are met:

. in the case of current tax assets and liabilities, the Company or the Group intends either to

settle on a net basis, or to realise the asset and settle the liability simultaneously; or

. in the case of deferred tax assets and liabilities, if they relate to taxation levied by the same

taxation authority on either:

— the same taxable entity; or

— different taxable entities, which, in each future period in which significant amounts of

deferred tax liabilities or assets are expected to be settled or recovered, intend to

realise the current tax assets and settle the current tax liabilities on a net basis or

realise and settle simultaneously.

(p) Revenue recognition

Revenue is recognised when the customer has accepted the goods and the related risks and rewards of

ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts

and returns.


— 83 —

Interest income is recognised on a time proportion basis, taking into account the principal amounts

outstanding and the interest rates applicable.

Sundry income is recognised on an actual basis.

(q) Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash at bank

and on hand, demand deposits with banks and other financial institutions, and short term highly liquid

investments that are readily convertible into known amounts of cash and which are subject to an insignificant

risk of changes in value, having been within three months of maturity at acquisition, less advances from banks

repayable within three months from the date of the advance.

(r) Related parties

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

(i) the party has the ability, directly or indirectly through one or more intermediaries, to control the

Group or exercise significant influence over the Group in making financial and operating decisions,

or vice versa, or where the Group and the party are subject to common control or common

significant influence;

(ii) the party is a member of the key management personnel of the Group;

(iii) the party is a close member of the family of any individual referred to in (i) or (ii);

(iv) the party is an entity that is controlled, jointly controlled or significantly influenced by or for

which significant voting power in such entity resides with, directly or indirectly, any individual

referred to in (ii) or (iii); or

(v) the party is a post-employment benefit plan for the benefit of employees of the Group, or of any

entity that is a related party of the Group.

3. Turnover and revenue

Turnover represents the sales value of jewellery products sold to customers. An analysis of turnover and revenue

is as follows:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Turnover 139,455 281,708 444,649

Other revenue

Bank interest income 41 56 199

Overdue interest received from an immediate

holding company — — 383

Sundry income 146 179 447

Write back of handling fee 208 — —

395 235 1,029

Total revenue recognised during the year 139,850 281,943 445,678


— 84 —

4. Profit from operating activities before taxation

Profit from operating activities before taxation is arrived at after charging:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Auditors’ remuneration

— current year provision 458 567 735

— prior year under provision — — 1,433

Cost of inventories# 98,700 162,907 191,306

Depreciation 555 4,366 11,234

Loss on disposal of property, plant and equipment 6 35 —

Operating lease charges 757 1,499 4,496

Provident fund contributions (included in staff costs

below) 439 1,300 3,717

Provision for inventories — — 5,435

Staff costs

— directors’ emoluments (note 5) — — —

— other 5,020 25,653 53,372

# Cost of inventories for the years ended 29 February 2004, 28 February 2005 and 28 February 2006 include

HK$2,012,000, HK$2,511,000 and HK$3,455,000, respectively, relating to staff costs, depreciation and

operating lease charges, which amount is also included in the respective total amounts disclosed separately

above for each of these types of expenses.

5. Directors’ emoluments

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Fees — — —

Other — for management services rendered — — —

— — —

6. Individuals with highest emoluments

The aggregate of emoluments in respect of the five individuals are as follows:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Salaries and other emoluments 2,136 3,208 3,446

Performance related incentives 283 542 816

Contributions to retirement benefits scheme 48 58 58

Share-based payments — — 192

2,467 3,808 4,512


— 85 —

The emoluments of the five, five and five individuals with the highest emoluments for the year ended 29

February 2004, 28 February 2005 and 28 February 2006, respectively, are within the following bands:

Group

2004 2005 2006

Below HK$1,000,000 4 4 4

HK$1,000,001 to HK$1,500,000 1 1 1

5 5 5

7. Segment reporting

Segment information is presented in respect of the Group’s geographical segments. Information relating to

geographical segments based on the location of assets is chosen because this is more relevant to the Group in making

operating and financial decisions. No geographical segment analysis of the Group is presented as all the Group’s

turnover and trading results are generated in PRC (including Hong Kong). No business segments analysis of the Group

is presented as all the Group’s turnover and trading results are generated from the manufacture, sale and marketing of

jewellery products.

8. Taxation

The provision for Hong Kong Profits Tax is calculated at 17.5%, 17.5% and 17.5% of the estimated assessable

profits for the years ended 29 February 2004, 28 February 2005 and 28 February 2006, respectively. Taxation for

overseas subsidiaries is similarly charged at the appropriate current rates of taxation ruling in the relevant countries.

Taxation in the consolidated income statement represents:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Current tax — Provision for Hong Kong Profits Tax

Tax for the year 1,829 1,106 170

Underprovision in respect of prior years — 137 —

1,829 1,243 170

Current tax — overseas

Tax for the year 136 11,293 22,948

Overprovision in respect of prior years — — (1,106)

136 11,293 21,842

Deferred tax

Origination and reversal of temporary differences — (340) (2,729)

1,965 12,196 19,283


— 86 —

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

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Profit before taxation 30,636 24,824 64,939

Notional tax on profits before tax, calculated at the

rates applicable to profits in jurisdictions

concerned 9,712 9,328 14,155

Tax effect of profits entitled to tax exemption (7,574) (699) (811)

Tax effect of expenses that are not deductible in

determining taxable profits 16 3,451 3,541

Tax effect of income that is not taxable in

determining taxable profits — (21) (2)

Tax effect of unused tax losses not recognised — — 2,414

Effect of temporary differences not recognised — — 1,071

Deferred tax not recognised in prior years — — 21

Prior year underprovision/(overprovision) — 137 (1,106)

Tax effect of prior year’s tax losses utilised this year (189) — —

Taxation 1,965 12,196 19,283


— 87 —

9. Property, plant and equipment

Group

Plant and

machinery

Furniture and

fixtures Motor vehicles Total

HK$’000 HK$’000 HK$’000 HK$’000

Cost or valuation

1 March 2003 175 2,662 — 2,837

Additions 214 510 — 724

Disposals — (13) — (13)

29 February 2004 389 3,159 — 3,548

Exchange adjustments 9 71 — 80

Additions 462 10,702 193 11,357

Disposals (34) (252) — (286)

28 February 2005 826 13,680 193 14,699

Exchange adjustments 28 453 6 487

Additions 263 15,030 435 15,728

Disposals — (36) — (36)

28 February 2006 1,117 29,127 634 30,878

Accumulated depreciation

1 March 2003 46 767 — 813

Charge for the year 45 510 — 555

On disposals — (6) — (6)

29 February 2004 91 1,271 — 1,362

Exchange adjustments 2 29 — 31

Charge for the year 157 4,197 12 4,366

On disposals (17) (81) — (98)

28 February 2005 233 5,416 12 5,661

Exchange adjustments 10 331 2 343

Charge for the year 195 10,925 114 11,234

On disposals (36) — (36)

28 February 2006 438 16,636 128 17,202

Net book value

29 February 2004 298 1,888 — 2,186

28 February 2005 593 8,264 181 9,038

28 February 2006 679 12,491 506 13,676


— 88 —

10. Deferred tax assets and liabilities

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Deferred tax assets

1 March — — 340

Exchange adjustments — — 50

Credit to income statements — 340 2,775

28 February — 340 3,165

Deferred tax assets arise from the following temporary differences:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Differences between the carrying amount of

property, plant and equipment and its tax base — — 770

Deductible temporary differences arising from

provisions — 340 2,395

— 340 3,165

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Deferred tax liabilities

1 March — — —

Charge to income statement — — 46

28 February — — 46

Deferred tax liabilities arise from the following temporary differences:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Differences between the carrying amount of

property, plant and equipment and its tax base — — 46

11. Inventories

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Raw materials 2,112 9,931 5,723

Work in progress 8,966 14,499 17,913

Finished goods 90,928 127,880 147,696

102,006 152,310 171,332


— 89 —

As at 29 February 2004 and 28 February 2005, the Group had consigned finished goods to the licensees, Beijing

Hua Long Rui Lin Economic and Trading Company Limited (‘‘Hua Long’’) and Beijing Rui Feng Da Lin Jewellery Co.,

Ltd. (‘‘Rui Feng’’), both established in the PRC, amounting to HK$78,704,000 and HK$23,808,000, and HK$10,556,000

and HK$4,800,000, respectively. The licensees are responsible for distributing the consigned finished goods to the shop

outlets operating under the trade names of ‘‘Tse Sui Luen’’ in the PRC. As at 29 February 2004 and 28 February 2005,

the Group had an amount due from Hua Long and Rui Feng amounting to HK$13,974,000 and HK$11,693,000, and nil

and HK$17,000, respectively. Since the Group cannot supervise the activities of the licensees, the directors consider

that it is possible that the Group may not be able to recover possession of all or certain of these consigned finished

goods in the event that the licensees are unable to meet their financial obligations. The directors are not aware of any

circumstances that lead the Group to believe that the licensees are unable to meet their financial obligations. As at 28

February 2006, the Group did not have any consigned finished goods.

As at 29 February 2004, 28 February 2005 and 28 February 2006, included in finished goods are inventories of

HK$14,422,000, HK$27,201,000 and HK$37,883,000, respectively, stated net of a general provision, made in order to

state these inventories at the lower of their cost and estimated net realisable value.

12. Trade and other receivables

Included in trade and other receivables are trade debtors (net of provision for bad and doubtful debts) with the

following ageing analysis:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

0 to 30 days 6,459 26,846 40,068

31 to 60 days 5,510 769 2,300

61 to 90 days 7,701 3,453 1,644

Over 90 days 691 9,841 14,100

Total trade receivables 20,361 40,909 58,112

Other receivables, deposits and prepayments 8,268 9,770 6,393

28,629 50,679 64,505

Details of trade and other receivables denominated in different currencies are as follows:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Hong Kong dollars 14,650 10,276 18,916

United States dollars — 4,588 —

Renminbi 13,979 35,815 45,589

28,629 50,679 64,505

The directors consider that trade and other receivables approximate to their fair value.


— 90 —

13. Due from/to immediate holding company and fellow subsidiaries

The amounts due from/to immediate holding company and fellow subsidiaries are unsecured, interest-free and

there are no fixed terms for repayment.

14. Cash at bank and in hand

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

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Hong Kong dollars 600 651 605

United States dollars — 86 179

Renminbi 5,631 27,684 59,719

6,231 28,421 60,503

15. Trade and other payables

Included in trade and other payables are trade creditors with the following ageing analysis:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

0 to 30 days — 3,018 3,308

31 to 60 days — — 11

61 to 90 days — — 20

Over 90 days — 5,128 50

Total trade payables — 8,146 3,389

Other payables and accruals 1,566 25,583 27,952

1,566 33,729 31,341

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

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Hong Kong dollars 300 6,480 2,827

United States dollars — — (6,619)

Renminbi 1,266 27,249 35,133

1,566 33,729 31,341

The directors consider that trade and other payables approximate to their fair value.


— 91 —

16. Share capital

2004 2005 2006

HK$’000 HK$’000 HK$’000

Authorised:

9,770 ordinary shares of US$1 each (A shares) 76 76 76

40,230 ordinary shares of US$1 each (B shares) 314 314 314

390 390 390

Issued and fully paid:

1,341 ordinary shares of US$1 each (A shares) 11 11 11

5,522 ordinary shares of US$1 each (B shares) 43 43 43

54 54 54

By a special resolution passed on 27 August 2002, the Company’s authorised share capital was reclassified into

A shares and B shares of US$1 each. The rights attaching to the shares of the relevant class with A rights and B rights

will be identical, save as to the payment of dividends in the following circumstances:

(i) Before the bank loans of Tse Sui Luen Jewellery (International) Limited and its subsidiaries (‘‘the TSL

Group’’) under an agreement dated 3 August 2000 (‘‘the Bank Loans’’) are fully repaid or refinanced

(whichever happens earlier):

. no dividend will be declared and paid and no other distribution, whether in specie or otherwise,

will be made in respect of the B shares; and

. the holder of A shares will be entitled to receive a dividend subject to available cash in respect of

each of such shares held by it, based on the formula which will effectively give the holder, in each

year, a dividend per share equivalent to the distributable profits (less any reserves agreed by the

board by approval of not less than three-quarters of the directors to be retained by the Company)

divided by the total number of shares in issue as at the last business day of each year.

(ii) After the Bank Loans are repaid in full or after such Bank Loans are refinanced (whichever occurs

earlier):

. no dividend shall be declared and paid and no other distribution, whether in specie or otherwise,

shall be made in respect of the A shares except to the extent such dividend relates to the period

prior to the date on which the Bank Loans have been repaid in full or have been refinanced; and

. the holder of B shares will firstly receive dividends equivalent to the total amount of the dividends

which would have been declared and paid in respect of the B shares had the Company distributed

the full amount of its distributable profits (less any reserves agreed by the board to be retained by

the Company) during the period between 31 August 2002 to the date when the Bank Loans are

repaid in full or refinanced (whichever occurs earlier). The two classes of shares will rank pari

passu in dividend entitlements thereafter.

17. Share options

The immediate holding company operates a share option scheme for the purpose of providing incentives and

rewards to eligible participants who contribute to the success of the Company’s operations. 875,000 options were

granted in 2005 to the directors, employees and service providers of the Company and its subsidiaries pursuant to the

2003 Share Option Scheme. 20% options granted are exercisable from 22 August, 2005. The next 40% options granted

are exercisable from 18 months from the date of grant and the remaining 40% options granted are exercisable from 24

months from the date of grant.


— 92 —

The fair value of options granted, was determined by using the Binomial valuation model. The significant inputs

into the model were share price of $1.71 at the grant date, exercise price of $1.76, expected volatility of the

intermediate holding company’s share price: 60% p.a., expected life of options of 4 years, expected nil dividend,

annual risk-free interest rate of 3.38%p.a., rate of leaving service of 15% p.a. and assume option holders will exercise

their options when the share price is at least 180% of the exercise price. The fair value of options granted are as

follows:

Exercise period Fair value per option No. of vested options granted

22 August 2005–25 July 2009 $0.56 175,000

22 January 2007–25 July 2009 $0.69 350,000

25 July 2007–25 July 2009 $0.73 350,000

Given the above assumptions and the inherent limitations of the Binomial valuation model, shareholders and

other investors are hereby warned of the subjectivity and uncertainty of the aforementioned values of the options.

18. Commitments

(a) Capital commitments

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Contracted but not accounted for — 667 3,017

(b) Lease commitments

At 29 February 2004, 28 February 2005 and 28 February 2006, the outstanding commitments under non-

cancellable operating leases in respect of land and buildings were respectively as follows:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Leases which expire:

Within one year 333 2,867 4,263

In the second and fifth years inclusive — 7,698 6,597

333 10,565 10,860

The Group leases a number of properties under operating leases. The leases typically run for an initial

period of one to three years, with an option to renew the lease when all terms are renegotiated. Lease payments

are usually adjusted to reflect market rentals upon renegotiated of the terms of the lease.

19. Pledge of assets

As at 29 February 2004, 28 February 2005 and 28 February 2006, the Group has pledged the capital contribution

to a subsidiary of the Group amounting to US$235,000, US$235,000 and US$235,000, respectively, and all the benefits

accruing to the pledged equity interest of 11.625%, 11.625% and 11.625%, respectively, of the subsidiary to the TSL

Group’s bankers and financial creditors as security for, inter alia, all obligations and liabilities, actual or contingent

from time to time owing by the TSL Group to the bankers and financial creditors.


— 93 —

20. Contingent liabilities

At 29 February 2004, 28 February 2005 and 28 February 2006, there were contingent liabilities in respect of the

following:

Guarantees given to banks by the company in respect of banking facilities extended to the TSL Group with

maximum liability amounting to HK$278,427,000, HK$125,371,000 and HK$180,096,000, respectively.

Guarantees given to Tse Sui Luen Jewellery Company Limited (‘‘TSLJ’’), an immediate holding company, by the

Company in respect of outstanding balance, obligations and liabilities owing by Infinite Assets Corp. (‘‘IAC’’), a fellow

subsidiary, to TSLJ. At 29 February 2004, 28 February 205 and 28 February 2006, the outstanding balance owing by

IAC to TSLJ amounted to HK$120,409,000, HK$115,129,000 and HK$123,241,000, respectively.

21. Related party transactions

(a) Transactions with related companies during the years ended 29 February 2004, 28 February 2005 and 28

February 2006 not disclosed elsewhere in the financial statements are summarised as follows:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Handling fee paid to immediate holding

company 207 — —

Royalty and management fee paid to

immediate holding company 2,789 5,731 8,733

Rental expenses paid to immediate holding

company — 136 146

Purchase of goods from immediate holding

company 104,272 110,079 113,928

Sales of goods to immediate holding company — — 7,900

Repairing fee paid to immediate holding

company — 313 1,061

Interest income received from immediate

holding company — — 383

Sales of goods to a fellow subsidiary — — 98

Purchase of goods from fellow subsidiaries — — 16,755

Sub-contracting fee paid to a fellow

subsidiary — — 2,185

Consultancy fee paid to a fellow subsidiary 183 416 569

Net sales of goods to companies under

common control (Note 1) 128,038 138,044 7,392

Note 1 : During the years ended 29 February 2004, 28 February 2005 and 28 February 2006, the Group

sold finished goods to Hua Long Rui Lin Economic and Trading Company Limited (‘‘Hua

Long’’) amounting to HK$120,450,000, HK$122,290,000 and HK$4,504,000, respectively; and

sold finished goods to Mr. Qi Jian Hong (‘‘Mr. Qi’’) amounting to nil, nil and HK$2,888,000,

respectively; and sold finished goods to Beijing Rui Feng Da Lin Jewellery Co., Ltd (‘‘Rui

Feng’’) amounting to HK$7,588,000, HK$15,754,000 and nil, respectively. As at 29 February

2004, 28 February 2005 and 28 February 2006, the amount due from Hua Long was

HK$13,082,000, HK$15,776,000 and HK$11,571,000, respectively; and the amount due from

Mr. Qi was nil, nil and HK$2,888,000, respectively; and the amount due from Rui Feng was nil,

HK$17,000 and nil, respectively.

Hua Long and Rui Feng are companies controlled by Mr. Qi who is a substantial shareholder and

a director of the Group.


— 94 —

Note 2 : During the years ended 29 February 2004, 28 February 2005 and 28 February 2006, Excellent

Ford Development Limited, a subsidiary of the Company, sold raw materials to Beijing Tse Sui

Luen Jewellery Company Limited, a subsidiary of the Company, through Rosy Blue (Shanghai)

Diamond Co., Ltd. (‘‘Rosy Blue SH’’), an authorised diamond trading company in the PRC,

amounting to HK$4,859,000, HK$70,618,000 and HK$51,976,000, respectively. As at 29

February 2004, 28 February 2005 and 28 February 2006, the amount due from Rosy Blue SH

was nil, HK$4,588,000 and HK$665,000, respectively.

Rosy Blue SH is a fellow subsidiary of Prime Investment S.A., a preference shareholder of

Partner Logistics Limited, the intermediate holding company.

The above transactions were made at prices and terms as agreed between the parties in the normal course

of business.

(b) Remuneration for key management personnel, including amounts paid to the Company’s directors as

disclosed in note 5, is as follows:

Group

2004 2005 2006

HK$’000 HK$’000 HK$’000

Short-term employee benefits — — —

Post-employment benefits — — —

— — —

22. Subsidiaries

Details of the principal subsidiaries of the Group are as follows:

Name of company

Place of

incorporation/

establishment

Proportion of

ownership

interest Principal activities

Excellent Ford Development Limited Hong Kong 100% Jewellery trading


Company Limited#

( )

PRC *90% Jewellery manufacturing

and trading

Beijing Qi Li Yun Jewellery Company

Limited

( )



Company Limited#

( )

PRC *100% Jewellery trading and

retailing

Guangzhou Hong Yun Jewellery

Company Limited

( )


Guangzhou Xi Yun Jewellery Company

Limited#

( )


Shanghai Fu Yun Jewellery Company

Limited#

( )



— 95 —

* Interest indirectly held by the Company.


23. Financial instruments

(a) Financial risk management

The Group is exposed to a variety of risks including foreign currency risk, credit risk, liquidity risk and

cash flow interest rate risk arising in the normal course of the Group’s business activities.

The Group does not have any written risk management policies and guidelines. The directors monitor the

financial risk management of the Group and take such measures as considered necessary from time to time to

minimise such financial risks.

(i) Foreign currency risk

Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to

changes in foreign exchange rates.

The Group is exposed to foreign currency risk primarily through sales and purchases that are

denominated in a currency other than the functional currency of the operations to which they relate. The

currencies giving rise to this risk are primarily United States dollars and Chinese Renminbi. The Group

does not hold or issue any derivative financial instruments for trading purposes or to hedge against

fluctuations in foreign exchange rates. The Group mitigates this risk by conducting the sales and

purchases transactions in the same currency, whenever possible.

(ii) Credit risk

Credit risk arises from the possibility that customers may not be able to settle obligations within

the normal terms of transactions. The Group performs ongoing credit evaluation of the debtors’ financial

condition and maintains an account for allowance for doubtful trade and other accounts receivable based

upon the expected collectibles of all trade and other accounts receivable.

At the balance sheet date, there were no major concentrations of credit risk.

The maximum exposure to credit risk is therefore represented by the carrying amount of each

financial asset as stated in the balance sheet.

Cash is held with financial institutions of good standing.

(iii) Liquidity risk

Liquidity risk is the risk that an enterprise will encounter difficulty in raising funds to meet

commitments associated with financial instruments. Liquidity risk may result from an inability to sell a

financial asset quickly at close to its fair value.

Prudent liquidity risk management implies maintaining sufficient cash. The Group monitors and

maintains a level of bank balances deemed adequate to finance the Group’s operations.

(iv) Cash flow and fair value interest rate risk

Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate

because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a

financial instrument will fluctuate due to changes in market interest rates.

As the Group has no significant interest-bearing assets, the Group’s income and operating cash

flows are substantially independent of changes in market interest rates.


— 96 —

(b) Estimation of fair values

The notional amounts of financial assets and liabilities with a maturity of less than one year (including

trade and other receivables, cash at bank and in hand, trade and other payables) are assumed to approximate their

fair values. The fair value of finance lease liabilities is estimated as the present value of future cash flows,

discounted at current market interest rates for similar financial instruments.

The fair value of non-trade balances due from/to group and related companies has not been determined as

the timing of the expected cash flows of these balances cannot be reasonably determined because of the

relationship.

24. Recent accounting and financial reporting pronouncements

The HKICPA has issued the following amendments, new standards and interpretations which may be/are relevant

to the preparation of the Group’s financial statements after 28 February 2006 :

Effective for

accounting periods

beginning on or after

HKAS 1 (Amendment) Presentation of Financial Statements: Capital

Disclosures

1 January 2007

HKAS 19 (Amendment) Employee Benefits — Actuarial Gains and Losses,

Group Plans and Disclosures

1 January 2006

HKAS 21 (Amendment) The Effects of Changes in Foreign Exchange Rate 1 January 2006

HKAS 39 (Amendment) Financial Instruments: Recognition and Measurement 1 January 2006

HKFRS 1 (Amendment) First-time Adoption of Hong Kong Financial Reporting

Standards

1 January 2006

HKFRS 6 Exploration for and Evaluation of Mineral Resources 1 January 2006

HKFRS 7 Financial Instruments: Disclosures 1 January 2007

HKFRS-Int 4 Determining whether an Arrangement contains a Lease 1 January 2006

HKFRS-Int 5 Rights to Interests arising from Decommissioning,

Restoration and Environmental Rehabilitation Funds

1 January 2006

HK(IFRIC)-Int 6 Liabilities arising from Participating in a Specific

Market — Waste Electrical and Electronic Equipment

1 December 2005

HK(IFRIC)-Int 7 Applying the Restatement Approach under HKAS 29

Financial Reporting in Hyperinflationary Economics

1 March 2006

HK(IFRIC)-Int 8 Scope of HKFRS 2 1 May 2006

HK(IFRIC)-Int 9 Reassessment of Embedded Derivatives 1 June 2006

In addition, the Hong Kong Companies (Amendment) Ordinance 2005 came into effect on 1 December 2005 and

will be first applicable to the Group’s financial statements for the year beginning 1 March 2006.

The Group is in the process of making an assessment of what the impact of these amendments, new standards

and interpretations is expected to be in the period of initial application. So far it has concluded that the adoption of

these amendments, new standards and interpretations is unlikely to have a significant impact on the Group’s results of

operations and financial position.

25. Parent and ultimate holding company

The company is a partially-owned subsidiary of Tse Sui Luen Jewellery Company Limited, which is incorporated

in Hong Kong.

At 28 February 2006, the directors consider the ultimate holding company to be Blink Technology Limited,

which is incorporated in the British Virgin Islands, and the ultimate controlling party to be Mr. Tse Tat Fung, Tommy.


— 97 —

VI. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Group in respect of any period

subsequent to 28 February 2006.

Yours faithfully,

Moore Stephens

Certified Public Accountants

Hong Kong


— 98 —

A. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ON THE ENLARGED

GROUP

The accompanying unaudited pro forma consolidated balance sheet of the Enlarged Group has

been prepared to illustrate the effects of the acquisition of a minimum of additional 17.8% and a

maximum of additional 24% interest in the issued share capital of Tse Sui Luen Investment (China)

Limited (the ‘‘Share Acquisition’’), assuming the transaction had been completed as at 28 February

2006, might have affected the financial position of the Enlarged Group.

The unaudited pro forma consolidated balance sheet is prepared based on the audited

consolidated balance sheet of the Group as at 28 February 2006 as set out in Appendix I to this

circular after making certain pro forma adjustments resulting from the Share Acquisition.

The unaudited pro forma consolidated balance sheet is prepared based on a number of

assumptions, estimates, uncertainties and currently available information, and is provided for

illustrative purposes only. Accordingly, as a result of the nature of the unaudited pro forma

consolidated balance sheet, it may not give a true picture of the actual financial position of the

Enlarged Group that would have been attained had the Share Acquisition actually occurred on 28

February 2006. Furthermore, the unaudited pro forma consolidated balance sheet does not purport to

predict the Enlarged Group’s future financial position.

A1. The following illustrates the effect of the acquisition of a minimum of additional

17.8% interest in the issued share capital of TSL China.

The Group

— as at

28 February

2006

(audited)

Pro forma

adjustment

Pro forma

adjustment

Unaudited

pro forma

consolidated

balance

sheet of the

Enlarged

Group

HK$’000 HK$’000 HK$’000 HK$’000(Note 1) (Note 2)

Non-current assets

Property, plant and

equipment 117,691 117,691

Other financial asset 500 500

Club debenture 103 103

Deferred tax assets 20,834 20,834

139,128 139,128

Current assets

Investments in securities 1 1

Inventories 500,723 500,723

Trade and other

receivables 109,680 109,680

Current tax recoverable 1,020 1,020

Cash at bank and in hand 101,249 (12,168) 12,168 101,249

712,673 712,673

APPENDIX III UNAUDITED PRO FORMA FINANCIALINFORMATION ON THE ENLARGED GROUP

— 99 —

The Group

— as at

28 February

2006

(audited)

Pro forma

adjustment

Pro forma

adjustment

Unaudited

pro forma

consolidated

balance

sheet of the

Enlarged

Group


Current liabilities

Trade and other payables 355,019 355,019

Bank overdrafts —

secured 18,550 18,550

Bank loans — secured 4,000 4,000

Other loans — secured 14,500 12,168 26,668

Obligations under finance

leases 660 660

Current tax payable 91,876 91,876

484,605 496,773





Bank loans — secured 53,000 53,000

Other loans — secured 57,867 57,867

Obligations under finance

leases 614 614

Employee benefit

obligations 8,759 8,759

Deferred tax liabilities 46 46

120,286 120,286

Net assets 246,910 234,742


Shares capital 51,766 51,766

Reserves 155,186 2,672 157,858

Total equity attributable to

equity holders of the

company 206,952 209,624

Minority interests 39,958 (14,840) 25,118

Total equity 246,910 234,742


— 100 —

Notes:

1. The decrease in cash at bank and in hand represents the payment of consideration of US$1,560,000 (i.e.

US$1,560,000 x 7.8 = HK$12,168,000) for the Share Acquisition of a minimum of 17.8% interest of TSL

China from The China Retail Fund, LDC.

The decrease of HK$14,840,000 in minority interests reflects reduction of 17.8% minority interest’s share

of the total equity attributable to equity holders of TSL China as at 28 February 2006 (i.e. HK$83,372,000

x 17.8%) following the Share Acquisition.

Adjustment to reserves of HK$2,672,000 represents the negative goodwill which is determined by

comparing the consideration amounting to HK$12,168,000 and the net asset value of 17.8% of the TSL

China Group as at 28 February 2006 amounting to HK$14,840,000.

2. The adjustment reflects the external loan borrowings to finance the Share Acquisition.


— 101 —

A2. The following illustrates the effect of the acquisition of a maximum of additional 24%

interest in the issued share capital of TSL China.

The Group

— as at

28 February

2006

(audited)

Pro forma

adjustment

Pro forma

adjustment

Unaudited

pro forma

consolidated

balance

sheet of the

Enlarged

Group


Non-current assets

Property, plant andequipment 117,691 117,691

Other financial asset 500 500Club debenture 103 103Deferred tax assets 20,834 20,834

139,128 139,128

Current assets

Investments in securities 1 1Inventories 500,723 500,723Trade and otherreceivables 109,680 109,680

Current tax recoverable 1,020 1,020Cash at bank and in hand 101,249 (16,380) 16,380 101,249

712,673 712,673

Current liabilities

Trade and other payables 355,019 355,019Bank overdrafts —secured 18,550 18,550

Bank loans — secured 4,000 4,000Other loans — secured 14,500 16,380 30,880Obligations under financeleases 660 660

Current tax payable 91,876 91,876

484,605 500,985





Bank loans — secured 53,000 53,000Other loans — secured 57,867 57,867Obligations under financeleases 614 614


— 102 —

The Group

— as at

28 February

2006

(audited)

Pro forma

adjustment

Pro forma

adjustment

Unaudited

pro forma

consolidated

balance

sheet of the

Enlarged

Group


Employee benefitobligations 8,759 8,759

Deferred tax liabilities 46 46

120,286 120,286

Net assets 246,910 230,530


Shares capital 51,766 51,766Reserves 155,186 3,629 158,815

Total equity attributable toequity holders of thecompany 206,952 210,581

Minority interests 39,958 (20,009) 19,949

Total equity 246,910 230,530

Notes:

1. The decrease in cash at bank and in hand represents the payment of consideration of US$2,100,000 (i.e.

US$2,100,000 x 7.8 = HK$16,380,000) for the Share Acquisition of a maximum of 24% interest of TSL

China from The China Retail Fund, LDC.

The decrease of HK$20,009,000 in minority interests reflects reduction of 24% minority interest’s share of

the total equity attributable to equity holders of TSL China as at 28 February 2006 (i.e. HK$83,372,000 x

24%) following the Share Acquisition.

Adjustment to reserves of HK$3,629,000 represents the negative goodwill which is determined by

comparing the consideration amounting to HK$16,380,000 and the net asset value of 24% of the TSL

China Group as at 28 February 2006 amounting to HK$20,009,000.

2. The adjustment reflects the external loan borrowings to finance the Share Acquisition.


— 103 —

B. ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following is the test of a report, prepared for inclusion in this circular, from the reporting

accountants of the Company, Moore Stephens, Certified Public Accountants, Hong Kong.

7 August 2006

The Directors


Tse Sui Luen Investment (China) Limited

Dear Sirs,

We report on the unaudited pro forma financial information of Tse Sui Luen Jewellery

(International) Limited (the ‘‘Company’’) and its subsidiaries (hereinafter collectively referred to as

the ‘‘Group’’), which has been prepared by the directors for illustrative purposes only, to provide

information about how the proposed acquisition of a minimum of additional 17.8% and a maximum

of additional 24% interest in the issued share capital of Tse Sui Luen Investment (China) Limited

(the ‘‘Share Acquisition’’) might have affected the financial information presented, for inclusion as

Appendix III to the Circular of the Company dated 7 August 2006 (the ‘‘Circular’’). The basis of

preparation of the pro forma financial information is set out on pages 99 to 103 to the Circular.

Responsibilities

It is the responsibility solely of the directors of the Company to prepare the unaudited pro

forma financial information in accordance with paragraph 4.29 of the Rules Governing the Listing of

Securities on The Stock Exchange of Hong Kong Limited (the ‘‘Listing Rules’’) and with reference

to AG 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars

issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’).

It is our responsibility to form an opinion, as required by paragraph 4.29(7) of the Listing

Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not

accept any responsibility for any reports previously given by us on any financial information used in

the compilation of the unaudited pro forma financial information beyond that owed to those to whom

those reports were addressed by us at the dates of their issue.


— 104 —

Basis of opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular

Reporting Engagements (HKSIR) 300 ‘‘Accountants’ Reports On Pro Forma Financial Information in

Investment Circulars’’ issued by the HKICPA. Our work consisted primarily of comparing the

unadjusted financial information with the source documents, considering the evidence supporting the

adjustments and discussing the pro forma financial information with the directors of the Company.

This engagement did not involve independent examination of any of the underlying financial

information.

We planned and performed our work so as to obtain the information and explanations we

considered necessary in order to provide us with sufficient evidence to give reasonable assurance

that the pro forma financial information has been properly compiled by the directors of the Company

on the basis stated, that such basis is consistent with the accounting policies of the Group and that

the adjustments are appropriate for the purpose of the unaudited pro forma financial information as

disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

The unaudited pro forma financial information is for illustrative purposes only, based on the

judgements and assumptions of the directors of the Company, and, because of its hypothetical

nature, does not provide any assurance or indication that any event will take place in the future and

may not be indicative of:

. the financial position of the Enlarged Group as at 28 February 2006 or any future date; or

. the results of the Enlarged Group for the year ended 28 February 2006 or any future

periods.

Opinion

In our opinion:

a. the unaudited pro forma financial information has been properly compiled by the directors

of the Company on the basis stated;

b. such basis is consistent with the accounting policies of the Group; and

c. the adjustments are appropriate for the purposes of the unaudited pro forma financial

information as disclosed pursuant to paragraph 4.29 (1) of the Listing Rules.

Yours faithfully,

Moore Stephens

Certified Public Accountants

Hong Kong


— 105 —

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of

giving information with regard to the Share Acquisition. The Directors jointly and severally accept

full responsibility for the accuracy of the information contained in this circular, and confirm, having

made all reasonable enquires, that to the best of their knowledge and belief there are no other facts

the omission of which would make any statement in this circular misleading.

2. DISCLOSURE OF INTERESTS

Directors’ and Chief Executive’s Interests and Short Positions in Shares, Underlying

Shares and Debentures of the Company

At as the Latest Practicable Date, the interests and short positions of the Directors and

chief executive and/or their respective associates of the Company in the shares, underlying

shares and debentures of the Company or any of its associated corporations (within the

meaning of Part XV of the Securities and Futures Ordinance (the ‘‘SFO’’)), which were

required to be notified to the Company and The Stock Exchange of Hong Kong Limited (the

‘‘Stock Exchange) pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and

short positions which they were taken or deemed to have under such provisions of the SFO), or

which were required to be entered in the register maintained by the Company pursuant to

section 352 of the SFO, or which were required to be notified to the Company and the Stock

Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed

Companies (the ‘‘Model Code’’), were as follows:

(i) Interests and short positions in issued shares of the Company

Ordinary shares of HK$0.25 each

Name of director

Personal

Interest

Family

Interest

Corporate

Interest

Derivative

interest

(share

option)

Short

position

Other

Interest

% of

total

Issued

shares

Tse Tat Fung, Tommy — — 152,960,914

(note 1)

2,000,000 — — 73.87%

100,000

(note 2)

Peter Gerardus Van

Weerdenburg

2,252,000 — — 2,000,000 — — 1.09%

Erwin Steve Huang — — — 100,000 — — —

Alex Chan — — — 200,000 — — —

Cheung Tse Kin,

Michael

— — — 75,000 — — —

Yau On Yee, Annie — — 152,960,914

(note 3)

100,000 — — 73.87%

2,000,000

(note 4)

APPENDIX IV GENERAL INFORMATION

— 106 —

Notes:

1. These ordinary shares were held by Partner Logistics Limited, a company which is owned and

controlled by Blink Technology Limited. Blink Technology Limited is wholly and beneficially

owned by Mr. Tse Tat Fung, Tommy. By virtue of the SFO, Mr. Tse Tat Fung, Tommy is deemed

to be interested in all the shares held by Partner Logistics Limited.

2. These 100,000 share options were granted to Ms. Yau On Yee, Annie, the spouse of Mr. Tse Tat

Fung, Tommy. By virtue of the SFO, Mr. Tse Tat Fung is deemed to be interested in these share

options.

3. These ordinary shares were held by Partner Logistics, a company which is owned and controlled by

Blink Technology Limited, Blink Technology is wholly and beneficially owned by Mr. Tse Tat

Fung, Tommy, the spouse of Ms. Yan On Yee, Annie. By virtue of SFO, Ms. Yau On Yee, Annie is

deemed to be interested in all the shares held by Partner Logistics Limited.

4. These 2,000,000 share options were granted to Mr. Tse Tat Fung, Tommy, the spouse of Ms. Yau

On Yee, Annie. By virtue of the SFO, Ms. Yau On Yee, Annie is deemed to be interested in these

share options.

(ii) Interests in underlying shares

As at the Latest Practicable Date, the Directors had interests in option to subscribe

for shares of the Company as follows:

Name of director Date of grant

Date of

acceptance

Exercise

price

Exercisable

period

Number of

share options

held as at the

Latest

Practicable

Date

Tse Tat Fung, Tommy 25 July, 2005 28 July, 2005 HK$1.76

(note 1)

22 August, 2005

to 25 July,

2009

(note 2)

2,000,000

Peter Gerardus Van

Weerdenburg

25 July, 2005 28 July, 2005 HK$1.76

(note 1)

22 August, 2005

to 25 July,

2009

(note 2)

2,000,000

Erwin Steve Huang 25 July, 2005 1 August,

2005

HK$1.76

(note 1)

22 August, 2005

to 25 July,

2009

(note 2)

100,000

Alex Chan 25 July, 2005 1 August,

2005

HK$1.76

(note 1)

22 August, 2005

to 25 July,

2009

(note 2)

200,000

Cheung Tse Kin, Michael 25 July, 2005 28 July, 2005 HK$1.76

(note 1)

22 August, 2005

to 25 July,

2009

(note 2)

75,000

Yau On Yee, Annie 25 July, 2005 28 July, 2005 HK$1.76

(note 1)

22 August, 2005

to 25 July,

2009

(note 2)

100,000


— 107 —

Notes:

1. The closing price of the Company’s shares traded on the Hong Kong Stock Exchange on 25 July,

2005 was HK$1.71, being the date on which the relevant options were offered for grant.

2. For one of the conditions of grant, the grantee concerned agreed with the Company that (i) 20% of

the options granted can be exercised during the period from 22 August, 2005 to 25 July, 2009; (ii)

the next 40% of the options granted can be exercised during the period from 25 January, 2007 to 25

July, 2009; and (iii) the remaining 40% of the options granted can be exercised during the period

from 25 July, 2007 to 25 July, 2009.

Other than as disclosed above and certain nominee shares in subsidiaries held by the

Directors in trust for the Company or its subsidiaries, none of the Directors, chief

executive and their respective associates, had any other interests or short positions in the

shares, underlying shares and debentures of the Company or its associated corporations

(within the meaning of Part XV of the SFO) which were required notification to the

Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO

(including interests and short positions which any such director or chief executive is taken

or deemed to have taken under such provisions of the SFO); or which were required

pursuant to section 352 of the SFO to be entered into the register maintained by the

Company; or which were required, pursuant to the Model Code contained in the Listing

Rules, to be notified to the Company or the Stock Exchange.

Substantial Shareholders’ and Other Person’s Interests and Short Positions in Shares and

underlying Shares of the Company

So far as is known to the Directors, as at the Latest Practicable Date, the interests and

short positions of any substantial shareholders (not being Directors or chief executive of the

Company) in the shares or underlying shares of the Company which have been disclosed to the

Company pursuant to the provisions of Divisions 2 and 3 of Part XV of the SFO and have been

recorded in the register required to be kept by the Company pursuant to section 336 of the SFO

were as follows:

Ordinary shares of HK$0.25 each

Name Capacity

Direct

Interest

% of total

Issued

share

capital

Short

position

% of total

Issued

share

capital

Other

Interest

% of total

Issued

share

capital

Partner Logistics

Limited (note 1)

Beneficial

owner

152,960,914 73.87% — — — —

Blink Technology

Limited (note 1)

Deemed

interest

— — — — 152,960,914 73.87%

Prime Investments

S.A. (note 2)

Deemed

interest

— — — — 152,960,914 73.87%

Rosy Blue

Investments

S.a.R.L. (note 2)

Deemed

interest

— — — — 152,960,914 73.87%

Harshad Ramniklal

Mehta (note 2)

Deemed

interest

— — — — 152,960,914 73.87%


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Notes:

1. These ordinary shares were held by Partner Logistics Limited, a company which is owned and controlled

by Blink Technology Limited. Blink Technology Limited is wholly and beneficially owned by Mr. Tse Tat

Fung, Tommy. Ms. Yau On Yee is the spouse of Mr. Tse Tat Fung, Tommy. By virtue of the SFO, Blink

Technology Limited, Mr. Tse Tat Fung, Tommy and Ms. Yau On Yee, Annie are deemed to be interested

in all the shares held by Partner Logistics Limited.

2. These ordinary shares were held by Partner Logistics Limited, a company which is owned and controlled

by Blink Technology Limited. Prime Investments S.A. is the preference shareholder of Partner Logistics

Limited. Prime Investments S.A. is owned as to 99.83% by Rosy Blue Investments S.a.R.L., which in turn

is owned as to 75% by Mr. Harshad Ramniklal Mehta. By virtue of the SFO, each of Prime Investments

S.A., Rosy Blue Investments S.a.R.L. and Mr. Harshad Ramniklal Mehta, is deemed to be interested in all

the shares held by Partner Logistics Limited.

Other than as disclosed above, the Company had not been notified of any persons who

had interests or short positions in the shares and/or underlying shares of the Company, which

were required to be recorded in the register required to be kept by the Company pursuant to

section 336 of Part XV of the SFO.

3. DIRECTORS’ SERVICE CONTRACTS

No Directors has an unexpired service contract which is not terminable by the Company or any

of its subsidiaries within one year without payment of compensation, other than normal statutory

obligations.

4. DIRECTORS’ INTERESTS IN COMPETING BUSINESS

Save as disclosed in note 29 of appendix I to this circular, none of the Directors is materially

interested in any contract or arrangement subsisting at the date hereof which is significant in relation

to the business of the Group taken as a whole.

5. DIRECTORS’ INTERESTS IN ASSETS

Save as disclosed in note 29 of appendix I to this circular, none of the Directors has any direct

or indirect interest in any assets which they have, since 28 February, 2006, the date to which the

latest published audited consolidated financial statement of the Company were made up, acquired,

disposed of by or leased to, any members of the Group, or are proposed to be acquired, disposed of

by, or leased to, any member of the Group.


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6. EXPERT’S QUALIFICATION, CONSENT AND INTERESTS

The following are the qualifications of the expert(s) (the ‘‘Experts’’) who have given their

advice for the inclusion in this circular:

Name Qualifications

Nature of opinion

or advice Date of opinion

Quam Capital Limited Deemed licensed

corporation to

carry out types 4,

6 and 9 regulated

activities under

the SFO

Letter to the

Independent

Board Committee

and the

shareholders of

the Company

7 August, 2006

Moore Stephens Certified public

accountants

Accountants’

Report

7 August, 2006

The Experts have given and have not withdrawn their respective written consent to the issue of

this circular with the inclusion of their respective letter of advice and the references to their names

in the form and context in which they respectively appears.

As at the Latest Practicable Date, each of the Experts was not interested beneficially or

otherwise in any shares in the Company or any of its subsidiaries or associated corporations and did

not have any right (whether legally enforceable or not) or option to subscribe for or to nominate

persons to subscribe for any shares in the Company or any of its subsidiaries or associated

corporations nor did it have any interest, either direct or indirect, in any assets which have been,

since the date to which the latest published audited financial statements of the Company were made

up, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or

leased to any member of the Group.

7. LITIGATION

Neither the Company nor any of its subsidiaries is engaged in any litigations or arbitration of

material importance and no litigations or claim of material importance is known to the Directors to

be pending or threatened against the Company or any of its subsidiaries.

8. MATERIAL CHANGES

The Directors have confirmed that there have been no material adverse changes to the financial

or trading position of the Group since 28 February, 2006, being the date to which the latest

published audited consolidated financial statements of the Group were made up.

9. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in ordinary course of business of the

Group) have been entered into the Group within two years immediately preceding the Latest

Practicable Date and are or may be material:

(a) the subscription agreement dated 27 September, 2004 entered into between the Company,

Partner Logistics Limited, Tse Sui Luen Jewellery Company Limited, Winter Pine Co.

Limited setting out the terms of the Debt Conversion (as defined in the circular issued by


— 110 —

the Company on 29 November, 2004) as supplemented and amended by a supplemental

agreement dated 26 October, 2004 between the parties extending the completion of the

Debt Conversion;

(b) the Revised Debt Restructuring Agreement dated 27 September, 2004 entered into

between the TSL Obligors (as defined in the circular issued by the Company on 29

November, 2004), Partner Logistics Limited and the Continuing Banks (as defined in the

circular issued by the Company on 29 November, 2004);

(c) the Underwriting Agreement dated 26 November, 2004 entered into between the

Underwriter (as defined in the circular issued by the Company on 29 November, 2004)

and the Company in relation to the underwriting of the Open Offer (as defined in the

circular issued by the Company on 29 November, 2004); and

(d) the Amendment Agreement dated 25 October, 2005 entered into between the Company

and certain of its subsidiaries who were parties to the agreement, Standard Chartered

Bank (Hong Kong) Limited, Bank of China (Hong Kong) Limited, ABN AMRO Bank

N.V. and Partner Logistics Limited for the new money arrangement of HK$77,000,000

made available by ABN AMRO Bank N.V. to Tse Sui Luen Jewellery Company Limited.

10. MISCELLANEOUS

(a) The registered office of the Company is at Clarendon House, Church Street, Hamilton HM

11, Bermuda. The head office and principal place of business of the Company is at

Ground Floor, Block B, Summit Building, 30 Man Yue Street, Hunghom, Kowloon, Hong

Kong. The Hong Kong branch share registrar of the Company is Secretaries Limited of

26/F, Tesbury Centre, 28 Queen’s Road East, Hong Kong.

(b) The secretary of the Company is Mr. Au Shiu Kee, Anthony who is an associate member

of The Hong Kong Institute of Chartered Secretaries and The Institute of Chartered

Secretaries and Administrators, U.K.

(c) The qualified accountant of the Company is Mr. Lai Tsz Mo, Lawrence who is a fellow

member of the Hong Kong Institute of Certified Public Accountants and the Association

of Chartered Certified Accountants, U.K.

(d) The English texts of this circular shall prevail over the Chinese texts.

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during business hours at the

head office and principal place of business of the Company at Ground Floor, Block B, Summit

Building, 30 Man Yue Street, Hunghom, Kowloon, Hong Kong from the date of this circular up to

21 August, 2006 :

(a) the memorandum of association and Bye-Laws of the Company;

(b) the letter of advice from Quam Capital Limited dated 7 August, 2006, the text of which is

set out on pages 14 to 19 of this circular;


— 111 —

(c) the letter for the Independent Board Committee, the text of which is set out on page 13 to

this circular;

(d) the consolidated audited financial statements of the Group for the two years ended 28

February, 2006;

(e) the material contracts as referred to in paragraph headed ‘‘Material Contracts’’ in this

appendix;

(f) the accountants’ report on TSL China, the text of which is set out in appendix II to this

circular;

(g) the pro forma statement of the unaudited consolidated balance sheet of the Group

immediately after Completion, the text of which is set out in appendix III to this circular;

(h) the letters from Moore Stephens in relation to the indebtedness statement and the

sufficiency of working capital, of the Group;

(i) the letter of consent from the Experts referred to in the paragraph headed ‘‘Expert’s

Qualification, Consent and Interest’’ in this appendix;

(j) the letter dated 26 May, 2006 from TSL China, as an agent, offering the Sale Shares to

shareholders of TSL China;

(k) the forms dated 17 July, 2006 from TSLJ and Liberty Mark respectively to TSL China

accepting the offer to buy all the Sale Shares.


— 112 —

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