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ANNUAL REPORT 2005 eFORCE HOLDINGS LIMITED

Contents

Page

Corporate Information 2

Biographical Details of Directors and Senior Management 3-5

Chairman’s Statement 6

Management Discussion and Analysis 7-10

Corporate Governance Report 11-14

Report of the Directors 15-22

Auditors’ Report 23-24

Consolidated Income Statement 25

Consolidated Balance Sheet 26

Balance Sheet 27

Consolidated Statement of Changes in Equity 28

Consolidated Cash Flow Statement 29-30

Notes to the Financial Statements 31-75

Five Year Financial Summary 76

eFORCE HOLDINGS LIMITED ANNUAL REPORT 2005

2

Corporate Information

Directors

Executive DirectorsLeung Chung Shan (Chairman)

Tam Lup Wai, Franky (Deputy Chairman)

Chiu Wing Keung

Independent Non-Executive DirectorsChow Siu Ngor

Ting Leung Huel, Stephen

Lam Bing Kwan

Company Secretary

Chiu Wing Keung

Qualified Accountant

Chiu Wing Keung

Auditors

RSM Nelson Wheeler

Principal Banker

Hang Seng Bank Limited

Principal Registrars

Butterfield Corporate Services Limited

Rosebank Centre

11 Bermudiana Road

Pembroke

Bermuda

Branch Registrars

Tengis Limited

Level 25, Three Pacific Place,

1 Queen’s Road East,

Hong Kong

Registered Office

Clarendon House

2 Church Street

Hamilton HM11

Bermuda

Head Office and PrincipalPlace of Business

Suite 3008, Man Yee Building

68 Des Voeux Road Central

Central

Hong Kong

Stock Code

943

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Biographical Details of Directors and Senior Management

Executive Directors

Mr Leung Chung Shan(Chairman and Executive Director)

Aged 45, was appointed as Chairman and Executive Director of the Company on 1 February 2000. Mr Leung is responsible

for the overall planning and strategy formulation of the Group. He has extensive experience and business interests in the

PRC, in particular, in the areas of infrastructure development, real estate properties and other areas. Mr Leung commenced

his investments in toll road projects in the early 1990s and in 1996 began investing in property development in the PRC

and Singapore. Apart from infrastructure and real property development, Mr Leung also has interests and experience in

trading, warehousing and commercial distribution and processing in the PRC.

Mr Tam Lup Wai, Franky(Deputy Chairman and Executive Director)

Aged 57, was appointed as Executive Director of the Company on 17 December 2001 and subsequently appointed as the

Deputy Chairman of the Company on 11 December 2003. Mr. Tam holds a BA in Applied Mathematics from the University

of California at Berkeley, USA. He has diversified management experiences in the fields of property, retail and technology.

He also specializes in formulating and executing business strategies for companies and has experience in the investment of

technology startup. He was previously an administration director of a conglomerate comprises four listed companies in

Hong Kong and directly oversaw the administration of the group and responsible in managing several subsidiary operations,

including property acquisition, strategic investment and hotel start-up project. Mr Tam also served as executive director of

a Hong Kong publicly listed fashion retail chain store with over 200 outlets in Hong Kong and China and was instrumental

in setting up the franchise operation in the PRC before joining the Company in 2001.

Mr Chiu Wing Keung(Executive Director and Company Secretary)

Aged 40, was appointed as Executive Director and Company Secretary of the Company on 5 November 2001. Mr Chiu is a

Certified Public Accountant (Practising). Fellow of both HKICPA and ACCA. He holds a Bachelor’s degree in science

from the University of Hong Kong and a degree of Master of Business Administration from University of Leicester. He

was previously the financial controller of a Hong Kong publicly listed company and has extensive experience in auditing,

finance and accounting.


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Independent Non-Executive Directors

Mr Chow Siu Ngor(Independent Non-Executive Director)

Aged 50, was appointed as an Independent Non-Executive Director of the Company on 1 October 1999, a member of the

Audit Committee of the Company on 28 December 1999 and the Chairman of the Audit Committee on 21 September 2004

and a member of the Remuneration Committee of the Company on 1 August 2005. Mr. Chow is a practicing solicitor in

Hong Kong. Mr. Chow graduated from the Chinese University of Hong Kong in 1981 with an Honours degree in Social

Science. Mr. Chow then obtained an Honours degree in Laws from the University of Birmingham in 1987. Mr. Chow was

admitted as a solicitor of the Supreme Court of Hong Kong in 1990 and has been in private practice since then. Currently,

Mr. Chow is a Partner with Messrs. Arculli Fong & Ng of Hong Kong. Mr. Chow also serves as an Independent Non-

Executive Director of three other listed companies, namely, CCT Tech International Limited, China Solar Energy Holdings

Limited (formerly known as REXCAPITAL International Holdings Limited) and REXCAPITAL Financial Holdings Limited.

Mr. Ting Leung Huel Stephen, MH, FCCA, FCPA (PRACTISING), ACA, FTIHK, FHKloD

(Independent Non-Executive Director)

Aged 52, was appointed as an Independent Non-Executive Director of the Company on 6 October 1999, a member of the

Audit Committee of the Company on 28 December 1999 and a member of the Remuneration Committee of the Company

on 1 August 2005. Mr. Ting is an accountant in public practice as managing partner of Ting Ho Kwan & Chan, Certified

Public Accountants since 1987. Mr. Ting is a member of the 9th Chinese People Political & Consultative Conference,

Fujian. He is now a non-executive director of Chow Sang Sang (Holdings) International Limited and an independent non-

executive director of six listed companies, namely, Tongda Group Holdings Limited, Minmetals Resources Limited, Tong

Ren Tang Technologies Company Limited, MACRO-LINK International Holdings Limited, Computer and Technologies

Holdings Limited and Texhong Textile Group Limited.

Mr. Lam Bing Kwan(Independent Non-Executive Director)

Aged 56, was appointed as an Independent Non-Executive Director of the Company and a member of the Audit Committee

of the Company on 30 September 2004 and the Chairman of the Remuneration Committee of the Company on 1 August

2005. Mr. Lam graduated from the University of Oregon in the United States of America with a Bachelor of Business

Administration degree in 1974. Mr. Lam has been in senior management positions in the banking and financial industry for

more than 10 years. Currently, he is a non-executive director of Sino-i Technology Limited and South Sea Holding

Company Limited, and an independent non-executive director of Lai Fung Holdings Limited and Lai Sun Development

Company Limited, all of which companies are listed on the main board of The Stock Exchange of Hong Kong Limited.

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Senior Management

Mr. Li Shiu Tong, Andrew

Aged 43, is the Managing Director of Fairform Manufacturing Company Limited, a wholly-owned subsidiary of the Group.

Mr. Li joined the Group on 1 February 2000 as the Deputy Chairman and Executive Director of the Company and

subsequently transferred to supervise the operation of the Group’s manufacturing business unit in 2002. Mr. Li is an

Associate of HKICPA and a Fellow of ACCA. He holds a Master’s degree in business administration from the University

of Wales, in the United Kingdom. He was the group chief financial officer of Guardforce Group and has extensive

experience in financial management and asset acquisitions and management before joining the Company in 2000.


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Chairman’s Statement

On behalf of eForce Holdings Limited (the “Company”) and its subsidiaries (the “Group”), I would like to present the

2005 Annual Report for the year ended 31 December 2005.

Business Overview and Prospect

2005 was a challenging year for the manufacturing business. Severe competition among manufacturers has put a lot of

pressure on the selling prices of our products. The profit margin was further squeezed by the ever rising raw material cost.

In an effort to maintain the gross margin, management has implemented various cost-reducing measures. The turnover for

2005 was HK$168 million compared to HK$170 million in 2004. Gross margin was at 23% compared to 22% in 2004.

In March 2006, we have decided to dispose of one of our wholly-owned subsidiary together with its entire investment in an

associated company of the Group for a consideration of HK$2 million. The associated company was principally engage in

the development and sales of Linux-based Chinese application software in the PRC. The disposal constituted a discloseable

transaction of the Company under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong

Limited (the “Listing Rules”) and details of the disposal was contained in our circular to the shareholders on 18 April

2006. An impairment loss of HK$12 million due to the disposal was recognized in the Group’s results for the year ended

31 December 2005. Upon the completion of the disposal, the Group has discontinued all its information technology

business and concluded the restructuring of the Group’s business.

In 2006, we will focus on the manufacturing business where we have the scale and competitive edge and having said that,

we will continue to search for new opportunities that will enhance our value to our shareholders.

Appreciation

On behalf of the Board of Directors (“Board”), I would like to thank all the shareholders for your continuous support. My

appreciation also extends to my fellow directors, the management and staffs for their commitment, dedication and

contributions to the Group in the past year.

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Management Discussion and Analysis

Financial Review

Turnover for the year ended 31 December 2005 amounted to HK$168 million, which represented a slightly decreased of

1% as compared to last year.

The consolidated results of the Group for the financial year ended 31 December 2005, which amounted to a loss of

HK$27.2 million (2004: HK$21.4 million). This represented an increase of 27% as compared to the loss of previous

financial year. The increase in loss noted mainly due to the following:

(i) In 2005, an impairment loss of HK$12.3 million was made on interests in associates. No such loss in 2004.

(ii) The decrease in share of losses attributable from an associated company of HK$6.1 million (2005: HK$1.9 million

and 2004: HK$8.0 million).

(iii) In 2004, the Group recognized a gain on deemed disposal of a subsidiary and disposal of a subsidiary amounted to

HK$3.3 million. No such gain in 2005.

(iv) The changes in fair value and impairment of available-for-sale securities was decreased by HK$2.9 million (2005:

HK$1.8 million and 2004: HK$4.7 million).

At the balance sheet date, the Group’s net liabilities were HK$31.4 million (2004: Net liabilities of HK$4.0 million). The

drop in net assets of approximately HK$27 million as compared to last year is mainly due to the losses incurred for the

year.

Final Dividend

The directors do not recommend the payment of a final dividend for the year ended 31 December 2005 (2004: HK$Nil)

The Group’s Liquidity and Financial Resources

At the balance sheet date, the Group had cash and bank deposits of HK$4.1 million (2004: HK$1.6 million) which

included a pledged bank deposits of HK$1.5 million (2004: HK$ Nil) and a foreign currency deposits of RMB1.4 million

(2004: RMB 0.5 million).

The Group’s consolidated net borrowings increased from last year’s figure of HK$22.5 million to HK$23 million. The

Group’s gearing ratio, which is expressed as a percentage of the Group’s net borrowings over total assets value of HK$74

million as at 31 December 2005 (2004: HK$80 million), has increased from 28% to 31%. The increase is attributable to

the dropped in the Group’s total assets value as compared to last year.


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The amount of debt due within one year at the balance sheet date amounted to HK$23 million (2004: HK$22.5 million).

The table below shows the type, maturity, currency and interest rate profiles of the Group’s bank and other borrowings at

the balance sheet date.

2005 2004

HK$’000 HK$’000

DEBT MATURITY PROFILE

Within one year 23,018 22,471

Within two to five years — —

Total 23,018 22,471

INTEREST RATE PROFILE

Unhedged floating 8,249 7,386

Fixed 14,769 15,085

Total 23,018 22,471

NATURE OF DEBT

Secured other loans 8,269 8,585

Unsecured other loans 14,749 13,886

23,018 22,471

CURRENCY PROFILE

Hong Kong Dollars 14,749 13,886

Renminbi 8,269 8,585

23,018 22,471

At the balance sheet date, the Group’s secured borrowings amounting to HK$8.3 million (2004: HK$8.6 million) which

were secured by a legal charge on certain leasehold land and buildings of the Group situated in the PRC with carrying

value of approximately HK$16 million at the balance sheet date.

Despite that the Group sustained recurrent losses and had net current liabilities of HK$63 million at 31 December 2005,

the directors of the Company are of the opinion that the Company and the Group will be able to meet their obligations as

and when fall due after taking into account the following:

1. HK$30 million loan facilities is made available to the Company from financial institutions up to 31 March 2007

which the financial institutions reserve the right to terminate the facilities at any time by notice to the Company in

writing; and

2. continuing financial support received from a substantial shareholder, Tees Corporation.

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The directors believe that the Group will have sufficient cash resources to satisfy its future working capital and other

financing requirements.

Exposure to Fluctuation in Exchange Rates, Interest Rates and Related Hedges

To manage the risk associated with an uncertain market environment, the Group pursues a funding strategy, using equity as

far as possible to finance long-term investments.

The Group’s borrowings and cash and cash equivalents are primarily denominated in Hong Kong dollars, Renminbi and US

dollars. The Group does not hedge against foreign exchange risk, as the management believe the Hong Kong dollar will

remain pegged to the US dollar in the foreseeable future and exchange risk associated with the Renminbi is expected to be

minimal.

The interest rates profile of the Group’s borrowings comprises a mixture of fixed and floating rates. The Group does not

hedge against interest rates risks as the management does not expect the impact of any fluctuation in interest rates to be

material to the Group.

Material Acquisitions and Disposal of Subsidiaries

In 2005, the Group had neither any material acquisition nor disposal.

In March 2006, the Company has disposed of Successful Mode Investments Limited, a wholly-owned subsidiary of the

Company, and its entire investment in Chinese 2 Linux (Holdings) Limited (“C2L”), an associated company of the

Company, for a consideration of HK$2 million. The disposal constituted a discloseable transaction of the Company under

the Listing Rules and details of the disposal was contained in our circular to the shareholders on 18 April 2006. An

impairment loss of HK$12 million due to the disposal was included in the Group’s results for the year ended 31 December

2005.

Business Review

2005 was a challenging year for the manufacturing business. The high labor cost and ever rising raw material cost, coupled

with severe competition among different manufacturers, has put a lot of pressure on the selling prices of our products. As a

result, the Group’s turnover was decreased by HK$2 million or 1% to HK$168 million (2004: HK$170 million). Gross

margin was at 23% compared to 22% in 2004 with the management’s effort to implement various cost-reducing measures.

The Group incurred a net loss of HK$27.2 million in 2005 as compared to a net loss of HK$21.4 million in 2004. An

impairment loss of interests in associates of HK$12 million was included in the Group’s results for the year ended 31

December 2005 and represented the deficit of consideration over the carrying value of the associate which was being

disposed of in March 2006.


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Outlook

We expect the business environment for manufacturers in 2006 will be difficult as materials and labor costs remain at a

high level. We will focus on the manufacturing business where we have the scale and competitive edge and continue our

effort in research and development of new products with better margin.

Material Contingent Liabilities

The Group is not aware of any material contingent liabilities as at 31 December 2005.

Employees and Remuneration Policy

At the balance sheet date, the Group employed approximately 38 staffs (2004: 39) in Hong Kong and approximately 1,453

employees (2004: 1,214) in Mainland China. Employee remuneration are given and reviewed based on market norms,

individual performance and experience. Awards and bonuses are considered based on the Group’s business results and

employees’ individual merit.

The Group also granted share options to certain employees of the Group on 10 July 2000, entitling them to subscribe for

shares of the Company. These options are exercisable in stages commencing twelve months from the date of grant. The

expiry date of the options is ten years from the date of grant. During the year under review, no option was exercised.

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Corporate Governance Report

Introduction

The Group commits to maintain and ensure high standards of corporate governance and has adopted the provisions

contained in the Code on Governance Practices (“Code”) as set out in Appendix 14 of the Listing Rules throughout the

year ended 31 December 2005 save for the few exceptions mentioned below. This report outlines the main corporate

governance processes and practices adopted by the Group with specific reference to the provisions of the Code.

Directors’ Securities Transactions

The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers (“Model Code”) as

set out in Appendix 10 of the Listing Rules as its own code for dealing in securities of the Company by the directors.

Having made specific enquiry of all directors, the Company confirmed that all directors have complied with the required

standard as set out in the Model Code during the year ended 31 December 2005.

Board of Directors

The Company is led and controlled through the Board. Apart from its statutory responsibilities, the Board sets the Group’s

overall business and financial strategies as well as setting policies on various matters including major investments, key

operational targets and financial control.

During the year ended 31 December 2005, the Board held four regular meetings at approximately quarterly intervals

according to the Code except for the last meeting was postponed to Jan 2006 as a director was on an important business

trip during December 2005. The attendance of each director is as follows:

Name of Director Number of attendance

Executive Director

Mr. Leung Chung Shan (Chairman) 2/4

Mr. Tam Lup Wai, Franky (Deputy Chairman) 4/4

Mr. Chiu Wing Keung 4/4

Independent Non-executive Director

Mr. Chow Siu Ngor 4/4

Mr. Ting Leung Huel, Stephen 4/4

Mr. Lam Bing Kwan 4/4

Under the code provision A.2.1, the role of chairman and chief executive officer should be separate and should not be

performed by the same individual. The Company does not at present have any officer with the title of chief executive

officer (“CEO”) but instead the duties of a CEO are performed by Mr. Tam, the Deputy Chairman of the Company in the

same capacity as the CEO of the Company.


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The Board comprises six members, three of whom are executive directors including the Chairman of the Board and three

are independent non-executive directors. An executive director and an independent non-executive director possess recognized

professional qualifications in accounting. The profiles of the directors’ qualifications and experience are set out on page 3

and 4 of this annual report. The Company is of the view that the current Board comprises members who, as a group,

provides the necessary skill and experience for the requirements of the Group’s business.

The three independent non-executive directors have all confirmed in writing to the Company that they meet the guidelines

for assessing independence set out in Rule 3.13 of the Listing Rules.

Under the code provision A.4.1, non-executive directors should be appointed for a specific term, subject to re-election.

There is no service contract between the Company and the independent non-executive directors whom are not appointed

for a specific term but are subject to retirement by rotation at the annual general meeting in accordance with the Bye-laws

of the Company. Their appointment will be reviewed when they are due for re-election and the Company is of the view that

this meets the same objectives of the said code provision.

Audit Committee

The Audit Committee was established by the Company on 28 December 1999 and the present members are as follows:


Mr. Chow Siu Ngor (Chairman) 2/2


Mr. Lam Bing Kwan 2/2

The primary function of the Audit Committee is to review and monitor the Group’s financial reporting process and internal

controls. It is also responsible for making recommendation to the Board for the appointment, reappointment or removal of

the external auditor.

During the year, the Audit Committee has convened two meetings and reviewed with the management and the Company’s

auditors the accounting principles and practices adopted by the Group and discussed auditing, internal control and financial

reporting matters including the audited financial statements and unaudited interim financial statements.

Remuneration Committee

The Remuneration Committee was established by the Company on 1 August 2005 and the members are as follows:


Mr. Lam Bing Kwan (Chairman) 1/1


Mr. Chow Siu Ngor 1/1

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The Remuneration Committee is responsible for making recommendations to the Board on the Group’s policy and structure

for all remuneration of directors and senior management. The Group adopts a competitive remuneration package for its

employees. Promotion and salary increments are assessed based on a performance related basis.

The Remuneration Committee has convened one meeting in 2005 to consider and approve the Group’s policy for the

remuneration of directors for the financial year ended 31 December 2005. The Remuneration Committee has assessed the

performance of the executive directors and considered the remuneration package of executive directors by reference to the

prevailing packages with companies listed on the main board of the Stock Exchange of Hong Kong Limited (the “Stock

Exchange”). Details of the remuneration of directors are disclosed on an individual basis and are set out in note 11 to the

financial statements.

Directors’ responsibilities for the financial statements

The directors are responsible for the preparing of the financial statements for each financial period which give a true and

fair view of the state of affairs of the Group and of the results and cash flows for that period. The Company’s accounts are

prepared in accordance with all relevant statutory requirements and applicable accounting standards. The directors have

selected suitable accounting policies and applied them consistently, made judgments and estimates on a going concern

basis.

Despite that the Group sustained recurrent losses and had net current liabilities of HK$63 million at 31 December 2005,

the Directors of the Company are of the opinion that the Company and the Group will be able to meet their obligations as

and when fall due after taking into account the following:

1. HK$30 million loan facilities is made available to the Company from financial institutions up to 31 March 2007

which the financial institutions reserve the right to terminate the facilities at any time by notice to the Company in

writing; and

2. continuing financial support received from a substantial shareholder, Tees Corporation.

The directors believe that the Group will have sufficient cash resources to satisfy its future working capital and other

financing requirements.

Auditors’ responsibilities and remuneration

The statement of RSM Nelson Wheeler regarding their report responsibilities is set out in the Auditors’ Report on page 23

and 24 of this annual report.

During the year, the audit fee and taxation service fee paid to the Company’s auditors, RSM Nelson Wheeler for the Group

amounted to HK$580,000 and HK$23,000 respectively.


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Internal Controls

The Board has the overall responsibilities for the Group’s internal control system and has adopted a set of internal controls

which facilitate effective and efficient operations, to safeguard assets and to ensure the quality of internal and external

reporting and compliance with relevant laws and regulations. The system is designed to minimize risks of failure to

achieve corporate objectives.

The Company has commenced to review the effectiveness of the Group’s internal control system in December 2005 and is

currently preparing the report for review by the Audit Committee.

Communication with shareholders

The annual general meeting provides a useful channel for shareholders to communicate with the Board. All shareholders

have at least 21 days’ notice of annual general meeting at which directors are available to answer questions on the

Company’s affair.

Separate resolutions are proposed at the annual general meeting on each substantially separate issue, including the election

of individual director.

The right to demand a poll was set out in the circular to shareholders of the Company dispatched together with this annual

report.

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Report of the Directors

The directors present their annual report together with the audited financial statements of the Company and its subsidiaries

(together the “Group”) for the year ended 31 December 2005.

Principal Activities

The principal activity of the Company is investment holding. The principal activities and other particulars of the subsidiaries

are set out in note 17 to the financial statements.

The analysis of the geographical locations of the operations of the Company and its subsidiaries during the financial year

are set out in note 8 to the financial statements.

Major Customers and Suppliers

The information in respect of the Group’s sales and purchases attributable to the major customers and suppliers respectively

during the financial year is as follows:

Percentage of

the Group’s total

Sales Purchases

The largest customer 14.72%

Five largest customers in aggregate 49.25%

The largest supplier 7.54%

Five largest suppliers in aggregate 24.22%

At no time during the year have the directors, their associates or any shareholder of the Company (which to the knowledge

of the directors owns more than 5% of the Company’s share capital) had any interest in these major customers and

suppliers.

Financial Statements

The Group’s results for the year ended 31 December 2005 and the state of the Company’s and the Group’s affairs as at that

date are set out in the financial statements on pages 25 to 75.

The directors do not recommend the payment of a dividend in respect of the year ended 31 December 2005.

Reserves

Details of movements in the reserves of the Company and of the Group during the year are set out in note 31 to the



16


Fixed Assets

Details of movements in fixed assets of the Group during the year are set out in note 16 to the financial statements.

Subsidiaries and Associates

Particulars of the Company’s subsidiaries and associates are set out in notes 17 and 18 to the financial statements.

Share Capital

Details of the movements in share capital of the Company during the year are set out in note 30 to the financial statements.

Share Options and Warrants

Details of share options and warrants in issued and their subsequent conversion are set out in note 30 and 31 respectively

to the financial statements.

Directors

The directors during the financial year and up to the date of this report were:

Executive directors

Mr Leung Chung Shan

Mr Tam Lup Wai, Franky

Mr Chiu Wing Keung

Independent non-executive directors

Mr Chow Siu Ngor

Mr Ting Leung Huel, Stephen

Mr. Lam Bing Kwan

In accordance with clauses 87(1) of the Company’s Bye-laws, Mr. Tam Lup Wai, Franky and Mr. Chow Siu Ngor will

retire by rotation at the forthcoming annual general meeting and, being eligible, offer themselves for re-election.

Independent non-executive directors are not appointed for a specific term because all of the directors, including non-

executive directors, are subject to retirement by rotation and re-election at the annual general meeting, in accordance with

the Company’s Bye-laws.

The Company confirmed that it has received from each of the independent non-executive directors an annual confirmation

of his independence pursuant to rule 3.13 and the Company still considers the independent non-executive directors to be

independent.

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Directors’ Service Contract

Mr. Leung Chung Shan has individually entered into service contract with the Company for a term of 3 years commencing

from 1 February 2000. The service contract of the executive director is subject to termination by either party giving not

less than 6 month’s written notice or otherwise shall continue thereafter from year to year.

Save as disclosed above, no director proposed for re-election at the forthcoming annual general meeting has an unexpired

service contract which is not determinable by the Company or any of its subsidiaries within one year without payment of

compensation, other than normal statutory compensation.

Directors’ and Chief Executive’s Interests and Short Positions in Shares,Underlying Shares and Debentures

At 31 December 2005, the interests and short positions of each directors and chief executives of the Company in shares,

underlying shares and debenture of the Company or any of its associated corporations (within the meaning of Part XV of

the Securities and Futures Ordinance (“SFO”)), as recorded in the register required to be kept under Section 352 of the

SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code were as follows :

Long position in issued shares and underlying shares

Number of

Nature of Number of underlying % of total

Name of director Capacity interests shares held shares held issued shares

Leung Chung Shan Interests of Corporate 880,762,000 — 45.45%

(“Mr. Leung”) a controlled (Note 1)

corporation

Mr. Leung Beneficial owner Personal 58,212,000 — 3.01%

(Note 1)

Note :

(1) The 880,762,000 shares are held by Tees Corporation (“Tees”), a Company incorporated in the British Virgin Islands and is

wholly-owned by Mr. Leung. Together with Mr. Leung’s personal interest in 58,212,000 shares, Mr. Leung is deemed to be

interested in an aggregate of 938,974,000 shares and in which 838,974,000 shares was pledged to TKR Finance Limited (“TKR

Finance”) for personal reasons. TKR Finance is currently under liquidation.

Save as disclosed above, as at 31 December 2005, none of the directors nor their associates had any interests and short

positions in any shares, underlying shares and debenture of the Company or any of its associated corporations (within the

meaning of Part XV of the SFO), as recorded in the register maintained by the Company pursuant to Section 352 of the

SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code.


18


Share Option Scheme

At 31 December 2005, the employees of the Group had the following interests in options to subscribe for shares of the

Company (market value per share at 31 December 2005 is HK$0.016) granted for HK$1 consideration under the share

option scheme of the Company. The options are unlisted. Each option gives the holder the right to subscribe for one

ordinary share of the Company.

Options

Number of options

Acquired on Outstanding

Exercise price Outstanding Cancelled exercise of Adjusted at

per share at 1 January during options during during 31 December

Grantees Date of grant (Adjusted) 2005 the year the year the year 2005

Directors — — — — — — —

Employees 10 July 2000 HK$0.392 30,780,000 — — — 30,780,000

The Company has a share option scheme, which was adopted on 2 June 1997 whereby the directors of the Company are

authorised, at their discretion, to invite employees of the Group, including directors of any company in the Group, to take

up options to subscribe for shares of the Company. The purpose of the share option scheme is to encourage the officers and

staff to participate in the ownership of the Company in order to provide additional incentives to them. The share option

scheme shall be valid and effective for a period of ten years ending 1 June 2007. However, with effect from 1 September

2001, the Company no longer can grant any further options under the Scheme unless the Company changes the terms of

the Scheme to comply with the requirements of Chapter 17 of the Listing Rules.

For options granted before 1 September 2001, the exercise price of options was determined by the board of directors and

was the higher of the nominal value of the shares of the Company and 80% of the average of the closing prices of the

shares on the Stock Exchange for the five business days immediately preceding the date of grant. The options vest after

one year and are exercisable within ten years from the date of grant. However, between 28 June 2001 and 23 August 2001,

most of the holders of the options undertake with the Company that the exercise of the options shall be restricted in the

following manner:

Period Number of Shares

10 Jul 2001 to 31 Dec 2001 (both dates inclusive) Not more than 10% of the outstanding options

1 Jan 2002 to 28 Feb 2002 (both dates inclusive) Not more than 10% of the outstanding options

1 Mar 2002 to 30 Jun 2002 (both dates inclusive) Not more than 15% of the outstanding options

1 Jul 2002 to 30 Sept 2002 (both dates inclusive) Not more than 15% of the outstanding options

1 Oct 2002 to 31 Dec 2002 (both dates inclusive) Not more than 15% of the outstanding options

1 Jan 2003 to 31 Mar 2003 (both dates inclusive) Not more than 15% of the outstanding options

1 Apr 2003 to 31 Jul 2003 (both dates inclusive) Not more than 20% of the outstanding options

19



In view that the Company no longer can issue options under the existing Scheme, the total number of shares available for

issue under the share option scheme at 31 December 2005 will be 30,780,000 shares, which represents the outstanding

options that have been granted but not yet lapsed or exercised at 31 December 2005, and it is 1.59% of the issued share

capital of the Company as at the date of the annual report.

In respect of the maximum entitlement of each participant under the scheme, no limitation in relation to the number of

shares issued and to be issued upon exercise of the options granted to each participant in any 12-month period of the

Company’s ordinary shares in issue.

Directors’ Emoluments

Particulars of the directors’ emoluments disclosed pursuant to section 161 of the Companies Ordinance and Appendix 16

of the Listing Rules are set out in note 11 to the financial statements.

Substantial Shareholders’ and Other Persons Interests and Short Positions inShares and Underlying Shares

As at 31 December 2005, the following persons had interests in the shares and underlying shares of the Company as

recorded in the register required to be kept by the Company under Section 336 of the SFO.

Long positions of substantial shareholders in the shares and underlying shares

Number of

Number of underlying % of total

Name of Shareholder Capacity shares held shares held issued shares

Tees Corporation (“Tees”) Beneficial Owner 880,762,000 — 45.45%

(Note 1)

TKR Finance Limited Interest of a controlled 871,186,144 — 44.96%

(“TKR Finance”) corporation/ (Note 2)

beneficial owner

Winway H.K. Investments Limited Beneficial Owner 153,000,000 — 7.90%

(“Winway”) (Note 3)

Notes:

(1) Tees is a company incorporated in the British Virgin Islands and wholly owned by Mr. Leung. By virtue of Tees’s interest in

880,762,000 shares and Mr. Leung’s personal interests in 58,212,000 shares, Mr. Leung is deemed to be interested in an aggregate

of 938,974,000 shares of the Company in which 838,974,000 shares was pledged to TKR Finance for personal reasons. TKR

Finance is currently under liquidation. For the avoidance of doubt, the same interests have been disclosed by Mr. Leung under the

heading “Directors’ and Chief Executive’s interests and Short Positions in Shares, Underling Shares and Debentures” above.


20


(2) In accordance with the SDI forms received by the Company from Tingkong Rexcapital Holdings Limited (“TRHL”) and Rexcapital

Partners Incorporated (“RPI”) on 25 June 2005, TRHL and RPI were deemed to be interested in 826,022,000 shares of the

Company which TKR Finance has a security interest and has been included in the share of the Company which Mr. Leung

pledged to TKR Finance. TKR Finance is a wholly-owned subsidiary of TRHL which in turn RPI has a 52.1% interest. TKR

Finance is currently under liquidation.

(3) Winway is a wholly-owned subsidiary of Culturecom Investments Limited (“CIL”), which in turn is a wholly-owned subsidiary of

Culturecom Holdings (BVI) Limited (“CHBVIL”), and CHBVIL is a wholly-owned subsidiary of Culturecom Holdings Limited

(“CHL”). By virtue of the SFO, CIL, CHBVIL and CHL are deemed to be interested in the 153,000,000 shares held by Winway.

Save as disclosed above, as at 31 December 2005, the Company according to the records required to be kept by the

Company under Section 336 of the SFO, there was no person who had any interest or short positions in the shares or

underlying shares of the Company.

Directors’ Interests in Contract

Apart from the transactions set out in note 35 to the financial statements, in which Mr Leung Chung Shan through its

shareholdings in Tees Corporation, the substantial shareholder of the Group, is interested, no contract of significance in

relation to the Group’s business to which the Company, its holding company or any of its subsidiaries was a party and in

which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or

at any time during the year.

Distributable Reserves

At 31 December 2005, the Company had no reserves available for distribution to shareholders of the Company, as

computed in accordance with the Companies Act 1981 of Bermuda. However, the Company’s share premium account, with

a balance of HK$1,392,241,000 at 31 December 2005, may be applied in paying up unissued shares of the Company to be

issued to the shareholders of the Company as fully paid bonus shares.

Pre-Emptive Rights

There are no provisions for pre-emptive rights under the Company’s Bye-laws or the laws of Bermuda, being the jurisdiction

in which the Company is incorporated, which would oblige the Company to offer new shares on a pro-rata basis to existing

shareholders.

Connected Transactions

There were no material transactions which need to be disclosed as connected transactions in accordance with the requirement

of the Listing Rules.

21



Purchase, Sale or Redemption of the Company’s Listed Securities

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

the year.

Loans From Financial Institutions

Particulars of loans from financial institutions of the Company and the Group as at 31 December 2005 are set out in note

25 and 26 to the financial statements.

Five Year Summary

A summary of the results and of the assets and liabilities of the Group for the last five financial years is set out on page 76

of this annual report.

Properties

Particulars of the major properties and property interests of the Group are shown in note 16 to the financial statements.

Pension Scheme

The Group operates a Mandatory Provident Fund Scheme (“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 makes contributions to the scheme at 5%-10% and employees are required to make 5% of the employees’

relevant income, subject to a cap of monthly relevant income of $20,000 except for certain senior staff. Contributions to

the scheme vest immediately. Contributions to the MPF scheme are charged to the profit and loss account as they become

payable, in accordance with the rules of the scheme. When an employee leaves the scheme prior to his/her interest in the

employer contributions being vested fully, the ongoing contributions payable by the Group may be reduced by the relevant

amount of forfeited contributions.

Subsidiaries incorporated in the PRC participate in various defined contribution retirement plans (“Plans”) organised by

local authorities for the Group’s employees in the PRC. The subsidiaries are required to contribute, based on a certain

percentage of the basic payroll, to the Plans. The Group has no other material obligation for the payment of pension

benefits associated with these Plans beyond the annual contributions described above.

Details of the pension scheme contributions of the employees, net of forfeited contributions, which have been dealt with in

the income statement of the Group for the year ended 31 December 2005, are set out in note 9 to the financial statements.

At 31 December 2005, forfeited contributions of approximately HK$52,685 (2004: HK$1,700) were available to offset

future employer contributions to the scheme.


22


Corporate Governance

The Company complied with all requirements set out in the Code contained in Appendix 14 of the Listing Rules, with

deviation from code provision A.4.1 that non-executive directors should be appointed for a specific term, subject to re-

election. Further information on the Company’s corporate governance practices is set out in the “Corporate Governance

Report” on page 11 to 14 of this annual report.

Public Float

Based on the information that is publicly available to the Company and within the knowledge of the directors at the date of

the annual report, there was a sufficient public float of the Company.

Auditors

KPMG had acted as auditors of the Company since 30 March 2001. KPMG retired and, did not offer themselves for

reappointment on the annual general meeting of the Company held on 30 June 2004.

RSM Nelson Wheeler act as the new auditors of the Group to fill the vacancy left by the retirement of KPMG on 30 June

2004.

The financial statements of the Company for the year under review have been audited by RSM Nelson Wheeler, who will

retire and, being eligible, offer themselves for re-appointment at the forthcoming annual general meeting.

By Order of the Board

Leung Chung Shan

Chairman and Executive Director

Hong Kong, 24 April 2006

23


Auditors’ Report

TO THE SHAREHOLDERS OF

eFORCE HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

We have audited the financial statements on pages 25 to 75 which have been prepared in accordance with accounting

principles generally accepted in Hong Kong.

Respective responsibilities of directors and auditors

The Company’s directors are responsible for the preparation of financial statements which give a true and fair view. In

preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are

selected and applied consistently.

It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion

solely to you, as a body, in accordance with section 90 of the Bermuda Companies Act 1981, and for no other purpose. We

do not assume responsibility towards or accept liability to any other person for the contents of this report.

Basis of opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of

Certified Public Accountants, except that the scope of our work was limited as explained below.

An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial

statements. It also includes an assessment of the significant estimates and judgements made by the directors in the

preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the

Group and of the Company, consistently applied and adequately disclosed.

We planned our audit so as to obtain all the information and explanations which we considered necessary in order to

provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from

material misstatement. However, the evidence available to us was limited because of the absence of sufficient documentary

evidence to verify the validity of the financial support from a substantial shareholder. As explained in note 2(a) to the

financial statements, the Company’s directors are of the opinion that the Company and the Group are able to continue as a

going concern and to meet their obligations when they fall due having regard to the HK$30 million loan facilities available

to the Company from financial institutions and the continuing financial support from a substantial shareholder, Tees

Corporation. However, we were not provided with sufficient documentary evidence to verify the validity of the financial

support from Tees Corporation. There were no other satisfactory audit procedures that we could adopt to verify whether

Tees Corporation could provide adequate financial assistance to maintain the Company and the Group as a going concern

in the foreseeable future.

In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

We believe that our audit provides a reasonable basis for our opinion.


24

Auditors’ Report

Fundamental uncertainties relating to the going concern basis

The Group incur a loss of approximately HK$27 million for the year ended 31 December 2005 and had net current

liabilities and net liabilities of approximately HK$63 million and HK$31 million respectively at 31 December 2005. As

explained in note 2(a) to the financial statements, these financial statements have been prepared on a going concern basis

as the directors of the Company are of the opinion that the Company and the Group are able to continue as a going concern

and to meet their obligations as when they fall due having regard to the HK$30 million loan facilities available to the

Company from financial institutions and the continuing financial support from a substantial shareholder, Tees Corporation.

However, it is uncertain that the financial institutions will continue to provide the HK$30 million loan facilities to the

Company as the financial institutions reserve the right to terminate the loan facilities at any time by written notice to the

Company. Moreover, we were not provided with sufficient documentary evidence to verify the validity of the financial

support from Tees Corporation. There were no other satisfactory audit procedures that we could adopt to verify whether

Tees Corporation could provide adequate financial assistance to maintain the Company and the Group as a going concern

in the foreseeable future.

The financial statements do not contain any adjustments that would result from the failure of the Company and the Group

to obtain adequate financial assistance to enable it to continue as a going concern. These would include any adjustments to

write down the Company’s and the Group’s assets to their recoverable amounts, to provide for any liabilities which may

arise on cessation of business and to reclassify non-current assets as current assets.

In forming our opinion, we have considered the adequacy of the disclosures made in note 2(a) to the financial statements.

We consider that appropriate disclosures concerning the fundamental uncertainties have been made.

However, in view of the extent of the fundamental uncertainties relating to the continuance and validity of the financial

supports mentioned above, we are unable to form an opinion as to whether the Company and the Group can continue as a

going concern. In addition, we are unable to quantify the adjustments that would be required if these financial statements

were not to be prepared on a going concern basis.

Qualified opinion: Disclaimer on view given by the financial statements

Because of the significance of the possible effects of the limitation in evidence available to us relating to the matter

referred to in the “basis of opinion” section of this report and of the fundamental uncertainties relating to the going

concern basis, we are unable to form an opinion as to whether the financial statements give a true and fair view of the state

of affairs of the Company and the Group as at 31 December 2005 and of the Group’s loss and cash flows for the year then

ended. In all other respects, in our opinion, the financial statements have been properly prepared in accordance with the

disclosure requirements of the Hong Kong Companies Ordinance.

In respect alone of the limitation on our works relating to the matter referred to in the “basis of opinion” section of this

report, we have not obtained all the information and explanations that we considered necessary for the purpose of our

audit.

RSM Nelson Wheeler

Certified Public Accountants

Hong Kong, 24 April 2006

25


Consolidated Income StatementFor the year ended 31 December 2005

2005 2004

Note HK$’000 HK$’000

Turnover 6 168,307 170,283

Cost of sales (129,236) (132,988)

39,071 37,295

Other revenue 7 973 843

Other gain, net 7 1,452 5,289

Distribution costs (6,540) (8,713)

Administrative expenses (37,533) (41,465)

Other operating expenses (21,074) (5,197)

Loss from operations 9 (23,651) (11,948)

Finance costs 10 (1,661) (1,456)

Share of losses of associates (1,911) (8,011)

Loss before taxation (27,223) (21,415)

Taxation 12 — —

Loss for the year attributable

to equity holders of the Company 13 (27,223) (21,415)

Loss per share

Basic 15 HK$0.01 HK$0.01


26

Consolidated Balance SheetAt 31 December 2005

2005 2004


Non-current assets

Fixed assets 16 25,169 25,700

Interests in associates 18 2,000 16,177

Other non-current assets 19 — —

Investment securities 20 — 6,269

Available-for-sale securities 21 4,478 —

31,647 48,146

Current assets

Inventories 22 18,040 17,309

Trade and other receivables 23 20,472 13,031

Pledged bank deposits 1,500 —

Cash and bank balances 24 2,639 1,650

42,651 31,990

Current liabilities

Loans from financial institutions 25 (16,518) (15,971)

Unsecured other loans 26 (6,500) (6,500)

Trade and other payables 27 (78,328) (57,306)

Taxation (4,347) (4,341)

(105,693) (84,118)

Net current liabilities (63,042) (52,128)

TOTAL ASSETS LESS CURRENT LIABILITIES (31,395) (3,982)

Capital and reserves

Share capital 30 96,891 96,891

Reserves 31(a) (128,286) (100,873)

CAPITAL DEFICIENCY ATTRIBUTABLETO EQUITY HOLDERS OF THE COMPANY (31,395) (3,982)

Approved by the Board of Directors on 24 April 2006

Tam Lup Wai, Franky Chiu Wing Keung

Director Director

27


Balance SheetAt 31 December 2005

2005 2004


Non-current assets

Interests in subsidiaries 17 (24,490) (24,210)

Current assets

Trade and other receivables 23 22 155

Cash and bank balances 6 13

28 168

Current liabilities

Loans from financial institutions 25 (8,249) (7,386)

Unsecured other loans 26 (6,500) (6,500)

Trade and other payables 27 (10,341) (9,853)

(25,090) (23,739)

Net current liabilities (25,062) (23,571)

TOTAL ASSETS LESS CURRENT LIABILITIES (49,552) (47,781)

Capital and reserves

Share capital 30 96,891 96,891

Reserves 31(b) (146,443) (144,672)

CAPITAL DEFICIENCY ATTRIBUTABLE

TO THE EQUITY HOLDERS OF THE COMPANY (49,552) (47,781)

Approved by the Board of Directors on 24 April 2006

Tam Lup Wai, Franky Chiu Wing Keung

Director Director


28

Consolidated Statement of Changes in EquityFor the year ended 31 December 2005

Exchange

Share Share fluctuation Warrant Accumulated

capital premium reserve reserve losses Total

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

At 1 January 2004 96,685 1,391,021 (1,840) 24,498 (1,494,183) 16,181

Exchange differences

on translating

foreign operations — — 98 — — 98

Net income

recognised directly

in equity — — 98 — — 98

Loss for the year — — — — (21,415) (21,415)

Total recognised

income and expenses

for the year — — 98 — (21,415) (21,317)

Shares issued upon

exercise of warrants

(note 30(a)) 206 948 — — — 1,154

Release of warrant

proceeds upon

exercise of warrants

(note 30(a)) — 272 — (272) — —

At 31 December 2004 96,891 1,392,241 (1,742) 24,226 (1,515,598) (3,982)

Exchange differences

on translating

foreign operations — — (190) — — (190)

Net loss

recognised directly

in equity — — (190) — — (190)

Loss for the year — — — — (27,223) (27,223)

Total recognised

income and expenses

for the year — — (190) — (27,223) (27,413)

At 31 December 2005 96,891 1,392,241 (1,932) 24,226 (1,542,821) (31,395)

29


Consolidated Cash Flow StatementFor the year ended 31 December 2005

2005 2004


Operating activities


Adjustments for:

Depreciation 4,963 4,964

Amortisation of goodwill — 111

Interest income (15) (236)

Gain on deemed disposal of a subsidiary — (1,776)

Gain on disposal of a subsidiary — (1,570)

Impairment of available-for-sale securities 1,791 —

Impairment of investment securities — 4,731

Impairment of interests in associates 12,266 —

Net gain on disposal and written off of fixed assets (336) (288)

Finance costs 1,661 1,456

Share of losses of associates 1,911 8,011

Foreign exchange difference (149) 98

Write off of other receivables 1,139 —

(3,992) (5,914)

Increase in inventories (731) (5,059)

Increase in trade and other receivables (8,542) (865)

Increase in trade and other payables 20,057 10,751

Net cash generated from/(used in) operating activities 6,792 (1,087)


30

Consolidated Cash Flow StatementFor the year ended 31 December 2005

2005 2004


Investing activities

Payment for purchase of fixed assets (4,839) (8,972)

Net proceeds from sale of fixed assets 1,157 4,430

Cash inflow from disposal of subsidiaries — 2,604

Increase in pledged bank deposits (1,500) —

Interest received 15 236

Net cash used in investing activities (5,167) (1,702)

Financing activities

Proceeds from exercise of warrants 30(a) — 1,154

New loans from financial institutions 863 4,124

Repayment of loans from financial institutions (472) (584)

Interest paid (1,027) (640)

Net cash (used in)/generated from financing activities (636) 4,054

Net increase in cash and cash equivalents 989 1,265

Cash and cash equivalents at 1 January 1,650 385

Cash and cash equivalents at 31 December 2,639 1,650

31


Notes to the Financial StatementsFor the year ended 31 December 2005

1. General

The Company was incorporated in Bermuda with limited liability as an exempted company under the Companies

Act (1981) of Bermuda with its shares listed on The Stock Exchange of Hong Kong Limited (“SEHK”). The

Company’s registered office is located at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda and its

principal place of business is Suite 3008, Man Yee Building, 68 Des Voeux Road Central, Central, Hong Kong.

The principal activity of the Company is investment holding. The principal activities of its subsidiaries are set out

in note 17 to the financial statements.

2. Basis of Preparation of Financial Statements

(a) Basis of preparation of financial statements

The financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards

(“HKFRS”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), the disclosure

requirements of the Hong Kong Companies Ordinance and the Rules Governing the Listing of Securities on

The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

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

revaluation of land and buildings and available-for-sale securities as explained in the accounting policies

set out below.

Notwithstanding that the Company and the Group incur losses and had net current liabilities and capital

deficiency at 31 December 2005, including unsecured other loans together with accrued interest of

approximately HK$7.5 million (note 26) which are overdue and remain outstanding as at the date of

authorization for issue of the financial statements, these financial statements have been prepared on a going

concern basis as the directors of the Company are of the opinion that the Company and the Group are able

to continue as a going concern and to meet their obligations as when they fall due having regard to the

following:

(i) HK$30 million loan facilities is made available to the Company from financial institutions up to 31

March 2007 which the financial institutions reserve the right to terminate the facilities at any time

by notice to the Company in writing; and

(ii) continuing financial support received from a substantial shareholder, Tees Corporation.

The directors believe that the Group will have sufficient cash resources to satisfy its future working capital

and other financing requirements. Accordingly, these financial statements have been prepared on a going

concern basis and do not include any adjustments that would be required should the Company and the

Group fail to continue as a going concern.


32


2. Basis of Preparation of Financial Statements (Continued)

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

From 1 January 2005, the Group has adopted the new and revised standards and interpretations (hereinafter

collectively referred to as “new HKFRSs”) issued by the HKICPA that are effective for accounting periods

beginning on or after 1 January 2005 and which are relevant to its operations.

All the standards have been applied retrospectively except where specific transitional provisions require a

different treatment. Accordingly the 2004 comparative figures and their presentation have been amended

where necessary in accordance with HKAS 8 and differ from those published in the financial statements for

the year ended 31 December 2004.

The application of the new HKFRSs has resulted in a change in the presentation of the income statement,

balance sheet and the statement of changes in equity. The adoption of the following new HKFRSs has

resulted in changes to the Group’s accounting policies that have an effect on how the results for the current

or prior accounting periods are prepared and presented.

• Business combinations (HKFRS 3);

• Impairment of assets (HKAS 36);

• Financial instruments (HKAS 32 and HKAS 39); and

• Leases (HKAS 17).

The impact of these changes in accounting policies is discussed below:

HKFRS 3 Business combinations and HKAS 36 Impairment of assets

In prior periods:

— positive or negative goodwill which arose prior to 1 January 2001 was taken directly to reserves at

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

impairment of the acquired business;

— positive goodwill which arose on or after 1 January 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

33




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

HKFRS 3 Business combinations and HKAS 36 Impairment of assets (Continued)

— negative goodwill which arose on or after 1 January 2001 was amortised over the weighted average

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

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

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

With effect from 1 January 2005, in order to comply with HKFRS 3 and HKAS 36, the Group has changed

its accounting policies relating to goodwill. Under the new policy, the Group no longer amortises positive

goodwill but subject to testing at least annually for impairment. Also with effect from 1 January 2005 and

in accordance with HKFRS 3, 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 consolidated income statement as it

arises. Further details of these new policies are set out in note 3(e).

The new policy in respect of the amortisation of positive goodwill has been applied prospectively in

accordance with the transitional arrangement under HKFRS 3. As a result of the new accounting policy, the

Group’s loss before taxation for the year ended 31 December 2005 decreased by approximately HK$1,813,000

and interests in associates at 31 December 2005 increased by approximately HK$1,813,000.

Also in accordance with the transitional arrangement under HKFRS 3, goodwill which had previously been

taken directly to reserves (i.e. goodwill which arose before 1 January 2001) will not be recognised in profit

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


34




HKAS 32 Financial Instruments: Disclosure and Presentation and HKAS 39 Financial Instruments:

Recognition and Measurement

In the current year, the Group has applied HKAS 32 “Financial Instruments: Disclosure and Presentation”

and HKAS 39 “Financial Instruments: Recognition and Measurement”. HKAS 32 requires retrospective

application. HKAS 39, which is effective for annual periods beginning on or after 1 January 2005, generally

does not permit to recognise, derecognise or measure financial assets and liabilities on a retrospective

basis. The application of HKAS 32 has had no material impact on how financial instruments of the Group

is presented for the current and prior accounting periods. The principal effects resulting from the

implementation of HKAS 39 are summarised below:

The Group has applied the relevant transitional provisions in HKAS 39 with respect to classification and

measurement of financial assets and financial liabilities that are within the scope of HKAS 39. Prior to 1

January 2005, the Group classified its investments in debt and equity securities in accordance with the

benchmark treatment of Statement of Standard Accounting Practice 24 (“SSAP 24”). Under SSAP 24,

investments in debt or equity securities are classified as “investment securities” and “other investments” as

appropriate. Investment securities are carried at cost less impairment losses (if any) while other investments

are measured at fair value, with realised/unrealised gains or losses included in the consolidated income

statement. From 1 January 2005 onwards, the Group has classified and measured its debts and equity

securities in accordance with HKAS 39. Under HKAS 39, financial assets are classified as “financial assets

at fair value through profit or loss”, “available-for-sale financial assets”, “held-to-maturity financial assets”

or “loans and receivables”. Financial assets at fair value through profit or loss and available-for-sale

financial assets are carried at fair value, with changes in fair value recognised in consolidated income

statement and equity respectively. Available-for-sale equity investments that do not have quoted market

prices in an active market and whose fair value cannot be reliably measured are measured at cost less

impairment after initial recognition. Loans and receivables and held-to-maturity financial assets are measured

at amortised cost using the effective interest rate method after initial recognition.

On 1 January 2005, the Group designated investment securities amounted to HK$6,269,000, as available-

for-sale securities.

35





HKAS 32 Financial Instruments: Disclosure and Presentation and HKAS 39 Financial Instruments:

Recognition and Measurement (Continued)

From 1 January 2005, financial liabilities are generally classified as “financial liabilities at fair value

through profit or loss” or “other financial liabilities”. Financial liabilities at fair value through profit or loss

are measured at fair value, with changes in fair value recognised in consolidated income statement directly.

Other financial liabilities are carried at amortised cost using effective interest rate method after initial

recognition. The Group has applied the relevant transitional provisions in HKAS 39. There has been no

material effect on how the results for the current accounting period are prepared and presented.

HKAS 17 Leases

Upon the adoption of HKAS 17, the land and buildings elements are considered separately for the purposes

of lease classification, unless the lease payments cannot be allocated reliably between the land and buildings

elements, in which case, the entire lease is generally treated as a finance lease. To the extent that the

allocation of the lease payments between the land and buildings elements can be made reliably, the leasehold

interests in land are reclassified to prepaid land lease payments under operating leases, which are carried at

cost and subsequently recognised in the income statement on a straight-line basis over the lease term. This

change in accounting policy has been applied retrospectively.

In previous years, leasehold land and buildings were included in fixed assets and carried at valuation less

accumulated depreciation and accumulated impairment losses. Since the lease payments cannot be allocated

reliably between the land and buildings elements, the entire lease payments continue to be treated as

finance leases and included in fixed assets.


36



(c) New and revised Hong Kong Financial Reporting Standards that have been issued butare not yet effective

There is no early adoption of the following new and revised HKFRSs applicable to these financial statements,

that have been issued but are not yet effective.

HKAS 1 (Amendment) Capital Disclosures1

HKAS 21 (Amendment) The Effect of Changes in Foreign Exchange Rates2

HKAS 39 (Amendment) Cash Flow Hedge Accounting of Forecast

Intragroup Transactions2

HKAS 39 (Amendment) The Fair Value Option2

HKAS 39 and HKFRS 4 Financial Guarantee Contracts2

(Amendment)

HKFRS 7 Financial Instruments: Disclosures1

HK(IFRIC) — Int 4 Determining whether an Arrangement contains a Lease2

1 Effective for annual periods beginning on or after 1 January 20072 Effective for annual periods beginning on or after 1 January 2006

The directors anticipate that the adoption of these new HKFRSs in future periods will have no material

impact on the financial statements of the Group.

3. Principal Accounting Policies

(a) 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 consolidated income statement as follows:

(i) Sale of goods

Revenue from the sale of goods is recognised on the transfer of risks and rewards of ownership,

which generally coincides with the time when the goods are delivered and the title has passed to the

customers.

(ii) Interest income

Interest income is accrued on a time basis by reference to the principal amounts outstanding and at

the effective interest rates applicable.

37



3. Principal Accounting Policies (Continued)

(b) Basis of consolidation

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

made up to 31 December 2005.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income

statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Intra-group balances and transactions, and any unrealised profit arising from intra-group transactions, are

eliminated in full in preparing the consolidated financial statements. 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.

(c) Subsidiaries

A subsidiary is an enterprise controlled by the Company. Control exists when the Company has the power,

directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits

from its activities. In assessing control, potential voting rights that presently are exercisable or convertible

are taken into account.

In the Company’s balance sheet, an investment in a subsidiary is stated at cost less any impairment losses.

The results of subsidiaries are accounted for by the Company on the basis of dividends received and

receivable.

(d) Associates

An associate is an entity in which the Group or the Company has significant influence, but not control or

joint control, over its management, including participation in the financial and operating policy decisions.

An investment in an associate is accounted for in the consolidated financial statements under the equity

method and is initially recorded at cost and adjusted thereafter for the post-acquisition changes in the

Group’s share of the associate’s net assets. The consolidated income statement includes the group’s share

of the post-acquisition, post-tax results of the associates for the year, including any impairment loss on

goodwill relating to the investment in associates recognised for the year (see notes 3(e) and (h)). When the

Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other

unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or

made payments on behalf of the associate.

Any goodwill adjustment attributable to the share in the associate is included in the amount recognised as

investment in an associate.


38



(d) Associates (Continued)

Unrealised profits and losses resulting from transactions between the Group and its associates are eliminated

to the extent of the Group’s interest in the associate, except where unrealised losses provide evidence of an

impairment of the asset transferred, in which case they are recognised immediately in the consolidated

income statement.

(e) Goodwill

Goodwill represents the excess of the cost of a business combination or an investment in an associate over

the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent

liabilities.

Goodwill is stated at cost less accumulated impairment losses. Goodwill is allocated to cash-generated

units and is tested annually for impairment (see note 3(h)). In respect of associates, the carrying amount of

goodwill is included in the carrying amount of the interest in the associate.

Any excess of the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and

contingent liabilities over the cost of a business combination or an investment in an associate is recognised

immediately in the consolidated income statement.

On disposal of a cash generating unit or an associate during the year, any attributable amount of purchased

goodwill is included in the calculation of the profit or loss on disposal.

(f) Investments

The Group’s investment in equity securities, other than investment in subsidiaries and associates, are as

follows:

Investments in securities held for trading are classified as current assets and are initially stated at fair

value. At each balance sheet date, the fair value is remeasured and any gain or loss is recognised in the

consolidated income statement.

Investment in equity securities that do not have a quoted market price in an active market and whose fair

value cannot be reliably measured are recognised in the balance sheet at cost less impairment losses.

Other investment in securities are classified as available-for-sale securities and are initially recognised at

fair value plus transaction costs. At each balance sheet date the fair value is remeasured and any gain or

loss is recognised directly in equity, except for impairment losses. When these investments are derecognised,

the cumulative gain or loss previously recognised in equity is recognised in the consolidated income

statement.

39




(g) Fixed assets

(i) Fixed assets are stated in the balance sheet on the following bases:

— Land and buildings held for own use are stated in the balance sheet at their revalued

amount, being their open market value at the date of revaluation less any subsequent

accumulated depreciation and impairment losses. Revaluations are performed by qualified

valuers with sufficient regularity to ensure that the carrying amount of these assets does not

differ materially from that which would be determined using fair values at the balance sheet

date; and

— Plant, machinery and other fixed assets are stated in the balance sheet at cost less accumulated

depreciation and impairment losses, if any.

(ii) Changes arising on the revaluation of land and buildings held for own use are generally dealt with

in reserves. The only exceptions are as follows:

— When a deficit arises on revaluation, it will be charged to the consolidated income statement,

if and to the extent that it exceeds the amount held in the reserve in respect of that same

asset immediately prior to the revaluation; and

— When a surplus arises on revaluation, it will be credited to the consolidated income statement,

if and to the extent that a deficit on revaluation in respect of that same asset had previously

been charged to the consolidated income statement.

(iii) Subsequent expenditure relating to a fixed asset that has already been recognised is added to the

carrying amount of the asset when it is probable that future economic benefits, in excess of the

originally assessed standard of performance of the existing asset, will flow to the Group. All other

subsequent expenditure is recognised as an expense in the period in which it is incurred.

(iv) Gains or losses arising from the retirement or disposal of a fixed asset are determined as the

difference between the estimated net disposal proceeds and the carrying amount of the asset and are

recognised in the consolidated income statement on the date of retirement or disposal.

(v) Depreciation is calculated to write off the cost or valuation of fixed assets less residual value over

their estimated useful lives as follows:

Land and buildings 30 years

Leasehold improvements over the unexpired term of the lease

Plant and machinery 5 years

Furniture, fixtures, office 5 years

equipment and motor vehicles

Moulds and tools 5 years


40



(g) Fixed assets (Continued)

(vi) The useful lives and residual value of the assets are reviewed and adjusted, if any, at each balance

sheet date.

(h) Impairment of assets

(i) Impairment of investments in debt and equity securities and other receivables

Investments in debt and equity securities and other current and non-current receivables that are

stated at cost or amortised cost or are classified as available-for-sale securities are reviewed at each

balance sheet date to determine whether there is objective evidence of impairment. If any such

evidence exist, any impairment loss is determined and recognised as follows:

— For unquoted equity securities and current receivables that are carried at cost, the impairment

loss is measured as the difference between the carrying amount of the financial asset and

the estimated future cash flows, discounted at the current market rate of return of a similar

financial asset where the effect of discounting is material. Impairment losses for current

receivables are reversed if in a subsequent period the amount of the impairment loss decreases.

Impairment losses for equity securities are not reversed.

— For financial assets carried at amortised cost, the impairment loss is measured as the difference

between the asset’s carrying amount and the present value of estimated future cash flows,

discounted at the financial asset’s original effective interest (i.e. the effective interest rate

computed at initial recognition of these assets).

— If in a subsequent period the amount of an impairment loss decreases and the decrease can

be linked objectively to an event occurring after the impairment loss was recognised, the

impairment loss is reversed through consolidated income statement. A reversal of an

impairment loss shall not result in the asset’s carrying amount exceeding that which would

have been determined had no impairment loss been recognised in prior years.

— For available-for-sale securities, the cumulative loss that had been recognised directly in

equity is removed from equity and is recognised in consolidated income statement. The

amount of the cumulative loss that is recognised in consolidated income statement is the

difference between the acquisition cost (net of any principal repayment and amortisation)

and current fair value, less any impairment loss on that asset previously recognised in


— Impairment losses recognised in consolidated income statement in respect of available-for-

sale equity security are not reversed through consolidated income statement. Any subsequent

increase in the fair value of such assets is recognised directly in equity.

41




(h) Impairment of assets (Continued)

(i) Impairment of investments in debt and equity securities and other receivables (Continued)

— Impairment losses in respect of available-for-sale debt securities are reversed if the subsequent

increase in fair value can be objectively related to an event occurring after the impairment

loss was recognised. Reversals of impairment losses in such circumstances are recognised in


(ii) Impairment of other assets

Internal and external sources of information are reviewed at each balance sheet date to identify

indications that the assets may be impaired or an impairment loss previously recognised no longer

exists or may have decreased. If any such indication exists, the asset’s recoverable amount is

estimated. An impairment loss is recognised whenever the carrying amount of an asset exceeds its

recoverable amount. The recoverable amount of goodwill is estimated annually whether or not there

is any indication of impairment.

(iii) Calculation of recoverable amount

The recoverable amount of an asset is the greater of its fair value less costs to sell and its 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 time value of money and

the risks specific to the asset. Where an asset does not generate cash inflows largely independent of

those from other assets, the recoverable amount is determined for the smallest group of assets that

generates cash inflows independently (i.e. a cash-generating unit).

(iv) Recognition of impairment losses

An impairment loss is recognised in consolidated income statement whenever the carrying amount

of an asset or the cash-generated unit to which it belongs exceeds its recoverable amount. Impairment

losses recognised in respect of cash-generating units are allocated first to reduce the carrying

amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce

the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that

the carrying value of an asset will not be reduced below its individual fair value less costs to sell, or

value in use, if determinable.

(v) Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable

change in the estimates used to determine the recoverable amount. An impairment loss in respect of

goodwill is not reversed.


42



(h) Impairment of assets (Continued)

(v) Reversals of impairment losses (Continued)

A reversal of impairment losses is limited to the asset’s carrying amount that would have been

determined had no impairment loss been recognised in prior years. Reversals of impairment losses

are credited to the consolidated income statement in the year in which the reversals are recognised.

(i) Inventories

Inventories are carried at the lower of cost and net realisable value.

Cost is calculated using the first-in, first-out 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 expenses in the period the write-down or

loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net

realisable value, is recognised as a reduction in the amount of inventories recognised as an expense in the

period in which the reversal occurs.

(j) Foreign currency translation

(i) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the

currency of the primary economic environment in which the entity operates (“the functional

currency”). The consolidated financial statements are presented in Hong Kong dollars, which is the

Company’s functional and presentation currency.

(ii) Transactions and balances in each entity’s financial statements

Foreign currency transactions are translated into the functional currency using the exchange rates

prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the

settlement of such transactions and from the translation at year-end exchange rates of monetary

assets and liabilities denominated in foreign currencies are recognised in the income statement.

43




(j) Foreign currency translation (Continued)

(ii) Transactions and balances in each entity’s financial statements (Continued)

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.

(iii) Translation on consolidation

The results and financial position of all the group entities (none of which has the currency of a

hyperinflationary economy) that have a functional currency different from the Company’s presentation

currency are translated into the Company’s presentation currency as follows:

— assets and liabilities for each balance sheet presented are translated at the closing rate at the

date of that balance sheet;

— income and expenses for each income statement are translated at average exchange rates

(unless this average is not a reasonable approximation of the cumulative effect of the rates

prevailing on the transaction dates, in which case income and expenses are translated at the

dates of the transactions); and

— all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign

entities, and of borrowings and other currency instruments designated as hedges of such investments,

are taken to shareholders’ equity. When a foreign operation is sold, such exchange differences are

recognised in the consolidated income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as

assets and liabilities of the foreign entity and translated at the closing rate.

(k) 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.


44



(k) Employee benefits (Continued)

(ii) Contributions to Mandatory Provident Funds as required under the Hong Kong Mandatory Provident

Fund Schemes Ordinance, are recognised as an expense in the consolidated income statement as

incurred.

(iii) Subsidiaries incorporated in the People’s Republic of China (“PRC”) participate in the retirement

schemes operated by the local authorities for the Group’s employees in the PRC. Contributions to

these schemes are charged to the consolidated income statement when incurred.

(iv) The fair value of the options is recognised as an expense and credited to an employee share-based

compensation reserve under equity. The total amount to be expensed over the vesting period is

determined by reference to the fair value of the options granted at the grant date. At each balance

sheet date, the Group revises its estimates of the number of options that are expected to become

exercisable. It recognises the impact of the revision of the original estimates, if any, in consolidated

income statement, and a corresponding adjustment to the employee share-based compensation reserve

over the remaining vesting period.

Upon exercise of the share options, the resulting shares issued are recorded by the Company as

additional share capital at the nominal value of the shares, and the excess of the exercise price over

the nominal value of the shares is recorded by the Company in the share premium account.

(v) Termination benefits are recognised when, and only when, the Group demonstrably commits itself

to terminate employment or to provide benefits as a result of voluntary redundancy by having a

detailed formal plan which is without realistic possibility of withdrawal.

(l) Cash and cash equivalents

Cash and cash equivalents represent cash at bank and on hand, demand deposits with banks and other

financial institutions, and short-term highly liquid investments which are readily convertible into known

amounts of cash and subject to an insignificant risk of change in value, having been with three months of

maturity at acquisition. For the purpose of the cash flow statement, bank overdrafts which 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.

45




(m) Related parties

A party is considered to be related to the Group if:

(a) directly, or indirectly through one or more intermediaries, the party:

(i) controls, is controlled by, or is under common control with, the Group;

(ii) has an interest in the Group that gives it significant influence over the Group; or

(iii) has joint control over the Group;

(b) the party is an associate of the Group;

(c) the party is a member of key management personnel of the Company or its parent company;

(d) the party is a close member of the family of any individual referred to in (a) and (c);

(e) 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, the individual

referred to in (c) or (d);

(f) 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.

(n) Provisions and contingent liabilities

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

present 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.

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.


46



(o) Research and development costs

Research costs are expensed as incurred. Costs incurred on development projects relating to the design and

testing of new or improved products are recognised as an intangible asset where the technical feasibility

and intention of completing the product under development has been demonstrated and the resources are

available to do so, costs are separately identifiable and there is an ability to sell or use the asset that will

generate probable future economic benefits. Such development costs are recognised as an asset and amortised

on a straight-line basis over the estimated useful lives to reflect the pattern in which the related economic

benefits are recognised. Development costs that do not meet the above criteria are expense as incurred.

Development costs previously recognised as an expense are not recognised as an asset in a subsequent

period.

(p) Borrowing costs

Borrowing costs are expensed in the consolidated income statement in the period in which they are incurred.

(q) Leases

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

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

to the consolidated 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 received are recognised in the consolidated income statement as an

integral part of the aggregate net lease payments made. Contingent rentals are charged to the consolidated

income statement in the accounting period in which they are incurred.

The cost of acquiring land held under an operating lease is amortised on a straight-line basis over the

period of the lease term.

(r) Taxation

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

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as

reported in the income statement because it excludes items of income or expense that are taxable or

deductible in other years and it further excludes items that are never taxable or deductible. The Group’s

liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the

balance sheet date.

47




(r) Taxation (Continued)

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the

financial statements and the corresponding tax bases used in the computation of taxable profit, and is

accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for

all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that

taxable profits will be available against which deductible temporary differences can be utilised. Such assets

and liabilities are not recognised if the temporary difference arises from goodwill or from the initial

recognition (other than in a business combination) of other assets and liabilities in a transaction that affect

neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investment in subsidiaries

and associates, except where the Group is able to control the reversal of the temporary difference and it is

probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent

that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset

to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is

settled or the asset realised. Deferred tax is charged or credited to income statement, except when it relates

to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax

assets against current tax liabilities and when they relate to income taxes levied by the same taxation

authority and the Group intends to settle its current tax assets and liabilities on a net basis.

(s) 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 business segment

information as the primary reporting format and geographical segment information as the secondary reporting

format.


48



(s) Segment reporting (Continued)

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 the segment. Unallocated costs mainly represent

corporate expenses. Segment assets consist primarily of fixed assets, inventories and receivables. Segment

liabilities comprise operating liabilities. They exclude items such as taxation and corporate borrowings.

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. Inter-segment

pricing is based on similar terms as those available to other external parties.

Segment capital expenditure is the total cost incurred during the period to acquire segment assets (both

tangible and intangible) that are expected to be used for more than one period.

In respect of geographical segment reporting, sales are based on the countries in which customers are

located. Total assets and capital expenditure are based on where the assets are located.

(t) Events after the balance sheet date

Post-year-end events that provide additional information about the Group’s position at the balance sheet

date or those that indicate the going concern assumption is not appropriate are adjusting events and are

reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the

notes when material.

(u) Trade and other receivables

Trade and other receivables are subsequently measured at amortised cost using the effective interest rate

method. Appropriate allowances for estimated irrecoverable amounts are recognised in income statement

when there is objective evidence that the asset is impaired. The allowance recognised is measured as the

difference between the asset’s carrying amount and the present value of estimated future cash flows discounted

at the effective interest rate computed at initial recognition.

(v) Financial liability and equity instruments

Financial liabilities and equity instruments are classified according to the substance of the contractual

arrangements entered into and the definitions of a financial liability and an equity instrument. An equity

instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of

its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are

set out below:

49




(v) Financial liability and equity instruments (Continued)

(i) Trade and other payables

Trade and other payables are stated at their fair value and subsequently measured at amortised cost

using the effective interest rate method unless the effect of discounting would be immaterial, in

which case they are stated at cost.

(ii) Equity instruments

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

costs.

4. Critical Accounting Judgements and Key Sources of EstimationUncertainty

In the process of applying the entity’s accounting policies which are described in note 3 to the financial statements,

management has made the following judgements that have significant effect on the amount recognised in the


Going concern basis

The Group’s management has prepared the financial statements on a going concern basis. Details of the basis

please refer to note 2(a) to the financial statements.

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet

date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities

within the next financial year, are discussed below:

Net realisable value of inventories

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

costs of completion and estimated costs necessary to make the sale. These estimates are based on the current

market condition and the historical experience of manufacturing and selling products of similar nature. It could

change significantly as a result of changes in customer taste and competitor actions in response to serve industry

cycles. Management will reassess the estimates at each balance sheet date.

Allowance for slow-moving inventories

Allowance for slow-moving inventories is made based on the ageing and estimated net realisable value of inventories.

The assessment of the allowance amount required involves management judgement and estimates. Where the actual

outcome or expectation in future is different from the original estimate, such differences will impact the carrying

value of inventories and allowance charge/write-back in the period in which such estimate has been changed.


50


5. Financial Risk Management Objectives and Policies

The Group’s major financial instruments include equity investments, trade and other receivables, trade and other

payables and borrowings. Details of these financial instruments are disclosed in respective notes. The risks associated

with these financial instruments and the policies on how to mitigate these risks are set out below. The management

manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective

manner.

Currency risk

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 Renminbi (RMB) and United States Dollars (USD). The Group has not used any forward

contracts, currency borrowings or other means to hedge its foreign currency exposure. Hong Kong Dollars against

RMB and USD were relatively stable during the year and as a result, the Group considers it has no material foreign

currency risks.

Interest rate risk

The interest rates and the terms of loan from financial institutions and unsecured other loans are disclosed in notes

25 and 26 to the financial statements. The Group has no significant exposure to interest rate risk.

Credit risk

The Group has no significant concentration of credit risk. The carrying amount of the trade and other receivables

included in the consolidated balance sheet represents the Group’s maximum exposure to credit risk in relation to its

financial assets.

Liquidity risk

The Group is exposed to liquidity risk. At 31 December 2005, the Group had net current liabilities and net

liabilities of HK$105,693,000 and HK$31,395,000 respectively. The maintenance of the Group as a going concern

is significantly dependent on the future improvement of the Group’s profitability and cash flows from its operation

and the availability of continuous funding from the substantial shareholder, Tees Corporation, and the loans from

financial institutions as described in Note 2(a) above.

Fair value estimation

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance

sheet date. The quoted market price used for financial assets held by the Group is the current bid price.

Fair value of financial assets and liabilities for disclosure purposes is estimated by discounting the future contractual

cash flows at the current market interest rate that is available to the Group for similar financial instruments.

51



5. Financial Risk Management Objectives and Policies (Continued)

Fair value estimation (Continued)

The fair values of cash and cash equivalents, trade and other receivables, trade and other payables, loans from

financial institutions and unsecured other loans are not materially different from their carrying amounts because of

the immediate or short term maturity of these financial instruments.

6. Turnover

Turnover represents the aggregate of sales value of goods supplied to customers less goods returned, trade discounts

and sales tax. The amount of revenue recognized in turnover during the year represents manufacture and sale of

healthcare and household products.

7. Other Revenue and Other Gain, Net

2005 2004

HK$’000 HK$’000

Other revenue

Interest income 15 236

Income from scrap sales 919 587

Rental income 18 17

Miscellaneous 21 3

973 843

Other gain, net

Net gain on disposal and written off of fixed assets 336 288

Gain on deemed disposal of a subsidiary — 1,776

Gain on disposal of a subsidiary — 1,570

Exchange gain 852 475

Others 264 1,180

1,452 5,289


52


8. Segmental Information

Segment information is presented in respect of the Group’s business and geographical segments. Business segment

information is chosen as the primary reporting format because this is more relevant to the Group’s internal

financial reporting.

(a) Business segments

The Group has been operating in a single business segment, that is the manufacture and sale of healthcare

and household products.

(b) Geographical segments

The Group’s business is managed on a worldwide basis, but participates in four principal economic

environments.

In presenting information on the basis of geographical segments, segment revenue is based on the

geographical location of customers. Segment assets and capital expenditure are based on the geographical

location of the assets.

Hong Kong

North America Europe The PRC and others Total

2005 2004 2005 2004 2005 2004 2005 2004 2005 2004

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

Sales to external customers 85,103 87,740 51,250 45,121 — — 31,954 37,422 168,307 170,283

Segment assets — — — — 46,785 23,863 27,513 56,273 74,298 80,136

Capital expenditure incurred

during the year — — — — 4,520 8,694 319 278 4,839 8,972

53



9. Loss from Operations

Loss from operations is arrived at after charging:

2005 2004

HK$’000 HK$’000

Cost of inventories# 129,236 132,988

Staff costs including directors’ remuneration (including contributions

to retirement scheme of HK$547,000 (2004: HK$559,000))#/* 38,113 36,750

Amortisation of positive goodwill — 111

Amortisation of positive goodwill included in share

of losses of associates — 1,813

Auditors’ remuneration 600 580

Research and development costs* 3,498 3,558

Depreciation# 4,963 4,964

Operating lease charges in respect of land and buildings 2,549 2,330

Impairment of investment securities — 4,731

Impairment of available-for-sale securities 1,791 —

Impairment of interests in associates 12,266 —

Write off of other receivables 1,139 —

# Cost of inventories includes HK$11,529,000 (2004: HK$12,797,000) relating to staff costs and depreciation expenses,

which amount is also included in the respective total amounts disclosed separately above for each of these types of

expenses.

* Research and development costs include staff costs of HK$3,167,000 (2004: HK$2,938,000) which amount is also

included in staff costs disclosed separately above.

10. Finance Costs

2005 2004

HK$’000 HK$’000

Interest on bank loans wholly repayable within one year 644 640

Interest on other borrowings wholly repayable within one year 1,017 816

1,661 1,456


54


11. Directors’ Remuneration and Five Highest Paid Individuals

Details of emoluments of the directors of the Company disclosed pursuant to the Listing Rules and Section 161 of

the Hong Kong Companies Ordinance are as follows:

For the year ended 31 December 2005

Basic

salaries, Retirement

allowances benefits

and benefits Discretionary Share-based scheme Total

Fees in kind bonus payment contributions emoluments

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

Name of director

Executive directors

Mr. Leung Chung Shan — 3,232 — — 34 3,266

Mr. Tam Lup Wai, Franky — 1,300 — — 37 1,337

Mr. Chiu Wing Keung — 845 — — 27 872

Independent non-executive

directors

Mr. Chow Siu Ngor 120 — — — — 120

Mr. Ting Leung Huel,

Stephen 120 — — — — 120

Mr. Lam Bing Kwan 60 — — — — 60

300 5,377 — — 98 5,775

55



11. Directors’ Remuneration and Five Highest Paid Individuals (Continued)

For the year ended 31 December 2004

Basic

salaries, Retirement

allowances benefits

and benefits Discretionary Share-based scheme Total

Fees in kind bonus payment contributions emoluments

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

Name of director

Executive directors

Mr. Leung Chung Shan — 3,223 — — 59 3,282

Mr. Tam Lup Wai, Franky — 1,300 — — 65 1,365

Mr. Chiu Wing Keung — 845 — — 42 887

Independent non-executive

directors

Mr. Chow Siu Ngor 120 — — — — 120

Mr. Ting Leung Huel,

Stephen 120 — — — — 120

Mr. Lam Bing Kwan 15 — — — — 15

255 5,368 — — 166 5,789

During the year, no options were granted to the directors.

There was no arrangement under which a director waived or agreed to waive any emoluments during the year

(2004: HK$Nil).


56


11. Directors’ Remuneration and Five Highest Paid Individuals (Continued)

The five highest paid individuals for the year ended 31 December 2005 included three (2004: three) directors,

details of whose emoluments are disclosed above. Details of the emoluments of the remaining two (2004: two)

highest paid individuals for the year ended 31 December 2005, which fell within the “Nil to HK$1,000,000” band,

are as follows:

2005 2004

HK$’000 HK$’000

Basic salaries, housing benefits, other allowances and benefits in kind 1,616 1,594

Retirement benefits scheme contributions 65 56

1,681 1,650

During the year, no emoluments were paid or payable by the Group to the directors and five highest paid individuals

as an inducement to join, or upon joining the Group, or as compensation for loss of office (2004: HK$Nil).

12. Taxation

(a) Hong Kong profits tax is provided at 17.5% (2004: 17.5%) based on the assessable profit for the year.

Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.

No provision for Hong Kong Profits Tax and PRC income tax has been made in the financial statements as

the individual companies comprising the Group do not have any assessable profits for taxation purposes

during the year or have sufficient tax losses brought forward to set off against current year’s assessable

profit.

(b) The taxation on the Group’s loss before taxation differs from the theoretical amount that would arise using

the Hong Kong profits tax taxation rate as follows:

2005 2004

HK$’000 HK$’000


Hong Kong profits tax at 17.5% (4,764) (3,752)

Tax effect of non-deductible expenses 5,584 3,617

Tax effect of non-taxable revenue (402) (41)

Tax effect of utilisation of timing difference

not previously recognised — (382)

Tax effect of tax losses not recognised 426 789

Tax effect of utilisation of tax losses not previously recognised (844) (231)

— —

57



13. Loss for The Year

The consolidated loss for the year attributable to equity holders of the Company includes a loss of HK$1,771,000

(2004: HK$65,116,000) which has been dealt with in the financial statements of the Company.

14. Dividends

The directors have not declared nor proposed any dividends in respect of the year ended 31 December 2005 (2004:

HK$Nil).

15. Loss Per Share

(a) Basic loss per share

The calculation of basic loss per share is based on the loss for the year attributable to equity holders of the

Company of HK$27,223,000 (2004: HK$21,415,000) and the weighted average number of ordinary shares

of 1,937,826,789 (2004: 1,937,430,068) in issue during the year.

(b) Diluted loss per share

No diluted loss per share is presented as the inclusion of the effects of all potential dilutive ordinary shares

would not have a dilutive effect on the basic loss per share for both the current and prior year.


58


16. Fixed Assets

Group

Furniture,fixtures,

officeequipment

Land and Optical Leasehold Plant and and motor Mouldsbuildings fibre cable improvements machinery vehicles and tools TotalHK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Cost or valuation:

At 1 January 2004 17,800 48,457 2,075 15,928 14,202 20,140 118,602Additions — — — 1,941 568 6,463 8,972Disposals — — (212) (401) (1,956) (3,644) (6,213)Written off — — — (6) — (61) (67)

At 31 December 2004 17,800 48,457 1,863 17,462 12,814 22,898 121,294

Additions — — — 1,122 706 3,011 4,839Disposals — — — — — (916) (916)Written off — — — (58) (93) — (151)Exchange difference 342 — — 422 83 403 1,250

At 31 December 2005 18,142 48,457 1,863 18,948 13,510 25,396 126,316

Representing:

Cost — 48,457 1,863 18,948 13,510 25,396 108,174Valuation — 2003 18,142 — — — — — 18,142

18,142 48,457 1,863 18,948 13,510 25,396 126,316

Accumulated depreciationand impairment:

At 1 January 2004 — 48,457 964 14,050 12,080 17,217 92,768Charge for the year 848 — 621 1,170 731 1,594 4,964Written back on disposals — — (85) (349) (1,360) (292) (2,086)Written back on write off — — — (6) — (46) (52)

At 31 December 2004 848 48,457 1,500 14,865 11,451 18,473 95,594

Charge for the year 864 — 363 1,067 755 1,914 4,963Written back on disposals — — — — — (109) (109)Written back on write off — — — (58) (81) — (139)Exchange difference 17 — — 376 70 375 838

At 31 December 2005 1,729 48,457 1,863 16,250 12,195 20,653 101,147

Net book value:

At 31 December 2005 16,413 — — 2,698 1,315 4,743 25,169

At 31 December 2004 16,952 — 363 2,597 1,363 4,425 25,700

59



16. Fixed Assets (Continued)

(a) The analysis of the net book value of land and buildings is as follows:

Group

2005 2004

HK$’000 HK$’000

Outside Hong Kong — medium-term leases 16,413 16,952

(b) The Group’s land and buildings held for own use were revalued at 31 December 2003 on an open market

value basis by C S Surveyors Limited, an independent firm of professional valuers. Had the land and

buildings held for own use been carried at historical cost less accumulated depreciation and impairment

loss as at 31 December 2005 their carrying value would have been approximately HK$27,261,000 (2004:

HK$28,355,000).

(c) At 31 December 2005, land and buildings of the Group with a carrying value of HK$16,413,000 (2004:

HK$16,952,000) held outside Hong Kong was pledged to secure certain loan facilities granted to the Group

(note 25).


60


17. Interests in Subsidiaries

Company

2005 2004

HK$’000 HK$’000

Unlisted shares, at cost 191,351 191,351

Amounts due from subsidiaries 1,449,912 1,450,854

Amounts due to subsidiaries (24,554) (24,554)

1,616,709 1,617,651

Less: Impairment loss (1,641,199) (1,641,861)

(24,490) (24,210)

Amounts due from/(to) subsidiaries are unsecured, interest-free and will not be repayable within the next twelve

months.

The following list contains the particulars of subsidiaries of the Group. The class of shares held is ordinary unless

otherwise stated. All of these are controlled subsidiaries as defined under note 3(c) and have been consolidated in

the Group financial statements.

Percentage of ownership interest

Place of Particulars of Group’s Held

incorporation issued share and effective by the Held by Principal

Name of company and operation paid up capital holding Company subsidiary activity

Dongguan Fairform Creative The PRC Registered capital 100 — 100 Inactive

Company Limited (note (a))* HK$8,000,000

Dongguan Weihang Electrical The PRC Registered capital 100 — 100 Manufacture and

Product Company Limited US$9,000,000 trading of healthcare

(note (b)) and household

products

eForce Management Limited Hong Kong 2 ordinary shares 100 100 — Provision of

of HK$1 each management services

eForce Project Services British Virgin 1 share of US$1 100 100 — Provision of

Limited Islands (“BVI”) management

consultancy services

61



17. Interests in Subsidiaries (Continued)





Fairform Group Limited BVI 15,700,200 shares 100 100 — Investment holding

of US$1 each

Fairform Holdings Limited Hong Kong 2 ordinary shares 100 100 — Name holding

of HK$1 each

Fairform Information Hong Kong 600,000 ordinary shares 100 — 100 Dormant

Technology Limited of HK$1 each

Fairform Manufacturing Hong Kong 138,750,000 ordinary 100 — 100 Manufacture and

Company Limited shares of HK$1 each trading of healthcare

and 250,000 non-voting and household

deferred shares of products

HK$1 each

Gainford International Inc. BVI 50 shares of US$1 each 100 — 100 Investment holding

Gofull Investments Limited BVI 1 share of US$1 100 100 — Investment holding

New Hong Kong Industrial Hong Kong 2 ordinary shares 100 — 100 Investment holding

Company Limited of HK$1 each and

300,000 non-voting

deferred shares of

HK$1 each

Oasis Global Limited BVI 10 shares of US$1 each 100 — 100 Trademark holding

Palm Beach Holdings Limited Republic of 1 share of US$1 100 — 100 Investment holding

Mauritius

Pro-Tek Electroforming Limited Hong Kong 200,000 ordinary shares 100 — 100 Dormant

of HK$1 each

Qesco International (H.K.) Ltd Hong Kong 1,000,000 ordinary 100 — 100 Trademark holding

shares of HK$1 each


62


17. Interests in Subsidiaries (Continued)





Successful Mode Investments BVI 1 share of US$1 100 100 — Investment holding

Limited

Top Harvest Industrial Limited Hong Kong 3,300,000 ordinary 100 — 100 Investment holding

shares of HK$1

each and 2,700,000

non-voting deferred

shares of HK$1 each

* For identification purpose only

Notes:

(a) Dongguan Fairform Creative Company Limited is a wholly foreign owned enterprise with an operating period of 12 years

expiring on 8 September 2017.

(b) Dongguan Weihang Electrical Product Company Limited is a wholly foreign owned enterprise with an operating period

of 30 years expiring on 10 April 2024.

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected

the results for the year or formed a substantial portion of the net liabilities of the Group. To give details of other

subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

18. Interests in Associates

Group

2005 2004

HK$’000 HK$’000

Share of net assets — 1,911

Goodwill 15,720 15,720

Less: Impairment loss (12,266) —

3,454 17,631

Amounts due to associates (1,454) (1,454)

2,000 16,177

63



18. Interests in Associates (Continued)

Amounts due to associates are unsecured, interest-free and will not be repayable within the next twelve months.

The following list contains the particulars of associates, all of which are unlisted corporate entities:

Proportion of

ownership interest

Place of Particulars Group’s

incorporation of issued and effective Held by Principal

Name of associate and operation paid up capital interest subsidiary activity

Chinese 2 Linux (Holdings) BVI 9,000 ordinary shares 42.5 42.5 Development and

Limited (“C2L”) of US$1 each sale of enterprise

applications

software

Dynasty L.L.C. United States 140,000 ordinary 50 50 Dormant

of America shares of US$1 each

Esterham Enterprise Inc. BVI 2 ordinary shares 50 50 Dormant

of US$1 each

The following illustrates the summarised financial information of the Group’s associates:

2005 2004

HK$’000 HK$’000

Balance sheet:

Total assets 24,593 29,073

Total liabilities (29,447) (24,576)

Net (liabilities)/assets (4,854) 4,497

Revenue and losses:

Revenue 7,226 2,713

Losses 9,351 18,849

Unrecognised share of the associates’ losses were approximately HK$2,063,000 for the year ended 31 December

2005 (2004: HK$Nil).


64


19. Other Non-Current Assets

It represented a quality guarantee deposit paid to China Infohighway Communications Co., Ltd. (“IHW”) pursuant

to Cooperation Agreement and Supplemental Agreements (collectively “the Agreements”) entered into between the

Group and IHW on 19 December 2001. Under the Agreements the Group agreed to provide certain equipment and

facilities as necessary for IHW’s network infrastructure for a facility fee. In the event that the Group fails to

provide the required equipment and facilities, IHW can make use of the deposit to purchase the required equipment

and facilities. The deposit was unsecured, non-interest bearing and is repayable upon the expiry of the Agreements

on 21 July 2019.

However, owing to the difficulty and complexity in securing a telecommunications service-operating permit in the

PRC, the Group had decided to suspend the cooperation projects. The directors are currently negotiating a refund

of the deposit with IHW but has been unable to reach an agreement.

As the recoverability of the deposit was uncertain, the directors considered that it is prudent to make full allowance

of impairment of HK$44,933,000 against the deposit.

20. Investment Securities

Group

2005 2004

HK$’000 HK$’000

Equity securities listed in Hong Kong, at cost — 11,000

Less: Impairment — (4,731)

— 6,269

Market value of listed equity securities — 6,269

In accordance with HKAS 39, investment securities were redesignated on 1 January 2005 as available-for-sale

securities and stated at fair value (note 21).

65



21. Available-for-Sale Securities

Group

2005 2004

HK$’000 HK$’000

At beginning of year 6,269 —

Change in fair value and impairment (1,791) —

Equity securities listed in Hong Kong, at market value 4,478 —

The Group’s available-for-sale securities was non-current in nature and represented 74,632,500 ordinary shares of

MegaInfo Limited at HK$0.06 each.

Following the adoption of HKAS 39 in 2005, certain financial assets were designated as available-for-sale securities

on 1 January 2005.

22. Inventories

Group

2005 2004

HK$’000 HK$’000

Raw materials 7,982 12,411

Work in progress 7,127 3,654

Finished goods 2,931 1,244

18,040 17,309


66


23. Trade and Other Receivables

Group Company

2005 2004 2005 2004

HK$’000 HK$’000 HK$’000 HK$’000

Trade debtors and bills receivables

(note (a)) 16,021 9,301 — —

Other debtors, deposits and

prepayments 4,430 3,706 22 155

Amounts due from associates

(note (b)) 21 24 — —

20,472 13,031 22 155

Notes:

(a) An ageing analysis of trade debtors and bills receivables (net of specific allowance for bad and doubtful debts) is as

follows:

Group

2005 2004

HK$’000 HK$’000

Current 12,710 6,839

1 to 3 months overdue 3,067 2,206

More than 3 months overdue but less than 12 months overdue 105 97

More than 12 months overdue 139 159

16,021 9,301

Trade debts are due within 30 days from the date of billing.

(b) Amounts due from associates are unsecured, interest-free and have no fixed terms of repayment.

24. Cash and Bank Balances

At 31 December 2005, the cash and bank balances of the Group denominated in Renminbi (“RMB”) amounted to

approximately HK$1,299,000 (2004: HK$508,000). RMB is not freely convertible into foreign currencies. Subject

to the PRC’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of

Foreign Exchange Regulations, the Group is permitted to exchange RMB for foreign currencies through banks

authorised to conduct foreign exchange business.

67



25. Loans from Financial Institutions

Group Company

2005 2004 2005 2004

HK$’000 HK$’000 HK$’000 HK$’000

Loans from financial institutions

— unsecured (note (a)) 8,249 7,386 8,249 7,386

— secured (note (b)) 8,269 8,585 — —

16,518 15,971 8,249 7,386

Notes:

(a) The unsecured loan represents a revolving loan facilities to 31 March 2006 of HK$30 million, interest bearing at 3% per

annum over the prevailing prime lending rate offered by The Hongkong and Shanghai Banking Corporation Limited. As

at 31 December, approximately HK$8.2 million (2004: HK$7.4 million) has been utilised. Subsequent after the year end,

the revolving loan facilities was extended to 31 March 2007 with the loan facilities remained at HK$30 million.

(b) The secured loan is interest bearing at 6.264% per annum and is secured over the Group’s leasehold land and buildings

held for own use situated outside Hong Kong with a carrying value of approximately HK$16 million (2004: HK$17

million).

26. Unsecured Other Loans

On 1 February 2000, pursuant to a placing and underwriting agreement dated 16 December 1999 entered into

between the Company and independent placing agents, 4% convertible notes with an aggregate principal amount of

HK$9 million were issued (the “Notes”). The Notes were convertible to ordinary shares of HK$0.05 each of the

Company at any time between 1 April 2000 and 27 January 2002 and Notes of HK$2.5 million were subsequently

converted during 2000.

Prior to maturity, holders of the remaining Notes of approximately HK$6.5 million had not exercised the conversion

right, therefore, the directors of the Company consider that the conversion right attaching to the Notes had lapsed.

The Notes should be regarded as unsecured other loans and the outstanding balances together with accrued interest

of approximately HK$7.5 million are due for repayment. As at the date of authorisation for issue of the financial

statements, the Notes holders have not yet requested the Company to repay the loans.


68


27. Trade and Other Payables

Group Company

2005 2004 2005 2004

HK$’000 HK$’000 HK$’000 HK$’000

Trade creditors (Note (a)) 23,339 21,263 — —

Other creditors and accrued charges 44,827 30,080 4,786 4,598

Amount due to a substantial

shareholder (note (b)) 40 40 40 40

Amount due to an associate (Note (b)) — 605 5,515 5,215

Amounts due to directors (Note (b)) 10,122 5,318 — —

78,328 57,306 10,341 9,853

Notes:

(a) An ageing analysis of trade creditors is as follows:

Group

2005 2004

HK$’000 HK$’000

Due within 1 month or on demand 13,576 12,248

Due after 1 month but within 3 months 7,157 7,071

Due after 3 months but within 6 months 1,323 681

Due after 6 months 1,283 1,263

23,339 21,263

(b) Amount due to a substantial shareholder, an associate and amounts due to directors are unsecured, interest-free and have

no fixed terms of repayment.

69



28. Employee Benefits

(a) Employee retirement benefits

The Group operates a Mandatory Provident Fund Scheme (“MPF Scheme”) under the Hong Kong Mandatory

Provident Fund Schemes Ordinance for employee 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 makes contributions to the scheme at 5% —

10% and employees are required to make 5% of the employees’ relevant income, subject to a cap of

monthly relevant income of $20,000 except for certain senior staff. Mandatory contributions to the scheme

vest immediately.

Subsidiaries incorporated in the PRC participate in various defined contribution retirement plans (“Plans”)

organised by local authorities for the Group’s employees in the PRC. The subsidiaries are required to

contribute, based on a certain percentage of the basic payroll, to the Plans. The Group has no other material

obligation for the payment of pension benefits associated with these Plans beyond the annual contributions

described above.

(b) Equity compensation benefits

The Company has a share option scheme which was adopted on 2 June 1997 whereby the directors of the

Company are authorised to invite employees of the Group, including the directors of any company in the

Group, to take up options to subscribe for shares of the Company. The exercise price of options was

determined by the board and was the higher of the nominal value of the shares of the Company and 80% of

the average of the closing prices per share on the SEHK for the five business days immediately preceding

the date of grant. The options vest after one year from the date of grant and are then exercisable within a

period of ten years thereafter. Each option gives the holder the right to subscriber for one share. With effect

from 1 September 2001, the Company needs to revise the terms of the existing scheme to comply with the

requirements of Chapter 17 of the Main Board Listing Rules if the Company wishes to continue to grant

options under the existing scheme.


70


28. Employee Benefits (Continued)

(b) Equity compensation benefits (Continued)

Movements in share options are as follows:

Number

2005 2004

At 1 January 30,780,000 36,180,000

Cancelled — (5,400,000)

At 31 December — options vested 30,780,000 30,780,000

The outstanding share options at the balance sheet dates were granted on 10 July 2000 and are exercisable

for a period commencing from 10 July 2001 to 9 July 2010 at an exercise price of $0.392 per share. No

other share options previously granted were exercised during the year.

29. Deferred Taxation

No provision for deferred taxation has been made in the financial statements as the tax effect of taxable temporary

differences is immaterial to the Group.

No deferred tax assets in respect of tax losses have been recognised as it is not probable that future profits will be

available against which the assets can be utilised. Major components of unprovided deferred tax assets by the

Company and the Group are set out below:

Group Company

2005 2004 2005 2004

HK$’000 HK$’000 HK$’000 HK$’000

Tax losses 25,405 25,823 4,971 4,546

71



30. Share Capital

2005 2004

HK$’000 HK$’000

Authorised:

6,000,000,000 ordinary shares of $0.05 each 300,000 300,000

2005 2004

No. of shares Amount No. of shares Amount

HK$’000 HK$’000

Issued and fully paid:

At 1 January 1,937,826,789 96,891 1,933,706,789 96,685

Shares issued upon exercise of

warrants (note (a)) — — 4,120,000 206

At 31 December 1,937,826,789 96,891 1,937,826,789 96,891

Note:

(a) Pursuant to the Company’s announcement dated 6 November 2003, the Company issued 370,000,000 warrants (“2004

Warrants”) at a placing price of HK$0.07 per warrant by private placement to not less than 100 selected independent

investors on 27 November 2003. Each warrant entitles the holder thereof to subscribe for one ordinary share of HK$0.05

each of the Company at an initial subscription price of HK$0.28 (subject to adjustment) during the one-year period from

the date of issue. The net proceeds of approximately HK$24.5 million were used for repayment of loans from financial

institutions. Dealing in the 2004 Warrants on the SEHK commenced on 10 December 2003.

During the year ended 31 December 2004, registered holders of 4,120,000 units of 2004 Warrants exercised their rights

to subscribe for 4,120,000 ordinary shares at a consideration of HK$1,154,000, of which HK$206,000 was credited to

share capital and the balance of HK$948,000 was credited to the share premium account.

The trading of 2004 Warrants on the SEHK had ceased after 2 December 2004 and the listing of the 2004 Warrants on the

SEHK was withdrawn from 4 December 2004. The subscription rights attaching to 2004 Warrants had expired on 7

December 2004. The Company had 365,880,000 outstanding 2004 Warrants not exercised.


72


31. Reserves

(a) Group

Share Exchange Warrant Accumulated

premium reserves reserve losses Total

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

At 1 January 2004 1,391,021 (1,840) 24,498 (1,494,183) (80,504)

Shares issued upon exercise

of warrants (note 30(a)) 948 — — — 948

Release of warrant proceeds

upon exercise of warrants

(Note 30(a)) 272 — (272) — —

Exchange differences on

translating foreign

operations — 98 — — 98

Loss for the year — — — (21,415) (21,415)

At 31 December 2004 1,392,241 (1,742) 24,226 (1,515,598) (100,873)

At 1 January 2005 1,392,241 (1,742) 24,226 (1,515,598) (100,873)

Exchange differences on

translating foreign

operations — (190) — — (190)

Loss for the year — — — (27,223) (27,223)

At 31 December 2005 1,392,241 (1,932) 24,226 (1,542,821) (128,286)

Included in the figure for the accumulated losses is an amount of HK$11,701,000 (2004: HK$9,790,000),

being the accumulated losses attributable to associates.

73



31. Reserves (Continued)

(b) Company

Share Contributed Warrant Accumulated

premium surplus reserve losses Total

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

At 1 January 2004 1,391,021 9,354 24,498 (1,505,377) (80,504)

Shares issued upon exercise

of warrants (note 30(a)) 948 — — — 948

Release of warrant proceeds

upon exercise of

warrants (note 30(a)) 272 — (272) — —

Loss for the year — — — (65,116) (65,116)

At 31 December 2004 1,392,241 9,354 24,226 (1,570,493) (144,672)

At 1 January 2005 1,392,241 9,354 24,226 (1,570,493) (144,672)

Loss for the year — — — (1,771) (1,771)

At 31 December 2005 1,392,241 9,354 24,226 (1,572,264) (146,443)

The contributed surplus of the Company arose as a result of the Group’s reorganisation carried out on 31

May 1997 and represents the excess of the then combined net assets of the subsidiaries acquired, over the

nominal value of the Company’s shares issued in exchange therefor.

Under the Bye-laws of the Company, the share premium is not distributable but may be applied in paying

up unissued shares of the Company to be issued to shareholders of the Company as fully paid bonus shares.

Under The Companies Act 1981 of Bermuda (as amended), the Company may make distributions to its

members out of the contributed surplus, provided that the Company is, after the payment of dividends out

of the contributed surplus, able to pay its liabilities as they become due; or the realisable value of the

Company’s assets would thereby not be less than the aggregate of its liabilities, issued share capital and

reserves.

The warrant reserve represents the proceeds received from the issue of the 2004 Warrants (note 30(a)), net

of warrant issue expenses. The reserve will be released to the share capital and share premium accounts

upon exercise of the 2004 Warrants.


74


32. Operating Lease Commitments

At 31 December 2005, the total future minimum lease payments under non-cancellable operating leases in respect

of land and buildings are payable as follows:

Group

2005 2004

HK$’000 HK$’000

Within one year 2,743 2,455

In the second to fifth year inclusive 732 1,920

After five years 7,835 7,869

11,310 12,244

The Group leases a number of properties under operating leases. The leases run for an initial period from 1.5 to 50

years, with an option to renew the lease and renegotiate the terms at the expiry date or dates as mutually agreed

between the Group and respective landlords/lessors. None of the leases include contingent rentals.

33. Commitments

At 31 December 2005, the Group has the following capital commitments outstanding and not provided for in the

financial statements:

Group

2005 2004

HK$’000 HK$’000

Contracted for:

Quality guarantee deposit 17,500 17,500

Purchases of fixed assets — 586

17,500 18,086

75



34. Contingent Liabilities

(a) In October 1999, Mersongate Holdings Limited, an independent third party (the “Plaintiff”), commenced an

action against (1) Mr. Huen Raico Hing Wah, a former director of the Company; (2) Central Growth

Limited and Bridal Path Corporation, former substantial shareholders of the Company; and (3) the Company

(collectively the “Defendants”), alleging that the Defendants have agreed to certain arrangements in relation

to the share capital of the Company, including certain rights of the Plaintiff to participate in the share

capital of the Company, and that the Defendants have failed to perform their respective obligations under

the arrangements, and claiming specific performance or, alternatively, damages. The Company has no

knowledge of and is not a party to the alleged arrangements. The Company has filed a defence against the

claim and the directors of the Company consider that no provision for the claim is necessary.

(b) At 31 December 2005, the Company had provided corporate guarantee to the extent of HK$19,000,000

(2004: HK$10,000,000) for banking facilities granted to a subsidiary, which were utilised to the extent of

HK$1.57 million (2004: HK$1.64 million).

35. Related Party Transactions

(a) During the year ended 31 December 2005, the Group was granted financial assistance from a substantial

shareholder. At 31 December 2005, included in trade and other payables is an amount due to a substantial

shareholder of HK$40,000 (2004: HK$40,000) is unsecured, interest-free and has no fixed terms of

repayment.

(b) The compensation to Group’s key management personnel is disclosed in note 11 to the financial statement.

36. Event after the Balance Sheet Date

On 23 March 2006, the Company entered into a sale and purchase agreement with an independent third party for

the disposal of its entire issued share capital of Successful Mode Investments Limited, a wholly owned subsidiary

of the Company and its entire interest, being 42.5% of the issued capital in C2L for a consideration of HK$2

million. An impairment loss of HK$12,266,000 was recognised in current year in bringing the carrying value of the

interest in associate in C2L to HK$2 million.

37. Approval of Financial Statements

The financial statements on pages 25 to 75 were approved and authorised for issue by the Board on 24 April 2006.


76

Five Year Financial Summary

Year ended 31 December

2005 2004 2003 2002 2001

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

Results

Turnover 168,307 170,283 96,339 90,033 124,434

Operating loss after finance costs (25,312) (13,404) (89,951) (118,524) (1,220,296)

Share of profit less losses

of associates (1,911) (8,011) (3,743) (2) 1,584

Loss before taxation (27,223) (21,415) (93,694) (118,526) (1,218,712)

Taxation — — — 2,157 —

Loss for the year (27,223) (21,415) (93,694) (116,369) (1,218,712)

Loss attributable to:

Equity holders of the Company (27,223) (21,415) (89,199) (114,931) (1,216,597)

Minority interests — — (4,495) (1,438) (2,115)

(27,223) (21,415) (93,694) (116,369) (1,218,712)

As at 31 December

2005 2004 2003 2002 2001

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

Total assets 74,298 80,136 86,370 120,979 336,002

Total liabilities (105,693) (84,118) (70,189) (78,396) (255,359)

Net (liabilities)/assets (31,395) (3,982) 16,181 42,583 80,643

Equity attributable to:

Equity holders of the Company (31,395) (3,982) 16,181 42,583 79,278

Minority interests — — — — 1,365

(31,395) (3,982) 16,181 42,583 80,643

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